A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA

INTRODUCTION

The challenge of change occupies the attention of one & all as every one knows in the present day world in general, & the financial sector in particular, change is the only certainty. The word “BANK” is actually derived from the word “BANCOS” that refers to benches & in ancient times benches were set up in market places for the people dealing in money transactions. Banks are the financial intermediaries who bridge between the entities possessing money & entities who are in need of it. In banking the ultimate question viz. Customer satisfaction remains the same although the answer keeps changing form time to time. Customer satisfaction is the ultimate purpose & only priorities keep shifting to achieve this intangible goal. With liberalization era set in, the banking sector witnessed deregulation, this opened up new opportunities for Bank of Baroda for diversification & growth. The Bank of Baroda is a Government of India undertaking, and carries on all banking business. The Bank was brought into existence by an ordinance passed on the 19th July 1969 by the Central Government. In terms of the ordinance the undertaking of the Bank of Baroda Ltd was vested to and transferred to the new bank. This ordinance was replaced by the Banking Companies (Acquisition and Transfer of Undertaking) Act, 1969. This Act was declared null & void by the Supreme Court on the 10th of February 1970 and subsequently the Ordinance was promulgated. Then the Banking Companies(Acquisition and Transfer of Undertaking) Act, 1970 was passed and it was made effective retrospectively from 2000 . Banks are financial Institutions which is involving its funds to various types of borrowers including private limited and public limited companies. During the course of time the bank has find it difficult to recover the loans due to non-study of proper assessment of the borrower wherein bank has to face huge losses, keeping in these

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A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA

things in mind Bank of Baroda has set up Risk Management Wing in April 2000. It gives focused direction to various Risk Management Initiatives in tune with RBI’s guidelines. The Risk Management wing undertakes the Rating of various types of Industries, big borrowal accounts/ Small traders by various Web based models. The Risk Management wing will receive the proposals for rating credit Risk through credit Review wing and they study the information given by the branch and they will rate the accounts and give proper guidance to circles to safeguard the banks fund and also apart from rating the big borrowal accounts now they have adopted to rate the small borrowal accounts by giving proper guidance to branches at grass root level. In Bank of Baroda credit risk rating of all borrowal accounts falls under following models 1. Risk Assessment Model ( RAM ) Risk Assessment Model is a software based credit decision support system and is integral part of CRISIL’s credit management advisory service for banks, financial institutions and large size corporate. Risk assessments Model is used by the Bank of Baroda since 2000 to risk rate Large c0orporate Accounts under the purview of Head office Power. 2. Manual Model Manual model has been developed to cover accounts falling under the sanctioning powers of AGM/DM/CM, which shall take care of the following three segments: • • • Industrial Accounts Trading Accounts New Accounts.

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A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA

BACKGROUND OF THE STUDY Meaning of Risk The word ‘risk’ is derived from an Italian word “risicare’ which means, “ to dare”. This means that risk is more a ‘choice” than a “fate”. Extending this analogy further we can say that risk is not something to faced but a set of opportunities open to ‘choice’. The Bank for International settlement (BIS) definition “ Risk is the threat that an event or action will adversely affect an organization’s ability to achieve its objectives and successfully execute its strategies”. In other words Risk is the probability of non fulfillment of commitment to stake holders on account of nonrealization of assets. .The risks arises on account of various reasons, which are liquidity, interest rate, exchange, country, group, reputation, legal, people, systems etc which can be grouped into three major categories . Features of Risk Risk is only threat of occurrence of loss and not loss itself. It is an uncertainty that the activity undertaken may result in loss. Likewise risk is not a peril but its likelihood. Risk is like two sides of a coin. on the one side we have the uncertainty of occurrence of loss and on the other the possibility that the chance taken may yield good returns. When viewed from a positive angle, risk is an opportunity to act on and earn profits. Risk pervades all human activities. like wise every business in fraught with risks. To do business is to take risk. risk cannot be totally eliminated but its impact can be controlled through effective management.

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A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA

Risk Management Most of the time we can take risk as God-given. An asset or business has its beta and that’s that. Its cash flow is exposed to unpredictable changes in raw material costs, tax rates, technology and a long list of other variables. There is nothing a manager can do about it. But this is not wholly true. Manager can choose the risk that business takes by placing an effective risk management system in place. An effective risk management system should do the following a) It should identify the variety of risks that the organization as a whole is exposed to and also the risks that individual activities are exposed to. b) Once different types of risks are identified the system should lost out the controls or measures that can effectively mitigate each of the identified risks. Once listed out it should make an assessment of the controls in place versus the identified risks for adequacy. This activity will throw light on areas where the controls need to be tightened to effectively mitigate the impact of risks. c) Next step is to quantify the risk, so that we can effectively decide or derive the financial impact of the risk and effective pricing of our products. Once we have quantified the risks, we need to calculate the quantum of loss due to that risk in monetary terms. This will give us the capital adequacy ratio or economic capital that a bank should maintain or keep aside to cover the risk

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A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA

Need of Risk Management Bankers worldwide recognized the risks associated with lending from the early days of banking operations. They were able to manage the credit risks by their personal involvement since the operations were limited and restricted with huge expansion with different products introduced in the banks it is beyond the control of Individual personal to mitigate the risks involved in credit. No scientific Risk Management process were evolved for managing the risks. However, the later half of 20th century and more particularly in the late 90s various countries. Further, successive incidents like the fall of Baring ( London’s oldest Bank ),huge losses suffered by Daiwa Bank and sumitom Bank due to failure of internal controls drew the world’s attention for the need to manage risks in a more scientific way. As the international trend has moved towards Liberalization, Globalization ,Privatization and consolidation of the financial system.. This has become the major challenge for Bank to regulate and supervise and need to manage the risks in a more scientific way. All the banks world wide attempted to put in place risk management policies for their diversified banking network operating in several countries.. All these banks operated in different regulatory framework and under different market conditions. Hence a need was felt by the international banking community for setting up broad guidelines based on risk policies and practices for the benefit of all the banks operating worldwide. Under these circumstances BASEL Committee for Banking supervision (BCBS) came out with capital Accord in 1988. As a result of this, banks were led to banking operations witnessed significant changes such as advances in technology, closer inter-relations among economies of

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A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA

implement the prudential norms such as Income recognition, Asset classification, provisioning, Capital Adequacy etc. Through the above methods the banks were able to manage some part of the risks. During 1998 BASELII norms were outlined specifically for

capital charge for operational risks following which RBI, during 1999,came out with comprehensive Guidelines on risk management and advised Individual banks to formulate Integrated Risk Management system taking into account their business volume. The Indian Banking scene has also witnessed progressive deregulation, Institution of prudential norms etc. So the Indian Banking Management adopted three supervisory approaches for risk assessments and ratings. They are 1. 2. CAMELS- (Capital adequacy, Asset Quality, Management, Earnings , Liquidity, Systems and controls ) CALCS- (Capital adequacy, Asset quality, Liquidity, compliance and system)

If there is no proper risk management system in an organization, then the organization will fail to restrain itself from the unexpected losses and hence is exposed to higher probability of solvency or loss making. Where as if there is proper risk management system in place the organizations will be in readiness to face unforeseen circumstances. This system will also help in forecasting losses and creating a buffer in the organization’s capital to absorb the unexpected financial losses

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corporate . In the case guarantees and letters of credit: Funds may not be forthcoming from the constituents upon crystallization of liability. settlement and other financial transactions. trading hedging. In case of treasury operations: The series of payments due from counter parties under the respective contracts may not be forthcoming or ceases. Credit risk 2. Broadly speaking they are exposed to three major categories of risks namely:1. Banks are exposed to various types of risks depending on the activities pursued by them. credit risk emanates from the banks dealing with individual. financial institutions etc • • • • In the case of direct lending: Principal and (/ or) interest amount may not be repaid. Market risk 3. Banks.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA Classification of Risk in Banks Risk is an integral part of the Banking business. Sri Bhagawan Mahaveer Jain College 7 . Operational risk Credit Risk Credit risk is defined as “the inability or unwillingness of the customer or counterparty to meet commitments in relation to lending. In the case of securities trading business Funds/securities settlement may not be effected.

The various types of operational risks are:• • • Portfolio risk Organizational risk. Market risk arises on account of the following: • • • • • Liquidity Risk Interest Rate Risk Foreign Exchange Risk Equity price risk Commodity price risk Operational Risk It is the risk of loss arising from failed or inadequate internal processes. and people or from external events. including foreign exchange rates. systems. equity prices.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA • In the case of cross border exposure: The availability & free transfer of foreign currency funds may either cease or restrictions may be imposed by the country where exposure is taken Market Risk It is the risk of losses in on & off balance sheet positions arising from movements in market prices. Strategic risk Sri Bhagawan Mahaveer Jain College 8 . commodity prices etc. interest rate.

Measurement of the credit risk is crucial if the Bank’s have to price the loan correctly or to set appropriate limits on amount of credit extended to any one borrower of the loss exposure it accepts from any particular counterparty. Thus. the risk of non-performance should be tackled by improving efficiency by the management of banks and by adopting appropriate techniques of credit management. Banks cover it partly by taking the guarantees from credit Guarantee corporation. the introduction of prudential norms made the banks to realize the impact of credit risk on the profits. Credit Risk Credit risk is defined by the losses in the event of a default of the borrower to repay his obligations or in the event of a deterioration of the borrower’s credit quality. Objectives of Credit Risk Management Sri Bhagawan Mahaveer Jain College 9 . It can also be tackled by legal means. The main concern of present day banks is to reduce the share of non-performing advances to total advances. Banks are familiar with the risk on non-payment in the performs period due to failure of the venture or willful default. credit risk can arise due to default by the counter-party and/or adoption of inefficient credit processes. therefore. It is nothing but possibility of default due to non-payment or delayed payment.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA • • Personnel / People risk Reputation risk CREDIT RISK MANAGEMENT Introduction Credit risk faced by the banks requires special treatment in future.

A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA The Credit risk management can have different objectives at two levels namely Transaction level and portfolio level. • • Ensuring adherence to regulatory guidelines Driving asset growth strategy If we closely analyze the above. group. product etc. Sri Bhagawan Mahaveer Jain College 10 . we can observe that the transaction level pursues value creation and portfolio level pursues value preservation. the objectives of credit risk management will be: • Development and monitoring of methodologies and norms to evaluate and mitigate risks arising from concentrating by industry. At the transaction level. measurement and monitoring process • • • Employing sophisticated tools/techniques to enable continuous risk evaluation on a scientific basis Ensuring adequate-pricing formula to optimize risk-return relationship At the portfolio level. the objectives of credit risk management ideally should be: • • • Setting an appropriate credit risk environment Framing a sound credit approval process Maintaining an appropriate credit administration.

. 3. 4. Sri Bhagawan Mahaveer Jain College 11 . 8. 9. 6. Monitoring of the accounts through assets sub classification code system (MTR) and watch and special watch category borrowal accounts 11. Ensuring a strong appraisal system Having credit risk rating system in place for borrowal accounts Evolving benchmark financial ratios Adopting proper pricing mechanism for loan products Having an effective loan review Mechanism Adoption of a comprehensive credit policy Delegation of appropriate credit sanctioning powers to various Fixation of prudential exposure ceilings to individuals/groups and Fixation of exposure ceiling to various industries/sectors/activities authorities substantial exposure.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA CREDIT RISK MANAGEMENT TECHNIQUES ADOPTED BY THE BANK 1. 12. 10. Regular meeting of Risk Management Committee to address matters relating to among others credit risks. etc. Constituted credit policy committee at HO to formulate and evaluate sound credit policies. 2. 5. 7.

certain key factors are incorporated. The credit risk model works on the premise that credit risk is a sum total of various factors emerging out of Industry risk. Sri Bhagawan Mahaveer Jain College 12 . While some of these factors are quantitative the others are qualitative factors. Management risk and Financial risk. Business risk.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA CREDIT RATING METHODOLOGY ADOPTED BY THE BANK Credit rating Credit rating is an objective assessment of a borrowers credit quality in terms of business and financial risk. The methodology covers the assessment of the following a) Industry risk b) Business risk c) Management risk d) Financial risk 1. Under each of these four risks. Credit rating signifies the default probability of the borrower. 2. Ratings also signify the degree of safety with respect to debt servicing capacity.

6. which ultimately decides the credit worthiness of borrower. the overall risk score is a result of combination of different weight ages given to quantitative and qualitative factors. Sri Bhagawan Mahaveer Jain College 13 . Thus. Each and every risk grade has a grade Description and degree of safety with respect to debt servicing capacity. Determining Final Risk Grade of the Borrower • • The scores under various risk factors are added up to get the overall risk score of a company by assigning appropriate weight ages The overall risk score is then map into a Risk Gradation scale to determine the Risk Grade of the company.To determine final risk grade of the borrower the scores under various risk factors are added up to get the overall risk score of a company by assigning appropriate weight ages. 4. Depending on the industry purposes to which the company belongs and also the business focus of the company. The overall risk score is then map into a Risk Gradation scale to determine the RISK GRADE of the company. Management risk and Financial risk and are collectively known as “Library of Factors”. the relevant risk factors are selected for scoring 5.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA 3. Business risk. The various risk factors under Industry risk. . 7.

00 VI VII VIII High Risk – HR1 High Risk – HR2 High Risk – HR3 therefore needs close monitoring The degree of safety with respect to debt servicing capacity is inadequate.50 Risk Grade Description Degree Of Safety with respect to Debt serving capacity The degree of safety with respect to debt servicing capacity is very high The degree of safety with respect to debt servicing capacity is reasonably high The degree of safety with respect to debt servicing capacity is good. The degree of safety with respect to debt servicing capacity is poor The degree of safety with respect to debt servicing capacity is very poor Grade I Low Risk – LR1 II III IV V Low Risk – LR2 Low Risk – LR3 Normal Risk Moderate Risk Sri Bhagawan Mahaveer Jain College 14 .25 -6.00 – 3.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA • Each and every Risk Grade has a Grade Description and degree of safety with respect to Debt servicing capacity. RISK GRADATION SCALE Overall Weighted Risk score Range 7.00 – 2.00 4.50 – 5.00 6.25 3. which ultimately decides the credit worthiness of borrower. The degree of safety with respect to debt servicing capacity is satisfactory The degree of safety with respect to debt servicing capacity is just adequate and 3.75 2.00 – 8.75 -4.00 5.00 – 3.00 1.00 – 7.

financial institutions and large size corporate. The RAM model can risk rate • • • • • • Large Corporate Accounts. This service aims at enhancing the efficiency and effectiveness of all credit related functions.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA RISK ASSESSMENT MODEL IN BANK OF BARODA Risk Assessment Model is a software based credit decision support system and is integral part of Cresol’s credit management advisory service for banks. Small Traders. Risk assessment model in Bank of Baroda was incorporated in the year 2000 to risk rate Large corporate accounts under the purview of Head office power The ram model covers NBFCS SME and Small Traders also besides Manufacturing companies. Large Borrowal Trading Accounts Small and Medium Trading Accounts Small and Medium Enterprises NBFCS. It helps an organization in assessing the credit quality of Borrower. RAM is based on CRISIL’s methodology for credit risk assessment. Sri Bhagawan Mahaveer Jain College 15 .

