CREDIT RATING

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A
Summer Training Report
On
CREDIT RISK RATING
At
Punjab National Bank

Submitted in partial fulfillment of the requirements of
Master of Business Administration (MBA)

Submitted To:-

Submitted By:

Name: Mrs. Roma Jaitly

Ankita Dogra

Assistant Professor

rd

MBA: 3 Semester
15412303913

Delhi Institute Of Advanced Studies
(Affiliated to Guru Gobind Singh Indraprastha University)
Plot No 6, Sector-25, Rohini, New Delhi 110085

DECLARATION
I hereby declare that the Internship Project Report titled ―Credit Risk Rating at PNB‖
submitted by me to Delhi Institute Of Advanced Studies, Rohini is a Bonaire work
undertaken during the period from

to

by me and has not been submitted to

any other University or Institution for the award of any degree diploma / certificate or
published any time before.

(Signature of the Student)
Name: Ankita Dogra
Enroll. No.: 15412303913

Date:

/

/ 2011

ACKNOWLEDGEMENT

Success is the expression of diligence, insistence, motivation inspiration and novelty. While
making this project, I had a wonderful experience. But this journey I have not travelled all
alone. There are some special people who made my journey easier with the words of support
and more intellectually satisfying by offering help in improving the quality of this work and
bringing it to a finish.

I would like to thanks Mrs. Barkha Bahl (Director) who has been a constant source of
inspiration and my special thanks to Mrs. Roma Jaitly And Mrs.Ruchi (project guide from the
institute) for her extensive guidance, cooperation and support.

My warm thanks to my parents for their continuous encouragement, interest and advice given
throughout the study. My thanks are also to all those who have shown keen interest in this
work and provided the much needed encouragement.

Last but not the least, God helps those who help themselves and thus I kept on helping myself
and God helped me through infinite ways I cannot define and God is too grateful and big for
my unallied efforts to thank him.

Ankita Dogra
15412303913

CONTENTS

I. College Certificate
II. Company Certificate
III. Declaration
IV Acknowledgement.
V Executive Summary.

Topics
1. Introduction

2. Company Profile

3. Literature Review

4.Research Methodology

5. Conceptual Framework

6.Analysis & Interpretation
7. Findings

8.Conclusion

9. Bibliography

10. Annexures

Page No.

EXECUTIVE SUMMARY
In India, the banking sector has been remarkably successful in some respects. Its immense
size and enormous penetration in rural areas are exemplary among developing countries, as is
its solid reputation for stability among depositors.
This project was undertaken at the Punjab National Bank Circle Office, Rajendra Place, New
Delhi, at the Credit Administration Department. This project explains various credit facilities
and processes followed by one of the most reputed bank in the country, Punjab National
Bank.
Each bank has its own set of policies that must be followed while sanctioning a loan and care
must be taken that the money provided by the bank is being used up for the intended purpose
only. The task ranging from acceptance of loan proposal to sanctioning of loan is carried out
at Credit Division of the bank. Moreover, each loan proposals fall under powers of different
levels depending on the size of the proposal.
Normally, the CAMEL approach is used for evaluating banks — capital, asset quality,
management, earnings and liquidity. Banks earn interest income and fee based income on the
loans and advances disbursed. While expansion of credit facilities is in the interest of both
banks and businesses, at the same time there are risks associated with the disbursal of credit.
Banks have to be cautious in deciding how much and to whom credit is being provided.
Because of the rising NPA of the public sector banks it is having a dent on their profitability
.Over a period of time, sophisticated processes have been developed to ensure efficient
delivery of the credit while ensuring meticulous appraisal of proposals, evaluation from
different perspectives and risk analysis. RBI has established norms and issues guidelines at
regular intervals to the banks regarding the credit disbursal and administration.

While

extensive restrictions and regulation could hamper the growth and efficient functioning of
credit, credit disbursal without proper control and due diligence can lead to financial
instability. Objective of the credit policies is to balance the twin goals of providing
convenient and timely credit facilities to the businesses while minimizing the exposure to the
risk of default and fraud.

The internship is intended to understand the process of credit risk rating being followed at
PNB. With a developing economy and many multinational companies coming up, new

projects are being undertaken. These projects require huge amount of capital and thus banks
come forward to finance these projects depending on the feasibility of the project. PNB
carries out an extensive study of the project and checks for it feasibility and if the project
seems to be feasible, a decision is taken.
This process of carrying out the feasibility test of the project based on the financial position
of the company is called Project Appraisal.
Since the project appraisal also includes a very essential step of Credit Risk Rating carried
out at Risk Management Division (RMD) of the bank, I also took training under risk
department for two weeks in order to closely understand the working.
Rating is done in order to find out the capability or the willingness of the company to pay its
debt. PNB uses its own model to rate a company and this model is one of its kind in the
country. The software used in this is known as PNB TRAC. Depending on the type of
project, a suitable model is chosen and based on financials of the company and the track
record of the management, rating is done. This rating also helps in determining the rate of
interest at which the loan should be given. Generally, a company with good ratings is gives
loan at a lower ROI as the risk involved is lower.
The study has been conducted with the purpose of getting in-depth knowledge about the
credit appraisal and credit risk rating procedure in the organization

Chapter :-1
Introduction

What is credit risk?
The risk that a borrower might fall to meet its obligations towards the bank in accordance
with the agreed terms and continuous of sanction.
It is the risk of default on the part of borrower, which could be due to either inability and/or
unwillingness to repay his debts.
Credit risk policy


Risk Identification



Risk Measurement



Risk Grading Techniques



Risk Reporting



Risk control system and Risk mitigation techniques

Credit Risk strategy
It is a meticulous exercise of achieving a balance between the risk to be taken and
profitability to be achieved.The strategy has to spell out bank‘s credit appetite vis-a-vis
acceptable credit risk.
Goal


To improve credit decisions



To improve quality of credit portfolio



To reduce loan losses

Need for credit risk Assessment
If terms and conditions of sanctions are stipulated without proper assessment of credit risk,
bank might charge:
High Rate of Interest from a good quality customer, which may drive them away to other
bank.
Or
Low Rate of Interest from a poor quality customer thereby not compensating fir higher losses
due to higher profitability of default.

