CHAPTER I - INTRODUCTION

“Journey Of Indian Banking Industry- From Closed To Liberalized System”

The face of Indian banking industry has been changing through the process of change is not yet

complete. The phenomenal growth of Indian banking , in terms of business volume, network,

staff, client-base can largely be attributed to the nationalization of major Indian banks in 1969

and the resulting socialistic banking policies. While the growth since then may appear

impressive, it is necessary to remember that the banking industry grew for more than two decade

mostly in a protected environment. The role of bank manager, irrespective if the hierarchy, was

largely confined to ensuring compliance with the guidelines of reserve bank of India in managing

banking operations. Actually, even such compliance remained more often true to the letter than

to spirit of RBI’s guidelines. The enormous growth achieved in a protected environment led to

many managers quickly ascending the hierarchy with skills which were relevant to government-

controlled , RBI-directed, socialist banking scenario.

By the mid-1980’s, it was becoming clear to the intelligent observer that Indian banking was

getting into troubled waters. However the game went on as if nothing alarming was going to

happen, until the balance of payment crisis in 1991. Along with the emergency funding from

IMF, a series of economic reforms was announced. Enter NARASIMHAN part I and II , and the

scene changed altogether. While the signals were evident much earlier when the VAGHUL

COMMITTEE recommendations were accepted for developing the money market, financial

sector reforms truly set in for the Indian banking industry from 1992.

The deregulations of interest rates and exchange rates changed the way Indian bankers have long

been used to thinking and acting. Because of these reforms banks are forced to take new

service lines, designing innovative products and expanding business horizon into new areas

hitherto unknown to traditional bankers. In the process banks are now exposes to more risks.

The vulnerability to risks- both internal and external- has increased. In such an environment,

pregnant with uncertainties, the only way is to counter business risk is to improve the requisite

1

skills for operating in such a volatility. New products and financial instruments have made

inroads into the banking business vocabulary and made it imperative for banks to acquire new

skills and improve their knowledge-base, particularly in new areas such as derivatives, futures,

risk management, asset liability management etc.

A lot of importance is being attached by the RESERVE BANK OF INDIA to the area of risk

management. Banks have been directed to focus on the area of risk management because in

today’s environment, there is a strong need for the bankers to be aware of the risks which they

are exposed , and the tolls available for managing such risks, assumes significance.

2

State Bank of India

State Bank of India (SBI), Mumbai Main Branch.

INTRODUCTION:

State Bank of India (SBI) is the largest state-owned banking and financial services company in

India, by almost every parameter - revenues, profits, assets, market capitalization, etc. The bank

traces its ancestry to British India, through the Imperial Bank of India, to the founding in 1806 of

the Bank of Calcutta, making it the oldest commercial bank in the Indian Subcontinent. The

Government of India nationalized the Imperial Bank of India in 1955, with the Reserve Bank of

India taking a 60% stake, and renamed it the State Bank of India. In 2008, the Government took

over the stake held by the Reserve Bank of India.

SBI provides a range of banking products through its vast network of branches in India and

overseas, including products aimed at NRIs. The State Bank Group, with over 16,000 branches,

has the largest banking branch network in India. With an asset base of $260 billion and $195

billion in deposits, it is a regional banking behemoth. It has a market share among Indian

commercial banks of about 20% in deposits and advances, and SBI accounts for almost one-fifth

of the nation's loans.

3

SBI has tried to reduce over-staffing by computerizing operations and "golden handshake"

schemes that led to a flight of its best and brightest managers. These managers took the

retirement allowances and then went on to become senior managers in new private sector banks.

The State bank of India is the 29th most

reputed company in the world according

to Forbes.

State Bank of India is the largest of the

Big Four Banks of India, along with

ICICI Bank, Axis Bank and HDFC Bank

— its main competitors.

4

State Bank of India

Type Public Sector Bank

IndustryBanking

Financial services

Founded July 1, 1955

Headquarters Mumbai, Maharashtra, India

Key peopleO. P. Bhatt

(Chairman)

Products

Investment Banking

Consumer Banking

Commercial Banking

Retail Banking

Private Banking

Asset Management

Pensions

Mortgages

Credit Cards

Revenue ▲ $29.242 billion (2011)

Profit ▲ $3.573 billion (2011)

Total assets ▲ $345.043 billion (2011)

Total equity ▲ $18.712 billion (2011)

Owner(s) Government of India

Employees 205,997 (2011)

History:

The roots of the State Bank of India rest in the first decade of 19th century, when the Bank of

Calcutta, later renamed the Bank of Bengal, was established on 2 June 1806. The Bank of Bengal

and two other Presidency banks, namely, the Bank of Bombay (incorporated on 15 April 1840)

and the Bank of Madras (incorporated on 1 July 1843). All three Presidency banks were

incorporated as joint stock companies, and were the result of the royal charters. These three

banks received the exclusive right to issue paper currency in 1861 with the Paper Currency Act,

a right they retained until the formation of the Reserve Bank of India. The Presidency banks

amalgamated on 27 January 1921, and the reorganized banking entity took as its name Imperial

Bank of India. The Imperial Bank of India continued to remain a joint stock company.

Pursuant to the provisions of the State Bank of India Act (1955), the Reserve Bank of India,

which is India's central bank, acquired a controlling interest in the Imperial Bank of India. On 30

April 1955 the Imperial Bank of India became the State Bank of India. The Govt. of India

recently acquired the Reserve Bank of India's stake in SBI so as to remove any conflict of

interest because the RBI is the country's banking regulatory authority.

5

Offices of the Bank of Bengal

In 1959 the Government passed the State Bank of India (Subsidiary Banks) Act, enabling the

State Bank of India to take over eight former State-associated banks as its subsidiaries. On

September 13, 2008, State Bank of Saurashtra, one of its Associate Banks, merged with State

Bank of India.

SBI has acquired local banks in rescues. For instance, in 1985, it acquired Bank of Cochin in

Kerala, which had 120 branches. SBI was the acquirer as its affiliate, State Bank of Travancore,

already had an extensive network in Kerala.

Associate banks:

SBI has five associate banks that with SBI constitute the State Bank Group. All use the same

logo of a blue keyhole and all the associates use the "State Bank of" name followed by the

regional headquarters' name. Originally, the then seven banks that became the associate banks

belonged to princely states until the government nationalised them between October, 1959 and

May, 1960. In tune with the first Five Year Plan, emphasizing the development of rural India, the

government integrated these banks into State Bank of India to expand its rural outreach. There

has been a proposal to merge all the associate banks into SBI to create a "mega bank" and

streamline operations.

The first step towards unification occurred on 13 August 2008 when State Bank of Saurashtra

merged with State Bank of India, reducing the number of state banks from seven to six. Then on

19 June 2009 the SBI board approved the merger of its subsidiary, State Bank of Indore, with

6

itself. SBI holds 98.3% in the bank, and the balance 1.77% is owned by individuals, who held the

shares prior to its takeover by the government.

The acquisition of State Bank of Indore added 470 branches to SBI's existing network of 12,448

and over 21,000 ATMs. Also, following the acquisition, SBI's total assets will inch very close to

the Rs 10-lakh crore mark. Total assets of SBI and the State Bank of Indore stood at Rs 998,119

crore as on March 2009. The process of merging of State Bank of Indore was completed by April

2010.

The subsidiaries of SBI are:

State Bank of Indore

State Bank of Bikaner & Jaipur

State Bank of Hyderabad

State Bank of Mysore

State Bank of Patiala

State Bank of Travancore

Branches of SBI:

SBI has 21000 ATMs.

SBI has 26500 branches, inclusive of branches that belong to its Associate banks.

SBI alone has 18500 branches.

WHAT IS RISK?

7

Risk is part of every human endeavor. From the moment we get up in the morning, drive or take

public transportation to get to school or to work until we get back into our beds (and perhaps

even afterwards), we are exposed to risks of different degrees. In the same way risk is also an

integral part of business. It is interwoven in the very fabric of life itself and is required to ensure

growth.

IN GENERAL RISK MEANS: Probability or threat of a damage, injury, liability, loss, or other

negative occurrence, caused by external or internal vulnerabilities, and which may be neutralized through

pre-mediated action.

Or

Risk can be used to describe as a situation where there is an uncertainty about the outcome

All organizations deal with risks, though the nature and magnitude may differ for each type of

organization. This is especially true for banks/financial institutions, as they deal with money.

They act as financial intermediaries in a economic system. They help in mobilizing household

corporate savings and making them available to deficit units. Since they help in credit creation

by means of loans and advances, the face many risks.

In facts, taking risk is the core and the most of the products and services offered by

banks/financial institutions.

If we talk about bank then it is exposed to the following risks:

DEFAULT RISK: Borrowers will not be able to repay principal and interest as arranged

(also called credit risk).

EXCHANGE RATE RISK: Appreciation or depreciation of a currency will result in a

loss or an naked-position.

8

INTEREST RATE RISK: Decline in net interest income will result from changes in

relationship between interest income and interest expense.