Financial Institutions. Large Borrower Trader Model: As the name suggests the Model will undertake rating of all large Trading Accountswhose main activities is basically trading in diversified or single product Small and Medium Enterprises (SMEs): The Model will undertake rating of accounts which are involved in manufacturing activities on a small scale which cannot be fit into Large Borrower Model. For example Beedi Manufacturing. etc. oil exploration. construction. Hotel.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA Large Corporate Model: The model will undertake rating of all Large corporate coming under the purview of Manufacturing. Insurance companies and stock Brokers etc. software Industries. NBFC Model: It will undertake rating of all types of non-banking finance activities. Incense sticks Sri Bhagawan Mahaveer Jain College 16 . shipping. It cannot rate Banks. power. Telecom – Basic and cellular.

RISK WEIGHTAGES FOR DIFFERENT MODELS Models Large corporate model Large Borrower trading model SME Model NBFC Model Small Trader Model Industry 10 10 10 20 0 Business 35 35 30 20 35 Financial Management 40 40 35 35 25 15 15 25 25 40 Total 100 100 100 100 100 Sri Bhagawan Mahaveer Jain College 17 . The turnover of these accounts may range up to Rs. which is undertaking trading activities in a small scale.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA Small Traders Model: This model will undertake the rating of accounts. 1-25 crores.

with I being a very poor score and 8 an excellent score. Business Risk. Business Risk. The risk is assessed by a combination of qualitative and quantitative risk parameters. Financial Risk and Management Risk. The respective risk scores on various risk factors under each of the four risks enumerated above are amalgamated to arrive at the risk score for Industry Risk Business Risk. The weights for the sub parameters under each of the above our risks are enumerated separately as follows.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA Risk weightage for large corporate Model Credit Risk is a function of Industry Risk. The risk factors under Industry Risk. The four risk scores are further combined by a combination of weights to get the overall weighted risk score. Risk Entity Industry Risk Business Risk Financial Risk Management Weight 10 35 40 15 Sri Bhagawan Mahaveer Jain College 100 Total 18 . Financial Risk and Management Risk. Financial Risk and Management Risk are scored. The scoring is done on a 1 to 8 scale.

however. For Industries where no risk is perceived on the input side. government policy would carry greater weight. The factors considered under industry risk are Qualitative factors Demand supply gap Government policy Extent of competition Input Related risk Quantitative factors Return on capital employed Operating margin Variability of operating margins Slope of operating margin trend line The weights for the qualitative risk factors are assigned depending on the industry and the relative importance of the respective factors in the particular industry. input related risk could assume significance. For highly regulated industries. the weight could be zero.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA Industry Risk Industry risk assessment focuses on the overall industry of which the company being analyzed is a constituent firm. Such weights world be Sri Bhagawan Mahaveer Jain College 19 . hence. Company specific factors are not covered at this stage. depending on the industry and its character relative weights would be assigned to each of the factors while taking into account for risk rating. for agro base industries.

technology. level of returns. Industries wherein demand is expected to exceed available supply over a 3 year horizon would score highly on this parameter Government policies This parameter involve taking a view on whether government policy over a 3 year time horizon would affect the industry in a favorable or unfavorable manner. Industries with high level of competition would score low on this parameter. realization and consequently the profitability of companies operating in an Industry. distribution network. brand equity could be significant entry barriers for prospective entrants to an industry. patents. Industries with favorable government polices would score high on this parameter. Qualitative factors Demand-supply gap Demand supply gap would critically determining the volumes. The attractiveness of an Industry for fresh capital investments would depend upon the anticipated demand supply equation.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA assigned to factors depending on the relative importance of the factors in the particular industry. Input Related risks Sri Bhagawan Mahaveer Jain College 20 . Existence of government regulations regarding licensing requirements. heavy capital investment requirements. Extent of competition The level of competition in an industry has implications on future profitability of players in an industry.

0% to 18 % Score 1 2 3 4 Sri Bhagawan Mahaveer Jain College 21 . highly volatile prices of raw material or low value addition would score low in this parameter Quantitative Risk factors ROCE (Return on Capital employed) ROCE= Profit before interest and tax (PBIT)/Average capital employed • • • Where capital employed = (Capital + Reserves + Short term debt + long term debt –Revaluation reserves – Capital work in progress ) Average capital employed = (capital employed at the beginning of year + Capital at the end of year )/2 ROCE is scored as a weighted average of the last three years Return on capital employed Less than 10% 10.0% to 14% 14.0%to 12 % 12.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA This parameter would involve taking a view on availability of raw material and volatility in the prices of raw material. Industries with limited availability of raw material. .

A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA 18. Operating Margin Less than (5) -5% to 5 % 5% to 10 % 10 % to 15 % 15 % to 20 % 20% to 25 % 25% to 30 % Above 30 % Score 1 2 3 4 5 6 7 8 Variability of operating margins Variability of operating Margins = Standard Deviation of operating margin errors over a seven year periods/ Average error over a seven year period Sri Bhagawan Mahaveer Jain College 22 .0 % to 24 % 24 % to 28 % Above 28.0 % to 20 % 20.0 % 5 6 7 8 Operating profit margin OPBDIT/ Operating Income This ratio is scored as a weighted average of the last three years.

A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA Variability Less than .05 0.05) to (0.05) (0. The factors that are assessed under this heads are:Operating efficiency Market position Sri Bhagawan Mahaveer Jain College 23 .2 0.1 0.27 0.2 to 0.15 0. This can be analyzed based on the market position of the issuer within the industry and operating efficiency.1 to 0.27 to 0.0025 0.08 to 0.01 Score 1 2 3 4 5 6 7 8 The industry financial score and the industry characteristic score is combined in the ratio of 30 : 70 to get the final Industry Risk Business Risk The business and the environment in which the firm operates involve a considerable credit risk.005 to .005 0.03) (0.35 Above 0.05 to0.01 Above 0.08 0.0075 0.15 to0.0075 to.35 Score 8 7 6 5 4 3 2 1 Growth in operating margins Growth in Operating Margins Less than (0.0025 to .03) to 0 0 to .

depending on the relative importance of the operating parameters. hence. industries which are dependent on agro inputs like cotton. appropriate risk factors would be selected for scoring and appropriate weights would be assigned to the risk factors so selected Access to raw materials Access to raw materials at competitive price is critical. Selling costs. multi locational plants etc. On the other hand . the risk is assessed base on how the company which is to be rated is placed in relation to its peers in the industry on the operating efficiency front. There are various risk factors under operating efficiency like Raw material usage Management of Input price Volatility. The location of a company neat the source of raw material in case of Sri Bhagawan Mahaveer Jain College 24 . edible oil etc the basic raw material like cotton is subject to vagaries of monsoon/ agriculture which in turn influences its availability and thereby price. hence. mainly for industries with low value addition.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA Raw material usage Management of Input price Volatility Energy costs Employee costs Selling costs Product range Brand equity Product design and development Long term assured off take Distribution set up Diversity of markets Operating efficiency Under this head. power/ Energy cost per ton assumes great significance in power intensive industries like cement. This is known as library of factors from which the most appropriate risk factor of the particular industry in which the company operates need to be selected. energy costs Employee costs. management of input price volatility by tracking cotton prices and buying at the most opportune time would determine to a large extent the operating efficiency of a company in cotton yarn industry. For example.

Energy costs Energy costs is of critical importance in power intensive industries. Savings in the energy cost either as a result of lower tariffs or captive generation facilities would result in a competitive advantage for the company. In addition. For example In Cement industry. For example modern cement plants using more energy efficient processes like vertical grinding mills tend to have lower power requirement than older plants. the sufficiency of limestone is critical for stable production. Employee costs This factor is relevant in lab our intensive industries where employee expenses forms a significant proportion of the overall cost structure. A cost structure characterized by Sri Bhagawan Mahaveer Jain College 25 .A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA high inward freight costs and assured supply of quality raw material at stable prices would determine the competitive position of the company. Management of input price volatility The ability to successfully manage fluctuations in input prices assumes importance in industries characterized by cyclicality in input prices. the proximity to limestone reserves determines its cost of inward transportation. Energy cost advantages can also arise from stability of operations and superior technology. effective stocking policies in cotton yarn industry and liquidity help partially mitigate risks of price volatility. For example In cotton textile industries development of strong relationships with marketing federations.

Here again. the principal question that is thrown up is “what determines the market share of a company in particular industry”. For example a leading cement company pioneered the concept of transporting cement by sea as compared to the traditional land route resulting in significant selling cost reduction. For example service sector industries such as banking. Geographical diversity of Market. Again. depending on the industry in which the company to be rated is placed appropriate risk factors relevant tot the industry would need to be selected for scoring and appropriate weights are assigned.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA high employee cost restricts ability to withstand a down turn. Examples of such risk factors are product Range. there are a range of risk factors in the library of Risk Factors. distributor Network. Brand equity. Market Position Under this head. Pricing Flexibility or sales network. a higher employee productivity leading to a reduction in employee costs yields a competitive advantage for companies in these industries. For example cement and steel need to be transported over long distances and freight forms a significant of the selling cost. have high employee costs. Sri Bhagawan Mahaveer Jain College 26 . particularly in view of the contentious nature of downsizing related issues. hotels. customization of product. Access to patents. Replacement Market. consultancy. Selling costs Selling costs are significant in industries wherein the product is bulky in nature and demand centers are localized. Access to cost Effective Technology etc. software etc.

A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA For example. depending on industry to industry. appropriate risk factors would be selected and appropriate weights would be assigned. mitigates risks due to demand slowdown or competition. these factors would need to be selected. High value added products in the product range partially insulate the margins of the company from any change in the prices of raw material. In consumer durable and ready made garments industry. Brand equity assumes significant importance in evaluating sustainability of market position. especially in industries with a high a value addition. Product design and development This parameter reflects the ability of a firm to modify existing products. Thus. Brand Equity and Dealer/medical Representatives network would play vital roles in determining a company’s market share. Brand equity may be international. Product range A wide product portfolio based on nature of offering and price. national or localized. Hence. Product range is assessed on breadth (Variety of Products) as well as depth (variants of a single Product). Sri Bhagawan Mahaveer Jain College 27 . Brand Equity This parameter measures the protection against erosion of market share enjoyed by the company. or develop new products based on a specific customer need or changing preferences in an industry. while rating a pharmaceutical formulations company. For example A company in cotton textile industry with high proportion of specialty yarns. and high value added dyed yarns is partially insulated from high volatile in cotton prices. For example. the ability of the company to build a strong brand image is critical for sustenance of its market position. owing to brand strengths. high count yarn.

presence of export. Diversity of markets This parameter assesses the presence of companies in different market segments where the market segmentation could be based on geographical diversity. and diversified customer base (including access to replacement markets) across different end user industries. Long term contracts/ assured off takes This parameter reflects factors in the available benefits if any. Sri Bhagawan Mahaveer Jain College 28 . Long term sales contracts assume significance in an increasingly competitive market scenario. Presence of a wide distribution network affords access to a wide customer base. Distribution set up This parameter assesses the geographical spread and quality of a company’s outbound logistics systems. particularly for suppliers of raw material and product intermediates. For example cement companies having an established distribution network are advantageously placed. thereby enabling growth and higher market penetration. existence of a strong dealer/distribution network erects significant entry barriers to potential competition. arising from the nature of sales agreement with the buyer. since ability to access interior regions is an important determinant of market position.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA For example the ability of a software company to make transition into new areas such as the internet rapidly changing technology would critically determine its market position. Further.

stability and adequacy of cash flows in relation to debt and working capital requirement can evaluate the financial risk. relative range of weights is expected to be in the region of 70:30 and vice versa. the presence of a company in more than one region would result in better ability to absorb the downturn. Financial Risk is assessed under three sub heads • Past Financial Ratios Sri Bhagawan Mahaveer Jain College 29 . depending on the relative importance of Operating Efficiency and Market position sub section as operating in the particular industry. The company’s financial flexibility and accounting quality like ability to raise resources. To measure the company’s repaying ability we have to consider its cash flows which is important for repaying its debt not its fixed assets or profits. auditor qualifications etc. the weights for Operating Efficiency and Market Position would vary depending on the industry in which the company is placed. Financial Risk The credit risk depends on the company’s capital structure. The weighted score from operating Efficiency subsection and weighted score from ‘Market Position” subsection would be combined by suitable weights. alternate financing plan in stress situations. then the Operating Efficiency subsection would attract a greater weight compared to “Market Position” sub section. accounting policies. overstatements or understatements. sources of future earnings growth. off balance sheet liabilities. Therefore the profitability ratios.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA For example In cement industry which has regional demand supply imbalances. For example. A company which is 100% equity financed is less risky compared to a company which is levered or financed by debt. Here again. Hence. Its debt to net worth ratio is an indicator of its financial risk. of profits. if a company is placed in an industry where the “operating Efficiency” parameters would to a greater extent determine the company’s standing in the market.

seven ratios are calculated and scored as per the benchmarks. Return on capital employed ROCE= PBIT/Average capital employed • • where capital employed = ( Capital + Reserves + short term debt + Long term Debt – Revaluation reserves – capital work in progress ) Average capital employed = (Capital employed at the beginning of year +Capital employed at the end of year )/2 ROCE (%) Less than 6 % 6% to 8% 8% to 10 % 10% to 13 % 13 % to 15 % 15 % to 18 % Score 1 2 3 4 5 6 Sri Bhagawan Mahaveer Jain College 30 .A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA • • Future Financial Ratios and Cash flow adequacy Past Financial Ratios Under this head. The seven ratios are: a) Return on Capital Employed b) Operating profit Margin c) Interest Coverage Ratio d) Debt service Coverage Ratio e) Total Outside Liabilities/Tangible net worth f) Current ratio g) Operating Income/ Short Term borrowings. all ratios have equal weight. The scores on each of the above ratios are combined as per the above weights to arrive at the weighted past financial ratios score. Under Past Financial ratios.