How to minimize Credit Risks


By controlling the internal factors to improve the quality of credit portfolio.
(For which we need to develop effective risk assessment system)



By proper diversification of credit portfolio across industries.
(For which we need to develop effective credit monitoring system)

CRIEDIT RISK RATING MODELS DEVELOPED BY BANK
ONLINE MODELS (PNB TRAC)


Large corporate model: Accounts availing total limits of above Rs. 15 crore or having
turnover of more than Rs.100 crore.(except trading concerns)



Mid corporate model: Accounts availing total limits of above Rs. 5 crore and up to
Rs.15 crore OR having turnover of more than Rs.25 crore. All trading concerns falling
under large corporate category shall also be rated under this model.



Small loan borrowers model: Accounts availing total limits of above Rs.50 lacs and
up to Rs.5 crore AND having turnover up to Rs.25 crore.



Small loans II: Accounts availing total limits of above Rs. 2 lacs AND up to Rs.50
lacs (Except trading – which are to be rated under PNB score model)



NBFC MODEL: Applicable all NBFC accounts Irrespective of the limits.



New projects model: New projects approaching our bank for total limits of above Rs.5
crore OR having total cost of project more than 15 crore.



Entrepreneur New Business Model(ENBM): Borrower setting up New Business and
requiring finance above Rs. 20 lacs up to Rs.5 crore AND having total cost of project
up to Rs. 15 crore .All new trading business irrespective of limits shall be rated under
this model.



Half-yearly review of rating model: Applicable to all large and mid corporate
accounts fund based and non-fund based limits above Rs.50 crore AND for all listed
irrespective of limits.



Credit rating model for banks/FI: Applicable to all banks and financial
Institutions.(Being done at HO level only)



Facility Rating Model :Applicable to all rating models based on Main default score
and securities available i.e., primary security, colletral security and cash margin etc



NPA Rating model: Applicable to all NPA accounts.



Future lease rental model: Applicable to future lease rental/real estate.

NOTE :Offline models are not be used further
Most Crucial Factor(Key Risk Factor)
The rating of an account may be downgraded by one notch on the basis of any crucial
factor coming to the notice, which may affect the operating efficiency/viability of the
unit substantially such as:


Absence of willingness/capability of the promoters to repay the debt.



Substantial impairment in the value of assets.



Obsolescence of the product or any other major change in Govt. Policies.



Major damage to plants/stocks, court judgment on environmental threats,
involvement of promoters/company in excise/FERA/tax-evasion, recovery
suit/winding-ups petition filed by creditors/FIs/Banks, any civil/criminal
proceedings against the promoters/company, change of management etc.

HURDLE POINTS-Financial Evaluation
Insufficient future cash flows of a borrower to meet its commitments coupled with high
TOL/TNW ratio may be very risky and increase the probability of default(PD).Hence, If:

The total financial score (after subjective assessment and trend adjustment) is equal to
or less than 40%.



Score under the parameter ―Future cash flow adequacy‖ is‘0‘(i.e. future cash flow
adequacy-company is likely to default)

AND


Score under the parameter ―TOL/TNW‖ is ‗0‘(i.e. the ratio of TOL/TNW is >5)



Then the rating of the borrowal may be downgraded to ‘B’. if the co’s rating is
already ‘B’ or ‘C’ then it will be downgraded by one notch.

HURDLE POINTS-Management Evaluation
If score under the parameter ―commitment and sincerity‖ OR ‗Track Record in Debt
Repayment‘ is ‗0‘

The Credit risk rating derived from the model may be downgraded to ‘B’. If in such
case, the rating is ‘B’ or ‘C’, the rating will be downgraded by one notch.


If the score the parameters ‗commitments and sincerity‘ and track ‗record in debt
repayment‘ is greater than ‗0‘ and up to ‗1‘,
The rating may be downgraded by one notch.

Validity of Credit Risk Rating
Due: Rating shall become due for updation after the expiry of 12 months from the month of
the month of confirmation of rating or 18 months from the date of balance sheet on the basis
of which credit risk rating was assigned, whichever is earlier.
Overdue: Rating shall be treated as overdue after the expiry of 15 months from the month of
confirmation of rating 21 months from the date of balance sheet on the basis of which credit
risk rating was assigned, whichever is earlier.
Exempted Category of Credit Risk Rating
 Sanctioned limits of Rs. 2 lakh and below.
 Advances against security of Bank‘s own deposits/Government securities
including NSCs/KVPs/IVPs etc.
 Loans against shares and debentures, units of mutual funds, life insurance
policies.
 All staff loans.
 Advances to central/state Govt. Departments. Undertaking/Establishments,
which are not running on commercial basis (e.g. Industrial /Agricultural/Rural
Development Boards of various State Govts.)
 All advances under retail banking schemes (gold and jewellery, conveyance
loan against two wheeler and car, loans to doctors, education loans, housing
loans, PNB Aarogya loan, PNB Paryatak loan ,personal loans to pensioners
/public/working couples, PNB privilege card scheme, Fin basket scheme,
finance to property owners against future lease rentals ,loans to professionally
qualified medical practitioners, finance for training/skill up gradation of
construction workers, PNB Vivah loan, credit card loans.
 Advances to traders under super trade scheme.

