A STUDY ON

CREDIT RISK MANAGEMENTAT

SYNDICATE BANK

IN PARTIAL FULFILLMENT OF THE REQUIREMENT FOR THE AWARD

OF THE DEGREE

MASTER OF BUSINESS ADMINISTRATION

FROM

OSMANIA UNIVERSITY

SUBMITTED BY

DVR POST GRADUATE INSTITUTE OF

MANAGEMENT STUDIES

KANDI, SANGAREDDY. 2009-2011

1
 ACKNOWLEDGEMENT

I would like to express my gratitude to our college Principal

Mr.D.SRINIVASULU or having given me the opportunity to work on
this project. It is indeed a great pleasure and a matter of immense
satisfaction for me to express my deep sense of gratitude and
Indebtness to Ms.Subbalakshmi (Head of Department of Business
Administration) and my college lecturers for the continuous support they
have given me.

This project would not have been possible without efforts and guidance
of a KRISHNA MURTHY of SYNDICATE BANK HYDERABAD. I take
opportunity to time all those magnanimous persons who rendered their
support to this project.

I would like to thank my project external guide, Ms.SUBBALAKSHMI for

his expert guidance and continuous guidance which lead to successful
completion of this project.

I am thankful to my friends for sharing technical expertise with me in

making this project successful.

2
 DECLARATION

I hereby declare that this project titled CREDIT & RISK MANAGEMENT

with reference to SYNDICATE BANK submitted here is genuine and

original work of mine.

This project report is submitted in partial fulfillment of the requirement

for the award of MASTER OF BUSINESS ADMINISTRATION degree

from D V R COLLEGE OF POST GRADUATE INSTITUTE OF

MANAGEMENT STUDIES, KANDI, HYDERABAD, for the year 2009-

2009.

I also declare that this is result of my own efforts and has not been
submitted to any other university for any other degree of diploma.

3
 CONTENTS PAGE
NO.

CHAPTER I PROFILE OF BANKING INDUSTRY 5-7

CHAPTER II INTRODUCTION 8-13

DESIGN OF STUDY

1. OBJECTIVES
2. NEED & IMPORTANCE
3. METHODOLOGY

4. SCOPE

5. LIMITATIONS

CHAPTER III ORGANISATION PROFILE 14-36

PROFILE OF KOTAK MAHINDRA BANK

TAXOMONY OF PERSONAL FINANCE

CHAPTER IV INTRODUCTION OF CREDIT & RISK 37-56

1. IMPORTANCE OF CREDIT & RISK

2. LEGAL ASPECTS OF RISK MANAGEMENT

CHAPTER V FINDINGS AND ANALYSIS 57-77

CHAPTER VI CONCLUSSION AND SUGGESTIONS 78-79

ANNEXURES 80-85

BIBLIOGRAPHY 85-89

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 INTRODUCTION
INTRODUCTION

Finance may be defined as the “provision of money at the time it is

required”. Finance refers to the management of flows of money through
an organization. It concerns with application of skills in the manipulation,
use and control of money.

Financial management refers to that part of the management activity

which is concerned with the planning and controlling of firm’s financial
resources. It deals with finding out various sources for raising funds for
the firm. The sources must be suitable and economical for the needs of
the business. The most appropriate use of such funds also forms a part
of financial management.

The main objectives of finance function are:-

1 Acquiring sufficient funds.

2 Optimum utilization of funds.
3 Increasing profitability.
4 Maximizing shareholders wealth.

In the present business context, a finance manager is expected to do

financial forecasting and planning .Financial manager has to plan the
funds needed in the future. How these funds will be acquired and applied
is an important function of a finance manager. The sources of supply of
5
funds are shares, debentures, financial institutions, commercial banks,
etc. The pros and cons of various sources should be analyzed before
making a final decision.
The cost of acquiring funds and the returns should be
compared. Capital budgeting technique is used for this purpose. The
objective of maximizing profits will be achieved only when funds are
efficiently used and they do not remain idle at any time. A number of
mergers and consolidations take place in present competitive Industrial
world. A finance manager is supposed to assist management in making
valuation etc. For this purpose, he should understand various methods
of valuing shares and others assets so that correct values are arrived.

Cash is the best source for maintaining liquidity. It is required to

purchase raw material, pay workers, meet other expenses, etc. A
finance manager is required to determine the need for liquid assets and
then arrange liquid assets in such a way that there is no scarcity of
funds.

DESIGN OF STUDY

Kotak Mahindra Bank personal loans are the largest business in the
bank. The personal loan business is doubling every year. It is the most
profitable business of the bank. Personal loans contribute substantially
to the overall base line of the bank.
Credit department is the back bone of personal loan business. Main
function of the credit is to assess the credit worthiness of an applicant
and lending him appropriate amount based on such assessment and
subject to the terms, conditions and limitations of the policies.

6
The term credit management has got importance from the time when
there increased the pressure of competition and force of custom
persuades to sell on credit. Credit is granted to facilitate the sales. Credit
is appealing to those customers who cannot borrow from other sources
due to many reasons. The firm’s investment in accounts receivable
depends on how much it sells on credit and how long it takes to collect
receivables. Accounts receivables constitute one of most important asset
category for firm which makes the firm to manage its credit well.
The term credit management can be analyzed from various aspects like:
Terms of payment, Credit policy variables, Credit evaluation, Credit
granting decision.
Risk management is a process of managing the collection of managing
the collection of liabilities with an objective of increasing the cash flows
with minimum costs. It involves collecting in right time, right amount, in
right terms.
This process starts from identifying the amount of liabilities and to
make the collection successful. This does not end with mere collection.
Besides collection, the difficulties and weak areas should also be
ascertained, which leads to development of an effective system for credit
extension or sales and collection.

OBJECTIVES OF THE STUDY:

The main objectives of the study are:

1 To study the effectiveness of credit process.
2 To study the risk process followed in Syndicate bank.
3 To know and analyze the procedure of loan disbursement and its
7
 evaluation criteria.
4 To study and analyze the factors contributing to default rate and
their interrelations.
5 To suggest suitable strategies for improving credit and risk
management.

NEED & IMPORTANCE OF THE STUDY:

In today’s market scenario, one of the most critical areas to focus on is

to protect the bank from bankruptcy. In such conditions Credit and Risk
Department plays a key role in growth of banks. Any delay in realizing
the receivables would adversely affect the working capital, which in turn
effects the overall financial management of a firm. No firm can be
successful if it’s over dues are not collected, monitored and managed
carefully in time. Thus Risk management is important in sustaining the
bank and its growth.

PERIOD OF STUDY:

The data obtained from the bank (syndicate bank) for the purpose of
credit period and risk time from the customers. The information of the
customers from different anglesto access the credit and risk
management for a period of THREE years. i.e. from 2007-2010.
Credit period refers to the length of the time are allowed to pay the
amount
For their purchase which is generally varied from 15 to 60 days, or 15 to
90 days.

8
RESEARCH METHODOLOGY:

To fulfill the objectives of the study both primary and secondary data are
used. The primary data was collected through interviewing all the
executives and officials of the KMBL Somajiguda Hyderabad.

The secondary data was collected from published records, website and
reports of the KMBL. Mainly the data relating to credit procedures
followed by the bank and risk management was obtained through
manager from bank database .The data for this purpose was obtained
from bank for a period of 3 years that is from. Based on the availability
of the data, the analysis was made from different angles to assess the
credit and risk management of KMBL, Somajiguda Hyderabad.

SCOPE OF THE STUDY:

1 The study intended to cover the degree and extent of default

by the customers of KMBL. In that direction the following has
been done.
2 The genesis of the company, its organs. And the range of
activities have been studied and documented such study, it
was thought, would uncover the weakness brought down as
legacy from its line of entrepreneurs.
3 The process involved in loan disbursement has been studied to
identify the weak area, follies committed in disbursement or in
9
 the design of disbursement process. The seeds of default are
built in; hence the study of loan disbursement process has
been attempted.
4 The profile of the defaulters including location, stage of
default, gender, age etc. has been studied and documented.
The components of the profile have been presumed to be
linked to the default.
5 The risk process itself has the potential for some loans to be
non recoverable hence to identify the probable causes, the risk
process has been studied and documented.
6 Based on the profile and the data of defaulted loans, an
analysis has been made to establish the links between default
and other variables like location of loan, amount of loan taken,
gender, profession etc.