Interest and taxes/operating Income Operating margin Less than 5 % 5 % to 7 % 7 % to 10 % 10 % to 13 % 13 % to 15 % 15 % to 18 % 18 % to 25 % Above 25 % Score 1 2 3 4 5 6 7 8 Interest Coverage Interest Coverage = Profit before interest.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA 18 % to 24 % Above 24 % 7 8 Operating profit Margin The ratio is defined as operating profit before deprecation. depreciation and tax (PBDIT )/ ( Interest and Finance charges Sri Bhagawan Mahaveer Jain College 31 .

25 to 1.5 to 3 3 to 3.5 to 1.75 3.9 to 2.2 Above 2.5 1.5 2.15 1.9 1.25 1.1 1.15 to 1.5 to 2 2 to 2.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA Interest Coverage Less than 1.2 Score 1 2 3 4 5 6 7 8 Total outside liabilities/ Total net worth TOL/ TNW = (Long term loans + other short term loans + working capital loans from banks + current liabilities and Provisions)? Equity share capital + reserves – revaluation reserve – loss brought forward – intangible assets) Sri Bhagawan Mahaveer Jain College 32 .5 1.1 to 1.7 to 1.75to 4 Above 4 Score 1 2 3 4 5 6 7 8 Debt service coverage ratio DSCR = (PBDIT – Tax)/ ( Repayment of long term loans + Interest on long term and short term loan Debt service coverage ratio Less than 1 1 to 1.7 1.

0 to 7.5 2.0 Above 7.0 0.25 to 2.5 to 2.0 to 6.0 2.0 2.0 to 2.0 4.0 1.5 to 1.0 Scores 1 2 3 4 5 6 7 8 Current ratio Current ratio = ( Cash & bank balances + total receivables + inventories + current assets related to operations + other currents )/ Working capital loans from banks + other short term loans + current liabilities and provisions Current Ratio Score Sri Bhagawan Mahaveer Jain College 33 .75 1.0 to 4.75 to 2.0 6.0 3.0 to 4.25 2.75 Above 2.0 to 1.75 Operating Income /Bank borrowing Score 1 8 7 6 5 4 3 2 1 It is calculated as a weighted average for the last three Years Sales to bank borrowings Less than 1.0 5.5 1.0 1.0 to 1.0 to 5.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA Total outside liabilities / Total Net worth Less than 0.0 to 2.

Financial flexibility Financial flexibility attempts to evaluate the ability of a company to comfortably raise funds to meet its future requirements. Financial Flexibility is a qualitative factor and depends largely on the following four fundamental factors:• • • • Gearing unutilized bank limits Reputation of the company in the financial market support of parent and other group companies Cash flow Adequacy Sri Bhagawan Mahaveer Jain College 34 .07 to 1.30 to 1.25 to 1.30 1.40 1.13 to 1.19 1.07 1.50 Future Financial Ratios 1 2 3 4 5 6 7 8 Under this head four ratios are calculated.19 to 1.40 to 1.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA Below 1. all the ratios have equal weight.25 1. These ratios are as under:a) Return on capital Employed b) Operating profit margin c) Debt service coverage ratio d) Total Outside liability/ Tangible net worth Under Future Financial ratios. The scores on each of the above ratios are combined with equal weights to arrive at the weighted future financial scores.50 Above 1.13 1.

Future Financial ratio’s score and cash flow adequacy score are combined with weights of 50: 20: 30 respectively to get the final financial Risk score. Sri Bhagawan Mahaveer Jain College 35 . the future cash flow adequacy of the company is assessed its contractual obligations and considered view is taken as the basis for scoring The weighted past Financial ratios score. Familiarity with the operating environment is expected to enable better decision making.33 33.33 33.34 100 Experience in the industry A management with greater experience in the industry places a company in an advantageous position visa a viz the competition. MANAGEMENT RISK Management risk comprises of three sub groups as follows:Particulars Management Track record Payment record Total The factors that are assessed under this heads are:Qualitative Experience in the Industry Managerial competence Business and financial policy Timeliness of furnishing information Past payment record Ability to achieve profit projections Quantitative Ability to achieve sales projections Weight 33.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA Under this head.

33 and 33. and would have a bearing on future debt bearing levels. Thereafter. as well as the general impression of the efficiency of the company’s systems and procedures. such large expansions would be viewed less unfavorably if they are related to the company’s existing operations. the final Management Risk score emerges by combining these scores in the respective weights of 33. 33. such as quarterly information.33. and other documentation. While educational qualifications could provide a base for good management. as well as managerial discipline. formal education in itself would not guarantee exceptional management. These are indicative of possible future strategies. Timeliness of furnishing information to the bank This factor assesses the company’s promptness in furnishing information required by the bank. However. The risk factors under these groups are first scored. stock statements.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA Managerial Competence Assessment of management’s competence would be based on the quality of past decision making. The timeliness of furnishing such information is indicative of the state of the company’s systems and procedures.34 Sri Bhagawan Mahaveer Jain College 36 . Business and financial policies can be said to be particularly risk prone in specific instances where such growth in the past is funded through borrowings rather than internal accrual.. Payment record Payment Record to bank is assessed by way of extent of payment of interest and instalment made to the Bank. Business and Financial policy The management’s conservatism is judged based on past business and financial policies.

underwriting of securities. banks are working to identify new business niches. acquisitions and corporate restructuring to securities underwriting.Although. Today. equity private placements and placements of debt securities with institutional investors. Supported by the latest technology. Over the past decade there has been an increasing convergence between the activities of investment and commercial banks. bank reconcilement). consolidation. deregulation and diversification of the financial industry. the banking sector will become even more complex.banking that covers an array of services from asset securitization. project finance. payroll services. deposit services (checking or savings account services) and foreign exchange. Furthermore. Taken together. these changes have made banks an even more important entity in the global business community. most bankers think about corporate clients in terms of the following: • Commercial banking . portfolio management and the insurance businesses. Some banks in the industrialized world are entering into investments. because of the deregulation of the financial sector. credit services (assetbased financing. private placements. the modern banking industry has brought greater business diversification. to develop customized services. commercial loans or commercial real estate loans). lines of credits. some investment and commercial banking institutions compete directly in money market operations. the biggest banks in the industrial world have become complex financial organizations that offer a wide variety of services to international markets and control billions of dollars in cash and assets. Sri Bhagawan Mahaveer Jain College 37 . the banking industry does not operate in the same manner all over the world.banking that covers services such as cash management (money transfers. to implement innovative strategies and to capture new market opportunities. With further globalization. bonds underwriting and financial advisory work. coverage of mergers.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA Recent Trends in the Banking Industry At the beginning of the 21st century. • Investment banking .

High ratings were accorded to these complex instruments by the credit rating agencies. Banks and financial institutions switched to securitisation of assets. There was a herd mentality for business expansion and revenue maximisation along with banks and financial institutions at the cost of normal banking prudence. particularly mortgage debt including sub-prime mortgages. Banks switched to the securitisation to lower their minimum capital requirements. regulators. Sub-prime lending refers to giving loans to those who do not qualify for conventional mortgages( regular loans at market interest rates) due to their poor credit history. financial institutions and academicians. In the process. The basic reason of the global meltdown can be traced back to when the housing boom coincided with the securitisation process. This sub-prime lending further catalysed the increase in demand for housing.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA RELEVANCE OF CREDIT RISK MANAGAMENT TO THE PRESENT SCENARIO The current global financial crisis and the resulting economic downturn is currently the top concern for governments. In securitisation banks pooled together mortgages belonging to borrowers of different credit qualities. These were then sold to institutional investors seeking higher returns. The loans were offered at a rate higher than the market rates that were prevailing at that time. Sri Bhagawan Mahaveer Jain College 38 . The crisis has brought to he fore the vulnerabilities of the financial system and the need to change the lax lending practices followed by some countries during the past few years. several risky home loans which became asset-backed securities were further bundled into special purpose vehicle known as Collateralised Debt Obligation (CDO).

The housing slump resulted in a surprising increase in defaults and foreclosures which also spread to securitised loans. the holders of CDOs purchased Credit Default Swaps (CDS). The mark-to-market losses of banks soared and distrust prevailed in the market resulting ina credit crunch.takers. The downgrades on CDOs continued and there were no estimates of how much of these toxic securities were held by various institutions. The housing bubble burst due to inherent miscalculation in reading the markets In August 2007. In order to cover the risk of defaults on subprime mortgages. The financial markets panicked due to the lack of credit discipline and the trust of the investors was lost as they were not paid the promised rate of return and hence they made a run on their stocks.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA However. mostly subprime mortgages.party. both for home loans as well as other business and personal loans. these complex securitization products suffered form the degradation of the underlying collateral. Credit Risk Management can be done through properly analysing the credibility of the borrower as well as hedging and using instruments like credit derivatives and credit default swaps. The root cause of the downfall was thus the lending on less credibility and defaulting by loan. Liquidity was further strained when it was found that the methods employed by banks to hold structured credit products were flawed. Sri Bhagawan Mahaveer Jain College 39 . This further stressed on proper credit risk management to be used by banks and hence the importance of credit risk management in today’s banking scenario is one of the reasons for chosing this topic to my project. This global phenomenon soon transcended into the Indian Markets through stock market and also various banks in India. These are contracts where banks and their customers hedge against the risk of default and pay an annual premium to the counter. the market crashed and the monthly mortgage payments exceeded the instalments under original terms.

Banks should leverage the existing strengths and consolidate themselves in terms of quality. In banking.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA It can be accurately said that banking is basically a business of management of risk. Banks should emphasise on quality of assets rather than on volume of business. It is desirable that banks should make full use of he information of potential borrowers that may be available with Credit Information Bureau ( India) Limited( CIBIL) so as to avoid default in loan repayments at a future date. They should also have a consolidated and comprehensive policy regarding the same. risk cannot be eliminated but minimised by recognising the changing business environment and taking appropriate proactive measures. liquidity and operational risks on a continual basis and take appropriate corrective actions. This the importance of Credit Risk Management is further emphasized. The comparatively less served segments of the economy should be carefully granted loans and advances. Banks should put in place more effective risk management systems to assess the market. profitability and productivity. Banks should follow in a more rigorous manner the Know Your Customer ( KYC) guidelines. Sri Bhagawan Mahaveer Jain College 40 .

A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA Sri Bhagawan Mahaveer Jain College 41 .

In this light. but literarily it can be rooted deep back the days of the Renaissance (by the Florentine Bankers). business or profession almost as old as the very existence of man. correspondent and internet banking. the study in its first section gives a background to the study and the second part is a detailed literature review on banking and credit risk management tools and assessment models. Credit risk has always been a vicinity of concern not only to bankers but to all in the business world because the risks of a trading partner not fulfilling his obligations in full on due date can seriously jeopardize the affaires of the other partner. practice. The axle of this study is to have a clearer picture of how banks manage their credit risk. The third part of this study is on hypothesis testing and use is made of a simple regression model. encompassing automatic teller machines (ATMs). through the Victorian-age to the technology-driven Google-age banking. It has sprouted from the very primitive Stone-age banking.Takang. credit and debit cards. Author. School of Technology and Society) Sri Bhagawan Mahaveer Jain College 42 . This leads us to conclude in the last section that banks with good credit risk management policies have a lower loan default rate and relatively higher interest income. Felix Achou.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA LITERATURE REVIEW Bank performance and credit risk management Banking is topic. Claudine Tenguh (University of Skövde. Ntui.

The core reason for the crisis was the credit crunch. CRO Sri Bhagawan Mahaveer Jain College 43 . That's why this is being held for a sixth year to help to get better results. and such a fluid condition was not anticipated by anyone around the world. Exposure to credit risk continues to be the leading source of problems in almost all banks.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA 6th Annual CEE Credit Risk Management Conference (2010) The financial crisis has brought forward key weaknesses in the way financial institutions are run the world over. Out of the departments in these financial institutions. Their practices differ depending upon the nature and complexity of their credit activities. Way too many borrowers failed to meet its obligations in accordance with agreed terms what put extra pressure on credit risk managers and their teams. the department which has come under the maximum scrutiny has been the Risk Management department. Vice President. BNP Paribas Fortis. Therefore it's absolutely crucial to know how business partners and competitors are dealing with credit risk and get the best from each one. The key topics to be addressed are: • • • • • • Achieve effectiveness in credit risk management Identify areas for development and improvement Enhance the awareness of counterparty credit exposure Manage successfully retail credit risk for SMEs Discover advanced collections & recovery techniques Minimize disputes in debt recovery Author. With five sold-out conferences and a great reputation within the industry. Their will be credit risk experts from leading banks and financial institutions in CEE countries. it is considered as "the best and most prestigious platform for all professionals involved in credit risk management".Philippe Van Hellemont. The key word for the Risk Managers here was to 'anticipate' and take precautionary measures.

First. The common framework is necessary to obtain a complete picture of portfolio risk and make the accurate management decisions. These benefits are realized. Third. interest rate and credit derivatives can further reduce economic capital and improve the risk/return relationship. From an economic point of view. Nevertheless. Indeed. The result holds even for bonds with high recovery rates or for portfolios having a good credit quality. the regulatory environment designed by the Basle Committee on Banking Supervision as well as the major risk management tools used by banks consider market and credit risk separately. it makes sense to measure and manage these sources of risk in a common framework in order to take the dependencies between them into account.Roger Walder Sri Bhagawan Mahaveer Jain College 44 . through a reduction of the economic capital needed to cover these risks. Second. Consequently.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA Integrated Market and Credit Risk Management of Fixed Income Portfolios The main sources of risk affecting fixed income portfolios are interest rate and credit risk. The study should deliver useful insights into the relative importance of market and credit risk and into the dependence between extreme losses due to interest rate and credit quality changes. the integration of market and credit risk makes diversification benefits possible. credit risk dominates market risk in a fixed income portfolio containing bonds belonging to rating classes between AAA and CCC. for example.. Author. losses due to interest rate changes do not necessarily happen simultaneously with losses due to changes in the credit quality of the counterparties. the determination of capital requirements by adding market and credit risk is conservative and penalizes banks or portfolios that are well diversified. The objective of this study is to propose an integrated framework for the management of market and credit risk of these portfolios and investigate the benefits of integration.

unlike manufacturing organisations. education/professional (accountancy training) and retail (supermarkets) completed measurement scales relating to potentially deterministic attributes and assessed these for current and previous suppliers. It is widely acknowledged that elements of “service quality” play a key role in the performance and competitiveness of service organisations and thus provide potential benchmarking criteria. information derived from consumers can provide a valuable input into a comprehensive external benchmarking programme involving both competitive and generic measures. the consumer is involved in the production process.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA Using consumer benchmarking criteria to improve service sector competitiveness The adoption of benchmarking techniques has increased over recent years. yet service organisations have been relatively reluctant to adopt the practice.John Whymark Sri Bhagawan Mahaveer Jain College 45 . The findings indicate that. Consumers of three service sectors – health (family planning). although management must be aware of a number of potential problems and issues. Yet perceived service quality must be defined from the consumer’s perspective and. This study examines the potential for the generation and evaluation of consumer focused benchmarking criteria. Author.

