`

PROJECT REPORT ON

“Credit management and issue of loan defaults”

SUBMITTED BY
Name - Siddhi shah
Roll number – 47

Bachelor of Commerce (Banking & Insurance)

Semester (V)
(2020-2021)

PROJECT GUIDE
PROF. BAIJUL MEHTA

Mithibai College of Arts, Chauhan Institute of Science & Amrutben Jivanlal

College of Commerce and Economics

Bhaktivedanta Swami Marg, Gulmohar Road, SuvarnaNagar, Vile Parle

(W), Mumbai, Maharashtra 400056

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“CREDIT MANAGEMENT AND ISSUE OF LOAN DEFAULTS”

Bachelor of Commerce (Banking & Insurance)

Semester (V)

Submitted
In Partial Fulfillment of the requirements
For the Award of Degree of
Bachelor of Commerce (Banking & Insurance)

By:
Name - SIDDHI SHAH
Roll No : 47

Mithibai College of Arts, Chauhan Institute of Science & Amrutben

Jivanlal College of Commerce and Economics

Bhaktivedanta Swami Marg, Gulmohar Road, Suvarna Nagar, Vile Parle

(W), Mumbai, Maharashtra 400056

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ACKNOWLEDGEMENT 
To list who all have helped me is difficult because they are so numerous, and the depth is
so enormous.
 
I would like to acknowledge the following as being idealistic channels and fresh
dimensions in the completion of this project.
 
I take this opportunity to thank Mithibai College for giving me chance to do this project.
 
I would like to thank my I/c Principal, Dr. Krutika Desai for providing the necessary
facilities required for completion of this project.
 
I take this opportunity to thank our Head of Department Mr. Mandar Thakur, for his
moral support and guidance. 

I would also like to express my sincere gratitude towards my project guide Asst. Prof.
Baijul Mehta whose guidance and care made the project successful.

 Lastly, I would like to thank every person who directly or indirectly helped me in the
completion of the project especially my Parents and Peers who supported me throughout
my project.

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DECLARATION

I, Siddhi Shah the student of T.Y.B.B.I. Semester V (2020-2021) hereby

declare that I have completed the project on Credit management and issue
of loan defaults

The information submitted is true and original to the best of my knowledge.

 

_____________________
Siddhi . P. Shah
Roll No: 47

Mithibai College of Arts, Chauhan Institute of Science & Amrutben Jivanlal

College of Commerce and Economics

Bhaktivedanta Swami Marg, Gulmohar Road, Suvarna Nagar, Vile Parle

(W), Mumbai, Maharashtra 400056

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CERTIFICATE
 
This is to certify that Siddhi Shah, Roll No: 47 of Third Year B.B.I., Semester V (2020-
2021) has successfully completed the project on

Title: Credit management and issue of loan defaults

Under the guidance of Asst. Prof. Baijul Mehta

Project Guide/ Internal Examiner

Asst. Prof. BAIJUL MEHTA

I/c Principal
Dr. Krutika Desai

External Examiner

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Table of content
SR INDEX PG
NO NO
I Abstract 8
II Executive Summary 9
III Problem Statement 10
IV Objectives Of Study 11
V Research Questions 12
VI Significance Of Study 13
VII Scope Of Study 13
VIII Limitation 14
Introduction
1.1 Bank Credit 15
1.2 Types Of Bank Credit 15
1.3 Meaning Of Credit Management 17
1.4 Deployment Of Banks Funds 17
1.5 Central Bank Credit Policies 21
1.6 Credit Control Measures By RBI 21
Credit Appraisal And Monitoring
2.1 Introduction 23
2.2 Meaning Of Credit Appraisal 23
2.3 Ratios For Credit Appraisal 24
2.4 Credit Appraisal Process 25
2.5 Credit Appraisal Process Of Tern Loan By SBI Bank 26
2.6 Meaning Of Credit Monitoring 27
2.7 Viewpoint Of RBI On Credit Monitoring 27
2.8 Monitoring Process 29
2.9 Early Warning Signals 30
2.10 Monitoring Focus Of ICICI Bank 31
Loan Defaults
3.1 Credit Risk 32
3.2 Meaning And Determinants Of Loan Defaults 32
3.3 Types Of Default 33

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3.4 Consequences Of Default 35

Literature Review
4.1 Determinants Of Loan Defaults 36
4.2 A Study On Retail Loan Distribution By Scheduled 37
Commercial Banks And The Borrowing Motive Of
Customers
4.3 Determinants Of Non Performing L0an 39
Research Methodology
5.1 Research Design 40
5.2 Sampling Techniques 41
5.3 Data Collection 41
5.4 Method Of Data Analysis 42
Presentation And Analysis Of Data
6.1 Data From Bank employees 43
6.2 Data From Clients 48
Conclusion Recommendation
7.1 Conclusion 53
7.2 Recommendation 55
IX Appendix
Questionnaire For Bank employees 59
Questionnaire For Clients 61
X Bibliography 63

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I) ABSTRACT

The study of credit management is an attempt to indicate the importance of credit

management in banking sector. Thus, the rationale behind undertaking this study is to
deeply investigate the causes of credit management problems and to suggest the possible
solutions that enable the bank to run its operation in a safest way as credit is known to be
the main stay of all banks.
The ability of banks to formulate and adhere to policies and procedures that promote
credit quality and curtail non-performing loans is the means to survive in the stiff
competition. Inability to create and build up quality loans and credit worthy customers
leads to default risk and bankruptcy as well as hampers economic growth of a country.
The main objective of the study is to evaluate the performance of credit management of
Indian banking sector and factors contributing to loan defaults. For the purpose of study
both primary and secondary data are used; Primary data is collected using questionnaires.
The secondary data is collected from articles, and bulletins of the bank. Descriptive
statistical tools are used in analyzing the data collected.
In conclusion, credit management forms an important part of bank profitability and
credibility and defaulting in that leads to credit risk for respective bank leading to various
difficult consequences.
Loan default is caused by the customers, the financial institution which is lending and
also external factors such as delay in release of contractor’s funds for government
projects, fire outbreak, decongestion etc. This affects the institution as it decreases its
profit margin and impinges on its operational sustainability and viability. It is
recommended that when screening clients for loans, Customer’s character, capacity,
capital, collateral and conditions under which loans are given should be thoroughly
examined and also loan amount should not be diverted by customers to acquire assets and
also interest rates which are normally high should be reduced.

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II) Executive summary

Banks are the catalyst of economic development of all countries whether developing or
developed countries. Credits has always been one of the principal sources of income for
commercial banks. It represents one of the principal assets of the bank. The extension of
credit on sound basis is therefore, very essential for the growth and prosperity of banks.
The central bank of developed and developing countries are more focused on the quality
of portfolio of commercial banks.
The globally accepted standards of capital adequacy, norms for asset classification,
income recognition and provisioning, risk management supervision and control of bank
credit are some of the key areas which helps in making the system strong and sound
David (l997) advanced
“Credit policy provides a framework for entire credit management process which
serves as a cornerstone of sound credit management.”
Banks to be competitive, the credit unions need to work at a reduced cost. This means the
credit unions will have to work efficiently. Furthermore, they need to combine efficient
credit management processes which will protect the largest asset of the credit unions
David (l997) advanced that credit policy provides a framework for entire credit
management process which serves as a cornerstone of sound credit management.

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III) PROBLEM STATEMENT

It is clear that the contributory factor of the collapse of most financial institution
is the weaknesses of the institutions credit management process. There are
problems with risk management in many financial institutions particularly credit
risk management.
Banks have unfavorable environment and capacity constraints to critically assess
borrowers effectively to reduce the incidence of loan default. In spite of this,
banks grant loans to their customers with no security to protect the loan. Granting
financial supports to lower income earning people with unimpressed credit history
or cannot offer any collateral protection is very expensive and dicey.

The problems in managing credit have led to the closure of banks. Loans
constitute the biggest financial asset of the banks while interest on loan is the
major source of income to the banks.

Now a days banks are facing difficulty in managing the loan portfolio
effectively .The funds granted out as a matter of fact are not owned by the banks,
they are liabilities to the banks which are owned by the members or customers of
the banks and must be made available to the depositors when they are in need.
The banks are usually under pressure to make sure that credit given out are
retrieved on schedule to enable them meet withdrawal demand of their members.
When withdrawal demands are not met, information could be sent out and can
cause panic withdrawal by members which will collapse the banks. This makes it
an important issue to ensure that banks manage their loan portfolio effectively and
efficiently in other to avoid potential fold up situation.
The research sought to uncover the effectiveness of credit management processes of
banks, highlight the issue of loan defaults and necessary measures to curb this alarming
situation and its consequences

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IV) OBJECTIVES OF THE STUDY

The objectives of the study are:

1. To critically assess the credit management process of the banks.

2. To assess tools and technique used by banks for managing credit

3. To analyze and conclude data of loan defaults from viewpoint of customers and
bank employees

4. To identify major factors contributing to loan defaults.

5. To identify the essential customer business characteristics that lead to loan

defaults.

