KARNATAKA STATE

FINANCIAL CORPORATION

‘A STUDY ON CREDIT
RISK MANGEMENT’

INTERNAL GUIDE EXTERNAL GUIDE

Prof. NAGARAJ Mr. M.A. MURTHY
SENOY (AGM dept of BD &
CR)

SUDARSHAN K R
1PT09MBA09
COMPANY PROFILE
Background and Inception of the Company
• Established by the state government in the year
of 1959 under the SFC Act 1951 with authorized
capital of Rs. 2 crores
• prior to November 1st 1973 were known as
MYSORE STATE FINANCIAL CORPORATION
• Since inception KSFC has assisted more than
1.60 lakh units with cumulative sanction of more
than Rs.9102 crore out of which about than 50%
towards SMEs
• start up assistance to industries such as Infosys,
Biocon & MTR, which are today India brand
ambassadors
PRODUCT PROFILE
• CORPORATE LOAN SCHEME
• NATIONAL EQUITY FUND SCHEME
• HIRE PURCHASE
• NON-CONVERTIBLE DEBENTURE
• FOREIGN LETTER OF CREDIT (FLC)
• CREDIT LINKED CAPITAL SUBSIDY
SCHEME (CLCSS)
MCKINSEY’S 7S MODEL
STRATEGY:
• KSFC believes its employees are greatest
assets to the corporation so retaining the
talent heads to avoid competition from
private institutions is their main strategy
STRUCTURE: Hierarchical structure
SYSTEM: integrated system by MIS
SKILLS
• Highly qualified professionals in the
company have major skills like technical,
finance, economical, marketing, and public
skill.
MCKINSEY’S 7S MODEL
STAFF
• There are about 38 branches in which altogether
there are 1281 employees in the corporation,
out of them 408 are class A-Officers, 703 Class
B- Assistance and clerical staff and 170 are
Class C-other subordinate staff.
STYLE
• Top down and bottom up
• Participative style
SHARED VALUES
• The value that the company upholds most is
“Customer’s Satisfaction”
SWOT ANALYSIS
STRENGTHS:
• presence of highly expertise people
• Public sector
• Network: KSFC has its branch in all
districts of Karnataka gives it strength to
access to reach every nook and corner
WEAKNESSES
• Comparatively higher interest rates.
• long procedure in case of certain
schemes.
• system followed in KSFC is out dated.
SWOT ANALYSIS
OPPORTUNITIES
• Development of infrastructure
• Department of credit research
• Websites… online Advertisements
THREATS
• Commercial banks
• IDBI, SIDBI, co-operative banks are
gearing up for term loan financing to
SME’s
OBJECTIVES OF PROJECT

• To study the various credit risk parameters

used at KSFC.
• To analyze the scoring given to the various
parameters.
• To assess the effectiveness of these risk
management activities and suggest
improvements for the same.
Reseach methodology
• STATEMENT OF PROBLEM: The lending
parameters used by SFC’s are traditional
and they are need to be revised to
formulate new techniques
• Type of data: secondary historical data
collected from annual reports and journals
released by the corporation
• Scope of study: restricted only to head
office
Limitations
• The collection of data for analysis is
restricted to KSFC Head Office only.
• The study is limited to a single
organization and there is no competition
with another company.
• The results of the study are based on the
assumption that all the information
provided is correct.
• In depth analysis could not be done due to
time constraint
 Credit rating models

Model-A Applicable for units with loans below Rs.25.00 lakhs

(both new and existing units)

Model-B Applicable for existing units with loans aggregating

more than Rs.25.00 lakhs and Rs.75.00 lakhs (existing
units)
Model-C Applicable to new units with loans aggregating more
than Rs.25.00 lakhs (new units)

Model-D Applicable for existing units with loans aggregating to

Rs.75.00 lakhs and above (existing units)
Based on the risk weight under different models, 7 risk indicators have been formulated as
given below:

Sl.no. Code RISK Score

1 LL Lower Risk >=90

2 L Low Risk >=80
3 M Medium Risk >=70
4 H High Risk >=60
5 HH Very High Risk >=50
6 C Critical Risk >=40
7 D Not Support Worthy < 40
CREDIT RISK PARAMETERS
• Current ratio
• PAT/net sales ratio
• Interest coverage ratio
• Return on capital employed
• Networth
• Debt equity ratio
• Repayment period
• Average debt service coverage ratio
• Security Margin on Primary Security
• Ratio of Overall Security to Overall
Outstandings
FINDINGS
• Firms are awarded higher scores if their
financial ratios found to be higher and its
vice versa
• According to KSFC the collateral security
should be high compared to the loan
outstanding to get the maximum mark.
• Larger the guarantee higher the marks it
may be personal or corporate
• Entrepreneurs experienced in the same
field for a long time to get the maximum
mark
• the firm will get the maximum marks if it is
going for diversification or modernization
• Finally a firm is to score minimum of 70 to
be eligible for the loan. If it is less then 70
it is very difficult to get the loan
sanctioned.
SUGGESTIONS
• KSFC should consider net cash accrual to total debt as a
parameter
• Consider moving average
- in current ratio
- debt equity ratio
- return on capital employed
• Consider vulnerability to macro-economic environment as a
parameter.
• Consider distribution network as a parameter
• Consider ability to manage change
• Consider integrity of the parameter
• Consider past success in introducing new projects
• Consider CRISIL, ICRA and SMERA ratings
CONCLUSION
Risk cannot be avoided always but as far
as possible measures should be taken to
reduce the risk. The Credit Risk
Department at KSFC does a good job in
managing the risk of the organization. But
there is always scope for improvement and
several suggestions have been made so
that the organization can do what it seems
best for it.