Professional Documents
Culture Documents
A DISSERTATION
BANGALORE UNIVERSITY
Submitted By
ARSHIA NOORIE.N
Register Number:
03XQCM6010
STUDENT DECLARATION
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
ACKNOWLEDGEMENT
I am extremely great full to Mr. Gaffer Haji Latif Director, for his
constant support and encouragement throughout this project 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.
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
Chapter 1
Executive Summary
Introduction:
About co-operative Bank
Structure of co-operative bank
Chapter 3
Bank Profile
Future Plans of The Bank
Product Profile
Review of literature
Rating system
Chapter 7 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
Graph Description
1.1 Deposit
1.2 Loans and Advances
EXECUTIVE SUMMARY
Executive summary
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.
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.
INTRODUCTION
5. Co-operative banks accept current, saving, fixed and other types of time
deposits from individuals and institutions including banks.
RBI
NABARD
SLDBs
SCBS UCBs
(PCBs)
CLDBs
CCBs
PACs
PLDBs
Branches
of SLDBs
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.
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
TABLE 1.1
TABLE 1.2
PROBLEM STATEMENT
OBJECTIVE OF STUDY
¾
To study the credit risk associated while lending loans to small scale
industry.
¾
To study the bank credit policy while lending to small scale industry
¾
To study the causes for increase in the NPA
¾
To study the parameters consider while lending the loans to small
scale industry.
¾
To study the objectives of Credit Management.
¾
To study the manner in which funds are raised by the bank.
The scope of the study is limited to the credit policy of amanath bank, while
lending to small scale industries.
BANK PROFILE
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 bank has also excelled in the field of sports by winning both the "Inter-
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.
TABLE 2.1
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 82 125 209 247 428.09 531.80 526
Reserves 179 784 1617 2017 3047.50 3917.00 2427
Deposits 2715 6500 20044 29293 41313.35 48895.70 43965
Advances 1895 4064 10578 14663 23631.61 30833.77 29707
Working 3300 8160 23372 33335 47505.28 56185.84 50561
Capital
Profits 65 191 506 607 712.74 425.94 247
TABLE 2.2
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%
TABLE 2.3
Above 1 year up to 2
4.00%
years
Above 2 years up to 3
4.70%
years
PRODUCT PROFILE
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
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 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
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
LOANS /ADVANCES
RESEARCH METHODOLOGY
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.
Secondary data: The banks previous records for lending to small scale
industries. The financial report of small scale industries
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.
REVIEW OF LITERATURE
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.
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-
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:
¾
Establishing an appropriate credit risk environment;
¾Operating under a sound credit granting process;
¾Maintaining an appropriate credit administration, measurement and
monitoring process;
¾
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
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.
CREDIT MANAGEMENT
CREDIT PLANNING
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:
CREDIT POLICY
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
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
1 Quantitative
2. Qualitative
QUALITATIVE:
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
Secured Advances
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.
TABLE 2.4
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
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
50000
40000
30000
Amount
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
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
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.
EXTERNAL RATING:
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.
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.
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 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.
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.
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.
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).
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.
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 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.
Disbursement of Loan
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.
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
500
400 short term loan
percentages
300
m edium trm loan
200
100 long term loan
0
2001 2002 2003 2004
Financial years
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.
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
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 .
