Credit Appraisal is the process by which a lender appraises the technical feasibility, economic viability and bankability including creditworthiness of the prospective borrower. Credit appraisal process of a customer lies in assessing if that customer is liable to repay the loan amount in the stipulated time, or not. Here bank has their own methodology to determine if a borrower is creditworthy or not. It is determined in terms of the norms and standards set by the banks. Being a very crucial step in the sanctioning of a loan, the borrower needs to be very careful in planning his financing modes. However, the borrower alone doesn’t have to do all the hard work. The banks need to be cautious, lest they end up increasing their risk exposure. All banks employ their own unique objective, subjective, financial and non-financial techniques to evaluate the creditworthiness of their customers.
Some requirements for credit appraisal are as follows:
- Wherever financing of infrastructure project is taken up under a consortium/syndication arrangement – bank’s exposure shall not exceed 23%.
- The credit requirement must be assessed by all Indian financial institutions or specialized institution set-up for this purpose.
- In such cases/due diligence on the inability of the projects are well defined and assessed. State Government guarantee may not be taken as a substitute for satisfactory credit appraisal.
- Bank may also take up financing infrastructure project independently exclusively in respect of borrower’s promoters of repute with excellent past record in project implementation.
Validation of proposal
The quality of every proposal should be explicitly validated. This means that you should confirm that the key aspects of the proposal are what the company wants them to be. It is nearly impossible to do this in one sitting with everything considered all at once. Proposal Quality Validation explicitly identifies what should be validated, allows for flexibility in how individual items get validated, and provides a mechanism to ensure that the items chosen and methods for validation are sufficient to achieve the quality desired.
Proposal Quality Validation ensures that your company confirms that key aspects of your proposal are what the company wants them to be prior to submission. It is an approach that confirms that what you have in the proposal meets your needs and expectations. It avoids disasters that result from teams that work in isolation, creating a proposal that is not what the company wants to submit and is only discovered too late to do anything about it.
In developing your proposal, you will:
- Make decisions
- Invent approaches
- Incorporate information
- Address requirements
- Deliver a message
- Seek a superior score
Dimensions of Credit Appraisals
Service credit is monthly payments for utilities such as telephone, gas, electricity, and water. One has to pay a deposit and late charge if payment is not on time.
Loans can be for small or large amounts and for a few days or several years. Money can be repaid in one lump sum or in several regular payments until the amount one borrowed and the finance charges are paid in full. Loans can be secured or unsecured.
Installment credit may be described as buying on time, financing through the store or the easy payment plan. The borrower takes the goods home in exchange for a promise to pay later. Cars, major appliances, and furniture are often purchased this way. One usually sign a contract, make a down payment, and agree to pay the balance with a specified number of equal payments called installments. The finance charges are included in the payments. The item one purchase may be used as security for the loan.
Credit cards are issued by individual retail stores, banks, or businesses. Using a credit card can be the equivalent of an interest-free loan-if one pay for the use of it in full at the end of each month.
Credit Appraisal Process:
The process of credit appraisal is as follows:
1) Credit Processing:
Credit processing is the stage where all required information on credit is gathered and applications are screened. Credit application forms should be sufficiently detailed to permit gathering of all information needed for credit assessment at the outset. In this connection, financial institutions should have a checklist to ensure that all required information is, in fact, collected.
A financial institution must have in place written guidelines on the credit approval process and the approval authorities of individuals or committees as well as the basis of those decisions. Approval authorities should be sanctioned by the board of directors. Approval authorities will cover new credit approvals, renewals of existing credits, and changes in terms and conditions of previously approved credits, particularly credit restructuring, all of which should be fully documented and recorded. Prudent credit practice requires that persons empowered with thee credit approval authority should not also have the customer relationship responsibility.
3) Credit Documentation:
Documentation is an essential part of the credit process and is required for each phase of the credit cycle, including credit application, credit analysis, credit approval, credit monitoring, collateral valuation, and impairment recognition, foreclosure of impaired loan and realization of security. The format of credit files must be standardized and files neatly maintained with an appropriate system of cross-indexing to facilitate review and follow-up. The Bank of Mauritius will pay particular attention to the quality of files and the systems in place for their maintenance.
Documentation establishes the relationship between the financial institution and the borrower and forms the basis for any legal action in a court of law. Institutions must ensure that contractual agreements with their borrowers are vetted by their legal advisers. Credit applications must be documented regardless of their approval or rejection. All documentation should be available for examination by the Bank of Mauritius.
4) Credit Administration:
Financial institutions must ensure that their credit portfolio is properly administered, that is, loan agreements are duly prepared, renewal notices are sent systematically and credit files are regularly updated. An institution may allocate its credit administration function to a separate department or to designated individuals in credit operations, depending on the size and complexity of its credit portfolio.
Structuring of Loan documents
Loan structure is the terms of a loan with respect to the various aspects the make up a loan, including the maturity or tenor, repayment, and risk.
The loan structure is arrived at by taking into consideration several factors, such as the purpose, the timeline, and the risk profile of the borrower. In the following sections, we will discuss different structures that exist based on the above factors.
Documents to Apply for a Personal Loan
When applying for a personal loan, you will need to submit the following documents:
- PAN Card
- Identity proof (Aadhaar Card, Driving licence, Passport, Voter ID, etc.)
- Signature Proof (Passport, PAN card, etc.)
- Address proof (Passport copy, Aadhaar card, driving licence, utility bill; Gas or electricity bill, Voter ID, ration card, rent agreement, etc.)
- Bank statements of the past 6 months
As a salaried individual, you additionally need to submit the following:
- Salary slips for the last three months
- Income tax returns OR form 16
As a self-employed individual, you additionally need to submit the following (for self / business entity as applicable):
- Balance sheet and profit and loss account, income computation for the last 2 years
- Income Tax Returns for the last 2 years
- Business proof (License, registration certificate, GST number)
- IT Assessment OR Clearance Certificate
- Income Tax Challans OR TDS Certificate (Form 16A) OR Form 26 AS for income declared in ITR