LIQUIDITY RISK: There will not be enough cash and/or cash-equivalents to meet the

needs of depositors and borrowers.

OPERATIONS RISK: Failure of data processing equipment will prevent the bank from

maintaining its critical operations to the customers' satisfaction.

PAYMENT SYSTEM RISK: Payment system of a major bank will malfunction and

will hinder its payments

MARKET RISK: it is the risk of losses due movements in financial market variables.

These may be interest rates, foreign exchange rates, security prices, etc.

COUNTRY RISK: this risk arise when bank transforms itself into an international one

when it starts lending across its borders or invests in instruments issued by foreign

organizations. there are number of factors like economic factors, political factors, legal

framework etc which brings the country risk.

TECHNOLOGY RISK: this risk arises due to failure and advancement in the

technology.

SYSTEMATIC RISK: this risk arises when there is a failure of a major market system

or institutions, which has an adverse effect on several other institutions. Systematic risks

have consequences for the whole market rather for one or two institutions.

REGULATORY RISKS: these arise because of non compliance of rules imposed by the

regulators. The results of non compliance can be penalties and even suspensions or

cancellations of licenses in extreme cases.

However there are still many types of risks which can be added to the above list. So when there

arises a risk so there is also arise a need of it’s management. So here emerges the concept of risk

management.

9

RISK MANAGEMENT

Risk Management does not mean risk reduction. Risk management enables banks to bring their

risk levels to manageable proportions without severely reducing their income. Thus, risk

management enables a bank to take required level of exposures in order to meet its profit targets.

This balancing act between the risk levels and profits, needs to be well-planned.

Risk management basically is a 5-step process which involves.

1. Identification of risks

2. Quantification of the level of exposures

3. Policy formulation

4. Engineering a strategy to transform the exposures to the desired form

5. Monitoring risk levels and restoring them to the standards set

IDENTIFICATION OF RISKS :

Risk can be anything that can hinder the company from meeting its targeted results. Each risk

must be defined precisely in order to facilitate the identification of the same by the various

business units. This will also enable banks to have a fundamental understanding of the activities

causing the risks. This understanding will be essential to evaluate aspects related to the

magnitude of the risks, the tenor and the implications they have on the accounting aspects. At

any point of time, a bank generally is exposed to a host of risks emanating from the exposures.

To avoid this, all signs of hidden, economic and competitive exposures are to be considered. This

is possible when the bank unbundles the risks involved in each transaction. This is in fact the

most critical step where most of the time needs to be spent. Unless bank identifies and

understands the nature of the exposures involved in a transaction, it will not be able to manage

them. Further, such unbundling also helps bank in deciding which risks it will have to manage

and which it would prefer to eliminate. The process of unbundling also helps a bank in pricing.

QUANTIFICATION OF RISKS:

10

By measuring the risks, bank is indirectly quantifying the consequences of the decisions taken. If

risks are not quantified, bank will neither be aware of the consequences of its decisions nor will

it be in a position to manage the risks. Thus, all risks to which bank is exposed to need to be

quantified. Quantification of risks is a crucial task and accurate measurement of the same

depends extensively on the information available. The quality of information coming from

various divisions, however, depends on the reporting system. The information provided needs to

be further evaluated to ensure that there is an effective and ongoing flow of information.

Technology and MIS play a crucial role here.

SETTING STANDARDS/POLICY FORMULATION:

The next step will be to develop a policy that gives the standard level of exposures that bank will

have to maintain in order to protect cash flows. Policy is a long-term framework to tackle risk

and hence the frequency of changes taking place in it is very low. Setting policies for risk

management will depend on the bank’s objectives and its risk tolerance levels. The Bank should

decide on a particular risk exposure level only if it aids in achieving the bank’s objectives and

also if it believes that it has the capacity to manage the risk for a gain. If either of the conditions

is not met, the bank will have to try and eliminate/minimize the risk.

STRATEGY FORMULATION:

A strategy is developed to implement a policy. Clearly, a strategy will then be relatively for a

shorter period. Given the exposures and volatilities, a strategy aids in managing these risks.

Firstly, the possible options and the risks attached to them are examined in order to know the

affect of each option on the cash flows and the earnings. With this information, a strategy will be

developed to identify the sources of losses/gains and how efficiently the risks can be shifted to

enhance profits while reducing the exposure.

MONITORING RISKS:

11

Laying down strategies will not lead to risk management since risk profile is not static. Volatile

circumstances may change the risk level of an investment and hence require a bank to restore the

same to the set target levels. For instance, a bank takes a long position on a loan of US$ 1mn. At

an exchange rate of Rs. 44.50, the risk which the bank is ready to take is up to a Rs. 0.10

variation. In absolute terms this will be Rs. 1 lakh. However, the exchange rate goes down by Rs.

0.15 due to which the loss to the bank is Rs. 1.5 lakh. This is beyond the target set by the bank.

In such circumstances, the bank can take a long positions in US$ if it believes that the rate will

move up. And in case the rates are expected to go down further, it can either enter into a forward

contract or exit from the long position taking up the loss.

Apart from the long-term changes, the exchange rate and the interest rate fluctuations

occur on a monthly, fortnightly and even on a daily basis. There should hence be a continuous

vigil on the risk profiles,. However, the frequency with which the bank can alter strategies or

take action to restore these exposure levels to the set targets may not be vary high. This is due to

the costs that are involved in taking such actions. In such a situation, the bank should decide to

go for the transaction only if change in the exchange rate is believed to be long-term. While

monitoring of risks should be done on a continuous basis, restoration of the same to the targets

should be done after analyzing the extent of fluctuations taking place during a given period and

the transaction costs involved in restoring the exposure to the target set.

LITERATURE REVIEW AND RESEARCH METHODOLOGY

LITERATURE REVIEW

GRAY(1998) in his research article “CREDIT RISK IN THE AUSTRALIAN

BANKING SECTOR” presented a brief overview of developments taken place in the

Australian banking sector relating to the measurement and management of credit risk. This paper

provides, the background, sketch of the structure of banking in Australia. The researcher has

considered some of the forces operating within the Australian banking and financial system to

increase the significance of credit and capital management in banks. He has also outlined some

12

of the credit risk management practices being adopted in the major Australian banks. He has

looked at the implications of the developments and speculates on the scope for greater use of

banks’ internal credit risk models, or other possible approaches, for capital adequacy purposes.

The researcher finally concluded that the activities of the leading banks are pushing regulatory

arrangements in the direction of greater sophistication of credit risk measurement (just as they

did in the case of market risk measurement). He has said that Credit modeling is still in an early

phase of development in the Australian market and it would be unrealistic to believe that a

regime based on that approach is viable in the short term. However, developments are occurring

quickly and credit modeling will become much more significant for banks in the medium term.

Murthy (2003) in his research article “A STUDY ON FINANCIAL RATIOS OF MAJOR COMMERCIAL BANKS” has calculated various important financial ratios of major commercial banks in Oman and compare their financial management practices as indicated by the ratios. The study also compared ratios of commercial banks in Oman with ratios of other banks in developed countries so that it throws up not only intra country performance comparisons but also cross country comparisons which makes study all the more useful. For the purpose of the study data was drawn from the balance sheets and income statements of

commercial banks. The researcher has used data from December 1997 to December 2004 for the

profitability ratios part of the study. For studying liquidity, interest rate risk, capital adequacy etc

the study uses the data from December 2000 to 2004. For purposes of international comparisons

data was drawn from various internet based sources and from the “Banker” Journal.

The ratios used in the study are divided into five broad groups:

Liquidity Management Ratios

Interest Rate Risk Management Ratios

Credit Risk Management Ratios

Capital Account Management Ratios

Cost Management Ratios

Profitability Management Ratios

13

In the end the study conclude that there are wide differences in the ratios of different banks and

that some banks had better financial management practices than others.

Bagchi(2003) in his research article “CREDIT RISK MITIGATION – IMPLICATIONS OF

BASEL II PRESCRIPTIONS IN INDIAN BANKING” has discussed the tool of credit risk

mitigation for reducing the credit risk. A Credit Risk Mitigation tool, commonly referred to as

‘security’, is universally recognized as a ‘protection’ for the lenders although the same is often

christened as ‘collateral’also. The author has discussed Forms of credit risk mitigation under the

Basel II Accord , salient features specified in Basel II accord for treatment of CRM tool, the

eligible collaterals for CRM purpose, Disclosure requirements for banks according to Basel II

Accord and implication of credit risk mitigation in Indian banks. The study finally conclude that

CRM techniques as prescribed, are biased in favour of the banking in advanced countries. In the

context of banking system in underdeveloped/developing countries the techniques may need

some refinements. Hence, eligible collaterals may be enlarged upon a review of legal/ social

system and practices of the countries concerned.