000-crore. the growth (in home loans) has been a healthy 23-25 per cent.Hardeep Singh Sri Bhagawan Mahaveer Jain College 46 . did not have any immediate plans to follow its competitors to offer home loans at 8 per cent but may look at the possibility in future after assessing the market conditions. including the country's largest lender. Bank of Baroda currently offers home loans at a rate ranging from 8. out of which home loans contributed around 45 per cent. SBI was the first to come with the dual rate home loan scheme early this year. we will look at it later. Bank of Baroda has seen its home loan portfolio growing by 2325 per cent during April-November. A host of lenders. "From April to November. as the growth (in home loans) has been quite healthy even without any such strategies. The lender has also maintained a healthy asset quality on its home loan portfolio. We expect this momentum to continue in the coming quarter as well.5 per cent to 10. As on September. Its gross non-performing assets from the home loan segment presently stands at around 2 per cent.5 per cent. State Bank of India and its nearest competitor ICICI Bank had announced similar home loan schemes to woo the spiring home buyers. and expects the growth to pick up further in the next quarter. Author. "As of now. 2009. Bank of India also have plans to offer fixed rate of 8 per cent for two years for new home loans upto Rs 30lakh from the new year. the official said. Axis and leading housing loan financer. Kotak Mahindra." the official said. May be.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA Bank of Baroda: 23-25 Pct Home Loan Growth Public-sector lender. Bank of Baroda's total retail loan book stood at around Rs 21. however. The bank. based upon the loan amount and tenure of the advance. Public-sector lender. which was followed by other leading players like ICICI Bank. we are not looking at launching any such schemes. HDFC.

To know how the Risk Assessment Model is adopted in Bank of Baroda. 2. To show how the firm in study fares when analysed on the basis of the various risks. To determine whether the bank should go ahead with giving the loan. measure. monitor and control credit risk as well as to determine that they hold adequate capital against these risks and that they are adequately compensated for risks incurred. Sri Bhagawan Mahaveer Jain College 47 . Bank of Baroda uses Credit Rating as a tool 3. business. 7. To study the impact of various factors in determining the credibility of a particular firm 6. To assess borrowers Credit quality in respect of Industry. 8. To assess the degree of safety with respect to debt servicing capacity of a borrower. Management and Financial Risk. 5. To assess credit Risk. Objectives of the study The Objectives include:1.A special importance to handle the credit crisis. To show the correlation between banks and credit. 4.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA Statement of the Problem Credit risk continues to be the leading source of problems in Bank of Baroda. Banks should have a keen awareness of the need to identify.

The methodology covers the assessment of • • • • Industry Risk Business Risk Management Risk Financial Risk for large corporate accounts In this study ‘Analytical Research Methodology’ is adopted where the available facts or information will be used and analyzed Type of Research The type of research used here is descriptive and I have used case study method. Sri Bhagawan Mahaveer Jain College 48 . Rating is used as a tool to measure the credit risk. This research is the most commonly used and the basic reason for carrying out descriptive research is to identify the cause of something that is happening. Hence the methodology adopted to measure the credit risk is credit rating. It may be understood as a science of studying how research is done scientifically. if the research is to return useful results whoever is conducting the research must comply with strict research requirements in order to obtain the most accurate figures. It is the blue print that is followed in completing the study.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA Research methodology of the study Research methodology is a way to systematically solve the research problem. wherein a company has been analysed according to the parameters of credit risk management at the Bank of Baroda and based on these observations the findings and suggestions are made. However. Credit Rating is defined as an objective assessment of a borrower’s credit quality in terms of business and financial risk. It is the exploration of the existing certain phenomenon. A research is purely & simply framework or plan for the study that guides the collection & collection & analysis of the data.

The data is collected by interviewing the executives of the bank and through the bank manuals. Another reason why this study is particularly important in the present global scenario is that in times of economic recession. Hence before advancing to a particular Industry study of Credit Rating has become necessary. The other sources of data include the financial statements of the bank and various publications by the bank itself and its official website also. An important source of data includes various magazines about the Indian Banking Scenario as well as interviewees with the top executives of the bank. the credit is restricted and hence only firms or individuals with high credit rating will be given credit after scrutiny.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA Sources of Data and methods of Data Collection This project is by and large involves only secondary data. Sri Bhagawan Mahaveer Jain College 49 . reports and websites. Significance of the study By giving various types of credit limit by way of fund based and non-fund based business the financial institutions risk will be spread in different rates.

loans are the largest and most obvious source of credit Risk. They are: 1. Risk Assessment Model 3. There are 3 types of Models used to rate the credit risk. Sri Bhagawan Mahaveer Jain College 50 . recovery and review is prerequisite. and effective handling of it is essential to the long term success of any banking organization. Though there are three types of Credit Rating Models I have been restricted my study only for RAM Model for Large corporate Accounts.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA Scope of the study One of the main functions of any bank is lending of loans and hence credit risk is part and parcel of their business and needs to be carefully analysed in order to ensure timely and appropriate availability of funds. The study is mainly based on Secondary data. As the future is uncertain the Risk rating done by me is construed as perfect or not. Manual model 2. 2. 3. Credit risk is a critical component of integrated Risk Management. For banks. for effective management of credit Risk. Therefore. Portfolio Model Limitations of the study The limitations of the study are as follows 1. focused attention on credit delivery.

The founder. and deposit of money and will be a powerful factor in the development of art. Mission statement Sri Bhagawan Mahaveer Jain College 51 . It is a story of ordinary bankers and their extraordinary contribution in the ascent of Bank of Baroda to the formidable heights of corporate glory.customers. It is a story crafted in private capital. Starting in 1908 from a small building in Baroda to its new hi-rise and hi-tech Baroda Corporate Centre in Mumbai. transmission.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA Bank of Baroda. industries and commerce of the State and adjoining territories. It has been a wisely orchestrated growth. On 20th July 1908. trustworthy financial body. employees & the public at large who in ample measure." It has been a long and eventful journey of almost a century across 25 countries. Maharaja Sayajirao Gaekwad.Profile The Heritage It all started with a visionary Maharaja's uncanny foresight into the future of trade and enterprising in his country. and with a paid up capital of Rs 10 Lacs started the legend that has now translated into a strong. and growing itself in turn. is a saga of vision. It is a story that needs to be shared with all those millions of people . under the Companies Act of 1897. enterprise. social pride and the vision of helping others grow. have contributed to the making of an institution. involving corporate wisdom. with his insight into the future. stakeholders. princely patronage and state ownership. financial prudence and corporate governance. THE BANK OF BARODA. saw "a bank of this nature will prove a beneficial agency for lending. It is a story scripted in corporate wisdom and social pride.

they seek to be a one-stop. compelling vermillion palette has been carefully chosen.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA To be a top ranking National Bank of International Standards committed to augmenting stake holders' value through concern. Logo Our new logo is a unique representation of a universal symbol. It is a signal that they recognize and are prepared for new business paradigms in a globalised world. It is the single most powerful source of light and energy – its far reaching rays dispel darkness to illuminate everything they touch. It also recognize that our bank is characterised by diversity. It comprises dual ‘B’ letterforms that hold the rays of the rising sun. Our network of branches spans geographical and cultural boundaries and rural-urban divides. The single-colour. At Bank of Baroda. The Ethics Sri Bhagawan Mahaveer Jain College 52 . they offer rewarding careers and to our investors and business partners. Our new corporate brand identity is much more than a cosmetic change. we will always stay in touch with our heritage and enduring relationships on which our bank is founded. By adopting a symbol as simple and powerful as the Baroda Sun. To our customers. To our employees. Our customers come from a wide spectrum of industries and backgrounds. maximum return on their investment. it hope to communicate both. They call this the Baroda Sun. The sun is an excellent representation of what our bank stands for. care and competence. At the same time. for its distinctivenes as it stands for hope and energy. they seek to be the source that will help all our stakeholders realise their goals. The Baroda Sun is a fitting face for our brand because it is a universal symbol of dynamism and optimism – it is meaningful for our many audiences and easily decoded by all. reliable partner who will help them address different financial needs.

were to become the central philosophy around which business decisions would be effected. the move to become a one stop financial supermarket had been set in motion. caution and an abiding care and concern for the hard earned savings of hard working people.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA Between 1913 and 1917. The Bank orchestrated its business strategies around the centrality of the customer. We are commited to provide our people wth an environment conducive to professional as well as personal growth. It ensured survival during the Great Depression. Bank of Baroda survived the crisis. INITIATIVES TAKEN BY THE BANK Marketing Initiatives The mid-eighties marked the beginning of the shift to a buyers` market. Service delivery standards were stipulated. Even while big names were dragged into the Stock Market scam and the Capital Market scam. Slowly but surely. as many as 87 banks failed in India. Sri Bhagawan Mahaveer Jain College 53 . performance management and other people friendly policies. credit cards and mutual funds. housing finance. A string of segment specific branches entrenched operations in the profitable markets. It ensured that the Bank survived the Great War years. mainly due to its honest and prudent leadership. This cardinal philosophy was over the 94 years of its existence. It diversified into areas of merchant banking. the Bank of Baroda continued its triumphant march along the best ethical practices Employee Development Bank of Baroda aims at providing it's people with a space for development through continous learning. Overseas operations were revamped and structural changes intensified in the territories to cater to second generation NRIs. business prudence. This financial integrity. to become its biggest asset.

This has been historically demonstrated in its recruitment practices. Despite adverse market conditions prevailing then. People Initiatives Bank of Baroda has always had an immense faith in the infinite potential of its people. according cross border and cross cultural work exposure to its managers. Sri Bhagawan Mahaveer Jain College 54 . covering 70% of its network and 91. the issue was over subscribed. Financial Initiatives New norms for capital adequacy required new capital management strategies. Digital Initiatives Bank of Baroda pioneered the shift from manual operating systems to a computerized work environment.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA Technology was adopted to add punch. managerial and leadership skills. Employees across the board were inculcated with the marketing concept. Starting with ledgers. where everyone prospered. People initiatives were blended with IR initiatives to create an effectively harmonious workplace. Strategic HR interventions like. through ALPMs. placement processes and promotion policies. gave the Bank competitive advantage. reflecting the positive public perception of the Bank's fundamental financial strength. In 1995 the Bank raised Rs 300 crores through a Bond issue. In 1996 the Bank tapped the capital market with an IPO of Rs 850 crores. the Bank graduated to the use of Unix based systems to Mainframes. to ledger posting machines. developmental initiatives.64% of its business.men who went on to build other great institutions. Aggressive marketing became the new business philosophy. the Bank has 1918 computerized branches. to client server based Total Branch Mechanization Systems. The Bank provided around a dozen CEOs to the industry. The elaborate man management policies also made the Bank a breeding ground for business leaders. Today. hiring diverse functional specialists to support line functionaries and complementing the technical competencies of its people by imparting conceptual.

the Bank reworked its distribution strategy. the Bank secured the ISO 9001:2000 certification for 15 branches. Discriminatory time schedule for renewal of borrowal accounts Monitoring country risk on real time basis. smart card authentication and secure networking. Sri Bhagawan Mahaveer Jain College 55 . FUTURE PLANS • • • • • • • • • • • Extension of credit rating exercise to all the exposures and carrying it out as a pre-sanction exercise biannually. Pricing of loans based on risk ratings Undertaking of rapid portfolio reviews.Evolving a policy for credit exposures taken on counterparty Bank. By end of the current financial. Multi Service Transaction Switch. verifying adherence to risk parameters by departments. The e-banking products used state of the art technologies like digital certificates. It ventured beyond the brick and mortar delivery channel into ATMs and the Omni BOB range of anytime. Quality Initiatives In its relentless striving for quality perfection.all geared to deliver convenience banking. Building up of historical data for estimating Probability of Default (PD). Being tagged with a global nature. telephone banking. Broadening more into various international markets. in the process of implementation will see the deployment of Core Banking Systems. Developing policy and procedures. Developing robust database/MIS to meet risk management requirements . Payment Gateways . stress tests and scenario analysis.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA Alive to the growing complexities of an intensely competitive marketplace and the mounting expectations of customers fuelled by this competition. The new IT strategy. anywhere electronic channels of PC banking. the Bank is targeting 54 more branches for this quality certification.

A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA ADAPTATION TO CHANGE Revolutionary and discontinuous changes in the operating environment are a stark reminder that business success is 'impermanent'. It will not be out of place now. to echo the same sentiments that guided the Bank in its platinum jubilee year .'a promising future is the sequel to a glorious past'. The relocation to the imposing Baroda Corporate Centre. Sri Bhagawan Mahaveer Jain College 56 . There will be no end. was the establishment of the Integrated Treasury branch. more resilient and positioned to become India's first bank of truly global standards. Actioning this strategy will position Bank of Baroda as India's uncontested premier bank. At Bank of Baroda. Towards creating a future Bank of Baroda. The conversion to an IT savvy. It has a beginning. is a true reflection of the Bank's resolve to move ahead of the times. It will be a long and difficult march. And the Bank will emerge stronger. change is a journey. has accentuated the need to initiate a major transformation program. as it stands on the threshold of a digital era. as a forerunner to full-fledged global treasury operations. A major and strategic step in hi-tech. market driven bank will be a prerequisite to survival and growth. The emergence of IT as a major driver for change. the Bank has adopted a revolutionary new business strategy that will be enabled by a revolutionary new IT strategy.

the credit rating model will also help the Bank in several other ways as under. The industry reports are communicated to the operating functionaries to consider the same while lending to these industries. the Bank has various policies in place such as Domestic Loan Policy. wherein the Bank has specified various prudential caps for credit risk exposures. etc. In order to provide clarity to the operating functionaries. monitoring and control of credit exposures. To measure and assess the overall credit risk and to evolve a desired profile of credit risk. Credit risk management processes involve identification. The Bank also conducts industry studies to assess the risk prevalent in industries where the Bank has sizable exposure and also for identification of sunrise industries. The Bank uses a robust rating model developed to measure credit risk for majority of the business loans (non personal loans). The Bank has adopted various credit rating models to measure the level of credit risk in a specific loan transaction. To migrate to Rating Based Approaches of computation of Risk Weighted Assets • • To price a specific credit facility considering the inherent credit risk. Off-Balance Sheet Exposure Policy.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA Credit Risk Credit Risk is the risk that the counterparty to a financial transaction will fail to discharge an obligation resulting in a financial loss to the Bank. Apart from estimating PD and LGD. Sri Bhagawan Mahaveer Jain College 57 . measurement. Loss Given Default (LGD) and unexpected losses in a specific loan asset. The rating model has the capacity to estimate probability of default (PD).

