INTRODUCTION

Finance may be defined as the provision of money at the time it is required. Finance refers to the management of flows of money through an organization. It concerns with application of skills in the manipulation, use and control of money. Financial management refers to that part of the management activity which is concerned with the planning and controlling of firms financial resources. It deals with finding out various sources for raising funds for the firm. The sources must be suitable and economical for the needs of the business. The most appropriate use of such funds also forms a part of financial management. The main objectives of finance function are:1 2 3 4 Acquiring sufficient funds. Optimum utilization of funds. Increasing profitability. Maximizing shareholders wealth.

In the present business context, a finance manager is expected to do financial forecasting and planning .Financial manager has to plan the funds needed in the future. How these funds will be acquired and applied is an important function of a finance manager. The sources of supply of funds are shares, debentures, financial institutions, commercial banks, etc. The pros and cons of various sources should be analyzed before making a final decision. The cost of acquiring funds and the returns should be compared. Capital budgeting technique is used for this purpose. The objective of maximizing profits will be achieved only when funds are efficiently used and they do not remain idle at any time. A number of mergers and consolidations take place in present competitive Industrial world. A finance manager is supposed to assist management in making valuation etc. For this purpose, he should understand various methods of valuing shares and others assets so that correct values are arrived. Cash is the best source for maintaining liquidity. It is required to purchase raw material, pay workers, meet other expenses, etc. A finance manager is required to determine the need for liquid assets and then arrange liquid assets in such a way that there is no scarcity of funds.

DESIGN OF STUDY
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Hdfc bankpersonal loans are the largest business in the bank. The personal loan business is doubling every year. It is the most profitable business of the bank. Personal loans contribute substantially to the overall base line of the bank. Credit department is the back bone of personal loan business. Main function of the credit is to assess the credit worthiness of an applicant and lending him appropriate amount based on such assessment and subject to the terms, conditions and limitations of the policies. The term credit management has got importance from the time when there increased the pressure of competition and force of custom persuades to sell on credit. Credit is granted to facilitate the sales. Credit is appealing to those customers who cannot borrow from other sources due to many reasons. The firms investment in accounts receivable depends on how much it sells on credit and how long it takes to collect receivables. Accounts receivables constitute one of most important asset category for firm which makes the firm to manage its credit well. The term credit management can be analyzed from various aspects like: Terms of payment, Credit policy variables, Credit evaluation, Credit granting decision. Risk management is a process of managing the collection of managing the collection of liabilities with an objective of increasing the cash flows with minimum costs. It involves collecting in right time, right amount, in right terms. This process starts from identifying the amount of liabilities and to make the collection successful. This does not end with mere collection. Besides collection, the difficulties and weak areas should also be ascertained, which leads to development of an effective system for credit extension or sales and collection.

OBJECTIVES OF THE STUDY:

The main objectives of the study are: 1 2 3 4 5 To study the effectiveness of credit process. To study the risk process followed in Hdfc bank. To know and analyze the procedure of loan disbursement and its evaluation criteria. To study and analyze the factors contributing to default rate and their interrelations.

To suggest suitable strategies for improving credit and risk management.

NEED & IMPORTANCE OF THE STUDY:

In todays market scenario, one of the most critical areas to focus on is to protect the bank
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from bankruptcy. In such conditions Credit and Risk Department plays a key role in growth of banks. Any delay in realizing the receivables would adversely affect the working capital, which in turn effects the overall financial management of a firm. No firm can be successful if its over dues are not collected, monitored and managed carefully in time. Thus Risk management is important in sustaining the bank and its growth.

RESEARCH METHODOLOGY:
To fulfill the objectives of the study both primary and secondary data are used. The primary data was collected through interviewing all the executives and officials of the HDFC BANKHyderabad. The secondary data was collected from published records, website and reports of the HDFC BANK. Mainly the data relating to credit procedures followed by the bank and risk management was obtained through manager from bank database .The data for this purpose was obtained from bank for a period of 3 years that is from.Based on the availability of the data, the analysis was made from different angles to assess the credit and risk management of HDFC BANK, Hyderabad. PERIOD OF STUDY: The data obtained from the bank (hdfc bank)for the purpose of credit period and risk time from the customers. The information of the customers from different anglesto access the credit and risk management for a period of THREE years. i.e. from Credit period refers to the length of the time are allowed to pay the amount For their purchase which is generally varied from15 to 60 days,or 15 to 90 days. SCOPE OF THE STUDY: 1 2 The study intended to cover the degree and extent of default by the customers of HDFC BANK. In that direction the following has been done. The genesis of the company, its organs. And the range of activities have been studied and documented such study, it was thought, would uncover the weakness brought down as legacy from its line of entrepreneurs. 3 The process involved in loan disbursement has been studied to identify the weak area, follies committed in disbursement or in the design of disbursement process. The seeds of default are built in; hence the study of loan disbursement process has been attempted. 4 The profile of the defaulters including location, stage of default, gender, age etc.
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has been studied and documented. The components of the profile have been presumed to be linked to the default. 5 The risk process itself has the potential for some loans to be non recoverable hence to identify the probable causes, the risk process has been studied and documented. 6 Based on the profile and the data of defaulted loans, an analysis has been made to establish the links between default and other variables like location of loan, amount of loan taken, gender, profession etc. LIMITATIONS OF THE STUDY: 1 2 3 The study is limited to Hyderabad city only. The study has been done according to bank point of view. The study has been done without meeting the defaulters due to constraints of time.

INTRODUCTION OF BANKING
Bank is an institution whose Debts widely accepted in settlement of other peoples debts to each other.

The banking company in India defined the Band , in the companies Act.1949, as the one which transacts the business of banking which means the accepting for the purpose of lending to invests of deposits of money form the public. The deposits, which repayable on demand withdrawal by check, draft orders.

TYPES OF BANKING
Several types of banks have come in to existence performing different specialized functions based upon the functions performed by them; banks may be classified into different types;

1) COMMERCIAL BANKS:
They are a joint stock bank which acts as different kinds of deposits from the public and grant short term loans. There main aims Is to provide security of funds to depositors and make profits for their share holders. As their deposits are mainly for short periods, they can not lend money for long periods. They mainly finance business and trade for short periods to meet their day to day transactions. They may provide finance in the form of cash credits our drafts or loans. They also provide finance by discounting bills of exchange.

2) INDUSTRIAL BANKS
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These banks are also called investment banks. They provide long terms finance to industries ranging over a few decades. They finance long term projects and developmental plans. T hey receives long term projects deposits from the public. They may also raise funds by the issue of shares debentures. They specialized in the undertake industrial finance the new issue of shares, debentures and securities of new enterprises.

3) AGRICULTURE BANKS
The commercial industrial banks are not able to meet the financial requirements of agriculture. Agriculture requires both short term and long term finance. Frames requires short term finance to buy seeds, fertilizers, implements etc.,

4) CO-OPERATIVE BANKS:
The banks are formed to supply credit to members on ea sy terms. They do not aim at profit in their operations. They attract depositors from the farmers and promote thrift by offering slightly higher rates of interests than commercial banks. They provide credit facility to needy framers and small scale industries.

5) EXCHANGE BANKS:
The specialized in financing the import and export trade of the country. They purchase bills from exporters and sell them to importers. They provide remittance facilities and trade information to their clients.

6) SAVEINH BANKS:
These banks collect small and scattered savings of the low and middle income group people. These banks receive small amounts, deposits and withdrawals are restricted. Bank offer minimum interest on these deposits.

