Credit Risk Management

(A study of reference to State Bank of Hyderabad, Gunfoundry, Hyderabad.) A Project Report Submitted to Osmania University, Hyderabad, in partial fulfillment For the award of the Degree of

MASTER OF BUSINESS ADMINISTRATION

Submitted by
ROLL NO. (08606-129)

R.ARAVINDA

Under the guidance of Ms. SARITHA, M.B.A.

T.K.R.I.M.S

(Affiliated to Osmania University) MEERPET, SAROORNAGAR, HYDERABAD.

2006-2008
1

DECLARATION
I hereby declare that this project entitled “ Credit Risk Management” from State Bank of Hyderabad, Gunfoundry, Hyderabad, has been prepared me for the award of the Degree of “Master of Business Administration”

I also declare that this project report work is the result of my own efforts and it has not been submitted to any other University for any Degree / Diploma.

(R.ARAVINDA)

2

ACKNOWLEDGEMENT

I would like to thank my almighty god for his love and kindness he bestowed unto me I thank my guide Mr. Avinash for giving me an

opportunity to do this project at State Bank of Hyderabad,
Gounfoundry.

I would like to express my profound gratitude to Ms. SARITHA, M.B.A. Faculty guide, T.K.R.I.M.S, for his constant support and guidelines. My sincere thanks to Ms. SARITHA & all the faculty members who extended their help in the completion of the project work. Lastly I would give thank my family and friends for their encouragement without whose support these project would not have been possible.

R.ARAVINDA 3

SUMMARY & CONCLUSIONS 6.TABLE OF CONTENTS CONTENTS List of Tables List of Figures 1. INTRODUCTION 2. THE COMPANY 4. DATA ANALYSIS & PRESENTATION 4. REVIEW OF LITERATURE 3. APPENDICES Appendix AAppendix B- PAGE NUMBERS 4 .1 Presentation and Analysis 4. BIBLIOGRAPHY 7.2 Interpretations 5.

Graphs & Charts S No. 5 .List of Tables. 1 2 3 Name of the concept Calculation of returns for futures and options Graphical interpretation of futures Graphical interpretation of options Page No.

INTRODUCTION Need for the study 6 .

In global sense. increased credit risks arise due to two reasons: one. This is clearly proved by statistics over last 25 years or so. In such a scenario. To an extent the phenomenon of disintermediation is also visible in India with well-rated corporate demanding loans at rates that do not meet the banks' Risk Adjusted Return on Capital (RAROC). The vast arrays of capital market products have brought corporate to Dalai Street rather than resort to traditional banking relationships. Banks balance sheets have more of below investment grade bonds. syndicated loans. the major cause of serious banking problems continues to be directly related to lax credit standards for borrowers and counterparties. the banks are supposed to improve their efficiency as far as credit recovery is concerned in order to improve their overall profitability. In Indian context. and commercials real estate lending today than in past. banks have been forced to lend to riskier clients because well rated corporates have moved away from banks to access capital markets directly. Problem Definition 7 . or a lack of attention to changes in economic or other circumstances that can lead to a deterioration in the credit standing of a bank's counterparties. the increased credit risk is inevitable with the opening up of the economy to global forces.While financial institutions have faced difficulties over the years for a multitude of reasons. poor portfolio risk management.

Efficiency. • To safeguards from future uncertainties. Management. Liquidity and Systems) of the banks and it is therefore felt that an in depth study of this credit risk should be carried out in order to minimize the risk and improve the profitability. • To improve efficiency in transactions. Assets. • To improve authenticity & accuracy. Methodology 8 . thus lowering the bank's rating. This in turn is adversely affecting the CAMELS (Capital Adequacy Ratio.Credit Risk by its very nature not only adversely affecting the profitability of the banks but also resulting in higher Non Performing Assets. Objectives • To ensure liquidity • To maximize profits • To overcome loan losses • To ensure proper margin • To overcome inherent risks. • To avoid unnecessary volatility. • Providing proper assurance for Bank customers.

• The history accounts of borrower have been studied. Study has been conducted in following manner • Credit approval procedure of State Bank of Hyderabad has been closely observed. 9 . • Cross-checked whether BASEL Committee reports and recommendation has been implemented or not. • Comparison with different banks strategies and success of it.This study is aimed at finding out various alternative methods and techniques adopted by various commercial banks for managing the credit risk in order to increase overall financial position of banks. • Secondary information so gathered has been analyzed. • Various regulatory procedures issued by RBI have been studied.

absence of loan review mechanism and post sanction surveillance etc. economic sanctions. The counterparty risk is generally viewed as a transient financial risk associated with trading rather than 10 . The external factors are the state of the economy. trading. settlement and other financial transactions. wide swings in commodity/equity prices. The non-performance may arise from counterparty's refusal to perform due to adverse price movements or from external constraints that were not anticipated by the principal. deficiencies in appraisal of borrower’s financial position. Government policies. Another variant of credit risk is counterparty risk. The credit Risk is generally made up of transaction risk or default risk and portfolio risk.THEORETICAL BACKGROUND ABOUT THE TOPIC Credit risk or default risk involves inability or unwillingness of a customer or counterparty to meet commitments in relation to lending. absence of prudential credit concentration limits. excessive dependence on collaterals and inadequate risk pricing. The internal factors are deficiencies in loan policies/administration. The credit risk of a bank's portfolio depends on both external and internal factors. etc. inadequately defined lending limits for Loan Officers/ Credit Committees. The counterparty risk arises from non-performance of the trading partners. hedging. trade restrictions. foreign exchange rates and interest rates. The portfolio risk in turn comprises intrinsic and concentration risk.

Definition Credit risk is defined as "the possibility of losses associated with diminution in the credit quality of borrowers or counterparties. Credit risk may take the following forms: • In the case of direct lending: Principal and or interest amount may not be repaid. • In the case of cross border exposure: the availability and free transfer of foreign currency funds may either cease or the sovereign may impose restrictions. trading. banks. • In the case of treasury operations: the payment or series of payments due from the counter parties under the respective contracts may not be forthcoming of ceases. management of credit risk should receive the top management's attention and the problems arising thereof should duly be addressed. losses result from reduction in portfolio value arising from actual or perceived deterioration in credit quality". settlement and other financial transactions. corporate.standard credit risk. • In the case of guarantees of letters of credit: funds may not be forthcoming from the constituents upon crystallization of the liability. and financial institution or a sovereign. 11 . Credit risk emanates from a bank's dealing with an individual. losses stem from outright default due to inability or unwillingness of a customer or counterparty to meet commitments in relation to lending. In a bank's portfolio. Therefore. Alternatively.

