Credit risk management

A study on credit risk management in SBI

Submitted in partial fulfillment of the requirement for the award of Degree of Masters in financial management of Christ University

By Priya agarwalla Regd. No. 0921522

Under the guidance of Niju k john, b.com, MBA

Department of Management Studies Christ University Bangalore-29

1

Credit risk management

Declaration
I declare that this project titled A Study on credit risk management in SBI is a record of bonafide work carried out by me under the supervision of Mr.Nizu.k. John Department of Management Studies Christ University, Bangalore. I further declare that this has not previously formed the basis of the award of any degree, diploma or other similar title of recognition.

Place: Bangalore Date: 10th June 2010

Priya agarwalla 0921522

Credit risk management

Guide Certificate
This is to certify that this project report titled A Study on credit risk management in SBI followed by state bank of India submitted to Christ University in partial fulfillment of the requirement for the award of the Degree of Masters of Financial Management, is a record of the original and independent work carried out by priya agarwalla under my guidance and supervision. This has not previously formed the basis of the award of any degree, diploma or other similar title or recognition.

Place: Bangalore Date: 10/30/2010 Niju.k.john

Credit risk management

Table of contents
Sl no Particulars Pg no

1 2 3

Executive summary Industry overview Company overview Internship findings

5 10 17 24

4 5 6

Data analysis and interpretation 47 Conclusion 52 Bibilograph 54

Credit risk management

EXECUTIVE SUMMARY

Credit risk management

TITLE OF THE PROJECT

Credit Risk Management in State Bank of India

BACKGROUND OF PROJECT TOPIC:

Credit risk is defined as the potential that a bank borrower or counterparty will fail to meet its obligations in accordance with agreed terms, or in other words it is defined as the risk that a firms customer and the parties to which it has lent money will fail to make promised payments is known as credit risk The exposure to the credit risks large in case of financial institutions, such commercial banks when firms borrow money they in turn expose lenders to credit risk, the risk that the firm will default on its promised payments. As a consequence, borrowing exposes the firm owners to the risk that firm will be unable to pay its debt and thus be forced to bankruptcy.

IMPORTANCE OF THE PROJECT

The project helps in understanding the clear meaning of credit Risk Management in State Bank of India. It explains about the credit risk scoring and Rating of the Bank. And also Study of comparative study of Credit Policy with that of its competitor helps in understanding the fair credit policy of the Bank and Credit Recovery management of the Banks and also its key competitors

OBJECTIVES OF PROJECT
1. To Study the complete structure and history of State Bank of India 2. To know the different methods available for credit Rating and understanding the Credit rating procedure used in State Bank of India. 3. To gain insights into the credit risk management activities of the State Bank Of India. 4. To know the RBI Guidelines regarding credit rating and risk analysis. 6

Credit risk management

METHODOLOGY:

DATA COLLECTION METHOD

Primary data:
Primary data has been collected through personal interview by direct contact method. The method which was adopted to collect the information is Personal Interview method. Personal interview and discussion was made with manager and other personnel in the organization for this purpose

Secondary data
The data is collected from the Magazines, Annual reports, Internet, Text books The various sources that were used for the collection of secondary data are

O Internal files & materials O Websites Various sites like

Www. sharekhan.com www.indiainfoline.com www.sbi.co.in www.investopedia.com www.wikepedia.com and other site

Findings:
7

Credit risk management

Project findings reveal that SBI is sanctioning less Credit to agriculture, as compared with its key competitors viz., Canara Bank, Corporation Bank, Syndicate Bank Recovery of Credit: SBI recovery of Credit during the year 2010 is 62.4% Compared to other Banks SBIs recovery policy is very good, hence this reduces NPA Total Advances: As compared total advances of SBI is increased year by year. State Bank of India is granting credit in all sectors in an Equated Monthly Installments so that anybody can borrow money easily Project findings reveal that State Bank Of India is lending more credit or sanctioning more loans as compared to other Banks.

State bank Of India is expanding its Credit in the following focus areas: 1. SBI Term Deposits 2. SBI Recurring Deposits 3. SBI Housing Loan 4. SBI Car Loan 5. SBI Educational Loan 6. SBI Personal Loan etc

. Credit risk management process of SBI used is very effective as compared with other banks.

RECOMMENDATIONS:
The Bank should keep on revising its Credit Policy which will help Banks effort to correct the course of the policies The Chairman and Managing Director/Executive Director should make modifications to the procedural guidelines required for implementation of the Credit Policy as they may become necessary from time to time on account of organizational needs. 8

Credit risk management

Banks has to grant the loans for the establishment of business at a moderate rate of interest. Because of this, the people can repay the loan amount to bank regularly and promptly. Bank should not issue entire amount of loan to agriculture sector at a time, it should release the loan in installments. If the climatic conditions are good then they have to release remaining amount

CONCLUSION

The project undertaken has helped a lot in gaining knowledge about the Credit Risk Management in Nationalized Bank with special reference to State Bank of India. Credit Policy and Credit Risk Policy of the Bank has become very vital in the smooth operation of the banking activities. Credit Policy of the Bank provides the framework to determine (a) Whether or not to extend credit to a customer and (b) How much credit to extend. The Project work has certainly enriched the knowledge about the effective management of Credit Policy and Credit Risk Management in banking sector.

Credit Policy and Credit Risk Management is a vast subject and it is very difficult to cover all the aspects within a short period. However, every effort has been made to cover most of the important aspects, which have a direct bearing on improving the financial performance of Banking Industry

To sum up, it would not be out of way to mention here that the State Bank of India has given special inputs on Credit Policy and Credit Risk Management. In pursuance of the instructions and guidelines issued by the Reserve Bank of India, the State bank Of India is granting and expanding credit to all sectors.

The concerted efforts put in by the Management and Staff of State Bank of India has helped the Bank in achieving remarkable progress in almost all the important parameters. The Bank is marching ahead in the direction of achieving the Number-1 position in the Banking Indus

Credit risk management

Banking Industry overview

10

Credit risk management

As per banking regulation act 1949, Banking means accepting for the purpose of lending or investment of deposits of money from public repayable on demand or otherwise and withdraw able by cheque, drafts order or otherwise. From the above definition the fact is clear that lending is one of the primary functions of banking.

In India banking mainly started with the establishment of bank of Bengal 1809. Bank of Bombay 1840 and bank of madras 1843 started by east India company. The three banks together known as presidency banks. Banks. This three banks amalgamated in 1920 as imperial bank with the passing act of SBI act in 1955. Later on it was taken over by the newly constituted by SBI.

The first phase of financial reforms resulted in the nationalization of 14 major banks in 1969 and resulted in a shift from class banking to mass banking. This in turn resulted in the significant growth in the geographical coverage of banks. The next wave of reforms saw the nationalization of 6 more commercial banks in 1980 since then the number of scheduled commercial banks increased four- fold and the number of bank branches increased to eight fold.