7) CENTRAL BANK:
The central bank controls the entire banking system in the country. It operates the currency and credit system in the country. It acts as an agent and adviser to the government and works in the best interests of the nation with out any profit motive in ts operations. Historically, a bank has been a place where depositors could park money and borrowers could borrow. The typical spread of the bank was raising money through deposits and leading it to 5

corporate clients. This made the relationship with the retail consumer rather passive. But with banks recognizing the power of the countrys middle class, this relationship is becoming very active. The commercial banking structure in India consists of: Scheduled Banks in India Unscheduled Banks in India Scheduled Banks in India constitute those banks which have been included in the Second Schedule of Reserve Bank of India (RBI) Act, 1934. RBI in turn includes only those banks in this schedule which sof theriria laid down vide section42 (6)(a) of the act. As on 30 th June, 1999, there were 300 scheduled banks in India having a total network of 64,918 branches. The scheduled commercial banks in India comprises of State bank of India and its associates (8), nationalized banks (19), foreign banks (45), private sector banks (32), co-operative banks and regional rural banks. Scheduled banks in India means the State Bank of India constituted under the State Bank of India Act,1955(23 of 1955), a subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959), a corresponding new bank constituted under section 3 of the Banking Companies(Acquisition and Transfer of Undertakings) Act, 1970 (5 of1970),

223.18lakhs the

main sources of the funds were long-term deposits were

Under section 3 of the banking companies (acquisition and transfer of undertakings) act, 1980 (40 of 1980), or any other bank being a bank included in the second schedule to the reserve bank of India act, 1934 (2 of 1934), but does not include of a co-operative bank. Non-schedule bank in India means a banking company as in clause (c) of section 5 of the banking regulation act, 1949 (10 of 1949). Which is not a schedule bank

The following are the schedule public sector banks in India:

State bank of India State bank of banker and Jaipur State bank of Hyderabad State bank of Indore State bank of Mysore State bank of Patiala 6

 State bank of Saurashtra State bank of Travancore Andhra bank Allahabad bank Bank of Baroda Bank of India Bank of Maharashtra Canara bank Central bank Central bank of India Corporation bank Dean Bank Indian overseas bank Indian Bank Oriental Bank of Commerce Punjab National Bank Punjab State and Sind Bank Syndicate Bank of India Unit Bank of India UCO Bank

The Following are the scheduled private sector Banks in India:

Vysya Bank Ltd UTI Bank Ltd Indusind Bank Ltd ICICI Banking Corporation Bank Ltd Global trust Bank Ltd HDFC Bank Ltd Bank of Punjab Ltd 7

 IDBI Bank Ltd

Top11 large Banks in INDIA:

1 2 3 4 5

1 7 3 6 15

HDFC HSBC ANB Amro Corporation bank Andhra bank

6 7 8 9 10

2 21 9 13 12

City bank NA Punjab national Bank Standard charted UTI Bank Vysya bank

COMPANY PROFILE
The Housing Development Finance Corporation Limited (HDFC) was amongst the first to receive an 'in principle' approval from the Reserve Bank of India (RBI) to set up a bank in the private sector, as part of the RBI's liberalisation of the Indian Banking Industry in 1994. The bank was incorporated in August 1994 in the name of 'HDFC Bank Limited', with its registered office in Mumbai, India. HDFC Bank commenced operations as a Scheduled Commercial Bank in January 1995. HDFC is India's premier housing finance company and enjoys an impeccable track record in India as well as in international markets. Since its inception in 1977, the Corporation has maintained a consistent and healthy growth in its operations to remain the market leader in mortgages. Its outstanding loan 8

portfolio covers well over a million dwelling units. HDFC has developed significant expertise in retail mortgage loans to different market segments and also has a large corporate client base for its housing related credit facilities. With its experience in the financial markets, a strong market reputation, large shareholder base and unique consumer franchise, HDFC was ideally positioned to promote a bank in the Indian environment. HDFC Bank's mission is to be a World-Class Indian Bank. The objective is to build sound customer franchises across distinct businesses so as to be the preferred provider of banking services for target retail and wholesale customer segments, and to achieve healthy growth in profitability, consistent with the bank's risk appetite. The bank is committed to maintain the highest level of ethical standards, professional integrity, corporate governance and regulatory compliance. HDFC Bank's business philosophy is based on four core values Operational Excellence, Customer Focus, Product Leadership and People. Capital Structure As on 31st December, 2009 the authorized share capital of the Bank is Rs. 550 crore. The paid-up capital as on said date is Rs. 455,23,65,640/- (45,52,36,564 equity shares of Rs. 10/- each). The HDFC Group holds 23.87 % of the Bank's equity and about 16.94 % of the equity is held by the ADS Depository (in respect of the bank's American Depository Shares (ADS) Issue). 27.46 % of the equity is held by Foreign Institutional Investors (FIIs) and the Bank has about 4,58,683 shareholders.he shares are listed on the Bombay Stock Exchange Limited and The National Stock Exchange of India Limited. The Bank's American Depository Shares (ADS) are listed on the New York Stock Exchange (NYSE) under the symbol 'HDB' and the Bank's Global Depository Receipts (GDRs) are listed on Luxembourg Stock Exchange under ISIN No US40415F2002. HDFC Bank is headquartered in Mumbai. The Bank at present has an enviable network of 1,725 branches spread in 771 cities across India. All branches are linked on an online real-time basis. Customers in over 500 locations are also serviced through Telephone Banking. The Bank's expansion plans take into account the need to have a presence in all major industrial and commercial centres where its corporate customers are located as well as the need to build a strong retail customer base for both deposits and loan products. Being a clearing/settlement bank to various leading stock exchanges, the Bank has 9

branches in the centres where the NSE/BSE have a strong and active member base. The Bank also has 4,000 networked ATMs across these cities. Moreover, HDFC Bank's ATM network can be accessed by all domestic and international Visa/MasterCard, Visa Electron/Maestro, Plus/Cirrus and American Express Credit/Charge cardholders.Mr. Jagdish Capoor took over as the bank's Chairman in July 2001. Prior to this, Mr. Capoor was a Deputy Governor of the Reserve Bank of India. The Managing Director, Mr. Aditya Puri, has been a professional banker for over 25 years, and before joining HDFC Bank in 1994 was heading Citibank's operations in Malaysia. The Bank's Board of Directors is composed of eminent individuals with a wealth of experience in public policy, administration, industry and commercial banking. Senior executives representing HDFC are also on the Board. Senior banking professionals with substantial experience in India and abroad head various businesses and functions and report to the Managing Director. Given the professional expertise of the management team and the overall focus on recruiting and retaining the best talent in the industry, the bank believes that its people are a significant competitive strength. HDFC Bank operates in a highly automated environment in terms of information technology and communication systems. All the bank's branches have online connectivity, which enables the bank to offer speedy funds transfer facilities to its customers. Multi-branch access is also provided to retail customers through the branch network and Automated Teller Machines (ATMs). The Bank has made substantial efforts and investments in acquiring the best technology available internationally, to build the infrastructure for a world class bank. The Bank's business is supported by scalable and robust systems which ensure that our clients always get the finest services we offer. The Bank has prioritised its engagement in technology and the internet as one of its key goals and has already made significant progress in web-enabling its core businesses. In each of its businesses, the Bank has succeeded in leveraging its market position, expertise and technology to create a competitive advantage and build market share. 10

HDFC Bank offers a wide range of commercial and transactional banking services and treasury products to wholesale and retail customers. The bank has three key business segments: Wholesale Banking Services The Bank's target market ranges from large, blue-chip manufacturing companies in the Indian corporate to small & mid-sized corporates and agribased businesses. For these customers, the Bank provides a wide range of commercial and transactional banking services, including working capital finance, trade services, transactional services, cash management, etc. The bank is also a leading provider of structured solutions, which combine cash management services with vendor and distributor finance for facilitating superior supply chain management for its corporate customers. Based on its superior product delivery / service levels and strong customer orientation, the Bank has made significant inroads into the banking consortia of a number of leading Indian corporates including multinationals, companies from the domestic business houses and prime public sector companies. It is recognised as a leading provider of cash management and transactional banking solutions to corporate customers, mutual funds, stock exchange members and banks. Retail Banking Services The objective of the Retail Bank is to provide its target market customers a full range of financial products and banking services, giving the customer a one-stop window for all his/her banking requirements. The products are backed by world-class service and delivered to customers through the growing branch network, as well as through alternative delivery channels like ATMs, Phone Banking, NetBanking and Mobile Banking. The HDFC Bank Preferred program for high net worth individuals, the HDFC Bank Plus and the Investment Advisory Services programs have been designed keeping in mind needs of customers who seek distinct financial solutions, information and advice on various investment avenues. The Bank also has a wide array of retail loan products including Auto Loans, Loans against marketable securities, Personal Loans and Loans for Two-wheelers. It is also a leading provider of Depository Participant (DP) services for retail customers, providing customers the facility to hold their investments in 11