6. To examine measures put in place in reducing loan defaults.

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V) RESEARCH QUESTIONS

In the bid to accomplish the set objectives of the research work, the following
research questions are posed:

1. How to critically assess the credit management process being used by Banks?

2. What are the factors contributing to loan defaults?

3. What are the measures and policies to reduce loan defaults?

4. What customer business characteristics makes it difficult for the customers

to meet their loan repayment?

5. To what extent is the Bank accelerating the performance of credit

management in line to its policy and national banks requirement?

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VI) Significance of the Study

Loans and advances are known to be the main stay of all commercial banks. They
occupy an important part in gross earnings and net profit of the banks. The share
advances in the total asset of the banks forms a lion share (almost more than 60
percent) and as such it is the back bone of banking sector. Bank lending is very
crucial for it makes possible the financing of agricultural, industrial, construction,
and commercial activities of a country. The strength and soundness of the banking
system primarily depends upon health of the advances. Therefore the ability of
banks to formulate and adhere to policies and procedures that promote credit
quality and curtail nonperforming loans is the means to survive in the stiff
competition. In ability to create and build up quality loans and credit worthy
customers leads to default risk and bankruptcy as well as hampers economic
growth of a country. However, little work is done to search the ways and means
that enable to quality loan creation and growth as well as to determine the
relationship between the theories, concepts and credit policies. Hence, this study
is assumed to be significant in indicating best practice and concepts for prudent
lending to enhance the performance of credit management to all managers and
policy makers of the bank as well as to all financial institutions and banks.
Moreover, it may help as a benchmark for researchers who are interested in the
area to extend it further.

VII) Scope OF THE STUDY

Bank loans are consistently becoming more and more expensive, inaccessible and
unattractive in recent times. This is as a result of the increasing volume of bad loans in
the portfolios of the financial institutions which has led to Banks writing off huge sums
of in the form of loss charges. It is for this reason that the research is being conducted to
make known the causes of loan defaults in financial institutions so as to identify ways of
reducing the increasing rate of default these institutions are saddled with and thereby
reduce cost and increase access to credit
. The credit policy approved by the board, should also cover the guidelines in regard to
placement and posting of experienced and well trained officers in credit department.
They should be posted to credit department after they have put in certain minimum
number of years of service and after acquiring sufficient exposure in credit appraisal
techniques. The credit policy approved by the board, should also cover the guidelines in

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regard to placement and posting of experienced and well trained officers in credit
department.
Organization-specific risk management strategies have to be developed according to the
business mix, geographical segment covered, staff culture and detailed work practices in
vogue in the respective banks

It has been found that in many cases funds sanctioned by the banks for a particular
purpose were diverted by certain unscrupulous borrowers, thereby making the loan prone
to become ‘nonperforming’. The banks have to develop appropriate ways and means to
ensure that end use of funds particularly in respect of large borrowers’ .Lines of authority
for sanctioning of loans and advances to be specified at executive levels or committee
thereof encompassing desirable system to be followed with the standards of measuring
risks.
For better co-ordination of activities and control of risk, an efficient and efficient internal
management reporting system should be put in place. The reports should be
comprehensive enough for meaningful analysis and effective interpretation. The reports
generated from the system should be reviewed at short intervals and suitable guidelines
should be issued to the operating levels.

VIII) Limitation of study

1. Due to pandemic and lockdown one-to-one interaction was not possible.

2. Some of the respondents failed to answer the questionnaire

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Chapter 1: Credit Management

1.1 Introduction
Bank credit
Banks and financial institutions make money from the funds they lend out to their clients.
These funds come from the money clients deposit in their checking and savings
accounts or invest in certain investment vehicles such as certificates of deposit (CDs). In
return for using their services, banks pay clients a small amount of interest on their
deposits, this money is then lent out to others and is known as bank credit. . By extending
credit, a bank essentially trusts borrowers to repay the principal balance as well as
interest at a later date. Whether someone is approved for credit and how much they
receive is based on the assessment of their creditworthiness.

Indian banking credit

The Indian banking landscape has been transforming over a decade, from changing
customer expectations and evolving technology to innovation in products and services,
fueled by a democratized digital infrastructure.
Over the same period, India changed from a savings to a consumption driven economy,
with rising incomes and declining household savings. As per RBI data, the disposable
income and consumption levels in India have also grown at a healthy rate of 9 12 per cent
since 2012/13.
Demand for credit, specifically retail credit, has been rising at 15.7 per cent every year
over the past three years. This interplay of factors sets the tone for future evolution of
banks to meet the need for better products, especially at the point of consumption.

1.2 Types of Bank Credit

Bank credit comes in two different forms

1. Secured

2. Unsecured

Secured credit or debt is backed by a form of collateral, either in the form of cash or
another tangible asset.

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E.g. In the case of a home loan, the property itself acts as collateral. Banks may also
require certain borrowers to deposit a cash security in order to get a secured credit card.
Secured credit reduces the amount of risk a bank takes in case the borrower defaults on
the loan. Banks can seize the collateral, sell it, and use the proceeds to pay off part or all
of the loan. Because it is secured with collateral, this kind of credit tends to have a lower
interest rate and more reasonable terms and conditions.

Unsecured credit, on the other hand, is not backed by collateral. These kinds of credit
vehicles are riskier than secured debt because the chance of default is higher. As such,
banks generally charge higher interest rates to lenders for unsecured credit.

Examples of Bank Credit

1. CREDIT CARD

The most common form of bank credit is a credit card. A credit card approval comes with
a specific credit limit and annual percentage rate (APR) based on the borrower's credit
history. The borrower is allowed to use the card to make purchases. They must pay either
the balance in full or the monthly minimum in order to continue borrowing until the
credit limit is reached.

2. Mortgage

Banks also offer mortgage and auto loans to borrowers. These are secured forms of credit
that use the asset—the home or the vehicle—as collateral. Borrowers are required to
make fixed payments at regular intervals, usually monthly, bi-weekly, or monthly, using
a fixed or variable interest rate.

3. Line of credit

One example of business credit is a business line of credit (LOC). These credit facilities

are revolving loans granted to a company. They may be either secured or unsecured and
give corporations access to short-term capital. Credit limits are normally higher than
those granted to individual consumers because of the needs of businesses, their
creditworthiness, and their ability to repay. Business LOCs are normally subject to annual
reviews.

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1.3 Meaning of credit management

According to Asiedu-Mante (2011) credit management involves establishing formal
legitimate procedures and policies that will ensure that the proper authorities grant credit,
the credit goes to right people, the credit is given for the productive activities or for
businesses which are economically and technically viable. An appropriate credit
assessment and monitoring systems yield wealth of information to assist financial
institutions evaluate risk and realize opportunities, thus protecting the institution and
making it profitable

1.4 Deployment Of Bank’s Funds

Commercial banks act as catalysts in the economic development of a country. This is
achieved by mobilizing almost one-third of the gross national product through their
various deposit schemes. Approximately 65-70% of these funds are deployed as bank
credit in various sectors of the economy. Thus, deposit mobilization and lending/credit
dissensions are the two most important functions of commercial banks. Banks are the
trustees of the public funds or savings.
The bank has to deploy its funds in three main areas: cash, investments, and loans
and advances. The first two are determined largely by the Reserve Bank of India (RBI)
from time to time. At present, the Cash Reserve Deployment (CRD) of funds in ratio is
4.75% of total time and banks demand liabilities. Cash Reserve Ratio (CRR) is kept in
current account with RBI. Currently CRR is 4% though the range is permissible between
3% and 15%, depending upon the decision of the central monetary authority. The
Statutory Liquidity Ratio (SLR) comprises (a) cash in hand and balances at other banks
and (b) investment in government and other approved securities.