The effective management of credit risk is a critical component of comprehensive risk management and is essential for the long-term success of any banking organization. The techniques for measuring credit risk that have evolved over the last twenty years are prompted by these questions and dynamic changes in the loan market. monitoring. and control of the credit risk exposures. • New markets are emerging in credit derivatives and the marketability of existing loans is increasing through securitisation/ loan sales market. the answer to the following question: Given our past experience and our assumptions about the future. which is sensitive and responsive to these factors. Credit risk management encompasses identification. Credit Risk Models A credit risk model seeks to determine. The increasing importance of credit risk modeling should be seen as the consequence of the following three factors • Banks are becoming increasingly quantitative in their treatment of credit risk. measurement. • Regulators are concerned to improve the current system of bank capital requirements especially as it relates to credit risk. directly or indirectly.In this backdrop. it is imperative that banks have a robust credit risk management system. 12 . what is the present value of a given loan or fixed income security? A credit risk model would also seek to determine the (quantifiable) risk that the promised cash flows will not be forthcoming.

Credit risk modeling may result in better internal risk management and may have the potential to be used in the supervisory oversight of banking organizations. active portfolio management and capital structure decisions. In the measurement of credit risk. models give their users a competitive edge.Credit Risk Models have assumed importance because they provide the decision maker with insight or knowledge that would not otherwise be readily available or that could be marshaled at prohibitive cost. risk-based pricing. 13 . aggregating. The outputs of these models also play increasingly important roles in banks' risk management and performance measurement processes. models may be classified along three different dimensions: the techniques employed the domain of applications in the credit process and the products to which they are applied. In a marketplace where margins are fast disappearing and the pressure to lower pricing is unrelenting. The credit risk models are intended to aid banks in quantifying. and managing risk across geographical and product lines. customer profitability analysis.

The sound practices for managing credit risk include: • Establishing an appropriate credit risk environment • Operating under a sound credit granting process • Maintaining an appropriate credit administration. failures of due diligence an inadequate monitoring. 14 . measurements and monitoring process • Ensuring adequate controls over credit risk Although specific credit risk management practices may differ among banks. the adequacy of provisions and reserves. a comprehensive credit risk management program will address these four areas. depending upon the nature and complexity of their credit activities. These practices should also be applied in conjunction with sound practices related to the assessment of asset quality. Several credit losses in banking system usually reflect simultaneous problems in several areas such as concentrations.EXISTING SYSTEM Managing Credit Risk in State Bank of Hyderabad Most major banking problems have been either explicitly or indirectly caused by weaknesses in credit risk management.

The Scenario in Respect of Credit Risk Management in State Bank of Hyderabad • The credit risk management policy is articulated in State Bank of Hyderabad in the loan Policy.Credit risk management is not Non Performing Asset Management. It involves measurement of the unexpected losses. manage. and control credit risk on a bank wide basis once a risk management structure is in place. • Risk pricing on scientific basis • Controlling the risk through loan review mechanism and portfolio management. which is approved by the Board of Directors and reviewed from time to time. changes in asset value or returns. In Non Performing Assets (NPAs) account the credit risk has crystallized. • Quantifying the risk through estimating expected loan losses. The process of credit risk management would encompass the following measurement of risk through credit rating/scoring. Credit risk management is consent with the quality of the credit portfolio before default. • The credit policy committee formulates policies on standards of presentation of 15 . Non Performing Assets are legacy of the past in the present whereas credit management is action in the present to safeguard the future. • A credit policy committee has been formed at the apex level to deal with issues relating to credit policy and procedures and is expected to analyze.

It is expected to serve as an effective control over the system of sanction of loans in the bank. rating standards and bench marks. When the borrower is unable to repay the credit amount. then the risk arises termed as credit risk. asset concentrations. 16 . Techniques Adopted by State Bank of Hyderabad Bank is a lending institution and lending of money to the borrower is called credit. delegation of credit approving powers. standards for loan collaterals. which helps to arrive at the risk associated with a loan thereby enabling proper credit decisions.credit proposals. To overcome this credit risk. banks adopt certain techniques and following techniques are few of them that are adopted by State Bank of Hyderabad to reduce the Credit Risk. • The Credit Risk Assessment system has been introduced in the bank covering all business segments. financial covenants. portfolio management etc • The loan review mechanism styled Credit Audit covers audit of credit sanctions of both fund based and non-fund based limits above a certain cut-off point. prudential exposures on large credit exposures.

If the borrower is rated between l and 4. 3) Rating of accounts State Bank of Hyderabad exclusively adopts this technique. then the assets and liabilities of the borrower can be taken over by the bank. In order to get the loan. 4) Securitization 17 . bank evaluates the Net worth of the borrower in order to get assured that in case if he fails to repay the loan. professional as well as good personal character. Rating 4 is known as hurdle rate and if the borrower rating lies between 5 and 8. the bank verifies whether he had paid it back in time without any delay. It also concentrates on the past record of the family members. The rating is on the scale of 1-8.1) Quality of the borrower/ Net worth of the borrower: For lending money to the borrower. one needs to have good reputation. The bank generally prefers that Net worth of the borrower should either be equal or more that of the borrowed amount. then the risk involved is very high and the interest rate on the amount will also be very high. 2) Past Record of the borrower and his family members: For borrowing money from the bank one needs to maintain a clean past record. then the risk involved is less and rate of interest will also be low. That is if at all he had availed loan from any other financial institution. Under this technique the borrower is rated on the basis of the risk involved.

2000. 6) Training to Office Staff: The bank regularly trains its staff in the area of credit risk management. national banking management center and others. the bank can keep a record of transactions taking place in the business. If the borrower is unable to pay back the loan. (SARFESI) had been passed in the parliament as a boon to banking industry to recover their bad debts. With the help of this. The training is not only confined to in house but the staff is also sent to various expertise knowledge centers like RBI staff training center.Securitization and Reconstruction of Financial Asset and Enforcement of Security Interest act. then bank has the right to acquire the asset and auction it. Under this. IIM's. the borrower has to keep his asset as the security with the bank till the repayment of the loan. and through that it can recover the loan amount. 7) Credit Appraisal Cell 18 . 5) Audit and Periodic Inspection: Banks performs periodic inspection of the accounts of the borrower or company to know the status of the business. It can know the position of the borrower whether he can repay the credit or not with the help of financial statements and stock statements. then bank shall give him a prior Notice of 120 days and if the borrower still does not repay the loan amount.

The board should set risk limits by assessing the bank's risk and risk-bearing capacity. and Vishakapatnam Risk management structure A major issue in establishing an appropriate risk management organizational structure is choosing between a centralized and decentralized structure. At present. natural netting of exposure. leaving the scope for other branches of the bank to concentrate on other aspects like marketing. customer relations. the committee should hold the line management more accountable for the 19 .For better monitoring of the credit. economies of scale. At the same time. there three such Credit Appraisal Cells are formed in the state at Hyderabad. The purpose of this top level committee is to empower one group with full responsibility of evaluating overall risks faced by the bank determining the level of risks which will be in the best interest of the bank. the bank has set up Credit Appraisal Cells. The primary responsibility of understanding the risks run by the bank and ensuring that the risks are appropriately managed should clearly be vested with the board of Directors. The Credit Appraisal Cells concentrate primarily on credit allowances and other procedural aspects involved in lending money. and easier reporting to top management. overall risk management should be assigned to an independent risk management committee. The global trend is towards centralizing risk management with integrated treasury management function to benefit from information on aggregate exposure. Secunderabad. At organizational level.