Role of banks in the economic development

Banks play important role in economic development of a country, like:

1) Banks mobilize the small savings of the people and make them available for productive purposes.

2) Promotes the habit of savings among the people thereby offering attractive rates of interests on their deposits.

3) Provides safety and security to the surplus money of the depositors and as well provides a convenient and economical method of payment.

4) Banks provide convenient means of transfer of fund from one place to another.

5) Helps the movement of capital from regions where it is not very useful to regions where it can be more useful.

6) Banks advances exposure in trade and commerce, industry and agriculture by knowing their financial requirements and prospects.

7) Bank acts as an intermediary between the depositors and the investors.

11

Credit risk management

8) Bank also acts as mediator between exporter and importer who does foreign trades. Thus Indian banking has come from a long way from being a sleepy business institution to a highly pro-active and dynamic entity. This transformation has been largely brought about by the large dose of liberalization and economic reforms that allowed banks to explore new business opportunities rather than generating revenues from conventional Streams (i.e. borrowing and lending). The banking in India is highly fragmented with 30 Banking units contributing to almost 50% of deposits and 60% of advances.

The Structure of Indian Banking:

The Indian banking industry has Reserve Bank of India as its Regulatory Authority. This is a mix of the Public sector, Private sector, Co-operative banks and foreign banks. The Private sector banks are again split into old banks and new banks

RESERVE BANK OF INDIA

SCHEDULED BANKS

COMMERCIAL BANKS

CO.OPERATIVE BANKS

PUBLIC SECTOR

PRIVATE SECTOR

FOREIGN BANKS

RRBS

Under public sector banks we have three categories

SBI and its subsidiaries

1. nationalized banks 12

Credit risk management

2. regional rural banks

IMPORTANCE OF BANKING SECTOR IN A GROWING ECONOMy

In the recent times when the service industry is attaining greater importance compared to manufacturing industry, banking has evolved as a prime sector providing financial services to growing needs of the economy

Banking industry has undergone a paradigm shift from providing ordinary banking services in the past to providing such complicated and crucial services like, merchant banking, housing finance, bill discounting etc. This sector has become more active with the entry of new players like private and foreign banks. For a fast developing economy like ours, presence of a sound financial system to mobilize and allocate savings of the public towards productive activities is necessary. Commercial banks play a crucial role in this regard The Banking sector in recent years has incorporated new products in their businesses, which are helpful for growth. The banks have started to provide fee-based services like, treasury operations, managing derivatives, options and futures, acting as bankers to the industry during the public offering, providing consultancy services, acting as an intermediary between two-business entities etc

Banks has changed itself from transaction type of banking into relationship banking, where you find friendly and quick service suited to your needs.

Another major role played by banks is in transnational business, transactions and networking. Many leading Indian banks have spread out their network to other countries, which help in currency transfer and earn exchange over it.

Another emerging change happening all over the banking industry is consolidation through mergers and acquisitions. This helps the banks in strengthening their empire and expanding their network of business in terms of volume and effectiveness

13

Credit risk management

EMERGING SCENARIO IN THE BANKING SECTOR

The Indian banking system has passed through three distinct phases from the time of inception. The first was being the era of character banking, where you were recognized as a credible depositor or borrower of the system. This era come to an end in the sixties. The second phase was the social banking. Nowhere in the democratic developed world, was banking or the service industry nationalized. But this was practiced in India. Those were the days when bankers has no clue whatsoever as to how to determine the scale of finance to industry. The third era of banking which is in existence today is called the era of Prudential Banking. The main focus of this phase is on prudential norms accepted internationally.

SBI GroupThe Bank of Bengal, which later became the State Bank of India. State Bank of India with its seven associate banks commands the largest banking resources in India.

NationalizationThe next significant milestone in Indian Banking happened in late 1960s when the then Indira Gandhi government nationalized on 19th July 1949, 14 major commercial Indian banks followed by nationalizations of 6 more commercial Indian banks in 1980. The stated reason for the nationalization was more control of credit delivery. After this, until 1990s, the nationalized banks grew at a leisurely pace of around 4% also called as the Hindu growth of the Indian economy. After the amalgamation of New Bank of India with Punjab National Bank, currently there are 19 nationalized banks in India

Liberalization-

In the early 1990s the then Narasimha rao government embarked a policy of Liberalization and gave licenses to a small number of private banks, which came to be known as new generation tech-savvy banks, which included banks like ICICI and HDFC. This move along with the rapid growth of the economy of India, kick started the banking sector in India, which has seen rapid growth with strong contribution from all the sectors of banks, namely Government banks, Private Banks and Foreign banks. However there had been a few hiccups for these new banks with many either being taken over like Global Trust Bank while others like Centurion Bank have found the going tough.

The next stage for the Indian Banking has been set up with the proposed relaxation in the norms for Foreign Direct Investment, where all Foreign Investors in Banks may be given 14

Credit risk management

voting rights which could exceed the present cap of 10%, at present it has gone up to 49% with some restrictions.

The new policy shook the Banking sector in India completely. Bankers, till this time, were used to the 4-6-4 method (Borrow at 4%; Lend at 6%;Go home at 4) of functioning. The new wave ushered in a modern outlook and tech-savvy methods of working for traditional banks. All this led to the retail boom in India. People not just demanded more from their banks but also received more

Current scenario:Currently (2010), the overall banking in India is considered as fairly mature in terms of Supply product range and reach - even though reach in rural India still remains a challenge for the private sector and foreign banks. Even in terms of quality of assets and Capital adequacy, Indian banks are considered to have clean, strong and transparent balance sheets - as compared to other banks in comparable economies in its region. The Reserve Bank of India is an autonomous body, with minimal pressure from the Government

One of the classical economic functions of the banking industry that has remained virtually unchanged over the centuries is lending. On the one hand, competition has had considerable adverse impact on the margins, which lenders have enjoyed, but on the other hand technology has to some extent reduced the cost of delivery of various products and services. Bank is a financial institution that borrows money from the public and lends money to the Public for productive purposes. The Indian Banking Regulation Act of 1949 defines the term Banking Company as "Any company which transacts banking business in India" and the term banking as "Accepting for the purpose of lending all investment of deposits, of money from the public, repayable on demand or otherwise and withdrawal by Cheque, draft or otherwise".

Various banks in India Central bank

Reserve bank of India

Nationalized banks
State Bank of India, Allahabad Bank, Andhra Bank, Bank of Baroda, Bank of India, Bank of Maharashtra, Canara Bank, Central Bank of India, Corporation Bank, Dena Bank, Indian Bank, Indian overseas Bank, Oriental Bank of Commerce, Punjab and Sind Bank, Punjab National Bank, Syndicate Bank, Union Bank of India, United Bank of India, UCO Bank and Vijaya Bank.

