Credit Appraisal Process in Indian Banks: The Full Journey from Proposal to Sanction

Credit appraisal in an Indian bank runs fourteen stages: proposal receipt, KYC and constitution checks, due diligence, technical appraisal, financial appraisal, working capital assessment, security and valuation, risk rating, CAM preparation, approval under delegated authority, sanction, documentation, charge creation and disbursement, then post-sanction monitoring. Each stage has a different owner and a different failure mode.

Key facts

• Fourteen stages, seven owners. A single mid-corporate proposal passes through the relationship team, the credit processing cell, legal, the panel valuer, risk, the sanctioning authority and operations before a rupee moves. Handoffs, not analysis, are where the time goes.
• RBI puts a clock on only the small end. Credit decisions on MSE loans up to ₹25 lakh must be taken within 14 working days; above that, each bank's board-approved norms govern (RBI, MSME FAQs, updated 29 July 2025).
• YuSight produces an end-to-end CAM draft in about 30 minutes, every figure traced to its source document and page — which removes the longest single block in the fourteen, the days a proposal sits between "spreading done" and "note ready for committee".
• The charge clock is statutory. A company must register a charge with the Registrar within 30 days of creation, extendable to 60 days on additional fees and a further 60 days on ad valorem fees, under Section 77 of the Companies Act, 2013.
• Asset classification starts the day after disbursement. SMA-0 is anything overdue up to 30 days, SMA-1 is 31 to 60 days, SMA-2 is 61 to 90 days, and NPA follows at more than 90 days overdue (RBI, Master Circular – Prudential Norms on Income Recognition, Asset Classification and Provisioning).

What are the stages of credit appraisal in a bank?

Turnaround times above are indicative of a ₹10–50 crore mid-corporate proposal at a mid-sized Indian bank. They are illustrative, not a published norm.

Stage 1 — What happens when a proposal is received?

The relationship manager takes a written application, records the facility sought, the purpose and the tenor, and forms a preliminary view against four filters: does the activity fall within the bank's loan policy and sectoral caps, is the borrower within the bank's geography and segment, is the ask proportionate to the borrower's scale, and is there any obvious knock-out.

Two things must happen here that routinely happen later, at cost. First, acknowledge the application. RBI expects banks to run a Credit Proposal Tracking System that generates an acknowledgement automatically. Second, issue the complete document checklist in one go. Proposals that receive their checklist in instalments spend two extra weeks in stage 2.

Stage 2 — KYC, constitution and legal capacity

This is not a formality. It establishes that the entity in front of you can legally borrow and that the person signing can legally bind it.

• Constitution documents. Certificate of Incorporation, MOA and AOA for a company; partnership deed and Form A for a firm; LLP agreement and incorporation certificate for an LLP; trust deed and registration for a trust.
• Borrowing power. For a company, check the AOA borrowing clause, the Section 180(1)(c) shareholder resolution where borrowings exceed paid-up capital plus free reserves plus securities premium, and a board resolution naming the signatories. For a partnership, check that the deed permits borrowing and mortgaging.
• Registrations. PAN, GSTIN, Udyam Registration Certificate where applicable, factory licence, pollution consent, drug licence, FSSAI — whatever the activity requires.
• KYC of the entity, its directors or partners, and every guarantor.
• Charge search. An MCA charge search on the borrower shows every existing lender and every satisfied and unsatisfied charge. Run it in stage 2, not stage 13.

The failure mode here is a proposal appraised for three weeks and then found to be from a company whose AOA caps borrowing below the amount requested.

Stage 3 — Due diligence and credit history

Four searches, one day, run in parallel:

1. Commercial bureau on the entity — CIBIL Commercial Report, and for MSMEs the CIBIL MSME Rank, a 1 to 10 grade where CMR-1 is least risky (TransUnion CIBIL).
2. Consumer bureau on directors, partners and guarantors, across CIBIL, CRIF High Mark, Experian or Equifax as your panel allows.
3. CRILC for aggregate exposure of ₹5 crore and above — this shows the borrower's position across the banking system, including any SMA reporting by other lenders.
4. Negative lists — RBI wilful defaulter list, suit-filed accounts, the bank's own caution list, ECGC caution list where relevant, and group exposure against internal caps.

