A STUDY ON

(CREDIT RISK MANAGEMENT)

AT
(State Bank of Hyderabad)
A Project Report submitted to the

JAWAHARLAL NEHRU TECHNOLOGICAL UNIVERIT!
H"der#b#d$
I% p#rti#& 'u&(&&me%t o' the re)uireme%t 'or the #*#rd o' the de+ree o'
,ATER O- .UINE A/,INITRATION
."
0C$REENIVAULU1
0 H#&& Tic2et No345C67E4487 1
0 6445 96474 1
U%der the Guid#%ce
0 ,r$#%j#" 1

COLLEGE LOGO
TIRUMALA ENGINEERING COLLEGE
7
BOGARAM (V), KEESARA (M), R.R.DIST
CERTIFICATION
This is to certi'" th#t the Project Report tit&e credit ri!
"#$#%e"e$t& submitted i% p#rti#& 'u&(&me%t 'or the #*#rd o'
,.A Pro+r#mme o' /ep#rtme%t o' .usi%ess
,#%#+eme%t:Tirum#&# E%+i%eeri%+ Co&&e+e ;ees#r#0A<&i#ted to
JNTU1H"der#b#d: *#s c#rried out b" C.Sree$i'#()( (*T+
NO,-.C/0E--10) u%der our +uid#%ce$ This h#s %ot bee%
submitted to #%" other U%i=ersit" or I%stitutio% 'or the #*#rd o'
#%" de+ree>dip&om#>certi(c#te$
,r$#%j#": ,r$CH$.#&# R#ju: /r$CH$ ;#mes*#r#
R#o:
0Assist#%t pro'?s1 0HO/1 0Pri%cip#&1
6

DECLARATION
I hereb" dec&#re th#t: this Project Report tit&ed @A TU/! ON
CRE/IT RI; ,ANAGE,ENTA submitted b" me to the /ep#rtme%t
o' .usi%ess ,#%#+eme%t: JNTU: H"der#b#d: is # bo%#(de *or2
u%dert#2e% b" me #%d it is %ot submitted to #%" other U%i=ersit"
or I%stitutio% 'or the #*#rd o' #%" /e+ree Certi(c#tio% or
pub&ished #%"time be'ore$


0C$RE
ENIVAULU1
B
ACKNO2LEDGMENT
I *ou&d &i2e to th#%2 m" +uide Mr. S#$3#4 Ait#$t 5r678 'or
his imme%se support: e%cour#+eme%t #%d +uid#%ce throu+h out
the course *or2 o' the project
I eCpress m" +r#titude to our pri%cip#& Dr. C*. K#"e9#r# R#6
'or his co%siste%t support$
I #&so &i2e to th#%2 Mr. C*.B#)# R#3 (: He#d o' the /ep#rtme%t
,.A: 'or his support i% the comp&etio% o' the project$ It h#s bee%
re#&&" # +re#t eCperie%ce *or2i%+ u%der there +uid#%ce$
I #m th#%2'u& to Mr. K. S#idi Redd4 (M#$#%er) o' the t#te
.#%2 o' H"der#b#d ece%dr#b#d 0Gu%'ou%d#r"1 'or pro=idi%+ me
*ith time #%d i%'orm#tio% re+#rdi%+ the project$
-i%#&&": I *ou&d &i2e to th#%2 m" e%tire '#cu&t" *ho he&ped me #t
#&& times throu+hout the te%ure o' this project$ There *ord o'
#d=ice: support #%d 'rie%dship did much to e%h#%ce the )u#&it" o'
8
m" *or2 #s *e&& #s m" +r#du#te eCperie%ce$

( C.SREENIVASULU)

CONTENTS: Page No
CHAPTER I
Introduction (1-10)

CHAPTER II (11-15)
RESEARCH METHODOLOGY
CHAPTER III (16-35)
ORGANISATIONAL PROFILE
CHAPTER IV (36-70)
THEORETICAL FRAMEWORK
CHAPTER - V (71-72)
DATA ANALYSIS AND INTERPRETATRION
CHAPTER VI (73-74)
SUMMARY OF FINDINGS
D
CHAPTER - V II (75)
SUMMARY OF SUGGESTIONS
CHAPTER - VIII (76)
BIBLIOGRAPHY
ABSTARCT
Basic business of banking is essentially acceptance of deposits
for the purpose of lending and investments. That business is to work profit from
financial risk. Main source of income for bank is interest income and savings
arrived by extending loans to business units and individuals in the form of term
loans are overdrafts
Banking extending loans will expose to the various risks vi. credit
risks! interest rate risk. "n fact there is inherent risk involved in all the lending
activities undertaken by the bank. The important #uestions are$ can take the risks
by the bank be accurately identified% And how much risk is bearable% The lowest
level credit risks and highest level safety&comfort. And highest level of credit risk
and lowest level of safety&comfort.
The methodology adopted the for the study is selecting the data
segmenting the data into various sectors ! analying the rating estimating sacrifice
made by the bank! and made suggestions and recommendations. After analysation
of total sample! it was found that health of total assets is good.
E
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INTRO/UCTION
F