The Bank undertakes portfolio reviews at regular intervals to improve the quality of the portfolio or to mitigate the adverse impact of concentration of exposures to certain borrowers. The primary objectives of the Credit Monitoring Department at the corporate level are fixed as under: • Identification of weakness/Potential default/incipient sickness in the loan accounts at an early stage. decline in credit rating. The Slippage Prevention Task Force formed at all Zonal/Regional offices in terms of the Bank’s Domestic Loan Policy was activated for the purpose of arresting slippage and also for initiating necessary restructuring in potential sick accounts at an early stage in conformity with the laid down norms and guidelines. whenever signals are noticed in any account.g. sectors or industries. Credit Monitoring Function Credit monitoring on a continuous basis is one of the most important tools for ensuring quality of advance assets. • Initiation of suitable and timely corrective actions for preventing impairment in credit quality. headed by a General Manager. The Bank placed special focus on sharpening of the credit monitoring process for improving the asset quality. identifying areas of concern/branches requiring special attention. working out strategies and ensuring their implementation in a time bound manner. A separate department for Credit Monitoring function at the corporate level. e. Sri Bhagawan Mahaveer Jain College 58 . started functioning since September 2008. and one at the Regional/Zonal level. the Bank has appropriate processes and systems to assess credit risk at portfolio level. The Bank has the system of monthly monitoring of the advance accounts at various levels to prevent asset quality slippages and to take timely corrective steps to improve the quality of credit portfolio.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA Apart from assessing credit risk at the counterparty level. delay in meeting liabilities in LC/Guarantee and delay in servicing of interest/ installments etc.

thereby improving the quality of Bank’s credit portfolio. Sri Bhagawan Mahaveer Jain College 59 . • Identification of suitable cases for restructuring/rescheduling/rephasement as well as further financing in deserving and genuine cases with matching contribution from the borrower. • Taking necessary steps/regular follow up. Maintenance of comprehensive data bank on various industries. for review of accounts and compliance of terms and conditions. Comprehensive valuation of financial status of assisted corporates. Preparation of operating agency report and submission to BIFR. Project Appraisal and viability studies. • Endeavoring for upward migration of Credit Ratings. products. Industrial Advisory Division ( Risk Management Wing) The functions performed by this division are as follows • • • • • • Credit risk assessment. Credit risk evaluation of assisted companies.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA • Prevention of slippage in the Asset Classification and relegation in Credit Ratings through vigorous follow up.

62 6.50 241.62 227.417.59 15.58 16.term can be understood and can be modified based upon its requirements Below are tables which compare The Bank of Baroda to its competitors in terms of stock prices as well various items on the Balance Sheet.65 340.32 905.80 Sri Bhagawan Mahaveer Jain College 60 . Last Price SBI PNB BOB BOI Canara Bank Union Bank IDBI Bank Indian Bank Oriental Bank Corporation BanK 1.347.80 160.406.15 431.20 3.830.40 117.491.447.) 121.918.33 84.402.631.24 3.879.45 855.121.072.45 382.582.245. The effectiveness of its policies both in the shortterm and the long.55 858.84 6. This comparison can be made on the basis of both internal and external financials that are available of the different companies.55 8.326. (Rs.183.15 173.091.36 17.35 Net Profit Total Assets 9.47 6.50 12.121.33 7.91 6. Improvements can also be made on this basis and its standing can be ascertained.905.726.856.645.972.568.67 26.975. cr.007.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA Competition In order to properly about a company and its performance.77 964.74 112.193.38 11.090.788.08 246.119.889.16 15.73 225.432.75 219.51 172.33 8.542.42 1. it is of great importance to judge in comparison with the other competitors prevailing in the industry.31 17.35 2.53 1.06 11.30 261.501.58 86.067.88 2.42 892.55 20.10 Market Cap.912.227.45 564.682.43 19.70 Net Interest Income 63.

The study is pertaining to risk rating of Overseas ”-a Ready Made Garment factory . • The Parameters used for assessing the Rating of Ready made Garment factory is Risk Gradation scale • The viability of the study is to see that whether the degree of safety with respect to debt serving capacity is low risk. moderate risk. “Texport Sri Bhagawan Mahaveer Jain College 61 . High risk.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA INTRODUCTION TO ANALYSIS • The analysis describes the way the credit rating process has been carried out in Bank of Baroda. Normal risk. • Risk Assessment Model is used to risk rate Ready Made Garment factory (Large corporate Accounts ) • Various options have been worked out on Business Risk. Management Risk and financial Risk.

This service aims at enhancing the efficiency and effectiveness Of all credit related functions. Small Traders Large Corporate Model There are various types of industries and companies that fall under large corporate model.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA ANALYSIS ON RISK ASSSESSEMENT MODEL Risk Assessment Model is a software based credit decision support system and is integral part of CRISIL’s credit management advisory service for banks. financial institutions and large size corporate. Small and Medium enterprise V. It helps an organization in assessing the credit quality of Borrower. RAM is based on CRISIL’S methodology for credit risk assessment. Large Trader III. There are various types of model in Risk Assessment Model. Non –banking financial corporation IV. Large corporate II. they are as follows: I. They are • • • • • Cement Industry Pharmaceutical industry Software Industry Automobile industry Ready made garment Industry Sri Bhagawan Mahaveer Jain College 62 .

A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA The rating is done on ready made garment Industry. The factors that are considered for rating of Ready made Garment are as follows PARTICULARS FACTORS Industry Characteristics Industry Financials Demand and supply gap Government Policies Input related risks Extent of competition Operating efficiency Return on capital employed Growth in operating margin Operating margin Variability of operating margin Market Position INDUSTRY RISK BUSINESS RISK Product design and Brand Equity development Long Availability of skilled labour contracts/Assured Selling cost off take Employee cost Distribution set up Product range Past Financials Future Financial term FINANCIAL RISK Return on capital employed Return on capital employedOperating margin projected Total liability /Total Net Debt service coverage ratio worth Total liability/TotalNet Current Ratio worth Operating Income/short Operating margin term borrowing Effectiveness of projection Accounting quality Financial flexibility of the Company Track Record Past Payment Record Sri Bhagawan Mahaveer Jain College 63 .

received a big impetus during economic reforms in the early 90's and during the last two decades.07% in quantity and by 37. Saudi Arabia. Switzerland and Australia have been the major importing countries of our Indian ready-made garments. U. India' s share of world ready made garments exports has not risen since 1994. The immediate cause is apparently the slowdown in the import growth of India' s major markets. Tirupur.1 million pieces. They represent value added and less import sub sector.68% in value terms. Hong Kong. which was to the tune of 253.9 million. up by 20. when compared with the same period last year. valued at US$ 1137. the United States and the EU. India's thrust into ready made garment production started in the early 80s in the wake of the liberalization. Mumbai and Chennai are all remarkably unique and dynamic centers of production. The export of ready made garments. Sri Bhagawan Mahaveer Jain College 64 . Japan. namely. Delhi. However. Ready made garments are India' s leading export products and achieved rapid growth in the late 1980s and the first half of the 1990s. has moved to the Tenth position. Ludhiana. In India.E.6 million pieces.A. Canada. in the World's export of ready made garments.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA MANAGEMENT RISK Ability to meet profit projections Ability to meet sales Projections Past payment record towards Management Experience in the Industry Managerial competence Business and Financial policy Timeliness of furnishing Information TEXPORT OVERSEAS– READY MADE GARMENT INDUSTRY INDUSTRY Ready-made garments account for approximately 45% of India's total textile exports. The USA. valued at US$ 826. during January-February 2003..5 million during January-February 2005 has increase in quantitative terms to 306. Bangalore. EU Member States.

Latin America. establishing new market niches.years and after phasing out of MFA. especially USA economy may have positive impact on the growth of Garments industry in medium term. MFA has been replaced by Agreement on Textile and clothing (ATC) and MFA is to be phased out over a 10-years period.16505 crore during Jan-Aug 2006. The major importing countries are the USA. Indian exporters stand to gain with the opening up of markets hitherto restricted. The market size of quota-imposing countries is large and exports will become more competitive.5 percent only. Europe. Middle East etc.14841 crore during Jan-Aug 2005 to Rs. In the world readymade garments market. the strategy should concentrate on restructuring of the production base.6157 crore). price and adherence to strict delivery schedules. With the formation of World Trade Organization (WTO) in January 1995. India is exporting ready-made garments to over 100 countries. and moving up the value chain. provided they measure up to standards of quality. The new textile policy has focused on the target of $25 billion worth of clothing and readymade garments exports by 2010.10348crore) and knitted garments (Rs.2758 crore during the period JanAug2006. There is scope for increased market access during the transition period of 10 . by 1st Jan 2005. Sri Bhagawan Mahaveer Jain College 65 . Exports from garments hub Tirpur alone has gone up by around 20% to Rs. The opportunities for exports will increase after scrapping of quota system world over from 1st Jan 2005.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA India is at present a niche player in the low-value market segment based on cotton fabrics and for seasonal and fashion garments. With the targets of enhancing quality. India's share is 2. These exports include both woven (Rs. Recent signs of recovery in the world economy. Exports of readymade garments have increased from Rs. This reflects India's comparative advantage in cotton cloth and its flexibility advantage in meeting small orders.

With increasing exposure to global brands and a virtual flood of international quality products. The Tirpur exporters in Tamilnadu are planning for a common brand and through which they will be able to compete in the global market. They have become savvier and are conscious of fashions and trends. In India. consumers have become more selective and demanding. And this has resulted in branded innerwear is gaining ground. the innerwear market is segmented between the organized and unorganized sector. Sri Bhagawan Mahaveer Jain College 66 . Innerwear ceased to remain a utility item in the ‘80s. with change in lifestyles and better buying power.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA The Union government has reduced the duty draw back rates. has wide choice. The casual wear shirt market is estimated at around Rs.185 crore. customer awareness in brands. The trouser market is growing at 30-35 percent per annum. However. The branded readymade garments industry in India is growing at the rate of 35 percent per annum. the Indian consumer today. employing of improved technology and growth of branded segment in the garment industry.a. Because of the entry of international brands. as the branded readymade garment industry is growing rapidly. The estimated size of branded readymade shirts market is around Rs. The size of the readymade trouser market is four million pieces annually in India The future for domestic small retailers will depend upon their ability to face competition. Dereservation of garments manufacturing has resulted into entry of major players directly into garments manufacturing. allowing 100 percent FDI may affect small companies with limited resources and professionalism. This development has paved the way for increased investments. quality. and is growing at 40 percent.000 crore and is growing at 10-12 percent per annum. price and dereservation of the garment industry from SSI. ensuring better quality. which may reduce the profitability of the exporting companies.2. Innerwear market is growing at 20% p.

Industry Risk can be classified into Industry Characteristics and Industry Financials.75 1. which will lead to increased competition.00 0. The total weights of Industry characteristics is 85 which is equal to100.95 5 4 5 3 3. Industry Characteristics has four factors which is shown in the above table.20 Proposed score Score Weighted Score 3. On account of this.35 1. The weights for the above table will remain constant for both the existing as well as proposed score Even the factors of Industry 85 20 25 15 40 3.8 1.Industry Characteristics Particulars Weights Existing Score (%) Score Weighted Score Industry Characteristics Demand supply gap Government policies Input related risks Extent of competition Interpretation:The table 1 indicates the scores given for Industry Risk.00 1.5 0. of India has proposed to develop an apparel park in Tirpur. characteristics is equal to 100.7 4 6 4 2 3.6 0. more units may come up. INDUSTRY RISK Table-1:. The weights of these factors will be fixed or defined by the Industry analysts.145 0.8 Sri Bhagawan Mahaveer Jain College 67 .A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA Govt.

Government policies.5 respectively. Inferences:By changing the score pattern of Demand supply gap. The scores for these factors is 4 and 6.7 .35 to3. The definitions derived from the model for the proposed scores are as follows : Demand and supply gap The branded ready made garment factory production is generally increased since the manufacturers are coming up with several designs and also they are bringing several types of products by using various types of raw material which is suitable to general public.6 respectively.95 to 3.145. Input Related Risk and Extent of Competition the total score of Industry characteristics has come down from 3.8 respectively. so the Industry risk is favorable. The existing score for these factor is 3 and the proposed score is 2. and the weighted score is 1 and 1.75 and . This has an impact on the weighted score of Industry characteristics which has slightly declined from 3.  The weights of extent of competition is 40. The Existing score is 5 and the proposed score is 4 and the weighted score for these factor is . Sri Bhagawan Mahaveer Jain College 68 . The weighted score for these factors is 1.and the weighted score for these factor is 1 and 0 . The unbranded manufacturing segments are garments either of low quality or export quality which will not affect branded manufacturers.8 respectively.  The weights of Government policy for Existing score and proposed score is 25.  The weights of Input related risk is 15 . As the Industry Characteristic is a part of Industry Risk by decline in the scores of Industry characteristics the overall Industry Risk rating of Ready Made garment Industry is reduced to certain extent.20 and . The Existing score for Demand and supply is 5 and the proposed score is 4. Hence the demand and supply situation in the domestic market are not in balance.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA  The weights of Demand and supply for existing and proposed score is 20.

along with the competition from unbranded ready. due to a limited number of players. Extent of competition : Because the garment industry is highly competitive.made and tailor – made garments. competition is intense due to large number of players and competition from unbranded garment industry. lee and color plus. wrangler.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA Government Policies The score 6 indicates that the government policies are much favorable to ready made garment industry. excise duty. arrow. taxes incentives for new investments.price segments. are some of the encouraging factors for ready made garment industry Input related risks: Availability of cotton and synthetic fabric is a competitive advantage for the Indian garment industry in the exports market. van Heusen. The impact of government policies with respect to tariff barriers. Competition in premium segment is relatively lower. allen soley. availability of superior quality processed fabric is limited. Sri Bhagawan Mahaveer Jain College 69 . The industry can be classified into premium and mid. However. The availability of low cost skilled labour also improves cost competitiveness of Indian garment Industry. This segment includes Brands like louis phillipe. vansoley. with over 100 brands competing with each other. In the mid-price segment.