Read the bureau against the bank statements. Any facility reported by a bureau with no matching debit in the statements is being serviced from an account you have not been shown.

Stage 4 — Technical appraisal

Applies to term loans and project finance, not to a plain working capital renewal. The technical officer or an external consultant tests:

• Location and infrastructure — land title, zoning, approach, power availability and sanctioned load, water, effluent treatment.
• Technology and capacity — process route, installed capacity, achievable capacity utilisation, machinery specification and supplier credentials.
• Cost of project — item-wise, against quotations, with the promoter's contribution identified separately and its source explained.
• Implementation schedule — a bar chart with the critical path marked, and the date from which the moratorium runs.
• Statutory clearances — environmental clearance, consent to establish and operate, building plan approval, fire NOC.

The output is a feasibility report that the credit analyst then converts into the cash flows used in the DSCR working. If the technical report and the financial projections disagree on capacity utilisation, the credit analyst has to reconcile them in the CAM. Most do not, and that gap is the single commonest cause of a project loan's first-year shortfall.

Stage 5 — Financial appraisal and spreading

Three years of audited financials, the latest provisionals and the projections, all recast into the bank's standard format so that this borrower can be compared with every other.

What the analyst is actually doing:

• Recasting. Reclassifying unsecured loans from promoters as quasi-equity where they are subordinated, moving deferred tax appropriately, netting off intangibles from net worth, treating investments in group companies as non-current.
• Testing the audit report. Qualifications, emphasis of matter, CARO reporting on statutory dues and related-party transactions, and any change of auditor during the period.
• Contingent liabilities. Guarantees issued for group companies, disputed tax demands, LCs outstanding, and pending litigation.
• Ratio computation on a consistent basis — current ratio, TOL/TNW, debt-equity, interest coverage, DSCR, inventory and receivable days, and return on capital employed.
• Trend and quality. Rising receivable days with flat sales is a collections problem. Rising other income as a share of PBT is an earnings quality problem.

Every figure the analyst produces here ends up in the CAM, and every figure in the CAM has to be defensible against a source document. When a committee spends twenty minutes arguing about where a number came from, it is not doing credit work.

Stage 6 — CMA data and working capital assessment

For working capital limits above the bank's threshold, the borrower's chartered accountant submits CMA data — a standard set of statements covering existing and proposed limits, operating statement, analysis of balance sheet, comparative statement of current assets and current liabilities, computation of MPBF, and the funds flow statement. What each of those statements contains, and how banks read them, is set out in what CMA data is and why Indian banks ask for it.

CMA is the borrower's submission. The bank's assessment is what happens next.

Worked example: assessing a ₹22 crore working capital request

Illustrative. Kaveri Textiles Pvt Ltd is a fictional borrower constructed to show the arithmetic.

Cotton yarn spinning, Erode. FY26 audited turnover ₹78.40 crore, FY27 projected ₹96.00 crore. Request: cash credit ₹22.00 crore and an inland LC limit of ₹8.00 crore. Existing term loan outstanding ₹6.50 crore.

Step 1 — MPBF Method II (Tandon)

Projected current assets (FY27) Raw material ₹ 8.60 crore Work in progress ₹ 3.20 crore Finished goods ₹ 6.40 crore Receivables ₹ 17.30 crore Other current assets ₹ 2.10 crore Total current assets ₹ 37.60 crore Less: other current liabilities (non-bank) Sundry creditors for goods ₹ 9.80 crore Other current liabilities ₹ 1.70 crore Total ₹ 11.50 crore Working capital gap (37.60 − 11.50) ₹ 26.10 crore MPBF (a) = gap − 25% of current assets = 26.10 − 9.40 ₹ 16.70 crore MPBF (b) = gap − projected net working capital = 26.10 − 9.85 ₹ 16.25 crore MPBF = lower of (a) and (b) ₹ 16.25 crore

The borrower asked for ₹22.00 crore. The assessment supports ₹16.25 crore. Recommended limit: ₹16.00 crore, with the shortfall against the request either met by the borrower bringing in additional long-term funds to lift net working capital, or by tightening the receivable cycle from the projected 66 days.