The functions of risk management committee should essentially be to identify. Banks have been moving towards the use of sophisticated models for measuring and managing risks. verify the models that are used for pricing complex products. It should also develop policies and procedures.risks under their control. therefore be the endeavor of all banks to upgrade the skills of staff. and mew performance of the bank in that area. the core staff at head offices should be trained in risks modeling and analytical tools. Internationally. It should.the committee should design stress scenarios to measure the impact of unusual market conditions and monitor variance between the actual volatility of portfolio value and that predicted by the risk measures and should also monitor compliance of various risk parameters by operating departments. At a more sophisticated level. The risks policies should clearly spell out the quantitative prudential limits on various segments of banks operations. a committee approach to risk management is being adopted. The risk management is a complex function and it requires specialized skills and expertise. Large banks and those operating in international markets should develop internal risk management models to be able to compete effectively with the international markets.Liability Management Committee deal with difference 20 . monitor. and measure the risk profile of the bank. While the Asset. the banks should have necessary expertise and skill in managing various types of risks in a scientific manner. review the risk models as development takes place in the markets and also identify new risks. Internationally. the trend is towards assigning risk limits in terms of portfolio standards or credit risk and Earning at Risk and Value at risk (market risk) .

The document should include risk identification. Senior management of a bank will have to take the responsibility for implementing the credit risk policy approved by the Board. aggregation techniques. Thus. risk measurement. In bank. legal issues and management of problem loans. an effective credit risk management framework would comprise of the following distinct building blocks • Policy and Strategy • Organizational Structure • Operations/Systems Policy and Strategy: Credit Risk Policy Bank should have a credit risk policy document approved by the Board.types of market risk. documentation. Credit Risk Strategy 21 . generally. credit origination/ maintenance procedures and guidelines for portfolio management. Credit risk policies should also define target markets. Banks could also set up a single committee for integrated management of credit and market risks. the policies and procedures for market risk are articulated in the Asset and Liability Management policies and credit risk is addressed in loan policies and procedures. the credit policy committee oversees the credit/ counterparty risk and country risk. credit approval authority. market and credit risks managed in a parallel two-track approach in banks. risk acceptance criteria. reporting and risk control/ mitigation techniques. risk grading.

It will devise the policy and strategy for integrated risk management 22 . This strategy will spell out clearly the organization's credit appetite and the acceptable level of risk-reward trade-off for its activities. Organizational Structure: Sound organizational structure is sine qua non for successful implementation of an effective credit risk management system. The organizational structure for credit risk management should have the following basic features: The Board of Directors should have the overall responsibility for management of risks. include a statement of the bank's willingness to grant loans based on the type of economic activity.Bank is expected to develop. and Operational Risk Management Committees. Market. geographical location. interest rate. the cost of capital in granting credit and the cost of bad debts. market. This would necessarily translate into the identification of target markets and business sectors. and anticipated profitability. currency. with the approval of its Board. maturity. its own credit risk strategy or plan that establishes the objective guiding the bank's credit-granting activities and adopt necessary policies or procedures for conducting such activities. The Risk Management Committee will be a Board level sub committee including Directors and heads of Credit. preferred levels of diversification and concentration. therefore. the Board should decide the risk management policy of the bank and set limits for liquidity. The strategy would. and foreign exchange and equity price risks.

• Monitor credit risk on a bank wide basis and ensure compliance with limits approved by the Board. Treasury. risk concentrations. risk monitoring. provisioning. For this purpose. and evaluation. clear policies on standards for presentations of credit proposals. Credit Risk Management Committee The Chairman/ED can head the committee with comprise of heads of Credit Department. this committee should effectively coordinate between the Credit Risk Management Committee. Credit Risk Management Department 23 . and other risk committees of the bank. financial covenants. • Recommend to the Boar. the Asset Liability Management Committee. • Decide delegation of credit approving powers. loan review mechanism. Credit Risk Management Department and the Chief Economist. The functions of the credit Risk Management Committee are: • Be responsible for the implementation of the credit risk policy/ strategy approved by the Board. prudential limits on large credit exposures. pricing of loans. for its approval.containing various risk exposure of the bank including the credit risk. portfolio management. standards for loan collateral. and regulatory/legal compliance. rating standards and benchmarks.

Concurrently, each bank should also set up Credit Risk Management Department. The functions of Credit Risk Management Department are • Measure, control, and manage credit risk on a bank-wide basis within the limits set by the Board. • Enforce compliance with the risk parameters and prudential limits set by the Board • Lay down risk assessment systems, develop MIS, monitor quality of loan/ investment portfolio, identify problems, correct deficiencies, and undertake loan review/audit. Large banks could consider separate set up for loan review/audit. • Be accountable for protecting the quality of the entire loan/ investment portfolio.

The

Department

should

undertake portfolio

evaluations

and

conduct comprehensive studies on the environment to test the resilience of the loan portfolio.

Operations / Systems

24

Banks should have in place an appropriate credit administration, credit risk measurement, and monitoring processes. The credit administration process typically involves the following phases:
• •

Relationship management phase i.e. business development. Transaction management phase covers risk assessment, loan pricing, structuring the facilities, internal approvals, documentation, loan

administration, on going monitoring and risk measurement.

Portfolio management phase entails monitoring of the portfolio at a macro level and the management of problem loans. On the basis of the broad management framework stated above, the banks should have the following credit risk measurement and monitoring procedures:

Banks should establish proactive credit risk management practices like annualhalf yearly industry studies and individual obligor reviews, periodic credit calls that are documented, periodic visits of plant and business site, and at least quarterly management reviews of troubled exposures/weak credits.

Banks should have a system of checks and balances in place for extension of credit viz.: Separation of credit risk management from credit sanction

• Multiple approvals

credit at

approvers stages

making viz.

financial credit

sanction risk

subject approvals,

to

various

ratings,

credit approval grid, etc. • An independent audit and risk review function.

The level of authority required to approve credit will increase as amounts and

25

transaction risks increase and as risk ratings worsen. • Every obligor and facility must be assigned a risk rating.

Mechanism to price facilities depending on the risk grading of the customer, and to attribute accurately the associated risk weightings to the facilities.

• Banks should ensure that there are consistent standards for the origination, documentation, and maintenance for extensions of credit.

Banks should have a consistent approach towards early problem recognition, the classification of problem exposures, and remedial action.

• Banks should maintain a diversified portfolio of risk assets; have a system to conduct regular analysis of the portfolio and to ensure on-going control of risk concentrations.

Credit risk limits include, obligor limits and concentration limits by industry or geography. The Boards should authorize efficient and effective credit approval processes for operating within the approval limits.

In order to ensure transparency of risks taken, it is the responsibility of banks to accurately, completely and in a timely fashion, report the comprehensive set of credit risk data into the independent risk system.

Banks should have systems and procedures for monitoring financial performance of customers and for controlling outstanding within limits.

