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A Research Project on Credit Risk and Liquidity Risk

A Research Project on Credit Risk and Liquidity Risk

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Published by: Ekam Jot on Apr 28, 2012
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Sections

  • CHAPTER I - INTRODUCTION
  • WHAT IS RISK?
  • LITERATURE REVIEW AND RESEARCH METHODOLOGY
  • LITERATURE REVIEW
  • INTRODUCTION OF CREDIT RISK AND LIQUIDITY RISK
  • CREDIT RISK
  • THE BASEL COMMITTEE’S PRINCIPLES OF
  • CREDIT RISK MANAGEMENT
  • WHAT IS LIQUIDITY?
  • ANALYSIS AND INTERPRETATION OF RATIOS
  • STATE BANK OF INDIA
  • STATE BANK OF BIKANER AND JAIPUR
  • STATE BANK OF HYDERABAD
  • STATE BANK OF INDORE
  • STATE BANK OF MYSORE
  • STATE BANK OF PATIALA
  • STATE BANK OF SAURASHTRA
  • STATE BANK OF TRAVANCORE
  • FINDINGS OF THE STUDY
  • CONCLUSION

CHAPTER I - INTRODUCTION

“Journey Of Indian Banking Industry- From Closed To Liberalized System”
The face of Indian banking industry has been changing through the process of change is not yet complete. The phenomenal growth of Indian banking , in terms of business volume, network, staff, client-base can largely be attributed to the nationalization of major Indian banks in 1969 and the resulting socialistic banking policies. While the growth since then may appear impressive, it is necessary to remember that the banking industry grew for more than two decade mostly in a protected environment. The role of bank manager, irrespective if the hierarchy, was largely confined to ensuring compliance with the guidelines of reserve bank of India in managing banking operations. Actually, even such compliance remained more often true to the letter than to spirit of RBI’s guidelines. The enormous growth achieved in a controlled , RBI-directed, socialist banking scenario. By the mid-1980’s, it was becoming clear to the intelligent observer that Indian banking was getting into troubled waters. However the game went on as if nothing alarming was going to happen, until the balance of payment crisis in 1991. Along with the emergency funding from IMF, a series of economic reforms was announced. Enter NARASIMHAN part I and II , and the scene changed altogether. While the signals were evident much earlier when the VAGHUL COMMITTEE recommendations were accepted for developing the money market, financial sector reforms truly set in for the Indian banking industry from 1992. The deregulations of interest rates and exchange rates changed the way Indian bankers have long been used to thinking and acting. Because of these reforms banks are forced to take new service lines, designing innovative products and expanding business horizon into new areas hitherto unknown to traditional bankers. In the process banks are now exposes to more risks. The vulnerability to risks- both internal and external- has increased. In such an environment, pregnant with uncertainties, the only way is to counter business risk is to improve the requisite skills for operating in such a volatility. New products and financial instruments have made inroads
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protected environment led to many

managers quickly ascending the hierarchy with skills which were relevant to government-

into the banking business vocabulary and made it imperative for banks to acquire new skills and improve their knowledge-base, particularly in new areas such as derivatives, management, asset liability management etc. A lot of importance is being attached by the RESERVE BANK OF INDIA to the area of risk management. Banks have been directed to focus on the area of risk management because in today’s environment, there is a strong need for the bankers to be aware of the risks which they are exposed , and the tolls available for managing such risks, assumes significance. futures, risk

State Bank of India
2

State Bank of India (SBI), Mumbai Main Branch.

INTRODUCTION:
State Bank of India (SBI) is the largest state-owned banking and financial services company in India, by almost every parameter - revenues, profits, assets, market capitalization, etc. The bank traces its ancestry to British India, through the Imperial Bank of India, to the founding in 1806 of the Bank of Calcutta, making it the oldest commercial bank in the Indian Subcontinent. The Government of India nationalized the Imperial Bank of India in 1955, with the Reserve Bank of India taking a 60% stake, and renamed it the State Bank of India. In 2008, the Government took over the stake held by the Reserve Bank of India. SBI provides a range of banking products through its vast network of branches in India and overseas, including products aimed at NRIs. The State Bank Group, with over 16,000 branches, has the largest banking branch network in India. With an asset base of $260 billion and $195 billion in deposits, it is a regional banking behemoth. It has a market share among Indian commercial banks of about 20% in deposits and advances, and SBI accounts for almost one-fifth of the nation's loans. SBI has tried to reduce over-staffing by computerizing operations and "golden handshake" schemes that led to a flight of its best and brightest managers. These managers took the retirement allowances and then went on to become senior managers in new private sector banks.
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The State bank of India is the 29th most reputed company in the world according to Forbes. State Bank of India is the largest of the Big Four Banks of India, along with ICICI Bank, Axis Bank and HDFC Bank — its main competitors.

State Bank of India

Type Industry Founded

Public Sector Bank Banking Financial services July 1, 1955

Headquarters Mumbai, Maharashtra, India Key people O. P. Bhatt

(Chairman)
Investment Banking Consumer Banking Commercial Banking Retail Banking

Products

Private Banking Asset Management Pensions Mortgages Credit Cards

Revenue Profit Total assets Total equity Owner(s) Employees

▲ $29.242 billion (2011) ▲ $3.573 billion (2011) ▲ $345.043 billion (2011) ▲ $18.712 billion (2011)
Government of India 205,997
(2011)

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On 30 April 1955 the Imperial Bank of India became the State Bank of India. namely. The Govt. Pursuant to the provisions of the State Bank of India Act (1955). was established on 2 June 1806. the Reserve Bank of India. later renamed the Bank of Bengal. The Bank of Bengal and two other Presidency banks.History: The roots of the State Bank of India rest in the first decade of 19th century. All three Presidency banks were incorporated as joint stock companies. The Imperial Bank of India continued to remain a joint stock company. when the Bank of Calcutta. Offices of the Bank of Bengal 5 . and the reorganized banking entity took as its name Imperial Bank of India. a right they retained until the formation of the Reserve Bank of India. the Bank of Bombay (incorporated on 15 April 1840) and the Bank of Madras (incorporated on 1 July 1843). which is India's central bank. and were the result of the royal charters. of India recently acquired the Reserve Bank of India's stake in SBI so as to remove any conflict of interest because the RBI is the country's banking regulatory authority. acquired a controlling interest in the Imperial Bank of India. These three banks received the exclusive right to issue paper currency in 1861 with the Paper Currency Act. The Presidency banks amalgamated on 27 January 1921.

SBI holds 98. 1959 and May. Also. The process of merging of State Bank of Indore was completed by April 2010. already had an extensive network in Kerala. All use the same logo of a blue keyhole and all the associates use the "State Bank of" name followed by the regional headquarters' name. merged with State Bank of India. the government integrated these banks into State Bank of India to expand its rural outreach.77% is owned by individuals. following the acquisition. it acquired Bank of Cochin in Kerala. enabling the State Bank of India to take over eight former State-associated banks as its subsidiaries. emphasizing the development of rural India. The acquisition of State Bank of Indore added 470 branches to SBI's existing network of 12. On September 13. the then seven banks that became the associate banks belonged to princely states until the government nationalised them between October. There has been a proposal to merge all the associate banks into SBI to create a "mega bank" and streamline operations. SBI's total assets will inch very close to the Rs 10-lakh crore mark. 1960. State Bank of Indore. and the balance 1.448 and over 21. State Bank of Saurashtra. with itself.119 crore as on March 2009. 2008.In 1959 the Government passed the State Bank of India (Subsidiary Banks) Act. The first step towards unification occurred on 13 August 2008 when State Bank of Saurashtra merged with State Bank of India. Associate banks: SBI has five associate banks that with SBI constitute the State Bank Group. Originally. For instance.000 ATMs. one of its Associate Banks. reducing the number of state banks from seven to six.3% in the bank. Total assets of SBI and the State Bank of Indore stood at Rs 998. which had 120 branches. Then on 19 June 2009 the SBI board approved the merger of its subsidiary. State Bank of Travancore. The subsidiaries of SBI are: 6 . SBI has acquired local banks in rescues. In tune with the first Five Year Plan. SBI was the acquirer as its affiliate. in 1985. who held the shares prior to its takeover by the government.

loss. injury. inclusive of branches that belong to its Associate banks. IN GENERAL RISK MEANS: Probability or threat of a damage. we are exposed to risks of different degrees. or other negative occurrence. It is interwoven in the very fabric of life itself and is required to ensure growth.• • • • • • State Bank of Indore State Bank of Bikaner & Jaipur State Bank of Hyderabad State Bank of Mysore State Bank of Patiala State Bank of Travancore Branches of SBI: • • SBI has 21000 ATMs. In the same way risk is also an integral part of business. drive or take public transportation to get to school or to work until we get back into our beds (and perhaps even afterwards). From the moment we get up in the morning. SBI alone has 18500 branches. • WHAT IS RISK? Risk is part of every human endeavor. caused by external or internal vulnerabilities. liability. SBI has 26500 branches. and which may be neutralized through pre-mediated action. Or Risk can be used to describe as a situation where there is an uncertainty about the outcome 7 .

In facts. This is especially true for banks/financial institutions. They help in mobilizing household corporate savings and making them available to deficit units. security prices.  EXCHANGE RATE RISK: Appreciation or depreciation of a currency will result in a loss or an naked-position.  LIQUIDITY RISK: There will not be enough cash and/or cash-equivalents to meet the needs of depositors and borrowers.  PAYMENT SYSTEM RISK: Payment system of a major bank will malfunction and will hinder its payments  MARKET RISK: it is the risk of losses due movements in financial market variables. though the nature and magnitude may differ for each type of organization.  INTEREST RATE RISK: Decline in net interest income will result from changes in relationship between interest income and interest expense. Since they help in credit creation by means of loans and advances.All organizations deal with risks.  COUNTRY RISK: this risk arise when bank transforms itself into an international one when it starts lending across its borders or invests in instruments issued by foreign 8 .  OPERATIONS RISK: Failure of data processing equipment will prevent the bank from maintaining its critical operations to the customers' satisfaction. They act as financial intermediaries in a economic system. If we talk about bank then it is exposed to the following risks:  DEFAULT RISK: Borrowers will not be able to repay principal and interest as arranged (also called credit risk). foreign exchange rates. the face many risks. These may be interest rates. taking risk is the core and the most of the products and services offered by banks/financial institutions. etc. as they deal with money.

Risk management basically is a 5-step process which involves. Identification of risks Quantification of the level of exposures Policy formulation Engineering a strategy to transform the exposures to the desired form Monitoring risk levels and restoring them to the standards set IDENTIFICATION OF RISKS : 9 .organizations.  SYSTEMATIC RISK: this risk arises when there is a failure of a major market system or institutions. needs to be well-planned. So when there arises a risk so there is also arise a need of it’s management. 1. Risk management enables banks to bring their risk levels to manageable proportions without severely reducing their income. legal framework etc which brings the country risk. Thus. Systematic risks have consequences for the whole market rather for one or two institutions.  REGULATORY RISKS: these arise because of non compliance of rules imposed by the regulators. So here emerges the concept of risk management. political factors. 2. 4. which has an adverse effect on several other institutions. However there are still many types of risks which can be added to the above list. RISK MANAGEMENT Risk Management does not mean risk reduction. there are number of factors like economic factors. This balancing act between the risk levels and profits. 3.  TECHNOLOGY RISK: this risk arises due to failure and advancement in the technology. 5. risk management enables a bank to take required level of exposures in order to meet its profit targets. The results of non compliance can be penalties and even suspensions or cancellations of licenses in extreme cases.

This is possible when the bank unbundles the risks involved in each transaction. To avoid this. all signs of hidden. Each risk must be defined precisely in order to facilitate the identification of the same by the various business units. QUANTIFICATION OF RISKS: By measuring the risks. economic and competitive exposures are to be considered. The information provided needs to be further evaluated to ensure that there is an effective and ongoing flow of information. bank is indirectly quantifying the consequences of the decisions taken. Further. Thus. This will also enable banks to have a fundamental understanding of the activities causing the risks. Unless bank identifies and understands the nature of the exposures involved in a transaction. This understanding will be essential to evaluate aspects related to the magnitude of the risks. Quantification of risks is a crucial task and accurate measurement of the same depends extensively on the information available. SETTING STANDARDS/POLICY FORMULATION: The next step will be to develop a policy that gives the standard level of exposures that bank will have to maintain in order to protect cash flows. Setting policies for risk management will depend on the bank’s objectives and its risk tolerance levels. it will not be able to manage them. however. The quality of information coming from various divisions. The Bank should decide on a particular risk exposure level only if it aids in achieving the bank’s objectives and also if it 10 . At any point of time.Risk can be anything that can hinder the company from meeting its targeted results. bank will neither be aware of the consequences of its decisions nor will it be in a position to manage the risks. This is in fact the most critical step where most of the time needs to be spent. Technology and MIS play a crucial role here. The process of unbundling also helps a bank in pricing. the tenor and the implications they have on the accounting aspects. If risks are not quantified. depends on the reporting system. Policy is a long-term framework to tackle risk and hence the frequency of changes taking place in it is very low. a bank generally is exposed to a host of risks emanating from the exposures. all risks to which bank is exposed to need to be quantified. such unbundling also helps bank in deciding which risks it will have to manage and which it would prefer to eliminate.

