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A PROJECT REPORT ON

SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENT OF AWARD THE DEGREE OF Under the Guidance of

To

Acknowledgement

Today at every field practical training is important in making a person perfect in this work. Today generally practical training is provided with a view to explain various matters practically.

Firstly Im thankful to the IGNOU who gave me a plate form to make a practical analysis. I surveyed the different periodicals and references to get a idea.

Im also thankful to Mr. _________________________ who constantly guided me a lot to make the project report. His continuous support and motivation encouraged me to work the best.

I am thankful to staff of PNB, ICICI, Canara Bank and Allahabad bank for providing me necessary data for making project report.

Last but not least, I express my gratitude to my parents and friends without whose support this would not have been possible.

PREFACE

Human being enters the world with a raw brain and mind. Until he works out with his imagination, he cannot reach the soaring heights of success. Study of management will be worthwhile only if it is coupled with the practical studies and imagination power.

Practical Training constitutes an important part in a good practice oriented management course. According to the syllabus of MBA, every student has to undergo practical project training for exposure in any commercial industry or organization. For the partial fulfillment of this requirement, I underwent my project in 4 banks namely ICICI, PNB, Allahabad Bank, Canara Bank.

Practical training, which is a part of management studies intends to provide a student with sufficient knowledge to develop an equation to connect theory and practical aspects and thereby gives an opportunity to test and verify application of theory and comprehends interaction between management concepts and practice.

It is with great sincerity and enthusiasm that I take up the challenge that this field has placed before me and hope to succeed with guidance from my professors.

CONTENTS

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1.

PARTICULARS
EXECUTIVE SUMMARY OBJECTIVE AND RESEARCH METHODOLOGY Objective of the study Research Methodology Limitations THEORETICAL FRAMEWORK OF CREDIT RISK MANAGEMENT Introduction Types of risks in Bank Risk Management Traditional Risk Management System Risk Management Process Basel Committee Credit risk Credit Risk management Factors on which Credit risk depends Measuring Credit Risk Principles for managing credit risk Approaches to credit risk management Credit Risk management in PNB Profile Credit Risk Management in PNB Credit risk rating system Credit Rating Model Credit Risk management through rating system Preventive Monitoring system Credit risk assessment software model Data analysis Credit Risk Management in ICICI Bank Profile Credit risk management in ICICI bank Credit Rating Data Analysis Credit Risk Management in Canara Bank Profile Credit risk management in Canara bank Data Analysis Credit Risk Management in Allahabad Bank Profile Credit risk management in Allahabad bank

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Data analysis Conclusion Bibliography

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EXECUTIVE SUMMARY
Banking is an art & science of measuring & managing risks in lending and investment activities for commensurate profits based on the risk perceptions. The face of banking in India is changing rapidly. The enhanced role of the banking sector in the Indian economy, the increasing levels of deregulation along with the increasing levels of competition have facilitated globalisation of the India banking system and placed numerous demands on banks. Operating in this demanding environment has exposed banks to various challenges and risks. From the day a bank is granted its charter up until its final day of operation, it faces a wide variety of internal and external risks. Many banking risks arise from the common cause of mismatching. If banks had perfectly matched assets and liabilities (i.e. identical maturities, interest rate conditions and currencies), then the only risk faced by a bank would be credit risk. This sort of matching, however, would be virtually impossible, and in any event would severely limit the banks profit opportunities. Mismatching is an essential feature of banking business. As soon as maturities on assets exceed those of liabilities then liquidity risk arises. When interest rate terms on items on either side of the balance sheet differ, then interest rate risk arises. Sovereign risk appears if the international nature of each side of the balance sheet is not countrymatched. Many of these risks are interrelated.

The banking industry has long viewed the problem of risk management as the need to control four of the above risks which make up most, if not all, of their risk exposure, viz., credit, interest rate, foreign exchange and liquidity risk.

Credit risk is the most obvious risk in banking, and possibly the most important in terms of potential losses. The default of a small number of key customers could generate very large losses and in an extreme case could lead to a bank becoming insolvent. The most important credit risk is the default risk. However, in some cases interest rate risk also comes under the credit risk. Default risk relates to the possibility that loans will not be paid or that investments will deteriorate in quality or go into default with consequent loss to the bank. Credit risk is not concerned to the risk that borrowers are unable to pay; it also includes the risk of payments being delayed, which can also cause problems for the bank. Given the fast changing, dynamic world scenario experiencing the pressures of globalization, liberalization, consolidation and disintermediation, it is important that banks have a robust credit risk management policies and procedures which is sensitive and responsive to these changes.

The quality of the credit risk management function will be the key driver of the changes to the level of shareholder return. To understand importance of credit risk management, I have taken 4 banks to study their credit risk management policy. This project is concerned with determining the credit risk faced by banks under consideration and tools used by these banks for managing the credit risk and thereafter comparing these banks on the basis of techniques used by them for credit risk management.

Banks considered for research purpose are: Punjab National Bank, ICICI Bank, Canara Bank and Allahabad Bank.

Project starts with objective and research methodology and how data were collection for the research. Second chapter deals with theoretical framework of risk management. Third chapter

deals with how these 4 banks are exposed to credit risk and what are the steps taken by banks to minimize and control this risk. Findings were given at the end of the project. I have used both primary as well as secondary data for the purpose of data collection. However, personal interviews of some Bank Officials will also be conducted for extracting the essential information which not available through secondary sources. Thereafter different Statistical Tools (like standard deviation, correlation etc.) will be applied on the collected data to extract the findings from it.

CHAPTER -1 OBJECTIVE AND RESEARCH METHODOLOGY

OBJECTIVES OF THIS PROJECT REPORT: 1 2 To determine credit risk faced by different Banks in India. To determine various tools and methods used by Punjab National Bank, ICICI Bank, Canara Bank and Allahabad Bank for managing the credit risk faced by them. 3 4 To determine whether or not there is any improvement in banks credit position due to the use of such tools and methods. To compare the credit position of these banks.

RESEARCH METHODOLOGY Research Design A research design is the arrangement of the condition for collection and analysis of data. Actually it is the blueprint of the research project. Research design used will be exploratory type.

DATA COLLECTION Primary Data : It will be collected through personal interview with bank officials.

Secondary Data : It will be collected from Business Newspapers, magazines, books, Journal and websites. SAMPLING DESIGN Sample Size : 4 Banks Punjab National Bank ICICI Bank Canara Bank Allahabad Bank Sampling technique : Simple Random Sampling DATA ANALYSIS It will be done with the help of statistical tools like Standard Deviation and Correlation.

LIMITATIONS OF STUDY 1. This project is restricted to study purpose which will not reflect clear picture. 2. Since my study is based on the secondary data only. 3. Since the Indian banking sector is so wide so it was not possible for me to cover all the banks of the Indian banking sector. 4. The major problem faced while conducting the research was unavailability of relevant data. Even bank did not agree to give its annual reports.

CHAPTER -2 THEORETICAL FRAMEWORK OF CREDIT RISK MANAGEMENT

INTRODUCTION

Banking is an art & science of measuring & managing risks in lending and investment activities for commensurate profits based on the risk perceptions. The face of banking in India is changing rapidly. The enhanced role of the banking sector in the Indian economy, the increasing levels of deregulation along with the increasing levels of competition have facilitated globalisation of the India banking system and placed numerous demands on banks. Operating in this demanding environment has exposed banks to various challenges and risks. Risk is a situation wherein objective probability distribution of the values a variable can take is known, even though the exact values it take are not known. The objective probability is one which is supported by rigorous theory, past experience, and the laws of chance. Risk means deviation from expectation. It can be defined as the chance that the expected or prospective advantage, gain, profit or return may not materialize; that the actual outcome of

investment may be less than the expected outcome. The greater the variability or dispersion in the possible outcomes, or the broader the range of possible outcomes, the greater the risk. The measure of risk is Standard Deviation. TYPES OF RISKS IN A BANK