15

Credit risk management

Private bank
Bank of Rajasthan, Bharath overseas Bank, Catholic Syrian Bank, Centurion Bank of Punjab, City Union Bank, Development Credit Bank, Dhanalaxmi Bank, Federal Bank, Ganesh Bank of Kurundwad, HDFC Bank, ICICI Bank, IndusInd Bank, ING Vysya Bank, Jammu and Kashmir Bank, Karnataka Bank Limited, Karur Vysya Bank, Kotak Mahindra Bank, Lakshmivilas Bank, Lord Krishna Bank, Nainital Bank, Ratnakar Bank, Sangli Bank, SBI Commercial and International Bank, South Indian Bank, Tamil Nadu Merchantile Bank Ltd., United Western Bank, UTI Bank, YES Bank.

16

Credit risk management

Company profile

17

Credit risk management

The origins of State Bank of India date back to 1806 when the Bank of Calcutta (later called the Bank of Bengal) was established. In 1921, the Bank of Bengal and two other Presidency banks (Bank of Madras and Bank of Bombay) were amalgamated to form the Imperial Bank of India. In 1955, the controlling interest in the Imperial Bank of India was acquired by the Reserve Bank of India and the State Bank of India (SBI) came into existence by an act of Parliament as successor to the Imperial Bank of India.

Today, State Bank of India (SBI) has spread its arms around the world and has a network of branches spanning all time zones. SBI's International Banking Group delivers the full range of cross-border finance solutions through its four wings - the Domestic division, the Foreign Offices division, the Foreign Department and the International Services division.

State Bank of India is the nation's largest bank. Tracing its roots back some 200 years to the British East India Company (and initially established as the Bank of Calcutta in 1806), the bank operates more than 14,000 branches within India, where it also owns majority stakes in seven associate banks. State Bank of India has more than 50 offices in nearly 35 other countries, including multiple locations in the US, Canada, and Nigeria. The bank has other units devoted to capital markets, fund management, factoring and commercial services, and brokerage services. The Reserve Bank of India owns about 60% of State Bank of India

State Bank of India (SBI) is India's largest commercial bank. SBI has a vast domestic network of over 9000 branches (approximately 14% of all bank branches) and commands one-fifth of deposits and loans of all scheduled commercial banks in India.

The State Bank Group includes a network of eight banking subsidiaries and several non-banking Subsidiaries offering merchant banking services, fund management, factoring services, primary dealership in government securities, credit cards and insurance. The eight banking subsidiaries are:

1-State Bank of Bikaner and Jaipur (SBBJ) 2-State Bank of Hyderabad (SBH) 3-State Bank of India (SBI) 4-State Bank of Indore (SBIR) 5-State Bank of Mysore (SBM) 6-State Bank of Patiala (SBP) 7-State Bank of Saurashtra (SBS) 8-State Bank of Travancore (SBT)

Later under the State Bank of India Act, 1959 the former State-associated banks were taken over by the S.B.I as its subsidiaries. The Banks registered office is in Calcutta. The Corporate Center is in Mumbai. The Central Accounts Office is in Calcutta. In terms of SBI Act, RBI should have minimum of 55% of the capital of the bank. The Central Office is now redesigned as Corporate Center.

18

Credit risk management

SBIs Present Organizational Structure:

The bank has a 4 tier structure- the Central Office is the Banks apex policy-making body. The Central Office is now called Corporate Center. The management of the Bank vests with the Central Board consisting of a Chairman, 2 Managing Directors and other directors. The term of office of a director is 3 years. At the Local Head Office, a Local Board is constituted. The Board Members comprise CGM (ex officio), directors of the Central Board ordinarily resident in the area, one member elected by the local shareholders holding together, not less than 2.5% of the issued capital and others nominated by the Government in consultation with the RBI.

ABOUT THE LOGO

THE PLACE TO SHARE THE NEWS ... SHARE THE VIEWS

Togetherness is the theme of this corporate loge of SBI where the world of banking services meet the ever changing customers needs and establishes a link that is like a circle, it indicates complete services towards customers. The logo also denotes a bank that it has prepared to do anything to go to any lengths, for customers. The blue pointer represent the philosophy of the bank that is always looking for the growth and newer, more challenging, more promising direction. The key hole indicates safety and security.

MISSION, VISION AND VALUES

To retain the Banks position as premiere Indian Financial Service Group, with world Class standards and significant global committed to excellence in customer, shareholder and employee satisfaction and to play a leading role in expanding and diversifying financial service sectors while containing emphasis on its development banking rule

19

Credit risk management

VISION STATEMENT
Premier Indian Financial Service Group with prospective world-class professionalism and institutional values. Retain its position in the country as pioneers in Development banking. Maximize the shareholders value through high-sustained earnings per Share. An institution with cultural mutual care and commitment, satisfying and continues learning opportunities. Good work environment and Standards of efficiency and

VALUES:
Excellence in customer service Profit orientation Belonging commitment to Bank Fairness in all dealings and relations Risk taking and innovative Team playing Learning and renewal Integrity Transparency and Discipline in policies and systems.

PRODUTS AND SERVICES

PRODUCTS: State Bank Of India renders varieties of services to customers through the following products: Personal Loan Product:

SBI Term Deposits SBI Recurring Deposits SBI Housing Loan SBI Car Loan SBI Educational Loan SBI Personal Loan SBI Loan for Pensioners Loan Against Mortgage Of Property Loan Against Shares & Debentures 20

Credit risk management

Rent Plus Scheme Medi-Plus Scheme Rates Of Interest

SBI Housing loan

SBI Housing loan or Mortgage Loan schemes are designed to make it simple for you to make a choice at least as far as financing goes!

'SBI-Home Loans' features:

No

cap on maximum loan amount for purchase/ construction of house/ flat to club income of your spouse and children to compute eligible loan

Option

amount
Repayment Free

permitted upto 70 years of age

personal accident insurance cover

Optional

Group Insurance from SBI Life at concessional premium (Upfront premium financed as part of project cost)
Interest 'Plus'

applied on daily diminishing balance basis

schemes which offer attractive packages with concessional interest rates to Govt. Employees, Teachers, Employees in Public Sector Oil Companies.
Special

scheme to grant loans to finance Earnest Money Deposits to be paid to Urban Development Authority/ Housing Board, etc. in respect of allotment of sites/ house/ flat
No

Administrative Charges or application fee

Prepayment

penalty is recovered only if the loan is pre-closed before half of the original tenure (not recovered for bulk payments provided the loan is not closed)
Provision

for downward refixation of EMI in respect of floating rate borrowers who avail Housing Loans of Rs.5 lacs and above, to avail the benefit of downward revision of interest rate by 1% or more
In-principle Option

approval issued to give you flexibility while negotiating purchase of a property

to avail loan at the place of employment or at the place of construction 21

Credit risk management Attractive

packages in respect of loans granted under tie-up with Central/ State Governments/ PSUs/ reputed corporate and tie-up with reputed builders .