Driga (2004) in his research article “MEANS OF REDUCING CREDIT RISK” firstly

discussed the meaning of credit risk and then he has discussed the various means by which credit

risk can be reduced. The author said that the quality of credits from the bank’s portfolio can be

estimated depending on their structure. From this point of view in classifying their credits banks

take into account several criteria: duty; financial performance; initiation of judicial procedures

for each customer that benefits of a certain loan. In order to determine the necessary specific risk

provisions due to a credit or investment, the following steps will be covered:

- determining the calculation base for specific credit risk provisions;

- applying the coefficient to the obtained calculation base

In the end author says that Knowing the risk involved by the credit portfolio it is possible to take

certain means able to decrease credit risk. Specific risk provisions can be determined for each 14

credit category by combining the client’s financial performances with his duty towards the bank.

This activity of forming funds in order to cover effective loss must take place in those moments

in which there are phenomena that allow and require the application of such procedures.

Carrying out a prudent selection and a permanent supervise for granted loans, requesting

collaterals, acquiring external credit insurances, forming provisions to cover losses in advance

certainly represents indispensable elements in supporting polities of diminishing credit risk and

its negative effects.

Sethuraman (2008) in his research article “LIQUIDITY RISK MANAGEMENT

DEMYSTIFIED” has discussed the concept of liquidity risk management. He first of all has

discussed the concept of liquidity then he has explained the importance of liquidity risk

management, its importance, the various issues and key considerations in LRM and BASEL

COMMITTEE guidelines on liquidity risk and finally conclude that there are strong linkages

between liquidity and capital, more so in times of financial stress. Liquidity problems has the

potential to affect the balance sheet of banks and, thus, the capital adequacy. Improvement in one

area benefits the other and banks would be better off with strong capital base to withstand the

kind of liquidity risk challenges seen in today's markets.

OBJECTIVE OF THE STUDY:

1. To measure and study the magnitude of credit risk in banks under the study.

2. To check and study the magnitude of liquidity risk in banks under the study.

NEED OF THE STUDY:

Before 1991 reforms Indian banking system was working under the closed environment. It was

only in the year 1991 that government of India when faced crisis and it gave the country the

doses of liberalization, privatization and globalization and same doses given to Indian banking

industry. Though the performance of the industry has increased but this has brought in severe

competition and several types of risk. Risk is the concept which cannot be eliminated completely 15

from the banking business. From the core business of banking i.e accepting deposits and

disbursing loans there arises two types of risks, these are liquidity risk and credit risk. These two

risks cannot be eliminated from the banking business as these lies in the core business of banks.

So there is a need to properly manage these two risk. So this study is conducted to measure the

credit and liquidity risk in sbi and its associates banks.

SCOPE OF THE STUDY :

Study covers only SBI AND ITS ASSOCIATES BANKS.

PERIOD OF STUDY:

Study period will be of 5 years i.e 2007-2011.

RESEARCH METHODOLOGY:

SOURCES OF DATA :

Only secondary data is taken for this study and on the basis of this data all analysis has been

done.

DATA COLLECTION:

Secondary Data is taken from the website of RBI.

TOOLS FOR MEASURING RISK:

Ratio analysis is used in order to measure the credit and liquidity risk in SBI AND ITS

ASSOCIATES BANKS.

16

For Measuring The Liquidity Risk Following Ratios Are Used:-

1. Ratio Of Core Deposit To Total Assets: Core deposits are treated to be the stable source

of liquidity. Core deposit will constitute deposits from the public in the normal course of

business. This ratio is calculated as follows:

Core Deposits (Demand deposits+ saving deposits+ term deposits)

Total assets

Rule of thumb: Higher the ratio better it is the liquidity position of the bank.

2. Loans To Totals Deposits Ratio-: It reflects the ratio of loans to public deposits or core

deposits. Total loans in this ratio represent the advances made by the bank to the public.

Loan is treated to be less liquid asset . This ratio is calculated as follows:

Loans(Advances)

Total deposits

Rule of thumb: Lower the ratio better it is the liquidity position of the bank.

3. Ratio Of Time Deposit To Total Deposits-: Time deposits provide stable level of liquidity and negligible volatility. This ratio is calculated as follows:

Term deposits/time deposits

Total deposits

Rule of thumb: Higher the ratio better it is the liquidity position of the bank.

17

4. Ratio Of Liquid Assets To Total Assets-: Higher level of liquid assets in total assets will ensure better liquidity. Liquid assets may include bank balances, money at call and short notice, inter bank placements due within one month, securities held for trading and available for sale having ready market. This ratio is calculated as follws:

Cash in hand+ Balance with the RBI+ Balance with banks in India+ Balance with the banks outside India+ money at call and short notice

Total assets

Rule of thumb: Higher the ratio better it is the liquidity position of the bank.

5. Ratio Of Prime Asset To Total Asset: Prime assets may include cash balances with the bank and balances with banks including central bank which can be withdrawn at any time without any notice. More or higher the ratio better it is.

Cash in hand+ Balance with the RBI+ Balance with banks in India+Balance with the banks outside India

Total Assets

Rule of thumb: Higher the ratio better it is the liquidity position of the bank.

FOR MEASURING THE CREDIT RISK FOLLOWING RATIOS ARE USED:-

1. NON PERFORMING LOANS TO LOANS: This ratio tells the percentage of NPA’s

of the total loans advanced the lower this ratio better it is. Because high NPA’s bring in

the credit risk for the bank. This ratio is calculated as follows

18

Non Performing Loans/NPA

Loans

Rule of thumb: Lower the ratio better it is.

NPA: An Asset , including a leased asset, becomes non performing when it ceases to generate

income for the bank.

Note: For the calculation of this ratio i have taken the gross NPA’s of banks.

2. RISK ADJUSTED MARGIN: Risk Adjusted Margin (RAM) is a measure which shows

the impact of credit risk on the profitability of the bank. Specifically it is calculated as net

interest income plus other income minus provisions made during the year for loan losses

divided by assets. When compared with the Net Interest Margin (NIM) figure it shows

the impact of loan losses on the bank. RAM rather than NIM is a true reflection of the

risk management abilities of the bank, because it shows the spread ( or margin) net of

loan loss provisions. Further it shows the risk faced by the bank in the process of

managing its credit portfolio. If one were to measure a bank’s management abilities only

using NIM it would show only the interest income generation net of interest expense but

it would not show the attendant risks. A bank can increase its NIM by giving high interest

loans, but if the high interest loans carry a higher risk this would not get reflected in

NIM. On the other hand RAM reflects this risk to the extent higher risk results in higher

provisions. So higher this ratio better it is.

( Net Interest Income + other Income – Provision for Credit Losses )

Average Assets

19

Rule of thumb: Higher the ratio better it is .

Note: Average assets are calculated by taking the opening and closing assets of the bank

and then dividing it by two.

3. TOTAL LOAN LOSS PROVISIONS TO LOANS: This ratio shows the percentage of

loan loss provisions of the bank to its loans. The lower this ratio the better it is for the

bank. It is calculated as follows:

Loan Loss Provisions

Loans

Rule of thumb: Lower the ratio better it is .

INTRODUCTION OF CREDIT RISK AND LIQUIDITY

RISK

CREDIT RISK

Credit risk is most simply defined as the probability that a bank borrower or counterparty will

fail to meet its obligations in accordance with agreed terms.

Credit risk arises from the lending activities of the bank. It arises when a borrower does not pay

interest and/or instalments as and when it falls due or in case where a loan is repayable on

demand, the borrower fails to make payments as and when demanded. Banks follow up for the

20

payments and more often not end up in receiving less than the amount that is due. The shortfall

in the payment is debited to the profit & loss account.

RISK IDENTIFICATION

Credit risk arises from potential changes in the credit quality of a borrower. It has two

components: default risk and credit spread risk.

DEFAULT RISK:

Default risk is driven by the potential failure of a borrower to make promised payments, either

partly or wholly. In the event of default, a fraction of the obligations will normally be paid. This

known as the recovery rate.

CREDIT SPREAD RISK OR DOWNGRADE RISK:

If a borrower does not default, there is still risk due to worsening in credit quality. This result in

the possible widening of the credit-spread. This is credit spread risk. These may arise from a

rating change (i.e., an upgrade or a downgrade). It will usually be firm specific.

Loans are not usually marked-to-market. Consequently, the only important factor is

whether or not the loan is in default today (since this is the only credit event that can lead to an

immediate loss). Capital market portfolios are marked-to-market. They have in addition credit

spread volatility (continuous changes in the credit-spread). This is more likely to be driven by the

market’s appetite for certain levels of risk. For example, the spreads on high-grade bonds may

21

widen or tighten, although this need not necessarily be taken as an indication that they are more

or less likely to default. Default risk and downgrade risk are transaction level risks.

Risks associated with credit portfolio as a whole is termed portfolio risk. Portfolio risk has two

components-

1. Systematic or Intrinsic Risk

2. Concentration Risk

SYSTEMATIC OR INTRINSIC RISK:

Portfolio risk can be reduced due to diversification. If a portfolio is fully diversified, i.e.

diversified across geographies, industries, borrowers, markets, etc. equitably, then the portfolio

risk is reduced to a minimum level. This minimum level corresponds to the risks in the economy

in which it is operating. This is systematic or intrinsic risk.

