A STUDY ON CREDIT RISK MANAGEMENT AT

ICICI BANK LTD.

Submitted in partial fulfillment of the requirement of the
MASTER OF BUSINESSADMINISTRATION
Submitted By
P. SAI DIVYA
H.T No.: 227820672046

Under the guidance of Mr. S. RAVI KUMAR ,

MBA, (ph.d) ASST PROF
(VISHWA VISHWANI SCHOOL OF BUSINESS)

Department of Business Administration

(Affiliated to Osmania University)
THUMKUNTA (VIL), SHAMIRPET ROAD
Hyderabad (INDIA)
2020-22
 DECLARATION

I, P. SAI DIVYA HT: 227820672046 hear by declare that, this project

titled as “A STUDY ON CREDIT RISKY MANAGEMENT at ICICI
BANT LTD.” an original work carried out by me, under the guidance of
Mr.S. RAVI KUMAR The report submit by me is a bonafide work carried by
me of my own effort and it has not to submitted to any other university or
published any time before.

DATE P. SAI DIVYA

PLACE: 227820672046
 ACKNOWLEDGEMENT

I take immense pleasure to acknowledge the efforts of the following people

who helped me to make this project a reality. I express my gratitude for their
suggestions, guidance and intellectual influence.

My sincere thanks to honourable principal Dr. M MADAN MOHAN, HOD

Dr. A.P GAYATRI and my project guide Mr. S. RAVI KUMAR for the
kind encouragement and constant support extended in completion of this
project work from the bottom of my heart..

I am also thankful to all those who have incidentally helped me, through their
valued guidance, co-operation and unstinted support during the course of my
project.

Signature
 CERTIFICATE BY THE GUIDE

This is to certify that the Project Report Title “A STUDY ON CREDIT RISKY
MANAGEMENT AT ICICI BANK LTD.” submitted in partial fulfilment of
Masters Business Administration at Vishwa Vishwani Institute of Systems and
Management, Osmania University, Hyderabad was carried out by “P.SAI DIVYA”
bearing HT.No. 227820672046 under the guidance of MR. S. RAVI KUMAR .
This has not been submitted to any university or institution for the award of any
Degree/Diploma/Course.

Signature for Internal Guide Signature for External

Guide
CHAPTER NO . CONTENT PAGE NO.

I INTRODUCTION

1.1 General 1-7

1.2 Need for the study 7

1.3 Scope of the study 7

1.4 Objectives of the study 7

1.5 Research Methodology 8

1.6 Limitations of the study 9

1.7 Risk in banking business / framework 9 - 44

II 2. REVIEW OF LITERATURE 46 - 49

III INDUSTRY PROFILE AND COMPANY

PROFILE

3.1 Industry Profile 51

3.1.1 History of Banking in India 51

3.1.2 Phase in development of Banking 52 - 53

sector

3.2 Company profile 55

3.2.1 History 55

3.2.2 Role in Indian financial Infrastructure 55

3.2.3 Products 57 - 58

3.2.4 Awards , Vision and Mission 59

IV DATA ANALYSIS AND

INTERPRETATION

4.1 Capital adequacy ratio 62 - 65

4.2 Asset Quality 66 - 68

4.3 Earning per non performing assets 69 - 70

 4.4 Correlation 71 - 74

4.5 Analysis of deposit mix 75 - 78

V
SUMMARY OF FINDINGS &
CONCLUSION

5.1 Findings 80

5.2 Suggestions 81

5.3 Conclusion 82 -83

BIBLIOGRAPHY/REFERENCE/WEBSITES 84
 CHAPTER -1
INTRODUCTION
 CHAPTER -I
INTRODUCTION TO CREDIT RISK MANAGEMENT

1.1 Introduction
As in the today scenario, globalization is increasing day by day. Thus it is
necessary to know about the risk of the organization sector, banking sector etc. A main
concept of choosing this project is to familiarize with the different techniques of the risk
management and how it is managed. Risk management evolved from a strictly banking
activity.
The four letters comprising the RISK define its features.
R –Rare (unexpected)
I – Incident (outcome)
S – Selection (identification)
K – Knocking (measuring, monitoring, controlling)

Risk, therefore needs to be looked at from four fundamental aspects:

1. IDENTIFICATION
2. MEASUREMENT
3. MONITORING
4. CONTROL(including risk audit)

Credit risk is the risk of loss due to a debtor's non-payment of a loan or other line of
credit (either the principal or interest (coupon) or both). The default events include a
delay in repayments, restructuring of borrower repayments, and bankruptcy.

Credit analysis is the method by which one calculates the creditworthiness of a business
or organization. The audited financial statements of a large company might be analyzed
when it issues or has issued bonds. Or, a bank may analyze the financial statements of a
small business before making or renewing a commercial loan. The term refers to either
case, whether the business is large or small. The standard definition of management is
that it is the process of accomplishing preset objectives; similarly, risk management aims
at fulfilling the same specific objectives.

1
Credit analysis involves a wide variety of financial analysis techniques, including ratio
and trend analysis as well as the creation of projections and a detailed analysis of cash
flows. Credit analysis also includes an examination of collateral and other sources of
repayment as well as credit history and management ability.

Figure 1.1
Risk Management Cycle
Lending has always been the primary function of banking, and accurately
assessing a borrower’s creditworthiness has always been the only method of lending
successfully. The method of analysis required varies from borrower to borrower. It also
varies function of the type of lending being considered. For example, the banking risks in
financing the building of a hotel or rail project, of providing lending secured by assets or
a large overdraft for a retail customer would vary considerably. For the financing of the
project, you would look to the funds generated by future cash flows to repay the loan, for
asset secured lending, you would look at the assets, and for an overdraft facility, you
would look at the way the account has been run over the past few years. In this book on
credit risk management, we will be looking specifically at the appropriate methods of
analysis for lending to companies, a subject more often known as ‘corporate credit’.

2
What is Credit Risk?
Credit risk is defined as the possibility of losses associated with diminution in the
credit quality of borrowers or counter parties. In banks/financial institutions portfolio,
losses stem from ought default due to inability or unwillingness of a customer or counter
party to meet commitments in relation to lending, trading, settlement and other financial
transactions. Alternatively, losses result from reduction in portfolio value arising from
actual or perceived deterioration in credit risk emanates from bank’s dealing with an
individual, corporate, bank financial institution or a sovereign. Credit risk may take the
following forms.
• In the case of direct lending: principal and /or interest amount may
not be repaid;

• In the case of guarantees or letters of credit: funds may not be

forthcoming from the constituents upon crystallization of the liability.

• In the case of treasury operations: the payment or series of payments

due from the counter parties under the respective contracts may not be
forthcoming or ceases;

• In the case of securities trading businesses: funds/securities settlement

may not be effected,

• In the case of cross-border exposure ceases or restrictions may be

imposed by the sovereign.

Credit Risk Management Techniques

Techniques are methods to accomplish a desired aim. In credit risk modeling, the
aim is essentially to compute the probability of default of an asset/loan. Broadly, the
following range is available to an organization going in for a credit risk model:
• Economics technique: statistical models such as linear probability and
logic model, linear discriminate model, RARUC model, etc.

• Neural networks: computer-based systems using economic techniques on

an alternative implementation basis.

3
Important elements of credit risk

Whether it is in business or otherwise (like schools/colleges etc), risk management

is not e new phenomenon. This has been there over the ages in ages in some from or the
other, though its various forms were not called market risk, credit risk or operational risk
as they are today. But the importance of risk management has grown in recent times

Figure 1.2
Components of Credit Risk:
Credit Risk arises from potential changes in the Credit Quality of a borrower or
portfolio. It has two components at portfolio level (i) Concentration Risk and (ii)
Systematic Risk. The two components of Transaction Risk are Default Grade Risk. The
diagram for the same is given here under:

Credit Risk

Portfolio Risk Borrower Level Risk

Concentration Risk Systematic Risk Default Risk Downgrade Risk

4
Portfolio Risk: This arises due to adverse credit distribution; credit
concentration/investment concentration etc. this risk also includes concentration risk and
systematic risk.
Borrower Level Risk: It may be defined as the possibility that a borrower or
counterparty will fail to meet its obligations in accordance with agreed terms.

Principles of risk Management

The International Organization for Standardization identifies the following principles of
risk management
Risk management should:
• Create value
• Be an integral part of organizational processes
• Be part of decision making
• Explicitly address uncertainty
• Be systematic and structured
• Be based on the best available information
• Be tailored
• Take into account human factors
• Be transparent and inclusive
• Be dynamic, iterative and responsive to change

Risk management can therefore be considered the identification, assessment, and

prioritization of risks followed by coordinated and economical application of resources
to minimize, monitor, and control the probability and/or impact of unfortunate events or
to maximize the realization of opportunities. Risks can come from uncertainty in
financial markets, project failures, legal liabilities, credit risk, accidents, natural causes
and disasters as well as deliberate attacks from an adversary. Several risk management
standards have been developed including the Project Management Institute, the National
Institute of Science and Technology, actuarial societies, and ISO standards. Methods,
definitions and goals vary widely according to whether the risk management method is in
the context of project management, security, engineering, industrial processes, financial
portfolios, actuarial assessments, or public health and safety.

5
The strategies to manage risk include transferring the risk to another party, avoiding the
risk, reducing the negative effect of the risk, and accepting some or all of the
consequences of a particular risk.

Risk Management Process

The word ‘process’ connotes a continuing activity or function towards a
particular result. The process is in fact the last of the four wings in the entire risk
management edifice-the other three being organizational structure, principles and
policies. In effect it is the vehicle to implement an organization’s risk principles and
policies, aided by organizational structure, with the sole objective of creating and
maintaining a healthy risk across the organization.

1. Risk Identification
In order to achieve a common understanding of the characteristics of each risk
segment at all levels in an organization, it is necessary to spell out the danger signals.
This helps decision-makers to get the best from various activity points of the
Organization, allowing them to take calculated risks and not be risk averse. While
identification risks, the following points have to be kept in mind.

• All types of risk (existing and potential) must be identified and their likely
effect in the short-run be understood, like for example a rise in interest rates
on bank borrowing in the next six months/one year.

• The magnitude of each risk segment may vary from organization to

organization. In financial service industries like banks, delayed payment by
counter-parties create ‘settlement risk’. Its effects may be more severe for
them when compared to utility service providers like power companies that
have a wide consumer base and one default may not a major credit risk
hazard. This being so, dominant risk activities must be separated from the
identification process.

• The geographical area covered by an organization may determine the

coverage of its content. A bank that international operations may experience
different intensity of credit, market and operational risks in various countries

6
 when compared with a pure domestic bank. Also, even with in a bank, risks
will vary in its domestic operations and its overseas arms.

• One clear way of identifying risk in an organization is to scan both balance

sheet items and off-balance sheet items and find the risk elements. For
operational risk issues of lapses arising out of ‘people’, process, system &
procedure may facilitate identification of risk contents.

1.2 NEED & IMPORTANCE OF THE STUDY:

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

1.3 SCOPE OF STUDY

The scope has been limited to sample size of 100 respondents due to time and
cost constraints. However, the area of study with respect to geographical city is
HYDERABAD.

1.4 Objective of the Study

Primary Objectives:
 To study the credit risk management operations (assessment & procedures) in
ICICI Bank Ltd.
 To study different kinds of risks existing in ICICI Bank Ltd.
Secondary Objectives:
 To study the effect on risk management in capital adequacy ratio of ICICI Bank.
 To identify the effect of Basel II norms regarding risk management in banks.

7
  To study the impact of asset quality on credit risk management of the bank.
 To analyze actual credit exposure of the bank.

1.5 RESEARCH METHODLOGY

This chapter focuses on the methodology & the techniques used for the collection,
classification & tabulation of data. It sheds light on the research problem, the objective
of study & its limitations. The later part of this chapter explain the manner in which the
data is collected, classified, tabulated & so as to reach on conclusive results. It is written
game plan for concluding research. There for into design a research problem it is
necessary to design a research methodology as the same may differ from problem to
problem

STATEMENT OF THE PROBLEM

In this project my statement of the problem is to analysis the credit risk
management in ICICI Bank. The study is very useful for the bank in formulation of the
various plans, strategies and policies.