SERVICES:
DOMESTIC TREASURY SBI VISHWA YATRA FOREIGN TRAVEL CARD BROKING SERVICES REVISED SERVICE CHARGES ATM SERVICES INTERNET BANKING E-PAY E-RAIL RBIEFT SAFE DEPOSIT LOCKER GIFT CHEQUES MICR CODES FOREIGN INWARD REMITTANCES

NRI HOME LOAN

SALIENT FEATURES
To To To To To

purchase/construct a new house / flat repair, renovate or extend an existing house/flat purchase an existing house/flat purchase a plot for construction of a dwelling unit. purchase furnishings and consumer durables, as a part of the project cost 22

Credit risk management

AGRICULTURE / RURAL
State Bank of India Caters to the needs of agriculturists and landless agricultural laborers through a network of 6600 rural and semi-urban branches. Here are 972 specialized branches which have been set up in different parts of the country exclusively for the development of agriculture through credit deployment. These branches include 427 Agricultural Development Branches (ADBs) and 547 branches with Development Banking Department (DBDs) which cater to agriculturists and 2 Agricultural Business Branches at Chennai and Hyderabad catering to the needs of hi-tech commercial agricultural projects.

23

Credit risk management

Internship findings

24

Credit risk management

MEANING OF CREDIT
The word credit comes from the Latin word credere, meaning trust. When sellers transfer his wealth to a buyer who has agreed to pay later, there is a clear implication of trust that the payment will be made at the agreed date. The credit period and the amount of credit depend upon the degree of trust.

Why credit is important

as we know that the primary function of a bank is to accept deposits and giving advances. Banks when they accepts deposits , gives a interest to depositors for the deposits accepted by them. And in turn charges, interest to borrowers for the loans taken by them. The difference between the two interest rates is the profit margin earned by banks. So we can understand than without lending a bank cannot survive. To maintain its continuity it has to go for safe lending.

RISK
Every business is attached with the word risk. Higher the risk, higher will be the profit. And banking business is not an exception. There can be an adverse outcome to the expectations , in the sense there is always a probability of default from the other side, on their obligations towards the bank. There are various kinds of risk which are explained below.

Market risk- the risk of adverse price movements such as exchange rates ,the value of securities, and interest rates less relevant to operating staff.

Operational risk- The risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. Credit risk- the risk that a borrower or counterparty might not honor its contractual obligations-very relevant to operating staff.

The area of my study is confined to various credit risks and its management in SBI. Credit risk arises due to failure of borrowers to discharge their repayment obligation as per the contract terms. This is oldest and the most important risk for banks. It is closely related to the business policy of the bank and the manner of implementation of the policy by the officers concerned.

25

Credit risk management

Factors causing credit risk

Credit risk depends on both external and internal factors. External factor: state of the economy commodity/ equity prices forex rates Internal factors: Deficiency in loan policies/ administration Absence of prudential credit concentration limits Deficiencies in loan appraisals Inadequate risk pricing Absence of review/ renewal mechanism, post sanction follow ups

CONTRIBUTORS OF CREDIT RISK

Corporate assets Retail assets Non-SLR portfolio May result from trading and banking book Inter bank transactions Derivatives Settlement, etc

Why credit risk management is important

Since the dawn of banking, banks have been making loans and taking exposures on borrowers and were well aware of the risk involved. The answer is that the during past 2 decades banks in the G-10 countries had gone quantitative. In the sense that they have come up with new tools of risk measurement that have become the foundation for turning risk management into a science in addition to the art that it already was. The Basel II accord gives a formal seal of approval on this quantitative approach. It does not recommend any particular model but requires regulators to examine to examine and approve internal rating systems developed by individual banks,to determined the risk they can use standardized approach or internal ratings approach. And according to risk attached they have to maintain capital adequacy. Even RBI guidelines October 2002 talks about various credit risk models. Methods of managing credit risk, credit rating framework etc it requires banks to reduce their NPAS through credit risk management. 26

Credit risk management

KEY ELEMENTS OF CREDIT RISK MANAGEMENT:

Establishing appropriate credit risk environment Operating under sound credit granting process Maintaining an appropriate credit administration, measurement & Monitoring Ensuring adequate control over credit risk Banks should have a credit risk strategy which in our case is communicated throughout the organization through credit policy

Two fundamental approaches to credit risk management

The internally oriented approach centers on estimating both the expected cost and volatility of future credit losses based on the firms best assessment

Future credit losses on a given loan are the product of the probability that the borrower will default and the portion of the amount lent which will be lost in the event of default. The portion which will be lost in the event of default is dependent not just on the borrower but on the type of loan (e.g. some bonds have greater rights of seniority than others in the event of default and will receive payment before the more junior bonds).

To the extent that losses are predictable, expected losses should be factored into product prices and covered as a normal and recurring cost of doing business. i.e. they should be direct charges to the loan valuation. Volatility of loss rates around expected levels must be covered through risk-adjusted returns

So total charge for credit losses on a single loan can be represented by ([expected probability of default] * [expected percentage loss in event of default]) + risk adjustment * the volatility of ([probability of default * percentage loss in the event of default]).

Financial institutions are just beginning to realize the benefits of credit risk management models. These models are designed to help the risk manager to project risk, ensure profitability, and reveal new business opportunities. The model surveys the current state of the art in credit risk management. It provides the tools to understand and evaluate alternative approaches to modeling. This also describes what a credit risk management model should do, and it analyses some of the popular models.

27

Credit risk management

The success of credit risk management models depends on sound design, intelligent implementation, and responsible application of the model. While there has been significant progress in credit risk management models, the industry must continue to advance the state of the art. So far the most successful models have been custom designed to solve the specific problems of particular institutions. A credit risk management model tells the credit risk manager how to allocate scarce credit risk capital to various businesses so as to optimize the risk and return characteristics of the firm. It is important or understand that optimize does not mean minimize risk otherwise every firm would simply invest its capital in risk less assets. A credit risk management model works by comparing the risk and return characteristics between individual assets or businesses. One function is to quantify the diversification of risks. Being well-diversified means that the firms have no concentrations of risk to say, one geographical location or one counterparty.