1. BANKING SECTOR PROFILE
EVOLUTION O- .AN;ING:
Banking in its crude form! is an age,old phenomenon. "t was in
existence even in ancient times. +evilpout a -rench writer! for instance mentions
about bank notes in Babylon in .// B.' in "ndia! the reference to money 0lending
business are fond in the Manu 1mriti also. 'haldean *gyptian and )henomenon
history also records the existence of rudimentary banking in early days.
)rof. Marshall in his book! Money! credit and commerce! (2345) writes
about the activities of money,charges in the temple of 6lympia and other sacred
places in 7reece! around 4/// B.'. To #uote him 8private money charges began
with the task of reducing many metallic currencies! more or less exactly! to a
common unit of value !and even to accept money on deposit at interest permitting
mean while drafts to be drawn on them9.
Another factor that supported the emerges of bank in the early period was
the need for borrowing by the monarchical government from finance companies ."n
the middle Ages in "taly the first bank called the 8Bank of venice9 was
established in 22:;!on this ground ! particularly! <hen authorities of venice were
in financial trouble due to war.
"n *ngland! however! the banker of =ombardy had taken the initiative to
start modern banking along with their trading activities in =ondon. But
!commercial began there only after 2.>/!when goldsmiths started receiving
5
deposits from public for safe custody !and issued receipts for the acknowledgement
which were being used as bearer demand notes later on.
'rowther thus speaks about three ancestors of a modern commercial bank!
vi.! the merchant the money lender and goldsmith. The merchants or trades issued
documents like ?hundi@ to remit the funds. Modern banks introduced che#ues! or
demand drafts for remittance purpose Money 0lender gave loans. Bankers too gave
loans. 7oldsmiths received deposits and created credit. Banks also received
deposits and adopted the process of credit in a similar fashion! by issuing che#ues.
"n short! the evolution of commercial! banking is related to the practice of safe,
keeping of gold and valuables by the people with merchants&goldsmiths&money,
lenders.*tymologically! however the ?bank@ is derived from the 7reek word
ban#ue! or the "talian word banco both meaning a bench,,,referring to a bench at
which money 0lenders and money,chargers used to display their coins and transact
business in the market place. "n *ngland! initially the bank of *ngland was
established in 2.3>on "talian lines to support government with finance.Modern
Aoint 0stock commercial bank! however! came into the picture with the passage of
the banking Act of B55 in *ngland."n "ndia! however! modern banking started when
the *nglish agency houses in 'alcutta and Bombay began to serve as bankers to
the *ast "ndia 'ompany and the (industan Bank was the first banking institution
of its kind to be established in 2;;3.
What is bank?
'ommercial banks are the most important source of institutional credit
in the money market. A bank is a profit,seeking business firm dealing in money
and credit .it is a financial situation dealing in money in the sense that it accepts
deposits of money from the public to keep on " its custody for safety. 1o !it deals in
credit !i.e. !it creates credit by making advances of the funds received as deposits to
needy people ."t thus functions as a mobiliser of saving in economy.
A bank is! therefore! like a reservoir into which inflow the savings! the
idle surplus money of the households! and from which loans are given on interest
to businessmen and others who need them for investment or productive uses.A
bank is an important institution of money market as it gives short,term loans to its
customers.
G
DEFINATION OF BANK:
6n account of the multifarious activities of the modern bank! it becomes
very difficult give a precise definitions of the world 8bank@. The 6xford dictionary
defines a bank as ?an establishment for the custody of money! which it pays out
ona customer ?order9. This! how ever! this is not a very satisfactory definition!since
it ignores the most important functions of a bank! that of money or creating credit.
A banking company in "ndia has been defined in the banking companies
Act! 23>3as one! which transact the business of banking which means the
accepting !for the purpose of lending investment! of deposits of money from the
public repayable on demand or otherwise and withdrawal by che#ues! drafts! order
or otherwise@ acceptance of che#uable demand and demanding them to others are
two distinctive features of a banking institution.
Objective of the !oject
The obAect of the proAect is to study credit risk management
=inking of the credit risk with health of the assets
KINDS OF BANKS
-inancial re#uirements in a modern economy are of a diverse nature!
distinctive variety large magnitude. (ence! different types of bank have been
instituted to cater to the varying of the company.
Banks in the organied sector may! however! be classified into the following maAor
forms$
2. 'ommercial bank
4. 'o,operative bank
5. 1pecialied banks
>. 'entral bank
CO""ERCIA# BANK:
'ommercial banks are Aoint,stock companies dealing in money and credit
.commercial banks may be defined as a financial institutions that accepts ch#uable
deposits of money from the public and also use the money with it accepts deposits
called demand deposits from the public which are che#uable! i.e.! withdraw able by
74
means of che#ues .Acceptance of che#uable deposits is to make use of these
deposits for lending to others.
'ommercial banks usually give short,term loans and advances. They occupy
a dominant place in the money market. They! as a matter of fact! from the biggest
component in the banking structure of any country. The commercial banks in "ndia
are governed by "ndian Banking +egulation Act! 23>3 brought up to date to
include additional rules there to. Cnder the law commercial banks are not supposed
to do any other business! excepting banking.
CO"ERCIA# BANKS IN INDIA:
"n "ndia however! there is a mixed banking system. )rior to Auly23.3!all
the commercial banks,;5 scheduled and 4. non scheduled banks! except the 1tate
Bank of "ndia and its subsidiaries, were under the control of private sector .6n Duly
23!23.3! however 2> maAor commercial banks with of high standing were taken
over by the government.
At present! there are 4/ at nationalied banks plus the 1tate Bank of "ndia
and its ; subsidiaries constituting public sector banking which controls over 3/
percent of the banking business in the country.
CO$O%ERAI&E BANK:
'o,operative banks are a group of institutions organied under the
provisions of the 'o,operative societies Act of the states. These banks are
essentially co,operative credit societies organied by members to meet their short,
term and medium 0term financial re#uirement.
The main obAect of 'o,operative banks to provide cheap credit to their
members .They are based on the principles of self reliance and mutual 'o,
operation.The co,operative banking system " "ndia is! however! small sied in
comparison to the commercial banking system. "ts credit outstanding is Aust less
than one 0fifth of the total credit outstanding of the commercial bank .Eonetheless!
'o,operative credit system is the main institutional source of rural !especially!
agriculture finance in "ndia. 'o,operative banking system in "ndia has the shape of
a pyramid! i.e.! a three,tier structure constituted by$
77
a' %!i(a!) C!e*it societies
b' Cent!a+ Co$oe!ative Banks
c) State Co$oe!ative Banks.
S%ECIA#I,ED BANKS:
There are specialied from of banks catering to special need with
these uni#ue nature of activities .There are! thus! foreign exchange banks!
industrial bank !development bank !land development bank etc.
Fo!ei-n E.chan-e Bank o! si(+) e.chan-e banks:
They are meant primarily to finance the foreign trade of a country.
They deal in foreign exchange business! buying and foreign exchange business
buying and selling of foreign currencies! discounting! accepting and collecting
foreign bills of exchange. They also o ordinary banking business such as
acceptance of deposits and advancing of loans! but in a limited way. "n "ndia!
there are 2: foreign commercial banks basically undertaking such activities
only.
In*/st!ia+ Banks
They are primarily meant to cater to the financial needs of industrial
undertaking they provide long,term credit to industries for the purchase of
machinery! e#uipment etc."n "ndia! there are some special financial institutions
which are called 8development banks9.
)resently! at the all,"ndia level! there are five industrial development banks$
2) The "ndustrial Bank of "ndia ("FB")
4) The "ndustrial -inance 'orporation of "ndia
5) The "ndustrial +econnection 'orporation of "ndia ("+'")
>) The "ndustrial 'redit and "nvestment 'orporation of "ndia ("'"'")
:) The Eational "ndustrial 'orporation (E1"')
All the "nstitutions have been founded by the government! except the "'"'" which
is owed by the private sector.
76
1imilarly! at the state level! there are$
2) The 1tate -inancial 'orporation (1-'s)
4) The 1tate "ndustrial Fevelopment 'orporation (1"F's)
5) The 1tate "ndustrial investment 'orporation (1""'s)
1erving as industrial development banks.
#an* Deve+o(ent Banks 0#DBs'They are meant to cater to the long and
medium 0term credit needs of agriculture in our country. They are district 0level
banks .since the =FBs gives loans to their members on the mortgage of
land!previously they were called land mortgage banks. There are state land
development banks at the top level and primary land development banks at the
local level .
A-!ic/+t/!a+ Refinance an* Deve+o(ent Co!o!ation 0ARDC':
"t is a kind of agriculture development bank which provides medium and
long,term finance to agriculture in our country. A+F' operate by making
provisions of reference to state =and Fevelopment Banks! 1tate 'o,operative Bank
and 1cheduled 'ommercial Bank which are its shareholders.
The E.o!t$I(o!t Bank of In*ia 0E1I" BANK'
"t has been instituted for planning! promoting a developing exports and imports of
the country.
"n <estern countries! there are specialied banks such as discount houses!
investment banks ! labor banks etc.! catering to the specialied needs of the
people.
CENTRA# BANK:
A central bank is the apex financial institution in the banking and financial
system of a country .it is regarded as the highest monetary authority in the
country ."t acts as the leader of the money market .it supervises controls and
regulates the activities of the commercial banks. "t is a service oriented financial
institution primarily concerned with the ordering! supervising regulating and
development of the banking system in the country. As the central bank is the able
to influence monetary and credit conditions and financial developments in a
7B
country! it is charged with the responsibility of carrying out the monetary and
credit policies.
In*ia2s cent!a+ bank is the Rese!ve Bank of In*ia3 estab+ishe* in 4567
A central bank is usually state,owned. But it may also be a private
organiation -or instance! the +eserve Bank of "ndia (+B")! was started as a
shareholders@ organiation in 235: which however! was nationalied after
independence! in23>3. Although the central bank is state,owned! it functions as a
semi,government institution! free from parliamentary control.
F/nctions of co((e!cia+ Banks:
'ommercial banks perform several crucial functions! which may be
classified into two categories.
2. )rimary functions.
4. 1econdary functions.
)rimary banking functions of the commercial banks include$
2) Acceptance of the deposits from the public
4) =ending of funds
5) Cse the che#ue systemG and
>) +emittance of funds.
48 Accetance of *eosits f!o( the /b+ic:
Accepting deposits is the primary function of a commercial bank. By
receiving deposits from the public! commercial banks mobilie savings of the
household sector.Banks generally accept deposits in three types of accounts.
'urrent Account
1aving Account
-ixed Feposits Account.
98 #en*in- of F/n*s:
Another maAor function of commercial bank is to extend loans and advances
out of the money which comes to them by way of deposits to businessmen and
78
entrepreneurs against approved such as gold or silver bullion ! government
securities ! easily saleable stocks and shares! and marketable goods.
Bank A*vances to C/sto(e!s (a) be (a*e in (an) :a)s:
6verdraft
'ash credits
Fiscounting trade bills
Money 0at,call or very short,term advances
Term loans
'ustomer 'redit
68 ;se of Che</e S)ste(:
"t is a uni#ue feature and function of banks that they have introduced the
che#ue system for the withdrawal of deposits.
There are types of che#ues$
The bearer che#ue and
'rossed che#ue
a) The bearer 'he#ue$
A Bearer che#ue is encashable immediately at the bank by its possessor.
1ince it is negotiable! it serves as good as cash on transferability.
b) A 'rossed 'he#ue$
A crossed che#ue! on the other hand! is one that is crossed by two parallel
lines on its face at the left hand corner and such a che#ue is not immediately
encashable. "t has no be deposited only in the payee@s account ."t is not
negotiable.
68Re(ittance of F/n*s:
'ommercial banks! on account of their network of branches throughout
the country! also provide facilities to remit funds from one place to another
for their customers by issuing bank drafts! mail transfers or telegraphic
transfers on nominal commission charges. As compared to the postal money
orders or other instruments! a bank draft has proved to be a much cheaper
mode of transferring money and has helped business community
considerably.
7D
"n addition to these! commercial banks perform a multitude of other
non,banking functions which may be classified as$
Bankers perform certain functions for and on behalf of their customers! such
(a)To collect or make payments for bills! che#ues! promissory notes! interest!
dividends! rent subscription! insurance premia! etc. -or these 1ervices! some
charges are usually levied by the banks.
(a) To remit funds on behalf of the clients by draft or mails or telegraphic
transfers.
(b) To act as executor! trustee and attorney for the customer@s will.
7eneral Ctility 1ervices
Modern commercial banks usually perform certain general utility services
for the community such as!
(a) =etter of credit may be given by the banks at the behest of the importer in
favor of the exporter.
(b) Banks drafts and traveler@s che#ues are issued in order to provide
facilities for transfer of funds from one part of the country to another.
(c) Banks may deal in foreign exchange or finance foreign trade by
accepting or collecting foreign ills of exchange.
7E
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+*1*A+'( M*T(6F6=67H
7F
2.RESEARCH METHODOLOGY3
Int!o*/ction:
"etho*o+o-) a*ote*:
2) The methodology adopted for the study as follows$
4) 1electing data
5) 1egmentation of the data various sectors
>) Analying the data
:) "nferences from the analysis
.) +ecommendations and suggestions
banking remains essentially with acceptance of deposits for the purpose of
lending and investment. The services a bank offer are opening of account of 1B!
'A! TA. 'redit account etc. )roviding che#ues! which can be used for making
payment and purchase of goods and services% savings accounts and time deposits
that can be used to save money for future useG loans that business and consumers
can use to purchase and goods and services$ and basic cash management services
such has che#ue cashing and foreign currency and exchange .
The deposit and loan services provide by bank benefit the economy in many ways.
Banks in doing their Aobs! do take risk. "n fact there is inherent risk involved in all
the lending activities.Cndertaken by the bank.
The important #uestions$ can the risk taken by bank be accurately identified% And
how risk is bearable%
NEED FOR RISK "ANA=E"ENT:
-inancially stability of a bank exists when it is resilient to wide range of shocks
and crisis with least disruption. These crisis can be external or from within the
system. -aster integrations of the domestic market with the international market
take the first place in making the working environment dynamic with the other
factors like competition within the industry mismanagement and misappropriations
lining up next.
75
Fynamic operations conditions causing volatile interest rate and extend rates !by
making them market related any effecting the profitability of the banks apart from
these ! there are internal factors like the technical aspects! human errors and
physical aspects which add uncertainty! to system! building pressure on the
management to appropriately handle these risks. in the process of handling these
risks bank seek process and procedure for identification! assessment and mitigation
of risk constituting risk management systems
#i(itation of the st/*)
2. "naccessibility to certain information and related to the proAect on account t
of its being confidential
4. Being the sample sie is short !only a few segments were found and
analyed
5. "n the analysis part few data is calculated in average and it may or may not
pertaining to every individual client
Definitions:
+isk can be the probability that the actual return will be less than the
expected returns. "t is also known as volatility of unexpected outcomes! generally
the value of assets or liabilities of interest
+isk can be classified into types$
1ystematic risk Cn,systematic risk
S)ste(atic !isk:
"t is also known as market risk! because all the securities are affected in the
same way by this risk. The source and their risk are the social,economic and
political conditions prevailing in the country at a particular point of time.
The different types of the systematic risks are$
A8"a!ket !isk:
This risk arises from changes in interest rates or exchange rates! or
from fluctuations in bond! e#uity or commodity prices. Bakes are subAect to
the market risk in both the management of their balance sheet and their
trading operations.
7G
B8inte!est !ate !isk $
The interest rates in a economy are determined by the demand and
supply for government Febt instruments like treasury bills and government
bonds. "f the demand is more than the supply then the interest will rise else it
will fall.
<hen the interest rates are on government bonds! it will have
negative effects on the market price of the corporate bonds! because the
price will fall and similarly it will affect the market price of the e#uity in the
market! they go down ward.
C8%/!chasin- o:e! !isk:
)urchasing power risk occurs because of inflation .<hen n investor
is making an investment in the capital market. "t means that is postponing
his consumption. 1o the investor adds a risk premium for raising prices.
;n$s)ste(atic !isk:
Cn,systematic +isk is also called as uni#ue risk! because it is related to that
particular company only. "t is drivers able because! if a company@s shares in
the portfolios.
The different types of the Cn,systematic risk$
a8 B/siness Risk:
"t is the risk faces by particular company because of its internal
environment like inefficient management! labors strikes! shortage of raw
materials! divorcing into new area without proper research.
b' Financia+ Risk:
-inancial risk means inability of the firm to pay the interest on the
debentures or bank loans.
64
67
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6+7AE"1AT"6EA= )+6-"=*
3.ORGANISATIONAL PROFILE:
The state bank of hyderabad is an entity formed with the coming together of .B
years old
T>E ORI=IN:
The origin of the erstwhile was pretty humble. "t was in the year 2354 that a
special committee under Mr.I.M.BA+C'( recommended the establishment of
bank for the state.
1B( was started as (yderabad state bank in 23>2 under (yderabad state
bank of act 23>2. The bank started with the uni#ue distinction of being the central
bank of the erstwhile Eiam 1tate! covering present day telanagana region of
66
Andhrapradesh! (yderabad,Iarnataka of Iarnataka and narathwada of
Maharastra! to manage its currency,osmania sikka and public debit! apart from the
function of commercial banking. The first branch was opened at gunfoundary!
(yderabad on :
th
April 23>4.
O;R "ISSION:
To achieve pre,eminence in banking and financial sectors with commitment
to excellence in customer satisfaction! profit maximiation and continued emphasis
on developmental banking through a skilled and committed work force by
providing training facilities and technological pgradation.
"I#ESTONES OF T>E BANK O&ER T>E #ON= ?EARS OF ITS
SER&ICE $
The long Aourney of over .B years has had several milestones! a few of
which may be observed from the following table$
2354 A special committee under Mr.I.M.BA+C'( recommended! the
establishment of a bank for the state.
23>2 (yderabad state bank incorporated on the august 4:
th
23>2.
23>4 The bank started business on April :
th
23>4.
23:5 The bank started conducting government and treasury business as agent of
+B". "n the same year! the bank assets and liabilities of (yderabad mercantile bank
=td! on April 2
st
23:5.
23:> The bank was authoried to deal in foreign exchange.
23:. Bank was taken over by +B" as its first subsidiary and its name was changed
from (yderabad state bank to state bank of (yderabad.
The bank became a subsidiary of the 1B" on its 2st oct 23:3 and is one of
the largest associate bank of 1B".
23;. +eorganiation of banks operations and introduction of the performance
budgeting system and evolution of present organiational structure.
6B
233:,3. Bonds issue (subordinated date).'oncluded to strengthen capital funds
and bank achieved capital ade#uacy ratio of 3.3/J as on 52,5,233..
233B,33 deposits crossed 2/!/// crores.
4/// Bank has launched depository services at gunfoundary branch
To be successful in this competitive environment bank is introducing new products
every year. Eew products introduced in this year are$
2. Ianya Kivah 1uvidha 1cheme.
4. Kalmiki Ambedkar 1cheme.
5. Adhyapak 1uvidha 1cheme.
>. Tax 1uvidha 1cheme.
:. +akshak 1uvidha 1cheme.
.. Cdhoga Bandhu 1cheme.
;. Kanitha 7old 1cheme.
B. Mahila 1hakhty and 'areer )lanner =oan.
3. 1M* 1mart 1core.
'urrently the bank! through various schemes is in to services like
commercial and institutional advances! personaG advances! agricultural advances!
small and medium enterprise financing! internet banking! resident foreign currency
and ordinary account@s demate&depository services! ATM services! electronic funds
transfer and life insurance services.
NET WORT> @ CA%ITA# ADEA;AC?$
The bank@s net worth increased from +s.2!;.:..: crores in -H/: to
+s.4!22>./4 crores as at the end of -H/. representing a growth of 23.;5J. Book,
value per share increased from +s.2/!4.5&, to +s.24!4::&, during the year.
68
The bank@s capital ade#uacy ratio increased to 24./BJ as at the end of
-H/. from 22.;>J at the beginning of the year. The bank shored up its tire ""
capital by raising +s.:// crores through a subordinated debt (bond) issue in
1eptember@ /:. This was necessitated by the sharp growth in credit in -H/: L
-H/. and the bank@s preparation for meeting Basel "" norms by 52
st
march 4//;.
The core capital ade#uacy ratio (Tier " 'apital to risk weighted assets) stood at
B.32J as at the end of -H/. as compared to ;.:BJ as on 52./5./:. this increase
was attributable to the fact that there was a significant rise in tier " capital on
account of shifting of "nvestment fluctuation reserve from tier "" capital to tier "
and the high net profits registered in -H/. as compared to previous years.
OR=ANISTION SET;% FOR SB>
6D
CHAIR,AN
.o#rd o'
directors
,#%#+i%+
director
CVO
,/?
dept$
Dea!t(ent seen ove! b) the -ene!a+ (ana-e!s
=ene!a+ (ana-e! 0Techno+o-)'
2. F7M ('))F).
a. A'M (core banking).
b. 'M(M"1).
c. '))F Fepartment.
4. F7M('AL+MF)
a. 'redit Audit Fepartment
b. +isk Management Fepartment
=ene!a+ "ana-e! 0Insetion @ C&A'
6E
G,0CH
I.1
Chie'
Ge%er#&
m#%#+er
AG,
0.RP1
G,
0INP1
G,
0OP1
G,
0PH/1
G,
0tech$1
G,
0tre#sur
"1
/G,
Credit
/irect
br#%ch
CNW
br#%ch
/G,
Co%tro&&
ed
/G,
Re+io%
s
AG,
he#d
br#%ch
es
/G,
IOO
N
.r#%ch
AG,
0re+io%
.r#%che
s
2. F7M ("nception).
4. A7M( 'ompliance)
5. A7M( Kigilance)
>. 'M(1L)).
=ene!a+ "ana-e!0Oe!ation'
2. F7M ()ersonal L (+F)
a. )ersonal Fepartment.
b. "ndustrial +elations Fepartment.
4. F7M (+ecovery)
a. +ecovery Fepartment.
b. A+M 'ell.
5. F7M (law)
>. A7M (Marketing)
:. 'M (1ecurity)
.. 'M (F) Fepartment)
;. 'M ("nsurance Fepartment)
=ene!a+ "ana-e! 0C @ IB'
2. F7M ('redit)
a. 'redit Fepartment.
b. 'ommercial Module.
4. A7M ("ndustrial +ehabilitation Fepartment)
5. 'M (Merchant Banking)
>. 'M (' L " Fepartment)
:. 'M ("BF)
=ene!a+ "ana-e! 0T!eas/!)'
2. F7M (Treasury)
a. Fomestic Treasury.
b. -orex Treasury.
4. F7M (A L 1)
a. Balance sheet 1ection.
b. 7overnment Accounts 1ection.
c. ))7 Fepartment.
d. -M 'ell! Bangalore.
e. AB16T.
f. 'entral Accounts Fepartment.
g. A7'=! Mumbai.
h. 7A=' Eagpur.
6F
5. 'M! A=M Fepartment.
=ene!a+ "ana-e! 0%+annin- @ Deve+o(ent'
2. F7M (++B)
4. A7M ()lanning)
5. A7M ()+ L =iaison)
>. A7M () L *1)
a. )remises Fepartment.
b. *states Fepartment.
c. 1tationary Fepartment.
:. A7M (F L +B)
a. 1"B Fepartment.
b. Agriculture Banking Fepartment.
c. =ead Banks Fepartment.
d. ) L 1B Fepartment.
.. 'M (6)F)
;. 'M (6=F)
B. 'M (6AF)
3. 'M (B6F)
2/. 'M ((+F) >.
CREDIT RISK "ANA=ENENT:
INTROD;CTION:
The maAor business activity of any commercial bank is lending and
the maAor risk in lending operation is credit risks.
'redit risks or default risk involves inability or unwillingness of a
customer or counter party to meet commitment in relation to lending! trading
hedging! and settlement other financial transaction. The credit risk is general made
up transaction risk or default risk and portfolio risk. The portfolio risk in turn
65
comprises intrinsic and concentrated risk. The credit risk of a bank portfolio
depends on both external and internal factors the external factors are the stages of
economy! wide swings in commodity &e#uity prices foreign exchange rates and
interest rates trade restriction economic sanctions and government policies etc. The
internal factors are deficiency policies&administration absence of prudential credit
concentration limits! inade#uately defined lending limits for loan officers&credit
committee@s deficiencies in appraisal of borrowers financial position! excessive
depends on collaterals and inade#uate risk pricing! absence of loan review
mechanism and post sanction surveillance etc.
Another variant of credit risk of counter party risk. The counter apart
risk arises from non,performance of trading partners .The non,performance arise
from counter party@s refusal to perform due to adverse price movement or from
external constraints that were not anticipated by the principal. The counter party
risk is generally viewed as transient financial risk associated with trading rather
than standard credit risk.
Therefore management of credit risk should receive the top
management@s attention and the problems arising thereof should duly the
addressed.
Definition:
8The credit risk is the financial loss resulting from default or movement in
the credits #uality of the issue of loans9.
8'redit risk can be defined as the possibility that a contractual counter
party does not meet obligations stated in the contract! thereby causing the creditors
and financial loss9 'redit risk is defined as the possibility of losses associated
diminution in the credit #uality of borrowers are counterparties in a bank@s
portfolio! losses stem from outright default due to inability unwillingness of
customer or counterparty to meet commitments in the relation to lending! trading!
settlement and other financial transactions. Alternatively losses results from
reduction in portfolio value arising from actual are perceived deterioration in credit
#uality. 'redit risk emanates from a bank@s dealings with and individual corporate
bank! financial institutions or sovereign. 'redit risk may take the following forms$
6G
"n the case of direct lending$ principal&and or interest amount may not be
repaidG"n the case of guarantees or letter of credit$
-unds may not be forth coming from the constituents upon crystalliation of
the liabilityG
"n the case of treasure operation$ The payments series of payment due from
the counterparties under the respective contracts may not be forth coming or
ceasesG
"n the case of securities trading business$ funds & securities settlement may
not be effectedG
"n the case of cross,border exposure$ The availability and free transfer of
foreign currency funds may either cease or restriction may be imposed by
the sovereign.
"n these backdrop its is imperative that banks have a robust credit risk
management system! which is sensitive and responsive to these factors. The
effective management of credit risk is a critical component of
comprehensive risk management and is essential for the long term success of
any banking organiation. 'redit risk management encompasses
identification! measurement! monitoring and control of the credit risk
exposures.
B/i+*in- b+ocks of c!e*it !isk (ana-e(ent:
"n a bank an effective credit risk management framework would comprise
a. )olicy and strategy
b. organiational structure
c. 6perations& systems.
%o+ic) an* st!ate-):
The board of directors of each bank shall be responsible for approving and
periodically reviewing the credit risk strategy and significant credit risk polices.
'+*F"T +"1I )6=6'H$
*very bank should have a credit risk policy document approved by the
board. The document should include risk identification risk measurement!
B4
risk grading&aggregation techni#ues! reporting and risk control&mitigation
techni#ues! documentation! legal issue and management of problem loans.
'redit risks policies should also defined target markets risk acceptance
criteria! credit approval authority! credit origination&maintenance processors
and guidelines for portfolio management.
The credit risk polices approved by the board should be communicated to
branches &controlling offices. All dealing official should clearly understand
the bank@s approach the credit sanction and should be held accountable for
complying established policies and procedures.
1enior management of a bank shall be responsible for implementing the
credit risk policy approved by the board.
C!e*it Risk St!ate-):
*ach bank should develop! with the approval of its board! it@s own credit risk
strategy or plan that establishes the obAectives guiding the bank@s credit 0
granting activities and adopt necessary policies&procedure for conduction
such activities. This strategy should spell out clearly the organiation@scredit
appetite and the acceptable level of risk,reward trade,off for its activities.
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. These would
necessarily translate into the identification of target markets and business
sectors! preferred levels of diversifications and concentration! the coast of
capital in granting credit and coast of bad debts.
The credit risk strategy should provide continuity in approaches also take
into account the cyclical aspects of the economy and resulting shift in the
composition&#uality of the overall credit portfolio. The strategy viable in the
long run and through various credit cycles.1enior management of a bank
shall be responsible for implementing the credit risk strategy approved by
the board.
O!-aniBationa+ St!/ct/!e:
1ound organiational structure is sine #ua non for successful implementation
of an effective credit risk management system. The organiational structure for
credit risk management should have the following basic future$The board directors
should have the overall responsibility for management of risks the board should
B7
decide the risk management policy of the bank and set limits for li#uidity! interest
rate! foreign exchange and e#uity price risks.
The risk management committee will be a board level subcommittee including
'*6 and heads of credit! market operational risk management committees. "t will
device the policy and strategy per integrated risk management containing various
risk exposure of the including the credit risk. -or these purpose! this committee
should effectively coordinate between the credit risk management committee
('+M')! the asset liability management committee and other risk committees of
the bank! if any. "t is imperative that the independence of the committee preserved.
The board should! therefore! ensure that this is not compromised at any coast. "n
the event of the board not accepting any recommendation of this committee system
should be put in place to spell out rational for such an action and should be
properly documented. This document should be made available to the internal and
external auditors for their scrutinyandcomments. The credit risk strategy and
policies adopt by the committee should be effectively communicated throughout
the organiation.
*ach bank may! depending on sie of organiation or loan&investment
book! constitute a high level credit risk management committee ('+M').The
committee should be headed by the chairman&'*6&*F! and should comprise of
heads of credit deportment! treasury! credit risk management deportment
('+MF)and the chief *conomist. The function of the credit risk management
should be as under$
Be responsible for the implementation of the credit risk policy& strategy
approved by the board.
Monitor risk on a bank wide basis and ensure compliance with limits
approved by the board.
+ecommended to the board! for its approval! near policies on standard for
presentation of credit proposals! financial covenants! rating standards and
benchmarks.
Fecide delegation of credit approving powers! prudential limit on large
credit exposures! standard for loan collateral! portfolio management! loan
review mechanism! risk concentration! monitoring and evaluation! pricing of
loans! provisioning regulatory&legal compliance! etc.
B6
Oe!ationsC S)ste(s
Banks should have in place an appropriate credit administration! credit
risk measurement and monitoring processes. The credit administration process
typically involves the following phase$
+elationship management phase ".e. business development
Transaction management phase covers risk assessment! loan pricing!
structuring the facilities! internal approvals! documentation! loan
administration! ongoing monitoring and risk measurement.
)ortfolio management phase entails monitoring of the portfolio at a macro
level and the management of problem loans. 6n the basis of the board
management framework stated above! the banks should have the following
credit risk measurement and monitoring procedure$
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 visits of plant and business site!
and at least #uarterly management reviews of troubled exposure&weak
credits.
Banks should have a system of checks and balance in place extension of
credit vi.$
,1eparation of credit risk management from credit sanction subAect to
approvals at various stages vi credit ratings! risk approvals! credit approvals
grid ! etc.
,An independent audit and risk review function$
The level of authority re#uired to approve credit will increase as amounts
and transaction risks ratings worsen.
*very obligor and facility must be assigned a risk rating.
Mechanism to price facilities depending on the risk grading of the customer!
and to attribute accurately the associated risk weightings to the facilities.
Banks should ensure that there are consistent standards for the origination!
documentation and maintenance for extensions of credit.
Banks should have a consistent approach towards early problem recognition!
the classification of problem exposures! and remedial action.
BB
Banks should have maintained a diversified portfolio a risk assetsG have a
system to conduct regular analysis of the portfolio and to ensure ongoing
control of risk concentrations.
'redit risk limits include! obligor limits and concentration limits by industry
or geography. The boards should have authoried efficient and effective
credit approval processes for operating within the approval limits.
"n 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 credit risk data into the independent risk system.
Banks should have systems and procedures for monitoring financial
performance of customers and for controlling outstanding within limits.
A conservative policy for provisioning in respect of non,performing
advances may be adopted.
1uccessful credit management re#uires experience! Audgment and
commitment to technical development Banks should have a clear! well,
documented scheme of delegation of powers for credit sanction.
Banks must have a management information system (M"1)! which should
enable them to management and measure the credit risk inherent in all on,
and off,balance sheet activities. The M"1 should provide ade#uate
information on the composition of the credit portfolio! including
identification of any concentration of risk. Banks should have price their
loans according to the risk profile of the borrower and the risk associated
with the loans.
OBDECTI&ES OF CREDIT RISK:
To ensure li#uidity.
To maximie profits.
To overcome loan losses.
To ensure proper margin.
To overcome inherent risks.
The c!e*it !isk often ste(s f!o(:
(igh concentration of exposure to one market.
=ack of consideration for credit #uality of counter party.
B8
1ubAective decision making and lack of risk sensitive pricing.
So(e of the (ain *iffic/+ties a!e */e to:
'redit standard for borrowers those are not stringent enough.
"nade#uate credit risk management across portfolios."nattention to
circumstances that could affect a party@s credit standing.
+"1I MAEA7*M*ET 1H1T*M "E BAEI1:
<ith liberaliation in the "ndian financial market over past decade and
growing integration of domestic markets with foreign markets! the risk associated
with the operations of bank have became complex and large! re#uiring strategic
management and are re#uired to determine on their own! interest rates! deposits
and advances !both in domestic and foreign currencies. The interest rates on bank9
investment in government and other securities are also now market related. "ntense
competition for business involving both the assets and liabilities! together with
increasing volatility in the domestic interest rates as well foreign! exchange rates!
brought tremendous pressure on the management on banks to maintain a delicate
balance between spreads! profitability and long term viability imprudent li#uidity
management can expose the bank@s earnings and reputation to great risk. These
pressures re#uired structured and comprehensive measures and not Aust adhoc
response. The management of banks have to base their business decisions on a
dynamic and integrated risk management system and process! driven by corporate
strategy.
"n view of this growing complexity of banks business and the dynamic
operating environment risk management as become very significant! in
The financial sector reserve bank of "ndia has already issued guidelines
To all banks devising and "mplementing risk management systems. +isk at
the apex eel may be visualied has the probability of a Bank@s financial health
being in impaird due to one or more contingent factors.
+isk can be categoried as$
a. Market +isk
b. 'redit +isk
c. 6perating +isk.
BD
"a!ket Risk:
Market risk is the risk that the value of an investment will decrease
due to moves in market factors. The four standard market risk factors are$
*#uity risk or the risk that stock prices will change.
"nterest rate or the risk that interest rates will change.
'urrency risks are the risk that foreign exchange rates will change.
'ommodity risks are the risk that commodity price (i.e. grains! metals! etc.) will
change.
C!e*it Risk:
The potential financial loss resulting from failure of customer to honor fully the
terms of a loan or contract. 'redit risk often stems from$
a. (igh concentration of exposure to one market segment.
b. =ack of consideration for credit #uality of counter party.
c. 1ubAective decision 0 making and lack of risk sensitive pricing.
Oe!ationa+ Risk:
The potential financial loss has result of break down in day to day
operation process. 6perational risk can arise from failure to comply with policies!
laws and regulation from fraud or forgery! or from a break down in the availability
or integrity of services systems or information.
a. (uman +isk$
=osses caused by international or CE international behavior of employees!
which causes interest of the bank to be compromised.
b. Technical +isks$
=osses due to failure in efficiency or technical factors leading to leakage of
information! theft! hacking! piracy! etc.
c. )hysical +isk$
BE
=ose due to damage of property by fire accidents or natural disasters like
earth #uake! floods etc.
d. *xternal +isk$
=osses caused by actions of external parties such as -rauds on the banks are
accounted have external risk.
Credit ris2 m#%#+eme%t3
'redit risk management lies at the hearts of the survival for the vast
maAority of banks. The profile of the customers,8<(6 (A1 B**E =*EF T69
must be transparent. +isk associated with key banking products 08<(AT (A1
B**E =*EF T69 must be understood and managed. The maturity profile of the
loan products,8-6+ (6< =6E7 T(* =6AE (AK* B**E MAF*9 interacts
strongly with li#uidity risk management.
'redit risk can be limited by reducing connected,)arty lending and large
exposure to related parties.
'redit risk or default risk involves inability or unwillingness of a
customer or counter party to meet commitment in relations. The credit risk is
general made up of transaction risk or default risk and portfolio risk of banks
portfolio depends on the both external and internal factors. The *xternal factors are
the stages of economy wide swings in commodity&e#uity prices! foreign exchanges
rates and interest rates! trade restrictions! economic sanctions! government polices
etc. The internal factors are deficiencies policies&administration! absence of
prudential credit connection limits! inade#uately defined lending limits for
financial position! excessive dependence on collaterals and inade#uate risk pricing!
absence of loan review mechanism and post sanction surveillance etc.
Inst!/(ent of c!e*it !isk "ana-e(ent:
'redit risk management encompasses a host of management techni#ues!
which help the banks in mitigating the adverse of credit risk.
C!e*it a!ovin- a/tho!it)
*ach bank is expected to have a carefully formulated scheme
of delegation of powers. The banks should also evolve multi,Tier credit approving
BF
system where an 8approval 7rid9 approves the loan proposal or a committee. The
?7rid@ or committee may approve the credit facilities above a specified limit!
comprising at least 5 or > offers and invariably one officer will have to represent
the credit risk management department! who has no volume and profile targets.
Banks can also consider credit approving committee at various levels i.e. large
branches (where considered necessary)! +egional offices! Monal offices! head
offices! etc. Banks could consider delegating powers for sanction of higher limits
to the ?approval 7rid@ or the committee for better rated&#uality customers. The sprit
of the credit approving system may be that no credit proposals should be approved
or recommended to higher authorities! if maAority members of the 8approval 7rid@
or ?committee@ do not agree on the creditworthiness of the borrower. "n case of
disagreement! the specific view of the dissenting members should be recorded.
The banks should also evolve suitable frame work for reporting and
evaluating the #uality of credit decisions should be evaluated within a reasonable
time! say 5,. months !through a well,defined loan review mechanism.
%!/*entia+ +i(its:
"n order to limit the magnitude of credit risk! prudential limits should be
laid down on various aspects of credit$
1tipulated benchmark current debt e#uity and profitability ratios! debt
service coverage ratio or other ratios! with flexibility for deviations. The
conditions subAect to which deviations are permitted and the authority
therefore should also be clearly spelt out in the loan policy.
1ingle&group borrower limits! which may be lower than the limits prescribed
by reserve bank to provide a filtering mechanism.
1ubstantial exposure limit i.e. sum total of exposure assumed in the respect
of those single borrowers enAoying credit facilities in excess of a threshold
limits! say 2/J or 2:J of capital funds. The substantial exposure limit may
be fixed at .//J or B//J of capital fundsG depending upon the degree
concentration risk the bank is exposed.
Maximum exposure limits to industry! sector etc. should be setup. There
must also be systems in place to evaluate the exposure reasonable intervals
and the limits should be adAusted especially when a particular sector or
industry faces slow down or other sector&industry specific problems. The
B5
exposure limits to sensitive sectors! such as advances against e#uity shares!
real estate! etc.
<hich are subAect to a high degree of asset price volatility and to specific
industries! which are subAect to fre#uent business cycles! May necessary be
restricted.
1imilarly! high risk industries! as perceived by the bank! should also be
placed under lower portfolio limit. Any access exposure should also be fully
backed by ade#uate collaterals or strategic considerations$ and
Bank may consider maturity profile of a bank loan! keeping in view the
market risks inherent in the balance sheet! risk evaluation capability!
li#uidity! etc.
Deth of !evie:s
The loan reviews should focus on$
Approval processG
Accuracy and timeliness of credit ratings assigned by loan
officersG
Adherence to internal policies and procedures! and
applicable laws&regulationG
'ompliance with loan covenantsG
)ost,sanction follow,upG
1ufficiency of loan documentationG
)ortfolio #uality G and
+ecommendations for improving portfolio #uality.
BG
The findings of reviews should be discussed with line
managers and the corrective actions should be elicited foe all
deficiencies. Feficiencies. That remain unresolved should be
reported to top management. The risk management group of the
Basle committee on banking supervision has released a
consultative paper on principles for the management of credit risk.
The paper deals with various aspects relating to credit risk
management.