• A conservative policy for provisioning in respect of non-performing advances may be adopted.

Successful

credit

management

requires

experience,

judgment,

and

26

The MIS should provide adequate information on the composition of the credit portfolio. Banks should price their loans according to the risk profile of the borrower and the risks associated with the loans. Banks should have a clear. welldocumented scheme of delegation of powers for credit sanction. Banks must have a Management Information System (MIS). including identification of any concentration of risk. Risk Planning • • Definition of procedures Design of credit processes Risk Assessment and Monitoring • Sector review • Credit Rating • • Review of Credit Proposals (new) Asset review (existing) Risk Analytics • Credit Risk and pricing models' design & maintenance 27 .and off-balance sheet activities. which should enable them to manage and measure the credit risk inherent in all on.commitment to technical development.

• Optimization models are mathematical programming techniques that discover the optimum weights for borrower and loan attributes that minimize lender error and maximize profits. • Rule-based or expert systems are characterized by a set of decision rules. • Hybrid Systems In these systems simulation are driven in part by a direct causal relationship. the parameters of which are determined through estimation techniques. a knowledge base consisting of data such as industry financial ratios. multiple regression. • Neural networks are computer-based systems that use the same data employed in the econometric techniques but arrive at the decision model using alternative implementations of a trial and error method. logic analysis and probability of default. etc. 28 . and a structured inquiry process to be used by the analyst in obtaining the data on a particular borrower.• Portfolio analysis and reporting Credit Risk -Systems • • Integration of risk Procedures with credit systems Design and development of support systems for risk assessment & monitoring Techniques The following are the more commonly used techniques: • Econometric Techniques such as linear and multiple discriminate analyses.

• Early warning: Credit models are used to flag potential problems in the portfolio to facilitate early corrective action. In some instances. • Common credit language: Credit models may be used to select assets from a pool to construct a portfolio acceptable to investors at the time of asset 29 . Unexpected losses implied by a credit model may be used to set the capital charge in pricing. Using a mark-to-market model. • Credit rating determination: Quantitative models are used in deriving 'shadow bond. The use of such models has expanded to include small business lending. They are generally not used in approving large corporate loans. • Credit risk models may be used to suggest the risk premium that should be charged in view of the probability of loss and the size of the loss given default.Domain of application: These models are used in a variety of domains: • Credit approval: Models are used on a stand-alone basis or in conjunction with a judgmental override system for approving credit in the consumer lending business. an institution may evaluate the costs and benefits of holding a financial asset. but they may be one of the inputs to a decision. the credit rating predicted by the model is used within an institution to challenge the rating assigned by the traditional credit analysis process. rating' for un-rated securities and commercial loans. These ratings in turn influence portfolio limits and other lending limits used by the institution.

This approach was frequently used in the last two decades. and Peck (1995. Underwriters may use such models for due diligence on the portfolio (such as a collateralized pool of commercial loans). Credit Risk Models: Approaches The literature on quantitative risk modeling has two different approaches to credit risk measurement. • Collection strategies: Credit models may be used in deciding on the best collection or workout strategy to pursue. a credit model indicates that a borrower is experiencing short-term liquidity problems rather than a decline in credit fundamentals. then an appropriate workout may be devised. separates defaulting firms from non-defaulting ones on the basis of certain financial ratios.securitization or to achieve the minimum credit quality needed to obtain the desired credit rating. 1996) have modified the original Z-score model to develop a model specific to emerging markets. The first approach is the development of statistical models through analysis of historical data. Hartzell. The linear model introduced by Altman (1967). The statistical approach tries to rate the firms on a discrete or continuous scale. If. Altman. also known as the Z-score Model. 30 . for example. The second type of modeling approach tries to capture distribution of the firm's assetvalue over a period of time. This model is known as the Emerging Market Scoring (EMS) model.

It calculates the asset value of a firm from the market value of its equity using an option pricing based approach that recognizes equity as a call option on the underlying asset of the firm. etc. complexity. risk bearing capacity and risk appetite. This model is based conceptually on Merton's (1974) contingent claim framework and has been working very well for estimating default risk in a liquid market. Banks may adopt any model depending on their size. achieve the following: • Result in differentiating the degree of credit risk in different credit exposures of a bank. In the last three years.The second type of modeling approach tries to capture distribution of the firm's assetvalue over a period of time. at the least. important advances have been made in modeling credit risk in lending portfolios. This model is based on the expected default frequency (EOF) model. The system could provide for transaction-based or borrower-based 31 . These models estimate the loss distribution associated with the portfolio and identify the risky components by assessing the risk contribution of each member in the portfolio. the credit risk models followed by banks should. and thus are applied at the time of diversification as well as portfolio based pricing. The new models are designed to quantify credit risk on a portfolio basis. However. The default risk is the probability of the estimated asset value falling below a pre-specified default point. Closely related to credit risk models are portfolio risk models. It tries to estimate the asset value path of the firm over a time horizon.

The portfolio risk in turn comprises intrinsic and concentration risk. Restricting risk measurement to only large sized exposures may fail to capture the portfolio risk in entirety for variety of reasons. trading. economic sanctions. a large sized exposure for a short time may be less risky than a small sized exposure for a long time • Identify concentration in the portfolios • Identify problem credits before they become NPAs • Identify adequacy/ inadequacy of loan provisions • Help in pricing of credit • Recognize variations in macro-economic factors and a possible impact under alternative scenarios • Determine the impact on profitability of transactions and relationship. The internal factors are deficiencies in 32 . etc. It is recommended that all exposures are to be rated. settlement and other financial transactions.rating or both. hedging. wide swings in commodity/ equity prices. The external factors are the state of the economy. The credit risk of a bank's portfolio depends on both external and internal factors. For instance. The credit Risk is generally made up of transaction risk or default risk and portfolio risk. foreign exchange rates and interest rates. trade restrictions. Government policies. Managing Credit Risk Credit risk or default risk involves inability or unwillingness of a customer or counterparty to meet commitments in relation to lending.

loan policies/administration. The counterparty risk is generally viewed as a transient financial risk associated with trading rather than standard credit risk.. The management of credit risk is expected to receive the top management's attention and the process should encompass: • Measurement of risk through credit rating/ scoring • Quantifying the risk through estimating expected loan losses i. deficiencies in appraisal of borrower’s financial position. inadequately defined lending limits for Loan Officers/ Credit Committees.e. Another variant of credit risk is counterparty risk. excessive dependence on collaterals and inadequate risk pricing. absence of prudential credit concentration limits. The non-performance may arise from counterparty's refusal to perform due to adverse price movements or from external constraints that were not anticipated by the principal. absence of loan review mechanism and post sanction surveillance etc. the amount of loan losses that bank would experience over a chosen time horizon (through tracking portfolio behavior over 5 or more years) and unexpected loan losses 33 . The counterparty risk arises from non-performance of the trading partners.

which help the banks in mitigating the adverse impact of credit risk. Banks could consider delegating powers for sanction of higher limits to the 'Approval Grid' or the committee for better rated/ quality customers. large branches (where considered necessary).. comprising at least 3 or 4 officers and invariably one officer will have to represent the Credit Risk Management Department.e. 'the amount by which actual losses exceed the expected loss (through standard deviation of losses or the difference between expected loan losses and some selected target credit loss quintile) • Risk pricing on a scientific basis and • Controlling the risk through effective loan Review Mechanism and portfolio management.i. The 'Grid' or 'Committee' may approve the credit facilities above a specified limit. The spirit of the credit approving system may be that no credit proposals should be approved or recommended to higher 34 . etc. The banks should also evolve multi-tier credit approving system where an 'Approval Grid' approves the loan proposals or a committee. Head Offices. Zonal Offices. Credit Approving Authority Each bank is expected to have a carefully formulates scheme of delegation of powers. Regional Offices. who has no volume and profit targets. Banks cam also consider credit approving committees at various levels i. Instruments of Credit Risk Management Credit Risk Management encompasses a list of management techniques.e.