CONCENTRATION RISK:

If the portfolio is not diversified that is to say that it has higher weight in respect of a borrower or

geography or industry etc., the portfolio gets concentration risk.

A portfolio is open to the systematic risk i.e., the risks associated with the economy. If

economy as a whole does not perform well, the portfolio performance will be affected. That is

why when an economy stagnates or faces negative or reduced growth, credit portfolio of banking

industry as a whole shows it in its indifferent perform.

Measuring and managing credit risk, whether for loans, bonds or derivative securities,

has become a key issue for financial institutions. The risk analysis can be performed either for

stand-alone trades or for portfolios as a whole. The latter approach takes into account risk

diversification across trades and borrowers. Ignoring risk diversification can lead to erroneous

risk management decisions, increasing rather than reducing the risk exposure of the financial

institution. Since different firms do not default at the same time, the risk level and corresponding

capital that must be held against defaults for a well-diversified portfolio is only a fraction of the

total exposure of the portfolio.22

A variant of credit risk is ‘Counterparty Risk’. The counterparty risk arises from non-

performance of the trading partners. The non-performance may arise from counterparty’s

refusal/inability to perform. The counterparty risk is generally viewed as a transient financial risk

associated with trading rather than standard credit risk.

‘Country Risk’ is also a type of credit risk where non-performance by a borrower or

counterparty arise because of restrictions imposed by a sovereign. The restrictions may be in the

nature of a sanction or may arise due to economic conditions.

RISK MEASUREMENT

Measurement of credit risk consists of:

(a) Measurement of risk through credit rating/scoring:

(b) Quantifying the risk through estimating expected loan losses i.e. the amount of loan

losses that bank would experience over a chosen time horizon (through tracking

portfolio behaviour over 5 or more years) and unexpected loan losses i.e. the amount

by which actual losses exceed the expected loss (through standard deviation of losses

or the difference between expected loan losses and some selected target credit loss

quantile).

(c) CREDIT RATING-WHY IS IT NECESSARY?

Credit Rating of an account is done with primary objective to determine whether the account,

after the expiry of a given period, would remain a performing asset i.e. it will continue to meet

its obligation to its creditors, including Bank and would not be in default. In other words, credit

rating exercise seeks to predict whether the borrower would have the capability to honour its

financial commitment in future to the rest of the World.

There is no mathematical/econometric/empirical model, which can predict the future

capability of a borrower to meet its financial obligations accurately. Nevertheless, lenders in

financial market, all over the world, rely on some model, which seeks to predict the future

capability of a borrower to meet its financial obligations. This is because behaviour of a group of

23

borrowers having similar rating, in terms of their failure to meet financial obligations i.e. having

defaulted financially, has been found to be, within bounds, consistent.

(d) CREDIT RATING-APPROACH TO IT

In order to develop our capability to actively manage our credit portfolio one must have in place

the following.

1. Credit Rating Model (or models for different categories of loans and advances)

2. Develop and maintain necessary data on defaults of borrowers rating category wise

i.e., ‘Rating Migration’.

Credit Rating Model

A credit rating model essentially differentiates borrowers based on degree of stability in terms of

top line (e.g., sales) and bottom-line (net profit) revenue generation. This is because where

uncertainty in revenue generation in a business is more, chances of failing in keeping financial

commitments to the rest of the World is also more. Where revenue generation is stable over a

given period, uncertainty or risk associated is zero. For example, cash generation from an

investment in Govt. Securities is absolutely stable and hence risk associated with such

investment is also non-existent. This would also mean that an ‘A’ rated borrower would have

more stable revenue generation than that of a ‘B’ rated borrower and an ‘A++’ rated borrower’s

revenue generation would be more stable than that of ‘A’ rated.

In developing a rating model, therefore, factors that have an impact on the stability of

revenue generation are relied upon. In fact, there are several rating models with various levels of

complexities and require data sets that could be fairly extensive and cover few years. The issue

of simplicity and its user friendliness are also very crucial in designing a model. A balance is

struck keeping in view the need of both these aspects. As such, a purely simple model very easy

to use may not be feasible as such a model may not be able to capture stability of revenue

generation of the borrower and may not be acceptable.

24

3. RATING MIGRATION

Rating migration is change in the rating of a borrower over a period of time when rated on the

same standard or model. For example, say a borrower M/s. XYZ Ltd. Is rated as B+ based on its

position as on 31.3.02. The same company is again rated as on 31.3.03 based on its position as

on that date , its rating, based on the same model, say comes to B. Then we say that the rating of

the account has migrated from B+ to B over one year period.

As in case of rating of borrower, rating migration of a single account also does not

convey much. It becomes useful when migration of a large number of accounts of similar rating

is observed. Say, we have 100 ‘A’ rated borrowers as on 31 st March, 2002. When these accounts

are rated again as on 31st March 2003, i.e. after one year, typically we may find new ratings.

CREDIT RISK POLICIES AND GUIDELINES ATTRANSACTION LEVEL

Instruments of Credit Risk Management at transaction level are:

1. Credit Appraisal Process

2. Risk Analysis Process

3. Credit Audit and Loan Review

4. Monitoring Process

There is a need to constantly improve the efficiency for each of these processes in

objectively identifying the credit quality of borrowers, enhancing default analysis, capturing the

risk elements adequately for future reference and providing an early warning signal for

deterioration in credit risk of borrowers.

Credit risk taking policy and guidelines at transaction level should be clearly articulated

in the Bank’s Loan Policy Document approved by the Board. Standards and guidelines should be

outlined for

25

1. Delegation of Powers

2. Credit Appraisals

3. Rating Standards and Benchmarks (derived from the Risk Rating System)

4. Pricing Strategy

CREDIT APPROVING AUTHORITY

Each Bank should have a carefully formulated scheme of delegation of powers. The banks

should also evolve multi-tier credit approving system where the loan proposals are approved by

an ‘Approval Grid’ or a ‘Committee’. The ‘Grid’ or ‘Committee’, comprising at least 3 or 4

officers, may approve the credit facilities above a specified limit and invariably one officer

should represent the CRMD, who has no volume and profit targets. The spirit of the credit

approving system may be that no credit proposals should be approved or recommended to higher

authorities, if majority members of the ‘Approval Grid’ or ‘Committee’ do not agree on the

creditworthiness of the borrower. In case of disagreement the specific views of the dissenting

member/s should be recorded.

CREDIT APPRASAL

Credit appraisal guidelines include borrower standards, procedures for analyzing credit

requirements and risk factors, policies on standards for presentation of credit proposals, financial

covenants, rating standards and benchmarks etc. This brings and uniformity of approach in credit

risk taking activity across the organization. Credit appraisal guidelines may include risk

monitoring and evaluation of assets at transaction level, pricing of loans, regulatory/legal

compliance, etc.

PRUDENTIAL LIMITS

Prudential limits serve the purpose of limiting credit risk. There are several aspects for which

prudential limits may be specified. They may include:

5. Prudential limits for financial and profitability ratios such as current ratio,

debt equity and return on capital or return on assets etc., and debt service

coverage ratio etc.

6. Prudential limits for credit exposure

26

7. Prudential limits for asset concentration

8. Prudential limits for large exposures

9. Prudential limit for maturity profile of the loan book.

Prudential limits may have flexibility for deviations. The conditions subject to which deviations

are permitted and the authority thereof should also be clearly spelt out in the Loan Policy.

RATING STANDARDS AND BENCHMARKS

The credit risk assessment exercise should be repeated bi-annually (or even at shorter intervals

for low quality customers) and should be delinked invariably from the regular renewal exercise.

The updating of the credit rating should be undertaken normally at quarterly intervals or at least

at half-yearly intervals, in order to gauge the asset quality at periodic intervals.

Note : Rating changes have implication at portfolio level. Variations in the ratings of borrowers

over time indicate changes in credit quality and expected loan losses from the credit portfolio.

Thus, if the rating system is to be meaningful, the credit quality reports should signal changes in

expected loan losses. The banks should undertake comprehensive study on migration (upward-

lower to higher and downward-higher to lower) of borrowers in the ratings to add accuracy in

expected loan loss calculations.

RISK PRICING

The pricing strategy for credit products should more towards risk based pricing to generate

adequate risk adjusted returns on capital. The Credit Spread should have a bearing on expected

loss rates and charges on capital.

Risk-return pricing is a fundamental tenet of risk management. In a risk-return setting,

borrowers with weak financial position are high credit risk stake and should be priced high.

Pricing of credit risk should have a bearing on the probability of default. Since probability of

default is linked to risk rating, pricing of loans normally should be linked to rating. However,

value of collateral, value of accounts, future business potential, portfolio/industry exposure and

strategic reasons may also play important role in pricing.

27

There is, however, a need for comparing the prices quoted by competitors for borrowers

perched on the same rating/quality. Thus, any attempt at price-cutting for market share would

result in wrong pricing of risk.