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DEPLOYMENT OF FUNDS
18

16

14

12

10

0
NON FOOD BANK AGRICULTURE AND INDUSTRY SECTOR PERSONAL LOANS SERVICE SECTOR
ALLIED ACTIVITIES

sector deployment of credit Aug-20 sector deployment of credit Aug-19

Highlights of the sectorial deployment of bank credit are given below:

 On a year-on-year (y-o-y) basis, non-food bank credit growth decelerated to 6.0

per cent in August 2020 from 9.8 per cent in August 2019.
 Credit to agriculture and allied activities increased by 4.9 per cent in August 2020
as compared with a growth of 6.8 per cent in August 2019.
 Credit growth to industry decelerated to 0.5 per cent in August 2020 from 3.9 per
cent in August 2019.
 Within industry, credit to ‘food processing’, ‘petroleum, coal products & nuclear
fuels’, ‘leather & leather products’, ‘wood & wood products’ and ‘paper & paper
products’ registered accelerated growth in August 2020 as compared with the growth in
the corresponding month of the previous year. However, credit growth to ‘beverage &

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tobacco’, ‘construction’, ‘infrastructure’, ’rubber plastic & their products’, ‘chemical &
chemical product’, ‘glass & glassware’ and ‘all engineering’ decelerated/contracted.
 Credit growth to the services sector decelerated to 8.6 in August 2020 from 13.3
per cent in August 2019. Within this sector, credit to ‘computer software’, ‘trade’ and
‘tourism, hotels & restaurants’ registered accelerated growth in August 2020 vis-à-vis the
growth in the corresponding month of the previous year.
 Personal loans continued to perform well registering a growth of 10.6 per cent in
August 2020 as compared with 15.6 per cent growth in August 2019. Within this sector,
vehicle loans registered an accelerated growth in August 2020 as compared with the
growth in the corresponding month of the previous year.

1.5 BROAD AREAS OF LENDING

The Reserve Bank has identified priority sectors for commercial banks to follow while
advancing loans. These are as follows:

Priority sectors as per RBI definition:

1. Agriculture
2. Micro, small and medium enterprises (MSME) (including setting up of industrial
estates)
3. Small road and water transport operators (owning up to 10 vehicles)
4. Small business (Original cost of equipment used for business not to exceed rupees
20 lakh or 2 million).
5. Retail trade (advances to private retail traders up to rupees 10 lakh or 1 million)
6. Professional and self-employed persons (borrowing limit not exceeding rupees 10
lakh of which not more than rupees 2 lakh for working capital; in the case of
qualified medical practitioners setting up practice in rural areas, the limits are
rupees 15 lakh and rupees 3 lakh respectively and purchase of one motor vehicle
within these limits can be included under priority sector).
7. State sponsored organizations for Scheduled Castes/Scheduled Tribes.

8. Education (educational loans granted to individuals by banks).

9. Housing [both direct and indirect—loans up to rupees 5 lakh (direct loans up to one
million in urban/metropolitan areas), Loans up to rupees 1 lakh and 2 lakhs for repairing
of houses in rural/semi-urban and urban areas respectively).

10. Consumption loans (under the consumption credit scheme for weaker sections).

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11. Micro-credit provided by banks either directly or through any intermediary; Loans to
self-help groups (SHG)/Non-government organizations (NGOs) for on—lending to
SHGs.

12. Loans to the software industry (having credit limit not exceeding rupees 1 core or 10
million from the banking system).

13. Loans to specified industries in the food and agro-processing sector having
investment in plant and machinery up to rupees 5 crore or 50 million.

14. Investment by banks in venture capital [venture capital funds/companies registered

with Stock Exchanges Board of India (SEBI).

Other sectors:

1. Exports (per-shipment and post-shipment finance).

2. Real estate financing.

3. Projects financing (Large scale industrials units except infrastructure and MSMEs).

4. Other commercial/conventional (non-priority) loans not covered above.

Infrastructure sector as defined by RBI.

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1.6 CENTRAL BANK CREDIT POLICIES

The Banking Regulation Act empowers the Reserve Bank to control the pattern, direction
and extent of bank credit. The specific authority is vested under Section 21 of the Act.
Sub-section (2) of Section 21 f stipulates that the powers vested in the Reserve Bank
include the powers to issue directions either generally to all the banks or to a bank in
particular with respect to the following.
(A) The purpose for which advances may or may not be made.
(B) The margins to be maintained in respect of secured advances.
(C)The maximum amount of advances or other financial accommodation which,
having regard to the paid-up capital, reserves and deposits of a banking company to
anyone company, firm, association of persons, or individual.
(D) The maximum amount up to which, having regard to the considerations in Cl. (C),
guarantees may be given by a banking company on behalf of anyone company, firm,
association of persons, or individuals.
(E) The rate of interest and other terms and conditions on which advances or other
financial accommodation may be made or guarantees given.

1.7 Credit control measures by RBI

The credit control measures are formulated by RBI in line with the monetary policy of
the country. The objective of the monetary policy are twofold:
 To facilitate flow of academic volume of bank credit to the various sectors with
specific reference to the weaker sectors
 To keep a control on inflationary pressure by ensuring restraint on credit
expansion and proper end use of bank credit
The RBI controls the flow of credit by using three major instruments
1. Bank rate
2. Open market operations
3. Variable reserve requirement/ratios
The first two instruments are directly operated and managed by reserve bank under RBI
Act:

 CRR-Reserve Bank Of India Act

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 SLR-Banking Regulation Act

Banking regulation act imposes an obligation on schedules commercial banks to maintain

a minimum holding of liquid assets as a statutory liquidity ratio equal to a specified % of
their demand and term liabilities (DTL), exclusive of a balance maintained under CRR
and Reserve Bank. The investment made by banks in central and state government
securities comprises the bulk of liquid assets under SLR

OPEN MARKET OPERATION

Open Market Operations is the simultaneous sale and purchase of government securities
and treasury bills by RBI to regulate the money supply in the economy. It is one of
the quantitative tools that RBI uses to smoothen the liquidity conditions through the
year and minimize its impact on the interest rate and inflation rate levels.
RBI had decided to carry an OMO worth Rs20, 000cr in two tranches of Rs10, 000cr
each. The first tranche was completed on September 10, 2020. While the second would
be held on September 17, 2020.

The key indicators of RBI Monetary Policy along with their current rates in the table
given below: Current Rate
20%
18.50%
18%

16%

14%

12%

10%

8%

6%
4.65% 4.65%
4.00%
4% 3.00% 3.35%

2%

0%
CRR SLR Repo Rate Reverse Repo Rate Marginal Standing Bank Rate
Facility Rate

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CHAPTER 2: CREDIT APPRAISAL AND MONITORING

2.1 INTRODUCTION
In today’s highly competitive and dynamic scenario, Indian banks too are evolving newer
approaches for extending credit to their customers. The banks in India also have to
contend with a credit market, which has become highly selective in respect of pricing of
loan products and quality of services.

It is, however, important the banks do not dilute credit granting standards even
while lending to the retail sector. Exposure limits should be established for a bank’s
exposure to sub-sectors of the retail sector such as housing finance, vehicle finance, and
personal loans.

Banks are increasingly switching over from the cash credit style of lending to the
loan system. Under the cash credit system borrowers had the freedom to draw whenever
and as much money as they wanted within an overall specified limit. A major fall out of
this credit style was that the banking system had no control over the timing and level of
utilization of bank credit thus making it difficult to plan and budget for resources. Also,
although credit was a short term working capital loan and technically payable within one
year, it continued for years. It was in fact, worse than term loans which though being
sanctioned for longer periods, got repaid as per the sanctioned terms of the loan, much
earlier than cash credits.

2.2 Meaning Of Credit Appraisal

Credit appraisal basically refers to assessing a particular loan application or proposal in a
thorough manner in order to gauge the repayment ability of the loan applicant. A lender
conducts a credit appraisal chiefly to make certain that the bank gets back the money that
it lends to its customers.  It appraises or evaluates management, market, technical, and
financial elements.
 Each lender will have its own techniques for performing credit appraisal processes. A
lender will have certain norms, rules, and standards to assess the creditworthiness of a
particular loan applicant. If a borrower has a high creditworthiness, there is high
probability that his or her loan application will be accepted by the bank. A credit
appraisal is done to avoid the risk of default on loans.

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In the context of loans and credit, creditworthiness broadly refers to the financial
character of a particular individual.
The lender will check the borrower’s credit history. This will comprise checking

 repayment behaviour,
 time taken to pay different equated monthly installments (EMIs)
 how a borrower has treated his or her different debt obligations
Apart from checking the credit history of a borrower, a lender will also evaluate his
or her credit score. A credit score refers to a particular score that is given to a
borrower depending on his or her credit history. This score is provided by credit
bureaus who will evaluate one’s full repayment behavior and give them a score. It
will be based on credit reports created by credit bureaus. Hence, if one is interested
in applying for a personal loan, a car loan or any other loan, he or she should make
sure that their credit score is good. In India, the credit score of any loan applicant
should ideally be 750 and above.
In India, CIBIL is the leading credit bureau that takes care of observing your
credit behavior and preparing a credit report with details of your credit score.
In case your credit score is high, you can be positive that your loan application will be
approved, provided you meet other eligibility criteria set by your lender. If your credit
score is low, you can take specific measures in order to increase it. When you incorporate
ssgood measures to enhance your credit score, you widen your scope to get your loan
approved by the bank. You will have to be extremely financially disciplined to increase
your credit score.

