Risk Management in Indian Bank1

7/28/2019 Risk Management in Indian Bank1

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A

PROJECT REPORT

ON

SUBMITTED IN PARTIAL FULFILLMENT OF THE

REQUIREMENT OF AWARD THE DEGREE OF

Under the Guidance of

To

Acknowledgement


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Today at every field practical training is important in making a person perfect in this

work. Today generally practical training is provided with a view to explain various

matters practically.

Firstly Im thankful to the IGNOU who gave me a plate form to make a practical

analysis. I surveyed the different periodicals and references to get a idea.

Im also thankful to Mr. _________________________ who constantly guided me a lot

to make the project report. His continuous support and motivation encouraged me to

work the best.

I am thankful to staff of PNB, ICICI, Canara Bank and Allahabad bank for providing me

necessary data for making project report.

Last but not least, I express my gratitude to my parents and friends without whose

support this would not have been possible.

PREFACE


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Human being enters the world with a raw brain and mind. Until he works out with his

imagination, he cannot reach the soaring heights of success. Study of management will be

worthwhile only if it is coupled with the practical studies and imagination power.

Practical Training constitutes an important part in a good practice oriented management

course. According to the syllabus of MBA, every student has to undergo practical

project training for exposure in any commercial industry or organization. For the partial

fulfillment of this requirement, I underwent my project in 4 banks namely ICICI, PNB,

Allahabad Bank, Canara Bank.

Practical training, which is a part of management studies intends to provide a student with

sufficient knowledge to develop an equation to connect theory and practical aspects and thereby

gives an opportunity to test and verify application of theory and comprehends interaction

between management concepts and practice.

It is with great sincerity and enthusiasm that I take up the challenge that this field has placed

before me and hope to succeed with guidance from my professors.

CONTENTS


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S.NO

.

PARTICULARS PAGE

NO.EXECUTIVE SUMMARY 1

1. OBJECTIVE AND RESEARCH METHODOLOGY 2Objective of the study

Research Methodology

Limitations

2. THEORETICAL FRAMEWORK OF CREDIT RISK

MANAGEMENT

3

Introduction

Types of risks in Bank

Risk Management

Traditional Risk Management System

Risk Management ProcessBasel Committee

Credit risk

Credit Risk management

Factors on which Credit risk depends

Measuring Credit Risk

Principles for managing credit risk

Approaches to credit risk management

3 Credit Risk management in PNB

Profile

Credit Risk Management in PNB

Credit risk rating systemCredit Rating Model

Credit Risk management through rating system

Preventive Monitoring system

Credit risk assessment software model

Data analysis

4 Credit Risk Management in ICICI Bank

Profile

Credit risk management in ICICI bank

Credit Rating

Data Analysis5 Credit Risk Management in Canara Bank

Profile

Credit risk management in Canara bank

Data Analysis

6 Credit Risk Management in Allahabad Bank

Profile

Credit risk management in Allahabad bank


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Data analysis

7 Conclusion

8 Bibliography 69

EXECUTIVE SUMMARY

Banking is an art & science of measuring & managing risks in lending and investment

activities for commensurate profits based on the risk perceptions.

The face of banking in India is changing rapidly. The enhanced role of the banking sector

in the Indian economy, the increasing levels of deregulation along with the increasing levels of

competition have facilitated globalisation of the India banking system and placed numerous

demands on banks. Operating in this demanding environment has exposed banks to various

challenges and risks.

From the day a bank is granted its charter up until its final day of operation, it faces a wide

variety of internal and external risks. Many banking risks arise from the common cause of

mismatching. If banks had perfectly matched assets and liabilities (i.e. identical maturities,

interest rate conditions and currencies), then the only risk faced by a bank would be credit risk.

This sort of matching, however, would be virtually impossible, and in any event would severely

limit the banks profit opportunities. Mismatching is an essential feature of banking business. As

soon as maturities on assets exceed those of liabilities then liquidity risk arises. When interest

rate terms on items on either side of the balance sheet differ, then interest rate risk arises.

Sovereign risk appears if the international nature of each side of the balance sheet is not country-

matched. Many of these risks are interrelated.


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The banking industry has long viewed the problem of risk management as the need to control

four of the above risks which make up most, if not all, of their risk exposure, viz., credit, interest

rate, foreign exchange and liquidity risk.

Credit risk is the most obvious risk in banking, and possibly the most important in terms of

potential losses. The default of a small number of key customers could generate very large losses

and in an extreme case could lead to a bank becoming insolvent. The most important credit risk

is the default risk. However, in some cases interest rate risk also comes under the credit risk.

Default risk relates to the possibility that loans will not be paid or that investments will

deteriorate in quality or go into default with consequent loss to the bank. Credit risk is not

concerned to the risk that borrowers are unable to pay; it also includes the risk of payments beingdelayed, which can also cause problems for the bank.

Given the fast changing, dynamic world scenario experiencing the pressures of

globalization, liberalization, consolidation and disintermediation, it is important that banks have

a robust credit risk management policies and procedures which is sensitive and responsive to

thesechanges.

The quality of the credit risk management function will be the key driver of the changes to the

level of shareholder return. To understand importance of credit risk management, I have taken 4

banks to study their credit risk management policy. This project is concerned with determining

the credit risk faced by banks under consideration and tools used by these banks for managing

the credit risk and thereafter comparing these banks on the basis of techniques used by them for

credit risk management.

Banks considered for research purpose are: Punjab National Bank, ICICI Bank,

Canara Bank and Allahabad Bank.

Project starts with objective and research methodology and how data were collection for theresearch. Second chapter deals with theoretical framework of risk management. Third chapter
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deals with how these 4 banks are exposed to credit risk and what are the steps taken by banks tominimize and control this risk. Findings were given at the end of the project. I have used bothprimary as well as secondary data for the purpose of data collection. However, personalinterviews of some Bank Officials will also be conducted for extracting the essential informationwhich not available through secondary sources. Thereafter different Statistical Tools (like

standard deviation, correlation etc.) will be applied on the collected data to extract the findingsfrom it.

CHAPTER -1

OBJECTIVE AND RESEARCH METHODOLOGY

OBJECTIVES OF THIS PROJECT REPORT:

1 To determine credit risk faced by different Banks in India.

2 To determine various tools and methods used byPunjab National Bank, ICICI

Bank, Canara Bank and Allahabad Bank for managing the credit risk faced by

them.

3 To determine whether or not there is any improvement in banks credit position

due to the use of such tools and methods.

4 To compare the credit position of these banks.

RESEARCH METHODOLOGY

Research Design

A research design is the arrangement of the condition for collection and analysis of

data. Actually it is the blueprint of the research project.

Research design used will be exploratory type.


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DATA COLLECTION

Primary Data : It will be collected through personal interview with bank officials.

Secondary Data : It will be collected from Business Newspapers, magazines, books,

Journal and websites.

SAMPLING DESIGN

Sample Size : 4 BanksPunjab National Bank

ICICI Bank

Canara Bank

Allahabad Bank

Sampling technique : Simple Random Sampling

DATA ANALYSIS

It will be done with the help of statistical tools like Standard Deviation and

Correlation.

LIMITATIONS OF STUDY

1. This project is restricted to study purpose which will not reflect clear picture.

2. Since my study is based on the secondary data only.

3. Since the Indian banking sector is so wide so it was not possible for me to cover all the

banks of the Indian banking sector.

4. The major problem faced while conducting the research was unavailability of

relevant data. Even bank did not agree to give its annual reports.


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CHAPTER -2

THEORETICAL FRAMEWORK OF CREDIT RISK MANAGEMENT

INTRODUCTION

Banking is an art & science of measuring & managing risks in lending and investment

activities for commensurate profits based on the risk perceptions.

The face of banking in India is changing rapidly. The enhanced role of the banking sector

in the Indian economy, the increasing levels of deregulation along with the increasing levels of

competition have facilitated globalisation of the India banking system and placed numerous

demands on banks. Operating in this demanding environment has exposed banks to various

challenges and risks.