399 Proposed Score Score Weighted Score 5.71 1.24 0.4 0.30 5.69 1. 0.67 Existing Score Score Weighted Score 3.75 4.2 1 score s 0.6 0.45 4.40 0.85 3.75 2.61 0.516 0.2 0 15 20 25 40 Existing score Proposed score weights Table-2:-Industry Financials Particulars Weights (%) 15 33.03 Industry Financials Return on capital employed Variability in operating margin Operating margin Growth in operating margin Interpretation:- Sri Bhagawan Mahaveer Jain College 70 .33 16.6 1.33 16.20 0.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA Industry Characterstics 1.85 2.10 6.916 .67 33.10 2.8 0.52 1.4 1.67 6.

the weighted score for this factor is 1.10 and 4. The existing score for this factor is 4.03 respectively.516 and 0.75.67 .75 and 5. the weighted score is 0.30.  The weights of Return on Capital employed is 33.  The weight of Growth in operating Margin is 16.71 respectively.399 and 1.0% to 24 %.69 respectively.  The weights of variability in operating Margin is 16.33 for both the Existing and proposed score.45 to 5. The weights of these factors will be fixed. The existing score for this factor is 2. This Indicates that the risk rating of Industry Financials are unfavorable for Ready made Garment Industry.61 and 2.916 and 1.  The weights of Operating margin is 33.75 indicates that the return on capital employed of ten companies lies between 20. operating margin and Growth in operating margin the total scores for this factor has been increased from 3. The weights for the above table will remain constant for both the existing and proposed score. The present status by changing the scores of the company are as follows Return on Capital employed The score 6. Inferences:By changing the scores of Return on capital employed.40 and 6.52 to 0. the weighted score for this factor is 0.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA The table 2 indicates the Industry financials which is one of the important part of Industry Risk.10. the weighted score for this factor is 0.24 respectively. The existing score for this factor is 2.33. Industry financial has four factors .67. This has an impact on the overall weighted score of Industry financials which has been increased from 0.85 and 6. Sri Bhagawan Mahaveer Jain College 71 .85.20.67 which is fixed for both the existing and proposed score. The existing score for this factor is 3. Variability in operating margin. The total weights of Industry financials is equal to 100.

A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA Variability of operating margin The score 4. Growth in operating margin The score 6.005 to . 0075 Sri Bhagawan Mahaveer Jain College 72 .20 indicates that the growth in operating margin lies between 0.10 indicates that the operating margin lies between 15 % to20 %.30 indicates that the variability of operating margin lies between 10 % to 15%. Operating Margin The score 5.

38 3.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA Industry Financials 2.36 0.3 Weights OVERALL RISK ASSESSEMENT SCORE OF INDUSTRY RISK Table-3:Existing score Particulars Proposed score Weights (%) Weighted Final Overall Weighted Final Overall score score risk score score risk score score 10 85 15 3.85 3.7 16.145 0.88 0.5 2 1.99 0.5 Scores 1 0.3 33.52 3.7 33.39 Industry Risk Industry characteristics Industry financials Sri Bhagawan Mahaveer Jain College 73 .5 0 Existing Score Proposed Score 16.

2004. when we consider the total final score of Industry risk  The existing final score of Industry risk is 3. This indicates that the overall industry risk rating of ready made garment industry is Unfavorable.52 and the weighted proposed score for this factor is 0.02. BUSINESS M/s Texport Overseas is a partnership firm incorporated on 01. The weighted existing score for Industry characteristics is 3. the partnership firm is converted to a private limited company viz.03.03. Sri Bhagawan Mahaveer Jain College 74 .A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA Interpretation:The above table indicates the overall risk assessment score given for Industry risk. Satish Goenka family promoted the company. Texport Overseas has won many awards for their export performance. There are more than five subsidiaries engaged in the same line of business. The business of M/s Texport Overseas is taken over by the newly formed company with effect from 01. From this table we can interpret that the weights assigned for Industry risk is 10 for both existing as well as for proposed score.2004.39 respectively Inferences:When we look into the overall risk assessment score of Industry risk there is a slight increase in these scores .38 and 0. Company is engaged in manufacturing and exporting of readymade garments. Later.2000 and started commercial operations in the financial year 2000-2001. The weighted existing score for Industry financial is 0.85 which has been interpreted in table 1 and table 2 respectively. M/s Texport Overseas Private Limited (GIPL) is incorporated on 01.36 and the weighted proposed score for the industry characteristics is 3.88 and the proposed final score of Industry risk is 3.145.99  The overall risk score for existing and proposed is 0.

75 1. The existing score for this factor is 5 and the proposed score is 7. The total weights of Operating efficiency and market position is100.25 1.2 1. The weights of these factors will be fixed.25 and the weighted proposed score for this factor is 1.00 Operating efficiency Product design and development Availability of Skilled labour Selling cost Employee cost Interpretation:- 30 20 25 35 20 The table 4 indicates the scores given for Business risk.75.4 0. Operating efficiency has 4 factors.2 and the weighted proposed score for this factor is 0. the weighted existing score for this factor is 1.75 1. Business risk has two components they are Operating efficiency and Market position.  The weights of availability of skilled labour for existing score and proposed is 25.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA BUSINESS RISK Table-4:-Operating efficiency Particulars Weights (%) Existing Score Score Weighted Score 4.39 1.3 4 7 5 5 1.59 0.8 Proposed Score Score Weighted Score 5. From the above table we can say that  The weights of product design and development for existing score and proposed score is 20 which is fixed.65 6 5 4 4 1. Sri Bhagawan Mahaveer Jain College 75 . The existing score for this factor is 6 and the proposed score is 4. the weighted existing score for this factor is 1.8 1.8.

Employee cost: The score 5 indicates employee costs are lower than industry average levels Sri Bhagawan Mahaveer Jain College 76 .  The weights of employee cost is 20 .4 and the weighted proposed score for this factor is 1.75. The following are the definitions derived from the model for the proposed scores are as follows: Product design and development: The score 4 indicates low priority on product design and development. The existing score for this factor is 4 and the proposed score for this factor is 5. Inferences:By changing the existing scores and by giving the proposed scores for product design and development.59.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA  The weights of selling cost is 35 and the existing score for this factor is 4 and the proposed score is 5. Availability of skilled labour: The score 7 indicates that skilled labour is easily available Selling cost: The score 5 indicates that selling costs are little better than industry averages. the Business Risk rating is unfavorable for Readymade garment Industry.65 to 5. so. availability of skilled labour selling cost and employee cost the total scores of operating efficiency of Business risk has been increased from 4. the weighted existing score for this factor is 1.39 to 1.8 and the weighted proposed score is1.3 which in turn has an impact on the overall weighted score of operating efficiency which has been increased from 1. Very few case of attempts to innovate but with no success. The weighted existing score is 0.

3 5 3.5 2.6 1.5 Market Position Brand equity Long term contracts/assured off take Distribution setup Product range 10 40 20 5 6 6 0.2 4 5 7 0.8 Proposed Score Score Weighted Score 5.2 1 Scores 0.4 Sri Bhagawan Mahaveer Jain College 77 .8 1.4 2.71 1.9 6 4.6 0.4 1.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA Operating Efficiency 1.4 0.4 1.2 0 20 20 25 35 Existing Score Proposed Score Weights Table-5:-Market position Particulars Weights (%) 70 30 Existing Score Score Weighted Score 5.8 0.0 1.13 1.

71. Market position has four factors .  The weights of Long term assured contract is 10 and the existing score is 5 and 4 respectively. The existing score is 6 and the proposed score is 5.13 to 3. The definition derived from the model for the proposed scores are as follows Sri Bhagawan Mahaveer Jain College 78 . The weighted existing score is 0.4. The total weight of market position is 100. The weighted existing score is 1.4 Inferences:Due to change in the score pattern of the factors of Market position of the Business Risk the overall weighted score of market position of the Business Risk has come down from 4.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA Interpretation:The table 5 indicates the scores given for market position of the Business risk.2 and the weighted proposed score is 1. The weighted existing score is 2.0  The weights of Product range is 20. From the above table we can interpret the following facts  The weights given for Brand equity is 30 which is fixed for both the existing and proposed score and the scores of this factor is 6 and 5.4 and the weighted proposed score is 2. The weighted score for this factor is 1.5 and the weighted proposed score is0. The existing score is 6 and the proposed score is 7. This means that the Business risk Rating for this particular factor is favorable for Ready made garment Industry.  The weights of Distribution set up is 40.5 respectively.8 and 1. The weights of these factors is also 100.

With wide geographical coverage. Some brands have a fairly good customer recall Long term contracts/assured off take: Long term contracts with assured take off with some covenants attached to it.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA Brand equity : The score 6 indicates that the Expenditure is on brand building . Product range: The score 7 indicates that company is expected to remain at the fore front owing to capability to introduce new products. Sri Bhagawan Mahaveer Jain College 79 . The score 5 indicates moderate distribution set up. Distribution set up:.

85 Sri Bhagawan Mahaveer Jain College 80 .94 1.59 3.53 1.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA M arke t Position 2.5 2 Scores 1.71 5.40 4.5 1 0.3 1.13 5.5 0 Existing Score Proposed Score 10 20 30 40 Weights OVERALL RISK ASSESSEMENT SCORE OF BUSINESS RISK Table-7:Particular Weight s s (%) Existing score Weighted Final score score Proposed score Weigh Final ted score score Overa ll risk score Overall risk score Business Risk Operating efficiency Market position 35 30 70 1.

 The existing final score of Business risk is 5.71.13 and the weighted proposed score is 3. All the companies/concerns are engaged in the same line of business and the sister concerns are undertaking company's job works.85.so the overall Business risk rating is favorable for Readymade garment Industry.85 Inferences:When we consider the overall Business risk score of ready made garment Industry the overall existing Business risk score is 1.Exports are dealing with our bank. Goenka Exports. The Business risk is assigned a weightage of 35 for both the existing and proposed scores.53 and the proposed score is 5.94 and the overall proposed score is 1. There is no significant change in the management. Indev Warehouse. Unique Creations and Goenka. The other companies/concerns in the group are Unique Creations. Central Warehouse etc. By this we can come to an conclusion that there is slight decrease in these scores .The weighted existing score of Market position is 4.3  The overall existing risk score is 1.59 . so the bank can adjudge this particular account as normal risk account. MANAGEMENT: The Company was promoted by Satish Goenka. whereas the proposed business risk score is 1. Out of this. The weighted existing score of operating efficiency is 1. even though the constitution has changed from partnership firm to private limited company Sri Bhagawan Mahaveer Jain College 81 . For this particular companies account the bank is having normal risk.40 and the weighted proposed score is 1. belongs to "Texport Overseas Exports" Group.94 .A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA Interpretation:The table 7 indicates the overall assessment score for Business risk.

 The weight of Ability to meet profit projection is 50.33 100 7 8 6 8 8 2. Payment record and Management The weights of this factor is also fixed. The weighted existing score is also 8 and the weighted proposed score is 7. The management risk has two components they are track record. The existing score is 6 and the proposed score is 5.33.5 8 5 7 7 2.16 4 2. The existing score is 8 and the proposed score is 7. The weighted existing score is 3 and the weighted proposed score is 2.67 8 Proposed Score Score Weighted Score 6.33 4 3 2.  The Weights of past payment record is 100 .33 50 50 33.  The weights of Ability to meet sales projection is 50 which is fixed for both the scores. The weighted Existing score is 4 and the weighted proposed score is also 4.33 7 Interpretation:The table 4 indicates the Management Risk of Track record and past payment record. The total weight for Track record is 33.8:-Track record& past payment record Particulars Weights Existing Score (%) Score Weighted Score Track Record Ability to meet profit projection Ability to meet sales projection Payment Record Past payment record 33. The weights for the above table will remain constant for both the existing and proposed scores.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA MANAGEMENT RISK Table. The existing score for this factor is 8 and the proposed score is also 8. Sri Bhagawan Mahaveer Jain College 82 .33 and the total weight for the Payment record is33.5 2.5.

This has an impact on the overall weighted score which in turn has come down from 2.33 to 2. ability to meet sales projection and past payment record the total score of the track record has come down from 7 to 6. Track Record & Payment Record 8 7 6 5 Scores 4 3 2 1 0 50 50 100 Existing Score Proposed Score Weights Sri Bhagawan Mahaveer Jain College 83 . . so this implies that the track record and past payment record of the company is favorable.33.67 to 2.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA Inferences:By changing the score pattern of ability to meet profit projections.16.5 and the total score of past payment record has come down from 2.

5 1. The score for this factor has been decreased from 5 to 4. The score for this factor has been increased 5 to7. The scores for this factor has been decreased from 6 to 4. The score of this factor has been increased from 5 to 7.  The weights of the Timeliness of furnishing information is 25.75 1.25 to 1.83 1.25 6 5 5 5 1.  The weights for the Business and financial policy is 25. The weighted score for this factor has also been decreased from1. From the above table the weights of the management is 33.5 4 7 7 4 1. The weighted score has also been increased from 1. and the weighted score has also been decreased from 1.00 MANAGEMENT Managerial competence Experience in the industry Business and financial policy Timeliness of furnishing information Interpretation:- 33.75.75 1.00 1.33 which is constant for both the existing and proposed scores. The weighted score for this factor has also been increased from 1. Sri Bhagawan Mahaveer Jain College 84 .25 to 1.25 to 1.33 25 25 25 25 The table 9 indicates the scores given for the Management of Management Risk.75 1.25 1.Management Particulars Weights (%) Existing Score Score Weighted Score 5.25 1. The weights of these factors are fixed and the total of this factor is equal to 100.00  The weights of the Experience in the Industry is 25.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA Table-9:. The Management has four factors.The weights of the Managerial competence is 25 which is constant for both the existing and proposed score.  .25 Proposed Score Score Weighted Score 5.75.5 to 1.

Sri Bhagawan Mahaveer Jain College 85 . The definitions derived from the model for the proposed scores are as follows: Experience in the Industry: The score 4 indicates that the top management of Ready made garment industry is fairly experienced and have not put sufficient years in the Industry. Managerial competence : The score 7 indicates that the management has demonstrated the ability to steer the company through difficult periods.83. large expansion into unrelated areas stable/declining trend in debt equity ratio .75 to 1.so the increase in scores is not a good sign for Ready made garment Industry.25 to 5.5. Absence of aggressive debt funded expansion. this in turn automatically increased the overall weighted score of the management from 1. Well established systems and procedures Business and Financial policy : The definition of score 7 is conservative management.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA Inferences:By changing the score pattern of the Management of the Management Risk the total score has been increased from 5. so the management risk rating is unfavorable.Avoidance of high risk Investments. The company possesses a strong second line of management.

