Overseas Bank Case Study

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The project is intended to standardize the credit appraisal process followed at Indian Overseas Bank to make it more effective in terms of final loan decision making. The major area of concern for the commercial lending division at IOB is the high NPA which was reported to be 7.35% (gross) by the end of October, 2014. Another problem that the bank faces is the proper role/duty allocation for each level of authority that is involved in the credit appraisal process. This is required to identify the responsible person when any account becomes NPA and take rectification actions accordingly.

Credit appraisal is most important to target as it is the root where a good or bad decision can be made. The entire lending procedure
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It is required to help the bank make correct credit decisions (i.e. to make good loans)
2. It is also required to help the bank avoid making incorrect credit decisions (i.e., not to make bad loans)

To a great extent, credit analysis is highly quantitative, particularly in today’s computer-oriented environment, but a significant part of it still is, and will remain, qualitative, driven by the judgment and experience of the credit officer involved. To the extent a bank loan is “unique”, as opposed to being “generic” like a security; the credit officer’s perceptive insight provides value-added non-market information about the company. Most bankers believe that the special relationship a bank have with its borrower makes a good credit decision as much an art as a quantitative science.

• Managing Credit Risk

Credit risk is the most important risk category for the Bank. Credit Risk is defined as the probability of losses associated with reduction in credit quality of borrowers or counterparties leading to non-payment of dues to the Bank. In the Bank’s portfolio, losses arise from default due to inability or unwillingness of a customer or counterparty to meet commitments in relation to lending, trading, settlements, or any other financial transaction. Alternatively, losses could occur due to reduction in portfolio value due to deterioration in credit
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The framework weighs five characteristics of the borrower to gauge the chance of default. The 5 C’s framework is composed of:
A. Capacity
Any moneylender will first assess the capacity of a borrower to pay back the loan and how the borrower plans to do it. The sources of repayment have to be ascertained. Primary source of repayment is the operation activities that the business of the borrower performs. Borrower’s credit relationship with his existing bankers also needs to be checked to gauge his past performance history with his creditors.
B. Capital
The bank or any other financial institution extending a term loan will expect that the borrower’s business is sustainable even in uncertain environment or unforeseen problems. Thus, they look into the reserves that the company holds or the “Net Worth” or the “Equity” of the company. It indicates the capital adequacy and commitment by stakeholders of the company which mitigates the moral hazard.

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