In such a situation. However. 0.5 lakh. Apart from the long-term changes.. a strategy will then be relatively for a shorter period. the possible options and the risks attached to them are examined in order to know the affect of each option on the cash flows and the earnings. the risk which the bank is ready to take is up to a Rs. 0. While monitoring of risks should be done on a continuous basis. 1. Volatile circumstances may change the risk level of an investment and hence require a bank to restore the same to the set target levels. In such circumstances. With this information. Clearly.50. 44. fortnightly and even on a daily basis. At an exchange rate of Rs. 1 lakh. For instance. a strategy aids in managing these risks. However. This is beyond the target set by the bank. a bank takes a long position on a loan of US$ 1mn. MONITORING RISKS: Laying down strategies will not lead to risk management since risk profile is not static. the bank can take a long positions in US$ if it believes that the rate will move up. restoration of the same to the targets should be done 11 .15 due to which the loss to the bank is Rs. There should hence be a continuous vigil on the risk profiles. This is due to the costs that are involved in taking such actions. the bank should decide to go for the transaction only if change in the exchange rate is believed to be long-term. Firstly. the exchange rate and the interest rate fluctuations occur on a monthly. In absolute terms this will be Rs.10 variation. it can either enter into a forward contract or exit from the long position taking up the loss. a strategy will be developed to identify the sources of losses/gains and how efficiently the risks can be shifted to enhance profits while reducing the exposure.believes that it has the capacity to manage the risk for a gain. the frequency with which the bank can alter strategies or take action to restore these exposure levels to the set targets may not be vary high. And in case the rates are expected to go down further. Given the exposures and volatilities. the bank will have to try and eliminate/minimize the risk. the exchange rate goes down by Rs. If either of the conditions is not met. STRATEGY FORMULATION: A strategy is developed to implement a policy.

He has said that Credit modeling is still in an early phase of development in the Australian market and it would be unrealistic to believe that a regime based on that approach is viable in the short term. or other possible approaches. The researcher finally concluded that the activities of the leading banks are pushing regulatory arrangements in the direction of greater sophistication of credit risk measurement (just as they did in the case of market risk measurement).after analyzing the extent of fluctuations taking place during a given period and the transaction costs involved in restoring the exposure to the target set. for capital adequacy purposes. 12 . The researcher has considered some of the forces operating within the Australian banking and financial system to increase the significance of credit and capital management in banks. This paper provides. developments are occurring quickly and credit modeling will become much more significant for banks in the medium term. However. LITERATURE REVIEW AND RESEARCH METHODOLOGY LITERATURE REVIEW GRAY(1998) in his research article “CREDIT RISK IN THE AUSTRALIAN BANKING SECTOR” presented a brief overview of developments taken place in the Australian banking sector relating to the measurement and management of credit risk. sketch of the structure of banking in Australia. He has looked at the implications of the developments and speculates on the scope for greater use of banks’ internal credit risk models. He has also outlined some of the credit risk management practices being adopted in the major Australian banks. the background.

For studying liquidity. A Credit Risk Mitigation tool. commonly referred to as ‘security’. For purposes of international comparisons data was drawn from various internet based sources and from the “Banker” Journal. The study also compared ratios of commercial banks in Oman with ratios of other banks in developed countries so that it throws up not only intra country performance comparisons but also cross country comparisons which makes study all the more useful. Disclosure requirements for banks according to Basel II 13 . The author has discussed Forms of credit risk mitigation under the Basel II Accord . The ratios used in the study are divided into five broad groups: • • • • • • Liquidity Management Ratios Interest Rate Risk Management Ratios Credit Risk Management Ratios Capital Account Management Ratios Cost Management Ratios Profitability Management Ratios In the end the study conclude that there are wide differences in the ratios of different banks and that some banks had better financial management practices than others. salient features specified in Basel II accord for treatment of CRM tool. the eligible collaterals for CRM purpose. is universally recognized as a ‘protection’ for the lenders although the same is often christened as ‘collateral’also. capital adequacy etc the study uses the data from December 2000 to 2004.Murthy (2003) in his research article “A STUDY ON FINANCIAL RATIOS OF MAJOR COMMERCIAL BANKS” has calculated various important financial ratios of major commercial banks in Oman and compare their financial management practices as indicated by the ratios. The researcher has used data from December 1997 to December 2004 for the profitability ratios part of the study. Bagchi(2003) in his research article “CREDIT RISK MITIGATION – IMPLICATIONS OF BASEL II PRESCRIPTIONS IN INDIAN BANKING” has discussed the tool of credit risk mitigation for reducing the credit risk. For the purpose of the study data was drawn from the balance sheets and income statements of commercial banks. interest rate risk.

the various issues and key considerations in LRM and BASEL 14 . financial performance. acquiring external credit insurances. Hence. Carrying out a prudent selection and a permanent supervise for granted loans. Sethuraman (2008) in his research article “LIQUIDITY RISK MANAGEMENT DEMYSTIFIED” has discussed the concept of liquidity risk management.Accord and implication of credit risk mitigation in Indian banks. From this point of view in classifying their credits banks take into account several criteria: duty.determining the calculation base for specific credit risk provisions. He first of all has discussed the concept of liquidity then he has explained the importance of liquidity risk management. In the context of banking system in underdeveloped/developing countries the techniques may need some refinements. eligible collaterals may be enlarged upon a review of legal/ social system and practices of the countries concerned. its importance. initiation of judicial procedures for each customer that benefits of a certain loan. The study finally conclude that CRM techniques as prescribed. requesting collaterals. Specific risk provisions can be determined for each credit category by combining the client’s financial performances with his duty towards the bank. forming provisions to cover losses in advance certainly represents indispensable elements in supporting polities of diminishing credit risk and its negative effects. The author said that the quality of credits from the bank’s portfolio can be estimated depending on their structure.applying the coefficient to the obtained calculation base In the end author says that Knowing the risk involved by the credit portfolio it is possible to take certain means able to decrease credit risk. In order to determine the necessary specific risk provisions due to a credit or investment. the following steps will be covered: . This activity of forming funds in order to cover effective loss must take place in those moments in which there are phenomena that allow and require the application of such procedures. . Driga (2004) in his research article “MEANS OF REDUCING CREDIT RISK” firstly discussed the meaning of credit risk and then he has discussed the various means by which credit risk can be reduced. are biased in favour of the banking in advanced countries.

Liquidity problems has the potential to affect the balance sheet of banks and. NEED OF THE STUDY: Before 1991 reforms Indian banking system was working under the closed environment. SCOPE OF THE STUDY : Study covers only SBI AND ITS ASSOCIATES BANKS.e accepting deposits and disbursing loans there arises two types of risks. the capital adequacy.COMMITTEE guidelines on liquidity risk and finally conclude that there are strong linkages between liquidity and capital. It was only in the year 1991 that government of India when faced crisis and it gave the country the doses of liberalization. these are liquidity risk and credit risk. So there is a need to properly manage these two risk. Though the performance of the industry has increased but this has brought in severe competition and several types of risk. So this study is conducted to measure the credit and liquidity risk in sbi and its associates banks. 2. thus. OBJECTIVE OF THE STUDY: 1. To check and study the magnitude of liquidity risk in banks under the study. From the core business of banking i. more so in times of financial stress. privatization and globalization and same doses given to Indian banking industry. Risk is the concept which cannot be eliminated completely from the banking business. 15 . Improvement in one area benefits the other and banks would be better off with strong capital base to withstand the kind of liquidity risk challenges seen in today's markets. These two risks cannot be eliminated from the banking business as these lies in the core business of banks. To measure and study the magnitude of credit risk in banks under the study.

16 . RESEARCH METHODOLOGY: SOURCES OF DATA : Only secondary data is taken for this study and on the basis of this data all analysis has been done. TOOLS FOR MEASURING RISK: Ratio analysis is used in order to measure the credit and liquidity risk in SBI AND ITS ASSOCIATES BANKS. For Measuring The Liquidity Risk Following Ratios Are Used:- 1.e 2007-2011. This ratio is calculated as follows: Core Deposits (Demand deposits+ saving deposits+ term deposits) Total assets Rule of thumb: Higher the ratio better it is the liquidity position of the bank. Core deposit will constitute deposits from the public in the normal course of business. DATA COLLECTION: Secondary Data is taken from the website of RBI. Ratio Of Core Deposit To Total Assets: Core deposits are treated to be the stable source of liquidity.PERIOD OF STUDY: Study period will be of 5 years i.

3. This ratio is calculated as follows: Term deposits/time deposits Total deposits Rule of thumb: Higher the ratio better it is the liquidity position of the bank. Loan is treated to be less liquid asset .2. Total loans in this ratio represent the advances made by the bank to the public. 4. inter bank placements due within one month. Loans To Totals Deposits Ratio-: It reflects the ratio of loans to public deposits or core deposits. 17 . securities held for trading and available for sale having ready market. Liquid assets may include bank balances. Ratio Of Time Deposit To Total Deposits-: Time deposits provide stable level of liquidity and negligible volatility. This ratio is calculated as follows: Loans(Advances) Total deposits Rule of thumb: Lower the ratio better it is the liquidity position of the bank. This ratio is calculated as follws: Cash in hand+ Balance with the RBI+ Balance with banks in India+ Balance with the banks outside India+ money at call and short notice Total assets Rule of thumb: Higher the ratio better it is the liquidity position of the bank. Ratio Of Liquid Assets To Total Assets-: Higher level of liquid assets in total assets will ensure better liquidity. money at call and short notice.

More or higher the ratio better it is. This ratio is calculated as follows Non Performing Loans/NPA Loans Rule of thumb: Lower the ratio better it is. FOR MEASURING THE CREDIT RISK FOLLOWING RATIOS ARE USED:1. NPA: An Asset . NON PERFORMING LOANS TO LOANS: This ratio tells the percentage of NPA’s of the total loans advanced the lower this ratio better it is. including a leased asset. Note: For the calculation of this ratio i have taken the gross NPA’s of banks. becomes non performing when it ceases to generate income for the bank. Ratio Of Prime Asset To Total Asset: Prime assets may include cash balances with the bank and balances with banks including central bank which can be withdrawn at any time without any notice. Cash in hand+ Balance with the RBI+ Balance with banks in India+ Balance with the banks outside India Total Assets Rule of thumb: Higher the ratio better it is the liquidity position of the bank. Specifically it is calculated as net interest income plus other income minus provisions made during the year for loan losses 18 . 2. Because high NPA’s bring in the credit risk for the bank. RISK ADJUSTED MARGIN: Risk Adjusted Margin (RAM) is a measure which shows the impact of credit risk on the profitability of the bank.5.

divided by assets. On the other hand RAM reflects this risk to the extent higher risk results in higher provisions. It is calculated as follows: Loan Loss Provisions 19 . When compared with the Net Interest Margin (NIM) figure it shows the impact of loan losses on the bank. 3. RAM rather than NIM is a true reflection of the risk management abilities of the bank. If one were to measure a bank’s management abilities only using NIM it would show only the interest income generation net of interest expense but it would not show the attendant risks. Note: Average assets are calculated by taking the opening and closing assets of the bank and then dividing it by two. because it shows the spread ( or margin) net of loan loss provisions. but if the high interest loans carry a higher risk this would not get reflected in NIM. A bank can increase its NIM by giving high interest loans. TOTAL LOAN LOSS PROVISIONS TO LOANS: This ratio shows the percentage of loan loss provisions of the bank to its loans. The lower this ratio the better it is for the bank. So higher this ratio better it is. ( Net Interest Income + other Income – Provision for Credit Losses ) Average Assets Rule of thumb: Higher the ratio better it is . Further it shows the risk faced by the bank in the process of managing its credit portfolio.

the borrower fails to make payments as and when demanded. This known as the recovery rate. 20 . Credit risk arises from the lending activities of the bank. INTRODUCTION OF CREDIT RISK AND LIQUIDITY RISK CREDIT RISK Credit risk is most simply defined as the probability that a bank borrower or counterparty will fail to meet its obligations in accordance with agreed terms. Banks follow up for the payments and more often not end up in receiving less than the amount that is due. It has two components: default risk and credit spread risk. It arises when a borrower does not pay interest and/or instalments as and when it falls due or in case where a loan is repayable on demand. a fraction of the obligations will normally be paid.Loans Rule of thumb: Lower the ratio better it is . DEFAULT RISK: Default risk is driven by the potential failure of a borrower to make promised payments. The shortfall in the payment is debited to the profit & loss account. In the event of default. either partly or wholly. RISK IDENTIFICATION Credit risk arises from potential changes in the credit quality of a borrower.