Steps to follow to minimize credit risks:Standardized approach

Credit risk
Internal ratings

Credit risk models

Credit mitigation

Standardized Approach
The standardized approach is conceptually the same as the present accord, but is more risk sensitive. The bank allocates risk to each of its assets and off balance sheet positions and produces a sum of risk weighted asset values. A risk weight of 100% means that an exposure is included in the calculation of risk weighted assets value, which translates into a capital charge equal to 9% of that value. Individual risk weight currently depends on the broad category of borrower (i.e. sovereign, banks or corporate). Under the new accord the risk weights are to be refined by reference rating provided by an external credit assessment institution( such as rating agency) that meets strict demands

28

Credit risk management

credit risk models

Banks follows specific models to assess the risk depending upon the amount and sector for which they are taking loan. SBI has its own credit risk model based on which they decide, the sanctioning of loan.

NEW CRA MODELS - 2007

NON-TRADING SECTOR
(C&I, SSI & AGL Segments)
SIMPLIFIED MODEL Exposure (FBL + NFBL) of Rs. 25 lacs to Rs. 5 cr.
BORROWER RATING SB-1 to SB-16

TRADING SECTOR
(Including Services)
SIMPLIFIED MODEL Exposure (FBL + NFBL) Rs. 25 lacs to Rs. 5 cr.
BORROWER RATING SB-1 to SB-16

REGULAR MODEL Exposure (FBL + NFBL) Above Rs. 5 cr.

BORROWER RATING SB-1 to SB-16 FACILITY RATING FR-1 to FR-16

REGULAR MODEL Exposure (FBL + NFBL) Above Rs. 5 cr.

BORROWER RATING SB-1 to SB-16 FACILITY RATING FR-1 to FR-16

EXISTING Co.

NEW Co.

EXISTING Co.

NEW Co.

EXISTING Co.

NEW Co.

EXISTING Co.

NEW Co.

29

Credit risk management

CREDIT RATING Definition:Credit rating is the process of assigning a letter rating to borrower indicating that creditworthiness of the borrower Rating is assigned based on the ability of the borrower (company). To repay the debt and his willingness to do so. The higher rating of company the lower the probability of its default.

Use in decision making:Credit rating helps the bank in making several key decisions regarding credit including 1. Whether to lend to a particular borrower or not; what price to charge? 2. What are the product to be offered to the borrower and for what tenure? 3. At what level should sanctioning be done, it should however be noted that credit\ rating is one of inputs used in credit decisions. There are various factors (adequacy of borrowers, cash flow, collateral provided, and relationship with the borrower) Probability of the borrowers default based on past data.

Main features of the rating tool:Comprehensive coverage of parameters Extensive data requirement Mix of subjective and objective parameters includes trend analysis 13 parameters are benchmarked against other players in the segment captions of industry outlook 8 grade ratings broadly mapped with external rating agencies prevailing data

Rating tool for SME

Internal credit ratings are the summary indicators of risk for the banks individual credit exposures. It plays a crucial role in credit risk management architecture of any bank. Based on the guidelines provided by Boston Consultancy Group (BCG), SBI adopted credit rating tool. 30

Credit risk management

The rating tool for SME borrower assigns the following Weight ages to each one of the four main categories i.e., (i) S.L.NO 1 2 3 4 scenario (I) without monitoring tool PARAMETERS FINANCIAL PERFORMACE OPERATING PERFORMANCE QUALITY MANAGEMENT INDUSTRY OUTLOOK WEIGHTAGES XXXX XXXX XXXX XXXX

(ii). Scenario (II) with monitoring tool [conduct of account]:- the weight age would be conveyed separately on roll out of the tool. In the above parameters first three parameters used to know the borrower characteristics. In fourth encapsulates the risk emanating from the environment in which the borrower operates & depends on the past performance of the industry its future outlook and macro economic factors.

Financial performance
S.NO SUB PARAMETERS 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Net sales growth rate (%) PBDIT Growth rate (%) PBDIT /Sales (%) TOL/TNW Current ratio Operating cash flow DSCR Foreign exchange ratio WEIGHTAGES% XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX

Expected values of D/E of 50% of NFB credit devolves XXXX Realisability of Debtors XXXX

31

Credit risk management

11. 12. 13.

State of export country economy Fund deputation risk xxxx Total

XXXX XXXX XXXX

Operating performance
SL NO SUB PARAMETERS 1. 2. 3. 4. 5. 6. 7. 8. 9. credit period allowed credit period availed working capital cycle Tax incentives WEIGHTAGES% XXXX XXXX XXXX XXXX

production related risk XXXX product related risk price related risk client risk fixed asset turnover TOTAL XXXX XXXX XXXX XXXX XXXX

Quality of management
SL.NO SUB PARAMETERS 1. 2. HR Policy / Track record of industrial unrest market report of management reputation 32 WEIGHTAGES% XXXX XXXX

Credit risk management

3. 4. 5. 6.

history of FERA violation / ED enquiry

XXXX

Too optimistic projections of sales and other financials XXXX technical and managerial expertise XXXX capability to raise money TOTAL XXXX XXXX

IN STATE BANK OF INDIA DFFERENT PARAMETERS USEDTO GIVE RATINGS ARE AS FOLOWS:FINANCIAL PARAMETERS
SL.NO Indicator/ratio

Score xxxx
XXXX XXXX XXXX

F1(a) F2(b) F1(c) F1(d) F1(e) F2 F3 F4 F5 F6 F7 F8 F9

Audited net sales in last year Audited net sales in year before last Audited net sales in 2 year before last Audited net sales in 3 year before last

Estimated or projected net sales in next year XXXX Net sales growth rate (%) PBDIT growth rate (%) Net sales (%) ROCE (%) TOL/TNW Current ratio DSCR Interest coverage ratio
33 XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX

Credit risk management

F10 F11 F12 F13

Foreign exchange risk Reliability of debtors Operating cash flow Trend in cash accruals

XXXX XXXX XXXX XXXX

BUSINESS PARAMETERS
SL.NO INDICATOR/RATIO

B1 B2 B3 B4 B5 B6 B7 B8 B9

SCORE Credit period allowed(days) XXXX Credit period availed(days) XXXX Working capital cycle(times) XXXX
Production related risks Product related risks Price related risks Fixed assets turnover No. of years in business Nature of clientele base

XXXX XXXX XXXX XXXX XXXX XXXX

MANAGEMENT PARAMETERS
SR NO INDICATOR RATIO M1 M2 M3 M4 M5 M6 M7 HR policy Track record in payment of statutory and other dues Market report of management reputation Too optimistic projections of sales and other financials Capability to raise resources Technical and managerial expertise Repayment track record 34 SCORE XXXX XXXX XXXX XXXX XXXX XXXX XXXX