electronic form. HDFC Bank was the first bank in India to launch an International Debit Card in association with VISA (VISA Electron) and issues the Mastercard Maestro debit card as well. The Bank launched its credit card business in late 2001. By March 2009, the bank had a total card base (debit and credit cards) of over 13 million. The Bank is also one of the leading players in the merchant acquiring business with over 70,000 Point-of-sale (POS) terminals for debit / credit cards acceptance at merchant establishments. The Bank is well positioned as a leader in various net based B2C opportunities including a wide range of internet banking services for Fixed Deposits, Loans, Bill Payments, etc. Treasury Within this business, the bank has three main product areas - Foreign Exchange and Derivatives, Local Currency Money Market & Debt Securities, and Equities. With the liberalisation of the financial markets in India, corporates need more sophisticated risk management information, advice and product structures. These and fine pricing on various treasury products are provided through the bank's Treasury team. To comply with statutory reserve requirements, the bank is required to hold 25% of its deposits in government securities. The Treasury business is responsible for managing the returns and market risk on this investment portfolio. Credit Rating The Bank has its deposit programs rated by two rating agencies - Credit Analysis & Research Limited (CARE) and Fitch Ratings India Private Limited. The Bank's Fixed Deposit programme has been rated 'CARE AAA (FD)' [Triple A] by CARE, which represents instruments considered to be "of the best quality, carrying negligible investment risk". CARE has also rated the bank's Certificate of Deposit (CD) programme "PR 1+" which represents "superior capacity for repayment of short term promissory obligations". Fitch Ratings India Pvt. Ltd. (100% subsidiary of Fitch Inc.) has assigned the "AAA ( ind )" rating to the Bank's deposit programme, with the outlook on the rating as "stable". This rating indicates "highest credit quality" where "protection factors are very high" The Bank also has its long term unsecured, subordinated (Tier II) Bonds rated by CARE and Fitch Ratings India Private Limited and its Tier I perpetual Bonds and Upper Tier II Bonds rated by CARE and CRISIL Ltd. CARE has assigned the rating 12

of "CARE AAA" for the subordinated Tier II Bonds while Fitch Ratings India Pvt. Ltd. has assigned the rating "AAA (ind)" with the outlook on the rating as "stable". CARE has also assigned "CARE AAA [Triple A]" for the Banks Perpetual bond and Upper Tier II bond issues. CRISIL has assigned the rating "AAA / Stable" for the Bank's Perpetual Debt programme and Upper Tier II Bond issue. In each of the cases referred to above, the ratings awarded were the highest assigned by the rating agency for those instruments. Corporate Governance Rating The bank was one of the first four companies, which subjected itself to a Corporate Governance and Value Creation (GVC) rating by the rating agency, The Credit Rating Information Services of India Limited (CRISIL). The rating provides an independent assessment of an entity's current performance and an expectation on its "balanced value creation and corporate governance practices" in future. The bank has been assigned a 'CRISIL GVC Level 1' rating which indicates that the bank's capability with respect to wealth creation for all its stakeholders while adopting sound corporate governance practices is the highest. On May 23, 2008, the amalgamation of Centurion Bank of Punjab with HDFC Bank was formally approved by Reserve Bank of India to complete the statutory and regulatory approval process. As per the scheme of amalgamation, shareholders of CBoP received 1 share of HDFC Bank for every 29 shares of CBoP. The merged entity will have a strong deposit base of around Rs. 1,22,000 crore and net advances of around Rs. 89,000 crore. The balance sheet size of the combined entity would be over Rs. 1,63,000 crore. The amalgamation added significant value to HDFC Bank in terms of increased branch network, geographic reach, and customer base, and a bigger pool of skilled manpower. In a milestone transaction in the Indian banking industry, Times Bank Limited (another new private sector bank promoted by Bennett, Coleman & Co. / Times Group) was merged with HDFC Bank Ltd., effective February 26, 2000. This was the first merger of two private banks in the New Generation Private Sector Banks. As per the scheme of amalgamation approved by the shareholders of

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both banks and the Reserve Bank of India, shareholders of Times Bank received 1 share of HDFC Bank for every 5.75 shares of Times Bank.

HDFC Bank Ltd. (BSE: 500180, NYSE: HDB) is a commercial bank of India, incorporated in August 1994, after the Reserve Bank of India allowed establishing private sector banks. The Bank was promoted by the Housing Development Finance Corporation, a premier housing finance company (set up in 1977) of India. HDFC Bank has 1,412 branches and over 3,295 ATMs, in 528 cities in India, and all branches of the bank are linked on an online real-time basis. As of September 30, 2008 the bank had total assets of INR 1006.82 billion. For the fiscal year 200809, the bank has reported net profit of Rs.2,244.9 crore, up 41% from the previous fiscal. Total annual earnings of the bank increased by 58% reaching at Rs.19,622.8 crore in 2008-09. Business Focus HDFC Bank deals with three key business segments - WholesaleBanking Services, Retail Banking Services, Treasury. It has entered the bankingconsortia of over 50 corporates for providing working capital finance, tradeservices, corporate finance and merchant banking. It is also providingsophisticated product structures in areasof foreign exchange and derivatives, money markets and debt trading and equityresearch. Wholesale Banking Services The Bank's target m inroads into the banking consortia of a number of leading Indian corporates including multinationals, companies from the domestic business houses and prime public sector companies. It is recognised as a leading provider of cash management and transactional banking solutions to corporate customers, mutual funds, stock exchange members and banks. Retail Banking Services The objective of the Retail Bank is to provide its target market customers a full range of financial products and banking services, giving the customer a one-stop window for all his/her banking requirements. The products are backed by world14

class service and delivered to customers through the growing branch network, as well as through alternative delivery channels like ATMs, Phone Banking, NetBanking and Mobile Banking. HDFC Bank was the first bank in India to launch an International Debit Card in association with VISA (VISA Electron) and issues the Mastercard Maestro debit card as well. The Bank launched its credit card business in late 2001. By March 2009, the bank had a total card base (debit and credit cards) of over 13 million. The Bank is also one of the leading players in the merchant acquiring business with over 70,000 Point-of-sale (POS) terminals for debit / credit cards acceptance at merchant establishments. The Bank is well positioned as a leader in various net based B2C opportunities including a wide range of internet banking services for Fixed Deposits, Loans, Bill Payments, etc. Treasury Within this business, the bank has three main product areas - Foreign Exchange and Derivatives, Local Currency Money Market & Debt Securities, and Equities. These services are provided through the bank's Treasury team. To comply with statutory reserve requirements, the bank is required to hold 25% of its deposits in government securities. The Treasury business is responsible for managing the returns and market risk on this investment portfolio. Distribution Network HDFC Bank is headquartered in Mumbai. The Bank has an network of 1,725 branches spread in 771 cities across India. All branches are linked on an online real-time basis. Customers in over 500 locations are also serviced through Telephone Banking. The Bank has a presence in all major industrial and commercial centres across the country. Being a clearing/settlement bank to various leading stock exchanges, the Bank has branches in the centres where the NSE/BSE have a strong and active member base. The Bank also has 3,898 networked ATMs across these cities. Moreover, HDFC Bank's ATM network can be accessed by all domestic and international Visa/MasterCard, Visa Electron/Maestro, Plus/Cirrus and American Express Credit/Charge cardholders. 15

Housing Development Finance Corporation Limited or HDFC (BSE: 500010), founded 1977 by Ravi Maurya and Hasmukhbhai Parekh, is an Indian NBFC, focusing on home mortgages. HDFC's distribution network spans 243 outlets that include 49 offices of HDFC's distribution company, HDFC Sales Private Limited. In addition, HDFC covers over 90 locations through its outreach programmes. HDFC's marketing efforts continue to be concentrated on developing a stronger distribution network. Home loans are also Sharcket through HDFC Sales, HDFC Bank Limited and other third party Direct Selling Agents (DSA).