84
'(A)T*+,"K
T(*6+*T"'A= -+AM*<6+I
87
4.THEORITICAL FRAMEWORK
CEIDET RISK "ANA=E"ENT IN STATE BANK OF
>?DERABAD
Most maAor banking problem have been either explicitly
caused by weakness management. 1everal credit losses in a
banking system usually reflect simultaneous problem in several
areas! such as concentration! failure of due diligence and
inade#uate monitoring.
The so/n* !actices fo! (ana-in- c!e*it !isk inc+/*es:$
2. *stablishing an appropriate credit risk environment.
4. 6perating under a sound credit granting process.
5. Maintaining on appropriate creditadministration!measurement
And monitoring process.
Although specific credit management practice may differ
amongst banks! depending upon the nature and complexity of other
credit activities ! a comprehensive credit risk management program
will address these four areas there practices should also be applied
in conAunction with sound practices related to the assessment of
asset #uality ! the ade#uacy of provisions and reserves. 'redit risk
management is not E)A managementG E)As are a legacy of the
past in the present whereas credit risk management action is the
present to safeguard the future. "n an E)A accounts the credit risk
has crystallied. 'redit risk management is concerned with the
#uality of the credit portfolio be for default. "t in volves
measurement of the unexpected losses! changes in asset values.
The process of credit risk management would encompass the
follow
2. Measurement of risk through credit rating&scoring.
4. Nuantifying the risk through estimating expected loan losses
that bank would experience over a chosen time horion
86
(throughtracking portfolio behaviors over : or more years) and
unexpected loan losses ".e. the amount by which actual losses
exceed the expected loss (through standard deviation of losses or
the difference between expected loan losses and some selected
target credit loss #uality.
5. +isk pricing on scientific basis.
>. 'ontrolling the risk through effective loan review mechanism
and portfolio management.
T>E SCENARIO IN RES%ET OF CREDIT RISK
"ANA=E"ENT IN STATE BANK OF >?DERABAD
The credit risk management policy is articulated in state
bank of (yderabad in the loan policy! which is approved by
the board of directors and reviewed from time to time.
A credit policy committee has been formed at the apex level
to deal with issues relating to credit policy and procedures
and is expected to analye! manage and control credit risk on
bank wide basis once a risk management structure is in
place. The credit policy committee polices on standards
)roposals! financial convents! rating standards! and bench
marks! delegation of large exposures! asset
concentration! standards for loan collaterals! portfolio
management etc.
The loan review mechanism styled credit audit covers audit
of credit sanction of both fund based and non,fund based
limits above a creation cut, off point. "t is expected to serve
as an effective control over the system of sanction of loans
in the bank.
8B
The credit risk assessment system has been introduced in the
banks covering all business segment segments! which helps
to arrive at risk associated with a loan thereby enabling
credit decisions.
TEC>NIA;ES ADO%TED B? STATE BANKK OF
>?DERABAD
Bank is lending institution and lending of money to the borrower is
called credit. <hen the borrower is unable to repay the credit
amount! and then the risk arises termed as credit risk.To overcome
this credit risk! banks adopted certain techni#ues and following
techni#ues are few of them that are adopted by state bank of
(yderabad to reduce credit risk.
48 A/a+it) of the bo!!o:e!Cnet :o!th of the bo!!o:e!:
-or lending money to the borrowers bank evaluated the net worth
of the borrowers in order to get assured that in case if he fails to
repay the loan! then the assets and liabilities of the borrower can be
taken over by the bank. The bank generally prefers that net worth
of the borrower should be e#ual or more then that borrower
amount.
98 %ast !eco!* of the bo!!o:e! an* his fa(i+) (e(be!s:
-or borrowing money from the bank one needs to maintain a clean
past record. That is if at all he had availed loan from any other
financial institution! the bank verifies whether he had paid it back
without delay. "t order to get the loan needs to have good
reputation! professional as well as good personal character.
68 Ratin- acco/nts
1tate bank of (yderabad exclusively adopts this techni#ue. Cnder
this techni#ue the borrower is rated on the basis of the risk
involved. The rating is on the scale of 2,B. "f the borrower is rated
between 2 to >! than the risk involved is less and rate of interest
will also be low. +ating > is known as hurdle rate and if the
borrower rating lies between : to B! then the risk involved is very
high and the interests very high and the interest rate on the amount
will also be very high.
88
>. Sec/!itiBation:
1ecuritiation and reconstruction of financial asset and
enforcement of security interest act! 4///(1A+-*1") had been
passed in the parliament as a boon to banking industry to receiver
their bad debts. Cnder this! the borrower has to keep his asset as a
security with the bank till the repayment of the loan. "f the
borrower is unable to pay back the loan! than banks shall give
him a prior notice of 24/ days and if the borrower still does not
repay the loan amount ! then bank has the right to ac#uire the asset
and auction it! and through that can receive the loan amount.
:.A/*it an* e!io*ic insection:
A bank performs periodic inspection of the account of the
borrower or company to know that status of the business. <ith the
help of this! the bank can keep a record of transactions taking place
in the business. "t can know the position of the borrower whether
he can repay the credit or not with the help of financial statements
and stock statements.
E8t!ainin- to office staff:
the bank regularly trains its staff in the aree of credit risk
management . The training is not confined to in house but the staff
is also sent to various expertise knowledge centers like +B" staff
training centers ! ""M@s!national banking management centers and
others.
F8 C!e*it a!aisa+ ce++:
-or better monitoring of the credit ! the bank has set up
credit appraisal cells . the credit appraisal clls concentrate primarily
on credit allowances and other procedural aspects involved in
lending money . ! leaving the sacop for other branches of the bank
to concentrate on other aspects like marketing ! customer relation
at persent! there three such credit appraisal calls are formed in the
state at (yderabad! secunderabad and vishaka patanam.
8D
BASE# CO""ITTEE ON BANKIN= S;%ER&ISION
>isto!) of base+ co((ittee$ "mplementation of basel,""
guidelinces has become a crucial time bound exercise for banking
industry worldwide including "ndia . to know further details ! it is
also necessary to know the history of besel ! besel 0" etcO besel is
the name of a place in 1witerland! where the head#uarter of bank
of international settlement (B"1) is situated. "n 23;>! the central
banks of the group of ten (7,2/)countries agreed to from a
voluntary committee popularly known as basel committee on
bankig supervision(B'B1).the primary obAective is to improve
banking regulations and supervision system and reducing the
gaps between system in different countries through issuance of
board supervisory standard and guidelinces. The committee is
neither an enforcing body nor a legal authority! so it@s not
mandatory to implement whatever guidelinces the committee
recommends. <hen the 23BB accord popularly known as Basel 0"!
was applied initially only too internationally active banks in the
72/ countries! it #uickly become acknowledged as a benchmark
measure of a banks solvency and was adopted by more than 2>/
countries.
BASE#$I:
"n Duly 2:! 23BBbasel committee on banking
supervision introduced global standards for regulating of capital
ade#uacy of banks. The accord! commonly referred to as BA1*=,"!
aimed at promoting banking stability and recommended a
minimum re#uirement of B percent of capital to risk weighted
assets ('+A+) for banks. This gave rise to introduction of '+A+
in the banking industry worldwide. Though originally the
committee stipulated the ratio should be minimum at B J! in "ndia
+B" stipulated at 3J for the "ndian banks! so as to encourage
"ndian banks to improve their risk management practices&system.
The Basel," accord has since been adopted by over 2>/ countries
worldwide and is a maAor milestone in the history of banking
8E
regulation. "n "ndian Basel," accord was adopted in 2334. The
committee supplemented the 23BB accord@s original focus on credit
risk with re#uirements for exposures to market risk in 233. which
was implemented from 233; by most of the banks.
BASE#$II
1ubse#uently! the committee felt that financial market
scenario had changed drastically along with the business of
banking and risk management. basel," capital ratio stipulated at a
minimum of 2BJ of capital to risk 0 weighted assets ('+A+) was
thought to be an inaccurate measure of a bank@s financial
condition in the 42
st
century. More over in basel,risk weights were
calculated only on credit risk and market risk where as operational
risk was not reckoned. "n 4//5! the best committee on banking
supervision (B'B1) proposed new know regulation to replace the
23BB accord. Basel," " accord popularly also known as 8the
international framework 8was finally issued by the B'B1
committee on Duly 4.! 4//>! which offers a new set of standards
for establishing minimum capital re#uirements for banking
organiations.
The main obAectives of BA1*= "" are to$
Make capital allocation of banks more risk sensitive.
1eparate operational risk from credit risk and calculate
capital changes for each
*ncourage banks to use their internal system for arriving at
levels of regulatory capital.
)roviding incentives to adopt the more advanced risk 0
sensitive approaches of the revised framework.
*ncourage improvements in risk management combining
these minimum capital re#uirements with supervisory
review and market discipline.
8F
The regulatory framework of BA1'= ""isbased on three mutually
reinforcing pillars as detailed below$
%i++a!4: (ini(/( caita+ !e</i!e(ents: $ the basal,""
accord stipulates the minimum capital re#uirement at BJ as
stipulated in bascl,"accord. (owever! the mechanism if
calculated risk 0 weighted assets is significantly different!
proposing changes in measurement for two of the three types
of risk (credit and operational) that contribute toward capital
ade#uacy of banks. 'apital change calculation under market
risk remains unchanged.
%i++a! 9: s/e!viso!) !evie: !ocess:$ the second pillar of
the new accord provides for supervisory of banks capital
ade#uacy and internal risk measurement processes . +eserve
bank of "ndia! the supervisor will be responsible for
evaluating and ensuing that banks have sound internal
processes in place which will enable them to take care of all
existing and potential risks and capital ade#uacy
re#uirements.
%i++a! 6$ (a!ket *isci+ine: $ the basal committee seeks to
enable market participants to assess key information about a
bank@s risk profile and level of capitaliation,thereby
encouraging market discipline through disclosures. )illar 5
is intended to act as a complement to the other two pillars.
The committee has suggested
various methods capital charge under credit! market and
operational risks! which are furnished below.

