Introduction to Credit Appraisal / Project Appraisal

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Credit Appraisal refers to the consideration of a fresh proposal for loan or an enhancement proposal for additional loan. Previously all credit decisions were taken purely on the loan of security.  Now the security oriented approach has been substituted by purpose, propriety and performance oriented lending.

Project appraisal may be defined as a detailed evaluation of the project to determine the technical feasibility, economic necessity financial viability of the project and managerial competence required for its successful operation.

Importance of Credit Appraisal 

It helps the banks to take following decisions.

1. To decide about quantum of loan to be sanctioned.
2. Helps to ascertain the ability to repay the loan.
3. To find out liquidity, profitability and solvency of the concern.
4. To ascertain in the financial viability of the proposal.
5. To ascertain the technical feasibility of the project.
6. To ascertain the economic necessity of the project.

procedure of Credit Appraisal

1.  Examination of Business Plan / Proposal : Business plan or proposal forms the very basis of credit appraisal. It helps to find the feasibility and practicability of the proposal. If it is found unrealistic, it has to be revised through negotiations.
2. Scrutiny of Cash Flow Statement : The scrutiny of cash flow statement, helps the banker to fix up a well-planned repayment schedule as per the cash accrual shown in the statement.
3. Study of Funds - Flow Statement : By studying the Funds - Flow statement the following points will be revealed.
1. How the current assets and fixed assets have been financed.
2. How the sale proceeds of fixed assets have been utilized.
3. How the borrowings have been utilized and repaid.
4. How the rise on the networking capital has been financed.
5. How the networking funds have decreased though the net income has gone up.
6. Whether the increase in credit limits is justified in the context of the cash resource managements of the company.
7. Whether the profits have been ploughed back into the business.
4. Application of Ratio Techniques : This helps the banker to measure the past performance of a concern and for projecting future trend. Ratios are helpful find out financial feasibility of the proposal.
5. Study of Technical Feasibility : As a part of credit appraisal, the banker has to study the technical feasibility of the proposed project. For that following factors are to be considered.
1. Location of the project.
2. Study about the background reputation and experience of Plant and Equipment supplies.
3. Nature of Technology used.
4. Construction and Installation schedule of the plant.
6. Study of Economic Necessity : This aspect has to be judged by taking into account the following factors.
1. The extent to which the market will absorb the additional production on account of the new project.
2. The extent to which 
1. the project is expected to contribute to the national exchequer, 
2. the project can bring about development in the area
3. the project will create more employment
4. the atmospheric and other pollutions could be contained
• Industrial Development Bank of India calculates for this purpose the "economic rate of return". The rate takes into account the contribution the project is going to make to the national exchequer and the social benefits it is going to bring.
7. Study of Financial Viability : The projects should be financially viable. This requires the careful study of the following.
1. Cost of the project
2. Sources of finance.
3. Profitability.
4. Repayment Capability.
5. Repayment Schedule.
8. Study of Managerial Competency : The technical competence, administrative ability, integrity and resources of borrowing concern's top managerial personnel determine to a great extent the willingness or otherwise of a financial institution to accept a term loan proposal. The loan application from concerns having competent and honest management find the most favorable consideration. It has, therefore, been correctly observed, "the appraisal of the management is the touch stone of term credit analysis".

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