CREDIT CONTROL AND MONITORINGAT PORTFOLIO LEVEL

Credit control and monitoring at portfolio level deals with the risk of a given portfolio, expected

losses, requirement of risk capital, impact of changing the portfolio mix on risk, expected losses

and capital. It also deals with the marginal and absolute risk contribution of a new position and

diversification benefits that come out of changing the mix. It also analyses factors that affect the

portfolio’s risk profile.

1. Identification of portfolio credit weakness in advance-through credit quality

migrations

2. Move from measuring obligor specific risk associated with individual credit

exposures to measuring concentration effects on the portfolio as a whole

3. Evaluate exposure distribution over rating categories and stipulate quantitative

ceilings on aggregate exposure in specified rating categories

4. Evaluate rating wise distribution in various industries and set corresponding exposure

limits to contain concentration risk

5. Move towards Credit Portfolio Value at risk Models

The existing framework of tracking the non performing loans around the balance sheet data

does not signal the quality of the entire loan book. A system for identification of credit

weaknesses well in advance could be realized by tracking the migration (upward or

downward) of borrowers from one rating scale to another. This process would be meaningful

only if the borrower wise rating are updated at quarterly/half-yearly intervals. Data on

movements within grading categories provide a useful insight into the nature and

composition of portfolio.

Some measures to maintain the portfolio quality are:

1. Quantitative ceiling on aggregate exposure in specified rating categories.

28

2. Evaluation of rating wise distribution of borrowers in various industry, business

segments, etc.

3. Industry wise and sector wise monitoring of exposure performance. Where portfolio

exposure to a single industry is badly performing, the banks may increase the quality

standards for that specific industry.

4. Target for probable defaults and provisioning requirements as a prudent planning

exercise. For any deviation/s from the expected parameters, an exercise for restructuring

of the portfolio should immediately be undertaken and if necessary, the entry-level

criteria could be enhanced to insulate the portfolio from further deterioration.

5. Introduce discriminatory time schedules for review of borrowers.

The credit risk of a bank’s portfolio depends on both external and internal factors. The

external factor are the state of the economy, wide swings in commodity/equity prices, foreign

exchange rates and interest rates, trade restrictions, economic sanctions, Government policies

etc. The internal factors are deficiencies in loan policies/administration, absence of prudential

credit concentration limit, inadequately defined lending limits, deficiencies in appraisal of

borrowers financial position, excessive dependence on collaterals inadequate risk pricing,

absence of loan review mechanism and post sanction surveillance, etc. Portfolio performance

may be analysed to identify the causes and necessary remedial action.

CONTROLLING CREDIT RISK THROUGH LOAN REVIEW MECHANISM

LRM is an effective tool for constantly evaluating the quality of loan book and to bring about

qualitative improvements in credit administration. Loan Review Mechanism is used for large

value accounts with responsibilities assigned in various areas such as, evaluating effectiveness of

loan administration, maintaining the integrity of credit grading process, assessing portfolio

quality, etc.

29

The main objectives of LRM are:

1. To identify promptly loans which develop credit weaknesses and initiate timely

corrective action;

2. To evaluate portfolio quality and isolate potential problem areas;

3. To provide information for determining adequacy of loan loss provision;

4. To assess the adequacy of and adherence to, loan policies and procedures, and to

monitor compliance with relevant laws and regulation; and

5. To provide top management with information on credit administration, including

credit sanction process, risk evaluation and post-sanction follow up.

Accurate and timely credit grading is one of the basic components of an effective LRM.

Credit grading involves assessment of credit quality, identification of problem loans, and

assignment of risk ratings. A proper Credit Grading System should support evaluating the

portfolio quality and establishing a loan loss provisions. Given the importance and subject

nature of credit rating, the credit ratings awarded by Credit Administration Department

should be subjected to review by Loan Review Officers who are independent of loan

administration.

Loan Review Policy should address the following issues.

QUALIFICATION AND INDEPENDENCE

The Loan Review Officers should have sound knowledge in credit appraisal, lending

practices and loan policies of the bank. They should also be well versed in the relevant

laws/regulations that affect lending activities. The independence of Loan Review Officers

should be ensured and the findings of the reviews should also be reported directly to the

Board or Committee of the Board.

FREQUENCY AND SCOPE OF REVIEWS

The Loan Reviews are designed to provide feedback on effectiveness of credit sanction and

to identify incipient deterioration in portfolio quality. Reviews of high value loans should be

30

undertaken usually within three months of sanction/renewal or more frequently when factors

indicate a potential for deterioration in the credit quality. The scope of the review should

cover all loans above a cut-off limit. In addition, banks should also target other accounts that

present elevated risk characteristics. At least 30-40% of the portfolio should be subjected to

LRM in a year to provide reasonable assurance that all the major credit risks embedded in the

balance sheet have been tracked.

DEPTH OF REVIEWS

The loan reviews should focus on:

1. Approval process;

2. Accuracy and timeliness of credit ratings assigned by loan officers;

3. Adherence to internal policies and procedures, and applicable laws/regulations;

4. Compliance with loan covenan

The findings of reviews should be discussed with line managers and the corrective

actions should be elicited for all deficiencies. Deficiencies that remain unresolved should be

reported to top management.

The banks should also evolve suitable framework for reporting and evaluating the quality

of credit decisions taken by various functional groups. The quality of credit decisions should

be evaluated within a reasonable time say 3-6 months, through a well-defined Loan Review

Mechanism.

CREDIT RISK MITIGATION

Credit risk mitigation is an essential part of credit risk management. This refers to the process

through which credit risk is reduced or it is transferred to a counter party. Strategies for risk

reduction at transaction level differ from that at portfolio level.

At transaction level banks use a number of techniques to mitigate the credit risks to which

they are exposed. They are mostly traditional techniques and need no elaboration. Recent

techniques include buying a credit derivative to offset credit risk at transaction level.

31

At portfolio level, asset securitization, credit derivatives, etc., are used to mitigate risks in

the portfolio. They are also used to achieve desired diversification in the portfolio as also to

develop a portfolio with desired characteristic. It must be noted that while the use of CRM

techniques reduces or transfers credit risk, it simultaneously may increase other risks such as

legal, operational, liquidity and market risks. Therefore, it is imperative that banks, employ

robust procedures and processes to control these risks as well. In fact, advantages of risk

mitigation must be weighed against the risks acquired and its interaction with the bank’s overall

risk profile.

THE BASEL COMMITTEE’S PRINCIPLES OF

CREDIT RISK MANAGEMENT

The following are the sound practices set out by the Basel Committee to 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.

32

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 should 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.

ESTABLISHING AN APPROPRIATE CREDIT RISK ENVIRONMENT

Principle 1: The board of directors should have responsibility for approving and periodically

(at least annually) reviewing the credit risk strategy and significant credit risk policies of the

bank. The strategy should reflect the bank’s tolerance for risk and the level of profitability the

bank expects to achieve for incurring various credit risks.

Principle 2: Senior management should have the responsibility for implementing the credit

risk strategy approved by the board of directors and for developing policies and procedures for

identifying, measuring, monitoring and controlling credit risk. Such policies and procedures

should address, credit risk in all of the bank’s activities and at both the individual credit and

portfolio levels.

Principle 3: Banks should identify and manage credit risk inherent in all products and

activities. Bank should ensure that the risks of products and activities new to them are subject to

adequate risk management procedures and controls before being introduced or undertaken, and

approved in advance by the board of directors or its appropriate committee.

OPERATING UNDER A SOUND CREDIT-GRANTING PROCESS

Principle 4: Banks must operate within sound, well-defined credit-granting criteria. These

criteria should include a clear indication of the bank’s target market and a thorough

understanding of the borrower or counterparty, as well as the purpose and structure of the credit,

and its source of repayment.

33

Principle 5: Banks should establish overall credit limits at the level of individual borrowers and

counterparties, and groups of connected counterparties that aggregate in a comparable and

meaningful manner different types of exposures, both in the banking and trading book and on-

and off-balance sheet.

Principle 6: Banks should have a clearly established process in place for approving new credits

as well as the amendment, renewal and re-financing of existing credits.

Principle 7: All extensions of credit must be made on an arm’s length basis. In particular, credits

to related companies and individuals must be authorized on an exception basis, monitored with

particular care and other appropriate steps taken to control or mitigate the risks of non-arm’s

length lending.

MAINTANING AN APPROPRIATE CREDIT ADMINISTRATION, MEASUREMENT

AND MONITORING PROCESS

Principle 8: Banks should have in place a system for the ongoing administration of their

various credit risk-bearing portfolios.

Principle 9: Banks must have in place a system for monitoring the condition of individual

credits, including determining the adequacy of provisions and reserves.

Principle 10: Banks are encouraged to develop and utilize and internal risk rating system in

managing credit risk. The rating system should be consistent with the nature, size and complexity

of a bank’s activities.

34

Principle 11: Banks must have information systems and analytical techniques that enable

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

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

credit portfolio, including identification of any concentrations of risk.

Principle 12: Banks must have in place a system for monitoring the overall composition and

quality of the credit portfolio.

