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Index

Pg.No.

Certificate 4

Declaration 5

Acknowledgement 6

Preface 7

1. Executive Summary 8

2. Industry Profile 9

3. Company Profile 11

4. Introduction 13

5. Need For Sound Decision Making 17

6. Importance of Credit Risk Assessment 20

7. Inter-Relationship Between Credit and Risk 21

8. Overview of Four Credit Risk Models 24

9. Credit Risk Management with special reference to

Oriental Bank of Commerce 28

10.Conclusion 41

11.Suggestions 42

12.References 43

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Executive Summary

Success comes out of measuring because what cannot be measured cannot be managed. Banks

have developed sophisticated systems to quantify and aggregate credit risk in an attempt to

model the credit risk arising from important aspects of their business lines.

Such models are intended to aid banks in quantifying, aggregating and managing risk across

geographical locations and product lines. Banks credit exposures span across geographicallocations and product lines. The use of credit risk models offer banks a framework for examining

this risk in a timely manner, centralizing data on global exposures and analyzing marginal and

absolute contributions to risk

The motivation for this particular study stemmed from the desire to provide more accurate and

comprehensive base for the estimation of credit risk which will further aid the quantitative

estimation of the amount of economic capital needed to support a banks risk-taking activities.

Furthermore, a models-based approach may also bring capital requirements into closer alignment

with the perceived riskiness of underlying assets, and may produce estimates of credit risk thatbetter reflect the composition of each banks portfolio. However, before a portfolio modeling

approach could be used in the formal process of setting regulatory capital requirements, it has to

be ensured that the models are not only well integrated with banks day-to-day credit risk

management, but are also conceptually sound, empirically validated, and produce capital

requirements that are comparable across similar institutions.

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INDUSTRY PROFILE

History of Banking in India

Without a sound and effective banking system in India it cannot have a healthy economy.

For the past three decades Indias banking system has several outstanding achievements to its

credit. It is no longer confirmed to only metropolitan or cosmopolitans in India. In fact, Indianbanking system has reached even to the remote corners of country. This is the main reasons of

Indias growth process.To make this write-up more explanatory, we prefix the scenario as Phase I, Phase II, and Phase

III.

Phase I

The General Bank of India was set up in the year 1786. Next came Bank of Hindustan andBengal 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 established 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 Mysorewere set up. Reserve Bank of India came in 1935.

During the first phase the growth was very slow and banks also experienced periodic failuresbetween 1913and 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, 1949which was later changed to Banking Regulation Act 1949 as peramending 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 the aftermath depositmobilization was slow. Abreast of it the savings bank facility provided by the Postal department

was comparatively safer. Moreover, funds were largely given to traders.

Phase- II

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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

especially in rural and semi urban areas. It formed State Bank of India to act as the principal

agent of RBI and to handle banking transaction of the Union and State Governments all over thecountry.

Seven banks forming subsidiary of State Bank of India was nationalized in1960 on 19th July

1969, major process of nationalization was carried out. It was the effort of the then PrimeMinister of India, Mrs. Indra Gandhi. 14 major commercial banks in the country were

nationalized.

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

ownership.

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: Nationalization of State Bank of India.

1959: Nationalization of SBI subsidiary.

1961: Insurance cover extended to deposits.

1969: Nationalization of 14 major banks.

1971: Creation of credit guarantees cooperation.

1975: Creation of Regional rural banks.

1980: Nationalization of seven banks with deposits over 200crore.

After nationalization of Banks, the Branches of the public sector bank India rose approximately

800% in deposits and advances took a huge jump by 11.000%.

Banking in sunshine of Government ownership gave the public implicit faith and immense

confidence about the sustainability of these institutions.

Phase III

This phase has introduced many more products and facilities in the banking sector in its reformsmeasure. In 1991, under the chairmanship of M Narasimham, a committee was set up by his name

which worked for the liberalization of banking practices.

The country is flooded with foreign banks and their ATM stations. Efforts are being put to give a

satisfactory service to costumers. Phone banking and net banking is introduced. The entire systembecame 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 shook as each other East Asian Countries suffered. Thisis all due to a flexible exchange rate regime, the foreign reserves are high, capital amount is not yet

fully convertible, and banks and their customers have limited foreign exchange exposure.

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Introduction

Emergence of Risk management in Banks

The banking environment consists of numerous risks that can impinge upon the profitability of

the banks. These multiple sources of risk give rise to a range of different issues. In an

environment where the aspect of the quantitative management of risks has become a major

banking function, it is of lesser importance to speak of the generic concepts

There have been a number of factors that can be attributed to the stabilization of the banking

environment in nineties.

Prior to that period, the industry was heavily regulated.

Commercial banking operations were basically restricted towards collecting resources and

lending operations.

The regulators were concerned by the safety of the industry and the control of its money creation

power. Among the main driving forces that played a crucial role in the changes were the

inflating role of the financial markets, deregulation of the banking sector and the increase in the

competition among the existing and emerging banks.

Monetary policies favoring high levels of interest rates and stimulating their intermediation was

by far the major channel of financing the economy, disintermediation increased at an accelerated

pace. Those changes turned into new opportunities and threats for the players.

Banks Risks

As stated, risks are usually defined by the adverse impact on profitability of several distinct

sources of uncertainty. Risk measurement requires that both the uncertainty and its potential

adverse effect on profitability be addressed. Let us now try to focus on the risk framework purely

from the perspective of a bank.

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Risk Framework

The various risks associated with the banking may be defined as below and these definitions

have the advantage of being readily recognizable to bankers.

(i) Credit Risk: Risk of loss to the bank as a result of a default by an obligator.

(ii) Solvency Risk: Risk of total financial failure of a bank due to its chronic inability to meet

obligations.

(iii) Liquidity Risk : the risk arising out of a banks inability to meet the repayment

requirements.

(iv) Interest Rate Risk: Volatility in operation of net interest income, or the present values of a

portfolio, to changes in interest rates.

(v) Price Risks: Risk of loss/gain in the value of assets, liabilities or derivative due to market

price changes, notably volatility in exchange rate and share price movements.

(vi) Operational Risk : Risks arising from out of failures in operations, supporting systems,

human error, omissions, design fault, business interruption, frauds, sabotage, natural disaster etc.