Risk is a situation wherein objective probability distribution of the values a variable can

take is known, even though the exact values it take are not known. The objective probability is

one which is supported by rigorous theory, past experience, and the laws of chance.

Risk means deviation from expectation. It can be defined as the chance that the expected

or prospective advantage, gain, profit or return may not materialize; that the actual outcome of


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investment may be less than the expected outcome. The greater the variability or dispersion in

the possible outcomes, or the broader the range of possible outcomes, the greater the risk. The

measure of risk is Standard Deviation.

TYPES OF RISKS IN A BANK

From the day a bank is granted its charter up until its final day of operation, it faces a wide

variety of internal and external risks. Many banking risks arise from the common cause of

mismatching. If banks had perfectly matched assets and liabilities (i.e. identical maturities,

interest rate conditions and currencies), then the only risk faced by a bank would be credit risk.

This sort of matching, however, would be virtually impossible, and in any event would severely

limit the banks profit opportunities. Mismatching is an essential feature of banking business. As

soon as maturities on assets exceed those of liabilities then liquidity risk arises. When interest

rate terms on items on either side of the balance sheet differ, then interest rate risk arises.

Sovereign risk appears if the international nature of each side of the balance sheet is not country-

matched. Many of these risks are interrelated. These include:

Credit risk- Credit riskis also known as Default risk. It is the risk that a counterpartyto a .financial transaction (the borrower) will fail to comply with its obligations to

service debt, or that the counterparty will deteriorate in its credit standing i.e. it arises

from the failure on the part of the borrower or debtor to pay the specified amount of

interest and/or repay the principal, both at the time specified in the debt contract or

covenant or indenture.

Liquidity risk covers all risks that are associated with a bank finding itself unable to

meet its commitments on time, or only being able to do so by recourse to emergency

borrowing.

Interest rate risk is the variability in return on security due to changes in the level of

market interest rates, or it is the loss of principal of a fixed-return security due to an


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increase in the general level of interest rates i.e. itrelates to risk of loss incurred due to

changes in market rates, for example, through reduced interest margins on outstanding

loans or reduction in the capital values of marketable assets.

Market riskrelates to risk of loss associated with adverse deviations in the value of the

trading portfolio. Broadly refers to the risk that a banks earnings and capital might be

adversely affected by changes in interest rates, exchange rates or securities prices. This

course focuses on how the risk posed by changes in interest rates may adversely affect a

banks net income and capital position.

Exchange Rate or Currency Risk it refers to cash-flow variability experienced by

economic units engaged in international transactions or international exchange, on

account of uncertain or unexpected changes in exchange rates.

Country riskis associated with the risks of incurring financial losses resulting from the

inability and/or unwillingness of borrowers within a country to meet their obligations.

Solvency riskrelates to the risk of having insufficient capital to cover losses generated

by all types of risks.

Operational risk - The risk of loss or harm from unanticipated internal or external events

that occur in the course of conducting business such as equipment breakdowns, acts of

God, customer and employee fraud and undetected software errors.

Legal risk - The risk of loss or harm from unenforceable contracts, lawsuits or adverse

judgments.

Reputational risk - The risk of loss or harm to a banks public image from negative

publicity.


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.

a) Strategic level: It encompasses risk management functions performed by senior

management and BOD. For instance definition of risks, ascertaining institutions risk

appetite, formulating strategy and policies for managing risks and establish adequate

systems and controls to ensure that overall risk remain within acceptable level and the

reward compensate for the risk taken.

b) Macro Level: It encompasses risk management within a business area or across business

lines. Generally the risk management activities performed by middle management or

units devoted to risk reviews fall into this category.

c) Micro Level: It involves On-the-line risk management where risks are actually created.

This is the risk management activities performed by individuals who take risk on

organizations behalf such as front office and loan origination functions. The risk

management in those areas is confined to following operational procedures and

guidelines set by management.

Traditional Risk Management Systems

Commercial banks are in the risk business. In the process of providing financial services, they

assume various kinds of financial risks. So we need to determine an approach to examine large-

scale risk management systems. The management of the banking firm relies on a sequence of

steps to implement a risk management system. These can be seen as containing the following

four parts:

Standards and reports

Position limits or rules

Investment guidelines or strategies


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Incentive contracts and compensation

In general, these tools are established to measure exposure, define procedures to manage these

exposures, limit individual positions to acceptable levels, and encourage decision makers tomanage risk in a manner that is consistent with the firm's goals and objectives.

RISK MANAGEMENT PROCESS:

IDENTIFICATION The first step in risk management process is to identify the risk.

QUANTIFICATION After identifying the risk we have to quantify it using techniques

like Standard Deviation i.e. the quantification of the level of exposures.

POLICY FORMULATION then we decide the alternative tools and find the best

alternative and various policies are formulated.

Then using the engineering strategies to transform the exposures to the desired form.

MONITERING & REVIEW Then the risk levels are monitored and reviewed and they

are restored to the pre-determined standards.

BASEL COMMITTEE

Basel 1

In July 1988, the Basel Committee came out with a set of recommendations aimed at introducing

minimum levels of capital for internationally active banks. These norms required the banks to

maintain capital of at least 8 per cent of their risk-weighted loan exposures. Different risk

weights were specified by the committee for different categories of exposure. For instance,


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government bonds carried risk-weight of 0 per cent, while the corporate loans had a risk-weight

of 100 per cent.

Basel II

To set right these aspects, the Basel Committee came up with a new set of guidelines in June

2004, popularly known as the Basel II norms. These new norms are far more complex and

comprehensive compared to the Basel I norms. Also, the Basel II norms are more risk-sensitive

and they rely heavily on data analysis for risk measurement and management. They have given

three pillars which act as guideline for implementation of Basel II.

Pillar 1

Basel II norms provide banks with guidelines to measure the various types of risks they face -

credit, market and operational risks and the capital required to cover these risks.

Pillar II (Supervisory Reviews)

Ensures that not only do the banks have adequate capital to cover their risks, but also that they

employ better risk management practices so as to minimise the risks. Capital cannot be regarded

as a substitute for inadequate risk management practices. This pillar requires that if the banks use

asset securitisation and credit derivatives and wish to minimise their capital charge they need to

comply with various standards and controls. As a part of the supervisory process, the supervisors

need to ensure that the regulations are adhered to and the internal measurement systems are

standardized and validated.

Pillar III (Market Discipline)

This market discipline is brought through greater transparency by asking banks to make adequate

disclosures. The potential audiences of these disclosures are supervisors, bank's customers, rating

agencies, depositors and investors. Market discipline has two important components:
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1. Market signaling in form of change in bank's share prices or change in bank'sborrowingrates.

2. Responsiveness of the bank or the supervisor to market signals.

CREDIT RISK

Credit risk is the most obvious risk in banking, and possibly the most important in terms

of potential losses. The default of a small number of key customers could generate very large

losses and in an extreme case could lead to a bank becoming insolvent. The most important

credit risk is the default risk. However, in some cases interest rate risk also comes under the

credit risk. Default risk relates to the possibility that loans will not be paid or that investments

will deteriorate in quality or go into default with consequent loss to the bank. Credit risk is not

concerned to the risk that borrowers are unable to pay; it also includes the risk of payments being

delayed, which can also cause problems for the bank. Capital markets react to a deterioration in a

companys credit standing through higher interest rates on its debt issues, a decline in its share

price, and/or a downgrading of the assessment of its debt quality.

Credit risk arises from the potential that an obligor is either unwilling to perform on an

obligation or its ability to perform such obligation is impaired resulting in economic loss to

the bank.

Credit risk is defined as the possibility that a borrower or counterparty will fail to meet its

obligations in accordance with agreed terms. Credit risk, therefore, arises from the banks'

dealings with or lending to a corporate, individual, another bank, financial institution or a

country. Credit risk may take various forms, such as:

in the case of direct lending, that funds will not be repaid;

in the case of guarantees or letters of credit, that funds will not be forthcoming from the

customer upon crystallization of the liability under the contract;
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in the case of treasury products, that the payment or series of payments due from the

counterparty under the respective contracts is not forthcoming or ceases;

in the case of securities trading businesses, that settlement will not be effected;

in the case of cross-border exposure, that the availability and free transfer of currency is

restricted or ceases.