CREDIT SPREAD RISK OR DOWNGRADE RISK: If a borrower does not default.e.e. then the portfolio risk is reduced to a minimum level. For example. although this need not necessarily be taken as an indication that they are more or less likely to default. the only important factor is whether or not the loan is in default today (since this is the only credit event that can lead to an immediate loss). This result in the possible widening of the credit-spread. This is credit spread risk. Systematic or Intrinsic Risk Concentration Risk SYSTEMATIC OR INTRINSIC RISK: Portfolio risk can be reduced due to diversification. equitably. an upgrade or a downgrade). If a portfolio is fully diversified. It will usually be firm specific. borrowers. the spreads on high-grade bonds may widen or tighten. i. Portfolio risk has two components1. industries. Risks associated with credit portfolio as a whole is termed portfolio risk. Capital market portfolios are marked-to-market. These may arise from a rating change (i.. This is more likely to be driven by the market’s appetite for certain levels of risk. there is still risk due to worsening in credit quality. CONCENTRATION RISK: 21 . Consequently. Loans are not usually marked-to-market. markets. etc. This is systematic or intrinsic risk. This minimum level corresponds to the risks in the economy in which it is operating. 2. Default risk and downgrade risk are transaction level risks. They have in addition credit spread volatility (continuous changes in the credit-spread). diversified across geographies.

Ignoring risk diversification can lead to erroneous risk management decisions. the amount by which actual losses exceed the expected loss (through standard deviation of losses or 22 .e. The non-performance may arise from counterparty’s refusal/inability to perform. credit portfolio of banking industry as a whole shows it in its indifferent perform. That is why when an economy stagnates or faces negative or reduced growth.. A variant of credit risk is ‘Counterparty Risk’.. The restrictions may be in the nature of a sanction or may arise due to economic conditions. whether for loans. ‘Country Risk’ is also a type of credit risk where non-performance by a borrower or counterparty arise because of restrictions imposed by a sovereign.e. The counterparty risk is generally viewed as a transient financial risk associated with trading rather than standard credit risk. RISK MEASUREMENT Measurement of credit risk consists of: (a) (b) Measurement of risk through credit rating/scoring: Quantifying the risk through estimating expected loan losses i. increasing rather than reducing the risk exposure of the financial institution. the portfolio performance will be affected. Measuring and managing credit risk. has become a key issue for financial institutions.e. the portfolio gets concentration risk. Since different firms do not default at the same time.If the portfolio is not diversified that is to say that it has higher weight in respect of a borrower or geography or industry etc. A portfolio is open to the systematic risk i. The risk analysis can be performed either for standalone trades or for portfolios as a whole. the risks associated with the economy. If economy as a whole does not perform well. bonds or derivative securities. The counterparty risk arises from nonperformance of the trading partners. the amount of loan losses that bank would experience over a chosen time horizon (through tracking portfolio behaviour over 5 or more years) and unexpected loan losses i. The latter approach takes into account risk diversification across trades and borrowers. the risk level and corresponding capital that must be held against defaults for a well-diversified portfolio is only a fraction of the total exposure of the portfolio.

which can predict the future capability of a borrower to meet its financial obligations accurately. (c) CREDIT RATING-WHY IS IT NECESSARY? Credit Rating of an account is done with primary objective to determine whether the account. Credit Rating Model (or models for different categories of loans and advances) Develop and maintain necessary data on defaults of borrowers rating category wise i. having defaulted financially.e. after the expiry of a given period. within bounds. would remain a performing asset i. In other words. This is because where uncertainty in revenue generation in a business is more.g. consistent. 1. all over the world. This is because behaviour of a group of borrowers having similar rating. Where revenue generation is stable over a 23 . sales) and bottom-line (net profit) revenue generation. rely on some model. it will continue to meet its obligation to its creditors. in terms of their failure to meet financial obligations i.the difference between expected loan losses and some selected target credit loss quantile). (d) CREDIT RATING-APPROACH TO IT In order to develop our capability to actively manage our credit portfolio one must have in place the following. Credit Rating Model A credit rating model essentially differentiates borrowers based on degree of stability in terms of top line (e. 2. which seeks to predict the future capability of a borrower to meet its financial obligations..e. chances of failing in keeping financial commitments to the rest of the World is also more. Nevertheless.e. There is no mathematical/econometric/empirical model. lenders in financial market. credit rating exercise seeks to predict whether the borrower would have the capability to honour its financial commitment in future to the rest of the World. has been found to be. ‘Rating Migration’.. including Bank and would not be in default.

Is rated as B+ based on its position as on 31. rating migration of a single account also does not convey much. Securities is absolutely stable and hence risk associated with such investment is also non-existent. A balance is struck keeping in view the need of both these aspects. a purely simple model very easy to use may not be feasible as such a model may not be able to capture stability of revenue generation of the borrower and may not be acceptable. say comes to B. 3. say a borrower M/s. based on the same model. XYZ Ltd. As in case of rating of borrower. CREDIT RISK POLICIES AND GUIDELINES ATTRANSACTION LEVEL Instruments of Credit Risk Management at transaction level are: 1. Then we say that the rating of the account has migrated from B+ to B over one year period. In fact.3. This would also mean that an ‘A’ rated borrower would have more stable revenue generation than that of a ‘B’ rated borrower and an ‘A++’ rated borrower’s revenue generation would be more stable than that of ‘A’ rated. after one year. Say.given period. Credit Appraisal Process 24 . its rating. 2002. therefore.e.3. For example. cash generation from an investment in Govt. When these accounts are rated again as on 31st March 2003. RATING MIGRATION Rating migration is change in the rating of a borrower over a period of time when rated on the same standard or model. As such. uncertainty or risk associated is zero. typically we may find new ratings. factors that have an impact on the stability of revenue generation are relied upon.02. The issue of simplicity and its user friendliness are also very crucial in designing a model. The same company is again rated as on 31.03 based on its position as on that date . In developing a rating model. i. we have 100 ‘A’ rated borrowers as on 31st March. there are several rating models with various levels of complexities and require data sets that could be fairly extensive and cover few years. For example. It becomes useful when migration of a large number of accounts of similar rating is observed.

2. 3. 4.

Risk Analysis Process Credit Audit and Loan Review Monitoring Process

There is a need to constantly improve the efficiency for each of these processes in objectively identifying the credit quality of borrowers, enhancing default analysis, capturing the risk elements adequately for future reference and providing an early warning signal for deterioration in credit risk of borrowers. Credit risk taking policy and guidelines at transaction level should be clearly articulated in the Bank’s Loan Policy Document approved by the Board. Standards and guidelines should be outlined for 1. 2. 3. 4. Delegation of Powers Credit Appraisals Rating Standards and Benchmarks (derived from the Risk Rating System) Pricing Strategy

CREDIT APPROVING AUTHORITY

Each Bank should have a carefully formulated scheme of delegation of powers. The banks should also evolve multi-tier credit approving system where the loan proposals are approved by an ‘Approval Grid’ or a ‘Committee’. The ‘Grid’ or ‘Committee’, comprising at least 3 or 4 officers, may approve the credit facilities above a specified limit and invariably one officer should represent the CRMD, who has no volume and profit targets. The spirit of the credit approving system may be that no credit proposals should be approved or recommended to higher authorities, if majority members of the ‘Approval Grid’ or ‘Committee’ do not agree on the creditworthiness of the borrower. In case of disagreement the specific views of the dissenting member/s should be recorded.
CREDIT APPRASAL

Credit appraisal guidelines include borrower standards, procedures for analyzing credit requirements and risk factors, policies on standards for presentation of credit proposals, financial covenants, rating standards and benchmarks etc. This brings and uniformity of approach in credit
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risk taking activity across the organization. Credit appraisal guidelines may include risk monitoring and evaluation of assets at transaction level, pricing of loans, regulatory/legal compliance, etc.
PRUDENTIAL LIMITS

Prudential limits serve the purpose of limiting credit risk. There are several aspects for which prudential limits may be specified. They may include: 5. Prudential limits for financial and profitability ratios such as current ratio, debt equity and return on capital or return on assets etc., and debt service coverage ratio etc. 6. 7. 8. 9. Prudential limits for credit exposure Prudential limits for asset concentration Prudential limits for large exposures Prudential limit for maturity profile of the loan book.

Prudential limits may have flexibility for deviations. The conditions subject to which deviations are permitted and the authority thereof should also be clearly spelt out in the Loan Policy.

RATING STANDARDS AND BENCHMARKS

The credit risk assessment exercise should be repeated bi-annually (or even at shorter intervals for low quality customers) and should be delinked invariably from the regular renewal exercise. The updating of the credit rating should be undertaken normally at quarterly intervals or at least at halfyearly intervals, in order to gauge the asset quality at periodic intervals. Note : Rating changes have implication at portfolio level. Variations in the ratings of borrowers over time indicate changes in credit quality and expected loan losses from the credit portfolio. Thus, if the rating system is to be meaningful, the credit quality reports should signal changes in expected loan losses. The banks should undertake comprehensive study on migration (upwardlower to higher and downward-higher to lower) of borrowers in the ratings to add accuracy in expected loan loss calculations.
RISK PRICING 26

The pricing strategy for credit products should more towards risk based pricing to generate adequate risk adjusted returns on capital. The Credit Spread should have a bearing on expected loss rates and charges on capital. Risk-return pricing is a fundamental tenet of risk management. In a risk-return setting, borrowers with weak financial position are high credit risk stake and should be priced high. Pricing of credit risk should have a bearing on the probability of default. Since probability of default is linked to risk rating, pricing of loans normally should be linked to rating. However, value of collateral, value of accounts, future business potential, portfolio/industry exposure and strategic reasons may also play important role in pricing. There is, however, a need for comparing the prices quoted by competitors for borrowers perched on the same rating/quality. Thus, any attempt at price-cutting for market share would result in wrong pricing of risk.

CREDIT CONTROL AND MONITORINGAT PORTFOLIO LEVEL

Credit control and monitoring at portfolio level deals with the risk of a given portfolio, expected losses, requirement of risk capital, impact of changing the portfolio mix on risk, expected losses and capital. It also deals with the marginal and absolute risk contribution of a new position and diversification benefits that come out of changing the mix. It also analyses factors that affect the portfolio’s risk profile. 1. 2. 3. 4. 5. Identification of portfolio credit weakness in advance-through credit quality migrations Move from measuring obligor specific risk associated with individual credit exposures to measuring concentration effects on the portfolio as a whole Evaluate exposure distribution over rating categories and stipulate quantitative ceilings on aggregate exposure in specified rating categories Evaluate rating wise distribution in various industries and set corresponding exposure limits to contain concentration risk Move towards Credit Portfolio Value at risk Models The existing framework of tracking the non performing loans around the balance sheet data does not signal the quality of the entire loan book. A system for identification of credit
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weaknesses well in advance could be realized by tracking the migration (upward or downward) of borrowers from one rating scale to another. This process would be meaningful only if the borrower wise rating are updated at quarterly/half-yearly intervals. Data on movements within grading categories provide a useful insight into the nature and composition of portfolio. Some measures to maintain the portfolio quality are: 1. Quantitative ceiling on aggregate exposure in specified rating categories. 2. Evaluation of rating wise distribution of borrowers in various industry, business segments, etc. 3. Industry wise and sector wise monitoring of exposure performance. Where portfolio exposure to a single industry is badly performing, the banks may increase the quality standards for that specific industry. 4. Target for probable defaults and provisioning requirements as a prudent planning exercise. For any deviation/s from the expected parameters, an exercise for restructuring of the portfolio should immediately be undertaken and if necessary, the entry-level criteria could be enhanced to insulate the portfolio from further deterioration. 5. Introduce discriminatory time schedules for review of borrowers.

The credit risk of a bank’s portfolio depends on both external and internal factors. The external factor are the state of the economy, wide swings in commodity/equity prices, foreign exchange rates and interest rates, trade restrictions, economic sanctions, Government policies etc. The internal factors are deficiencies in loan policies/administration, absence of prudential credit concentration limit, inadequately defined lending limits, deficiencies in appraisal of borrowers financial position, excessive dependence on collaterals inadequate risk pricing, absence of loan review mechanism and post sanction surveillance, etc. Portfolio performance may be analysed to identify the causes and necessary remedial action.

