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CREDIT MANAGEMENT & INTERNAL RATING SYSTEM FOR SMALL SCALE INDUSTRY AT AMANATH CO-OPERATIVE BANK A DISSERTATION
CREDIT MANAGEMENT & INTERNAL RATING SYSTEM
FOR SMALL SCALE INDUSTRY AT AMANATH
CO-OPERATIVE BANK
A DISSERTATION
Submitted in partial Fulfillment of the requirements for
MBA Degree of
BANGALORE UNIVERSITY
Submitted By
ARSHIA NOORIE.N
Register Number:
03XQCM6010
Under the Guidance of:
Mr. Mansoor
Human Resource Manager
Amanath co-operative Bank
Dr.N.S.Malavalli
Principal
M. P. Birla Institute of Management
Associate Bharatiya Vidya Bhavan
Bangalore-560001
2003 - 2005

AMANATH CO-OPERATIVE BANK

AMANATH CO-OPERATIVE BANK STUDENT DECLARATION I hereby declare that this DISSERTATION entitled “Credit Management & Internal

STUDENT DECLARATION

I hereby declare that this DISSERTATION entitled “Credit Management & Internal Rating System to Small Scale industries” at

Amanath co-operative Bank, Bangalore has been undertaken and completed by me under the valuable guidance of Mr. MANSOOR, Human Resource Manager and Dr N.S. Malavalli, Principal in partial fulfillment of Master of Business Administration (2003-2005) program and it is my original work and not submitted for the award of any other degree, diploma, fellowship or other similar title or prizes.

The findings in the study are based on the data collected by me and have not formed the basis for the award of any other university

Bangalore

ARSHIA NOORIE.N

Date

Reg No: 03XQCM6010

AMANATH CO-OPERATIVE BANK

ACKNOWLEDGEMENT

AMANATH CO-OPERATIVE BANK ACKNOWLEDGEMENT I am sincerely thankful to Dr. Nagesh Malavalli , Principal M.P.Birla Institute
  • I am sincerely thankful to Dr. Nagesh Malavalli, Principal M.P.Birla

Institute of Management, Bangalore for granting me the permission to do

the internship project.

  • I am extremely great full to Mr. Gaffer Haji Latif Director, for his constant support and encouragement throughout this project study.

  • I would also like to thank Mr.Mansoor, for his valuable role in making this project study a learning experience.

I would like to express my sincere thanks to Miss Amina Ali Shaikh junior assistant HRD, Amanath co-operative bank Ltd, who has spent valuable time in giving the necessary guidance throughout the projects works.

  • I would like to express my profound

gratitude to

all

the

staff of

Amanath co-operative Bank those who have helped me directly or indirectly in the course of this study.

Last but not the least I would like to express my profound gratitude to my family and friends who have indirectly encouraged me in completing this study.

BANGALORE

DATE:

Arshia Noorie.N

AMANATH CO-OPERATIVE BANK

AMANATH CO-OPERATIVE BANK CERTIFICATE BY THE GUIDE This is to certify that the project titled “Credit

CERTIFICATE BY THE GUIDE

This is to certify that the project titled “Credit Management & Internal Rating System to Small Scale Industries” at Amanath co-operative Bank. Bangalore is completed under my guidance and supervision. It is submitted in partial fulfilment of the requirement for the degree of MASTER OF BUSINESS ADMINISTRATION to Bangalore University by Ms.ARSHIA NOORIE.N and this has not forwarded a basis for the award of any degree, diploma or fellowship by any other Institute or University.

Place: Bangalore

Date:

(Dr. Nagesh Malavalli)

AMANATH CO-OPERATIVE BANK

AMANATH CO-OPERATIVE BANK Chapter No. Particulars Chapter 1 Executive Summary Introduction: About co-operative Bank Structure of

Chapter No.

Particulars

Chapter 1

Executive Summary Introduction:

About co-operative Bank Structure of co-operative bank

Chapter 2

Problem statement Objective of the study Scope of the study

Chapter 3

Bank Profile Future Plans of The Bank Product Profile

Chapter 4

Research Methodology Research technique Propose of the study Tools of the study Sampling technique Data collection Limitation of the study

AMANATH CO-OPERATIVE BANK

AMANATH CO-OPERATIVE BANK Chapter 5 Review of literature Chapter 6 Credit Management Funds for lending Credit

Chapter 5

Review of literature

Chapter 6

Credit Management Funds for lending Credit Planning Credit Panning Credit Policy Credit Standards Credit Analysis

Chapter 7

Rating system Internal system External system Credit rating system Credit rating model

Chapter 8

Justification & Significance

Chapter 9

Data Analysis & Interpretation

Chapter 10

Findings Suggestions Conclusions Bibliography

AMANATH CO-OPERATIVE BANK

AMANATH CO-OPERATIVE BANK SL.NO TABLE DESCRIPTION 1.1 Distribution of UCB'S at end of march 2005 1.2

SL.NO

TABLE DESCRIPTION

   

1.1

Distribution of UCB'S at end of march 2005

1.2

Distribution of UCB'S Deposits size- wise as

 

on 31st march 2005

2.1

Financial position of Bank

2.2

Rate of Interest on Term Deposit

2.3

Rate of Interest on NRE

2.4

 
 

Growth of Fixed Deposit, Saving Deposit, Current Deposit

3.1

Borrowings from other bank

3.2

Total Credit and Deposit

3.3

Credit Deposit Ratio

4.1

Gross NPA'S and UCB'S

4.2

Status of NPA

4.3

Status of Gross NPA and Net NPA

5.1

Growth Rate of Individual Advances

6.1

Credit Rating Model

7.1

Analysis of Net Sales

7.2

Analysis of Capacity Utilization

7.3

Analysis of DEBT- EQUITY

7.4

Analysis of Current Ratio

7.5

Analysis of Net Profit

7.6

Analysis of Interest Coverage Ratio

AMANATH CO-OPERATIVE BANK

AMANATH CO-OPERATIVE BANK Graph Description 1.1 Deposit 1.2 Loans and Advances 2.1 3.1 Credit Deposit ratio

Graph Description

1.1

Deposit

1.2

Loans and Advances

   

2.1

 

3.1

Credit Deposit ratio Gross NPA of urban co-operative Banks

   

3.2

Status of NPA

4.1

Total growth of Advances

4.1

Credit Rating Model

5.2

net sales

5.3

capacity utilization

5.4

current ratio

5.5

net profit

5.6

interest coverage ratio

7.3

debit equity

7.4

current ratio

7.5

net profit

7.6

interest coverage ratio

AMANATH CO-OPERATIVE BANK

AMANATH CO-OPERATIVE BANK EXECUTIVE SUMMARY M P Birla Institute Of Management 9

EXECUTIVE SUMMARY

AMANATH CO-OPERATIVE BANK

Executive summary

AMANATH CO-OPERATIVE BANK Executive summary Today bank are also a business entity like any other business,

Today bank are also a business entity like any other business, but their risk are highly leveraged, as borrowing money from depositors runs their entire business. The deposit collected from customers are not the bank’s own property .If a bank conducts its business with out exercising the required detrimental to the interest and stability of the entire financial sector and can adversely affect the economics health of the country.

Indian banker today has innumerable challenges: worrying level of Non- performing Assets, stricter prudential norms and diversified risks. They should maintain adequacy of capital and reserve of the bank in relation to loans related risks, the quality of assets and consequent guidelines for provisioning of assets of bad and doubtful quality and recognition of income that the assets generated so as to give the true and correct picture of the profitability of the banks.

In order to avoid default risk the bank should manage the credit risk by developing the rating model .the study is based on analysis of financial statements of small scale industry and then developing a rating model to avoid the default risk of the borrowers. The analysis is based on previous financial reports of small scale industry .the analysis consider the credit risk associated with the lending of loans to the small scale industry .the rating model consist of rating of various factors such as the debt equity ratio, current ratio, net sales increase in profit, demand analysis capacity utilization & various other factors. The rating model is developed by considering the credit policy of Amanath co-operative bank.

AMANATH CO-OPERATIVE BANK

AMANATH CO-OPERATIVE BANK INTRODUCTION M P Birla Institute Of Management 11

INTRODUCTION

AMANATH CO-OPERATIVE BANK

AMANATH CO-OPERATIVE BANK INTRODUCTION TO CO-OPERATIVE BANKING The beginning of co-operative banking in India dates back

INTRODUCTION TO CO-OPERATIVE BANKING

The beginning of co-operative banking in India dates back to 1904. The Institutional source of credit for agriculture and related activities was very inadequate at that time. The money lenders would provide some credit at very high rates of interest. The co-operative banks were expected to substitute such unorganized money market agencies and provide short and long term credit at reasonable rates of interest. It was expected that they would co-ordinate the activities of unorganized and organized segments of Indian money market. Subsequent to the adoption of economic planning in 1951, co-operative banks were expected to play a crucial role in achieving agricultural and rural development. Before the nationalization of commercial banks the co- operative banks were the only substitute for money lenders and other informal sector lenders. But after nationalization and creation of Regional Rural Banks and NABARD their relative share declined. Co-operative Banks in India, (with their network; spread over remote rural areas and a large number of smaller towns), have historically played a major role in mobilization of domestic savings for economic development of the country. They have provided the farmers and non-farm entrepreneurs with the needed credit support. These institutions have also contributed significantly to private capital formation in agriculture and accelerated the pace of distribution of farm inputs NABARD 2002).

AMANATH CO-OPERATIVE BANK

AMANATH CO-OPERATIVE BANK Co-operative banks are promoted to meet the banking requirements of consumers. They are

Co-operative banks are promoted to meet the banking requirements of consumers. They are established not only in the urban areas but also in the rural areas. In rural areas these banks supply finance to agriculture, while in the urban areas they are started to provide finance to buy consumer goods. They provided short and medium term loans. They provide loans at a lower rate comparatively. They are formed on the co-operative society principles and as such are more service oriented than profit oriented.

Definition and meaning of co-operative banks:

In the words of HENRY WOLFF “co-operative banking is an agency which is in a position to deal with the small means on his own terms accepting the security he has and without drawing ion the protection of the rich.

DEVINE defines “a mutual society formed composed and governed by working people themselves for encouraging regular saving and generating miniature loans on easy terms of interest and repayments”. On the analysis of above definitions, one can say that co-operative banks is a co-operative organization where persons Voluntarily associate together as human being on the basis of equality for the Promotion of economic interest of themselves engaged in the banking functions of acceptance of deposits and lending the credit. In short, co-operative bank is an institution, which performs the banking functions of accepting deposits and borrowing of funds and lending of credit.

AMANATH CO-OPERATIVE BANK

AMANATH CO-OPERATIVE BANK FEATURES OF CO-OPERATIVE BANKS 1. They are organized and managed on the principle

FEATURES OF CO-OPERATIVE BANKS

  • 1. They are organized and managed on the principle of co-operation self- help and mutual help. vote”.

They function with the rule of “one member one

  • 2. Co-operative banks perform all the main banking function of deposit mobilization, supply of credit and provision for remittance facilities.

  • 3. Co-operative banks are perhaps the first government supported agency in India.

  • 4. Co-operative banks belong to the money market as well as the capital markets.

  • 5. Co-operative banks accept current, saving, fixed and other types of time deposits from individuals and institutions including banks.

  • 6. Co-operative banks do banking business mainly in the agricultural and rural sector.

