Final Project for BBM

A STUDY ON CREDIT RISK MANAGEMENT AT BANK OF BARODA

INTRODUCTION

The challenge of change occupies the attention of one & all as every one knows in

the present day world in general, & the financial sector in particular, change is the

only certainty. The word “BANK” is actually derived from the word “BANCOS” that

refers to benches & in ancient times benches were set up in market places for the

people dealing in money transactions.

Banks are the financial intermediaries who bridge between the entities possessing

money & entities who are in need of it. In banking the ultimate question viz.

Customer satisfaction remains the same although the answer keeps changing form

time to time. Customer satisfaction is the ultimate purpose & only priorities keep

shifting to achieve this intangible goal.

With liberalization era set in, the banking sector witnessed deregulation, this

opened up new opportunities for Bank of Baroda for diversification & growth. The

Bank of Baroda is a Government of India undertaking, and carries on all banking

business. The Bank was brought into existence by an ordinance passed on the 19th

July 1969 by the Central Government. In terms of the ordinance the undertaking of

the Bank of Baroda Ltd was vested to and transferred to the new bank. This ordinance

was replaced by the Banking Companies (Acquisition and Transfer of Undertaking)

Act, 1969. This Act was declared null & void by the Supreme Court on the 10th of

February 1970 and subsequently the Ordinance was promulgated. Then the Banking

Companies(Acquisition and Transfer of Undertaking) Act, 1970 was passed and it

was made effective retrospectively from 2000 .

Banks are financial Institutions which is involving its funds to various types of

borrowers including private limited and public limited companies. During the course

of time the bank has find it difficult to recover the loans due to non-study of proper

assessment of the borrower wherein bank has to face huge losses, keeping in these

Sri Bhagawan Mahaveer Jain College 1


things in mind Bank of Baroda has set up Risk Management Wing in April 2000. It

gives focused direction to various Risk Management Initiatives in tune with RBI’s

guidelines.

The Risk Management wing undertakes the Rating of various types of Industries, big

borrowal accounts/ Small traders by various Web based models. The Risk

Management wing will receive the proposals for rating credit Risk through credit

Review wing and they study the information given by the branch and they will rate

the accounts and give proper guidance to circles to safeguard the banks fund and also

apart from rating the big borrowal accounts now they have adopted to rate the small

borrowal accounts by giving proper guidance to branches at grass root level.

In Bank of Baroda credit risk rating of all borrowal accounts falls under following

models

1. Risk Assessment Model ( RAM ) Risk Assessment Model is a software

based credit decision support system and is integral part of CRISIL’s credit

management advisory service for banks, financial institutions and large size

corporate. Risk assessments Model is used by the Bank of Baroda since 2000

to risk rate Large c0orporate Accounts under the purview of Head office

Power.

2. Manual Model Manual model has been developed to cover accounts falling

under the sanctioning powers of AGM/DM/CM, which shall take care of the

following three segments:

Industrial Accounts

Trading Accounts

New Accounts.



BACKGROUND OF THE STUDY

Meaning of Risk

The word ‘risk’ is derived from an Italian word “risicare’ which means, “ to dare”.

This means that risk is more a ‘choice” than a “fate”. Extending this analogy further

we can say that risk is not something to faced but a set of opportunities open to

‘choice’. The Bank for International settlement (BIS) definition “ Risk is the threat

that an event or action will adversely affect an organization’s ability to achieve its

objectives and successfully execute its strategies”. In other words Risk is the

probability of non fulfillment of commitment to stake holders on account of non-

realization of assets. .The risks arises on account of various reasons, which are

liquidity, interest rate, exchange, country, group, reputation, legal, people, systems

etc which can be grouped into three major categories .

Features of Risk

Risk is only threat of occurrence of loss and not loss itself. It is an uncertainty that the

activity undertaken may result in loss. Likewise risk is not a peril but its likelihood.

Risk is like two sides of a coin. on the one side we have the uncertainty of

occurrence of loss and on the other the possibility that the chance taken may yield

good returns. When viewed from a positive angle, risk is an opportunity to act on and

earn profits. Risk pervades all human activities. like wise every business in fraught

with risks. To do business is to take risk. risk cannot be totally eliminated but its

impact can be controlled through effective management.



Risk Management

Most of the time we can take risk as God-given. An asset or business has its beta and

that’s that. Its cash flow is exposed to unpredictable changes in raw material costs, tax

rates, technology and a long list of other variables. There is nothing a manager can do

about it. But this is not wholly true. Manager can choose the risk that business takes

by placing an effective risk management system in place. An effective risk

management system should do the following

a) It should identify the variety of risks that the organization as a whole is

exposed to and also the risks that individual activities are exposed to.

b) Once different types of risks are identified the system should lost out

the controls or measures that can effectively mitigate each of the

identified risks. Once listed out it should make an assessment of the

controls in place versus the identified risks for adequacy. This activity

will throw light on areas where the controls need to be tightened to

effectively mitigate the impact of risks.

c) Next step is to quantify the risk, so that we can effectively decide or

derive the financial impact of the risk and effective pricing of our

products.

Once we have quantified the risks, we need to calculate the quantum of loss due to

that risk in monetary terms. This will give us the capital adequacy ratio or economic

capital that a bank should maintain or keep aside to cover the risk



Need of Risk Management

Bankers worldwide recognized the risks associated with lending from the early days

of banking operations. They were able to manage the credit risks by their personal

involvement since the operations were limited and restricted with huge expansion

with different products introduced in the banks it is beyond the control of Individual

personal to mitigate the risks involved in credit. No scientific Risk Management

process were evolved for managing the risks. However, the later half of 20 th century

and more particularly in the late 90s banking operations witnessed significant

changes such as advances in technology, closer inter-relations among economies of

various countries.

Further, successive incidents like the fall of Baring ( London’s oldest Bank ),huge

losses suffered by Daiwa Bank and sumitom Bank due to failure of internal controls

drew the world’s attention for the need to manage risks in a more scientific way.

As the international trend has moved towards Liberalization,

Globalization ,Privatization and consolidation of the financial system.. This has

become the major challenge for Bank to regulate and supervise and need to manage

the risks in a more scientific way.

All the banks world wide attempted to put in place risk management policies for their

diversified banking network operating in several countries.. All these banks operated

in different regulatory framework and under different market conditions. Hence a

need was felt by the international banking community for setting up broad guidelines

based on risk policies and practices for the benefit of all the banks operating world-

wide.

Under these circumstances BASEL Committee for Banking supervision (BCBS)

came out with capital Accord in 1988. As a result of this, banks were led to

implement the prudential norms such as Income recognition, Asset classification,

provisioning, Capital Adequacy etc. Through the above methods the banks were able

to manage some part of the risks. During 1998 BASELII norms were outlined

specifically for



capital charge for operational risks following which RBI, during 1999,came out with

comprehensive

Guidelines on risk management and advised Individual banks to formulate Integrated

Risk Management system taking into account their business volume.

The Indian Banking scene has also witnessed progressive deregulation, Institution of

prudential norms etc. So the Indian Banking Management adopted three supervisory

approaches for risk assessments and ratings. They are

1. CAMELS- (Capital adequacy, Asset Quality, Management, Earnings , Liquidity,

Systems and controls )

2. CALCS- (Capital adequacy, Asset quality, Liquidity, compliance and system)

If there is no proper risk management system in an organization, then the organization

will fail to restrain itself from the unexpected losses and hence is exposed to higher

probability of solvency or loss making. Where as if there is proper risk management

system in place the organizations will be in readiness to face unforeseen

circumstances.

This system will also help in forecasting losses and creating a buffer in the

organization’s capital to absorb the unexpected financial losses



Classification of Risk in Banks

Risk is an integral part of the Banking business. Banks are exposed to various types

of risks depending on the activities pursued by them. Broadly speaking they are

exposed to three major categories of risks namely:-

1. Credit risk

2. Market risk

3. Operational risk

Credit Risk

Credit risk is defined as “the inability or unwillingness of the customer or counter-

party to meet commitments in relation to lending, trading hedging, settlement and

other financial transactions. credit risk emanates from the banks dealing with

individual, corporate , Banks, financial institutions etc

In the case of direct lending: Principal and (/ or) interest amount may not be

repaid.

In the case guarantees and letters of credit: Funds may not be forthcoming

from the constituents upon crystallization of liability.

In case of treasury operations: The series of payments due from counter

parties under the respective contracts may not be forthcoming or ceases.

In the case of securities trading business Funds/securities settlement may

not be effected.

In the case of cross border exposure: The availability & free transfer of

foreign currency funds may either cease or restrictions may be imposed by the

country where exposure is taken



Market Risk

It is the risk of losses in on & off balance sheet positions arising from movements in

market prices, including foreign exchange rates, equity prices, interest rate,

commodity prices etc. Market risk arises on account of the following:

Liquidity Risk

Interest Rate Risk

Foreign Exchange Risk

Equity price risk

Commodity price risk

Operational Risk

It is the risk of loss arising from failed or inadequate internal processes, systems, and

people or from external events. The various types of operational risks are:-

Portfolio risk

Organizational risk.

Strategic risk

Personnel / People risk

Reputation risk

CREDIT RISK MANAGEMENT



Introduction

Credit risk faced by the banks requires special treatment in future. It is nothing but

possibility of default due to non-payment or delayed payment. Banks are familiar

with the risk on non-payment in the performs period due to failure of the venture or

willful default. Banks cover it partly by taking the guarantees from credit Guarantee

corporation. It can also be tackled by legal means. the introduction of prudential

norms made the banks to realize the impact of credit risk on the profits. The main

concern of present day banks is to reduce the share of non-performing advances to

total advances. therefore, the risk of non-performance should be tackled by improving

efficiency by the management of banks and by adopting appropriate techniques of

credit management.

Credit Risk

Credit risk is defined by the losses in the event of a default of the borrower to repay

his obligations or in the event of a deterioration of the borrower’s credit quality.

Measurement of the credit risk is crucial if the Bank’s have to price the loan correctly

or to set appropriate limits on amount of credit extended to any one borrower of the

loss exposure it accepts from any particular counterparty. Thus, credit risk can arise

due to default by the counter-party and/or adoption of inefficient credit processes.

Objectives of Credit Risk Management

The Credit risk management can have different objectives at two levels namely

Transaction level and portfolio level.

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

Setting an appropriate credit risk environment

Framing a sound credit approval process

Maintaining an appropriate credit administration, measurement and

monitoring process

Employing sophisticated tools/techniques to enable continuous risk



evaluation on a scientific basis

Ensuring adequate-pricing formula to optimize risk-return relationship

At the portfolio level, the objectives of credit risk management will be:

Development and monitoring of methodologies and norms to evaluate

and mitigate risks arising from concentrating by industry, group,

product etc.

Ensuring adherence to regulatory guidelines

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 TECHNIQUES

ADOPTED BY THE BANK



1. Adoption of a comprehensive credit policy

2. Delegation of appropriate credit sanctioning powers to various authorities

3. Fixation of prudential exposure ceilings to individuals/groups and

substantial exposure.

4. Fixation of exposure ceiling to various industries/sectors/activities etc.,

5. Ensuring a strong appraisal system

6. Having credit risk rating system in place for borrowal accounts

7. Evolving benchmark financial ratios

8. Adopting proper pricing mechanism for loan products

9. Having an effective loan review Mechanism

10. Monitoring of the accounts through assets sub classification code system

(MTR) and watch and special watch category borrowal accounts

11. Constituted credit policy committee at HO to formulate and evaluate sound

credit policies.

12. Regular meeting of Risk Management Committee to address matters

relating to among others credit risks.

CREDIT RATING METHODOLOGY ADOPTED BY

THE BANK



Credit rating

Credit rating is an objective assessment of a borrowers credit quality in terms of

business and financial risk. Credit rating signifies the default probability of the

borrower. Ratings also signify the degree of safety with respect to debt servicing

capacity.

The methodology covers the assessment of the following

a) Industry risk

b) Business risk

c) Management risk

d) Financial risk

1. The credit risk model works on the premise that credit risk is a sum total of

various factors emerging out of Industry risk, Business risk, Management risk

and Financial risk.

2. Under each of these four risks, certain key factors are incorporated. While

some of these factors are quantitative the others are qualitative factors.

3. Thus, the overall risk score is a result of combination of different weight ages

given to quantitative and qualitative factors.

4. The various risk factors under Industry risk, Business risk, Management risk

and Financial risk and are collectively known as “Library of Factors”.

Depending on the industry to which the company belongs and also the

business focus of the company, the relevant risk factors are selected for scoring

purposes

5. .To determine final risk grade of the borrower the scores under various risk

factors are added up to get the overall risk score of a company by assigning

appropriate weight ages.



6. The overall risk score is then map into a Risk Gradation scale to determine the

RISK GRADE of the company.

7. Each and every risk grade has a grade Description and degree of safety with

respect to debt servicing capacity, which ultimately decides the credit

worthiness of borrower.

Determining Final Risk Grade of the Borrower

The scores under various risk factors are added up to get the overall risk score

of a company by assigning appropriate weight ages

The overall risk score is then map into a Risk Gradation scale to determine the

Risk Grade of the company.

Each and every Risk Grade has a Grade Description and degree of safety with

respect to Debt servicing capacity, which ultimately decides the credit

worthiness of borrower.

Overall Weighted

Risk score Range

Risk

Grade

Grade Description Degree Of Safety with respect to Debt

serving capacity



7.00 – 8.00 I Low Risk – LR1 The degree of safety with respect to debt

servicing capacity is very high

6.00 – 7.00 II Low Risk – LR2 The degree of safety with respect to debt

servicing capacity is reasonably high

5.25 -6.00 III Low Risk – LR3 The degree of safety with respect to debt

servicing capacity is good.

4.50 – 5.25 IV Normal Risk The degree of safety with respect to debt

servicing capacity is satisfactory

3.75 -4.50 V Moderate Risk The degree of safety with respect to debt

servicing capacity is just adequate and

therefore needs close monitoring

3.00 – 3.75 VI High Risk – HR1 The degree of safety with respect to debt

servicing capacity is inadequate.