The conditions subject to which deviations are permitted and the authority therefore should also be clearly spelt out in the Loan Policy. which may be lower than the limits prescribed by Reserve Bank to provide a filtering mechanism. with flexibility for deviations.e. Prudential Limits In order to limit the magnitude of credit risk. through a well-defined Loan Review Mechanism. The quality of credit decision should be evaluated within a reasonable time. prudential limits should be laid down on various aspects of credit: • Stipulate benchmark current/debt equity and profitability ratios. say 3-6 months. • Single/ group borrower limits. depending upon the degree of concentration risk the bank is exposed. The banks should also evolve suitable framework for reporting and evaluating the quality of credit decisions taken by various functional groups. debt service coverage ratio or other ratios. The substantial exposure limit may be fixed at 600% or 800% of capital funds. Incase of disagreement. if majority members of the 'Approval Grid' or Committee do not agree on the creditworthiness of the borrower. the specific views of the dissenting members should be recorded. 35 .' sum total of exposure assumed in respect of those single borrowers enjoying credit facilities in excess of a threshold limit.authorities. • Substantial exposure limit i. say 10% or 15% of capital funds.

liquidity.• Maximum exposure limits to industry. The pricing of loans normally should be linked to risk rating or credit quality. as perceived by the bank. Which are subject to a high degree of asset price volatility and to specific industries. etc. etc. borrowers with weak financial position and hence placed in high credit risk category should be priced high. real estate. such as. risk evaluation capability. In a risk return setting. may necessarily be restricted. But value of collateral. which is the function of loan loss provision/ charge offs for the last five years or so. banks should evolve scientific systems to price the credit risk. high-risk industries. market forces. should also be placed under lower portfolio limit. Any excess exposure should also be fully backed by adequate collaterals or strategic considerations: and • Banks may consider maturity profile of the loan book. which are subject to frequent business cycles. There must also be systems in place to evaluate the exposure at reasonable intervals and the limits should be adjusted especially when a particular sector or industry faces slowdown or other sector/industry specific problems. 36 . Banks should build historical database on the portfolio quality and provisioning / charge off to equip themselves to price the risk. Similarly. Thus. sector. • Risk Pricing Risk return pricing is a fundamental tenet of risk management. etc. should be set up. which should have a bearing on the expected probability of default. keeping in view the market risks inherent in the balance sheet. advances against equity shares. The exposure limits to sensitive sectors. The probability of default could be derived from the past behavior of the loan portfolio.

etc. a need for comparing the prices quoted by competitors for borrowers perched on the same rating/quality. future business potential. The complexity and the scope of Loan Review Mechanism normally vary based on banks size. put in place proper loan Review Mechanism for large value accounts with responsibilities design in various areas such as evaluating the effectiveness of loan administration maintaining the integrity of credit grading process. Large sized banks across the world have already put in place Risk Adjusted Return on Capital (RAROC) framework. portfolio/industry exposure. assessing the loan loss provision. Loan Review Mechanism Loan Review Mechanism is an effective tool for constantly evaluating the quality of the loan book and to bring about qualitative improvements in credit administration. Generally. Flexibility should also be made for revising the price (risk premium) due to changes in rating / value of collaterals over time. lender begins by charging on interest mark-up to cover the expected loss expected default rate of the rating category of the borrower. There is. Thus. therefore.variability of default rates. type of 37 . any attempt at price-cutting for market share would result in wrong pricing of and 'Adverse Selection'. international banks allocate enough capital so that the expected loan loss outcomes.perceived value of accounts. The lender then allocates enough capital to the prospective loan to cover some amount of unexpected loss . however. and strategic reasons may also play important role in pricing. Banks should. portfolio quality.

and to monitor compliance with relevant loss and regulations • To provide top management with information on credit administration including credit sanction process. 38 . It may be independent of the Credit Risk Management Department are even separate department in large banks. risk evaluation and post-sanction follow-up • Accurate and timely grading is one of the basic components of an effective Loan • Review Mechanism. The main objective of Loan Review Mechanism could be: • To identify promptly loan which develop credit weakness and initiate timely corrective action • To evaluate portfolio quality and isolate potential problem areas • To provide information for determining adequacy of loan loss provision • To assess the adequacy of and adherence to loan policies and procedures. and assignment of risk ratings. A proper Credit Grading System should support evaluating the portfolio quality and establishing loan loss provisions. Credit grading involves assessment of credit quality.operations and management practices. identification of problem loans. Given the importance and subjective nature of credit rating. the credit ratings awarded Credit Administration Department should be subjected to review by Loan Review Officers who are independent of loan administration.

Banks should formulate Loan Review Policy and the board should review it annually. • Depth of Reviews • The loan reviews should focus on • Approval process • Accuracy and timeliness of credit ratings assigned by loan officers • Adherence to internal policies and procedures. banks should also target other accounts that present elevated risk characteristics. The policy should inter alias address. The scope of the review should coverall loans above a cut-off limit. Frequency and Scope of Reviews The Loan Reviews are designed to provide feedback on effectiveness of credit sanction and to identify incipient deterioration in portfolio quality. and applicable laws/regulations • Compliance with loan convents • Post-sanction follow up • Recommendations for improving portfolio quality 39 . In addition. 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. At least 30-40% of the portfolio should be subjected to Loan Review Mechanism in a year to provide reasonable assurances that all the major credit risks embedded in the balance sheet have been tracked.

particularly in investment proposals. etc.The Risk Management Group of the Basel Committee on Banking Supervision has released a consultative paper on principles for the Management of Credit Risk. The proposals for investments should also be subjected to the same degree of credit risk investments should also be subjected to the same degree of credit risk analysis. The banks should exercise due caution. The rating migration of the issuers and the consequent diminution in the portfolio quality should also be tracked at periodic intervals. There should be greater interaction between Credit and Treasury Departments and the portfolio analysis should also cover the total exposure. The proposals should be subjected to detail appraisal and rating framework that factors in financial and non-financial parameters of issuers. The paper deals with various aspects relating to credit risk management. which are not rated and should ensure comprehensive risk evaluation. 40 . The maximum exposure to a customer should be bank-wide and include all exposures assumed by the credit and treasury departments. Credit Risk and Investment Banking Significant magnitude of credit risk. The coupon on non-sovereign papers should be commensurate with their risk profile. is inherent in investment banking. including investments. in addition to market risk. as any loan proposals. sensitivity to external developments.