CONTROLLING CREDIT RISK THROUGH LOAN REVIEW MECHANISM 28

Credit grading involves assessment of credit quality. loan policies and procedures. Loan Review Policy should address the following issues. 4. 5. 3. The independence of Loan Review Officers should be ensured and the findings of the reviews should also be reported directly to the Board or Committee of the Board. QUALIFICATION AND INDEPENDENCE The Loan Review Officers should have sound knowledge in credit appraisal. lending practices and loan policies of the bank. To evaluate portfolio quality and isolate potential problem areas. etc. A proper Credit Grading System should support evaluating the portfolio quality and establishing a loan loss provisions. FREQUENCY AND SCOPE OF REVIEWS 29 . Given the importance and subject nature of credit rating. assessing portfolio quality. maintaining the integrity of credit grading process. and to monitor compliance with relevant laws and regulation. and assignment of risk ratings. identification of problem loans. risk evaluation and post-sanction follow up. They should also be well versed in the relevant laws/regulations that affect lending activities.LRM is an effective tool for constantly evaluating the quality of loan book and to bring about qualitative improvements in credit administration. To assess the adequacy of and adherence to. and To provide top management with information on credit administration. including credit sanction process. To identify promptly loans which develop credit weaknesses and initiate timely corrective action. The main objectives of LRM are: 1. evaluating effectiveness of loan administration. the credit ratings awarded by Credit Administration Department should be subjected to review by Loan Review Officers who are independent of loan administration. Accurate and timely credit grading is one of the basic components of an effective LRM. To provide information for determining adequacy of loan loss provision. 2. Loan Review Mechanism is used for large value accounts with responsibilities assigned in various areas such as.

banks should also target other accounts that present elevated risk characteristics. The banks should also evolve suitable framework for reporting and evaluating the quality of credit decisions taken by various functional groups. 3. and applicable laws/regulations. 4. CREDIT RISK MITIGATION Credit risk mitigation is an essential part of credit risk management. The quality of credit decisions should be evaluated within a reasonable time say 3-6 months. 2. Approval process. Strategies for risk reduction at transaction level differ from that at portfolio level. Compliance with loan covenan The findings of reviews should be discussed with line managers and the corrective actions should be elicited for all deficiencies. Accuracy and timeliness of credit ratings assigned by loan officers. In addition. 30 . The scope of the review should cover all loans above a cut-off limit. Adherence to internal policies and procedures. Reviews of high value loans should be undertaken usually within three months of sanction/renewal or more frequently when factors indicate a potential for deterioration in the credit quality. This refers to the process through which credit risk is reduced or it is transferred to a counter party. Deficiencies that remain unresolved should be reported to top management.The Loan Reviews are designed to provide feedback on effectiveness of credit sanction and to identify incipient deterioration in portfolio quality. At least 30-40% of the portfolio should be subjected to LRM in a year to provide reasonable assurance that all the major credit risks embedded in the balance sheet have been tracked. through a well-defined Loan Review Mechanism. DEPTH OF REVIEWS The loan reviews should focus on: 1.

employ robust procedures and processes to control these risks as well. operational. are used to mitigate risks in the portfolio. Recent techniques include buying a credit derivative to offset credit risk at transaction level. it is imperative that banks. They are mostly traditional techniques and need no elaboration. Therefore. operating under a sound credit granting process. In fact. credit derivatives. liquidity and market risks. THE BASEL COMMITTEE’S PRINCIPLES OF CREDIT RISK MANAGEMENT The following are the sound practices set out by the Basel Committee to specifically address the following areas: (i) (ii) establishing an appropriate credit risk environment. etc. At portfolio level. it simultaneously may increase other risks such as legal. asset securitization. It must be noted that while the use of CRM techniques reduces or transfers credit risk. They are also used to achieve desired diversification in the portfolio as also to develop a portfolio with desired characteristic. advantages of risk mitigation must be weighed against the risks acquired and its interaction with the bank’s overall risk profile. 31 ..At transaction level banks use a number of techniques to mitigate the credit risks to which they are exposed.

monitoring and controlling credit risk. ESTABLISHING AN APPROPRIATE CREDIT RISK ENVIRONMENT Principle 1: 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. These practices should also be applied in conjunction with sound practices related to the assessment of asset quality. Although specific credit risk management practices may differ among banks depending upon the nature and complexity of their credit activities. Such policies and procedures should address. Principle 2: Senior management should have the responsibility for implementing the credit risk strategy approved by the board of directors and for developing policies and procedures for identifying. OPERATING UNDER A SOUND CREDIT-GRANTING PROCESS 32 . Principle 3: Banks should identify and manage credit risk inherent in all products and activities. 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. Bank should ensure that the risks of products and activities new to them are subject to adequate risk management procedures and controls before being introduced or undertaken. measurement and monitoring process.(iii) maintaining an appropriate credit administration. a comprehensive credit risk management program should address these four areas. the adequacy of provisions and reserves and the disclosure of credit risk. and approved in advance by the board of directors or its appropriate committee. measuring. credit risk in all of the bank’s activities and at both the individual credit and portfolio levels. and (iv) ensuring adequate controls over credit risk..

MAINTANING AN APPROPRIATE CREDIT ADMINISTRATION. well-defined credit-granting criteria. credits to related companies and individuals must be authorized on an exception basis. These criteria should include a clear indication of the bank’s target market and a thorough understanding of the borrower or counterparty. 33 .Principle 4: Banks must operate within sound. as well as the purpose and structure of the credit. MEASUREMENT AND MONITORING PROCESS Principle 8: Banks should have in place a system for the ongoing administration of their various credit risk-bearing portfolios. including determining the adequacy of provisions and reserves. Principle 5: Banks should establish overall credit limits at the level of individual borrowers and counterparties. In particular. renewal and re-financing of existing credits. Principle 6: Banks should have a clearly established process in place for approving new credits as well as the amendment. monitored with particular care and other appropriate steps taken to control or mitigate the risks of non-arm’s length lending. Principle 9: Banks must have in place a system for monitoring the condition of individual credits. both in the banking and trading book and on-and off-balance sheet. and groups of connected counterparties that aggregate in a comparable and meaningful manner different types of exposures. and its source of repayment. Principle 7: All extensions of credit must be made on an arm’s length basis.

and should assess their credit risk exposures under stressful conditions. including identification of any concentrations of risk. Principle 16: Banks must have a system in place for early remedial action on deteriorating credits. Principle 13: Banks should take into consideration potential future changes in economic conditions when assessing individual credits and their credit portfolios. Principle 15: Banks must ensure that the credit-granting function is being properly managed and that credit exposures are within levels consistent with prudential standards and internal limits. managing problem credits and similar workout situations. THE ROLE OF SUPERVISORS 34 . The rating system should be consistent with the nature. The management information system should provide adequate information on the composition of the credit portfolio. Principle 11: Banks must have information systems and analytical techniques that enable management to measure the credit risk inherent in all on-and off-balance sheet activities. Principle 12: Banks must have in place a system for monitoring the overall composition and quality of the credit portfolio. procedures and limits are reported in a timely manner to the appropriate level of management for action. ongoing assessment of the bank’s credit risk management processes and the results of such reviews should be communicated directly to the board of directors and senior management. size and complexity of a bank’s activities.Principle 10: Banks are encouraged to develop and utilize and internal risk rating system in managing credit risk. Banks should establish and enforce internal controls and other practices to ensure that exceptions to policies. ENSURING ADEQUATE CONTROLS OVER CREDIT RISK Principle 14: Banks must establish a system of independent.

almost any bank will be unable to cover their claims and will fail-even though it might otherwise be in sound financial condition. monitor and control credit risk as part of an overall approach to risk management. if a bank does not plan carefully. Supervisors should consider setting prudential limits to restrict bank exposures to single borrowers or groups of connected counterparties. individual institutions are rarely allowed to fail. it may 35 . liquidity is a bank’s ability to generate cash quickly and at a reasonable cost. thanks to the safety net existing in most countries in the form of deposit insurance.Principle 17: Supervisors should require that banks have an effective system in place to identify. LIQUIDITY RISK WHAT IS LIQUIDITY? Simply stated. More importantly. Bank need liquidity in order to meet routine expenses. However. they need liquidity to meet unexpected liquidity shocks. the central bank’s role as lender of last resort. Supervisors should conduct an independent evaluation of a bank’s strategies. such as large deposit withdrawals or heavy loan demand. and stringent capital requirements. such as interest payments and overhead costs. measure. The most extreme example of a liquidity shock is a bank run. as financial intermediaries. However. If all depositors attempt to withdraw their money at once. procedures and practices related to the granting of credit and the ongoing management of the portfolio. policies.

and in extreme circumstances. Internal indicators: 1. 4. Recent trends in the liability profiles of banks pose further challenges to the industry and brings in liquidity risk to the banks.be forced to turn to high-cost sources of funding to cover liquidity shocks thus cutting into profitability. and ultimately. interest margins and earnings. Asset quality is deteriorating as evidenced by growing proportion of impaired assets. and (c) the speed with which funds can be transmitted and withdrawn. into its very existence. which are more sensitive to credit and market risks. (b) the increase in off-balance sheet activities such as derivatives and securitization that have compounded the challenge of cash flow management. LIQUIDITY RISK Liquidity risk arises when the bank may not be able to fund increases in assets or meet liability obligations as they fall due without incurring unacceptable losses. Declining spreads. This is basically due to following reasons: (a) the increasing proportion in bank liabilities of wholesale and capital market funding. Liquidity problems can also affect the proper functioning of payment systems and other financial markets. The problem may lie in the bank ‘s inability to liquidate assets or obtain funding to meet its obligations. The problem could also arise due to uncontrollable factors such as market disruption or liquidity squeeze. 2. Increasing cost of borrowings. thanks to advanced technology and systems. Excessive concentrations on certain assets and funding sources. through the bank may otherwise be solvent. may even lead to the collapse of the bank itself. 5. Rapid asset growth funded by volatile liabilities. Market indicators: 36 . SYMPTOMS OF POTENTIAL LIQUIDITY PROBLEMSSome internal and market indicators could be useful to assess whether a potential liquidity problem is developing. Liquidity problems can have an adverse impact on the bank’s earnings and capital. 3.

In addition to run there may be interbank dealings and in turn other banks may also be affected in the process. External liquidity risks can be geographic. 2. 4. If a bank fails to honour its commitments to the market participants. Credit rating downgrades. Increasing trend of deposit withdrawals. it can cause the other participant not honouring its commitments 37 . TYPES OF LIQUIDITY RISKS Liquidity exposure can stem from both internally (institution specific) and externally generated factors. For example. 3. Widened spread on the bank’s senior and subordinated debt. 2. a big level of fraud can tighten the position of a bank along with loss of confidence of the public resulting a run on the bank.1. Gradual but persistent fall in the share prices of the bank. regional. systemic or instrument specific. Internal liquidity risk relates largely to perceptions of an institution in its various markets: local. 4. Conversion of non-fund based limit into fund based 2. Other categories of liquidity risk are: FUNDING RISK: Need to replace net outflows due to unanticipated withdrawal/non-renewal of deposits (wholesale and retail). Swaps and options Many times more than one factor manifest and make the liquidity situation worse. Severe deterioration in the asset quality Standard assets turning into non-performing assets Temporary problems in recover Time involved in managing liquidity CALL RISK: Crystallisation of contingent liabilities are inability to undertake profitable business opportunities when desirable: arises due to: 1. national or international. Fraud causing substantial loss Systemic risk Loss of confidence Liabilities in foreign currencies TIME RISK: Need to compensate for non-receipt of expected inflows of funds. arises due to: 1. 3. 2. arises due to: 1. 3. 5. Reduction in available credit lines from correspondent banks. 4.

They may not be in a position to distinguish between the rumor and the reality of crisis. Measuring and managing liquidity risk 38 . the analysis of liquidity requires bank managements to measure not only the liquidity positions of banks on an ongoing basis but also to examine how funding requirements are likely to evolve under crisis scenarios. the time available to a bank to address the problem will be determined by its liquidity. By assuring a bank’s ability to meet its liabilities as they come due. analysis of net funding requirements under alternative scenarios. a bank may not be able to mobilize domestic funds to meet foreign currency liabilities. and contingency planning are crucial elements of strong liquidity management at a bank of any size or scope of operations. central liquidity control. such as a severe deterioration in asset quality or the uncovering of fraud. Following steps are necessary for managing liquidity risk in banks: 1. liquidity management can reduce the probability of an irreversible adverse situation developing. Setting tolerance level and limit for liquidity risk 3. Some times if foreign currencies create complexity to liquidity management because real strength of the bank may not be known to the foreign creditors.based on the expected inflow of funds from the failed institution. In certain circumstances. Developing a structure for managing liquidity risk 2. good management information systems. In particular. MEASURING AND MANAGING LIQUIDITY RISK Measuring and managing liquidity are among the most vital activities of commercial banks. diversification of funding sources. Even in cases where crises develops because of a problem elsewhere at a bank. Indeed. the importance of liquidity transcends the individual institution. or where a crisis reflects a generalized loss of confidence in financial institutions. since a liquidity shortfall at a single institution can have system-wide repercussions. For this reason.