 Loans to business concerns against mortgage of IPs where market value of IP
is at least 150% of the loan amount.
 Advances

to

individuals

under

agriculture

(Direct),

Agriculture

(Indirect),other priority sectors including transporters, Artisan and handicrafts.
 Loans under LUCC and advances against warehouse receipts of CWC.
 Purchase of cheques drawn by central and state Govts and drafts of public
sector banks, ILCs/FLCs where full cover is held by way of deposits till
maturity etc.
 Advances against clearing instruments/bills/clean overdrafts permitted within
the vested loaning powers at various levels where the client is not availing any
other loan/limit for which risk rating is applicable as per guidelines.
 Borrowers setting up new business where requirement of credit facilities is up
to Rs.20 lakh (exempted for 1st time only).
 Loans against mortgage of IPs are exempted only for those cases where
Annual Audited Balance Sheet is not prepared. But wherever ABS is available
credit risk rating is to be conducted.
 Rating/Vetting Authority
Sanctioning Authority

Rating conducted by

Rating Approved by

BO Power

BO Rater

BO Veter

HUB Power

HUB Rater

HUB Veter

CO & FGM Power

BO/HUB Rater & Veter

CO Veter

HO Power

BO & CO Rater & Veter

HO Veter

Papers to be submitted to circle office with Credit Risk Rating:
Fresh proposal(New Venture):
Report including projected B/sheet, P/L statement, cash flow, DSCR etc. duly signed by the
Co/firm and approved by BO.


Copy of limit proposal and its annexure.



Rating sheet along with IRR data feeding sheet duly signed by BO rater & veter.



Copy to TEV study report (external and/or internal), if any.

Fresh proposal (Existing Co/firm-including takeover account):


Annual Audited Balance Sheet (including auditor‘s report, All schedules/Annexure
Notes to accounts) for last 5 years/(for mid/large rating models, if the co/firm is less
than 5 years old then all available years), for small model last 3 years ABS are
required.



CMA data (in case proposed limit is more than 1 crore).



Copy of limit proposal and its annexure.



Rating sheet along with financial statement data feeding sheet duly signed by BO
rater and veter.

Enhancement proposal


Annual Audited Balance Sheet (including auditor‘s report, All schedules/Annexure
Notes to accounts)



Project Report including projected B/sheet, P/L statement, cash flow, DSCR etc in
case of any expansion of capacity.



Copy of limit proposal and its annexure



Rating sheet along with Financial statement data feeding sheet duly signed by BO
rater & veter.



Copy to TEV study report (external and/or internal), if any.

Renewal Proposal


Annual Audited Balance Sheet (including auditor‘s report, All schedules/Annexure
Notes to accounts)



Copy of limit proposal and its annexure



Rating sheet along with IRR/ Financial statement data feeding sheet duly signed by
BO rater & veter.

Annual Rating without waiting for Renewal of limits:
It has been emphasized that rating should be conducted as soon as Annual Audited Balance
sheet including Auditor‘s report, all annexure, schedule and notes of accounts are available
without waiting for the date of renewal of limits. In that case complete ABS along with duly
signed printed copy of rating sheet is to be submitted to vetting authority.

Areas of Evaluation for credit Risk Rating:
All the models have four areas of evaluation –Financials, business and industry, Management
and conduct of account. Further, there

are various objective(quantitative) and

subjective(qualitative) parameters under these areas of evaluation but only the number of
parameters varies from model to model. There are maximum number of parameters in case of
large corporate model and minimum in case of Small-II model.
Rating conducted in two models and single point score : There are instances, when an
existing company/firm go in for expansion of their capacities or for establishing a new
venture. if the gross block proposed to be added for the expansion or new venture is more
than 50% of existing gross block (as per latest ABS) ,then the credit risk rating is concluded
in combination of two models (New project/ENBM and large/mid/small borrowal model
according to the proposed limit and turnover and final score is arrived at through weighted
average of individual rating model score and corresponding accepted level of turnover.
CMIE Prowess Database: Bank has subscribed the CMIE Database (named as ‘Prowess‘)
for uploading annual audited financial statements and comparative financial ratios of peer
groups (i.e., companies engaged in similar activities with near-about capacities/turnover)in
large corporate rating models. The data base also provides very useful information like
capacities, production/sales, corporate governance, information on capital, management,
stock market perception, industry analysis, ratio analysis, quarterly results etc for all listed
companies and also for limited and some large private limited companies. Even if the
financials of the borrower for which rating is being carried out is not available at CMIE
Prowess, the financials of the companies engaged in similar activities can be viewed and
compared from this data base .Head office, all LCBs, all circle offices and some EL/VL
branches having many large corporate borrowers have given permission to subscribe the data
base.
CRISIL Industry Rating Report: Bank has been subscribing Industry rating from CRISIL
for around 70 industries and the same has been incorporated in the system on quarterly basis.
While conducting credit risk rating, the rater has to select industry according to activities of
the borrower and the rating model picks up the respective update industry score from the
system. Hence, selection of correct industry is very important to get the correct industry is
very important to get the correct industry score of a borrower. The quarterly and annual

CRISIL reports for all the industries are also available under RMD circular of e-circular site
of the bank.
Previously bank has been subscribing industry rating from ICRA
Final Rating score Category and risk Indicator:
The Credit Risk Rating has been divided into 7 categories (From ‗PNB AAA‘, i.e., the best to
‗PNB D‘. the worst) according to the Total Final Score(%) obtained by the borrower, Further,
the rating categories ‗PNB AA‘ to ‘PNB B‘ are further suffixed with ‗+‘ of ‗-‗sign as an
indicative sign to show its possibility of moving/slipping towards upper or lower category
.The detail table for scores vis-a-vis Rating category and Risk Indicator is placed below.
Score Obtained

Rating

Description

Above 80

AAA

Minimum Risk

77.50-80.00

AA+

Marginal Risk

72.50-77.50

AA

70.00-72.50

AA-

67.50-70.00

A+

62.50-67.50

A

60.00-62.50

A-

57.50-60.00

BB+

52.50-57.50

BB

50.00-52.50

BB-

47.50-50.00

B+

42.50-47.50

B

40.00-42.50

B-

40.00-42.50

C

High Risk

30.00 & below

D

Caution

Moderate Risk

Average Risk

Marginally acceptable Risk

Implementation of NPA Module in PNB Trac
Risk Management Division, Head Office, vide their Circular No. RMD/22/2009 dated
22/10/09 has introduced following three NPA ratings in the system and necessary changes
have been incorporated in the software:
Score Obtained

Rating Grade

Description

Defaulted Accounts

PNB-NS

NPA-Sub-Standard

(Accounts that have slipped PNB-ND

NPA-Doubtful(I,II&III)

to NPA category)

NPA-Loss

PNB-NL

The NPA ratings classifications are to be marked, which will be treated as new ratings, as and
when a rated account becomes NPA and again as and when there is change in Asset
Classification of NPA account in the following manner:


The account should be rated as Sub-Standard when is classified as sub-standard
account.