Credit risk management

CONDUCT PARAMETERS
A1 Creation of charges on primary security A2 Creation of charges on collateral and execution of personal or corporate guarantee A3 Proper execution of documents A4 Availability of search report A5 Other terms and conditions not complied with A6 Receipt of periodical data A7 Receipt of balance sheet

B1 Negative deviation in half yearly net sales vis-a vis proportionate estimates

XX

B2 Negative deviation in annual net sales vis-a vis estimates XX B3 Negative deviation in half yearly net profit vis-a-vis proportionate estimates B4 Adverse deviation in inventory level in months vis-a-vis estimate level XX

XX

B5 Adverse deviation in receivables level in months vis-a-vis XX estimated level B6 Quality of receivable assess from profile of debtors XX

B7 Adverse deviation in creditors level in months vis-a-vis estimated level B8 Compliance of financial covenants

XX

B9 Negative deviation in annual net profit vis-a-vis estimates XX

35

Credit risk management

Short-term and Long-Term Ratings:

For Exposures with a contractual maturity of less than or equal to one year (Except Cash Credit, Overdraft and other Revolving Credits) Short-term Ratings given by ECAIs will be applicable. For Domestic Cash Credit, Overdraft and other Revolving Credits irrespective of the period and Term Loan exposures of over 1 year, Long Term Ratings given by ECAIs will be applicable. For overseas exposures, irrespective of the contractual maturity, Long Term Ratings given by IRAs will be applicable. Rating assigned to one particular entity within a corporate group cannot be used to risk weight other entities within the same group

APPRAISAL OF THE FIRMS POSITION ON BASIS OF FOLLOWING OTHER PARAMETERS

1. Managerial Competence 2. Technical Feasibility 3. Commercial viability 4. Financial Viability

Managerial Competence
Back ground of promoters Experience Technical skills, Integrity & Honesty Level of interest / commitment in project Associate concerns

Technical Feasibility
Location 36

Credit risk management

Size of the Project Factory building Plant & Machinery Process & Technology Inputs / utilities

Commercial Viability
Demand forecasting / Analysis Market survey Pricing policies Competition Export policies

Financial Viability
Whether adequate funds are available at affordable cost to implement the project Whether sufficient profits will be available Whether BEP or margin of safety are satisfactory What will be the overall financial position of the borrower in coming years.

37

Credit risk management

Credit rating in SBI

NEW RATING SCALES BORROWER RATING - 16 RATING GRADES

Sl. No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Borrower Rating SB-1 SB-2 SB-3 SB-4 SB-5 SB-6 SB-7 SB-8 SB-9 SB-10 SB-11 SB-12 SB-13 SB-14 SB-15 SB-16 Range of Scores 94-100 90-93 86-89 81-85 76-80 70-75 64-69 57-63 50-56 45-49 40-44 35-39 30-34 25-29 < 25 Risk Level Virtually Zero Risk Lowest Risk Lower Risk Low Risk Moderate Risk With Adequate Cushion Moderate Risk Average Risk Acceptable Risk (Risk Tolerance Threshold) Borderline risk High Risk Higher Risk Substantial risk Pre-Default Risk
(Extremely vulnerable to default)

Comfort

Level

Virtually Absolute Safety Highest Safety Higher Safety High Safety Adequate Safety Moderate Safety Above Safety Threshold Safety Threshold Inadequate Safety Low Safety Lower Safety Lowest Safety Nil

Default Grade

Credit investigation report

Branch prepares Credit investigation report in order to avoid consequence in later stage Credit investigation report should be a part of credit proposal. Bank has to submit the duly completed credit investigation reports after conducting a detailed credit investigation as per guidelines.

Some of the guidelines in this regards as follow:

38

Credit risk management

Wherever a proposal is to be considered based only on merits of flagships concerns of the group, then such support should also be compiled in respect of subject flagship in concern besides the applicant company. In regard of proposals falling beyond the power of rating officer, the branch should ensure participation of rating officer in compilation of this report. The credit investigation report should accompany all the proposals with the fund based limit of above 25 Lakhs and or non fund based of above Rs. 50 Lakhs. The party may be suitably kept informed that the compilation of this report is one of the requirements in the connection with the processing for consideration of the proposal. The branch should obtain a copy of latest sanction letter by existing banker or the financial institution to the party and terms and conditions of the sanction should studied in detail. Comments should be made wherever necessary, after making the observations/lapses in the following terms of sanction. Some of the important factors like funding of interest, re schedule of loans etc terms and conditions should be highlighted. Copy of statement of accounts for the latest 6 months period should be obtained by the bank. To get the present condition of the party. Remarks should be made by the bank on adverse features observed. (e.g., excess drawings, return of cheques etc). Personal enquiry should be made by the bank official with responsible official of partys present / other bankers and enquiries should be made with a elicit information on conduct of account etc. Care should be taken in selection of customers or creditors who acts as the representative. They should be interviewed and compilation of opinion should be done.

Enquiries should be made regarding the quality of product, payment terms, and period of overdue which should be mentioned clearly in the report. Enquiry should be aimed to ascertain the status of trading of the applicant and to know their capability to meet their commitments in time. To know the market trend branch should enquire the person or industry that is in the same line of business activity. 39

Credit risk management

In depth observation may be made of the applicant as to: i. ii. iii. iv. v. vi. whether the unit is working in full swing number of shifts and number of employees any obsolete stocks with the unit nature and conditions of the machinery installed Information on power, water and pollution control etc. information on industrial relation and marketing strategy

credit report in SBI Section contents Borrower profile 1 a. Name , Address, Manufacturing activity/Locations, Date of incorporation, Banking arrangement etc of b. Brief Background(Company/ Group/ Promoters/ Management including shareholding pattern ) c. Brief write up on Industry/Sector and Companys standing d. RMD Advisory/qualitative approach/Quantitative approach/Comments e. Indebtedness/Exposure & capital charge Present Proposal 2 a. Proposal : For sanction/approval/confirmation b. Credit limits (existing and proposed) Sharing pattern Performance Details 3 a. Performance and Financial indicators b. Industry exposure as on c. Movement in TNW d. Synopsis of balance sheet Risk assessment : 4 a. Credit Rating b. Risk and mitigating factors c. Warning signals/Major irregularities in Inspection Audit/Credit Audit/Other Reports d. Security e. Changes in Security if any, justification 5 Pricing a. b. c. d. Conduct of account Income analysis Other Banks/FIs pricing Proposed pricing pages

Loan Policy : Deviations & Compliance: 40

Credit risk management

a. Whether names of promoters, directors, company, group concern figure in defaulters/willful defaulters list b. Deviation in Loan policy c. Deviation in Take over norms and comments d. Directors of Borrowers company: status of relation with Board/ Sr Official of the bank etc a. Future plans & Business Potential including cross selling/retail marketing b. Environmental and sustainability implications c. Earlier terms of Sanction: Compliance status d. Statutory dues /Contingent Liabilities a. Justification for the Proposal & b. Recommendations :

