Very good morning to the honorable Director, Principal and the esteemed faculties present over here!!!

I am Juhi Agarwal currently Asst.Professor at SDJ International college. Previous to that I was a credit
analyst at JP Morgan Chase and Company in Mumbai and I shall be presenting my topic ‘Analysis of the
credit related factors in the banking industry’.

Starting with what is credit analysis: It is something very simple yet very complex. IN layman terms,
maine apna paisa kisiko diya hai to mai aise hi thodi de dungi. I will investigate before giving, I will
investigate after giving. In daily life also, this is very relevant. Now there is a group of friends. There are
all types of friends in a group. Some will be like they always pay their share on time. Some will ask you
for a loan: ki yaar aaj tu dede, tuje deta hu kal wapis. Then the next day, someone will return you and
some might not return. Then we wait for a few days and write off that person ki yaar nahi hi aayega
yaha se paisa toh. Then obviously from next time onwards we will be careful while lending money to
that friend.

As credit analysts our primary concern is to identify credit risk and rectify it. Now what is credit risk. It
refers to the probable risk of loss if the borrower fails to pay the interest or the principal amount leading
to increase in collection costs.

Now starting with the process of credit analysis: our first step is the EIC model i.e Economy, Industry and
Company. The economic conditions such as:

1) GDP growth, fiscal position, central bank’s stance and its monetary policies play a very crucial
role for the banking industry.
2) Like recently, after the dip in GDP to a 5 year low of 5.8% in 4Q19 and 45 year high
unemployment rate of 6.1%, has changed the stance of the RBI from Neutral to Accommodative
leading to the 3rd time cut in repo rate to 5.75% from 6% which is a plus for the banks.

Next comes industry:

1) How is the banking industry as a whole? Like in India 75% is state owned and rest is private.
2) What is the situation of NPA’s?
3) Like in India, the introduction of Insolvency and Bankruptcy code can be considered as an even
bigger reform than GST. Rs. 70,000 crores have been recovered through the IBC in FY19. Even
the gross NPA’s have declined to 10.3% in Dec 2018 from 11.2% in Mar 2018. The govt is also
very keen on banks consolidation which is improving their performance. Five associate banks
and Bharatiya mahila bank merged with State Bank of India. Dena bank and Vijaya bank merged
with Bank of Baroda. There are ongoing talks of merger of Lakshmi villas bank with Indiabulls
Housing Finance.

Then comes the company which will be the bank.

For a bank there are an end number of factors to be looked into but they all revolve around just one
word- CAMELOS. (Capital, asset quality, management, earnings, liquidity, others, support).
Liabilities Assets

Deposits from customers Cash and cash equivalents

Deposits from banks (60%-80%) Interbank assets
Senior debt Loans to customers (30-70%)
Subordinated debt Investments (15%-50%)
Other liab Other assets
Equity+retained earnings+reserves

IDEALLY DEPOSITS>>>LOANS

Out of all these heavy weight factors, what is the factor that is of utmost importance? It is the
qualitative aspect of: Management and Market position.

It is important to assess the management’s past performance, strategic objectives and risk controls
in good times as well as bad. A recent example of management failure can be seen in the case of Jet
Airways which used to be a proud Indian brand from 1990’s whose growth symbolized the growth of
liberalized India but yoy it was burning cash with its cost of operations much higher than revenues.
Still the management was unable to control the fall and today they have a debt of Rs 15,000 crores
sitting on it.

The next point is Earnings which is the primary source of income for a bank and primarily includes:
interest income and fee and commission. An important metric in this is the

1) Net interest margin= Yields-cost of funds. The recent decrease in repo rate will bring down its
cost of funds and ultimately improve the NIM’s.
2) A major expense is the Provisioning for bad loans. The bank sets aside some part of earnings as
provisioning. In 2017, RBI had introduced stricter measures for provisioning by banks which had
affected the banks profitability.

Asset quality: refers to the quality of loans and securities.

MAIN ISSUE in India is DIRECTED LENDING BY REGULATOR in case of state run banks because of
which the govt has to pitch in again and again by infusing capital. In 2018-19, Rs 1.6 lakhs crore
had been pumped in- highest ever. Again Rs 40k cr to be infused now. PNB, Union bank among
loss making entities.

1) Investments: High risk and low risk investments. Inv in subprime assets, structured assets and
level 3 assets is very risky.
2) Are there any large exposures to a specific industry or borrower.
3) What % of loans are collateralized.
4) Quality of collateral. Is it readily saleable? What are the top 20 exposures?
5) Quantum of derivatives on balance sheet.
Capital: The Bank’s capital is the cushion used to absorb potential losses and avoid becoming
insolvent. Level of capital (reported), access to capital, RWA analysis, dividend payouts and stress
test results.

Liquidity: it is one of the main reasons why banks fail. We all know the very famous example of Bear
Sterns in which the liquidity pool started at $18.1 bn and then finally plummeted to $2bn. The
funding mix is also quite critical and majority should be coming from the deposit base rather than
debt. Access to capital markets is also quite critical (SBI, BOB to tap capital markets now rather than
seeking funds from government). EMERGING MARKETS RELY HEAVILY ON DEPOSITS. DEVELOPED
MARKETS WITNESS MORE OF WHOLESALE FUNDING. LCR ratio is also quite important which is the
proportion of highly liquid assets which can be used to meet short term requirements. RBI is now
proposing introduction of LCR for non banking financial companies (NBFC) with asset size > Rs
5000cr. Min LCR requirement shall be 60% from Apr 2020 and shall be increased to 100% by Apr
2024. CAN BANKS DO ALL THIS ALONE? NO GOVT PROVIDES A SUPPORTING FRAMEWORK AND
INSTILLS DEPOSITOR CONFIDENCE.

1) Assesses bank’s ability to fund its assets in the normal course of business.
2) To check: concentration within any source of funding, composition of deposit base, ability to
renew maturing liabilities.
3) IN weak markets, deposits are not the most stable form of funding.