In a banks portfolio, losses stem from outright default due to inability or unwillingness of a

customer or counter party to meet commitments in relation to lending, trading, settlement and

other financial transactions. Alternatively losses may result from reduction in portfolio value due

to actual or perceived deterioration in credit quality.

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

could stem from activities both on and off balance sheet. In addition to direct accounting loss,

credit risk should be viewed in the context of economic exposures. This encompasses

opportunity costs, transaction costs and expenses associated with a non-performing asset over

and above the accounting loss.

Credit risk can be further sub-categorized on the basis of reasons of default. For instance the

default could be due to country in which there is exposure or problems in settlement of a

transaction.

Credit risk not necessarily occurs in isolation. The same source that endangers credit risk for the

institution may also expose it to other risk. For instance a bad portfolio may attract liquidity

problem.

As a result of these risks, bankers must exercise discretion in maintaining a sensible distribution

of liquidity in assets, and also conduct a proper evaluation of the default risks associated with

borrowers. In general, protection against credit risks involves maintaining high credit standards,

appropriate diversification, good knowledge of the borrowers affairs and accurate monitoring

and collection procedures.


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CREDIT RISK MANAGEMENT

PHILOSOPHY BEHIND CREDIT RISK MANAGEMENT IS:

HIGHER THE RISK, HIGHER THE EXPECTED REWARD

In general, credit risk management for loans involves three main principles:

Selection

Limitation

Diversification.

First of all, selection means banks have to choose carefully those to whom they will lend money.

The processing of credit applications is conducted by credit officers or credit committees, and a

banks delegation rules specify responsibility for credit decisions.

Limitation refers to the way that banks set credit limits at various levels. Limit systems clearly

establish maximum amounts that can be lent to specific individuals or groups. Loans are also

classified by size and limitations are put on the proportion of large loans to total lending. Banks

also have to observe maximum risk assets to total assets, and should hold a minimum proportion

of assets, such as cash and government securities, whose credit risk is negligible.

Credit management has to be diversified. Banks must spread their business over different types

of borrower, different economic sectors and geographical regions, in order to avoid excessive

concentration of credit risk problems. Large banks, therefore, have an advantage in this respect.

The long-standing existence of the above procedures within banks is insufficient to address all

credit risk problems. For example, the amount of a potential loss is uncertain since outstanding

balances at the time of default are not known in advance. The size of the commitment is not

sufficient to measure the risk, since there are both quantity and quality dimensions to consider.


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The more diversified a banking group is, the more intricate systems it would need, to

protect itself from a wide variety of risks. These include the routine operational risks applicable

to any commercial concern, the business risks to its commercial borrowers, the economic and

political risks associated with the countries in which it operates, and the commercial and the

reputational risks concomitant with a failure to comply with the increasingly stringent legislation

and regulations surrounding financial services business in many territories. Comprehensive risk

identification and assessment are therefore very essential to establishing the health of any

counterparty.

Credit risk management enables banks to identify, assess, manage proactively, and

optimise their credit risk at an individual level or at an entity level or at the level of a

country. Given the fast changing, dynamic world scenario experiencing the pressures of

globalisation, liberalization, consolidation and disintermediation, it is important that banks have

a robust credit risk management policies and procedures which is sensitive and responsive to

these changes.

The quality of the credit risk management function will be the key driver of the changes

to the level of shareholder return. Low loan loss banks stage a quicker share price recovery than

their peers, and in a credit downturn, the market rewards the banks with the best credit

performance with a moderate price decline relative to their peers.

FACTORS ON WHICH CREDIT RISK DEPENDS

The credit risk depends on both internal and external factors.

EXTERNAL FACTORS

The external factors are:

The state of the economy

Swings in commodity prices and equity prices

Foreign exchange rates and


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Interest rates, etc.

INTERNAL FACTORS

The internal factors are:

Deficiencies in loan policies and administration of loan portfolio which would cover

weaknesses in the area of prudential credit concentration limits,

Appraisal of borrowers' financial position

Excessive dependence on collaterals and inadequate risk pricing,

Absence of loan review mechanism and post sanction surveillance, etc.

Such risks may extend beyond the conventional credit products such as loans and letters of credit

and appear in more complicated, less conventional forms, such as credit derivatives or tranches

of securitised assets.

MEASURING CREDIT RISK.

The measurement of credit risk is of vital importance in credit risk management.

A number of qualitative and quantitative techniques to measure risk inherent in credit portfolio

are evolving. To start with, banks should establish a credit risk rating framework across all type

of credit activities. Among other things, the rating framework may, incorporate:

1. Business Risk

Industry Characteristics

Competitive Position (e.g. marketing/technological edge)

Management


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2. Financial Risk

Financial condition

Profitability

Capital Structure

Present and future Cash flows

PRINCIPLES FOR THE MANAGEMENT OF CREDIT RISK

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. This experience is common in both G-10 and non-G-

10 countries.

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


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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. The Basel Committee is issuing this document in

order to encourage banking supervisors globally to promote sound practices for managing credit

risk. 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, all of which have been addressed in other recent Basel Committee documents.

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, all members of the Basel Committee agree that

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. Forsmaller 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.


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7. The Committee stipulates in Sections II through VI of the paper, principles for banking

supervisory authorities to apply in assessing bank's credit risk management systems. In addition,

the appendix provides an overview of credit problems commonly seen by supervisors.

8. 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.

APPROACHES TO CREDIT RISK MANAGEMENT

The Basel Committee has proposed two approaches for estimating regulatory capital, that is;

1. Standardised Approach

2. Internal Rating Based (IRB) Approach

1. THE STANDARDISED APPROACH TO CREDIT RISK

Under the Standardised Approach, the committee desires neither to produce net increase nor a

net decrease, on an average, in minimum regulatory capital, even after accounting for operational

risk.

Under the Standardised Approach, preferential risk weights in the range of 0, 20, 50, 100 and

150 percent would be assigned on the basis of external credit assessments.

Standardised approach to credit risk in Basel II:


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The minimum capital requirements for the corporate, interbank and sovereign loan portfolios of

a representative bank in each EMU country are evaluated by means of Monte-Carlo simulations

depending on the credit rating agencies chosen by the bank to risk-weight its exposures.

Three main results emerge from the analysis.

First, although the use of different combinations of credit rating agencies leads to

significant differences in minimum capital requirements, these differences never exceed

10% of banks regulatory capital for loans to corporates, banks and sovereigns on average

in the EMU.

Second, the standardised approach provides a small regulatory capital incentive for banks

to use several credit rating agencies to risk-weight their exposures.

Third, the minimum capital requirements for the corporate, interbank and sovereign loan

portfolios of EMU banks will be higher in Basel II than in Basel I. The incentive for

banks to engage in regulatory arbitrage in the standardised approach to credit risk is

limited.

Objectives of the Standardised Approach

The standardised approach is the simplest of the three broad approaches to credit

risk. The other two approaches are based on banks internal rating systems

The standardised approach aligns regulatory capital requirements more closely with the key

elements of banking risk by introducing a wider differentiation of risk weights and a wider

recognition of credit risk mitigation techniques, while avoiding excessive complexity.

Accordingly, the standardised approach should produce capital ratios more in line with the

actual economic risks that banks are facing, compared to the present Accord. This should

improve the incentives for banks to enhance the risk measurement and management

capabilities and should also reduce the incentives for regulatory capital arbitrage.

The Risk Weights in the Standardised Approach:


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Along the lines of the proposals in the consultative paper to the new capital

adequacy framework issued in June 1999,1 the risk weighted assets in the standardized

approach will continue to be calculated as the product of the amount of exposures and

supervisory determined risk weights. As in the current Accord, the risk weights will be

determined by the category of the borrower: sovereign, bank, or corporate. Unlike in the

current Accord, there will be no distinction on the sovereign risk weighting depending on

whether or not the sovereign is a member of the Organisation for Economic Coordination.