INTRODUCTION OF CREDIT AND RISK MANAGEMENT

Introduction of credit and risk management CREDIT MANAGEMENT The term credit management has got importance from the time when there increased the pressure of competition and force of custom persuades to sell on credit. Credit is granted to facilitate the sales. Credit is appealing to those customers who cannot borrow from other sources due to many reasons. The firms investment in accounts receivable depends on how much it sells on credit and how long it takes to collect receivables. Accounts receivables constitute one of most important asset category for firm which makes the firm to manage its credit well. The term credit management can be analyzed from various aspects like: 1 2 3 4 Terms of payment. Credit policy variables. Credit evaluation. Credit granting decision.

i) Terms of payment vary widely in practice. The most accepted one in which arrangement is made wherein the trade cycle is financed partly by seller, partly by buyer and partly by some financial intermediary. When goods are sold on cash terms the payment is received either in advance or on delivery. Credit sales are generally on open account. Consignment and bill of exchange come under credit. ii) Credit policy variables have the dimensions like credit standards, credit period, cash
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discount and collection effort. A firm has wide range of choice in respect of granting credit. At one end of spectrum, it may decide not to grant credit to any customer, however strong his credit rating may be. At the other end, it may decide to grant credit to all customers irrespective of their credit rating. Between these two extremes lie several possibilities, often the more practical ones. Credit period refers to the length of the time customers are allowed to pay for their purchases which is generally varied from 15 days to 60 days. Lengthening the credit period pushes sales up by inducing existing customers to purchase more and attracting additional customers. This is accompanied by a larger investment in debtors and a higher incidence of bad debts loss. Cash discounts are generally given by the firms to induce customers to make prompt payments. The percentage discount and the percentage discount and the period during which it is available are reflected in the credit terms. Liberalizing the cash discount may mean that the discount percentage is increased and the discount period are lengthen which enhance the sales, reduce the average collection period and increase the cost of discount. The collection programme of the firm aims at timely collection of receivables. A rigorous collection programme tends to decrease sales, shorten the average collection period, reduce bad debt percentage, and increase the collection expense and vice versa in case of lax collection programme. iii) Credit evaluation is an important element of credit management which helps in establishing credit limits. This includes two types of errors like: Type I error Type II error A good customer is misclassified as a poor credit risk. A bad customer is misclassified as a good credit risk.

Both the errors are costly. Type I error leads to loss of profit on sales to good customers who are denied credit. Type II error results in bad debt losses on credit sales made to risky customers. Proper credit evaluation can mitigate the occurrence of such type of errors. Three broad approaches used for credit evaluation are 1 2 3 five Cs of credit. 1 2 Character of customer that is his willingness to honor his obligation. Capacity of the customer to meet credit obligations from the operating cash flows.
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Traditional credit analysis. Sequential credit analysis. Discriminant analysis.

The traditional credit analysis calls for assessing a prospective customer in terms of the

3 4 5

Financial reserves in the form of capital of the customer. If customer has difficulty in meeting his credit obligations from operating cash flows then focus to his capital. Collateral security offered by customer in the form of pledged assets is considered. Fifth C is general ECONOMIC CONDITIONS that affect the customer.

For sake of simplicity, only three Cs are considered i.e. character, capacity and capital. The judgment of customer on these dimensions the credit manager considers both quantitative and qualitative measures. Sequential credit analysis is most efficient method than traditional one. In this analysis, investigation is carried further if the benefit of such analysis outweighs it cost. To illustrate, consider three stages of credit analysis: review of the past payment record, detailed internal analysis and credit investigation by an external agency. The credit analyst proceeds from stage one to stage two only if there is no past payment history and hence a detailed internal credit analysis is warranted. Likewise, the credit analyst goes from one stage two to stage three only if internal credit analysis suggests that the customer poses a medium risk and hence there is a need for external analysis. Numerical credit scoring is an improvement over traditional ones in which more systematic numerical are assigned to evaluate the customer unlike judgmental decisions made on basis of five Cs in traditional ones. In this the credit manager identifies the factors relevant for credit evaluation. Then weights are assigned to these factors and customers are rated based on these factors using suitable rating scale usually 5 point or 7 point rating scale. Factor score is derived by multiplying factor weight with factor rate for each factor. Customer rating index is derived by adding the entire factor score based on which customers are classified. Numerical credit scoring is ad hoc in nature as it is based on weights which are subjective in nature. The technique of discriminant analysis is employed to construct better risk index. This method considers the financial ratios of the customers as the basic determinants of their creditworthiness. The analysis is made based on these financial ratios which are considered to be essential for creditworthiness of customer. Risk classification is another method in which customers are classified into various risk categories for credit investigation process. iv) Credit granting decision is important because once the creditworthiness of a customer has been assessed the credit manager has to decide whether the credit should be offered or not. It is generally done based on the decision tree. The expected profit for the action refuse
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credit is 0. If the expected profit for the course of action offer credit is positive, it is desirable to extend credit, otherwise not. The repeat order is accepted only if the customer does not default on the first order. Once the customer pays on the first order, the probability that he would default on the second order is less than the probability of his defaulting on the first order. RISK MANAGEMENT Once the credit is being granted to the customer the credit manager has to find out the ways for timely collection of the credit given. Traditionally two methods have been commonly suggested like Days sales outstanding and ageing schedule. Though these methods are popularly used they have serious limitations as they are based on an aggregation of sales and receivables. To overcome the limitations of traditional methods Collection matrix approach is used. The days sales outstanding (DSO) at a given time t may be defined as the ratio of accounts receivable outstanding at that time to average daily sales figure during the preceding 30 days, 60 days, 90 days, or some other relevant period. The ageing schedule (AS) classifies outstanding accounts receivables at a given point of time into different age brackets. The actual AS of the firm is compared with some standard AS to determine whether accounts receivable are in control. A problem is indicated if the actual AS shows a greater proportion of receivables, compared with the standard as, in the higher age groups. Collection matrix is improvement over the traditional methods of risk managements. In order to study correctly the changes in the payment behavior of customer, it is helpful to look at the pattern of collections associated with credit sales. From the collection, pattern one can judge whether the collection is improving, stable, or deteriorating. A secondary benefit of such an analysis is that it provides a historical record of collection percentages that can be useful in projecting monthly receipts for each budgeting period. FUNCTIONS OF EACH DEPARTMENT The four main departments involved in loan process of HDFC BANKare : 1) MARKETING 2) CREDIT 3) OPERATIONS 4) RISK
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ORGANISATIONAL CHART OF MARKETING DEPARTMENT: REGIONAL MARKETING HEAD

LOCATION MARKETING HEAD

LOCAITON MARKETING HEAD

LOCAITON MARKETING HEAD

RELATIONSHIP MANAGER

RELATIONSHIP MANAGER

DIRECT SELLING AGENT

DIRECT SELLING TEAM

FLEET

ON

FLEET ON STREET

Regional Marketing Head (RMH) (heading entire region)

20

Location Marketing Head (LMH) (heading entire location) Relationship Manager (RM) (for maintaining relationships with DSA and DST) DSA/DST Direct Selling Agent (external) / Direct sales Team (internal) Fleet On Street (FOS) (for sourcing the case, making cold calls, collecting department works through network of DSA/DST and RM. RMs are responsible for managing relationships with DSA and DST. The sales department is divided in to two units under the guidance of RM that is A) DSA (DIRECT SELLING AGENT) B) DST (DIRECT SELLING TEAM) DSA is an outside party who is interested in sourcing prospective loan candidates into the bank. The bank studies the capacity of the party bringing applicants per month and gives certain targets and if the DSA agent reaches that target then the bank provides commission to the DSA agent. The bank does not involve in any activities of DSA directly. The DSA agent has to maintain the telecallers and executives at his own expenses. The second category is DST which is called K-DIRECT in Hdfc bankunder whom telecallers, team leaders and executives work. All the office expenses and salaries are paid to them by Hdfc banktheir salaries are more compared to DSA. The persons working under DST directly comes under the Kotak Mahindra Bank. Relationship Manager is in charge of the functions of K-DIRECT team. ORGANISATIONAL CHART OF CREDIT DEPARTMENT: NATIONAL CREDIT HEAD relevant documents etc.) business. This Marketing department in personal finance is responsible for sourcing of