4 0.83 Proposed score Weighted Fin Overall score al risk score sco re 6.8 0.3 3 0.33 1.4 1.8 1.2 0 25 25 25 25 Weights Scores Existing Score Proposed Score OVERALL RISK ASSESSSEMENT SCORE OF MANAGEMENT RISK Table-10:Particulars Weight s (%) Existing score Weighted Final Ove score score rall risk sco re 6.33 2.67 1.33 33.33 Sri Bhagawan Mahaveer Jain College 86 .16 2.33 33.6 1.01 2.6 0.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA Management 1.75 1.94 Management Risk Track Record Payment Record Management 15 33.75 2.2 1 0.

For this particular factor the Bank is having low risk so the bank can adjudge as low risk account Sri Bhagawan Mahaveer Jain College 87 .67 and the weighted proposed score for this factor is 2.33 and the weighted proposed score for this factor is 2.94  The overall risk score for existing and proposed score is 1.33.When we consider the total final score of Management risk  The existing final score of Management risk is 6.The weighted existing score for payment record is 2. This indicates that the overall management risk is favorable for readymade garment Industry. From this table we can interpret that the weights assigned for Management risk is 15 for both existing and proposed score.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA Interpretation:The above table indicates the overall risk assessment score given for Management risk.01 and 0.94 respectively. The weighted existing score for track record is 2.75 and the proposed final score of Management risk is 0.16. Inferences:When we look into the overall risk assessment score of Management risk score of there is a decrease in these scores.

The debtors collection period has improved from 50 days to 30 days. The prorate achievement being 96%. the company has estimated a sales of Rs 44759 lakhs. from Rs 36237 lakhs in the year 2007-08 to Rs 37071 lakhs in the year 2008-09. The other income has increased from Rs 173 lakhs to Rs 258 lakhs (growth of 49. Upto Feb. ROCE has reduced from 57% to 33%. Exports constitute 98% of the total net sales.1% i.e. The creditors holding period has increased from 9 days to 11 days.47 to 1.34. 10 the company has achieved a sales of Rs 39200 lakhs.e. The current ratio has declined from 1.41. Future Financials: For the year 2009-10. The cash profit of the company has decreased from Rs 4021 lakhs to Rs 3538 lakhs. PAT has declined by 14. from Rs 3742 lakhs to Rs 3216 lakhs.47 to 1. The cash generation from operating activity is sufficient enough to cover its financial obligations.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA FINANCIALS: Past Financials: The company’s net sales has increased by 2. PAT has declined mainly on account of increase in manufacturing and administrative expenses.13%).3% i. Bank borrowings to net sales has increased from 6% to 14%. The inventory holding period has increased from 48 days to 63 days. Sri Bhagawan Mahaveer Jain College 88 . TOL/TNW has reduced from 1.

1432 0.0003 1.00 7.71 1.00 8.1432 1.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA FINANCIAL RISK Table 11:.43 8.8574 1.0003 1.29 14.29 14.29. Past financials has 7 factors which is shown in the above table. The weights for the above table will remain constant for both the existing as well as proposed score  The weights of Return on capital employed for existing and proposed score is 14.0003 1. The total weights of past financial is 50 which is equal to 100.5716 1.29 14.1432 1. The existing score of this factor is 8 and the proposed score is also 8 and the weighted existing score is1.1432 1.29 14.14 8 4 7 7 8 8 8 3.1432 Option-I Proposed Score Score Weighted Score 7.00 3. Financial Risk has two components they are past financial and future financials.Past Financials Particulars Weights (%) Past financials ROCE-past Operating margin TOL/TNW Current Ratio DSCR Operating Income/short term borrowing Interest coverage 50 14.00 8. Sri Bhagawan Mahaveer Jain College 89 .29 14.00 7 .1432 Interpretation:The table 11 indicates the scores given for Option I of Financial Risk.1432.1432 1.00 6.0003 1.00 8.29 14.57 1.29 Existing Score Score Weighted Score 7.1432 and the weighted proposed score is also 1.1432 0.

14.0003  The weights of debt service coverage ratio for existing and proposed score is .1432 Inferences:The net sales has been increased by 15 % compare to previous year sales.1429. The existing score is 8 and the proposed score is 1. and the weighted scores has remained constant at 1. By this we can come to an conclusion that if we increase the net sales the overall weighted score will have an impact on past financials.5716 and 0.  The existing score of current Ratio is 7 and the proposed score is also 7. The weighted existing score has remained constant at 1.0003 and the weighted proposed score is also 1. The weighted score has remained constant at 1.57 to 3. this has an impact on overall weighted score of past financials which has been increased from 3. so the Option I of past financials for ready made garment industry is not favorable.29.71.8574 respectively.The weighted existing score is 0.  The existing score of Interest coverage is 8 and the proposed score is 8.  The weights of Total liability/ Total Net worth is 14.29.  The existing scores of operating income/ short term borrowing is 8 and the proposed score is also 8 . Sri Bhagawan Mahaveer Jain College 90 .1432 to 0. The weighted score of this factor has been declined from 1. The weighted existing score is 1.0003 for both the existing as well as for proposed score. The existing score is 7 and the proposed score is also 7.1432.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA  The existing score for operating margin is 4 and the proposed score is 6. which in turn has an effect on operating margin scores which has been increased by 4 to 6.

0003 1.29 Existing Score Score Weighted Score 7.1429 0.1429 respectively.1432 0.1432 Option II Proposed Score Score Weighted Score 3.0003 0.00 8.0003 1.29.57 1.1432 1.00 3.1429 The table 11 indicates the scores given for option III of Financial Risk.00 7.85 0.14 8.1432 and 0.0003 1.00 1.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA Table 12 Particulars Weights (%) 50 14.00 7. and the weighted score1.29 8.00 1.00 7.00 4.  The existing score for operating margin is 4 and the proposed score is 1.1432 8.00 1. The existing score for this factor is 8 and the proposed score is1.00 1.29 14. The existing score is 7 and the proposed score is also 7.29 14.00 1. Sri Bhagawan Mahaveer Jain College 91 .The weighted score is 0.29 14.1432 0.29.00 7.5716 and 0.29 14. The weights for the above table will remain constant for both the existing as well as proposed score  The weights of Return on capital employed for existing and proposed score is 14.1429 1. The weighted score has remained constant at 1.0003.1429 Past Financials ROCE Operating Marginpast TOL/TNW Current Ratio DSCR Operating Income/short term borrowing Interest Coverage Interpretation:- 14.715 1.00 8.00 1.5716 1.1429  The weights of Total liability/ Total Net worth is 14.29 14.

Inferences:- The variable costs such as Raw material. power and fuel .1432 and 0.the option II has more favorable rating for Ready Made Garment Industry. operating margin score which has decreased from 4 to1and Interest coverage ratio from 8 to 1.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA  The existing score of current Ratio is 7 and the proposed score is also 7. which in turn has an effect on the scores of return on capital employed which has decreased from 8 to 1. 14.85.Thus the option II is much more favorable for the Ready made garment Industry Thus from the above two options.1429 respectively. other Manufacturing expenses and Administration .1432 to 0.1429.  The existing scores of operating income/ short term borrowing is 8 and the proposed score is also 8 . so the option II has been taken for final assessment of companies Financial risk.57 to 1.1432  The existing score of Interest coverage is 8 and the proposed score is1 and the weighted score is 1.. The weighted score has remained constant at 1. The existing score is 8 and the proposed score is 1.29. The weighted score has remained constant for both existing and proposed score at 1. selling and other cost etc has been increased by 15 %. Employee cost. The weighted score of this factor has been declined from 1. This has an impact on the overall weighted score of past financial which has been decreased from 3. Sri Bhagawan Mahaveer Jain College 92 .0003  The weights of debt service coverage ratio for existing and proposed score is .

3 14.3 14.3 14.5 8 8 7 7 5 5 1.5 5 Proposed Score Score Weighted Score 5.6 0.4 0.5 2 1.8 Scores 0.2 1 0.2 0 14.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA Past Financials 1.3 Weights Existing Score Proposed Score Table 13:-Future Financials Particulars Weights Existing Score (%) Score Weighted Score Future Financials ROCE-Projected DSCR TOL/TNW Operating Margin Financial flexibility of Company Financial flexibility of company 20 25 25 25 25 30 100 7.75 0.5 2 2 1.75 1.75 6 8 7 2 6 6 1.5 1.8 6 Sri Bhagawan Mahaveer Jain College 93 .75 1.15 1.

The score of this factor is has decreased from 8 to 6 and the weighted existing score has also decreased from 2 to 1. The weights for the above table will remain constant for both the existing as well as proposed score  The weights of Return on capital employed for existing and proposed score is 25.  The score of operating margin has been decreased from 7 to 2. this will have an effect on the costs of the future financials and in turn will have an impact on the weighted scores of future financials.5to 1.The weighted existing score has decreased from 1. But in this case as the future financials has come down from 1.75 to 0.  The weights of debt service coverage ratio for existing and proposed score is .75. Future financials has 7 factors which is shown in the above table. Sri Bhagawan Mahaveer Jain College 94 . The weighted existing score is 5 and the weighted proposed score is 6. The total weights of future financial is 20 which is equal to 100. 25. The weighted existing score has remained constant at 1.5  .5. The existing score is 7 and the proposed score is also 7. Inferences:- By increasing the variable costs by 15%.  The weights of Total liability/ Total Net worth is 25.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA Interpretation:The table 11 indicates the scores given for Future Financials. The existing score is 5 and the proposed score is 6.15 this is favorable for the Ready made garment Industry. The scores of this factor has remained constant.The weights of financial flexibility of the company is 100.

Sri Bhagawan Mahaveer Jain College 95 .81 1.50 1.86 1. The weights assigned for past financials.92 30 1.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA Future financials & financial flexibility of company 6 5 4 Scores 3 2 1 0 25 25 25 Weights 25 100 Existing score Proposed score OVERALL RISK ASSESSMENT SCORE OF FINANCIAL RISK Table 14:Particulars Weigh ts (%) Existing score Proposed score Weight Final Overall Weighted Final Overall ed score risk score score risk score score score Financial Risk Past Financials Future Financials Financial flexibility of the company Interpretation:- 40 50 20 3.15 4.80 The table 15 indicates the overall risk assessment score given for Financial risk.63 1.57 1. From this table we can interpret that the weights assigned for Financial risk is 40for both existing as well as for proposed score.57 2.50 6.

For this particular factor the bank is having normal risk so the bank can adjudge as normal risk account.The weighted existing score of financial flexibility of the company is 1.80 .81.57 and the weighted proposed score is1. Inferences:- Option II has been taken for overall risk assessment score of Financial risk.15.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA future financials and for financial flexibility of the company is 50. The weighted existing score of future financials is 1.50 and the weighted proposed score of this factor is 1.92respectively.so by this we can come to an conclusion that the overall Financial risk rating is favorable for Ready made garment Industry. When we consider the total final scores of Financial risk  The existing final score of Financial risk is 6.63 and 1. 20 and 30 respectively.86.50 and the weighted proposed score of this factor is 1. Sri Bhagawan Mahaveer Jain College 96 . When we look into the overall Financial risk the score has come down from 2.  The overall risk score for existing and propose is 2. The weighted existing score of past financial is 3.63 to 1.92.57 and the proposed final score is 4.

LR3 The degree of safety with respect to debt servicing capacity is good Proposed score 0.11 IV Normal Risk The degree of safety with respect to debt servicing capacity is satisfactory Inferences:Due to change in scores we find there is vast volatility in Rating grade of the company.92 5. In the present context as per the analysis mentioned above the company is under Normal Risk.96 III Low Risk.39 1. so the degree of safety with respect to debt servicing capacity is satisfactory.38 1.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA RISK ASSESSMENT SCORE Table:-15 Score type : Company Industry Risk Business Risk Financial Risk Management Risk Overall Company score Overall Grade Grade Description Degree of safety correspond to the Grade Existing score 0.85 0. By this we can conclude that the company is facing high risk/low risk/Normal risk.63 1.94 2.94 1. Sri Bhagawan Mahaveer Jain College 97 .01 5.

A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA Risk Assessment Score Existing Score Proposed Score 0 1 Score 2 3 Sri Bhagawan Mahaveer Jain College 98 .

Industry Risk. • The Financial Risk Rating is favourable for Texport Overseas which is in the Ready made garment Industry in India. • The Business Risk Rating is favourable for Texport Overseas. a firm which is in the Ready made Garment Industry in India. which is in the Ready Made Garment industry in India. after taking into consideration all the factors pertaining to all the different risks that the firm might face. • So. the overall rating for Texport Overseas. • The Management Risk Rating is also favourable for Texport Overseas which is in the Ready made garment Industry in India. Business Risk. From the analysis mentioned above: • The Industry Risk Rating is unfavourable for Texport Overseas.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA FINDINGS OF THE STUDY • From the analysis mentioned above the degree of safety with respect to debt servicing capacity is satisfactory and can be termed as safe enough for giving the loan to the firm.( after using proposed and existing scores). a firm which is in the Ready Made Garment Industry in India. be it in. SUGGESTIONS Sri Bhagawan Mahaveer Jain College 99 . • Based on the scores given for a particular factor the overall Rating of company keeps on changing and so also the Risk grade also keeps on changing due to its impact. Management Risk or Financial Risk. is taken as to be favourable for this purpose.

also better understand the market and its expectations. • The Bank of Baroda can also. take the opinion of other banks which have been dealing in this sector. Texport Overseas is favourable the Bank can consider the financial needs of this company. so as to get a better risk cover and by this means. which has been adopted here. if needed. • At times the Risk Assessment Model will not function properly because of system failure. • Apart from the Risk Assessment Models. • Banks need to involve branch level administrators in making credit risk decisions. • The Bank along with this also has to take into consideration its priorities and the sectors it prefers. Hence it is suggested that the Banks should train their officers and Employees suitably to undertake the Risk Rating Related Work. the bank should also consider the use of some other models like Loan Review Mechanism and Loan Default Analysis. Sri Bhagawan Mahaveer Jain College 100 .A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA • Since the Overall Rating and Financial Condition of this particular company.