2. INTERNAL RATING BASED(IRB) APPROACH

Under the IRB Approach, the committees ultimate goals are to ensure that the overall level of

regulatory capital is sufficient to address the underlying credit risks and also provide capital

incentives relative to the standardized approach, that is, a reduction in the risk weighted assets of

2 to 3 percent (foundation IRB approach) and 90 percent of the capital requirement under the

foundation approach for the advanced IRB approach to encourage banks to adopt IRB approach

for providing capital.

NOTE -Minimum Capital to Risk-weighted Assets Ratio (CRAR) should be 9 %.

Need to have: rating models have to be

predictive (accurate ratings, significant discrimination between risk segments)

reliable (stable performance, consistent ratings)

developed quickly (volume!), consistently and safely

analysed, monitored and back-tested

combined with human judgment

massively documented.


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Nice to have: rating models have to be

easily taken into production, without any IT or other bottleneck

easily integrated in all relevant processes and applications (also in real-time orindirect channels)

easily (re-)used in marketing and sales processes

easily and safely managed, updated and replaced.

CHAPTER -3

CREDIT RISK MANAGEMENT IN PNB

PNB..the name you can BANK upon

PROFILE

With over 72 million satisfied customers and 5937 domestic branches, PNB has continued to

retain its leadership position amongst the nationalized banks. The Bank enjoys strong

fundamentals, large franchise value and good brand image. Over the years PNB has remained

fully committed to its guiding principles of sound and prudent banking irrespective of conditions.

Bank has been earning many laurels and accolades in recognition to its service towards doing

good to society, technology usage and on its overall performance.

Some of the major awards won by the Bank are the Best Bank Award, Most Socially

Responsive Bank by Business World-PwC, Most Productive Public Sector Bank, Golden

Peacock Awards by Institute of Directors, etc. Besides, the Bank is ranked 26th amongst FE

500 Indias Finest Companies, 26th amongst the Top 500 India's Largest Corporations by


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Fortune 500 India. The Banker ranked PNB on 186th position in 2011, improving from 257th

position a year before. PNB ranked 668th amongst 2000 Global Giants as per the Forbes and

170th in 2012 improving from 195th in 2011 in Top 500 Most Valuable Banking Brands by Brand

Finance Banking 500. India Inc Top 100 Most Powerful CEOs for the year 2012, Shri K.R.

Kamath, CMD, PNB, adjudged Most Powerful amongst the Nationalised Banks in India, with

overall rank at 50 by Economic Times. Bank has also been ranked 26th amongst India Top

Companies as per ET 500 and 25th amongst the Top 50 most valuable corporate brand by

Brand Finance-ET.

Since its humble beginning in 1895 with the distinction of being the first Swadeshi Bank to have

been started with Indian capital, Punjab National Bank has continuously strived for growth in

business which at the end of June 2012 amounted to Rs.6,79,823 crore. PNB is the largest

nationalised Bank in the country in terms of Branch Network, Total Business, Advances,

Operating Profit and Low Cost CASA Deposits. The CASA deposits share to the Total

Deposits of the Bank was at 35.6% as on June 2012. Bank achieved a Net Profit of ` 1246 crore

during the Q1 FY13. Bank also has a strong capital base with Capital Adequacy Ratio of

12.57% as on June12 as per Basel II with Tier I and Tier II capital ratio at 9.33% and 3.24%

respectively.

The Bank is offering all the technology enabled services to its customers ranging from Mobile

Banking, Call Centre, Internet Banking, on line booking of rail tickets, payment of utilities bills,

booking of airline tickets to SMS alerts and Mobile Banking services to keep them updated

about their financial transactions at all time. Towards developing a cost effective alternative

channels of delivery, the Bank with more than 6050 ATMs has the largest ATM network

amongst Nationalized Banks. ATM Network of the Bank provides other value added services

such as Funds Transfer, Bill Payments and mobile registration for generation of SMS alerts;

Direct Tax Payment, request for stop payment of cheques, etc. are also provided to the

cardholders.

CREDIT RISK MANAGMENET IN PNB


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The credit risk rating system provides a common language and uniformframework across bank for assessing credit risk. The system enables the bank toevaluate and track risk on individual obligors on a continuing basis. And most

importantly, it enables banks to track and manage risk on portfolio basis also.In order to create and stabilize robust credit risk management system, bank has beencontinuously monitoring the ratings and their migration.To provide a standard definition and benchmarks under the credit risk rating system,seven rating grades for performing loans have been specified.

According to PNB :

Any amount due to the bank under any credit facility is overdue if it is not paid on the

due date fixed by the bank. Further, an impaired asset is a loan or an advance where:

(i) interest and/or installment of principal remains overdue for a period of more than 90

days in respect of a term loan.


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(ii) the account remains out of order in respect of an overdraft/cash credit for a period of

more than 90 days.

Account will be treated out of order, if:

- the outstanding balance remains continuously in excess of the limit/drawing power.

- in cases where the outstanding balance in the principal operating account is less than

the sanctioned limit/drawing power, but there are no credits continuously for 90 days as

on the date of balance sheet or credits are not enough to cover the interest debited

during the same period

(iii) in case of bills purchased & discounted, the bill remains overdue for a period of

more than 90 days

(iv) the installment or principal or interest thereon remains overdue for two crop seasons

for short duration and the installment of principal or interest thereon remains overdue for

one crop season for long duration crops.

Credit approving authority, prudential exposure limits, industry exposure limits, credit

risk rating system, risk based pricing and loan review mechanisms are the tools used by

the bank for credit risk management. All these tools have been defined in the Credit

Management & Risk Policy of the bank. At the macro level, policy document is an

embodiment of the Banks approach to understand, measure and manage the credit riskand aims at ensuring sustained growth of healthy loan portfolio while dispensing the

credit and managing the risk. Credit risk is measured through sophisticated models,

which are regularly tested for their predictive ability as per best practices.

CREDIT RISK RATING SYSTEM


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PNB TRAC is an internally developed centralised web based software application forassessment of credit risk in a borrowal account. It incorporates all rating models on asingle platform and enables on line rating of borrowers. The data is stored in acentralizedserver, which makes the data collection and storage easier.Preventive Monitoring System is put in place to track the changes in the account based

on the adverse signals observed in the operations of account and select performanceparameters. It ranks accounts on a scale of 1-10.

CREDIT RATING MODEL AT PNB:

Various Credit risk rating models are used to rate the borrower on a scale of sevenrating grades.

1. Large Corporate Borrowers ( Bank exposure more than Rs.15 crore)2. Mid Corporate Borrowers ( Bank exposure from Rs.5 crore to less than Rs.15

crore)3. Small Borrowers -- I(Bank exposure from Rs.20 lacs to less than Rs.5 crore)4. Small Borrowers II ( Bank exposure from Rs.2 lacs to less than Rs.20 Lacs)5. NBFCs Rating Model6. New Projects Rating Model7. Banks and Financial Institutions Rating Model8. New Business Rating Model9. Half Yearly Review of Rating


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10.Facility Rating Model11.Industry Exposure limits12.Segment wise Retail Rating

To ensure the quality and consistency of credit risk ratings, vetting of the rating is also

done.The credit risk rating of a borrower becomes due for updation after the expiry of 12months from the month of previous rating. Thus fresh rating in the accounts isconducted annually.Out of the seven rating grades, B and above are treated as Investment Grade. Theaverage annual default rates in these rating grades is under 2 %.

CREDIT RISK MANAGEMENT THROUGH RATING SYSTEM

The Bank has in place a multi-tier credit approving system. In order to enable the fieldfunctionaries to take expeditious decisions and also to attract quality accounts, higherloaning powers have been vested with various level of officials for better ratedborrowers.No fresh exposure is taken in 'C'& 'D' rated accounts. However, ManagementCommittee of the Board is empowered to consider proposals in respect of freshexposure in such accounts.

Adhoc/additional/enhancement facility in 'C'& 'D' rated accounts is to be sanctioned byauthority not below the level of Zonal head and in exception circumstances.