From the day a bank is granted its charter up until its final day of operation, it faces a wide variety of internal and external risks. Many banking risks arise from the common cause of mismatching. If banks had perfectly matched assets and liabilities (i.e. identical maturities, interest rate conditions and currencies), then the only risk faced by a bank would be credit risk. This sort of matching, however, would be virtually impossible, and in any event would severely limit the banks profit opportunities. Mismatching is an essential feature of banking business. As soon as maturities on assets exceed those of liabilities then liquidity risk arises. When interest rate terms on items on either side of the balance sheet differ, then interest rate risk arises. Sovereign risk appears if the international nature of each side of the balance sheet is not countrymatched. Many of these risks are interrelated. These include: Credit risk - Credit risk is also known as Default risk. It is the risk that a counterparty to a .financial transaction (the borrower) will fail to comply with its obligations to service debt, or that the counterparty will deteriorate in its credit standing i.e. it arises from the failure on the part of the borrower or debtor to pay the specified amount of interest and/or repay the principal, both at the time specified in the debt contract or covenant or indenture. Liquidity risk covers all risks that are associated with a bank finding itself unable to meet its commitments on time, or only being able to do so by recourse to emergency borrowing. Interest rate risk is the variability in return on security due to changes in the level of market interest rates, or it is the loss of principal of a fixed-return security due to an

increase in the general level of interest rates i.e. it relates to risk of loss incurred due to changes in market rates, for example, through reduced interest margins on outstanding loans or reduction in the capital values of marketable assets. Market risk relates to risk of loss associated with adverse deviations in the value of the trading portfolio. Broadly refers to the risk that a banks earnings and capital might be adversely affected by changes in interest rates, exchange rates or securities prices. This course focuses on how the risk posed by changes in interest rates may adversely affect a banks net income and capital position. Exchange Rate or Currency Risk it refers to cash-flow variability experienced by economic units engaged in international transactions or international exchange, on account of uncertain or unexpected changes in exchange rates. Country risk is associated with the risks of incurring financial losses resulting from the inability and/or unwillingness of borrowers within a country to meet their obligations. Solvency risk relates to the risk of having insufficient capital to cover losses generated by all types of risks. Operational risk - The risk of loss or harm from unanticipated internal or external events that occur in the course of conducting business such as equipment breakdowns, acts of God, customer and employee fraud and undetected software errors.

Legal risk - The risk of loss or harm from unenforceable contracts, lawsuits or adverse judgments.

Reputational risk - The risk of loss or harm to a banks public image from negative publicity.

RISK MANAGEMENT The banking industry has long viewed the problem of risk management as the need to control four of the above risks which make up most, if not all, of their risk exposure, viz., credit, interest rate, foreign exchange and liquidity risk. While they recognize counterparty and legal risks, they view them as less central to their concerns.

Risk Management is a discipline at the core of every financial institution and encompasses all the activities that affect its risk profile. It involves identification, measurement, monitoring and controlling risks to ensure that a) The individuals who take or manage risks clearly understand it. b) The organizations Risk exposure is within the limits established by Board of Directors. c) Risk taking Decisions are in line with the business strategy and objectives set by BOD. d) The expected payoffs compensate for the risks taken e) Risk taking decisions are explicit and clear. f) Sufficient capital as a buffer is available to take risk The acceptance and management of financial risk is inherent to the business of banking and banks roles as financial intermediaries. Risk management as commonly perceived does not mean minimizing risk; rather the goal of risk management is to optimize risk-reward trade -off. Notwithstanding the fact that banks are in the business of taking risk, it should be recognized that an institution need not engage in business in a manner that unnecessarily imposes risk upon it: nor it should absorb risk that can be transferred to other participants. Rather it should accept those risks that are uniquely part of the array of banks services.

In every financial institution, risk management activities broadly take place simultaneously at following different hierarchy levels:

. a) Strategic level: It encompasses risk management functions performed by senior management and BOD. For instance definition of risks, ascertaining institutions risk appetite, formulating strategy and policies for managing risks and establish adequate systems and controls to ensure that overall risk remain within acceptable level and the reward compensate for the risk taken. b) Macro Level: It encompasses risk management within a business area or across business lines. Generally the risk management activities performed by middle management or units devoted to risk reviews fall into this category. c) Micro Level: It involves On-the-line risk management where risks are actually created. This is the risk management activities performed by individuals who take risk on organizations behalf such as front office and loan origination functions. The risk management in those areas is confined to following operational procedures and guidelines set by management.

Traditional Risk Management Systems Commercial banks are in the risk business. In the process of providing financial services, they assume various kinds of financial risks. So we need to determine an approach to examine largescale risk management systems. The management of the banking firm relies on a sequence of steps to implement a risk management system. These can be seen as containing the following four parts:

Standards and reports Position limits or rules Investment guidelines or strategies

Incentive contracts and compensation

In general, these tools are established to measure exposure, define procedures to manage these exposures, limit individual positions to acceptable levels, and encourage decision makers to manage risk in a manner that is consistent with the firm's goals and objectives.

RISK MANAGEMENT PROCESS: IDENTIFICATION The first step in risk management process is to identify the risk.

QUANTIFICATION After identifying the risk we have to quantify it using techniques like Standard Deviation i.e. the quantification of the level of exposures.

POLICY FORMULATION then we decide the alternative tools and find the best alternative and various policies are formulated.

Then using the engineering strategies to transform the exposures to the desired form.

MONITERING & REVIEW Then the risk levels are monitored and reviewed and they are restored to the pre-determined standards.

BASEL COMMITTEE Basel 1 In July 1988, the Basel Committee came out with a set of recommendations aimed at introducing minimum levels of capital for internationally active banks. These norms required the banks to maintain capital of at least 8 per cent of their risk-weighted loan exposures. Different risk weights were specified by the committee for different categories of exposure. For instance,

government bonds carried risk-weight of 0 per cent, while the corporate loans had a risk-weight of 100 per cent. Basel II To set right these aspects, the Basel Committee came up with a new set of guidelines in June 2004, popularly known as the Basel II norms. These new norms are far more complex and comprehensive compared to the Basel I norms. Also, the Basel II norms are more risk-sensitive and they rely heavily on data analysis for risk measurement and management. They have given three pillars which act as guideline for implementation of Basel II. Pillar 1 Basel II norms provide banks with guidelines to measure the various types of risks they face credit, market and operational risks and the capital required to cover these risks. Pillar II (Supervisory Reviews) Ensures that not only do the banks have adequate capital to cover their risks, but also that they employ better risk management practices so as to minimise the risks. Capital cannot be regarded as a substitute for inadequate risk management practices. This pillar requires that if the banks use asset securitisation and credit derivatives and wish to minimise their capital charge they need to comply with various standards and controls. As a part of the supervisory process, the supervisors need to ensure that the regulations are adhered to and the internal measurement systems are standardized and validated. Pillar III (Market Discipline) This market discipline is brought through greater transparency by asking banks to make adequate disclosures. The potential audiences of these disclosures are supervisors, bank's customers, rating agencies, depositors and investors. Market discipline has two important components:

1. Market signaling in form of change in bank's share prices or change in bank's borrowing rates. 2. Responsiveness of the bank or the supervisor to market signals. CREDIT RISK

Credit risk is the most obvious risk in banking, and possibly the most important in terms of potential losses. The default of a small number of key customers could generate very large losses and in an extreme case could lead to a bank becoming insolvent. The most important credit risk is the default risk. However, in some cases interest rate risk also comes under the credit risk. Default risk relates to the possibility that loans will not be paid or that investments will deteriorate in quality or go into default with consequent loss to the bank. Credit risk is not concerned to the risk that borrowers are unable to pay; it also includes the risk of payments being delayed, which can also cause problems for the bank. Capital markets react to a deterioration in a companys credit standing through higher interest rates on its debt issues, a decline in its share price, and/or a downgrading of the assessment of its debt quality. Credit risk arises from the potential that an obligor is either unwilling to perform on an obligation or its ability to perform such obligation is impaired resulting in economic loss to the bank. Credit risk is defined as the possibility that a borrower or counterparty will fail to meet its obligations in accordance with agreed terms. Credit risk, therefore, arises from the banks' dealings with or lending to a corporate, individual, another bank, financial institution or a country. Credit risk may take various forms, such as:

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

in the case of treasury products, that the payment or series of payments due from the counterparty under the respective contracts is not forthcoming or ceases;

in the case of securities trading businesses, that settlement will not be effected; in the case of cross-border exposure, that the availability and free transfer of currency is restricted or ceases.