Principle 13: Banks should take into consideration potential future changes in economic

conditions when assessing individual credits and their credit portfolios, and should assess their

credit risk exposures under stressful conditions.

ENSURING ADEQUATE CONTROLS OVER CREDIT RISK

Principle 14: Banks must establish a system of independent, ongoing assessment of the bank’s

credit risk management processes and the results of such reviews should be communicated

directly to the board of directors and senior management.

Principle 15: Banks must ensure that the credit-granting function is being properly managed

and that credit exposures are within levels consistent with prudential standards and internal

limits. Banks should establish and enforce internal controls and other practices to ensure that

exceptions to policies, procedures and limits are reported in a timely manner to the appropriate

level of management for action.

Principle 16: Banks must have a system in place for early remedial action on deteriorating

credits, managing problem credits and similar workout situations.

THE ROLE OF SUPERVISORS

Principle 17: Supervisors should require that banks have an effective system in place to identify,

measure, monitor and control credit risk as part of an overall approach to risk management.

35

Supervisors should conduct an independent evaluation of a bank’s strategies, policies,

procedures and practices related to the granting of credit and the ongoing management of the

portfolio. Supervisors should consider setting prudential limits to restrict bank exposures to

single borrowers or groups of connected counterparties.

LIQUIDITY RISK

WHAT IS LIQUIDITY?

Simply stated, liquidity is a bank’s ability to generate cash quickly and at a reasonable cost. Bank need liquidity in order to meet routine expenses, such as interest payments and overhead costs. More importantly, as financial intermediaries, they need liquidity to meet unexpected liquidity shocks, such as large deposit withdrawals or heavy loan demand. The most extreme example of a liquidity shock is a bank run. If all depositors attempt to withdraw their money at once, almost any bank will be unable to cover their claims and will fail-even though it might otherwise be in sound financial condition. However, individual institutions are rarely allowed to fail, thanks to the safety net existing in most countries in the form of deposit insurance, the central bank’s role as lender of last resort, and stringent capital requirements. However, if a bank does not plan carefully, it may be forced to turn to high-cost sources of funding to cover liquidity shocks thus cutting into profitability, and ultimately, into its very existence.

36

LIQUIDITY RISK

Liquidity risk arises when the bank may not be able to fund increases in assets or meet liability obligations as they fall due without incurring unacceptable losses. The problem may lie in the bank ‘s inability to liquidate assets or obtain funding to meet its obligations. The problem could also arise due to uncontrollable factors such as market disruption or liquidity squeeze.

Liquidity problems can have an adverse impact on the bank’s earnings and capital, and in extreme circumstances, may even lead to the collapse of the bank itself, through the bank may otherwise be solvent. Liquidity problems can also affect the proper functioning of payment systems and other financial markets.

Recent trends in the liability profiles of banks pose further challenges to the industry and brings in liquidity risk to the banks. This is basically due to following reasons:

(a) the increasing proportion in bank liabilities of wholesale and capital market funding, which are more sensitive to credit and market risks;

(b) the increase in off-balance sheet activities such as derivatives and securitization that have compounded the challenge of cash flow management; and

(c) the speed with which funds can be transmitted and withdrawn, thanks to advanced technology and systems.

SYMPTOMS OF POTENTIAL LIQUIDITY PROBLEMS-

Some internal and market indicators could be useful to assess whether a potential liquidity

problem is developing.

Internal indicators:

1. Asset quality is deteriorating as evidenced by growing proportion of impaired assets.

2. Excessive concentrations on certain assets and funding sources.

3. Declining spreads, interest margins and earnings.

4. Increasing cost of borrowings.

5. Rapid asset growth funded by volatile liabilities.

Market indicators:

37

1. Credit rating downgrades.

2. Gradual but persistent fall in the share prices of the bank.

3. Widened spread on the bank’s senior and subordinated debt.

4. Reduction in available credit lines from correspondent banks.

5. Increasing trend of deposit withdrawals.

TYPES OF LIQUIDITY RISKS

Liquidity exposure can stem from both internally (institution specific) and externally generated factors. External liquidity risks can be geographic, systemic or instrument specific. Internal liquidity risk relates largely to perceptions of an institution in its various markets: local, regional, national or international. Other categories of liquidity risk are:

FUNDING RISK: Need to replace net outflows due to unanticipated withdrawal/non-renewal of deposits (wholesale and retail); arises due to:

1. Fraud causing substantial loss2. Systemic risk3. Loss of confidence4. Liabilities in foreign currencies

TIME RISK: Need to compensate for non-receipt of expected inflows of funds, arises due to:

1. Severe deterioration in the asset quality2. Standard assets turning into non-performing assets3. Temporary problems in recover4. Time involved in managing liquidity

CALL RISK: Crystallisation of contingent liabilities are inability to undertake profitable business opportunities when desirable: arises due to:

1. Conversion of non-fund based limit into fund based2. Swaps and options

Many times more than one factor manifest and make the liquidity situation worse. For example, a big level of fraud can tighten the position of a bank along with loss of confidence of the public resulting a run on the bank. In addition to run there may be interbank dealings and in turn other banks may also be affected in the process. If a bank fails to honour its

38

commitments to the market participants, it can cause the other participant not honouring its commitments based on the expected inflow of funds from the failed institution. Some times if foreign currencies create complexity to liquidity management because real strength of the bank may not be known to the foreign creditors. They may not be in a position to distinguish between the rumor and the reality of crisis. In certain circumstances, a bank may not be able to mobilize domestic funds to meet foreign currency liabilities.

MEASURING AND MANAGING LIQUIDITY RISK

Measuring and managing liquidity are among the most vital activities of commercial banks.

By assuring a bank’s ability to meet its liabilities as they come due, liquidity management

can reduce the probability of an irreversible adverse situation developing. Even in cases

where crises develops because of a problem elsewhere at a bank, such as a severe

deterioration in asset quality or the uncovering of fraud, or where a crisis reflects a

generalized loss of confidence in financial institutions, the time available to a bank to address

the problem will be determined by its liquidity. Indeed, the importance of liquidity

transcends the individual institution, since a liquidity shortfall at a single institution can have

system-wide repercussions. For this reason, the analysis of liquidity requires bank

managements to measure not only the liquidity positions of banks on an ongoing basis but

also to examine how funding requirements are likely to evolve under crisis scenarios.

In particular, good management information systems, central liquidity control, analysis of

net funding requirements under alternative scenarios, diversification of funding sources, and

contingency planning are crucial elements of strong liquidity management at a bank of any

size or scope of operations.

Following steps are necessary for managing liquidity risk in banks:

1. Developing a structure for managing liquidity risk

2. Setting tolerance level and limit for liquidity risk

3. Measuring and managing liquidity risk

39

1. DEVELOPING A STRUCTURE FOR MANAGING LIQUIDITY RISK

Sound liquidity risk management involves setting a strategy for the bank ensuring effective

board and senior management oversight as well as operating under a sound process for

measuring, monitoring and controlling liquidity risk.

Virtually every financial transactions or commitment has implications for a bank’s

liquidity. Moreover, the transformation of illiquid into more liquid ones is a key activity of

banks. Thus, a bank’s liquidity policies and liquidity management approach should form key

elements of a bank’s general business strategy. Understanding the context of liquidity

management involves examining a bank’s managerial approach to funding and liquidity

operations and its liquidity planning under alternative scenarios.

1. The liquidity strategy should set out the general approach the bank will have to liquidity

including various quantitative and qualitative targets.

2. The strategy should also address the bank’s goal of protecting financial strategy and the

ability to withstand stressful events in the market place.

3. It should enunciate specific policies on particular aspects of liquidity management like

composition of assets and liabilities, maintain cumulative gaps over certain period and

approach to managing liquidity in different currencies and from one country to another.

4. The strategy of managing liquidity risk should be communicated through out the

organization. All business units within the bank that conduct activities having an impact

on liquidity should be fully aware of the liquidity strategy and operate under the approved

policies and procedures.

40

5. The Board should monitor the performance and liquidity risk profile of the bank and

periodically review information that is timely and sufficiently detailed to allow them to

understand and asses the liquidity risk facing the bank’s key portfolios and the bank as a

whole.

2. SETTING TOLERANCE LEVEL AND LIMIT FOR LIQUIDITY RISK

Bank’s management should set limits to ensure liquidity and these limits should be reviewed by

supervisors. Alternatively supervisors may set the limits. Limits could be set on the following:

1. The cumulative cash flow mismatches (i.e. the cumulative net funding requirement as

a percentage of total liabilities) over particular periods-next day, next week, next

fortnight, next month, next year. These mismatches should be calculated by taking a

conservative view of marketability of liquid assets, with a discount to cover price

volatility and any drop in price in the event of a forced sale, and should include likely

outflows as a result of draw-down of commitments, etc.

2. Liquid assets as a percentage of short-term liabilities. The assets included in this

category should be those which are highly liquid, i.e. only those which are judged to

be having a ready market even in periods of stress.