Exposure is not taken in industries considered unfavorable. However in case the Zonalhead finds a bankable proposal, then such sanction is given only by the Board of thebank.The pricing of the facility is linked with credit risk rating in case of rated accounts.Interest rate is charged depending upon the quality of asset. Better-rated accounts arepriced at lower rate of interest as compared to low rated accounts.Where the borrowers like to know about the rationale of their rating, they are informedabout their weak areas such as Financial, Business/Industry, Management or Conductof Accounts and the steps they can take to improve their rating.


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AVERAGE ANNUAL DEFAULT RATES UPTO 31.3.2012

COMPARATIVE AVERAGE ANNUAL DEFAULT RATE


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Bank initiates necessary actions on accounts showing early warning signals throughPMS or having C or D (high) risk-rating.

CREDIT RISK ASSESSMENT SOFTWARE MODEL(RAM)

PNB also uses RAM for managing credit risk faced by it.

RAM is internal rating software designed to assist a Bank or financial institutionaddress issues raised by the Internal Rating based approach of the New Basel Accord(Basel II).

RAM is an easy to use Internal Rating software installed in the central server of an

institution and accessible throughout the organization. RAM guides a user to assess thecredit risk of various categories of borrowers such as Large Corporates, Small andMedium Enterprises, Traders, Banks, Infrastructure Companies, Green-Field Projects,Banks, Non-Banking Financial Companies, Capital Market Brokers, etc

CRISIL by virtue of being the fourth largest rating agency in the world has over theyears been very successful in rating companies belonging to various categories and hasbeen able to predict with a high degree of probability, the default risk of suchcompanies. It is this rating experience, which is encapsulated in RAM.

RAM is a highly parametric software which can be easily customized to the userenvironment right from Workflows, user-interfaces as well as various reports for

Management Information System.

RAM is also capable of incorporating any number of rating models through a VisualBasic based client interface.

RAM follows a pre-designated (customizable) workflow approach to credit riskassessment and begins with assessment of "Financial Risk", "Industry Risk", "BusinessRisk" and "Management Risk". It then follows a "Christmas Tree" approach drilling downto assessment of various minute factors. Once the credit risk assessment is done by the

first level officer, the assessment can either be approved or modified at various higherlevels in the risk hierarchy. Audit trails capture all modifications/changes/comments ateach level. The final rating or grading is based on the weighted average score of allassessed factors.

Powerful features like Financial Analysis Tool (FAT), Facility Risk Rating module (FRR)and an intelligent feature called 'Virtual Guide' which guides an analyst or officer toprobe deeper into the account being rated. These features and other such, make RAMa complete Credit Risk Management Software which performs much more than just


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rating the obligor and enables the Risk Manager to analyze the credit risk take a 360degree view of the account being rated.

RAM is a web-based application, available on a Java 2 Enterprise Edition (J2EE)framework, which is platform independent. The database is ORACLE 9i.

Data Analysis:

The total gross credit risk exposures:

( Rs. In Crore)

Particular Mar-13 Mar-12

Fund Based 315244 297892.6

Non Fund Based 69735.66 76531.91

The geographic distribution of exposures is:

( Rs. In Crore )

Overseas Domestic

Particular Mar-13 Mar-12 Mar-13 Mar-12

Fund Based 32121.14 21784.83 283122.9 276107.7

Non Fund Based 4843.68 3161.48 64891.98 73370.43

Gross NPA : ( Rs. In Crore)

Category Mar-13 Mar-12

Sub Standard 6670.52 5576.41Doubtful -1 3353.6 1766.81

Doubtful -2 1683.32 726.11

Doubtful -3 362.64 293.34

Loss 1395.71 356.95

Total 13465.79 8719.62


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Net NPA ( Rs. In Crore)


Net NPA 7236.5 4454.23

NPA Ratios:

NPA Ratios Mar-13 Mar-12

% of gross NPA to Gross Advances 4.27% 2.93%

% of net NPA to Net advances 2.93% 1.52%

Capital Adequacy (Basel II) (Rs. Crore)


Capital Fund

Tier I 27080 31664

Tier II 9773 9608

Total ( Tier I + Tier II) 36853 41273Risk Weighted Assets 291919 324380

Capital Adequacy Ratio(%) 12.63% 12.72%

Tier I (%) 9.28% 9.76%

Tier II (%) 3.35% 2.96%

The CRAR of PNB has increased from 12.63 % in March 12 to 12.72 % in March 13

which means that there is an increase in banks capital as compared to its risk weighted

assets which is good for the bank.

Due to improved recovery effort, Bank has been able to bring down theGross and Net NPA level on sequential quarter basis.


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Gross NPAs increased to Rs 13466 crore in Mar13 from Rs 8716 crore inMarch12 Net NPAs has increased to Rs 7237 crore in Mar13 from Rs 4454 crore inMarch12

CHAPTER 4

CREDIT RISK MANAGEMENT OF ICICI BANK

Profile

ICICI Bank is India's second-largest bank with total assets of Rs. 4,736.47 billion (US$ 93 billion) at

March 31, 2012 and profit after tax Rs. 64.65 billion (US$ 1,271 million) for the year ended March 31,

2012. The Bank has a network of 3,130 branches and 10,486 ATMs in India, and has a presence in 19countries, including India.

ICICI Bank offers a wide range of banking products and financial services to corporate and retail

customers through a variety of delivery channels and through its specialised subsidiaries in the areas of

investment banking, life and non-life insurance, venture capital and asset management.

The Bank currently has subsidiaries in the United Kingdom, Russia and Canada, branches in United

States, Singapore, Bahrain, Hong Kong, Sri Lanka, Qatar and Dubai International Finance Centre and

representative offices in United Arab Emirates, China, South Africa, Bangladesh, Thailand, Malaysia and

Indonesia. Its UK subsidiary has established branches in Belgium and Germany.

ICICI Bank's equity shares are listed in India on Bombay Stock Exchange and the National Stock

Exchange of India Limited and its American Depositary Receipts (ADRs) are listed on the New York


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Stock Exchange (NYSE).

CREDIT RISK MANAGEMENT IN ICICI BANK

ICICI Bank is primarily exposed to credit risk, market risk, liquidity risk, operational riskand legal risk.

ICICI Bank has three centralized groups:

the Global Risk Management Group

the Compliance Group and

the Internal Audit Group ;

with a mandate to identify, assess and monitor all of ICICI Bank's principal risks in

accordance with well-defined policies and procedures.

The Global Risk Management Group is further organized into:

the Global Credit Risk Management Group

the Global Market and Operational Risk Management Group.

In addition, theCredit and Treasury Middle Office Groups and the Global Operations Group monitoroperational adherence to regulations, policies and internal approvals.

The Global Risk Management Group, Middle Office Groups and Global

Operations Group report to a whole time Director.

The Compliance Group reports to the Audit Committee of the board of directors

and the Managing Director and CEO.

The Internal Audit Group reports to the Audit Committee of the board of directors.

These groups are independent of the business units and coordinate withrepresentatives of the business units to implement ICICI Bank's risk managementmethodologies.


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Committees of the board of directors have been constituted to oversee the various riskmanagement activities. The Audit Committee provides direction to and also monitors thequality of the internal audit function.

The Risk Committee reviews risk management policies in relation to various risks

including portfolio, liquidity, interest rate, investment policies and strategy, andregulatory and compliance issues in relation thereto. The Credit Committee reviewsdevelopments in key industrialsectors and our exposure to these sectors as wellas to large borrower accounts.The Asset Liability Management Committee is responsible for managing the balancesheet and reviewing the asset-liability position to manage ICICI Bank's liquidity andmarket risk exposureThe Compliance Group is responsible for the regulatory and anti-money launderingcompliance of ICICI Bank.

Credit risk, the most significant risk faced by ICICI Bank, is managed by the Credit RiskCompliance & Audit Department (CRC & AD) which evaluates risk at the transaction

level as well as in the portfolio context. The industry analysts of the department monitorall major sectors and evolve a sectoral outlook, which is an important input to theportfolio planning process. The department has done detailed studies on defaultpatterns of loans and prediction of defaults in the Indian context. Risk-based pricing ofloans has been introduced.

