Ms.Balkees K.S.,,(Oct 2015) .,Int.J.Res.Ins.,Vol 2 (Issue 2)., pp.76-91.

A STUDY ON CREDIT APPRAISAL SYSTEM OF SAKTHI

FINANCE LIMITED, CALICUT WITH SPECIAL
REFERENCE TO COMMERCIAL VEHICLES

Ms.BALKEES. K.S

Research scholar, Srimad Andavan Arts and Science College(Autonomous) Thiruchirappalli.

Email: [email protected]

ABSTRACT

In the present scenario, the Non-Banking Finance Companies (NBFCs) have a

quite significant role to play with RBI has already placed substantial important to further
development of the NBFC sector along with the prudent lines. Sakthi Finance Limited is one
among the leading Non-Banking Finance Companies. This study is undertaken to analyze the
various factors involved in appraising the credit proposals of the customers in Calicut branch
of Sakthi Finance Limited. The credit proposals are given by many type of customers with
various background and capabilities. The research was undertaken 250 customers belonging
to commercial vehicles segment who were not found regular in their payment of their equated
monthly installments. The analyses were made by using statistical tools such as percentage
analysis and chi-square test.

Key words: Credit Appraisal System.

1. INTRODUCTION
Today a wide range of financial institutions, through plethora of customer with
friendly financial products, is conducting the "intermediation". Repeated evaluation of the

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 Ms.Balkees K.S.,,(Oct 2015) .,Int.J.Res.Ins.,Vol 2 (Issue 2)., pp.76-91.

role of NBFCs by study group set up periodically but the Government has confirmed, "That
NBFCs usefully supplement the activities of banks in the fields of both deposit mobilization
and leading. NBFCs are capable of playing a dynamic role in the economy.
A credit transaction is a contract between two parties: the borrower and the lender
subject to a mutual agreement on the terms of credit. The terms of credit is defined based on
five critical financial parameters: amount of credit, interest rate, maturity of loans, frequency
of loan servicing and collateral. Optimizing decision pertaining to the terms of credit could
differ from the borrower to that of lender. As such, the mutual agreement between the
borrower and the lender may not necessarily imply an optimal configuration for both. At this
juncture, distinction between a defaulter and a non- performing loan account is in order. A
default entails violation of the loan contract or the agreed terms of the contract, while non-
performing loan entails that the borrower does not renege from the loan contract but fails to
comply the repayment schedule due to evolving unfavorable conditions. However, from the
perspective of corporate finance, a common perspective is that both the cases of ‘defaulter’
and ‘non-performer’ imply similar financial implications, i.e., financial loss to institutions.
Moreover, in the Indian context regulatory and supervisory process does no focus on such a
distinction between default and non-performer as far as prudential norms are concerned. The
NPL is defined as past due concept, taking into account either non-payment of interest due
principal or both. For simplicity, this common perspective prevails in the rest of the
theoretical analysis. The most important reason for default could be mismatch between
borrower’s terms of credit and creditor’s terms of credit.

2. STATEMENT OF THE PROBLEM

There are different type of factors are involved in the credit appraisal process of
commercial vehicle loans .The company want to identify the important factors in this process.
The factors are being analyzed for their influence. An attempt is made to understand the
degree of influence of various factors on the quality of the borrower accounts.

250 arrear borrowers were selected for the study. They are grouped into 5 categories as
under:
1. One arrear set
2. 2 to 3 installment arrear set
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3. 4 to 6 installment arrear set

4. 7 to 12 installment arrear set
3. OBJECTIVES OF THE STUDY

• To analyze the credit appraisal procedure of the Sakthi Finance Ltd

• To identify the closely related factors involved in credit appraisal process of
commercial vehicle loans.
• To suggest any additional relevant factors to strengthen the credit appraisal
process of the company.
• To provide inputs to build software for automatic generation of credit appraisal
decisions.

4. METHODOLOGY
The study is based on descriptive analysis of data furnished in the proposal records
that were submitted to the company for sanction of loan. The researcher used both primary
and secondary data for this study.
Primary data:
Primary data are that which are collected afresh and for the first time and thus
happens to be original in character. They are collected for the first time for analyzing the
study. In this study the primary data were collected through “Questionnaire” method.
Secondary Data
Secondary data is the data already available. For this study such data were collected
from books, journals, research studies, websites and customer files and records.