3. A limit on loan to deposit ratio.

4. A limit on loan to capital ratio.

5. A general limit on the relationship between anticipated funding needs and available

sources for meeting those needs.

6. Primary sources for meeting funding needs should be quantified.

7. Flexible limits on the percentage reliance on a particular liability category. (e.g.

certificates of deposits should not account for more than certain per cent of total

liabilities).

8. Limits on the dependence on individual customers or market segments for funds in

liquidity position calculations.

41

9. Flexible limits on the minimum/maximum average maturity of different categories of

liabilities.

10. Minimum liquidity provision to be maintained to sustain operations.

3. MEASURING AND MANAGING LIQUIDITY RISK

Measuring and managing funding requirement can be done through two approaches.

(i) Stock approach

(ii) Flow approach

(i) Stock Approach (to Measuring and Managing Liquidity)

Stock approach is based on the level of assets and liabilities as well as off balance sheet

exposures on a particular date. The following ratio are calculated to assess the liquidity

position of a bank.

(a) Ratio of core deposit to total assets: More the ratio better it is because core deposits are

treated to be the stable source of liquidity. Core deposit will constitute deposits from the

public in the normal course of business.

(b) Net loans to totals deposits ratio: It reflects the ratio of loans to public deposits or core

deposits. Total loans in this ratio represent net advances after deduction of provision for loan

losses and interest suspense account. Loan is treated to be less liquid asset and therefore

lower the ratio better it is.

(c) Ratio of time deposit to total deposits: Time deposits provide stable level of liquidity

and negligible volatility. Therefore, higher the ratio better it is.

42

(d) Ratio of volatile liabilities to total assets: Volatile liabilities like market borrowings are

to be assessed and compared with the total assets. Higher portion of volatile assets will

paused higher problems of liquidity. Therefore, lower the ratio better it is.

(e) Ratio of short-term liabilities to liquid assets: Short-term liabilities are required to be

redeemed at the earliest. Therefore, they will require ready liquid assets to meet the

liability. It is expected to be lower in the interest of liquidity.

(f) Ratio of liquid assets to total assets: Higher level of liquid assets in total assets will

ensure better liquidity. Therefore, higher the ratio better it is. Liquid assets may include

bank balances, money at call and short notice, inter bank placements due within one

month, securities held for trading and available for sale having ready market.

(g) Ratio of short-term liabilities to total assets: Short-term liabilities may include

balances in current account, volatile portion of savings accounts leaving behind core

portion of saving which is constantly maintained. Maturing deposits within a short period

of one month. A lower ratio is desirable.

(h) Ratio of prime asset to total asset: Prime assets may include cash balances with the

bank and balances with banks including central bank which can be withdrawn at any time

without any notice. More or higher the ratio better it is.

(i) Ratio of market liabilities to total assets: market liabilities may include money market

borrowings, inter bank liabilities repayable within a short period. Lower the ratio better it

is.

(ii) Flow Approach (to Measuring and Managing Liquidity)

The framework for assessing and managing bank liquidity through flow approach has three

major dimensions:

(a) Measuring and managing net funding requirements

(b) Managing market access, and

(c) Contingency planning.

43

(a) Measuring and managing net funding requirements

Flow approach is the basic approach being followed by Indian banks. It is called gap method

of measuring and managing liquidity. It requires the preparation of structural liquidity gap

report. In this method net funding requirement is calculated on the basis of residual

maturities of assets and liabilities. These residual maturities will represent the net cash flow,

i.e. difference of out flow and inflow of cash in the future time buckets. These calculations

are based on the part behaviour pattern of assets and liabilities as well as off balance sheet

exposures. Cumulative gap is calculated at various time buckets. It shows that at a particular

time after week/fortnight/month/quarter/half year/year cash outflow and inflow difference

will be represented by gap. In case the gap is negative, the bank will have to manage the

shortfall through various sources according to the liquidity policy and strategy of the bank.

The analysis of net funding requirements involves the construction of a maturity ladder

and the calculation of a cumulative net excess or deficit of funds at selected maturity dates. A

Bank’s net funding requirements are determined by analyzing its future cash flows based on

assumptions of the future behaviour of assets, liabilities and off-balance-sheet items, and then

calculating the cumulative net excess over the time frame for the liquidity assessment. These

aspects will be elaborated under following heads.

(i) The maturity ladder

(ii) Alternative scenarios

(iii) Measuring liquidity over the chosen time-frame.

(iv) Assumptions used in determining cash flows

(j) The maturity ladder:

A maturity ladder should be used to compare a bank’s future cash inflows to its future cash

outflows over a series of specified time periods. Cash inflows arise from maturing assets,

saleable non-maturing assets and established credit lines that can be trapped. Cash outflows

44

include liabilities falling due and contingent liabilities, especially committed lines of credit

that can be drawn down.

In constructing the maturity ladder, a bank has to allocate each cash inflow or outflow to

a given calendar date from a starting point, usually the next day. As a preliminary step to

constructing the maturity ladder, cash inflows can be ranked by the date on which assets

mature of a conservative estimate of when credit lines can be drawn down. Similarly, cash

outflows can be ranked by the date on which liabilities fall due, the earliest date a liability

holder could exercise an early repayment option, or the earliest date contingencies can be

called.

(ii)Alternative Scenarios

This involves evaluating whether a bank has sufficient liquidity depends in large measure on

the behaviour of cash flows under the different conditions. Analysing liquidity thus entails

laying out what if scenarios.

There may be three scenarios for a bank in connection with management of liquidity

which provide useful benchmarks:

(a) General market conditions

(b) Bank specific crisis

(c) General market crisis

(iii) Measuring liquidity over the chosen time frame

The evolution of a bank’s liquidity profile under one or more scenarios can be tabulated or

portrayed graphically, by cumulating the balance of expected cash inflows and cash outflows

at several time points. A stylized liquidity graph can be constructed enabling the evolution of

the cumulative net excess or deficit of funds to be compared under the three scenarios in

order to provide further insights into a bank’s liquidity and to check how consistent and

realistic the assumptions are for the individual bank. For example, a high-quality institution

may look very liquid in a going-concern scenario, marginally liquid in a bank-specific crisis

45

and quite liquid in a general market crisis. In contrast, a weaker institution might be far less

liquid in the general crisis than it would in a bank specific crisis.

(iv) Assumptions used in determining cash flows

Liquidity risk planning is done for the future scenarios and therefore, it is not always

possible to predict with certainty as to what will happen in future. It all depends upon certain

assumptions which require to be reviewed frequently to determine their continuing validity for

making predictions for liquidity risk management. The total number of major liquidity

assumptions to be made, however, is fairly limited and fall under categories of (a) assets, (b)

liabilities, (c) off-balance-sheet activities, and (d) others.

b)Managing Market Access

Some liquidity management techniques are viewed not only for their influence on the

assumptions used in constructing in maturity ladders, but also for their direct contribution to

enhancing a bank’s liquidity. Thus, it is important for a bank to review periodically its efforts

to maintain the diversification of liabilities, to establish relationships with liability holders

and to develop asset-sales markets.

Developing markets for asset sales or exploring arrangements under which a bank can

borrow against assets is the third element of managing market access. The inclusion of loan-

sale clauses in loan documentation and the frequency of use of some asset-sales markets are

two possible indicators of a bank’s ability to execute asset sales under adverse scenarios.

c) Contengency Planning

A bank’s ability to withstand a net funding requirement in a bank specific or general market

liquidity crisis can also depend on the caliber of its formal contingency plans. Effective

contingency plans should address two major questions:

* Does management have a strategy for handling a crisis?

* Does management have procedures in place for accessing cash in emergency?46

The degree to which a bank has addressed these questions realistically, provides

management with additional insight as to how a bank may fare in a crisis.

Strategy for handling a crises: A game plan for dealing with a crisis should consist of

several components. Most important are those that involve managerial coordination. A

contingency plan needs to spell out procedures to ensure that information flows remain

timely and uninterrupted, and that the information flows provide senior management with the

precise information it needs in order to make quick decisions. A clear division of

responsibility must be set out so that all personnel understand what is expected of them

during a crisis. Confusion in this area can waste resources on certain issues and omit

coverage on others.

Another major element in the plan should be a strategy for taking certain actions to alter

asset and liability behaviours. While assumptions can be made as to how an asset or liability

will behave under certain conditions (as discussed above), a bank may have the ability to

change these characteristics. For example, a bank may conclude that it will suffer a liquidity

deficit in a crisis based on its assumptions regarding the amount of future cash inflows from

saleable assets and outflows from deposit run-offs. During such a crisis however, a bank may

be able to market assets more aggressively, or sell assets that it would not have sold under

normal conditions and thus augment its cash inflows from asset sales. Alternatively, it may

try to reduce cash outflows by raising its deposit rates to retain deposits that might otherwise

have moved elsewhere.

Back up liquidity for emergency situations: Contingency plans should also include

procedures for making up cash flow shortfalls in emergency situations. Banks have available

to them several sources of such funds, including previously unused credit facilities and the

domestic central bank. Depending on the severity of a crisis, a bank may choose-or be

forced-to use one of more of these sources. The plan should spell out as clearly as possible

the amount of funds a bank has available from these sources, and under what scenarios a

bank could use them.