The functions of this department include:

Review of Credit Origination & Monitoring

- Credit rating of companies/structures

- Default risk & loan pricing

- Review of industry sectors

- Review of large exposures in industries/ corporate groups/ companies

- Ensure Monitoring and follow-up by building appropriate systems such as CAS

Design appropriate credit processes, operating policies & procedures

Portfolio monitoring

- Methodology to measure portfolio risk

- Credit Risk Information System (CRIS)

Focused attention to structured financing deals

- Pricing, New Product Approval Policy, Monitoring

Monitor adherence to credit policies of RBI

During the year, the department has been instrumental in reorienting the creditprocesses, including delegation of powers and creation of suitable control points in thecredit delivery process with the objective of improving customer response time andenhancing the effectiveness of the asset creation and monitoring activities.

Availability of information on a real time basis is an important requisite for sound riskmanagement. To aid its interaction with the strategic business units, and provide real


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time information on credit risk, the CRC & AD has implemented a sophisticatedinformation system, namely the Credit Risk Information System. In addition, the CRC& AD has designed a web-based system to render information on various aspects of thecredit portfolio of ICICI Bank.

ICICI Bank also uses RAM to manage its credit risk.

1. Credit Risk Assessment Procedures for Corporate Loans

In order to assess the credit risk associated with any financing proposal, ICICI Bankassesses a variety of risks relating to the borrower and the relevant industry. Borrowerrisk is evaluated by considering:

the financial position of the borrower by analyzing the quality of its financialstatements, its past financialperformance, its financial flexibility in terms of ability to raise capital and its cash flowadequacy; the borrower's relative market position and operating efficiency; and the quality of management by analyzing their track record, payment record andfinancial conservatism.

Industry risk is evaluated by considering: certain industry characteristics, such as the importance of the industry to the economy,its growth outlook,

cyclicality and government policies relating to the industry; the competitiveness of the industry; and certain industry financials, including return on capital employed, operating margins andearnings stability.

After conducting an analysis of a specific borrower's risk, the Global Credit RiskManagement Group assigns a credit rating to the borrower. ICICI Bank has a scale of10 ratings ranging from AAA to B, an additional default rating of D and short-termratings from S1 to S8. Credit rating is a critical input for the credit approval process.

ICICI Bank determines the desired credit risk spread over its cost of funds by

considering the borrower's credit rating and the default pattern corresponding to thecredit rating. Every proposal for a financing facility is prepared by the relevant businessunit and reviewed by the appropriate industry specialists in the Global Credit Risk

Management Group before being submitted for approval to the appropriate approvalauthority. The approval process for non-fund facilities is similar to that for fund-basedfacilities. The credit rating for every borrower is reviewed at least annually. ICICI Bankalso reviews the ratings of all borrowers in a particular industry upon the occurrence of


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any significant event impacting that industry.

Working capital loans are generally approved for a period of 12 months. At the end ofthe 12 month validity period (18 months in case of borrowers rated AA- and above),ICICI Bank reviews the loan arrangement and the credit rating of the borrower and

takes a decision on continuation of the arrangement and changes in the loan covenantsas may be necessary.

2. Project Finance Procedures

3. Corporate Finance Procedures

4. Working Capital Finance Procedures5. Credit Monitoring Procedures for Corporate Loans -The Credit Middle OfficeGroup monitors compliance with the terms and conditions for credit facilities prior todisbursement. It also reviews the completeness of documentation, creation of security

and insurance policies for assets financed. All borrower accounts are reviewed at leastonce a year.

Retail Loan Procedures

Small Enterprises Loan Procedures

Rural and Agricultural Loan Procedures

Credit Approval Authorities

Data analysis:

CREDIT RATINGS

ICICI Banks credit ratings by various credit rating agencies at March 31, 2013 are givenbelow:

Agency India ICICI Bank Limited

Senior Debt & Deposit Ratings of ICICI Bank Limited

Moody's FC - Long Term Baa2 Baa2

S & PFC - Long Term BBB- BBB-

FC - Short Term A-3 A-3JCRA FC - Long Term BBB+ BBB+

CARE

Rupee - Long Term - Care - AAA

Fixed Deposits - Care - AAA

Rupee - Short Term - PR1+


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ICRA

Rupee - Long Term - LAAA

Term Deposit; - MAAA

Rupee - Short Term - A1+

Classification of gross assets (net of write-offs and unpaid interest on

non-performing assets).

( Rs. In billion)


Sub Standard 18.72 14.49

Doubtful -1 67.91 73.35

Loss 9.84 7.79Total 96.47 95.63

(1) Includes loans, debentures, lease receivables and excludes preference shares.(2) All amounts have been rounded off to the nearest Rs. 10.0 million.

NON-PERFORMING ASSETS

Year Gross NPA Net NPANet customerassets

% of NPA tonet customerasset

Mar-13 96.47 22.34 3517.62 0.64%

Mar-12 95.63 18.94 3059.84 0.62%

(1) Net of write-offs and interest suspense.(2) Excludes preference shares.(3) Customer assets include advances and credit substitutes like debentures andbonds.(4) All amounts have been rounded off to the nearest Rs. 10.0 million.

CAPITAL ADEQUACY


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Rs. In billion


Capital Fund

Tier I 505.18 565.62

Tier II 232.95 262.74

Total ( Tier I + Tier II) 738.13 828.36

Risk weighted Assets 3,985.86 4419.44


Tier I (%) 12.37% 12.80%

Tier II (%) 5.84% 5.94%

During fiscal 2013, capital funds (net of deductions) increased by ` 90.23 billion from `738.13 billionat March 31, 2012 to ` 828.36 billion at March 31, 2013. The increase in the capital fundswas dueto accretion to retained earnings, issuance of lower Tier-2 capital instruments, lowerdeduction fromcapital funds on account of securitisation exposures and repatriation of capital from anoverseas bankingsubsidiary.

Credit risk RWA increased by ` 426.08 billion from ` 3,468.74 billion at March 31, 2012 to `3,894.82 billion at March 31, 2013 primarily due to increase of ` 369.53 billion in RWA foron-balance sheet exposures, offset, in part, by decrease of ` 56.55 billion in RWA for off-balance sheet credit exposures.


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CHAPTER -5

CREDIT RISK MANAGEMENT IN CANARA BANK

Profile

Canara Bank occupies a premier position in the comity of Indian banks. With an unbroken record

of profits since its inception, Canara Bank has several firsts to its credit. These include:

Launching of Inter-City ATM Network

Obtaining ISO Certification for a Branch

Articulation of Good Banking Banks Citizen Charter

Commissioning of Exclusive Mahila Banking Branch

Launching of Exclusive Subsidiary for IT Consultancy


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Issuing credit card for farmers

Providing Agricultural Consultancy Services

Over the years, the Bank has been scaling up its market position to emerge as a major 'Financial

Conglomerate' with as many as nine subsidiaries/sponsored institutions/joint ventures in India

and abroad. As at March 2013, the Bank has further expanded its domestic presence, with 3723

branches spread across all geographical segments. Keeping customer convenience at the

forefront, the Bank provides a wide array of alternative delivery channels that include over 3526

ATMs, covering 1296 centres. Several IT initiatives have been undertaken during the year,

which include Funds Transfer through Interbank Mobile Payment Services (IMPS) in ATMs,

ASBA facility to net banking users, E-filing of tax returns and facility for viewing details of tax

deducted at source, Terminal at select branches for customers to use net banking, SMS/e-mail

alerts for all transactions done through ATM, net banking, POS, mobile banking, online

payments irrespective of amounts, online loan applications and tracking facility, generation of

automatic pass sheets through e-mail and automatic renewal of term deposits. Under

Government business, the Bank has implemented internet based application for UGC Maulana

Azad National Fellowship Scheme, Web portal for National Scheme for Girl Child Secondary

Education, Electronic Accounting Systems of e-Receipts-Customs (EASeR-C) for collection of

customs duty and e-payment of commercial taxes module for UP, Karnataka, Delhi and TamilNadu.

RISK MANAGEMENT IN CANARA BANK

The Banks policies assume moderate risk appetite and healthy balance between risk and return.