85
8G
BASCL:II
;i))#r+III
(M#r!et
dici5)i$e)
Credit Ri! M#r!et ri! O5er#ti6$#) ri!
St#$d#rdi<ed
#55r6#c=
IRB A55r6#c=
St#$d#rdi<ed
#55r6#c=
M6de)
A55r6#c=
B#ic i$dic#t6r
St#$d#rdi<ed
A55r6#c=
Ad'#$ced
A55r6#c=
F6($d#ti6
$
A55r6#c=
Ad'#$c
ed
IRB
;i))#r+ I
(Mi$i"("
c#5it#)
re>(irr"e$t)
;i))#r+II
(S(5er'i6r4
re'ie9)
The Basel committee recommends for implementation of the new
framework in member Aurisdiction as of year 0 end 4//.. +B" has already issued
guidelines for adoption of basal 0"" framework i.e. 52./>.4//. by the "ndian banks
and parallel run are being implemented w.e.f./2./>.4//. by them. Accordingly!
banks are computing their '+A+ under prudential guidelines as well as basel
guidelines for comparison as a move towards to basel,"" initially ! to start with
banks in "ndia will implement the standardied approach for credit and market
risk and basel indicator approach for operational risk as shown in the above
diagram before computation of the risk weights. Banks will be allowed to adopt
the advanced approaches under credit! market and operational risk after due
approval of the +B".
>o: *oes base+$II *iffe! f!o( the 4GHH Base+ caita+ acco!*
0Base+$I': The Basel "" framework is more reflective of the
inherent risks in banking and provides strongmen incentives for
improved risk management and improves the capital re#uirement. "t
builds on the 23BB accord@s basic structure for setting capital
re#uirement and improves the capital framework s sensitivity to the
risk that banks actually face. The significant changes on basel,""
over Basel 0" are as under$
2. The 23BB accord sets capital re#uirement based on broad classes
of exposures and does not distinguish the relative degrees of
creditworthiness among individual borrowers . *xposures the same
kind of borrower might pose. <hereas! capital charge calculation
under credit risk differs for various exposures under basel,"".risk
weights are differently assigned to different rated corporate.
4. "nterdiction of external credit assessment institutions (*'A") for
rating the corporate clients for benefit of risk weights.
5. under Basel," there no incentives for credit risk mitigation
techni#ues.
>. the bank has to assess its inherent risk to provide capital according
while moving to the advanced approaches.
D4
:. capital charge for operational risk introduced.
.. basel,"" stresses on improvements in internal processes! the
adoption of more advanced risk measurement techni#ues! and the
increasing use of sophisticated risk management practices.
Wh) a!e banks s/bject to caita+ !e</i!e(ents
The banks are re#uired to maintain at least a minimum level
of capital. The overall capital is that markets financial systems
stable. 'apital as a foundation for a bank@s future growth and as a
cushion against its unexpected losses. 7enerally the expected losses
of a banks are covered with earning and provision where as the
unexpected losses are covered with the capital. Cnexpected losses
beyond the normal range of expectation need have to be met by
capital. Ade#uately capitaliation banks those are well managed are
better able to withstand losses and to provide credit to consumers
and businesses throughout the business cycle! including during
downturns. "f their capital is ade#uate! it helps to promote public
confidence in the banking system.
The technical challenge for both banks and supervisors has to
determent how much capital is necessary to serve as a sufficient
buffer against unexpected losses. "f capital levels are too low! bank
may be unable to absorb high levels of losses. *xcessively low
levels of capital increase the risk of bank failures! of losses.
*xcessively low levels of capital increase the if capital levels are
too high! banks may not be able to make the most efficient use of
their resources! banks may constrain their ability to make credit
available. Basel,"" accord is supposed to half the banks in assign the
minimum levels of the economies capital which the banks should
maintain.
So(e i(o!tant stes fo! the banks to i(+e(ent Base+ II:
D7
". Analying gaps in the existing system and the +e#uirmentsof
Basel 0"" data.
"". Frawing road map for implementation
""". 'reating infrastructure for data management
"K. Building data base
K. Testing the solutions ! infrastructure and procedures
K". )reparing for supervisory certification.
RBI initiatives in Base+ III i(+e(entation$
The +B" announced in it@s annul police statement in my 4//>
that banks in "ndia should examine in depth the option
available under Basel "" and draw arose 0map by end of
Fecember 4//> for migration to basely and review the
progress made at #uarterly intervals.
The reserve bank organied a two 0day seminar in Duly 4//> mainly
sensities the chief executive officer of banks! to the opportunities and
challenges emerging from the Basel "" norms.
All banks were advised in august 4//> to undertake a self,assessment of the
various risk management systems in vogue! with specific reference to the
three maAor risks covered under the basel,"" and initiate necessary remedial
measures to op date the systems to match up the minimum standards
prescribed under the new framework.
+eserve bank issued a guidance note on operational risk management in
Eovember 4//:! which serves as a benchmark for banks to establish a
scientific operational risk management framework.
D6
As per normal practice! and with a view to ensuring migration to Basel "" in
a non 0 disruptive manner! a consultative and participative approach had
been adopted for both designing and implementing Basel "". A steering
committee comprising senior officials from 2> banks (public private and
foreign) had been constituted wherein representation from the "ndian bank@s
association and the +B" was ensured .the steering committee had formed
subgroups to the steering to address specific issues. 6n the basis of
recommendations of the steering committee! draft guidelines to the banks on
implementations of the capital ade#uacy framework have been issued in
-ebruary 4//:.
To commence the parallel run ! banks are to place before to the board report
on bank@s '+A+ maunder both prudential as well as under basel,"" norms
bimonthly till dec 4//. ! commencing Dune 4//. ! and monthly thereafter as
advised by +B" vide its letter no .FB6F. Eo. B).2.:B&42. />.22B&4//:,/.
dated may 5/! 4//..
CREDIT RISK RATIN=
Back-!o/n*
A 'redit,risk +ating -ramework ('+-) is necessary to avoid the
limitations associated with a simplistic and broad classification of loans&exposures
into a good or a bad category. The '+- deploys a number& alphabet& symbol as a
primary summary indicator of risks associated with a credit exposure. 1uch a rating
framework is the basic module for developing a credit risk management system
and all advanced models& approaches are based on this structure. "n spite of the
advancement in risk management techni#ues! '+- is continued to be used to a
great extent. These frameworks have been primarily driven by a need to
standardie and uniformly communicate the Audgment in credit selection
procedures and are not a substitute to the vast lending experience accumulated by
the banks@ professional staff.
%;R%OSE:
The customers risk rating system is a tool! which sets forth a uniform
frame work and common language for evaluating! monitoring and managing the
risk in a credit portfolio. This system enables the lender to asses and tract the risk.
That arises from a credit relationship both at the customer and the portfolio level.
DB
By utiliing the amelioration provided by suitably structuring transactions. By
developing a historical portfolio of rating movement it would be possible to
develop a mechanism to forecast defaults in portfolio at various levels of ratings.