  • 7. Some co-operative banks are schedule co-operative banks while others are non-schedule co-operative banks.

AMANATH CO-OPERATIVE BANK

AMANATH CO-OPERATIVE BANK 8. Co-operative banks also required to comply with requirement of statutory liquidity ratio
  • 8. Co-operative banks also required to comply with requirement of statutory liquidity ratio (SLR) and cash reserve ratio (CRR) liquidity requirements as other scheduled and non-scheduled banks.

STRUCTURE OF CO-OPERATIVE BANKING IN INDIA

RBI NABARD SLDBs SCBS UCBs CLDBs CCBs PACs PLDBs Branches of SLDBs
RBI
NABARD
SLDBs
SCBS
UCBs
CLDBs
CCBs
PACs
PLDBs
Branches
of SLDBs

AMANATH CO-OPERATIVE BANK

AMANATH CO-OPERATIVE BANK The co-operative banking is federal in character with three tie linkages between state,

The co-operative banking is federal in character with three tie linkages between state, district and village level institutions. At the state level, we have development banks (SLDBs) at the district level, the central co- operative banks (CCBs) or the District Central co-operative banks (CLDBs), then at the village level, the primary agricultural credit societies (PACs), and the primary land development banks (PLDB’s and the branches of SLDBs). The lower tiers are the members and the shareholders of the immediate higher ties. Besides, there are Urban Co-operative banks (UCBs) or the primary co-operative banks (PCBs) which are outside this federal structure. Though federal in its nature the system is integrated vertically on the basis of Functional responsibilities of various components of the system. The SCBs, CCBs, & PACs form the short term and medium term credit structure and it is the same in all states. The LDBs at various levels make the long term credit structure which is not uniform in all states.

The state level co-operative banks are said to be the apex institutions in their federal Structure. However, the apex institutions from the point of view of promotion, supply of resources and supervision are controlled by the government. NABARD and National Co-operative bank of India, SCBs and SLDBs are in the immediate position between the institution just mentioned on the one hand and the co-operative banks on the other. The SCBs co-ordinate and regulate the working of CCBs. They act ad custodians of surplus funds of the CCBs and supplement them by attracting deposits and by obtaining loans from the RBI. The CCBs mobilize resources in districts to finance their members and they also chanalise funds from the SCB to primary credit societies.

AMANATH CO-OPERATIVE BANK

AMANATH CO-OPERATIVE BANK The PACs at the village level form the base of the co-operative banking.

The PACs at the village level form the base of the co-operative banking. Although they are expected to be multi purpose societies, they mostly deal in credit. Unlike the short and medium term credit structure, the arrangements for the provision of long term are not uniform in all the states however a majority states have a federal set up for this purpose also. These states have SLDBs at the state level affiliated to primary land development banks at the district and taluk levels. In other states the operational units below the SLDBs are the branches of SLDBs .The SLDBs obtain funds by issuing ordinary debentures and special development debentures. The PDBs obtain funds mainly from SLDBs. The LDBs do not accept deposits and therefore, they are not banks in strict sense. They give long term loans. The UCBs are like commercial banks in their operations. The banking commission had opined that the UCBs have not been uniformly and clearly defined in all states. The UCBs are normally restricted under their by-laws and confines their business to metropolitan, urban and semi urban centers. More than one UCB may function in the same town area. They cater mainly to the needs of the small borrowers and owners of small scale units, retail traders, professional and salaried class. The RBI is licensing authority for new banks and new branches of the existing banks. The number of UCBs increased to 2105 including 179 banks under liquidation at the end of June 2004 compared with 1106 in 1966 the year in which UCB were brought under the purview of Banking Regulation Act, 1949. The state wise distribution of branches shows that around 80% of UCBs are concentrated in 5 states viz, Maharastra, Gujarat, Karnataka, Andhra Pradesh, Tamilnadu. Only nine UCBs had a deposit size f more than

AMANATH CO-OPERATIVE BANK

AMANATH CO-OPERATIVE BANK Rs 1000 crore while more of the UCBs (about 60%) had a deposit

Rs 1000 crore while more of the UCBs (about 60%) had a deposit size of less than 25 crore which is shown in the following tables.

TABLE 1.1

DISTRIBUTION OF UCBS: AT THE END – MARCH 2005

Name of the bank

No of banks

No of branches

Andhra Pradesh

133

299

Gujarat

5

5

Jammu & Kashmir

328

1.091

Karnataka

4

17

Kerala

300

1.052

Madhya Pradesh

63

344

Maharastra &Goa

81

108

New Delhi

639

4.333

Orissa

  • 16 60

 

Punjab, Haryana,HP

  • 13 50

 

Rajasthan

  • 17 48

 

Tamil nadu

  • 42 161

 

Pondicherry

134

180

UP&Uttaranchal

80

306

West Bengal

52

86

North Eastern states

19

26

Total

1926

8166

AMANATH CO-OPERATIVE BANK

TABLE 1.2

AMANATH CO-OPERATIVE BANK TABLE 1.2 DISTRIBUTION OF UCB DEPOSIT SIZE-WISE AS ON 31 MARCH 2005 DEPOSIT

DISTRIBUTION OF UCB DEPOSIT SIZE-WISE AS ON 31 MARCH 2005

DEPOSIT SIZE

NO OF BANKS

Less than Rs 10 crore

544

Rs 10-25 crore

401

Rs 25-50 crore

225

Rs 50-100 crore

177

Rs 100-250crore

127

Rs 250-500 crore

38

Rs 500-1000 crore

18

Above Rs 1000 crore

9

(SOURCE: REPORT ON TREND AND PROGRESS OF BANKING IN INDIA)

AMANATH CO-OPERATIVE BANK

PROBLEM STATEMENT

AMANATH CO-OPERATIVE BANK PROBLEM STATEMENT To study credit management process and to manage the credit risks

To study credit management process and to manage the credit risks of the bank in order to reduce the growing default risk problem and to develop the rating model for small scale industry. Hence this project is an attempt which considers the factors while lending loan to small scale industry, and rating those parameters to manage the credit risk.

OBJECTIVE OF STUDY

To study the credit risk associated while lending loans to small scale industry. To study the bank credit policy while lending to small scale industry To study the causes for increase in the NPA To study the parameters consider while lending the loans to small scale industry. To study the objectives of Credit Management. To study the manner in which funds are raised by the bank.

Scope of the Study

Credit risk management is very important in every bank in order to

manage the default risk. The bank should develop an appropriate rating system.

The scope of the study is limited to the credit policy of amanath bank, while lending to small scale industries.

AMANATH CO-OPERATIVE BANK

AMANATH CO-OPERATIVE BANK BANK PROFILE M P Birla Institute Of Management 21

BANK PROFILE

AMANATH CO-OPERATIVE BANK

AMANATH CO-OPERATIVE BANK Amanath Co-operative Bank Ltd had begun with just 3000 members, now boasts of

Amanath Co-operative Bank Ltd had begun with just 3000 members, now boasts of nearly 39,000 members. The 15 branches in the state service the depositors and account holders, who exceed 2.54 lakhs in number. Many more branches are scheduled to open shortly with the aim of extending the area of operation in the state.

Amanath Co-operative Bank Ltd. offers ATM facility at its branches at Brigade Road, Gangenahalli, N.R. Road, Shivajinagar, R.V. Road, Mangalore and Gulbarga. The Bank has stepped into the new millennium incorporating the latest development in banking and Information Technology with a resolve to make banking with Amanath a pleasure.

The microcosm of its objective is "MASS BANKING" right from its inception. Hence, the major thrust of the bank has been to inculcate the banking habits among middle and lower strata of the society, mostly in hitherto unbanked / underbanked areas. Keeping this objective in view, Amanath Bank opened branches in such areas, which are predominantly resided by middle/lower income groups, and the areas concentrated by minorities and backward classes to whom commercial banks are not easily accessible.

The bank has, therefore adopted selective policy in the opening of branches by identifying the centre where there is a good potential for inculcating the habit of saving amongst the people and at the same time, providing much needed finance to these people, not only to meet their domestic needs but also for developing their businesses, and in the process helping them become self-sufficient. Keeping this objective in

AMANATH CO-OPERATIVE BANK

AMANATH CO-OPERATIVE BANK view, Bank has introduced a scheme called 'MICRO-CREDIT' for the benefit of poorest

view, Bank has introduced a scheme called 'MICRO-CREDIT' for the benefit of poorest among poor by involving SHGs and NGOs who are working for the economic upliftment of the poor.

The bank has 443 employees on its roll, including 82 Officers. Human resources being the most important asset of the bank, all out efforts are made to enhance the motivational level and efficiency of the employees. In-house capabilities for imparting adequate training to the employees continued to be a major strength of the bank. Training is being provided to make them more competitive and customer oriented.

The Bank has bagged the "Best Urban Co-operative Bank" award for the second successive year from the Karnataka State Co-operative Federation and Karnataka State urban Banks Federation.

The Reserve Bank of India conferred the "Scheduled Status" on Amanath Bank effective from 29th January 2000 and has included the name of the bank in the second schedule to the Reserve Bank of India act, 1934. Amanath Bank is the first urban Co-operative bank in Karnataka to be awarded this prestigious status. The conferment of "Scheduled Status" will enable it to render more service to the members, clientele and the society. The past achievements are the source of inspiration for future progress and prosperity.

The bank has also excelled in the field of sports by winning both the "Inter-

AMANATH CO-OPERATIVE BANK

AMANATH CO-OPERATIVE BANK Bank Cricket Tournament" organized by the Canara Bank and the "Inter Co-operative Banks

Bank Cricket Tournament" organized by the Canara Bank and the "Inter Co-operative Banks Cricket Tournament" in 2000.

FUTURE PROSECTUS AND PLANS OF THE BANK:

Extension of area of Operation of the Bank to the entire State of Karnataka Opening of branches at all district headquarters and minorities concentrated centers. Installation of ATMs for better customer service. Introduction of more value-added services such as Home Banking, Tele Banking such as Home Banking, Tele Banking Service, Networking Services and E-banking Expansion of credit for Medium Scale Industries Foreign Exchange business. Opening of "Ladies Branches" in minorities concentrated residential areas. Innovative schemes for financing priority sector/weaker section. Opening of currency chest and small coin depot. Launching of Mobile Banking.