Credit Risk:

Credit risk with respect to bank is most simply defined as the risk of a borrowers payment

default on payment of interest and principal due to the borrowers unwillingness or inability to

service the debt. The higher the credit risk an institution is exposed to, the greater the losses may

be. For banks and most other credit institutions, credit risk is considered to be the form of riskthat can most significantly diminish earnings and financial strength

Need to Manage Credit Risk

For most banks loans are the largest and most obvious source of credit risk; loans and advances

constitute almost 60 per cent of the assets side of the balance sheet of any bank. As long as the

borrower pays the interest and the principal on the due dates, a loan will be a performing asset.

The problem however arises once the payments are delayed or defaulted and such situations are

very common occurrences in any bank. Delays/defaults in payments affect the cash forecasts

made by the bank and further result in a changed risk profile, as the bank will now have to face

an enhanced interest rate risk, liquidity risk and credit risk.

Traditional Credit Risk Measurement Approaches

It is hard to draw a clear line between traditional and new approaches, as many of the superior

concepts of the traditional models are used in the new models. One of the most widely used

traditional credit risk measurement approaches is the Expert System.

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Expert Systems

In an expert system, the credit decision is made by the local or branch credit officer. Implicitly,

this persons expertise, skill set, subjective judgment and weighting of certain key factors are the

most important determinants in the decision to grant credit. The potential factors and expert

systems a credit officer could look at are infinite. However, one of the most common expertsystems, the five Cc of credit will yield sufficient understanding. The expert analyzes these

five key factors, subjectively weights them, and reaches a credit decision:

Capital Structure: The equity-to-debt ratio (leverage) is viewed as a good predictor of

bankruptcy probability. High leverage suggests greater suggests greater probability of

bankruptcy than low leverage as a low level of equity reduces the ability of the business to

survive losses of income.

Capacity: The ability to repay debts reflects the volatility of the borrowers earnings.

Collateral: In event of a default a lender has claim on the collateral pledged by the borrower.

The greater the propagation of this claim and the greater the market value of the underlying

collateral, the lower the remaining exposure risk of the loan in t he case of a default.

Cycle / Economic Conditions: An important factor in determining credit-risk exposure is the

state of the business cycle, especially for cycle-dependent industries.

Character: This is measure of the firms reputation, its willingness to repay, and its credit

history. In particular, it has been established empirically that the age factor of an organization is

a good proxy for its repayment reputation.

Another factor, not covered by the five Cs, is the interest rate. It is well known from economic

theory that the relationship between the interest-rate level and the expected return on a loan (loss

probability) is highly non-linear. At low interest-rate levels, an increase in rates may lower the

return on a loan, as the probability of loss would increase.

Many financial institutions still use expert systems as part of their credit decision process, these

systems face two main problems regarding the decision process:

Consistency: what are the important common factors to analyze across different types of

groups of borrowers?

Subjectivity: What are the optimal weights to apply to the factors chosen?

In principle, the subjective weights applied to the five Cs derived by an expert can vary from

borrower to borrower. This makes comparability of rankings and decisions across the loan

portfolio very difficult for an individual attempting to monitor a personal decision and for other

experts in general.

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Management Information Systems Management of Credit Risk

Banks must have information systems and analytical techniques that enable management to

measure the credit risk inherent in all on- and off-balance sheet activities. The management

information system should provide adequate information on the composition of the credit

portfolio, including identification of any concentration of risk. Banks should have methodologiesthat enable them to quantify the risk involved in exposures to individual borrowers. Banks

should also be able to analyze credit risk at the product and portfolio level in order to identify

any particular sensitivities or concentrations. The measurement of credit risk should take account

of:

i. The specific nature of the credit (loan, derivative, facility, etc.) and its contractual and

financial conditions.

ii. The exposure profile until maturity in relation to potential market movements

iii. The existence of the collateral or guarantees

iv. The potential for default based on the internal risk rating. The analysis of credit risk data

should be undertaken at an appropriate frequency with the results reviewed against relevant

limits. Banks should use measurement techniques that are appropriate to the complexity and

level of the risks involved in their activities, based on robust data and subject to periodic

validation.

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Need For Sound Decision Making

Over the last few years financial markets have witnessed far-reaching changes at a fast pace.

Intense competition for business involving both the assets and liabilities, together with

increasing volatility in the domestic interest rates as well as foreign exchange rates with a

pronounced downward trend, has brought pressure on the banks to generate bigger volumes of

business in order to maintain good spreads, profitability and long-term viability. These pressures

call for structured and comprehensive measures and sound decision making on the part of banks.

Banks have to base their business decisions on a dynamic and integrated risk management

system and process, driven by corporate strategy. Banks are exposed to several major risks in the

course of their business-credit risk, interest rate risk, foreign exchange risk, liquidity risk,

operational risk etc. Risk management rather than risk avoidance is the goal.

Credit fundamentals are critical to soundness. The importance of developing sound credit

policies, that can reduce the risk of troubled loans, as well as help to maintain the integrity of a

quality portfolio are imperative.

Commercial banking is a world infrastructure profession with an ancient past. Debt propels

progress, and bankers have been the traditional intermediaries.

When an economy is in trouble, there is a flight to safety and quality, and the focus is on

currency values, cross-border exposure, risky lending, and bank liquidity. Government, industry,

commerce, and consumption all large users of credit are affected. Each needs a viable

banking system.

On the other hand, there is a no business that can get into trouble faster. Among financialinstitutions, only a commercial bank can create money. It does this when it provides demands

deposits for borrowers or buys investments for its own account. A bank can expand its deposits

to the extent that reserves and reserve requirements permit. No matter how carefully it manages

its liabilities, a bank that strains liquidity by excessive risk taking will come to a financial

moment of truth.

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Credit is extended to many types of borrowers, for varying periods, in differing patterns, on

many bases, and for a variety of purposes. In each case, the credit is based on the credit

worthiness of the borrower, not the bank. A bank uses its own credit to attract funds or as a

substitute for a customers credit for example, a letter of credit.

The borrower and bank credit join to become the banks credit when write-offs reach the point atwhich a premium must be paid by the bank to attract funds. This prompts questions about the

banks credit worthiness and management capability.