'+"*F"T +"1I +AT"E7 1H1T*M -6=6<*F "E 1B(
1B( risk rating system is a alpha numeric rating system used to indicate
the perceived degree of risk! rated on alpha numeric scale of 1B( 2 to 1B(B.
<here 1B( 2 represents lower level credit risk and highest level of safety&
comfort. And ending with 1B( B represent the highest level of credit risk and
lowest level of safety& comfort. 1B(>! is hurdle rate any borrower who is rated
under 1B( >! there will be a less chance that his loan to sanctioned.
A total of 2// marks will be distributed on the parameters mentioned. Based
on the aggregate marks obtained by the borrower on the given parameters ratings
are assigned from 1B( 2 to 1B( B. +atings are assigned as under based on
aggregate marks arrived$
1B( 2&1B(T= 2PQ3/
1B( 4&1B(T= 4PQ;:
1B( 5&1B(T= 5PQ.:
1B( >&1B(T= >PQ:/
1B( :&1B(T= :PQ>:
1B( .&1B(T= .PQ5:
1B( ;&1B(T= ;PQ4:
1B( B&1B(T= BRQ4:
S"ECSSI SE="ENT
The 1B( grants different types of advances &loans to different types of
customers. Among then one is 1M*&11".And the being personal advances!
commercial and institutional! small business finances! agricultural advances. 1M*
play an important role in the economic development of "ndia. This role can be
D8
gauged from the fact that they contribute more than one,third of the total industrial
output in "ndia and from the single largest earner of the foreign exchange for the
country. "t is misnomer to call them small and medium industries or enterprises
because the sie of this individual industry or service enterprise may be small! but
the contribution made by then is truly big.
1mall and medium enterprise! both in sie and shape! are not uniform
countries is not on comparable parameters. 1till in both developing and developed
counties! they were according to special status! specific dispensations and
particular attention.
Cha!acte!istics of S"E:
1M* are vulnerable to loan dilin#uenencies.
"nformation about 1M*@s is scare.
1M*s are geographically dispersed.
1M*s are transaction intensive.
1M*s are diverse in character and content.
+evival in 1M* units is very difficult because the promoters loss interest
once the unit becomes sick. They show an inclination to dispose of the units
rather than revive it. This is the reason that the banks demand collateral
security.
I(o!tance of S"E:
+epresenting 3:J of "ndia@ industrial enterprises! 1M*s comprise a critical
sector of the "ndia economy on the basis of employment and 7F).
They contribute to growing economy! but are an underserved market the
1M* segment offers an attractive risk & return trade off in future. 1ince the
government and 1B" now consider 1M*s to be a priority sector banks
dominate lending to this segment.
DD
"n recognition of growing 1M* need ! the government has launched a
number of measures to improve the credit flow in this direction! including $

