A

PROJECT REPORT

ON
SUBMITTED IN PARTIAL FULFILLMENT OF THE
REQUIREMENT OF AWARD THE DEGREE OF
BACHELOR OF BUSINESS ADMINISTRATION(BBA)

By
RAHUL SHARMA
Enrollment No. 0DL/

Under the Guidance of

Mr. Dharmendra Singh
Through

SOFTDOT HITECH EDUCATION AND TRAINING INSTITUTE

Pitampura, New Delhi-34
Study Center Code-1006

To
Directorate of Open and Distance Learning
Jamia Hamdard University, New Delhi-110062
 STUDENT DECLARATION

I here by declare that the project report entitled on

“”
Submitted in partial fulfillment
Of the requirement to award the degree of
BACHLOR IN BUSINESS ADMINISTRATION

To

Jamia Hamdard university, this is my original work and not submitted for the
award of any other degree, diploma in fellowship, of any other similar tital of
prizes

RAHUL SHARMA
ENROLLMENT NO.-ODL/
 CERTIFICATION BY ORIGINALITY
This is to certify that the project “___” is an original work of RAHUL
SHARMA as a sudent of BBA ENROLMENT NO.-ODL is being
submitted in partitial fulfillment for the award of the degree of Bachelors
in Business Administration from Jamia Hamdard University through our
recognized center- Softdot Hi-Tech Education & Training Institute
(1006), Pitampura, New Delhi-34

RAHUL SHARMA as a sudent of BBA Enrollment no.

ENROLLMENT NO.-ODL/has worked out under the guidance of Ms.
Vaishali Sharma and declares that no part of this project has been
submitted for the award of any degree, diploma, fellowship or any other
similar title of price earlier to this university or to any other
university/institute for the fulfillment of the requirement of a coerce of
study.

DR. DHARMENDRA SINGH

(COORDINATOR)

CERTIFICATION BY EXAMINERS
The project report is submitted for the final year of Bachelor of Business
Administration in the stream of management (BBA) by a student of
Jamia Hamdard University - ENROLLMENT NO.-ODL/07/403/2659

Acadmic council of Softdot Hi-Tech Education & Training Institute, has

decided the title “CREDIT NRISK MANAJMENT IN INDIAN
BANKS” as an approved and acceptable project in the standard quality
to the set norms of jamia Hamdard University and by the institute as a
Bachelor of Business Administration (BBA) to the student MANISH
KUMAR DAHIYA Enrollment no. ENROLLMENT NO.-
ODL/07/403/2659 according to the norms of the university standards
academically.

Certify By: Mr. G.S. Kalsi

Examiner: Mr. Vaishali Sharma

CONTENTS
S.NO PARTICULARS PAGE
. NO.
1. EXECUTIVE SUMMARY 1
2. INTRODUCTION 2
3. TYPES OF RISKS IN A BANK 3
4. RISK MANAGEMENT 5
•1 Approaches
•2 Process
5. BASEL COMMITTEE 7
6. CREDIT RISK 10
•1 Credit Risk Management 11
•2 Factors on which credit risk depends 13
•3 Building blocks on Credit Risk 14
•4 Principles for managing credit risk 21
•5 Approaches to Credit Risk Management 23
7. PUNJAB NATIONAL BANK 27
•1 Profile 27
•2 Credit Risk Management in PNB 29
•3 Financial Position 39
•4 Asset Quality 44
•5 Capital & Financial Ratios 47
8. ICICI BANK 48
•1 Profile 48
•2 Risk Management 49
•3 Credit Risk Management 50
•4 Capital Adequacy 54
•5 Non-Performing Assets 56
9. CANARA BANK 57
•1 Profile 57
•2 Risk Management 59
•3 Capital Adequacy 60
•4 Asset Quality 60
10. ALLAHABAD BANK 62
•1 Profile 62
•2 Risk Management 63
•3 Financial Position 64
•4 Asset Quality & Capital Adequacy 65
11. CONCLUSION 66
12. BIBLIOGRAPHY 69

EXECUTIVE SUMMARY
 This project is concerned with determining the credit risk faced by banks under
consideration and tools used by these banks for managing the credit risk and thereafter
comparing these banks on the basis of techniques used by them for credit risk management.

Banks considered for research purpose are: Punjab National Bank, ICICI Bank,
Canara Bank and Allahabad Bank.

OBJECTIVES OF THIS PROJECT REPORT:

1 To determine credit risk faced by different Banks in India.

2 To determine various tools and methods used by these Banks for managing the
credit risk faced by them.
3 To determine whether or not there is any improvement in banks credit position due
to the use of such tools and methods.
4 To compare the credit position of these banks.

The research work is done on the basis of secondary data available on the websites of
the banks, annual reports, books etc.
 STRUCTURE OF THE PROJECT

“RISK MANAGEMENT IN INDIAN BANKS”

OBJECTIVES OF THE PROJECT:

5 To determine various types of risks faced by different Banks in India.

6 To determine various tools and methods used by these Banks for managing the risks
faced by them.
7 To compare public sector banks and private sector banks according to the intensity of
risks faced by them and tools used by them to manage those risks.

Risk means deviation from expectation and Risk Management involves identification,
measurement, monitoring and controlling risk.

This project is concerned with determining the risk faced by the banks under consideration and
thereafter determining the risk management tools used by these banks.

Banks considered for research are Standard Chartered Bank, HDFC Bank, ICICI Bank, IDBI
Bank, Allahabad Bank & Canara Bank.

An Exploratory Research will be conducted, as it would be mainly based on the secondary data
available from the various secondary sources like websites, magazines, newspapers, textbooks,
“consultative documents” from the publication of Banks etc.

However, personal interviews of some Bank Officials will also be conducted for extracting the
essential information which not available through secondary sources.

Thereafter different Statistical Tools (like standard deviation, correlation etc.) will be applied on
the collected data to extract the findings from it.
 INTRODUCTION

Banking is an art & science of measuring & managing risks in lending and investment
activities for commensurate profits based on the risk perceptions.

The face of banking in India is changing rapidly. The enhanced role of the banking sector
in the Indian economy, the increasing levels of deregulation along with the increasing levels of
competition have facilitated globalisation of the India banking system and placed numerous
demands on banks. Operating in this demanding environment has exposed banks to various
challenges and risks.

Risk is a situation wherein objective probability distribution of the values a variable can
take is known, even though the exact values it take are not known. The objective probability is
one which is supported by rigorous theory, past experience, and the laws of chance.

Risk means deviation from expectation. It can be defined as the chance that the
expected or prospective advantage, gain, profit or return may not materialize; that the
actual outcome of investment may be less than the expected outcome. The greater the
variability or dispersion in the possible outcomes, or the broader the range of possible outcomes,
the greater the risk. The measure of risk is Standard Deviation.

BIBLIOGRAPHY
WEBSITES:

1 www.pnbindia.com
2 www.icicibank.com
3 www.allahabadbank.com
4 www.canarabank.com
5 www.google.com

6 Online Newspaper: Hindu Business Line

BOOKS:

1 Financial Institutions and Markets; By: L.M. Bhole

Indian Financial System; By: M.Y. Khan

EXECUTIVE SUMMARY

This project is concerned with determining the credit risk faced by banks under
consideration and tools used by these banks for managing the credit risk and thereafter
comparing these banks on the basis of techniques used by them for credit risk
management.

Banks considered for research purpose are: Punjab National Bank, ICICI Bank,
Canara Bank and Allahabad Bank.

OBJECTIVES OF THIS PROJECT REPORT:

• To determine credit risk faced by different Banks in India.

• To determine various tools and methods used by these Banks for
managing the credit risk faced by them.
• To determine whether or not there is any improvement in banks credit
position due to the use of such tools and methods.
• To compare the credit position of these banks.

The research work is done on the basis of secondary data available on the
websites of the banks, annual reports, books etc.
 INTRODUCTION

Banking is an art & science of measuring & managing risks in lending and
investment activities for commensurate profits based on the risk perceptions.

The face of banking in India is changing rapidly. The enhanced role of the
banking sector in the Indian economy, the increasing levels of deregulation along with
the increasing levels of competition have facilitated globalisation of the India banking
system and placed numerous demands on banks. Operating in this demanding
environment has exposed banks to various challenges and risks.

Risk is a situation wherein objective probability distribution of the values a

variable can take is known, even though the exact values it take are not known. The
objective probability is one which is supported by rigorous theory, past experience, and
the laws of chance.

Risk means deviation from expectation. It can be defined as the chance that
the expected or prospective advantage, gain, profit or return may not materialize;
that the actual outcome of investment may be less than the expected outcome.
The greater the variability or dispersion in the possible outcomes, or the broader the
range of possible outcomes, the greater the risk. The measure of risk is Standard
Deviation.
 TYPES OF RISKS IN A BANK

From the day a bank is granted its charter up until its final day of operation, it faces a
wide variety of internal and external risks. Many banking risks arise from the common
cause of mismatching. If banks had perfectly matched assets and liabilities (i.e. identical
maturities, interest rate conditions and currencies), then the only risk faced by a bank
would be credit risk. This sort of matching, however, would be virtually impossible, and
in any event would severely limit the banks’ profit opportunities. Mismatching is an
essential feature of banking business. As soon as maturities on assets exceed those of
liabilities then liquidity risk arises. When interest rate terms on items on either side of
the balance sheet differ, then interest rate risk arises. Sovereign risk appears if the
international nature of each side of the balance sheet is not country-matched. Many of
these risks are interrelated. These include:

• Credit risk - Credit risk is also known as Default risk. It is the risk that a
counterparty to a .financial transaction (the ‘borrower’) will fail to comply with its
obligations to service debt, or that the counterparty will deteriorate in its credit
standing i.e. it arises from the failure on the part of the borrower or debtor to pay
the specified amount of interest and/or repay the principal, both at the time
specified in the debt contract or covenant or indenture.

• Liquidity risk covers all risks that are associated with a bank finding itself
• unable to meet its commitments on time, or only being able to do so by
• recourse to emergency borrowing.

• Interest rate risk is the variability in return on security due to changes in the
level of market interest rates, or it is the loss of principal of a fixed-return security
due to an increase in the general level of interest rates i.e. it relates to risk of loss
incurred due to changes in market
• rates, for example, through reduced interest margins on outstanding
• loans or reduction in the capital values of marketable assets.

• Market risk relates to risk of loss associated with adverse deviations in

• the value of the trading portfolio. Broadly refers to the risk that a bank’s earnings
and capital might be adversely affected by changes in interest rates, exchange
rates or securities prices. This course focuses on how the risk posed by changes
in interest rates may adversely affect a bank’s net income and capital position.
• Exchange Rate or Currency Risk – it refers to cash-flow variability experienced
by economic units engaged in international transactions or international
exchange, on account of uncertain or unexpected changes in exchange rates.

• Country risk is associated with the risks of incurring financial losses resulting
from the inability and/or unwillingness of borrowers within a country to meet their
obligations.