Tight margins on commercial loans and fewer legal obstacles to capital markets activities led

banks to consolidate and make other adjustments, including:

A closer relationship between commercial and investing banking

Increased expansion into fee-driven services

Increasing use of technology in credit scoring, trading and positioning. New software productshave fostered development of derivatives and other such products. Sound judgment in computer

application is imperative.

Credit Elements: Policy, Process, Behavior

Credit elements ultimately come together within the framework of credit policy, process, credit

officers behavior and audit. Policy is the credit cultures anchor and the banks credit

conscience. Its role is to assist credit officers in balancing the volume and quality of credit.

Process is the line-driven operational arm of credit and credit strategy. It makes the credit system

work, defends its integrity through close supervision and built-in checks and balances and by

anticipating problems, guards against surprises.

Credit officers behavior reflects the attitudes and patterns of behavior of the CEO and

supervisory management as well as institutional philosophies, traditions, priorities and standards.

Audits role is more than being counting. It also evaluates such matters as conformity to policy,

credit practices and procedures, portfolio quality, adherence to business plans, development and

distribution of credit talent and the competence of individual credit officers. Credit behavior

ranges from defensive conservatism to irresponsible aggressiveness. There must be a balance,

and this is what a bank expects of its credit officers:

Understand each aspect of each credit proposal thoroughly.

Balance the quantity and quality of credit to achieve earning objectives while meeting

appropriate credit needs.

Always maintain acceptable credit standards.

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Not be greedy and keep risks to reasonable limits.

Evaluate new business opportunities in a balanced way, avoiding risks that should not be taken.

Not be mesmerized by house names or by size. Big borrowers can swing big and be high

rollers when in trouble. The amount of the banks exposure should be related to the quality ofthe borrower.

Place the banks interest ahead of the profit centers

Be mindful of banks liquidity and loan port-folio objectives.

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Importance of Credit Risk Assessment

The importance of credit risk management for banking is tremendous. Banks and other financial

institutions are often faced with risks that are mostly of financial nature. These institutions must

balance risks as well as returns. For a bank to have a large consumer base, it must offer loanproducts that are reasonable enough. However, if the interest rates in loan products are too low,

the bank will suffer from losses. In terms of equity, a bank must have substantial amount of

capital on its reserve, but not too much that it misses the investment revenue, and not too littlethat it leads itself to financial instability and to the risk of regulatory non-compliance.

Credit risk management, in finance terms, refers to the process of risk assessment that comes inan investment. Risk often comes in investing and in the allocation of capital. The risks must be

assessed so as to derive a sound investment decision. Likewise, the assessment of risk is alsocrucial in coming up with the position to balance risks and returns.

Banks are constantly faced with risks. There are certain risks in the process of granting loans to

certain clients. There can be more risks involved if the loan is extended to unworthy debtors.

Certain risks may also come when banks offer securities and other forms of investments.

The risk of losses that result in the default of payment of the debtors is a kind of risk that must be

expected. Because of the exposure of banks to many risks, it is only reasonable for a bank to

keep substantial amount of capital to protect its solvency and to maintain its economic stability.The second Basel Accords provides statements of its rules regarding the regulation of the bank'scapital allocation in connection with the level of risks the bank is exposed to. The greater the

bank is exposed to risks, the greater the amount of capital must be when it comes to its reserves,

so as to maintain its solvency and stability. To determine the risks that come with lending andinvestment practices, banks must assess the risks. Credit risk management must play its role then

to help banks be in compliance with Basel II Accord and other regulatory bodies.

To manage and assess the risks faced by banks, it is important to make certain estimates, conduct

monitoring, and perform reviews of the performance of the bank. However, because banks areinto lending and investing practices, it is relevant to make reviews on loans and to scrutinize and

analyze portfolios. Loan reviews and portfolio analysis are crucial then in determining the creditand investment risks.

The complexity and emergence of various securities and derivatives is a factor banks must beactive in managing the risks. The credit risk management system used by many banks today has

complexity; however, it can help in the assessment of risks by analyzing the credits and

determining the probability of defaults and risks of losses.

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Credit risk management for banking is a very useful system, especially if the risks are in linewith the survival of banks in the business world.

Inter-Relationship Between Credit And Risk

Risk is a fact of business life. Taking and managing risk is part of what organizations must do to

create profits and shareholder value. But the corporate scenario of recent years suggests that

many organizations neither manage risk well nor fully understand the risks they are taking.

Risk, in very broad terms can be defined as the chance that some event will have a positive or

negative effect on something of value. In financial contexts, it is defined as the chance that the

returns on an investment will be different from what were expected. This includes the possibility

of losing some or all of the original investment.

Hedging usually involves taking positions in assets that are negatively correlated, so that if the

value of one asset goes down, the value of another asset would go up, thereby keeping the net

losses of the firm at the minimum. To take a hedge position, it is necessary that the firm

estimates the risk it is exposed to.

The importance of the assessment (and then the management) of risk also arises from the relation

between the risks undertaken by a firm and the returns it gets. The reason is that the investors

expect to be compensated for the additional risk that they bear.

The necessity to measure risk becomes more important because firms need to know their stand;

about how much risk they are bearing for what amount of returns. Sometimes, it is not only thefirm and its owners and employees who are affected but the common people are also effected if a

firm goes bankrupt due to the extreme risk positions it takes too much risk, like in cases of banks

becoming bankrupt due to low quality lending.

But there would be very low returns without being exposed to any risk. Therefore there is a need

to strike a middle path to find the maximum amount of risk that can be taken without having a

fear of bankruptcy.

Credit Risk is the risk that a firm (or any party) will not recover the payment due to it, because

the borrower will default. Though this risk exists for almost all businesses (as there is a risk thatthey might not receive their receivables), the risk is huge for financial institutions and banks,

which are in the business of lending.

Risk is the potential impact (positive or negative) on an asset due to some present or future

occurrence. In financial terms, risk is the probability that an assets value will reduce or

diminish, creating problems for the firm owning the asset. The asset could be the cash flows of

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the firm, the fixed assets of the firm, or the positions that the firm takes in various financial

instruments.

Measurement of risk comprises the quantification of the risk that the firm expects it will face,

and the firm is therefore in a position to take decisions that mitigate (in financial terms hedge)

the risk.

Credit Risk is the first kind of risk identified, it is the risk that a firm will not be able to collect

the loans it lent. As can be expected, credit risk is the most predominant form of risk for banks

and financial institutions.