2.2 Ratios for Calculation

 Generally, banks and NBFCs take a look at certain ratios in order to check your loan
eligibility. These are some of the ratios that are useful in the credit appraisal process:

 Fixed obligation to income ratio (FOIR): This ratio refers to how one deals
with his or her debts and how often they repay their debts. It refers to the ratio of the
loan obligations and other expenses to the income that they earn on a monthly basis.
The bank will assess if a certain portion of your income is sufficient to manage
your EMIs for the loan that you have applied for and for your other liabilities. If the
ratio is higher than the benchmark fixed by the lender, then the lender may not accept
the application.

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 Installment to income ratio (IIR): This ratio considers the equated monthly

installments (EMIs) of your loan to the income that you earn. It will indicate the
amount you will be required to take from your income to pay your personal loan EMI.
 Loan to cost ratio: This ratio indicates the maximum amount that a particular
borrower is eligible to take. This will depend on the cost of the car if you are taking a
car loan and on the cost of the house if you are taking a home loan. For a personal loan,
it will depend on your personal requirement. Usually, the ratio will range from 70 to
90% of the cost of the car or house

2.4 Credit appraisal process

Credit appraisal depends on several core factors which deserve to be carefully

enumerated. Here is taking a brief look at the same.

This procedure depends on the five major Cs of credit. These are

1. capital,
2. character,
3. conditions,
4. capacity
5. Collateral.

PROCRESS

STEP 1: Receipt of application

STEP 2: Pre- sanction visit by bank officers

STEP 3: Checking and evaluating history

STEP 4: Valuation of reports

STEP 5: Preparation of financial data

STEP 6: Proposal preparation

STEP 7: Assessment and approval of proposal

STEP 8: Sanction by appropriate sanctioning authority

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STEP 9: Disbursement of loan

STEP 10: Appropriate agreement, mortgages and contracts

STEP 11: Post sanction activities

2.5 Credit appraisal process of term loans by SBI BANK

Appraisal of Term Loans

Credit Appraisal process of term loan comprises of s several steps. There are four broad
aspects of appraisal,

 Technical Feasibility - To determine the suitability of the technology s & the

adequacy of the technical investigation & design; study of the availability, costs,
quality & accessibility of all the goods & services needed
 Location of project
 Labor
 Size of plant
 Type of technology
 Technical report

 Economic Feasibility - To ascertain the extent of profitability of the project & its
sufficiency in relation to the repayment obligations pertaining to term assistance
 Thorough market analysis

a) How big is the market?

b) How much it is likely to grow?
c) How much of it can the project capture?
 Possible future changes in volume and pattern of supply and demand

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 Demand of intermediate product

3. Financial Feasibility - To determine the accuracy of cost estimates, suitability of the

envisaged pattern of financing & general soundness of the capital structure
Managerial Competency
It can be broadly grouped under following heads

 Cost of the project including working capital

 
 Cost of production & estimates of profitability
 
 Cash flow estimates & sources of finance

 Breakeven point
Data service coverage ratio= _______cash accruals_____________
Maturing annual obligations

4. Managerial competence

To ensure successful implementation & efficient management after commencement

of commercial production

The integrity & credit worthiness of the personnel in charge of the management of the
industry as well as their experience in management of industrial concerns should be
examined.
In high cost schemes, an idea of the unit’s key personnel may also be necessary

In a dynamic environment, the capacity of an enterprise to forge ahead of its

competitors depends to a large extent, on the relative strength of its management. Hence,
an appraisal of management is the touchstone of process

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2.6 Credit monitoring

Credit Monitoring is an integral part of lending activity. Banks have a great responsibility
to maintain the quality of the assets and to recover the interest and other dues in time.
Though adequate precautions are taken during assessment and sanction of a loan, a
banker has to be more vigilant after sanction of the loan. Unless early warning signals are
captured, a bank may not be able to take proper remedial measures to arrest the slippage
in the quality of the asset. Banks need to put in place a very sound and effective credit
monitoring system for watching the borrower’s account from various angles.
Over the last few years, due to change in the economic environment, competition,
globalization and advent of new management techniques etc., such sentimental subjective
factor is slowly giving place to a more objective evaluation of the economic value of
connection in terms of quantification of risk
In order to ensure that the asset quality of each borrower account is not slipped from
performing to non performing status, there is a need for an automated system which takes
care of the following:

 Symptoms of sickness, weakness and deterioration of asset quality must be

recognized well in time and acted upon promptly through effective monitoring/ alertness
to capture the early warning signal.
 There should not be excessive reliance on securities in preference to viability and
cash flow.
 There should not be excessive lending to certain borrowers/ group accounts.
 At the time of sanction of loans, there should not be over valuation of securities.
 The charges on securities should be properly created.
 Obsolete stocks should be monitored.
 Stock statements should be submitted in time by the borrower.
 Annual Financial statements should be submitted in time by the borrowers
 All the covenants stipulated while sanctioning the loan should be adhered to.
 The interest and instalments are paid as per the agreed schedule.

2.7 RBI POINT OF VIEW ON CREDIT MONITORING

Bank credit is recovering from the risk aversion of recent years and bank intermediation
in the flow of resources to the commercial sector is regaining lost ground, according to
the Reserve Bank of India (RBI) Lending to the agricultural sector is getting adversely

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impacted, possibly reflecting deteriorating asset quality in the sector,” the central bank
said in its Report on Trend and Progress of Banking in India 2017-18.

Going forward, the central bank said the Insolvency and Bankruptcy Code and the
evolving framework for resolution of stressed assets are expected to address the bad
loan problem and improve debtor-creditor relationships, even as competition from
non-banking finance companies, bond market and fintech companies intensifies.
In this environment, the RBI observed that banks need to augment their capital base
to guard against future balance sheet stress and improve their credit monitoring and
risk management strategies to support inclusive growth in the evolving financial
landscape.

2.8 Monitoring process

It is essential to continuously monitor the actual performance vis-a-via projections.

Monitoring is required to ascertain whether the business is progressing as envisaged
So interaction with borrower regularly and discussion about production levels and
movement of stock from factory to market and position of debtors will give sufficient
indications as how the business is going

Generally monitoring is done at every stages, however stages can be broadly classified in
following manner

PRE- DURING POST

DISTRIBUTION DISTRIBUTION DISTRIBUTION
STAGE STAGE STAGE
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PRE- DURING POST

DISTRIBUTION DISTRIBUTION DISTRIBUTION
STAGE STAGE STAGE
PRE-DISBURSEMENT STAGE: It covers obtaining satisfactory credit reports from
existing lenders, execution of the stipulated security documents, including creation of
collateral security/mortgage as per terms of the sanction, obtaining letters of guarantee
from the guarantors, if any. The other formalities such as vetting of documents by legal
experts and ensuring disbursement by the other participating banks and financial
institutions are also required as the responsibility of the monitoring department.

DURING THE DISBURSEMENT: monitoring work should ensure the end-use of the
funds by disbursing the amount in the right manner. Credit delivery in loan accounts is
distinct from overdraft and cash credit accounts. All disbursements should be related to
actual/acceptable levels of performance of the business unit and in line with the basic
objective of safety of the banks’ exposure in the credit assets. The disbursement should
be commensurate with the progress of the project/business activity, as well as shall take
into account the extent of margin brought in by the promoters up to the given point of
time.

POST-DISBURSEMENT: monitoring forms a substantial part of the monitoring

function in a bank. Actual performance of the borrowers should be monitored by inviting
select operational data at a particular frequency. The particulars furnished by the
borrower need to be compared with the projected performance given to the bank before
granting the loans. Periodical inspections and stock audit by the appropriate officials
should be ensured. Timely abstention and analysis of the audited financials and review of
the account, at least once in a year, is the most integral part of post disbursement
monitoring. Timely identification of accounts showing symptoms of strain, and putting
them under Watch Category for constant monitoring is absolutely imperative.

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2.9 Early warning signals

Regular accounts- asset code-11-. The accounts exhibit normal business risk. If no
monitoring is done in accounts you cannot find out unsatisfactory features/signals. As
soon as these are found and remain more than 30 days the count should be classified
under Asset-code-12 as early warning signals and close watch up should be done
Some signals which could be noticed within banks:
 Unplanned borrowing for margin contribution
 Return of cheeques for financial reasons
 Frequent request for additional cheeques limit
 Lack of transparency in borrowers’ dealings
 Failure to mention unpaid stocks constantly
 Installment overdue beyond 30 days
 Noncompliance of terms of sanction
 Delay in payment of interest beyond 30 days
 Reduction in credit summations
 Frequent return by buyers
 Credit slowed on sale documents negotiated by bank

2.10 Monitoring focus of ICICI bank

 Apart from an independent Risk Management Group, Credit Monitoring Group formed
for wholesale & SME business

• Focus on use of analytics and day-to-day credit monitoring of wholesale banking and
SME customers.