SOURCES OF DATA
DATA COLLECTION FROM SECONDARY SOURCES
 Annual Reports
 Company Records
 Data published on websites
 Journals
 Websites
 Manual book of Bank
 Brochures
 RBI website

Tools used for Data Collection

 Capital Adequacy Ratio
 Asset Quality
 ENPA

8
  Correlation
 Bar diagram
 Pie-chart

1.5 LIMITATIONS OF THE STUDY

• Availability of literature is limited. The data for the project is mainly compiled
from the Credit Risk Management Statements of bank.
• A comprehensive outlook of Credit Risk Management could be projected.
• Lack of availability of confidential data
• Unavailability of Financial Data restricted to know the financial status of the
company
• Time constraint

Risk in Banking business:-

Banking business lines are many and varied. Commercial banking,
corporate finance, retail banking, trading and investment banking and various financial
services form the main business lines of Banks. Within each lines of business these are
sub-groups and each sub-group contains variety of financial activities. Bank’s clients
may very from retail consumers to mid-market corporate to large corporate to financial
institutions. Banking may differ appreciably for each segment even for the similar
services for example; lending activities may extend from retail banking to specialized
finance. Again specialized finance may extend from specific fields with standard
practice, such as exports and commodities financing to structure financing implying
specific structuring and customization for making large and risky transactions feasible,
such as project financing or corporate acquisitions. Banks also assemble financial
products and derivatives and deliver them as a package to its clients as a part of
specialized financing commensurate with the needs of clients.

Product lines also vary across client segments. Standard lending products include
short-term and long –term loans with specified repayments, demand loans and various
othis lines of credit such as bill purchase and bills discounting facilities, as auto loans,
house –building loans etc. banks also offer guarantees, letters of credit etc. which are in
the nature of off- balance heet transactions. These are various deposits products that vary
for different segments and different needs. Banks also offer market products such as
9
fixed income security shares, foreign exchange trading and derivates like standard swaps
and options.

The key driver in managing all the business lines are enhancing risk
adjusted expected returns. This is the common factor for all business lines. But
management practices vary across business lines, activities differ, and so does the risk
factors associated with them.

Types of banking Risks:-

These are major 5 types of banking risk. They are

1) Liquidity risk.
2) Interest rate risk.
3) Market risks
4) Credit risk ( Default risk )
5) Operational risk.

Each of above risk is the risk which every bank faces and each risk is having
sub-risk.

Each of above risk is unique & has huge depth & my project is concerned about
only credit risk. Thus, my focus hereafter will be exclusively on “credit risk”

1. THE ORIGINS AND EVOLUTION OF CREDIT RISK MANAGEMENT

Credit is much older than writing. Hammurabi’s code, which codified legal thinking
since 4000 years ago in Mesopotamia, didn’t outline the basic rules of borrowing and
didn’t address concept such as interest, collateral and default. These concepts appear to
have been too well known to have required explanation. However, the code did
emphasize that failure to pay a debt is a crime that should be treated identically to theft
and fraud.

The code also set some limits to penalties. For example, a defaulter could be
seized by his creditors and sold into slavery, but his wife and children could only be sold
for a three-year term. Similarly, the Bible records enslavement for debt without

10
disapproval; for example, the story of Eli’sha and the widow’s oil concern the threatened
enslavement of two children because their faiths died without paying his debts. But the
Bible also goes further than Hammurabi in limiting the collection rights of creditors
purely a matter of mercy.

The modern bankruptcy concepts of protection from creditors and extinguishment

of debt are entirely absent from both Hammurabi and the bible. Historically, credit
default was a crime. At various places and times, it was punishable by death, mutilation,
torture, imprisonment or enslavement-punishment that could be visited upon debtors and
their dependents.

Unpaid debts could sometimes be transferred to relatives or political entities. But

that does not mean that the law was creditors friendly. The Bible prohibits charging
interest [usury], which removes any incentives to lend. It also specified general releases
from debt. Aristocrats, especially sovereigns, would frequently repudiate their and
sometimes debts in general.

Considering the potential consequences, one has to wonder why anyone borrowed
or lent money in ancient times. Borrowers risked horrendous consequences from default,
while lenders faced legal obstacles to collecting money owed-and to making a profit.
Both sides also risked strong social disapproval if money was not repaid.

Moreover, moralists and lawmakers favored equity financing over credit. Under an
equity financing arrangement, both successful and unsuccessful outcomes could be
resolved without expensive legal proceedings. Documentation and oversight was also
much simpler. Even the equity financing language was, and remains, biased with words
like “equity” [which means “fair”] as opposed to negative words like “debts” and
“liability”.
To answer the question about why people engaged in credit agreements, we must
go even far this back in history and replace written sources with guesswork. Credit risk
arose before financing of business ventures. This is credit risk, for example, when a
farmer says to a stranger,” help me harvest my crop, and I’ll give you two baskets of
grain”.

11
 The Bible is hostile even to this form of credit, saying you should not let the sun go
down on an unpaid wage. Surprisingly, this belief even has supported today, as some
fundamentalists insist on paying all employees in cash every day before sundown.

The trouble with this approach, of course, is that it requires the farmer to have cash
or goods to spare before the harvest is in. More generally, in any economy; you need
money supply, at least equal to the total value of all goods and services in the process of
production.

Back To Basic:

The work on “exposure at default” and “loss given default” has highlighted
deficiencies in understanding of “probability of default”. Early research defined
“default” as Mr.ing a payment or filing for bankruptcy. These events are easy to
determine and thus convenient for early progress in estimating probabilities. As the
market place evolved, probability was defined over fixed time intervals.

Lenders sometime “restructure” rather than “default”. Restructuring form a

continuum from those that involve no loss of economic value to creditors to those that
make creditors claim almost worthless. These clearly contribute to creditors losses and
thus should be included in loss given default. If we do this, it’s easier to measure the loss
given default but harder to define default and hence harder to estimates probability of
default.

To estimates “exposure” at default, we need to know the future time series of

probability of default, not just the cumulative probability over specific intervals. Even
the probability over every interval is not enough; we need to know the dynamics of the
process. This has been quite a bit of work done on this problem for the purpose of
pricing credit derivatives, but unfortunately it has proven hisd to reconcile with risk
management default probability models. This has been a dilemma in the past and will
continue to be a major challenge in the future, especially as active credit risk
management strategies gain popularity.

12
 Credit risk has been around for millennia. Good qualitative credit ratings have
been around for century. Serious quantitative credit risk estimates have a 40-years
history. Quantitative progress was slowed by confusion within the profession, but
regulators, rating agencies, practitioners and academics have been working togethis for at
least last five years. Consequently, for the first time in history, it seems likely that the
problem of credit risk can be solved.

Types Of Credit Risk

Credit risk arises from potential changes in the credit quality of a borrower. It has
two components: default risk and credit spread risk or downgrade risk.

1. DEFAULT RISK :-
Default risk is driven by the potential failure of a borrower to make promised
payment, either party or wholly. In the event of default, a fraction of the obligation will
normally be paid. This is known as the recovery rate.

2. CREDIT SPREAD RISK OR DOWNGRADE RISK:-

If a borrower does not default, this is still risk due to worsening in credit quality.
This results in the possible widening of the credit-spreads. This is credit spread risk.
These may arise from a rating change {i.e., an upgrade or a downgrade}. It will usually
be firm specific.

Loans are not usually marketed to market. Consequently, the only important
factor is whether or not the loan is in default today [since this is the only credit event that
can lead to an immediate loss]. Capital market portfolios are marketed to market. They
have in addition credit spread volatility [continuous changes in the credit-spread]. This is
more likely to be driven by the market’s appetite for certain levels of risk. For example,
the spreads on high-grade bonds may widen or tighten, although this need not necessarily
be taken as an indication that they are more or less likely to default.

Default risk and downgrade risk are transaction level risks. Risks associated with credit
portfolio as a whole is termed portfolio risk. Portfolio risk has two components-

13
 • Systemic or intrinsic risk.
• Concentration risk.

1. Systemic risk:-
As we have seen, portfolio risk is reduced due to diversification. If a portfolio
is fully diversified, i.e. diversified across geographies, industries, borrowers markets,
etc., equitably, then the portfolio risk is reduced to a minimum level. This minimum
level corresponds to the risks in the economy in which it is operating. This is systemic or
intrinsic risk.

2. Concentration risk:-
If the portfolio is not diversified that is to say that it has highis weight in
respect of a borrower or geography or industry etc., the portfolio gets concentration risk.

The following chart outlines financial risk in lending:-

CREDIT
RISK

PORTFOLIO RISK TRANSACTION

RISK

CONCENTRATION SYSTEMIC RISK DEFAULT RISK DOWNGRADE

RISK RISK

A variant of credit risk is ‘counterparty risk’. The counterparty risk arises from non-
performance of the trading partners. The non-performance may arise from counterparty’s
refusal/inability to perform. The counterparty risk is generally viewed as a transient
financial risk associated with trading rathis than standard credit risk.

14
.The components of credit risk are:
Credit growth in the organization and composition of the credit folio in
terms of sectors, centers and size of borrowing activities so as to assess the extent of
credit concentration.
Credit quality in terms of standard, sub-standard, doubtful and loss-making
assets. Extent of the provisions made towards poor quality credits. Volume of off-
balance-heet exposures having a bearing on the credit portfolio.

Thus credit involves not only funds outgo by way of loans and advances and
investments, but also contingent liabilities. Thisefore, credit risk should cover the entire
gamut of an organization’s operations whose ultimate ‘loss factor’ is quantifiable in
terms of money.
According to Reserve Bank of India, the following are the forms of credit risk:

1. Non-repayment of the principal of the loan and/or the interest on it.

2. Contingent liabilities like letters of credit/guarantees issued by the bank on
behalf of the client and upon crystallization – amount not deposited by the
customer.

3. In the case of treasury operations, default by the counter-parties in meeting

the obligations.

4. In the case of securities trading, settlement not taking place when it is due.

5. In the case of cross-border obligations, any default arising from the flow of
foreign exchange and/or due to restrictions imposed on remittances out of
the country.

OBJECTIVES OF CREDIT RISK MANAGAMENT:-

Credit risk management can have different objectives at two levels namely –
transaction level & Portfolio level.
At the transaction level, the objectives of credit risk management ideally should be:

15
 1. Setting an appropriate credit risk environment.

2. Framing a sound credit approval process.

3. Maintaining an appropriate credit administration, measurement and

monitoring process.

4. Employing sophisticated tools/techniques to enable continuous risk evaluation

on a scientific basis.

5. Ensuring adequate pricing formula to optimize risk return relationship

At the Portfolio level, the objectives of credit risk management should be:

1. Development and Monitoring of methodologies and norms to evaluate and

mitigate risks arising from concentrating by industry, group, product, etc.

2. Ensuring adherence to regulatory guidelines.

3. Driving asset growth strategy.

If we closely analyze the above, we can observe that the transaction level pursues
value creation and portfolio level pursues value preservation.

CREDIT RISK MANAGEMENT FRAMEWORK

Banks need to manage credit risk inherent in the entire portfolio as well as risk
in individual credits or transactions. The effective management of credit risk is a critical
component of a comprehensive approach of risk management and essential to long term
of any banking organization. Banks for this purpose incorporates proper framework for
credit risk management (CRM), which includes,

16
 1. Policy framework

2. Credit risk rating framework

3. Credit risk limits

4. Credit risk modeling

5. RAROC pricing

6. Risk mitigates

7. Loan review mechanism/credit audit

POLICY FRAMEWORK:-

Given the fast changing, dynamic world scenario experiencing the pressure of
globalization, liberalization, consolidation and disintermediation, it is important that
banks must have robust credit risk management policies (CRMPs) and procedures, which
are sensitive and responsive to these changes. In any bank, the corporate goals and credit
culture are closely linked and an effective CRM framework requires the following
distinct building blocks:

(1) Strategy and policy,

(2) Organization, and
(3) operations/systems.