The primary risk management goals are to maximize value for share holders within acceptable

parameters and adequately addressing the requirements of regulatory authorities, depositors and

other stakeholders. The guiding principles in risk management of the Bank comprise of

Compliance with regulatory and legal requirements, achieving a balance between risk and return,

ensuring independence of risk functions, and aligning risk management and business objectives.

The Credit Risk Management process of the Bank is driven by a strong organizational culture


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and sound operating procedures, involving corporate values, attitudes, competencies,

employment of business intelligence tools, internal control culture, effective internal reporting

and contingency planning.

The overall objectives of Bank's Credit Risk Management are to:

Ensure credit growth, both qualitatively and quantitatively that would be sectorally

balanced, diversified with optimum dispersal of risk.

Ensure adherence to regulatory prudential norms on exposures and portfolios.

Adequately pricing various risks in the credit exposure.

Form part of an integrated system of risk management encompassing identification,measurement, monitoring and control.

Strategies and processes:

In order to realize the above objectives of Credit Risk Management, the Bank prescribes various

methods for Credit Risk identification, measurement, grading and aggregation techniques,

monitoring and reporting, risk control / mitigation techniques and management of problem

loans / credits. The Bank has also defined target markets, risk acceptance criteria, credit approval

authorities, and guidelines on credit origination / maintenance procedures.

The strategies are framed keeping in view various measures for Credit Risk Mitigation, which

includes identification of thrust areas and target markets, fixing of exposure ceiling based on

regulatory guidelines and risk appetite of the Bank, minimizing concentration Risk, and pricing

based on rating.

Bank from time to time would identify the potential and productive sectors for lending, based on

the performance of the segments and demands of the economy. The Bank restricts its exposuresin sectors which do not have growth potentials, based on the Banks evaluation of industries /

sectors based on the prevailing economic scenario prospects etc.

The operational processes and systems of the Bank relating to credit are framed on sound Credit

Risk Management Principles and are subjected to periodical review.


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The Bank has comprehensive credit risk identification processes as part of due diligence on

credit proposals.

The structure and organization of the Credit Risk Management Function: Credit Risk

Management Structure in the Bank is as under-

Board of Directors

Risk Management Committee of the Board (RMC)

Credit Risk Management Committee (CRMC)

General Manager-Risk Management Wing, H.O (Chief Risk Management Officer)

Credit Risk Management Department, Risk Management Wing.

The Credit Risk Management Department comprises of Credit Policy Section, CreditStatistics Section and Credit Risk Management Section. The Credit Risk Management

Section has three functional desks, the Credit Risk Management Desk, Credit Risk Rating

Desk and Industry Research Desk.

Risk Management & Credit Review Section at Circle Offices.

The scope and nature of risk reporting and / or measurement systems:

Bank has an appropriate credit risk measurement and monitoring processes. The measurement of

risk is through a pre-sanction exercise of credit risk rating and scoring models put in place by the

Bank. The Bank has well laid down guidelines for identifying the parameters under each of these

risks as also assigning weighted scores thereto and rating them on a scale of I to VII.

The Bank also has a policy in place on usage/mapping of ratings assigned by the recognized

ECAIs (External Credit Assessment Institutions) for assigning risk weights for the eligible credit

exposures as per the guidelines of the RBI on standardized approach for capital computation.The Bank has adopted Standardized Approach for entire credit portfolio for credit risk

measurement.

In Canara Bank, Risk is managed by using following tools:


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Credit Audit System to identify, analyze instances of non-compliance and rectification.

Review of loan sanctioned by each sanctioning authority by the next higher authority.

Mid Term Review of borrowal accounts beyond a certain level of exposure.

Monitoring of special watch accounts at various levels. Formation of SlippageManagement Committee at HO / Circles to monitor the accounts with exposure of ` 1Crore & above, among the list of accounts appearing in Special Watch List.

Monitoring tools like Credit Monitoring Format (web-based), Quarterly InformationSystems, Half Yearly Operation Systems, Stock Audits, Special Watch List Accounts,etc.

Credit Monitoring Officers at branches in charge of monitoring functions.

Data Analysis:

ASSET QUALITY

Mar12 Mar13

Gross NPA 4032 6260

Gross NPA Ratio (%) 1.73 2.57

Net NPA 3386 5278

Net NPA Ratio (%) 1.46 2.18

Cash Recovery 3296 4006


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Asset Quality

Parameters Mar12 MAR13

Gross Advances 233607 243936

Sub-Standard 2445 4279

Doubtful 1539 1932

Loss 48 50

Provisions for NPA 390 933

Provision Coverage

Ratio (%) 67.6 61.35

Capital Adequacy Ratio

Rs. In Crore



Tier I (%) 10.35% 9.77

Tier II (%) 3.41% 2.43%

The Bank continues to maintain strong capital position among its peers. As at

March 2013, Capital Adequacy Ratio stood at 12.40% (as against mandatory levelof 9%), witha Tier I capital ratio at 9.77% (as against mandatory level of 6%).

Adequate headroom available under both Tier-I and Tier-II options to raise capital

to support business growth momentum. Government shareholding is at 67.72%


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The Bank has strong Common Equity Capital to meet the stringent Basel III norms

during the current year and onwards.

The Bank has performed well in containing NPAs and making higher cash recoveries

in economic downturn, at a time when most banks experienced higher slippages.

The Banks gross NPA level was 6260 crore and net NPA level was 5278crore as

at March 2013.

The Banks gross NPA ratio has increased to 2.57%compared to last year of 1.73%

Net NPA ratio has also increased to 2.18% compared to last year of 1.46%

Cash Recovery during FY13 aggregated to a record 4006 crore compared to

3296 crore for FY12.

The Banks outstanding restructured portfolio at 18113 crore constituted 7.41%

for the total advances.

RATING OF CANARA BANK GIVEN BY MOODYS

.Moodys assigns a bank financial strength rating (BFSR) of D+ to Canara Bank (CB),which translates into a Base line Credit Assessment (BCA) of Baa#, reflecting thebank's important nationwide franchise and strong market position as the fourth-largestcommercial bank in India. The rating also takes into account the increasingly

competitive operating environment and the challenges the bank faces in modernizing itsoperations and processes. Although there have been some signs of revival in the Indianindustrial sector in the past few years, banks still have to contend with a high level ofcredit risk. CB's focus on retail, small and medium-sized enterprise (SM E) andagricultural lending over the past few years has helped its loan diversification,which in the past was dominated by corporate credits. The BFSR alsoencompasses the bank's strong links with corporates.

ICRA reaffirms LAAA rating to Canara Bank`s bond programs

Leading credit agency, ICRA reaffirmed the LAAA rating to the outstanding lower tier II bond

and infrastructure bond programs of Canara Bank(Canara).The rating indicates highest creditquality and the rated instruments carry the lowest credit risk.

ICRA has also reaffirmed the A1+ rating to the certificate of deposit program of Canara Bank(Q,N,C,F)* indicating highest credit quality. Instruments rated in this category carry the lowestcredit risk in the short term. Canara`s ratings factor in the implicit sovereign support enjoyed bythe bank in its role as the largest Nationalised Bank in the country, the strong brand franchise inthe corporate sector and improvement in asset quality as depicted by the declining credit costs.
http://opennewsmain%28%27/shares/company/quoteShow.php?icode=CANBANK%27)http://opennewsmain%28%27/shares/news/corporateNews.php?cSelect=5&icode=CANBANK%27)http://opennewsmain%28%27/shares/company/chartShow.php?cSelect=2&icode=CANBANK%27)http://opennewsmain%28%27/shares/company/financial.php?cSelect=3&icode=CANBANK%27)http://www.inrsymbol.in/http://www.inrsymbol.in/http://www.inrsymbol.in/http://www.inrsymbol.in/http://www.inrsymbol.in/http://opennewsmain%28%27/shares/company/quoteShow.php?icode=CANBANK%27)http://opennewsmain%28%27/shares/news/corporateNews.php?cSelect=5&icode=CANBANK%27)http://opennewsmain%28%27/shares/company/chartShow.php?cSelect=2&icode=CANBANK%27)http://opennewsmain%28%27/shares/company/financial.php?cSelect=3&icode=CANBANK%27)


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The ratings also take into account the competitive operating cost structure, given the bank`s largebranch network and the comfortable regulatory capitalisation levels and liquidity position. ICRAbelieves that the management`s efforts to reduce high cost deposits and rebalance the creditportfolio could start generating higher interest spreads over the medium term.

