What are the papers examined by banks for credit appraisal?

Commercial Banks extend varieties of credit facilities to different types of customer viz. Individual, Sole Proprietor, Partnership firm, HUF, Trust, Club, Societies, Association, Limited Company, Public Sector Undertaking, Consortium advance etc. Depending upon type of borrower and nature of credit facilities required, bank will call for certain non-financial papers to examine along with financial papers.

The financial papers commonly required for working capital assessments are;

1. Audited Balance sheet and income and expenditure statement of previous two years,
2. Estimated balance sheet for the current year and projected balance sheet for ensuing years
3. Orders/LC’s in hand,
4. Latest month’s lists of sundry creditors and sundry debtors.
5. Invoice obtained for purchase of machinery (if any) etc.

Beside financial papers,  following are the non-financial papers processed by the banks for credit appraisal.

From Individuals: In case of employed persons, normally loan will be considered only to confirmed employees. Employer’s no objection certificate/salary certificates are other requirements for retail loans. In case of self-employed, IT return for past 2-3 years would be verified to assess the repayment capacity of the applicant. No due certificate from existing banker, CERSAI & Credit information reports (CIBIL report) of the applicant (for a very small loan it is not necessary) will be verified. Proof of Residence like voter card,/Telephone bill, Electricity Bills, Registered lease deed, Sale agreement etc. will be verified before entertaining borrower’s request for facility. In case, the applicant is operating his/her account with other banks, SB pass book and original statement of account is verified.

From Sole Proprietor: Banks examine certified business account statement, Income Tax and Sales Tax Assessment Orders, VAT turnover statement, orders copy and other related papers. CIBIL report of the proprietor and the firm will be examined. The property offered as a security will be inspected and related documents are verified. No due certificate from existing banker, CERSAI & Credit information reports (CIBIL report etc.) of the proprietor will be examined. Proof of residence like voter card,/Telephone bill, Electricity Bills, Registered lease deed, Sale agreement etc. will be verified before entertaining borrower’s request for facility. In case, the applicant is operating his/her account with other banks, SB pass book and Current account original statement is verified. Property offered as security will be inspected and title records of security offered are investigated.

From Partnership firms: Banks examine Partnership Deed, Certified statement of Accounts, copies of Income Tax assessments, wealth tax Assessment and Sales Tax assessments orders, VAT turnover statement for the reporting year etc. Reports obtained from CERSAI & Credit information reports (CIBIL etc.)  of  the partners and the firm will be verified. No due certificate from existing banker, proof of residence like voter card,/Telephone bill, Electricity Bills, Registered lease deed, Sale agreement etc. will be verified before entertaining borrower’s request for facility. In case, the applicant is operating his/her account with other banks, Original statement of account is verified. Property offered as security will be inspected and title records of security offered are investigated.

Trust Accounts:Registered Trust Deed, profiles of the Trustees is examined by the bank before considering the loan proposal. The purpose and provisions to raise loans must be incorporated in the Trust deed. Financing bank would go through the trust deed to confirm who are the authorized person/ signatory to the loan documents to be executed. In case, the applicant is operating his/her account with other banks, Original statement of account is verified. Copy of Resolution passed, CERSAI & Credit information reports (CIBIL report etc.) the trustees and the trust and also property offered as security will be inspected and title records of security offered are investigated.

From HUFs: Bank would first ascertain whether Karta or the Manager (major co-parceners, authorized by the Karta) of HUF, can create a charge against the joint family property for the loan availed. Banks should be cautious while considering a credit request from a HUF, as it is a legal necessity to prove that the loan for which the charge is created, is taken for a purpose necessary or beneficial to the family. The onus of proving, the purpose for which loan is taken, lies on the financer. The financer should keep a record that he made reasonable inquiries and he was satisfied that the loan is availed for the benefit of joint family, CERSAI & Credit information reports (CIBIL report etc.) of the Karta and all major co-parceners of the joint family. Original statement of account is verified. Property offered as security will be inspected and title records of security offered are investigated.

From Clubs, Societies, and Associations:

Registered Bye–laws of the Society/Association/club, Copy of resolution passed in the AGM to authorize managing committee to avail loan and pledge or mortgage the assets of the club or society or association as a security to the bank. Profile of Office bearers and CERSAI & Credit information reports (CIBIL report etc.) on them will be called for. Banks also verify whether the purpose and provisions to raise loans is incorporated in the bye-laws of the entities and who are the authorized person/ Signatory to the Documents, Legal Opinion on creation of charge on assets of the clubs/association/society would be obtained. The property would be inspected by the bank officials.

From Private Limited and Public Limited Companies:

Certificate of Incorporation, Memorandum of Association, Articles of Association, Certificate for commencement of Business (for public limited companies), List of Directors, Share Holding pattern, Power of directors, common seal, Securities for Bank Advances, CIBIL report of the directors and the company, Search report of the company from the ROC to be verified by the bank to ensure that there is no prior charge on the assets to be offered to the bank as a security. Profile of directors of the company, CERSAI & Credit information reports (CIBIL report etc.) report on them will be called for. Banks also verify whether the purpose and provisions to raise loans is incorporated in the memorandum of the company and find out are the authorized person/ Signatory to the Documents, Legal Opinion on creation of charge on assets of the company would be obtained. The property would be inspected by the bank officials.

From Public Sector Undertakings:

The general documents/papers for loans, processed by banks for Public sector are as in case of PSUs. The bank may explore the possibilities of getting guarantee from the State or Central Governments for the advance made by the bank.

For Consortium advances : A group of two or more banks join together and sharing the advance of large size loans to a borrower by means of an inter se (pari passu) agreement. The leader bank will process the non-financial as well financial papers of the applicant company (as mentioned above). Consortium lending helps banks in Joint appraisal of the project by different banks which will facilitate for exchange of valuable information among the Banks. It also helps the Banks to keep their exposure to the borrower within the desired limit and reduce the credit risk. Normally the bank with higher percentage of lending will lead the consortium completes joint documentation for total advance by all the members of consortium.

Related articles:

1. Basic ideas on appraisal of working capital limits

2. 5 Steps of Credit Appraisal

2. How to understand a balance sheet?

3. How to study a profit and loss statement?

4. Computation of working capital limits under Turn-Over method (Nayak Committee Norms)

5.Working capital assessment under cash budget method

6.How the length of operating period (Holding period for stocks and receivables) is measured?

7.Ratio analysis: Learn the techniques & get into saddle

8.The types of loans and advances which are considered as working capital finance

9.Assessment of Non-fund based (LC/LG/DPG/APG) Limits

10.How to appraise term loan proposals?

11.The Important Points to be borne in mind while in Execution of Loan Documents

12 How to devote your time for execution of loan documents?