Credit Appraisal: Validation of proposal, Dimensions of Credit Appraisals, Structuring of Loan documents

Credit Appraisal: When a lender does an appraisal of Technical feasibility, economic viability, and bankability which also includes the creditworthiness of the applicant, the process is known as credit appraisal. 

This process of credit appraisal assessment of whether the applicant will be able to repeat the loaned amount in the scheduled time or not. Different banks have different methods for the determination of the creditworthiness of a borrower. These methods are determined within the norms & standards which are set by the banks. 

It is a very important step in sanctioning a loan because it is important that the borrowers carefully plan their financing modes. Banks need to be careful while granting a loan because we could actually end up increasing their risk exposure. All banks have their own objectives which are subjective to them to evaluate the creditworthiness of the customers.

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It has been prescribed that when infrastructure projects are financed under Consortium or syndication arrangement, the exposure shall not be> 23%. 

Requirement for the assessment to be done by all the Indian financial institutions or other specialized Institutions which have been set up for this very purpose. 

In most such cases, due diligence on the inability of projects should be well-defined and assessed. It has also been prescribed that even guarantees by the State government should not be accepted as a substitute for satisfactory appraisal of credit. 

Banks are allowed to take up the financing of infrastructure projects independently for the project whose promoters are of repute having excellent past records in implementing the projects.


Every proposal is required to be explicitly validated i.e. it should be confirmed that all the key aspects of the proposal are actually what the company wants some to be. And this cannot be done in just one sitting or at once. 

It is a process of identification where what needs to be validated is identified to allow flexibility for every item to get validated as well as provides a mechanism where all the chosen items and methods to validate are insured for their efficiency to get the desired quality.

This way companies are ensured that all the key aspects are exactly what they are supposed to be before they get submitted for approval. This process helps in avoiding the disasters which can result from teams that work in isolation. Because in most of those cases, proposals are used not worth what the companies want and they discover it too late to alter it.

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In the process of developing the proposal, the following actions, need to be taken:

  • Making decisions
  • Inventing approaches
  • Incorporating required information
  • Addressing the proposal requirements 
  • Delivering a message
  • Seeking a superior score


Service of credit includes monthly payments for utilities such as electricity bills, gas bills, telephone bills, and water bills. The payment on these credit services is required to be made on time otherwise a deposit and late charge will be imposed.

While loans (secured or unsecured) can range from small to large amounts and range from a few days to several years. The amount can be repaid in one lump sum amount or in small instalments until the principal amount and the finance charges are paid in full.


The process which is followed for the appraisal of credit is described below:

1) Credit Processing :

In this stage, all the information which is required to provide the credit is gathered and screening of applications is done. The application form which is used to apply should have sufficient columns for details so that all the information which is needed to assess the credit can be gathered. 

For this purpose, banks and Financial Institutions should have a checklist so that this can actually be done.

2) Credit-Approval/Sanction :

There should be written guidelines on the credit approval process and authorities who will be responsible for the approval as well as there should be a proper basis on which their decisions will be dependent. 

The authorities relating to approval should be duly sanctioned by the board of directors & should cover all the aspects of new credit approvals, renewables of credit and any changes in terms and conditions of the credit which have been provisionally approved. All these approvals should also be properly recorded and documented. 

As a prudent norm, it should be ensured that the approval authority should not have the responsibility of building customer relationships.

3) Credit Documentation :

One of the most essential parts of the credit process is documentation and it should be insured for each phase of the cycle in the credit process whether it is for the credit application, credit analysis, approval, monitoring, valuation or the recognition of impairment, foreclosure or realisation of security. 

There should be a standard format for credit files and the proper maintenance system be there as well for cross-indexing to assist in the process of review and follow-up.

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4) Credit Administration :

Banks and Financial Institutions are also required to ensure that their credit portfolios are administered properly which is to say that all the loan agreements are duly prepared, notices of renewal are sent timely & that the credit files are updated regularly. 

Institutions depending on the size and complexity of their credit portfolio can also assign this admin function to a separate Department or specific individuals.


Structure of loan documents: It refers to the terms of a loan with respect to the different aspects of which a loan is made up. It includes the maturity of the loan, repayment and the risk involved.

There are so many factors that need to be considered such as the purpose of the loan, the time period involved and the borrower’s risk profile.


The following are the main documents that are usually required when applying for a personal loan:

  • PAN Card
  • Identity proof could be Aadhaar Card, Driving license, Passport or Voter ID, etc.
  • Signature Proof such as Passport or PAN card, etc.
  • Address proof could be a copy of a Passport, Aadhaar card, driving license, utility bill; Gas or electricity bill, Voter ID, ration card or even a rent agreement, etc.
  • Bank statement for the past 6 months

If you are a salaried individual, the following documents are applied in addition to the above-mentioned documents:

  • Salary slips for the last 3 months
  • ITRs or Form 16

If you are a self-employed individual, additionally the below documents will need to submit (for self/business entity as applicable):

  • Financial statements for the last two years (balance sheet, profit and loss statement)
  • Income Tax Returns for the last 2 years
  • Proof of Business i.e License, registration certificate, GST number etc
  • IT Assessment or Certificate of Clearance
  • Challans of Income Tax or TDS Certificate (Form 16A) or Form 26 AS for income declared in ITR
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