• Solvency risk relates to the risk of having insufficient capital to cover losses
generated by all types of risks.

• Operational risk - The risk of loss or harm from unanticipated internal or

external events that occur in the course of conducting business such as
equipment breakdowns, “acts of God,” customer and employee fraud and
undetected software errors.
• Legal risk - The risk of loss or harm from unenforceable contracts, lawsuits or adverse
judgments.

• Reputational risk - The risk of loss or harm to a bank’s public image from negative
publicity.
 RISK MANAGEMENT

The banking industry has long viewed the problem of risk management as the need to
control four of the above risks which make up most, if not all, of their risk exposure, viz.,
credit, interest rate, foreign exchange and liquidity risk. While they recognize
counterparty and legal risks, they view them as less central to their concerns.

Risk Management is a discipline at the core of every financial institution and

encompasses all the activities that affect its risk profile. It involves identification,
measurement, monitoring and controlling risks to ensure that
a) The individuals who take or manage risks clearly understand it.
b) The organization’s Risk exposure is within the limits established by Board of
Directors.
c) Risk taking Decisions are in line with the business strategy and objectives set by
BOD.
d) The expected payoffs compensate for the risks taken
e) Risk taking decisions are explicit and clear.
f) Sufficient capital as a buffer is available to take risk

The acceptance and management of financial risk is inherent to the business of banking
and banks’ roles as financial intermediaries. Risk management as commonly perceived
does not mean minimizing risk; rather the goal of risk management is to optimize risk-
reward trade -off. Notwithstanding the fact that banks are in the business of taking risk,
it should be recognized that an institution need not engage in business in a manner that
unnecessarily imposes risk upon it: nor it should absorb risk that can be transferred to
other participants. Rather it should accept those risks that are uniquely part of the array
of bank’s services.

In every financial institution, risk management activities broadly take place

simultaneously at following different hierarchy levels:
.
a) Strategic level: It encompasses risk management functions performed by senior
management and BOD. For instance definition of risks, ascertaining institutions
risk appetite, formulating strategy and policies for managing risks and establish
adequate systems and controls to ensure that overall risk remain within
acceptable level and the reward compensate for the risk taken.
 b) Macro Level: It encompasses risk management within a business area or across
business lines. Generally the risk management activities performed by middle
management or units devoted to risk reviews fall into this category.

c) Micro Level: It involves ‘On-the-line’ risk management where risks are actually
created. This is the risk management activities performed by individuals who take
risk on organization’s behalf such as front office and loan origination functions.
The risk management in those areas is confined to following operational
procedures and guidelines set by management.

Traditional Risk Management Systems

Commercial banks are in the risk business. In the process of providing financial
services, they assume various kinds of financial risks. So we need to determine an
approach to examine large-scale risk management systems. The management of the
banking firm relies on a sequence of steps to implement a risk management system.
These can be seen as containing the following four parts:
• Standards and reports
• Position limits or rules
• Investment guidelines or strategies
• Incentive contracts and compensation

In general, these tools are established to measure exposure, define procedures to

manage these exposures, limit individual positions to acceptable levels, and encourage
decision makers to manage risk in a manner that is consistent with the firm's goals and
objectives.

RISK MANAGEMENT APPROACHES:

• AVOIDANCE
• TRANSFER
• SHARING
• LOSS CONTROL
• SEPARATION
• COMBINATION

RISK MANAGEMENT PROCESS:

• IDENTIFICATION – The first step in risk management process is to identify the

risk.
 • QUANTIFICATION – After identifying the risk we have to quantify it using
techniques like Standard Deviation i.e. the quantification of the level of
exposures.

• POLICY FORMULATION – then we decide the alternative tools and find the best
alternative and various policies are formulated.

• Then using the engineering strategies to transform the exposures to the desired
form.

• MONITERING & REVIEW – Then the risk levels are monitered and reviewed and
they are restored to the pre-determined standards.

BASEL COMMITTEE

Basel 1

In July 1988, the Basel Committee came out with a set of recommendations aimed at
introducing minimum levels of capital for internationally active banks. These norms
required the banks to maintain capital of at least 8 per cent of their risk-weighted loan
exposures. Different risk weights were specified by the committee for different
categories of exposure. For instance, government bonds carried risk-weight of 0 per
cent, while the corporate loans had a risk-weight of 100 per cent.

Basel II

To set right these aspects, the Basel Committee came up with a new set of guidelines in
June 2004, popularly known as the Basel II norms. These new norms are far more
complex and comprehensive compared to the Basel I norms. Also, the Basel II norms
are more risk-sensitive and they rely heavily on data analysis for risk measurement and
management. They have given three pillars which act as guideline for implementation of
Basel II.

Pillar 1

Basel II norms provide banks with guidelines to measure the various types of risks they
face - credit, market and operational risks and the capital required to cover these risks.
Pillar II (Supervisory Reviews)

ensures that not only do the banks have adequate capital to cover their risks, but also
that they employ better risk management practices so as to minimise the risks. Capital
cannot be regarded as a substitute for inadequate risk management practices. This
pillar requires that if the banks use asset securitisation and credit derivatives and wish
to minimise their capital charge they need to comply with various standards and
controls. As a part of the supervisory process, the supervisors need to ensure that the
regulations are adhered to and the internal measurement systems are standardised and
validated.

Pillar III (Market Discipline)

This market discipline is brought through greater transparency by asking banks to make
adequate disclosures. The potential audiences of these disclosures are supervisors,
bank's customers, rating agencies, depositors and investors. Market discipline has two
important components:

Market signalling in form of change in bank's share prices or change in bank's

borrowing rates

Responsiveness of the bank or the supervisor to market signals.

What they Mean for banks?

Basel II norms are expected to have far-reaching consequences on the health of

financial sectors worldwide because of the increased emphasis on banks' risk-
management systems, supervisory review process and market discipline.

Active Risk Management

The new norms bring to fore not only the issues of bank-wide risk measurement but
also of active risk management. This will help in better pricing of the loans in alignment
with their actual risks. The beneficiary will be the customer with high credit-worthiness
and ratings as they will be able to get cheaper loans.

Higher Risk Sensitivity

Higher risk sensitivity of the norms provides no incentive to lend to borrowers with
declining credit quality. During economic downturns, corporate profits and ratings tend
to decline. This can lead to banks pulling the plugs on lending to corporates with falling
credit ratings, at a time when these companies will be in desperate need of credit. The
opposite is expected during economic booms, when corporate credit worthiness
improves and banks will be more than willing to lend to corporates.

Lower Risk Weight Available Only for a Few Corporate

With better risk measurement practices in place the capital allocation for loans to quality
borrowers are going to decrease. Banks can use this capital for other purposes to
increase profits. But the population of rated corporate is small in India and most of them
would have to be assigned a risk weight of 100 per cent.

The benefit of lower risk weight of 20 per cent and 50 per cent would, therefore, be
available only for loans to a few corporates. The cover required for bad loans will
increase exponentially with deteriorating credit quality, which can lead to an increase in
capital requirement.
 CREDIT RISK

Credit risk is the most obvious risk in banking, and possibly the most important in
terms of potential losses. The default of a small number of key customers could
generate very large losses and in an extreme case could lead to a bank becoming
insolvent. The most important credit risk is the default risk. However, in some cases
interest rate risk also comes under the credit risk. Default risk relates to the possibility
that loans will not be paid or that investments will deteriorate in quality or go into default
with consequent loss to the bank. Credit risk is not concerned to the risk that borrowers
are unable to pay; it also includes the risk of payments being delayed, which can also
cause problems for the bank. Capital markets react to a deterioration in a company’s
credit standing through higher interest rates on its debt issues, a decline in its share
price, and/or a downgrading of the assessment of its debt quality.

Credit risk arises from the potential that an obligor is either unwilling to perform
on an obligation or its ability to perform such obligation is impaired resulting in
economic loss to the bank.
Credit risk is defined as the possibility that a borrower or counterparty will fail to meet its
obligations in accordance with agreed terms. Credit risk, therefore, arises from the banks'
dealings with or lending to a corporate, individual, another bank, financial institution or a
country. Credit risk may take various forms, such as:
• in the case of direct lending, that funds will not be repaid;
• in the case of guarantees or letters of credit, that funds will not be forthcoming from the
customer upon crystallization of the liability under the contract;
• in the case of treasury products, that the payment or series of payments due from the
counterparty under the respective contracts is not forthcoming or ceases;
• in the case of securities trading businesses, that settlement will not be effected;
• in the case of cross-border exposure, that the availability and free transfer of currency is
restricted or ceases.
In a bank’s portfolio, losses stem from outright default due to inability or unwillingness of
a customer or counter party to meet commitments in relation to lending, trading,
settlement and other financial transactions. Alternatively losses may result from
reduction in portfolio value due to actual or perceived deterioration in credit quality.
Credit risk emanates from a bank’s dealing with individuals, corporate, financial
institutions or a sovereign. For most banks, loans are the largest and most obvious
source of credit risk; however, credit risk could stem from activities both on and off
balance sheet. In addition to direct accounting loss, credit risk should be viewed in the
context of economic exposures. This encompasses opportunity costs, transaction costs
and expenses associated with a non-performing asset over and above the accounting
loss.
Credit risk can be further sub-categorized on the basis of reasons of default. For
instance the default could be due to country in which there is exposure or problems in
settlement of a transaction.

Credit risk not necessarily occurs in isolation. The same source that endangers credit
risk for the institution may also expose it to other risk. For instance a bad portfolio may
attract liquidity problem.

As a result of these risks, bankers must exercise discretion in maintaining a sensible

distribution of liquidity in assets, and also conduct a proper evaluation of the default
risks associated with borrowers. In general, protection against credit risks involves
maintaining high credit standards, appropriate diversification, good knowledge of the
borrower’s affairs and accurate monitoring and collection procedures.

CREDIT RISK MANAGEMENT

PHILOSOPHY BEHIND CREDIT RISK MANAGEMENT IS:

“HIGHER THE RISK, HIGHER THE EXPECTED REWARD”

In general, credit risk management for loans involves three main principles:

• Selection
• Limitation
• Diversification.

First of all, selection means banks have to choose carefully those to whom they will
lend money. The processing of credit applications is conducted by credit officers or
credit committees, and a bank’s delegation rules specify responsibility for credit
decisions.

Limitation refers to the way that banks set credit limits at various levels. Limit systems
clearly establish maximum amounts that can be lent to specific individuals or groups.
Loans are also classified by size and limitations are put on the proportion of large loans
to
total lending. Banks also have to observe maximum risk assets to total assets, and
should hold a minimum proportion of assets, such as cash and government securities,
whose credit risk is negligible.

Credit management has to be diversified. Banks must spread their business over
different types of borrower, different economic sectors and geographical regions, in
order to avoid excessive concentration of credit risk problems. Large banks, therefore,
have an advantage in this respect. The long-standing existence of the above
procedures within banks is insufficient to address all credit risk problems. For example,
the amount of a potential loss is uncertain since outstanding balances at the time of
default are not known in advance. The size of the commitment is not sufficient to
measure the risk, since there are both quantity and quality dimensions to consider.