Step 2 — The post-sanction current ratio test

Current assets ₹ 37.60 crore Current liabilities Other current liabilities ₹ 11.50 crore Bank borrowing (short term) ₹ 16.25 crore Total ₹ 27.75 crore Current ratio = 37.60 ÷ 27.75 = 1.35

That clears the 1.33 benchmark the Tandon framework implies, which is the internal consistency check on the assessment. If it did not, the MPBF working would have to be revisited, not waived.

Step 3 — Leverage and coverage

Total outside liabilities ₹ 43.20 crore Tangible net worth ₹ 18.60 crore TOL / TNW = 43.20 ÷ 18.60 = 2.32 EBITDA (FY27 projected) ₹ 9.80 crore Total interest cost ₹ 2.85 crore Interest coverage = 9.80 ÷ 2.85 = 3.44

Step 4 — Security cover

Primary: hypothecation of stocks and receivables (book value, FY27 projected) ₹ 37.60 crore Collateral: equitable mortgage Factory land and building (valuation) ₹ 14.20 crore Plant and machinery (valuation) ₹ 9.60 crore Total collateral ₹ 23.80 crore Total exposure Cash credit ₹ 16.00 crore Inland LC ₹ 8.00 crore Term loan outstanding ₹ 6.50 crore Total ₹ 30.50 crore Collateral cover = 23.80 ÷ 30.50 = 78.0%

A 78% collateral cover against a policy norm of, say, 100% is a deviation. It goes into the CAM as a separately listed deviation with a mitigant — here, the primary security of ₹37.60 crore of current assets and an interest coverage of 3.44 times — and it gets approved by the authority competent for that specific deviation, which may not be the same authority approving the limit.

Stage 7 — Security, valuation and legal opinion

Two independent professionals, working in parallel:

• The panel valuer produces a valuation report on the immovable property with the basis of valuation stated, comparable transactions, guideline value and realisable value. Most banks require two valuations above a threshold and take the lower.
• The panel advocate produces a title search report covering typically 13 to 30 years of title flow, an encumbrance certificate, and an opinion on the property's marketability and the mortgage that can be created.

Run these two in parallel. Run them the day the property documents arrive, not after the CAM is drafted. Sequencing valuation after committee approval is the most common self-inflicted delay in the whole fourteen stages.

Stage 8 — Internal risk rating

Every scheduled commercial bank runs a board-approved internal rating model, typically on a scale of about ten grades, combining:

• Financial risk — the ratios computed in stage 5, scored against segment norms.
• Business and industry risk — segment outlook, competitive position, customer and supplier concentration, capacity utilisation.
• Management risk — promoter track record, succession, group support, financial discipline, integrity findings.
• Conduct risk — account operation history, cheque returns, LC devolvement, BG invocation, SMA history.

The rating drives three things: whether the proposal is eligible at all, which authority can sanction it, and the pricing spread over the external benchmark. Any qualitative override to the model-generated rating must be written down with its justification. An unexplained one-notch upgrade is the finding an internal auditor will open with.

Stage 9 — Credit Appraisal Memorandum

Everything above converges into one document. Its section order and its contents are covered in full in what a credit appraisal memorandum is — gist of proposal, purpose, borrower profile, management, credit history, industry analysis, financial analysis, limit assessment, security, rating, deviations, and recommendation.

Three things separate a CAM that gets approved from one that gets deferred:

1. Every number is traceable. Source document and page, on the face of the note.
2. Deviations are listed individually, each with its own mitigant and its own competent authority. A deviation buried in a paragraph is a deviation not approved.
3. The recommendation states terms, covenants and monitoring triggers, not just an amount. Stock statement periodicity, DP computation basis, minimum credit summation, financial covenants and their test dates.

This stage is where the ~30-minute automated CAM draft earns its keep. The drafting itself is mechanical — pulling spread figures, bureau data and bank statement summaries into a standard structure. What is not mechanical is the judgement in the recommendation, and that is what the committee should be spending its time on.

Stage 10 — Who approves a credit proposal at each limit?

Every bank publishes a board-approved delegation of powers. The structure below is representative of a mid-sized Indian bank; your own matrix will differ and it, not this table, governs.

Four rules that hold across almost every Indian bank:

• Powers are exercised on aggregate group exposure, not on the individual facility being sanctioned.
• A lower internal rating pushes the proposal up the ladder, regardless of ticket size.
• Deviation approval is separate from limit approval. The authority competent to sanction ₹20 crore may not be competent to approve a collateral shortfall.
• No officer sanctions a proposal they recommended. The recommending and sanctioning roles are always separated.