6. RESEARCH DESIGN
Sampling unit
The sampling unit is one credit proposal submitted to Sakthi Finance Limited for
sanctioning loan and defaulted in paying the due on dates.
Population
Population refers to the entire group of people, events or things of interest that the
researcher wishes investigate. The population used in this study by the researcher is total
defaulted commercial vehicle loan borrowers of Sakthi Finance Limited.
Tools of analysis
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 Ms.Balkees K.S.,,(Oct 2015) .,Int.J.Res.Ins.,Vol 2 (Issue 2)., pp.76-91.

Percentage analysis and Chi-square test is used to verify the different objectives.

7. HYPOTHESIS
• The borrower’s repayment behaviors does not influence either by market officer
ratings, branch officer ratings, existing customer ratings or new customer ratings.
• The borrowers repayment behaviors do not get influenced either by guarantor oriented
factors like guarantor rating (exiting or new), track record, similar line business or
value of immovable assets.
• The borrower’s repayment behavior does not get influenced either by EMI
commitments, value of immovable asset, total expenditure, or insurance cover.
• The borrower’s repayment behavior does not get influenced either by net income
ratio, other income or average inflow.
8. SCOPE OF THE STUDY

The study throws light on varies aspects including the company’s system of credit
appraisal. The objectives of the study include the study of the management of credit
proposals firm with the help of statistical tools to find the correlation between various factors
of credit process. It also identifies the weightage for each factor of credit processes. In the
study based on the analysis the researcher has made useful suggestion to improve the credit
appraisal process of the organization.
9. LIMITATIONS OF THE STUDY
• The study is limited to a period of five years only
• The analysis pertains to defaulted customers.
• The reliability and accuracy of calculation depends on the accuracy of information
found in customer files.
10. REVIEW OF LITERATURE
The following are the various reviews collected from various journals and website.
Mohan (2003) observed that lending rates of have not come down as much as deposit rates
and interest rates on Government bonds. While some institutions have reduced their prime
lending rates (PLRs) to some extent and are also extending sub PLR loans, effective lending
rates continue to remain high. This development has adverse systemic implications especially
in a country like India where interest cost as a proportion of sales or corporate are much
higher as compared to many emerging economics.
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Sun and Li (2006) have developed a model to predict companies’ financial distress, testing
35 financial ratios for 135 pairs of listed companies. Their final distress prediction model
includes net profit growth rate, liabilities to tangible assets, accounts receivable turnover,
liabilities to cash flows, liabilities to equity market value, total asset turnover and gross profit
margin.
Sathya Varathan et al (2012) intended to study the credit policy and credit appraisal of the
bank process credit rating methods followed by the bank for different credit ranges are also
analyzed. The bank must bring more transparency in appraisal of the project there should be
explanation for a appraisal of the project that was sanctioned by higher authority. Nancy
Arora et al (2013) research paper discussed the Credit Risk Assessment Model of SBI Bank
and check process of the commercial, financial & technical viability of the project proposed
& its funding pattern. The paper studied the movements to reduce various risk parameters
which are broadly categorized into financial risk, business risk, industrial risk & management
risk.
Akila and Pathmavathy (2014) they studied on the topic Credit appraisal procedure and
disbursement of loans to MSME. their study finalized with the proper evaluation of
customers is performed this measures the financial condition and the ability of the customer
to repay back the Loan in future .generally the credit facilities are extended against the
security know as collateral. Thus the customers’ cash flows are ascertained to ensure the
timely payment of principal and the interest.
11. ANALYSIS AND INTERPRETATIONS
Table 1: Age of the borrowers
Age of the borrowers Frequency Percentage
<25 years 21 8.4
25-35 years 92 36.8
36-45 years 92 36.8
46-55 years 40 16.0
above 55 years 5 2.0
Total 250 100.0
From the above table it can be observed that the customers within age group of (25-35)
years and (36-45) years were interested in availing more number of loans (36.8 %)
followed by 16% (46-55 age group),8.4%(<25 years) and 2% (above 55 years).