AMANATH CO-OPERATIVE BANK

TABLE 2.1

AMANATH CO-OPERATIVE BANK TABLE 2.1 Financial Position of Bank PARTICULARS POSITION AS ON 30.6.1990 31.3.1995 31.3.1999
Financial Position of Bank PARTICULARS POSITION AS ON 30.6.1990 31.3.1995 31.3.1999 31.3.2000 31.03.2001 31.03.2002 31.03.2003 Paid-up
Financial Position of Bank
PARTICULARS POSITION AS ON
30.6.1990 31.3.1995 31.3.1999 31.3.2000 31.03.2001 31.03.2002 31.03.2003
Paid-up Capital
Reserves
Deposits
Advances
Working
Capital
Profits
82
125
209 247
428.09 531.80
526
179 784
1617 2017
3047.50 3917.00
2427
2715
6500
20044
29293
41313.35
48895.70
43965
1895
4064
10578
14663
23631.61
30833.77
29707
3300
8160
23372
33335
47505.28
56185.84
50561
65 191
506 607
712.74 425.94
247

TABLE 2.2

RATE OF INTEREST ON TERM DEPOSITS

 

RATE OF INTEREST

 

PERIOD

   
 

Up to Rs. 15 lakhs

Over Rs. 15 Lakhs

   

Senior

 

Senior

     

Citizens

Citizens

     
  • 31 days - 90 days

5.25%

5.75%

5.75%

6.25%

  • 91 days - 180 days

6.00%

6.50%

6.50%

7.00%

181 days to 1 year

6.25%

6.75%

6.75%

7.25%

Above 1 year up to

6.50%

7.00%

7.00%

7.50%

  • 2 years

       

Above 2 years up to

6.75%

7.25%

7.25%

7.75%

  • 3 years

       

Above 3 years

7.00%

7.50%

7.00%

7.50%

M P Birla Institute Of Management

25

AMANATH CO-OPERATIVE BANK

AMANATH CO-OPERATIVE BANK TABLE 2.3 RATE OF INTEREST ON NRE DEPOSITS Above 1 year to 2

TABLE 2.3

RATE OF INTEREST ON NRE DEPOSITS

Above 1 year

 

to

2

 

up

4.00%

years

 

Above 2

 

to

3

 

years

up

4.70%

years

 

NOTE: S.B & NRE S.B @ 3.50%

AMANATH CO-OPERATIVE BANK

AMANATH CO-OPERATIVE BANK PRODUCT PROFILE M P Birla Institute Of Management 27

PRODUCT PROFILE

AMANATH CO-OPERATIVE BANK

AMANATH CO-OPERATIVE BANK Amanath co-operative Bank offers various Deposit Schemes to suite different customer profile of

Amanath co-operative Bank offers various Deposit Schemes to suite different customer profile of the society. Check here of such schemes and click more info for more detailed information of respective schemes.

Fixed Deposit Cumulative Deposit Savings Bank Accounts

Fixed Deposit

Fixed Deposit Cumulative Deposit Savings Bank Accounts

Cumulative Deposit

Fixed Deposit Cumulative Deposit Savings Bank Accounts

Savings Bank Accounts

Accounts

Accounts

Khushal Deposit Rozan Bachath Deposits Current Accounts

Khushal Deposit

Khushal Deposit Rozan Bachath Deposits Current Accounts

Rozan Bachath Deposits

Khushal Deposit Rozan Bachath Deposits Current Accounts

Current Accounts

Accounts

Flexi Deposits NRI Accounts

Flexi Deposits

Flexi Deposits NRI Accounts

NRI Accounts

   

FIXED DEPOSIT ACCOUNTS

This scheme will enable the depositor to fund his liquid cash for period of time enabling him to get attractive income. An individual, by a guardian on behalf of the Minor, Partnership Associations, Trusts, Associations, Societies and Corporate bodies, can open this account.

KHUSHAL DEPOSIT ACCOUNTS

This is an interesting scheme, which facilitates reinvesting the interest earned over a period of time and also ensures the liquidity. Interest is compounded and calculated on quarterly basis and added to original deposit. Individuals, by a guardian on behalf of the Minor, can open this account Trusts, Associations, Societies and companies for a maximum period of ten years.

CUMULATIVE DEPOSIT ACCOUNTS

This scheme ideally suits monthly savings may be in small accounts but resulting in big accumulation of funds over the period of time. An individual, by a guardian on behalf of the Minor, can open this account

AMANATH CO-OPERATIVE BANK

AMANATH CO-OPERATIVE BANK Trusts, Associations, Societies and companies for a maximum period of ten years. ROZAN

Trusts, Associations, Societies and companies for a maximum period of ten years.

ROZAN BACHATH DEPOSITS

This scheme is aimed at savings on a daily basis from small amount such as Re. 1/-, which is collected at the doorstep of depositor. An individual, firm and partnership to have a savings generated from daily income subject to maximum Rs.1000/- a day can open this account.

SAVINGS BANK ACCOUNTS

Savings Bank Accounts provides the scope for saving of money at attractive terms even with small amounts with a convenience of withdrawing at your pleasure. This account can be opened by an individual, jointly with another individual, by a guardian on behalf of the Minor, Trusts, Associations and Societies.

CURRENT ACCOUNTS

The Current Accounts are opened to meet needs of the business community involving large transactions of business nature. An individual, a firm, Partnership Associations, Trusts, Societies and Companies, can open this Account. This account can be opened by an individual, jointly with another

AMANATH CO-OPERATIVE BANK

AMANATH CO-OPERATIVE BANK individual, by a guardian on behalf of the Minor, Trusts, Associations and Societies.

individual, by a guardian on behalf of the Minor, Trusts, Associations and Societies.

FLEXI DEPOSITS

This scheme will enable the depositor / Investor to fund his liquid cash for period of time enabling him to get attractive income and also investment for a secured future. This account can be opened by an individual, jointly with another individual, by a guardian on behalf of the Minor, Non-resident individuals, Associations, Trusts and Corporate bodies.

Graph 1.1

DEPOSITS

AMANATH CO-OPERATIVE BANK individual, by a guardian on behalf of the Minor, Trusts, Associations and Societies.

AMANATH CO-OPERATIVE BANK

Graph 1.2

LOANS /ADVANCES

AMANATH CO-OPERATIVE BANK Graph 1.2 LOANS /ADVANCES LOANS AND ADVANCES OFFERED BY THE BANK TABLE 2.4
AMANATH CO-OPERATIVE BANK Graph 1.2 LOANS /ADVANCES LOANS AND ADVANCES OFFERED BY THE BANK TABLE 2.4

LOANS AND ADVANCES OFFERED BY THE BANK TABLE 2.4

Business Loans

To traders, workshop, hotels and other business Ventures.

Industrial Loans

To start small scale and medium scale Industries.

Vehicle Loans

75% loan against the cost of vehicle (two, three and four wheeler) with repayment span as per repayment capacity.

AMANATH CO-OPERATIVE BANK

AMANATH CO-OPERATIVE BANK Personal Loans For petty trade, education, housing, marriage and other ceremonial purposes. Housing
   

Personal Loans

For petty trade, education, housing, marriage and other ceremonial purposes.

Housing Loans

For construction /acquisition of homes Repairs, renovation etc

Consumer Loans

For purchase of household articles like T.V, Fridge, Furniture, computer etc

Professional Loans

For Doctors, Engineers and Chartered Accountants etc to set up their offices

Educational Loans

For Graduates, Post graduates and professional Courses

AMANATH CO-OPERATIVE BANK

AMANATH CO-OPERATIVE BANK RESEARCH METHODOLOGY M P Birla Institute Of Management 33

RESEARCH METHODOLOGY

AMANATH CO-OPERATIVE BANK

Research Technique

AMANATH CO-OPERATIVE BANK Research Technique The research method adopted is analytical research .The study required analysis

The research method adopted is analytical research .The study required analysis of financial statements, ratio analysis, debt coverage ratio interest coverage ratio, and turn over of the company, efficiency & capacity utilization of the company.

Purpose of the Study

The main purpose of this work is o To study the parameters required while granting the loan to small scale industry which will help to minimize the NPA problem of the bank, and to find out as well as suggest the remedial measures. o To understand the factors which influence in the rise of credit risk o To understand the importance of credit risk management with the practical orientation. o The bank can consider these suggestions to decrease the default risk problem. There by developing a rating system for the small scale industry.

Tools of the Study

The tools used conducting research study is through analysis of

financial statements and personal interviews. The interview is framed with both open ended and close-ended questions.

AMANATH CO-OPERATIVE BANK

Sampling Technique:

AMANATH CO-OPERATIVE BANK Sampling Technique: The sample technique used in this project is of the convent

The sample technique used in this project is of the convent sampling where the sample are selected as per the convince, for which the entire financial data was available to analyses all the financial statement.

STATISTICAL ANALYSIS

In the analysis statistical tools like simple percentages and ratios are

extensively used.

Data Collection Technique:

Primary data: Interview with employee of amanath co-operative bank in particular to the credit management department.

Secondary data: The banks previous records for lending to small scale industries. The financial report of small scale industries

Limitations of the Study

The research project is aimed at analysing the credit risk, and analysis financial statement of small scale industry’s and develops a credit rating system at Amanath co-operative Bank.

There are several shortcomings, which are listed below:

AMANATH CO-OPERATIVE BANK

AMANATH CO-OPERATIVE BANK 1) The study is confined to only , Amanath co-operative Bank Bangalore and

1) The study is confined to only, Amanath co-operative Bank Bangalore and therefore the results and conclusions of study may not be applicable to other banks. 2) The study size is confined to 10 financial reports of small scale industry due to time constraint so an extensive research could not be undertaken. 3) Analysis is done on the assumptions that financial data obtained is accurate. 4) The study is limited only to ACBL. 5) The study is limited to information provided by the bank. 6) In depth study was not done.

AMANATH CO-OPERATIVE BANK

AMANATH CO-OPERATIVE BANK REVIEW OF LITERATURE Credit Risk and NPAs Quite often credit risk management (CRM)

REVIEW OF LITERATURE

Credit Risk and NPAs

Quite often credit risk management (CRM) is confused with managing non- performing assets (NPAs). However there is an appreciable difference between the two. NPAs are a result of past action whose effects are realized in the present i.e. they represent credit risk that has already materialized and default has already taken place.

On the other hand managing credit risk is a much more forward-looking approach and is mainly concerned with managing the quality of credit portfolio before default takes place. In other words, an attempt is made to avoid possible default by properly managing credit risk.

Considering the current global recession and unreliable information in financial statements, there is high credit risk in the banking and lending business.

To create a defense against such uncertainty, bankers are expected to develop an effective internal credit risk models for the purpose of credit risk management.

Credit risk is most simply defined as the potential that a bank borrower or counterparty will fail to meet its obligations in accordance with agreed terms. The goal of credit risk management is to maximize a bank’s risk-

adjusted rate of return by maintaining credit risk exposure within acceptable parameters. Banks need to manage the credit risk inherent in the entire

AMANATH CO-OPERATIVE BANK

AMANATH CO-OPERATIVE BANK portfolio as well as the risk in individual credits or transactions. Banks should

portfolio as well as the risk in individual credits or transactions. Banks should also consider the relationships between credit risk and other risks. The effective management of credit risk is a critical component of a comprehensive approach to risk management and essential to the long-term success of any banking organization.

For most banks, loans are the largest and most obvious source of credit risk; however, other sources of credit risk exist throughout the activities of a bank, including in the banking book and in the trading book. Banks are increasingly facing credit risk (or counterparty risk) in various advances.

Banks should now have a keen awareness of the need to identify, measure, monitor and control credit risk as well as to determine that they hold adequate capital against these risks and that they are adequately compensated for risks incurred

The sound practices set out in this document specifically address the following areas:

Establishing an appropriate credit risk environment; Operating under a sound credit granting process; Maintaining an appropriate credit administration, measurement and monitoring process; Ensuring adequate controls over credit risk.

Although specific credit risk management practices may differ among banks depending upon the nature and complexity of their credit activities, a

AMANATH CO-OPERATIVE BANK

AMANATH CO-OPERATIVE BANK comprehensive credit risk management program will address these four areas. These practices should

comprehensive credit risk management program will address these four areas. These practices should also be applied in conjunction with sound practices related to the assessment of asset quality, the adequacy of provisions and reserves,

A further particular instance of credit risk relates to the process of settling financial transactions. If one side of a transaction is settled but the other fails, a loss may be incurred that is equal to the principal amount of the transaction. Even if one party is simply late in settling, then the other party may incur a loss relating to missed investment opportunities.