The assessment of credit risk has been one of the major necessities for compliance with the

Basel I norms (which were set out for all international banks). Basel I gave the minimum capital

that banks required to maintain so that the probability of the bank defaulting is minimal. This

minimum capital that is required to be maintained is determined by using the credit exposures of

the bank.

Basel II developed this context of assessing and minimizing credit risk further by assigning

weights to the various credit exposures of the bank. The net capital that is required to be

maintained is then determined. The benefit is that the capital requirements according to Basel II

are usually much lesser than under Basel I, therefore banks have more free cash flows that can

be used for the further expansion of their business.

The banks determine the risk-weight that has to be assigned to each asset according to the Basel

guidelines. One method is based on the credit ratings of the borrowers (called the Standardized

Approach); a borrower firm that has a high credit rating is given a low weight and vice versa.

Another way is to use the Internal Ratings Based Approach (IRB Approach), where the bank

calculates the credit risk inherent in its exposures. The estimation of the probability of default

(PD) is a very crucial part of the IRB approach. The Probability of Default, along with measures

like Expected Loss and Loss Given Default are used to find the final credit exposure of the bank,

and therefore assess the adequate capital requirements of the bank.

Because there are many types of counterpartiesfrom individuals to sovereign governments,

and many different types of obligationsfrom auto loans to derivatives transactionscredit risk

takes many forms.

Credit Quality of an obligation, refers to counterpartys ability to perform on an obligation. Thisencompasses both the obligation's default probability and anticipated recovery rate. The term

Credit Analysis is used to describe any process for assessing the credit quality of counterparty.

Credit Analysis is often done based on the balance sheets and the financial statements of the

firms. Credit risk modeling is a concept that broadly encompasses any algorithm-based methods

of assessing credit risk.

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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 other 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 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 will decide whether or not to extend credit. The process is

formulaic and highly standardized.

There are many ways that credit risk can be managed or mitigated. The first line of defense is the

use of credit scoring or credit analysis to avoid extending credit to parties that entail excessive

credit risk. Credit risk limits are widely used. These generally specify the maximum exposure a

firm is willing to take to counterparty. Industry limits or country limits may also be established

to limit the sum credit exposure a firm is willing to take to counterparties in a particular industry

or country finally; firms can hold capital against outstanding credit exposures.

For most banks, loans are the largest and most obvious source of credit risk; however, othersources of credit risk exist throughout the activities of a bank, including in the banking book and

in the trading book, and both on and off the balance sheet. Banks are increasingly facing credit

risk (or counterparty risk) in various financial instruments other than loans, including

acceptances, inter-bank transactions, trade financing, foreign exchange transactions, financial

futures, swaps, bonds, equities, options, and in the extension of commitments and guarantees,

and the settlement of transactions.

The goal of credit risk management is to maximize a bank's risk-adjusted rate of return by

maintaining credit risk exposure within acceptable parameters. Banks need to manage the credit

risk inherent in the entire portfolio as well as the risk in individual credits or transactions. Banksshould also consider the relationships between credit risk and other risks. The effective

management of credit risk is a critical component of a comprehensive approach to risk

management and essential to the long-term success of any banking organization.

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Overview of Four Credit Risk Models

A brief overview of the four credit risk models that have achieved global acceptance as

benchmarks for measuring stand-alone as well as portfolio credit risk is given below:

The four models are:

Altmans Z-Score model

KMV model for measuring default risk

Credit Metrics

Credit Risk

The first two models were developed to measure the default risk associated with an individual

borrower. The Z-Score model separates the bad firms or the firms in financial distress from the

set of good firms who are able to service their debt obligations in time. The KMV model, on

the other hand, estimates the default probability of each firm. Thus, the output of this model can

be used as an input for risk based pricing mechanism and for allocation of economic capital. The

other two models are the most frequently used portfolio risk models in credit risk literature. They

are intended to measure the same risks, but impose different restrictions, make different

distributional assumptions and use different techniques for calibration.

Z score Model

Altmans Z score model is an application of multivariate discriminant analysis in credit risk

modeling. Discriminant analysis is a multivariate statistical technique that analyses a set of

variables in order to differentiate two or more groups by minimizing within group variance and

maximizing the between group variance simultaneously.

Altman started with twenty variables (Financial Ratios) and finally five of them were found to be

significant. The resulting discriminant function was:

Z = 0.72X1 + 0.85X2 +3.1X3 + 0.42X4 +X5

Where,

X1 = Working Capital / Total Assets

X2 = Retained Earnings/Total Assets

X3 = Earnings before Interest and Taxes/Total Assets

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X4 = Market Value of Equity/Book Value of Total Liabilities

X5 = Sales/Total Assets

Altman found a lower bound value of 1.2 (Critical Zone and an upper bound value of 2.8(Safe

Zone) to be optimal. Any score in between 1.2 and 2.9 was treated as being in the gray zone.

KMV Model

KMV Corporation has built a credit risk model that uses information on stock prices and the

capital structure of the firm to estimate its default probability. The starting point of this model is

the proposition that a firm will default only if its asset value falls below a certain level (Default

Point), which is a function of its liability. It estimates the asset value of the firm and its asset

volatility from the market value of equity and the debt structure in the option theoretic

framework.

Using these two values, a metric (Distance from default or DD) is constructed that representsthe number of standard deviation i.e. the number of times the firms assets value is away from

the default point.. However, this method was successfully commercialized by Moodys KMV

(formerly KMV Corporation).

Finally, a mapping is done between the DD value and the actual default rate, based on the

historical experience. The result probability is called Expected Default.

Credit Metrics Approach

In April 1997, J.P Morgan released the credit metrics technical document that immediately set a

new benchmark in the literature of risk management. This provides a method for estimating the

distribution of value of assets in a portfolio subject to changes in the credit quality of individual

borrower. A portfolio consists of different stand along assets, defined by a stream of future cash

flows each asset has over the possible range of future rating class.

Starting from its initial rating, an asset may end in any one of the possible rating categories. Each

rating category has a different credit spread, which will be used to discount the future cash

flows. Moreover, the assets are correlated among themselves depending on the industry they

belong to. It is assumed that the asset returns are normally distributed and change in the asset

returns cause the change in rating category in the future. Finally, the simulation technique is used

to estimate the value distribution of the assets.