REGIONAL CREDIT HEAD

REGIONAL CREDIT HEAD

LOCATION CREDIT HEAD

21

LOCATIN CREDIT HEAD

CREDIT MANAGER

CREDIT MANAGER

CENTRA PROCESSING AGENCY

NCH - National Credit Head RCH Regional Credit Head LCH Location Credit Head CM Credit Manager ( With in location) CPA Central Processing Agency After sourcing the files (loan applicants) in to the bank the second and crucial step is being played by credit department. Here the sourced files are examined thoroughly whether the required documents are furnished or not. The hierarchical level is followed in this department. It is from top to bottom starting from National Credit Head to Central Processing Agency. Also at few places there are ACH (Area Credit Head). They occupy an intermediary position between RCH and LCH. While the Marketing department is responsible for sourcing, the Credit department is responsible for buying the business. OPERATIONS DEPARTMENT: After the completion of the process of sanctioning loan amount to the customer, the file goes to operations department where they have to look after the entire operation of disbursement. The operation department will issue the cheque to the party. In this department all the PDCs (Post Dated Cheques) and any other original important documents are placed in the head office in Mumbai where all the documents are preserved in a private security locker NUCLEUS which is fire proof and the bank pays for the storage of files.
22

In Nucleus all the respective PDCs of respective month on mentioned dates comes directly to the bank. The Hdfc bankhas its clearing department with nationalized bank where it accepts all the PDCs and disburse them to respective banks if it is cleared then it mentions the cleared members data and uncleared cheque data through soft copy that day evening to the operation department. The next day morning the operation department will get the hard copy and they come to know clearly the reasons for cheque bounce cases. Then the telecaller will follow up the customers and intimate them about the cheque bounces and reasons for that and intimates them about the penal charges and depending on the reply of the customer they further proceed. All the data is maintained in the system.

ORGANISATIONAL CHART OF RISK DEPERTMENT: NATIONAL HEAD

REGIONAL RISK HEAD

STATE RISK HEAD LOCAL RISK HEAD

BKT-1

PORTFOLIO

BKT-2

PORTFOLIO

BKT-3

PORTFOLIO

MANAGER

MANAGER

MANAGER

TEAM LEADER

TEAM LEADER

TEAM LEADER

23

EXECUTIVES EXECUTIVES TELECALLER EXECUTIVES TELECALLER TELLE CALLER

In personal finance business whatever is sourced by the marketing department and bought by the credit has great tenacity to go bad or non performing or delayed due to combined effect of various variables like fraud, negligence, intentional, etc. The inherent nature of personal loan arise the need of having separate risk department(RD) to focus on timely collection and risk of loan agreements. There is primarily on collecting the money which was funded by combined efforts of marketing and credit. RD is responsible for controlling the losses by having a strong network of collection agents and thus keeping the delinquency level under control

PROCESS FLOW CHART (FILE MOVEMENT SYSTEM) FILE TO BE LOGGED IN

FILE INVESTIGATION WILL BE SHOT ON THE CASE

CREDIT DOES ANALYSIS

24

CASE IN SACTIONED OR REJECTED

IF SACTIONED , DISBURSEMENT AGREEMENT TO BE SIGNED AND PDCS TO BE COLLECTED

DISBURSEMENT TO BE LOGGED IN

CHEQUE TO BE DELIVERED TO THE CUSTOMER

STOP

Credit Risk Management: Policy Framework Risk is inherent in all aspects of a commercial operation and covers areas such as customer services, reputation, technology, security, human resources, market price, funding, legal, regulatory, fraud and strategy. However, for banks and financial institutions, credit risk is the most important factor to be managed. Credit risk is defined as the possibility that a borrower or counterparty will fail to meet its obligations in accordance with agreed terms. Credit risk, therefore, arises from the banks' dealings with or lending to a corporate, individual, another bank, financial institution or a country. Credit risk may take various forms, such as:
25

in the case of direct lending, that funds will not be repaid; in the case of guarantees or letters of credit, that funds will not be forthcoming from the customer upon crystallization of the liability under the contract; in the case of treasury products, that the payment or series of payments due from the counterparty under the respective contracts is not forthcoming or ceases;

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

The more diversified a banking group is, the more intricate systems it would need, to protect itself from a wide variety of risks. These include the routine operational risks applicable to any commercial concern, the business risks to its commercial borrowers, the economic and political risks associated with the countries in which it operates, and the commercial and the reputational risks concomitant with a failure to comply with the increasingly stringent legislation and regulations surrounding financial services business in many territories. Comprehensive risk identification and assessment are therefore very essential to establishing the health of any counterparty. Credit risk management enables banks to identify, assess, manage proactively, and optimise their credit risk at an individual level or at an entity level or at the level of a country. Given the fast changing, dynamic world scenario experiencing the pressures of globalisation, liberalization, consolidation and disintermediation, it is important that banks have a robust credit risk management policies and procedures which is sensitive and responsive to these changes. Strategy and Policy It is essential that each bank develops its own credit risk strategy or enunciates a plan that defines the objectives for the credit-granting function. This strategy should spell out clearly the organisations credit appetite and the acceptable level of risk - reward trade-off at both the macro and the micro levels.

26

The strategy would therefore, include a statement of the banks willingness to grant loans based on the type of economic activity, geographical location, currency, market, maturity and anticipated profitability. This would necessarily translate into the identification of target markets and business sectors, preferred levels of diversification and concentration, the cost of capital in granting credit and the cost of bad debts. A common feature of most successful banks is to establish an independent group responsible for credit risk management. This will ensure that decisions are made with sufficient emphasis on asset quality and will deploy specialised skills effectively. In some organisations, the credit risk management team is responsible for the management of problem accounts, and for credit operations as well. The responsibilities of this team are the formulation of credit policies, procedures and controls extending to all of its credit risks arising from corporate banking, treasury, credit cards, personal banking, trade finance, securities processing, payment and settlement systems, etc. This team should also have an overview of the loan portfolio trends and concentration risks across the bank and for individual lines of businesses, should provide input to the Asset Liability Management Committee of the bank, and conduct industry and sectoral studies. Inputs should be provided for the strategic and annual operating plans. In addition, this team should review credit related processes and operating procedures periodically. The credit risk strategy and policies should be effectively communicated throughout the organisation. All lending officers should clearly understand the bank's approach to granting credit and should be held accountable for complying with the policies and procedures. Keeping in view the foregoing, each bank may, depending on the size of the organization or loan book, constitute a high level Credit Policy Committee also called Credit Risk Management Committee or Credit Control Committee, etc. to deal with issues relating to credit policy and procedures and to analyse, manage and control credit risk on a bank wide basis. The Committee should be headed by the Chairman/CEO/ED, and should comprise heads of Credit Department, Treasury, Credit Risk Management Department (CRMD) and the Chief Economist. The Committee should, inter alia, formulate clear policies on standards for presentation of credit proposals, financial covenants, rating standards and benchmarks, delegation of credit approving powers, prudential limits on large credit exposures, asset
27

concentrations, standards for loan collateral, portfolio management, loan review mechanism, risk concentrations, risk monitoring and evaluation, pricing of loans, provisioning, regulatory/legal compliance, etc. Concurrently, each bank may also set up Credit Risk Management Department (CRMD), independent of the Credit Administration Department. The CRMD should enforce and monitor compliance of the risk parameters and prudential limits set by the CPC. The CRMD should also lay down risk assessment systems, monitor quality of loan portfolio, identify problems and correct deficiencies, develop MIS and undertake loan review/audit. Large banks may consider separate set up for loan review/audit. The CRMD should also be made accountable for protecting the quality of the entire loan portfolio. The Department should undertake portfolio evaluations and conduct comprehensive studies on the environment to test the RISK MANAGEMENT MEANING OF RISK Risk management is a process of managing the collection of managing the collection of liabilities with an objective of increasing the cash flows with minimum costs. It involves collecting in right time, right amount, in right terms.This process starts from identifying the amount of liabilities and to make the collection successful. This does not end with mere collection. Besides collection, the difficulties and weak areas should also be ascertained, which leads to development of an effective system for credit extension or sales and collection. Risk management is an area of tremendous challenge. Risk management is used to minimize bad debts through active account delinquency management. As the companies strive to increase their cash flows and improve customer relationships, the risk partner is more important than any other. IMPORTANCE OF RISK In todays market scenario, one of the most critical areas to focus on is to protect the bank from bankruptcy. In such conditions Risk department plays a key role in the growth of banks. Any delay in realizing the receivables would adversely effect the working capital, which in turn effects the overall financial management of the firm. No firm can be successful if its overdue are not collected, monitored and managed carefully in time. Thus risk management is important in sustaining the bank and its growth.
28