Settlement risk (i.e. the risk that the completion or settlement of a financial transaction will fail to take place as expected) thus includes elements of liquidity, market, operational and reputation risk as well as credit risk. The level of risk is determined by the particular arrangements for settlement. Factors in such arrangements that have a bearing on credit risk.

AMANATH CO-OPERATIVE BANK

AMANATH CO-OPERATIVE BANK CREDIT MANAGEMENT M P Birla Institute Of Management 40

CREDIT MANAGEMENT

AMANATH CO-OPERATIVE BANK

CREDIT MANAGEMENT

AMANATH CO-OPERATIVE BANK CREDIT MANAGEMENT “Credit allows the customer to buy now pay later”. constitutes the

“Credit allows the customer to buy now pay later”. So also credit constitutes the major business activity of the banks i.e. lending loan and advances. Of all the functions of modern banking, with or without security is by far the most important function .Advances comprise a very large portion of total bank assets and forms to backbone of very bank structure. The strength of the bank is thus primarily judged by the soundness of its advances. A wise and prudent policy in regard to advances is considered an important factor inspiring confidence in the depositors and the prospective customer of a bank. Advances not play an important role in gross earnings of banks, but also promote the economic development of the country. All type of business activity including trade, industry and agriculture depend on bank finance in one form or other. Banks by canalizing accumulated savings of the nation into productive uses help both depositors and borrowers. Bank assists in creating more avenues of employment and thus helps in raising the standard of living of the people. Creditability of a bank is one of the most important criteria in establishing the credit-worthiness of a bank. Loans and advances constitute lending. Loans form the major business activity of a bank and they need to be liquid and easily realizable as the bank is obligated to repay the depositors as and when they are due for payment. Major part of the bank’s income is earned from interest on the advances .So there is a need for the proper management of loans and advances.

AMANATH CO-OPERATIVE BANK

AMANATH CO-OPERATIVE BANK MEANING OF CREDIT MANAGEMENT CREDIT MANAGEMENT can be defined as management of loans

MEANING OF CREDIT MANAGEMENT

CREDIT MANAGEMENT can be defined as management of loans and advances in Banks.

In other words credit management means successfully managing the credit by paying the debt obligations on time for the amount required.

FUNDS FOR LENDING

If we examine the Balance sheet of a bank, we would observe that the main Sources of funds available for lending and investment are as follows:

Deposits of all types – fixed, current, saving and recurring Borrowings from other banks mostly from RBI Undistributed profit Paid-up-capital General reserves and other resources Re-finance loans from the IDBI and NABARD

FORMS OF BANK LENDING

Banks offers different kinds of borrowing facilities to customers for various purposes according to security, maturity, method of payment which is highlighted below:

LOANS:

A loan account represents one

way of lending

money to

a

customer. In case of loan, the banker advances a lump sum for a certain

AMANATH CO-OPERATIVE BANK

AMANATH CO-OPERATIVE BANK period at an agreed rate of Interest. The entire amount is paid either

period at an agreed rate of Interest. The entire amount is paid either in cash or by credit to his current account, which he can draw at any time. The interest is charged for the full amount sanctioned whether he draws the money from his account or not. To this extent, loan account loan account borrowing is more costly than overdraft.

OVERDRAFT: Overdraft is an arrangement between a banker and his customer by which the latter is allowed to withdraw over and above his credit balance in the current account up to an agreed limit. This is only a temporary arrangement usually granted against securities which may be personal or tangible.

CASH CREDIT: A cash credit is an arrangement by which the customer is allowed to borrow money up to a certain limit. The customer need not draw the sanctioned amount at once but draw the amount as and when required and can save the interest by reducing the debit balance whenever he is in a position to do so. They are granted against personal security.

BILLS DISCOUNTED: Bills, maturing with in 90 days are discounted by banks for approved parties. It constitutes a clean advance against two or more signatures of independent parties, one that of endorser and the other that of the drawer. Banks rely on credit-worthiness, standing and means of the endorser.

BILLS PURCHASED: Bills, clean or documentary are sometimes purchased from approved customers in whose favor regular limits are sanctioned. In case of documentary bill, the drafts are accompanied by

AMANATH CO-OPERATIVE BANK

AMANATH CO-OPERATIVE BANK documents of title to goods such as railway receipts or bill of lading.

documents of title to goods such as railway receipts or bill of lading. Before granting a limit the bankers satisfy himself as to the credit-worthiness of the drawer. Sometimes banks verify the financial standing of the drawers of the bills particularly when the amounts are large.

TERM LOANS: Since sometimes, bankers have started lending large amounts for fairly long periods to industries and agriculture on the security of fixed asset term loan basis. Such loans are re-payable by installment over a number of years ranging from 3 to 10 years and some times more. Banks extended term loans for acquiring fixed assets by their customers. Banks normally ask for project to understand the cost of project, source of finance, fund/cash flow estimates for the period.

CREDIT PLANNING

Credit planning has emerged as a major instrument for planned allocation of credit among the various sectors and projects that have been considered necessary for the allocation of scarce resources in accordance with planned priorities. The basic objective of credit planning is to guide investment and output along the lines postulated in the development planning by RBI .The macro level national credit plan is linked with micro level credit budgets of banks.

For the implementation

of national level credit plan

formulated at the

macro level , it becomes necessary to disaggregate in terms of its various components like deposit mobilization , credit expansion , priority sector

AMANATH CO-OPERATIVE BANK

AMANATH CO-OPERATIVE BANK lending so that individual banks should know how exactly each bank fits into

lending so that individual banks should know how exactly each bank fits into the national credit plan . In-fact credit planning is a two way process:

Individual bank’s credit plan should feed the process of credit plan formulated at national level. Once the national plan is finalized individual banks should implement it in terms of its various components.

Based on their experience and judgment banks formulate their own credit plan in the prescribed preformed. The implementation of the credit plan is largely the responsibility of individual banks for the realistic estimation of available resources for lending mainly in the form of mobilization of deposits. While preparing the credit plan and making credit allocation, a bank has to consider all the quantitative and qualitative aspects as summarized below:

  • 1. The resources available for deployment have to be gauged from expected mobilization of deposits, the charge on such deposit accretion by way of Cash reserves, statutory requirement and net funds availability.

  • 2. Funds required to meet the statutory obligations deducting the liquid assets from the total estimated demand and time liabilities we can find out the funds for lending

  • 3. In estimating the total credit, funds are allocated for sectoral employment and the balance should be embarked for different segments of borrowers like industry, trade and commerce.

AMANATH CO-OPERATIVE BANK

AMANATH CO-OPERATIVE BANK 4. Each branch of bank will then prepare the annual credit plan for
  • 4. Each branch of bank will then prepare the annual credit plan for deployment Credit in each of the villages in its own service area.

  • 5. The annual credit plan should reflect both the needs and potentialities of the Area on the basis of the intimate knowledge gained by the branch manager through the survey.

  • 6. The branch manager will take a note of the lending programmer, PLDB’s while finalizing their own credit plans.

  • 7. A list of borrowers is to be obtained to avoid double financing and emphasis has to be on agriculture and allied activities.

  • 8. The annual credit plans prepared by all the branches in a block together with the lending programmes of co-operatives and the primary sector activities Proposed to be financed are to be consolidated into block credit plan.

  • 9. While financing the credit proposals, in case of any minor shortfalls, the RBI can be approached for stand-by and discretionary refinance limits. CREDIT POLICY According to the preamble of RBI Act of 1934, the main functions of RBI are to regulate the issue of bank notes and keeping of reserves with a view to secure monetary stability and generally to operate the currency and credit systems of the country to its advantage . Credit policy can be looked upon as a short term policy instrument to make connections in the economy as it progresses. It is customary for the Reserve bank to announce the credit policy for the first half of the fiscal year. The credit policy indicates the current economic scenario while at the same time indicates the areas where credit

AMANATH CO-OPERATIVE BANK

AMANATH CO-OPERATIVE BANK policy initiatives are required. It also specifies the various policy measures to be

policy initiatives are required. It also specifies the various policy measures to be indicated by the reserve bank over the next six months.

The credit policy measures may include some or all of the following measures depending upon the prevailing situations:

Reserve Bank’s expectations of deposit growth and to achieve the targeted growth rate. Measures to control liquidity in the banking system which may include CRR, SLR and curtailment of refinance facilities. Changes in bank deposit and lending interest rate and their effect on savings and deposit mobilization, priority sector lending, investment and bank profitability. Measures to promote agricultural growth and rural development. Changes in re-financing and bills re-discounting facilities.

So, also individual banks must also prepare their own credit policy in

conformation with the guidelines issued by RBI. A bank’s credit policy is of

  • a. Tight or Restrictive

  • b. Liberal or Non restrictive

CREDIT STANDARDS

If credit standards are relaxed it means more credit will be extended while if standards are tightened less credit will be extended. The written policy states the type of loans the bank considers desirable. Desirable loans routinely include the granting of short term loans to business customers in

AMANATH CO-OPERATIVE BANK

AMANATH CO-OPERATIVE BANK the trade area to the extent that resources and opportunities permit. The type

the trade area to the extent that resources and opportunities permit. The type of loans to be avoided should be mentioned. It should indicate both desirable and unacceptable types of collateral. It should further indicate circumstances in which unsecured lending is prohibited. The loan policy should establish lending limits for all loan officers and loan committees.

CREDIT ANALYSIS AND CREDIT INVESTIGATION

Besides establishing credit standards a bank should develop procedure for evaluating credit applicants. The basic aspects of credit policies are credit analysis and credit investigation.

CREDIT ANALYSIS is the process of assessing the risk of lending to a business or an individual. The so called credit risk must be evaluated against the benefits the bank expects to derive from making a loan. Credit risk is primarily related to the quality of the bank’s loan portfolio and the bank’s delivery mechanism. a banks risk exposure is determined by its portfolio of its assets, liabilities and capital. Credit risk is the risk that the counter party will to perform on an obligation to the bank Credit risk constitutes the critical portfolio which has to be managed well by the banks.

Credit risk assessment has both quantitative and qualitative dimensions, the qualitative dimension of risk are generally more difficult to assess. The two basic steps involved in this process are:

AMANATH CO-OPERATIVE BANK

  • 1. Obtaining Credit information

  • 2. Analysis of credit information

AMANATH CO-OPERATIVE BANK 1. Obtaining Credit information 2. Analysis of credit information OBTAINING CREDIT INFORMATION: The

OBTAINING CREDIT INFORMATION:

The first step in credit analysis is obtaining credit information which

forms a basis to evaluate the credit worthiness of a customer. The sources of information may be:

a.

Internal

b. External

INTERNAL:

Banks usually require their customers to fill various forms and documents giving details of its financial operations .They are also require to furnish trade references with which banks can have contacts to judge the credit worthiness of the customer. Another source of credit information is derived from the records of the banks contemplating on the extension of credit .It is likely that a particular customer may have enjoyed credit facility in the past , in that case the bank would have information on the behavior of the customer in terms of the historical payment pattern. But this type of information may not be sufficient and may therefore have to be supplemented by information from other sources.