Credit Risk

Introduced by Credit Suisse Financial Products, Credit Risk is a model of default risk. Each asset

has only two possible ends of period states: Default and Non-default. In the event of default, the

lender recovers a fixed proportion of the total exposure. The default rate is considered as a

continuous random variable. It does not try to estimate the default correlation directly. The

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default correlation is assumed to be determined by a set of risk factors. The final step is to obtain

the probability generating function for losses. The losses are entirely determined by the exposure

and recovery rate.

Hence, while implementing Basel II, prime focus will be on regulation and risk management.

After March 31st 2007, the banking industry will be ruled by bankers who learn to manage theirrisks effectively.

The banks may evaluate the utility of these models with suitable modifications to the country

specific environment for fine-tuning the credit risk management. Banks may therefore attempt

building adequate database for switching over to credit risk modeling after a specified period of

time.

Credit Risk modeling results in a better internal risk management. Banks credit exposures

typically are spread across geographical locations and product lines. The use of credit risk

models offer banks a framework for examining this risk in a timely manner, centralizing data onglobal exposures and analyzing marginal and absolute contributions to risk. These properties of

models may contribute to an improvement in a banks overall ability to identify measure and

manage risk.

Loan review, administration, and management (LRM) are an inherent process of credit

management among banks. The obvious and more serious banking problems arise due to lax

credit standards, poor portfolio risk management, or a lack of attention to changes in economic,

or other circumstances that lead to a deterioration in the credit standing of a banks portfolio.

Therefore, the banking industry has been focusing more attention than ever on risk management.

Basel II Accord:

Many credit problems reveal basic weaknesses in the credit granting and monitoring processes.

While shortcomings in underwriting and management of market-related credit exposures

represent important sources of losses at banks, many credit problems would have been avoided

or mitigated by a strong internal credit process. Many banks find carrying out a thorough credit

assessment a substantial challenge. For traditional bank lending, competitive pressures and the

growth of loan syndication techniques create time constraints that interfere with basic due

diligence. Globalization of credit markets increases the need for financial information based on

sound accounting standards and timely macroeconomic and flow of funds data. When this

information is not available or reliable, banks may dispense with financial and economic

analysis and support credit decisions with simple indicators of credit quality, especially if they

perceive a need to gain a competitive foothold in a rapidly growing foreign market. Finally,

banks may need new types of information to assess relatively newer borrowers, such as

institutional investors and highly leveraged institutions.

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Whilst refocusing of credit practices is essential, certain credit rating models that are being

adopted still follow the outdated practices of the past, which focus on risk avoidance, rather than

risk management and if banks seek to continually avoid risk, significant opportunities will be

lost. As a consequence the banks will lose out to more sophisticated competitors. However,

banks have now become more sophisticated in their hedging and pricing of interest rate risk.

New modeling methods are changing the way banks understand and handle credit risk. One has

to wait and watch for the implications.

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Credit Risk Management

CREDIT RISK MANAGEMENT POLICY OF THE BANK-2009-10

The Credit Risk Management Policy formulated by the Bank was last reviewed and approved

vide item no- RM-02 by the Board of Directors in the meeting held on 29.09.08. The policy for

2009-10 has been reviewed based on the feedback / suggestions received from field functionaries

and other departments, RBI guidelines, AND AFI observations. The policy has been approvedby the Board of Directors vide item no. RM-07 in the meeting held on 24.09.09 The major

changes / modifications, which have been effected, are summarised as under.

The bank has introduced 10 new credit rating models developed by M/s IMaCS and the same

have been implemented in the bank w.e.f 01/08/2009 thus replacing the earlier NIBM models.These models cover all the segments of advances i.e. Large Corporate, SME, SBS, NBFC,

Green Field Projects, Infrastructure Projects, Retail and agriculture.

The mapping of credit rating grades as per new models vis-a vis NIBM models has alreadybeen done and the pricing of loans based on new models as approved by the Board has been

incorporated in the Credit Risk Management policy.

Consequent upon the special package for concession in rate of interest on MSME sector

w.e.f 18/12/2008, the policy has been revised and the rate of interest applicable for Microenterprises have also been incorporated in Credit Risk Management policy.

The discretionary powers of Regional Heads to allow concessions in rate of interest were

revised in view of the competitive market conditions, value of the account etc, vide guidelinesissued as per circular letter no. HO/ADV/69/2008-09 dated 18.11.2009. The policy has

accordingly been revised and also the discretionary powers of the Regional Heads to reduce

rate of interest on small and medium enterprises have been delinked from rating grades.

The revision in the discretionary powers of CMD/ ED and other functionaries were last

approved by the Board of Directors vide item no. RM-6 dated 11.09.2006 wherein it wasstipulated that in respect of borrowers rated below A, the powers shall be reduced to 80% of

the normal powers under Corporate as well as non-corporate borrowers.

However, in terms of the approved loan policy for 2009-10, if the rating in IMaCS models is

below 5 as equivalent to below B+ in NIBM models, the powers shall stand reduced to

80% of the normal powers under corporate as well as non-corporate borrowers. The same hasbeen incorporated in the credit Risk management Policy.

The bank has introduced the concept of TRIGGER POINTS to mitigate the creditrisk. The ceilings for exposures to various sectors have been prescribed in Banks loan policy.

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In order to contain the credit flow to various sectors well within the prescribed limit, twotrigger points for each sector have been proposed based on the sensitivity of the sector. More

sensitive is the sector, lower is the trigger point. First trigger point to be called Caution will

be the indicator for slowing down fresh exposures to that sector. Second trigger point to becalled Management Attention will restrict the further fresh exposures and only renewals or

enhancement (on selective basis) will be considered. The above trigger points have beenapproved by the Board in its meeting held on 23.06.2009 and the same have been incorporated

in the Credit Risk Management policy.

Details of the policy have been mentioned inthe following chapters.

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INTRODUCTION

1.1 Definition Of Credit Risk

Credit risk is defined as the possibility of losses associated with diminution in the credit

quality of borrowers or counter parties. In a banks portfolio, losses stem with outright

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 quality. Credit Risk emanates from a banks dealings

with an individual, corporate, bank, financial institution or a sovereign.