RISK DEPARTMENT IN HDFC BANK When all the doors are closed to collect the EMI from the customer then it comes to risk department. In Hdfc bankthe most importance is given to risk department. The risk department in HDFC BANKfollows bucket wise policies which starts from BUCKET 1. The cheques of the customers which got bounced will come to the risk department where they pressurizes the customer and gets the EMI including penal and cheque bounce charges from customer. The first six months of the customer is very important for the risk department which is called INFANT DELIQUENCY where the risk department estimates whether the customer is going to be defaulter in future. The risk department is very strong in HDFC BANKwhere they follow the bucket system. The bucket system depends on Days past dues. For every 30 days the bucket system shifts from one bucket to other depending on pending EMI amount. PROCESS FLOW INSERT If the bank is unable to collect atleast one EMI from the customer from past continuous 3 months then they book the case as non performance assets. They claim the future calculated amount as loss so to avoid this type of loss to the bank. They take lot of care to collect the EMIs within the three months with out fail to reduce the increase in the default ratio through bucket wise. The loss is calculated using the following formula: Future outstanding = EMI * lost amount + EMI * future turn amount. To control the defaulters ratio they started the necessary steps from the starting of the collection department. The flow of power is as shown in the flow chart from top level to bottom level. When the case comes to bucket 1 lot of pressure is made by portfolio manager to stop the case not to extend to bucket 2. The bucket portfolio manager plays a prominent role in risk department and he is paid more pay and perks. In similar way in bucket 2 the portfolio manager plays a prominent role to reduce the case not to extend to bucket 3. When the case enters bucket 3 and portfolio manager is unable to collect at least one EMI then the case is
29

booked as non performance asset which is a loss to the bank. LEGAL ASPECTS OF RISK When the file comes to bucket 3 there after making all pressures if they could not get the amount they further proceed legally to collect the money. The three main sections used to proceed legally are: 1 2 3 Section 138 Where any cheque drawn by a person on account maintained by him with the banker for payment of any amount of money to another person from out of that account for the discharge, in a whole or in part, of any debt or any liability, his return by bank unpaid, either because of the amount of money outstanding to the credit of that account by an agreement made with the bank. Such person shall be deemed to have committed an offence and shall without prejudice to any other provisions of this act can be punished with imprisonment for a term which may extend to one year or with a fine which may extend to twice the amount of cheque or with the both. Now the court has the power to order two-year imprisonment for cheque bounces under section 138 N.I. a POST DATED CHEQUES A cheque post-dated remains bills of exchange till the date written on it and with effect from the said date shown on the face of it; it becomes a cheque under the act. Post dated cheque deemed to have been drawn on the date it bears provision of section 138 (a) held. ELECTRONIC CLEARENCE SERVICE Electronic clearance service contains six cheques among that four cheques contain the EMI amount and one with full loan amount and another with cleared amount each cheque is signed by the loan according to RBI rules. STANDARD INSTRUCTIONS This type of instruction are produced when the loanee working in the same bank and taking loan amount.
30

Section 138 (NEGOTIABLE INSTRUMENTS ACT) Section 156 Section 9

SUMMONS The chief ministerial officer of the court shall ordinarily sign summons issued to witness. 1: These are the witness summons. 2: Accused summons to be signed by magistrates: Magistrates shall themselves sign summons to accused persons. The copy of the complaint may be sent with summons or warrant issued to the accused under sub-Section (i) of section 204 of the code. Place of hearing to be stated: Every summons and every order of adjournment shall state the place in which the course to which it relates will be heard. Warrant bearing sign manual of the judge or the magistrate: All warrants should receive the sign of them from whose court they are issued. SECTION 156 This case is claimed against the customer as cheating or forgery case where the customer might have given some fake documents to get a loan which might have mislead the bank. Whoever by deceiving any person fraudulently or dishonestly include the persons. So deceive to deliver property to any person or to consent that any person shall retain any property intentionally include person so deceived to do or omit to do anything which he would not do or omit if he were not so deceived, and which after omission cause or lively cause damage or harm to that person in body, mind, reputation and property is said to cheat Example 1. A by putting a counterfoil mark on an article intentionally deceives into a belief that this articles were made by celebrity manufacturer, and thus dishonestly induces Z to buy and pay for the articles A cheats. 2. A by pleading as diamonds articles which he knows are not diamonds intentionally deceives Z if he thereby dishonestly includes Z to land money, A cheats. i) ii) Section 9 This case is claimed against the customer as a property attachment where the bank attacks the property of the customer. This section is very rarely used.
31

Dibas sarkar vs. State 1989 Cr. LJ MOC 30 Cal. Kakumukkala Krishnamurthy vs. State of AP AIR 1956 Sec.333

ANALYSIS AND FINDINGS ANALYSIS AND FINDINGS The information or data of credit and risk management reference to hdfc bank. Finding for last years of description for risk mode . NON PERFORMANCE ASSETS table shows the data of the non performance assets of the HDFC BANK.

MONTHS

TARGET (In lacks)

ACHIEVEMENTS (In lacks) 0.41 1.2 1.3 0.56 1.72 2.13 0.60 0.61 0.00 1.9 1.98 0.32 12.73

April 10 May 10 June 10 July 10 Aug 10 Sep 10 Oct 10 Nov10 Dec 10 Jan11 Feb11 Mar11

1.56 1.62 1.77 1.92 2.11 2.34 2.58 2.83 3.10 3.37 3.68 4.01 30.89

NON PERFORMANCE ASSETS-IN LAKHS

32

1) TARGETS : This is the amount given to book as loss for the risk department in every month of non performance of asset. 2) ACHIEVEMENTS : This is the amount booked as loss to risk department achieved in every month. PENAL CHARGES COLLECTED Finding for last years of description for risk mode . MONTHS TARGET (In lacks) Apl 10 May 10 June 10 July 10 Aug 10 Sep 10 Oct 10 0.26 0.29 0.32 0.36 0.40 0.43 0.47 ACHIEVEMENTS (In lacks) 0.19 0.32 0.52 0.30 0.83 0.32 0.66

33

Nov 10 Dec 10 Jan11 Feb11 Mar11

0.52 0.56 0.61 0.65 0.70

0.77 0.65 0.59 0.81 1.29

5.57

7.25

PENAL AMOUNT

1. TARGETS: This is the target penal amount given for risk department to collect. 2. ACHIEVEMENTS: This is the penal amount collected by risk department every
34

month. Months April 2010 May2010 June2010 July 2010 August 2010 September 2010 October 2010 November 2010 December 2010 Target (lakhs) 0.71 0.74 0.77 MONTH 0.80 0.82 0.87 0.90 0.91 0.93 Achievements (lakhs) 0.67 0.53 0.80 0.74 1.21 1.22 0.93 0.75 0.95

WISE

PENAL AMOUNT

1. TARGETS: This is the target penal amount given for risk department to collect. 2. ACHIEVEMENTS: This is the penal amount collected by risk department every month. Details of self clients of HDFC BANK SEP RSENP SURR SAL SENP TOTAL

35

DEFAULTERS(%)

57

20

37

34

155

DEFAULTERS AMNOUNT

134043

410510

110438

412913

1298755

2365656

DEFAULTERS PERCENTAGE DEFAULTERS CLIENTS (%)

1: SELF EMPLOYED PROFESSIONAL. 2: RETAIL SELF EMPLOYED NON PROFESSIONAL. 3: SURROGATIVES. 4: SALARIED. 5: SELF EMPLOYED NON PROFESSIONAL. TOTAL

(SEP) (RSENP) (SURR) (SAL) (SENP) 57

20 37 34 155

36

DEFAULTERS PERCENTAGE

22%

5% 36%

SEP RSENP SURR SAL

24%

13%

SENP

Analysis of defaulters (%) 1: SEP = 7/155 *110 = 5%

2: RSENP = 57/155 *110 = 36% 3: SURR = 20/155 *110 = 13% 4: SAL =37/155 *110 5: SENP =34/155 *100 = 24% = 22%

DEFAULTERS AMOUNT PERCENTAGE Defaulters Amount

1: SELF EMPLOYED PROFESSIONAL. 2: RETAIL SELF EMPLOYED NON PROFESSIONAL. 3: SURROGATIVES.