2.00 – 3.00 VII High Risk – HR2 The degree of safety with respect to debt

servicing capacity is poor

1.00 – 2.00 VIII High Risk – HR3 The degree of safety with respect to debt

servicing capacity is very poor

RISK GRADATION SCALE

RISK ASSESSMENT MODEL IN BANK OF BARODA



Risk Assessment Model is a software based credit decision support system and is

integral part of Cresol’s credit management advisory service for banks, financial

institutions and large size corporate. This service aims at enhancing the efficiency and

effectiveness of all credit related functions. It helps an organization in assessing the

credit quality of Borrower. RAM is based on CRISIL’s methodology for credit risk

assessment. Risk assessment model in Bank of Baroda was incorporated in the year

2000 to risk rate Large corporate accounts under the purview of Head office power

The ram model covers NBFCS SME and Small Traders also besides Manufacturing

companies.

The RAM model can risk rate

Large Corporate Accounts.

Large Borrowal Trading Accounts

Small and Medium Trading Accounts

Small and Medium Enterprises

NBFCS.

Small Traders.

Large Corporate Model:



The model will undertake rating of all Large corporate coming under the purview of

Manufacturing, construction, power, Hotel, Telecom – Basic and cellular, shipping,

oil exploration, software Industries, etc.

NBFC Model:

It will undertake rating of all types of non-banking finance activities. It cannot rate

Banks, Financial Institutions, Insurance companies and stock Brokers etc.

Large Borrower Trader Model:

As the name suggests the Model will undertake rating of all large Trading Accounts-

whose main activities is basically trading in diversified or single product

Small and Medium Enterprises (SMEs):

The Model will undertake rating of accounts which are involved in manufacturing

activities on a small scale which cannot be fit into Large Borrower Model. For

example Beedi Manufacturing, Incense sticks

Small Traders Model:

This model will undertake the rating of accounts, which is undertaking trading

activities in a small scale. The turnover of these accounts may range up to Rs. 1-25

crores.

RISK WEIGHTAGES FOR DIFFERENT MODELS



Models Industry Business Financial Management Total

Large corporate

model

10 35 40 15 100

Large Borrower

trading model

10 35 40 15 100

SME Model 10 30 35 25 100

NBFC Model 20 20 35 25 100

Small Trader Model 0 35 25 40 100

Risk weightage for large corporate Model



Credit Risk is a function of Industry Risk, Business Risk, Financial Risk and

Management Risk. The risk is assessed by a combination of qualitative and

quantitative risk parameters. The scoring is done on a 1 to 8 scale, with I being a very

poor score and 8 an excellent score. The risk factors under Industry Risk, Business

Risk, Financial Risk and Management Risk are scored. The respective risk scores on

various risk factors under each of the four risks enumerated above are amalgamated

to arrive at the risk score for Industry Risk Business Risk, Financial Risk and

Management Risk.

The four risk scores are further combined by a combination of weights to get the

overall weighted risk score.

The weights for the sub parameters under each of the above our risks are enumerated

separately as follows;

Industry Risk

Sri Bhagawan Mahaveer Jain College

Risk Entity Weight

Industry Risk

Business Risk

Financial Risk

Management

10

35

40

15

Total 100

18


Industry risk assessment focuses on the overall industry of which the company being

analyzed is a constituent firm. Company specific factors are not covered at this stage.

The factors considered under industry risk are

Qualitative factors Quantitative factors

Demand supply gap

Government policy

Extent of competition

Input Related risk

Return on capital employed

Operating margin

Variability of operating margins

Slope of operating margin trend line

The weights for the qualitative risk factors are assigned depending on the industry

and the relative importance of the respective factors in the particular industry. For

highly regulated industries, government policy would carry greater weight. For

Industries where no risk is perceived on the input side, the weight could be zero.

however, for agro base industries, input related risk could assume significance. hence,

depending on the industry and its character relative weights would be assigned to

each of the factors while taking into account for risk rating. Such weights world be

assigned to factors depending on the relative importance of the factors in the

particular industry.

Qualitative factors

Demand-supply gap

Demand supply gap would critically determining the volumes, realization and

consequently the profitability of companies operating in an Industry. The

attractiveness of an Industry for fresh capital investments would depend upon the

anticipated demand supply equation. Industries wherein demand is expected to

exceed available supply over a 3 year horizon would score highly on this parameter



Government policies

This parameter involve taking a view on whether government policy over a 3 year

time horizon would affect the industry in a favorable or unfavorable manner.

Industries with favorable government polices would score high on this parameter.


The level of competition in an industry has implications on future profitability of

players in an industry. Existence of government regulations regarding licensing

requirements, level of returns, heavy capital investment requirements, distribution

network, technology, patents, brand equity could be significant entry barriers for

prospective entrants to an industry. Industries with high level of competition would

score low on this parameter.

Input Related risks

This parameter would involve taking a view on availability of raw material and

volatility in the prices of raw material. . Industries with limited availability of raw

material, highly volatile prices of raw material or low value addition would score low

in this parameter

Quantitative Risk factors



ROCE (Return on Capital employed)

ROCE= Profit before interest and tax (PBIT)/Average capital employed

Where capital employed = (Capital + Reserves + Short term debt + long term

debt –Revaluation reserves – Capital work in progress )

Average capital employed = (capital employed at the beginning of year +

Capital at the end of year )/2

ROCE is scored as a weighted average of the last three years

Return on capital

employed

Score

Less than 10% 1

10.0%to 12 % 2

12.0% to 14% 3

14.0% to 18 % 4

18.0 % to 20 % 5

20.0 % to 24 % 6

24 % to 28 % 7

Above 28.0 % 8

Operating profit margin

OPBDIT/ Operating Income

This ratio is scored as a weighted average of the last three years.



Operating Margin Score

Less than (5) 1

-5% to 5 % 2

5% to 10 % 3

10 % to 15 % 4

15 % to 20 % 5

20% to 25 % 6

25% to 30 % 7

Above 30 % 8

Variability of operating margins

Variability of operating Margins = Standard Deviation of operating margin errors

over a seven year periods/ Average error over a seven year period

Variability Score

Less than .05 8

0.05 to0.08 7

0.08 to 0.1 6

0.1 to 0.15 5

0.15 to0.2

4

0.2 to 0.27 3

0.27 to 0.35 2

Above 0.35 1

Growth in operating margins



Growth in Operating

Margins

Score

Less than (0.05) 1

(0.05) to (0.03) 2

(0.03) to 0 3

0 to .0025 4

0.0025 to .005 5

0.005 to .0075 6

0.0075 to.01 7

Above 0.01 8

The industry financial score and the industry characteristic score is combined in

the ratio of 30 : 70 to get the final Industry Risk

Business Risk

The business and the environment in which the firm operates involve a considerable

credit risk. This can be analyzed based on the market position of the issuer within the

industry and operating efficiency.

The factors that are assessed under this heads are:-

Operating efficiency Market position

Raw material usage

Management of Input

price

Volatility

Energy costs

Employee costs

Selling costs

Product range

Brand equity

Product design and

development

Long term assured off take

Distribution set up

Diversity of markets

Operating efficiency



Under this head, the risk is assessed base on how the company which is to be rated is

placed in relation to its peers in the industry on the operating efficiency front. There

are various risk factors under operating efficiency like Raw material usage

Management of Input price Volatility, energy costs Employee costs, Selling costs,

multi locational plants etc. This is known as library of factors from which the most

appropriate risk factor of the particular industry in which the company operates need

to be selected.

For example, power/ Energy cost per ton assumes great significance in power

intensive industries like cement. On the other hand , industries which are dependent

on agro inputs like cotton, edible oil etc the basic raw material like cotton is subject to

vagaries of monsoon/ agriculture which in turn influences its availability and thereby

price. hence, management of input price volatility by tracking cotton prices and

buying at the most opportune time would determine to a large extent the operating

efficiency of a company in cotton yarn industry. hence, depending on the relative

importance of the operating parameters, appropriate risk factors would be selected for

scoring and appropriate weights would be assigned to the risk factors so selected

Access to raw materials

Access to raw materials at competitive price is critical, mainly for industries with low

value addition. The location of a company neat the source of raw material in case of

high inward freight costs and assured supply of quality raw material at stable prices

would determine the competitive position of the company.

For example In Cement industry, the proximity to limestone reserves determines its

cost of inward transportation. In addition, the sufficiency of limestone is critical for

stable production.

Management of input price volatility



The ability to successfully manage fluctuations in input prices assumes importance in

industries characterized by cyclicality in input prices.

For example In cotton textile industries development of strong relationships with

marketing federations, effective stocking policies in cotton yarn industry and liquidity

help partially mitigate risks of price volatility.

Energy costs

Energy costs is of critical importance in power intensive industries. Savings in the

energy cost either as a result of lower tariffs or captive generation facilities would

result in a competitive advantage for the company. Energy cost advantages can also

arise from stability of operations and superior technology.

For example modern cement plants using more energy efficient processes like

vertical grinding mills tend to have lower power requirement than older plants.

Employee costs

This factor is relevant in lab our intensive industries where employee expenses forms

a significant proportion of the overall cost structure. A cost structure characterized by

high employee cost restricts ability to withstand a down turn, particularly in view of

the contentious nature of downsizing related issues.

For example service sector industries such as banking, hotels, consultancy, software

etc. have high employee costs. a higher employee productivity leading to a reduction

in employee costs yields a competitive advantage for companies in these industries.

Selling costs



Selling costs are significant in industries wherein the product is bulky in nature and

demand centers are localized. For example cement and steel need to be transported

over long distances and freight forms a significant of the selling cost.

For example a leading cement company pioneered the concept of transporting

cement by sea as compared to the traditional land route resulting in significant selling

cost reduction.

Market Position

Under this head, the principal question that is thrown up is “what determines the

market share of a company in particular industry”. Here again, there are a range of

risk factors in the library of Risk Factors. Examples of such risk factors are product

Range, Brand equity, distributor Network, Geographical diversity of Market,

Replacement Market, Pricing Flexibility or sales network, customization of product,

Access to patents, Access to cost Effective Technology etc. Again, depending on the

industry in which the company to be rated is placed appropriate risk factors relevant

tot the industry would need to be selected for scoring and appropriate weights are

assigned.

For example, while rating a pharmaceutical formulations company, Brand Equity

and Dealer/medical Representatives network would play vital roles in determining a

company’s market share. Hence, these factors would need to be selected. Thus,

depending on industry to industry, appropriate risk factors would be selected and

appropriate weights would be assigned.

Product range

A wide product portfolio based on nature of offering and price, mitigates risks due to

demand slowdown or competition. Product range is assessed on breadth (Variety of

Products) as well as depth (variants of a single Product). High value added products

in the product range partially insulate the margins of the company from any change in

the prices of raw material.

For example A company in cotton textile industry with high proportion of specialty

yarns, high count yarn, and high value added dyed yarns is partially insulated from

high volatile in cotton prices.



Brand Equity

This parameter measures the protection against erosion of market share enjoyed by

the company, owing to brand strengths. Brand equity may be international, national

or localized. Brand equity assumes significant importance in evaluating sustainability

of market position, especially in industries with a high a value addition.

For example, In consumer durable and ready made garments industry, the ability of

the company to build a strong brand image is critical for sustenance of its market

position.

Product design and development

This parameter reflects the ability of a firm to modify existing products, or develop

new products based on a specific customer need or changing preferences in an

industry.

For example the ability of a software company to make transition into new areas

such as the internet rapidly changing technology would critically determine its market

position.

Long term contracts/ assured off takes

This parameter reflects factors in the available benefits if any, arising from the nature

of sales agreement with the buyer. Long term sales contracts assume significance in

an increasingly competitive market scenario, particularly for suppliers of raw material

and product intermediates.

Distribution set up



This parameter assesses the geographical spread and quality of a company’s outbound

logistics systems. Presence of a wide distribution network affords access to a wide

customer base, thereby enabling growth and higher market penetration. Further,

existence of a strong dealer/distribution network erects significant entry barriers to

potential competition.

For example cement companies having an established distribution network are

advantageously placed, since ability to access interior regions is an important

determinant of market position.

Diversity of markets

This parameter assesses the presence of companies in different market segments

where the market segmentation could be based on geographical diversity, presence of

export, and diversified customer base (including access to replacement markets)

across different end user industries.

For example In cement industry which has regional demand supply imbalances, the

presence of a company in more than one region would result in better ability to

absorb the downturn.

The weighted score from operating Efficiency subsection and weighted score from

‘Market Position” subsection would be combined by suitable weights. Here again, the

weights for Operating Efficiency and Market Position would vary depending on the

industry in which the company is placed.

For example, if a company is placed in an industry where the “operating Efficiency”

parameters would to a greater extent determine the company’s standing in the market,

then the Operating Efficiency subsection would attract a greater weight compared to

“Market Position” sub section.

Hence, depending on the relative importance of Operating Efficiency and Market

position sub section as operating in the particular industry, relative range of weights is

expected to be in the region of 70:30 and vice versa.



Financial Risk

The credit risk depends on the company’s capital structure. A company which is

100% equity financed is less risky compared to a company which is levered or

financed by debt. Its debt to net worth ratio is an indicator of its financial risk. To

measure the company’s repaying ability we have to consider its cash flows which is

important for repaying its debt not its fixed assets or profits. Therefore the

profitability ratios, sources of future earnings growth, stability and adequacy of cash

flows in relation to debt and working capital requirement can evaluate the financial

risk. The company’s financial flexibility and accounting quality like ability to raise

resources, alternate financing plan in stress situations, accounting policies,

overstatements or understatements, of profits, off balance sheet liabilities, auditor

qualifications etc.