1.2 Summary of Latest Rbi Guidelines Relating To Risk Management

The summary of RBI guidelines relating to risk management is given below:

(i) All commercial banks in India (excluding Local Area Banks and Regional Rural Banks)shall adopt Standardized Approach (SA) for Credit Risk, Basic Indicator Approach (BIA)

for Operational Risk and shall continue to apply Standardized Duration Approach (SDA)

for computing capital requirement for Market Risk.

(ii) Banks are required to maintain minimum CRAR of 9.00% on an ongoing basis.(iii) Under Standardized Approach in Credit Risk, Reserve Bank of India have advised that

banks may use the rating of any of the following credit rating agencies for the purposes of

risk weighting their claims i.e.

Credit Analysis and Research Limited (CARE)

CRISIL Limited

Fitch India ; and

ICRA Limited.

(iv) The risk weight shall vary from 20% to 150% based on ratings assigned by the ratingagencies.

(v) An analysis of the Banks CRAR under existing guidelines and the guidelines on

revised framework shall be reported to the Board of Directors by each Bank onquarterly intervals.

(vi) Each Bank will have a Board approved Policy on utilization of credit risk mitigation

techniques and collateral management.

(vii) Each Bank will have a Board approved policy on Disclosures.(viii) Board approved policy on Internal Capital Adequacy Assessment Process (ICAAP)

along with the capital requirement as per ICAAP.(ix) Each Bank will develop requisite MIS to meet the requirements under Basel II.(x) RBI vide circular no. DBOD.BP.BC.No.23/21.06.001/2009-10 dated 07.07.2009 has

advised all the Banks to take steps for migration to advanced approaches as per the

time schedule given below.

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Approach The earliest date ofmaking application

by banks to the RBI

Likely date of

approval by the RBI

Our Bank's

position in this

regard

FOUNDATION InternalRatings-Based (FIRB)

Approach for Credit Risk

April 1, 2012 March 31, 2014 April 1, 2012

ADVANCED Internal

Ratings-Based (AIRB)

Approach for Credit Risk.

April 1, 2012 March 31, 2014 April 1, 2012

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OBJECTIVES AND STRATEGIES

2.1 Need for Credit Risk Management Policy

Keeping in view RBI guidelines on the subject, it has become imperative that each Bank should

have a robust credit risk management system, which is sensitive and responsive to the emerging

needs of the Organization. The implementation of Basel Accord-II is going to have far reachingimplications for banks. Keeping in view these factors, the Credit Risk Management Policy has

since been reviewed.

2.2 Philosophy of Credit Risk Management Policy

The Credit Risk Management philosophy of the Bank shall be to sustain diversified business

growth, with particular emphasis on low risk, thrust areas and retail sectors to optimize/ theoverall risk in lending in order to achieve reduction in default probability and thereby improving

Return on Assets (ROA).

Broad Objectives of Credit Risk Management Policy

The Credit Management & Risk Policy of the Bank at the macro level is an embodiment of theBanks approach to understand measure and manage the credit risk and aims at ensuring

sustained growth of healthy loan portfolio while dispensing the credit and managing the risk.

The Bank that truly understands various kinds of risks and can properly identify and quantify thespecific risks would certainly gain business advantages.

a) Within the parameters of the Risk Management Philosophy outlined above, theobjectives of Credit Risk Management Policy shall be to strive for a balanced and healthier

Credit portfolio by understanding properly the Credit Risk involved and by measuring thesame with a scientifically developed independent and accurate rating mechanism.

b) Credit Risk being inherent in exposures in which funds are deployed, the policy aims toachieve that risk taking decisions are explicit, transparent and clear and are consistent with

the strategic business objectives and policies laid down.

c) The Bank shall view the policy as a framework where risk mitigation will be consideredappropriate and as a means of achieving organizational objectives of higher net return for

which bank shall gear up mechanism to understand credit risk in all related activities and

improve lending techniques.

2.3 Implementation of RBI Guidelines

Risk Management Guidelines issued by RBI shall continue to act as a guiding factor whileformulating and implementing the risk system in the Bank. The Bank shall continue to comply

with all statutory and regulatory restrictions on credit as stipulated by RBI from time to time.

In order to implement the guidelines of RBI, following measures have been taken by the Bank.

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2.5 Exposure Management Measures

Exposures ceilings prescribed by RBI and approved by Board of Directors as incorporated in theLoan Policy will continue to be followed.

2.6 Sector Wise Ceiling

Compliance with the exposure limits incorporated in the Loan Policy for aggregate commitments

to specific sectors, industries, categories of borrowers etc, fixed having regard to performance of

different sectors /industries and the risk perceived, shall be ensured while approving any freshcredit/investment exposure or renewal/enhancement of an existing limit.

2.7 Thrust and Restricted Areas of Banks Lending

Achievement of targets set by RBI for advances to Priority Sector/Agriculture / Weaker

Section/DRI/ SSI/ Export from time to time shall be ensured.

Retail sector with emphasis on capturing larger share of the retail segment and increase the

component of the Banks lending to the retail sector. Besides marketing of the retail credit

products already developed, new products will continue to be developed as per the market needand necessary customization.

Thrust areas and Restricted areas of lending as incorporated in the Loan Policy shall befollowed.

2.8 Provisioning Compliance

Provisioning for NPA is being monitored by Recovery and Law Deptt as per RBI guidelines and

Recovery Policy approved by the Board of Directors

2.9 Credit Approval Grids

Credit approval Grids have been formed at the level of all the Regional Offices and Head Officeand all the proposals falling within the discretionary powers of Regional Head and various

functionaries at Head office are routed through the Credit Approval Grids wherein presence of

an official from Credit Risk Management Department is mandatory for the quorum. This isproposed to be continued.

2.10 Discretionary Powers

The Board of Directors has approved revision in the discretionary powers of various

functionaries for Loans and Advances in the meeting held on 11.09.2006. In terms of theirdiscretionary powers, the loaning powers of HO functionaries are lesser for non-corporate

borrowers in comparison with corporate borrowers as per guidelines received from RBI under

Basel II norms.