EXTERNAL:

The second source of information is external. The availability of Information from this source to assess the credit worthiness of customers depends on the development of institutional facilities and industry practices. In India the external sources of information is not developed as much as

AMANATH CO-OPERATIVE BANK

AMANATH CO-OPERATIVE BANK industrially developed countries of the world. Depending upon the availability the following sources

industrially developed countries of the world. Depending upon the availability the following sources may be employed:

(i)

Financial Statements

(ii)

Bank Reference

(iii)

Trade Reference

(iv)

Credit Bureau Report

ANALYSIS OF CREDIT INFORMATION

Once the credit information has been collected from different sources it should be analyzed to determine the credit worthiness of the applicant. Although these are not established procedure to analyze the information the firm should cover two aspects:

1 Quantitative

2. Qualitative

QUANTITAVE: The assessment of the quantitative aspect is based on the factual information available from the financial statements the past record of the firm. The first step involved in this type of assessment is to prepare ageing schedule of the accounts payable of the applicant as well as calculate average age of the accounts payable. The exercise will give an insight into the past records of the customer. Another step involved in analyzing the credit information is through ratio analysis of the liquidity, profitability and debt capacity of the applicant. These ratios should be compared with the industry average. More over trend analysis over a period of time would reveal the financial strength of the customers.

AMANATH CO-OPERATIVE BANK

QUALITATIVE:

AMANATH CO-OPERATIVE BANK QUALITATIVE: The quantitative assessment should be supplemented by a qualitative interpretation of the

The quantitative assessment should be supplemented by a qualitative interpretation of the applicant’s credit worthiness .The su bjective judgment cover aspects relating to the quality management. Here the reference from other suppliers, bank reference and specialist bureau report would form the basis for the conclusion to be drawn. In the ultimate analysis the decision whether to grant credit to the applicant and what amount to extend will depend upon the subjective interpretation of his credit standing. After obtaining and analyzing the credit information the firm will get an idea about the type of the customer, whether new or existing, the customer’s business line, background and related trade risk and these data should be promptly gathered. It finally helps to classify the customer into several credit categories:

Completely reliable customer Highly reliable customer Slightly reliable customer Doubtful customer

Unnecessary delay in responding to the customer request can prove to be detrimental and should be informed about the decision taken by the bank whether he will be granted credit or not.

AMANATH CO-OPERATIVE BANK

AMANATH CO-OPERATIVE BANK FOLLOW-UP SUPERVISION AND CONTROL OF BANK CREDIT No doubt, credit disbursals are made

FOLLOW-UP SUPERVISION AND CONTROL OF BANK CREDIT

No doubt, credit disbursals are made by banks after careful evaluation and appraisal of loan proposals to determine their ‘bank ability’ on the basis

of principles of bank of the lending banker is to follow-up and supervise the use of bank credit to verify First, whether the assumptions on which lending decision was taken continue to hold good both in regard to business operations and environment and second whether the end use is according to the purpose for which it was given.

When money has been lent, the bank can reduce the risk of not getting repaid by checking up on how the money has been used and what the customer is doing about repayment. Any diversion of funds and deviation by the borrowers from terms and conditions stipulated by banks has to be noticed and timely action has to be taken. As such, the banker has to be cautious and guard against any misuse of credit facilities. Loans -made successfully should be repaid according to their terms and conditions.

It has been said that a bank “never” makes a bad loan – a loan goes bad after it has been made. So it is very necessary to take necessary precaution before accepting the proposal for credit and at the same time it is also necessary to supervise and control after loan is disbursed to the customer.

ADVANCES

There are 2 types of Advances given. They are:-

Secured Advances

AMANATH CO-OPERATIVE BANK

Unsecured Advances

Secured Advances

AMANATH CO-OPERATIVE BANK • Unsecured Advances Secured Advances The advances are granted against security of some

The advances are granted against security of some property. Security

may be in the form of Hypothecation, Pledge or Mortgage. The loans are sanctioned against the following securities:-

Unsecured advances

These advances are granted against personal security which includes the following:- Surety loans: These loans are sanctioned to only regular members of the bank against the personal security of one or more members. The period of loan shall be 12-25 months for the purpose of trade, commerce and for productive purposes such as poultry, farming, bee keeping and dairy farming etc and up to 48 months for other purposes such as housing, education, consumption, ceremonial purposes etc repayable monthly installments together with interest.

Clean Overdraft/overdraft/cash credit

It is granted only to the regular members of the bank who is engaged in bonafide trade, commerce and industry. It may be granted for such periods as fixed by the board of directors in each case but not exceeding one year in any case

TABLE 2.4

Growth of Fixed Deposit , Saving Deposit and Current Deposits

AMANATH CO-OPERATIVE BANK

(In Percentage)

AMANATH CO-OPERATIVE BANK (In Percentage) YEAR Fixed Deposits Saving Bank Current Deposits Deposits 2002 148.42 118.45
 

YEAR

Fixed Deposits

Saving Bank

 

Current

 

Deposits

Deposits

2002

 
  • 148.42 118.45

 

131.70

2003

 
  • 118.15 125.27

 

98.63

2004

86.09

98.37

 

108.37

2005

73.90

107.24

 

122.05

Inference: From the table it is observed that the percentage growth of total Fixed Deposits was148.42% during the year 20002-2003 which reduced to 73.90 percent by the year 2004-2005.The percentage growth of total Saving Bank Deposit was 118.45% during the year 2002-2003 which reduced to 107.24% by the year 2004-2005.The percentage growth of Current deposit was 131.70% during the year 20001-2002 which reduced to 122.05% by the year 2004-2005. Overall the growth rate of all types of deposits is reducing over the years.

 

Table 3.1BORROWINGS FROM OTHER BANKS

 
 

YEAR

NABARD

KCAB

 

KMDC

 

2000

---

8.6

 

---

 

2001

---

---

 

---

 

2002

715.47

479.36

 

---

 

2003

608

---

 

6.25

 

2004

386.91

---

 

---

 

TOTAL

1710.38

487.96

 

6.25

AMANATH CO-OPERATIVE BANK

AMANATH CO-OPERATIVE BANK Inference : From the above table it is observed that the main source

Inference: From the above table it is observed that the main source of funds for the bank is the borrowings from NABARD.The second main source is Karnataka State Co-operative Apex Bank Ltd (KCAB).

Credit- Deposit Ratio

Credit Deposit ratio is a measure of utilization of resources (deposits) by banks and has a direct bearing on the size of the loan portfolio. It has implications for the profitability of the banks. It is one of the most widely used banking indicators for analyzing the role of banks in promoting productive sectors and contributing to economic growth. CD ratio assumes greater significance as an aggressive measure for gauging the effectiveness of credit delivery system. Higher CD ratio implies for greater credit orientation of banks. The deployment of credit and time path of CD ratio in general is influenced by structural transformation of the economy, the role of credit culture and lending policy of banks have a considerable impact on the size of the ratio.

Table3.2

Total Credit and Deposits

(Rs in lakh)

YEAR

CREDIT

DEPOSIT

 
  • 2002 23631.61

41313.34

 
  • 2003 30833.77

48895.70

 
  • 2004 29707.79

43965.84

 
  • 2005 22291.40

35390.97

AMANATH CO-OPERATIVE BANK

AMANATH CO-OPERATIVE BANK Inference: From the above table it is observed that total credit advanced was

Inference: From the above table it is observed that total credit advanced was Rs.23631.61 lakh against total deposit of Rs.41313.34 lakh during the year 2002 which reduced to Rs.22291.40 lakh against total deposit of Rs.35390.97 lakh by the year 2005.

GRAPH 2.1 CREDIT DEPOSIT RATIO

Amount

Credit Deposit Ratio

   

50000

50000

40000

30000

20000

 

Credit

   

10000

   

0

   

Deposit

2002

2003

2004

2005

 

Financial years

Table no-3.3 Credit Deposit ratio

Year

In Percentage

2001

50.05

2002

57.20

2003

63.06

2004

67.57

2005

62.98

AMANATH CO-OPERATIVE BANK

AMANATH CO-OPERATIVE BANK Inference : From the table it is observed that the credit deposit ratio

Inference: From the table it is observed that the credit deposit ratio was 50.05% during the year 2002 which increased to 62.98% by the year 2005.

RATING SYSTEM

AMANATH CO-OPERATIVE BANK

AMANATH CO-OPERATIVE BANK Unlike agency rating, which use public scales, internal ratings use, propriety scales that

Unlike agency rating, which use public scales, internal ratings use, propriety scales that vary across banks. Both types of rating serve as the foundation for the internal rating based (IRB) approach of the new accord and should play a role for differentiating credit risk of loans.

External ratings are those of debt issues, not of issuers. The ratings assigned to senior unsecured debt are close to issuer rating since the debt default only if the issuer does. Subordinate debt might default without a default of senior debt. The secured debt benefits from various guarantees, acting as a shield between the debts risk and the pure issuers credit risk. The ratings of issues of facilities capture the severity of losses, which is combination of default probability and expected recovery.

Rating schemes use various criteria, from qualitative factors such as strengths and weakness of firms, up to financials of corporate borrowers. Internal rating system should use a rating scheme isolating the various ingredients of credit risk, default probability and recovery rates. This implies distinguishing the intrinsic rating of barrower, the role of a supporting entity if any the recoveries resulting from the guarantees attached to each facility. To move back and forth from internal ratings to default probabilities, as the IRB approach of regulatory requires, a mapping between external ratings and internals ratings. This mapping remains conventional. The last section explains how to move from internal ratings to default probabilities, one of the major credit risk drivers in risk models.

AMANATH CO-OPERATIVE BANK

EXTERNAL RATING:

AMANATH CO-OPERATIVE BANK EXTERNAL RATING : The main or global, rating agencies are Moody’s, standard and

The main or global, rating agencies are Moody’s, standard and Poor’s (S&P) and Fitch. Ratings are assessments of the credit standing of a debt issue, materialized by coded letters (Such as AAA, AA, etc) that serve essentially the needs of investors to have a third party view on the credit risk of dent. In additions, ratings rank risk rather than value risk. This is a major distinction between ratings and default probabilities, the later being a quantification of the default likelihood of a debt issuer.

Rating agencies rate public issues rather than issuers. The same issuers usually have several debt issues rather than issuers not all of them having the same risk. They all share the risk that the issuer defaults. However, issues differ by seniority levels and guarantees. Senior unsecured ratings are very close to issuer rating because they benefits from first priority repayments in the event of default. Hence the likelihood of less is similar to the default likelihood of the issuer. Secured debts have collateral attached so that, in the event of default of the issuer, they benefit from the higher recoveries. Subordinate debts are subject to claims from more senior lenders and have a higher risk. Therefore, the credit risk varies across debt issues of the same issuer, even though they all share the same default risk, which is specific to the issuer because senior unsecured debt is first to be repaid and does not benefit from any collateral other than the credit standing of the issuer, it is possible to consider senior unsecured debt rating as issuer’s rating.

