University of Mumbai

A study on

Credit Risk Management of HDFC BANK

A project submitted to

University of Mumbai for partial completion of the degree of

Bachelors of commerce (Accounting and Finance)

Under the faculty of commerce

By

SAYYED AHEMAD HUSSAIN

Roll No. 44

Semester VI

Under the guidance of

Prof.Mubina Shaikh

SREE NARAYANA GURU COLLEGE OF COMMERCE

P.L.LOKHANDE MARG, CHEMBUR, MUMBAI-400089

2018-19
 SREE NARAYANA GURU COLLEGE OF COMMERCE
P.L.LOKHANDE MARG, CHEMBUR, MUMBAI-400089

DECLARATION

I the undersigned Mr...SAYYED AHEMAD HUSSAIN here by, declare that the
work embodied in this project work titled Credit Risk Management of HDFC
BANK

forms my own contribution to the research work under the guidance of

Prof.Mubina Shaikh is a result of my own research work and has not been
previously submitted by any other university for any other degree/diploma to this
or any other university.

Wherever reference has been made to previous work of other, it has been clearly
indicated as such and included in the bibliography.

I hereby further declare that all information of this document has been obtained
and presented in accordance with academic rules and ethical conduct.

SAYYED AHEMAD HUSSAIN

Place: CHEMBUR
Date: 30. 3. 2019
 SREE NARAYANA GURU COLLEGE OF
COMMERCEP.L.LOKHANDE MARG, CHEMBUR, MUMBAI-
400089

CERTIFICATE

This is to certify that Mr. SAYYED AHEMAD HUSSAIN has worked and duly
completed her/his Project Work for the degree of Bachelor in Commerce
(Accounting& Finance) under the Faculty of Commerce in the subject of and
her/his project is entitled, “Credit Risk Management of HDFC BANK ” under
my supervision.

I further certify that the entire work has been done by the learner under my
guidance and that no part of it has been submitted previously for any Degree or
Diploma of any University.

It is her/ his own work and facts reported by her/his personal findings and
investigations.

Date of submission:

Project Guide Coordinator Principal

External
 Acknowledgment
To list who all have helped me is difficult because they are so numerous and the
depth is so enormous. I would like to acknowledge the following as being
idealistic channels and fresh dimensions in the completion of this project. I take
this opportunity to thank the University of Mumbai for giving me chance to do
this project.

I would like to thank my Principal, Dr.RavindranKarathadi for providing the

necessary facilities required for completion of this project. I take this
opportunity to thank our Coordinator Miss. MamtaMeghnani for her moral
support and guidance.

I would also like to express my sincere gratitude towards my project guide

Prof.Mubina Shaikh whose guidance and care made the project successful. I
would like to thank my College Library, for having provided various reference
books and magazines related to my project.

Lastly, I would like to thank each and every person who directly or indirectly
helped me in the completion of the project especially my Parents and Peers who
supported me throughout my project.

SAYYED AHEMAD HUSSAIN

Date of submission:
 INDEX

Chapter Title of Chapter Page No.

No.

1 Executive Summary 1

2 Introduction 2-22

3 Literature Review 23

4 Objective of Study 24

5 Company Profile 25-44

6 Research Methodology 45

7 Data Analysis & Interpretation 46 -54

8 Observations & Findings 55

9 Limitations of the Study 56

10 Recommendations & Suggestions 57

11 Conclusion 57-58

12 Webliography& Bibliography 59

13 Annexure -
6
 1

Chapter 1

EXECUTIVE SUMMARY

Credit risk is defined as the potential that a bank borrower or counterparty will fail to
meet its obligations in accordance with agreed terms, or in other words it is defined as
the risk that a firm customer and the parties to which it has lent money will fail to make
promised payments is known as credit risk

The exposure to the credit risks large in case of financial institutions, such commercial
banks when firms borrow money they in turn expose lenders to credit risk ,the risk that
the firm will default on its promised payments.

As a consequence, borrowing exposes the firm owners to the risk that firm will be
unable to pay its debt and thus be forced to bankruptcy

This study try to explore various parameters pertinent to credit risk management as it
affect banks‘ financial performance. Such parameters covered in the study were; default
rate, cost per loan assets and capital adequacy ratio. Financial report of HDFC banks
were used to analyze which was presented in to analyze the data.

The study revealed that all these parameters have an inverse impact on banks‘ financial
performance; however, the default rate is the most predictor of bank financial
performance. The recommendation is to advice banks to design and formulate strategies
that will not only minimize the exposure of the banks to credit risk but will enhance
profitability
 2

CHAPTER NO .2

INTRODUTION TO CREDIT RISK MANAGEMENT

MEANING
The word „credit‟ comes from the Latin word „credere‟, meaning „trust‟. When sellers
transfer his wealth to a buyer who has agreed to pay later, there is a clear implication of
trust that the payment will be made at the agreed date.
The credit period and the amount of credit depend upon the degree of trust. Credit is an
essential marketing tool. It bears a cost, the cost of the seller having
To borrow until the customers payment arrives.
Ideally, that cost is the price but, as most customer s pay later than agreed, the extra
unplanned cost erodes the planned net profit
 3

Risk is defined as uncertain resulting in adverse outcome, adverse in relation to

planned objective or expectation. It is very difficult to find a risk free
investment. An important input to risk management is risk assessment. Many
public bodies such as advisory committees concerned with risk management.
There are mainly three types of risk they are follows

• Market risk
• Credit Risk

• Operational risk

Risk analysis and allocation is central to the design of any project finance, risk
management is of paramount concern. Thus quantifying risk along with profit
projections is usually the first step in gauging the feasibility of the project.
Once risk have been identified they can be allocated to participants and
appropriate mechanisms put in place.
 4

INTRODUCTUION & MEANING OF

CREDIT RISK MANAGEMENT

With the advancing liberalization and globalization, credit risk management is gaining a
lot of importance. It is very important for banks today to understand and manage credit
risk. Banks today put in a lot of efforts in managing, modeling and structuring credit
risk.
Credit risk is defined as the potential that a borrower or counterparty will fail to meet its
obligation in accordance with agreed term s. RBI has been extremely sensitive to the
credit risk it faces on the domestic and international front

Credit risk management is not just a process or procedure. It is a fundamental

component of the banking function. The management of credit risk must be incorporated
into the fiber of banks .Any bank today needs to implement efficient risk adjusted return
one capital methodologies, and build cutting-edge portfolio credit risk management
systems. Credit Risk comes full circle.