When the same account is classified as Doubtful, it should be again rated as doubtful
account.



When the same account is classified as Loss, it should be again rated as loss account.



If an account is directly classified as Doubtful of Loss, it should be directly rated as
doubtful or loss as the case may be without rating it as sub-standard or doubtful
account.

Any subsequent up gradation of asset into performing category would require fresh rating
of borrower as per the extant guidelines .All guidelines regarding rating/vetting authority
for credit risk rating will also be applicable for NPA rating.
You are required to download captioned circular from e-circular site, read the circular and
its annexure(where methodology is given) and as an onetime exercise, all existing
accounts in the branch, which were rated in PNB Trac and have become NPA in the past,
be marked as NPA immediately on receipt of this letter.

SOME USEFUL TIPS (ON-LINE RATING IN PNB TRAC)
A. How to apply for Rater/Vetter ID to use PNB Trac
Any Officer posted in a branch and wants to apply for Rater/Vetter to use PNB Trac, he/she
has to:1.Submit on-line request for allotment of user ID by filling up on-line ‗User Profile‘ Click
the blue colour line ‗New User to click here for create user profile’ at the Welcome to
PNB Trac page. A form shall be opened. Fill up the same and press ‗submit‘ button.
2 .A letter from the Incumbent In charge of the branch recommending him/her for issuing
ID(as Rater or Veter) for carrying out Credit Risk Rating through PNB Trac to be faxed to
CRMD, Circle Office.
B. How to submit request for cancellation of Rater/Vetter ID in PNB Trac
All user ID (rater or veter) for carrying out on-line credit risk rating through ‗PNB Trac‘ are
branch specific and linked through his/her employee number. As such any officer who were
earlier allotted user ID for accessing ‗PNB Trac‘ in his/her previous branch shall have to
submit first on-line request for cancellation of earlier user ID and then only he/she can submit
requests afresh for creation of new user ID.
The process is as under:

Open PNB Trac, using his/her existing User ID and to check whether any in-progress
rating is lying in his user ID, and if so, decision to be taken on them, i.e. to accept or
cancel or to transfer the same to same other Rater/Vetter ID.



To submit request for cancellation of User ID. For this purpose, the Rater/Vetter has
come to your ‗Home-work list page and then to click ‗Cancel User Profile‘ under
‗Rating‘ menu .A small form will be opened, which is to be submitted on-line by
clicking the ‗submit‘ button.

In case the Rater/Vetter has to get relieved in haste and does not find time to submit such
request before being relieved, he/she is advised to submit such request immediately on
joining the new office by logging in PNB Trac.

C.How to Transmit on-line rating to Higher office for vetting in PNB Trac.
Step 1 to 6: Same as above. Skip step 7 (No need to take print).
Step 8: Select ‗Zonal office‘ (not Regional Office for Delhi Circle) as the nomenclature
‗circle office‘ has not yet incorporated in PNB Trac. The direct reporting branch shall select
‗Head Office‘ for the ratings where sanctions falls under HO power.
Step 9 to 11: Same as above. Only at step 10,after clicking close window button under View
Rating ‗Submit rating for vetting‘ shall be activated and to be clicked.
D.How to cancel(delete) unnecessary/superfluous/duplicate rating from PNB Trac
At times, a rater starts rating but left it incomplete or he/she might have completed it but
subsequently the proposal did not move. There may be the case that the rating of same
borrower for same FY. Created two times. These superfluous/duplicate / Unnecessary rating
need to cancelled from the work list.
The steps are as under:Step 1 to 6: Almost same as above. Only at‘ Common Details Page‘ i.e. 1st page of rating
,change the sanctioning authority to ‗Branch Manager‘, even if it was originally meant for
higher office. If all the data in the rating is not filled up, select a simpler model and fill up
arbitrary data and random options, submit all the pages and finally submit to Vetter‘s ID step
7(No need to take print).
Step 8 to 11:For the rating to be deleted from the system ,the Vetter may not move through
all the pages and he/she can directly go to ‗conduct of account‘ or ‗submit page‘. There are
vetter should select ‗Cancel‘ option and then View rating, close window and the bottom
centre position and finally ‗complete rating process‘. The work list will pop and this page
now to be refreshed by clicking ‗Home‘(at the top left corner).
E.How to View/take print of already vetted rating
Go to ‗Search menu (2nd option) at the top band of PNB Trac and click rating. Then search
the rating either typing the rating Id or borrower code or by typing the name or part name of
that borrower. The respective radio button is to be clicked. In case the name of borrower is
having some abbreviated letters(say, N.V. Distilleries‘),then check the exact way (i.e. dot

,space etc) the borrower has been created in the system. This can be cross checked from the
earlier vetted report.
In case the rating has been transmitted on-line to higher officer but still under process (i.e.
vetting not yet done), then rating can‘t be viewed. The higher office, of course(where the
rating is under process),can take a print on your behalf by changing the draft number.
HOW THE RATING IS DONE
1. The scores are assigned to each of the parameters of each of the broad
category in the different s e c t i o n s o n a s c a l e o f 0 t o 4 u p t o t w o
d e c i m a l p o i n t s w i t h 0 b e i n g v e r y p o o r a n d 4 b e i n g excellent. The
scoring of some of these parameters is subjective while for some others it is
done on the basis of pre-defined objective criteria.
2.