AMANATH CO-OPERATIVE BANK

AMANATH CO-OPERATIVE BANK Ratings depend on the fundamental analysis under a long view. Agencies tend to

Ratings depend on the fundamental analysis under a long view. Agencies tend to rate ‘through the cycle’ based on the long -term view of ‘strength and

weaknesses, opportunities and threat’ (SWOT) of firms. Hence, ratings do not change frequently under normal conditions because short-term deviations due to current conditions are not relevant as long as they do not alter durably the credit standing of an obligor. However, agencies continuously review their ratings on a periodical basis or under occurrence of contingent events that affect the credit standing of an issuer. An example of such an event is a merger or an acquisition, which changes significantly the risk profile of corporate borrower. Rating agencies also provide short-term rating and signal ratings under review to investor.

External ratings apply to various debt issues from: corporate firms; banks and financial institution; sovereign borrowers (country risk); multilateral development banks. Ratings also apply to currencies, including local currency and foreign currency held locally and subject to transfer risk, the risk of being unable to transfer cash out of the country. By contrast an issuer’s rating characteristics the credit standing of an issuer and should correlate with its default probability.

Rating from agencies exits only for issues of large listed companies. This creates a bias when assigning default frequencies based on historical default statistics because the sample of counter parties rated by agencies is usually not representative of the banks, portfolios. For bank corporate loans or market counter parties, external agency ratings are usually not available because borrowers are medium or small businesses.

AMANATH CO-OPERATIVE BANK

AMANATH CO-OPERATIVE BANK Banks need to relay their own internal rating scheme to differentiate the risk

Banks need to relay their own internal rating scheme to differentiate the risk of their exposures to these counter parties. In general, a typical rating scales uses such general quantifications of credit risk as ‘highest’, ‘high grade’, ‘some risk’ or vulnerable’,’ highly vulnerable’. The quantifications of various le vels do not make fully explicit the criteria used for rating, although all agencies provide methodology notes. This makes sense given that there are a wide variety of criteria influencing the credit standing of borrower.

INTERNAL RATING SYSTEM:

Internal rating system is public and is customized to each bank’s need. There is a strong tendency towards harmonization due to the new regulations putting the rating system in a central position for evaluation capital requirements. Since capital requirements affect pricing, the banking industry needs common benchmarks. Banks have exposure to all sorts of counter parties and across industries and countries. Therefore, all banks also need ratings for various types of entities; corporate firms; banks; country rating. Like external ratings, internal ratings are grades assigned to borrowers or facilities for ranking their risk relative to each other. Unlike external ratings, the counter parties of the banks are usually non-rated entities, Such as small or medium size businesses. Internal rating isolates the borrowers risk from the facility risk, which depends on how secured it is. Internal ratings result from a review of both borrowers and facility characteristics.

AMANATH CO-OPERATIVE BANK

AMANATH CO-OPERATIVE BANK Typical components of internal rating system include: Borrowers risk External support from a

Typical components of internal rating system include:

Borrowers risk External support from a supporting entity, typically a holding company supporting a subsidiary. Facility risk (a facility being transaction), the equivalent to a debt issue for public firms.

The intrinsic borrower’s risks are the risk of a corporate as a standalone entity. The support of another entity can stonily affect the risk of the couple ‘primarily barrower supporting entity’ facilities might benefits from a wide spectrum of guarantees, strongly mitigating the credit risk.

Support plays a major role in enhancing intrinsic rating. The support can be formal, for government owned companies for instance. In general, support designates a less formal relationship linking a holding company to its subsidiary. If the subsidiary is in the core business of the parent company, chances are that the parent company will not let it down. To assess support, it is necessary to assess the credit standing of the direct borrower, that of the supporting entity and the ‘strength’ of the support. Combining support assessment with intrinsic rating provide the borrowers overall rating. For facilities, other factors mitigate credit risk, mainly the seniority level and the guarantees attached to single facilities.

Hence, a well-collateralized facility might have a good rating even though the role for banks internal system.

AMANATH CO-OPERATIVE BANK

AMANATH CO-OPERATIVE BANK The risk mitigates of a facility relate directly to recovery in the event

The risk mitigates of a facility relate directly to recovery in the event of default. Recovery rates based on experience, type of transaction and type of guarantee now serve as a substitute for facility ratings, sometimes used. Chances are that these Forfeits will evolve into hard data with historical statistics from default built up under the incentives of the regulators.

Internal ratings of banks should ideally include:

The intrinsic rating of the borrowers.

In the rating of the supporting entity:

The overall borrower rating, given intrinsic rating, the supporting entity rating and the assessment of the support An assessment of the guarantees, which should be converted into a recovery rate of loss, given default rate for capital requirement purposes. It is desirable to differentiate recovery rates according to the nature of guarantees. A rating qualifying the intensity of support of a parent company if any. Evidence from many banks in recent years suggests that collateral values and recovery rates (RRs). This link between RRs and default rates has traditionally been neglected by credit risk models, as most of them focused on default risk and adopted static loss assumptions, treating the RR either as

AMANATH CO-OPERATIVE BANK

AMANATH CO-OPERATIVE BANK a constant parameter or as a stochastic variable independent from the probability of

a constant parameter or as a stochastic variable independent from the probability of default (PD).

Strength and weakness competitive advantages financial etc.

 
Strength and weakness competitive advantages financial etc. Intrinsic rating of borrowers .

Intrinsic rating of borrowers.

 

Third party support and credit standing country risk regulations

 
Third party support and credit standing country risk regulations Internal ratings of borrower

Internal ratings of borrower

 
 

Guarantees: third party, collateral etc.

 
Guarantees: third party, collateral etc. Internal rating of facilities or recovery date

Internal rating of facilities or

recovery date

 
 

Internal Rating System in co-operative banks base their analyses on a company’s financial statements, turn ov er, ratios analysis, management quality and competitive position in its industry, and seek to predict credit performance – the servicing of debt obligations in full and on time, and several other parameters including stress situations. This analysis is based not only on public information, but also on private/confidential information.

Inherent in this definition of ratings is the notion that they are an ordinal measure of risk, but not necessarily a cardinal one. Accordingly, all Credit Rating system expresses the outcome of their assessments in the form of symbols, such as PPP, AAA, or on a scale 20.

AMANATH CO-OPERATIVE BANK

AMANATH CO-OPERATIVE BANK From an operational standpoint, the purpose of ratings is to measure credit risk

From an operational standpoint, the purpose of ratings is to measure credit risk in terms of probability of default, expected losses or likelihood of timely payments in accordance with contractual terms. Internal Rating System the

Probability of default varies with different time horizons. While agencies have been criticized, and at times rightly so, for being vague as to the time horizon over which they are rating, Different agencies use different concepts of loss, although in practice the differences do not appear to affect the ratings outcomes significantly. IRAs compare the fundamental credit analysis on which ratings are based with market sentiment, which is measured by quantitative indicators such as the market price of corporate bonds and equities, price volatility, the subordinated debt price, and the credit default swap price.

Although the recent increase in rating volatility may to some extent have been due to an increase in economic and business uncertainty, questions remain as to whether this uncertainty will lead the IRS to adjust the weights they attach to different objectives – accuracy and stability – in their rating process more actively. Assessing the performance of rating agencies with regard to these two objectives can be done either in relation to the methodology they use (i.e. do ratings provide an accurate and stable picture of default risk).

Ratings provided by CRAs are a measure of the long-term fundamental credit strength of customers, i.e. their long-term ability and willingness to meet debt-servicing obligations. More specifically, ratings apply either to the general creditworthiness of an obligor or to its obligations with respect to a

AMANATH CO-OPERATIVE BANK

AMANATH CO-OPERATIVE BANK particular debt security (secured or unsecured, collateralized debt structures, etc.) RULES TO SMALL

particular debt security (secured or unsecured, collateralized debt structures, etc.)

RULES TO SMALL - SCALE INDUSTRIES:

MEANING TO SMALL SCALE INDUSTRIES:

The small scale unit covers any unit, engaged in Industrial Activities such as manufacturing processing or preservation of goods, whose original investment in plant and machinery and equipment does not exceed Rs 5 lakhs.

ADVANCES TO SMALL SCALE INDUSTRIES:

Are, considered as priority sector advance. In view its importance to the National Economy authorities have called upon on the entire bank's for enlarging their assistance to this sector.

Following types of credit facilities covered under small scale

Medium term Loan Over draft Sight letters of credits Unsecured facilities such as clean over draft and purchase of up country cheques. Inland Documentary bills purchased and discounted / Advances against bills for collection.

Before providing any credit facility, a satisfactory status report is obtained .While compiling the report the emphasis is on technical knowledge and experience of the proprietor / Partner / Directors in managing small scale industrial units than on their means.

AMANATH CO-OPERATIVE BANK

MEDIUM TERM LOAN

AMANATH CO-OPERATIVE BANK MEDIUM TERM LOAN This facility normally is available only to a new unit

This facility normally is available only to a new unit for financing purchase of plant, machinery equipment required for setting up a small scale industrial unit. A term loan will also be considered for an existing unit provided the loan is to be utilized for financing purchase of fixed assets required for expansion of its capacity for production.

Before granting a medium term loan a careful scrutiny of the project and its viability and capacity to generate sufficient surplus to enable it to meet its obligation in due time is made. Further, we should examine the technical feasibility of the unit with particular reference to the various items of plant and machinery which will be purchased for !use in the factory.

Security

The security for the medium term loan will be a first charge on the ,entire fixed assets of the unit by way of mortgage by deposit of title ,deeds and hypothecation of plant and machinery or movables.

Margin for Loan

Normally book will ask for a margin based on the cost of various items of the fixed assets. In genuine cases, the bank will accept a reduced margin after taking in to consideration the financial position of the promoter, his technical knowledge and efficiency of the unit, Medium term loans are required to be repaid within a maximum period of five to seven years in

convenient installments.

Medium term loans are required to be repaid within a maximum period of five to seven years in convenient installments.

AMANATH CO-OPERATIVE BANK

Disbursement of Loan

AMANATH CO-OPERATIVE BANK Disbursement of Loan Bank will make disbursement of the medium term loan after

Bank will make disbursement of the medium term loan after proper verification of the type of fixed assets acquired its values and other details from original invoice etc., it is preferable to make direct payment to the machinery and other supplier to the debit of the account of barrowers account. All the above norms will equally apply where a medium term loan is required by an existing unit for financing its expansion.

Cash Credit / Secured Overdraft facility for financing_ working_ capital Requirement

The bank would only consider cash credit or secure overdraft facility against the security of raw materials and finished goods on a edge basis either in which a small portion can also be considered in serving cases under the hypothecation of raw materials, stocks that are normally under process and finished goods.

Where hypothecation facilities are required the bank usually insists for a change on fixed sets to hold them as collateral security. This is being stipulated as on additional precaution where there has no control over the security

Small scale industries have to face stiff competition from and large industries. It is therefore, not advisable to provide working capital facilities which are disproportionate to the actual need of the Unit., except where, imported items from a major portion of raw materials required, stock of raw

AMANATH CO-OPERATIVE BANK

AMANATH CO-OPERATIVE BANK materials required for two months production would be considered as quite sufficient in

materials required for two months production would be considered as quite sufficient in the case of small scale units. 'a the cost price of the raw materials for two months, we may add one month’s wages and the normal trade credit required to be given to the ,purchaser. Manager will then get an idea of the actual requirements of the working capital required by the particular until.