Traditionally the primary risk of financial institutions has been credit risk arising
through lending. As financial institutions entered new markets and traded new products,
other risks such as market risk began to compete for management's attention. In the last
few decades financial institutions have developed tools and methodologies to manage
market risk.
Recently the importance of managing credit risk has grabbed management's attention.
Once again, the biggest challenge facing financial

Institutions are credit risk. In the last decade, business and trade have expanded rapidly
both nationally and globally.
By expanding, banks have taken on new market risks and credit risks by dealing with
new clients and in some cases new governments also.
Even banks that do not enter into new markets are finding that the concentration of
credit risk within here existing marketing is a hindrance to growth as a result; banks
have created risk management mechanisms in order to facilitate their growth and to
safeguard their interests.
 5

Meaning of credit
risk

A credit risk is the risk of default on a debt that may arise from a borrower failing to
make required payments.In the first resort, the risk is that of the lender and includes
lost principal and interest, disruption to cash flows, and increased collection costs. The
loss may be complete or partial. In an efficient market, higher levels of credit risk will
be associated with higher borrowing costs Because of this, measures of
borrowing costs such as yield spreads can be used to infer credit risk levels based on
assessments by market participants. Losses can arise in a number of circumstances,
for example:

•A consumer may fail to make a payment due on a mort age loan,

credit card, line of credit, or other loan.
•A company is unable to repay asset-secured fixed or floating charge
debt.
•A business or consumer does not pay a trade invoice when due.
•A business does not pay an employee's earned wages when due.
 6

•A business or government bond issuer does not make a payment on a coupon or

principal payment when due.
• An insolvent insurance company does not pay a policy obligation.
• An insolvent bank won't return funds to a depositor.
•A government grants bankruptcy protection to an insolvent consumer or business.
To reduce the lender's credit risk, the lender may perform a credit check on the
prospective borrower, may require the borrower to take out appropriate insurance,
such as mortgage insurance, or seek security over some assets of the borrower or
a guarantee from a third party.

• The lender can also take out insurance against the risk or on-sell the debt to
another company. In general, the higher the risk, the higher will be the interest
rate that the debtor will be asked to pay on the debt.

• Credit risk mainly arises when borrowers are unable to pay due willingly or
unwillingly.

Risk management is the identification, evaluation, and prioritization of risks (defined in

ISO 31000 as the effect of uncertainty on objectives) followed by coordinated and
economical application of resources to minimize, monitor, and control the probability or
impact of unfortunate events or to maximize the realization of opportunities. Risks can
come from various sources including uncertainty in financial markets, threats from
project failures (at any phase in design, development, production, or sustainment life-
cycles), legal liabilities, credit risk, accidents, natural causes and disasters, deliberate
attack

From an adversary, or events of uncertain or unpredictable root-cause.

There are two types of events i.e. negative events can be classified as risks while
positive events are classified as opportunities.

Several risk management standards have been developed including the Project
Management Institute, the National Institute of Standards and Technology, actuarial
societies, and ISO standards.

Methods, definitions and goals vary widely according to whether the risk management
method is in the context of project management, security, engineering, industrial
processes, financial portfolios, actuarial assessments, or public health and safety.
 7

Strategies to manage threats (uncertainties with negative consequences) typically include

avoiding the threat, reducing the negative effect or probability of the threat, transferring
all or part of the threat to another party, and even retaining some or all of the potential or
actual consequences of a particular threat, and the opposites for opportunities (uncertain
future states with benefits).

Certain aspects of many of the risk management standards have come under criticism for
having no measurable improvement on risk; whereas the confidence in estimates and
decisions seem to increase.For example, one study found that one in six IT projects were
"black swans" with gigantic overruns (cost overruns averaged 200%, and schedule
overruns 70%).

Definition
 8

TYPES OF CREDIT
RISK
MANAGEMENT

CONCENTRATION
RISK

CREDIT DEAFULT
RISK

COUNTRY
RISK
 9

TYPES OF RISK

CONCENTRATION RISK

Concentration riskis a banking term describing the level of risk in a

bank's portfolio arising from concentration to a single counterparty,
sector or country. The risk arises from the observation that more
concentrated portfolios are less diverse and therefore the returns on the
underlying assets are more correlated

.
 10

TYPES OF CONCENTRATION RISK

There are two types of concentration risk.

These types are based on the sources of the risk. Concentration risk can arise from
uneven distribution of exposures (or loan) to its borrowers.

Such a risk is called name concentration risk. Another type is spectral concentration
risk, which can arise from uneven distribution of exposures to particular sectors, regions,
industries or products

1. Monitoring risk

2. Management risk

Most financial institutions have policies to identify and limit concentration risk.

This typically involves setting certain thresholds for various types of risk.

Once these thresholds are set, they are managed by frequent and diligent reporting to
assess concentration areas and identify elevated thresholds.

A key component to the management of concentration risk is accurately defining

thresholds across various concentrations to minimize the combined risks across
concentrations.

CREDIT DEFAULT RISK

 11

The risk of loss arising from a debtor being unlikely to pay its loan
obligations in full or the debtor is more than 90 days past due on any
material credit obligation; default risk may impact all credit-sensitive
transactions, including loans, securities and derivatives.

COUNTRY RISK

The risk of loss arising from a sovereign state freezing foreign currency
payments (transfer/conversion risk) or when it defaults on its obligations
(sovereign risk); this type of risk is prominently associated with the country's
macroeconomic performance and its political stability.

Political risk analysis providers and credit rating agencies use different methodologies to
assess and rate countries' comparative risk exposure
 12

Credit rating agencies tend to use quantitative econometric models and focus on
financial analysis, whereas political risk providers tend to use qualitative methods,
focusing on political analysis.
However, there is no consensus on methodology in assessing credit and political risks.