In a banks portfolio, losses stem from outright default due to inability or unwillingness of a customer or counter party to meet commitments in relation to lending, trading, settlement and other financial transactions. Alternatively losses may result from reduction in portfolio value due to actual or perceived deterioration in credit quality. For most banks, loans are the largest and most obvious source of credit risk; however, credit risk could stem from activities both on and off balance sheet. In addition to direct accounting loss, credit risk should be viewed in the context of economic exposures. This encompasses opportunity costs, transaction costs and expenses associated with a non-performing asset over and above the accounting loss. Credit risk can be further sub-categorized on the basis of reasons of default. For instance the default could be due to country in which there is exposure or problems in settlement of a transaction. Credit risk not necessarily occurs in isolation. The same source that endangers credit risk for the institution may also expose it to other risk. For instance a bad portfolio may attract liquidity problem. As a result of these risks, bankers must exercise discretion in maintaining a sensible distribution of liquidity in assets, and also conduct a proper evaluation of the default risks associated with borrowers. In general, protection against credit risks involves maintaining high credit standards, appropriate diversification, good knowledge of the borrowers affairs and accurate monitoring and collection procedures.

CREDIT RISK MANAGEMENT

PHILOSOPHY BEHIND CREDIT RISK MANAGEMENT IS: HIGHER THE RISK, HIGHER THE EXPECTED REWARD In general, credit risk management for loans involves three main principles: Selection Limitation Diversification. First of all, selection means banks have to choose carefully those to whom they will lend money. The processing of credit applications is conducted by credit officers or credit committees, and a banks delegation rules specify responsibility for credit decisions. Limitation refers to the way that banks set credit limits at various levels. Limit systems clearly establish maximum amounts that can be lent to specific individuals or groups. Loans are also classified by size and limitations are put on the proportion of large loans to total lending. Banks also have to observe maximum risk assets to total assets, and should hold a minimum proportion of assets, such as cash and government securities, whose credit risk is negligible. Credit management has to be diversified. Banks must spread their business over different types of borrower, different economic sectors and geographical regions, in order to avoid excessive concentration of credit risk problems. Large banks, therefore, have an advantage in this respect. The long-standing existence of the above procedures within banks is insufficient to address all credit risk problems. For example, the amount of a potential loss is uncertain since outstanding balances at the time of default are not known in advance. The size of the commitment is not sufficient to measure the risk, since there are both quantity and quality dimensions to consider.

The more diversified a banking group is, the more intricate systems it would need, to protect itself from a wide variety of risks. These include the routine operational risks applicable to any commercial concern, the business risks to its commercial borrowers, the economic and political risks associated with the countries in which it operates, and the commercial and the reputational risks concomitant with a failure to comply with the increasingly stringent legislation and regulations surrounding financial services business in many territories. Comprehensive risk identification and assessment are therefore very essential to establishing the health of any counterparty. Credit risk management enables banks to identify, assess, manage proactively, and optimise their credit risk at an individual level or at an entity level or at the level of a country. Given the fast changing, dynamic world scenario experiencing the pressures of globalisation, liberalization, consolidation and disintermediation, it is important that banks have a robust credit risk management policies and procedures which is sensitive and responsive to these changes. The quality of the credit risk management function will be the key driver of the changes to the level of shareholder return. Low loan loss banks stage a quicker share price recovery than their peers, and in a credit downturn, the market rewards the banks with the best credit performance with a moderate price decline relative to their peers.

FACTORS ON WHICH CREDIT RISK DEPENDS The credit risk depends on both internal and external factors. EXTERNAL FACTORS The external factors are: The state of the economy Swings in commodity prices and equity prices Foreign exchange rates and

Interest rates, etc.

INTERNAL FACTORS The internal factors are: Deficiencies in loan policies and administration of loan portfolio which would cover weaknesses in the area of prudential credit concentration limits, Appraisal of borrowers' financial position Excessive dependence on collaterals and inadequate risk pricing, Absence of loan review mechanism and post sanction surveillance, etc.

Such risks may extend beyond the conventional credit products such as loans and letters of credit and appear in more complicated, less conventional forms, such as credit derivatives or tranches of securitised assets. MEASURING CREDIT RISK.

The measurement of credit risk is of vital importance in credit risk management. A number of qualitative and quantitative techniques to measure risk inherent in credit portfolio are evolving. To start with, banks should establish a credit risk rating framework across all type of credit activities. Among other things, the rating framework may, incorporate: 1. Business Risk

Industry Characteristics Competitive Position (e.g. marketing/technological edge) Management

2. Financial Risk

Financial condition Profitability Capital Structure Present and future Cash flows

PRINCIPLES FOR THE MANAGEMENT OF CREDIT RISK

1. While financial institutions have faced difficulties over the years for a multitude of reasons, the major cause of serious banking problems continues to be directly related to lax credit standards for borrowers and counterparties, poor portfolio risk management, or a lack of attention to changes in economic or other circumstances that can lead to a deterioration in the credit standing of a bank's counterparties. This experience is common in both G-10 and non-G10 countries. 2. 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 maximise 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 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 organisation. 3. 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, and both on and off the balance sheet. Banks are increasingly facing credit risk (or counterparty risk) in various financial instruments other than loans, including acceptances, interbank transactions, trade financing, foreign exchange transactions, financial

futures, swaps, bonds, equities, options, and in the extension of commitments and guarantees, and the settlement of transactions. 4. Since exposure to credit risk continues to be the leading source of problems in banks worldwide, banks and their supervisors should be able to draw useful lessons from past experiences. 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 Basel Committee is issuing this document in order to encourage banking supervisors globally to promote sound practices for managing credit risk. Although the principles contained in this paper are most clearly applicable to the business of lending, they should be applied to all activities where credit risk is present. 5. The sound practices set out in this document specifically address the following areas: (i) establishing an appropriate credit risk environment; (ii) operating under a sound credit-granting process; (iii) maintaining an appropriate credit administration, measurement and monitoring process; and (iv) 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 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, and the disclosure of credit risk, all of which have been addressed in other recent Basel Committee documents. 6. While the exact approach chosen by individual supervisors will depend on a host of factors, including their on-site and off-site supervisory techniques and the degree to which external auditors are also used in the supervisory function, all members of the Basel Committee agree that the principles set out in this paper should be used in evaluating a bank's credit risk management system. Supervisory expectations for the credit risk management approach used by individual banks should be commensurate with the scope and sophistication of the bank's activities. For smaller or less sophisticated banks, supervisors need to determine that the credit risk management approach used is sufficient for their activities and that they have instilled sufficient risk-return discipline in their credit risk management processes.

7. The Committee stipulates in Sections II through VI of the paper, principles for banking supervisory authorities to apply in assessing bank's credit risk management systems. In addition, the appendix provides an overview of credit problems commonly seen by supervisors. 8. 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 reputational 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 include: the timing of the exchange of value; payment/settlement finality; and the role of intermediaries and clearing houses.

APPROACHES TO CREDIT RISK MANAGEMENT The Basel Committee has proposed two approaches for estimating regulatory capital, that is; 1. Standardised Approach 2. Internal Rating Based (IRB) Approach

1. THE STANDARDISED APPROACH TO CREDIT RISK Under the Standardised Approach, the committee desires neither to produce net increase nor a net decrease, on an average, in minimum regulatory capital, even after accounting for operational risk. Under the Standardised Approach, preferential risk weights in the range of 0, 20, 50, 100 and 150 percent would be assigned on the basis of external credit assessments. Standardised approach to credit risk in Basel II:

The minimum capital requirements for the corporate, interbank and sovereign loan portfolios of a representative bank in each EMU country are evaluated by means of Monte-Carlo simulations depending on the credit rating agencies chosen by the bank to risk-weight its exposures. Three main results emerge from the analysis. First, although the use of different combinations of credit rating agencies leads to significant differences in minimum capital requirements, these differences never exceed 10% of banks regulatory capital for loans to corporates, banks and sovereigns on average in the EMU. Second, the standardised approach provides a small regulatory capital incentive for banks to use several credit rating agencies to risk-weight their exposures. Third, the minimum capital requirements for the corporate, interbank and sovereign loan portfolios of EMU banks will be higher in Basel II than in Basel I. The incentive for banks to engage in regulatory arbitrage in the standardised approach to credit risk is limited.

Objectives of the Standardised Approach

The standardised approach is the simplest of the three broad approaches to credit risk. The other two approaches are based on banks internal rating systems The standardised approach aligns regulatory capital requirements more closely with the key elements of banking risk by introducing a wider differentiation of risk weights and a wider recognition of credit risk mitigation techniques, while avoiding excessive complexity. Accordingly, the standardised approach should produce capital ratios more in line with the actual economic risks that banks are facing, compared to the present Accord. This should improve the incentives for banks to enhance the risk measurement and management capabilities and should also reduce the incentives for regulatory capital arbitrage. The Risk Weights in the Standardised Approach:

Along the lines of the proposals in the consultative paper to the new capital adequacy framework issued in June 1999,1 the risk weighted assets in the standardized approach will continue to be calculated as the product of the amount of exposures and supervisory determined risk weights. As in the current Accord, the risk weights will be determined by the category of the borrower: sovereign, bank, or corporate. Unlike in the current Accord, there will be no distinction on the sovereign risk weighting depending on whether or not the sovereign is a member of the Organisation for Economic Coordination.