Understanding the context of liquidity management involves examining a bank’s managerial approach to funding and liquidity operations and its liquidity planning under alternative scenarios. It should enunciate specific policies on particular aspects of liquidity management like composition of assets and liabilities. a bank’s liquidity policies and liquidity management approach should form key elements of a bank’s general business strategy. DEVELOPING A STRUCTURE FOR MANAGING LIQUIDITY RISK Sound liquidity risk management involves setting a strategy for the bank ensuring effective board and senior management oversight as well as operating under a sound process for measuring. The strategy should also address the bank’s goal of protecting financial strategy and the ability to withstand stressful events in the market place. The Board should monitor the performance and liquidity risk profile of the bank and periodically review information that is timely and sufficiently detailed to allow them to 39 . Virtually every financial transactions or commitment has implications for a bank’s liquidity. Thus. Moreover. 3. 4. 1. The strategy of managing liquidity risk should be communicated through out the organization.1. The liquidity strategy should set out the general approach the bank will have to liquidity including various quantitative and qualitative targets. 5. monitoring and controlling liquidity risk. 2. the transformation of illiquid into more liquid ones is a key activity of banks. All business units within the bank that conduct activities having an impact on liquidity should be fully aware of the liquidity strategy and operate under the approved policies and procedures. maintain cumulative gaps over certain period and approach to managing liquidity in different currencies and from one country to another.

SETTING TOLERANCE LEVEL AND LIMIT FOR LIQUIDITY RISK Bank’s management should set limits to ensure liquidity and these limits should be reviewed by supervisors. 2. The assets included in this category should be those which are highly liquid. The cumulative cash flow mismatches (i. 9. 5. next week. etc. next month. 10. and should include likely outflows as a result of draw-down of commitments. Limits could be set on the following: 1. Flexible limits on the percentage reliance on a particular liability category. next fortnight. 4. only those which are judged to be having a ready market even in periods of stress.e. A limit on loan to capital ratio. 7. i. (e. the cumulative net funding requirement as a percentage of total liabilities) over particular periods-next day. A limit on loan to deposit ratio.understand and asses the liquidity risk facing the bank’s key portfolios and the bank as a whole. Limits on the dependence on individual customers or market segments for funds in liquidity position calculations. Flexible limits on the minimum/maximum average maturity of different categories of liabilities. certificates of deposits should not account for more than certain per cent of total liabilities). 2.g. A general limit on the relationship between anticipated funding needs and available sources for meeting those needs. 8. next year. with a discount to cover price volatility and any drop in price in the event of a forced sale. 6. Primary sources for meeting funding needs should be quantified. Liquid assets as a percentage of short-term liabilities. 3. These mismatches should be calculated by taking a conservative view of marketability of liquid assets. Minimum liquidity provision to be maintained to sustain operations. 40 . Alternatively supervisors may set the limits.e.

(c) Ratio of time deposit to total deposits: Time deposits provide stable level of liquidity and negligible volatility. (i) (ii) Stock approach Flow approach (i) Stock Approach (to Measuring and Managing Liquidity) Stock approach is based on the level of assets and liabilities as well as off balance sheet exposures on a particular date. The following ratio are calculated to assess the liquidity position of a bank. Loan is treated to be less liquid asset and therefore lower the ratio better it is. (e) Ratio of short-term liabilities to liquid assets: Short-term liabilities are required to be redeemed at the earliest. Therefore. they will require ready liquid assets to meet the liability. Total loans in this ratio represent net advances after deduction of provision for loan losses and interest suspense account. MEASURING AND MANAGING LIQUIDITY RISK Measuring and managing funding requirement can be done through two approaches. (d) Ratio of volatile liabilities to total assets: Volatile liabilities like market borrowings are to be assessed and compared with the total assets. Core deposit will constitute deposits from the public in the normal course of business. Therefore. lower the ratio better it is. 41 . It is expected to be lower in the interest of liquidity. Higher portion of volatile assets will paused higher problems of liquidity. (a) Ratio of core deposit to total assets: More the ratio better it is because core deposits are treated to be the stable source of liquidity.3. Therefore. higher the ratio better it is. (b) Net loans to totals deposits ratio: It reflects the ratio of loans to public deposits or core deposits.

i. money at call and short notice. It requires the preparation of structural liquidity gap report. volatile portion of savings accounts leaving behind core portion of saving which is constantly maintained. A lower ratio is desirable. Liquid assets may include bank balances. (i) Ratio of market liabilities to total assets: market liabilities may include money market borrowings. It is called gap method of measuring and managing liquidity. (g) Ratio of short-term liabilities to total assets: Short-term liabilities may include balances in current account. Maturing deposits within a short period of one month. inter bank liabilities repayable within a short period. (ii) Flow Approach (to Measuring and Managing Liquidity) The framework for assessing and managing bank liquidity through flow approach has three major dimensions: (a) Measuring and managing net funding requirements (b) Managing market access. and (c) Contingency planning. Lower the ratio better it is. securities held for trading and available for sale having ready market. difference of out flow and inflow of cash in the future time buckets. higher the ratio better it is. (h) Ratio of prime asset to total asset: Prime assets may include cash balances with the bank and balances with banks including central bank which can be withdrawn at any time without any notice. These residual maturities will represent the net cash flow.e. These calculations are based on the 42 . More or higher the ratio better it is. (a) Measuring and managing net funding requirements Flow approach is the basic approach being followed by Indian banks. inter bank placements due within one month. Therefore.(f) Ratio of liquid assets to total assets: Higher level of liquid assets in total assets will ensure better liquidity. In this method net funding requirement is calculated on the basis of residual maturities of assets and liabilities.

Cash outflows include liabilities falling due and contingent liabilities. usually the next day.part behaviour pattern of assets and liabilities as well as off balance sheet exposures. In case the gap is negative. liabilities and off-balance-sheet items. saleable non-maturing assets and established credit lines that can be trapped. Cumulative gap is calculated at various time buckets. especially committed lines of credit that can be drawn down. cash inflows can be ranked by the date on which assets mature of a conservative estimate of when credit lines can be drawn down. the bank will have to manage the shortfall through various sources according to the liquidity policy and strategy of the bank. Assumptions used in determining cash flows (j) The maturity ladder: A maturity ladder should be used to compare a bank’s future cash inflows to its future cash outflows over a series of specified time periods. and then calculating the cumulative net excess over the time frame for the liquidity assessment. (i) (ii) (iii) (iv) The maturity ladder Alternative scenarios Measuring liquidity over the chosen time-frame. It shows that at a particular time after week/fortnight/month/quarter/half year/year cash outflow and inflow difference will be represented by gap. As a preliminary step to constructing the maturity ladder. The analysis of net funding requirements involves the construction of a maturity ladder and the calculation of a cumulative net excess or deficit of funds at selected maturity dates. A Bank’s net funding requirements are determined by analyzing its future cash flows based on assumptions of the future behaviour of assets. Similarly. the earliest date a liability 43 . cash outflows can be ranked by the date on which liabilities fall due. a bank has to allocate each cash inflow or outflow to a given calendar date from a starting point. These aspects will be elaborated under following heads. Cash inflows arise from maturing assets. In constructing the maturity ladder.

marginally liquid in a bank-specific crisis and quite liquid in a general market crisis. There may be three scenarios for a bank in connection with management of liquidity which provide useful benchmarks: (a) General market conditions (b) Bank specific crisis (c) General market crisis (iii) Measuring liquidity over the chosen time frame The evolution of a bank’s liquidity profile under one or more scenarios can be tabulated or portrayed graphically. For example.holder could exercise an early repayment option. it is not always possible to predict with certainty as to what will happen in future. a high-quality institution may look very liquid in a going-concern scenario. It all depends upon certain assumptions which require to be reviewed frequently to determine their continuing validity for making predictions for liquidity risk management. The total number of major liquidity assumptions 44 . by cumulating the balance of expected cash inflows and cash outflows at several time points. A stylized liquidity graph can be constructed enabling the evolution of the cumulative net excess or deficit of funds to be compared under the three scenarios in order to provide further insights into a bank’s liquidity and to check how consistent and realistic the assumptions are for the individual bank. Analysing liquidity thus entails laying out what if scenarios. (iv) Assumptions used in determining cash flows Liquidity risk planning is done for the future scenarios and therefore. or the earliest date contingencies can be called. a weaker institution might be far less liquid in the general crisis than it would in a bank specific crisis. In contrast. (ii)Alternative Scenarios This involves evaluating whether a bank has sufficient liquidity depends in large measure on the behaviour of cash flows under the different conditions.

c) Contengency Planning A bank’s ability to withstand a net funding requirement in a bank specific or general market liquidity crisis can also depend on the caliber of its formal contingency plans. and that the information flows provide senior management with the precise information it needs in order to make quick decisions. is fairly limited and fall under categories of (a) assets. The inclusion of loansale clauses in loan documentation and the frequency of use of some asset-sales markets are two possible indicators of a bank’s ability to execute asset sales under adverse scenarios. Developing markets for asset sales or exploring arrangements under which a bank can borrow against assets is the third element of managing market access. Effective contingency plans should address two major questions: * * Does management have a strategy for handling a crisis? Does management have procedures in place for accessing cash in emergency? The degree to which a bank has addressed these questions realistically.to be made. (b) liabilities. (c) offbalance-sheet activities. it is important for a bank to review periodically its efforts to maintain the diversification of liabilities. however. A clear division of responsibility must 45 . Strategy for handling a crises: A game plan for dealing with a crisis should consist of several components. Most important are those that involve managerial coordination. to establish relationships with liability holders and to develop asset-sales markets. but also for their direct contribution to enhancing a bank’s liquidity. A contingency plan needs to spell out procedures to ensure that information flows remain timely and uninterrupted. and (d) others. provides management with additional insight as to how a bank may fare in a crisis. Thus. b)Managing Market Access Some liquidity management techniques are viewed not only for their influence on the assumptions used in constructing in maturity ladders.

a bank may be able to market assets more aggressively. a bank may have the ability to change these characteristics. or sell assets that it would not have sold under normal conditions and thus augment its cash inflows from asset sales. Banks have available to them several sources of such funds. 46 . The plan should spell out as clearly as possible the amount of funds a bank has available from these sources. a bank may choose-or be forcedto use one of more of these sources. a bank may conclude that it will suffer a liquidity deficit in a crisis based on its assumptions regarding the amount of future cash inflows from saleable assets and outflows from deposit run-offs. During such a crisis however. Alternatively. it may try to reduce cash outflows by raising its deposit rates to retain deposits that might otherwise have moved elsewhere. While assumptions can be made as to how an asset or liability will behave under certain conditions (as discussed above). Back up liquidity for emergency situations: Contingency plans should also include procedures for making up cash flow shortfalls in emergency situations. including previously unused credit facilities and the domestic central bank. and under what scenarios a bank could use them. Confusion in this area can waste resources on certain issues and omit coverage on others. Another major element in the plan should be a strategy for taking certain actions to alter asset and liability behaviours.be set out so that all personnel understand what is expected of them during a crisis. Depending on the severity of a crisis. For example.

CORE DEPOSIT TO TOTAL ASSETS 2007 76.84 2009 77.46 2010 77. LOAN TO TOTAL DEPOSIT 2007 55.14 2008 68.87 2008 74.55 2011 73.94 2010 73.11 47 .ANALYSIS AND INTERPRETATION OF RATIOS STATE BANK OF INDIA 1.88 2011 75. 2.87% but after that it has declined continuously but again in 2011 has increased so it can be seen that it’s deposits has declined till 2010 but in 2011 it again started to increase.97 INTERPRETATION: It can be seen in 2007 this ratio was 76.48 2009 74.

79 2008 4. 5. NON PERFORMING LOANS TO LOANS 2007 2008 2009 2010 2011 48 .55 2008 9.17 2010 9.66 2011 8. This ratio shows that in all five years the bank have more than 50% of the time deposits out of the total deposits.52 INTERPRETATION: This ratio has increased significantly in all years.06 2010 7.79% but in 2011 it has increased to the level of 8. 3.45 2009 51.36 INTERPRETATION: This ratio has declined after 2007 but again started to increase after 2009.35 2011 10. In 2007 this ratio was 4. LIQUID ASSETS TO TOTAL ASSETS 2007 8.52 2010 53.52%.83 INTERPRETATION: This ratio the proportion of liquid assets out of the total assets.55% in 2007 to 10.51 2009 6. 6.04 2011 58.02 2009 9. TIME DEPOSIT TO TOTAL DEPOSIT 2007 58.83 % in 2011. Which is a good sign. 4. The banks performance in this ratio is good as this ratio has increased from 8.72 2008 52. PRIME ASSETS TO TOTAL ASSETS 2007 4.INTERPRETATION: This ratio has increased significantly after 2007 remained stable in 2009 & 2010 but has declined slightly in the year 2011.

06 2009 0. RISK ADJUSTED MARGIN 2007 4. 8.46 INTERPRETATION: This ratio has decreased to a greater extent in 2008 but after that it has rise for continuous two years i.87%.32 2008 4.87 INTERPRETATION: The bank has been able to improve it’s performance in this ratio.97 2.e 2009 & 2010 but in 2011 it has decreased slightly.96 3.42 2010 0.60 2010 3.08 2. 49 .6.15% in 2007 but afterwards it is continuously declining.63 2009 3. It was 6.48 2011 0.59 2008 0.22 INTERPRETATION: This ratio was good in years 2007 and 2008 but afterwards it has shown declining trend but still as it is has not declined sharply so it is a good thing.TOTAL LOAN LOSS PROVISIONS TO LOANS 2007 0. and in 2011 it is only 2. 7.15 3.29 2011 3.