REDUCTION OF CREDIT RISK MANAGEMENT

Lenders mitigate credit risk in a number of ways, including:

• Risk-based pricing – Lenders may charge a higher interest rate to borrowers who
are more likely to default, a practice called risk-based pricing. LENDERS
consider factors relating to the loan such as loan purpose, credit rating, and loan-
to value ratio and estimates the effect on yield (credit spread).
• Covenants – Lenders may write stipulations on the borrower, called covenants,
into loan agreements, such as: [22]

• Periodically report its financial condition,

• Refrain from paying dividends, repurchasing shares, borrowing further, or other
specific, voluntary actions that negatively affect the company's financial position,
and
• Repay the loan in full, at the lender's request, in certain events such as changes in
the borrower's debt-to-equity ratio or interest coverage ratio.
• Credit insurance and credit derivatives – Lenders and bond holders may hedge
their credit risk by purchasing credit insurance or credit derivatives. These
contracts transfer the risk from the lender to the seller (insurer) in exchange for
payment. The most common credit derivative is the credit default swap.
• Tightening – Lenders can reduce credit risk by reducing the amount of credit
extended, either in total or to certain borrowers. For example, a distributor selling
 13

its products to a troubled retailer may attempt to lessen credit risk by reducing
payment terms from net 30 to net 15.
• Diversification – Lenders to a small number of borrowers (or kinds of borrower)
face a high degree of unsystematic credit risk, called
Concentration risk Lenders reduce this risk by diversifying the borrower pool.
 Deposit insurance – Governments may establish deposit insurance to guarantee
bank deposits in the event of insolvency and to encourage consumers to hold their
savings in the banking system instead of in cash

RISK V/S
UNCERTAINTY

(Risk is not the same as uncertainty)

In a business situation, any decision could be affected by a host of events: an abnormal

rise in interest rates
 14

Fall in bond prices, growing incidence of default by debtors, etc.

A compact risk management system has to consider all these as any of them could
happen at a future date, though the possibility may be low.

Many professionals commonly use risk interchangeably with uncertainty in project

management or more specifically in risk management

TYPES OF RISKS:
The risk profile of an organization and in this case
banks may be Reviewed from the following angles

• Business risk.
• Non business risk.
 15

1. Businesss risk

• The term business risks refers to the possibility of a commercial business making
inadequate profits (or even losses) due to uncertainties - for example: changes in tastes,
changing preferences of consumers, strikes, increased competition, changes in
government policy, obsolescence etc.

• Every business organization faces various risk elements while doing business.

• Business risk implies uncertainty in profits or danger of loss and the events that could
pose a risk due to some unforeseen events in future, which causes business to fail

• For example, a company may face different risks in production, risks due to irregular
supply of raw materials, machinery breakdown, labor unrest, etc.

• In marketing, risks may arise due to fluctuations in market prices, changing trend s and
fashions, errors in sales forecasting, etc.

• In addition, there may be loss of assets of the firm due to fire, flood, earthquakes, riots or
war and political unrest which may cause unwanted interruptions in the business
operations.

• Thus business risks may take place in different forms depending upon the nature of a
company and its production.

• Business risks can arise due to the influence by two major risks: internal risks (risks
arising from the events taking place within the organization) and external risks (risks
arising from the events taking place outside the organization

• Internal risks arise from factors (endogenous variables, which can be influenced) such
as:
• human factors (talent management, strikes)
• technological factors (emerging technologies)
• physical factors (failure of machines, fire or theft)
• operational factors (access to credit, cost cutting, advertisement)
 16

• External risks arise from factors (exogenous variables, which cannot be controlled) such
as:
• economic factors (market risks, pricing pressure)
• natural factors (floods, earthquakes)
• political factors (compliance demands and regulations imposed by governments)

• Though corporate entities may have an image of risk aversion, they may continue to
stake their reputations and indulge in their gambling propensities by sponsoring
competitive sports teams.

Non business risk

• This refers to risks that do not arise from the direct business of the organization.

• Non business risks are typically outside the control of the Organization but may impact
on the organization. For example, the risk of wider economic changes affecting the rate
of interest on long-term sources of finance.

• Non-business risk is a term normally found in risk and control and financial
management.
 17

• All Organizations will face financial risk at some point and must evaluate potential
losses and take action to reduce or eliminate such threats. Risk control is a technique that
utilizes findings from risk assessments (identifying potential risk factors in a firm‗s
Operations, such as technical and non-technical aspects of the business, financial
policies, and other policies that may impact the well-being of the firm), and
implementing changes to reduce risk in these areas.

What is risk management

Risk management is the process of identifying, assessing and controlling threats to an

organization's capital and earnings.
 18

These threats, or risks, could stem from a wide variety of sources, including financial
uncertainty, legal liabilities, strategic management errors, accidents and natural disasters.
IT security threats and data-related risks, and the risk management strategies to alleviate
them, have become a top priority for digitized companies
. As a result, a risk management plan increasingly includes companies' processes for
identifying and controlling threats to its digital assets, including proprietary corporate
data, a customer's personally identifiable information and intellectual property

Introduction:

Since the early 2000s, several industry and government bodies have
expandedregulatorycompliancerules that scrutinize companies' risk
management plans, policies and procedures. In an increasing number of
industries, boards of directors are required to review and report on the
adequacy ofenterprise risk managementprocesses. As a result,risk
analysis,internal auditsand other means of risk assessment have become major
components of business strategy.

Risk management standards have been developed by several organizations,

including theNational Institute of Standards and Technologyand theISO.These
standards are designed to help organizations identify specific threats, assess
unique vulnerabilities to determine their risk, identify ways to reduce these
risks and then implement risk reduction efforts according to organizational
strategy.

The ISO 31000 principles, for example, provideframeworksfor risk

management process improvements that can be used by companies, regardless
of the organization's size or target sector.