CREDIT FILES:Its the file, which provides important source material for loan supervision in regard to information for internal review and external audit. Branch has to maintain separate credit file compulsorily in case of Loans exceeding Rs 50 Lakhs which should be maintained for quick access of the related information

Contents of the credit file:Basic information report on the borrower Milestones of the borrowing Competitive analysis of the borrower Credit approval memorandum Financial statement Copy of sanction communication Security documentation list Dossier of the sequence of events in the accounts Collateral valuation report Latest ledger page supervision report Half yearly credit reporting of the borrower 41

Credit risk management

Quarterly risk classification Press clippings and industrial analysis appearing in newspaper Minutes of latest consortium meeting Customer profitability Summary of inspection of audit observation Credit files provide all information regarding present status of the loan account on basis of credit decision in the past. This file helps the credit officer to monitor the accounts and provides concise information regarding background and the current status of the account

Credit risk mitigation techniques Guarantees

Where guarantees are direct, explicit, irrevocable and unconditional banks may take account of such credit protection in calculating capital requirements. A range of guarantors are recognized. As under the 1988 Accord, a substitution approach will be applied. Thus only guarantees issued by entities with a lower risk weight than the counterparty will lead to reduced capital charges since the protected portion of the counterparty exposure is assigned the risk weight of the guarantor, whereas the uncovered portion retains the risk weight of the underlying counterparty. Detailed operational requirements for guarantees eligible for being treated as a CRM are as under:

Operational requirements for guarantees

(i) A guarantee (counter-guarantee) must represent a direct claim on the protection provider and must be explicitly referenced to specific exposures or a pool of exposures, so that the extent of the cover is clearly defined and incontrovertible. The guarantee must be irrevocable; there must be no clause in the contract that would allow the protection provider unilaterally to cancel the cover or that would increase the effective cost of cover as a result of deteriorating credit quality in the guaranteed exposure. The guarantee must also be unconditional; there should be no clause in the guarantee outside the direct control of the bank that could prevent the protection provider from being obliged to pay out in a timely manner in the event that the original counterparty fails to make the payment(s)due. (ii) All exposures will be risk weighted after taking into account risk mitigation available in the form of guarantees. When a guaranteed exposure is classified as non-performing, 42

Credit risk management

the guarantee will cease to be a credit risk mitigant and no adjustment would be permissible on account of credit risk mitigation in the form of guarantees. The entire outstanding, net of specific provision and net of realisable value of eligible collaterals / credit risk mitigants, will attract the appropriate risk weight

Additional operational requirements for guarantees

(i) On the qualifying default/non-payment of the counterparty, the bank is able in a timely manner to pursue the guarantor for any monies outstanding under the documentation governing the transaction. The guarantor may make one lump sum payment of all monies under such documentation to the bank, or the guarantor may assume the future payment obligations of the counterparty covered by the guarantee. The bank must have the right to receive any such payments from the guarantor without first having to take legal actions in order to pursue the counterparty for payment. (ii)The guarantee is an explicitly documented obligation assumed by the guarantor. (iii)Except as noted in the following sentence, the guarantee covers all types of payments the underlying obligor is expected to make under the documentation governing the transaction, for example notional amount, margin payments etc. Where a guarantee covers payment of principal only, interests and other uncovered payments.

Qualitative Disclosures
(a) The general qualitative disclosure requirement (paragraph 10.13 ) with respect to credit risk, including: Definitions of past due and impaired (for accounting purposes); Discussion of the banks credit risk management policy;

Quantitative Disclosures
(b) Total gross credit risk exposures24, Fund based and Non-fund based separately. (c) Geographic distribution of exposures25, Fund based and Non-fund based separately Overseas Domestic (d) Industry26 type distribution of exposures, fund based and non-fund based separately (e) Residual contractual maturity breakdown of assets, 27 (g) Amount of NPAs (Gross) Substandard Doubtful 1 Doubtful 2 Doubtful 3 Loss 43

Credit risk management

(h) Net NPAs (i) NPA Ratios Gross NPAs to gross advances Net NPAs to net advances (j) Movement of NPAs (Gross) Opening balance Additions Reductions Closing balance (k) Movement of provisions for NPAs Opening balance Provisions made during the period Write-off Write-back of excess provisions Closing balance (l) Amount of Non-Performing Investments (m) Amount of provisions held for non-performing investments (n) Movement of provisions for depreciation on investments Opening balance Provisions made during the period Write-off Write-back of excess provisions Closing balance

Managing credit risk:For banks and financial institutions selling credit protection through a credit derivative, management should complete a financial analysis of both reference obligor(s) and the counterparty (in both default swaps and TRSs), establish separate credit limits for each, and assign appropriate risk rating. The analysis of the reference obligor should include the same level of scrutiny that a traditional commercial borrower would receive. Documentation in the credit file should support the purpose of the transaction and credit worthiness of the reference obligor. Documentation should be sufficient to support the reference obligor. Documentation should be sufficient to support the reference obligors risk rating. It is especially important for banks and financial institutions to use rigorous due diligence procedure in originating credit exposure via credit derivative. Banks and financial institutions should not allow the ease with which they can originate credit Exposure in the capital markets via derivatives to lead to lax underwriting standards, or to assume exposures indirectly that they would not originate directly.

For banks and financial institutions purchasing credit protection through a credit 44

Credit risk management

derivative, management should review the creditworthiness of the counterparty, establish a credit limit, and assign a risk rating. The credit analysis of the counterparty should be consistent with that conducted for other borrowers or trading counterparties. Management should continue to monitor the credit quality of the underlying credits hedged. Although the credit derivatives may provide default protection, in many instances the bank will retain the underlying credits after settlement or maturity of the credit derivatives. In the event the credit quality deteriorates, as legal owner of the asset, management must take actions necessary to improve the credit. Banks and financial institutions should measure credit exposures arising from credit derivatives transactions and aggregate with other credit exposures to reference entities and counterparties. These transactions can create highly customized exposures and the level of risk/protection can vary significantly between transactions. Measurement should document and support their exposures measurement methodology and underlying assumptions. The cost of protection, however, should reflect the probability of benefiting from this basis risk. More generally, unless all the terms of the credit derivatives match those of the underlying exposure, some basis risk will exist, creating an exposure for the terms and conditions of protection agreements to ensure that the contract provides the protection desired, and that the hedger has identified sources of basis.