-reedom to change rate of interest on case 0to,case basis depended on the
rating of the customer.
%!ob+e( in S"E +en*in-:
)romoters of 1M*s have limited financial and managerial resources.
The financial statements of typical 1M* in general! do not reflect .its true
financial position.
1M* lending is mostly collateral dependent. The #uality of the collateral
offered by an 1M* may not be high #uality for immediate default.
The ability of promoters submit an accurately filed out loan application is
also limited because of lack of financial data and personal with financial
knowledge
1M*s have low sustenance power. A business recession or delay in credit
sanction would have a greater adverse effect on 1M* unit@s performance
than on a large borrower.
SB> =I&ES S%ECIA# SER&IC&E TO S"ECSSI BORROWE
"t has simplified the proAect appraisal system for speedy sanction to 1M*s
Eo collateral security is re#uired for loans up to +s. -ive lakhs.
"t has also waived collateral re#uirement for 1M* units for loans above +s :
lakhs and up +s 4: lakhs based on good track record.
The working capital limits are sanctioned according to the nayak committee
recommendations! which are 4/J of sales turnover or in line with traditional
method whichever is higher.
-or the benefit of 1M*s to improve to performance under various
parameters and achieve higher rating. The details of '+A are placed as follows.
The '+A model reckons various parameters as mentioned below for arriving the
DE
scoring to rate the borrower in various grades from 1B( 2 &1B(T=2 T6
1B(B&1B(T=B.Tracing or rate of interest to be changed will be linked to the credit
rating.
Bank will not entertain any new proposal whose credit rating is
1B(.>&1B(.T=.>Si.ehurdle rateT or below
The other risks for term loans would be rationalied as under$
-inancial risk (-+) 4:
Business risk (B+) 4:
"ndustry risk
("+)
2/
Management
risk SM+T
>/
Tota+ 4GG
A8FINANCIA# RISK
0a' 48 Static !atios I :o!kin- caita+