The

scores given

to the

individual

parameters

multiply

b y a l l o c a t e d w e i g h t s a r e a g g r e g a t e d and a composite score for the
company is arrived at in percentage terms. Higher the score obtained by a
company, better is its credit rating. Weights have been assigned to
different parameters based on their importance.
Example:
% scored

Factor

Weight

obtained
Financial

Weighted
score

55.00

40.00%

22.00

50.00

25.00%

12.50

80.00

20.00%

16.00

75.00

15.00%

11.25

evaluation
Business
&industry
evaluation
Management
evaluation
Conduct

of

account
Table 2.2: EXAMPLE OF RATING PROCESS
So, AGGREGATE SCORE: 61.75
The Aggregate Score of 61.75 refers toPNB- A-

Significant Accounting Policies adopted by PNB
a) Basis of Accounting
The financial statements prepared by the company are based on the historical cost convention
followed by going concern concept and on accrual basis of accounting.
b) Depreciation
The method of depreciation used in the company to provide depreciation on the fixed assets
is written down method. The company provides no depreciation on goodwill.
c) Inventories
Inventories of securities are valued at market value. Closing stock of shares includes stock
pledged against secured loans from banks.
Cash and receivables
a) List of debtors of Punjab National Bank are :
i.

Tata power Delhi distribution limited is the biggest debtor of PNB.

ii.

National thermal power consumption (NTPC)

iii.

Housing development finance corporation limited (HDFC)

iv.

International Netherlands Group (ING) VYSYA bank

v.

Power grid

vi.

Benlon ltd.

vii.

Tecnia group of institute of management studies.

viii.

Food Corporation of India.

b) There are no discounts offered to any of the debtor in Punjab National Bank.

c) In Punjab National Bank, for mitigating risk from default of debtors, they have formed
a recovery department in circle office that helps the bank to get back their money. In
Punjab National Bank, bad debts do not exist. While giving loans, they asked their
debtors to give collateral security in exchange of loan, if the debtor is not able to pay
money, bank‘s recovery department gets money by selling that collateral security.
Sources of Finance
a) Long term financing is done only through government bonds, government securities
and short term financing is done through accrual basis and from money market. As
PNB is very renowned and faithful bank, so they don‘t face as such any obstacle for
raising funds.
b) Factors that this company bears in mind while deciding source of financing are:
i)

Cost of capital

ii)

Expenditure in raising the funds.

iii)

Debt-equity ratio.

iv)

Impact on future borrowings.

v)

Economic atmosphere.

Credit policy
a) Company‘s current credit policies
i.

To keep a watch on the project during implementation stage so that time and cost
overruns do not occur.

ii.

To ensure that the funds released are utilized for the purpose for which these have
been provided and there is no diversion of each funds.

iii.

To evaluate, operational and financial results, such as production sales, profit/loss,
flow of funds etc. And comparing these with the projections/ estimates given by
the borrower at the time of sanction of credit facilities.

iv.

To ensure that the terms and conditions as stipulated in the sanction have been
complied with.

v.

To monitor operations in the account particularly cash credit facilities which
indicate health of the account.

vi.

To obtain market report on the borrower, to gather information like reputation,
financial standing etc.

vii.

To detect signals and symptoms of sickness or deterioration taking place in
conduct/performance of the account.

viii.
ix.

To ensure that the unit‘s management and organization set-up is effective.
To keep a check on aspects like accumulation of statutory liabilities, creditors,
debtors, raw-material, stock-in-process, finished goods etc.

x.

To ensure charging of applicable rate of interest/penal interest/commitment
charges as per bank‘s guidelines.

xi.

To keep all the securities mortgaged or hypothecated to the bank fully insured
against fire and other risks which may be considered necessary. The insurance
policies should be in the joint names of the borrower and the bank with the agreed
bank clause and remain in the custody of the bank.

b) Terms of payment is different for different types of credit policies like:
i.

For term loan, it is 3 to 7 years and in exceptional cases beyond 7
years.

ii.

Its product like senior citizen savings scheme, the tenure is 5 years etc.

c) Credit evaluation is done by credit risk department of PNB. They rate the
individual/firm/company on the basis of many factors like financial data, relationship
with the bank, current status, good will etc. There are no changes in credit policies.

Chapter:-2
Company Profile

The last decade has seen many positive developments in the Indian banking sector. The
growth in the Indian Banking Industry has been more qualitative than quantitative and it is
expected to remain the same in the coming years. Based on the projections made in the "India
Vision 2020" prepared by the Planning Commission, the report forecasts that the pace of
expansion i n the balance-sheets of banks is likely to decelerate. The total assets of all
scheduled commercial banks by end-March 2010 are estimated at Rs.40, 90,000 crores. That
will comprise about 65 per cent of GDP at current market prices as compared to 67 per cent
in 2002-03. Bank assets are expected to grow at an annual composite rate of 13.4 per cent
during the rest of the decade as against the growth rate of 16.7 per cent that existed between
1994-95 and 2002-03. It is expected that there will be large additions to the capital base and
reserves on the liability side.

The Indian Banking Industry can be categorized into non-scheduled banks and scheduled
banks. Scheduled banks constitute of commercial banks and co-operative banks. There are
about 67,000 branches of Scheduled banks spread across India. As far as the present scenario
is concerned the Banking Industry in India is going through a transitional phase. The Public
Sector Banks (PSBs), which are the base of the Banking sector in India account for more than
78 per cent of the total banking industry assets. Unfortunately they are burdened with
excessive Non-Performing assets (NPAs), massive manpower and lack of modern
technology. On the other hand the Private Sector Banks are making tremendous progress.
They are leaders in Internet banking, mobile banking, phone banking, ATMs. As far as
foreign banks are concerned they are likely to succeed in the Indian Banking Industry.
Currently, banking in India is generally fairly mature in terms of supply, product range and
reach-even though reaching rural India still remains a challenge for the private sector and
foreign banks. In terms of quality of assets and capital adequacy, Indian banks are considered
to have clean, strong and transparent balance sheets relative to other banks in comparable
economies in its region. The Reserve Bank of India is an autonomous body, with minimal
pressure from the government. The stated policy of the Bank on the Indian Rupee is to
manage volatility but without any fixed exchange rate-and this has mostly been true. With the
growth in the Indian economy expected to be strong for quite some time-especially in its
services sector-the demand for banking services, especially retail banking, mortgages and
investment services are expected to be strong. One may also expect M&as, takeovers, and

asset sales. In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its
stake in Kotak Mahindra Bank (a private sector bank) to 10%. They have a combined
network of over 53,000 branches and 17,000 ATMs. According to a report by ICRA Limited,
a rating agency, the public sector banks hold over 75 percent of total assets of the banking
industry, with the private and foreign banks holding 18.2% and 6.5% respectively. The policy
makers, which comprise the Reserve Bank of India (RBI), Ministry of Finance and related
government and financial sector regulatory entities, have made several notable efforts to
improve regulation in the sector. The sector now compares favorably with banking sectors in
the region on metrics like growth, profitability and non-performing assets (NPAs). Indian
banks have compared favorably on growth, asset quality and profitability with other regional
banks over the last few years. The banking index has grown at a compounded annual rate of
over 51 per cent since April 2001 as compared to a 27 per cent growth in the market index for
the same period.