maturity. futures. duration. indemnities and warranties and low risk . swap. industry.reverse repose. The total exposures to the counterparties on a dynamic basis should be the sum total of: • The current replacement cost: and • The potential increase in replacement cost (estimated with the help of Value at Risk or other methods to capture future volatilities in the value of the outstanding contracts/ obligations). letters of credit.As a matter of prudence. Credit Risk in Off-balance Sheet Exposure Banks should evolve adequate framework for managing their exposure in off-balance sheet products like Forex forward contracts. options. 41 . currency swaps. issuer-wise. etc. etc. which do not support existing financial obligations) bid bonds. etc. medium risk (not direct credit substitutes. options. The trading credit exposure to counterparties can be measured on static (constant percentage of the notional principal over the life of the transaction) and on a dynamic basis. banks should stipulate entry-level minimum rating/quality standards. etc. limits in investment proposals as well to mitigate the adverse impacts of concentration the risk of liquidity. as apart of overall credit to individual customer relationship and subject to the same classify their offbalance sheet exposures into three broad categories.

liquidity conditions.The current and potential credit exposures may be measured on a daily basis to evaluate the impact of potential changes in market conditions of the value of counterparty positions. 42 . as the case may be. Inter-bank Exposure and Country Risk A suitable framework should be evolved to provide a centralized overview on the aggregate exposure on other banks. operating efficiency. Regarding exposure on overseas banks. The maximum exposure should be subjected to adherence of country and bank exposure limits already in place. past experience. 1-8. etc. Banks should endeavor for developing an internal matrix those recons the counterparty and country risks. The limits so arrive at should be allocated to various operating centers and followed up and half-yearly/annual reviews undertaken at a single point. While the exposure should at least be monitored on a weekly basis till the banks are equipped to monitor exposure on al real time basis. equity prices. on the basis of their credit quality. management quality. etc. Like corporate clients. foreign exchange rates. all exposures to problem countries should be evaluated on the real time basis. banks can use the country rating of international rating agencies and classifying the countries into low risk. moderate risk and high risk. The potential exposures also may be quantified by subjecting the position to market movements involving normal and abnormal movements in interest rates. Bank-wise exposure limits could be set on the basis of assessment of financial performance. banks should also be rated and placed in range of 1-5.

112 branches are present in Karnataka and the 43 . Secunderabad. Gulburga. Vizag. Organization The organization was set up in decentralized with 7 zonal offices at Hyderabad. The first branch of the bank was opened at Gunfoundary.1n 1953. 165 branches are present in Maharashtra. State Bank of Hyderabad has very strong network. The bank became the subsidiary of state Bank India on 1st October. The Bank started with a unique distinction of being the Central Bank of the first while State of Hyderabad. the Bank was taken over by Reserve Bank of India as its first subsidiary and its name was changed from Hyderabad State Bank to State Bank of Hyderabad. the bank took over assets and liabilities of the Hyderabad Mercantile Bank Limited. By 31SI March. Maharashtra to manage its currency-Osmania Sikka and public debt apart from functions of commercial banking. covering present day Telangana region of Andhra Pradesh. 1959 and now it is the largest associate bank of State Bank of India. 1942.PROFILE OF THE COMPANY Origin State bank of Hyderabad was formed in the year 1941. Hyderabad on 5th April. under Hyderabad State Bank Act.25 regional offices attached to the zones act as the controlling offices for the Branches. In the same year the bank started conducting Government and treasury Business as the agent of Reserve Bank of India In 1956. Karnataka. Aurangabad and Mumbai headed by DGMs. Warangal. Hyderabad. 2004 it has 994 Branches out of which 649 branches are present in Andhra Pradesh.

The branches have installed ATMs at many of its branches. The bank has also foreign exchange dealing rooms and has 63 branches authorized to deal in foreign exchange. exchange mutilated notes and conducts clearing house operations at centers in its traditional areas. Agriculture. The bank is lead bank in 8 districts and 8826 villages under its service area. the number of agricultural branches is 24 and the number of specialized branches is 22. 44 . i. and export finance. It maintains currency chests on behalf of Reserve bank of India.More than 300 branches have computerized accounting systems including 40 fully automated branches. and Capital Market Service Branches. remittance. The bank also conducts foreign exchange transactions. debenture trusteeships. small-scale industries. tele-banking. It collects and pays Money on behalf of the Central Government and State Government through an agency agreement. safe deposits. The major portions of advances are production loans to industries and priority sectors. international trade. small-scale industries. The specialized branches include Industrial Finance branches. business finance. service banking and Iris . Overseas Branches. It also offers Merchant Banking services to corporate clients.remaining branches are spread over 11 states and 2 union territories. Service of the Bank: The bank offers all types of deposits and lending services. collection service. ATMs. Out of its total number of branches. The bank has 18 specialized branches to cater to the customer segments like industries. personal. that is Chandigarh and Pondicherry.e. IT-enabled products such as networking. safe custody and locker service to general public. NRI Branches.

Valmiki Ambedkar Awas Yojana 3. SME Credit Plus 9. which measures and mitigates the operational risk. Adhyapak Suvidha Scheme 4.955 crores and advances are 12441 crores. Tax Suvidha Scheme 5. Deposits are 23. Bank wide branch-network and faster communications will enable to improve the marketing of their products.smart cards. New products introduced in this year are: 1. Udyogabandhu Scheme 7. so as to record increased profitability. Kanya Vivah Suvidha Scheme 2. Star Kissan Credit Card 8. SME Smart Score 10. internet banking etc. are being introduced. Banks net worth for the year ending 31-03-2006 is 30646. It amends the operational risk 45 .10 crores. Rakshak Suvidha Scheme 6. and make the operations cost effective with the help of faster Communication/IT. To be successful in this competitive environment Bank is introducing new products every year. Rent Plus Scheme Bank has separate department named as operational risk management department.

management information. Bank is ranked under low risk category as per survey conducted by RBI’s move to risk based supervision of banks.policy on yearly basis. One such risk that has been adversely affecting the banks through out is credit risk. and supervisory reporting systems. 2000 the move towards risk based supervision. increase in default rates. With the advent of foreign banks into the market. Recession in economy. History: The banking industry all over the world has been witnessing a dramatic change and Indian banking industry is not an exception in this changing scenario. announced in the monetary and credit policy statement of April. In the monetary policy statement for the year 2001-2002. inherent risks involved in the banking industry have worsened the situation further. Credit risk has always been a factor of concern for banks and financial institutions. the competition has become cutthroat and banks are forced to operate at much lower spreads. In such a situation it has become utmost important for the banking industry to manage various risks that not only hamper the profitability but also jeopardize the very survival to the industry. Apart from the macro economic factors. The governor. In 46 . RBI. increased NPA's. have only added owes to the already ailing industry. banks were advised to meet the requirements of RBI's by taking measures to improve the reliability and robustness of their risk management.

or limit oneself to India the results are the same but the reasons may be different. No one has any doubts that credit risks have substantially increased in global banking over the last few years. Therefore it is felt that an in-depth study should take place regarding credit risk and various alternatives to manage the same in order to maximize the benefits from the industry which otherwise booming and lucrative. 47 . One can take a macro global vision. credit risk is becoming inevitable with the opening up of the economy to global forces.India.