Financial Risk is assessed under three sub heads

Past Financial Ratios

Future Financial Ratios and

Cash flow adequacy

Past Financial Ratios

Under this head, seven ratios are calculated and scored as per the benchmarks. The

seven ratios are:

a) Return on Capital Employed

b) Operating profit Margin

c) Interest Coverage Ratio

d) Debt service Coverage Ratio

e) Total Outside Liabilities/Tangible net worth

f) Current ratio

g) Operating Income/ Short Term borrowings.

Under Past Financial ratios, all ratios have equal weight. The scores on each of the

above ratios are combined as per the above weights to arrive at the weighted past

financial ratios score.




ROCE= PBIT/Average capital employed

where capital employed = ( Capital + Reserves + short term debt + Long term

Debt – Revaluation reserves – capital work in progress )

Average capital employed = (Capital employed at the beginning of year

+Capital employed at the end of year )/2

ROCE (%) Score

Less than 6 % 1

6% to 8% 2

8% to 10 % 3

10% to 13 % 4

13 % to 15 % 5

15 % to 18 % 6

18 % to 24 % 7

Above 24 % 8

Operating profit Margin

The ratio is defined as operating profit before deprecation, Interest and

taxes/operating Income



Operating margin Score

Less than 5 % 1

5 % to 7 % 2

7 % to 10 % 3

10 % to 13 % 4

13 % to 15 % 5

15 % to 18 % 6

18 % to 25 % 7

Above 25 % 8

Interest Coverage

Interest Coverage = Profit before interest, depreciation and tax (PBDIT )/ ( Interest

and Finance charges

Interest Coverage Score

Less than 1.1 1

1.1 to 1.5 2

1.5 to 2 3

2 to 2.5 4

2.5 to 3 5

3 to 3.75 6

3.75to 4 7

Above 4 8

Debt service coverage ratio

DSCR = (PBDIT – Tax)/ ( Repayment of long term loans + Interest on long term and

short term loan



Total outside liabilities/ Total net worth

TOL/ TNW = (Long term loans + other short term loans + working capital loans from

banks + current liabilities and Provisions)? Equity share capital + reserves –

revaluation reserve – loss brought forward – intangible assets)

Total outside

liabilities / Total Net

worth

Score

Less than 0.0 1

0.0 to 1.0 8

1.0 to 1.5 7

1.5 to 1.75 6

1.75 to 2.0 5

2.0 to 2.25 4

2.25 to 2.5 3

2.5 to 2.75 2

Above 2.75 1

Operating Income /Bank borrowing

It is calculated as a weighted average for the last three Years

Sri Bhagawan Mahaveer Jain College

Debt service coverage

ratio

Score

Less than 1 1

1 to 1.15 2

1.15 to 1.25 3

1.25 to 1.5 4

1.5 to 1.7 5

1.7 to 1.9 6

1.9 to 2.2 7

Above 2.2 8

32


Sales to bank

borrowings

Scores

Less than 1.0 1

1.0 to 2.0 2

2.0 to 4.0 3

3.0 to 4.0 4

4.0 to 5.0 5

5.0 to 6.0 6

6.0 to 7.0 7

Above 7.0 8

Current ratio

Current ratio = ( Cash & bank balances + total receivables + inventories + current

assets related to operations + other currents )/ Working capital loans from banks +

other short term loans + current liabilities and provisions

Current Ratio Score

Below 1.07 1

1.07 to 1.13 2

1.13 to 1.19 3

1.19 to 1.25 4

1.25 to 1.30 5

1.30 to 1.40 6

1.40 to 1.50 7

Above 1.50 8

Future Financial Ratios

Under this head four ratios are calculated. These ratios are as under:-

a) Return on capital Employed

b) Operating profit margin



c) Debt service coverage ratio

d) Total Outside liability/ Tangible net worth

Under Future Financial ratios, all the ratios have equal weight. The scores on each of

the above ratios are combined with equal weights to arrive at the weighted future

financial scores.

Financial flexibility

Financial flexibility attempts to evaluate the ability of a company to comfortably raise

funds to meet its future requirements. Financial Flexibility is a qualitative factor and

depends largely on the following four fundamental factors:-

Gearing

unutilized bank limits

Reputation of the company in the financial market

support of parent and other group companies

Cash flow Adequacy

Under this head, the future cash flow adequacy of the company is assessed its

contractual obligations and considered view is taken as the basis for scoring

The weighted past Financial ratios score, Future Financial ratio’s score and cash

flow adequacy score are combined with weights of 50: 20: 30 respectively to get the

final financial Risk score.

MANAGEMENT RISK

Management risk comprises of three sub groups as follows:-

Particulars Weight

Management 33.33



Track record 33.33

Payment record 33.34

Total 100

The factors that are assessed under this heads are:-

Qualitative Quantitative

Experience in the

Industry

Managerial competence

Business and financial

policy

Timeliness of furnishing

information

Ability to achieve sales

projections

Ability to achieve profit

projections

Past payment record

Experience in the industry

A management with greater experience in the industry places a company in an

advantageous position visa a viz the competition. Familiarity with the operating

environment is expected to enable better decision making.

Managerial Competence

Assessment of management’s competence would be based on the quality of past

decision making, as well as the general impression of the efficiency of the company’s

systems and procedures. While educational qualifications could provide a base for

good management, formal education in itself would not guarantee exceptional

management.

Business and Financial policy

The management’s conservatism is judged based on past business and financial

policies. These are indicative of possible future strategies, and would have a bearing

on future debt bearing levels.. Business and financial policies can be said to be



particularly risk prone in specific instances where such growth in the past is funded

through borrowings rather than internal accrual. However, such large expansions

would be viewed less unfavorably if they are related to the company’s existing

operations.

Timeliness of furnishing information to the bank

This factor assesses the company’s promptness in furnishing information required by

the bank, such as quarterly information, stock statements, and other documentation.

The timeliness of furnishing such information is indicative of the state of the

company’s systems and procedures, as well as managerial discipline.

Payment record

Payment Record to bank is assessed by way of extent of payment of interest and

instalment made to the Bank.

The risk factors under these groups are first scored. Thereafter, the final

Management Risk score emerges by combining these scores in the respective weights

of 33.33, 33.33 and 33.34



Recent Trends in the Banking Industry

At the beginning of the 21st century, the biggest banks in the industrial world have

become complex financial organizations that offer a wide variety of services to

international markets and control billions of dollars in cash and assets. Supported by

the latest technology, banks are working to identify new business niches, to develop

customized services, to implement innovative strategies and to capture new market

opportunities. With further globalization, consolidation, deregulation and

diversification of the financial industry, the banking sector will become even more

complex.Although, the banking industry does not operate in the same manner all over

the world, most bankers think about corporate clients in terms of the following:

Commercial banking - banking that covers services such as cash management

(money transfers, payroll services, bank reconcilement), credit services (asset-

based financing, lines of credits, commercial loans or commercial real estate

loans), deposit services (checking or savings account services) and foreign

exchange;

Investment banking - banking that covers an array of services from asset

securitization, coverage of mergers, acquisitions and corporate restructuring to

securities underwriting, equity private placements and placements of debt

securities with institutional investors.

Over the past decade there has been an increasing convergence between the activities

of investment and commercial banks, because of the deregulation of the financial

sector. Today, some investment and commercial banking institutions compete directly

in money market operations, private placements, project finance, bonds underwriting

and financial advisory work.

Furthermore, the modern banking industry has brought greater business

diversification. Some banks in the industrialized world are entering into investments,

underwriting of securities, portfolio management and the insurance businesses. Taken

together, these changes have made banks an even more important entity in the global

business community.



RELEVANCE OF CREDIT RISK MANAGAMENT TO THE PRESENT

SCENARIO

The current global financial crisis and the resulting economic downturn is currently

the top concern for governments, regulators, financial institutions and academicians.

The crisis has brought to he fore the vulnerabilities of the financial system and the

need to change the lax lending practices followed by some countries during the past

few years.

The basic reason of the global meltdown can be traced back to when the housing

boom coincided with the securitisation process. Banks and financial institutions

switched to securitisation of assets, particularly mortgage debt including sub-prime

mortgages. Sub-prime lending refers to giving loans to those who do not qualify for

conventional mortgages( regular loans at market interest rates) due to their poor credit

history.

The loans were offered at a rate higher than the market rates that were prevailing at

that time. This sub-prime lending further catalysed the increase in demand for

housing.

There was a herd mentality for business expansion and revenue maximisation along

with banks and financial institutions at the cost of normal banking prudence. Banks

switched to the securitisation to lower their minimum capital requirements. In

securitisation banks pooled together mortgages belonging to borrowers of different

credit qualities. In the process, several risky home loans which became asset-backed

securities were further bundled into special purpose vehicle known as Collateralised

Debt Obligation (CDO). High ratings were accorded to these complex instruments by

the credit rating agencies. These were then sold to institutional investors seeking

higher returns.



However, these complex securitization products suffered form the degradation of the

underlying collateral, mostly subprime mortgages. In order to cover the risk of

defaults on subprime mortgages, the holders of CDOs purchased Credit Default

Swaps (CDS). These are contracts where banks and their customers hedge against the

risk of default and pay an annual premium to the counterparty.

The housing bubble burst due to inherent miscalculation in reading the markets

In August 2007, the market crashed and the monthly mortgage payments exceeded

the instalments under original terms. The housing slump resulted in a surprising

increase in defaults and foreclosures which also spread to securitised loans. The

downgrades on CDOs continued and there were no estimates of how much of these

toxic securities were held by various institutions. The mark-to-market losses of banks

soared and distrust prevailed in the market resulting ina credit crunch.

Liquidity was further strained when it was found that the methods employed by

banks to hold structured credit products were flawed. The financial markets panicked

due to the lack of credit discipline and the trust of the investors was lost as they were

not paid the promised rate of return and hence they made a run on their stocks.

This global phenomenon soon transcended into the Indian Markets through stock

market and also various banks in India. The root cause of the downfall was thus the

lending on less credibility and defaulting by loan- takers, both for home loans as well

as other business and personal loans. This further stressed on proper credit risk

management to be used by banks and hence the importance of credit risk management

in today’s banking scenario is one of the reasons for chosing this topic to my project.

Credit Risk Management can be done through properly analysing the credibility of

the borrower as well as hedging and using instruments like credit derivatives and

credit default swaps.



It can be accurately said that banking is basically a business of management of risk.

In banking, risk cannot be eliminated but minimised by recognising the changing

business environment and taking appropriate proactive measures. Banks should put in

place more effective risk management systems to assess the market, liquidity and

operational risks on a continual basis and take appropriate corrective actions.

Banks should leverage the existing strengths and consolidate themselves in terms of

quality, profitability and productivity.

Banks should emphasise on quality of assets rather than on volume of business. The

comparatively less served segments of the economy should be carefully granted loans

and advances. Banks should follow in a more rigorous manner the Know Your

Customer ( KYC) guidelines. It is desirable that banks should make full use of he

information of potential borrowers that may be available with Credit Information

Bureau ( India) Limited( CIBIL) so as to avoid default in loan repayments at a future

date.

This the importance of Credit Risk Management is further emphasized. They should

also have a consolidated and comprehensive policy regarding the same.



LITERATURE REVIEW

Bank performance and credit risk management

Banking is topic, practice, business or profession almost as old as the very existence

of man, but literarily it can be rooted deep back the days of the Renaissance (by the

Florentine Bankers). It has sprouted from the very primitive Stone-age banking,

through the Victorian-age to the technology-driven Google-age banking,

encompassing automatic teller machines (ATMs), credit and debit cards,

correspondent and internet banking. Credit risk has always been a vicinity of concern

not only to bankers but to all in the business world because the risks of a trading

partner not fulfilling his obligations in full on due date can seriously jeopardize the

affaires of the other partner.

The axle of this study is to have a clearer picture of how banks manage their credit

risk. In this light, the study in its first section gives a background to the study and the

second part is a detailed literature review on banking and credit risk management

tools and assessment models. The third part of this study is on hypothesis testing and

use is made of a simple regression model. This leads us to conclude in the last section

that banks with good credit risk management policies have a lower loan default rate

and relatively higher interest income.

Author- Takang, Felix Achou, Ntui, Claudine Tenguh

(University of Skövde, School of Technology and Society)



6 th Annual CEE Credit Risk Management Conference (2010)

The financial crisis has brought forward key weaknesses in the way financial institutions are run the world over. Out of the departments in these financial institutions, the department which has come under the maximum scrutiny has been the Risk Management department. The core reason for the crisis was the credit crunch, and such a fluid condition was not anticipated by anyone around the world. Way too many borrowers failed to meet its obligations in accordance with agreed terms what put extra pressure on credit risk managers and their teams. The key word for the Risk Managers here was to 'anticipate' and take precautionary measures. Exposure to credit risk continues to be the leading source of problems in almost all banks. That's why this is being held for a sixth year to help to get better results. Their will be credit risk experts from leading banks and financial institutions in CEE countries. Their practices differ depending upon the nature and complexity of their credit activities. Therefore it's absolutely crucial to know how business partners and competitors are dealing with credit risk and get the best from each one. With five sold-out conferences and a great reputation within the industry, it is considered as "the best and most prestigious platform for all professionals involved in credit risk management".

The key topics to be addressed are:

Achieve effectiveness in credit risk management Identify areas for development and improvement Enhance the awareness of counterparty credit exposure Manage successfully retail credit risk for SMEs Discover advanced collections & recovery techniques Minimize disputes in debt recovery

Author- Philippe Van Hellemont, BNP Paribas Fortis, Vice President, CRO



Integrated Market and Credit Risk Management

of Fixed Income Portfolios

The main sources of risk affecting fixed income portfolios are interest rate

and credit risk. From an economic point of view, it makes sense to measure

and manage these sources of risk in a common framework in order to take the

dependencies between them into account. Indeed, losses due to interest rate

changes do not necessarily happen simultaneously with losses due to changes in

the credit quality of the counterparties. The common framework is necessary

to obtain a complete picture of portfolio risk and make the accurate management

decisions. Nevertheless, the regulatory environment designed by the Basle

Committee on Banking Supervision as well as the major risk management tools

used by banks consider market and credit risk separately.