LIMITATIONS OF THE STUDY:

1 The study is limited to Hyderabad city only.
2 The study has been done according to bank point of view.
3 The study has been done without meeting the defaulters due
to constraints of time.

10
 COMPANY PROFILE
THE PROFILE OF BANKING INDUSTRY

Financial institutions today face enormous challenges as they

defend their place in market; ordinarily they are simple business
oriented or commercial concerns. They need to discover innovative ways
to take on these challenges by making critical strategic insights and
emerging industry best practices, which strengthen approaches to
fluctuating interest rates and uncertain investment yields to produce
increased profitability and reduce earning volatility.

A study of financial institutions in India can appropriately begin

with a brief discussion of the regulatory framework of the country carried
out by RESERVE BANK OF INDIA.

Financial regulation is necessary to generate, maintain and

promote confidence, trust and faith of people for its smooth functioning.
Financial markets involve intermediaries or agencies, where RBI ensures
investors protection, discloser to trustees, easy access, timely and
adequate information to interested parties.

RESERVE BANK OF INDIA as the central bank of the country is

the center of the Indian financial and monitory system. It is the oldest
among the central banks in the developing countries; it started
functioning from April 1st 1935.

11
 In framing various policies all the banks require to maintain close
and continuous collaboration with RBI and Government.

The preamble of RBI states that “Reserve bank is expedient to

regulate the issue of bank notes and keeping of reserves with a view to
securing monetary stability in India and generally to operate the
currency and credit system of the country to its advantage”.

To elaborate the above statement, functions of RBI helps us to

understand the clear workings of financial system in INDIA.
Role and Functions of RBI:

 Note issuing authority

 Government banker

 Bankers bank

 Exchange control authority

 Security authority

Above functions of RBI are discussed as under.

NOTE ISSUING AUTHORITY:

The issue of currency note is one of the basic functions of RBI; the
responsibility of the bank is not only to put currency into or withdraw it
from circulation but also to exchange notes and coins of one
denomination into those of other denomination as demanded by public.
The bank issues notes against the security of gold coins and gold bullion,
12
foreign security, rupee coins Government of India security, and bills of
exchange and promissory notes as are eligible for purchase by the bank.
At present bank issues notes in denominations of Rs. 10, 20, 50, 100,
500, and 1000.

GOVERNMENT BANKER:

The RBI is the banker to the Central and State Governments. It

provides all the banking services such as accepting of deposits,
withdrawal of funds by cheques, making payment as well as receipts and
collection of payments on behalf of the Governments. As a banker to the
Government, the bank can make “ways and means advances” to both
Central and State Governments. Type of advances provided are normal
or clean advances, secured advances and special advances.

BANKERS BANK:

RBI called as Bankers Bank because of its special relationship with

commercial and co-operative banks and the major part of its business is
with these kinds of banks. It controls the volume of reserves and
determines the deposits or credits creating ability of banks. RBI is also
said to be “bank of last resort or the lender of last resort”.

EXCHANGE CONTROL AUTHORITY:

RBI has to maintain the stability of the external value of the rupee.
As far as external sector is concerned, the task of RBI has (a) administer
foreign exchange control, (b) chose exchange rate system and fix the
rate of rupee, (c) manage exchange reserves, (d) to interact with

13
monetary authorities such as IMF, World Bank and Asian Development
Banks. The RBI administers the exchange controls in terms of FOREIGN
EXCHANGE MANAGEMENT ACT (FEMA), 1973.
SECURING AUTHORITY:

The RBI has vast powers to supervise and control commercial and
co-operative banks with a view to developing adequate and sound
banking system in the country. It has following authorities (a) issue
license to new banks (b) issue license to setting up bank branches (c) to
prescribe minimum requirement for paid up capital and reserves,
transfer to reserve funds, maintain cash reserves and control liquid
assets (d) inspects working of banks in India as well as in abroad, checks
branch expansion, mobilization of deposits investment, credit portfolio
management, credit upraise system, profit planning etc (e) to conduct
investigations into complaints, irregularities and frauds in respect of
banks (f) to control methods of operations, appointments,
reappointments, terminations of Chairmen and Chief Executive Officers
of any private sector banks (g) to approve or force amalgamation.

14
 INDIAN BANKS PROFILE:

RESERVE BANK OF INDIA (RBI)

NATIONAL BANK OF AGRICULTURAL AND RURAL DEVELOPMENT

(NABARD)

STATE STATE URBAN

CO-OPERATIVE LAND CO-
OPERATIVE
BANKS (SCBs) DEVELOPMENT BANKS
(UCBs)

CENTRAL
CO-OPERATIVE
BANKS (CCBs)

PRIMARY
AGRICULTURAL
CREDIT
SOCIETIES (PACSs)

15
 1.1 INDIAN BANK PROFILE

 Total state co-operative banks (SCBs) till date are 28 banks.

 Total primary agricultural credit societies under various CCBs are

2950.

TECHNOLOGY IN BANKING INDUSTRY:

 The advent of the internet and the popularity of personal

computers presented both an opportunity and a challenge for the
banking industry; hence online banking provides numerous
benefits to businesses and end-users.

 In order to bypass the time-consuming, paper-based aspects of

traditional banking, online banking helps in using powerful
computer networks to automate a number of daily transactions
and to manage finance more quickly and efficiently.

 With the comfort of a mouse click online banking provides the

comfort of managing the finance by pay bills, transfer funds, file
Government remittances and have investment and loan facilities.

 Online banking sites generally execute and confirm transactions

quicker than ATM, providing convenience of 24 hours a day and
seven days week accessibility.

 E-Banking has revolutionized the whole concept of Banking; it has

become a necessary weapon changing the banking industry
worldwide.
16
  The customer should be taken into confidence as far as security is
concerned; banks should extensively propagate the detailed
security plan adopted to arrest frauds through E-Banking.

 Banks have come to realize survival in the new E-Economy

depends on delivering their banking services on the internet while
continuing to support their traditional infrastructure providing good
security and customer satisfaction will survive.

 Standard for secure electronic transactions (SET) on internet helps

in security measures, digital authentication and verification of on-
line identity in all E-Banking transactions, which increase consumer
confidence.

LATEST AMMENDMENTS OF RBI.

 The RBI has cautioned against potential risk in the short and
medium term on three key factors (1) Growth rates flattening out
in some key industries, (2) higher oil prices and (3) continuing
infrastructure constraints.

 The RBI’s latest industrial outlook survey shows the current

financial health of corporate India increased by 2.6 %.

 Demand for bank credit has been largely driven by agricultural,

industry and housing sector. Growth rate increased by 31.5 %
compared to 24.9 % the preceding year.

17
  The Reserve Bank Of India has signaled its policy of “inclusion” i.e.,
account with nil or minimum balance requirement as well as
charges that would make such accounts accessible to vast sections
of the population.

 The RBI has granted general permission to banks to issue debit

cards in tie up with
non-bank entities.

 The quality of assets of Indian banks is now increasingly

converging towards international benchmarks. The report on
trends of banks in India by RBI.

 Capital Adequacy Ratio (CAR) of banks, the most accepted

measure of the soundness has improved to 12.5 % which are
higher, the better.
 The RBI issued guidelines on credit cards operations of banks to
issue and ensures that there is on delay in dispatching bills.
Unsolicited loans or other credit facilities should not be offered.

 In the major development for the banking sector, the Government

recently threw open the Asset Reconstruction companies (ARCs) to
Foreign Direct Investment (FDI), permitting 49 % in the equity
capital of ARCs.