DF
Si
no
%a!a(ete!s "a.i(/(
Sco!e
(i) 'ollateral security&financial
standing
.
Tota+
(a!ks
.
0a'98 Static !atios$te!( +oan
(?
)
F(t(re 5r65ect3
0c' Risk (iti-ation: co++ate!a+ sec/!it)Cfinancia+ stan*in-:


D5
SI8 No RATIOS "a.i(/(
sco!e
(i) 'urrent ratio 7
(ii) T6=&E*< 7
(iii) )AT&E*T sales (J) 4G
(iv) )BF"T&"ET 7
(v) +eturn on capital employed (+6'*) (J) 7
(vi) "nventory&net sales Ureceivables&gross sales (days) 7
(vii) Trends in performance 6
Tota+ (a!ks 6H
Si8 no %a!a(ete!s "a.i(/(
sco!e
(i) )roAected profitability 5
(ii) Eon,achievement of proAected
profitabilitySscore(,)5T
,5
Tota+ (a!ks 5
Ratios "a.i(/(
sco!e
(i) )roAect debt&e#uity :
(ii) T6=&TE< :
(iii) 7ross average F1'+ of the proAect :
(iv) 7ross average F1'+ of all loans :
(v) Terms of repayment :
Tota+ (a!ks
B8 B;SINESS RISK$


C8IND;STR? RISK
DG
1i no %a!a(ete!s "a.i(/(
sco!e
(i) Technology >
(ii) 'apacity utiliation vs. breakeven point 4
(iii) 'ompliance of environment regulation 4
(iv) Cser&product profile 4
(v) 'onsistent in #uality >
(vi) Fistribution net work 4
(vii) 'onsistency of cash flow >
Tota+ (a!ch 9G
Si 8no %a!a(ete!s "a.i(/(
sco!e
(i) 'ompetition 4
(ii) 'yclicality&industry out look 4
(iii) +egulatory risk 4
(iv) 'ontemporary issues like <T6.etc 4
Tota+ (a!ks H