The objective of this study is to propose an integrated framework for the

management of market and credit risk of these portfolios and investigate

the benefits of integration. The study should deliver useful insights into the

relative importance of market and credit risk and into the dependence between

extreme losses due to interest rate and credit quality changes.

First, credit risk dominates market risk in a fixed income portfolio containing bonds

belonging to rating classes between AAA and CCC. The result holds even for bonds with

high recovery rates or for portfolios having a good credit quality. Second, the integration of

market and credit risk makes diversification benefits possible. These benefits

are realized, for example, through a reduction of the economic capital needed

to cover these risks.. Consequently, the determination of capital requirements by adding

market and credit risk is conservative and penalizes banks or portfolios that are well

diversified. Third, interest rate and credit derivatives can further reduce economic capital and

improve the risk/return relationship.

Author- Roger Walder



Using consumer benchmarking criteria to improve service sector competitiveness

The adoption of benchmarking techniques has increased over recent years, yet service

organisations have been relatively reluctant to adopt the practice. It is widely

acknowledged that elements of “service quality” play a key role in the performance

and competitiveness of service organisations and thus provide potential

benchmarking criteria. Yet perceived service quality must be defined from the

consumer’s perspective and, unlike manufacturing organisations, the consumer is

involved in the production process.

This study examines the potential for the generation and evaluation of consumer

focused benchmarking criteria. Consumers of three service sectors – health (family

planning); education/professional (accountancy training) and retail (supermarkets)

completed measurement scales relating to potentially deterministic attributes and

assessed these for current and previous suppliers. The findings indicate that, although

management must be aware of a number of potential problems and issues,

information derived from consumers can provide a valuable input into a

comprehensive external benchmarking programme involving both competitive and

generic measures.

Author- John Whymark



Bank of Baroda: 23-25 Pct Home Loan Growth

Public-sector lender, Bank of Baroda has seen its home loan portfolio growing by 23-

25 per cent during April-November, and expects the growth to pick up further in the

next quarter. "From April to November, 2009, the growth (in home loans) has been a

healthy 23-25 per cent. We expect this momentum to continue in the coming quarter

as well.

The bank, however, did not have any immediate plans to follow its competitors to

offer home loans at 8 per cent but may look at the possibility in future after assessing

the market conditions.

"As of now, we are not looking at launching any such schemes, as the growth (in

home loans) has been quite healthy even without any such strategies. May be, we will

look at it later," the official said. Bank of Baroda currently offers home loans at a rate

ranging from 8.5 per cent to 10.5 per cent, based upon the loan amount and tenure of

the advance.

A host of lenders, including the country's largest lender, State Bank of India and its

nearest competitor ICICI Bank had announced similar home loan schemes to woo the

spiring home buyers. As on September, Bank of Baroda's total retail loan book stood

at around Rs 21,000-crore, out of which home loans contributed around 45 per cent.

The lender has also maintained a healthy asset quality on its home loan portfolio, the

official said. Its gross non-performing assets from the home loan segment presently

stands at around 2 per cent.

SBI was the first to come with the dual rate home loan scheme early this year, which

was followed by other leading players like ICICI Bank, Kotak Mahindra, Axis and

leading housing loan financer, HDFC. Public-sector lender, Bank of India also have

plans to offer fixed rate of 8 per cent for two years for new home loans upto Rs 30-

lakh from the new year.

Author- Hardeep Singh


http://www.sooperarticles.com/finance-articles/loans-articles/bank-baroda-23-25-pct-home-loan-growth-32144.html#%23





Statement of the Problem

Credit risk continues to be the leading source of problems in Bank of Baroda. Banks

should have a keen awareness of the need to identify, measure, monitor and control

credit risk as well as to determine that they hold adequate capital against these risks

and that they are adequately compensated for risks incurred.A special importance to

handle the credit crisis.

Objectives of the study

The Objectives include:-

1. To assess the degree of safety with respect to debt servicing capacity of a

borrower.

2. To assess credit Risk, Bank of Baroda uses Credit Rating as a tool

3. To assess borrowers Credit quality in respect of Industry, business, Management

and Financial Risk.

4. To know how the Risk Assessment Model is adopted in Bank of Baroda.

5. To study the impact of various factors in determining the credibility of a

particular firm

6. To show the correlation between banks and credit.

7. To show how the firm in study fares when analysed on the basis of the various

risks.

8. To determine whether the bank should go ahead with giving the loan.



Research methodology of the study

Research methodology is a way to systematically solve the research problem. It may

be understood as a science of studying how research is done scientifically.

A research is purely & simply framework or plan for the study that guides the

collection & collection & analysis of the data. It is the blue print that is followed in

completing the study. Rating is used as a tool to measure the credit risk. Hence the

methodology adopted to measure the credit risk is credit rating. Credit Rating is

defined as an objective assessment of a borrower’s credit quality in terms of business

and financial risk.

The methodology covers the assessment of

Industry Risk

Business Risk

Management Risk

Financial Risk for large corporate accounts

In this study ‘Analytical Research Methodology’ is adopted where the available facts

or information will be used and analyzed

Type of Research

The type of research used here is descriptive and I have used case study method,

wherein a company has been analysed according to the parameters of credit risk

management at the Bank of Baroda and based on these observations the findings and

suggestions are made. This research is the most commonly used and the basic reason

for carrying out descriptive research is to identify the cause of something that is

happening. However, if the research is to return useful results whoever is conducting

the research must comply with strict research requirements in order to obtain the most

accurate figures. It is the exploration of the existing certain phenomenon.



Sources of Data and methods of Data Collection

This project is by and large involves only secondary data. The data is collected by

interviewing the executives of the bank and through the bank manuals, reports and

websites.

An important source of data includes various magazines about the Indian Banking

Scenario as well as interviewees with the top executives of the bank.

The other sources of data include the financial statements of the bank and various

publications by the bank itself and its official website also.

Significance of the study

By giving various types of credit limit by way of fund based and non-fund based

business the financial institutions risk will be spread in different rates. Hence before

advancing to a particular Industry study of Credit Rating has become necessary.

Another reason why this study is particularly important in the present global scenario

is that in times of economic recession, the credit is restricted and hence only firms or

individuals with high credit rating will be given credit after scrutiny.



Scope of the study

One of the main functions of any bank is lending of loans and hence credit risk is part

and parcel of their business and needs to be carefully analysed in order to ensure

timely and appropriate availability of funds.

Credit risk is a critical component of integrated Risk Management. For banks, loans

are the largest and most obvious source of credit Risk. Therefore, for effective

management of credit Risk, focused attention on credit delivery, recovery and review

is prerequisite, and effective handling of it is essential to the long term success of any

banking organization. There are 3 types of Models used to rate the credit risk. They

are:

1. Manual model

2. Risk Assessment Model

3. Portfolio Model

Limitations of the study

The limitations of the study are as follows

1. The study is mainly based on Secondary data.

2. Though there are three types of Credit Rating Models I have been restricted

my study only for RAM Model for Large corporate Accounts.

3. As the future is uncertain the Risk rating done by me is construed as perfect or

not.



Bank of Baroda- Profile

The Heritage

It all started with a visionary Maharaja's uncanny foresight into the future of trade and

enterprising in his country. On 20th July 1908, under the Companies Act of 1897, and

with a paid up capital of Rs 10 Lacs started the legend that has now translated into a

strong, trustworthy financial body, THE BANK OF BARODA.

It has been a wisely orchestrated growth, involving corporate wisdom, social pride

and the vision of helping others grow, and growing itself in turn.

The founder, Maharaja Sayajirao Gaekwad, with his insight into the future, saw "a

bank of this nature will prove a beneficial agency for lending, transmission, and

deposit of money and will be a powerful factor in the development of art, industries

and commerce of the State and adjoining territories."

It has been a long and eventful journey of almost a century across 25 countries.

Starting in 1908 from a small building in Baroda to its new hi-rise and hi-tech Baroda

Corporate Centre in Mumbai, is a saga of vision, enterprise, financial prudence and

corporate governance.

It is a story scripted in corporate wisdom and social pride. It is a story crafted in

private capital, princely patronage and state ownership. It is a story of ordinary

bankers and their extraordinary contribution in the ascent of Bank of Baroda to the

formidable heights of corporate glory. It is a story that needs to be shared with all

those millions of people - customers, stakeholders, employees & the public at large -

who in ample measure, have contributed to the making of an institution.

Mission statement



To be a top ranking National Bank of International Standards committed to

augmenting stake holders' value through concern, care and competence.

Logo

Our new logo is a unique representation of a universal symbol. It comprises dual ‘B’

letterforms that hold the rays of the rising sun. They call this the Baroda Sun.

The sun is an excellent representation of what our bank stands for. It is the single

most powerful source of light and energy – its far reaching rays dispel darkness to

illuminate everything they touch. At Bank of Baroda, they seek to be the source that

will help all our stakeholders realise their goals. To our customers, they seek to be a

one-stop, reliable partner who will help them address different financial needs. To our

employees, they offer rewarding careers and to our investors and business partners,

maximum return on their investment.

The single-colour, compelling vermillion palette has been carefully chosen, for its

distinctivenes as it stands for hope and energy.

It also recognize that our bank is characterised by diversity. Our network of branches

spans geographical and cultural boundaries and rural-urban divides. Our customers

come from a wide spectrum of industries and backgrounds. The Baroda Sun is a

fitting face for our brand because it is a universal symbol of dynamism and optimism

– it is meaningful for our many audiences and easily decoded by all.

Our new corporate brand identity is much more than a cosmetic change. It is a signal

that they recognize and are prepared for new business paradigms in a globalised

world. At the same time, we will always stay in touch with our heritage and enduring

relationships on which our bank is founded. By adopting a symbol as simple and

powerful as the Baroda Sun, it hope to communicate both.

The Ethics

Between 1913 and 1917, as many as 87 banks failed in India. Bank of Baroda

survived the crisis, mainly due to its honest and prudent leadership. This financial



integrity, business prudence, caution and an abiding care and concern for the hard

earned savings of hard working people, were to become the central philosophy

around which business decisions would be effected. This cardinal philosophy was

over the 94 years of its existence, to become its biggest asset. It ensured that the Bank

survived the Great War years. It ensured survival during the Great Depression. Even

while big names were dragged into the Stock Market scam and the Capital Market

scam, the Bank of Baroda continued its triumphant march along the best ethical

practices

Employee Development

Bank of Baroda aims at providing it's people with a space for development through

continous learning, performance management and other people friendly policies. We

are commited to provide our people wth an environment conducive to professional as

well as personal growth.

INITIATIVES TAKEN BY THE BANK

Marketing Initiatives

The mid-eighties marked the beginning of the shift to a buyers` market. The Bank

orchestrated its business strategies around the centrality of the customer. It diversified

into areas of merchant banking, housing finance, credit cards and mutual funds. A

string of segment specific branches entrenched operations in the profitable markets.

Overseas operations were revamped and structural changes intensified in the

territories to cater to second generation NRIs. Slowly but surely, the move to become

a one stop financial supermarket had been set in motion. Service delivery standards

were stipulated.



Technology was adopted to add punch. Employees across the board were inculcated

with the marketing concept. Aggressive marketing became the new business

philosophy.

People Initiatives

Bank of Baroda has always had an immense faith in the infinite potential of its

people. This has been historically demonstrated in its recruitment practices,

developmental initiatives, placement processes and promotion policies. Strategic HR

interventions like, according cross border and cross cultural work exposure to its

managers, hiring diverse functional specialists to support line functionaries and

complementing the technical competencies of its people by imparting conceptual,

managerial and leadership skills, gave the Bank competitive advantage. The elaborate

man management policies also made the Bank a breeding ground for business leaders.

The Bank provided around a dozen CEOs to the industry- men who went on to build

other great institutions. People initiatives were blended with IR initiatives to create an

effectively harmonious workplace, where everyone prospered.

Financial Initiatives

New norms for capital adequacy required new capital management strategies. In 1995

the Bank raised Rs 300 crores through a Bond issue. In 1996 the Bank tapped the

capital market with an IPO of Rs 850 crores, Despite adverse market conditions

prevailing then, the issue was over subscribed, reflecting the positive public

perception of the Bank's fundamental financial strength.

Digital Initiatives

Bank of Baroda pioneered the shift from manual operating systems to a computerized

work environment. Starting with ledgers, to ledger posting machines, through

ALPMs, the Bank graduated to the use of Unix based systems to Mainframes, to

client server based Total Branch Mechanization Systems. Today, the Bank has 1918

computerized branches, covering 70% of its network and 91.64% of its business.



Alive to the growing complexities of an intensely competitive marketplace and the

mounting expectations of customers fuelled by this competition, the Bank reworked

its distribution strategy. It ventured beyond the brick and mortar delivery channel into

ATMs and the Omni BOB range of anytime, anywhere electronic channels of PC

banking, telephone banking. The e-banking products used state of the art technologies

like digital certificates, smart card authentication and secure networking.

The new IT strategy, in the process of implementation will see the deployment of

Core Banking Systems, Multi Service Transaction Switch, Payment Gateways - all

geared to deliver convenience banking.

Quality Initiatives

In its relentless striving for quality perfection, the Bank secured the ISO 9001:2000

certification for 15 branches. By end of the current financial, the Bank is targeting 54

more branches for this quality certification.

FUTURE PLANS

Extension of credit rating exercise to all the exposures and carrying it out as a

pre-sanction exercise biannually.

Building up of historical data for estimating Probability of Default (PD).

Pricing of loans based on risk ratings

Undertaking of rapid portfolio reviews, stress tests and scenario analysis.

Developing robust database/MIS to meet risk management requirements

.Evolving a policy for credit exposures taken on counterparty Bank.

Developing policy and procedures, verifying adherence to risk parameters by

departments.

Discriminatory time schedule for renewal of borrowal accounts

Monitoring country risk on real time basis.

Broadening more into various international markets.

Being tagged with a global nature.