The more diversified a banking group is, the more intricate systems it would need, to
protect itself from a wide variety of risks. These include the routine operational risks applicable
to any commercial concern, the business risks to its commercial borrowers, the economic and
political risks associated with the countries in which it operates, and the commercial and the
reputational risks concomitant with a failure to comply with the increasingly stringent legislation
and regulations surrounding financial services business in many territories. Comprehensive risk
identification and assessment are therefore very essential to establishing the health of any
counterparty.
Credit risk management enables banks to identify, assess, manage proactively, and
optimise their credit risk at an individual level or at an entity level or at the level of a
country. Given the fast changing, dynamic world scenario experiencing the pressures of
globalisation, liberalization, consolidation and disintermediation, it is important that banks have
a robust credit risk management policies and procedures which is sensitive and responsive to
these changes.
The quality of the credit risk management function will be the key driver of the changes
to the level of shareholder return. Low loan loss banks stage a quicker share price recovery than
their peers, and in a credit downturn, the market rewards the banks with the best credit
performance with a moderate price decline relative to their peers.
 FACTORS ON WHICH CREDIT RISK DEPENDS

The credit risk depends on both internal and external factors.

EXTERNAL FACTORS

The external factors are:

• the state of the economy
• swings in commodity prices and equity prices
• foreign exchange rates and
• interest rates, etc.

INTERNAL FACTORS

The internal factors are:

• deficiencies in loan policies and administration of loan portfolio which would

cover weaknesses in the area of prudential credit concentration limits,
• appraisal of borrowers' financial position
• , excessive dependence on collaterals and inadequate risk pricing,
• absence of loan review mechanism and post sanction surveillance, etc.
Such risks may extend beyond the conventional credit products such as loans and
letters of credit and appear in more complicated, less conventional forms, such as credit
derivatives or tranches of securitised assets.
 BUILDING BLOCKS ON CREDIT RISK

In any bank, the corporate goals and credit culture are closely linked, and an effective credit risk
management framework requires the following distinct building blocks: -
1. Strategy and Policy
This covers issues such as the definition of the credit appetite, the development of credit
guidelines and the identification and the assessment of the credit risk.
2. Organisation
This would entail the establishment of competencies and clear accountabilities for managing the
credit risk.
3. Operations/Systems
MIS requirements of the senior and middle management, and the development of tools and
techniques will come under this domain.

1. Strategy and Policy

1.1 It is essential that each bank develops its own credit risk strategy or enunciates a plan that
defines the objectives for the credit-granting function. This strategy should spell out clearly the
organisation's credit appetite and the acceptable level of risk - reward trade-off at both the macro
and the micro levels.
1.2 The strategy would therefore, include a statement of the bank's willingness to grant loans
based on the type of economic activity, geographical location, currency, market, maturity and
anticipated profitability. This would necessarily translate into the identification of target markets
and business sectors, preferred levels of diversification and concentration, the cost of capital in
granting credit and the cost of bad debts.
1.3 The policy document should cover issues such as organizational responsibilities, risk
measurement and aggregation techniques, prudential requirements, risk assessment and review,
reporting requirements, risk grading, product guidelines, documentation, legal issues and
management of problem loans. Loan policies apart from ensuring consistency in credit practices,
should also provide a vital link to the other functions of the bank. It has been empirically proved
that organisations with sound and well-articulated loan policies have been able to contain the
loan losses arising from poor loan structuring and perfunctory risk assessments.
http://www.coolavenues.com/know/fin/svs_credit_3.php3
1.4 The credit risk strategy should provide continuity in approach, and will need to take into
account the cyclical aspects of any economy and the resulting shifts in the composition and
quality of the overall credit portfolio. This strategy should be viable in the long run and through
various credit cycles.
1.5 An organisation's risk appetite depends on the level of capital and the quality of loan book
and the magnitude of other risks embedded in the balance sheet. Based on its capital structure, a
bank will be able to set its target returns to its shareholders and this will determine the level of
capital available to the various business lines.
1.6 Keeping in view the foregoing, a bank should have the following in place:
1. Dedicated policies and procedures to control exposures to designated higher risk sectors
such as capital markets, aviation, shipping, property development, defence equipment,
highly leveraged transactions, bullion etc.
2. Sound procedures to ensure that all risks associated with requested credit facilities are
promptly and fully evaluated by the relevant lending and credit officers.
3. Systems to assign a risk rating to each customer/borrower to whom credit facilities have
been sanctioned.
4. A mechanism to price facilities depending on the risk grading of the customer, and to
attribute accurately the associated risk weightings to the facilities.
5. Efficient and effective credit approval process operating within the approval limits
authorized by the boards.
6. Procedures and systems which allow for monitoring financial performance of customers
and for controlling outstandings within limits.
7. Systems to manage problem loans to ensure appropriate restructuring schemes. A
conservative policy for the provisioning of non-performing advances should be followed.
8. A process to conduct regular analysis of the portfolio and to ensure on-going control of
risk concentrations.

Credit Policies and Procedures

The credit policies and procedures should necessarily have the following elements: -
• Banks should have written credit policies that define target markets, risk acceptance
criteria, credit approval authority, credit origination and maintenance procedures and
guidelines for portfolio management and remedial management.
 • Banks should establish proactive credit risk management practices like annual / half
yearly industry studies and individual obligor reviews, periodic credit calls that are
documented, periodic plant visits, and at least quarterly management reviews of troubled
exposures/weak credits.
• Business managers in banks will be accountable for managing risk and in conjunction
with credit risk management framework for establishing and maintaining appropriate risk
limits and risk management procedures for their businesses.
• Banks should have a system of checks and balances in place around the extension of
credit which are:
o An independent credit risk management function

o Multiple credit approvers

o An independent audit and risk review function

• The Credit Approving Authority to extend or approve credit will be granted to individual
credit officers based upon a consistent set of standards of experience, judgment and
ability.
• The level of authority required to approve credit will increase as amounts and transaction
risks increase and as risk ratings worsen.
• Every obligor and facility must be assigned a risk rating.
• Banks should ensure that there are consistent standards for the origination, documentation
and maintenance for extensions of credit.
• Banks should have a consistent approach toward early problem recognition, the
classification of problem exposures, and remedial action.
• Banks should maintain a diversified portfolio of risk assets in line with the capital desired
to support such a portfolio.
• Credit risk limits include, but are not limited to, obligor limits and concentration limits by
industry or geography.
• In order to ensure transparency of risks taken, it is the responsibility of banks to
accurately, completely and in a timely fashion, report the comprehensive set of credit risk
data into the independent risk system.

2. Organizational Structure
2.1 A common feature of most successful banks is to establish an independent group
responsible for credit risk management. This will ensure that decisions are made with sufficient
emphasis on asset quality and will deploy specialised skills effectively. In some organisations,
the credit risk management team is responsible for the management of problem accounts, and for
credit operations as well. The responsibilities of this team are the formulation of credit policies,
procedures and controls extending to all of its credit risks arising from corporate banking,
treasury, credit cards, personal banking, trade finance, securities processing, payment and
settlement systems, etc. This team should also have an overview of the loan portfolio trends and
concentration risks across the bank and for individual lines of businesses, should provide input to
the Asset - Liability Management Committee of the bank, and conduct industry and sectoral
studies. Inputs should be provided for the strategic and annual operating plans. In addition, this
team should review credit related processes and operating procedures periodically.

2.2 It is imperative that the independence of the credit risk management team is preserved,
and it is the responsibility of the Board to ensure that this is not allowed to be compromised at
any time. Should the Board decide not to accept any recommendation of the credit risk
management team and then systems should be in place to have the rationale for such an action to
be properly documented. This document should be made available to both the internal and
external auditors for their scrutiny and comments.
2.3 The credit risk strategy and policies should be effectively communicated throughout the
organisation. All lending officers should clearly understand the bank's approach to granting
credit and should be held accountable for complying with the policies and procedures.
2.4 Keeping in view the foregoing, each bank may, depending on the size of the organization
or loan book, constitute a high level Credit Policy Committee also called Credit Risk
Management Committee or Credit Control Committee, etc. to deal with issues relating to credit
policy and procedures and to analyse, manage and control credit risk on a bank wide basis. The
Committee should be headed by the Chairman/CEO/ED, and should comprise heads of Credit
Department, Treasury, Credit Risk Management Department (CRMD) and the Chief Economist.
The Committee should, inter alia, formulate clear policies on standards for presentation of credit
proposals, financial covenants, rating standards and benchmarks, delegation of credit approving
powers, prudential limits on large credit exposures, asset concentrations, standards for loan
collateral, portfolio management, loan review mechanism, risk concentrations, risk monitoring
and evaluation, pricing of loans, provisioning, regulatory/legal compliance, etc. Concurrently,
each bank may also set up Credit Risk Management Department (CRMD), independent of the
Credit Administration Department. The CRMD should enforce and monitor compliance of the
risk parameters and prudential limits set by the CPC. The CRMD should also lay down risk
assessment systems, monitor quality of loan portfolio, identify problems and correct deficiencies,
develop MIS and undertake loan review/audit. Large banks may consider separate set up for loan
review/audit. The CRMD should also be made accountable for protecting the quality of the entire
loan portfolio. The Department should undertake portfolio evaluations and conduct
comprehensive studies on the environment to test the resilience of the loan portfolio.
 TYPICAL ORGANISATIONAL
STRUCTUREhttp://www.coolavenues.com/know/fin/svs_credit_6.php3

http://www.coolavenues.com/know/fin/svs_credit_5.php3
http://www.coolavenues.com/know/fin/svs_credit_4.php33. Operations / Systems

3.1 Banks should have in place an appropriate credit administration, measurement and
monitoring process. The credit process typically involves the following phases:
1. Relationship management phase i.e. business development.
2. Transaction management phase: cover risk assessment, pricing, structuring of the
facilities, obtaining internal approvals, documentation, loan administration and routine
monitoring and measurement.
3. Portfolio management phase: entail the monitoring of the portfolio at a macro level and
the management of problem loans.
3.2 Successful credit management requires experience, judgement and a commitment to
technical development. Each bank should have a clear, well-documented scheme of delegation of
limits. Authorities should be delegated to executives depending on their skill and experience
levels. The banks should have systems in place for reporting and evaluating the quality of the
credit decisions taken by the various officers.
3.3 The credit approval process should aim at efficiency, responsiveness and accurate
measurement of the risk. This will be achieved through a comprehensive analysis of the
borrower's ability to repay, clear and consistent assessment systems, a process which ensures that
renewal requests are analyzed as carefully and stringently as new loans and constant
reinforcement of the credit culture by the top management team.
3.4 Commitment to new systems and IT will also determine the quality of the analysis being
conducted. There is a range of tools available to support the decision making process. These are:
-
• Traditional techniques such as financial analysis.
• Decision support tools such as credit scoring and risk grading.
• Portfolio techniques such as portfolio correlation analysis.
The key is to identify the tools that are appropriate to the bank.
Banks should develop and utilize internal risk rating systems in managing credit risk.
The rating system should be consistent with the nature, size and complexity of the
bank's activities.
3.5 Banks must have a MIS, which will enable them to manage and measure the credit risk
inherent in all on- and off-balance sheet activities. The MIS should provide adequate information
on the composition of the credit portfolio, including identification of any concentration of risk.
Banks should price their loans according to the risk profile of the borrower and the risks
associated with the loans.
 MEASURING CREDIT RISK.