The committee's decision is minuted with conditions. Conditions precedent must be satisfied before disbursement; conditions subsequent within a stated period after.

Stage 11 — Sanction and conveyance of terms

The sanction letter sets out facility-wise limits, tenor, rate of interest and the benchmark it is linked to, margin, primary and collateral security, guarantees, processing and documentation charges, insurance requirements with bank clause, financial covenants, conditions precedent and subsequent, and the validity of the sanction.

The borrower's written acceptance, on every page, is what makes it a contract. A sanction conveyed by email and accepted by silence is a documentation exception that will surface at the worst possible moment.

Stage 12 — Documentation and stamping

Executed before any charge is created and before any money moves:

• Demand promissory note and letter of continuity
• Facility agreement or loan agreement, facility-wise
• Deed of hypothecation over stocks, receivables, plant and machinery
• Memorandum of entry or registered mortgage deed for immovable property
• Deed of guarantee from each guarantor, with the guarantor's independent acknowledgement
• Letter of negative lien or non-disposal undertaking where applicable
• Board resolutions authorising execution, and a certified copy of the shareholder resolution under Section 180(1)(c)

Stamp duty is a state subject and the rate varies. Under-stamped documents are inadmissible in evidence until impounded and the duty plus penalty paid, which is a problem discovered only at enforcement. Have the stamping schedule confirmed by legal for the state of execution before documents are printed.

Stage 13 — Charge creation: CERSAI and ROC

Two registries, two different regimes.

ROC — Companies Act, 2013. Where the borrower is a company or LLP, particulars of the charge must be filed with the Registrar of Companies in Form CHG-1 (CHG-9 for debentures). Section 77(1) requires registration within thirty days of creation. For charges created on or after 2 November 2018, the first proviso allows the Registrar to permit registration within sixty days on payment of additional fees, and the second proviso allows a further sixty days on payment of ad valorem fees (MCA, Instruction Kit for webform CHG-1; Companies Act, 2013). Miss all of that and the charge is not registered, which means it is not enforceable against a liquidator or other creditors. Verify the filing by pulling the MCA index of charges — do not rely on the borrower's confirmation.

CERSAI — SARFAESI Act, 2002. Particulars of every creation, modification or satisfaction of a security interest, and of securitisation and reconstruction transactions, are filed with the Central Registry under the Central Registry Rules, 2011. Note that Rule 5, which prescribed a thirty-day filing period, was omitted by the Central Registry (Amendment) Rules, 2020 with effect from 24 January 2020, so the statutory thirty-day clock no longer sits in the operative rules — most lenders retain a thirty-day internal norm anyway, because CERSAI registration determines priority.

For MSME borrowers, the equivalent journey — including where CGTMSE cover replaces collateral — is set out in the MSME loan underwriting process guide.

Stage 14 — Disbursement and post-sanction monitoring

Disbursement happens only after conditions precedent are certified as satisfied, documents are executed and stamped, charges are filed, insurance is in place with the bank clause noted, and — for a term loan — the promoter's contribution has been brought in and verified.

Then monitoring begins immediately:

• Stock and book-debt statements at the sanctioned periodicity, with drawing power recomputed each time after margins and after deducting creditors for goods.
• Credit summation in the account against the projected turnover. A cash credit account whose annual credit summation is a fraction of turnover means the sales are going somewhere else.
• End-use verification for term loans, against invoices and physical inspection.
• Covenant testing on the stated test dates, with breaches escalated rather than noted.
• Asset classification. SMA-0 up to 30 days overdue, SMA-1 at 31 to 60, SMA-2 at 61 to 90, NPA beyond 90. For exposures of ₹5 crore and above, SMA status is reported to CRILC and visible to every other lender in the system.
• Annual review, whether or not the limit is being renewed.

Where origination runs through a digital channel or a partner platform, the post-sanction obligations also include the reporting and data controls in the RBI Digital Lending Directions — the working checklist for credit and compliance teams sets those out clause by clause.

How long does bank credit appraisal take?

For MSE loans up to ₹25 lakh, fourteen working days is a regulatory expectation. Everything above is governed by the bank's own norms, and the honest answer for a ₹10 to 50 crore mid-corporate proposal is four to eight weeks from complete application to first disbursement — of which perhaps four days is credit judgement.