37

1,34,043 4,10,510 1,10,438

4: SALARIED. 5: SELF EMPLOYED NON PROFESSIONAL.

4,12,913 12,98,755

Analysis of Defaulters amount (%) 1: SEP = 134043/2365656 *110 = 6%

2: RSENP =410510/2365656 *110 = 17% 3: SURR = 110438/2365656 *110 = 4: SAL = 412913/2365656 *110 5%

= 17%

5: SENP =1298755/2365656 *100 = 55% TABLE: 1 The statement showing default on the lines of repayment period NUMBER OF DAYS DEFAULT REPAYMENT PERIOD 30 DAYS 60 DAYS 90 DAYS ABOVE 90DAYS ROW TOTAL

[0 YRS 2 YRS]

14 (58)

2 (8)

3 (13)

5 (21)

24

[2 YRS - 3 YRS]

91 (76)

11 (9)

7 (6)

10 (9)

119

[3 YRS 4YRS]

9 (75)

1 (8)

1 (8)

1 (9)

12

COLUMN TOTAL

114 (74)

14 (9)

11 (7)

16 (10)

155

** figures in parenthesis denote the row wise percentage.

38

Effective risk (%) in terms of period 1) 14/24*100=58 2) 91/ 199*100=76 3) 9/12*100=75 The distribution of defaulters with respect to repayment period is visible in table 1. According to the table more number of defaulters are lying in bucket 1, 74% of the defaulters are in bucket 1 followed by11% in above 90 days and 9% in bucket 2 and 7% in bucket 3. The same is reflected in the categories of 2-3 years and 3-4 years repayment period where as in 0-2 years repayment period 58% of defaulters are in 30 days 21% in above 90 days, 13% in 90 days and 8% in 60 days. It implies the bank has been focusing to control and reduce the number of defaulters in other than 30 days bucket further it also implies the repayment period is not a factor which influence on number of defaulters. Table: 2 The statement showing default on the lines of profession NUMBER OF DAYS DEFAULT PROFESSION 30 DAYS 60 AYS 90 DAYS ABOVE 90DAYS ROW TOTAL

TECHNICAL

26 (0.65)

40

BUSINESS

75 (0.77)

97

COLUMN TOTAL

101

11

10

15

137

**figures in parenthesis denote the row wise percentage. Here business category is defined as the income category based on their non-salaried and non-professional incomes where they use their business skills, RSENP, SENP comes under this category. Technical profession, these are the persons having an income either from salary or from their professional qualification. SEP, SALARIED comes under this category. NULL HYPOTHESIS: H0:
39

There is no relationship between profession and number of defaulters P1=P2 ALTERNATE HYPOTHESIS: H1: There is relationship between profession and default rate. The business professions are more than the technical profession. P1<P2 (Left tailed test) Test of proportions Z=P1-P2/P (1-P) (1/n1+1/n2) Where P1=26/40=0.65 P2=75/97=0.77 P=P1+P2/n1+n2 Where n1=40 , N2=97 Therefore P=0.74 Z=0.65-0.77/ (0.74) (1-0.74) (1/40+1/97) = -1.46 The calculated value of test of proportion is -1.46 The table value of test of proportion is -1.645 at 95% confidence level. Therefore the calculated value lies in rejection rejoin, so null hypothesis is accepted Therefore there is no relationship between the profession and the number of defaulters. TABLE: 3 The statement showing default on the lines of gender. NUMBER OF DAYS DEFAULT 30 SEX DAYS 60 DAYS 90 DAYS ABOVE 90DAYS ROW TOTAL

MALE FEMALE

95 (0.72) 20 (0.87)

11 1

11 1

15 1

132 23

COLUMN TOTAL

115

12

12

16

155

**figures in parenthesis denote the row wise percentage. NULL HYPOTHESIS: H0: There is no relationship between sex and number of defaulters
40

P1=P2 ALTERNATE HYPOTHESIS: H1: There is relationship between sex and number of defaulters. Female are more in number than male. P1<P2 (Left tailed test) Test of proportions Z=P1-P2/P (1-P) (1/n1+1/n2) Where P1=95/132=0.72 P2=20/23=0.87 P=P1+P2/n1+n2 Where n1=132 , N2=23 Therefore P=0.74 Z=0.72-0.87/(0.74) (1-0.74) (1/132+1/23) = -1.52 The calculated value of test of proportion is -1.52 The table value of test of proportion is -1.645 at 95% confidence level. Therefore the calculated value lies in rejection rejoin, so null hypothesis is accepted Therefore there is no relationship between the sex and the number of defaulters. TABLE: 4 To find the relationship between AMOUNT OF LOAN and DAYS DEFAULT RATE. NUMBER OF DAYS DEFAULT RATES 30 AMOUNT of LOAN [RS 0 RS 1,00,000] [RS1,00,000 RS 2,00,000] [RS 2,00,000 RS 5,00,000] [RS 5,00,000 RS 7,00,000] [RS7,00,000- RS11,00,000] DAYS 54 (0.77) 32 (0.64) 22 2 6 60 DAYS 4 7 1 0 0 90 DAYS 6 3 2 0 0 ABOVE 90DAYS 6 8 1 1 0 ROW TOTAL 70 50 26 3 6

COLUMN TOTAL

116
41

12

11

16

155

*figures in parenthesis denote row wise percentage. NULL HYPOTHESIS: H0: Percentage of defaulters within 30 days period do not differ significantly between the amount borrowed 0-1 lack and 1 lack-2 lack P1=P2 ALTERNATE HYPOTHESIS: H1: Percentage of defaulters within 30 days period differ significantly between the amount borrowed 0-1 lack and 1 lack-2 lack. P1>P2 (Right tailed test) Test of proportions Z=P1-P2/P (1-P) (1/n1+1/n2) Where P1=54/70=0.77 P2=32/50=0.64 P=P1+P2/n1+n2 Where n1=70 N2=50 Therefore P=0.72 Z=0.77-0.64/ (0.72) (1-0.72) (1/70+1/50) = 1.566 The calculated value of test of proportion is 1.566 The table value of test of proportion is 1.645 at 95% confidence level. Therefore the calculated value lies in rejection rejoin, so null hypothesis is accepted Therefore there is no relationship between the loan amount and the number of defaulters. Note: The hypothesis is tested between first two slots i.e. amount range Rs 0-1 lack and Rs 1 lack-2 lack. TABLE 5: Statement showing default on line of location. NUMBER OF DAYS DEFAULT 30 LOCATION DAYS 60 DAYS 90 DAYS ABOVE 90DAYS ROW TOTAL

42

NEW HYDERABAD

41

58

SECUNDERABAD RANGA REDDY DISTRICT

30

43

29

39

COLUMN TOTAL

100

12

12

16

140

**figures in parenthesis denote row wise percentage

Observed frequency (oi) NEW HYDERABAD 41

Expected frequency (ei) 1.44 (oi-ei)2 (oi.-ei) 2/ei

34

49

SECUNDERABAD

30

33

0.27

RANGA REDDY DISTRICT

29 -------100 ---------

33 --------110 ----------

16

0.48 -------chisquare =2.19 --------

43

NULL HYPOTHESIS: H0: Categories in 30 days are equally distributed P1=P2 ALTERNATIVE HYPOTHESIS: H1: Categories in 30 days are not equally distributed P1=P2 Chi square value is 2.19 Critical value at 95% confidence level is 5.99. Chi square value is less than critical value so null hypothesis is accepted. Therefore location of the loanees not influence on the defaulters (in 30 days category).

CONCLUSSION
44

Periodically customer meet should be conducted and category wise the best customer should be appreciated and if possible rewarded by way of cash prize or in kind. This helps in creating good publicity for the bank as well as to penetrate in to market.