The measurement of credit risk is of vital importance in credit risk management.

A number of qualitative and quantitative techniques to measure risk inherent in credit
portfolio are evolving. To start with, banks should establish a credit risk rating
framework across all type of credit activities. Among other things, the rating framework
may, incorporate:

1. Business Risk

• Industry Characteristics
• Competitive Position (e.g. marketing/technological edge)
• Management

2. Financial Risk

• Financial condition
• Profitability
• Capital Structure
• Present and future Cash flows
 PRINCIPLES FOR THE MANAGEMENT OF CREDIT RISK
1. While financial institutions have faced difficulties over the years for a multitude of reasons,
the major cause of serious banking problems continues to be directly related to lax credit
standards for borrowers and counterparties, poor portfolio risk management, or a lack of
attention to changes in economic or other circumstances that can lead to a deterioration in the
credit standing of a bank's counterparties. This experience is common in both G-10 and non-G-
10 countries.
2. Credit risk is most simply defined as the potential that a bank borrower or counterparty will
fail to meet its obligations in accordance with agreed terms. The goal of credit risk management
is to maximise a bank's risk-adjusted rate of return by maintaining credit risk exposure within
acceptable parameters. Banks need to manage the credit risk inherent in the entire portfolio as
well as the risk in individual credits or transactions. Banks should also consider the relationships
between credit risk and other risks. The effective management of credit risk is a critical
component of a comprehensive approach to risk management and essential to the long-term
success of any banking organisation.
3. For most banks, loans are the largest and most obvious source of credit risk; however, other
sources of credit risk exist throughout the activities of a bank, including in the banking book and
in the trading book, and both on and off the balance sheet. Banks are increasingly facing credit
risk (or counterparty risk) in various financial instruments other than loans, including
acceptances, interbank transactions, trade financing, foreign exchange transactions, financial
futures, swaps, bonds, equities, options, and in the extension of commitments and guarantees,
and the settlement of transactions.
4. Since exposure to credit risk continues to be the leading source of problems in banks world-
wide, banks and their supervisors should be able to draw useful lessons from past experiences.
Banks should now have a keen awareness of the need to identify, measure, monitor and control
credit risk as well as to determine that they hold adequate capital against these risks and that they
are adequately compensated for risks incurred. The Basel Committee is issuing this document in
order to encourage banking supervisors globally to promote sound practices for managing credit
risk. Although the principles contained in this paper are most clearly applicable to the business of
lending, they should be applied to all activities where credit risk is present.
5. The sound practices set out in this document specifically address the following areas: (i)
establishing an appropriate credit risk environment; (ii) operating under a sound credit-granting
process; (iii) maintaining an appropriate credit administration, measurement and monitoring
process; and (iv) ensuring adequate controls over credit risk. Although specific credit risk
management practices may differ among banks depending upon the nature and complexity of
their credit activities, a comprehensive credit risk management program will address these four
areas. These practices should also be applied in conjunction with sound practices related to the
assessment of asset quality, the adequacy of provisions and reserves, and the disclosure of credit
risk, all of which have been addressed in other recent Basel Committee documents.
6. While the exact approach chosen by individual supervisors will depend on a host of factors,
including their on-site and off-site supervisory techniques and the degree to which external
auditors are also used in the supervisory function, all members of the Basel Committee agree that
the principles set out in this paper should be used in evaluating a bank's credit risk management
system. Supervisory expectations for the credit risk management approach used by individual
banks should be commensurate with the scope and sophistication of the bank's activities. For
smaller or less sophisticated banks, supervisors need to determine that the credit risk
management approach used is sufficient for their activities and that they have instilled sufficient
risk-return discipline in their credit risk management processes.
7. The Committee stipulates in Sections II through VI of the paper, principles for banking
supervisory authorities to apply in assessing bank's credit risk management systems. In addition,
the appendix provides an overview of credit problems commonly seen by supervisors.
8. A further particular instance of credit risk relates to the process of settling financial
transactions. If one side of a transaction is settled but the other fails, a loss may be incurred that
is equal to the principal amount of the transaction. Even if one party is simply late in settling,
then the other party may incur a loss relating to missed investment opportunities. Settlement risk
(i.e. the risk that the completion or settlement of a financial transaction will fail to take place as
expected) thus includes elements of liquidity, market, operational and reputational risk as well as
credit risk. The level of risk is determined by the particular arrangements for settlement. Factors
in such arrangements that have a bearing on credit risk include: the timing of the exchange of
value; payment/settlement finality; and the role of intermediaries and clearing houses.

APPROACHES TO CREDIT RISK MANAGEMENT

The Basel Committee has proposed two approaches for estimating regulatory capital, that is;
1. Standardised Approach
2. Internal Rating Based (IRB) Approach

1. THE STANDARDISED APPROACH TO CREDIT RISK

Under the Standardised Approach, the committee desires neither to produce net
increase nor a net decrease, on an average, in minimum regulatory capital, even after
accounting for operational risk.

Under the Standardised Approach, preferential risk weights in the range of 0, 20, 50,
100 and 150 percent would be assigned on the basis of external credit assessments.

Standardised approach to credit risk in Basel II:

The minimum capital requirements for the corporate, interbank and sovereign loan
portfolios of a representative bank in each EMU country are evaluated by means of
Monte-Carlo simulations depending on the credit rating agencies chosen by the bank to
risk-weight its exposures.
Three main results emerge from the analysis.
• First, although the use of different combinations of credit rating agencies leads to
significant differences in minimum capital requirements, these differences never
exceed 10% of banks’ regulatory capital for loans to corporates, banks and
sovereigns on average in the EMU.
• Second, the standardised approach provides a small regulatory capital incentive
for banks to use several credit rating agencies to risk-weight their exposures.
• Third, the minimum capital requirements for the corporate, interbank and
sovereign loan portfolios of EMU banks will be higher in Basel II than in Basel I.
The incentive for banks to engage in regulatory arbitrage in the standardised
approach to credit risk is limited.

Objectives of the Standardised Approach

The standardised approach is the simplest of the three broad approaches to credit
risk. The other two approaches are based on banks internal rating systems
The standardised approach aligns regulatory capital requirements more closely with the
key elements of banking risk by introducing a wider differentiation of risk weights and a
wider recognition of credit risk mitigation techniques, while avoiding excessive
complexity.
Accordingly, the standardised approach should produce capital ratios more in line
with the actual economic risks that banks are facing, compared to the present
Accord. This should improve the incentives for banks to enhance the risk
measurement and management capabilities and should also reduce the incentives for
regulatory capital arbitrage.

The Risk Weights in the Standardised Approach:

Along the lines of the proposals in the consultative paper to the new capital
adequacy framework issued in June 1999,1 the risk weighted assets in the
standardized approach will continue to be calculated as the product of the
amount of exposures and supervisory determined risk weights. As in the current
Accord, the risk weights will be determined by the category of the borrower:
sovereign, bank, or corporate. Unlike in the current Accord, there will be no distinction
on the sovereign risk weighting depending on whether or not the sovereign is a
member of the Organisation for Economic Coordination.

2. INTERNAL RATING BASED(IRB) APPROACH

Under the IRB Approach, the committee’s ultimate goals are to ensure that the overall
level of regulatory capital is sufficient to address the underlying credit risks and also
provide capital incentives relative to the standardized approach, that is, a reduction in
the risk weighted assets of 2 to 3 percent (foundation IRB approach) and 90 percent of
the capital requirement under the foundation approach for the advanced IRB approach
to encourage banks to adopt IRB approach for providing capital.

NOTE - Minimum Capital to Risk-weighted Assets Ratio (CRAR) should

be 9 %.

• Need to have: rating models have to be

 predictive (accurate ratings, significant discrimination between risk
segments)
 reliable (stable performance, consistent ratings)
 developed quickly (volume!), consistently and safely
 analysed, monitored and back-tested
 combined with human judgment
 massively documented.

• Nice to have: rating models have to be

 easily taken into production, without any IT or other bottleneck
 easily integrated in all relevant processes and applications (also in real-
time or indirect channels)
 easily (re-)used in marketing and sales processes
 easily and safely managed, updated and replaced.
ANALYSIS & FINDINGS
 PUNJAB NATIONAL BANK
PNB…..the name you can BANK upon

PROFILE
With its presence virtually in all the important centres of the country, Punjab National Bank
offers a wide variety of banking services which include corporate and personal banking,
industrial finance, agricultural finance, financing of trade and international banking. Among the
clients of the Bank are Indian conglomerates, medium and small industrial units, exporters, non-
resident Indians and multinational companies. The large presence and vast resource base have
helped the Bank to build strong links with trade and industry.
Punjab National Bank is serving over 3.5 crore customers through 4563 Offices including 421
extension counters - largest amongst Nationalized Banks.
Punjab National Bank with 112 year tradition of sound and prudent banking is one among 300
global companies and seven Indian companies which are expected to emerge as challengers to
World’s leading blue chip companies. While among top 1000 world banks, “The Banker”, the
leading magazine in London, has placed PNB at the 248th position, the bank features at 1308th
position among Forbe’s Global 2000 list of global giants and fast growing companies.
At the same time, the bank has been conscious of its social responsibilities by financing
agriculture and allied activities and small scale industries (SSI). Considering the importance of
small scale industries bank has established 31 specialised branches to finance exclusively such
industries.
Strong correspondent banking relationship which Punjab National Bank maintains with over 200
leading international banks all over the world enhances its capabilities to handle transactions
world-wide. Besides, bank has Rupee Drawing Arrangements with 15 exchange companies in
the Gulf and one in Singapore. Bank is a member of the SWIFT and over 150 branches of the
bank are connected through its computer-based terminal at Mumbai. With its state-of-art dealing
rooms and well-trained dealers, the bank offers efficient forex dealing operations in India.
The bank has been focussing on expanding its operations outside India and has identified some
of the emerging economies which offer large business potential. Bank has set up representative
offices at Almaty: Kazakhistan, Shanghai: China and in London. Besides, Bank has opened a full
fledged Branch in Kabul, Afghanistan.
Keeping in tune with changing times and to provide its customers more efficient and speedy
service, the Bank has taken major initiative in the field of computerization. All the Branches of
the Bank have been computerized. The Bank has also launched aggressively the concept of "Any
Time, Any Where Banking" through the introduction of Centralized Banking Solution (CBS) and
over 2409 offices have already been brought under its ambit.
PNB also offers Internet Banking services in the country for Corporates as well as individuals.
Internet Banking services are available through all Branches of the Bank networked under CBS.
Providing 24 hours, 365 days banking right from the PC of the user, Internet Banking offers
world class banking facilities like anytime, anywhere access to account, complete details of
transactions, and statement of account, online information of deposits, loans overdraft account
etc. PNB has recently introduced Online Payment Facility for railway reservation through
IRCTC Payment Gateway Project and Online Utility Bill Payment Services which allows
Internet Banking account holders to pay their telephone, mobile, electricity, insurance and other
bills anytime from anywhere from their desktop.
Another step taken by PNB in meeting the changing aspirations of its clientele is the launch of its
Debit card, which is also an ATM card. It enables the card holder to buy goods and services at
over 99270 merchant establishments across the country. Besides, the card can be used to
withdraw cash at more than 25000 ATMs, where the 'Maestro' logo is displayed, apart from the
PNB's over 1094 ATMs and tie up arrangements with other Banks.