NATIONAL BANK FOR AGRICULTURAL AND RURAL DEVELOPMENT

(NABARD)

18
 NABARD was established on 12th July 1982 as a central or apex
institution for financing agricultural and rural sector.
 The Government and the RBI subscribe NABARD paid-up capital
of rupees 100 crores equally.
 NABARD is a co-coordinating agency, in respect of agricultural
and rural development activities or policies of the Central and
State Government, Planning Commission and other Institutions.
 NABARD has set up Co-operative Development Fund (CDF) to
improve management systems and skills in co-operative banks.
 NABARD supports rural credit system by way of refinancing for
short-term, production, marketing, medium-term and short-term
loans relating to State Co-operative Banks (SCBs) and Regional
Rural Banks (RRBs)
 NABARD oversees the entire rural credit system and to that
extent, it has taken over a part of the job of the RBI.
 NABARD provides term loans and investment credits, which are
technically feasible and financially viable on farm and non-farm
sectors through SCBs and RRBs.
 NABARD undertakes inspection of co-operative Banks and RRBs
without prejudice to the powers of the RBI.
 NABARD provides loans to State Government to enable them to
contribute them to the share capital of SCBs and RRBs.
 NABARD has established Research and Development (R&D) fund
to provide insights into the problems of agriculture and rural
development through in-depth studies and applied research with
innovative experiments.

19
BANK PROFILE:

ANDHRA PRADESH STATE CO-OPERATIVE BANK

Andhra Pradesh state co-operative bank (SYNDICATE) offers all types

of banking service through its 26 banking offices including Head Office, 22

Branches, 2 Extension counters situated in the twin cities and having branches

at Tirupathi and Vijayawada.

The Bank actively guides the District Co-operative Bank (DCCBs) to withstand

the stiff competition encountered by them; greater emphasis was laid on the

financial discipline at all levels in the cooperative credit structure. The Bank has

continued its efforts to provide increased financial assistance to the farming

community through the DCCBs and PACs by bridging the gap between the

assistance from NABARD and the credit requirements at the grass root level

with its own resources.

The Government of Andhra basing on the recommendations of the Expert

Committee restructured the PACs bringing down their number from 4464 to

2746 in the State ensuring on PACs at Mandal level.

Elections are conducted to all three-tiers of the PACs after restructuring.

Democratically elected managements are in position at the PACs, DCCBs and

SYNDICATE levels.

The Government of Andhra Pradesh has accepted and decided to implement

the revival package offered by the Government of India and accordingly

20
entered into a memorandum of understanding with the Government of India

and NABARD.

21
 BOARD OF MANAGEMENT /COMMITTEE OF

ANDHRA PRADESH STATE CO-OPERATIVE BANK

2.1 TABLE

S. No. Names Representation

1. G.Sudheer, I.A.S Chairman

Principal Secretary to
Govt

(coop. marketing)Dept.

2. Dr.C.Uma Malleshwar Member

Rao,I.A.S

CC & RCS

3. R.Ramakrishnaiah, Member
I.A.S

CC & RCS

4. P.Ramana Reddy Member

CC & RCS

5. T.S.Appa Rao,I.A.S Member

Principal secretary to
Govt.

(Finance & R &D) Dept.

22
6. J.R.Sarangal Member

C.G.M. NABARD

7. V.Krishna Rao. Member

C.G.M.NABARD

8. M.Veerabhadraiah, Member
I.A.S

Managing Director
SYNDICATE

23
PERFORMANCE HIGHLIGHTS DURING2008-2009:

• State level best performance award for kharif 2007 lendings instituted by
government of A.P., was awarded to the bank.

• Own funds of the bank increased from Rs.1315.90 crores to Rs.1387.48

crores.

• Borrowings of the bank increased from Rs.3123.52 crores to Rs. 4074.73

crores.

• Disbursements under investment credit impressively increased from

Rs.189.93 crores to Rs.367.87 crores during the year under report
registering an increase by 51.63 %.

• The net profit during2008-2009 is Rs.5.70 crores compared to Rs.4.84

crores of the previous year.

• Investments portfolio of SYNDICATE has recorded an increase of

23.03% during the year and stood at Rs. 785.82 crores.

• The deposits of SYNDICATE as on 31.3.2006 stood at Rs.1697.15

crores.

• The deposits of DCCBs stood at Rs. 2417.30 crores as on 31.3.2006,

registering decrease due to the prevailing adverse environment for
cooperative banks.

24
• The bank has been providing financial assistance to DCCBs and PACS
for strengthening their infrastructural facilities. During the year 2007-06,
SYNDICATE released an amount of Rs.4.14 lakhs to three DCCBs out of
its development fund.

• Disbursements under short term crop loans increased from Rs. 2317.15
crores to Rs. 2981.73 crores during the year under report registering an
increase by 28.68%.

• 290 farmers clubs (VVV clubs) were established upto as on

31.3.2006.These clubs are functioning as dissemination centers for credit
and related activities.

• The SYNDICATE training institute has conducted 578 programs,

imparting training to 18,106 participants under NABARD assistance
scheme from the year 2004-2007to2008-2009.

• Under retail banking, gold loans increased to Rs. 69.12 crores during the
year
2007-06 as compared to Rs. 48.36 crores in previous year.

• Loans amounting to Rs. 802.29 crores were rescheduled covering Rs.

7.29 crores liquidity support received from NABARD.

• 32,55,651 farmer member of PACS were covered under the cooperative

kisan credit card scheme upto 31.3.2006.

25
• The financial assistance by the bank for working capital limits to
cooperative sugar factories increased to Rs. 287.00 crores.

26
VISION OF THE SYNDICATE

• To prepare development action plan at the apex level, DCCB level and at
PACS level and organize implementation.

• To cover all agricultural member of PACS under cooperative kisan credit

card scheme to achieve 100 % coverage and also to provide timely and
adequate credit support both short term and long term investments.

• To improve the lending to the small and marginal farmers as also SC and
ST agriculturists.

• To provide more advances through Rythu Mirta Groups (RMGs)

• To formulate and adopt appropriate strategy for improved loan

recoveries and to reduce Non Performing Asstes (NPAs).

• To ensure writing books of accounts and also ensure regular audit at all
levels.

• To ensure uniform accounts, Ledger maintenance at PACs level and

DCCB level.

• To provide ATM services at various important places in twin cities.

• To provide anywhere banking services and Teller banking services.

• To convert extension counters into full ledged branches.

27
• To raise deposits upto Rs. 2040 crores.

• To computerize the operations of DCCBs and their branches.

• To provide basic training and also periodical refresher courses to staff

members at all level.

• To reduce cost of management.

28
Introduction of credit and risk Management

Introduction of credit and risk management

CREDIT MANAGEMENT

The term credit management has got importance from the time when
there increased the pressure of competition and force of custom
persuades to sell on credit. Credit is granted to facilitate the sales. Credit
is appealing to those customers who cannot borrow from other sources
due to many reasons. The firm’s investment in accounts receivable
depends on how much it sells on credit and how long it takes to collect
receivables. Accounts receivables constitute one of most important asset
category for firm which makes the firm to manage its credit well.

The term credit management can be analyzed from various aspects like:
1 Terms of payment.
2 Credit policy variables.
3 Credit evaluation.
4 Credit granting decision.

i) Terms of payment vary widely in practice. The most accepted one in

which arrangement is made wherein the trade cycle is financed partly by
seller, partly by buyer and partly by some financial intermediary. When
goods are sold on cash terms the payment is received either in advance
or on delivery. Credit sales are generally on open account. Consignment
and bill of exchange come under credit.

29
ii) Credit policy variables have the dimensions like credit standards,
credit period, cash discount and collection effort. A firm has wide range
of choice in respect of granting credit. At one end of spectrum, it may
decide not to grant credit to any customer, however strong his credit
rating may be. At the other end, it may decide to grant credit to all
customers irrespective of their credit rating. Between these two
extremes lie several possibilities, often the more practical ones.

Credit period refers to the length of the time customers are allowed to
pay for their purchases which is generally varied from 15 days to 60
days. Lengthening the credit period pushes sales up by inducing existing
customers to purchase more and attracting additional customers. This is
accompanied by a larger investment in debtors and a higher incidence of
bad debts loss.

Cash discounts are generally given by the firms to induce customers to

make prompt payments. The percentage discount and the percentage
discount and the period during which it is available are reflected in the
credit terms. Liberalizing the cash discount may mean that the discount
percentage is increased and the discount period are lengthen which
enhance the sales, reduce the average collection period and increase the
cost of discount.

The collection programme of the firm aims at timely collection of

receivables. A rigorous collection programme tends to decrease sales,
shorten the average collection period, reduce bad debt percentage, and
increase the collection expense and vice versa in case of lax collection
programme.