TABLE NO: 5.1

Growth rate of Individual Advances – Term wise (in percentage)

YEAR

Short term

Medium

Long term

loan

term loan

loan

2001

142.11

261.50

120.22

2002

100.7

97.45

383.67

2003

105.5

89.27

88.33

2004

135.36

88.33

112.13

GRAPH NO 4.1

TOTAL GROWTH OF ADVANCES

Total Growth of Advances

short term loan medium trm loan long term loan 0 500 400 300 200 100
short term loan
medium trm loan
long term loan
0
500
400
300
200
100
percentages
2004
2002
2003
2001

Financial years

AMANATH CO-OPERATIVE BANK

Credit Rating System

AMANATH CO-OPERATIVE BANK Credit Rating System The credit rating system is essentially one point indicator of

The credit rating system is essentially one point indicator of an individual credit exposure and is used to identify measure and monitor the credit risk of individual proposal. At the whole bank level, credit rating system enables tracking the health of banks entire credit portfolio. Credit rating models take into account various type of risks viz, financial, industry and management associated with a borrower unit. The exercise generally has done at the time of sanction of new borrowal account and at the time of review/renewal of existing credit facilities. The credit rating model rates on scale of 3 to 0.

Financial analysis:

The financial analysis considers the debt equity ratio, current ratio, interest coverage ratio, debt coverage ratio, growth in sales, increase in profit and positive cash flows if the standard is met then the loan is granted. The risk each of the items is determined while granting the loan.

Market industry analysis:

This analysis consider the demand of the product if the supply is short of the demand the this situation is said to be favorable, competitive situation is analyzed like number of competitors, presence of big competitors in the market is also considered, availability of input/raw material,location

AMANATH CO-OPERATIVE BANK

AMANATH CO-OPERATIVE BANK advantage, technology factors, capacity utilization, and seasonality factors are parameters which are rated

advantage, technology factors, capacity utilization, and seasonality factors are parameters which are rated in market –industry analysis.

Rating of facility:

In rating of facility the parameters which are consider are the turn over of the small scale industry ,repayments of loans, submission of balance sheet& profit and loss account, there commitment to term loans are rated on a scale 0-3 .

Credit rating model rating model depends on the data gathered by banks previous records, while granting the loan to small scale industries the risk is rated as lowest risk, satisfactory risk, and high risk. If the bank have aggressive policy for lending then the bank lends the loans by taking high Risk if the bank follows a defensive policy for lending then it will never lend loans to those companies who have high risk. The bank should compare the rating parameters for two consecutive years. If there result is favorable then bank can make a decision of lending.

The credit rating model is developed by considering factors like whether the company as satisfactory relationship with the bank from past 5 years ,submission of audited profit & loss statements, their repayments of loans on time, these parameters should be consider for two consecutive years .

AMANATH CO-OPERATIVE BANK

AMANATH CO-OPERATIVE BANK Credit Rating Model For For PARAMETER CRITERION SCORE previous present A FINANACIAL RISK

Credit Rating Model

       

For

For

PARAMETER

CRITERION

SCORE

previous

present

           

A

FINANACIAL RISK

       
           
   

Below 1

3

   

1 to 1.50

2

   

1

DEBT EQUITY RATIO

1.50

to 2.50

1

   

Above 2.50

0

   
       
     

1.50

     

&Below

3

2

CURRENT RATIO

1.50

to 2.50

2

   

2.50-4.00

1

   
   

Above 4.00

0

   
       
   

Above 15%

4

   

>12% to

     
 

15%

3

>10% to

     

3

RETURN ON CAPITAL EMPLOYED

 

12%

2

>8% to 10%

1

   

Less than

     
 

8%

0

       

4

NET SALES

100%

3

   

AMANATH CO-OPERATIVE BANK

AMANATH CO-OPERATIVE BANK >80% <100% 2 >60% <80% 1 BELOW 50% 0 >2.5 3 2.00 to
   

>80%

     

<100%

2

>60% <80%

1

   

BELOW

     

50%

0

       
   

>2.5

3

   

2.00 to 2.5

2

   

5

INTEREST COVERAGE RATIO

1.99

to 1.50

1

   

> 1.50

0

   
       
     

>2

3

   

>1.50 to

     

6

DEBT SERVICE RATIO

2.00

2

1.10

to 1.50

1

   
   

<1.10

0

   
       
   

>20%

3

   

>15% <20%

2

   

7

GROWTH IN SALES

>10% <15%

1

   

<10%

0

   
       
   

>20%

3

   

>15% <20%

2

   

GROWTH IN NET PROFIT

>10% <15%

1

   

8

<10%

0

   
       

SUB TOTAL

 

BASED ON CASH FLOW STATEMENTS

       

For

For

1

NET CASH FROM SALES

Criteria

Score

previous

present

>5%

3

   

>3% TO 5%

2

   

AMANATH CO-OPERATIVE BANK

AMANATH CO-OPERATIVE BANK 0 to 3% 1 Negative 0 Above 40% 3 2 CASH FROM LONG
   

0 to 3%

1

     

Negative

0

   
       
   

Above 40%

3

   

2

CASH FROM LONG TERM DEBTS

25% to 40%

2

   

10% to 25%

1

   
   

Below 10%

0

   

FINANCIAL RISK

 

LOWEST RISK =20-25 SATISFACTORY RISK=17-20 HIGH RISK=10-15

 
 

MARKET-INDUSTRY

   

For

For

C

RISK

Criteria

previous

present

           

1

 

GOOD

2

  • 2 2

 

Market potential/demand

NEUTRAL

1

   

UNFAVOURABLE

0

     

situation

 
       
         
 

Diversification

among

 

HIGH

2

  • 2 2

 

2

 

different

MODERATE

1

   

consumer segments

 

LOW

0

   
 

geographical spread

       
   

Monopoly Situation

3

  • 3 3

 

Favorable

2

   

Neutral

1

   

Unfavorable

0

   

3

Competitive situation

       
     

High

2

  • 2 2

 

moderate

1

   

inputs/raw materials

 

low

0

   

4

availability

       

5

location issues

Favorable

2

  • 2 2

 

Neutral

1

   

AMANATH CO-OPERATIVE BANK

AMANATH CO-OPERATIVE BANK Unfavorable 0 Superior 2 Adequate 1 1 1 technology Low 0 6 Good
Unfavorable 0 Superior 2 Adequate 1 1 1 technology Low 0 6 Good Satisfactory Average Below
Unfavorable
0
Superior
2
Adequate
1
1
1
technology
Low
0
6
Good
Satisfactory
Average
Below average
3
3
3
Manufacturing
efficiency
capacity utilization
2
1
0
7
2
2
2
1
Cyclicality/Seasonality
0
8
Not affected by
cyclical fluctuations
Favorable industry
cycle with long
term
prospects
Susceptible to
unfavorable
changes
in the markets/
industry
cycle
sub - total
MARKET INDUSTRY RISK
LOWEST RISK =15-18
SATISFACTORY RISK=6-10
HIGH RISK=3-5
RATING OF THE
FACILITY
2
A
COMPLIANCE OF SANCTION TERMS
1
Compliance of sanction

AMANATH CO-OPERATIVE BANK

AMANATH CO-OPERATIVE BANK terms All sanction terms compiled with and legally enforceable 2 2 documentation held
 

terms

All sanction terms compiled with and

   

legally enforceable

2

2

documentation held on records

   

documentation held on records

1

only 2nd charge not registered

0

 

EM not completed

   
     
   

Timely Submission

2

 

Submission of stock

statements /QPR

Submitted within 30 days from due

   

date

1

Belated Submission beyond 30 days

0

0

2

       
 

Submission of audited

submitted within 3 months from the

   

closure of the account

2

Balance sheet &Profit

submitted within a period of >3 months

   

&loss

<6 months from the

1

a/c &financial data in

     

CMA forms

closure of the account

0

0

 

delay >6 months

   

3

       
 

Repayment schedule for

Upto 5 yrs

0

0

Terms Loans only

>5 yrs

2

NA

4

       
   

TOP Class

   

no occasion of excess and return of

   

cheaques

3

3

satisfactory rare occasions of excess

   

5

Operations in the account

&returns of cheaques

2

Average occasional excesses &return

   
 

of cheaques

1

Below Average frequent excess

   

&return of cheaques

0

       
   

Turnover Commensurate with sales

3

3

Turnover >70% to

   

6

Operations in the account

<90%Commensurate with sales

2

Turnover >60% to <70%

1

 
   

Turnover<60%

0

 
     

AMANATH CO-OPERATIVE BANK

AMANATH CO-OPERATIVE BANK Timely payment 3 Commitments under Irregular/ overdue unto one month DPGL/ from due
   

Timely payment

3

 

Commitments under

Irregular/ overdue unto one month

   

DPGL/

from due date

2

7

Term loan and payment of

Irregular /overdue beyond one month

   

int

up to 2 months

1

cash credit /overdraft,etc

Delayed beyond 2 months

0

 
     
 

TABLE NO: 3

BUSINESS CONSIDERATIONS

   
         
   

Having satisfactory relationship with

   

the bank for >5 yrs

2

2

1

Length of Relationship

Having satisfactory relationship with

   

the bank b/w 1 - 5 yrs

1

   

Having satisfactory relationship with the bank for L<1 yr

0

 
 

Income Value to the

     

(Interest,

>10%

2

 

2

commission, exchange,

>8%-10%

1

 
 

etc)

<8%

0

 

from the account as %to

     

total

     

fund based limits

     

RATING OF THE FACILITY

LOWEST RISK =15-19 SATISFACTORY RISK=10-13 HIGH RISK=0-5

AMANATH CO-OPERATIVE BANK

AMANATH CO-OPERATIVE BANK JUSTIFICATION & SIGNIFICANCE M P Birla Institute Of Management 78

JUSTIFICATION & SIGNIFICANCE

AMANATH CO-OPERATIVE BANK

AMANATH CO-OPERATIVE BANK NON-PERFORMING ASSETS Non Performing Asset means an asset or account of borrower, which

NON-PERFORMING ASSETS

Non Performing Asset means an asset or account of borrower, which has been classified by a bank or financial institution as sub-standard, doubtful or loss asset, in accordance with the directions or guidelines relating to asset classification issued by RBI.

An amount due under any credit facility is treated as "past due" when it has not been paid within 30 days from the due date. Due to the improvement in the payment and settlement systems, recovery climate, up gradation of technology in the banking system, etc., it was decided to dispense with 'past due' concept, with effect from March 31, 2001. Accrodingly, as from that date, a Non performing asset (NPA) shell be an advance where

Interest and /or installment of principal remain overdue for a period of more than 180 days in respect of a Term Loan,

Interest and/ or installment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agricultural purpose, and

Any amount to be received remains overdue for a period of more than 180 days in respect of other accounts.

AMANATH CO-OPERATIVE BANK

AMANATH CO-OPERATIVE BANK With a view to moving towards international best practices and to ensure greater

With a view to moving towards international best practices and to ensure greater transparency, it has been decided to adopt the '90 days overdue' norm for identification of NPAs, form the year ending March 31, 2004. Accordingly, with effect form March 31, 2004, a non-performing asset (NPA) shell be a loan or an advance where;

Overdue:

Any amount due to the bank under any credit facility is 'overdue' if it is not paid on the due date fixed by the bank

Standard Assets: Such an asset is not a non-performing asset. In other words, it carries not more than normal risk attached to the business.

Sub-standard Assets: It is classified as non-performing asset for a period not exceeding 18 months.

Doubtful Assets: Asset that has remained NPA for a period exceeding 18 months is a doubtful asset.