99 2010 64.94 2009 64.18 INTERPRETATION: This ratio has seen a positive trend from 2007 to 2011.85% in 2008.85 2009 82.27 2009 72. In all the 5 years the proportion of the term deposits was more than 50 % out of the total deposits.52 2011 76. LOAN TO TOTAL DEPOSIT 2007 63. 50 .88 2011 84.STATE BANK OF BIKANER AND JAIPUR 1.10 INTERPRETATION: This ratio has seen a positive trend from 2007 to 2010.53 2010 82. CORE DEPOSIT TO TOTAL ASSETS 2007 81.36% in 2007 to 78.88 2008 57. But afterwards it has has shown a positive trend. 2. TIME DEPOSIT TO TOTAL DEPOSIT 2007 56.74 2011 62.08 2008 73. 3. Which shows that bank is actively distributing loans.36 2008 78.07 2010 73.59 INTERPRETATION: This ratio has increased in all year except in 2008 when it has declined from 81. And if we leave 2007 and 2008 rest all the 3 years the ratio was more than 60%. Which is remarkable thing.

But afterwards it is continuously declining.30 2009 10.21 51 . remained stable in 2010 but afterwards it has declined. So it is a good sign.98 2011 9.92 2009 12.59 2008 8.33 2008 2. NON PERFORMING LOANS TO LOANS 2007 3.64 INTERPRETATION: The bank has done well in this ratio as this ratio is continuously declining.90 2010 10.80 2011 2.31 INTERPRETATION: The ratio has increased significantly from the period between 2007-2009.74 2011 1.45 2009 2.17 2008 6.65 2010 10.98 2011 8. 7. which is not a good sign.26 2010 1. 6.4.93 2010 1. RISK ADJUSTED MARGIN 2007 5.72 INTERPRETATION: This ratio has increased significantly in the year 2009 . LIQUID ASSETS TO TOTAL ASSETS 2007 7.36 2009 3. PRIME ASSETS TO TOTAL ASSETS 2007 5.58 2008 4. 5.

25 INTERPRETATION: This ratio has declined in year 2008 but in 2009 it has risen to 0.27 2009 0. 8.37 % but after that for next two years it has continuously declined which is a good thing.INTERPRETATION: The bank performance in this ratio is not good. As after 2007 there is continuous decline but in 2011 again it has increased when compared with 2010.37 2010 0. STATE BANK OF HYDERABAD 52 .38 2008 0.30 2011 0. TOTAL LOAN LOSS PROVISIONS TO LOANS 2007 0.

32 2009 67.40 INTERPRETATION: This ratio has seen a rising trend in the years 2007-2009.30 2010 10.45 2009 9.32 2011 81.54%. CORE DEPOSIT TO TOTAL ASSETS 2007 82. So it is a good sign.81 2008 7.62 2010 69. 4.25 2011 9.73 2010 71. It was only 44.61 2010 81.1. but in 2011 it has declined slightly. but afterwards it has declined.66 2009 68. LOAN TO TOTAL DEPOSIT 2007 44. LIQUID ASSETS TO TOTAL ASSETS 2007 8. And remained stable in 2010-2011.67 2008 61.07 53 .33 INTERPRETATION: The performance of bank in this ratio is remarkable as not only the ratio been in upward trend rather the ratio is in all the years remained above 65%. 2. 3.67% in 2007 and in 2010 it has increased to 71.54 2011 69.40 2011 69.74 2009 84.94 INTERPRETATION: There has been a Sharpe increase in this ratio. TIME DEPOSIT TO TOTAL DEPOSIT 2007 67.84 2008 83.37 2008 65.

5.07 INTERPRETATION: The ratio has declined in 2008 and it risen upward but again in 2011 it has declined.58 2009 8.24 2008 6.60 2010 2.87 2011 1.61 2009 3.55 2008 2.41 2009 0.96 2008 3.95 2011 2.00 2008 0.16 2010 -0. NON PERFORMING LOANS TO LOANS 2007 3.87% in 2010. But it has increased slightly in the year 2011 to 1. PRIME ASSETS TO TOTAL ASSETS 2007 8.28 2010 10.25 2010 0.17 2009 1.25 2011 9.11 INTERPRETATION: The performance of the bank is quite good in this ratio as the ratio been in declining ternd from 2007-2010.74 INTERPRETATION: The ratio is in declining trend in all the five years which shows the credit risk pressure In which the bank is operating. TOTAL LOAN LOSS PROVISIONS TO LOANS 2007 0. 7.09 2011 0.11% as compared to . 8. 6.INTERPRETATION: This ratio has declined in 2008 and again after rising in 2009-20010 again it declined in 2011. RISK ADJUSTED MARGIN 2007 3.31 54 .

which is a good thing. STATE BANK OF INDORE 1.44 2009 81.45 2010 84. In 2009 the ratio has declined considerably to the level of 0. CORE DEPOSIT TO TOTAL ASSETS 2007 81.INTERPRETATION: In 2007 the bank has not made any provisions at all. In 2010 the ratio is in negative which means that some of the npa has recovered or there is upward shift in the npa because of which now bank has reversed the provision.31%. But again in 2011 the ratio has increased to 0.37 2011 85.66 55 .16%.71 2008 80.

85 2010 73.89 2009 8. It was only in 2008 that it has declined from 81.28 2009 76.79 2011 76.17 2008 69. Which is a good thing. so it is good sign that it is in positive trend 2. 3.79 INTERPRETATION: This ratio has been stable in 2007-2008. LIQUID ASSETS TO TOTAL ASSETS 2007 7. TIME DEPOSIT TO TOTAL DEPOSIT 2007 69.44. The good thing is that in all five years it has not gone below the levels of 68%. 56 . 4.27 2011 69.86 2010 6.71%(2005) to 80.17 2009 70. increased in 2009 and declined in 2010 and again increased slightly in 2011. LOAN TO TOTAL DEPOSIT 2007 65.92 2011 7.28 INTERPRETATION: This ratio has been in increasing trend in all the five years which shows it is actively distributing loans.INTERPRETATION: The ratio remained in rising trend since 2009.10 2008 9.01 INTERPRETATION: This has increased in 2008 but seen a decline afterwards and again it has risen slightly in 2011.48 2008 71.82 2010 68.

11 INTERPRETATION: The performance of the bank in this ratio has been in decline till 2010. PRIME ASSETS TO TOTAL ASSETS 2007 5.89 2008 9. but in 2011 it has again increased from 2.32 2010 0.04 2009 0.86 2010 6.39 2009 8.77 2011 3.85 2011 6.86 INTERPRETATION: This ratio has increased in 2008 but afterwards it has declined and it remained stable in 2010-2011. 57 . 7.46 2011 1.39 2011 0. which is a good sign. RISK ADJUSTED MARGIN 2007 4. 6.11%.06 2010 2.39 INTERPRETATION: This ratio has been in the declining trend in all the five years.92 2010 1. TOTAL LOAN LOSS PROVISIONS TO LOANS 2007 0.03 2008 3.5.77 2009 3.26 INTERPRETATION: The bank has not made any provision for npa in 2007.06 2009 1.00 2008 0. 8.77% to 3.36 2008 3. NON PERFORMING LOANS TO LOANS 2007 3. But again in 2011 the ratio has declined. But in 2009 and 2010 this ratio has increased a lot if compared with 2008.

It is only in the year 2010 that it has increased as compared to 2009.07 2008 84. 2.77 2010 76.65 2009 82.64 2008 71.04 2010 83. LOAN TO TOTAL DEPOSIT 2007 64.81 2009 74.STATE BANK OF MYSORE 1.82 58 . CORE DEPOSIT TO TOTAL ASSETS 2007 82.04 2011 81.30 INTERPRETATION: This ratio has shown a decline in deposits after 2010.57 2011 77.

08 in 2009. 6. 4. PRIME ASSETS TO TOTAL ASSETS 2007 6.12 INTERPRETATION: The performance is very good in this ratio as it remained in rising trend in all the 5 years.27 INTERPRETATION: The ratio shows that liquidity position is showing up and downs . 3.in 2008 the ratio has gone down then again it has risen and afterwards it again declined to the level of 5.08 2010 8.13 2011 71.08 in 2009.29 INTERPRETATION: The ratio shows that liquidity position is showing up and downs .79 2011 5.49 2009 68.46 2008 7. NON PERFORMING LOANS TO LOANS 59 . TIME DEPOSIT TO TOTAL DEPOSIT 2007 64.31 2008 64.08 2010 8.INTERPRETATION: The ratio has been in upward trend in all the 5 years. 5.79 2011 5. LIQUID ASSETS TO TOTAL ASSETS 2007 9.03 2009 9.27% in 2011 from the level of 9.59 2008 4.05 2010 68.in 2008 the ratio has gone down then again it has risen and afterwards it again declined to the level of 5.44 2009 9.29% in 2011 from the level of 9.

73 2008 3. 60 .27 2009 0. 8. TOTAL LOAN LOSS PROVISIONS TO LOANS 2007 1.10 % respectively if compared with ratios of 2007 and 2008.73% in 2007.71 2011 1. As it has declined continuously and reached to the level of 1.2007 4.12 INTERPRETATION: The ratio is continuously declining trend.70 2010 3.52 2011 3.44 INTERPRETATION: There has been a good improvement in this ratio. But in 2011 this ratio has increased if compared with 2010.39 2009 2.85 2008 4. Which is not a good sign.10 2011 0. 7.25 and 0.25 2010 0.46 2008 1.44% in 2011 from 4.33 2010 1. RISK ADJUSTED MARGIN 2007 4.21 INTERPRETATION: The bank has shown tremendous improvement in the years 2009 and 2010 as it is just 0.13 2009 3.

2.37 2008 70.94 2011 72.40 61 .13 INTERPRETATION: This ratio has seen a very sharpe decline in the year 2008 when this ratio has gone down from the levels of 84.25 2009 73. but afterwards it again risen sharpely and remained above the levels of 82%.76 2010 74.42 2009 72. TIME DEPOSIT TO TOTAL DEPOSIT 2007 68. LOAN TO TOTAL DEPOSIT 2007 57.11% to 57.11 2011 77. CORE DEPOSIT TO TOTAL ASSETS 2007 84.68 2009 82. But afterwards is again fell sharpely and remained in the levels of 72 %.24 2011 86.97 2008 93.68%.42 2010 74.11 2008 57. 3.56 2010 82.STATE BANK OF PATIALA 1.72 INTERPRETATION: This ratio seen a sharpe rise in the year 2008 when out of the total deposits the bank has distributed 93% loans.

LIQUID ASSETS TO TOTAL ASSETS 2007 7. The ratio never gone down below the levels of 70%.82 2010 1.12 2010 8. RISK ADJUSTED MARGIN 62 .70% 6.06 2008 4.71 2009 8.32 INTERPRETATION: The performance is very good as there is a continuous decline in the npa’s. NON PERFORMING LOANS TO LOANS 2007 4.70 INTERPRETATION: The ratio has gone down in 2008 but afterwards remained in upward trend but in 2011 it again fell to the levels of 6.69 2009 6.31 2010 8. which is a good sign.INTERPRETATION: There has been a rising trend in this ratio in all the five years. PRIME ASSETS TO TOTAL ASSETS 2007 6. 7. 5.13 2011 7.25 2008 2. 4. Which is a good sign.13 2011 6.45 2009 1.43 2011 1.44 2008 7.23 INTERPRETATION: The ratio has been in upwards trend till 2009 and afterwards it’s been in declining stage.

07 2008 3. 8.91 2010 2.14 0.33 -0.22 0. which is a good thing.But in 2009 it has again risen but after that for the years 2010 and 2011 it is declining.33% and in 2008 this ratio is in negative which means that some of the npa has recovered or there is upward shift in the npa because of which now bank has reversed the provision. TOTAL LOAN LOSS PROVISIONS TO LOANS 2007 2008 2009 2010 2011 0.21 0.42 INTERPRETATION: The performance is not good as the ratio is continuously declining.34 2009 2.17 INTERPRETATION: In 2007 the ratio was 0. 63 .39 2011 2.2007 4.

LOAN TO TOTAL DEPOSIT 2007 53. CORE DEPOSIT TO TOTAL ASSETS 2007 83.87 2008 83.00 2009 merged 2010 2011 INTERPRETATION: The ratio shows an increasing trend till2008 and after that in 2009 its merged. TIME DEPOSIT TO TOTAL DEPOSIT 2007 70. 2.STATE BANK OF SAURASHTRA 1.64 2009 merged 2010 2011 INTERPRETATION: The ratio shows a declining trend till 2008 but in 2009 its merged. 4. LIQUID ASSETS TO TOTAL ASSETS 2007 2008 2009 2010 20 64 .23 2008 61. 3.74 2009 merged 2010 2011 INTERPRETATION: The ratio shows the stablity in 2007-08 and after that in 2009 its merged.84 2008 63.