30
31
iii) Credit evaluation is an important element of credit management
which helps in establishing credit limits. This includes two types of errors
like:
Type I error: A good customer is misclassified as a poor credit
risk.
Type II error: A bad customer is misclassified as a good credit
risk.

Both the errors are costly. Type I error leads to loss of profit on sales to
good customers who are denied credit. Type II error results in bad debt
losses on credit sales made to risky customers. Proper credit evaluation
can mitigate the occurrence of such type of errors.

Three broad approaches used for credit evaluation are

1 Traditional credit analysis.
2 Sequential credit analysis.
3 Discriminant analysis.

The traditional credit analysis calls for assessing a prospective

customer in terms of the “five C’s of credit”.

1 Character of customer that is his willingness to honor his

obligation.
2 Capacity of the customer to meet credit obligations from the
operating cash flows.
3 Financial reserves in the form of capital of the customer. If
customer has difficulty in meeting his credit obligations from
operating cash flows then focus to his capital.

32
 4 Collateral security offered by customer in the form of pledged
assets is considered.
5 Fifth C is general ECONOMIC CONDITIONS that affect the
customer.

For sake of simplicity, only three C’s are considered i.e. character,
capacity and capital. The judgment of customer on these dimensions the
credit manager considers both quantitative and qualitative measures.

Sequential credit analysis is most efficient method than traditional one.

In this analysis, investigation is carried further if the benefit of such
analysis outweighs it cost. To illustrate, consider three stages of credit
analysis: review of the past payment record, detailed internal analysis
and credit investigation by an external agency. The credit analyst
proceeds from stage one to stage two only if there is no past payment
history and hence a detailed internal credit analysis is warranted.
Likewise, the credit analyst goes from one stage two to stage three only
if internal credit analysis suggests that the customer poses a medium
risk and hence there is a need for external analysis.

Numerical credit scoring is an improvement over traditional ones in

which more systematic numerical are assigned to evaluate the customer
unlike judgmental decisions made on basis of five C’s in traditional ones.
In this the credit manager identifies the factors relevant for credit
evaluation. Then weights are assigned to these factors and customers
are rated based on these factors using suitable rating scale usually 5
point or 7 point rating scale. Factor score is derived by multiplying factor
weight with factor rate for each factor. Customer rating index is derived

33
by adding the entire factor score based on which customers are
classified.

Numerical credit scoring is ad hoc in nature as it is based on weights

which are subjective in nature. The technique of discriminant analysis is
employed to construct better risk index. This method considers the
financial ratios of the customers as the basic determinants of their
creditworthiness. The analysis is made based on these financial ratios
which are considered to be essential for creditworthiness of customer.

Risk classification is another method in which customers are classified

into various risk categories for credit investigation process.

iv) Credit granting decision is important because once the

creditworthiness of a customer has been assessed the credit manager
has to decide whether the credit should be offered or not. It is generally
done based on the decision tree. The expected profit for the action
‘refuse credit’ is 0. If the expected profit for the course of action ‘offer
credit’ is positive, it is desirable to extend credit, otherwise not. The
repeat order is accepted only if the customer does not default on the
first order. Once the customer pays on the first order, the probability
that he would default on the second order is less than the probability of
his defaulting on the first order.

RISK MANAGEMENT

Once the credit is being granted to the customer the credit manager
has to find out the ways for timely collection of the credit given.
34
Traditionally two methods have been commonly suggested like Days
sales outstanding and ageing schedule. Though these methods are
popularly used they have serious limitations as they are based on an
aggregation of sales and receivables. To overcome the limitations of
traditional methods Collection matrix approach is used.

35
The days sales outstanding (DSO) at a given time t may be defined as
the ratio of accounts receivable outstanding at that time to average daily
sales figure during the preceding 30 days, 60 days, 90 days, or some
other relevant period.

The ageing schedule (AS) classifies outstanding accounts receivables at

a given point of time into different age brackets. The actual AS of the
firm is compared with some standard AS to determine whether accounts
receivable are in control. A problem is indicated if the actual AS shows a
greater proportion of receivables, compared with the standard as, in the
higher age groups.

Collection matrix is improvement over the traditional methods of risk

managements. In order to study correctly the changes in the payment
behavior of customer, it is helpful to look at the pattern of collections
associated with credit sales. From the collection, pattern one can judge
whether the collection is improving, stable, or deteriorating. A secondary
benefit of such an analysis is that it provides a historical record of
collection percentages that can be useful in projecting monthly receipts
for each budgeting period.

FUNCTIONS OF EACH DEPARTMENT

The four main departments involved in loan process of KMBL are :

1) MARKETING
2) CREDIT
3) OPERATIONS
4) RISK

36
 ORGANISATIONAL CHART OF MARKETING DEPARTMENT:

REGIONAL MARKETING HEAD

LOCATION LOCAITON
MARKETING HEAD
MARKETING HEAD LOCAITON
MARKETING HEAD

RELATIONSHIP MANAGER RELATIONSHIP MANAGER

DIRECT SELLING AGENT DIRECT SELLING TEAM

FLEET ON STREET FLEET ON STREET

Regional Marketing Head (RMH) (heading entire region)

Location Marketing Head (LMH) (heading entire location)
Relationship Manager (RM) (for maintaining relationships with DSA and
DST)
DSA/DST – Direct Selling Agent (external) / Direct sales Team (internal)
Fleet On Street (FOS) (for sourcing the case, making cold calls,
collecting relevant documents etc.)
37
Marketing department in personal finance is responsible for sourcing of
business. This department works through network of DSA/DST and RM.

RMs are responsible for managing relationships with DSA and DST. The
sales department is divided in to two units under the guidance of RM
that is

A) DSA (DIRECT SELLING AGENT)

B) DST (DIRECT SELLING TEAM)

DSA is an outside party who is interested in sourcing prospective loan

candidates into the bank. The bank studies the capacity of the party
bringing applicants per month and gives certain targets and if the DSA
agent reaches that target then the bank provides commission to the DSA
agent. The bank does not involve in any activities of DSA directly. The
DSA agent has to maintain the telecallers and executives at his own
expenses.
The second category is DST which is called K-DIRECT in Kotak
Mahindra Bank under whom telecallers, team leaders and executives
work. All the office expenses and salaries are paid to them by Kotak
Mahindra Bank their salaries are more compared to DSA. The persons
working under DST directly comes under the Kotak Mahindra Bank.
Relationship Manager is in charge of the functions of K-DIRECT team.

38
ORGANISATIONAL CHART OF CREDIT DEPARTMENT:

NATIONAL CREDIT HEAD

REGIONAL CREDIT HEAD REGIONAL CREDIT HEAD

LOCATION CREDIT HEAD LOCATIN CREDIT HEAD

CREDIT MANAGER

CREDIT MANAGER

CENTRA PROCESSING AGENCY

NCH - National Credit Head

RCH – Regional Credit Head
LCH – Location Credit Head
CM – Credit Manager (With in location)
CPA – Central Processing Agency

39
After sourcing the files (loan applicants) in to the bank the second and
crucial step is being played by credit department. Here the sourced files
are examined thoroughly whether the required documents are furnished
or not.

The hierarchical level is followed in this department. It is from top to

bottom starting from National Credit Head to Central Processing Agency.
Also at few places there are ACH (Area Credit Head). They occupy an
intermediary position between RCH and LCH. While the Marketing
department is responsible for sourcing, the Credit department is
responsible for buying the business.

OPERATIONS DEPARTMENT:

After the completion of the process of sanctioning loan amount to the

customer, the file goes to operations department where they have to
look after the entire operation of disbursement.

The operation department will issue the cheque to the party. In this
department all the PDC’s (Post Dated Cheques) and any other original
important documents are placed in the head office in Mumbai where all
the documents are preserved in a private security locker “NUCLEUS”
which is fire proof and the bank pays for the storage of files.

In Nucleus all the respective PDC’s of respective month on mentioned

dates comes directly to the bank. The Kotak Mahindra Bank has its
clearing department with nationalized bank where it accepts all the

40
PDC’s and disburse them to respective banks if it is cleared then it
mentions the cleared member’s data and uncleared cheque data through
soft copy that day evening to the operation department. The next day
morning the operation department will get the hard copy and they come
to know clearly the reasons for cheque bounce cases.