Profile of the Organization

Punjab National Bank (PNB) was set up in 1895 in Lahore - and has the distinction of being
the first Indian bank to have been started solely with Indian capital. The bank was
nationalized in July1969 along with 13 other banks. Today, PNB is a professionally managed
bank with a successful track record of over 110 years. The bank has the 2nd largest branch
network in India, with4525 branches including 432 extension counters spread throughout the
country. PNB was ran ked as248th biggest bank in the world by Bankers Almanac, London.
Punjab National Bank is not only the first bank to specialize in credit rating models in India
but also the first one to launch image based cheque transaction system for collection of intra
bank intercity cheques thereby providing credits merely in 48 hrs. in 13 cities. PNB has
achieved significant growth in business which at the end of March 2010 amounted to Rs4,
35,931 crore.

Today, with assets of more than Rs.2,96,633 crore, PNB is ranked as the 3rdlargest bank in
the country (after SBI and ICICI Bank) and has the 2nd largest network
of

branches (5002 offices including 5 overseas branches ). During the FY 2009-10,

with 40.85%share of CASA deposits, the bank achieved a net profit of Rs.3905 crore. Bank
has a strong capital base with capital adequacy ratio of 14.16% as on Mar‘10 as per Basel II
with Tier I and Tier II capital ratio at 9.15% and 5.01% respectively. As on March‘10, the

Bank has the Gross and Net NPA ratio of 1.71% and 0.53% respectively. During the FY
2009-10, its‘ ratio of Priority Sector Credit to Adjusted Net Bank Credit at 40.5% &
Agriculture Credit to Adjusted Net Bank Credit at 19.7% was also higher than the stipulated
requirement of 40% & 18%.

Punjab National Bank is a multinational bank. Presently, the bank has its overseas presence in
10 countries by way of 5 branches (Hong Kong, Dubai, Kabul, & OBU-Mumbai), 3
subsidiaries (London, Bhutan and Kazakhstan), a joint venture (at Nepal) and 5 representative
offices (Sydney, Shanghai, Oslo, Dubai and Almaty).

Competition Information

Name

Last Price

Market

Cap. Net

(Rs. cr.)

Income

Interest Net Profit

Total Assets

SBI

2,473.90

184,694.72

136,350.80

10,891.17

1,792,234.60

Bank of Baroda

909.40

39,165.95

38,939.71

4,541.08

659,504.53

PNB

976.50

35,356.13

43,223.25

3,342.57

550,419.92

Canara Bank

406.25

18,738.64

39,547.61

2,438.19

374,160.20

Bank of India

281.00

18,068.30

37,910.10

2,729.27

573,190.20

IDBI Bank

91.40

14,660.07

26,597.51

1,121.40

328,996.62

Union Bank

205.05

12,924.43

29,349.39

1,696.25

353,780.90

UCO Bank

102.50

10,400.77

18,229.92

1,510.54

239,124.75

Central Bank

69.50

9,385.55

24,427.55

-1,262.84

289,496.22

IOB

70.35

8,690.68

22,643.55

601.74

274,904.85

SWOT analysis of the bank
Strengths


Weaknesses

PNB has a wide network of branches



and ATM allowing it to cater to large

branding as compared to other banks, the

number of customers.

bank is not known to rural areas.




Casual behavior of bank employees
towards customers.

Large customer base.


.


But due to Inadequate advertising and

Less penetration in the urban areas.

PNB has adapted to technological
changes in the banking sector and can

.

leverage it to cut costs as well as


improve its services


Very high level of gross non-performing
asset.

PNB has all the products under its belt,
which help it to extend the relationship
with existing customers. PNB has
umbrella

of

products

to

offer

to

customers.




PNB is having little presence outside

Strong IT support with ―best fit‖

India, because of which companies

approach.

prefer MNC banks. So if PNB tries to
emerge outside India then it has a huge
potential of customers.



Its 56,000+ workforce serves over 37
million customers.



Slow decision making due to large
hierarchy.

Opportunity


Threat

Small scale business banking across



India.




Expansion

crisis

and

economic

fluctuations.
in

other

countries

for



Highly competitive environment from

international banking.

other nationalized banks because of their

Installation of more ATM‘s and better

ever improving service standards.

customer‘s services.


Economic

Fast growing Indian economy presents



Stringent Banking Norms by the RBI
and the Government..

tremendous credit growth opportunity
for the bank.


PNB can tap the huge potential in micro
financing by leveraging the potential of
its operations n rural and semi urban
India.

Market share of the bank
Currently, Punjab National Bank has over 6 crore customers. The segments in which the
business of the bank can be divided in are- Corporate Banking, Retail Banking and Treasury.
The bank has 5.18% market share in deposits and 5.11% market share in credit as on Mar‘13.
The Government of India owns 57.9% stake in Punjab National bank.