2. INTERNAL RATING BASED(IRB) APPROACH Under the IRB Approach, the committees ultimate goals are to ensure that the overall level of regulatory capital is sufficient to address the underlying credit risks and also provide capital incentives relative to the standardized approach, that is, a reduction in the risk weighted assets of 2 to 3 percent (foundation IRB approach) and 90 percent of the capital requirement under the foundation approach for the advanced IRB approach to encourage banks to adopt IRB approach for providing capital. NOTE - Minimum Capital to Risk-weighted Assets Ratio (CRAR) should be 9 %.

Need to have: rating models have to be predictive (accurate ratings, significant discrimination between risk segments) reliable (stable performance, consistent ratings) developed quickly (volume!), consistently and safely analysed, monitored and back-tested combined with human judgment massively documented.

Nice to have: rating models have to be easily taken into production, without any IT or other bottleneck easily integrated in all relevant processes and applications (also in real-time or indirect channels) easily (re-)used in marketing and sales processes easily and safely managed, updated and replaced.

CHAPTER -3 CREDIT RISK MANAGEMENT IN PNB

PNB..the name you can BANK upon PROFILE


With over 72 million satisfied customers and 5937 domestic branches, PNB has continued to retain its leadership position amongst the nationalized banks. The Bank enjoys strong fundamentals, large franchise value and good brand image. Over the years PNB has remained fully committed to its guiding principles of sound and prudent banking irrespective of conditions. Bank has been earning many laurels and accolades in recognition to its service towards doing good to society, technology usage and on its overall performance. Some of the major awards won by the Bank are the Best Bank Award, Most Socially Responsive Bank by Business World-PwC, Most Productive Public Sector Bank, Golden Peacock Awards by Institute of Directors, etc. Besides, the Bank is ranked 26th amongst FE 500 Indias Finest Companies, 26th amongst the Top 500 India's Largest Corporations by

Fortune 500 India. The Banker ranked PNB on 186th position in 2011, improving from 257th position a year before. PNB ranked 668th amongst 2000 Global Giants as per the Forbes and 170th in 2012 improving from 195th in 2011 in Top 500 Most Valuable Banking Brands by Brand Finance Banking 500. India Inc Top 100 Most Powerful CEOs for the year 2012, Shri K.R. Kamath, CMD, PNB, adjudged Most Powerful amongst the Nationalised Banks in India, with overall rank at 50 by Economic Times. Bank has also been ranked 26th amongst India Top Companies as per ET 500 and 25th amongst the Top 50 most valuable corporate brand by Brand Finance-ET. Since its humble beginning in 1895 with the distinction of being the first Swadeshi Bank to have been started with Indian capital, Punjab National Bank has continuously strived for growth in business which at the end of June 2012 amounted to Rs.6,79,823 crore. PNB is the largest nationalised Bank in the country in terms of Branch Network, Total Business, Advances, Operating Profit and Low Cost CASA Deposits. The CASA deposits share to the Total Deposits of the Bank was at 35.6% as on June 2012. Bank achieved a Net Profit of ` 1246 crore during the Q1 FY13. Bank also has a strong capital base with Capital Adequacy Ratio of 12.57% as on June12 as per Basel II with Tier I and Tier II capital ratio at 9.33% and 3.24% respectively.

The Bank is offering all the technology enabled services to its customers ranging from Mobile Banking, Call Centre, Internet Banking, on line booking of rail tickets, payment of utilities bills, booking of airline tickets to SMS alerts and Mobile Banking services to keep them updated about their financial transactions at all time. Towards developing a cost effective alternative channels of delivery, the Bank with more than 6050 ATMs has the largest ATM network amongst Nationalized Banks. ATM Network of the Bank provides other value added services such as Funds Transfer, Bill Payments and mobile registration for generation of SMS alerts; Direct Tax Payment, request for stop payment of cheques, etc. are also provided to the cardholders. CREDIT RISK MANAGMENET IN PNB

The credit risk rating system provides a common language and uniform framework across bank for assessing credit risk. The system enables the bank to evaluate and track risk on individual obligors on a continuing basis. And most importantly, it enables banks to track and manage risk on portfolio basis also. In order to create and stabilize robust credit risk management system, bank has been continuously monitoring the ratings and their migration. To provide a standard definition and benchmarks under the credit risk rating system, seven rating grades for performing loans have been specified.

According to PNB :
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. Further, an impaired asset is a loan or an advance where: (i) interest and/or installment of principal remains overdue for a period of more than 90 days in respect of a term loan.

(ii) the account remains out of order in respect of an overdraft/cash credit for a period of more than 90 days. Account will be treated out of order, if: - the outstanding balance remains continuously in excess of the limit/drawing power. - in cases where the outstanding balance in the principal operating account is less than the sanctioned limit/drawing power, but there are no credits continuously for 90 days as on the date of balance sheet or credits are not enough to cover the interest debited during the same period (iii) in case of bills purchased & discounted, the bill remains overdue for a period of more than 90 days (iv) the installment or principal or interest thereon remains overdue for two crop seasons for short duration and the installment of principal or interest thereon remains overdue for one crop season for long duration crops. Credit approving authority, prudential exposure limits, industry exposure limits, credit risk rating system, risk based pricing and loan review mechanisms are the tools used by the bank for credit risk management. All these tools have been defined in the Credit Management & Risk Policy of the bank. At the macro level, policy document is an embodiment of the Banks approach to understand, measure and manage the credit risk and aims at ensuring sustained growth of healthy loan portfolio while dispensing the credit and managing the risk. Credit risk is measured through sophisticated models, which are regularly tested for their predictive ability as per best practices.

CREDIT RISK RATING SYSTEM

PNB TRAC is an internally developed centralised web based software application for assessment of credit risk in a borrowal account. It incorporates all rating models on a single platform and enables on line rating of borrowers. The data is stored in a centralized server, which makes the data collection and storage easier. Preventive Monitoring System is put in place to track the changes in the account based on the adverse signals observed in the operations of account and select performance parameters. It ranks accounts on a scale of 1-10. CREDIT RATING MODEL AT PNB: Various Credit risk rating models are used to rate the borrower on a scale of seven rating grades. 1. Large Corporate Borrowers ( Bank exposure more than Rs.15 crore) 2. Mid Corporate Borrowers ( Bank exposure from Rs.5 crore to less than Rs.15 crore) 3. Small Borrowers -- I(Bank exposure from Rs.20 lacs to less than Rs.5 crore) 4. Small Borrowers II ( Bank exposure from Rs.2 lacs to less than Rs.20 Lacs) 5. NBFCs Rating Model 6. New Projects Rating Model 7. Banks and Financial Institutions Rating Model 8. New Business Rating Model 9. Half Yearly Review of Rating

10. Facility Rating Model 11. Industry Exposure limits 12. Segment wise Retail Rating To ensure the quality and consistency of credit risk ratings, vetting of the rating is also done. The credit risk rating of a borrower becomes due for updation after the expiry of 12 months from the month of previous rating. Thus fresh rating in the accounts is conducted annually. Out of the seven rating grades, B and above are treated as Investment Grade. The average annual default rates in these rating grades is under 2 %.

CREDIT RISK MANAGEMENT THROUGH RATING SYSTEM The Bank has in place a multi-tier credit approving system. In order to enable the field functionaries to take expeditious decisions and also to attract quality accounts, higher loaning powers have been vested with various level of officials for better rated borrowers. No fresh exposure is taken in 'C'& 'D' rated accounts. However, Management Committee of the Board is empowered to consider proposals in respect of fresh exposure in such accounts. Adhoc/additional/enhancement facility in 'C'& 'D' rated accounts is to be sanctioned by authority not below the level of Zonal head and in exception circumstances. Exposure is not taken in industries considered unfavorable. However in case the Zonal head finds a bankable proposal, then such sanction is given only by the Board of the bank. The pricing of the facility is linked with credit risk rating in case of rated accounts. Interest rate is charged depending upon the quality of asset. Better-rated accounts are priced at lower rate of interest as compared to low rated accounts. Where the borrowers like to know about the rationale of their rating, they are informed about their weak areas such as Financial, Business/Industry, Management or Conduct of Accounts and the steps they can take to improve their rating.