Then the telecaller will follow up the customers and intimate them about
the cheque bounces and reasons for that and intimates them about the
penal charges and depending on the reply of the customer they further
proceed. All the data is maintained in the system.

41
ORGANISATIONAL CHART OF RISK DEPARTMENT:

NATIONAL HEAD

REGIONAL RISK HEAD

STATE RISK HEAD

LOCAL RISK HEAD

BKT-1 PORTFOLIO BKT-3 PORTFOLIO

BKT-2 PORTFOLIO
MANAGER MANAGER
MANAGER

TEAM LEADER
TEAM LEADER TEAM LEADER

EXECUTIVES
EXECUTIVES EXECUTIVES

TELECALLER
TELECALLER TELLE CALLER

In personal finance business whatever is sourced by the marketing

department and bought by the credit has great tenacity to go bad or non
performing or delayed due to combined effect of various variables like
fraud, negligence, intentional, etc.
The inherent nature of personal loan arise the need of having separate

42
risk department(RD) to focus on timely collection and risk of loan
agreements. There is primarily on collecting the money which was
funded by combined efforts of marketing and credit.
RD is responsible for controlling the losses by having a strong network
of collection agents and thus keeping the delinquency level under
control.

PROCESS FLOW CHART (FILE MOVEMENT SYSTEM)

FILE TO BE LOGGED IN

FILE INVESTIGATION WILL BE SHOT ON THE CASE

CREDIT DOES ANALYSIS

CASE IN SACTIONED OR REJECTED

43
 IF SANCTIONED,DISBURSEMENT AGREEMENT TO BE
SIGNED AND PDC’S TO BE COLLECTED

DISBURSEMENT TO BE LOGGED IN

CHEQUE TO BE DELIVERED TO THE CUSTOMER

STOP
Credit Risk Management: Policy Framework

Risk is inherent in all aspects of a commercial operation and covers

areas such as customer services, reputation, technology, security,
human resources, market price, funding, legal, regulatory, fraud and
strategy. However, for banks and financial institutions, credit risk is the
most important factor to be managed. Credit risk is defined as the
possibility that a borrower or counterparty will fail to meet its obligations
in accordance with agreed terms. Credit risk, therefore, arises from the
banks' dealings with or lending to a corporate, individual, another bank,
financial institution or a country. Credit risk may take various forms,
such as:

• in the case of direct lending, that funds will not be repaid;

44
 • in the case of guarantees or letters of credit, that funds will not be
forthcoming from the customer upon crystallization of the liability
under the contract;

• in the case of treasury products, that the payment or series of

payments due from the counterparty under the respective
contracts is not forthcoming or ceases;

• in the case of securities trading businesses, that settlement will

not be effected;

• in the case of cross-border exposure, that the availability and free

transfer of currency is restricted or ceases.

The more diversified a banking group is, the more intricate systems it
would need, to protect itself from a wide variety of risks. These include
the routine operational risks applicable to any commercial concern, the
business risks to its commercial borrowers, the economic and political
risks associated with the countries in which it operates, and the
commercial and the reputational risks concomitant with a failure to
comply with the increasingly stringent legislation and regulations
surrounding financial services business in many territories.
Comprehensive risk identification and assessment are therefore very
essential to establishing the health of any counterparty.

Credit risk management enables banks to identify, assess, manage

proactively, and optimise their credit risk at an individual level or at an
entity level or at the level of a country. Given the fast changing,
dynamic world scenario experiencing the pressures of globalisation,
liberalization, consolidation and disintermediation, it is important that
45
banks have a robust credit risk management policies and procedures
which is sensitive and responsive to these changes.

Strategy and Policy

It is essential that each bank develops its own credit risk strategy or
enunciates a plan that defines the objectives for the credit-granting
function. This strategy should spell out clearly the organisation’s credit
appetite and the acceptable level of risk - reward trade-off at both the
macro and the micro levels.

The strategy would therefore, include a statement of the bank’s

willingness to grant loans based on the type of economic activity,
geographical location, currency, market, maturity and anticipated
profitability. This would necessarily translate into the identification of
target markets and business sectors, preferred levels of diversification
and concentration, the cost of capital in granting credit and the cost of
bad debts.

A common feature of most successful banks is to establish an

independent group responsible for credit risk management. This will
ensure that decisions are made with sufficient emphasis on asset quality
and will deploy specialised skills effectively.

In some organisations, the credit risk management team is responsible

for the management of problem accounts, and for credit operations as
well. The responsibilities of this team are the formulation of credit
policies, procedures and controls extending to all of its credit risks
arising from corporate banking, treasury, credit cards, personal banking,

46
trade finance, securities processing, payment and settlement systems,
etc.

This team should also have an overview of the loan portfolio trends and
concentration risks across the bank and for individual lines of
businesses, should provide input to the Asset - Liability Management
Committee of the bank, and conduct industry and sectoral studies.
Inputs should be provided for the strategic and annual operating plans.
In addition, this team should review credit related processes and
operating procedures periodically.

The credit risk strategy and policies should be effectively communicated

throughout the organisation. All lending officers should clearly
understand the bank's approach to granting credit and should be held
accountable for complying with the policies and procedures.

Keeping in view the foregoing, each bank may, depending on the size of
the organization or loan book, constitute a high level Credit Policy
Committee also called Credit Risk Management Committee or Credit
Control Committee, etc. to deal with issues relating to credit policy and
procedures and to analyse, manage and control credit risk on a bank
wide basis. The Committee should be headed by the Chairman/CEO/ED,
and should comprise heads of Credit Department, Treasury, Credit Risk
Management Department (CRMD) and the Chief Economist. The
Committee should, inter alia, formulate clear policies on standards for
presentation of credit proposals, financial covenants, rating standards
and benchmarks, delegation of credit approving powers, prudential limits
on large credit exposures, asset concentrations, standards for loan
collateral, portfolio management, loan review mechanism, risk

47
concentrations, risk monitoring and evaluation, pricing of loans,
provisioning, regulatory/legal compliance, etc. Concurrently, each bank
may also set up Credit Risk Management Department (CRMD),
independent of the Credit Administration Department. The CRMD should
enforce and monitor compliance of the risk parameters and prudential
limits set by the CPC. The CRMD should also lay down risk assessment
systems, monitor quality of loan portfolio, identify problems and correct
deficiencies, develop MIS and undertake loan review/audit. Large banks
may consider separate set up for loan review/audit. The CRMD should
also be made accountable for protecting the quality of the entire loan
portfolio. The Department should undertake portfolio evaluations and
conduct comprehensive studies on the environment to test the

48
RISK MANAGEMENT

MEANING OF RISK

Risk management is a process of managing the collection of managing

the collection of liabilities with an objective of increasing the cash flows
with minimum costs. It involves collecting in right time, right amount, in
right terms.This process starts from identifying the amount of liabilities
and to make the collection successful. This does not end with mere
collection. Besides collection, the difficulties and weak areas should also
be ascertained, which leads to development of an effective system for
credit extension or sales and collection.
Risk management is an area of tremendous challenge. Risk
management is used to minimize bad debts through active account
delinquency management. As the companies strive to increase their cash
flows and improve customer relationships, the risk partner is more
important than any other.

IMPORTANCE OF RISK

In today’s market scenario, one of the most critical areas to focus on is

to protect the bank from bankruptcy. In such conditions Risk department
plays a key role in the growth of banks. Any delay in realizing the
receivables would adversely effect the working capital, which in turn
effects the overall financial management of the firm.

No firm can be successful if its overdue are not collected, monitored and
managed carefully in time. Thus risk management is important in
49
sustaining the bank and its growth.

RISK DEPARTMENT IN KMBL

When all the doors are closed to collect the EMI from the customer then
it comes to risk department. In Syndicate bank the most importance is
given to risk department. The risk department in KMBL follows bucket
wise policies which starts from BUCKET 1.

The cheques of the customers which got bounced will come to the risk
department where they pressurizes the customer and gets the EMI
including penal and cheque bounce charges from customer.

The first six months of the customer is very important for the risk
department which is called “INFANT DELIQUENCY” where the risk
department estimates whether the customer is going to be defaulter in
future.

The risk department is very strong in KMBL where they follow the bucket
system. The bucket system depends on “Days past dues”. For every 30
days the bucket system shifts from one bucket to other depending on
pending EMI amount.