Post disbursement contact with the loanee should be maintained. This process not only builds report but also gives important clues about loanees ability to honour the payment responsibility. At the same time this also leads to good customer care.

There should be good coordination among sales department, credit department and risk department where they should go through the loanees profile and should sanction the amount through proper stringent verification when the amount is huge.

Future status of loanees business, if he is a business man, should be assessed. Reserves, environment, competition, capabilities etc. should be considered before sanctioning a loan based on past performance. Future analysis is more important for a new customer than to an old customer. Whereas, in case of employee, the job security, skill base, proof of past financial discipline, property owned etc. should be considered. Simply not with numerical parameters but also with other qualitative factors.

Government employee is also an important segment, bulk applicants can be attracted by influencing the undertaking office or accounts officer of the concerned department for taking letters to see that installments payments are directly deducted from their salaries. This segment is definitely useful in boosting up the loan selling if proper verification and strict scrutanisation is done with corresponding undertaking officers. Good rapport with government officers by risk department will help in recovering the targeted amounted from government employees proper branch network and good force in risk department will solve if there is any transfer of employees.

To safeguard the loan and improve the risk especially when there is a probability of mobility of a loan for example: in case of a personal loan property attachment or guaranteed of government employee is to be taken.Hence such defaulters can be reduced.

SUGGESTION
A loanees political affiliation and his past career in politics have to be investigated
45

before disbursing the loan amount in order to reduce the hardships involved in collecting the amount. Proper verification of documents and evaluation of stocks and assets of business people before sanctioning such loans is essential to avoid overvaluation by the employees. For this a technical person is to be appointed who has entire knowledge of risk, legal aspects and technical process where thorough verification can be done. To detect the fraud by the sales people whose intention is to usually just sourcing the loans applications the risk department head along with sales department head should select the cases randomly and visit the places for inspection in every month first week where they can find the exact picture and at the same time can ascertained the scope for fraud. In terms of customer wise loan amount the percentage of self employed non professionals is more and special attention should be given while disbursing the loan amounts. Risk management should be a proactive process and hence its role should not be limited to the post default activity it should develop a system to track the possible pitfalls in each sanction from the very beginning.

BIBILIOGRAPHY
R.K. Sharma Shashi K. Guptha ----- Management Accounting

P.V. Varshney

---- Companying Law and practices

S.N. Maheshwari Web sites: www.investopedia.com www.wikipedia.com

---- Financial Management

Annexure
Annexure

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Credit department is the back bone of personal loan business. Main function of the credit is to assess the credit worthiness of an applicant and lending him appropriate amount based on such assessment and subject to the terms, conditions and limitations of the policies. Comprehensive credit information, which provides details pertaining to credit facilities already availed by the borrower as well as his payment track record, has become the need of an hour. Credit risk is defined as the possibility that a borrower or counterparty will fail to meet its obligations in accordance with agreed terms. Credit risk, therefore, arises from the banks' dealings with or lending to a corporate, individual, another bank, financial institution or a country. Credit risk management enables banks to identify, assess, manage proactively, and optimise their credit risk at an individual level or at an entity level or at the level of a country. Given the fast changing, dynamic world scenario experiencing the pressures of globalisation, liberalization, consolidation and disintermediation, it is important that banks have a robust credit risk management policies and procedures which is sensitive and responsive to these changes. The strategy would therefore, include a statement of the banks willingness to grant loans based on the type of economic activity, geographical location, currency, market, maturity and anticipated profitability. This would necessarily translate into the identification of target markets and business sectors, preferred levels of diversification and concentration, the cost of capital in granting credit and the cost of bad debts. In some organisations, the credit risk management team is responsible for the management of problem accounts, and for credit operations as well. The responsibilities of this team are the formulation of credit policies, procedures and controls extending to all of its credit risks arising from corporate banking, treasury, credit cards, personal banking, trade finance, securities processing, payment and settlement systems, etc. The credit risk strategy and policies should be effectively communicated throughout the organisation. All lending officers should clearly understand the bank's approach to granting credit and should be held accountable for complying with the policies and procedures. To deal with issues relating to credit policy and procedures and to analyse, manage and control credit risk on a bank wide basis.
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Credit risk is not really manageable for very small companies (i.e., those with only one or two customers). This makes these companies very vulnerable to defaults, or even payment delays by their customers. Lenders will trade off the cost/benefits of a loan according to its risks and the interest charged. But interest rates are not the only method to compensate for risk. Protective covenants are written into loan agreements that allow the lender A recent innovation to protect lenders and bond holders from the danger of default are credit derivatives, most commonly in the form of credit defaulters swap. These financial contracts allow companies to buy protection against defaults from a third party, the protection seller. The protection seller receives a periodic fee (the credit spread) as compensation for the risk it takes, and in return it agrees to buy the debt should a credit event ("default") occur. Employees of any firm also depend on the firm's ability to pay wages, and are exposed to the credit risk of their employer Risk management is used to minimize bad debts through active account delinquency management in right time, right amount, in right terms.Any delay in realizing the receivables would adversely effect the working capital, which in turn effects the overall financial management of the firm.

CREDIT RISK IS FACED BY Faced by lenders to consumers Most lenders employ their own models (credit scoreboard) to rank potential and existing customers according to risk, and then apply appropriate strategies. With products such as unsecured personal loans or mortgages, lenders charge a higher price for higher risk customers and vice versa. With revolving products such as credit cards and overdrafts, risk is controlled through careful setting of credit limits. Some products also require security, most commonly in the form of property.

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Faced by lenders to business Lenders will trade off the cost/benefits of a loan according to its risks and the interest charged. But interest rates are not the only method to compensate for risk. Protective covenants are written into loan agreements that allow the lender some controls. These covenants may:

limit the borrower's ability to weaken his balance sheet voluntarily e.g., by buying back shares, or paying dividends, or borrowing further. allow for monitoring the debt by requiring audits, and monthly reports allow the lender to decide when he can recall the loan based on specific events or when financial ratios like debt/equity, or interest coverage deteriorate.

A recent innovation to protect lenders and bond holders from the danger of default are credit derivatives, most commonly in the form of credit defaulters swap. These financial contracts allow companies to buy protection against defaults from a third party, the protection seller. The protection seller receives a periodic fee (the credit spread) as compensation for the risk it takes, and in return it agrees to buy the debt should a credit event ("default") occur. Faced by business Companies carry credit risk when, for example, they do not demand up-front cash payment for products or services.[1] By delivering the product or service first and billing the customer later - if it's a business customer the terms may be quoted as NET-30- the company is carrying a risk between the delivery and payment. Significant resources and sophisticated programs are used to analyze and manage risk. Some companies run a credit risk department whose job is to assess the financial health of their customers, and extend credit (or not) accordingly. They may use in house programs to advise on avoiding, reducing and transferring risk. They also use third party provided intelligence. Companies like MOODYS and DUN BRADSTREETprovide such information for a fee. For example, a distributors selling its products to a troubled retailersmay attempt to lessen credit risk by tightening payment terms to "net 15", or by actually selling fewer products on credit to the retailer, or even cutting off credit entirely, and demanding payment in advance.
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Such strategies impact on sales volume but reduce exposure to credit risk and subsequent payment defaults. Credit risk is not really manageable for very small companies (i.e., those with only one or two customers). This makes these companies very vulnerable to defaults, or even payment delays by their customers. The use of a collection agency is not really a tool to manage credit risk; rather, it is an extreme measure closer to a write down in that the creditor expects a below-agreed return after the collection agency takes its share (if it is able to get anything at all). Faced by individuals Consumers may also face credit risk in a direct form as depositors at banks or as investors/lenders. They may also face credit risk when entering into standard commercial transactions by providing a deposit to their counterparty, e.g. for a large purchase or a real estate rental. Employees of any firm also depend on the firm's ability to pay wages, and are exposed to the credit risk of their employer.

In some cases, governments recognize that an individual's capacity to evaluate credit risk may be limited, and the risk may reduce economic efficiency; governments may enact various legal measures or mechanisms with the intention of protecting consumers against some of these risks. Bank deposits, notably, are insured in many countries (to some maximum amount) for individuals, effectively limiting their credit risk to banks and increasing their willingness to use the banking system.

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