AVERAGE ANNUAL DEFAULT RATES UPTO 31.3.2012

COMPARATIVE AVERAGE ANNUAL DEFAULT RATE

PREVENTIVE MONITORING SYSTEM (PMS)


Credit Monitoring/Post-sanction follow up is an important ingredient of sound Credit Management System and calls for monitoring of the health/conduct of borrowal accounts on regular intervals. It is also pivotal for improving the Asset (Credit Portfolio) Quality of the bank. It is an action oriented post sanction monitoring tool that tracks and evaluates the health of a borrowal account on regular basis. The aim is to minimise the loan losses by focusing on accounts showing Early Warning signals of deterioration. SALIENT FEATURES OF PMS Comprehensive performance etc. Covers indicators of conduct of account, business

Objective - Health of the account is reflected as a single numerical score. Diagnostic - The reasons behind deterioration are analysed for taking remedial steps. Memory - Unsatisfactory features or irregularities are accounted for one year. Preventive - Timely action / corrective measures can be taken in Early Warning Category Accounts.

Continuous monitoring of health & conduct of account. Captures negative signals in respect of 27 parameters. PMS rank is an input to credit risk rating.PMS rank is calibrated on a scale of 1-10.

Bank initiates necessary actions on accounts showing early warning signals through PMS or having C or D (high) risk-rating.

CREDIT RISK ASSESSMENT SOFTWARE MODEL(RAM)


PNB also uses RAM for managing credit risk faced by it. RAM is internal rating software designed to assist a Bank or financial institution address issues raised by the Internal Rating based approach of the New Basel Accord (Basel II). RAM is an easy to use Internal Rating software installed in the central server of an institution and accessible throughout the organization. RAM guides a user to assess the credit risk of various categories of borrowers such as Large Corporates, Small and Medium Enterprises, Traders, Banks, Infrastructure Companies, Green-Field Projects, Banks, Non-Banking Financial Companies, Capital Market Brokers, etc CRISIL by virtue of being the fourth largest rating agency in the world has over the years been very successful in rating companies belonging to various categories and has been able to predict with a high degree of probability, the default risk of such companies. It is this rating experience, which is encapsulated in RAM. RAM is a highly parametric software which can be easily customized to the user environment right from Workflows, user-interfaces as well as various reports for Management Information System.

RAM is also capable of incorporating any number of rating models through a Visual Basic based client interface. RAM follows a pre-designated (customizable) workflow approach to credit risk assessment and begins with assessment of "Financial Risk", "Industry Risk", "Business Risk" and "Management Risk". It then follows a "Christmas Tree" approach drilling down to assessment of various minute factors. Once the credit risk assessment is done by the first level officer, the assessment can either be approved or modified at various higher levels in the risk hierarchy. Audit trails capture all modifications/changes/comments at each level. The final rating or grading is based on the weighted average score of all assessed factors. Powerful features like Financial Analysis Tool (FAT), Facility Risk Rating module (FRR) and an intelligent feature called 'Virtual Guide' which guides an analyst or officer to probe deeper into the account being rated. These features and other such, make RAM a complete Credit Risk Management Software which performs much more than just

rating the obligor and enables the Risk Manager to analyze the credit risk take a 360 degree view of the account being rated. RAM is a web-based application, available on a Java 2 Enterprise Edition (J2EE) framework, which is platform independent. The database is ORACLE 9i.

Data Analysis:

The total gross credit risk exposures:

( Rs. In Crore) Particular Fund Based Non Fund Based Mar-13 315244 69735.66 Mar-12 297892.6 76531.91

The geographic distribution of exposures is: ( Rs. In Crore )

Overseas Particular Fund Based Non Fund Based Mar-13 32121.14 4843.68 Mar-12 21784.83 3161.48

Domestic Mar-13 283122.9 64891.98 Mar-12 276107.7 73370.43

Gross NPA :
Category Sub Standard Doubtful -1 Doubtful -2 Doubtful -3 Loss Total Mar-13 6670.52 3353.6 1683.32 362.64 1395.71 13465.79

( Rs. In Crore)
Mar-12 5576.41 1766.81 726.11 293.34 356.95 8719.62

Net NPA

( Rs. In Crore)

Category Net NPA

Mar-13 7236.5

Mar-12 4454.23

NPA Ratios:
NPA Ratios % of gross NPA to Gross Advances % of net NPA to Net advances Mar-13 4.27% 2.93% Mar-12 2.93% 1.52%

Capital Adequacy (Basel II)


Particular Capital Fund Tier I Tier II Total ( Tier I + Tier II) Risk Weighted Assets Capital Adequacy Ratio(%) Tier I (%) Tier II (%) 27080 9773 36853 291919 12.63% 9.28% 3.35% Mar-12

(Rs. Crore)

Mar-13 31664 9608 41273 324380 12.72% 9.76% 2.96%

The CRAR of PNB has increased from 12.63 % in March 12 to 12.72 % in March 13 which means that there is an increase in banks capital as compared to its risk weighted assets which is good for the bank.

Due to improved recovery effort, Bank has been able to bring down the Gross and Net NPA level on sequential quarter basis.

Gross NPAs increased to Rs 13466 crore in Mar13 from Rs 8716 crore in March12 Net NPAs has increased to Rs 7237 crore in Mar13 from Rs 4454 crore in March12

CHAPTER 4 CREDIT RISK MANAGEMENT OF ICICI BANK

Profile

ICICI Bank is India's second-largest bank with total assets of Rs. 4,736.47 billion (US$ 93 billion) at March 31, 2012 and profit after tax Rs. 64.65 billion (US$ 1,271 million) for the year ended March 31, 2012. The Bank has a network of 3,130 branches and 10,486 ATMs in India, and has a presence in 19 countries, including India.

ICICI Bank offers a wide range of banking products and financial services to corporate and retail customers through a variety of delivery channels and through its specialised subsidiaries in the areas of investment banking, life and non-life insurance, venture capital and asset management. The Bank currently has subsidiaries in the United Kingdom, Russia and Canada, branches in United States, Singapore, Bahrain, Hong Kong, Sri Lanka, Qatar and Dubai International Finance Centre and representative offices in United Arab Emirates, China, South Africa, Bangladesh, Thailand, Malaysia and Indonesia. Its UK subsidiary has established branches in Belgium and Germany.

ICICI Bank's equity shares are listed in India on Bombay Stock Exchange and the National Stock Exchange of India Limited and its American Depositary Receipts (ADRs) are listed on the New York

Stock Exchange (NYSE).

CREDIT RISK MANAGEMENT IN ICICI BANK ICICI Bank is primarily exposed to credit risk, market risk, liquidity risk, operational risk and legal risk. ICICI Bank has three centralized groups: the Global Risk Management Group the Compliance Group and the Internal Audit Group ; with a mandate to identify, assess and monitor all of ICICI Bank's principal risks in accordance with well-defined policies and procedures. The Global Risk Management Group is further organized into: the Global Credit Risk Management Group the Global Market and Operational Risk Management Group. In addition, the Credit and Treasury Middle Office Groups and the Global Operations Group monitor operational adherence to regulations, policies and internal approvals. The Global Risk Management Group, Middle Office Groups and Global Operations Group report to a whole time Director. The Compliance Group reports to the Audit Committee of the board of directors and the Managing Director and CEO. The Internal Audit Group reports to the Audit Committee of the board of directors. These groups are independent of the business units and coordinate with representatives of the business units to implement ICICI Bank's risk management methodologies.