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2.11 Credit Appetite as well as the Acceptable Level

In order to clearly define the Banks credit appetite as well as acceptable level of risk-rewardtrade off for its credit activities, the Bank shall consider fresh proposals for credit under credit

rating category up to credit rating category 7 ( i.e. 1 to 7) or any other equivalent ratingassigned by the External Credit Rating Agency. Executive Director or Chairman & Managing

Director can consider any deviation in this regard and such deviation shall generally relate tocases where:

a) The borrower is State / Central Government undertakingb) The borrower rating has been affected due to poor financials on account of

circumstances beyond borrowers control such as unexpected losses due natural calamities.

c) Additional credit exposure is required to be sanctioned under CDR cases ofCorporate/SME Borrowers.

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ORGANIZATIONAL STRUCTURE

3.1 Board of Directors

Board of Directors shall be the overall authority for assessing and monitoring the progress on on-going

basis.

3.2 Supervisory Committee of Directors on Risk Management - SCDRM (Board Level Committee)

A committee at the Board Level with Chairman and Managing Director, as the Chairman of the

Committee has since been constituted to review the progress at regular interval. The Committee

shall meet at quarterly interval or oftener as the case may be.

3.3 Credit Risk Management Committee (also called Credit Policy Committee):-

This committee has been constituted with the following members in order to effectively monitor and

implement Credit Risk guidelines / strategies approved by the Board / Supervisory Committee of theBoard on Risk Management (SCDRM) from time to time:

(i) Chairman & Managing Director

(ii) Executive Directors

(iii) General Manager (IT & Risk Management)

(iv) General Manager (Accounts and Services)

(v) General Manager (Corporate Strategy & Planning)

(vi) General Manager (Investment and Large Corporate Credit)

(vii) General manager (Mid Corporate, SME & IBD)(viii) General manager(RDRPSC)

(ix) Dy. General manager(Investment)

(x) Dy. General manager (Risk Management)

(xi) Asst. General manager (Risk Management) Member Secretary

3.4 Credit Risk Management Department

This Department, independent of Credit Administration Department, has been set up at Head

Office under the overall charge of General Manager (Risk Management) to implement, executeand monitor work relating to Credit Risk Management on day to day basis in coordination with

other departments.

3.5 Loan Review Mechanism Cell

The Loan Review Mechanism cell already set up under Inspection & Control Department, Head

Office evaluates the Credit decisions of:

a) Assigning rating grades.

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b) Sanctioning of various limits and its structures.

c) Documentation etc. With the sole objective of bringing about systematic improvementswhile verifying and ensuring the integrity of the existing system and that it is functioning

within the framework of existing policies and procedures.

d) This Department also identifies potential problematic loans having exposure of Rs.5.00crore and above for special monitoring.

e) Exception report in respect of irregularities/ deviations of serious nature, if any, inrespect of cases falling under the powers of GM (Credit) /ED/CMD/MCB shall be put up

by Loan Review Deptt to the Audit Committee of the Board through Executive Director

on quarterly basis. However, the department concerned shall ensure monitoring andrectification thereof.

The Loan Review Mechanism Cell at present reviews sanction-process and status of postsanction process of:

1. All fresh proposals and proposals for renewal of limits of all existing accounts

with sanction limit equal to or above Rs. 5 crore.2. Randomly selected accounts from rest of the portfolio.

3. The LRM cell at Regional office reviews sanction-process and status of post

sanction process of all such accounts sanctioned by Regional Office having exposure ofRs 1.00 crore and above but less than 5.00 crore.

Besides above, to have effective monitoring for compliance of terms and condition of sanction

the LRM cell will also review

a. Accounts above Rs. 1.00 Crore of sister concerns / group / associate concerns of aboveaccounts, even if the limit is less than Rs. 5.00 crore shall also be reviewed.

b. All accounts sanctioned by the Branch Incumbent having total exposure of Rs 5.00 croreand above shall also be reviewed by the Loan Review Mechanism Cell at Regional office

periodically and submit the monthly report directly to the Regional Head.

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CREDIT RISK RATING FRAMEWORK

The Bank has developed framework for Credit Risk Rating of 10 different categoriesof borrowers and implemented the same w.e.f 01.08.2009.

4.1 Credit Rating Of Borrowers

The credit rating of borrowers shall be done on the 10 different models provided by M/S

IMaCS from ICRA

4.2Rating Of NON-SLR Investments

As per RBI guidelines, all Non-SLR investment proposals have to be subjected to similar

credit risk assessment as is done in case of proposals for advances. A Model for assessing

Credit Risk in Non-SLR investments has been developed and implemented.

4.3Bank Wise Exposure Limit (BEL)

A Credit Risk Rating Model for measuring credit risk in exposure to banks and fixing Bank wise

Exposure Limit (BEL) has been developed and implemented. The Bank wise exposure limit is

revised annually.

4.4 Rating Models (IMaCS)

There are eight models (1 to 8) for the corporate and two are for the retail sector(9 & 10)

which caters the requirement of different fields/proposals of our credit portfolio.

S.NO Rating model Criteria Financial DataRequirement

1 Large Corporate (LC) Turnover >=100 cr Three years audited

financial statement

2 Small & Medium

Enterprises (SME)

Turnover < 100 cr

(manufacturing)

Three years audited

financial statement

3 Small Business &

Service (SBS)

Turnover < 100 cr

(trading & services

sector)

Three years audited

financial statement

4 NBFC Activity based Three years audited

financial statement

5 Banks Activity based Three years audited

financial statement

6 Green field

infrastructure project

(Infra)

New project

(infrastructure only)

One year projected

financial statement

7 Green field real estate New project One year projected

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project (RE) (real estate only) financial statement

8 Green field project (GF) New project (other

than infra & real estate

only)

One year projected

financial statement

9 Retail

1.Home Loan2.Education Loan

3.Personal Loan

(Loan To Individuals)

Housing loanEducation loans

Any retail other than

home/education

Income & net worthIncome & net worth

Income & net worth

10 Agriculture

1.Agri Loan(Term Loan)

2.Agri Loan Working

Capital)

3.Allied Loan (Term

Loan)

4.Allied Loan (Working

Capital)

(Loan To Individuals)

Agriculture Loan

Depending On The

Type Of The Facility/

Purpose Of Loan

Income & net worth

4.5 Grading Pattern Used In The IMaCS Credit Risk Rating System

The credit rating under IMaCS models is based on rating grade of 1 to 10.The risk level and its

description is given in the following table

Ratinggrade

Risk level Description

1 Minimal risk Highest quality, with minimal risk.

2 Modest risk Highest quality and are subject to very low credit risk

3 Average risk Upper medium grade and subject to low credit risk

4 Acceptable risk Adequate credit quality and subject to Average credit

risk.