• Uses of predictive models for stress identification.

• Use of internal transaction data and external newsfeeds for triggers.

• Parameters for early warning signals identified.

Credit monitoring dashboard designed and rolled out.

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Continuous monitoring of delinquency trends in retail business

 

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CHAPTER 3: Loan Defaults

3.1 Credit risk
It is the possibility of a loss resulting from a borrower's failure to repay a loan or meet
contractual obligations. Traditionally, it refers to the risk that a lender may not receive
the owed principal and interest, which results in an interruption of cash flows and
increased costs for collection
Reasons

 Inefficient data management: An inability to access the right data when it’s
needed causes problematic delays.

 No group wide risk modeling framework: Without it, banks can’t generate

complex, meaningful risk measures and get a big picture of group wide risk.

 Constant rework: Analysts can’t change model parameters easily, which results

in too much duplication of effort and negatively affects a bank’s efficiency ratio.

 Insufficient risk tools: Without a robust risk solution, banks can’t identify

portfolio concentrations or re-grade portfolios often enough to effectively manage risk.

 Cumbersome reporting: Manual, spreadsheet-based reporting processes

overburden analysts and IT.

3.2 Meaning

People take loans to cover the distance between their needs or desires and insufficient
finance, but many times, they are not able to pay back these loans. Loan default happens
when repayments are not made for a certain period of time. When a loan defaults, it is
sent to a debt collection agency whose job is to contact the borrower and retrieve the
unpaid funds. Defaulting on a loan will drastically reduce your credit score, impact your
ability to receive credit in future, and can lead to the seizure of personal property. If you
cannot make payments on time, it's important to contact your lender or loan servicer to
discuss the restructuring of the loan terms.

Loan default occurs when a borrower fails to pay back a debt according to the initial
arrangement. In the case of most consumer loans, this means that successive payments
have been missed over the course of weeks or months. Fortunately, lenders and loan
servicers usually allow a grace period before penalizing the borrower. The period

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between missing a loan payment and the loan default is known as a delinquency. The
delinquency period gives the debtor time to avoid default by contacting their loan
servicer or making up for the missed payments before it turns into a default or generally
categorized as Non-Performing Asset.

There are various types of loans which provide financial assistance and the most common
ones include Home loans, student loans, auto loans, credit cards and personal loans

Determinants of loan defaults

Broadly, these Factors are mentioned as a causes of loan delinquencies and non-
performing loans

 Players in financial institutions,

 Borrower specific variables
 Loan delivery system
 Macro-economic factors.
 Socio demographical factors

3.3 Types of loan default

A loan default will usually be categorized as a debt service default, a technical default, a

sovereign default or a strategic default. For each default the consequences will vary for
non-payment of the loan.   

1. Debt Service Default

a debt service default is missing a scheduled payment on a loan. A borrower’s

inability to pay a loan will not keep it from going into default status.
Delinquencies on a scheduled loan payment are reported to credit agencies
usually after 60 days late. Once a loan goes into default status, the principal plus
interest must be paid in full. A lender has several options for obtaining the money
which includes garnishing wages, seizing the funds from a bank account, or
withholding the money from annual tax refunds.

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2. Technical Default

A technical default is the result of not meeting a condition of the loan, and has
nothing to do with missing a scheduled loan payment. Business loans contain
affirmative and negative covenants. An affirmative covenant is an agreement to
something. Negative covenants are the opposite, they restrict a business from
doing something.  These requirements and restrictions are put in place to protect
the both the lender and the business. Affirmative covenants include maintaining
taxes and certain levels of insurance. Negative covenants may restrict a business
from disposing of any assets or changing the nature of their business. A technical
default will also result in payment to be made in full. 

3. Sovereign Default

Countries can default on debt, however, since they are not subject to any
bankruptcy court, usually no legal consequences will be taken. Even though a
nation will not likely be held to any legal action, it is in their best interest to honor
the debt re-payment, because they will likely lose access to international lending
in the future. If they are extended credit, the cost to borrow from a foreign lender
will increase since they will be charged more. When a nation is on the brink of
loan default, the creditor will work with the nation to restructure the loan. The
loan term may be extended and the re-payments may be reduced.

4. Strategic Default

A strategic default is when a borrower purposely refuses to make a payment on a

loan despite their ability to make the payments. This will usually occur with a
non-recourse loan. Unlike a student or auto loan, with a non-recourse loan the
creditor cannot go after the borrower’s assets if they decide to default on the loan.
A mortgage loan is an example of a non-recourse loan a borrower will
strategically default. If a borrower’s home value has decreased to the point where
they owe more on the property than what it is worth, a borrower may decide to
walk away from the home. The lender’s only recourse is to take possession of the
property.

Any of these loan defaults can have a lasting impact on a borrower’s credit rating and
greatly limit the borrower’s ability to obtain another loan in the future. A lender may

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decide to risk lending to the borrower, however, at a much higher interest rate than a
borrower who is creditworthy.

3.4 Consequences of Default

Although it depends upon the type of loan and the policies of the lender yet some
common repercussions in case of non-payment of the loan amount are given below:

 Negative remarks on a borrower's credit report and lowering of the credit score,
which is a numerical value or measure of a borrower's creditworthiness
 Reduced chances of obtaining credit in the future
 Higher interest rates on existing debt as well as any new debt
 Garnishment of wages and other penalties. It refers to a legal process that instructs
a third party to deduct payments directly from a borrower’s wage or bank
account. 
 Seizure of collateral property

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CHAPTER 4 : LITERATURE REVIEW

It gives the framework of the present literature on the procedures and processes that can
be included in the operations of the credit unions to make sure that their credit
management processes are effective which can make them financially strong.
Additionally, the hypothesis suggests that societies must acquire broad skills and
technology in order to understand the risks that they are handling and its consequences if
not properly handled. Generally, the literature creates the basis on which loans
management procedures employed by the unions could be improved in order to enhance
the loans portfolio performance of the credit unions. This section presents an in-depth
background on financial institutions, the role they play as intermediaries between the
surplus earning and deficit spending individuals and the procedures they have adopted in
reducing the increasing trend of bad loans in their Portfolios. It also explains how
customer business characteristics affect rates. Some business characteristics which are
exhibited by the customers when they collect facilities or loans also prevail upon their
powers and render them unable to pay their loans.

1. Literature review on determinants of loan defaults

According to Berger and De Young managers in most financial institutions are faced
with the problem of non-performing loans because they do not practice adequate loan
underwriting, monitoring and control. The World Bank policy research paper on non-
performing loans revealed that non-performing loans are caused by adverse economic
shocks coupled with high cost of capital and high interest margin

Goldstein and Turner reported that accumulation of non-performing loans is generally

due to economic downturn and volatility, term of trade deterioration, high interest rate,
excessive reliance on overly high-priced interbank borrowing, insider borrowing and moral
hazard. Again, poor handing over from one loan officer to another, late disbursement of
loan, delayed loan process, business or crop failure and sudden change in the market have
been reported as some of the factors that drive loan Default or non-performing loans. For
instance, an unexpected change in the Market such as increase in prices of items could
affect loan market; how much people can take as loans and subsequently how much they
can pay as installment.

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Ahmad reported lack of willingness to pay loan, diversion of funds, Willful negligence
and improper appraisal by credit officers as some of the factors that cause loan default. He
identified loan shortages, delays in loan delivery, small farm size, and high interest rate,
age of farmers and poor supervision as determinants of loan default.
In addition, poor business practice and management such as record keeping, and assessing
business performance over time also result in loan default. Many borrowers do not have the
technical know-how to undertake their investment activities properly and as a result tend to
generate low income which affects loan repayment and finally leading to loan default.

The study by Munene and Guyo showed that one of the causes of
Loan defaults is characteristics of the business. It was revealed that high cases of Loan
default were common in the manufacturing sector (67.9 percent) and was followed by the
service industry (64.0 percent); agricultural sector (58.3 percent) and the trade sector
recorded the least cases of loan default (34.9 percent). This Least value recorded by the
trade sector could be attributed to the fact that the Sector deals in fast moving products on
high demand which could translate into Good business performance and increased revenue
and hence loan could be repaid on time.