The ISO 31000 is designed to "increase the likelihood of achieving objectives,

improve the identification of opportunities and threats, and effectively allocate
and use resources for risk treatment," according to the ISO website.
 19

Although ISO 31000 cannot be used for certification purposes, it can help
provide guidance for internal or external risk audit, and it allows organizations
to compare their risk management practices with the internationally recognized
benchmarks.

The ISO recommended the following target areas, or principles, should be part
of the overall risk management process:

• The process should create value for the organization.

• It should be an integral part of the overall organizational process.

• It should factor into the company's overall decision-making process.

• It must explicitly address any uncertainty.

• It should be systematic and structured.

• It should be based on the best available information.

• It should be tailored to the project.

• It must take into account human factors, including potential errors.

• It should be transparent and all-inclusive.

• It should be adaptable to change.

• It should be continuously monitored and improved upon.

The ISO standards and others like it have been developed worldwide to help
organizations systematically implement risk management best practices. The ultimate
goal for these standards is to establish common frameworks and processes to effectively
implement risk management strategies.

These standards are often recognized by international regulatory bodies, or by target

industry groups. They are also regularly supplemented and updated to reflect rapidly
changing sources ofbusiness risk. Although following these standards is usually
voluntary, adherence may be required by industry regulators or through business
contracts.

Risk management strategies and processes

All risk management plans follow the same steps that combine to make up the overall
risk management process:

• Risk identification.The company identifies and defines potential risks that may
negatively influence a specific company process or project.
 20

• Risk analysis.Once specific types of risk are identified, the company then determines
the odds of it occurring, as well as its consequences. The goal of the analysis is to further
understand each specific instance of risk, and how it could influence the company's
projects and objectives.
• Risk assessment and evaluation. The risk is then further evaluated after determining the
risk's overall likelihood of occurrence combined with its overall consequence.The
company can then make decisions on whether the risk is acceptable and whether the
company is willing to take it on based on its risk appetite.

• Risk mitigation. During this step, companies assess their highest-ranked risks and
develop a plan to alleviate them using specific risk controls. These plans include risk
mitigation processes, risk prevention tactics and contingency plans in the event the risk
comes to fruition.

• Risk monitoring. Part of the mitigation plan includes following up on both the risks and
the overall plan to continuously monitor and track new and existing risks. The overall
risk management process should also be reviewed and updated accordingly
 21

Two fundamental approaches to credit risk

management:-

• The internally oriented approach centers on estimating both the expected cost and
volatility of future credit losses based on the firm‘s best assessment.
• Future credit losses on a given loan are the product of the probability that the borrower
will default and the portion of the amount lent which will be lost in the event of default.
• The portion which will be lost in the event of default independent not just on the
borrower but on the type of loan (e.g., some bonds have greater rights of seniority than
others in the event of default and will receive payment before the more junior bonds).

• To the extent that losses are predictable, expected losses should be factored into product
prices and covered as a normal and recurring cost of doing business. I.e. they should be
direct charges to the loan valuation.

Volatility of loss rates around expected levels must be covered through risk-adjusted
returns
 22

Chapter 3

Literature Review
This researcher work is an attempt to investigation on the Credit Management in the
Nigeria Banking Industry.
It is a based on how customer of the Bank expect their bankers to provide them with
loans and advances to make up any short fall in their funds requirement for transactional
motive.
Again the banks ability to strike a balance between the customers need for and at the
same time maintain profitable operations, depends upon a large extent on the credit
policy.
And its administration adopted by the bank. The study is divided in five chapters, its
focused on the problems associated with the loans and advances, purpose of the study
which is aimed at examine and actually finding out how the banking industry in Nigeria
has been fairing in credit management with a view meeting the financial requirements
and satisfaction of the various categories of customer like the private and governments
sections, definition of terms.

Objective of the study and researcher question were used in the research.
Also highlighted a brief introduction of literature review on the origin of bank lending,
models and or theories relevant to research questions on a number of constraints in
which the lending function has to be performed.

The current literatures based on the variable of the theories and models, hypothesis and
research questions based on the variable considered lending.

Summary of the literature review is also highlighted.

The method used in collecting data for the study and analyzing which include primary
and secondary data.
The analysis of data gotten from the different methods, which include questionnaire
analysis and personal interview used finding were also used.

The researcher used finding which include poor credit assessment counter order by
supervisor staff on lending officers which affect their decision and the collaboration of
some banks staff with customer to commit fraud on the bank also some recommendation
and conclusion were made in order for the bank to thrive better and this will be
beneficial to both the owner and the public suggestion for further research also made.
 23

Chapter 4

OBJECTIVE OF STUDY

In the banking industry, understanding the objectives of credit risk management helps
you as a consumer.
Lenders face credit risk management with every loan they consider.
Banks must create a delicate balance between strict credit risk policies and customer
satisfaction.
Conservative credit risk management policies, fast loan decisions and reasonable loan
pricing achieve this balance of protecting loan portfolios while keeping bank customers
satisfied with the institution.
To know which quality of bank is performing well.

All lenders must reduce their risk of loan loss. Credit risk management is the most difficult
potential loan loss to prevent.

Borrowers with consistently poor credit reports or excellent credit scores allow lenders to make
easier approval and rejection decisions.

However, prospective borrowers with a mix of on-time payments and late payments create
credit risk management challenges for lenders
 24

Chapter 5

COMPANY PROFILE
 25

HDFC BANK

HOUSING DEVELOPMENT FINANCE

CORPORATION

Not only many financial institution in the world today can claim the antiquity and
majesty of the HDFC Bank with primarily intent of imparting stability to the money
market, the bank from its inception mobilized funds for supporting both the public credit
of the companies governments in the three presidencies of British India and the private
credit of the European and India merchants from about 1860s

when the Indian economy book a significant leap forward under the impulse of
quickened world communications and ingenious method of industrial and agricultural
production the Bank became intimately in valued in the financing of practically

Adaptation world and the needs of the hour has been one of the strengths of the Bank, In
the post-depression exe. For instance when business opportunities become extremely
 26

restricted, rules laid down in the book of instructions were relined to ensure that good
business did not go post.
Yet seldom did the bank contravene its value as depart Formosan d banking principles to
retain as expand its business.
An innovative array of office, unknown to the world then, was devised in the form of
branches, sub branches, treasury pay office, pay office, sub pay office and out students
to exploit the opportunities of an expanding economy.