Meanwhile, the bank`s efforts to improve fee income levels, including revamping the operationsof subsidiaries, and the gains on its trading book could support profitability. The bank has beenmaintaining a relatively superior operating cost structure but the inevitable investments requiredto upgrade its technology platform to cover more branches under CBS (Core Banking Solution)and Basel II requirements could adversely impact the operating cost levels.

Q - Quote, N - News, C - Chart, F Financials


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CHAPTER -6

CREDIT RISK MANAGEMENT IN ALLAHABAD BANK

PROFILE

Allahabad Bank is one of the premier nationalized banks in India. It is also the oldest joint stock bank of India. It wasincorporated by a group of Europeans at Allahabad on April 24, 1865. It was the time Indian economy had startedshifting towards organized trade and business affairs. After some years in 1920, the P&O Bank brought AllahabadBank and its headquarters at Kolkata. The Allahabad bank got an entirely new identity when it was nationalized in1969 along with 13 other banks in India. Since then the Allahabad Bank had a smooth journey towards progress.Today it is one of the leading banks in India with a whooping business of over Rs.1, 00,000 crores.

As on 31st March, 2013, Allahabad Bankhas computerized all its 2260 branches includingforeign branches, 69 extension counters and 26 Zonal offices. Allahabad Bank has installed 211ATMs and to facilitate the service, Allahabad Bankcustomer can access all VISA & NFS ATMover 38,000 across the country for all sorts of transactions at free of cost. International business

ofAllahabad Bankis carried out through its 55 branches including 6 foreign branches.

The Oldest Joint Stock Bank of the Country, Allahabad Bank was founded on April 24, 1865 bya group of Europeans at Allahabad. At that juncture Organized Industry, Trade and Bankingstarted taking shape in India. Thus, the History of the Bank spread over three Centuries -Nineteenth, Twentieth and Twenty-First.

The Bank particularly focuses on the retail banking while serving all sectors of the Indianeconomy. Bank's operations for corporate and commercial customers cater to large corporatecustomers as well as to small and middle market businesses and Government entities. Corporate

and commercial products include Term Loans, Bill Discounting, Export Credit and otherbusiness credit and financing products. Also the bank offers a wide range of retail productsincluding Home Loans, Personal Loans and Automobile Loans as well as Debit Cards. Inaddition, specialised products and services to the agricultural sector also one of entity of thebank.


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CREDIT RISK MANAGEMENT IN ALLAHABAD BANK

The aim and objective of Risk Management Practice is to ensure stability and efficiency in theoperation of the Bank. While establishing the Risk Management Practice, the Bank hasadopted a comprehensive approach, align with the best practice in the Industry covering

Organizational structure, Risk Policies, Risk processes, Risk Mitigation and Risk audit, all

in order to identify, manage, monitor and control various categories of risks. The Bank hasalso adopted an integrated approach at the committee level to put in place a robust Risk

Management System.

The Bank is updating / fine-tuning systems and procedures, technological capabilities,

Risk structure etc. to meet the requirements of the guidelines. The Bank proposes tomigrate to the final guidelines given by the RBI for embracing Basel II norms. TheBank initiated parallel run exercise in line with RBI guidelines

Improvement in Risk Management practices has been integrated with the betterment

of asset quality through introduction of proper credit management practices.

Centralised Credit Appraisal Cells have been created at Zonal Offices with proper

networking arrangement for better processing of credit proposals and promptdecisions.

Improved credit monitoring measures have already been put in place for insulating

the Bank from future loan losses.

Allahabad Bank also uses RAM for managing its Credit Risk.

The Bank has established a structured, dynamic, proactive and integrated Credit Risk

Management System to proper identification & quantification of the credit risk associated

with the credit proposals.

The Bank has developed various risk rating module for credit risk rating. The Bank has also

devised risk rating module exclusively for SSI & SME sector.

In regard to Operational Risk, the Bank has framed policy and procedural guidelines forimplementation as per the extant guidelines of Reserve Bank of India.


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Data analysis

ASSET QUALITY

NPA Ratio Mar -13 Mar -12

(i) Gross NPA 513699 205898

(ii) Net NPA 412676 109170

(b) (i) % of Gross NPA 3.92 1.83

(ii) % Net NPA 3.19 0.98

CAPITAL ADEQUACY

Rs. In billionParticular Mar-12 Mar-13

Capital Fund

Tier I 9912.2010749

Tier II4023.02 3973

Total ( Tier I + Tier II)

13935.22 14722

Risk weighted Assets108575.27 133509

Capital Adequacy Ratio(%) 12.83 % 11.03%

Tier I (%) 9.13% 8.05%


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Tier II (%) 3.71% 2.98%

CHAPTER - 7CONCLUSION

Punjab National Bank (PNB) measures, monitors and manage credit risk for eachborrower and also at the portfolio level.It uses various techniques for this purpose like:

Credit Policy

Rating of Borrower

Models for Credit Risk Rating

Credit Risk Rating for Performing Loans

PNB TRAC for online rating of borrowers

Preventive Monitering System (PMS) for monitering conduct of borrowel A/c on

regular basis. It updates the ratings of its borrowers annually.

Credit Risk Assessment Software Model (RAM) for assessing the credit risk

faced by it.

The CRAR of PNB has increased from 12.63 % in March 12 to 12.72 % in March 13

which means that there is an increase in banks capital as compared to its risk weighted

assets which is good for the bank.

Due to improved recovery effort, Bank has been able to bring down theGross and Net NPA level on sequential quarter basis.

Gross NPAs increased to Rs 13466 crore in Mar13 from Rs 8716 crore inMarch12 Net NPAs has increased to Rs 7237 crore in Mar13 from Rs 4454 crore inMarch12


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ICICI Bank measures, monitors and manage credit risk for each borrower and also atthe portfolio level.It has made specific department for performing the various activities for credit risk

management. These departments are: Global Credit Risk Management Group

Credit Risk Compliance & Audit Department (CRC & AD) which evaluates risk at

the transaction level as well as in the portfolio context.

It used credit risk rating system and RAM for managing and assessing its credit riskrespectively.

At March 31, 2013, the gross NPAs (net of write-offs, interest suspense and derivativesincome reversal)

were ` 96.47 billion compared to ` 95.63 billion at March 31, 2012.

Net NPAs were ` 22.34 billion at March 31, 2013 compared to ` 18.94 billion at March 31,2012. The ratio of net NPAs to net customer assets increased marginally from 0.62% atMarch 31, 2012 to 0.64% at March 31, 2013.

During fiscal 2013, capital funds (net of deductions) increased by ` 90.23 billion from `738.13 billionat March 31, 2012 to ` 828.36 billion at March 31, 2013. The increase in the capital fundswas dueto accretion to retained earnings, issuance of lower Tier-2 capital instruments, lowerdeduction fromcapital funds on account of securitisation exposures and repatriation of capital from an

overseas bankingsubsidiary.

Credit risk RWA increased by ` 426.08 billion from ` 3,468.74 billion at March 31, 2012 to `3,894.82 billion at March 31, 2013 primarily due to increase of ` 369.53 billion in RWA foron-balance sheet exposures, offset, in part, by decrease of ` 56.55 billion in RWA for off-balance sheet credit exposures.

Provision coverage ratio (i.e. total provisions made against NPAs as a percentage of grossNPAs) atMarch 31, 2013 was 76.8%. At March 31, 2013, total general provision held against standardassets was` 16.24 billion compared to ` 14.80 billion at March 31, 2012.

Canara Bank also uses various techniques for managing its credit risk like:

Credit rating system

Risk based Internal Audit System

RAM

Risk Management in Indian Bank1

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