1. Strategy and policy:

Strategy and policies includes defining credit limits, the development of credit
guidelines and the identification and assessment of credit risk. Banks should develop its
own credit risk strategy defining the objectives for the credit granting function. This

17
strategy should spell out clearly the organisation’s credit limits and acceptable level of
risk-reward trade-off at both macro and micro levels. The credit risk strategy should
provide continuity in approach, and take into account the cyclical aspects of any
economy and the resulting shifts in the composition and quality of the overall credit
portfolio. This strategy should be viable in the long run and through various credit
cycles.
Credit policies and procedures should necessarily have the following elements:

Banks should have written policies that define target markets, risk acceptance criteria,
credit approval authority, credit origination and maintenance procedures and guidelines
for portfolio management and remedial management.

Sound procedures to ensure that all risks associated with requested credit facilities are
promptly and fully evaluated by the relevant lending and credit officers.

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

Procedures and systems, which allow for monitoring financial performance of

customers and for controlling outstanding within limits. Systems to manage problem
loans to ensure appropriate restructuring schemes. A conservative policy for the
provisioning of non-performing advances should be followed.

Banks should have a consistent approach towards early problem recognition, the
classification of problem exposures, and remedial action and maintain a diversified
portfolio of risk assets in line with the capital desired to support such a po

2. Organizational structure:

Banks should have an independent group responsible for the CRM. The
responsibilities of this team are the formulation of credit policies, procedures and
controls extending to all of its credit risk arising from corporate banking, treasury, credit
18
cards, personal banking, trade finance, securities processing, payments and settlement
systems.

3. Operations/systems:

Banks should have in place an appropriate credit administration, measurement and

monitoring process.

The credit process typically involves the following phases:

Relationship management phase, that is, business development, Transaction
management phase to cover risk assessment, pricing, structuring of the facilities,
obtaining internal approvals, documentation, loan administration and routine monitoring
and measurement, and Portfolio management phase to entail the monitoring of portfolio
at a macro level and the management of problem loans.

The banks should have systems in place for reporting and evaluating the quality of the
credit decisions taken by the various officers.

Banks must have a MIS to enable them to manage and measure the credit risk
inhisent in all on and off-balance heet activities. It should provide adequate information
on the composition of the credit portfolio, including identification of any concentration
of risk.

CREDIT RISK RATING FRAMEWORK:-

A credit risk-rating framework deploys a number/alphabet/symbol as a primary

summary indicator of risks associated with a credit exposure. These rating frameworks
are logic-based, utilize responses made on a specified scale and promote the accuracy
and consistency of the judgment exercised by the banks.

For loans to individuals or small businesses, credit quality is typically assessed

through a process of credit scoring. Prior to extending credit, a bank or this lender will
obtain information about the party requesting a loan. In the case of a bank issuing credit
cards, this might include the party's annual income, existing debts, whether they rent or
19
own a home, etc. A standard formula is applied to the information to produce a number,
which is called a credit score. Based upon the credit score, the lending institution decides
whethis or not to extend credit. The process is formulaic and highly standardized.

Many forms of credit risk—especially those associated with larger institutional

counterparties—are complicated, unique or are of such a nature that that it is worth
assessing them in a less formulaic manner. The term credit analysis is used to describe
any process for assessing the credit quality of counterparty. While the term can
encompass credit scoring, it is more commonly used to refer to processes that entail
human judgement. One or more people, called credit analysts, review information about
the counterparty. This might include its balance heet, income statement, recent trends in
its industry, the current economic environment, etc. They may also assess the exact
nature of an obligation.

For example, secured debt generally has high is credit quality than does subordinated
debt of the same issuer. Based upon their analysis, they assign the counterparty (or the
specific obligation) a credit rating, which can be used for making credit decisions.

Many banks, investment managers and insurance companies hire their own credit
analysts who prepare credit ratings for internal use. These firms—including Standard &
Poor's, Moody's and Fitch—are in the business of developing credit ratings for use by
investors or third parties. Institutions that have publicly traded debt hire one or more of
them to prepare credit ratings for their debt. In the United States, the National
Association of Insurance Com Mr.ioners publihes credit ratings that are used for
calculating capital charges for bond portfolios held by insurance companies.

Exhibit 1 indicates the system of credit ratings employed by Standard & Poor's. Other
systems are similar.
Standard & Poor's Credit Ratings
Exhibit 1
AAA --- Best credit quality—extremely reliable with regard to financial obligations.
AA --- Very good credit quality—Very reliable.
A --- More susceptible to economic conditions—still good credit quality.
BBB --- Lowest rating in investment grade.
20
BB --- Caution is necessary—best sub-investment credit quality.
B --- Vulnerable to changes in economic conditions— currently showing the ability to
meet its financial obligations.
CCC --- Currently vulnerable to nonpayment—Dependent on favorable economic
Conditions.
CC --- Highly vulnerable to a payment default.
C --- Close to or already bankrupt—payment on the obligation currently continued.

D --- Payment default on some financial obligation has actually occurred.

This is the system of credit ratings Standard & Poor's applies to bonds.
Other credit rating systems are similar.

Credit Rating Model:-

The customer rating model is being developed by me for solving the problem of
nonpayment of loan. This model helps to determine the repayment capacity of the
customer at the initial level. This model is applicable only for personal and housing
loan.
The system of customer rating would involve allocating marks for various parameters of
the prospective customer’s profile and his repayment capacity such as his personal
details, financial status, repayment capacity and past relation with the bank. A format of
the rating heet is being introduced hise. It may be observed that thise are 15 parameters
for which a maximum of 100 marks are allotted. The loan request of applicants securing
marks of 60 and above {i.e. credit rating of ‘A’ and above} may be considered by the
branch manager. The applicant getting marks between 50 to 60{credit rating ‘B’} will
not be considered by branch manager but it will be submitted to credit committee. In
considering such request, the sanctioning authority may take into consideration othis
relevant facts into consideration and also stipulate a highis rate of interest, if warranted;
commensurate with the high is risk perception. An applicant scoring less than 50 marks
will not be eligible for being considered for loan.

21
CREDIT RISK LIMITS:-

For managing credit risk, a bank generally sets an exposure credit limit
for each counter party to which it has credit exposure. This is standard procedure in
many contexts. It could be a corporate loan, individual loan or a derivative dealer
transacting with counterparties. All entail credit risk. All are contexts wise credit
exposure limits are used. A bank may also use aggregate credit exposure limits. A bank
might set credit exposure limits by industry. It might also set a total exposure credit limit
for all its corporate lending activities. Exposures are calculated with the help of credit
risk models.

Depending on the assessment of the borrower (commercial as well as retail) a credit

exposure limit is decided for the customer, however, within the framework of a total
credit limit for the individual divisions and for the company as a whole. Also within the
limit as per RBI, i.e. not more than 20% of capital to individual borrower and not more
than 40% of capital to a group borrower.

Threshold limit is set depending on the:

➢ Credit rating of the borrower

➢ Past financial records
➢ Willingness and ability to repay
➢ Borrower’s future cash flow projections.

CREDIT RISK MODELLING:-

A credit risk model seeks to determine, directly or indirectly, the answer to the
following question: Given our past experience and our assumptions about the future,
what is the present value of a given loan or fixed income security? A credit risk model
would also seek to determine the (quantifiable) risk that the promised cash flows will not
be forthcoming. The techniques for measuring credit risk that have evolved over the last
twenty years are prompted by these questions and dynamic changes in the loan market.

22
 The increasing importance of credit risk modeling should be seen as the
consequence of the following three factors:

• Banks are becoming increasingly quantitative in their treatment of credit risk.

• New markets are emerging in credit derivatives and the marketability of existing
loans is increasing through securitization/ loan sales market.
• Regulators are concerned to improve the current system of bank capital
requirements especially as it relates to credit risk.

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

In the measurement of credit risk, models may be classified along three different
dimensions: the techniques employed the domain of applications in the credit process
and the products to which they are applied.

Techniques: The following are the more commonly used techniques:

a. Econometric Techniques such as linear and multiple discriminate analyses,

multiple regression, logic analysis and probability of default, etc.
b. Neural networks are computer-based systems that use the same data employed
in the econometric techniques but arrive at the decision model using alternative
implementations of a trial and error method.
c. Optimization models are mathematical programming techniques that discover
the optimum weights for borrower and loan attributes that minimize lender error
and maximise profits.

23
d. Rule-based or expert systems are characterised by a set of decision rules, a
knowledge base consisting of data such as industry financial ratios, and a
structured inquiry process to be used by the analyst in obtaining the data on a
particular borrower.
e. Hybrid Systems In these systems simulation are driven in part by a direct causal
relationship, the parameters of which are determined through estimation
techniques.

Domain of application: These models are used in a variety of domains:

a. Credit approval: Models are used on a standalone basis or in conjunction with a

judgmental override system for approving credit in the consumer lending
business. The use of such models has expanded to include small business lending.
They are generally not used in approving large corporate loans, but they may be
one of the inputs to a decision.
b. Credit rating determination: Quantitative models are used in deriving ‘shadow
bond rating’ for unrated securities and commercial loans. These ratings in turn
influence portfolio limits and othis lending limits used by the institution. In some
instances, the credit rating predicted by the model is used within an institution to
challenge the rating assigned by the traditional credit analysis process.
c. Credit risk models may be used to suggest the risk premier that should be
charged in view of the probability of loss and the size of the loss given default.
Using a mark-to-market model, an institution may evaluate the costs and benefits
of holding a financial asset. Unexpected losses implied by a credit model may be
used to set the capital charge in pricing.
d. Early warning: Credit models are used to flag potential problems in the portfolio
to facilitate early corrective action.
e. Common credit language: Credit models may be used to select assets from a
pool to construct a portfolio acceptable to investors at the time of asset
securitisation or to achieve the minimum credit quality needed to obtain the
desired credit rating. Underwriters may use such models for due diligence on the
portfolio (such as a collateralized pool of commercial loans).
f. Collection strategies: Credit models may be used in deciding on the best
collection or workout strategy to pursue. If, for example, a credit model indicates

24
 that a borrower is experiencing short-term liquidity problems rather than a
decline in credit fundamentals, then an appropriate workout may be devised.

g. Credit Risk Models: Approaches

The literature on quantitative risk modeling has two different approaches to credit
risk measurement. The first approach is the development of statistical models through
analysis of historical data. This approach was frequently used in the last two decades.
The second type of modeling approach tries to capture distribution of the firm's asset-
value over a period of time.

The statistical approach tries to rate the firms on a discrete or continuous scale.
The linear model introduced by Altman (1967), also known as the Z-score Model,
separates defaulting firms from non-defaulting ones on the basis of certain financial
ratios. Altman, Hartzell, and Peck (1995, 1996) have modified the original Z-score
model to develop a model specific to emerging markets. This model is known as the
Emerging Market Scoring (EMS) model.

The second type of modeling approach tries to capture distribution of the firm's
asset-value over a period of time. This model is based on the expected default frequency
(EDF) model. It calculates the asset value of a firm from the market value of its equity
using an option pricing based approach that recognizes equity as a call option on the
underlying asset of the firm. It tries to estimate the asset value path of the firm over a
time horizon. The default risk is the probability of the estimated asset value falling below
a pre-specified default point. This model is based conceptually on Merton's (1974)
contingent claim framework and has been working very well for estimating default risk
in a liquid market.

Closely related to credit risk models are portfolio risk models. In the last three
years, important advances have been made in modeling credit risk in lending portfolios.
The new models are designed to quantify credit risk on a portfolio basis, and thus are
applied at the time of diversification as well as portfolio based pricing. These models

25
estimate the loss distribution associated with the portfolio and identify the risky
components by assessing the risk contribution of each member in the portfolio.

Banks may adopt any model depending on their size, complexity, risk bearing
capacity and risk appetite, etc. However, the credit risk models followed by banks
should, at the least, achieve the following:

• Result in differentiating the degree of credit risk in different credit exposures of a

bank. The system could provide for transaction-based or borrower-based rating or
both. It is recommended that all exposures are to be rated. Restricting risk
measurement to only large sized exposures may fail to capture the portfolio risk
in entirety for variety of reasons. For instance, a large sized exposure for a short
time may be less risky than a small sized exposure for a long time
• Identify concentration in the portfolios
• Identify problem credits before they become NPAs
• Identify adequacy/ inadequacy of loan provisions
• Help in pricing of credit
• Recognize variations in macro-economic factors and a possible impact under
alternative scenarios
• Determine the impact on profitability of transactions and relationship.