PROCESS FLOW
INSERT

If the bank is unable to collect atleast one EMI from the customer from
past continuous 3 months then they book the case as non performance
50
assets.

They claim the future calculated amount as loss so to avoid this type of
loss to the bank. They take lot of care to collect the EMI’s within the
three months with out fail to reduce the increase in the default ratio
through bucket wise.

The loss is calculated using the following formula:

Future outstanding = EMI * lost amount + EMI * future turn amount.
To control the defaulters’ ratio they started the necessary steps from
the starting of the collection department. The flow of power is as shown
in the flow chart from top level to bottom level.

When the case comes to bucket 1 lot of pressure is made by portfolio

manager to stop the case not to extend to bucket 2. The bucket portfolio
manager plays a prominent role in risk department and he is paid more
pay and perks. In similar way in bucket 2 the portfolio manager plays a
prominent role to reduce the case not to extend to bucket 3. When the
case enters bucket 3 and portfolio manager is unable to collect at least
one EMI then the case is booked as non performance asset which is a
loss to the bank.

51
LEGAL ASPECTS OF RISK

When the file comes to bucket 3 there after making all pressures if they
could not get the amount they further proceed legally to collect the
money.
The three main sections used to proceed legally are:
1 Section 138 (NEGOTIABLE INSTRUMENTS ACT)
2 Section 156
3 Section 9

Section 138
Where any cheque drawn by a person on account maintained by him
with the banker for payment of any amount of money to another person
from out of that account for the discharge, in a whole or in part, of any
debt or any liability, his return by bank unpaid, either because of the
amount of money outstanding to the credit of that account by an
agreement made with the bank. Such person shall be deemed to have
committed an offence and shall without prejudice to any other provisions
of this act can be punished with imprisonment for a term which may
extend to one year or with a fine which may extend to twice the amount
of cheque or with the both. Now the court has the power to order two-
year imprisonment for cheque bounces under section 138 N.I. a

POST DATED CHEQUES

A cheque post-dated remains bills of exchange till the date written on it
and with effect from the said date shown on the face of it; it becomes a
“cheque” under the act.
Post dated cheque deemed to have been drawn on the date it bears –
provision of section 138 (a) held.
52
ELECTRONIC CLEARENCE SERVICE
Electronic clearance service contains six cheques among that four
cheques contain the EMI amount and one with full loan amount and
another with cleared amount each cheque is signed by the loan
according to RBI rules.

STANDARD INSTRUCTIONS
This type of instruction are produced when the loanee working in the
same bank and taking loan amount.

SUMMONS
The chief ministerial officer of the court shall ordinarily sign summons
issued to witness.
1: These are the witness summons.
2: Accused summons to be signed by magistrates:
Magistrates shall themselves sign summons to accused persons. The
copy of the complaint may be sent with summons or warrant issued to
the accused under sub-Section (i) of section 204 of the code.
Place of hearing to be stated:
Every summons and every order of adjournment shall state the place in
which the course to which it relates will be heard.
Warrant bearing sign manual of the judge or the magistrate:
All warrants should receive the sign of them from whose court they are
issued.

SECTION 156
This case is claimed against the customer as cheating or forgery case
where the customer might have given some fake documents to get a
loan which might have mislead the bank.

53
Whoever by deceiving any person fraudulently or dishonestly include the
persons. So deceive to deliver property to any person or to consent that
any person shall retain any property intentionally include person so
deceived to do or omit to do anything which he would not do or omit if
he were not so deceived, and which after omission cause or lively cause
damage or harm to that person in body, mind, reputation and property
is said to “cheat “

Example

1. A by putting a counterfoil mark on an article intentionally

deceives into a belief that this articles were made by celebrity
manufacturer, and thus dishonestly induces Z to buy and pay for
the articles ‘A cheats’.
2. A by pleading as diamonds articles which he knows are not
diamonds intentionally deceives Z if he thereby dishonestly
includes Z to land money, ‘A cheats’.
i) Dibas sarkar vs. State 1989 Cr. LJ MOC 30 Cal.
ii) Kakumukkala Krishnamurthy vs. State of AP AIR 1956
Sec.333

Section 9
This case is claimed against the customer as a property attachment
where the bank attacks the property of the customer. This section is
very rarely used.

54
 ANALYSIS and FINDINGS:

ANALYSIS and FINDINGS

The information or data of credit and risk management reference to

Syndicate bank.

Finding for last years of description for risk mode.

NON PERFORMANCE ASSETS table shows the data of the non
performance assets of the KMBL.

MONTHS TARGET ACHIEVEMENTS

(In lakhs) (In lakhs)
April 09 1.56 0.41
May 09 1.62 1.2
June 09 1.77 1.3
July 09 1.92 0.56
Aug 09 2.11 1.72
Sep 09 2.34 2.13
Oct 09 2.58 0.60
Nov09 2.83 0.61
Dec 09 3.10 0.00
Jan 10 3.37 1.9
Feb 10 3.68 1.98
Mar 10 4.01 0.32
Total 30.89 12.73

55
 NON PERFORMANCE ASSETS-IN LAKHS

1) TARGETS: This is the amount given to book as loss for the risk
department in every month of non performance of asset.
2) ACHIEVEMENTS: This is the amount booked as loss to risk
department achieved in every month.

56
PENAL CHARGES COLLECTED

Finding for last years of description for risk mode.

MONTHS TARGET ACHIEVEMENTS

(In lakhs) (In lakhs)

Apr 07 0.26 0.19

May 07 0.29 0.32
June 07 0.32 0.52
July 07 0.36 0.30
Aug 07 0.40 0.83
Sep 07 0.43 0.32
Oct 07 0.47 0.66

Nov 07 0.52 0.77

Dec 07 0.56 0.65
Jan 08 0.61 0.59

Feb 08 0.65 0.81

Mar 08 0.70 1.29

Total 5.57 7.25

57
 PENAL AMOUNT

1. TARGETS: This is the target penal amount given for risk

department to collect.

2. ACHIEVEMENTS: This is the penal amount collected by risk

department every month.

Months Target (lakhs) Achievements (lakhs)

April 2008 0.71 0.67

58

MONTH
May2008 0.74 0.53
June 2008 0.77 0.80
July 2008 0.80 0.74
August 2008 0.82 1.21
September 2008 0.87 1.22
October 2008 0.90 0.93
November 2008 0.91 0.75
December 2008 0.93 0.95

PENAL AMOUNT

1. TARGETS: This is the target penal amount given for risk

department to collect.
2. ACHIEVEMENTS: This is the penal amount collected by risk
department every month.
Details of self clients of KMBL

SEP RSENP SURR SAL SENP TOTAL

59
DEFAULTERS (%) 7 57 20 37 34 155

DEFAULTERS 134043 409509 110438 412913 1298755 2365656

AMNOUNT

DEFAULTERS PERCENTAGE
DEFAULTERS CLIENTS
(%)

1: SELF EMPLOYED PROFESSIONAL. (SEP) 7

2: RETAIL SELF EMPLOYED NON PROFESSIONAL.(RSENP) 57

3: SURROGATIVES. (SURR) 20

4:SALARIED (SAL) 37

5: SELF EMPLOYED NON PROFESSIONAL. (SENP) 34

TOTAL 155

60
 DEFAULTERS PERCENTAGE

22% 5% SEP
36% RSENP
SURR
SAL
24%
13% SENP

Analysis of defaulters (%)

1: SEP = 7/155 * 100 = 5%

2: RSENP = 57/155 * 100 = 36%

3: SURR = 20/155 * 100 = 13%

4: SAL =37/155 * 100 = 24%

5: SENP =34/155 *100 = 22%

61
DEFAULTERS AMOUNT PERCENTAGE

Defaulters Amount

1: SELF EMPLOYED PROFESSIONAL. 1,34,043

2: RETAIL SELF EMPLOYED NON PROFESSIONAL. 4,09,509

3: SURROGATIVES. 1,10,438

4: SALARIED. 4,12,913

5: SELF EMPLOYEDN ON PROFESSIONAL. 12,98,755

DEFAULTERS AMOUNT PERCENTAGE

6% SEP
17%
RSENP
SURR
55% 5%
SAL
17% SENP

62
Analysis of Defaulters amount (%)

1: SEP = 134043/2365656 * 100 = 6%

2: RSENP =409509/2365656 * 100 = 17%

3: SURR = 110438/2365656 * 100 = 5%

4: SAL = 412913/2365656 * 100 = 17%

5: SENP =1298755/2365656 *100 = 55%

TABLE: 1 The statement showing default on the lines of repayment

period

NUMBER OF DAYS DEFAULT

REPAYMENT 30 60 90 ABOVE ROW

PERIOD DAYS DAYS DAYS 90DAYS TOTAL

[0 YRS – 2 YRS] 14 2 3 5 24
(58) (8) (13) (21)