ADAPTATION TO CHANGE

Revolutionary and discontinuous changes in the operating environment are a stark

reminder that business success is 'impermanent'. The emergence of IT as a major

driver for change, has accentuated the need to initiate a major transformation

program. The conversion to an IT savvy, market driven bank will be a prerequisite to

survival and growth. A major and strategic step in hi-tech, was the establishment of

the Integrated Treasury branch, as a forerunner to full-fledged global treasury

operations. Towards creating a future Bank of Baroda, the Bank has adopted a

revolutionary new business strategy that will be enabled by a revolutionary new IT

strategy. Actioning this strategy will position Bank of Baroda as India's uncontested

premier bank.

At Bank of Baroda, change is a journey. It has a beginning. There will be no end. It

will be a long and difficult march. And the Bank will emerge stronger, more resilient

and positioned to become India's first bank of truly global standards. The relocation

to the imposing Baroda Corporate Centre, is a true reflection of the Bank's resolve to

move ahead of the times. It will not be out of place now, as it stands on the threshold

of a digital era, to echo the same sentiments that guided the Bank in its platinum

jubilee year - 'a promising future is the sequel to a glorious past'.



Credit Risk

Credit Risk is the risk that the counterparty to a financial transaction will fail to

discharge an obligation resulting in a financial loss to the Bank. Credit risk

management processes involve identification, measurement, monitoring and control

of credit exposures.

In order to provide clarity to the operating functionaries, the Bank has various

policies in place such as Domestic Loan Policy, Off-Balance Sheet Exposure Policy,

etc, wherein the Bank has specified various prudential caps for credit risk exposures.

The Bank also conducts industry studies to assess the risk prevalent in industries

where the Bank has sizable exposure and also for identification of sunrise industries.

The industry reports are communicated to the operating functionaries to consider the

same while lending to these industries.

The Bank has adopted various credit rating models to measure the level of credit risk

in a specific loan transaction. The Bank uses a robust rating model developed to

measure credit risk for majority of the business loans (non personal loans). The rating

model has the capacity to estimate probability of default (PD), Loss Given Default

(LGD) and unexpected losses in a specific loan asset.

Apart from estimating PD and LGD, the credit rating model will also help the Bank in

several other ways as under.

To migrate to Rating Based Approaches of computation of Risk Weighted Assets

To price a specific credit facility considering the inherent credit risk.

To measure and assess the overall credit risk and to evolve a desired profile of

credit risk.

Apart from assessing credit risk at the counterparty level, the Bank has appropriate

processes and systems to assess credit risk at portfolio level. The Bank undertakes



portfolio reviews at regular intervals to improve the quality of the portfolio or to

mitigate the adverse impact of concentration of exposures to certain borrowers,

sectors or industries.

Credit Monitoring Function

Credit monitoring on a continuous basis is one of the most important tools for

ensuring quality of advance assets. The Bank has the system of monthly monitoring

of the advance accounts at various levels to prevent asset quality slippages and to take

timely corrective steps to improve the quality of credit portfolio.

A separate department for Credit Monitoring function at the corporate level, headed

by a General Manager, and one at the Regional/Zonal level, started functioning since

September 2008. The Slippage Prevention Task Force formed at all Zonal/Regional

offices in terms of the Bank’s Domestic Loan Policy was activated for the purpose of

arresting slippage and also for initiating necessary restructuring in potential sick

accounts at an early stage in conformity with the laid down norms and guidelines.

The Bank placed special focus on sharpening of the credit monitoring process for

improving the asset quality, identifying areas of concern/branches requiring special

attention, working out strategies and ensuring their implementation in a time bound

manner.

The primary objectives of the Credit Monitoring Department at the corporate level are

fixed as under:

Identification of weakness/Potential default/incipient sickness in the loan

accounts at an early stage;

Initiation of suitable and timely corrective actions for preventing impairment

in credit quality, whenever signals are noticed in any account, e.g. decline in

credit rating, delay in meeting liabilities in LC/Guarantee and delay in

servicing of interest/ installments etc;

Prevention of slippage in the Asset Classification and relegation in Credit

Ratings through vigorous follow up;



Identification of suitable cases for restructuring/rescheduling/rephasement as

well as further financing in deserving and genuine cases with matching

contribution from the borrower;

Taking necessary steps/regular follow up, for review of accounts and

compliance of terms and conditions, thereby improving the quality of Bank’s

credit portfolio;

Endeavoring for upward migration of Credit Ratings.

Industrial Advisory Division ( Risk Management Wing)

The functions performed by this division are as follows

Credit risk assessment,

Maintenance of comprehensive data bank on various industries, products.

Comprehensive valuation of financial status of assisted corporates.

Credit risk evaluation of assisted companies.

Preparation of operating agency report and submission to BIFR.

Project Appraisal and viability studies.



Competition

In order to properly about a company and its performance, it is of great importance to

judge in comparison with the other competitors prevailing in the industry. This

comparison can be made on the basis of both internal and external financials that are

available of the different companies. Improvements can also be made on this basis

and its standing can be ascertained. The effectiveness of its policies both in the short-

term and the long- term can be understood and can be modified based upon its

requirements Below are tables which compare The Bank of Baroda to its competitors

in terms of stock prices as well various items on the Balance Sheet.

Last Price Market Cap.

(Rs. cr.)

Net Interest

Income

Net Profit Total Assets

SBI 1,912.45 121,417.67 63,788.43 9,121.24 964,432.08

PNB 855.45 26,972.55 19,326.16 3,090.88 246,918.62

BOB 564.65 20,568.31 15,091.58 2,227.20 227,406.73

BOI 340.45 17,879.59 16,347.36 3,007.35 225,501.75

Canara Bank 382.50 15,682.50 17,119.06 2,072.42 219,645.80

Union Bank 241.40 12,193.55 11,889.38 1,726.55 160,975.51

IDBI Bank 117.15 8,491.33 11,631.62 858.53 172,402.33

Indian Bank 173.30 7,447.91 6,830.33 1,245.32 84,121.74

Oriental Bank 261.15 6,542.84 8,856.47 905.42 112,582.58

Corporation BanK 431.10 6,183.70 6,067.35 892.77 86,905.80



INTRODUCTION TO ANALYSIS

The analysis describes the way the credit rating process has been carried out

in Bank of Baroda. The study is pertaining to risk rating of “Texport

Overseas ”-a Ready Made Garment factory .

Risk Assessment Model is used to risk rate Ready Made Garment factory

(Large corporate Accounts )

Various options have been worked out on Business Risk, Management Risk

and financial Risk.

The Parameters used for assessing the Rating of Ready made Garment factory

is Risk Gradation scale

The viability of the study is to see that whether the degree of safety with

respect to debt serving capacity is low risk, Normal risk, moderate risk, High

risk.



ANALYSIS ON RISK ASSSESSEMENT MODEL

Risk Assessment Model is a software based credit decision support system and is

integral part of CRISIL’s credit management advisory service for banks, financial

institutions and large size corporate. This service aims at enhancing the efficiency and

effectiveness Of all credit related functions. It helps an organization in assessing the

credit quality of Borrower. RAM is based on CRISIL’S methodology for credit risk

assessment.

There are various types of model in Risk Assessment Model, they are as follows:

I. Large corporate

II. Large Trader

III. Non –banking financial corporation

IV. Small and Medium enterprise

V. Small Traders

Large Corporate Model

There are various types of industries and companies that fall under large corporate

model.

They are

Cement Industry

Pharmaceutical industry

Software Industry

Automobile industry

Ready made garment Industry



The rating is done on ready made garment Industry. The factors that are considered

for rating of Ready made Garment are as follows

PARTICULARS

FACTORS

INDUSTRY RISK

Industry Characteristics Industry Financials

Demand and supply gapGovernment PoliciesInput related risksExtent of competition


Growth in operating margin Operating marginVariability of operating margin

BUSINESS RISK

Operating efficiency Market Position

Product design and

developmentAvailability of skilled labourSelling costEmployee cost

Brand Equity Long term contracts/Assured off take Distribution set up Product range

FINANCIAL RISK

Past Financials Future Financial

Return on capital employedOperating marginTotal liability /Total Net worthCurrent RatioOperating Income/short term borrowingAccounting quality

Return on capital employed- projected Debt service coverage ratio Total liability/TotalNet worth Operating margin Effectiveness of projection Financial flexibility of the

Company

MANAGEMENT RISK

Track Record Past Payment Record

Ability to meet profit projections Ability to meet sales Projections

Past payment record towards Management Experience in the Industry

Managerial competence Business and Financial



policy Timeliness of furnishing Information

TEXPORT OVERSEAS– READY MADE GARMENT INDUSTRY

INDUSTRY

Ready-made garments account for approximately 45% of India's total textile exports.

They represent value added and less import sub sector. India's thrust into ready made

garment production started in the early 80s in the wake of the liberalization, received

a big impetus during economic reforms in the early 90's and during the last two

decades, has moved to the Tenth position, in the World's export of ready made

garments.

Ready made garments are India' s leading export products and achieved rapid growth

in the late 1980s and the first half of the 1990s. However, India' s share of world

ready made garments exports has not risen since 1994. The immediate cause is

apparently the slowdown in the import growth of India' s major markets, namely, the

United States and the EU.

The export of ready made garments, which was to the tune of 253.6 million pieces,

valued at US$ 826.5 million during January-February 2005 has increase in

quantitative terms to 306.1 million pieces, valued at US$ 1137.9 million, up by

20.07% in quantity and by 37.68% in value terms, during January-February 2003,

when compared with the same period last year. The USA, EU Member States,

U.A.E., Japan, Saudi Arabia, Canada, Hong Kong, Switzerland and Australia have

been the major importing countries of our Indian ready-made garments. In India,

Ludhiana, Tirupur, Delhi, Bangalore, Mumbai and Chennai are all remarkably unique

and dynamic centers of production.

India is at present a niche player in the low-value market segment based on cotton

fabrics and for seasonal and fashion garments. This reflects India's comparative

advantage in cotton cloth and its flexibility advantage in meeting small orders. With

the targets of enhancing quality, establishing new market niches, and moving up the



value chain, the strategy should concentrate on restructuring of the production base.

India is exporting ready-made garments to over 100 countries. The major importing

countries are the USA, Europe, Latin America, Middle East etc. In the world ready-

made garments market, India's share is 2.5 percent only.

With the formation of World Trade Organization (WTO) in January 1995, MFA has

been replaced by Agreement on Textile and clothing (ATC) and MFA is to be phased

out over a 10-years period, by 1st Jan 2005. There is scope for increased market

access during the transition period of 10 - years and after phasing out of MFA. The

market size of quota-imposing countries is large and exports will become more

competitive. Indian exporters stand to gain with the opening up of markets hitherto

restricted, provided they measure up to standards of quality, price and adherence to

strict delivery schedules.

The opportunities for exports will increase after scrapping of quota system world over

from 1st Jan 2005. The new textile policy has focused on the target of $25 billion

worth of clothing and readymade garments exports by 2010. Recent signs of recovery

in the world economy, especially USA economy may have positive impact on the

growth of Garments industry in medium term.

Exports of readymade garments have increased from Rs.14841 crore during Jan-Aug

2005 to Rs.16505 crore during Jan-Aug 2006. These exports include both woven

(Rs.10348crore) and knitted garments (Rs.6157 crore). Exports from garments hub

Tirpur alone has gone up by around 20% to Rs.2758 crore during the period Jan-

Aug2006.

The Union government has reduced the duty draw back rates, which may reduce the

profitability of the exporting companies. Dereservation of garments manufacturing

has resulted into entry of major players directly into garments manufacturing. This



development has paved the way for increased investments, employing of improved

technology and growth of branded segment in the garment industry.

The branded readymade garments industry in India is growing at the rate of 35

percent per annum. With increasing exposure to global brands and a virtual flood of

international quality products, the Indian consumer today, has wide choice. They have

become savvier and are conscious of fashions and trends. The estimated size of

branded readymade shirts market is around Rs.2,000 crore and is growing at 10-12

percent per annum. The casual wear shirt market is estimated at around Rs.185 crore,

and is growing at 40 percent. The trouser market is growing at 30-35 percent per

annum. The size of the readymade trouser market is four million pieces annually in

India

The future for domestic small retailers will depend upon their ability to face

competition, as the branded readymade garment industry is growing rapidly. Because

of the entry of international brands, customer awareness in brands, quality, price and

dereservation of the garment industry from SSI, allowing 100 percent FDI may affect

small companies with limited resources and professionalism.

In India, the innerwear market is segmented between the organized and unorganized

sector. Innerwear ceased to remain a utility item in the ‘80s. However, with change in

lifestyles and better buying power, consumers have become more selective and

demanding. And this has resulted in branded innerwear is gaining ground. Innerwear

market is growing at 20% p.a.

The Tirpur exporters in Tamilnadu are planning for a common brand and through

which they will be able to compete in the global market, ensuring better quality.

Govt. of India has proposed to develop an apparel park in Tirpur. On account of this,

more units may come up, which will lead to increased competition.



INDUSTRY RISK

Table-1:- Industry CharacteristicsParticulars Weights

(%)Existing Score Proposed score

Score WeightedScore

Score WeightedScore

Industry Characteristics

Demand supply gap

Government policies

Input related risks


85

20

25

15

40

3.95

5

4

5

3

3.35

1.00

1.00

0.75

1.20

3.7

4

6

4

2

3.145

0.8

1.5

0.6

0.8

Interpretation:-

The table 1 indicates the scores given for Industry Risk. Industry Risk can be

classified into Industry Characteristics and Industry Financials. Industry

Characteristics has four factors which is shown in the above table. The weights of

these factors will be fixed or defined by the Industry analysts. The total weights of

Industry characteristics is 85 which is equal to100. Even the factors of Industry

characteristics is equal to 100.

The weights for the above table will remain constant for both the existing as well

as proposed score

The weights of Demand and supply for existing and proposed score is 20. The

Existing score for Demand and supply is 5 and the proposed score is 4.and the

weighted score for these factor is 1 and 0 .8 respectively.