2. A Study On Retail Loan Distribution By Scheduled Commercial

Banks And The Borrowing Motive Of Customers With Special
Reference To Coimbatore District by MATILDA ROZARIO of
Bharattihar University

Retail credit comprises of mainly housing loans, advances to individuals against

fixed deposits, credit card, educational loans and loans for purchase of consumer
durables were granted the freedom in the early1990s to decide the quantum, rate
of interest, margin requirement, repayment period and other related conditions of
retail loans

With high economic growth in post reform years, employment opportunities in

urban areas expanded and income levels, especially middle class, rose sharply.
Rising income levels boosted the affordability. This combined with real estate
boom created opportunities for the customers to own a house by availing the
housing loans. The sharp rise in retail bank credit was also facilitated by the
changing consumer demographics explaining the future consumption. There are
many motives that influence the borrowing practices of individuals such as:

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I. Demographic and Socio-Economic Profile

II. Age of respondents

III. Education qualification of respondents

IV. Gender of respondents

V. Monthly income of respondents

VI. Occupation of respondents

VII. Area of residence

The biggest opportunity for the Indian banking system today is the Indian
consumer. Demographic shifts in terms of income levels and cultural
shifts in terms of lifestyle aspirations are changing the profile of the Indian
consumer. This is and will be a key driver of economic growth going
forward.

It has been observed that majority i.e., 75 per cent of the respondents are
influenced by the banker’s support in availing retail loans and also by the
reputation of the bank. Thus, it is clearly understood that almost i.e., 100
per cent of the respondents feel very comfortable with the services of a
particular bank where they own an account and they exhibit high degree of
satisfaction towards the retail loan availability (types) of particular banker.
While coming to the problems, 97.80 public sector bank customers are
affected by the unclear interest rates and false attractive offers/promise
given by the banker for availing retail loan and by other issues like issues
like ambiguous rules, unwanted charges etc. Followed by this, the private
sector bank customers complain that they are affected by unclear interest
rates, sudden changes in interest rates on long term loans and by the
inflexible repayment facilities of the bank. Thus, it has been concluded
that the bank loan are highly useful for the middle class people for asset
creation. However, the bank customers are affected by the unclear & high
interest rate charged for retail loans.

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3. Determinants of nonperforming loan by NKUSU

The impact of inflation, however, may be ambiguous. On one hand, higher

inflation can make debt servicing easier by reducing the real value of
outstanding loan, but on the other hand, it can also reduce the borrowers’
real income when wages are sticky. In countries where loan rates are
variable, higher inflation can also lead to higher rates resulting from the
monetary policy actions to combat inflation. Several studies also found
that NPLs are affected by stock prices arguing that a drop in shares prices
might lead to more default via wealth effects and decline in the value of
collaterals.

He focused on 26 advanced economies in the period of 1998–2009,

investigate the macroeconomic determinants of loan and found that
adverse shocks to asset prices, macroeconomic performance and credit to
the private sector lead to a worsening of loan quality. He suggests that
increase in interest rates result in deterioration of borrower’s repayment
capacity and hence, cause of increase in non-performing loans.

In line with the above theoretical as well as empirical review there is no

global standard to define non-performing loans at practical level.
Nonperforming loan is loan either in default or close to being in default.
Nonperforming loan is not only harm to banks, but also it is danger for the
overall economy. It also revealed that banks nonperforming loan can be
affected by different factors such as bank specific and macroeconomic
factors

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Chapter 4: Research Methodology

INTRODUCTION

The methods used in assembling data and information for this research is shown in this
chapter. The research objectives and questions are formed in accordance with theories
that are related to the survey topic and other necessary literature. Consequently, there is a
description of how the survey will be presented which will involve the rationale behind
the selection of the specific method of collecting and analyzing data

4.1 RSEARCH DESIGN

A good number of research works depend on techniques such as observation, survey

research, and experimental, explorative, descriptive or cross-sectional techniques. In this
research, descriptive design type is used.
Practical methods that best address the research questions of interest were used. Research
was also based on clear chains of inferential reasoning supported and justified by a
complete coverage of the relevant literature

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This work is a descriptive survey, the survey uses questionnaire as data collection tool.
This was used to collect useful information for assessment of loans management process
of banks in India

In this work, the respondents’ opinions and experiences gathered from the questionnaire.
These data are gathered from both primary and secondary source. The survey is a
quantitative one as a result of that the research questions are intended to suit the
quantitative analysis. Due to that, a lot of the questions are close ended questions,
however few of the questions are open ended questions. The questionnaires are served on
the following group of people from the participating societies: the bank managers, junior
officer, senior officer, and customers

4.2 Sampling Techniques

The sampling techniques used were
 Convenience sampling
 Purposive sampling.
Convenience sampling is a statistical method of drawing representative data by selecting
people because of the ease of their volunteering or selecting units because of their
availability or easy access.
On the other hand a purposive sampling technique is o used to select cases that are
particularly informative. The main goal of using purposive sampling is to focus on
particular characteristics of a population that are of interest, which will best enable you to
answer research questions.

Target group
The target group of this study are the clients who have or had the loan and the employees
who are involved in credit processing and administering of credit management

4.3 Data collection

For the purpose of this study, both primary and secondary data are used. Questionnaires
are used to collect primary data. . This helped to address the research questions more
specifically or to concentrate more on the topic itself. Secondary data is collected from
reports and bulletins of the bank.

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With regard to the members of the credit union, questionnaires were sent to them on
social media platform... In all, a total of 70 questionnaires are administered out of which
over 90 percent responded

Two separate questionnaires were used;

1. questionnaire for bank officers,
2. Questionnaire for customers.
. The questionnaire for the loan officers was intended to implore their opinions on
why some of their clients are not able to pay their loans and the measures put in
place by central bank and by the particular bank to curb the phenomenon.
The second set of questionnaires designed was used to ascertain why clients are
not able to repay their loans and measures they believe if put in place by the Bank
can help them repay their loans.
Questionaries’ helped to know their views on:
 causes of loan defaults,
 measures they have put in place in reducing bad loans in their loan
portfolio and
 The effects of bad loans on the institution.

4.4 Method of Data Analysis

Both descriptive and inferential tools are used in analyzing the data (which include:
percentages, bar and pie charts, scatter and line diagrams). Responses from respondents
were coded and presented in a simplified form using Microsoft Excel. Charts and graphs
Were considered in analyzing the data because they are user friendly and easy to use,
simple and easy to understand.

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CHAPTER 5: PRESENTATION AND ANALYSIS OF DATA

INTRODUCTION
This section of the survey treats how data collected from the respondents are analyzed
and presented. The data are analyzed by using the quantitative methodology. Tables, pie
charts and bar charts are used to represent the data collected from respondents. The data
collected are analyzed based on the objectives of the research with inferences drawn from
the analysis of the data. The reason is to present the results of the research from both semi
structured interviews and questionnaire conducted in other to achieve the research
objectives.

Presentation of data

Demographic Information of Respondents is the scientific and statistical study of any

kind of dynamic population with respect to size, growth, density, distribution and other
vital statistics. It emphasizes on the quantitative study of human populations

Response from bank employees

a. Designation of respondent

Designation of respondents

24% loan department officer

28% senior manager
branch manager
16% junior clerk
20% middle management
officer

12%

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b. Age of respondents

Age of respondents
8%
17% 33% 18-25
25-35
35-45
45-60

42%

Survey result from Primary Data Sources The age of the employee shows as indicated
75% percent are in the range of age between 18 to 35, and 25 percent are also between
the ranges up to 60 This implies the bank has the human resource that can work
energetically and competitively understanding the mission and goals of the bank.

c. Credit policy and procedures

Credit policy, processing and collection %
Is the credit policy up to date 70
Is credit policy compliance to law 95
Is loan growth required 13
Is loan service as clients preference 40
Is lending and overriding limit convenient 70
Is the collection technique effective 100
70 percent of the employees have comment on the existing credit manuals While 30
percent of them are yet recognizing it as up to date.
Moreover, 95 percent of the employees have agreed on the compliance of the credit
policy and credit procedures to the regulation
Though loan provision is the main product of the bank as it is the main source of income
its growth is not as expected almost in all branches in the region. 70 percent of the bank
employee have agreed on the impediments for the loan growth being the branch lending
and overriding limit.