New business strategy was also evaded way back in 1937 to render the best banking
service through prompt and courteous attention to customers.

Adaptation world and the needs of the hour has been one of the strengths of the Bank, in
thepost-depression exe. For instance

When business opportunities become extremely restricted, rules laid down in the book of
instructions were relined to ensure that good business did not go post.
Yet seldom did the bank contravenes its value as depart Formosan d banking principles
to retain as expand its business.
An innovative array of office, unknown to the world then, was devised in the form of
branches, sub branches, treasury pay office, pay office, sub pay office and out students
to exploit the opportunities of an expanding economy.
New business strategy was also evaded way back in 1937 to render the best banking
service through prompt and courteous attention to customers.
 27

HISTORY

• Banking in India has its origin as carry as the Vedic period. It is believed that the
transition from money lending to banking must have occurred even before Manu, the
great Hindu jurist, who has devoted a section of his work to deposits and advances and
laid down rules relating to the interest. During the mogal period, the indigenous

• Bankers played a very important role in lending money and financing foreign trade and
commerce. During the days of East India Company, it was to turn of the agency house
stop carry on the banking business. The general bank of India was the first joint stock
bank to be established in the year 1786.

• The others which followed were the Bank of Hindustan and the Bengal Bank. The Bank
of Hindustan is reported to have continued till1906, while the other two failed in the
meantime. In the first half of the 19

• Century the East India Company established three banks; The Bank of Bengal in 1809,
The Bank of Bombay in 1840 and The Bank of Madras in 1843.These three banks also
known as presidency banks and were independent units and functioned well. These three
banks Are amalgamated in 1920

• The Imperial Bank of India was established on the 27 Jan 1921, with the passing of the
SBI Act in 1955,

• The undertaking of The Imperial Bank of India was taken over by the newly constituted
SBI. The Reserve Bank which is the Central Bank was created in 1935 by passing of
RBI Act 1934, in the wake of movement
 28

• A number of banks with Indian Management were established in the country namely
Punjab National Bank Ltd, Bank of India Ltd , Canara Bank Ltd, Indian Bank Ltd, The
Bank of Baroda Ltd, The Central Bank of India Ltd .

• On July 19 1969, 14 Major Banks of the country were nationalized and in 15April 1980
six more commercial private sector banks were also taken over by the government.

• The India n Banking industry, which is governed by the Banking Regulation Act of
India 1949, can be broadly classified into two major categories, non-scheduled banks
and scheduled banks.

• Scheduled Banks comprise commercial banks and the co-operative banks

The Indian Banking System

Banking in our country is already witnessing the sea changes as the banking sector seeks
new technology and its applications.

The best port is that the benefits are beginning to reach the masses. Earlier this domain
was the preserve of very few organizations. Foreign banks with heavy investments in
technology started giving some ―Out of the world‖ customer services.

But, such services were available only to selected few- the very large account holders.
Then came the liberalization and with it a multitude of private banks, a large segment of
the urban population now requires minimal time and space for its banking needs

Reserve Bank of India Act 1934, banks are classified as scheduled banks and non-
scheduled banks. The scheduled banks are those, which are entered in the Second
 29

Schedule of RBI Act, 1934. Such banks are those, which have paid- up capital and
reserves of an aggregate value of not less than Rs.5 lacks and which satisfy RBI that
their affairs are carried out in the interest of their depositors.

All commercial banks Indian and Foreign, regional rural banks and state co-operative
banks are
Scheduled banks. Non Scheduled banks are those, which have not been included in the
Second Schedule of the RBI Act, 1934.

The Reserve Bank of India is the supreme monetary and banking authority in the
country and has the responsibility to control the banking system in the country. It keeps
the reserves of all
Commercial banks and hence is known as the Reserve Bank

The Structure of Indian Banking:

The Indian banking industry has Reserve Bank of India as its Regulatory Authority.

This is a mix of the Public sector, Private sector, Co-operative banks and foreign banks.
The private sector banks are again split into old banks and new banks

The existing banking structure in India evolved over several decades, is elaborate and has
been serving the credit and banking services needs of the economy.
 30

There are multiple layers in today‘s banking structure to cater to the specific and varied
requirements of different customers and borrowers

. The structure of banking in India played a major role in the mobilization of savings and
promoting economic development.

In the post-financial sector reforms (1991) phase, the performance and strength of the
banking structure improved perceptibly.

Financial soundness of the Indian commercial banking system compares favorably with most
of the advanced and emerging countries.

IMPORTANCE OF BANKING SECTOR

IN A GROWING ECONOMY
Banking industry has undergone a paradigm shift from providing ordinary banking
services in the past to providing such complicated and crucial services like, merchant
banking, housing finance, bill discounting etc. .This sector has become more active with
the entry of new players like private and foreign banks. It has also evolved as a prime
builder of the economy by understanding the needs of the same and encouraging the
development by way of giving loans, providing infrastructure facilities and financing
activities for the promotion of entrepreneurs and other business establishments

.For a fast developing economy like ours, presence of a sound financial system to
mobilize and allocate savings of the public towards productive activities is necessary.

Commercial banks play a crucial role in this regard .The Banking sector in recent years
has incorporated new products in their businesses, which are helpful for growth. The
banks have started to provide fee-based services like, treasury operations, managing
derivatives, options and futures, acting as bankers to the industry during the public
offering, providing consultancy services, acting as an intermediary between two-
business entities etc.

At the same time, the banks are reaching out to other end of customer requirements like,
insurance premium payment, tax payment etc.

It has changed itself from transaction type of banking into relationship banking, where
you find friendly and quick service suited to your needs.
 31

This is possible with understanding the customer needs their value to the bank, etc. This
is possible with the help of well-organized staff, computer based network for speedy
transactions, products like credit card, debit card, health care, ATM etc. These are the
present trend of services.