Loss Assets: Here loss is identified by the banks concerned or by internal auditors or by external auditors or by Reserve Bank India (RBI) inspection.

In terms of RBI guidelines, as and when an asset becomes a NPA, such advances would be first classified as a sub-standard one for a period that should not exceed 18 months and subsequently as doubtful assets.

It should be noted that the above classification is only for the purpose of computing the amount of provision that should be made with respect to bank

AMANATH CO-OPERATIVE BANK

AMANATH CO-OPERATIVE BANK advances and certainly not for the purpose of presentation of advances in the

advances and certainly not for the purpose of presentation of advances in the banks balance sheet.

There was an increase in the NPA in Amanath co-operative bank since three years as the credit risk of the customers was not properly managed by the bank since these reason lead to develop the credit raing system in Amanath co-operative bank

The following table shows the position of Urban Co-operative Banks as on 31-03-04. If we examine the position of NPAs, we can identify that it has increased from Rs 3306 crores to Rs 13647 crores which is very high and thus there is a great need to take corrective steps to reduce them though not eliminate them completely.

Table 4.1 Gross NPAs of UCBs as on 31-03-05

YEAR

AMOUNT(IN

CRORES)

  • 2000 3306

 
  • 2001 4535

 
  • 2002 9245

 
  • 2003 13706

 
  • 2004 13647

 

Source :( IBA Bulletin Special Issue January 2004)

AMANATH CO-OPERATIVE BANK

GRAPH NO:3.1

AMANATH CO-OPERATIVE BANK GRAPH NO:3.1 Gross NPAs of Urban Co-operative Banks as on 31-03-05 15000 13706

Gross NPAs of Urban Co-operative Banks as on 31-03-05

15000 13706 13647 13000 Rs in Crores 11000 9245 9000 7000 4535 5000 3306 3000 2001
15000
13706
13647
13000
Rs in Crores
11000
9245
9000
7000
4535
5000
3306
3000
2001
2002
2003
2004
2005

YEAR

TABLE NO: 4.2

Table Showing Status of NPAs in the bank

Year

% of NPAs to Total Advances

2002

8.9

2003

10.73

2004

35.95

2005

53.91

Inference: From the table it is observed that the percentage of NPAs was 8.9% during the year 2002 which increased to 53.91% during the year 2005.

AMANATH CO-OPERATIVE BANK

AMANATH CO-OPERATIVE BANK Status of NPAs 60 2003 2002 2005 2004 10 20 30 40 50

Status of NPAs

60 2003 2002 2005 2004 10 20 30 40 50 0 70 80 90 8.9 100
60
2003
2002
2005
2004
10
20
30
40
50
0
70
80
90
8.9
100
35.95
10.73
53.91

Financial years

  • % of NPAs to total

  • Total Advances Advances

STATUS OF GROSS AND NET NPAs

(Rs in lakh)

YEAR

GROSS NPAs

NET NPAs

2002

---

---

2003

4518

3311

2004

12661.61

10681.33

2005

14010.75

12019.20

Inference: From the above table it is observed that the total gross NPAs was Rs. 4518 during the year 2003 which increased to Rs.14010.75 during the year 2005. The Net NPAs was Rs. 3311 lakh during the year 2003 which increased to 12019.20 during the year 2005 from profit and loss account.

AMANATH CO-OPERATIVE BANK

AMANATH CO-OPERATIVE BANK DATA ANALYSIS & INTERPRETATION M P Birla Institute Of Management 84

DATA ANALYSIS & INTERPRETATION

AMANATH CO-OPERATIVE BANK

Analysis of Net Sales

TABLE NO : 7.1

AMANATH CO-OPERATIVE BANK Analysis of Net Sales TABLE NO : 7.1 Net Sales percentage of percentage

Net Sales

percentage of

percentage of

NPA

Recovery

     

100%

 
  • 15 85

>80%

   

<100%

  • 33 67

>50 < 60%

  • 52 48

 

Graph 7.1

percentage of NPA 100 percentage of Recovery 80 60 40 20 0 100% >80% >50 <
percentage of NPA
100
percentage of Recovery
80
60
40
20
0
100%
>80%
>50
< 60%
<100%

Inference:

This graph shows that when the small scales industries have meet 100% of their sales then bank was able to recover loan on time of about 85% and when the sales is below 50% there was an NPA of 52%.this indicates when the sales increases the credit worthiness of the bower increases .

AMANATH CO-OPERATIVE BANK

AMANATH CO-OPERATIVE BANK TABLE NO: 7.2 Analysis of Capacity Utilization Capacity percentage of percentage of Utilization

TABLE NO: 7.2 Analysis of Capacity Utilization

Capacity

percentage of

percentage of

Utilization

NPA

Recovery

     

>90%

12

88

75% to 90%

41

59

50% to 75%

47

53

Graph 7.2

percentage of NPA 100 percentage of Recovery 80 60 40 20 0 >90% 75% to 90%
percentage of NPA
100
percentage of Recovery
80
60
40
20
0
>90%
75% to 90%
50% to 75%

Inference:

This graph shows that when the Capacity Utilization is 90% the bank was able to recovery loan on time of about 88% and when the capacity utilization is below 50% there was an NPA of 47%.the capacity utilization reveal about the turnover of the company which is a very good indicator of the paying capacity of the borrower.

AMANATH CO-OPERATIVE BANK

AMANATH CO-OPERATIVE BANK TABLE NO :7.3 Analysis of Debt Equity Ratio Debt equity ratio percentage of

TABLE NO :7.3 Analysis of Debt Equity Ratio

Debt equity ratio

percentage of

percentage of

NPA

Recovery

     

below 1

 
  • 20 80

1 to 1.50

 
  • 25 75

above 2.50

 
  • 55 45

Graph 7.3

100 80 60 40 20 0 percentage of NPA percentage of Recovery below 1 above 1
100
80
60
40
20
0
percentage of
NPA
percentage of
Recovery
below 1
above
1 to
2.50
1.50

Inference:

This graph shows that when the small scales industries have debt equity ratio of 1 the bank was able to recovery loan on time of about 80% and when the debt equity mix above 2.50 there was an NPA of 52%.this ratio is a very good indicator of the credit worthiness of the borrower.

AMANATH CO-OPERATIVE BANK

TABLE NO: 7.4

Analysis of Current Ratio

AMANATH CO-OPERATIVE BANK TABLE NO: 7.4 Analysis of Current Ratio Current ratio percentage of percentage of

Current ratio

percentage of

percentage of

NPA

Recovery

     

1:01

32

68

1.50 to 2.50

23

77

2.50 to 4.00

45

55

     

Graph 7.4

100 80 60 40 20 0 2.50 to 1.50 to 1:01
100
80
60
40
20
0
2.50 to
1.50 to
1:01
  • 2.50 4.00

percentage of NPA percentage of Recovery
percentage of
NPA
percentage of
Recovery

Inference:

This graph shows that when the current ratio of 1:1 it was not a good indicator of credit worthiness, as the ratio keep changing and the bank was able to recovery loan on time of only about 68%where as when the current ratio was ranging from 1.5 to 2.5 the bank was able to recovery loan of 77%.thus the current ratio is not a good indicator of credit worthiness of the borrower.

AMANATH CO-OPERATIVE BANK

Analysis of Net Profit

TABLE NO: 7.5

AMANATH CO-OPERATIVE BANK Analysis of Net Profit TABLE NO: 7.5 % of Net Profit % of
   

% of

Net Profit

% of NPA

Recovery

     

>20%

9

91

>10% to

   

<20%

57

43

<10%

66

34

Graph 7.5

100 40 20 80 60 0
100
40
20
80
60
0
% of Recovery % of NPA
% of Recovery
% of NPA
>10% to <20% <10% >20%
>10% to <20% <10% >20%
>10% to
<20%
<10%
>20%

Inference:

This graph shows that when an increase in net profit was about >20% the bank was able to recovery loan on time of about 91% and when the net profit is below 10% there was an NPA of 66%.this indicates that when the profit increases by 20% from the previous year the loan is paid on the time .where as when the profit is <10% the payment is not on time.

AMANATH CO-OPERATIVE BANK

AMANATH CO-OPERATIVE BANK TABLE NO: 7.6 Analysis of Interest Coverage Ratio Interest coverage % of %

TABLE NO: 7.6 Analysis of Interest Coverage Ratio

Interest coverage

% of

% of

ratio

NPA

Recovery

>2.5

 
  • 15 85

2.00 to 2.5

 
  • 28 72

<1.50

 
  • 57 43

Graph 7.6

60 0 20 40 80 100
60
0
20
40
80
100
% of Recovery % of NPA
% of Recovery
% of NPA
2.00 to 2.5 <1.50 >2.5
2.00 to 2.5
<1.50
>2.5

Inference:

This graph shows that when the interest coverage ratio is greater than 2.5%than then the bank was able to recovery loan on time of about 85% and when the ratio was less than 1.50 there was an NPA of 43%.

AMANATH CO-OPERATIVE BANK

AMANATH CO-OPERATIVE BANK FINDING & SUGGESTION M P Birla Institute Of Management 91

FINDING & SUGGESTION

AMANATH CO-OPERATIVE BANK

FINDINGS

AMANATH CO-OPERATIVE BANK FINDINGS The findings are based on the analysis of the financial statements of

The findings are based on the analysis of the financial statements of the small scale industries in order to develop a credit rating model.

There was NPA of about 13647 crores in the bank.

The net

NPA for the

year 31

march

2003

was 3311

lakh and the

increased to12019.20 during the year 2005 from profit and loss account.

It is observed that the total gross NPAs were Rs. 4518 during the year 2002 which increased to Rs.14010.75 by the year 2005.

There existing rating system in Amanth Co-operative bank did not consider the rating of interest coverage ratio, and debt service ratio.

The bank did not have any credit rating model to rate the small scale industries.

The bank did not manage the credit risk by getting the credit risk information from the other bank in order to lend.

The current ratio is not a very good indicator of the credit worthiness of the borrower. Where as the debt equity ratio and the interest coverage ratio is a very good indicator of the credit worthiness of the borrower.

AMANATH CO-OPERATIVE BANK

Suggestions

AMANATH CO-OPERATIVE BANK Suggestions The board of directors should have responsibility for approving and periodically (at

The board of directors should have responsibility for approving and periodically (at least annually) reviewing the credit risk strategy and significant credit

Risk policies of the bank. The strategy should reflect the bank’s tolerance for risk and the level of profitability the bank expects to achieve for incurring various credit risks.

Banks should identify and manage credit risk inherent in all products and activities. Banks should ensure that the risks of products and activities new to them are Subject to adequate risk management procedures and controls before being introduced

Banks should establish overall credit limits at the level of individual borrowers and counter parties, and groups of connected counter parties that aggregate in comparable and meaningful manner different types of exposures, both in the banking and trading book and on and off the balance sheet.

Banks are encouraged to develop and utilize an internal risk rating system in managing credit risk. The rating system should be consistent with the nature, size and complexity of a bank’s activities.

AMANATH CO-OPERATIVE BANK

AMANATH CO-OPERATIVE BANK Banks must have a system in place for early remedial action on deteriorating

Banks must have a system in place for early remedial action on deteriorating credits, managing problem credits and similar workout situations.

The bank should implement a credit rating model in order to manage the credit risk of the borrower.