The weights of Government policy for Existing score and proposed score is

25. The scores for these factors is 4 and 6, and the weighted score is 1 and 1.5

respectively.



The weights of Input related risk is 15 . The Existing score is 5 and the

proposed score is 4 and the weighted score for these factor is .75 and .6

respectively.

The weights of extent of competition is 40. The existing score for these factor

is 3 and the proposed score is 2. The weighted score for these factors is 1.20

and .8 respectively.

Inferences:-

By changing the score pattern of Demand supply gap, Government policies, Input

Related Risk and Extent of Competition the total score of Industry characteristics has

come down from 3.95 to 3.7 . This has an impact on the weighted score of Industry

characteristics which has slightly declined from 3.35 to3.145. As the Industry

Characteristic is a part of Industry Risk by decline in the scores of Industry

characteristics the overall Industry Risk rating of Ready Made garment Industry is

reduced to certain extent, so the Industry risk is favorable.

The definitions derived from the model for the proposed scores are as follows :

Demand and supply gap

The branded ready made garment factory production is generally increased since the

manufacturers are coming up with several designs and also they are bringing several

types of products by using various types of raw material which is suitable to general

public. The unbranded manufacturing segments are garments either of low quality or

export quality which will not affect branded manufacturers. Hence the demand and

supply situation in the domestic market are not in balance.

Government Policies

The score 6 indicates that the government policies are much favorable to ready made

garment industry. The impact of government policies with respect to tariff barriers,



excise duty, taxes incentives for new investments, are some of the encouraging

factors for ready made garment industry

Input related risks:

Availability of cotton and synthetic fabric is a competitive advantage for the Indian

garment industry in the exports market. However, availability of superior quality

processed fabric is limited. The availability of low cost skilled labour also improves

cost competitiveness of Indian garment Industry.

Extent of competition :

Because the garment industry is highly competitive, with over 100 brands competing

with each other, along with the competition from unbranded readymade and tailor –

made garments. The industry can be classified into premium and mid- price segments.

Competition in premium segment is relatively lower, due to a limited number of

players. This segment includes Brands like louis phillipe, allen soley, vansoley, van

Heusen, arrow, wrangler, lee and color plus. In the mid-price segment, competition is

intense due to large number of players and competition from unbranded garment

industry.



Table-2:-Industry Financials

Particulars Weights(%)

Existing Score Proposed ScoreScore Weighted

ScoreScore Weighted

Score Industry Financials


Variability in operating margin

Operating margin

Growth in operating margin

15

33.33

16.67

33.33

16.67

3.45

4.85

3.10

2.75

2.40

0.52

1.61

0.516

0.916.

0.399

5.67

6.75

4.30

5.10

6.20

0.85

2.24

0.71

1.69

1.03

Interpretation:-



The table 2 indicates the Industry financials which is one of the important part of

Industry Risk. Industry financial has four factors . The weights of these factors will be

fixed. The total weights of Industry financials is equal to 100.

The weights for the above table will remain constant for both the existing and

proposed score.

The weights of Return on Capital employed is 33.33 for both the Existing and

proposed score. The existing score for this factor is 4.85 and 6.75, the

weighted score for this factor is 1.61 and 2.24 respectively.

The weights of variability in operating Margin is 16.67 which is fixed for both

the existing and proposed score. The existing score for this factor is 3.10 and

4.30, the weighted score for this factor is 0.516 and 0.71 respectively.

The weights of Operating margin is 33.33. The existing score for this factor is

2.75 and 5.10, the weighted score for this factor is 0.916 and 1.69

respectively.

The weight of Growth in operating Margin is 16.67. The existing score for

this factor is 2.40 and 6.20, the weighted score is 0.399 and 1.03 respectively.

Inferences:-

By changing the scores of Return on capital employed, Variability in operating

margin, operating margin and Growth in operating margin the total scores for this

factor has been increased from 3.45 to 5.67 . This has an impact on the overall

weighted score of Industry financials which has been increased from 0.52 to 0.85.

This Indicates that the risk rating of Industry Financials are unfavorable for Ready

made Garment Industry.

The present status by changing the scores of the company are as follows

Return on Capital employed

The score 6.75 indicates that the return on capital employed of ten companies lies

between 20.0% to 24 %.



Variability of operating margin

The score 4.30 indicates that the variability of operating margin lies between 10 % to

15%.

Operating Margin

The score 5.10 indicates that the operating margin lies between 15 % to20 %.

Growth in operating margin

The score 6.20 indicates that the growth in operating margin lies between 0.005

to .0075



OVERALL RISK ASSESSEMENT SCORE OF INDUSTRY RISK

Table-3:-

Particulars Weights (%)

Existing score Proposed score

Weighted score

Final score

Overall risk score

Weighted score

Final score

Overall risk score

Industry Risk

Industry characteristics

Industry financials

10

85

15

3.36

0.52

3.88 0.38

3.145

0.85

3.99 0.39



Interpretation:-

The above table indicates the overall risk assessment score given for Industry risk.

From this table we can interpret that the weights assigned for Industry risk is 10 for

both existing as well as for proposed score. The weighted existing score for Industry

characteristics is 3.36 and the weighted proposed score for the industry characteristics

is 3.145. The weighted existing score for Industry financial is 0.52 and the weighted

proposed score for this factor is 0.85 which has been interpreted in table 1 and table 2

respectively. when we consider the total final score of Industry risk

The existing final score of Industry risk is 3.88 and the proposed final score of

Industry risk is 3.99

The overall risk score for existing and proposed is 0.38 and 0.39 respectively

Inferences:-

When we look into the overall risk assessment score of Industry risk there is a slight

increase in these scores . This indicates that the overall industry risk rating of ready

made garment industry is Unfavorable.

BUSINESS

M/s Texport Overseas is a partnership firm incorporated on 01.02.2000 and started

commercial operations in the financial year 2000-2001. Satish Goenka family

promoted the company. Later, the partnership firm is converted to a private limited

company viz. M/s Texport Overseas Private Limited (GIPL) is incorporated on

01.03.2004. The business of M/s Texport Overseas is taken over by the newly

formed company with effect from 01.03.2004.

Company is engaged in manufacturing and exporting of readymade garments. There

are more than five subsidiaries engaged in the same line of business.

Texport Overseas has won many awards for their export performance.



BUSINESS RISK

Table-4:-Operating efficiencyParticulars Weights

(%)Existing Score Proposed Score

Score WeightedScore

Score WeightedScore


Product design and development

Availability of Skilled labour

Selling cost

Employee cost

30

20

25

35

20

4.65

6

5

4

4

1.39

1.2

1.25

1.4

0.8

5.3

4

7

5

5

1.59

0.8

1.75

1.75

1.00

Interpretation:-

The table 4 indicates the scores given for Business risk. Business risk has two

components they are Operating efficiency and Market position. Operating efficiency

has 4 factors. The weights of these factors will be fixed. The total weights of

Operating efficiency and market position is100. From the above table we can say that

The weights of product design and development for existing score and

proposed score is 20 which is fixed. The existing score for this factor is 6 and

the proposed score is 4, the weighted existing score for this factor is 1.2 and

the weighted proposed score for this factor is 0.8.

The weights of availability of skilled labour for existing score and proposed is

25. The existing score for this factor is 5 and the proposed score is 7, the

weighted existing score for this factor is 1.25 and the weighted proposed score

for this factor is 1.75.



The weights of selling cost is 35 and the existing score for this factor is 4 and

the proposed score is 5, the weighted existing score for this factor is 1.4 and

the weighted proposed score for this factor is 1.75.

The weights of employee cost is 20 . The existing score for this factor is 4 and

the proposed score for this factor is 5. The weighted existing score is 0.8 and

the weighted proposed score is1.

Inferences:-

By changing the existing scores and by giving the proposed scores for product design

and development, availability of skilled labour selling cost and employee cost the

total scores of operating efficiency of Business risk has been increased from 4.65 to

5.3 which in turn has an impact on the overall weighted score of operating efficiency

which has been increased from 1.39 to 1.59. so, the Business Risk rating is

unfavorable for Readymade garment Industry.

The following are the definitions derived from the model for the proposed scores are

as follows:

Product design and development:

The score 4 indicates low priority on product design and development. Very few case

of attempts to innovate but with no success.

Availability of skilled labour:

The score 7 indicates that skilled labour is easily available

Selling cost:

The score 5 indicates that selling costs are little better than industry averages.

Employee cost:

The score 5 indicates employee costs are lower than industry average levels



Table-5:-Market position



ScoreScore Weighted

Score

Market Position

Brand equity

Long term contracts/assured off take

Distribution setup

Product range

70

30

10

40

20

5.9

6

5

6

6

4.13

1.8

0.5

2.4

1.2

5.3

5

4

5

7

3.71

1.5

0.4

2.0

1.4



Interpretation:-

The table 5 indicates the scores given for market position of the Business risk.

Market position has four factors . The total weight of market position is 100. The

weights of these factors is also 100. From the above table we can interpret the

following facts

The weights given for Brand equity is 30 which is fixed for both the existing

and proposed score and the scores of this factor is 6 and 5. The weighted score

for this factor is 1.8 and 1.5 respectively.

The weights of Long term assured contract is 10 and the existing score is 5

and 4 respectively. The weighted existing score is 0.5 and the weighted

proposed score is0.4.

The weights of Distribution set up is 40. The existing score is 6 and the

proposed score is 5. The weighted existing score is 2.4 and the weighted

proposed score is 2.0

The weights of Product range is 20. The existing score is 6 and the proposed

score is 7. The weighted existing score is 1.2 and the weighted proposed score

is 1.4

Inferences:-

Due to change in the score pattern of the factors of Market position of the Business

Risk the overall weighted score of market position of the Business Risk has come

down from 4.13 to 3.71. This means that the Business risk Rating for this particular

factor is favorable for Ready made garment Industry.

The definition derived from the model for the proposed scores are as follows



Brand equity :

The score 6 indicates that the Expenditure is on brand building . Some brands have a

fairly good customer recall

Long term contracts/assured off take: Long term contracts with assured take off

with some covenants attached to it.

Distribution set up:.

The score 5 indicates moderate distribution set up. With wide geographical coverage.

Product range:

The score 7 indicates that company is expected to remain at the fore front owing to

capability to introduce new products.



OVERALL RISK ASSESSEMENT SCORE OF BUSINESS RISK

Table-7:-Particulars

Weights(%)

Existing score Proposed scoreWeightedscore

Final score

Overall risk score

Weightedscore

Final score

Overall risk score

Business Risk


Market position

35

30

70

1.40

4.13

5.53 1.94

1.59

3.71

5.3 1.85



Interpretation:-

The table 7 indicates the overall assessment score for Business risk. The Business risk

is assigned a weightage of 35 for both the existing and proposed scores. The weighted

existing score of operating efficiency is 1.40 and the weighted proposed score is

1.59 .The weighted existing score of Market position is 4.13 and the weighted

proposed score is 3.71.

The existing final score of Business risk is 5.53 and the proposed score is 5.3

The overall existing risk score is 1.94 and the overall proposed score is 1.85

Inferences:-

When we consider the overall Business risk score of ready made garment Industry the

overall existing Business risk score is 1.94 , whereas the proposed business risk score

is 1.85. By this we can come to an conclusion that there is slight decrease in these

scores ,so the overall Business risk rating is favorable for Readymade garment

Industry. For this particular companies account the bank is having normal risk, so the

bank can adjudge this particular account as normal risk account.

MANAGEMENT:

The Company was promoted by Satish Goenka, belongs to "Texport Overseas

Exports" Group. The other companies/concerns in the group are Unique Creations,

Goenka Exports, Indev Warehouse, Central Warehouse etc. Out of this, Unique

Creations and Goenka.Exports are dealing with our bank. All the companies/concerns

are engaged in the same line of business and the sister concerns are undertaking

company's job works.

There is no significant change in the management, even though the constitution has

changed from partnership firm to private limited company



MANAGEMENT RISK

Table- 8:-Track record& past payment recordParticulars Weights


Score WeightedScore

Score WeightedScore

Track Record

Ability to meet profit projection

Ability to meet sales projection

Payment Record

Past payment record

33.33

50

50

33.33

100

7

8

6

8

8

2.33

4

3

2.67

8

6.5

8

5

7

7

2.16

4

2.5

2.33

7

Interpretation:-

The table 4 indicates the Management Risk of Track record and past payment record.

The management risk has two components they are track record, Payment record

and Management The weights of this factor is also fixed. The total weight for Track

record is 33.33 and the total weight for the Payment record is33.33. The weights for

the above table will remain constant for both the existing and proposed scores.

The weight of Ability to meet profit projection is 50. The existing score for

this factor is 8 and the proposed score is also 8. The weighted Existing score is

4 and the weighted proposed score is also 4.

The weights of Ability to meet sales projection is 50 which is fixed for both

the scores. The existing score is 6 and the proposed score is 5. The weighted

existing score is 3 and the weighted proposed score is 2.5.

The Weights of past payment record is 100 . The existing score is 8 and the

proposed score is 7. The weighted existing score is also 8 and the weighted

proposed score is 7.



Inferences:-

By changing the score pattern of ability to meet profit projections, ability to meet

sales projection and past payment record the total score of the track record has come

down from 7 to 6.5 and the total score of past payment record has come down from

2.67 to 2.33. This has an impact on the overall weighted score which in turn has

come down from 2.33 to 2.16. so this implies that the track record and past payment

record of the company is favorable.

.



Table-9:- Management


Existing Score Proposed Score

Score WeightedScore

Score WeightedScore

MANAGEMENT

Managerial competence

Experience in theindustry

Business and financial policy

Timeliness of furnishing information

33.33

25

25

25

25

5.25

6

5

5

5

1.75

1.5

1.25

1.25

1.25

5.5

4

7

7

4

1.83

1.00

1.75

1.75

1.00

Interpretation:-

The table 9 indicates the scores given for the Management of Management Risk. The

Management has four factors. The weights of these factors are fixed and the total of

this factor is equal to 100. From the above table the weights of the management is

33.33 which is constant for both the existing and proposed scores.