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Table 2: Income range of the borrowers

Income range of the
Frequency Percentage
borrowers
1-2 lakhs 42 16.8
>2-4 lakhs 104 41.6
>4-6 lakhs 58 23.2
above 6 lakhs 46 18.4
Total 250 100.0

From the above table it can be observed that the customers with income group of (>2-4
lakhs) were interested in availing more number of loans (41.6%) followed by 23.2 %(> 4-6
lakhs), 18.4 %( above 6 lakhs) and 16.8 %( 1-2 lakhs).
Table 3: Branch officer ratings of the borrowers

Branch officer
Frequency Percentage
ratings
AAA 126 50.4
AA 73 29.2
A 51 20.4
Total 250 100.0
From the above table it can be observed that the AAA rated group of Branch officers were
found to have appraised loan to more number of customers (50.4%) followed by 29.2%(AA
rated group), 20.4%(A rated group).
Table 4: Marketing officer ratings of the borrowers

Marketing officer
Frequency Percentage
ratings
AAA 127 50.8
AA 74 29.6
A 49 19.6
Total 250 100.0

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 Ms.Balkees K.S.,,(Oct 2015) .,Int.J.Res.Ins.,Vol 2 (Issue 2)., pp.76-91.

From the above table it can be observed that the AAA rated group of marketing officer were
found to have appraised loan to more number of customers (50.8%) followed by 29.6 %(AA
rated group), 19.6 %(A rated group).
Table 5: New customer ratings of the borrowers

Customer ratings Frequency Percentage

New consumer 36 14.4
AAA 137 54.8
AA 62 24.8
A 15 6.0
Total 250 100.0

From the above table it can be observed that the AAA rated groups of customers were
interested in availing more number of loans (54.8 %) followed by AA rated group customers
(24.8%), new customer group (14.4%), A rated group (6%).
Table 6: Existing customer ratings of the borrowers
Customer ratings Frequency Percentage
Existing customer 200 80.0
BBB 24 9.6
BB 18 7.2
B 8 3.2
Total 250 100.0

From the above table it can be observed that the BBB rated group of new customers were
interested in availing more number of loans (9.6%) followed by BB rated group customers
(7.2%), B rated group (3.2%).
Table 7: Model profile of the borrowers
Model profile Frequency Percentage
Positive 117 46.8
Low 90 36.0
Negative 43 17.2
Total 250 100.0

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From the above table it can be observed that the positively rated vehicles are liked by more
number of people (46.8%)who are interested to get more number of loans (36%) followed by
low rated vehicles, negative rated vehicles (17.2%).

Table 8: track record Company of the borrowers

Track record
Frequency Percentage
company
Reputed company 202 80.8
Pvt/shriram 42 16.8
No track 6 2.4
Total 250 100.0

From the above table it can be observed that the group of people with a track record from a
reputed company were interested to get more number of loans (80.8%) followed by other
private / limited companies (16.8%), The people without any track record get minimum
amount of loans( 2.4%).

Table 9: Track record of the borrowers,

Track record of the
Frequency Percentage
borrowers
No track record 3 1.2
within 30/10 157 62.8
within 60/30 53 21.2
within 90/60 37 14.8
Total 250 100.0

From the above table it can be observed that the group of people with track record (30/10)
were interested to get more number of loans (62.8%) followed by people with track record
(60/30) 21.2%. The group of people with track record (90/60) 14.8% and people with No
track record get less number of loans (1.2%).

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Table 10: Clearing period of past loan

Clearing period of
Frequency Percentage
past loan
Yes 191 76.4
No 59 23.6
Total 250 100.0

From the above table it can be observed that the groups of people who have cleared their past
loans with in the stipulated period were interested to get more number of loans (76.4%).
Table 11: Purpose of the loan
Purpose of the loan Frequency Percentage
Commercial use 99 39.6
Personal use 151 60.4
Total 250 100.0

From the above table it can be observed that the customers using the vehicle for personal use
were interested to get more number of loans (60.4%) while compared to customers using the
vehicle for commercial purpose (39.6%).

Table 12: Second line supporters

Second line supporters Frequency Percentage
Available 145 58.0
Not available 105 42.0
Total 250 100.0

From the above table it can be observed that the borrowers with second line supporters were
interested to get more number of loans (58%) followed by customers without second line
customers (42).

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Table 13: Similar line guarantor

Similar line
Frequency Percentage
guarantor
Yes 219 87.6
No 31 12.4
Total 250 100.0

From the above table it can be observed that the similar line guarantors give more guarantees
(87.6%) to the lending people compare to unrelated guarantors.