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d. Type of business

Type of business

14%
small scale business
micro enterprise
medium scale enterprise
54%
32%

e. Collection techniques of the bank

Collection techniques %
Debiting client account per pre undertaking 45
Cash payments 25
transferring 10
all 20
The collection technique so far adopted by the Bank is cash/check payment, debiting own
account per the given authorization, and transferring through the bank’s branch excluding
commission charge. As shown, 100 percent of the bank employee have agreed on the
convenience of the collection technique. Moreover, 45 percent adopts debiting the clients
account, 25 percent uses cash collection system, and 20 percent uses either cash or
debiting account system of collection technique While 10 percent uses transferring when
the clients are e out of the branch. Hence, the most common collection techniques used
by the bank is cash payment and debiting clients account.
f. Type of defaulters

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Type of defaulters

willful defaults
38% non willful defaults
62%

g. Type of loan that defaults the most

Type of loan

6%

home loans
25% 38% business loans
personal loans
loan against property
others

6%

25%

h. Main reasons for loan defaults

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Reasons for loan defaults

6%
12%
economic conditions borrowers inappopriateness
borrower’s lenders inefficiencie
47% inappropriateness and
economic conditions
35% pertaining at a particular
point in time

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i. Measures to reduce long defaults

Appropriates measures to reduce the loan

defaults

financial institutions
and banks must be
proactive in dealing
24% with delinquencies
35%
payment rebates
positive incentives for
good payment history

41%

Response from customer

A. First application for loan

12%

by self initiation
17% by effort of
former client of
bank B. Loan
by staff effort of
bank
71%

processing and client relation

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Loan client relation %

have you met the bank services as expected 48.50
Employs visit during loan request 100
Simplicity of application requirement 88.90
Loan processing time convenience 33.30
Access to relevant information 92.22
Extension of relation with bank 65.56

C. Needs improvement in credit management procedure

Improvment in credit management procedures

2%

in accepting loan
33% applicants
in collateral estimation
in follow up and loan
collection
in loan processing and
56% approving amount

9%

As shown, 2 percent and 9 percent of the respondents exposed the need of improvement
the prevailing procedures in accepting loan applicants, follow up and collection
procedures respectively. 56 With regard to the problems in collateral estimation and
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reduction of loans as well as long loan processing time, Thus, this reveals the policy and
guidance of collateral value estimation, the time of processing and decision at head office
loan analyst and loan approving committee needs improvement in order to be in position
to entertain potential loan clients and assure loan clients long lasting relationship

D. Credit follow up status

Follow up %
Status of follow up 88
Sufficiency of loan granted 27.8
Convenience of loan schedule 45.60
Relevance of business follow up 94.40

E. Factors motivating loan repayment

Factors %
Not to lose collateral 4.4
Expectation of getting another loan 6.7
To be ethical and meet obligation 88.9

If loans are not repaid as per the contract agreement and when due credit risk is involved,
hence the value of the bank’s business will be reduced. In order to continue lending, the
bank must be able to collect its outstanding loans on time. Hence, in order to minimize
the occurrence of bad loans strict follow up must be carried to the utmost degree and take
timely action when necessary. As it is shown in table 88.90 percent of the respondents
revealed that they manage to pay their loan convincing themselves that loan repayment
being an obligation and ethical while the rest 4.40 percent and 6.70 percent exposed that
they repay their loan for the sake of protecting their property held as collateral and also to
secure getting another loan from the bank.
It shows most of the clients of the bank are loyal and credit worthy in meeting their
obligation and accepted loan repayment as ethical and moral obligation. This is an
indicator of cultural change that has moved a step forward which was a problem to most
banks and micro finances in the previous decades.

F. Reasons for default

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f actors f or de f aults

10%

market problem
47% enviornment problem
33% loan diversion problem
bank policy problem

10%

47 percent of the respondents who are unable to pay their periodic repayment indicated
that the major reasons for default were market problem, 33 percent used the loan for other
purposes like consumption (loan diversion), and 10 percent are due to credit policy
problem of the bank like repayment time schedule, loan granting period (season), and
loan amount provided. The remaining 10 percent responded that environmental problem
like shortage of rain was the main problem which affected the success of their business
especially agricultural business in the west part of the region like Humera and around. In
most commercial banks loan diversion is the most common problem of defaults which
banks usually take care of and exert possible efforts to protect from it through proper
business viability assessment analysis, supervisions, and loan reviewing made before and
after the loan provision.

G. Factors contributing to non-performing

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24%

loan experience in
other bank
46% amount as per your
request
convenience of
repayment duration
are measures taken fair
22% and legal

7%

H. Measures taken by banks to cover NPL

Measures taken %
Refusal of additional loan 10
Foreclosing 3.3
warning 86.7

When loans failed to non-performing status, the Bank uses various mechanisms. Out of
the mechanisms, rescheduling is advisable if the causes of non-performing is reasonable
as well as if the background, experience, and track record of the loan client in his/her
previous record was trustworthy. Additional loan is not recommended unless the case is

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very justifiable. If there is no promising ground for rescheduling a forcing measure is

used such as strict follow up and counseling followed by reminding and warning letters.
These are the efforts that help to settle amicably. If these all are exhausted foreclosing
and court proceeding are to be taken as a last solution of recovery.

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CHAPTER 6: Conclusion and recommendation

Conclusion

1. Most major banking problems have been either explicitly or indirectly caused by
weaknesses in credit management. In research, certain key problems tend to
persist. Severe credit losses in a banking system usually reflect simultaneous
problems in several areas, such as concentrations, failures of due diligence and
inadequate monitoring

2. Concentrations are probably the single most important cause of major credit
problems. Credit concentrations are viewed as any exposure where the potential
losses are large relative to the bank’s capital, its total assets or, where adequate
measures exist, it increases bank’s overall risk level.
3. Many credit problems reveal basic weaknesses in the credit granting and
monitoring processes like shortcomings in underwriting and management of
market-related credit exposures represent important sources of losses at banks

4. Many banks find carrying out a thorough credit assessment (or basic due
diligence) a substantial challenge. For traditional bank lending, competitive
pressures and the growth of loan syndication techniques create time constraints
that interfere with basic due diligence.

5. Some credit problems arise from subjective decision-making by senior

management of the bank. This includes extending credits to companies they own
or with which they are affiliated, to personal friends, to persons with a reputation
for financial acumen or to meet a personal agenda, such as cultivating special
relationships with celebrity.

6. A common and very important problem among troubled banks in the early 1990s
was their failure to monitor borrowers or collateral values. Many banks neglected
to obtain periodic financial information from borrowers or real estate appraisals in
order to evaluate the quality of loans on their books and the adequacy of
collateral. As a result, they failed to recognize early signs that asset quality was
deteriorating and missed opportunities to work with borrowers to stem their

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financial deterioration and to protect the bank’s position. This lack of monitoring
led to a costly process by senior management to determine the dimension and
severity of the problem loans and resulted in large losses.

7. In some cases, the failure to perform adequate due diligence and financial
analysis and to monitor the borrower can result in a breakdown of controls to
detect credit related fraud. For example, banks experiencing fraud-related losses
have neglected to inspect collateral, such as goods in a warehouse or on a
showroom floor, have not authenticated or valued financial assets presented as
collateral, or have not required audited financial statements and carefully
analyzed them.

8. Many banks have experienced credit losses because of the failure to use
sufficient caution with certain leveraged credit arrangements. As noted above,
credit extended to highly leveraged borrowers is likely to have large losses in
default.

9. Many banks’ credit activities involve lending against non-financial assets. In such
lending, many banks have failed to make an adequate assessment of the
correlation between the financial condition of the borrower and the price changes
and liquidity of the market for the collateral assets. Much asset-based business
lending (i.e. commercial finance, equipment leasing, and factoring) and
commercial real estate lending appear to involve a relatively high correlation
between borrower creditworthiness and asset values. Since the borrower’s
income, the principal source of repayment is generally tied to the assets in
question, deterioration in the borrower’s income stream, if due to industry or
regional economic problems may be accompanied by declines in asset values for
the collateral. Some asset based consumer lending (i.e. home equity loans, auto
financing) exhibits a similar, if weaker, relationship between the financial health
of consumers and the markets for consumer assets.

10. Most of the loans provided are on short term repayment schedule (Mostly for the
purpose of working capital). This is may be due to the limitation of capital base of
the bank. However, it is currently causing burden of installment repayment and
most of loan clients preferred to be improved as most of the time faces difficulty
to manage it accordingly. It is one of the causes for loan client termination.

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11. The collection techniques so far adopted by the bank is appropriate and
convenient to most loan clients to manage it. Consistent to the convenience of the
collection techniques, the repayment behavior of most loan client is improved to
the required level revealing one step forward in the culture of meeting obligation
and trustworthiness

12. Most of loan clients now a day are considering loan repayment per the contract
agreement as ethical and obligation. Moreover, most business people understand
the advantage of creating friendship ground with the financial sector as a best
strategy to their business growth and success.

13. The Bank is compliant to all directions of the regulating body in all of its
activities of credit management. Hence the way of categorizing and holding
provisions for the non-performing loans is as per the direction and requirement.

14. The default problem in the bank is due to market problem, environmental
problem, loan diversion, and policy problem like the credit policy of the bank
related to loan duration and amount. These all leads to credit risk that has bad
consequences on the Bank’s financial stability, clients’ business performance, and
economy of the region.