Committees of the board of directors have been constituted to oversee the various risk management activities. The Audit Committee provides direction to and also monitors the quality of the internal audit function. The Risk Committee reviews risk management policies in relation to various risks including portfolio, liquidity, interest rate, investment policies and strategy, and regulatory and compliance issues in relation thereto. The Credit Committee reviews developments in key industrial sectors and our exposure to these sectors as well as to large borrower accounts. The Asset Liability Management Committee is responsible for managing the balance sheet and reviewing the asset-liability position to manage ICICI Bank's liquidity and market risk exposure The Compliance Group is responsible for the regulatory and anti-money laundering compliance of ICICI Bank. Credit risk, the most significant risk faced by ICICI Bank, is managed by the Credit Risk Compliance & Audit Department (CRC & AD) which evaluates risk at the transaction level as well as in the portfolio context. The industry analysts of the department monitor all major sectors and evolve a sectoral outlook, which is an important input to the portfolio planning process. The department has done detailed studies on default patterns of loans and prediction of defaults in the Indian context. Risk-based pricing of loans has been introduced. The functions of this department include: Review of Credit Origination & Monitoring Credit rating of companies/structures Default risk & loan pricing Review of industry sectors Review of large exposures in industries/ corporate groups/ companies Ensure Monitoring and follow-up by building appropriate systems such as CAS

Design appropriate credit processes, operating policies & procedures Portfolio monitoring - Methodology to measure portfolio risk - Credit Risk Information System (CRIS) Focused attention to structured financing deals - Pricing, New Product Approval Policy, Monitoring Monitor adherence to credit policies of RBI During the year, the department has been instrumental in reorienting the credit processes, including delegation of powers and creation of suitable control points in the credit delivery process with the objective of improving customer response time and enhancing the effectiveness of the asset creation and monitoring activities. Availability of information on a real time basis is an important requisite for sound risk management. To aid its interaction with the strategic business units, and provide real

time information on credit risk, the CRC & AD has implemented a sophisticated information system, namely the Credit Risk Information System. In addition, the CRC & AD has designed a web-based system to render information on various aspects of the credit portfolio of ICICI Bank.

ICICI Bank also uses RAM to manage its credit risk.


1. Credit Risk Assessment Procedures for Corporate Loans In order to assess the credit risk associated with any financing proposal, ICICI Bank assesses a variety of risks relating to the borrower and the relevant industry. Borrower risk is evaluated by considering: the financial position of the borrower by analyzing the quality of its financial statements, its past financial performance, its financial flexibility in terms of ability to raise capital and its cash flow adequacy; the borrower's relative market position and operating efficiency; and the quality of management by analyzing their track record, payment record and financial conservatism. Industry risk is evaluated by considering: certain industry characteristics, such as the importance of the industry to the economy, its growth outlook, cyclicality and government policies relating to the industry; the competitiveness of the industry; and certain industry financials, including return on capital employed, operating margins and earnings stability. After conducting an analysis of a specific borrower's risk, the Global Credit Risk Management Group assigns a credit rating to the borrower. ICICI Bank has a scale of 10 ratings ranging from AAA to B, an additional default rating of D and short-term ratings from S1 to S8. Credit rating is a critical input for the credit approval process. ICICI Bank determines the desired credit risk spread over its cost of funds by considering the borrower's credit rating and the default pattern corresponding to the credit rating. Every proposal for a financing facility is prepared by the relevant business unit and reviewed by the appropriate industry specialists in the Global Credit Risk Management Group before being submitted for approval to the appropriate approval authority. The approval process for non-fund facilities is similar to that for fund-based facilities. The credit rating for every borrower is reviewed at least annually. ICICI Bank also reviews the ratings of all borrowers in a particular industry upon the occurrence of

any significant event impacting that industry. Working capital loans are generally approved for a period of 12 months. At the end of the 12 month validity period (18 months in case of borrowers rated AA- and above), ICICI Bank reviews the loan arrangement and the credit rating of the borrower and takes a decision on continuation of the arrangement and changes in the loan covenants as may be necessary. 2. Project Finance Procedures 3. Corporate Finance Procedures 4. Working Capital Finance Procedures 5. Credit Monitoring Procedures for Corporate Loans - The Credit Middle Office Group monitors compliance with the terms and conditions for credit facilities prior to disbursement. It also reviews the completeness of documentation, creation of security and insurance policies for assets financed. All borrower accounts are reviewed at least once a year. Retail Loan Procedures Small Enterprises Loan Procedures Rural and Agricultural Loan Procedures Credit Approval Authorities Data analysis:

CREDIT RATINGS
ICICI Banks credit ratings by various credit rating agencies at March 31, 2013 are given below:
Agency India ICICI Bank Limited

Senior Debt & Deposit Ratings of ICICI Bank Limited Moody's S&P JCRA FC - Long Term FC - Long Term FC - Short Term FC - Long Term Rupee - Long Term CARE Fixed Deposits Rupee - Short Term Baa2 BBBA-3 BBB+ Baa2 BBBA-3 BBB+ Care - AAA Care - AAA PR1+

Rupee - Long Term ICRA Term Deposit; Rupee - Short Term

LAAA MAAA A1+

Classification of gross assets (net of write-offs and unpaid interest on non-performing assets).
( Rs. In billion)
Category Sub Standard Doubtful -1 Loss Total Mar-13 18.72 67.91 9.84 96.47 Mar-12 14.49 73.35 7.79 95.63

(1) Includes loans, debentures, lease receivables and excludes preference shares. (2) All amounts have been rounded off to the nearest Rs. 10.0 million.

NON-PERFORMING ASSETS
Net customer assets 3517.62 3059.84 % of NPA to net customer asset 0.64% 0.62%

Year Mar-13 Mar-12

Gross NPA 96.47 95.63

Net NPA 22.34 18.94

(1) Net of write-offs and interest suspense. (2) Excludes preference shares. (3) Customer assets include advances and credit substitutes like debentures and bonds. (4) All amounts have been rounded off to the nearest Rs. 10.0 million.

CAPITAL ADEQUACY

Rs. In billion Particular Capital Fund Tier I Tier II Total ( Tier I + Tier II) Risk weighted Assets Capital Adequacy Ratio(%) Tier I (%) Tier II (%) 505.18 232.95 738.13 3,985.86 18.52% 12.37% 5.84% 565.62 262.74 828.36 4419.44 18.74% 12.80% 5.94% Mar-12 Mar-13

During fiscal 2013, capital funds (net of deductions) increased by ` 90.23 billion from ` 738.13 billion at March 31, 2012 to ` 828.36 billion at March 31, 2013. The increase in the capital funds was due to accretion to retained earnings, issuance of lower Tier-2 capital instruments, lower deduction from capital funds on account of securitisation exposures and repatriation of capital from an overseas banking subsidiary. Credit risk RWA increased by ` 426.08 billion from ` 3,468.74 billion at March 31, 2012 to ` 3,894.82 billion at March 31, 2013 primarily due to increase of ` 369.53 billion in RWA for on-balance sheet exposures, offset, in part, by decrease of ` 56.55 billion in RWA for offbalance sheet credit exposures.

CHAPTER -5 CREDIT RISK MANAGEMENT IN CANARA BANK

Profile Canara Bank occupies a premier position in the comity of Indian banks. With an unbroken record of profits since its inception, Canara Bank has several firsts to its credit. These include:

Launching of Inter-City ATM Network Obtaining ISO Certification for a Branch Articulation of Good Banking Banks Citizen Charter Commissioning of Exclusive Mahila Banking Branch Launching of Exclusive Subsidiary for IT Consultancy

Issuing credit card for farmers Providing Agricultural Consultancy Services

Over the years, the Bank has been scaling up its market position to emerge as a major 'Financial Conglomerate' with as many as nine subsidiaries/sponsored institutions/joint ventures in India and abroad. As at March 2013, the Bank has further expanded its domestic presence, with 3723 branches spread across all geographical segments. Keeping customer convenience at the forefront, the Bank provides a wide array of alternative delivery channels that include over 3526 ATMs, covering 1296 centres. Several IT initiatives have been undertaken during the year, which include Funds Transfer through Interbank Mobile Payment Services (IMPS) in ATMs, ASBA facility to net banking users, E-filing of tax returns and facility for viewing details of tax deducted at source, Terminal at select branches for customers to use net banking, SMS/e-mail alerts for all transactions done through ATM, net banking, POS, mobile banking, online payments irrespective of amounts, online loan applications and tracking facility, generation of automatic pass sheets through e-mail and automatic renewal of term deposits. Under Government business, the Bank has implemented internet based application for UGC Maulana Azad National Fellowship Scheme, Web portal for National Scheme for Girl Child Secondary Education, Electronic Accounting Systems of e-Receipts-Customs (EASeR-C) for collection of customs duty and e-payment of commercial taxes module for UP, Karnataka, Delhi and Tamil Nadu.

RISK MANAGEMENT IN CANARA BANK


The Banks policies assume moderate risk appetite and healthy balance between risk and return. The primary risk management goals are to maximize value for share holders within acceptable parameters and adequately addressing the requirements of regulatory authorities, depositors and other stakeholders. The guiding principles in risk management of the Bank comprise of Compliance with regulatory and legal requirements, achieving a balance between risk and return, ensuring independence of risk functions, and aligning risk management and business objectives. The Credit Risk Management process of the Bank is driven by a strong organizational culture

and sound operating procedures, involving corporate values, attitudes, competencies, employment of business intelligence tools, internal control culture, effective internal reporting and contingency planning.