RISK ADJUSTED RETURN ON CAPITAL (RAROC) :-

As it became clearer that banks needed to add an appropriate capital charge in the
pricing process, the concept of risk adjusting the return or risk adjusting capital was
born. RAROC is based on a market-to market concept. As defined by Bankers Trust,
RAROC allocates a capital charge to a transaction or a line of business at an amount
equal to the maximum expected loss (at a 99 percent confidence level) over one year on
an after-tax basis. As may be expected, the highs volatility of the returns, the more the
capital allocated. The highest capital allocation means that the transaction has to generate
cash flows larger enough to offset the volatility of returns, which results from the credit
risk, material risk, and others risks taken.

26
The RAROC process estimates the asset value that may prevail in the worst case
scenario and then equates the capital cushion to be provided for the potential loss.
These are four basic steps in this process:

1. Analyze the activity or product.

2. Determine the basic risk categories that it contains, for example, interest
rate (country, directional, basis, yield curve, optionality), foreign
exchange, equity, commodity, and credit.

3. Operating risks.

4. Quantify the risk in each category by a market proxy.

Using the historical price movements of the market proxy over the past three years,
compute a market risk factor, given by the following equation:

RAROC risk factor = 2.33 * weekly volatility * square root of 52 *

(I – tax rate)

In this equation, the multiplier 2.33 gives the volatility (expressed as per cent) at
the 99 percent confidence level. The term 52 converts the weekly price movement into
an amount movement. The term (I – tax rate) converts the calculated value to an after-tax
basis.

Compute the rupee amount of capital required for each category by multiplying the
risk factor by the size of the position. Establishing the maximum expected loss in each
product line and linking the capital to this loss makes it possible to compare products of
different risk levels by stating the risk side of the risk-reward equation in a consistent
manner. The risk-to-reward ratio becomes comparable.

The RAROC is an improvement over the traditional approach in that it allows one
to compare two businesses with different risk (volatility of returns) profiles. Using a
hurdle rate, a lender can also use the RAROC principle to set the target pricing on a
27
relationship or a transaction. Although not all assets have market price distribution,
RAROC is a first step towards examining an institution’s entire balance heet on a mark-
to-market basis if only to understand the risk-return tradeoffs that have been made.

RISK MITIGANTS:-

Credit risk mitigation means reduction of credit risk in an exposure by a safety

net of tangible and realizable securities including third-party approved
guarantees/insurance.
Banks use a number of techniques to mitigate the credit risks to which they
are exposed.
Exposures may be collaterised by first priority claims, in whole or in part
with cash or securities, a loan exposure may be guaranteed by a third-party, or a bank
may buy a credit derivative to offset various forms of credit risk.
Additionally banks may also net the loans owned to them against deposits
from the same counter-party.
The various credit risk mitigants laid down by Basel Committee are as follows:
1. Collateral (tangible, marketable) securities
2. Guarantees
3. Credit derivatives
4. On-balance-sheet netting

The extent to which a particular credit risk mitigant helps depends on the
quantum of exposure, or the strength of the mitigant.
These are certain conditions to be met for the use of credit risk mitigants, which
are as follows:
All documentation used in collateralized transactions and for documenting on-balance-
heet netting, guarantees, and credit derivative must be binding on all parties and must be
legally enforceable in all relevant jurisdictions.
Banks must have properly reviewed all the documents and should have appropriate
legal opinions to verify such, and ensure its enforceability.

28
LOAN REVIEW MECHANISM / CREDIT AUDIT :-

Credit audit examines the compliance with extant sanction and post-sanction
processes and procedures laid down by the bank from time to time. The objectives of
credit audit are:

1. Improvement in the quality of credit portfolio,

2. Review of sanction process and compliance status of large loans,

3. Feedback on regulatory compliance,

4. Independent review of credit risk assessment,

5. Pick-up of early warning signals and suggest remedial measures, and

6. Recommend corrective actions to improve credit quality, credit administration,

and credit skills of staff.

CREDIT RISK MITIGANTS AS PER BASEL 2 ACCORD

Recommendations of BASEL II

The Basel II principles are intended to achieve an ongoing improvement of risk

management procedures in the loan business. The regulatory treatment of credit risk
mitigation has widely been acknowledged as needing substantial updating. Basel
establishes a framework for recognizing the various mitigation techniques of collateral,
netting, guarantees and credit derivatives.

As per BASEL committee any valid ‘hedge’ should attract regulatory capital relief.
However, hedges are rarely perfect: this will generally be a residual risk element,
including an element of operational risk, which will attract a regulatory capital charge.

29
The various credit risk mitigants laid down by Basel Committee are as follows:

1. Collateral (tangible, marketable) securities

2. Guarantees

3. Credit derivative

4. On-balance-Sheet netting.

1. Collateral:-

A collateralised transaction is one in which banks have a credit exposure or

potential credit exposure in the form of loan of cash or securities, securities posted as
collateral or the exposure under the over-the counter derivative contract, to a counter-
party; and that credit exposure is hedged in whole or in part by collateral posted by the
counter-party or by a third-party on behalf of the counter-party.

The following requirements must be met:

The collateral must be pledged for at least the life of exposure and it must be
marked to market and revalued with a minimum frequency of six months.
The banks must have clear and robust procedures for the timely liquidation of
collateral.
Whise the custodian holds the collateral; banks must take reasonable steps to
ensure that the custodian segregates the collateral from its own assets.

The various collateral instruments eligible for recognition are as follows:

• Cash on deposit with bank including certificates of deposit or comparable
instruments issued by the lending bank,
• Gold,
• Debt securities issued by sovereigns and public-sector enterprises that are treated
as sovereigns by the national supervisor,

30
 • And also debt securities listed on the recognized exchange, which are issued by
banks.
• Equities.
• Mutual funds.
The amount of credit exposure of the bank to the counter-party will be reduced to
the extent of market value of the collateral posted by the counter-party.

2. Guarantees:-
A guarantee given on behalf of counter-party must represent a direct claim on
protection provider and must be explicitly referenced to specific exposures. In the case of
default on part of counter-party, the guarantor shall be bound to pay the amount of credit
exposure.

In order for a guarantee to be recognized, following must be satisfied:

• On the qualifying default/non-payment of the counter-party, the bank may in a

timely manner pursue the guarantor for the credit outstanding under the
documentation governing the transaction.
• The guarantee is explicitly documented obligation assumed by the guarantor.
• The guarantor covers all types of payments the underlying obligor is expected to
make under the documentation governing the transaction, for example, notional
amount, margin payments, etc.

Credit protection given by the following entities is recognized:

• Sovereign entities, public-sector enterprises, banks and securities firms, having

risk weight lower than that of counter-party,
• Othis entities like parent, subsidiary or affiliated companies, which have risk
weight lower than that of counter-party.

31
3. Credit derivative

Credit derivative is an instrument designed to segregate market risk from

credit risk and to allow the separate trading of credit risk. Credit derivatives allow a more
efficient allocation and pricing of credit risk. Credit derivatives are privately negotiated
bilateral contracts that allow users to manage their exposure to credit risk.
For example, a bank concerned that one of its customers may not be able to repay a loan
can protect itself against loss by transferring the credit risk to another party while
keeping the loan on its books.
This mechanism can be used for any debt instrument or a basket of instruments for
which an objective default price can be determined.
Credit derivatives are traded over-the-counter (OTC) in developed markets. OTC
trades are contracts negotiated between counterparties that take place outside the
regulated exchanges. This permits maximum flexibility in structuring a contract that
meets the needs of both parties.

Types of Credit Derivative:-

The product menu in the credit derivatives market is changing every day, but these
are four major instruments that make up the bulk of the trading volume today:

1. Total Return Swaps

2. Credit Default Swap

3. Credit Spread Options and

4. Credit Linked Notes.

Terminology varies among market participants, sometimes based on geography. For

example, Credit Default Swaps are sometimes called Credit Swaps.

Banks involved in swap derivatives can reduce risks by netting agreements.

Closeout netting is now a standard provision in the legal documentation of the over-the-
counter derivative contract.
32
 Bilateral closeout netting agreements cover a set of ‘N’ derivatives contracts
between two parties. In case of default, counter-party cannot stop payments on contracts
that have negative value while demanding payment on positively valued contracts.
Net loss in case of default is the positive sum of the market value of all the contracts in
the agreement:

Net loss = max (ÓVi, 0)

i = 1 to N
In contrast without a netting agreement, the potential loss is the sum of all positive
value contracts.
On-balance heet netting will be fully recognized for the first time, subject to the
following operational conditions:
An enforceable legal agreement is in place;
All assets and liabilities subject to the netting agreement can be precisely determined at
any time;
Exposures are monitored and controlled on a net basis;
Roll-off risk is monitored and controlled; and
Assets and liabilities are maturity matched and hedges meet the minimum 1-year
residual maturity requirement.

CREDIT RISK MITIGANTS USED BY DIFFERENT BANKS:-

For decades mitigation of credit risk has been mainly achieved through
selecting and monitoring borrowers and through creating a well-diversified loan
portfolio. More recently, new financial instruments and risk sharing markets have
evolved, in particular, markets for credit derivatives virtually exploded during the 1990s.

The Bank for International Settlements in its annual report said that in the
early 1990s, the market for credit-risk transfer from banks on to the buyers of securities
and loans involved a few billion dollars worth of loans; by 2002, that figure had grown to
more than $2 trillion.

33
The different mitigation techniques used by banks are as under:

1. Collateralization
2. Guarantees
3. Escrow account
4. Break trade laws
5. Insurance
6. Securitisation
7. Equator principle
8. Settlement through Clearing Corporation of India Limited (CCIL)
9. Netting

1. COLLATERALISATION:-

Collateral is asset provided to secure an obligation. Traditionally, banks

might require corporate borrowers to commit company assets as security for loans.
Today, this practice is called secured lending or asset-based lending. Collateral can take
many forms: cash deposits, property, equipment, receivables, oil reserves, marketable
securities, bonds, national saving certificates, etc. Collateral levels may be fixed or vary
over time to reflect the market value of the deal.

A more recent development is collateralization arrangements used to secure repo

securities lending and derivatives transactions. Under such arrangement, a party who
owes an obligation to another party posts collateral—typically consisting of cash or
securities—to secure the obligation.
In the event that the party defaults on the obligation, the secured party may seize
the collateral. In this context, collateral is sometimes called margin.

In a typical collateral arrangement, the secured obligation is periodically marked-

to-market, and the collateral is adjusted to reflect changes in value. The securing party
posts additional collateral when the market value has risen, or removes collateral when it
has fallen.
The Collateral agreement may specify:-

34
 1. Acceptable collateral.
2. Frequency of Margin calls.
3. Valuation.
4. Lien on Collateral.
5. Closeout & Termination clauses.

Types of Collateral –Amount of Collateral & Margin requirement:-

Sr. Nature of Collateral Sub Nature of Exposure Margin

No. Collateral against requirement
collateral (%) (%)
1. Cash Deposits Same Currency 100% NIL
Different 90% to 95% 10% to5%
Currency
2. Fixed Assets Plant & 75% to 80% 25% to 20%
Machinery
Land & 70% to 80% 30% to 20%
Building
Vehicle 70% to 75% 30% to 25%
3. Fixed Deposits With Banks 80% to 85% 20% to 15%
National 75% to 85% 25% to 15%
Saving
Certificates
Government 80% 20%
Bonds
4. Marketable Securities --- 50% 50%

2. GUARANTEES:-

Banks take guarantee on behalf of their customer as a credit risk mitigation

technique. Guarantees of following entities are approved by the banks:
1. Guarantees from this banks including central bank

35
 2. Guarantees from government

3. Guarantees from parent/associate of that company having stronger entity

4. Guarantees from the director/trustees of the company

5. Guarantees from inter-bank/ inter-branch

6. Guarantee from a third party

The conditions to be met, when issues of loans against guarantees are as follows:

All the terms and conditions for a guarantee must be clearly documented and made
available to all parties involved in processing loans
Care should be taken while guarantees are time bound that the expiry date of the
guarantee does not pass without a new guarantee or an extension of the old one is
received.