6%
4%
Interset Income
Other Income
Fee Based
Income

90%

Sources of income generation

21%

48%

Corporate Banking
Retail Banking
Treasury

31%

Percentage of segments in Punjab National Bank

Figure 1.6 Comparing market shares of commercial banks
Source: share market research

Turnover of the bank
Punjab National Bank has reported sharp 29% dip in the net profit for the quarter ended
March 2014 to Rs 806.35 crore. However, the bank has recorded healthy growth in noninterest income. Gross NPA increased 14% quarter over quarter to Rs 18880.06 crore, while
Net NPA moved up 9% quarter over quarter to Rs 9916.99 crore at end March 2014.Cash
recovery (Rs 504 crore), up gradations (Rs 806 crore) and write-offs (Rs 99 crore) together at
Rs 1410 crore during Q4FY2014, were extremely below the fresh slippages (net) of Rs 3695
crore in Q4FY2014.Punjab National Bank turnover is 6462.32 by 4th august 2014.
Position of Punjab National Bank in India
Serial number

Name of the banks

1

State Bank of India

2

ICICI Bank

3

HDFC Bank

4

Punjab National Bank

5

Bank Of India

6

Canara bank

7

Bank of Baroda

8

Axis Bank

9

Kodak Mahindra bank

10

Union bank of India

11

Indian overseas bank

12

IDBI bank limited

13

State bank of Patiala

14

Indian Bank

15

Power Finance corporation

16

Oriental Bank Of commerce

17

Syndicate bank

Position of Punjab National Bank in Indian Industry
Punjab National Bank is ranked as the 4th largest bank in the country in terms of branch
network, business and many other parameters as on 31st July 2014 PNB was on 2nd position
till June, 2014 but due to increase in NPA it has come to 4th position. The bank has been
ranked 248th biggest bank in the world by the Bankers' Almanac.
Organization structure of the bank
The bank has a four tier structure comprising of head office, field general manager (FGM),
circle office and branch office. There are 69 circle offices and 6215 branch offices. There is
decentralized power up to the branch level which has improved speed of decision making.
The major decisions are taken in the head office related to new product, how it is to be
commercialized, interviews for new hires etc. are taken in the head office and then they are
forwarded to the field general manager to check for execution and then all the decisions are
forwarded to circle offices and then they forwarded to all the branches and branch members
will actually implement those decisions through communicating with the customers.

Head Office
Field General Manager (FGM)
Circle Office

Branches

Board of
directors

CMD

ED

GM
(Credit)

GM
(Retail &
lending)

GM ( NPA
& Weak
Account)

DGM

AGM

GM
(Treasury)

DGM

AGM

GM
(IRMD)

GM
(Audit)

.......

......

DGM

AGM

GM
(Deposits)

......

Funtional
Head

Organization structure in Punjab National Bank
This is hierarchical organization structure where every entity in the organization, except one,
is subordinate to a single other entity. In an organization, the hierarchy usually consists of a
group of power at the top with subsequent levels of power beneath them. This is the dominant
mode of organization
and organized

among large organizations.

religions are

hierarchical

Most corporations, governments,

organizations

with

different

levels

of management, power or authority. Members of hierarchical organizational structures chiefly
communicate with their immediate superior and with their immediate subordinates.
Structuring organizations in this way is useful partly because it can reduce the
communication overhead by limiting information flow; this is also its major limitation.

Chapter:-3
Literature Review

Ratings, including Rating Watches and Outlooks, assigned by Fitch are opinions based on
established criteria and methodologies that Fitch is continuously evaluating and updating.
Therefore, ratings are the collective work product of Fitch and no individual, or group of
individuals, is solely responsible for a rating. Ratings are not facts, and therefore cannot be
described as being "accurate" or "inaccurate‖. Users should refer to the definition of each
individual rating for guidance on the dimensions of risk covered by such rating

The risk of loss of principal or loss of a financial reward stemming from a borrower's failure
to repay a loan or otherwise meet a contractual obligation. Credit risk arises whenever a
borrower is expecting to use future cash flows to pay a current debt. Investors are
compensated for assuming credit risk by way of interest payments from the borrower or
issuer of a debt obligation.

An assessment of the credit worthiness of a borrower in general terms or with respect to a
particular debt or financial obligation. A credit rating can be assigned to any entity that seeks
to borrow money – an individual, corporation, state or provincial authority, or sovereign
government. Credit assessment and evaluation for companies and governments is generally
done by a credit rating agency such as Standard & Poor‘s or Moody‘s. These rating agencies
are paid by the entity that is seeking a credit rating for itself or for one of its debt issues. For
individuals, credit ratings are derived from the credit history maintained by credit-reporting
agencies such as Equifax, Experian and Trans Union.

look within internal ratings based approach recommended by the basel committee would
form the basis for a sophisticated risk management system for banks. a key element of the
basel committee's proposed new capital accord is the use of a bank's internal credit risk
ratings to calculate the minimum regulatory capital it would need to set aside for credit risk.
called the internal ratings based (irb) approach. it links capital adequacy to the rating of the
assets in a bank's books.

Credit risk measurement remains a critical field of top priority in banking finance, directly
implicated in the recent global financial crisis. This paper examines the dynamic linkages
between credit risk migration due to rating shifts and prevailing macroeconomic conditions,
reflected in alternative business cycle states. An innovative empirical methodology applies to
bank internal rating data, under different economic scenarios and investigates the

implications of credit risk quality shifts for risk rating transition matrices. The empirical
findings are useful and critical for banks to align to Basel guidelines in relation to core capital
requirements and risk-weighted assets in the underlying loan portfolio.

Chapter:-4
Objective of the study

To study broad contours of management of credit, the loan policy, credit appraisal for
business units i.e. for working capital loan or Term Loan

To understand the basis of credit risk rating and its significance

To utilize the above learning and appraise the creditworthiness organizations thoseapproach
PUNJAB NATIONAL BANK for credit. This would entail undertaking of the following
procedures:

Management Evaluation
Business / Industry Evaluation
Financial Evaluation
Credit Risk Rating

Chapter5:-Research
Methodology

The sources to study the application and feasibility of various theories and concepts, the
following sources of information are being used:
Primary sources
The primary sources are discussions with the company guide, staff members and other
department heads.
Secondary sources
The secondary sources of information are Reserve Bank of India guidelines regulating the
activities of the banks, bank‘s Credit policy and related circulars and guidelines, research
papers, power point presentations and PDF files prepared by the bank audits related officials,
study of proposals and manuals, website of Punjab National Bank and other secondary
(published) sources.