FINANCIAL RISK: 1. The Pricing or Rate of Interest to be charged will be linked to the credit rating. No.00 lakhs and above in all segments excluding Trade.4 [i. Static Ratios – Working Capital Maximum Sl.TL. Presently the Bank is following a Credit Risk Assessment (CRA) model for all advances of Rs 25.e. (i) (ii) (iii) (iv) (v) (vi) (vii) Total Marks Ratios Current Ratio TOL/TNW PAT/Net Sales (%) PBDIT Return on Capital Employed (ROCE) (%) Inventory/Net Sales + Receivables/Gross Sales (Days) Trends in Performance 48 Score 5 5 10 5 5 5 3 38 . Bank will not entertain any new proposal whose credit rating is SBH. For the benefit of SMEs to improve performance under various parameters and achieve higher rating. NBFC and PER.CREDIT RISK ASSESSMENT (CRA) MODEL The Credit Rating Assessment [CRA] involves judgmental / subjective assessment on sensitive issues. the details of CRA are placed on Website. apart from other objective financial parameters and are devised to take credit decisions and to fix pricing of the advances.4/SBH. The CRA model reckons various parameters as mentioned below for arriving the scoring to rate the borrower in various grades from SBH 1 / SBHTL 1 to SBH 8 / SBHTL 8. hurdle rate] or below: A.

2.No. No. Static Ratios – Term Loan Maximum Sl. Parameters Score 3 -3 3 (i) Projected Profitability (ii) Non-Achievement of Projected Profitability [score ( -)3] Total Marks 49 . (i) (ii) (iii) (iv) (v) Total Marks Ratios Project Debt / Equity TOL/TNW Gross Average DSCR of the project Gross Average DSCR of all Loans Terms of Repayment Score 5 5 5 5 5 25 The other risks for term loans would be rationalized as under: Financial Risk [FR] Business Risk [BR] Industry Risk [IR] Management Risk [MR] Total 25 25 10 40 100 (b) Future Prospects: Maximum Sl.

(c) Risk Mitigation: Collateral Security/Financial Standing: Maximum Sl. (i) (ii) (iii) (iv) (v) (vi) (vii) Total Marks Parameters Technology Capacity Utilization vs. etc. BUSINESS RISK: Maximum Sl. No. (i) (ii) (iii) (iv) Total Marks Parameters Competition Cyclicality/Industry Outlook Regulatory Risk Contemporary Issues like WTO. Parameters Score 6 6 (i) Collateral Security/Financial Standing Total Marks B. INDUSTRY RISK: Maximum Sl. No.No. Score 2 2 2 2 8 50 . Break Even Point Compliance of Environment Regulations User / Product Profile Consistency in Quality Distribution Network Consistency of Cash Flows Score 4 2 2 2 4 2 4 20 C.

No: (i) Parameters Score Integrity : sole proprietary firm/ partnership firm/ Private Ltd. No: Parameters Score (-) 10 (-) 10 (i) Marks under Qualitative Factors Total Marks 51 .D. QUALITATIVE FACTORS: NEGATIVE PARAMETER Maximum Sl. MANAGEMENT RISK: Maximum Sl. Companies Or Integrity (for Corporate) : Corporate Governance Track Record Managerial Competence/ Commitment Expertise Structure & Systems Experience in the Industry Credibility: Ability to meet Sales Projections Credibility: Ability to meet Profit (PAT) Projections Payment Record Strategic Initiatives Length of Relationship with the bank 3 3 3 2 2 2 2 2 2 2 2 25 (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) (x) (xi) Total Marks E.

SUMMARY Sl.E. No: Risk Category Financial Risk a) Static Ratios b) Future Prospects c) Risk Mitigation: Collateral Security / Financial Standing 38 3 20 Sub-Total Score Total Score (i) 47 0 20 (ii) (iii) (iv) Business Risk Industry Risk Management Risk TOTAL 8 25 6 100 (10) 8 25 0 100 (10) (v) Qualitative Factors (Negative Parameter) 52 .

SBH 4 / SBHTL 4 rating is treated as hurdle rate by the Bank. Ratings are assigned as under based on the aggregate marks arrived: SBH 1 / SBHTL 1 > = 90 SBH 2 / SBHTL 2 > = 75 SBH 3 / SBHTL 3 > = 65 SBH 4 / SBHTL 4 > = 50 SBH 5 / SBHTL 5 > = 45 SBH 6 / SBHTL 6 > = 35 SBH 7 / SBHTL 7 > = 25 SBH 8 / SBHTL 8 < 25 53 . A total of 100 marks are distributed on the parameters mentioned above (A to E). ratings are assigned in various grades from SBH 1 / SBHTL 1 to SBH 8 / SBHTL 8. Based on the aggregate marks obtained by the borrower on the above parameters.

in lacs) 339.51 Advances 15599. in lacs) 1.90 54 .20 2.65 Reserves) Deposits 28929.74 Profit per Employee (Rs.26 22.83 250.49 Capital Adequacy Ratio (%) 11.33 PARTICULARS Total Income Total Expenditure Net Profit Owned Funds(Paid up Capital + 1765.20 2114.02 34024.03 Dividend % 300 September 2005-2006 2746.59 12.01 400 19.08 16.74 Net NPAs (%) 0.05 12255.75 21.48 3.36 403.60 20863. 1454.91 Return on Average Equity (RoE %) 15. in crores) September % increase 2006-2007 3338. 100/-) in Rs.08 0.40 1.73 70.72 Book Value per Share (Rs. Earning per Share (Rs.Table 1: Performance Highlights State Bank of Hyderabad / Performance Highlights (Rs.74 Investments 14559.74 (-) 2.02 14256.04 70.44 33.55 2911.65 Rs.39 Total Assets / Liabilities 34922.61 Business per Employee (Rs.29 Return on Assets (%) 0.83 19.72 2495.19 2475.66 427.68 46.98 18. 100/-) in 10235.76 70.01 40630.35 45.90 (-) 40.73 17.71 16.61 33.

Table 2: Financial Results 55 .