3. ESCROW ACCOUNT:-

Escrow account is one of the techniques used by the banks to recover their
repayment from the borrower, thiseby reducing their loan exposure.
Escrow account is an amount set aside to keep the money that is owed by one
party to another. Bank asks the borrower to open an escrow account with the trustee bank
for repayment in the event of default. Both the parties decide when the money is to be
transferred in the escrow account, depending on that the borrower puts the money in such
account and the escrow agent pays the part of the money to the lending bank in charge of
loan. Escrow account is also maintained by the borrower to pay the lending bank at the
expiry of their loan contract. This technique enables bank to recover loan from the
escrow account.

36
4. BREAK TRADE LAWS:-

Banks use technique such as break trade laws/termination clause, i.e. they have
a mutual contract whereby they can exit from the trade in the event of any type of default
on the part of borrower.

5. INSURANCE :-

Banks lending against collateral, such as lending for housing property, insure
such property with the insurance company. Insurance enables banks to recover their loss
in the case of uncertain event. Thus, an insurance policy may provide for compensation
in the event that a party defaults.

6. SECURITISATION:-

The Securitization and Reconstruction of Financial Assets Act enables bank

and FIs to recover some of the amounts from the existing NPAs.
Securitization involves the pooling or repackaging of asset (e.g. a portfolio of
loans or a group of accounts) for sale to an entity that then sells securities backed by the
assets to the investors. A service is retained by the entity to service the loans or work the
accounts, thus providing the entity with the projected and necessary cash flow to pay
back the investors within the appropriate time frame. Banks package and sell large
corporate loans to the institutional and individual investors. Thus, securitization enables
banks to transfer its loan exposure to this entity. This is also one of the techniques used
by banks to reduce their loan exposure.

7. EQUATOR PRINCIPLE:-

The Equator Principles - a voluntary set of guidelines developed for managing

social and environmental issues related to the financing development projects - apply
only to projects which cost $50 million or more, as those costing less represent only 3
per cent of the market.

37
 Banks adopting the Equator Principles undertake to provide loans only to projects
whose sponsors can demonstrate their ability and willingness to comply with
comprehensive processes aimed at ensuring that projects are developed in a socially
responsible manner and according to sound environmental management practices.

Equator principle involves following steps:

The banks, to begin with, agree upon a common terminology in categorizing

projects into high, medium and low environmental and social risk, based on the
International Finance Corporation’s (IFC) categorization process. They apply this to
projects globally and to all industry sectors such as mining, oil and gas and forestry, so
as to ensure consistent approaches in their dealings with high- and medium-risk projects.

Banks ask their customers to demonstrate in their environmental and social reviews,
and in their environmental and social management plans, the extent to which they have
met the applicable World IFC safeguard policies, or to justify exceptions to them. This
practice allows them to secure information of the quality required for them to make
judgments. And then again, the banks insert into the loan documentation for high- and
medium-risk projects covenants for borrowers to comply with their environmental and
social management plans.
The Equator Principles enables banks to better assess, mitigate, document and
monitor the credit risk and reputation risk associated with financing development
projects.

8. CLEARING CORPORATION OF INDIA LIMITED:-

Clearing Corporation of India Limited (CCIL) has been promoted by leading

banks and financial institutions (SBI, IDBI, LIC, ICICI, Bank of Baroda and HDFC
Bank) operating in India to address the need for an integrated clearing and settlement
system for debt and forex transactions.

For participants in the forex market, CCIL's intermediation provides a

structure to mitigate, and manage, the risks associated with the settlement of these high-
value transactions. Since the foreign currency leg has necessarily to be settled overseas
38
while the rupee leg gets settled locally, time-zone differences come into the picture,
adding to the settlement risk. Besides bringing tangible benefits in the form of improved
efficiency and easier reconciliation of accounts with their correspondent banks, CCIL's
intermediation in the settlement process brings the benefit of lower cost to the
participating banks.

CCIL at present guarantees settlement of trades of its members concluded in the

debt and forex market. The debt market trades are the ones that are carried out on the
NDS (Negotiated Dealing System) and come to CCIL for settlement. The forex trades
carried out by the dealers on their respective trading system are sent to CCIL for
settlement.

CCIL clears and settles trades of its members transacted on Reserve Bank of
India's NDS. The trades include normal outright trades, forward outright trades, normal
repo / reverse repo trades (other than RBI-repo) and forward repo / reverse repo trades
for government securities and Treasury Bills. The settlement of these trades is
guaranteed by CCIL through a process called novation whiseby CCIL becomes central
counterparty for each trade.

CCIL also clears and settles inter-bank forex trades in India. These are initially
rupee-based US dollar spot and forward trades, later cash and trades would also get
settled through CCIL. In future, CCIL also proposes to handle trades in other currencies.
The settlement of these trades will be guaranteed by CCIL through the legal process
called novation.

Collateralized borrowing and lending obligation (CBLO) trading system

To expand the depth of the debt market in India, CCIL has provided a trading
platform to the market participants for undertaking collateralised borrowing and lending
by offering repoable securities and bonds as collateral.

By providing the CBLO trading system, CCIL has achieved the following objectives:

a. Facilitating easy liquidity in the repo market

39
 b. Enhancing the depth of the market through wider participation by
corporate, MFs, trusts etc

c. Providing non-bank entities suitable opportunities for short-term

investment (other than call money market)

d. Reducing the counter-party and default risk by ensuring suitable

settlement mechanism

e. Elimination of market inefficiency in short-term borrowing and

lending

f. Development of market-oriented short-term reference rate for inter-

bank transactions.

9. NETTING:-

Netting is one of the techniques considered by Basel 2 accord for reduction of

credit exposure to counterparties.

Netting means the occurrence of any or all of the followings:

1. The termination or acceleration of payment or delivery obligations or entitlement

under one or more qualified financial contracts entered into under netting
agreement;

2. the calculation or estimation of a closeout value, market value, liquidation value,

or replacement value in respect of each obligation or entitlement terminated and/or
accelerated;

3. The conversion of any values calculated under (2) into a single currency;

4. The offset of any values calculated under (2), as converted under (3);
40
Netting arrangement means:

Any agreement between two parties that provides for netting of present or future
payment or delivery obligations or entitlements arising under or in connection with one
or more qualified financial contracts entered into these under by the parties to the
agreement, and,
Any collateral arrangement related to one or more of the foregoing. “Qualified
financial contract” means any financial contract, including any terms and conditions
incorporated by reference in any such financial contract, pursuant to which payment or
delivery obligations that have a market or an exchange price are due to be performed at a
certain time or within a certain period of time. Qualified financial contract include:

• A currency, cross-currency or interest rate swap agreement;

• A basis swap agreement;
• A spot, future, forward or this foreign exchange agreement;
• A cap, collar or floor transaction;
• A commodity swap;
• A forward rate agreement;
• A currency or interest rate future;
• A currency or interest rate option
• Equity derivatives;
• Credit derivatives;
• Spot, future, forward or others commodity contract;
• A repurchase agreement;
• An agreement to buy, sell, borrow or lend securities, such as a securities lending
transaction;
• A title collateral arrangement;
• An agreement to clear or settle securities transaction s or to act as depository
for securities;
• Any agreement or contract designated as such by the Bank under this Act

41
NEW CAPITAL ACCORD: IMPLICATIONS FOR CREDIT RISK
MANAGEMENT

The Basel Committee on Banking Supervision had released in June 1999 the first
Consultative Paper on a New Capital Adequacy Framework with the intention of
replacing the current broad-brush 1988 Accord. The Basel Committee has released a
Second Consultative Document in January 2001, which contains refined proposals for
the three pillars of the New Accord – Minimum Capital Requirements, Supervisory
Review and Market Discipline.

The Committee proposes two approaches, viz., Standardised and Internal Rating
Based (IRB) for estimating regulatory capital. Under the standardised approach, the
Committee desires to produce neither a net increase nor a net decrease, on an average, in
minimum regulatory capital, even after accounting for operational risk. Under the IRB
approach, the Committee’s ultimate goals are to ensure that the overall level of
regulatory capital is sufficient to address the underlying credit risks and also provides
capital incentives relative to the standardised approach, i.e., a reduction in the risk
weighted assets of 2% to 3% (foundation IRB approach) and 90% of the capital
requirement under foundation approach for advanced IRB approach to encourage banks
to adopt IRB approach for providing capital.

The minimum capital adequacy ratio would continue to be 8% of the risk-weighted

assets, which cover capital requirements for market (trading book), credit and operational
risks. For credit risk, the range of options to estimate capital extends to include a
standardised, a foundation IRB and an advanced IRB approaches.

Standardized Approach

Under the standardized approach, preferential risk weights in the range of 0%,
20%, 50%, 100% and 150% would be assigned on the basis of ratings given by external
credit assessment institutions.

Orientation of the IRB Approach

Banks’ internal measures of credit risk are based on assessments of the risk
characteristics of both the borrower and the specific type of transaction. The probability

42
of default (PD) of a borrower or group of borrowers is the central measurable concept on
which the IRB approach is built. The PD of a borrower does not, however, provide the
complete picture of the potential credit loss. Banks should also seek to measure how
much they will lose should a borrower default on an obligation. This is contingent upon
two elements. First, the magnitude of likely loss on the exposure: this is termed the Loss
Given Default (LGD), and is expressed as a percentage of the exposure. Secondly, the
loss is contingent upon the amount to which the bank was exposed to the borrower at the
time of default, commonly expressed as Exposure at Default (EAD). These three
components (PD, LGD, EAD) combine to provide a measure of expected intrinsic, or
economic, loss. The IRB approach also takes into account the maturity (M) of exposures.
Thus, the derivation of risk weights is dependent on estimates of the PD, LGD and, in
some cases, M, that are attached to an exposure. These components (PD, LGD, EAD, M)
form the basic inputs to the IRB approach, and consequently the capital requirements
derived from it.

IRB Approach

The Committee proposes two approaches – foundation and advanced - as an alternative

to standardized approach for assigning preferential risk weights. Under the foundation
approach, banks, which comply with certain minimum requirements viz. comprehensive
credit rating system with capability to quantify Probability of Default (PD) could assign
preferential risk weights, with the data on Loss Given Default (LGD) and Exposure at
Default (EAD) provided by the national supervisors. In order to qualify for adopting the
foundation approach, the internal credit rating system should have the following
parameters/conditions:

• Each borrower within a portfolio must be assigned the rating before a loan is
originated.
• Minimum of 6 to 9 borrower grades for performing loans and a minimum of 2
grades for non-performing loans.
• Meaningful distribution of exposure across grades and not more than 30% of the
gross exposures in any one borrower grade.
• Each individual rating assignment must be subject to an independent review or
approval by the Loan Review Department.
• Rating must be updated at least on annual basis.
43
 • The Board of Directors must approve all material aspects of the rating and PD
estimation.
• Internal and External audit must review annually, the banks’ rating system
including the quantification of internal ratings.
• Banks should have individual credit risk control units that are responsible for the
design, implementation and performance of internal rating systems. These units
should be functionally independent.
• Members of staff responsible for rating process should be adequately qualified
and trained.
• Internal rating must be explicitly linked with the banks’ internal assessment of
capital adequacy in line with requirements of Pillar 2.
• Banks must have in place sound stress testing process for the assessment of
capital adequacy.
• Banks must have a credible track record in the use of internal ratings at least for
the last 3 years.
• Banks must have robust systems in place to evaluate the accuracy and
consistency with regard to the system, processing and the estimation of PDs.
• Banks must disclose in greater detail the rating process, risk factors, and
validation etc. of the rating system.

Under the advanced approach, banks would be allowed to use their own estimates of
PD, LGD and EAD, which could be validated by the supervisors. Under both the
approaches, risk weights would be expressed as a single continuous function of the PD,
LGD and EAD. The IRB approach, therefore, does not rely on supervisory determined
risk buckets as in the case of standardized approach. The Committee has proposed an

IRB approach for retail loan portfolio, having homogenous characteristics distinct from
that for the corporate portfolio. The Committee is also working towards developing an
appropriate IRB approach relating to project finance.