8
D8"ANA=E"ENT RISK

E4
Si 8no %a!a(ete!s "a.i(/(
sco!e
(") "ntegrity$ sole proprietary firm&partnership
firm& private ltd. 'ompanies (or) "ntegrity (for
corporate)$ corporate governance.
5
("") Track record 5
(""") Managerial competence&commitment 5
("K) *xpertise 4
(K) 1tructureL systems 4
(K") *xperience in the industry 4
(K"") 'redibility$ ability to meet sales proAections 4
(K""") 'redibility$ ability to meet profit ()AT)
proAections
4
(ix) )ayment record 4
01' 1trategic initiatives 4
01I' #en-th of !e+ationshi :ith the bank 4
Tota+ (a!ks 97
1B(>1B(T=> rating is as hurdle rate the bank.
A total of 2// marks are distributed on the parameters mentioned above (A
to *) based on the aggregate marks obtained by the borrower on the above
parameters! rating A+* A11"7E*F "E various grades from 1B(2&1B(T=2to
1B(B&1B(T=B. +ating is assigned as under on the aggregate marks arrived$
1B(2V1B(T=2PQ3/
1B(4V1B(T=4PQ;:
1B(5V1B(T=5PQ.:
1B(>V1B(T=>PQ:/
1B(:V1B(T=:PQ>:
1B(.V1B(T=.PQ5>
E7
/!ose
To (eet e.en*it/!e s/ch as:
+epairs to plant machinery
)ayments to labors
Tax )ayments
Additional purchase of raw material for execution of bulk order
e+i-ibi+it)
7ood rating
E.istin- c/sto(e!s$ standard asset as on 52
st
march for the
preceding two years
Ne: c/sto(e!s$ at the discretion of the sanctioning authority
A(o/nt of finance
4/J of aggregate fund 0 based working capital limits or a
maximum of +s. 4: lakhs! whichever is les
Inte!est !ate Based on aggregate finance






E6
'(A)T*+,K
FATA AEA=H1"1 L "ET*+)+*TAT"6E
5. DATA ANALYSIS & INTERPRETATION$
ELECTION O- /ATE3
1ample sie$ :/ account.
Account are analyed by segmenting in to various sector detailed under.
-ood processing
Man made textiles.
EB
=eather and =eather products.
)aper and paper products
+ubber! plastic L their products.
ANA#?SIS:

The limit segmentation can be graphical represented as followOMaAority of the
customers are enAoying credit limit between 2,: lakhs.
E8
RAN=E NO OF C;STO"ERS %ERICEA=E
/2,/:, =AI(1 4: :/
.,2/, =AI(1 2/ 4:
2/,2:, =AI(1 /; 2>
2.,4/, =AI(1 /2 /4
42,4:, =AI(1 /4 />
Above ,4:, =AI(1 /: 2/
ED

SECTOR SE="ENTAION 0in no8 of acco/nts'
EE
SECTOR %ERCENTA=E
-ood processing >/
Man made textiles 2:
=eather L leather products 4/
)aper L paper products 2/
+ubber! plastic!L their
products
2:

RATIN= "ATRI1
The above show matrix show how different sectors got different rating based on
their scores. i.e. from 1B(2 to 1B(T= B.The pricing or rate of interest to be
charged will be linked to the credit rating.Bank will not entertain any new proposal
whose credit rating is 1B(.>& 1B(.T=.> Si.e. hurdle rateT
EF
SECTORS
1B(2 1B(4 1B(5 1B(> 1B(: 1B(. 1B(; 1B(B
Foo*
!ocessin-
24 2/ 5
$$$$$$ $$$$$$$ $$$$$$$ $$$$$$ $$$$$$
"an (a*e
te.ti+es
: >
,,,,,,,,,
2
,,,,,,,, $$$$$$$$$ $$$$$$$ $$$$$$$
#eathe! @
+eathe!
!o*/cts
:
,,,,,,, ,,,,,,,, ,,,,,,,
4
$$$$$$$$ $$$$$$ $$$$$$$$
%ae! @
ae!
!o*/cts
2 :
,,,,,,,, $$$$$$ $$$$$$$$ $$$$$$$$ $$$$$$$ $$$$$$$
R/bbe!3
+astic3@
thei! !o*/cts
4
,,,,,, ,,,,,,,, $$$$$$ $$$$$$$ $$$$$$$$$ $$$$$$$ $$$$$$
A total of 2// marks are distributed on the parameters! based on the aggregate
marks obtained by the borrowers. +atings are assigned in various grades from 1B(
2 to1B(.B.
1B(2&1B(T=2PQ3/
1B(4&1B(T=4PQ;:
1B(5&1B(T=5PQ.:
1B(>&1B(T=>PQ:/
1B(:&1B(T=:PQ>:
1B(.&1B(T=.PQ5:
1B(;&1B(T=;PQ4:
1B(B&1B(T=BR4:
"n the above matrix the sectors which are rated under 1B( 2! show that the
sectors have excellent track record .i.e. !the customer getting rated as 1B( 2PQ3/.
The rating for the customer will be based on the four parameters.
-inancial risk rating
Business risk rating
"ndustry risk rating
Management risk rating
Reasons fo! *iffe!ent t)es of !atin-
48Financia+ !isk !atin-: the financial risk rating will based on the
Fo++o:in- Ratios8
'C++*ET +AT"6
E5
T6=&TE<.
)BF"T&"ET+*1T.
)AT&E*T 1A=*1 (J)
+*TC+E "E 'A)"TA= *M)=6H*F (:).

9 8 B/siness !isk !atin-:
Based on the Technology.
)roduct profile.
'onsistency in #uality.
Eet worth.
'onsistency of cash flow
68 In*/st!) !isk !atin-:

Based on the competition L market risk.
"ndustry out look
+egulatory labors and environments risk
Technology and #uality control.
Cser profile.
J8"ana-e(ent !isk !atin-
"ntegrity
*xpertise! competence & commitment
EG
Track record
1tructure and system
'apital market perception


F4
F7
%ARTIC;#ARS 9GG7$GE 9GGE$GF 9GGF$GH 9GGH$G5
)aid up capital
L reserves 2:;5.;;
2;.:..: 422>.4/ 4:>/.B>
'apital
Ade#uacy ratio
2>.43 22.;> 24./B 24.:2
Feposits 4:52/.;4 4B343./:4 5>/4>../ >2:/4.;/
Advances 22B2..B 2::33.;> 4/B.5./4 4B22B
Agriculture
Advances
2.:3.3: 4225.>4 4B;3.5: 5B;4.B:
-inances to ssi 2/3..;. 245;.:. 2>>:.:; 2.:3
1mall business .3>..; ;:2./B B3B.>B 33:
*xport finanace 22:;.:3 2223.2/ 24;:.22 2:.4
"nvestments 2>:54./: 2>::3.53 2>4:../2 25323.2.
no of offices 2/:4 2/:3 2/:> 2/;2
Eo. of employes 254;B 252/; 252/B 24BB/
F6
Bala!" #$""%
FB
F8
FD
FE
'(A)T*+,K"
U,,AR! O- -IN/ING

FF
@.FINDING AND CONCLUSION$
The guest challenge the banks may face is the data challenge in the
form of collection! cleaning up and cross,referencing exiting data so that
comparisons can be made across asset classes. This can be a tedious task! as banks
had never expected that such a scenario will arise in future and the little attention
was paid in the past to how this data collected! stored or managed. "t is time for the
bank to first formally define what their Basel date re#uirement in the existing
systems. The systems should be so developed to capture past& historical data as
well as current data in a real,time basis. This will enable the banks in calculating
the current credit risk exposures on a real,time basis. 6therwise adoption of
advanced approaches will be difficult.
Banks will need to plan and provision for changes related to
infrastructure (hardware! software! processing re#uirements! etc) and people
(training! business process change! etc) also suitable for successful implementation
of the Basel,"" accord.
A maAor compliance initiative! such as Basel "" compliance! re#uires a
centralied! dedicated team! and significant investment in infrastructure and human
capital. Because the impact of such an exercise would be felt across the bank! it
should ensure that the initiative is cross,woven across the bank to drive the desired
benefit. 6n an ongoing basis! new development in risk management should be
reviewed and appropriate action has to be taken to meet exceptions of the bank@s
management and the supervisor@s directive. The end of such an initiative is not in
the achievement of immediate goals (such as Basel compliance) but in the constant
refinement of processes in the light of changing needs .
"t is expected that initially capital re#uirement under standardied
approaches will be high and it will reduce on adoption of advanced after
development of suitable mechanism and approval of the regulator.
F5
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U,,AR! O- UGGETION

FG


&. S'(("#%)*#:
The following are some of the suggestion for improvement of '++ ratting model
followed in1B($
Eew customer with excellent track record gets lower rating.
The credit sanction to be done in a short span. Because a delay in
credit sanction would have a greater adverse effect on a 1M*
unit@s performance and interest income loss to banks.
1tatus on payment of statutory obligations vi. "ncome Tax! 1ales
Tax! etc may be added as one of the parameter in arriving at a
rating.
)arameter on demand of product in the market dealt may be added
on arriving a rating.
54


'(A)T*+,K"""
B"B="67+A)(H


57
+. BIBLIOGRAPHY:
-INANCIAL ,ANAGE,ENT 9 I$,$PAN/E!
-INANCIAL ,ANAGE,ENT 9 PRAANNA
CHAN/RA
-INANCIAL ,ANAGE,ENT 9 ;HAN H
JAIN
A/VANCE/ ,ANAGE,ENT 9 R$;
HAR,A
ANNUAL REPORT O- .H
999.SB*.COM
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5B
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