[2 YRS - 3 YRS] 91 11 7 10 119

(76) (9) (6) (9)

63
 [3 YRS – 4YRS] 9 1 1 1 12
(75) (8) (8) (9)

COLUMN TOTAL 114 14 11 16 155

(74) (9) (7) (10)

** Figures in parenthesis denote the row wise percentage.

Effective risk (%) in terms of period

1) 14/24*100=58

2) 91/ 199*100=76

3) 9/12*100=75

The distribution of defaulters with respect to repayment period is visible

in table 1. According to the table more number of defaulters are lying in
bucket 1, 74% of the defaulters are in bucket 1 followed by 10% in
above 90 days and 9% in bucket 2 and 7% in bucket 3. The same is
reflected in the categories of 2-3 years and 3-4 years repayment period
where as in 0-2 years repayment period 58% of defaulters are in 30
days 21% in above 90 days, 13% in 90 days and 8% in 60 days.

It implies the bank has been focusing to control and reduce the number
of defaulters in other than 30 days bucket further it also implies the
repayment period is not a factor which influence on number of
defaulters.

64
Table: 2 The statement showing default on the lines of profession

NUMBER OF DAYS DEFAULT

PROFESSION 30 60 90 ABOVE ROW

DAYS AYS DAYS 90DAYS TOTAL

TECHNICAL 26 5 3 6 40
(0.65)

BUSINESS 75 6 7 9 97
(0.77)
COLUMN TOTAL 101 11 10 15 137

**figures in parenthesis denote the row wise percentage.

Here business category is defined as the income category based on their

non-salaried and non-professional incomes where they use their
business skills, RSENP, SENP comes under this category.

Technical profession, these are the persons having an income either

from salary or from their professional qualification. SEP, SALARIED
comes under this category.

NULL HYPOTHESIS: H0:

There is no relationship between profession and number of defaulters
P1=P2

65
ALTERNATE HYPOTHESIS: H1:

There is relationship between profession and default rate. The business

professions are more than the technical profession.
P1<P2 (Left tailed test)

Test of proportions Z=P1-P2/√P (1-P) (1/n1+1/n2)

Where P1=26/40=0.65
P2=75/97=0.77
P=P1+P2/n1+n2
Where n1=40 , N2=97
Therefore P=0.74

Z=0.65-0.77/√ (0.74) (1-0.74) (1/40+1/97)

= -1.46

The calculated value of test of proportion is -1.46

The table value of test of proportion is -1.645 at 95% confidence level.
Therefore the calculated value lies in rejection rejoin, so null hypothesis
is accepted
Therefore there is no relationship between the profession and the
number of defaulters.

66
TABLE: 3 The statement showing default on the lines of gender.

NUMBER OF DAYS DEFAULT

30 60 90 ABOVE ROW
SEX DAYS DAYS DAYS 90DAYS TOTAL

MALE 95 11 11 15 132
(0.72)
FEMALE 20 1 1 1 23
(0.87)

COLUMN 115 12 12 16 155

TOTAL

**figures in parenthesis denote the row wise percentage.

NULL HYPOTHESIS: H0:

There is no relationship between sex and number of defaulters

P1=P2

ALTERNATE HYPOTHESIS: H1:

There is relationship between sex and number of defaulters.

Female are more in number than male.

P1<P2 (Left tailed test)

Test of proportions Z=P1-P2/√P (1-P) (1/n1+1/n2)

67
Where P1=95/132=0.72

P2=20/23=0.87

P=P1+P2/n1+n2

Where n1=132 , N2=23

Therefore P=0.74

Z=0.72-0.87/√(0.74) (1-0.74) (1/132+1/23)

= -1.52

The calculated value of test of proportion is -1.52

The table value of test of proportion is -1.645 at 95% confidence level.

Therefore the calculated value lies in rejection rejoin, so null hypothesis

is accepted

Therefore there is no relationship between the sex and the number of

defaulters.

68
TABLE: 4 To find the relationship between AMOUNT OF LOAN and DAYS
DEFAULT RATE.

NUMBER OF DAYS DEFAULT RATES

30 60 90 ABOVE ROW
AMOUNT of LOAN DAYS DAYS DAYS 90DAYS TOTAL

[RS 0 – RS 1,00,000] 54 4 6 6 70
(0.77)
[RS1,00,000 – RS 32 7 3 8 50
2,00,000] (0.64)

[RS 2,00,000 – RS 22 1 2 1 26
5,00,000]

[RS 5,00,000 – RS 2 0 0 1 3
7,00,000]

[RS7,00,000- RS 6 0 0 0 6
10,00,000]

COLUMN TOTAL 116 12 11 16 155

*figures in parenthesis denote row wise percentage.

69
NULL HYPOTHESIS: H0:

Percentage of defaulters within 30 days period do not differ significantly

between the amount borrowed 0-1 lack and 1 lack-2 lack
P1=P2

ALTERNATE HYPOTHESIS: H1:

Percentage of defaulters within 30 days period differ significantly

between the amount borrowed 0-1 lack and 1 lack-2 lack.
P1>P2 (Right tailed test)

Test of proportions Z=P1-P2/√P (1-P) (1/n1+1/n2)

Where P1=54/70=0.77
P2=32/50=0.64
P=P1+P2/n1+n2

Where n1=70

N2=50
Therefore P=0.72

Z=0.77-0.64/√ (0.72) (1-0.72) (1/70+1/50)

= 1.566

The calculated value of test of proportion is 1.566

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The table value of test of proportion is 1.645 at 95% confidence level.

Therefore the calculated value lies in rejection rejoin, so null hypothesis

is accepted
Therefore there is no relationship between the loan amount and the
number of defaulters.
Note: The hypothesis is tested between first two slots i.e. amount range
Rs 0-1 lack and Rs 1 lack-2 lack.
TABLE 5: Statement showing default on line of location.

NUMBER OF DAYS DEFAULT

30 60 90 ABOVE ROW
LOCATION DAYS DAYS DAYS 90DAYS TOTAL

NEW 41 6 4 7 58
HYDERABAD

SECUNDERABAD 30 3 5 5 43

RANGA REDDY
DISTRICT 29 3 3 4 39

COLUMN TOTAL 100 12 12 16 140

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 **figures in parenthesis denote row wise percentage.

Observed Expected
frequency frequency (oi-ei)2 (oi.-ei) 2/ei
(oi) (ei)

NEW
1.44
HYDERABAD 41 34 49

SECUNDERABAD 30 33 9 0.27

RANGA REDDY 29 33 16 0.48

DISTRICT
-------- --------- -----
100 100 ---
--------- ---------- chisquare
=2.19
-----
---

NULL HYPOTHESIS: H0:

Categories in 30 days are equally distributed

P1=P2

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ALTERNATIVE HYPOTHESIS: H1:

Categories in 30 days are not equally distributed

P1=P2

Chi square value is 2.19

Critical value at 95% confidence level is 5.99.

Chi square value is less than critical value so null hypothesis is accepted.
Therefore location of the loanees not influence on the defaulters (in 30
days category).