The adoption of the New Accord, in the proposed format, requires substantial up
gradation of the existing credit risk management systems. The New Accord also
provided in-built capital incentives for banks, which are equipped to adopt foundation or
advanced IRB approach. Banks may, therefore, upgrade the credit risk management
systems for optimising capital.
44
 CHAPTER: II

REVIEW OF LITERATURE

45
 CHAPTER: II
REVIEW OF LITERATURE
INTRODUCTION
Risk and credit Risk Management in Banks has been the subject of study of many
Agencies, Researchers and Academicians. There is a treasure of literature available on
the subject. A careful selection of relevant material was a formidable task before the
Researcher. Efforts have been made to scan the literature highly relevant to the
Context.

The main sources of literature have been the Website of the Reserve Bank of India,
the Central Banks of Yemen, the website of the Basle Committee on Banking
Supervision and the websites of several major Private Sector Banks both in India and
Yemen. The publications of Academicians engaged in the Risk Management and
Central Banking Supervision spheres also throws valuable insights into the area. The
occasional Research papers published by the Reserve Bank of India and Central
Banks of Yemen, the Publications of the Reserve Bank of India, the Indian Banks
Association have proved quite relevant to the study in Yemen and India.

REVIEW OF LITERATURE : INDIAN PERSPECTIVE

Swaranjeet Arora (2013) made an attempt to identify the factors that contribute to
Credit Risk analysis in Indian banks and to compare Credit Risk analysis practices
followed by Indian public and private sector banks, the empirical study has been
conducted and views of employees of various banks have been tested using
statistical tools. Present study explored the phenomenon from different perspectives
and revealed that Credit Worthiness analysis and Collateral requirements are the two
important factors for analyzing Credit Risk. From the descriptive and analytical
results, it concluded that Indian banks efficiently manage credit risk. The results also
indicate that there is significant difference between the Indian Public and Private
sector banks in Analyzing Credit Risk.

T. VEERABHADRA RAO (2011) in his study assessed the Risk Management,

Regulation and Supervision of the Financial Sector in general and the Banking Sector
in particular is of paramount importance for the orderly growth of the economy. The

46
present study is undertaken to assess the impact of such Risk Management and Risk
Based Supervision measures introduced by the Reserve Bank of India (RBI) in the
post Reform period. The main objective of the study is to evaluate the benefits
of these measures on the overall working of the Scheduled Commercial Banks
(SCBs)belonging to the three Sectors viz., Public Sector, Private Sector and Foreign
Banks. The study also made inter- sector cross comparisons to see if the impact is
uniform among these sectors and if not, to find out which sector has performed better
due to these changes.

Dr. Krishn A. Goyal (2010) made an attempt to discuss in depth, the

importance of risk management process and throws light on challenges and
opportunities regarding implementation of Basel-II in Indian Banking Industry. The
fast changing financial environment exposes the banks to various types of risk. The
concept of risk and management are core of financial enterprise. The financial sector
especially the banking industry in most emerging economies including India is
passing through a process of change. Rising global competition, increasing
deregulation, introduction of innovative products and delivery channels have pushed
risk management to the forefront of today’s financial landscape. Ability to gauge the
risks and take appropriate position will be the key to success. It Concluded that Risk
is an opportunity as well as a threat and has different meanings for different users.
The banking industry is exposed to different risks such as forex volatility, risk,
variable interest rate risk, market play risk, operational risks, credit risk etc. which can
adversely affect its profitability and financial health. Risk management has thus
emerged as a new and challenging area in banking. Basel II intended to improve
safety and soundness of the financial system by placing increased emphasis on bank’s
own internal control and risk management process and models. The supervisory
review and market discipline. Indeed, to enable the calculation of capital requirements
under the new accord requires a bank to implement a comprehensive risk management
framework.

Dr. Yogieta S. Mehra (2010) analysed the impact of size and ownership of banks
on the range of operational risk management practices used by the banks through
execution of survey comprising of a questionnaire. The study aimed to explore
the range of practices used by Indian Banks in management of operational risk
essential for achievement of Advanced Measurement Approach (hereafter referred to

47
as AMA) for a cross –section of Indian Banks and perform a comparative analysis
with AMA compliant banks worldwide.

The analysis was performed to extract the most important variables which
differentiate performance of one bank from other. The study provides a conclusive
evidence of heightened awareness and due importance given to operational risk by
Indian banks.

Bodla, B. S., Verma, Richa(2009) designed a paper to study the implementation of

the Credit Risk Management Framework by Commercial Banks in India. The results
show that the authority for approval of Credit Risk vests with €Board of
Directors• in case of 94.4% and 62.5% of the public sector and private sector
banks, respectively. This authority in the remaining banks, however, is with the €Credit
Policy Committee•. For Credit Risk Management, most of the banks (if not all) are
found performing several activities like industry study, periodic credit calls, periodic
plant visits, developing MIS, risk scoring and annual review of accounts.

Usha, Janakiramani (2008) assessed in detail the status of operational risk

management in the Indian banking system in the context of Basel II. The expected
coverage of banking assets and the approach adopted for operational risk capital
computation is compared broadly with the position of the banking system in Asia,
Africa and the Middle East. A survey conducted on twenty two Indian banks indicates
insufficient internal data, difficulties in collection of external loss data and modeling
complexities as significant impediments in the implementation of operational risk
management framework in banks in India. The survey underscores the need to devote
more time and resources if banks desire to implement the advanced approach under
Basel II. The results of the survey clearly indicate that the process of designing the
framework for operational risk has just begun for Indian banks. Basel II /regulatory
compliance and desire to establish and implement good controls emerged as two
major drivers of operational risk management in banks. The positive features are that
all banks have well defined organizational structure and Board approved policies for
operational risk management; a majority of the banks were using some for of self-
assessment- a qualitative factor, as an important tool in their operational risk
framework; many banks had started the operational risk loss data collection exercise

48
for moving over to the advanced approaches though these were still in the formative
stages.

Diction O.B. Sathish Kumar(2007) in their study evaluated the financial

performance of Indian private sector banks. Private sector banks play an important
role in development of Indian economy. After liberalization the banking industry
underwent major changes. The economic reforms totally have changed the banking
sector. RBI permitted new banks to be started in the private sector as per the
recommendation of Narashiman committee. The Indian banking industry was
dominated by public sector banks. But now the situations have changed new

NAJAF, Gharachourlou Aghjelou (2007) investigated risk analysis and risk

management in selected Co-Op banks in Pune . Objectives of this research are
verifying the integrity of internal risk management systems. During the verification
process, the researcher test independently in proportion to the risk. And validate
periodically; all key control functions within a bank, even those designated as low
risk. Beside the general purpose of the research, the following specific objectives have
been mentioned in the research: identifying significant risks, Quantifying the risk ,
Evaluating management•s , the board•s awareness , understanding of the significant
risks facing in the banks and Recommend action plan for reducing risk. It findings,
that The results study indicates that 20.2 percent of risk factors is not applied to
cooperative banks and it shows that there is a big gap between theory and practice for
reduction risk in cooperative banks in Pune.

49
 CHAPTER – III
INDUSTRY PROFILE AND COMPANY
PROFILE

50
 CHAPTER – III
INDUSTRY PROFILE AND COMPANY PROFILE

History of Banking in India

Without a sound and effective banking system in India it cannot have a healthy
economy. The banking system of India should not only be hassle free but it should be
able to meet new challenges posed by the technology and any other external and internal
factors. For the past three decades India's banking system has several outstanding
achievements to its credit. The most striking is its extensive reach. It is no longer
confined to only metropolitans or cosmopolitans in India. In fact, Indian banking system
has reached even to the remote corners of the country. This is one of the main reasons of
India's growth process.

The government's regular policy for Indian bank since 1969 has paid rich dividends
with the nationalization of 14 major private banks of India. Not long ago, an account
holder had to wait for hours at the bank counters for getting a draft or for withdrawing
his own money. Today, he has a choice. Gone are days when the most efficient bank
transferred money from one branch to other in two days. Now it is simple as instant
messaging or dials a pizza. Money has become the order of the day. The first bank in
India, though conservative, was established in 1786. From 1786 till today, the journey of
Indian Banking System can be segregated into three distinct phases. They are as
mentioned below:

• Early phase from 1786 to 1969 of Indian Banks

• Nationalization of Indian Banks and up to 1991 prior to Indian banking sector
Reforms.
• New phase of Indian Banking System with the advent of Indian Financial &
Banking Sector Reforms after 1991.

51
PHASE IN DEVELOPMENT OF BANKING SECTOR

Phase1

The General Bank of India was set up in the year 1786. Next came Bank of
Hindustan and Bengal Bank. The East India Company established Bank of Bengal
(1809), Bank of Bombay (1840) and Bank of Madras (1843) as independent units and
called it Presidency Banks. These three banks were amalgamated in 1920 and Imperial
Bank of India was established which started as private shareholders banks, mostly
Europeans shareholders. In 1865 Allahabad Bank was established and first time
exclusively by Indians, Punjab National Bank Ltd. was set up in 1894 with headquarters
at Lahore. Between 1906 and 1913, Bank of India, Central Bank of India, Bank of
Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set up. Reserve Bank of
India came in 1935.

During the first phase the growth was very slow and banks also experienced
periodic failures between 1913 and 1948. There were approximately 1100 banks, mostly
small. To streamline the functioning and activities of commercial banks, the Government
of India came up with The Banking Companies Act, 1949 which was later changed to
Banking Regulation Act 1949 as per amending Act of 1965 (Act No. 23 of 1965).
Reserve Bank of India was vested with extensive powers for the supervision of banking
in india as the Central Banking Authority. During those days public has lesser
confidence in the banks. As an aftermath deposit mobilization was slow comparatively.
Moreover, funds were largely given to traders.

PhaseII

Government took major steps in this Indian Banking Sector Reform after
independence. In 1955, it nationalized Imperial Bank of India with extensive banking
facilities on a large scale specially in rural and semi-urban areas. It formed State Bank of
India to act as the principal agent of RBI and to handle banking transactions of the Union
and State Governments all over the country. Seven banks forming subsidiary of State
Bank of India was nationalized in 1960 on 19th July, 1969, major process of
nationalization was carried out. It was the effort of the then Prime Minister of India, Mrs.

52
Indira Gandhi. 14 major commercial banks in the country wasnationalised.Second phase
of nationalization Indian Banking Sector Reform was carried out in 1980 with seven
more banks. This step brought 80% of the banking segment in India under
Government.The following are the steps taken by the Government of India to Regulate
Banking Institutions in the Country:

• 1949 : Enactment of Banking Regulation Act.

• 1955 :Nationalisation of State Bank of India.
• 1959 :Nationalisation of SBI subsidiaries.
• 1961 : Insurance cover extended to deposits.
• 1969 :Nationalisation of 14 major banks.
• 1971 : Creation of credit guarantee corporation.
• 1975 : Creation of regional rural banks.
• 1980 :Nationalisation of seven banks with deposits over 200 crore.

After the nationalisation of banks, the branches of the public sector bank India rose to
approximately 800% in deposits and advances took a huge jump by 11,000%.Banking in
the sunshine of Government ownership gave the public implicit faith and immense
confidence about the sustainability of these institutions .

PhaseIII

This phase has introduced many more products and facilities in the banking sector
in its reforms measure. In 1991, under the chairmanship of M Narasimham, a committee
was set up by his name which worked for the liberalisation of banking practices. The
country is flooded with foreign banks and their ATM stations. Efforts are being put to
give a satisfactory service to customers. Phone banking and net banking is introduced.
The entire system became more convenient. and swift. Time is given more importance
than money. The financial system of India has shown a great deal of resilience. It is
sheltered from any crisis triggered by any external macroeconomics shock as other East
Asian Countries suffered. This is all due to a flexible exchange rate regime, the foreign
reserves are high, the capital account is not yet fully convertible, and banks and their
customers have limited foreign exchange exposure.