82 7. In 2 years the ratio shows a declining trend. 5.52 2008 3.37 2009 merged 2010 2011 INTERPRETATION: The performance regarding this ratio cannot be said satisfactory as it is not been able to retain margin as in 2007.74 2008 1. Which is a good sign.45 2009 merged 2010 2011 INTERPRETATION: The ratio declined in 2008.7. The ratio shows a continuous decline. TOTAL LOAN LOSS PROVISIONS TO LOANS 65 .than it merged.06 2008 6.86 2009 merged 2010 2011 INTERPRETATION: This ratio shows an inefficient performance as the bank has been able to reduce the npa. 8.56 merged INTERPRETATION: Theratio is stable in 2007-08 and after that in 2009 it merged. 6. PRIME ASSETS TO TOTAL ASSETS 2007 7. NON PERFORMING LOANS TO LOANS 2007 2. RISK ADJUSTED MARGIN 2007 4. 7.

NOTE: STATE BANK OF SAURASHTRA HAS MERGED WITH STATE BANK OF INDIA IN 2009.00 66 .32 2009 merged 2010 2011 INTERPRETATION: The ratio in 2007 is 0.59 2009 81. STATE BANK OF TRAVANCORE 1.2007 0.87% and in 2008 is 0.32% it means the ratio is declined.58 2008 81.CORE DEPOSIT TO TOTAL ASSETS 2007 83.55 2010 80.87 2008 0.54 2011 85.

96 INTERPRETATION: The ratio has declined sharply in year 2008 but afterwards it has increased but again in 2011 it fell downward to the level of 4.59 2011 77. LIQUID ASSETS TO TOTAL ASSETS 2007 9. 3. Which is not a good sign. 5.53 2008 72.TIME DEPOSIT TO TOTAL DEPOSIT 2007 70.72 2011 67.PRIME ASSETS TO TOTAL ASSETS 67 .LOAN TO TOTAL DEPOSIT 2007 61.38 2008 69.57 INTERPRETATION: The ratio has declined except in 2009 but the good thing is that it has not gone down below the level of 69%.58% but afterwards it continues to decline till 2010 but it has increased by 5% in the year 2011 as compared to 2010.98 2010 8.67 2010 70.40 2011 4.34 2009 6. 2.00 2010 79.96% from 8.57 2009 80.80 2008 4.81 INTERPRETATION: The ratio is in increasing trend till 2009 but afterwards it has declined both in the year 2010-2011.40% in 2010.INTERPRETATION: In 2007 the ratio was 83. 4.60 2009 71.

63 INTERPRETATION: This ratio has shown a declining trend till 2010 but again 2011 it has increased it’s risk adjusted margin significantly. 68 . From 4.18%.40% in 2010.23 2009 2.28 2010 0.40%.63 2008 4.81 2010 8.39% in 2007 the bank has bring down the npa’s to the level of just 1. Which is a good sign.96 3.2007 9.03 2011 1. But for the next three years it has continuously increased but in 2011 this ratio has declined sharply to the level of 0.37 2011 0.NON PERFORMING LOANS TO LOANS 2007 4. Which is not a good sign.94 3.TOTAL LOAN LOSS PROVISIONS TO LOANS 2007 0. 8. 7.96 INTERPRETATION: The ratio has declined sharply in year 2008 but afterwards it has increased but again in 2011 it fell downward to the level of 4.38 2.34 2009 6.18 2010 2.40 2008 0.40 2011 4.73 3. 6.RISK ADJUSTED MARGIN 2007 2008 2009 2010 2011 4.24 2009 0.66 INTERPRETATION: There has been a significant improvement in the ratio if we compare all 5 years.96% from 8.66%.39 2008 3.18 INTERPRETATION: The ratio in 2007 this ratio is in 0.

07 2008 74.45 82.74 80.32 84.44 84.87 81.37 83.66 81.61 81.COMPARISON OF RATIOS WITH THE AVERAGE GROUP RATIO CORE DEPOSIT TO TOTAL ASSETS NAME OF THE BANK STATE BANK OF INDIA STATE BANK OF BIKANER AND JAIPUR STATE BANK OF HYDERABAD STATE BANK OF INDORE STATE BANK OF MYSORE 2007 76.36 82.94 82.65 2009 74.48 78.84 81.71 82.88 82.4 85.53 84.97 84.3 69 .59 81.4 2010 73.85 83.88 81.04 2011 75.

87 83. 2008: In this year the group average of the core deposits to total assets ratio was 78.57 85 83.13 80.59 78.e State Bank Of India.68% ratio as compared to the group average of 78. State Bank Of India.e State Bank Of India.46%. 2009: In this year the group average of the core deposits to total assets ratio was 81. The performance of State Bank Of Patiala was very bad as it has only 57.96 82.42%. State Bank Of Mysore have less ratio then the average ratio. Rest four banks have above average ratio.46 82.74 81.STATE BANK OF PATIALA STATE BANK OF SAURASHTRA STATE BANK OF TRAVANCORE INDUSTRY AVERAGE 84.96%. 70 .68 83. except State Bank Of Patiala and State Bank Of India rest all banks have above average ratios.55 81.57%.00 INTERPRETATION 2007: In this year the group average of the core deposits to total assets ratio was 82. out of eight three banks i.56 merged 81. State Bank Of Indore and State Bank Of Travancore has less ratio as compared to group average.24 86.11 83. State Bank Of Indore.54 80. 2010: In this year the group average of the core deposits to total assets ratio was 80.42 57.58 82. out of eight three banks i. State Bank Of Saurashtra and State Bank Of Travancore has less ratio then the industry average but the performance of State Bank Of India and State Bank Of Saurashtra is worse if compared with State Bank Of Travancore.46%. State Bank Of Bikaner And Jaipur.

32 71.72 79.85 74.11 76.07 67.81 93.59 77.53 2008 68.97 53.82 72.2011: In this year the group average of the core deposits to total assets ratio was 83%.28 71.14 63.77 73. State Bank Of Hyderabad and State Bank Of Mysore has ratios less than of the group average.1 69.64 57.84 73.28 77.54 73.55 73.81 71 .08 44.67 65.46 72.73 76.48 64.25 61 72.94 76. State Bank Of India.52 71.42 merged 80 2010 77.23 61.94 2011 73. LOAN TO TOTAL DEPOSITS NAME OF THE BANK STATE BANK OF INDIA STATE BANK OF BIKANER AND JAIPUR STATE BANK OF HYDERABAD STATE BANK OF INDORE STATE BANK OF MYSORE STATE BANK OF PATIALA STATE BANK OF SAURASHTRA STATE BANK OF TRAVANCORE 2007 55.57 74.27 61.79 76.57 2009 77.

State Bank Of Mysore.10%.45 57.36 62.22. State Bank Of Indore.67 74.10 74.42 64. These banks are State Bank Of Bikaner And Jaipur. State Bank Of Patiala.99 2010 53.88 2008 52. State Bank Of Bikaner And Jaipur State Bank Of Mysore. These banks are State Bank Of Mysore. State Bank Of Travancore 2008: In this year the average loan to total deposits ratio of the group was 71. State Bank Of Travancore And State Bank Of Bikaner And Jaipur TIME DEPOSITS TO TOTAL DEPOSITS NAME OF THE BANK STATE BANK OF INDIA STATE BANK OF BIKANER AND JAIPUR 2007 58.83 2007: In this year the average loan to total deposits ratio of the group was 58.18 72 .INDUSTRY AVERAGE INTERPRETATION: 58. State Bank Of India.These banks are State Bank Of Indore. out of the eight banks four banks have more ratio then the average ratio. out of the eight banks four banks have more ratio then the average ratio.04 64. State Bank Of Mysore.72 56.94 2009 51.74 2011 58. State Bank Of Indore. 2010: In this year the average loan to total deposits ratio of the group was 73. These banks are State Bank Of Indore. 2011: In this year the average loan to total deposits ratio of the group was 74. out of seven four banks has more ratio than the average group ratio. State Bank Of Patiala.67 %. State Bank Of Mysore.22 71. State Bank Of Travancore. These banks are State Bank Of Bikaner And Jaipur. out of six banks five banks has more ratio than the average group ratio . 2009: In this year the average ratio of the group was 74.05%. out of eight four banks had ratio more than the average industry ratio. State Bank Of Travancore.05 73.83%. State Bank Of India And State Bank Of Travancore.

72 66.81%. Out of the two State Bank Of India has very less time deposit to total deposit ratio i. except State Bank Of India. State Bank Of India.81 65.49 70.79 71.17%.33 69.42% as compared to the group average.67 66.4 68.87 69. 73 .27 68.96 INTERPRETATION: 2007: In this year the average time deposits to total deposits ratio of the group was 65.73 67.37 69.76 merged 71.6 64.78 65. State Bank Of Bikaner And Jaipur.11 69.64 69.57 67.05 72.12 77. 2008: In this year the average time deposits to total deposits ratio of the group was 64.82 68.17 64.66 69.e 51. State bank of saurashtra has ratios less than the average group ratio. State Bank Of Bikaner And Jaipur all other banks has ratio above than the average group ratio.37 70.87%.13 74.17 64.62 70.4 70. 2009: In this year the average time deposits to total deposits ratio of the group was 66.31 68.84 70. except State Bank Of India And State Bank Of Bikaner And Jaipur rest all other banks has ratios above than the average group ratio.STATE BANK OF HYDERABAD STATE BANK OF INDORE STATE BANK OF MYSORE STATE BANK OF PATIALA STATE BANK OF SAURASHTRA STATE BANK OF TRAVANCORE INDUSTRY AVERAGE 67.42 63.17 68.

08 8. out of eight three banks has ratios less than that of the average group ratio.02 8.89 7.83 9.55 7. LIQUID ASSETS TO TOTAL ASSETS NAME OF THE BANK STATE BANK OF INDIA STATE BANK OF BIKANER AND JAIPUR STATE BANK OF HYDERABAD STATE BANK OF INDORE STATE BANK OF MYSORE STATE BANK OF PATIALA STATE BANK OF SAURASHTRA STATE BANK OF TRAVANCORE 2007 8. State Bank Of Bikaner And Jaipur.3 8.86 9.35 10.45 9.96 74 .82 9.31 merged 6.29 7.98 10.34 2009 9.2010: In this year the average time deposits to total deposits ratio of the group was 66.17 12. these banks are State Bank Of India.56 4.31 9. State Bank Of Bikaner And Jaipur.71 7.79 8.73%. 2011: In this year the average time deposits to total deposits ratio of the group was 67.92 8.7 7. These banks are State Bank Of India.46 7.01 5.59 8. State Bank Of Travancore.92 7.98 2010 9.1 9.25 6.96%.13 2011 10.65 9.8 2008 9. three banks has ratio less than the average group ratio.03 7.81 7.23 8.4 4.44 7.

State Bank Of Patiala And State Bank Of Travancore has less ratio than the average group ratio.3 2009 6. State Bank Of Indore.74%.17 2008 4. 2011: In this year the average liquid assets to total assets ratio of the group was 7. PRIME ASSETS TO TOTAL DEPOSIT NAME OF THE BANK STATE BANK OF INDIA STATE BANK OF BIKANER AND JAIPUR 2007 4. Except State Bank Of Bikaner And Jaipur.26%.76%. State bank of Hyderabad . Out of these three State Bank Of Bikaner And Jaipur has very high ratio if compared with the average group ratio. State Bank Of Patiala And State Bank Of Travancore has ratios less than the average group ratio. Out of seven four banks State Bank Of Indore.26 9. these are State Bank Of India.32 7.06 7. State Bank Of Mysore. 2010: In this year the average liquid assets to total assets ratio of the group was 9.74 9.79 5.76 Interpretation: 2007: In this year the average liquid assets to total assets ratio of the group was 8.51 6. these are State Bank Of Bikaner And Jaipur. out of eight only three banks has ratios above than the average group ratio. 2008: In this year the average liquid assets to total assets ratio of the group was 7. 2009: In this year the average liquid assets to total assets ratio of the group was 9.52 8. only three banks has ratio above than the average group ratio.98 2011 8. State Bank of Travancore has very poor ratio if compared with the average group ratio.72 75 .66 10.06 10.9 2010 7.55%. State Bank Of Indore all other banks has ratio above than the average group ratio. Out of eight these four banks State Bank Of Indore.06%. State Bank Of Bikaner And Jaipur. State Bank Of Mysore.INDUSTRY AVERAGE 8.