The customers at present ask for convenience of banking transactions, like 24hours
banking, where they want to utilize the services whenever there is a need. The
relationship banking plays a major and important role in growth, because the customers
now has enough number of opportunities, and they choose according to their satisfaction
of responses and recognition they get.

So the banks have to play cautiously, else they may lose out the place in the market due
to competition, where slightest of opportunities are captured fast.

The HDFC bank has three key business

segments

• Wholesale Banking
 32

• The Bank‗s target market is primarily large, blue-chip manufacturing companies in the
Indian corporate sector and to a lesser extent, small & mid-sized corporates and agri-
based 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 recognized as a leading provider of cash management and transactional banking

solutions to corporate customers, mutual funds, stock exchange members and bank
 33

Treasury

• The Treasury business is responsible for managing the returns and market risk on this
investment portfolio. Within this business, the bank has three main product areas -
 34

Foreign Exchange and Derivatives, Local Currency Money Market & Debt Securities,
and Equities.
• With the liberalization 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.

Retail Banking

• 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, Net Banking and Mobile Banking.
 35

• 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 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 2015, the bank
had a total card base (debit and credit cards) of over 25 million.
• The Bank is also one of the leading players in the ―merchant acquiring‖ business with
over 235,000 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

ABOUT LOGO
 36

WE UNDERSTAND YOUR WORLD……

Togetherness is the theme of this corporate loge of HDFC where the world of banking
services meet the ever changing customers‘ needs and establishes a that is like a the are
Is an Individual and the lines surrounding indicates the protective boundaries like a
house shelters its occupants. The blue pointer represent the philosophy of the bank that
is always looking for the growth and newer, more challenging, more promisingdirection.
The key hole indicates safety and security.

PRODUCTS AND SERVICES

PRODUCTS:
 37

State Bank of India renders varieties of services to customers through the following
products:
Personal Loan Product:

 HDFC Housing Loan

 HDFC Car Loan
 HDFC Educational Loan
 HDFC Personal Loan
 HDFC Loan against Loan Property
 HDFC Term Loan
 Loan against Mortgage of Property
 Loan against Shares & Debentures
 Rent plus Scheme
 Media-Plus Scheme
 Rates of Interest

HDFC Housing loan

No matter where you are in the world, Home makes owning a home in India, simpler.
Get your dream home in India at attractive rates with flexible repayment options,
minimum paperwork and a complete guidance at every step.

'HDFC-Home Loans'

• No cap on maximum loan amount for purchase/ construction of house/ flat

• Option to club income of your spouse and children to compute eligible loan amount

• Provision to club expected rent accruals from property proposed to compute eligible
loan amount Provision to finance cost of furnishing and consumer durables as part of
project cost
 38

• Repayment permitted up to 70 years of age

• Free personal accident insurance cover

• Optional Group Insurance from HDFC Life at concessional premium (Upfront premium
financed as part of project cost)

• Interest applied on daily diminishing balance basis

• Special scheme to grant loans to finance Earnest Money Deposits to be paid to Urban

• Development Authority/ Housing Board, etc. in respect of allotment of sites/ house/ flat

• No Administrative Charges or application fee

• Prepayment penalty is recovered only if the loan is pre-closed before half of the original
tenure (not recovered for bulk payments provided the loan is not closed)

• In-principle approval issued to give you flexibility while negotiating purchase of a

property

• Option to avail loan at the place of employment or at the place of construction

• Attractive packages in respect of loans granted under tie-up with Central/ State
Governments/ PSUs/ reputed corporate and tie-up with reputed builders (Please contact
your nearest branch for details)
 39

• Faster processing of loan with door step service

• BROKING SERVICES

• REVISED SERVICE CHARGES

• ATM SERVICES

• INTERNET BANKING

• E-PAY

• RBIEFT

• SAFE DEPOSIT LOCKER

• GIFT CHEQUES

• IVR CODESFOREIGN INWARD REMITTANCES

ATM SERVICEs
 40

HDFC BANK NETWORKED ATM

SERVICES
State Bank offers you the convenience of over2952 ATMs

In India, the largest network in the country and continuing to expand fast! This means
that you can transact free of cost at the ATMs of HDFC Bank Group (This includes the
ATMs of State Bank of India as well as the Associate Banks

Namely, State Bank of Bikaner & Jaipur , State Bank of Hyderabad, State Bank of
Indore, State Bank of Mysore, State Bank

How is HDFC Bank different from

other banks?

• HDFC bank is considered to be one of the best performing new age private sector bank.
It is among top 5 in all business parameters.

• Here, I would like to mention few not so known facts about the bank.

1. Although it being an Indian bank, the majority shares are held by Foreign Institutional
Investors. HDFC Bank Shareholding Pattern
 41

2. It offers (or had offered) all kinds of financial products and services except one, Home
loans. Yet, it holds one of largest portfolio of home loans.

3. Interesting! HDFC Ltd does not charge HDFC Bank a royalty for the use of its name
however it can ask HDFC bank to change its name if its shareholding in the bank drops
below a threshold level.
Deepak Parekh, Chairman of HDFC Ltd., is not on the board of HDFC Bank but attends
most of its board meetings as a 'special invitee.' HDFC Bank does not sell its own home
loans but acts as a distributor of HDFC Ltd. in return for a commission and the right to
buy back 70% of such loans.

4. To know more about this read, ‗A bank for the buck‗ by Tamal Bando padhyay
5. It has same CEO from day one. Mr. Aditya Puri.
6. It is one of first investors in National Stock Exchange (NSE) and Goods & Services Tax
Network (GSTN).
7. It is one of those few companies that exceeded the performance of their parent company
HDFC Ltd.
8. If they both merge, it would be largest Indian company by market capitalization.
9. HDFC Bank persuaded the CBDT to allow it to collect taxes by offering to deposit them
with the tax authority in as little as 4 days (earlier PSU banks would take 2 weeks).
10. Today it is the second largest collector of direct tax after SBI
 42

HDFC Bank Achievement

1 Best Performing Branch in Microfinance among private sector banks by

NABARD,2016
2 Most Valued brand in India for third successive year

3 Best managed public company India

4 World‘s 30 best CEOs – aditya puri

5 Best In class straight through processing rates

6 Best Banking Performer, India

In 2016 by Global Brands Magazine Award
 43

The internally oriented approach centers on estimating both the expected cost and
volatility of future credit losses based on the firm‘s best assessment.