53
Nationalization of Banks in India

The nationalization of banks in India took place in 1969 by Mrs. Indira Gandhi
the then prime minister. It nationalized 14 banks then. These banks were mostly owned
by businessmen and even managed by them. After the nationalization of banks in India,
the branches of the public sector banks spread through out the India. These branches as
follows:

• Central Bank of India

• Bank of Maharashtra
• Dena Bank
• Punjab National Bank
• Syndicate Bank
• Canara Bank
• Indian Bank
• Indian Overseas Bank
• Bank of Baroda
• Union Bank
• Allahabad Bank
• United Bank of India
• UCO Bank
• Bank of India

Before the steps of nationalization of Indian banks, only State Bank of India
(SBI) was nationalized. It took place in July 1955 under the SBI Act of 1955.
Nationalization of Seven State Banks of India (formed subsidiary) took place on 19th
July, 1960.The State Bank of India is India's largest commercial bank and is ranked one
of the top five banks worldwide. It serves 90 million customers through a network of
9,000 branches and it offers -- either directly or through subsidiaries -- a wide range of
banking services. The second phase of nationalization of Indian banks took place in the
year 1980. Seven more banks were nationalized with deposits over 200 corers. Till this
year, approximately 80% of the banking segment in India was under Government
ownership. After the nationalization of banks in India, the branches of the public sector

54
banks rose to approximately 800% in deposits and advances took a huge jump by
11,000%.

• 1955: Nationalisation of State Bank of India.

• 1959: Nationalisation of SBI subsidiaries.
• 1969: Nationalisation of 14 major banks.
• 1980: Nationalisation of seven banks with deposits over 200 crores.

Company profile
ICICI Bank Limited is an Indian multinational bank and financial services company
headquartered in the city of Vadodara, India.

It offers a wide range of banking products and financial services for corporate and retail
customers through a variety of delivery channels and specialized subsidiaries in the areas
of investment banking, life, non-life insurance, venture capital and asset management.

The bank has a network of 5,275 branches and 15,589 ATMs across India and has a
presence in 17 countries.

The bank has subsidiaries in the United Kingdom and Canada; branches in United
States, Singapore, Bahrain, Hong Kong, Qatar, Oman, Dubai International Finance
Centre, China and South Africa; as well as representative offices in United Arab
Emirates, Bangladesh, Malaysia and Indonesia. The company's UK subsidiary has also
established branches in Belgium and Germany.

HISTORY

ICICI Bank was established by the Industrial Credit and Investment Corporation of
India (ICICI), an Indian financial institution, as a wholly owned subsidiary in 1994
in Vadodara however the parent company was formed in 1955 as a joint-venture of
the World Bank, India's public-sector banks and public-sector insurance companies to
provide project financing to Indian industry. The bank was founded as the Industrial
Credit and Investment Corporation of India Bank, before it changed its name to ICICI
Bank. The parent company was later merged with the bank. The Industrial Credit and
Investment Corporation of India (ICICI) was established on 5 January 1955 and
Sir Arcot Ramasamy Mudaliar was elected as the first Chairman of ICICI Ltd.

ICICI Bank launched Internet Banking operations in 1998.

55
ICICI's shareholding in ICICI Bank was reduced to 46% through a public offering of
shares in India in 1998, followed by an equity offering in the form of American
depositary receipts on the NYSE in 2000. ICICI Bank acquired the Bank of
Madura Limited in an all-stock deal in 2001 and sold additional stakes to institutional
investors during 2001–02.

In the 1990s, ICICI transformed its business from a development financial institution
offering only project finance to a diversified financial services group, offering a wide
variety of products and services, both directly and through a number of subsidiaries and
affiliates like ICICI Bank. In 1999, ICICI become the first Indian company and the first
bank or a financial institution from non-Japan Asia to be listed on the NYSE.

ICICI, ICICI Bank, and ICICI subsidiaries ICICI Personal Financial Services Limited
and ICICI Capital Services Limited merged in a reverse merger in 2002.

During the financial crisis of 2007–2008, customers rushed to ICICI ATMs and branches
in some locations due to rumors of bank failure. The Reserve Bank of India issued a
clarification on the financial strength of ICICI Bank to dispel the rumours.

In March 2020, the board of ICICI Bank Ltd. approved an investment of Rs 1,000 crore
in Yes Bank, resulting in a 5% ownership interest in Yes.

ACQUISITIONS

• 1996: ICICI Ltd. A diversified financial institution with headquarters in

Mumbai[21]
• 1997: ITC Classic Finance. incorporated in 1986, ITC Classic was a non-bank
financial firm that engaged in hire, purchase and leasing operations. At the time of
being acquired, ITC Classic had eight offices, 26 outlets and 700 brokers.
• 1997: SCICI (Shipping Credit and Investment Corporation of India)
• 1998: Anagram (ENAGRAM) Finance. Anagram had built up a network of some
50 branches in Gujarat, Rajasthan, and Maharashtra that were primarily engaged in
the retail financing of cars and trucks. It also had some 250,000 depositors.
• 2001: Bank of Madura
• 2002: The Darjeeling and Shimla branches of Grindlays Bank
• 2005: Investitsionno-Kreditny Bank (IKB), a Russian bank

56
• 2007: Sangli Bank. Sangli Bank was a private sector unlisted bank, founded in
1916, and 30% owned by the Bahte family. Its headquarters were in Sangli
in Maharashtra, and it had 198 branches. It had 158 in Maharashtra and 31
in Karnataka, and others in Gujarat, Andhra Pradesh, Tamil Nadu, Goa, and Delhi.
Its branches were relatively evenly split between metropolitan areas and rural or
semi-urban areas.
• 2010: The Bank of Rajasthan (BOR) was acquired by the ICICI Bank in 2010
for ₹30 billion (US$400 million). RBI was critical of BOR's promoters not reducing
their holdings in the company. BOR has since been merged with ICICI Bank.

Role in Indian financial infrastructure

ICICI bank has contributed to the setting up of a number of Indian institutions to

establish financial infrastructure in the country over the years:

• The National Stock Exchange was promoted by India's leading financial

institutions (including ICICI Ltd.) in 1992 on behalf of the Government of India with
the objective of establishing a nationwide trading facility for equities, debt
instruments and hybrids, by ensuring equal access to investors all over the country
through an appropriate communication network.
• In 1987, ICICI Ltd along with UTI set up CRISIL as India's first
professional credit rating agency.
• NCDEX (National Commodities and Derivatives EXchange) was set up in 2003,
by ICICI Bank Ltd, LIC, NABARD, NSE, Canara Bank, CRISIL, Goldman
Sachs, Indian Farmers Fertiliser Cooperative Limited (IFFCO) and Punjab National
Bank.
• ICICI Bank facilitated the setting up of "FINO Cross Link to Case Link Study" in
2006, as a company that would provide technology solutions and services to reach
the underserved and underbanked population of the country. Using technologies
like smart cards, biometrics and a basket of support services, FINO enables financial
institutions to conceptualise, develop and operationalise projects to support sector
initiatives in microfinance and livelihoods.
• Entrepreneurship Development Institute of India (EDII), was set up in 1983, by
the erstwhile apex financial institutions like IDBI, ICICI, IFCI and SBI with the

57
 support of the Government of Gujarat as a national resource organisation committed
to entrepreneurship development, education, training and research.
• Eastern Development Finance Corporation (NEDFI) was promoted by national
level financial institutions like ICICI Ltd in 1995 at Guwahati, Assam for the
development of industries, infrastructure, animal husbandry, agri-horticulture
plantation, medicinal plants, sericulture, aquaculture, poultry and dairy in the North
Eastern states of India.
• Following the enactment of the Securitisation Act in 2002, ICICI Bank, together
with other institutions, set up Asset Reconstruction Company India Limited (ARCIL)
in 2003. ARCIL was established to acquire non-performing assets (NPAs) from
financial institutions and banks with a view to enhance the management of these
assets and help in the maximisation of recovery.
• ICICI Bank has helped in setting up Credit Information Bureau of India
Limited (CIBIL), India's first national credit bureau in 2000. CIBIL provides a
repository of information (which contains the credit history of commercial and
consumer borrowers) to its members in the form of credit information reports.

Products

ICICI Bank offers products and services such as online money transfers, tracking
services, current accounts, savings accounts,[38] time deposits, recurring deposits,
mortgages, loans, automated lockers, credit cards, prepaid cards, debit cards and digital
wallets called ICICI pocket.

ICICI bank launched 'ICICIStack' which provides online services such as payment
options, digital accounts, instant car loans, insurance, investments, loans etc.

Subsidiaries

ICICI Prudential Life Insurance

ICICI Lombard

ICICI Prudential Mutual Fund

ICICIdirect

58
AWARDS

• ICICI Prudential Life Insurance Annual Report 2021 wins Gold Award from
League of American Communications Professionals (LACP) 2021 Spotlight
Awards
• CICI Prudential Life Insurance wins 'ET BFSI Excellence Award 2021' for
'Excellence in Innovation' under the category ‘Best Use of Emerging Technology
for business growth’ for Humanoid (Voice bot) out calling
• ICICI Prudential Life Insurance adjudged winner in the Life Insurance category
for "Excellence in Claims and Customer Experience" by FICCI Insurance
Industry Awards 2021
• ICICI Prudential Life Insurance Company Annual Report 2019-20 was ranked at
#52 worldwide among the entries received by League of American
Communications Professionals LLC (LACP)
• Awarded the “Claims & Customer Service Excellence Awards” in the Life
Insurance Category by FICCI
• "Customer Service Company of the Year" by India Insurance Summit &
Awards 2020
• "Best Alternative or Digital Payments Program of the Year" by the Customer
Fest Leadership Awards 2020

Vision:

To be the leading provider of financial services in India and a major global bank.

Mission:

ICICI will leverage our people, technology, speed and financial capital to: be the
banker of the first choice for our customers by delivering high quality, world-class
products, and services.

59
 CHAPTER – IV
DATA ANALYSIS AND INTERPRETATION

60
 CHAPTER- IV
DATA ANALYSIS & INTERPRETATION

1) CAPITAL ADEQUACY RATIO

Capital adequacy ratios (CAR) are a measure of the amount of a bank's core
capital expressed as a percentage of its risk-weighted asset.

Capital adequacy ratio is the ratio which determines the bank's capacity to meet the time
liabilities and other risks such as credit risk, operational risk, etc. In the most simple
formulation, a bank's capital is the "cushion" for potential losses, and protects the bank's
depositors and other lenders. Banking regulators in most countries define and monitor
CAR to protect depositors, thereby maintaining confidence in the banking system.

CAR can be viewed from two aspects:

a) Total advancement to total assets

b) Total investment to total assets

Capital Adequacy Ratio is defined as,

CAR = Capital
Risk Weighted Asset

61
 Table No:6.1Capital Adequacy Ratio

YEAR 2016-17 2017-18 2018-19 2019-20 2020-21

BASEL I 11.08 13.8 13.89 14.73 13.17
BASEL II 14.76 15.39 14.01

Chart No:6.1 Capital Adequacy Ratio

Interpretation: The CRAR has declined to 13.17 in 2020-21 which was 14.73 in 2019-
2020. Thus, it is showing slight inefficient management of credit risk as per Basel norms.

62
 a) Total Advances to Total Assets

Table No:6.2 Total Advances to total assets

(Crore)
Year Advances Assets Ratio
2016-17 7,919 13,653 0.58
2017-18 10,454 17,090 0.61
2018-19 11,848 20,379 0.58
2019-20 15,823 25,534 0.62
2020-21 20,489 32,820 0.62

Interpretation: The ratio is showing an increasing trend at 0.62 in 2020-21 which

implies proper balancing of advances & assets.

Chart No:6.2 Total Advances to total assets

63
 b) Total Investment to Assets

Table No:6.3 Total Investments to Assets

(Crore)
Year Investment Assets Ratio
2016-17 3430 13,653 0.25
2017-18 4572 17,090 0.27
2018-19 6075 20,379 0.3
2019-20 7156 25,534 0.28
2020-21 8924 32,820 0.27

Interpretation: The ratio is showed an increasing trend till from 2016-17 to 2018-19
and from 2019-2020 it decreased; it shows inefficiency in maintenance of investments &
assets

Chart No: 6.3: Total Investments to Assets

64
2) ASSET QUALITY

Asset quality is related to the left-hand side of the bank balance sheet. Bank
managers are concerned with the quality of their loans since that provides earnings
for the bank. Loan quality and asset quality are two terms with basically the same
meaning. Government bonds and T-bills are considered as good quality loans
whereas junk bonds, corporate credits to low credit score firms etc. are bad quality
loans. A bad quality loan has a higher probability of becoming a non-performing
loan with no return.