Table 14: Insurance cover of vehicle

Insurance cover Frequency Percentage
=>100% of adv. amt 235 94.0
81 % - 99 % 12 4.8
61 % - 80 % 3 1.2
Total 250 100.0
From the above table it can be observed that the group of peoples have insurance cover
(=>100% of advance amount) were interested to get more number of loans (94%) followed
by the group (81%-99%) 4.8% and the group (61%-80%) 1.2%,

TABLE 15: RATINGS Vs. REPAYMENT BEHAVIOR

Null Hypothesis
H0: The borrower’s repayment behaviors does not influence either by market officer
ratings, branch officer ratings, existing customer ratings or new customer ratings.

Alternative Hypothesis

H1: The borrower’s repayment behaviors do get influenced by market officer ratings or
branch officer ratings or existing customer ratings or new customer ratings.
.
Level Of Significance 5% level

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Statistical test: Chi-square test

Contingency Table 15
Factors Chi – square Degrees of Expected Null
Significance
(Ratings) value freedom value Hypothesis
Market Not
34.941 4 9.488 Rejected
officer significance
Branch Not
38.850 4 9.488 Rejected
officer significance
Exiting Not
40.695 6 12.592 Rejected
customer significance
New Not
30.841 6 12.592 Rejected
customer significance

INFERENCE
It is inferred from the above chi-square analysis that ratings of market officer, branch
officer and customer influence the repayment behavior of the customer.
TABLE 16: PROFILE OF CUSTOMER Vs. REPAYMENT BEHAVIOR
Null Hypothesis
H0: The borrower’s repayment behavior does not get influenced either by model profile,
Track Record Company, track record of customer, old loan cleared, purpose of asset and their
age.

Alternative Hypothesis
H1: The borrower’s repayment behaviors do get influenced by model profile, Track
Record Company, track record of customer, old loan cleared, purpose of asset and their age.

Level Of Significance 5% Level

Statistical test: Chi-square test

Contingency Table 16

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 Ms.Balkees K.S.,,(Oct 2015) .,Int.J.Res.Ins.,Vol 2 (Issue 2)., pp.76-91.

Factors Chi – square Degrees of Expected Null

Significance
value freedom value Hypothesis
Model Not
23.478 4 9.488 Rejected
profile significance
Track Record
0.587 2 5.991 Significance Accepted
Company
Not
Track record 72.062 4 9.488 Rejected
significance
Old Loan Not
19.620 2 5.991 Rejected
Cleared significance

Age 13.258 8 15.507 Significance Accepted

Purpose of Not
20.253 2 5.991 Rejected
asset significance

INFERENCE:
It is inferred from the above chi-square analysis that except age of the customer the
model profile, track record Company, track record, old loan cleared and purpose of asset
influences the repayment behavior.
TABLE 17: LOAN DETAILS Vs. REPAYMENT BEHAVIOR
Null Hypothesis
H0: The borrower’s repayment behavior does not get influenced either by advance
amount, EMI amount, quantum percentage and funding quantum.

Alternative Hypothesis

H1: The borrower’s repayment behaviors do get influenced either by advance amount,
EMI amount, quantum percentage and funding quantum.
.

Level Of Significance 5 % level

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 Ms.Balkees K.S.,,(Oct 2015) .,Int.J.Res.Ins.,Vol 2 (Issue 2)., pp.76-91.

Statistical test: Chi-square test

Contingency Table 17
Factors Chi – square Degrees of Expected Null
Significance
value freedom value Hypothesis
Advance Not
92.625 6 12.592 Rejected
amount significance
Not
EMI amount 149.723 6 12.592 Rejected
significance
Quantum Not
59.469 4 9.488 Rejected
percentage significance
Funding
1.174 2 5.991 significance Accepted
quantum

INFERENCE:

It is inferred from above chi-square analysis that advance amount, EMI amount and quantum
percentage influences the repayment behavior except funding quantum

TABLE 18: EARNING CAPACITY vs. REPAYMENT BEHAVIOR

Null Hypothesis

H0: The borrower’s repayment behavior does not get influenced either by net income ratio,
other income or average inflow.
Alternative Hypothesis

H1: The borrower’s repayment behaviors do get influenced by net income ratio or other
income or average inflow.
Level Of Significance 5% level

Statistical test: Chi-square test

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 Ms.Balkees K.S.,,(Oct 2015) .,Int.J.Res.Ins.,Vol 2 (Issue 2)., pp.76-91.