• Future credit losses on a given loan are the product of the probability that the borrower
will default and the portion of the amount lent which will be lost in the event of default.
• The portion which will be lost in the event of default independent not just on the
borrower but on the type of loan (e.g., some bonds have greater rights of seniority than
others in the event of default and will receive payment before the more junior bonds).-

• To the extent that losses are predictable, expected losses should be factored into product
prices and covered as a normal and recurring cost of doing business.

• i.e. They should be direct charges to the loan valuation.

• Volatility of loss rates around expected levels must be covered through risk-adjusted
returns
 44

Chapter 6

RESEARCH METHODOLOGY
In view of growing complexity of banks business and the dynamic operating
environment, risk management has become very significant, especially in the financial
sector. Risk at the apex level may be visualized as the probability of a bank‘s financial
health being impaired due to one or more contingent factors.
While the parameters indicating the banks‗ health may vary from net interest margin to
market value of equity, the factor which can cause the important are also numerous.
For instance, these could be default in repayment of loans by borrowers, change in value
of assets or disruption of operation due to reason like technological failure.

While the first two factors may be classified as credit risk and market risk, generally
banks have all risks excluding the credit risk and market risk as operational risk. Risk
Analysis, in a broad sense, is any method — qualitative and/or quantitative — for
assessing the impacts of risk on decisions.

Different Risk Analysis methods are used that blend both qualitative and quantitative
techniques. The goal of any of these methods is to help the decision-maker choose a
course of action, given a better understanding of the possible outcomes that could occur.

Risk Management is the application of proactive strategy to plan, lead, organize, and
control the wide variety of risks that are rushed into the fabric of an organizations daily
and long-term functioning. Like it or not, risk has a say in the achievement of our goals
and in the overall success of an organization.

There are many methods for investigation of risk management. In this chapter researcher
has discussed about research methodology used for this study
 45

Chapter 7

Data Analysis & Interpretation.

1 ARE YOU DEALING WITH HDFC BANK ON?

ARE YOU DAILY WEEKLY MONTHLY OTHERS

DEALING
WITH
HDFC
BANK ON?
% 50 30 17 3

50
45
40
35 DAILY
30 WEEKLY
25 MONTHLY
20 OTHERS
15
10
5
0
%

ANALYSIS AND INTERPRETATION:-

 Dealing with hdfc bank on daily basis is very high as compare to

other i.e. weekly , monthly ,and others
 46

2 THE IMPORTANCE OF RISK MANAGEMENT IN HDFC BANK OF Credit

Risk

RATE THE IMPORTANCE OF VERY HIGH HIGH MEDIUM LOW

RISK MANAGEMENT IN
HDFC BANK

CREDIT RISK 50 20 20 10

Credit Risk

50

40

30

20

10

0
CREDIT RISK

VERY HIGH HIGH MEDIUM LOW

ANALYSIS AND INTERPRETATION:-

 THE IMPORTANCE OF RISK MANAGEMENT IN HDFC BANK

 IN TERMS OF Credit is 50% i.e. Very high as compare to others.

 47

3 .RATE THE IMPORTANCE OF RISK MANAGEMENT IN HDFC BANK OF

MARKET RISK ?

RATE THE VERY HIGH HIGH MEDIUM LOW

IMPORTANCE OF
RISK MANAGEMENT
IN HDFC BANK

MARKET RISK 40 30 25 5

Chart Title

40
35
30
25
20
15
10
5
0
Category 1

Very High High Medium Low

ANALYSIS AND INTERPRETATION:-

 THE RISK MANAGEMENT IN HDFC BANK

 IN TERMS OF market risk is 40%i.e. Very high as compare to others.

 48

.4 RATE THE IMPORTANCE OF RISK MANAGEMENT IN HDFC BANK OF

LIQUIDITY RISK ?

RATE THE VERY HIGH HIGH MEDIUM LOW

IMPORTANCE
OF RISK
MANAGEMENT
IN HDFC BANK
OF MARKET
RISK
LIQUIDITY 70 20 30 10
RISK

Chart Title

70
60
50
40
30
20
10
0
LIQUIDITY RISK

Very High High Medium Low

ANALYSIS AND INTERPRETATION:-

 THE RISK MANAGEMENT IN HDFC BANK

 IN TERMS of liquidity risk is 70% i.e. Very high as compare to others.

 49

5.RATE THE IMPORTANCE OF RISK MANAGEMENT IN

HDFC BANK OF OPERATIONAL RISK ?

RATE THE VERY HIGH MEDIUM LOW

IMPORTANCE HIGH
OF RISK
MANAGEMENT
IN HDFC BANK
OF
OPERATIONAL
RISK
OPERATIONAL 60 20 10 5
RISK

Chart Title

60
50
40
30
20
10
0
OPERATIONAL RISK

Very High High Medium Low

ANALYSIS AND INTERPRETATION:-

 THE RISK MANAGEMENT IN HDFC BANK

 IN TERMS of operational risk is 60% i.e. Very high as compare to others.

 50

6 RATE THE IMPORTANCE OF RISK MANAGEMENT IN HDFC BANK

OF INTREST RISK?

RATE THE Ver Hig Mediu Lo

IMPORTANCE OF y h m w
RISK
MANAGEMENT Hig
IN BANKING h
INDUSTRY

INTRES 45 35 5 15
T RSIK

Chart Title

50
40
30
20
10
0
RATE THE IMPORTANCE OF RISK MANAGEMENT IN BANKING INDUSTRY

Very High High Medium L;ow

ANALYSIS AND INTERPRETATION:-

 THE RISK MANAGEMENT IN HDFC BANK

 IN TERMS of interest risk is 45% i.e. Very high as compare to others.

 51

7 RATE THE IMPORTANCE OF RISK MANAGEMENT IN HDFC BANK OF

FOREIGN EXCHANGE BANK?