the bank will suffer from losses. While financial institutions have faced difficulties over the years for a multitude of reasons. or a lack of attention to changes in economic or other circumstances that can lead to a deterioration in the credit standing of a bank's counterparties. The effective management of credit risk is a critical component of a comprehensive approach to risk management and essential to the long-term success of any banking organisation. refers to the process of risk assessment that comes in an investment. it must offer loan products that are reasonable enough. Banks should also consider the relationships between credit risk and other risks.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA CONCLUSION The importance of credit risk management for banking is tremendous. if the interest rates in loan products are too low. poor portfolio risk management. Credit risk management. Risk often comes in investing and in the allocation of capital. However. Likewise. These institutions must balance risks as well as returns. Credit risk is most simply defined as the potential that a bank borrower or counterparty will fail to meet its obligations in accordance with agreed terms. Sri Bhagawan Mahaveer Jain College 101 . Banks and other financial institutions are often faced with risks that are mostly of financial nature. Banks need to manage the credit risk inherent in the entire portfolio as well as the risk in individual credits or transactions. 1. in finance terms. 2. The risks must be assessed so as to derive a sound investment decision. For a bank to have a large consumer base. The goal of credit risk management is to maximise a bank's risk-adjusted rate of return by maintaining credit risk exposure within acceptable parameters. the major cause of serious banking problems continues to be directly related to lax credit standards for borrowers and counterparties. the assessment of risk is also crucial in coming up with the position to balance risks and returns. but not too much that it misses the investment revenue. a bank must have substantial amount of capital on its reserve. and not too little that it leads itself to financial instability and to the risk of regulatory non-compliance. In terms of equity.

trade financing. however. and the disclosure of credit risk. Banks are increasingly facing credit risk (or counterparty risk) in various financial instruments other than loans. measurement and monitoring process. and (iv) ensuring adequate controls over credit risk. For most banks. 6. and both on and off the balance sheet. 4. While the exact approach chosen by individual supervisors will depend on a host of factors. (iii) maintaining an appropriate credit administration. swaps. Since exposure to credit risk continues to be the leading source of problems in banks world-wide. including in the banking book and in the trading book. monitor and control credit risk as well as to determine that they hold adequate capital against these risks and that they are adequately compensated for risks incurred. financial futures. and in the extension of commitments and guarantees. the principles set out in this paper should be used in evaluating a bank's credit risk management system. the adequacy of provisions and reserves. bonds. including acceptances. banks and their supervisors should be able to draw useful lessons from past experiences. options. Although the principles contained in this paper are most clearly applicable to the business of lending. they should be applied to all activities where credit risk is present.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA 3. Banks should now have a keen awareness of the need to identify. 5. foreign exchange transactions. measure. (ii) operating under a sound credit-granting process. and the settlement of transactions. equities. other sources of credit risk exist throughout the activities of a bank. Supervisory expectations for the credit risk management approach used by individual banks should be commensurate with the scope and sophistication of the Sri Bhagawan Mahaveer Jain College 102 . interbank transactions. loans are the largest and most obvious source of credit risk. These practices should also be applied in conjunction with sound practices related to the assessment of asset quality. including their on-site and off-site supervisory techniques and the degree to which external auditors are also used in the supervisory function. The sound practices set out in this document specifically address the following areas: (i) establishing an appropriate credit risk environment. Although specific credit risk management practices may differ among banks depending upon the nature and complexity of their credit activities. a comprehensive credit risk management program will address these four areas.

A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA

bank's activities. For smaller or less sophisticated banks, supervisors need to determine that

the credit risk management approach used is sufficient for their activities and that they have instilled sufficient risk-return discipline in their credit risk management processes. 7. A further particular instance of credit risk relates to the process of settling financial transactions. If one side of a transaction is settled but the other fails, a loss may be incurred that is equal to the principal amount of the transaction. Even if one party is simply late in settling, then the other party may incur a loss relating to missed investment opportunities. Settlement risk (i.e. the risk that the completion or settlement of a financial transaction will fail to take place as expected) thus includes elements of liquidity, market, operational and reputational risk as well as credit risk. The level of risk is determined by the particular arrangements for settlement. Factors in such arrangements that have a bearing on credit risk include: the timing of the exchange of value; payment/settlement finality; and the role of intermediaries and clearing houses. After going through the Findings & Suggestions we can come to a conclusion that Risk Rating is favourable when the degree of safety in respect of the debt servicing capacity of the borrower is satisfactory. Only on studying Credit Risk we can assess the Business Risk, Industry Risk, and Financial Risk of a Particular Borrower. Thus, in this project which is based on the credit risk management at the Bank of Baroda, I have tried to show how this risk is managed and how the bank uses its policy to determine the credibility of a particular firm before giving the loan of the particular amount. The company taken for example is “Texport Overseas”. And after taking all factors into consideration, it is found favourable. Hence, by this analysis the credit risk management practiced at the Bank is properly analysed from all angles and hence its effectiveness is determined.

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BIBLIOGRAPHY

Websites-

         

Search.epnet.com Wikipedia.com Google.com Creditriskmanagement.com Defaultrisk.com Bankofbaroda.com Indiatimes.com Moneycontrol.com Texportoverseas.com Banknetindia.com

Books, Magazines…

    

The Indian Banker Business India Economic Times Internal Credit Risk Models ( by Michal Kong) Credit Risk Modelling: Design & Application( by Elizabeth Mays) India Today

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PARTICULARS Capital and Liabilities: Total Share Capital Equity Share Capital Share Application Money Preference Share Capital Reserves Revaluation Reserves Net Worth Deposits Borrowings Total Debt Other Liabilities & Provisions Total Liabilities Assets Cash & Balances with RBI Balance with Banks, Advances Investments Gross Block Accumulated Depreciation Net Block Capital Work In Progress Other Assets Total Assets Contingent Liabilities Bills for collection

Balance Sheet of Bank Of Baroda ------------------- in Rs. Cr. ------------------Mar '05 Mar '06 Mar '07 Mar '08 Mar '09

294.53 294.53 0.00 0.00 5,333.23 0.00 5,627.76 81,333.46 1,640.83 82,974.29 6,062.19 94,664.24

365.53 365.53 0.00 0.00 7,478.91 0.00 7,844.44 93,661.99 4,802.20 98,464.19 7,083.90 113,392.53

365.53 365.53 0.00 0.00 8,284.41 0.00 8,649.94 124,915.98 1,142.56 126,058.54 8,437.70 143,146.18

365.53 365.53 0.00 0.00 10,678.40 0.00 11,043.93 152,034.13 3,927.05 155,961.18 12,594.41 179,599.52

365.53 365.53 0.00 0.00 12,470.01 0.00 12,835.54 192,396.95 5,636.09 198,033.04 16,538.15 227,406.73

2,712.32 6,541.88 43,400.38 37,074.44 1,707.68 846.88 860.80 0.00 4,074.41 94,664.23 33,066.99 9,768.27

3,333.43 10,121.21 59,911.78 35,114.22 1,873.17 952.44 920.73 0.00 3,991.16 113,392.53 34,678.87 10,407.04

6,413.52 11,866.85 83,620.87 34,943.63 2,244.62 1,155.81 1,088.81 0.00 5,212.50 143,146.18 54,999.86 12,976.53

9,369.72 12,929.56 106,701.32 43,870.07 3,787.14 1,360.14 2,427.00 0.00 4,301.83 179,599.50 75,364.33 15,105.51

10,596.34 13,490.77 143,985.90 52,445.88 3,954.13 1,644.41 2,309.72 0.00 4,578.12 227,406.73 64,745.82 22,584.64

Sri Bhagawan Mahaveer Jain College

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486.692.35 237.697.569.99 275.396.309.930.in Rs.644.30 315.11 263.36 214.73 634.645.29 13.00 0.811.18 352.72 0.385.26 219.16 12.77 143.776.75 2.81 110.510.46 12.65 1.828.73 416.470.629.494.653.985.46 303.607.44 0.61 193.918.96 63.13 1.20 964.92 189.490.270.058.702.48 9.27 5.17 17.12 227.63 209.00 410.30 0.596.00 0.403.90 4.00 0.513.79 6.62 525.70 742.01 0.18 3.056.892.953.786.929.20 154.824.00 9.835.77 410. Cr.490.00 12.04 16.08 11.432.036.941.46 0.73 64.91 219.578.538.74 14.757.432.845.915.62 614.421.00 57.86 18.08 246.50 4.219.80 Assets Cash & Balances with RBI Balance with Banks Advances Investments Gross Block Accumulated Depreciation Net Block Capital Work In Progress Other Assets Total Assets Contingent Liabilities Bills for collection Book Value (Rs) 10.08 315.501.918.909.733.42 25.258.61 2.72 1.06 3.603.406.168.760.00 0.710.41 2.74 8.207.90 52.77 186.89 542.39 225.156.312.033.18 10.59 1.91 525.374.90 215.949.00 37.37 Balance Sheet March’09 Capital and Liabilities: Total Share Capital Equity Share Capital Share Application Money Preference Share Capital Reserves Revaluation Reserves Net Worth Deposits Borrowings Total Debt Other Liabilities & Provisions Total Liabilities ------------------.354.00 12.12 13.00 12.98 199.857.88 3.947.34 13.060.501.73 244.406.23 1.41 2.68 795.75 107. ------------------Bank of Baroda SBI PNB Bank of India Canara Ban 365.54 192.80 136.97 142.53 365.708.25 3.63 4.15 227.584.964.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA Book Value (Rs) 191.95 5.130.745.74 224.00 11.45 5.503.020.445.13 246.99 138.40 57.61 2.488.574.578.713.155.88 0.87 Sri Bhagawan Mahaveer Jain College 106 .65 152.00 0.636.47 79.645.07 1.88 634.28 12.43 912.64 352.00 0.00 57.06 31.82 22.53 0.397.440.02 225.00 4.48 110.533.25 48.82 0.37 55.954.546.09 198.39 10.91 0.57 964.00 4.073.622.13 53.37 52.134.51 7.195.36 6.

2010 Domestic Sales Export Sales 2.3.3.10 0 Gross Sales Less.g.00 44295.00 36236.3.00 597.YY) e.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA PROFIT AND LOSS ACCOUNT OF TEXPORT OVERSEAS COMPANY : PROFIT & LOSS ACCOUNT YEAR (DD.MM.65 597.2008 BASE YEAR 31.2003 PAST YEARS FROM THE BASE YEAR 31.58 200 Net Sales Adjustment for stock ( .3.22 44985.18 36307.10 37070.10 Sri Bhagawan Mahaveer Jain College 107 .66 37259.07 597.2006 31.00 491.2007 31.65 604 37070.11 763. 31./ +) Net Income 597.3.07 2.54 35745.2009 PROJECTED YEAR 31.64 44785.46 490.10 188. Excise Duty 2.07 2.00 36236.07 0.03.64 44785.00 36840.00 0.

00 55.2008 5183 0 5183 0 0 0 0 0 0 2287 901 4302 148 5350 12821 31.2010 8189 0 8189 0 0 0 0 10 10 5264 1233 2010 180 3423 16896 Sri Bhagawan Mahaveer Jain College 108 .00 35.80 3216.3.18 0 -27.00 32447.62 173 2957.3. other income Interest.00 4393.27 7187.00 6.00 5. Selling & Other : 2 0 1 1 YEARS 0 379.00 258.51 37102.2009 5902 0 5902 0 0 0 0 0 0 5064 1133 1987 165 3285 14251 31.30 3674.80 0. Depreciation Tax 4.00 FROM THE 39.00 YEAR 584. other income Non-Opearting Income -3. Excld.3.80 PAT -3. Expenses TEXPORT OVERSEASCost Admn.2007 2038 0 2038 0 0 0 0 45 2471 214 746 746 5514 31.18 8.93 13.35 -1.28 0 430 440 0 175 0 545 279 0 PAT.00 23890 30 445 6630 BASE 1452 22865. Expenses BALANCE SHEET PBDIT.Long term loan Interest-Short term loan & Working caps.00 YEAR YEAR 33584.3. excld.05 7966.00 105.71 7882.50 94.61 962.45 0.31 0 0 1 0 1.85 BASE 1695.3.00 3742.50 25152 104 1058 8923 PROJECTED 1865 PAST Total op.00 3569.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA Raw materials Power & Fuel Employee Cost Other Mfg.27 322.45 BALANCE SHEET OF TEXPORT OVERSEAS LIABILITIES Equity Capital Preference Capital Total Capital General Reserves Capital Reserves Revaluation Reserves Total Reserves Deferred Tax – Liability Long Term Loans Short Term Loans WC Loans from Banks Sundry Creditors Other Current Liablities Provisions Current Liabilities & Provisions TOTAL Repayment towards term loan 31.00 0..99 7012.2006 5 0 5 0 0 0 0 2 0 0 20 20 27 31.00 394.00 34.

00 0 6 2 3 6 16.2009 3086.3.3. Depreciations Net Block Capital Work In Progress Investments Inventories Debtors Loans & Advances Cash & Bank Balances Total Current Assets Non current assets Debtors .00 611.00 31.36) Sri Bhagawan Mahaveer Jain College 109 .3.93 (1371.2006 7 10 31.3.00 27 0 5514 0 12821 0 14251 0 16896 0 FUNDS FLOW STATEMENT OF TEXPORT OVERSEAS TEXPORT OFVERSEAS : FUNDS FLOW STATEMENT PAST YEARS FROM THE BASE YEAR 31.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA ASSETS Gross Block Less.3.90 0.2009 719 1475 PROJECTED YEAR 31.00 4746.3.74) 756.30 3086.2010 2297 890 Fund Flow Details Long Term Sources Long Term Uses Surplus / (Deficit) Short Term Sources Short Term Uses (2.00 54.3.10 (1407.2007 714.26 348 1755 Surplus / (Deficit) 2.00 714.84 0.00 0.2006 10 10.30 0 6448 3092 1210 415 11164.More than six months Total Non-Current Assets Deferred Tax – Assets Accumulated Lossess Intangible Assets TOTAL DIFFERENCE INDICATOR 31.93) (2202.2008 3145 942 BASE YEAR 31.00 31.2008 1890 279 1611.00 760.11) 2821 2065 1407.3.75 6731 8934 (756.00 3061.3.00 314.2007 2076 704 31.00 54.93 3411 4783 2202.00 0.27 0 4767 5006 822 615 11209.00 31.00 0 7548 3192 1610 570 12920.2010 4286 310 3976.93) 20 17 1371.22 0.00 31.3.

6 5 Recovery 99% 3679 210 30 7187.1 37070.8032 3216.2008 31.3.2007 Payment record over last 12 months 40500 37536 900 Demand 100% 44785.3.3.A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA ANALYSIS: TEXPORT OVERSEAS Ability to meet projections Projected Actual Projected Operating Operating PAT Income Income Actual PAT Year 31.27 3742.45 Sri Bhagawan Mahaveer Jain College 110 .2009 31.6 4 36236.

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