This can be calculated using two ratios:

a) Net NPA’s to total assets, and

b) Net NP’s to total advances.

65
a) Net NPA’s to Total Assets
This ratio helps in identifying the quality of the asset of the bank. It can be calculated
by dividing Net NPA by Total assets. Lesser the ratio shows the good quality of the
asset.

Table No:6.4:Net NPA’s to Total Assets

(Crore)
Year Net NPA Total Assets Percentage
2016-17 77.81 13,653 0.56
2017-18 33.97 17,090 0.19
2018-19 134.31 20,379 0.66
2019-20 61.57 25,534 0.24
2020-21 60.02 32,820 0.18

Interpretation: The percentage of Net NPA to Total assets has decreased to 0.18%
during 2020-21. This indicates a sound asset quality.

Chart No:6.4: Net NPA’s to Total Assets

66
 b) Net NPA’s to Total Advances
Net NPA shows the level of net NPA on net advances given by the bank. It can
be calculated by dividing net NPA by net advances. Higher the ratio more will be
the alarming situation for the bank and vice-versa.

Table No:5.5: Net NPA’s to Total Advances

(Crore)
Year Net NPA Advances Percentage
2016-17 77.81 7,919 0.98
2017-18 33.97 10,454 0.32
2018-19 134.31 11,848 1.13
2019-20 61.57 15,823 0.39
2020-21 60.02 20,489 0.29

Interpretation: The percentage is showing an decreasing trend from the period 2018-19
to 2020-21, 0.29% due to good management.

Chart No: 6.5: Net NPA’s to Total Advances

67
3) EARNING PER NON PERFORMING ASSETS
An NPA is defined as a loan asset, which has ceased to generate any income for a
bank whether in the form of interest or principal repayment.

Exposure to Credit Risk

 The bank can quantify the credit risk on the basis of the level of NPA’s. The
following expression quantifies the credit risk of the bank.

Earning per Non Performing Asset ( ENPA) can be calculated using the following
formulae:

ENPA = (EBT/TA) / (NPA’s/ TA)

ENPA- Earning per Non Performing Assets

NPA – Non Performning Assets
TA - Total Assets
EBT– Earnings before tax

68
Credit Risk ratio of ICICI Bank

Table No:5.6: Earning per Non Performing Assets

(Crore)
Year EBT TA NPA ENPA
2016-17 160.33 13,653 77.81 2.2
2017-18 246.95 17,090 33.97 7
2018-19 303.23 20,379 134.31 2.14
2019-20 381.32 25,534 61.57 7.2
2020-21 467.05 32,820 60.02 7

Interpretation: The ENPA during 2020-21 has come down to 7 from 7.2

Chart No:6.6: Earning per Non Performing Assets

69
4) CORRELATION

Correlation refers to any of a broad class of statistical relationships involving

dependence. The correlation coefficient is a measure of linear association
between two variables. Use the Correlation transformer to determine the extent to
which changes in the value of an attribute (such as length of employment) are
associated with changes in another attribute (such as salary).

Following are some of the correlation analysis made:

a) Correlation between deposits and advances:

It shows the relationship between deposits and advances in the bank over a period
of time.

b) Correlation between deposits and net profit:

It shows the relationship between deposits and net profit in the bank over a period
of time.

c) Correlation between net profit and advances:

It shows the relationship between net profit and advances in the bank over a
period of time.

70
 a) Correlation between Deposits and Advances

Table No: 6.7: Correlation between Deposits and Advances

(Crore)
Year Deposits Advances
2016-17 12240 7,919
2017-18 15156 10,454
2018-19 18093 11,848
2019-20 23011 15,823
2020-21 29720 20,489

Interpretation: The deposits have increased over the years thus leading to an increase in
the advances.

Chart No: 6.7: Correlation between Deposits and Advances

71
 b) Correlation between Deposits and Net Profit

Table No:5.8: Correlation between Deposits and Net Profit

(Crore)
Year Deposits Net Profit
2016-17 12240 104.12
2017-18 15156 151.62
2018-19 18093 194.75
2019-20 23011 233.76
2020-21 29720 292.56

Interpretation: Increase in deposits has also lead to an increase in the Net profit during
2020-21.

Chart No: 6.8: Correlation between Deposits and Net Profit

72
 c) Correlation between Advances and Net Profit

Table No:6.9:Correlation between Advances and Net Profit

Year Advances Net profit

2016-17 7,919 104.12
2017-18 10,454 151.62
2018-19 11,848 194.75
2019-20 15,823 233.76
2020-21 20,489 292.56

Interpretation: The Net profit has increased to 292.56 in 2020-21 while it was only
104.12 in 2016-17.

Chart No: 6.9: Correlation between Advances and Net Profit

73
 5) Analysis of Deposit Mix

Table No:6:10: Analysis of Deposit Mix

(Crore)
Demand Total
Year deposits Savings deposit Term deposits deposits
2016-17 619 2311 9310 12240
2017-18 773 2876 11507 15156
2018-19 846 3460 13787 18093
2019-20 1052 4271 17688 23011
2020-21 1201 5203 23316 29720

Chart No: 6:10: Analysis of Deposit Mix

74
 a) Percentage of Demand Deposits to Total Deposit

Table No:6.11:Percentage of Demand Deposits to Total Deposit

(Crore)
Demand
Year deposit total deposit % of deposits
2016-17 619 12240 5.06
2017-18 773 15156 5.1
2018-19 846 18093 4.68
2019-20 1052 23011 4.57
2020-21 1201 29720 4.04

Interpretation: The proportion was 5.06% in 2016-17 & is 4.04% in 2020-21, which is
shows an decreasing trend in percentage

Chart No: 6.11:Percentage of Demand Deposits to Total Deposit

75
 b) Percentage of Savings Deposits to Total Deposits

Table No: 6.12:Percentage of Savings Deposits to Total Deposits

(Crore)

Saving
Year deposit Total deposit % of total deposit
2016-17 2311 12240 18.88
2017-18 2876 15156 18.98
2018-19 3460 18093 19.12
2019-20 4271 23011 18.56
2020-21 5203 29720 17.51

Interpretation: The proportion was 18.88% in 2016-17 & has increased to 19.12 in
2018-19.and later during 2019-2020 to 2020-21 it has decreased.

Chart No: 6.12:Percentage of Savings Deposits to Total Deposits

76
 c) Percentages of Term Deposits to Total Deposits

Table No: 5.13: Percentages of Term Deposits to Total Deposits

(Crore)
Term
Year deposit total deposit % of total deposit
2016-17 9310 12240 76.06
2017-18 11507 15156 75.92
2018-19 13787 18093 76.2
2019-20 17688 23011 76.87
2020-21 23316 29720 78.45

Interpretation: The proportion is showing a consistent relation from 2006-07 from

76.06 to 2020-21 78.45.

Chart No: 5.13: Percentages of Term Deposits to Total Deposits

77
 CHAPTER - V
SUMMARY OF
FINDINGS & CONCLUSION

78
 CHAPTER - V
SUMMARY OF FINDINGS & CONCLUSION

FINDINGS

• The CRAR has declined to 13.17 in 2020-21 which was 14.73 in 2019-2020.
Thus, it is showing slight inefficient management of credit risk as per Basel
norms.
• The ratio is showing an increasing trend at 0.62 in 2020-21 which implies proper
balancing of advances & assets.
• The ratio is showed an increasing trend till from 2016-17 to 2018-19 and from
2019-2020 it decreased; it shows inefficiency in maintenance of investments &
assets
• The percentage of Net NPA to Total assets has decreased to 0.18% during 2020-
21. This indicates a sound asset quality.
• The percentage is showing a decreasing trend from the period 2018-19 to 2020-
21, 0.29% due to good management.
• The ENPA during 2020-21 has come down to 7 from 7.2
• The deposits have increased over the years thus leading to an increase in the
advances.
• Increase in deposits has also lead to an increase in the Net profit during 2020-21.
• The Net profit has increased to 292.56 in 2020-21 while it was only 104.12 in
2016-17.
• The percentage of demand deposits to total deposits was 5.06% in 2016-17 & is
4.04% in 2020-21, which is shows an decreasing trend in percentage
• The percentage of savings deposits to total deposit was 18.88% in 2016-17 & has
increased to 19.12 in 2018-19.and later during 2019-2020 to 2020-21 it has
decreased.
• The percentage of term deposits to total deposits is showing a consistent relation
from 2016-17 to 2020-21 from 76.06 to 78.45.

79
\

SUGGESTIONS

• Bank should establish a system that helps identify problem loan ahead of time
when there may be more options available for remedial measures.
• Banks should disclose to the public, information on the level of risk and policies
for risk management.
• Bank should take measures to improve its asset quality, so that the credit risk can
be minimized.
• The bank must put maximum effort to attract the fixed deposits which contribute
significantly towards the enhancement of banks profitability.
• The bank should maintain a good proportion in their deposits and advances.

80
CONCLUSION

The ICICI Bank with a new logo and image marches on. With branches all over India
and a clientele across the world, the bank is considered one of the most pro active banks
in India with a competent tech savvy team of professional at the core of services. In
2019-2020 ICICI Bank could present an outstanding performance which was beyond
market expectations despite the challenging economic scenario where the bank operates.
ICICI Bank, the bank that focuses on technology and service delivery, has always come
up with innovative banking products to meet the growing demands of the customers.

Largely concentrated in the semi-urban areas of the Southern states of India, SIB's
profitable, cost-efficient and technologically up-to-date network constitutes a reasonably
attractive stand alone franchise. The Bank's Deposit franchise includes a niche NRI
customer base that contributes a meaningful 17% of deposits and gives it a distinguishing
cost advantage over several of its peers. At the same time, the Bank is trading at the
cheapest valuations among peers.

Even though, the banking sector all over the world has been affected by the recession due
to the global meltdown in economy, especially the US banking system, ICICI Bank
proved its competence not only in terms of increased profit but also in providing
boundless customer service. Among so many players and competitive products, ICICI
Bank could maintain its premier and prestigious position only with the support of the
customers. This show how bank functions and how the bank fulfills its mission and
mission.

SIB's overall strategy and execution has been creditable over the past few years, with the
Bank maintaining its market share even in CASA deposits. While bank expects a loss in
market share for the peer group that the Bank belongs to, however, based on the Bank's
track record, and keeping in mind the importance of customer loyalty in the Banking

81
Industry, ICICI Bank expects the bank to deliver profitable growth above the average
growth rate of its peer group

 The effectiveness of credit risk management rests where the credit quality is
maintained by the bank.
 Basel III is likely to improve the risk management systems of banks as the banks
aim for adequate capitalization to meet the underlying credit risks and strengthen
the overall financial system of the country
 Formerly, people were not much bothered about the banking services but now
they are comparing banks based on the services offered.

82
Bibliography
Reference
➢ Patel Rashna,“ India’s strengths –Tremendous sourcing centers”, Home
Fashion , Servewell Printers, Mumbai, Vol-1, No.1,pp-08-09.
➢ Kothari C. R., Research methodology, Second edition(1985) , Wishwa
Prakashan , New Delhi,pp-71-80.
➢ Cherunilam Francis, International Business, 2nd Edition , pp—120.
➢ Bhalla K. V. and Shivaramu S., 10th revised edition, International Business
Environment and Management, “Export Management”, Anmol Publications,
pp-417.
➢ Sharan K. Vyukta , “International Business- Concept, Environment and
Strategy”, Pearsons Publications, 2nd edition, pp-383-386.
➢ Business, 2nd edition, Tata Mcgraw Hill Publications,pp-260.
➢ Websites
ICICI .org.in
Scribd.com
Economywatch.com

83
84