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 CONCLUSION

CONCLUSION
• Periodically customer meet should be conducted and category wise
the best customer should be appreciated and if possible rewarded
by way of cash prize or in kind. This helps in creating good
publicity for the bank as well as to penetrate in to market.
• Post disbursement contact with the loanee should be maintained.
This process not only builds report but also gives important clues
about loanee’s ability to honour the payment responsibility. At the
same time this also leads to good customer care.
• There should be good coordination among sales department, credit
department and risk department where they should go through the
loanee’s profile and should sanction the amount through proper
stringent verification when the amount is huge.
• Future status of loanees business, if he is a business man, should
be assessed. Reserves, environment, competition, capabilities etc.
should be considered before sanctioning a loan based on past
performance. Future should be analyzed as to whether the
business would sustain in future, the products are going to match
the future needs or not should be analyzed. Future analysis is
more important for a new customer than to an old customer.
Whereas, in case of employee, the job security, skill base, proof of
past financial discipline, property owned etc. should be considered.
Simply not with numerical parameters but also with other
qualitative factors.
• Government employee is also an important segment, bulk
applicants can be attracted by influencing the undertaking office or
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 accounts officer of the concerned department for taking letters to
see that installments payments are directly deducted from their
salaries. This segment is definitely useful in boosting up the loan
selling if proper verification and strict scrutanisation is done with
corresponding undertaking officers. Good rapport with government
officers by risk department will help in recovering the targeted
amounted from government employee’s proper branch network
and good force in risk department will solve if there is any transfer
of employees.
• To safeguard the loan and improve the risk especially when there
is a probability of mobility of a loan for example: in case of a
personal loan property attachment or guaranteed of government
employee is to be taken.Hence such defaulters can be reduced.

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 SUGGESTION

SUGGESTION

• A loanee’s political affiliation and his past career in politics have to

be investigated before disbursing the loan amount in order to
reduce the hardships involved in collecting the amount.
• Proper verification of documents and evaluation of stocks and
assets of business people before sanctioning such loans is
essential to avoid overvaluation by the employees. For this a
technical person is to be appointed who has entire knowledge of
risk, legal aspects and technical process where thorough
verification can be done.
• To detect the fraud by the sales people whose intention is to
usually just sourcing the loans applications the risk department
head along with sales department head should select the cases
randomly and visit the places for inspection in every month first
week where they can find the exact picture and at the same time
can ascertained the scope for fraud.
• In terms of customer wise loan amount the percentage of self
employed non professionals is more and special attention should
be given while disbursing the loan amounts.

• Risk management should be a proactive process and hence its role

should not be limited to the post default activity it should develop
a system to track the possible pitfalls in each sanction from the
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 very beginning.

Annexure
Annexure

Credit department is the back bone of personal loan business. Main

function of the credit is to assess the credit worthiness of an applicant
and lending him appropriate amount based on such assessment and
subject to the terms, conditions and limitations of the policies.
Comprehensive credit information, which provides details pertaining to
credit facilities already availed by the borrower as well as his payment
track record, has become the need of an hour. Credit risk is defined as
the possibility that a borrower or counterparty will fail to meet its
obligations in accordance with agreed terms. Credit risk, therefore,
arises from the banks' dealings with or lending to a corporate, individual,
another bank, financial institution or a country.

Credit risk management enables banks to identify, assess, manage

proactively, and optimise their credit risk at an individual level or at an
entity level or at the level of a country. Given the fast changing,
dynamic world scenario experiencing the pressures of globalisation,
liberalization, consolidation and disintermediation, it is important that
banks have a robust credit risk management policies and procedures
which is sensitive and responsive to these changes.

The 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
77
profitability. This would necessarily translate into the identification of
target markets and business sectors, preferred levels of diversification
and concentration, the cost of capital in granting credit and the cost of
bad debts.

In some organisations, the credit risk management team is responsible

for the management of problem accounts, and for credit operations as
well. The responsibilities of this team are the formulation of credit
policies, procedures and controls extending to all of its credit risks
arising from corporate banking, treasury, credit cards, personal banking,
trade finance, securities processing, payment and settlement systems,
etc.

The credit risk strategy and policies should be effectively communicated

throughout the organisation. All lending officers should clearly
understand the bank's approach to granting credit and should be held
accountable for complying with the policies and procedures.

To deal with issues relating to credit policy and procedures and to

analyse, manage and control credit risk on a bank wide basis.

Credit risk is not really manageable for very small companies (i.e., those
with only one or two customers). This makes these companies very
vulnerable to defaults, or even payment delays by their customers.

Lenders will trade off the cost/benefits of a loan according to its risks
and the interest charged. But interest rates are not the only method to
compensate for risk. Protective covenants are written into loan
agreements that allow the lender A recent innovation to protect lenders
and bond holders from the danger of default are credit derivatives, most
78
commonly in the form of credit defaulters swap. These financial
contracts allow companies to buy protection against defaults from a third
party, the protection seller. The protection seller receives a periodic fee
(the credit spread) as compensation for the risk it takes, and in return it
agrees to buy the debt should a credit event ("default") occur.

Employees of any firm also depend on the firm's ability to pay wages,
and are exposed to the credit risk of their employer
Risk management is used to minimize bad debts through active account
delinquency management in right time, right amount, in right terms.Any
delay in realizing the receivables would adversely effect the working
capital, which in turn effects the overall financial management of the
firm.

CREDIT RISK IS FACED BY

Faced by lenders to consumers

Most lenders employ their own models (credit scoreboard) to rank

potential and existing customers according to risk, and then apply
appropriate strategies. With products such as unsecured personal loans
or mortgages, lenders charge a higher price for higher risk customers
and vice versa. With revolving products such as credit cards and
overdrafts, risk is controlled through careful setting of credit limits.
Some products also require security, most commonly in the form of
property.

Faced by lenders to business

Lenders will trade off the cost/benefits of a loan according to its risks
and the interest charged. But interest rates are not the only method to
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compensate for risk. Protective covenants are written into loan
agreements that allow the lender some controls. These covenants may:

• limit the borrower's ability to weaken his balance sheet voluntarily

e.g., by buying back shares, or paying dividends, or borrowing
further.
• allow for monitoring the debt by requiring audits, and monthly
reports
• allow the lender to decide when he can recall the loan based on
specific events or when financial ratios like debt/equity, or interest
coverage deteriorate.

A recent innovation to protect lenders and bond holders from the danger
of default are credit derivatives, most commonly in the form of credit
defaulters swap. These financial contracts allow companies to buy
protection against defaults from a third party, the protection seller. The
protection seller receives a periodic fee (the credit spread) as
compensation for the risk it takes, and in return it agrees to buy the
debt should a credit event ("default") occur.

Faced by business

Companies carry credit risk when, for example, they do not demand up-
front cash payment for products or services.[1] By delivering the product
or service first and billing the customer later - if it's a business customer
the terms may be quoted as NET-30- the company is carrying a risk
between the delivery and payment.

Significant resources and sophisticated programs are used to analyze

and manage risk. Some companies run a credit risk department whose
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job is to assess the financial health of their customers, and extend credit
(or not) accordingly. They may use in house programs to advise on
avoiding, reducing and transferring risk. They also use third party
provided intelligence. Companies like MOODYS and DUN
BRADSTREETprovide such information for a fee.

For example, a distributors selling its products to a troubled retailersmay

attempt to lessen credit risk by tightening payment terms to "net 15", or
by actually selling fewer products on credit to the retailer, or even
cutting off credit entirely, and demanding payment in advance. Such
strategies impact on sales volume but reduce exposure to credit risk and
subsequent payment defaults.

Credit risk is not really manageable for very small companies (i.e., those
with only one or two customers). This makes these companies very
vulnerable to defaults, or even payment delays by their customers.

The use of a collection agency is not really a tool to manage credit risk;
rather, it is an extreme measure closer to a write down in that the
creditor expects a below-agreed return after the collection agency takes
its share (if it is able to get anything at all).

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Faced by individuals

Consumers may also face credit risk in a direct form as depositors at

banks or as investors/lenders. They may also face credit risk when
entering into standard commercial transactions by providing a deposit to
their counterparty, e.g. for a large purchase or a real estate rental.
Employees of any firm also depend on the firm's ability to pay wages,
and are exposed to the credit risk of their employer.

In some cases, governments recognize that an individual's capacity to

evaluate credit risk may be limited, and the risk may reduce economic
efficiency; governments may enact various legal measures or
mechanisms with the intention of protecting consumers against some of
these risks. Bank deposits, notably, are insured in many countries (to
some maximum amount) for individuals, effectively limiting their credit
risk to banks and increasing their willingness to use the banking system.

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 BIBLIOGRAPHY

BIBLIOGRAPHY

www.kotak.com

www.wikipedia.org

www.rmahq.org

www.syndicate bank .com

www.rbi.org

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