State Bank Of Mysore.68 6.81 10.7 8.44 4.89 6.08 6.12 merged 6.83 4.68%.85 8.State Bank Of Mysore.24 5.STATE BANK OF HYDERABAD STATE BANK OF INDORE STATE BANK OF MYSORE STATE BANK OF PATIALA STATE BANK OF SAURASHTRA STATE BANK OF TRAVANCORE INDUSTRY AVERAGE 8. out of eight these banks i.e State Bank Of India.39 4.79 8.06 7. 76 .06 9.13 9.State Bank Of Indore.86 5. 2009: In this year the average prime assets to total assets ratio of the group was 7.69 6. State Bank Of Patiala. out of eight these four banks i.28 8. out of eight these four banks i.58 9.86 9.27 6.63 6. State Bank Of Patiala And State Bank Of Travancore has ratios less than that of the average group ratio.96 7.59 6.4 8.45 4. State Bank Of Patiala has ratios less than that of the average group ratio. 2008 In this year the average prime assets to total assets ratio of the group was 5.84%.25 6.84 8.81 7.81%.e State Bank Of India.e State Bank Of India.07 6. State Bank Of Travancore has ratios less than that of the average group ratio.16 Interpretation: 2007: In this year the average prime assets to total assets ratio of the group was 6.34 5. State Bank Of Bikaner And Jaipur.

State Bank Of Patiala.39 2.43 2011 2.83%.45 1. State Bank Of Indore.17 3. out of eight five banks has less ratio than that of the average group ratio.03 1.82 2009 2.86 3.39 4.36 4.06 2008 3.98 2010 3.33 3.11 1.33 1.46 1.63 77 .18 1.74 0.06 3.66 1.55 3.2010: In this year the average prime assets to total assets ratio of the group was 8.87 1.82 merged 2.32 2. these are State Bank Of India.45 2. These banks are State Bank Of Indore.74 4. State Bank Of Patiala. out of seven for banks has ratios less than that of average group ratio.39 1.72 1. State Bank Of Mysore.15 3.64 1. NON PERFORMING LOANS TO LOANS NAME OF THE BANK STATE BANK OF INDIA STATE BANK OF BIKANER AND JAIPUR STATE BANK OF HYDERABAD STATE BANK OF INDORE STATE BANK OF MYSORE STATE BANK OF PATIALA STATE BANK OF SAURASHTRA STATE BANK OF TRAVANCORE INDUSTRY AVERAGE 2007 6.23 2.44 1.25 1. State Bank Of Travancore. State Bank Of Mysore.73 4.71 1. State Bank Of Travancore.87 1.97 2.16%.92 2.26 1. 2011: In this year the average prime assets to total assets ratio of the group was 7.08 1.25 2.96 2.

2011: In this year the average non performing loans to loans ratio of the group was 1.36 3. And State Bank Of Travancore RISK ADJUSTED MARGIN NAME OF THE BANK STATE BANK OF INDIA STATE BANK OF BIKANER AND JAIPUR STATE BANK OF HYDERABAD STATE BANK OF INDORE 2007 4. 2009: In this year the average non performing loans to loans ratio of the group was 1. State Bank Of Bikaner And Jaipur and State Bank Of Travancore has more ratio than that of average group ratio. State Bank Of Travancore has more ratio than the average group ratio.32 5. these four banks State Bank Of India. 2010: In this year the average non performing loans to loans ratio of the group was 1.06 2010 3.29 1.21 2. State Bank Of Mysore State Bank Of Travancore has more ratio than the average group ratio.03 2008 4.06%.6 3. State Bank Of Mysore.93 3.8 2.77 2009 3. State Bank Of Bikaner And Jaipur. 2008: In this year the average non performing loans to loans ratio of the group was 2.74 3. these three banks State Bank Of India.72%. The name of banks are State Bank Of India.77 2011 3.82%. State Bank Of Bikaner And Jaipur.98%.Interpretation: 2007: In this year the average non performing loans to loans ratio of the group was 4.63 4. State Bank Of Indore. these three banks has more ratio than that of the average group ratio.6 3. these four banks State Bank Of India. State Bank Of Mysore has more ratio than that of the average group ratio.61 3.63%.22 2.95 2.96 4.58 3. State Bank Of Patiala. out of eight these four banks State Bank Of India. State Bank Of Travancore.11 78 .

76 3.90 3. these four banks State Bank Of Indore.85 4.90%. State Bank Of Patiala has less ratio than that of the average group ratio.42 2. these four banks State Bank Of Hyderabad. State Bank Of Saurashtra has less ratio than that of the average group ratio.37 3. State Bank Of Indore State Bank Of Patiala.76%. State Bank Of Hyderabad.51%. these four banks State Bank Of India.34 3.96 3.94 2.40%.38 3.12 2. State Bank Of Patiala. 2010: In this year the average risk adjusted margin of the group was 2.STATE BANK OF MYSORE STATE BANK OF PATIALA STATE BANK OF SAURASHTRA STATE BANK OF TRAVANCORE INDUSTRY AVERAGE 4.40 3.63 2. State Bank Of Patiala has less ratio than that of the average group ratio.39 3.07 4.91 merged 3.52 4.7 2. State Bank Of Travancore has less ratio than that of the average group ratio. these three banks State Bank Of Bikaner And Jaipur.13 3.51 4.52 2. 79 .92 Interpretation: 2007: In this year the average risk adjusted margin of the group was 4. 2009: In this year average risk adjusted margin of the group was 3.73 4. 2008: In this year the average risk adjusted margin of the group was 3. State Bank Of Indore .

18 0.33 -0.31 0.09 0.92%.31 2009 0.24 0.32 0.32 0.17 0.2011: In this year the average risk adjusted margin of the group was 2. State Bank Of Hyderabad And State Bank Of Patiala has less ratio than that of the average group ratio.27 -0.26 Interpretation: 80 .42 0.37 0.22 merged 0.39 0.14 0.46 0.16 0. TOTAL LOAN LOSS PROVISION TO LOANS NAME OF THE BANK STATE BANK OF INDIA STATE BANK OF BIKANER AND JAIPUR STATE BANK OF HYDERABAD STATE BANK OF INDORE STATE BANK OF MYSORE STATE BANK OF PATIALA STATE BANK OF SAURASHTRA STATE BANK OF TRAVANCORE INDUSTRY AVERAGE 2007 0.1 0.37 0.26 0. these three banks State Bank Of Bikaner And Jaipur.27 2010 0.4 0.48 0.25 0.21 0.28 0.19 2008 0.38 0 0 1.06 0.25 0.27 0.27 0.21 2011 0.87 -0.04 1.59 0.41 0.3 -0.46 0.

only two banks State Bank Of India And State Bank Of Hyderabad has ratio more than that of the average group ratio.31%. Rest four banks has ratio more than that of the average group ratio.82%. State Bank Of Saurashtra And State Bank Of Travancore has ratio in negative which is a good sign. State Bank Of Indore. State Bank Of Mysore. these three banks State Bank Of Hyderabad. 2008: In this year the average total loan loss provision to loans ratio of the group was 0.26%. 2010: In this year the average total loan loss provision to loans ratio of the group was 2.2007: In this year the average total loan loss provision to loans ratio of the group was 0. State Bank Of Hyderabad and State Bank Of Indore has not made provisions at all. State Bank Of Indore. State Bank Of Hyderabad has ratio in negative which is a good sign.19%. State Bank Of Bikaner And Jaipur. State Bank Of Patiala has ratio in negative which is good sign. State Bank Of Travancore has more ratio than that of the average group ratio. these four banks State Bank Of India. these four banks i. 81 .27%.e State Bank Of India. State Bank Of Bikaner And Jaipur. State Bank Of Travancore has more ratio than that of the average group ratio. Rest all other banks has ratio below the average group ratio. 2011: In this year the average total loan loss provision to loans ratio of the group was 0. 2009: In this year the average total loan loss provision to loans ratio of the group was 0. State Bank Of Saurashtra has ratios more than that of the average group ratio.

FINDINGS OF THE STUDY  CORE DEPOSITS TO TOTAL ASSETS RATIO:- State Bank Of India’s ratio remained below the average group ratio in the four years i.State Bank Of Patiala has the highest ratio consecutively for four years(2008-2011) as compared to average group ratio. State bank of Patiala ratio has been the highest in two years(2007 & 2011) as compared to the group average ratio. 2010. 2009. 2009. 2011. On the other hand state bank of Travancore has the highest ratio in two years 2009 & 2010 as compared to group average ratio. On the other hand State Bank Of India has lowest ratio for consecutively four years(20082011) as compared to average group ratio. 82 .e 2007. 2011 and the State Bank Of Saurashtra has the lowest ratio in the years 2007 and 2008 as compared to group average ratio.  LOAN TO TOTAL DEPOSITS RATIO:.  TIME DEPOSITS TO TOTAL DEPOSITS RATIO:. It is only once in the year (2008) that its ratio has gone down below the average group ratio.State Bank Of Hyderabad has the lowest ratio in the years 2007.

2009. on the other hand State Bank Of Saurashtra(2007-2008) and State Bank Of Hyderabad(2010-2011) has the lowest ratio as compared to group average ratio. On the other hand State Bank Of Travancore has the lowest ratio in three years (2008.State Bank Of Bikaner And Jaipur has the highest ratio in two years(2009 & 2010) as compared to the average group ratio. although it has managed to bring down its NPA’s.  RISK ADJUSTED MARGIN:. LIQUID ASSETS TO TOTAL ASSETS RATIO:.State Bank Of India has the highest ratio in all the five years as compared to average group ratio. On the other hand State Bank Of India( 2007 & 2009) and state bank of Travancore(2008 & 2011) has the lowest ratios as compared to group average ratio.  TOTAL LOAN LOSS PROVISION TO LOANS:. It is only once in 2007 that it has the highest ratio. PRIME ASSETS TO TOTAL ASSETS RATIO:. On the other hand State Bank Of Mysore(2007-2008) and State Bank Of India(2009-2011) has the highest ratio as compared to the average group ratio. 2011) as compared to average group ratio. State Bank of Patiala has also the lowest ratio in the year 2008 & 2009 as compared to group average ratio.State Bank Of Bikaner And Jaipur has the highest ratio in the year 2009 & 2010 as compared to average group ratio.   NON PERFORMING LOANS TO LOANS RATIO:. 83 .State Bank Of Bikaner And Jaipur has remain on both the sides. It has the highest ratio in the year 2007 & 2009 and has the lowest ratio in the year 2010 & 2011.State Bank Of Patiala(2008 & 2011) and State Bank Of Saurashtra (2007 & 2008) has the lowest ratio as compared to average group ratio.

But while calculating liquidity risk with the help of prime assets to total assets and liquid assets to total assets ratio it is seen that the State Bank Of Travancore liquidity position have been very up and down in 5 years. So State Bank Of India should try to manage its loan activities efficiently in future. Although it has managed to bring down its NPA’s from 2007 to 2011. In future there will be more challenges for the state bank group to manage the credit and liquidity risk as now its associates banks are merging in State Bank Of India. 84 . And in calculating the credit risk it is seen that State Bank Of India remained in worst performer in two ratios.CONCLUSION The analysis of the ratios shows that there is no trend emerges for the state bank group regarding liquidity and credit risk. As also world is world is shrinking and economies are becoming interdependent on each other so there will be lot of challenges in the future.e credit risk and liquidity risk cannot be eliminated as these arises from the basic activities of banks. In Non Performing Loans To Loans Ratio it have been in the worst performer for all the five years if its ratio is compared with the average industry ratio. But banks should always keep in mind that these two risks i. Recently State Bank Of Saurashtra has merged into the State Bank Of India and because of the increasing competition from the private banks. And in the second ratio for measuring the credit risk i. But the otherwise the position is satisfactory and there are no signs of worry for the largest and the strongest group of banks in India. but if properly managed can be mitigated to an extent.e Total Loan Loss Provision To Loans it have been in the worst performer category from 2009-2011.

D. Sree Rama Murthy (2003) “A STUDY ON FINANCIAL RATIOS OF  MAJOR COMMERCIAL BANKS”  Imola Driga (2004) “MEANS OF REDUCING CREDIT RISK” WEBSITES: www.rbi. Macmillan India Ltd. RESEARCH PAPERS: Brian Gray (1998). “CREDIT RISK IN THE AUSTRALIAN BANKING SECTOR”  S. Chandershekhar.  Dun & Bradstreet(2009) “FINANCIAL RISK MANAGEMENT” Tata McGraw Hill Publications. C.  Ajay Kumar.BIBLIOGRAPHY BOOKS-:  T. Y.K Bagchi (2005) “CREDIT RISK MITIGATION – IMPLICATIONS OF BASEL II PRESCRIPTIONS IN INDIAN BANKING”  V. D.org. Ravi Kumar(2005). “ASSET LIABILITY MANAGEMENT”.N. 2ND Edition.  Justin Paul & Padmalatha Suresh (2007) “MANAGEMENT OF BANKING AND FINANCIAL SERVICES” Dorling Kindersley (India) Pvt Ltd.G Patwardhan(2007) . Indian Institute Of Banking And Finance. Vision Books.Sethuraman (2008) “LIQUIDITY RISK MANAGEMENT DEMYSTIFIED”  Dr.P Chatterjee. “RISK MANAGEMENT”.in 85 .

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