Difficulty of measuring credit risk

Measuring credit risk on a portfolio basis is difficult. Banks and financial institutions traditionally measure credit exposures by obligor and industry. They have only recently attempted to define risk quantitatively in a portfolio context e.g., a value-at-risk (VaR) framework. Although banks and financial institutions have begun to develop internally, or purchase, systems that measure VaR for credit, bank managements do not yet have confidence in the risk measures the systems produce. In particular, measured risk levels depend heavily on underlying assumptions and risk managers often do not have great confidence in those parameters. Since credit derivatives exist principally to allow for the effective transfer of credit risk, the difficulty in measuring credit risk and the absence of confidence in the result of risk measurement have appropriately made banks cautious. about the use of banks and financial institutions internal credit risk models for regulatory capital purposes

Measurement difficulties explain why banks and financial institutions have not, until very recently, tried to implement measures to calculate Value-at-Risk (VAR) for credit. The VAR concept, used extensively for market risk, has become so well accepted that banks and financial institutions supervisors allow such measures to determine capital requirements for trading portfolios. The models created to measure credit risk are new, and have yet to face the test of an economic downturn. Results of different credit risk models, using the same data, can widely. Until banks have greater confidence in parameter inputs used to measure the credit risk in their portfolios. They will, and should, 45

Credit risk management

exercise caution in using credit derivatives to manage risk on a portfolio basis. Such models can only complement, but not replace, the sound judgment of seasoned credit risk managers.

October 2002- RBI;S GUIDANCE NOTE ON CRM

RBI guidance note on CRM consist of the following broad areas
Policy framework Credit policy and strategy- policies should include risk identification, risk measurement , risk grading techniques, reporting, risk control, and mitigation techniques, documentation, legal issues , and management of loan problems. The policies should define target markets, risk acceptance criteria, follow up procedures and guidelines for portfolio management.

Strategies should indicate the willingness to grant loans based on economic activity, geographical location, currency, market, maturity and anticipated profitability, therefore, strategy will include identification of target markets, business sectors, cost of capital in granting credit, and cost of bad debts. Organizational structure- the role and duties of board of directors, risk management committees, credit risk management department should to be identified. Operations/ systems

Credit risk framework A good rating framework is the basis of credit risk management Credit risk models Portfolio management and risk limits Managing credit risk in inter-bank exposure Credit risk in off-balance sheet exposure Country risk Credit audit Economic profit New capital accord: implications for credit risk management

46

Credit risk management

Data Analysis and interpretation

47

Credit risk management

Deposits
Rs in billion Deposits 2005 2006 2007 2008 2009

3670.48

3800.46

4355.21

5374.05

7420.73

Deposits
8000 6000 4000 2000 0 Deposits 2005 3670.48 2006 3800.46 2007 4355.21 2008 5374.05 2009 7420.73

INTERPRETATION

As we can see in the above diagram that the deposits of the bank has increased with a good percentage. In the year 2005 the deposits are 3670.48 and in the year 2009 the deposits are 7420.73. so we can say that the deposits of the company is increasing which is a very good sign for the compan

48

Credit risk management

Advances
Rs in billion advances 2005 2023.74 2006 2618.01 2007 3373.36 20008 4168.95 2009 5425.03

6000 5000 4000 3000 2000 1000 0 advances 2005 2023.74

advances

2006 2618.01

2007 3373.36

2008 4168.95

2009 5425.03

Interpretation
As we can see in the above diagram the advances for the company is increasing which is a sign of growth, the companies advances were 2023.74 in the year 2005 as against 5425.03 in 2009 which gives an indication that the company is able to attract customers in this competitive scenario also. This is one of the main advantage of having credit risk management, which not only reduces the risk but also promotes advances and in turn profits of the company

NPA ratio
Key financial indicator Net NPA ratio 2005 2006 2007 2008 2009

2.65

1.88

1.56

1.78

1.79

49

Credit risk management

NPA RATIO
3 2.5 2 1.5 1 0.5 0 NPA RATIO

2005 2.65

2006 1.88

2007 1.56

2008 1.78

2009 1.79

Interpretation
As we can see in the above diagram that the companies net NPA ratio has gone down from 2.65 in 2005 to 1.79 in 2009 which is an indication that the company is able to reduce its NPA considerably over the years that means the company can write off its NPA and have a higher profits in the future. Credit risk management plays an important role in reducing the NPA.

50

Credit risk management

Operating profit
Rs in billion Operating profit 2005 109.91 2006 112.99 2007 100.00 2008 131.07 2009 179.05

OPERATING PRIFIT
200 180 160 140 120 100 80 60 40 20 0 OPERATING PRIFIT 2005 109.91 2006 112.99 2007 100 2008 131.07 2009 179.05

Interpretation
The operating profit of the bank for 2005 stood at 109.91 billion as against 2006 112.99 billion. From the year 2006 to 2007 the company had growth of 31.08%. while in the year 2009 the company had a profit of 179.05 as compared to 2008 it was 131.07 registering a growth of 136.60%

51

Credit risk management

Conclusion

52

Credit risk management

The project undertaken has helped a lot in gaining knowledge of the Credit Risk Management in Nationalized Bank with special reference to State Bank Of India. Credit Policy and Credit Risk management of the Bank has become very vital in the smooth operation of the banking activities. Credit Policy of the Bank provides the framework to determine a)whether or not to extend credit to a customer and (b) how much credit to extend. The Project work has certainly enriched the knowledge about the effective management of Credit Policy and Credit Risk Management in banking sector. Credit Risk Management is a vast subject and it is very difficult to cover all the aspects within a short period. However, every effort has been made to cover most of the important aspects, which have a direct bearing on improving the financial performance of Banking Industry To sum up, it would not be out of way to mention here that the State Bank Of India has given special inputs on Credit Risk Management. In pursuance of the instructions and guidelines issued by the Reserve Bank of India, the State bank Of India is granting and expanding credit to all sectors. The concerted efforts put in by the Management and Staff of State Bank Of India has helped the Bank in achieving remarkable progress in almost all the important parameters. The Bank is marching ahead in the direction of achieving the Number-1 position in the Banking Industry.

53

Credit risk management

BIBLIOGRAPH

54

Credit risk management

BOOKS REFERRED:
1. M.Y.Khan and P.K.Jain, Management Accounting (Third Edition), Tata McGraw-Hill. 2. M.Y.Khan and P.K.Jain, Financial Management (Fourth Edition), Tata McGraw 3. D.M.Mittal, Money, Banking, International Trade and Public Finance (Eleventh Edition), Himalaya Publishing House.

WEB SITES
1. www.sbi.co.in 2. www.icicidirect.com 3. www.rbi.org 4. www.indiainfoline.com 5. www.google.com

BANKS INTERNAL RECOREDS:

1. Annual Reports of State bank Of India (2003-2007) 2. State bank Of India Manuals 3. Circulars sent to all Branches, Regional Offices and all the Departments of Corporate Offices.

55