The overall objectives of Bank's Credit Risk Management are to: Ensure credit growth, both qualitatively and quantitatively that would be sectorally balanced, diversified with optimum dispersal of risk. Ensure adherence to regulatory prudential norms on exposures and portfolios. Adequately pricing various risks in the credit exposure. Form part of an integrated system of risk management encompassing identification, measurement, monitoring and control.

Strategies and processes: In order to realize the above objectives of Credit Risk Management, the Bank prescribes various methods for Credit Risk identification, measurement, grading and aggregation techniques, monitoring and reporting, risk control / mitigation techniques and management of problem loans / credits. The Bank has also defined target markets, risk acceptance criteria, credit approval authorities, and guidelines on credit origination / maintenance procedures. The strategies are framed keeping in view various measures for Credit Risk Mitigation, which includes identification of thrust areas and target markets, fixing of exposure ceiling based on regulatory guidelines and risk appetite of the Bank, minimizing concentration Risk, and pricing based on rating. Bank from time to time would identify the potential and productive sectors for lending, based on the performance of the segments and demands of the economy. The Bank restricts its exposures in sectors which do not have growth potentials, based on the Banks evaluation of industries / sectors based on the prevailing economic scenario prospects etc. The operational processes and systems of the Bank relating to credit are framed on sound Credit Risk Management Principles and are subjected to periodical review.

The Bank has comprehensive credit risk identification processes as part of due diligence on credit proposals. The structure and organization of the Credit Risk Management Function: Credit Risk Management Structure in the Bank is as under Board of Directors Risk Management Committee of the Board (RMC) Credit Risk Management Committee (CRMC) General Manager-Risk Management Wing, H.O (Chief Risk Management Officer) Credit Risk Management Department, Risk Management Wing. The Credit Risk Management Department comprises of Credit Policy Section, Credit Statistics Section and Credit Risk Management Section. The Credit Risk Management Section has three functional desks, the Credit Risk Management Desk, Credit Risk Rating Desk and Industry Research Desk. Risk Management & Credit Review Section at Circle Offices.

The scope and nature of risk reporting and / or measurement systems: Bank has an appropriate credit risk measurement and monitoring processes. The measurement of risk is through a pre-sanction exercise of credit risk rating and scoring models put in place by the Bank. The Bank has well laid down guidelines for identifying the parameters under each of these risks as also assigning weighted scores thereto and rating them on a scale of I to VII. The Bank also has a policy in place on usage/mapping of ratings assigned by the recognized ECAIs (External Credit Assessment Institutions) for assigning risk weights for the eligible credit exposures as per the guidelines of the RBI on standardized approach for capital computation. The Bank has adopted Standardized Approach for entire credit portfolio for credit risk measurement.

In Canara Bank, Risk is managed by using following tools:

Credit Audit System to identify, analyze instances of non-compliance and rectification. Review of loan sanctioned by each sanctioning authority by the next higher authority. Mid Term Review of borrowal accounts beyond a certain level of exposure. Monitoring of special watch accounts at various levels. Formation of Slippage Management Committee at HO / Circles to monitor the accounts with exposure of ` 1 Crore & above, among the list of accounts appearing in Special Watch List. Monitoring tools like Credit Monitoring Format (web-based), Quarterly Information Systems, Half Yearly Operation Systems, Stock Audits, Special Watch List Accounts, etc. Credit Monitoring Officers at branches in charge of monitoring functions.

Data Analysis:

ASSET QUALITY

Mar12

Mar13

Gross NPA

4032

6260

Gross NPA Ratio (%)

1.73

2.57

Net NPA

3386

5278

Net NPA Ratio (%)

1.46

2.18

Cash Recovery

3296

4006

Asset Quality

Parameters

Mar12

MAR13

Gross Advances Sub-Standard Doubtful Loss

233607 2445 1539 48

243936 4279 1932 50

Provisions for NPA Provision Coverage Ratio (%)

390

933

67.6

61.35

Capital Adequacy Ratio


Rs. In Crore Particular Capital Adequacy Ratio(%) Tier I (%) Tier II (%) Mar-12 13.76% 10.35% 3.41% Mar-13 12.40% 9.77 2.43%

The Bank continues to maintain strong capital position among its peers. As at March 2013, Capital Adequacy Ratio stood at 12.40% (as against mandatory level of 9%), with a Tier I capital ratio at 9.77% (as against mandatory level of 6%). Adequate headroom available under both Tier-I and Tier-II options to raise capital to support business growth momentum. Government shareholding is at 67.72%

The Bank has strong Common Equity Capital to meet the stringent Basel III norms during the current year and onwards. The Bank has performed well in containing NPAs and making higher cash recoveries in economic downturn, at a time when most banks experienced higher slippages. The Banks gross NPA level was at March 2013. 6260 crore and net NPA level was 5278 crore as

The Banks gross NPA ratio has increased to 2.57% compared to last year of 1.73% Net NPA ratio has also increased to 2.18% compared to last year of 1.46% Cash Recovery during FY13 aggregated to a record 3296 crore for FY12. The Banks outstanding restructured portfolio at for the total advances. 4006 crore compared to 18113 crore constituted 7.41%

RATING OF CANARA BANK GIVEN BY MOODYS .Moodys assigns a bank financial strength rating (BFSR) of D+ to Canara Bank (CB), which translates into a Base line Credit Assessment (BCA) of Baa#, reflecting the bank's important nationwide franchise and strong market position as the fourth-largest commercial bank in India. The rating also takes into account the increasingly competitive operating environment and the challenges the bank faces in modernizing its operations and processes. Although there have been some signs of revival in the Indian industrial sector in the past few years, banks still have to contend with a high level of credit risk. CB's focus on retail, small and medium-sized enterprise (SM E) and agricultural lending over the past few years has helped its loan diversification, which in the past was dominated by corporate credits. The BFSR also encompasses the bank's strong links with corporates.

ICRA reaffirms LAAA rating to Canara Bank`s bond programs


Leading credit agency, ICRA reaffirmed the LAAA rating to the outstanding lower tier II bond and infrastructure bond programs of Canara Bank (Canara).The rating indicates highest credit quality and the rated instruments carry the lowest credit risk. ICRA has also reaffirmed the A1+ rating to the certificate of deposit program of Canara Bank (Q, N,C,F)* indicating highest credit quality. Instruments rated in this category carry the lowest credit risk in the short term. Canara`s ratings factor in the implicit sovereign support enjoyed by the bank in its role as the largest Nationalised Bank in the country, the strong brand franchise in the corporate sector and improvement in asset quality as depicted by the declining credit costs.

The ratings also take into account the competitive operating cost structure, given the bank`s large branch network and the comfortable regulatory capitalisation levels and liquidity position. ICRA believes that the management`s efforts to reduce high cost deposits and rebalance the credit portfolio could start generating higher interest spreads over the medium term. Meanwhile, the bank`s efforts to improve fee income levels, including revamping the operations of subsidiaries, and the gains on its trading book could support profitability. The bank has been maintaining a relatively superior operating cost structure but the inevitable investments required to upgrade its technology platform to cover more branches under CBS (Core Banking Solution) and Basel II requirements could adversely impact the operating cost levels. Q - Quote, N - News, C - Chart, F Financials

CHAPTER -6 CREDIT RISK MANAGEMENT IN ALLAHABAD BANK


PROFILE
Allahabad Bank is one of the premier nationalized banks in India. It is also the oldest joint stock bank of India. It was incorporated by a group of Europeans at Allahabad on April 24, 1865. It was the time Indian economy had started shifting towards organized trade and business affairs. After some years in 1920, the P&O Bank brought Allahabad Bank and its headquarters at Kolkata. The Allahabad bank got an entirely new identity when it was nationalized in 1969 along with 13 other banks in India. Since then the Allahabad Bank had a smooth journey towards progress. Today it is one of the leading banks in India with a whooping business of over Rs.1, 00,000 crores.