.The weights of the Managerial competence is 25 which is constant for both

the existing and proposed score. The scores for this factor has been decreased

from 6 to 4, and the weighted score has also been decreased from 1.5 to 1.00

The weights of the Experience in the Industry is 25. The score of this factor

has been increased from 5 to 7. The weighted score has also been increased

from 1.25 to 1.75.

The weights for the Business and financial policy is 25. The score for this

factor has been increased 5 to7. The weighted score for this factor has also

been increased from 1.25 to 1.75.

The weights of the Timeliness of furnishing information is 25. The score for

this factor has been decreased from 5 to 4. The weighted score for this factor

has also been decreased from1.25 to 1.



Inferences:-

By changing the score pattern of the Management of the Management Risk the total

score has been increased from 5.25 to 5.5, this in turn automatically increased the

overall weighted score of the management from 1.75 to 1.83.so the increase in

scores is not a good sign for Ready made garment Industry. so the management risk

rating is unfavorable.

The definitions derived from the model for the proposed scores are as follows:

Experience in the Industry:

The score 4 indicates that the top management of Ready made garment industry is

fairly experienced and have not put sufficient years in the Industry.

Managerial competence :

The score 7 indicates that the management has demonstrated the ability to steer the

company through difficult periods. The company possesses a strong second line of

management. Well established systems and procedures

Business and Financial policy : The definition of score 7 is conservative

management. Absence of aggressive debt funded expansion, large expansion into

unrelated areas stable/declining trend in debt equity ratio .Avoidance of high risk

Investments.



OVERALL RISK ASSESSSEMENT SCORE OF MANAGEMENT RISK

Table-10:-

Particulars Weights

(%)

Existing score Proposed scoreWeighted

scoreFinal score

Overall risk score

Weighted score

Final

score

Overall risk

score

Management Risk

Track Record

Payment Record

Management

15

33.33

33.33

33.33

2.33

2.67

1.75

6.75 1.01

2.16

2.33

1.83

6.33

0.94



Interpretation:-

The above table indicates the overall risk assessment score given for Management

risk. From this table we can interpret that the weights assigned for Management risk

is 15 for both existing and proposed score. The weighted existing score for track

record is 2.33 and the weighted proposed score for this factor is 2.16.The weighted

existing score for payment record is 2.67 and the weighted proposed score for this

factor is 2.33.When we consider the total final score of Management risk

The existing final score of Management risk is 6.75 and the proposed final

score of Management risk is 0.94

The overall risk score for existing and proposed score is 1.01 and 0.94

respectively.

Inferences:-

When we look into the overall risk assessment score of Management risk score of

there is a decrease in these scores. This indicates that the overall management risk is

favorable for readymade garment Industry. For this particular factor the Bank is

having low risk so the bank can adjudge as low risk account



FINANCIALS:

Past Financials:

The company’s net sales has increased by 2.3% i.e. from Rs 36237 lakhs in the year 2007-08 to Rs 37071 lakhs in the year 2008-09.

Exports constitute 98% of the total net sales.

PAT has declined by 14.1% i.e. from Rs 3742 lakhs to Rs 3216 lakhs.

PAT has declined mainly on account of increase in manufacturing and administrative expenses.

The other income has increased from Rs 173 lakhs to Rs 258 lakhs (growth of 49.13%).

TOL/TNW has reduced from 1.47 to 1.41.

ROCE has reduced from 57% to 33%.

The inventory holding period has increased from 48 days to 63 days.

The debtors collection period has improved from 50 days to 30 days.

The creditors holding period has increased from 9 days to 11 days.

Bank borrowings to net sales has increased from 6% to 14%.

The current ratio has declined from 1.47 to 1.34.

The cash profit of the company has decreased from Rs 4021 lakhs to Rs 3538 lakhs.

Future Financials:

For the year 2009-10, the company has estimated a sales of Rs 44759 lakhs. Upto

Feb, 10 the company has achieved a sales of Rs 39200 lakhs. The prorate

achievement being 96%.

The cash generation from operating activity is sufficient enough to cover its financial obligations.



FINANCIAL RISK

Table 11:- Past Financials Option-I Particulars Weights


Score Weighted Score

Score Weighted Score

Past financials

ROCE-past

Operating margin

TOL/TNW

Current Ratio

DSCR

Operating Income/short term borrowing

Interest coverage

50

14.29

14.29

14.29

14.29

14.29

14.29

14.29

7.14

8

4

7

7

8

8

8

3.57

1.1432

0.5716

1.0003

1.0003

1.1432

1.1432

1.1432

7.43

8.00

6.00

7.00

7 .00

8.00

8.00

8.00

3.71

1.1432

0.8574

1.0003

1.0003

1.1432

1.1432

1.1432

Interpretation:-

The table 11 indicates the scores given for Option I of Financial Risk. Financial Risk

has two components they are past financial and future financials. Past financials has 7

factors which is shown in the above table. The total weights of past financial is 50

which is equal to 100.

The weights for the above table will remain constant for both the existing as well as

proposed score

The weights of Return on capital employed for existing and proposed score

is 14.29. The existing score of this factor is 8 and the proposed score is also

8 and the weighted existing score is1.1432 and the weighted proposed score

is also 1.1432.



The existing score for operating margin is 4 and the proposed score is 6.The

weighted existing score is 0.5716 and 0.8574 respectively.

The weights of Total liability/ Total Net worth is 14.29. The existing score

is 7 and the proposed score is also 7. The weighted existing score has

remained constant at 1.0003 for both the existing as well as for proposed

score.

The existing score of current Ratio is 7 and the proposed score is also 7.

The weighted existing score is 1.0003 and the weighted proposed score is

also 1.0003

The weights of debt service coverage ratio for existing and proposed score is

. 14.29. The existing score is 8 and the proposed score is 1. The weighted

score of this factor has been declined from 1.1432 to 0.1429.

The existing scores of operating income/ short term borrowing is 8 and the

proposed score is also 8 . The weighted score has remained constant at

1.1432.

The existing score of Interest coverage is 8 and the proposed score is 8, and

the weighted scores has remained constant at 1.1432

Inferences:-

The net sales has been increased by 15 % compare to previous year sales, which in

turn has an effect on operating margin scores which has been increased by 4 to 6.

this has an impact on overall weighted score of past financials which has been

increased from 3.57 to 3.71. By this we can come to an conclusion that if we increase

the net sales the overall weighted score will have an impact on past financials. so the

Option I of past financials for ready made garment industry is not favorable.



Table 12

Option IIParticulars Weights


Score WeightedScore

Score WeightedScore

Past Financials

ROCE

Operating Margin-past

TOL/TNW

Current Ratio

DSCR

Operating Income/short term borrowing

Interest Coverage

50

14.29

14.29

14.29

14.29

14.29

14.29

14.29

7.14

8.00

4.00

7.00

7.00

8.00

8.00

8.00

3.57

1.1432

0.5716

1.0003

1.0003

1.1432

1.1432

1.1432

3.715

1.00

1.00

7.00

7.00

1.00

8.00

1.00

1.85

0.1429

0.1429

1.0003

1.0003

0.1429

1.1432

0.1429

Interpretation:-

The table 11 indicates the scores given for option III of Financial Risk. The weights

for the above table will remain constant for both the existing as well as proposed

score


is 14.29. The existing score for this factor is 8 and the proposed score is1,

and the weighted score1.1432 and 0.1429 respectively.

The existing score for operating margin is 4 and the proposed score is 1.The

weighted score is 0.5716 and 0.1429

The weights of Total liability/ Total Net worth is 14.29. The existing score

is 7 and the proposed score is also 7. The weighted score has remained

constant at 1.0003.



The existing score of current Ratio is 7 and the proposed score is also 7.

The weighted score has remained constant for both existing and proposed

score at 1.0003


. 14.29. The existing score is 8 and the proposed score is 1. The weighted

score of this factor has been declined from 1.1432 to 0.1429.

The existing scores of operating income/ short term borrowing is 8 and the

proposed score is also 8 . The weighted score has remained constant at

1.1432

The existing score of Interest coverage is 8 and the proposed score is1 and

the weighted score is 1.1432 and 0.1429 respectively.

Inferences:-

The variable costs such as Raw material, power and fuel , Employee cost, other

Manufacturing expenses and Administration ., selling and other cost etc has been

increased by 15 %, which in turn has an effect on the scores of return on capital

employed which has decreased from 8 to 1, operating margin score which has

decreased from 4 to1and Interest coverage ratio from 8 to 1. This has an impact on

the overall weighted score of past financial which has been decreased from 3.57 to

1.85.Thus the option II is much more favorable for the Ready made garment Industry

Thus from the above two options,the option II has more favorable rating for Ready

Made Garment Industry. so the option II has been taken for final assessment of

companies Financial risk.



Table 13:-Future Financials



ScoreScore Weighted

Score

Future Financials

ROCE-Projected

DSCR

TOL/TNW

Operating Margin

Financial flexibility of Company

Financial flexibility of company

20

25

25

25

25

30

100

7.5

8

8

7

7

5

5

1.5

2

2

1.75

1.75

1.5

5

5.75

6

8

7

2

6

6

1.15

1.5

2

1.75

0.5

1.8

6



Interpretation:-

The table 11 indicates the scores given for Future Financials. Future financials has 7

factors which is shown in the above table. The total weights of future financial is 20

which is equal to 100.

The weights for the above table will remain constant for both the existing as well as

proposed score


is 25. The score of this factor is has decreased from 8 to 6 and the weighted

existing score has also decreased from 2 to 1.5.


. 25. The scores of this factor has remained constant.

The weights of Total liability/ Total Net worth is 25. The existing score is 7

and the proposed score is also 7. The weighted existing score has remained

constant at 1.75.

The score of operating margin has been decreased from 7 to 2.The

weighted existing score has decreased from 1.75 to 0.5

.The weights of financial flexibility of the company is 100. The existing

score is 5 and the proposed score is 6. The weighted existing score is 5 and

the weighted proposed score is 6.

Inferences:-

By increasing the variable costs by 15%, this will have an effect on the costs of the

future financials and in turn will have an impact on the weighted scores of future

financials. But in this case as the future financials has come down from 1.5to 1.15 this

is favorable for the Ready made garment Industry.



OVERALL RISK ASSESSMENT SCORE OF FINANCIAL RISK

Table 14:-

ParticularsWeigh

ts (%)

Existing score Proposed scoreWeight

ed score

Final score

Overall risk

score

Weighted score

Final score

Overall risk

score

Financial Risk

Past Financials

Future Financials

Financial flexibility of the company

40

50

20

30

3.57

1.50

1.50

6.57 2.63

1.86

1.15

1.80

4.81 1.92

Interpretation:-

The table 15 indicates the overall risk assessment score given for Financial risk. From

this table we can interpret that the weights assigned for Financial risk is 40for both



existing as well as for proposed score. The weights assigned for past financials, future

financials and for financial flexibility of the company is 50, 20 and 30 respectively.

The weighted existing score of past financial is 3.57 and the weighted proposed score

is1.86.

The weighted existing score of future financials is 1.50 and the weighted proposed

score of this factor is 1.15.The weighted existing score of financial flexibility of the

company is 1.50 and the weighted proposed score of this factor is 1.80 . When we

consider the total final scores of Financial risk

The existing final score of Financial risk is 6.57 and the proposed final score

is 4.81.

The overall risk score for existing and propose is 2.63 and 1.92respectively.

Inferences:-

Option II has been taken for overall risk assessment score of Financial risk. When we

look into the overall Financial risk the score has come down from 2.63 to 1.92.so by

this we can come to an conclusion that the overall Financial risk rating is favorable

for Ready made garment Industry. For this particular factor the bank is having normal

risk so the bank can adjudge as normal risk account.



Score type : Company Existing score Proposed score

Industry Risk 0.39 0.38

Business Risk 1.94 1.85

Financial Risk 2.63 0.94

Management Risk 1.01 1.92

Overall Company score 5.96 5.11

Overall Grade III IV

Grade Description Low Risk- LR3 Normal Risk

Degree of safety correspond

to the Grade

The degree of safety with

respect to debt servicing

capacity is good

The degree of safety with

respect to debt servicing

capacity is satisfactory

RISK ASSESSMENT SCORE

Table:-15

Inferences:-

Due to change in scores we find there is vast volatility in Rating grade of the

company.

By this we can conclude that the company is facing high risk/low risk/Normal risk.

In the present context as per the analysis mentioned above the company is under

Normal

Risk. so the degree of safety with respect to debt servicing capacity is satisfactory.



FINDINGS OF THE STUDY

From the analysis mentioned above the degree of safety with respect to debt

servicing capacity is satisfactory and can be termed as safe enough for giving

the loan to the firm.

Based on the scores given for a particular factor the overall Rating of

company keeps on changing and so also the Risk grade also keeps on

changing due to its impact.

From the analysis mentioned above:

The Industry Risk Rating is unfavourable for Texport Overseas, a firm which

is in the Ready made Garment Industry in India.

The Business Risk Rating is favourable for Texport Overseas, a firm which is

in the Ready Made Garment Industry in India.

The Management Risk Rating is also favourable for Texport Overseas which

is in the Ready made garment Industry in India.

The Financial Risk Rating is favourable for Texport Overseas which is in the

Ready made garment Industry in India.

So, after taking into consideration all the factors pertaining to all the different

risks that the firm might face, be it in- Industry Risk, Business Risk,

Management Risk or Financial Risk, the overall rating for Texport Overseas,

which is in the Ready Made Garment industry in India, is taken as to be

favourable for this purpose.( after using proposed and existing scores).

SUGGESTIONS



Since the Overall Rating and Financial Condition of this particular company,

Texport Overseas is favourable the Bank can consider the financial needs of

this company.

The Bank along with this also has to take into consideration its priorities and

the sectors it prefers.

The Bank of Baroda can also, if needed, take the opinion of other banks which

have been dealing in this sector, so as to get a better risk cover and by this

means, also better understand the market and its expectations.