For For
SCORE
PARAMETER CRITERION 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
3
&Below
1.50 to 2.50 2
2 CURRENT RATIO
2.50-4.00 1
Above 4.00 0
Above 15% 4
>12% to
3
15%
>10% to
2
3 RETURN ON CAPITAL EMPLOYED 12%
>8% to 10% 1
Less than
0
8%
>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
2
2.00
6 DEBT SERVICE RATIO
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
For For
1 NET CASH FROM SALES
Criteria Score previous present
>5% 3
>3% TO 5% 2
Above 40% 3
25% to 40% 2
2 CASH FROM LONG TERM DEBTS
10% to 25% 1
Below 10% 0
FINANCIAL RISK
1 GOOD 2 2 2
NEUTRAL 1
Market potential/demand
UNFAVOURABLE 0
situation
Superior 2
Adequate 1 1 1
technology
Low 0
6
Good 3 3 3
Manufacturing Satisfactory 2
efficiency Average 1
capacity utilization Below average 0
7
Not affected by 2 2 2
cyclical fluctuations
Favorable industry 1
cycle with long
term
prospects
Cyclicality/Seasonality Susceptible to 0
8
unfavorable
changes
in the markets/
industry
cycle
sub - total
RATING OF THE
FACILITY
2
A COMPLIANCE OF SANCTION TERMS
1 Compliance of sanction
terms
M P Birla Institute Of Management 75
AMANATH CO-OPERATIVE BANK
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
Submitted within 30 days from due
Submission of stock
date 1
statements /QPR
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 &returns of cheaques 2
Operations in the account
Average occasional excesses &return
of cheaques 1
Below Average frequent excess
&return of cheaques 0
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. Acco
rdingly, as from that
date, a Non performing asset (NPA) shell be an advance where
¾
Interest and /or installment of principal remain overdue for a period of
more than 180 days in respect of a Term Loan,
¾
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
¾
Any amount to be received remains overdue for a period of more than
180 days in respect of other accounts.
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
Doubtful Assets: Asset that has remained NPA for a period exceeding 18
months is a doubtful asset.
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
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
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
15000
13706 13647
13000
Rs in Crores
11000
9245
9000
7000
5000 4535
3306
3000
2001 2002 2003 2004 2005
YEAR
% of NPAs to Total
Year
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.
Status of NPAs
100
90
80
70 53.91
60 35.95
50 Total Advances
40
30 10.73 % of NPAs to total
20 8.9
Advances
10
0
2002 2003 2004 2005
Financial years
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.
percentage of percentage of
Net Sales
NPA Recovery
100% 15 85
>80%
33 67
<100%
>50 < 60% 52 48
Graph 7.1
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 .
>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% 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.
percentage of percentage of
Debt equity ratio
NPA Recovery
below 1 20 80
1 to 1.50 25 75
above 2.50 55 45
Graph 7.3
100
80 perc e ntage of
60 NP A
40 perc e ntage of
20 R ec ove ry
0
below 1 1 to above
1.50 2.50
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.
percentage of percentage of
Current ratio
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 perc entage of
60 NP A
40 perc entage of
20 R ec overy
0
1:01 1.50 to 2.50 to
2.50 4.00
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.
% of
Net Profit % of NPA
Recovery
>20% 9 91
>10% to
57 43
<20%
<10% 66 34
Graph 7.5
100
80
60
40
20
0
% of NPA >20% >10% to <10%
<20%
% of Recovery
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.
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
100
80
60
40
20
0
% of NPA >2.5 2.00 to 2.5 <1.50
% of Recovery
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%.
The findings are based on the analysis of the financial statements of the
small scale industries in order to develop a credit rating model.
¾
There was NPA of about 13647 crores in the bank.
¾
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.
¾
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.
¾
There existing rating system in Amanth Co-operative bank did not
consider the rating of interest coverage ratio, and debt service ratio.
¾
The bank did not have any credit rating model to rate the small scale
industries.
¾
The bank did not manage the credit risk by getting the credit risk
information from the other bank in order to lend.
¾
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.
Suggestions
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 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.
The bank should implement a credit rating model in order to manage
the credit risk of the borrower.
The rating should be based on financial analysis, managerial
information and the technical analysis of the small scale industries.
The bank should compare the present year and previous year analysis
of financial statements in order to verify whether there is increase in
the sales and profit before lending the loan.
Conclusion:
The project was aimed to develop credit rating model for the SSI units,
early the rating was a manual system and credit risk of the borrower was
not managed properly and hence there was an increase in NPA of the
bank .The credit rating model is designed to manage the credit risk and
minimize the NPA of the bank.
BIBLOGRAPHY
H.R.Suneja, “Management of Bank Credit” Himalaya Publishing
House
H.L Bedi and V.K Hardikar, “Practical Banking Advances”, UBS
Publishers and Distributers ltd
Vasant Desai, “Indian Banking”, Himalaya Publishing House
V.K Bhaskar Rao , “Management of NPAs in the Bank- Banking
Finance” Feb 2004
www.amanath-bank.com