5 Acceptable with

care

Moderate credit quality and may posses speculative

characteristics.

6 Management

attention

Speculative elements and are subject to high credit risk.

7 Special care Speculative and are subject to high credit risk

8 Substandard Poor standing and are subject to very high credit risk

9 Doubtful Highly Speculative and are likely to become default in the

near future.

10 Loss Lowest and are typically in default or close to default

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4.6 Frequency For Review- Based On Credit Risk Rating

All accounts including Term Loan falling under rating grade 1 to 5 are rated once in a year

irrespective of nature and amount of limit at the time of renew/review.

The accounts with rating grade 6 & 7 are reviewed on half yearly basis. Such accounts shall

be closely monitored by the Regional Heads on regular basis.

The accounts with rating grade 8 to 10 are being reviewed on quarterly basis. A quarterly

progress report on the accounts under Credit Rating Grade 8 to 10 is also being put up to theSupervisory Committee of Directors on Risk Management (SCDRM).

4.7 Renewal/ Review of accounts under Credit Rating Grade 8 to 10

To have proper control over such advances, It has been decided that for all the accounts having limit

of Rs.5.00 Crore and above and rated as 8 to 10 , branchesshall not have delegated powers to

renew such facility. Such cases shall be renewed only at R.O level and shall be monitored closely by

the Regional Heads. The renewing authority shall also advise branches to monitor specific areas of

operation of account and guide the borrower for improving the performance vis--vis the rating.Quarterly review of all such accounts, however, shall continue to be done by branches.

4.8 Reporting and Analysis of Credit Risk

Presently, the rating awarded by the branches is verified by the Branch Managers and

Specific Certificate to this effect has to be appended to the rating sheet, whenever theproposal is sanctioned under branch powers. In those cases where the proposal falls under theRegional Office and Head Office powers, the ratings is confirmed by an officer not below

the rank of Scale IV.

The rating process has been decoupled from originator to ensure the quality and consistency of basic

risk related data and to avoid conflicts of interest. The process of rating and vetting has been defined

as under:

S.NO Loan Sanctioning

Authority

Credit Risk

Rating

Officer

Credit Risk

Rating

verification

Authority

Credit Risk

Rating Vetting

Authority

1 Branch Incumbent up to

scale III

Loan

Incharge

Officer not related

to Loans

Branch Incumbent

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2 Branch Incumbent in

scale IV &V

Loan

Incharge

Officer not related

to Loans

Branch Incumbent

3 Branch Incumbent in

scale VI which isreporting directly to

HO for Loan

Proposals

Loan

Incharge

Branch Incumbent Credit Risk

ManagementDeptt at Head

Office

4 Regional Head LoanIncharge

Officer not relatedto Loans

Credit RiskManagement Cell

at RO

5 Head Office Loan

Incharge atRegional

Office

Second Man at

Regional office

Credit Risk

ManagementDeptt at Head

Office

Specific Certificate that account has been vetted by the Competent Designated Authority hasto be appended to the rating sheet.

4.9 Validity/ Review of Credit Risk Rating

Rating shall be reviewed within 3 months of the due date of submission of Audited Balance

Sheet, irrespective of the date of previous rating.

After the expiry of the above period, the rating shall be treated as over due for renewal.

In case a borrower has extended the accounting period, the vetting authority may consider theextension of the validity of the earlier rating on the merit of each case.

Fresh rating should be assigned to a borrower account, irrespective of the validity period stated

above, in case any material development/ information on the borrower comes to light, which may affect

the rating adversely.

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Conclusion

The management of credit risk is possible only with its measurement. Models are the tools toeffectively measure the risk exposure of various financial institutions. With the correct measure

of the credit risk, its management will become effective and efficient. This work concentrates on

developing an approach to measure the credit risks associated with various borrowers of a bank.

For this the major assessment parameters for the bank are taken as the predictor variables.There are many approaches to developing credit risk model which have been discussed already

in report. It is difficult to say conclusively, which of the approaches has the best ability to predict

default, each having its pros and cons.However, with the absence of any theoretical structure, The choice depends on the individual

business circumstances and portfolio specifics of each bank. Depending on the circumstances, it

may sometimes be prudent to use types of methodologies simultaneously to refine the creditdecision system of the bank.

Banks analyze and interpret different credit exposures on the basis of the credit ratings

provided by different organizations. And proper evaluation and control measure are taken tominimize the credit risk .

The availability of data is a major constraint for such studies and with the availability of more

accurate data such findings can be even more useful for a bank. However, key hurdles,

principally concerning data limitations and model validation, must be cleared before models maybe used in the process of setting regulatory capital requirements.

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Suggestions

a) The Bank shall provide the needed organization capable of designing and developingsuch tools.

b) The Bank shall also develop the skills and capabilities of associated staff in the process

of measuring, monitoring and controlling Credit Risk and thus implement the tool/modelin the organization.

c) The Bank shall specify the acceptable level of risk-reward trade off for its various

products and activities where it is exposed to Credit Risk.d) In the loan policy it is addressed by way of deciding the thrust and restricted areas of

lending, statutory, and regulatory restrictions, exposure norms, criteria of lending to specific

industries etc.e) Pre, Post and recovery Mechanism should be strengthened.

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References:

Altman E, A Resti and A Sironi (2004): Default Recovery Rates in Credit RiskModeling: A Review of the Literature and Empirical Evidence, economic Notes, vol 33,

iss 2, pp 183-208.

Barth, M., D. Cram, and K. Nelson. 2001. Accruals and the prediction of future cash

flows. The Accounting Review 76(1): 27-58.

Basel capital Accord., Jan 2001. Basel Committee on Banking supervision ., Consultative

document on The New Fama, E. and K. French. 1997. Industry cost of equity. Journal of

Financial Economics 43: 153193.

www.bis.org

www.rbi.org.in

www.moodyskmv.com/research/whitepaper/Credit_Valuation.pdf.

www.obcindia.co.in
http://www.bis.org/http://www.rbi.org.in/http://www.rbi.org.in/http://www.bis.org/http://www.rbi.org.in/

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