ANALYSIS & FINDINGS

PNB…..the name you can BANK upon

The credit risk rating system provides a common language and uniform
framework across bank for assessing credit risk. The system enables the bank to
evaluate and track risk on individual obligors on a continuing basis. And most
importantly, it enables banks to track and manage risk on portfolio basis also.

In order to create and stabilize robust credit risk management system, bank has been
continuously monitoring the ratings and their migration.

To provide a standard definition and benchmarks under the credit risk rating system,
seven rating grades for performing loans have been specified.

CREDIT RISK RATING SYSTEM

PNB TRAC is an internally developed centralised web based software application
for assessment of credit risk in a borrowal account. It incorporates all rating models
on a single platform and enables on line rating of borrowers. The data is stored in a
centralized server, which makes the data collection and storage easier.

Preventive Monitoring System is put in place to track the changes in the account based
on the the adverse signals observed in the operations of account and select
performance parameters. It ranks accounts on a scale of 1-10.

TOOLS FOR CREDIT RISK IN PNB

Various Credit risk rating models are used to rate the borrower on a scale of
seven rating grades.
1. Large Corporate Borrowers ( Bank exposure more than Rs.15 crore)
2. Mid Corporate Borrowers ( Bank exposure from Rs.5 crore to less than
Rs.15 crore)
3. Small Borrowers -- I(Bank exposure from Rs.20 lacs to less than Rs.5 crore)
4. Small Borrowers – II ( Bank exposure from Rs.2 lacs to less than Rs.20
Lacs)
5. NBFCs Rating Model
6. New Projects Rating Model
7. Banks and Financial Institutions Rating Model
8. New Business Rating Model
9. Half Yearly Review of Rating
10. Facility Rating Model
11. Industry Exposure limits
12. Segment wise Retail Rating

To ensure the quality and consistency of credit risk ratings, vetting of the rating is also
done.

The credit risk rating of a borrower becomes due for updation after the expiry of 12
months from the month of previous rating. Thus fresh rating in the accounts is
conducted annually.

Out of the seven rating grades, B and above are treated as Investment Grade. The
average annual default rates in these rating grades is under 2 %.
 CREDIT RISK MANAGEMENT THROUGH RATING SYSTEM

The Bank has in place a multi-tier credit approving system. In order to enable the field
functionaries to take expeditious decisions and also to attract quality accounts, higher
loaning powers have been vested with various level of officials for better rated
borrowers.

No fresh exposure is taken in 'C'& 'D' rated accounts. However, Management

Committee of the Board is empowered to consider proposals in respect of fresh
exposure in such accounts.

Adhoc/additional/enhancement facility in 'C'& 'D' rated accounts is to be sanctioned by

authority not below the level of Zonal head and in exception circumstances.

Exposure is not taken in industries considered unfavorable. However in case the Zonal
head finds a bankable proposal, then such sanction is given only by the Board of the
bank.

The pricing of the facility is linked with credit risk rating in case of rated accounts.
Interest rate is charged depending upon the quality of asset. Better-rated accounts are
priced at lower rate of interest as compared to low rated accounts.

Where the borrowers like to know about the rationale of their rating, they are informed
about their weak areas such as Financial, Business/Industry, Management or Conduct
of Accounts and the steps they can take to improve their rating.
AVERAGE ANNUAL DEFAULT RATES UPTO 31.3.2005

PROBABILITY OF DEFAULT FOR RATED ACCOUNTS

COMPARATIVE AVERAGE ANNUAL DEFAULT RATE
 PREVENTIVE MONITORING SYSTEM (PMS)

Credit Monitoring/Post-sanction follow up is an important ingredient of sound Credit

Management System and calls for monitoring of the health/conduct of borrowal
accounts on regular intervals. It is also pivotal for improving the Asset (Credit Portfolio)
Quality of the bank.

It is an action oriented post sanction monitoring tool that tracks and evaluates the health
of a borrowal account on regular basis.

The aim is to minimise the loan losses by focusing on accounts showing “ Early
Warning” signals of deterioration.

SALIENT FEATURES OF PMS

• Comprehensive –Covers indicators of conduct of account, business

performance etc.

• Objective - Health of the account is reflected as a single numerical score.

• Diagnostic - The reasons behind deterioration are analysed for taking remedial
steps.

• Memory - Unsatisfactory features or irregularities are accounted for one year.

• Preventive - Timely action / corrective measures can be taken in Early Warning

Category Accounts.

Continuous monitoring of health & conduct of account. Captures negative signals in

respect of 27 parameters.

PMS rank is an input to credit risk rating.PMS rank is calibrated on a scale of 1-10.
Bank initiates necessary actions on accounts showing early warning signals through
PMS or having ‘C’ or ‘D’ (high) risk-rating.

CREDIT RISK ASSESSMENT SOFTWARE MODEL(RAM)

PNB also uses RAM for managing credit risk faced by it.
RAM is internal rating software designed to assist a Bank or financial institution
address issues raised by the Internal Rating based approach of the New Basel Accord
(Basel II).
RAM is an easy to use Internal Rating software installed in the central server of an
institution and accessible throughout the organization. RAM guides a user to assess the
credit risk of various categories of borrowers such as Large Corporates, Small and
Medium Enterprises, Traders, Banks, Infrastructure Companies, Green-Field Projects,
Banks, Non-Banking Financial Companies, Capital Market Brokers, etc

CRISIL by virtue of being the fourth largest rating agency in the world has over the
years been very successful in rating companies belonging to various categories and has
been able to predict with a high degree of probability, the default risk of such
companies. It is this rating experience, which is encapsulated in RAM.
RAM is a highly parametric software which can be easily customized to the user
environment right from Workflows, user-interfaces as well as various reports for
Management Information System.

RAM is also capable of incorporating any number of rating models through a Visual
Basic based client interface.
RAM follows a pre-designated (customizable) workflow approach to credit risk
assessment and begins with assessment of "Financial Risk", "Industry Risk", "Business
Risk" and "Management Risk". It then follows a "Christmas Tree" approach drilling down
to assessment of various minute factors. Once the credit risk assessment is done by the
first level officer, the assessment can either be approved or modified at various higher
levels in the risk hierarchy. Audit trails capture all modifications/changes/comments at
each level. The final rating or grading is based on the weighted average score of all
assessed factors.
Powerful features like Financial Analysis Tool (FAT), Facility Risk Rating module (FRR)
and an intelligent feature called 'Virtual Guide' which guides an analyst or officer to
probe deeper into the account being rated. These features and other such, make RAM
a complete Credit Risk Management Software which performs much more than just
rating the obligor and enables the Risk Manager to analyze the credit risk take a 360
degree view of the account being rated.
RAM is a web-based application, available on a Java 2 Enterprise Edition (J2EE)
framework, which is platform independent. The database is ORACLE 9i.

FINANCIAL POSITION

GROWING SIZE OF PNB

(Rs. In Crore)
Largest network amongst nationalized banks with 4563 offices.

OPERATING PROFIT

PARTICULARS 30.06.07 30.06.07 Growth (%)

Interest Income 3363 2630 27.9
Interest Expenses 1985 1348 47.3
Net Interest Income 1378 1282 7.5
Non-Interest Income 432 293 47.4
Net Total Income 1810 1575 25.8
Operating Expenses 877 697 25.8
a) Staff Expenses 641 479 33.8
b) Other Operating 236 218 8.4
Expenses
OPERATING PROFIT (Excl. 933 878 6.2
loss on transfer of
Securities)
NET PROFIT
 (Rs. in Crore)

PARTICULARS 30.06.07 30.06.06 Growth (%)

Operating Profit(excl. loss 933 878 6.2 %
on transfer of securities)
LESS: Loss on transfer of 69 Nil
securities(net of dep. Held)
LESS: Provisions for
a) NPAs 138 26
b) Dep. on 86 364
Investments(Net of
Dep. Held against
securities transferred) 14 - 26
c) Others
PROFIT BEFORE TAX 626 514 21.7 %
LESS: Provision for Taxes 201 146
NET PROFIT 425 368 15.4 %

NON INTEREST INCOME

Excluding the loss incurred on Transfer of securities to HTM portfolio.

 CREDIT PORTFOLIO

Yield on Advances increased to 10.23% (Jun’07) from 8.76% (Jun’06)

• Advances rose to Rs 95,640 cr at the end of june’07 showing a YOY growth of

23.3%.
• C/D ratio increased to 67.1% as at Jun’07 compared to 66.2% in Jun’06.

• The eight Large Corporate Branches (LCBs) account for around 18.2% of
Bank’s net credit at the end of Jun’07 compared to 16.2% in Jun’06.

• During FY07, bank’s PLR was increased from 10.75 % in April’06 to 12.25% in
Mar’07. During Q1 FY 08, PLR further increased to 13 %.
 Focus Area – Agriculture & SME

(Rs. In Crore)

• 2/3 of our branches are in Rural/ Semi-urban area with predominance in the
Indo-Gangetic plain where major economic activity is agriculture which gives us a
natural advantage in disbursing agriculture credit.
• Bank has a long tradition of lending to agriculture and it has given us reasonable
returns.
• Towards empowering farmers bank has set up 8 ‘Farmers’ Training Centres’
which provide free training to farmers, rural women & unemployed youth.
• Catering to niche segments through 101 Specialised Branches.
 Focus Area - Retail Credit

Retail credit constitutes 22.7% of Net credit as on 30th June 2007.

• Outstanding Retail credit increased by 21.7% to Rs 22,035 crore as on 30th June’07
compared to Rs 18,172 crore as on 30th Jun’06.
• Education loan is the area of thrust for the bank. As at 30th June’07 the outstanding
under education loan increased by 40%.
• Loan to traders increased by 47%.
• Housing loan showed an increase of 18%.
• Gross NPA in retail advances was about 2% as at 30th Jun’07

42 Hub & Spoke models to cater the need of retail segment.

 ASSET QUALITY

Improving Asset Quality is a Focus area of Bank.