RATE THE Very High Medium Low

IMPORTANCE OF High
RISK MANAGEMENT
IN HDFC BANK

FOREIGN 10 15 55 20
EXCHANGE
BANK

Chart Title

60

50

40

30

20

10

0
FOREIGN EXCHANGE BANK

Series 1 High Medium Low

ANALYSIS AND INTERPRETATION:-

 THE RISK MANAGEMENT IN HDFC BANK

 IN TERMS of foreign exchange bank is 10% i.e. Very low as compare to others.
 52

8 .RATE THE IMPORTANCE OF RISK MANAGEMENT IN HDFC BANK OF

OTHER?

RATE THE Very High Medium Low

IMPORTANCE High
OF RISK
MANAGEMENT
IN HDFC BANK

Other 60 30 8 2

Chart Title

60

50

40

30

20

10

0
RATE THE IMPORTANCE OF RISK MANAGEMENT IN BANKING INDUSTRY

Very h-High High Medium Series 4

ANALYSIS AND INTERPRETATION:-

 THE RISK MANAGEMENT IN HDFC BANK

 IN TERMS of other risk is 60% i.e. Very high as compare to others.

 53

9 DO YOU FEEL SECURE TO INVESTING IN HDFC BANK ?

DO YOU FEEL YES NO

SECURE TO
INVESTING IN
HDFC
BANK
ANSWER 80 20

8
0
7
0
6
0 Y
5
0 E
N
4 S
O
0
3
0
2
0
1
0
0
A
N
S
W
E
R

ANALYSIS AND INTERPRETATION

 AS PER the above diagram a study show 80% feel secure while investing hdfc
bank i.e. very high.
 20 % of the reaming didn‘t feel secure to invest in hdfc bank.
 54

Chapter 8

FINDING

The research study carried out at HDFC Bank under the topic ―CREDIT RISK
MANAGEMENT in banking- a study of HDFC bank‖ to fulfill the said motive turned
out to be useful in understanding the various policies and practices used by the bank to
manage the different types of risk that arise in banking
As per the above diagram (1) it show of risk management in hdfc bank in terms of credit
is 50% i.e. very high as compare to others

As per the above diagram (2) the risk management in hdfc bank in terms of market risk
is 40% i.e. very high as compare to others

As per the above diagram (3) the risk management in hdfc bank in terms of liquidity risk
is 70% i.e. very high as compare to others

As per the above diagram (4) the risk management in hdfc bank in terms of operational
risk is 60% i.e. very high as compare to others.

As per the above diagram (5) the risk management in hdfc bank in terms interest risk of
is 45% i.e. very high as compare to others.

As per the above diagram (6) the risk management in hdfc bank in terms of foreign
exchange bank is 10% i.e. very low as compare to others.

As per the above diagram (7) the risk management in hdfc bank in terms of other risk is
60% i.e. very high as compare to others

As per the above diagram (8) the customer feels very secure while investing hdfc bank
80%i.e. very high

As per the above diagram(9) its show dealing with hdfc bank are daily basis is very high
as compare to weekly and monthly , others .
 55

Chapter 9

LIMITATION OF STUDY

• The time constraint was a limiting factor, as more in depth analysis could not be carried.

• Some of the information is of confidential in nature that could not be divulged for the
study.

The present study was not out of limitations. But it was a great opportunity
for me to know the banking activities OF HDFC BANK
 56

Chapter 10

RECOMMENDATIONAND SUGGESTION

• The Bank should keep on revising its Credit Policy which will help Bank‗s effort to
correct the course of the policies

• The Chairman and Managing Director/Executive Director should make modifications to

the procedural guidelines required for implementation of the Credit Policy as they may
become necessary from time to time on account of organizational needs.

• Banks has to grant the loans for the establishment of business at a moderate rate of
interest. Because of this, the people can repay the loan amount to bank regularly and
promptly.
 57

Chapter 11

Conclusion

• The management of credit risk is possible only with its measurement.

• Models are the tools to effectively measure the risk exposure of various financial
institutions.

• With the correct measure of the credit risk, its management will become effective and
efficient. This research work concentrates on developing an approach to measure the
credit risks associated with various borrowers of a bank. For this the major assessment
parameters for the bank are taken as the predictor variables. There are many approaches
to developing credit risk model which have been discussed already in interim report.

• It is difficult to say conclusively, which of the approaches has the best ability to predict
default, each having its pros and cons. The stock price-based model is conceptually
appealing, as there is an explicit theoretical foundation of this model.

• On the other hand, accounting-based statistical methods rely more on statistical

relationships rather than on any financial principle .However, with the absence of any
theoretical structure, accounting based statistical approach which also forms the basis of
my study can act more flexibly by incorporating or excluding the explanatory variables
depending on their information content.

• It is more prudent to look at these two approaches as supplementing each other by

providing additional information, which the other does not possess. The choice depends
on the individual business circumstances and portfolio specifics of each bank.
Depending on the circumstances, it may sometimes be prudent to use both types of
methodologies simultaneously to refine the credit decision system of the bank.

• The availability of data is a major constraint for such studies and with the availability of
more accurate data such findings can be even more useful for a bank. The credit risk
modeling may indeed prove to result in better internal risk management a t banking
 58

institutions. However, key hurdles, principally concerning data limitations and model
validation, must be cleared before models may be used in the process of setting
regulatory capital requirements.

• The project undertaken has helped a lot in gaining knowledge of the ―Credit Policy and
Credit Risk Management‖ in Nationalized Bank with special reference to HDFC BANK
• India. Credit Policy and Credit Risk Policy of the Bank has become very vital in the
smooth operation of the banking activities. Credit Policy of the Bank provides the
framework to determine

• (a) whether or not to extend credit to a customer and

• (b) How much credit to extend. The Project work has certainly enriched the knowledge
about the effective management of ―Credit Policy‖ and ―Credit Risk Management‖ in
banking sector.
 59

Chapter 12

BIBLIOGRAPHY
.

• www.hdfc.co.in2.

• www.icicidirect.com3.

• www.rbi.org4.

• www.indiainfoline.com

• www.google.com
 60