Contingency Table 18
Factors Chi – square Degrees of Expected Null
Significance
value freedom value Hypothesis
Not Rejected
Income range 36.613 6 12.592
Significance
Net income : Not
253.404 6 12.592 Rejected
EMI ratio significance
Other income Not
89.508 8 15.507 Rejected
: EMI ratio significance
Average Not
309.252 4 9.488 Rejected
inflow significance

INFERENCE:
It is inferred from the above chi-square analysis that net income ratio , other income and
average inflow influences the repayment behavior but insurance cover does not influenced
the borrower’s repayment behavior.
12. RESEARCH FINDINGS

The customers within age group of 25-35 years and 36-45 years were interested in
availing more number of loans (36.8 %) followed by 16% in 46-55 age group
,8.4% in <25 years and 2% above 55 years.

The customers with income group of above 2 to 4 lakhs were interested in availing
more number of loans (41.6%) followed by 23.2 % above 4 to 6 lakhs, 18.4 %
above 6 lakhs and 16.8 % between 1 to 2 lakhs.

The AAA Branch officers dispersed more loan to of customers (50.4%) followed by
AA for 29.2%customers, A for 20.4% customers.

The AAA marketing officer were found to have appraised loan to more number of
customers (50.8%) followed by 29.6 % in AA and 19.6 % in A.

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 Ms.Balkees K.S.,,(Oct 2015) .,Int.J.Res.Ins.,Vol 2 (Issue 2)., pp.76-91.

The AAA customers avail more number of loans (54.8 %) followed by AA

customers (24.8%), new customers (14.4%), A customers (6%).

The new customers are denoted by BBB, BB and B. The BBB rated group of new
customers were interested in availing more number of loans (9.6%) followed by BB
rated group customers (7.2%), B rated group (3.2%).

The vehicles are rated as positive, low and negative based on its market value. The
positively rated vehicles are purchased by more number of people who are
interested in getting loans (58%) followed by low rated vehicles 36 % and
negatively rated vehicles (6.8%).

The group of people with good track record from a reputed company were
interested in getting loans (80.8 %) followed by other private / limited companies
(16.8%), The people without track record discouraged to avail loans.

The repayment behavior of customers is judged by two characters viz, (i) maximum
number of delayed payment and (ii) average number of days in delayed payment.
For example it is denoted as (30/10). The group of people with track record (30/10)
were interested to get more number of loans (62.8%) followed by people with track
record (60/30) 21.2%. The group of people with track record (90/60) 14.8% and
people with No track record get less number of loans (1.2%).

The groups of people who have cleared their past loans with in the stipulated period
were interested to get more number of loans (89.6%).

The customers using the vehicle for personal use were interested to get more
number of loans (60.4%) while compared to customers using the vehicle for
commercial purpose (39.6%).

The borrowers with second line supporters were interested to get more number of
loans (58%) followed by customers without second line customers (42 %).

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 Ms.Balkees K.S.,,(Oct 2015) .,Int.J.Res.Ins.,Vol 2 (Issue 2)., pp.76-91.

The similar line guarantors give more guarantees (88 %) to the lending people
compare to unrelated guarantors.

The group of peoples have insurance cover (100% and above of advance amount)
were interested to get more number of loans (94%) followed by the group (81%-
99%) 4.8% and the group (61%-80%) 1.2%.

13. SUGGESTIONS.

To encourage high repayment by creditor a differential interest rate can be

administered. The difference can be 0.1 % from A to A++. Those at grade D should be dealt
with caution in appraising their loan proposal.
REFERENCES
1. NArora, A Gaur, Babita, “Credit Appraisal Process Of SBI: A Case Study Of Branch Of
SBI In Hisar”, A rth Prabhand : A Journal of Economics and Management, 2013, Vol.2
(Issue 1), pp. 10-26.
2. S. Varathan et al., “Credit policy and credit appraisal of Canaara bank using ratio analysis”
, International Multidisciplinary Research Journal , 2012, Vol. 2 (Issue 7), pp.19-28
3.Simona Mihai Yiannaki (2008) “Bank Risk Regulation and the Credit Crunch ,” Journal of
e- library no. G 34, June 17, 2008.
4. Punithavathy Pandian Security Analysis and Portfolio Management second Edition. 2014.
5.Shashi K Gupta,Praneet Rangi “Research methodology methods, Tools and techniques” ,
Kalyani Publishers Fourth Edition 2014.
6. Chris Brooks “introductory econometrics for finance”, Cambridge University Press the
Edinburgh Building, Cambridge CB2 8RU, UK.

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