As on 31st March, 2013, Allahabad Bank has computerized all its 2260 branches including foreign branches, 69 extension counters and 26 Zonal offices. Allahabad Bank has installed 211 ATMs and to facilitate the service, Allahabad Bank customer can access all VISA & NFS ATM over 38,000 across the country for all sorts of transactions at free of cost. International business of Allahabad Bank is carried out through its 55 branches including 6 foreign branches. The Oldest Joint Stock Bank of the Country, Allahabad Bank was founded on April 24, 1865 by a group of Europeans at Allahabad. At that juncture Organized Industry, Trade and Banking started taking shape in India. Thus, the History of the Bank spread over three Centuries Nineteenth, Twentieth and Twenty-First.

The Bank particularly focuses on the retail banking while serving all sectors of the Indian economy. Bank's operations for corporate and commercial customers cater to large corporate customers as well as to small and middle market businesses and Government entities. Corporate and commercial products include Term Loans, Bill Discounting, Export Credit and other business credit and financing products. Also the bank offers a wide range of retail products including Home Loans, Personal Loans and Automobile Loans as well as Debit Cards. In addition, specialised products and services to the agricultural sector also one of entity of the bank.

CREDIT RISK MANAGEMENT IN ALLAHABAD BANK

The aim and objective of Risk Management Practice is to ensure stability and efficiency in the operation of the Bank. While establishing the Risk Management Practice, the Bank has adopted a comprehensive approach, align with the best practice in the Industry covering Organizational structure, Risk Policies, Risk processes, Risk Mitigation and Risk audit, all in order to identify, manage, monitor and control various categories of risks. The Bank has also adopted an integrated approach at the committee level to put in place a robust Risk Management System. The Bank is updating / fine-tuning systems and procedures, technological capabilities, Risk structure etc. to meet the requirements of the guidelines. The Bank proposes to migrate to the final guidelines given by the RBI for embracing Basel II norms. The Bank initiated parallel run exercise in line with RBI guidelines Improvement in Risk Management practices has been integrated with the betterment of asset quality through introduction of proper credit management practices. Centralised Credit Appraisal Cells have been created at Zonal Offices with proper networking arrangement for better processing of credit proposals and prompt decisions. Improved credit monitoring measures have already been put in place for insulating the Bank from future loan losses.

Allahabad Bank also uses RAM for managing its Credit Risk.
The Bank has established a structured, dynamic, proactive and integrated Credit Risk Management System to proper identification & quantification of the credit risk associated with the credit proposals. The Bank has developed various risk rating module for credit risk rating. The Bank has also devised risk rating module exclusively for SSI & SME sector. In regard to Operational Risk, the Bank has framed policy and procedural guidelines for implementation as per the extant guidelines of Reserve Bank of India.

Data analysis

ASSET QUALITY

NPA Ratio (i) Gross NPA

Mar -13 513699 412676 3.92 3.19

Mar -12 205898 109170 1.83 0.98

(ii) Net NPA (b) (i) % of Gross NPA (ii) % Net NPA

CAPITAL ADEQUACY
Rs. In billion Particular Capital Fund Mar-12 Mar-13

Tier I

9912.20 4023.02

10749 3973 14722 133509


11.03% 9.13% 8.05%

Tier II

13935.22
Total ( Tier I + Tier II)

Risk weighted Assets Capital Adequacy Ratio(%) Tier I (%)

108575.27 12.83 %

Tier II (%)

3.71%

2.98%

CHAPTER - 7 CONCLUSION

Punjab National Bank (PNB) measures, monitors and manage credit risk for each borrower and also at the portfolio level. It uses various techniques for this purpose like: Credit Policy Rating of Borrower Models for Credit Risk Rating Credit Risk Rating for Performing Loans PNB TRAC for online rating of borrowers Preventive Monitering System (PMS) for monitering conduct of borrowel A/c on regular basis. It updates the ratings of its borrowers annually. Credit Risk Assessment Software Model (RAM) for assessing the credit risk faced by it.

The CRAR of PNB has increased from 12.63 % in March 12 to 12.72 % in March 13 which means that there is an increase in banks capital as compared to its risk weighted assets which is good for the bank. Due to improved recovery effort, Bank has been able to bring down the Gross and Net NPA level on sequential quarter basis. Gross NPAs increased to Rs 13466 crore in Mar13 from Rs 8716 crore in March12 Net NPAs has increased to Rs 7237 crore in Mar13 from Rs 4454 crore in March12

ICICI Bank measures, monitors and manage credit risk for each borrower and also at the portfolio level. It has made specific department for performing the various activities for credit risk management. These departments are: Global Credit Risk Management Group Credit Risk Compliance & Audit Department (CRC & AD) which evaluates risk at the transaction level as well as in the portfolio context. It used credit risk rating system and RAM for managing and assessing its credit risk respectively.
At March 31, 2013, the gross NPAs (net of write-offs, interest suspense and derivatives income reversal) were ` 96.47 billion compared to ` 95.63 billion at March 31, 2012. Net NPAs were ` 22.34 billion at March 31, 2013 compared to ` 18.94 billion at March 31, 2012. The ratio of net NPAs to net customer assets increased marginally from 0.62% at March 31, 2012 to 0.64% at March 31, 2013. During fiscal 2013, capital funds (net of deductions) increased by ` 90.23 billion from ` 738.13 billion at March 31, 2012 to ` 828.36 billion at March 31, 2013. The increase in the capital funds was due to accretion to retained earnings, issuance of lower Tier-2 capital instruments, lower deduction from capital funds on account of securitisation exposures and repatriation of capital from an overseas banking subsidiary. Credit risk RWA increased by ` 426.08 billion from ` 3,468.74 billion at March 31, 2012 to ` 3,894.82 billion at March 31, 2013 primarily due to increase of ` 369.53 billion in RWA for on-balance sheet exposures, offset, in part, by decrease of ` 56.55 billion in RWA for offbalance sheet credit exposures. Provision coverage ratio (i.e. total provisions made against NPAs as a percentage of gross NPAs) at March 31, 2013 was 76.8%. At March 31, 2013, total general provision held against standard assets was ` 16.24 billion compared to ` 14.80 billion at March 31, 2012.

Canara Bank also uses various techniques for managing its credit risk like: Credit rating system Risk based Internal Audit System RAM

Capital Adequacy
The Bank continues to maintain strong capital position among its peers. As at March 2013, Capital Adequacy Ratio stood at 12.40% (as against mandatory level of 9%), with a Tier I capital ratio at 9.77% (as against mandatory level of 6%). Adequate headroom available under both Tier-I and Tier-II options to raise capital to support business growth momentum. Government shareholding is at 67.72% The Bank has strong Common Equity Capital to meet the stringent Basel III norms during the current year and onwards.

Asset Quality
The Bank has performed well in containing NPAs and making higher cash recoveries in economic downturn, at a time when most banks experienced higher slippages. The Banks gross NPA level was at March 2013. 6260 crore and net NPA level was 5278 crore as

The Banks gross NPA ratio has increased to 2.57% compared to last year of 1.73% Net NPA ratio has also increased to 2.18% compared to last year of 1.46% Cash Recovery during FY13 aggregated to a record 3296 crore for FY12. The Banks outstanding restructured portfolio at for the total advances. 4006 crore compared to 18113 crore constituted 7.41%

Allahabad Bank:
Allahabad Bank uses a comprehensive approach, aligned with the best practice in the Industry covering Organizational structure, Risk Policies, Risk processes, Risk Mitigation and Risk audit, all in order to identify, manage, monitor and control various categories of risks. The Bank has also adopted an integrated approach at the committee level to put in place a robust Risk Management System. Various credit monitoring measures are used by the bank and RAM is also used by the bank. Capital Adequacy ratio has decreased in March -13 from 12.83% to 11.03%. % Gross NPA has increased from 1.83% to 3.92% and net NPA increased to 0.98% to 3.19%.

Thus, we can conclude finally that Canara Bank manages its Credit Risk most effectively, then is Allahabad Bank, then is Punjab National Bank and at last is the ICICI Bank which has not managed is credit risk effectively due to which its NPAs are increasing even though it has made so many departments for managing credit risk and is also using so many softwares for it. This shows that there is certainly some flaw in its credit risk management system and also in credit management system of PNB. Thus, these banks need to improve upon their credit risk management system as it is very important for their growth prospectus.

CHAPTER -8 BIBLIOGRAPHY

WEBSITES: www.pnbindia.in www.icicibank.com www.allahabadbank.com www.canarabank.com www.google.com Online Newspaper: Hindu Business Line

BOOKS: Financial Institutions and Markets; By: L.M. Bhole Indian Financial System; By: M.Y. Khan

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