Apart from the Risk Assessment Models, which has been adopted here, the

bank should also consider the use of some other models like Loan Review

Mechanism and Loan Default Analysis.

Banks need to involve branch level administrators in making credit risk

decisions.

At times the Risk Assessment Model will not function properly because of

system failure. Hence it is suggested that the Banks should train their officers

and Employees suitably to undertake the Risk Rating Related Work.



CONCLUSION

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 loan products 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 little that

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 in an 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 also crucial in coming up with the position to balance risks and

returns.

1. While financial institutions have faced difficulties over the years for a multitude of

reasons, the major cause of serious banking problems continues to be directly related

to lax credit standards for borrowers and counterparties, poor portfolio risk

management, or a lack of attention to changes in economic or other circumstances

that can lead to a deterioration in the credit standing of a bank's counterparties.

2. Credit risk is most simply defined as the potential that a bank borrower or

counterparty will fail to meet its obligations in accordance with agreed terms. The

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

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

the credit risk inherent in the entire portfolio as well as the risk in individual credits or

transactions. Banks should 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 organisation.



3. For most banks, loans are the largest and most obvious source of credit risk;

however, other sources 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, interbank

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.

4. Since exposure to credit risk continues to be the leading source of problems in

banks world-wide, banks and their supervisors should be able to draw useful lessons

from past experiences. Banks should now have a keen awareness of the need to

identify, measure, monitor and control credit risk as well as to determine that they

hold adequate capital against these risks and that they are adequately compensated for

risks incurred. Although the principles contained in this paper are most clearly

applicable to the business of lending, they should be applied to all activities where

credit risk is present.

5. The sound practices set out in this document specifically address the following

areas: (i) establishing an appropriate credit risk environment; (ii) operating under a

sound credit-granting process; (iii) maintaining an appropriate credit administration,

measurement and monitoring process; and (iv) ensuring adequate controls over credit

risk. Although specific credit risk management practices may differ among banks

depending upon the nature and complexity of their credit activities, a comprehensive

credit risk management program will address these four areas. These practices should

also be applied in conjunction with sound practices related to the assessment of asset

quality, the adequacy of provisions and reserves, and the disclosure of credit risk,

6. While the exact approach chosen by individual supervisors will depend on a host of

factors, including their on-site and off-site supervisory techniques and the degree to

which external auditors are also used in the supervisory function, the principles set

out in this paper should be used in evaluating a bank's credit risk management system.

Supervisory expectations for the credit risk management approach used by individual

banks should be commensurate with the scope and sophistication of the bank's

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



the credit risk management approach used is sufficient for their activities and that

they have instilled sufficient risk-return discipline in their credit risk management

processes.

7. A further particular instance of credit risk relates to the process of settling financial

transactions. If one side of a transaction is settled but the other fails, a loss may be

incurred that is equal to the principal amount of the transaction. Even if one party is

simply late in settling, then the other party may incur a loss relating to missed

investment opportunities. Settlement risk (i.e. the risk that the completion or

settlement of a financial transaction will fail to take place as expected) thus includes

elements of liquidity, market, operational and reputational risk as well as credit risk.

The level of risk is determined by the particular arrangements for settlement. Factors

in such arrangements that have a bearing on credit risk include: the timing of the

exchange of value; payment/settlement finality; and the role of intermediaries and

clearing houses.

After going through the Findings & Suggestions we can come to a conclusion that

Risk Rating is favourable when the degree of safety in respect of the debt servicing

capacity of the borrower is satisfactory. Only on studying Credit Risk we can assess

the Business Risk, Industry Risk, and Financial Risk of a Particular Borrower.

Thus, in this project which is based on the credit risk management at the Bank of

Baroda, I have tried to show how this risk is managed and how the bank uses its

policy to determine the credibility of a particular firm before giving the loan of the

particular amount.

The company taken for example is “Texport Overseas”. And after taking all factors

into consideration, it is found favourable. Hence, by this analysis the credit risk

management practiced at the Bank is properly analysed from all angles and hence its

effectiveness is determined.



BIBLIOGRAPHY

Websites-

Search.epnet.com

Wikipedia.com

Google.com

Creditriskmanagement.com

Defaultrisk.com

Bankofbaroda.com

Indiatimes.com

Moneycontrol.com

Texportoverseas.com

Banknetindia.com

Books, Magazines…

The Indian Banker

Business India

Economic Times

Internal Credit Risk Models ( by Michal Kong)

Credit Risk Modelling: Design & Application( by Elizabeth

Mays)

India Today



Balance Sheet of Bank Of Baroda

------------------- in Rs. Cr. -------------------

PARTICULARS Mar '05 Mar '06 Mar '07 Mar '08 Mar '09

Capital and Liabilities:

Total Share Capital 294.53 365.53 365.53 365.53 365.53

Equity Share Capital 294.53 365.53 365.53 365.53 365.53

Share Application Money 0.00 0.00 0.00 0.00 0.00

Preference Share Capital 0.00 0.00 0.00 0.00 0.00

Reserves 5,333.23 7,478.91 8,284.41 10,678.40 12,470.01

Revaluation Reserves 0.00 0.00 0.00 0.00 0.00

Net Worth 5,627.76 7,844.44 8,649.94 11,043.93 12,835.54

Deposits 81,333.46 93,661.99 124,915.98 152,034.13 192,396.95

Borrowings 1,640.83 4,802.20 1,142.56 3,927.05 5,636.09

Total Debt 82,974.29 98,464.19 126,058.54 155,961.18 198,033.04

Other Liabilities & Provisions 6,062.19 7,083.90 8,437.70 12,594.41 16,538.15

Total Liabilities 94,664.24 113,392.53 143,146.18 179,599.52 227,406.73

Assets

Cash & Balances with RBI 2,712.32 3,333.43 6,413.52 9,369.72 10,596.34

Balance with Banks, 6,541.88 10,121.21 11,866.85 12,929.56 13,490.77

Advances 43,400.38 59,911.78 83,620.87 106,701.32 143,985.90

Investments 37,074.44 35,114.22 34,943.63 43,870.07 52,445.88

Gross Block 1,707.68 1,873.17 2,244.62 3,787.14 3,954.13

Accumulated Depreciation 846.88 952.44 1,155.81 1,360.14 1,644.41

Net Block 860.80 920.73 1,088.81 2,427.00 2,309.72

Capital Work In Progress 0.00 0.00 0.00 0.00 0.00

Other Assets 4,074.41 3,991.16 5,212.50 4,301.83 4,578.12

Total Assets 94,664.23 113,392.53 143,146.18 179,599.50 227,406.73



Contingent Liabilities 33,066.99 34,678.87 54,999.86 75,364.33 64,745.82

Bills for collection 9,768.27 10,407.04 12,976.53 15,105.51 22,584.64

Book Value (Rs) 191.90 215.35 237.46 303.18 352.37

Balance Sheet ------------------- in Rs. Cr. -------------------

March’09 Bank of Baroda SBI PNB Bank of India Canara Bank

Capital and Liabilities:

Total Share Capital 365.53 634.88 315.30 525.91 410.00

Equity Share Capital 365.53 634.88 315.30 525.91 410.00

Share Application Money 0.00 0.00 0.00 0.00 0.00

Preference Share Capital 0.00 0.00 0.00 0.00 0.00

Reserves 12,470.01 57,312.82 12,824.59 11,258.72 9,629.61

Revaluation Reserves 0.00 0.00 1,513.74 1,710.29 2,168.16

Net Worth 12,835.54 57,947.70 14,653.63 13,494.92 12,207.77

Deposits 192,396.95 742,073.13 209,760.50 189,708.48 186,892.51

Borrowings 5,636.09 53,713.68 4,374.36 9,486.98 7,056.61

Total Debt 198,033.04 795,786.81 214,134.86 199,195.46 193,949.12

Other Liabilities & Provisions 16,538.15 110,697.57 18,130.13 12,811.39 13,488.91

Total Liabilities 227,406.73 964,432.08 246,918.62 225,501.77 219,645.80

Assets

Cash & Balances with RBI 10,596.34 55,546.17 17,058.25 8,915.28 10,036.79

Balance with Banks 13,490.77 48,857.63 4,354.89 12,845.97 6,622.99

Advances 143,985.90 542,503.20 154,702.99 142,909.37 138,219.40

Investments 52,445.88 275,953.96 63,385.18 52,607.18 57,776.90

Gross Block 3,954.13 10,403.06 3,930.36 3,578.23 4,440.07

Accumulated Depreciation 1,644.41 6,828.65 1,533.25 1,156.75 1,510.61



Net Block 2,309.72 3,574.41 2,397.11 2,421.48 2,929.46

Capital Work In Progress 0.00 263.44 0.00 110.45 0.00

Other Assets 4,578.12 37,733.27 5,020.20 5,692.02 4,060.26

Total Assets 227,406.73 964,432.08 246,918.62 225,501.75 219,645.80

Contingent Liabilities 64,745.82 614,603.47 79,270.65 107,155.08 136,569.42

Bills for collection 22,584.64 152,964.06 31,941.43 11,490.74 25,757.73

Book Value (Rs) 352.37 912.73 416.74 224.39 244.87



PROFIT AND LOSS ACCOUNT OF TEXPORT OVERSEAS

COMPANY : PAST YEARS FROM THE BASE YEAR

BASE YEAR

PROJECTED YEAR

PROFIT & LOSS ACCOUNT

YEAR (DD.MM.YY) e.g; 31.03.2003 31.3.2006 31.3.2007 31.3.2008 31.3.2009 31.3.2010

Domestic Sales 2.07 597.00 491.54 763.18 490.00

Export Sales 0.00 0.00 35745.11 36307.46 44295.10

Gross Sales 2.07 597.00 36236.65 37070.64 44785.10Less, Excise Duty 0

Net Sales 2.07 597.00 36236.65 37070.64 44785.10Adjustment for stock ( - / +) 604 188.58 200

Net Income 2.07 597.00 36840.66 37259.22 44985.10Raw materials 2 379.00 23890 22865.50 25152Power & Fuel 0 6.00 30 94.61 104Employee Cost 1 55.00 445 962.05 1058Other Mfg. Expenses 1 105.00 6630 7966.85 8923Admn., Selling & Other Cost 0 39.00 1452 1695.50 1865

Total op. Expenses 4.00 584.00 32447.35 33584.51 37102.30PBDIT, Excld. other income -1.93 13.00 4393.31 3674.71 7882.80Interest- Long term loan 0 1.00 0 0.00 0Interest-Short term loan & Working caps. 0 34.00 545 394.27 430Depreciation 1 5.00 279 322.45 440Tax 0 0.00 0 0.00 0

PAT, excld. other income -3.18 -27.00 3569.62 2957.99 7012.80Non-Opearting Income 0 35.00 173 258.28 175

PAT -3.18 8.00 3742.45 3216.27 7187.80



TEXPORT OVERSEAS : PAST YEARS FROM THE BASE YEAR

BASE YEAR

PROJECTED YEAR

BALANCE SHEET

BALANCE SHEET OF TEXPORT OVERSEAS

LIABILITIES 31.3.2006 31.3.2007 31.3.2008 31.3.2009 31.3.2010 Equity Capital 5 2038 5183 5902 8189 Preference Capital 0 0 0 0 0 Total Capital 5 2038 5183 5902 8189 General Reserves 0 0 0 0 0 Capital Reserves 0 0 0 0 0 Revaluation Reserves 0 0 0 0 0 Total Reserves 0 0 0 0 0 Deferred Tax – Liability Long Term Loans 2 45 0 0 10 Short Term Loans 0 2471 0 0 10 WC Loans from Banks 0 214 2287 5064 5264 Sundry Creditors 20 746 901 1133 1233 Other Current Liablities 4302 1987 2010 Provisions 148 165 180 Current Liabilities & Provisions 20 746 5350 3285 3423 TOTAL 27 5514 12821 14251 16896 Repayment towards term loan ASSETS 31.3.2006 31.3.2007 31.3.2008 31.3.2009 31.3.2010 Gross Block 10 714.00 1890 3086.30 4286 Less, Depreciations 279 310 Net Block 10.00 714.00 1611.27 3086.30 3976.00 Capital Work In Progress Investments 0 0.00 0 0 0 Inventories 6 3061.00 4767 6448 7548 Debtors 2 314.00 5006 3092 3192 Loans & Advances 3 611.00 822 1210 1610 Cash & Bank Balances 6 760.00 615 415 570 Total Current Assets 16.90 4746.00 11209.22 11164.84 12920.00 Non current assets 54.00 Debtors - More than six months Total Non-Current Assets 0.00 54.00 0.00 0.00 0.00 Deferred Tax – Assets Accumulated Lossess Intangible Assets TOTAL 27 5514 12821 14251 16896 DIFFERENCE INDICATOR 0 0 0 0 0



FUNDS FLOW STATEMENT OF TEXPORT OVERSEAS

TEXPORT OFVERSEAS : PAST YEARS FROM THE BASE YEAR

BASE YEAR

PROJECTED YEAR FUNDS FLOW STATEMENT

Fund Flow Details 31.3.2006 31.3.2007 31.3.2008 31.3.2009 31.3.2010

Long Term Sources 7 2076 3145 719 2297 Long Term Uses 10 704 942 1475 890

Surplus / (Deficit) (2.93) 1371.93 2202.75 (756.11) 1407.26 Short Term Sources 20 3411 6731 2821 348 Short Term Uses 17 4783 8934 2065 1755

Surplus / (Deficit) 2.93 (1371.93) (2202.74) 756.10 (1407.36)

ANALYSIS:

TEXPORT OVERSEAS

Year

Ability to meet projections Projected Operating

Income

Actual Operating

Income

Projected PAT

Actual PAT

31.3.2009 40500 44785.1 3679 7187.8032

31.3.2008 37536 37070.6

4 210 3216.27

31.3.2007 900 36236.6

5 30 3742.45 Payment record over last 12 months Demand Recovery 100% 99%


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