 GROSS NPA

3800 3709

Rs. in Crores
3600
3400
3162 GROSS NPA
3200
3000
2800
30.06.06 30.06.07

GROSS NPA AS A %OF GROSS CREDIT

4 3.98

3.95

3.9
GROSS NPA AS
%

3.85 A %OF GROSS

3.81 CREDIT
3.8

3.75

3.7
30.06.06 30.06.07

Gross NPA of PNB has increased from Rs. 3162 crores in June’06 to Rs. 3709 crores in
June’07. However, Gross NPA as a % of Gross credit has reduced from 3.98 % to 3.81
%. Though in absolute terms Gross NPA has increased from 2006 to 2007 but in
comparative terms it has been decreased. This shows that PNB has effective credit risk
management system due to which it has been able to reduce the percentage of defaults
as compared to its gross credit.
 NET NPA

1000 926
900
800
700
Rs. in CRORE 600
500 NET NPA
400
266
300
200
100
0
30.06.06 30.06.07

NET NPA AS A % OF NET CREDIT

1.2
0.98
1

0.8
NET NPA AS A % OF
0.6
%

NET CREDIT
0.4 0.35

0.2

0
30.06.06 30.06.07

Net NPA of PNB has increased drastically from Rs. 266 crores in 30.6.06 to Rs. 926 in
30.6.07 and also Net NPA as a % of Net Credit has increased from .35 % in ‘06 to .98
% in ’07 which shows that overall there is some flaw in credit risk management system
of PNB which it should take care of.
 CAPITAL & FINANCIAL RATIOS

Comfortable Capital Adequacy Ratio

PARTICULARS JUNE ‘07 JUNE ‘06 MARCH’07

CRAR (%) 12.41 12.29 12.29
Tier I 9.16 9.69 8.93
Tier II 3.25 2.60 3.36
FINANCIAL RATIOS (%)
AVG. RETURN ON 10.23 8.76 9.17
ADVANCES
AVG COST OF DEPOSITS 5.46 4.38 4.53

The CRAR of PNB has increased from 12.29 % in June ’06 to 12.41 % in june’07
which means that there is an increase in banks’ capital as compared to its risk
weighted assets which is good for the bank.

ICICI BANK
 PROFILE
ICICI Bank is India's second-largest bank with total assets of Rs. 3,767.00 billion (US$
96 billion) at December 31, 2007 and profit after tax of Rs. 30.08 billion for the nine months
ended December 31, 2007. ICICI Bank is second amongst all the companies listed on the Indian
stock exchanges in terms of free float market capitalisation. The Bank has a network of about
955 branches and 3,687 ATMs in India and presence in 18 countries. ICICI Bank offers a wide
range of banking products and financial services to corporate and retail customers through a
variety of delivery channels and through its specialised subsidiaries and affiliates in the areas of
investment banking, life and non-life insurance, venture capital and asset management. The Bank
currently has subsidiaries in the United Kingdom, Russia and Canada, branches in Unites States,
Singapore, Bahrain, Hong Kong, Sri Lanka, Qatar and Dubai International Finance Centre and
representative offices in United Arab Emirates, China, South Africa, Bangladesh, Thailand,
Malaysia and Indonesia. Our UK subsidiary has established branches in Belgium.
ICICI Bank's equity shares are listed in India on Bombay Stock Exchange and the National Stock
Exchange of India Limited and its American Depositary Receipts (ADRs) are listed on the New
York Stock Exchange (NYSE).

ANALYSIS & FINDINGS

RISK MANAGEMENT

As a financial intermediary, we are exposed to risks that are particular to our lending,
transaction banking and trading businesses and the environment within which we
operate. Our goal in risk management is to ensure that we understand, measure and
monitor the various risks that arise and that the organization adheres strictly to the
policies and procedures, which are established to address these risks.
ICICI Bank is primarily exposed to credit risk, market risk, liquidity risk, operational risk
and legal risk.

ICICI Bank has three centralized groups:

• the Global Risk Management Group
• the Compliance Group and
• the Internal Audit Group ;
with a mandate to identify, assess and monitor all of ICICI Bank's principal risks in
accordance with well-defined policies and procedures.

The Global Risk Management Group is further organized into:

• the Global Credit Risk Management Group
• the Global Market and Operational Risk Management Group.

In addition, the
Credit and Treasury Middle Office Groups and the Global Operations Group monitor
operational adherence to
regulations, policies and internal approvals.
• The Global Risk Management Group, Middle Office Groups and Global
Operations Group report to a whole time Director.
• The Compliance Group reports to the Audit Committee of the board of directors
and the Managing Director and CEO.
• The Internal Audit Group reports to the Audit Committee of the board of directors.
These groups are independent of the business units and coordinate with
representatives of the business units to implement ICICI Bank's risk management
methodologies.

Committees of the board of directors have been constituted to oversee the various risk
management activities. The Audit Committee provides direction to and also monitors the
quality of the internal audit function.

The Risk Committee reviews risk management policies in relation to various risks
including portfolio, liquidity, interest rate, investment policies and strategy, and
regulatory and compliance issues in relation thereto. The Credit Committee reviews
developments in key industrial sectors and our exposure to these sectors as well
as to large borrower accounts.
The Asset Liability Management Committee is responsible for managing the balance
sheet and reviewing the asset-liability position to manage ICICI Bank's liquidity and
market risk exposure
The Compliance Group is responsible for the regulatory and anti-money laundering
compliance of ICICI Bank.
 CREDIT RISK

Credit risk is the risk that a borrower is unable to meet its financial obligations to the
lender. We measure, monitor and manage credit risk for each borrower and also at the
portfolio level. We have standardized credit approval processes, which include a well-
established procedure of comprehensive credit appraisal and rating. We have
developed internal credit rating methodologies for rating obligors. The rating factors in
quantitative, qualitative issues and credit enhancement features specific to the
transaction. The rating
serves as a key input in the approval as well as post-approval credit processes. Credit
rating, as a concept, has been well internalised within the Bank. The rating for every
borrower is reviewed at least annually. Industry knowledge is constantly updated
through field visits and interactions with clients, regulatory bodies and industry experts.
In our retail credit operations, all products, policies and authorisations are approved by
the Board or a Board Committee or pursuant to authority delegated by the Board. Credit
approval authority lies only with our credit officers who are distinct from the sales teams.
Our credit officers evaluate credit proposals on the basis of the approved product policy
and risk assessment criteria. Credit scoring models are used in the case of certain
products like credit cards. External agencies such as field investigation agencies and
credit processing agencies are used to facilitate a comprehensive due diligence process
including visits to offices and homes in the case of loans to individual borrowers. Before
disbursements are made, the credit officer conducts a centralised check on the
delinquencies database and review of the borrower’s profile. We continuously refine our
retail credit parameters based on portfolio analytics. It also draws upon reports from the
Credit Information Bureau (India) Limited (CIBIL).

CREDIT RISK MANAGEMENT BY ICICI BANK

Credit risk, the most significant risk faced by ICICI Bank, is managed by the
Credit Risk Compliance & Audit Department (CRC & AD) which evaluates risk at the
transaction level as well as in the portfolio context. The industry analysts of the
department monitor all major sectors and evolve a sectoral outlook, which is an
important input to the portfolio planning process. The department has done detailed
studies on default patterns of loans and prediction of defaults in the Indian context.
Risk-based pricing of loans has been introduced.
The functions of this department include:
Review of Credit Origination & Monitoring
- Credit rating of companies/structures
- Default risk & loan pricing
- Review of industry sectors
- Review of large exposures in industries/ corporate groups/ companies
- Ensure Monitoring and follow-up by building appropriate systems such as CAS
 Design appropriate credit processes, operating policies & procedures
Portfolio monitoring
- Methodology to measure portfolio risk
- Credit Risk Information System (CRIS)
Focused attention to structured financing deals
- Pricing, New Product Approval Policy, Monitoring
Monitor adherence to credit policies of RBI

During the year, the department has been instrumental in reorienting the credit
processes, including delegation of powers and creation of suitable control points in the
credit delivery process with the objective of improving customer response time and
enhancing the effectiveness of the asset creation and monitoring activities.
Availability of information on a real time basis is an important requisite for sound risk
management. To aid its interaction with the strategic business units, and provide real
time information on credit risk, the CRC & AD has implemented a sophisticated
information system, namely the Credit Risk Information System. In addition, the CRC
& AD has designed a web-based system to render information on various aspects of the
credit portfolio of ICICI Bank.

ICICI Bank also uses RAM to manage its credit risk.

1. Credit Risk Assessment Procedures for Corporate Loans

In order to assess the credit risk associated with any financing proposal, ICICI Bank
assesses a variety of risks relating to the borrower and the relevant industry. Borrower
risk is evaluated by considering:

• the financial position of the borrower by analyzing the quality of its financial
statements, its past financial
performance, its financial flexibility in terms of ability to raise capital and its cash flow
adequacy;
• the borrower's relative market position and operating efficiency; and
• the quality of management by analyzing their track record, payment record and
financial conservatism.
Industry risk is evaluated by considering:
• certain industry characteristics, such as the importance of the industry to the economy,
its growth outlook,
cyclicality and government policies relating to the industry;
• the competitiveness of the industry; and
• certain industry financials, including return on capital employed, operating margins and
earnings stability.
After conducting an analysis of a specific borrower's risk, the Global Credit Risk
Management Group assigns a credit rating to the borrower. ICICI Bank has a scale of
10 ratings ranging from AAA to B, an additional default rating of D and short-term
ratings from S1 to S8. Credit rating is a critical input for the credit approval process.
ICICI Bank determines the desired credit risk spread over its cost of funds by
considering the borrower's credit rating and the default pattern corresponding to the
credit rating. Every proposal for a financing facility is prepared by the relevant business
unit and reviewed by the appropriate industry specialists in the Global Credit Risk
Management Group before being submitted for approval to the appropriate approval
authority. The approval process for non-fund facilities is similar to that for fund-based
facilities. The credit rating for every borrower is reviewed at least annually. ICICI Bank
also reviews the ratings of all borrowers in a particular industry upon the occurrence of
any significant event impacting that industry.
Working capital loans are generally approved for a period of 12 months. At the end of
the 12 month validity period (18 months in case of borrowers rated AA- and above),
ICICI Bank reviews the loan arrangement and the credit rating of the borrower and
takes a decision on continuation of the arrangement and changes in the loan covenants
as may be necessary.

2.Project Finance Procedures

3.Corporate Finance Procedures
4.Working Capital Finance Procedures
5.Credit Monitoring Procedures for Corporate Loans -The Credit Middle Office
Group monitors compliance with the terms and conditions for credit facilities prior to
disbursement. It also reviews the completeness of documentation, creation of security
and insurance policies for assets financed. All borrower accounts are reviewed at least
once a year.
• Retail Loan Procedures
• Small Enterprises Loan Procedures
• Rural and Agricultural Loan Procedures
• Credit Approval Authorities

CREDIT RATINGS

ICICI Bank’s credit ratings by various credit rating agencies at March 31, 2007 are given
below:
CAPITAL ADEQUACY
(1) USD 750 million (Rs. 32.60 billion) of foreign currency bonds raised for Upper Tier II
capital have been excluded from the above capital adequacy ratio computation, pending
clarification required by RBI regarding certain terms of these bonds. If these bonds were
considered as Tier II capital, the total capital adequacy ratio would be 12.81%.