Chapter 6:-A Case
Study

Basel Accord has classified in to three categories-Credit risk, Market risk, and Operational
risk.Of the three the most prominent risk is credit risk constituting 90-95% of risk segment
of banks.RBI has approved standardized approach for credit risk measurement.whereby a
borrower is to be rated by approved credit rating agency for taking lending decisions.Punjab
National Bank has developed an assessment model for the purpose of risk ratings of its
borrowers known as PNB TRAC It has categorized as borrowers as large corporate borrowers
,mid corporate borrowers small loans, NBFC,New Project rating models and entrepreneur
new business model for rating purpose and has the rating scales starting from D to AAA as
follows

Score Obtained

Rating

Description

Above 80

AAA

Minimum Risk

77.50-80.00

AA+

Marginal Risk

72.50-77.50

AA

70.00-72.50

AA-

67.50-70.00

A+

62.50-67.50

A

60.00-62.50

A-

57.50-60.00

BB+

52.50-57.50

BB

50.00-52.50

BB-

47.50-50.00

B+

42.50-47.50

B

40.00-42.50

B-

40.00-42.50

C

High Risk

30.00 & below

D

Caution

Moderate Risk

Average Risk

Marginally acceptable Risk

CASE
For the purpose of illustrating the rating procedure by using PNB TRAC Entrepreneur new
business model is selected. Borrower is a Private Ltd company locally providing
services.PNB TRAC‘s evaluation criteria includes Management evaluation, Business
evaluation, Financial evaluation-Both objective and subjective also key risk factor. The
evaluation is reported as follows

Credit Risk Rating For Entrepreneur New Business Model

1. Name of the Borrower:

2. Address

3. Constituition

4. Industry

5. Activity

6. Balance sheet as on date

7. Borrower code

8. Rating Id

9. Exposure

10. Draft no:1
i)Sanctioned limits
ii)Propsed limits

Management Evaluation(Score0-4)

Parameters

Comments

Managerial capabilities

Capable

Rate
of

efficient 2.00

management
Commitment & Sincerity

Sincere and Trust worthy

Financial flexibility /family Family Support

3.00
3.00

group support
Track

record

in

debt N.A

Repayment
Relationship with Bank

Good relation Maintained so 3.00
far

Business Evaluation-Service sector(0-4)

Prameters

Comments

Rate

Location of unit

Near to branch in the city

3.00

Marketing service

Easily marketable

2.50

Core competency

One

promoter

id

highly 2.50

qualified
Infrastructure Available

Necessary infrastructure now 3.00
made available

Quality

Good

quality

maintained
Others

NA

of

service 2.50

Financial Evaluation-Subjective
Parameters

Comments

Rate

Reliability of data submized/ reasonably reliable
reputation

of

/Impairment

in

2.50

appraiser
value

of

assets
Conduct of A/c

NA

Total Score
SL no

Parameters

Max score

Score

Weight

Obtained

Weighted
Score

1.

Management

100

68.00

40

27.20

2.

Business

100

67.50

35

23.63

23.

Financial

100

70.42

25

17.61

Credir Risk Rating (Maximum Ceiling on Total Score is applied) PNB-A 65
Source: PNB Branch Data

Chapter:-7
Findings

After completing the entire project at Punjab National Bank the following key findings as
mentioned below were observed.
1. At Punjab National Bank, Circle Office the priority to appraise a proposal was given to
new or fresh clients over the existing clients presenting proposals for renewal

2. Ratings, as being performed at PNB, are done once a year. Therefore, the ratings do not take
into account short term drastic changes like price level changes (which are an issue with any

method based on accounting statements, since annual reports are based onhistorical cost basis
of accounting and other changes like sudden mishap/ of thecounterparty are not readily
accounted for by the rating system due to long lag between repeat ratings on the same
account.

3. Some of the parameters in Business and industry evaluation are based on the information
provided by company, which in some cases may not be sufficient. No specific guidelines are
followed in such cases. Also, some of the parameters here may be rendered redundant in
some cases and may push up/ push down the rating needlessly in these cases.

4. The present risk rating model does not have any mechanism to prioritize certain sectors of the
economy. There are certain sector in the economy where risk spread is low and certain sectors

where spread
infrastructural

of risk
projects

is high like
which

real estate.
need

Also,
to

there

are certain

be

prioritized.

The risk rating model is not flexible to incorporate all these issues.
5. The BPLR system will soon be replaced by Base Rate system. Banks may choose any
benchmark to arrive at the Base Rate for a specific tenor that may be disclosed transparenly.

6. With the deregulation of the financial sector, the ability of the banks to service the credit
requirements of the SME sector depends on the underlying transaction costs, efficient
recovery processes and available security. There is an immediate need for the banking
sectorto focus on credit and finance requirements of SMEs.

Chapter:-8
Suggestions

The Credit Department at PNB, works at its full potential and the staff is highly experienced
and has a very strong intuitive sense. So, there is no such recommendation on the entire
process. However to make the process more flexible and efficient, an electronic database
should be designed carrying all the available and important information related to the

proposals accepted, and it shRould be easily accessible to the Credit Department. This will
help reduce paperwork and loss of information.

Chapter :-9
Bibilography

Websites


https://www.fitchratings.com/web_content/ratings/fitch_ratings_definitions_and_scal
es.pdf



http://www.investopedia.com/terms/c/creditrisk.asp



http://www.investopedia.com/terms/c/creditrating.asp



https://www.google.co.in/?gfe_rd=cr&ei=I255VM3vLubA8ge5j4GIBw&gws_rd=ssl
#q=articles+of+credit+risk+rating



http://articles.economictimes.indiatimes.com/keyword/credit-risk



http://en.wikipedia.org/wiki/Internal_Ratings-Based_Approach_%28Credit_Risk%29



http://www.mdpi.com/2227-7072/2/1/122



http://www.investopedia.com/articles/fundamental/03/061803.asp



http://www.pnbindia.in/



http://en.wikipedia.org/wiki/Punjab_National_Bank
PNB journals:



Gist of operative circulars on loans and advances.



Documents and reference material of PNB.



Internal files of PNB.

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