696 887 57. 118.264 203.STATE BANK OF HYDERABAD FINANCIAL RESULTS FOR THE NINE MONTHS PERIOD ENDED 30.2006 30.2006 31. 6 11.06.360 19. EXPENDED 206 OPERATING 4.27 5 56 37.548 53.370 3.458 42.2006 (Reviewed) (Reviewed) (Reviewed) (Reviewed) (Audited) 3 4 5 6 7 88. 8 103.01 2. 3. .09.05 274.662 219 28.06.98 288. income 182 OTHER 2.26 3.461 29. discount on 010 Advances/bills Income on b.194 79.527 232. 455 81. 399 10. 11.50 60.005 248 89.909 284 107. provisions for Figures for (Rs. investments 218 Interest on Term c. Money lendings 399 Interest on balances with RBI d.247 638 148. and Other inter 204 bank funds Other interest e.316 436 3. 875 165. 4 1.in the Lakhs) Nine Previous month accounting period year ended 30. 612 53.223 124.879 1. 9 58. 69. 0 20. 2 19 3 15.12.58 155. EARNED Interest and a. INCOME (1+2) 641 INTEREST 3. EXPENSES 237 Payments to and a.816 281 58. 013 1 247.12.2007 1 2 INTEREST 1. INCOME 628 TOTAL A. 988 333. 4 28.06.93 41.2007 ended 30. 4.2007 HEAD OFFICE : HYDERABAD Figures for Figures for Nine Corresponding quarter month PARTICULARS quarter ended ended period 31.37 155.155 1. 8 1.20 85.

09 427.2 2006 Sep-06 1765.02 868. Profit Net Profit 1573.22 381.22 250.9 2007 Sep-07 2144.Profit and Net Worth Profit and Net Worth for the Last 3 Years 2500 2000 Rs (in Crores) 1500 Net Worth (cr) G.04 57 .77 1014.55 713. Profit Net Profit 1000 500 0 2005 Sep-05 Net Worth G.

which shows slow down. the result of gross profit is 1014.04 crores in the year 2007. 58 .22 crores.55 crores in the year 2006 and 2144. In the year 2006.9 crores. It has been increased to 1765. it has been decreased to 713. Gross profit: In the year 2005.77 crores. the result of net profit is 381. Again it is increased to 868.2 crores. b.09 crores in the year 2007. Net profit: In the year 2005.22 crores. Net worth: In the year 2005 net worth is about 1573. In the year 2006.CHART NO 1 Interpretation: The above graph clearly says about three positions a. c. it has been decreased to 250.02 crores in the year 2007. which shows slow down. Again it is increased to 427. It shows the steady growth results.

occupies more deposits than other schemes. a. c.Deposits Deposits Mix (crores) Current Account.takes least position with 4828. 59 .6 Saving Bank Deposits.5 Term Deposits. Term deposits . It is the main source for middle income people. Saving bank deposits . Current accounts . which is about 22340. b.6 crores.occupies deposits of about 6855. 6855.71 CHART NO 2 Interpretation Deposits in SBH bank classified into three categories.71 crores. 4828.5 crores. 22340.

Other Liabilties.59 crores b) Borrowings . 60 .Funds Source of Funds(in crores) Borrowings.are occupied last position with 2114.59 CHART NO 3 Interpretation Funds in SBH are classified into three categories a) Deposits . Reserves and Surplus.79 Capital.Most of the source of funds position occupied by the deposits with 34024.02 crores. 2114. 34024. which results less profits.02 Deposits.Borrowings are occupied next position with 4491.79 crores. c) Capital reserves and surplus . 4491.

2. The credit risk strategy should receive top management's attention 5.FINDINGS 1. 3. Every bank should develop its own Credit Risk strategy 61 . Hedging though proved to be very effective instrument to handle the credit risk has not been adopted by many banks 4. It is quite evident from above study that banks are largely suffering from credit or default risk. This Credit Risk or Default Risk along with not only reducing banks profitability of the banks but also contributing the higher Non Performance Asset.

SUGGESTIONS From the above study it can be said that all the banks should follow the following program to manage the Credit Risk effectively 1. Credit Risk Management Committee and Credit Risk Department should be setup 3. 5. documentation and maintenance for extensions of credit 62 . credit risk measurement and monitoring processes. 2. which should enable them to manage and measure the credit risk inherent in all on. Banks should ensure that there are consistent standards for the origination. Banks must have a Management Information System (MIS).and offbalance sheet activities. 4. Banks should have in place an appropriate credit administration. The Board of Directors should have the overall responsibility for management of risks.

from Page no 1081-1103 • Risk Management Process by Christopher. from page no 270-290 • Risk Management an Introduction .SBH 63 . Corporate Risk Management. First Edition. Sixth Edition Chapter no: 40. Financial Risk Management.Chapter no:10.Culp.L. Tata Mcgraw hill publications.BIBLIOGRAPHY • Financial Management Theory and Practice by Prasanna Chandra. Wiley Publication.

45.89.58 636.27 6 7 8 9 10 11 12 2872.63 64 .93.72 172500 2096.70 4615.59.01.61.25. in thousands) SCHEDULE AS ON AS ON 30.55.2007 30.16.00.40.APPENDIX .32.07 712.30 1690.27 17779.40.47 40630.58.78 747.94 223.25.03 34024.23 3.20.40.09.06 2262.38.74.44 40630.59.85 49052.58.00.23 2218.09.78 1719.42.67.22 242.90 20863.63.63 14256.22 3855.97 2277.67 28109.2006 CAPITAL & LIABILITIES Capital Reserves & Surplus Deposits Borrowings Other Liabilities & Provisions TOTAL ASSETS Cash and balances with RBI Balances with banks and money at call and short notice Investments Advances Fixed Assets Other Assets TOTAL Contingent Liabilities Bills For Collection 1 2 3 4 5 17.15.60 13919.32.55 49052.69.94 41502.77.00 2523.72 18116.1 Balance Sheet State Bank of Hyderabad Balance Sheet For Year Ended 30th Sep’ 2007 (Rs.23.

PROFIT/LOSS: Net Profit for the year Profit brought forward TOTAL IV.48.2007 30.30 78.45 459.APPENDIX .63 4 505.36 218.39 808.50.73 4 505.25 78.83.20.33.49.75 2.79.92 65 . I N C O M E: 30. E X P E N D I T U R E: Interest expended 15 Operating Expenses 16 Provisions and Contingencies TOTAL III. in thousands) Schedule Year ended I. APPROPRIATIONS: Transfer to Statutory Reserve Transfer to Other Reserves Transfer to Capital Reserve Proposed Dividend {*} Balance carried over to the balance sheet 151.04.65 816.87.97.72 4 128.53 2134.87.11.91.63 2780.2 Profit & Loss Account PROFIT & LOSS ACCOUNT FOR YEAR ENDED 30th Sep’ 2007 (Rs.00 3441.54.69 457.47 6 427.09.2006 Interest earned Other Income TOTAL II.67.66 1654.54.30.49.60 3946.27 498.12.04.09.67 427.71.29 2748.67.10 1.04.04.45 13 14 3489.17 310.47 3207.91 272.34.53.

67 427.49.53 66 .TOTAL {*} Dividend includes Corporate Dividend Tax 505.04.

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