ICICI Bank is subject to the capital adequacy requirements of the RBI, which are
primarily based on the capital adequacy accord reached by the Basel Committee of
Banking Supervision, Bank of International Settlements in 1988. It is required to
maintain a minimum ratio of total capital to risk adjusted assets of 9.0%, at least half of
which must be Tier I capital.

Its total capital adequacy ratio calculated in accordance with the RBI guidelines at year-
end fiscal 2007 was 11.69%, including Tier I capital adequacy ratio of 7.42% and Tier II
capital adequacy ratio of 4.27%. In accordance with the RBI guidelines, the risk-
weighted assets at year-end fiscal include home loans to individuals at a risk weightage
of 75%, other consumer loans and capital market exposure at a risk weightage of 125%.
Commercial real estate exposure and investments in venture capital funds have been
considered at a risk weightage of 150%. The risk-weighted assets at year-end fiscal
2006 and year end fiscal 2007 also include the impact of capital requirement for market
risk on the held for trading and available for sale portfolio. Deferred tax asset amounting
to Rs. 6.10 billion and unamortised amount of expenses on Early Retirement Option
Scheme amounting to Rs. 0.50 billion at year-end fiscal 2007, have been reduced from
Tier I capital while computing the capital adequacy ratio.
Classification of gross assets (net of write-offs and unpaid interest on
non-performing assets).

(1) Includes loans, debentures, lease receivables and excludes preference shares.
(2) All amounts have been rounded off to the nearest Rs. 10.0 million.

NON-PERFORMING ASSETS
(1) Net of write-offs and interest suspense.
(2) Excludes preference shares.
(3) Customer assets include advances and credit substitutes like debentures and
bonds.
(4) All amounts have been rounded off to the nearest Rs. 10.0 million.

CANARA BANK
 Widely known for its customer centricity, Canara Bank was founded by Shri
Ammembal Subba Rao Pai, a great visionary and philanthropist, in July 1906, at a small
port in Mangalore, Karnataka. The Bank has undergone various phases in its growth
path over hundred years of its existence. The growth of Canara Bank was phenomenal,
especially after nationalization in the year 1969, attaining the status of a national level
player in terms of geographical reach and clientele segments. Eighties was
characterized by business diversification for the Bank. In June 2006, the Bank
completed a century of operation in the Indian banking industry. The eventful journey of
the Bank was strewn with many memorable milestones. Today, Canara Bank occupies
a premier position in the comity of Indian banks, emerging as the largest nationalized
bank in India in terms of aggregate business volume for 2006-07. With an unbroken
record of profits since its inception, Canara Bank has several firsts to its credit. These
include:

• Launching of Inter-City ATM Network

• Obtaining ISO Certification for a Branch

• Articulation of ‘Good Banking’ – Bank’s Citizen Charter

• Commissioning of Exclusive Mahila Banking Branch

• Launching of Exclusive Subsidiary for IT Consultancy

• First Bank in India to issue credit card for farmers

• First Bank in India to provide Agricultural Consultancy Services

Over the years, the Bank has been scaling up its market position to emerge as a major
'Financial Conglomerate' with as many as nine subsidiaries/sponsored
institutions/joint ventures in India and abroad. As at December 2007, the Bank has
further expanded its domestic presence, with 2641 branches spread across all
geographical segments. In view of the centrality of customer convenience, the Bank
provides a wide array of alternative delivery channels that include over 1900 ATMs-
covering 680 centres, 1157 branches providing Internet and Mobile Banking (IMB)
services and 1833 branches offering 'Anywhere Banking' services. Under advanced
payment and settlement system, 1693 branches of the Bank offer Real Time Gross
Settlement (RTGS) and National Electronic Funds Transfer (NEFT).
Canara Bank has made a distinctive mark in various corporate social responsibilities,
namely, serving national priorities, promoting rural development, enhancing rural self-
employment through several training institutes, spearheading financial inclusion
objective etc. Promoting an inclusive growth strategy, which forms the basic plank of
national policy agenda today, is in fact deeply rooted in the Bank's founding principles.
"A good bank is not only the financial heart of the community, but also one with an
obligation of helping in every possible manner to improve the economic conditions of
the common people". These insightful words of our founder continue to resonate even
today in serving the society with a purpose.
The growth story of Canara Bank in its first century was due, among others, to the
continued patronage of its valued customers, stakeholders, committed staff and
uncanny leadership ability demonstrated by its leaders at the helm of affairs. We
strongly believe that the next century is going to be equally rewarding and eventful not
only in service of the nation but also in helping the Bank emerge as a "Global Bank
with Best Practices". This justifiable belief is founded on strong fundamentals,
customer centricity, enlightened leadership and a family like work culture.

ANALYSIS & FINDINGS

RISK MANAGEMENT IN CANARA BANK

In Canara Bank, Risk is managed by using following tools:

 • A scientific Risk Based Internal Audit system is used for complete and objective
compliance with the Risk Based Supervision system.

• Credit Risk Assessment Software Model (RAM) as discussed earlier is used for
managing Credit Risk faced by Canara Bank.

Canara Bank's Net profit for the first half year of FY08 recorded a 16.18% growth (Y-O-
Y) to reach Rs.642 crore, after making a total provision of Rs.620 crore, compared to a
net profit level of Rs.553 crore for the corresponding period of last year. Net profit for
the second quarter of the FY08 reached Rs.402 crore as compared to Rs.362 crore in
the corresponding quarter a year ago, recording a y-o-y growth of 11%. Sequentially,
net profit for Q2 registered a 67% growth over Q1 in the current financial. Operating
profit for Q2 stood at Rs.650 crore, recording a growth of 8.41% as against Rs.600
crore for the same period last year.

Earnings Per Share (EPS) (not annualized) improved from Rs.13.48 as at September
2006 to Rs.15.66 as at September 2007. Book value rose to Rs.213.32 as at
September 2007 from Rs.184.95 for the corresponding period last year. Return on
Average Assets for the Q2 remained at 0.97% as compared to 1.05% for the same
quarter a year ago.

Capital to Risk Weighted Assets Ratio as at September 2007 worked out to

13.89% vis-à-vis the regulatory minimum of 9%. The Bank is fully geared up to
make a smooth transition to the new capital adequacy framework under Basel II
norms from March 2008. The Bank has already commenced parallel run. In the
medium term, the Bank aims to maintain a 12% CRAR as per Basel II norms.
With a strong 39% Y-o-Y growth in the interest income from core lending operations, the
Bank's total income registered a 36% growth to touch Rs.7815 crore as against
Rs.5733 crore for the same period of the previous year. Non-interest income for the half
year amounted to Rs.952 crore, registering a 76% growth. Total expenditure for the
half year under review stood at Rs.6552 crore .

CAPITAL ADEQUACY

PARTICULARS 30.09.06 30.09.07

CRAR 12.27 % 13.89 %

The CRAR of Canara Bank has increased from 12.27 % to 13.89 % which is a good
indicator of bank’s performance because it shows that banks’ capital in comparison to
its risk-weighted assets have increased.

ASSET QUALITY

PARTICULARS 30.09.06 30.09.07

GROSS NPA RATIO (%) 2.13 % 1.66 %

NET NPA RATIO .99 % .99 %

Asset quality of the Bank exhibited further improvement as at September 2007.

Backed by a cash recovery of Rs.423 crore, Bank's gross NPA ratio came down from
2.13% as at September 2006 to 1.66% as at September 2007 while the net NPA
ratio remained at 0.99%.

RATING OF CANARA BANK GIVEN BY MOODY’S

.Moody’s assigns a bank financial strength rating (BFSR) of D+ to Canara Bank (CB),
which translates into a Base line Credit Assessment (BCA) of Baa#, reflecting the
bank's important nationwide franchise and strong market position as the fourth-largest
commercial bank in India. The rating also takes into account the increasingly
competitive operating environment and the challenges the bank faces in modernizing its
operations and processes. Although there have been some signs of revival in the Indian
industrial sector in the past few years, we believe that the banks still have to contend
with a high level of credit risk. CB's focus on retail, small and medium-sized
enterprise (SM E) and agricultural lending over the past few years has helped its
loan diversification, which in the past was dominated by corporate credits. The
BFSR also encompasses the bank's strong links with corporates.

ICRA reaffirms LAAA rating to Canara Bank`s bond programs

Leading credit agency, ICRA reaffirmed the LAAA rating to the outstanding lower tier II bond
and infrastructure bond programs of Canara Bank (Canara).The rating indicates highest credit
quality and the rated instruments carry the lowest credit risk.

ICRA has also reaffirmed the A1+ rating to the certificate of deposit program of Canara Bank
(Q, N,C,F)* indicating highest credit quality. Instruments rated in this category carry the lowest
credit risk in the short term. Canara`s ratings factor in the implicit sovereign support enjoyed by
the bank in its role as the largest Nationalised Bank in the country, the strong brand franchise in
the corporate sector and improvement in asset quality as depicted by the declining credit costs.
The ratings also take into account the competitive operating cost structure, given the bank`s large
branch network and the comfortable regulatory capitalisation levels and liquidity position. While
Canara`s core profitability has been declining as a result of the shrinking interest spreads (1.62%
during nine-months ended December 2007) and relatively low core fee income levels (0.56%
during nine-months ended December 2007), ICRA believes that the management`s efforts to
reduce high cost deposits and rebalance the credit portfolio could start generating higher interest
spreads over the medium term.

Meanwhile, the bank`s efforts to improve fee income levels, including revamping the operations
of subsidiaries, and the gains on its trading book could support profitability. The bank has been
maintaining a relatively superior operating cost structure but the inevitable investments required
to upgrade its technology platform to cover more branches under CBS (Core Banking Solution)
and Basel II requirements could adversely impact the operating cost levels.
Q - Quote, N - News, C - Chart, F – Financials

ALLAHABAD BANK

PROFILE
The Oldest Joint Stock Bank of the Country, Allahabad Bank was founded on April 24, 1865 by
a group of Europeans at Allahabad. At that juncture Organized Industry, Trade and Banking
started taking shape in India. Thus, the History of the Bank spread over three Centuries -
Nineteenth, Twentieth and Twenty-First.

Twenty-First Century

October, 2002 The Bank came out with Initial Public Offer (IPO), of 10
 crores share of face value Rs.10 each, reducing
Government shareholding to 71.16%.
April, 2005 Follow on Public Offer (FPO) of 10 crores equity shares of
face value Rs.10 each with a premium of Rs.72, reducing
Government shareholding to 55.23%.
June, 2006 The Bank Transcended beyond the National Boundary,
opening Representative Office at Shenzen, China.
Oct, 2006 Rolled out first Branch under CBS.
February, 2007 The Bank opened its first overseas branch at Hong Kong.
March 2007 Bank's business crossed Rs.1,00,000 crores mark.