The rest is document collection, running valuation and legal in series when they could run in parallel, rekeying figures into the CAM, and waiting for a committee slot. Three of those four are fixable without changing a single credit policy.

FAQ

What are the stages of credit appraisal in a bank?

Proposal receipt, KYC and constitution checks, due diligence on bureau and defaulter lists, technical appraisal for term loans, financial appraisal and spreading, working capital or term loan assessment, security and valuation, internal risk rating, CAM preparation, approval under delegated authority, sanction, documentation, charge creation with ROC and CERSAI, and disbursement followed by post-sanction monitoring.

Who approves a credit proposal at each limit?

It depends on the bank's board-approved delegation of powers. Typically the branch or cluster head handles the smallest tickets, a regional committee the next band, a zonal committee above that, and a head office or management credit committee the largest. Powers are exercised on aggregate group exposure, and a weaker internal rating pushes the file one level higher regardless of size.

How long does bank credit appraisal take?

Up to ₹25 lakh for MSE borrowers, RBI expects a decision within 14 working days. For a mid-corporate proposal of ₹10 to 50 crore, four to eight weeks from a complete application to first disbursement is normal, and the bulk of that is document handling, valuation and legal, and CAM drafting rather than credit analysis.

What is the difference between credit appraisal and credit assessment?

In Indian practice they are used interchangeably. Where a distinction is drawn, appraisal is the whole process from proposal to sanction, and assessment is the narrower exercise of computing how much credit the borrower can be given — the MPBF working, the DSCR, the limit.

Is CMA data mandatory for every loan?

No. Banks call for CMA data when working capital limits cross their internal threshold, commonly around ₹1 crore to ₹2 crore, and for term loans where projections are needed. Small ticket and retail-style MSME products are assessed on GST returns, bank statements and bureau instead.

What is MPBF and which method do banks use?

Maximum Permissible Bank Finance is the working capital limit the Tandon framework supports. Method II is the standard: the working capital gap less 25% of current assets, compared with the gap less actual net working capital, with the lower figure taken. For small units, banks also run the turnover method as a cross-check.

What is a deviation and who approves it?

A deviation is any departure from the bank's loan policy — a ratio below norm, thinner collateral cover, a rating below the product floor. Each one is listed separately in the CAM with a justification and a mitigant, and each is approved by the authority competent for that specific deviation, which is frequently one level above the authority sanctioning the limit itself.

Why do banks register charges with both ROC and CERSAI?

They serve different purposes. ROC registration under Section 77 of the Companies Act makes the charge enforceable against a liquidator and other creditors of a company. CERSAI registration under the SARFAESI Act records the security interest in a central registry that any lender can search, which establishes priority and prevents multiple financing against the same asset.

What happens after sanction if the borrower's account slips?

The account moves through the SMA classification — SMA-0 up to 30 days overdue, SMA-1 at 31 to 60 days, SMA-2 at 61 to 90 days — and becomes an NPA beyond 90 days. For exposures of ₹5 crore and above, the SMA position is reported to CRILC, so every other lender in the system sees it.

Can post-sanction monitoring change the sanctioned limit?

Yes. Drawing power is recomputed from every stock and book-debt statement, so the amount actually available moves month to month even when the sanctioned limit does not. A covenant breach or a rating downgrade can also trigger a review that reduces or withdraws the limit.

Key takeaways

• Fourteen stages, seven owners. Most delay comes from handoffs and from running valuation and legal in series rather than parallel.
• Do the legal capacity check and the MCA charge search in stage 2. Discovering a borrowing-power problem in week three is expensive.
• Run both MPBF limbs, state which governs, and test the resulting current ratio. An assessment that produces a current ratio below the benchmark is an assessment that has not been finished.
• List every deviation separately with its own mitigant and its own competent authority. A deviation inside a paragraph is a deviation nobody approved.
• Register the charge with the ROC within thirty days of creation. The extensions cost money and the outer limit is real.
• Post-sanction monitoring is part of appraisal, not a separate discipline. Drawing power, credit summation and covenant tests are what tell you whether the appraisal was right.

Take the drafting out of the critical path and the judgement gets the time it deserves.

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