15. The credit analysis and procedures which is being followed by the bank is
lengthy and reluctant to approve adequate amount per the requisition and intended
purpose of the business, requiring improvement so as to speed up and satisfy the
delivery of loan to its clients and become acceptable in the eyes of potential
customers.

Recommendations

For Banks
On the basis of the results and conclusions of this study, the following policy
implications are suggested so as to be considered in the future intervention
strategies which are aimed at improving the credit management of the bank.

The credit policy and procedure of the Bank should incorporate the ideas of the
clients and employees to become more competitive in the banking industry and

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meet its vision. In other words, it is better for the Bank to make its credit policy
flexible to meet its potential loan clients and thereby putting a good administrative
set up that improves Credit lending and administration.
The periodic repayment schedule of the Bank should be flexible by considering
the operation of the clients’ business as repayment duration has its impact on the
performance of loan collection. As it is disclosed in the analysis part of the study
most of the loan clients and bank employees have complaints on the credit policy
and guidelines regarding valuing property offered for collateral, loan discretion,
length of loan processing time, repayment schedule, and excessive requirements
for analysis. These are the major factors impeding client reputation and retarding
to attract potential loan clients. Hence, the bank should made remarkable changes
on its credit policy and procedure guidelines regarding the above aforesaid
drawbacks in order to solve the current problems and achieve the client
reputation.

The current loan processing and approving direction of the bank is moderate
inclined to be conservative especially regarding collateral and analysis. This is
highly retarding the loan growth of the branches in particular and the Bank in
general. Hence, the bank should follow creative way of loan processing and
approving direction that assists to meet the loan demand of potential loan
applicants and the required level of loan growth as it is the main source of income
for the banking industry.

The system of loan approving and decision based on committee level as well as
the lending and overriding limit both in branch and head office is acceptable as a
direction for prudent credit management and control. But most often it is observed
as impediment when loans are forwarded to head office causing long time loan
processing and reduction of loans without substance and offends potential
applicants. Hence, the amount of lending and overriding limit of each branch
should be improved and the head office credit management committee should
focus on big loans and on loans that are complex in nature. Though the bank has
followed the strategy of large area coverage as to create easy access of the society
to the financial sector by opening considerable branches in all regions like the
region under the study, it did not follow the strategy that assist the branches to be
functional as required. Opening a branch is not an end by itself. Hence, the bank
should assist the newly established branch in a flexible way in order to have the
required loan growth

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For clients/customers
For students loan there are specific measures offered by lenders like
rescheduling the loans or deferring payments. Borrowers can opt for
rescheduling the loan through consultation with bank which results in reducing
the burden with the extension of tenure. One can also choose for deferred
monthly payments. In that the monthly installments are paused for months or
years, known as EMI holiday

In other types of loans, best way is to negotiate a repayment plan with the debt
collector, it is always advisable to voluntarily approach the lending institution ad
apprise them of the reason. Most of the institutions will assist the borrowers and
guide them to manage the current situation.

It is easier to restructure the long term loan, but in short term loans it is better to
liquidate other assets and pay backShort term loan like personal loan and credit
card dues have high interest rates. One should cash out from investments like
mutual funds and gold to pay the dues. Another option is to ask for interest free
borrowing from family members to pay back high interest loans

In the case of long term loans, the only option is adjustment in lifestyle along
with a fees arrangement with lender

Bank of future
 Three factors are expected to impact banks' efforts in building a 'bank of the future':
1. Changing customer expectations,
2. Evolving technologies
3. Design of innovative banking products.

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Banking customers, be it retail or corporate, are demanding customized products,

incorporating decision points such as family circumstances, risk tolerance and life stage.
Traditionally relying on transaction volumes to segment customers, banks must transition
to behavioral banking i.e. assessing customer value based on financial behavior derived
from digital data.

Individuals today are channel agnostic. Hence, a truly Omni channel experience, with a
connected enterprise focus is essential. It analyses channels from multiple lenses:
products/services optimized real time, responsive supply chains, data analytics to
optimize experiences and an experience centric culture.

Another rising demand is self-service functionality, especially on mediums such as apps

or websites, helping customers do maximum tasks with minimal intervention. The
modern banking customer is also sensitive to data privacy, and banks offering higher
security levels are expected to see more profitable customers in the future. Using data
driven insights to drive Using data driven insights to drive personalization of products
and services is going to be the key differentiator for the future bank.

Millennial today not only demand basic banking, but also help with managing
expenditures through budgeting and investment tools. Hence, banks must design personal
finance tools that leverage analytics and AI to offer expenditure management and
investment advisory.

Futuristic branches might aim to be more space optimized, use biometric authentication
for self service and hold fewer staff doing high value tasks.

Digital walls can provide personalized offerings and allow for instant account opening
and loans. A large global bank is testing zero staff branches called 'virtual centers', where
customers can make ATM transactions and consult staff via video conferencing.

Designing a bank of the future is no easy task, given the dynamics of customer
preferences and evolving technologies within the framework of regulations. Larger banks
with investable capital must lead the way, starting with pilots. RBI's finch sandbox has
the potential to go a long way in helping banks and finch companies experiment with
solutions in a controlled environment, eventually helping roll out superior products and
services.

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Appendix

Questionnaire for bank employees

1. Email address 
 
2 .Name OF THE RESPONDENT *

3. DESIGNATION *

4. NAME OF BANK-BRANCH *

5. Do you have any targets to sanction the loan *

A) yes
b) No
6. Do you have any government policy to sanction loan based on caste community
and socio-demographic factors *
Yes
No
Maybe

7. How do you deal with internal issue such as improper assessment of loan
applications?

8. Do you have to deal with external pressures such as political pressure of loan
waiver *
Yes
No
Maybe

9. Age of loan defaulters *

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18-25 years
25-40 years
40-60 years
60 years and above

10. Type of customer business of loan defaulters *

Micro enterprises.
Small scale business
Medium scale enterprises

11. Borrower defaults *

Voluntary
Involuntary

12. In which kind of loan do you find more defaulters *

Personal loans
Education loans
Business loans
Vehicle loans
Loans against property
Home loans
Others

13. What are the reasons for loan defaults *

Lenders misjudgments or inefficiencies
Borrower’s inappropriateness
Economic conditions pertaining at a particular point in time

14. Do you give any incentives for regular repayment of loans *

Yes
No
Maybe
If yes, mention the incentives

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15. Appropriates measures to reduce the loan defaults *

Positive incentives for good payment history
Payment rebates
Equitable repayment plan
Assistance to the borrower.
Financial institutions and banks must be proactive in dealing with delinquencies

Questionnaire for customers

1. Age of respondent
a) 18__ 25 b) 26-35
c) 36-45 d) Above 45

2. If you settled the previous loans regularly what do you think the problem with the
current one? __________________________________

3. Was the amount you took enough for the intended purpose and per your Interest?
a) Yes b) No
If “No”, explain if it has any impact on your business Performance
_______________________________________________

4. Would you please mention any problem/s/that affects your performance you
encountered during loan delivery of the bank?
_______________________________________________ .

5. Do you think the loan repayment duration was convenient to your business?
a) Yes b) No

6. You became unable to pay your periodic loan repayment, what is/are the major
reason/s/ for failure?
a) Market problem
b) Environmental problem

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c) Contingencies problem such as death, sickness, etc.

d) Usage of the loan for other purposes like consumption
e) Policy problem like credit policy of the bank
f) Lack of appropriate management

7. Who do you blame for the failure?

a) Yourself b) the bank c) others

8. What mechanism have you designed to pay the unpaid loan balance?
a) Change of the business type b) Sell of property
c) Borrowing from other financial institutions
d) Borrowing from relatives, friends, and family
e) Others, (specify) _____________________________

9. What measures are taken by the bank for delay?

a) Legal under taking
b) Refusal of additional loan
c) Foreclosing

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BIBLIOGRAPHY
Books
G.S. Popli , S.K. Puri (2013) strategic credit management in banks , PHI
LEARNING Pvt, Ltd, Delhi
Indian institute of Banking and Finance(IIBF), (2018) Bankers
Handbook on Credit Management,  Taxmann pvt Ltd
K. Vaidyanathan (2013) Credit risk management for Indian Banks ,
SAGE Response pvt Ltd
R.K. Gupta AND Himanshu Gupta(2017)Credit Appraisal and analysis
of financial statement, Notion Press Pvt Ltd
Michele Cagan, (2020) Debt 101, Adams Media Pvt Ltd.
Bhattacharya Hrishikes (2011) Banking Strategy, Credit Appraisal, and
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term-loans-by-financial-institutions-like-banks
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https://www.bankbazaar.com/personal-loan/credit-appraisal

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https://www.rbi.org.in/Scripts/OccasionalPublications

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