RISK MANAGEMENT IN ALLAHABAD BANK

ANALYSIS & FINDINGS

The aim and objective of Risk Management Practice is to ensure stability and efficiency in the
operation of the Bank. While establishing the Risk Management Practice, the Bank has
adopted a comprehensive approach, align with the best practice in the Industry covering
Organizational structure, Risk Policies, Risk processes, Risk Mitigation and Risk audit, all
in order to identify, manage, monitor and control various categories of risks. The Bank has
also adopted an integrated approach at the committee level to put in place a robust Risk
Management System.

• The Bank is updating / fine-tuning systems and procedures, technological capabilities,

Risk structure etc. to meet the requirements of the guidelines. The Bank proposes to
migrate to the final guidelines given by the RBI for embracing Basel II norms. The
Bank initiated parallel run exercise in line with RBI guidelines. The CRAR as per
existing norms (Basel I) stands at 12.52% while under parallel run of Basel II
norms, it works out to be 11.65% if we take March, 07 figures.
 • Improvement in Risk Management practices has been integrated with the betterment
of asset quality through introduction of proper credit management practices.

• Centralised Credit Appraisal Cells have been created at Zonal Offices with proper
networking arrangement for better processing of credit proposals and prompt
decisions.

• Improved credit monitoring measures have already been put in place for insulating
the Bank from future loan losses.
Allahabad Bank also uses RAM for managing its Credit Risk.
The Bank has established a structured, dynamic, proactive and integrated Credit Risk
Management System to proper identification & quantification of the credit risk associated
with the credit proposals.
The Bank has developed various risk rating module for credit risk rating. The Bank has also
devised risk rating module exclusively for SSI & SME sector.
In regard to Operational Risk, the Bank has framed policy and procedural guidelines for
implementation as per the extant guidelines of Reserve Bank of India.

FINANCIAL POSITION

The highlights of the performance for the quarter-ended June 2007 are summarised as
under:
• The Business of the Bank has crossed Rs.1,03,000 crore mark as at June-end
2007. The Business of the Bank stood at Rs.1,03,379 crores as on 30.06.2007
as against Rs.82,621 crores corresponding date previous year.
• Year-on-Year basis, the Business increased by 25.13%.(During April-June,
2007 : 1.89%)
• Working Funds crosses Rs.70,000 crore mark to reach Rs.71,484 as on June-
end, 2007
• Total Deposit of the Bank went up to Rs.62,819 crores as on 30.6.2007 from
Rs.49,773 crores as on 30.6.2006 and Rs.59,544 crores as on 31.3.2007.
• Year-on-Year basis, Total Deposits grew by 26.21% (During April-June, 2007 :
5.50%)
• Market Share in aggregate deposits increased to 2.34% as at June-end 2007
from 2.26% as at June-end 2006.
 • Gross Credit was Rs.40,560 crores as on 30.6.2007 as against Rs.32,848 crores
as on 30.6.2006 and Rs.41914 crores as on 31.3.2007
• Year-on-Year basis, the Gross Credit increased by 23.48%.
• Market share in advances also increased to 2.16% from 2.13% during this
period.
• Gross Credit to Total Deposit ratio was 64.57% as at June-end 2007 as against
66.0% as at June-end, 2006.
• Operating Profit increased from Rs.207.43 crores during April-June'06 to
Rs.288.87 crores during April-June'07, registering a growth of 39.26% during the
period.
• Net Profit of the Bank was Rs.200.40 crores during April-June'07 as against
Rs.128.25 crores in the corresponding period last year registering a growth
of 56.26%.

ASSET QUALITY

PARTICULARS 30.06.06 30.06.07 31.03.07

Gross NPA to Gross Advances 3.67 % 2.46 % 2.61 %

Ratio (%)

Net NPA to Net Advances Ratio .81 % .76 % 1.07 %

(%)

Capital Adequacy Ratio or 12.24 % 12.71 % 12.52 %

CRAR
 • Gross NPA to Gross Advances further declined to 2.46% as at June-end
2007 from 3.67% as at June-end 2006 and 2.61% as at March-end 2007.

• Net NPA to Net Advances ratio also reduced to 0.76% as at June-end

2007 from 0.81% as at June-end 2006 and 1.07% as at March-end,2007.

• Capital Adequacy Ratio was 12.71% as at June-end 2007 which is above

the stipulated norm of 9%, as against 12.24% as on 30.6.2006 and
12.52% as on 31.3.2007.

• Net Interest Margin (NIM) remains steady at 2.97% as on 30.6.2007

compared to position as on 31.3.2007.
• As at June-end 2007, Earning per share (EPS) stood at Rs.17.94 as against
Rs.11.48 as on 30.6.2006 and Rs.16.79 as on 31.3.2007. Book Value was
Rs.104.23 increased from Rs.84.30 as on 30.6.2007 and Rs.100.22 as on
31.3.2007.
• Return on Assets improved from 0.99% as on 30.6.2006 to Rs.1.18% as on
30.6.2007.
• Business per employee rose from Rs.4.04 crores as on 30.6.2006 to Rs.5.02
crores as on 30.6.2007. As on 31.3.2007, the amount stood at Rs.4.56 crores.
• Business per branch improved from Rs.41.31 crores to Rs.49.06 crores during
the period.

CONCLUSION

We know that on the basis of size the ranking of four banks considered for research
work are:
1. ICICI Bank
2. Punjab National Bank
3. Canara Bank
4. Allahabad Bank

All these banks identify, measure and then manage the risk faced by them.
Punjab National Bank (PNB) measures, monitors and manage credit risk for each
borrower and also at the portfolio level.
It uses various techniques for this purpose like:
• Credit Policy
• Rating of Borrower
• Models for Credit Risk Rating
• Credit Risk Rating for Performing Loans
• PNB TRAC for online rating of borrowers
• Preventive Monitering System (PMS) for monitering conduct of borrowel A/c on
regular basis.
• It updates the ratings of its borrowers annually.
• Credit Risk Assessment Software Model (RAM) for assessing the credit risk
faced by it.

The Gross NPA as a % of Gross Advances has reduced from 3.98 % in Jun’06 to 3.81
% in Jun’07 i.e. by 4.2 %.

Net NPA as a % of Net Advances Ratio has increased from .35 % in June ‘06 to .98 %
in Jun’07 i.e. by 180 %.

The CRAR of PNB has increased from 12.29 % in June ’06 to 12.41 % in June ’07 i.e.
by .976 %

ICICI Bank measures, monitors and manage credit risk for each borrower and also at
the portfolio level.
It has made specific department for performing the various activities for credit risk
management. These departments are:
• Global Credit Risk Management Group
• Credit Risk Compliance & Audit Department (CRC & AD) which evaluates risk at
the transaction level as well as in the portfolio context.

It used credit risk rating system and RAM for managing and assessing its credit risk
respectively.

Gross NPA has increased from Rs. 22.73 billion in Mar’06 to Rs. 41.68 billion in
Mar’07 i.e. by 83.36 %.

Net NPA as a % of Net Advances has also increased from .71 in Mar’06 to % to .98
% in Mar’07 i.e. by 38.03 %.

CRAR has decreased from 13.35 % in Mar’06 to 11.69 % in Mar’07 i.e. by 12.43 %.
Canara Bank also uses various techniques for managing its credit risk like:
• Credit rating system
• Risk based Internal Audit System
• RAM

Its ratio of Gross NPA as a % of Gross Advances has reduced from 2.13 % in Sep’06 to
1.66 % in Sep’07 i.e. by 22.07 %.
Its Net NPA as a % of Net Advances remained constant at .99 % in Sep’07 also as
compared to Sep’06.
Its CRAR has increased from 12.27 % as on Sep’06 to 13.89 % as on 30 Sep’07 i.e. by
13.20 %.

Allahabad Bank uses a comprehensive approach, aligned with the best practice in the Industry
covering Organizational structure, Risk Policies, Risk processes, Risk Mitigation and Risk audit,
all in order to identify, manage, monitor and control various categories of risks. The Bank has
also adopted an integrated approach at the committee level to put in place a robust Risk
Management System.
Various credit monitoring measures are used by the bank and RAM is also used by the bank.
The ratio of Gross NPA as a % of Gross Advances has decreased from 3.67 % in Jun’06 to 3.46
% in Jun’07 i.e. by 5.72 %.
The ratio of Net NPA as a % of Net Advances has also reduced from .81 % in Jun’06 to .76 % in
Jun’07 i.e. by 6.17 %.
CRAR for Allahabad Bank has increased from 12.24 % in Jun’06 to 12.71 % in Jun’07 i.e. by
3.84 %.
In comparison to itself, Allahabad Bank has shown a great improvement as both Gross NPA and
Net NPA ratio are decreasing and CRAR is increasing.

Therefore, finally we can conclude that if we consider the performance of

individual banks in comparison to their own performance then Canara Bank is at
the top position because its Gross NPA a % of Gross Advances has reduced by
22.07 % and Net NPA as a % of Net Advances has remained constant at 99 %
which shows that it has been able to manage its credit risk effectively due to
which its NPA has decreased. Moreover its CRAR is highest among the all four
banks and has increased by 13.20 % in Sep’07 (i.e 13 .89 %) as compared to
Sep’06 (12.27 %).

Allahabad Bank is at the second position because in its case both Net NPA as a
% of Net Advances and Gross NPA as a % of Gross Advances have decreased by
6.17 % and 5.72 % and also the CRAR has increased by 3.84 % and is 12.71 % in
June’07.

At the third position is the Punjab National Bank as its Gross NPA as a % of
Gross advances has decreased by 4.2 % but Net NPA as a % of Net advances has
increased drastically by 180 %.
However, it CRAR has increased by .976 % i.e. to 12.41 % as on Jun’07.

ICICI Bank is at the last position in case of managing its credit risk because its
Gross NPA has increased from Rs. 22.73 billion in Mar’06 to Rs. 41.68 billion in
Mar’07.
Its Net NPA as % of Net Advances has increased by 38.03 % till Mar’07 as
compared to Mar’06.
Its CRAR has also decreased by 12.43 % till Mar’07 (i.e. .98 %) as compared to
Mar’06 (.71 %).

Thus, we can conclude finally that Canara Bank manages its Credit Risk most
effectively, then is Allahabad Bank, then is Punjab National Bank and at last is the
ICICI Bank which has not managed is credit risk effectively due to which its
NPA’s are increasing even though it has made so many departments for
managing credit risk and is also using so many software’s for it. This shows that
there is certainly some flaw in its credit risk management system and also in
credit management system of PNB.

Thus, these banks need to improve upon their credit risk management system as
it is very important for their growth prospectus.

BIBLIOGRAPHY

WEBSITES:

• www.pnbindia.com
• www.icicibank.com
• www.allahabadbank.com
• www.canarabank.com
• www.google.com

• Online Newspaper: Hindu Business Line

BOOKS:

• Financial Institutions and Markets; By: L.M. Bhole

• Indian Financial System; By: M.Y. Khan