47

ANALYSIS AND INTERPRETATION OF RATIOS

STATE BANK OF INDIA

1. CORE DEPOSIT TO TOTAL ASSETS

2007 2008 2009 2010 2011

76.87 74.48 74.94 73.88 75.9748

INTERPRETATION: It can be seen in 2007 this ratio was 76.87% but after that it has

declined continuously but again in 2011 has increased so it can be seen that it’s deposits has

declined till 2010 but in 2011 it again started to increase.

2. LOAN TO TOTAL DEPOSIT

2007 2008 2009 2010 2011

55.14 68.84 77.46 77.55 73.11

INTERPRETATION: This ratio has increased significantly after 2007 remained stable in 2009

& 2010 but has declined slightly in the year 2011.

3. TIME DEPOSIT TO TOTAL DEPOSIT

2007 2008 2009 2010 2011

58.72 52.45 51.52 53.04 58.36

INTERPRETATION: This ratio has declined after 2007 but again started to increase after

2009. This ratio shows that in all five years the bank have more than 50% of the time deposits

out of the total deposits. Which is a good sign.

4. LIQUID ASSETS TO TOTAL ASSETS

2007 2008 2009 2010 2011

8.55 9.02 9.17 9.35 10.83

49

INTERPRETATION: This ratio the proportion of liquid assets out of the total assets. The

banks performance in this ratio is good as this ratio has increased from 8.55% in 2007 to 10.83 %

in 2011.

5. PRIME ASSETS TO TOTAL ASSETS

2007 2008 2009 2010 2011

4.79 4.51 6.06 7.66 8.52

INTERPRETATION: This ratio has increased significantly in all years. In 2007 this ratio was

4.79% but in 2011 it has increased to the level of 8.52%.

6. NON PERFORMING LOANS TO LOANS

2007 2008 2009 2010 2011

6.15 3.97 2.96 3.08 2.87

INTERPRETATION: The bank has been able to improve it’s performance in this ratio. It was

6.15% in 2007 but afterwards it is continuously declining. and in 2011 it is only 2.87%.

7. RISK ADJUSTED MARGIN

2007 2008 2009 2010 2011

4.32 4.63 3.60 3.29 3.22

INTERPRETATION: This ratio was good in years 2007 and 2008 but afterwards it has shown

declining trend but still as it is has not declined sharply so it is a good thing.

50

8.TOTAL LOAN LOSS PROVISIONS TO LOANS

2007 2008 2009 2010 2011

0.59 0.06 0.42 0.48 0.46

INTERPRETATION: This ratio has decreased to a greater extent in 2008 but after that it has

rise for continuous two years i.e 2009 & 2010 but in 2011 it has decreased slightly.

STATE BANK OF BIKANER AND JAIPUR

1. CORE DEPOSIT TO TOTAL ASSETS

2007 2008 2009 2010 2011

81.36 78.85 82.53 82.88 84.59

51

INTERPRETATION: This ratio has increased in all year except in 2008 when it has declined

from 81.36% in 2007 to 78.85% in 2008. But afterwards it has has shown a positive trend.

2. LOAN TO TOTAL DEPOSIT

2007 2008 2009 2010 2011

63.08 73.27 72.07 73.52 76.10

INTERPRETATION: This ratio has seen a positive trend from 2007 to 2010. Which shows that

bank is actively distributing loans.

3. TIME DEPOSIT TO TOTAL DEPOSIT

2007 2008 2009 2010 2011

56.88 57.94 64.99 64.74 62.18

INTERPRETATION: This ratio has seen a positive trend from 2007 to 2011. Which is

remarkable thing. In all the 5 years the proportion of the term deposits was more than 50 % out

of the total deposits. And if we leave 2007 and 2008 rest all the 3 years the ratio was more than

60%.

4. LIQUID ASSETS TO TOTAL ASSETS

2007 2008 2009 2010 2011

7.59 8.92 12.65 10.98 9.31

INTERPRETATION: The ratio has increased significantly from the period between 2007-

2009. But afterwards it is continuously declining, which is not a good sign.

52

5. PRIME ASSETS TO TOTAL ASSETS

2007 2008 2009 2010 2011

5.17 6.30 10.90 10.98 8.72

INTERPRETATION: This ratio has increased significantly in the year 2009 , remained stable

in 2010 but afterwards it has declined.

6. NON PERFORMING LOANS TO LOANS

2007 2008 2009 2010 2011

3.33 2.45 2.26 1.74 1.64

INTERPRETATION: The bank has done well in this ratio as this ratio is continuously

declining. So it is a good sign.

7. RISK ADJUSTED MARGIN

2007 2008 2009 2010 2011

5.58 4.36 3.93 1.80 2.21

INTERPRETATION: The bank performance in this ratio is not good. As after 2007 there is

continuous decline but in 2011 again it has increased when compared with 2010.

53

8. TOTAL LOAN LOSS PROVISIONS TO LOANS

2007 2008 2009 2010 2011

0.38 0.27 0.37 0.30 0.25

INTERPRETATION: This ratio has declined in year 2008 but in 2009 it has risen to 0.37 %

but after that for next two years it has continuously declined which is a good thing.

STATE BANK OF HYDERABAD

1. CORE DEPOSIT TO TOTAL ASSETS

2007 2008 2009 2010 201154

82.84 83.74 84.61 81.32 81.40

INTERPRETATION: This ratio has seen a rising trend in the years 2007-2009, but afterwards

it has declined. And remained stable in 2010-2011.

2. LOAN TO TOTAL DEPOSIT

2007 2008 2009 2010 2011

44.67 61.32 67.73 71.54 69.94

INTERPRETATION: There has been a Sharpe increase in this ratio. It was only 44.67% in

2007 and in 2010 it has increased to 71.54%. but in 2011 it has declined slightly.

3. TIME DEPOSIT TO TOTAL DEPOSIT

2007 2008 2009 2010 2011

67.37 65.66 68.62 69.40 69.33

INTERPRETATION: The performance of bank in this ratio is remarkable as not only the ratio

been in upward trend rather the ratio is in all the years remained above 65%. So it is a good sign.

4. LIQUID ASSETS TO TOTAL ASSETS

2007 2008 2009 2010 2011

8.81 7.45 9.30 10.25 9.07

55

INTERPRETATION: This ratio has declined in 2008 and again after rising in 2009-20010

again it declined in 2011.

5. PRIME ASSETS TO TOTAL ASSETS

2007 2008 2009 2010 2011

8.24 6.58 8.28 10.25 9.07

INTERPRETATION: The ratio has declined in 2008 and it risen upward but again in 2011 it

has declined.

6. NON PERFORMING LOANS TO LOANS

2007 2008 2009 2010 2011

3.55 2.17 1.25 0.87 1.11

INTERPRETATION: The performance of the bank is quite good in this ratio as the ratio been

in declining ternd from 2007-2010. But it has increased slightly in the year 2011 to 1.11% as

compared to .87% in 2010.

7. RISK ADJUSTED MARGIN

2007 2008 2009 2010 2011

3.96 3.61 3.60 2.95 2.74

INTERPRETATION: The ratio is in declining trend in all the five years which shows the credit

risk pressure In which the bank is operating.

8. TOTAL LOAN LOSS PROVISIONS TO LOANS

56

2007 2008 2009 2010 2011

0.00 0.41 0.16 -0.09 0.31

INTERPRETATION: In 2007 the bank has not made any provisions at all. In 2009 the ratio has

declined considerably to the level of 0.16%. In 2010 the ratio is in negative which means that

some of the npa has recovered or there is upward shift in the npa because of which now bank has

reversed the provision, which is a good thing. But again in 2011 the ratio has increased to 0.31%.

STATE BANK OF INDORE

1. CORE DEPOSIT TO TOTAL ASSETS

57

2007 2008 2009 2010 2011

81.71 80.44 81.45 84.37 85.66

INTERPRETATION: The ratio remained in rising trend since 2009. It was only in 2008 that it

has declined from 81.71%(2005) to 80.44. so it is good sign that it is in positive trend

2. LOAN TO TOTAL DEPOSIT

2007 2008 2009 2010 2011

65.48 71.28 76.85 73.79 76.28

INTERPRETATION: This ratio has been in increasing trend in all the five years which shows

it is actively distributing loans.

3. TIME DEPOSIT TO TOTAL DEPOSIT

2007 2008 2009 2010 2011

69.17 69.17 70.82 68.27 69.79

INTERPRETATION: This ratio has been stable in 2007-2008, increased in 2009 and declined

in 2010 and again increased slightly in 2011. The good thing is that in all five years it has not

gone below the levels of 68%. Which is a good thing.

4. LIQUID ASSETS TO TOTAL ASSETS

58

2007 2008 2009 2010 2011

7.10 9.89 8.86 6.92 7.01

INTERPRETATION: This has increased in 2008 but seen a decline afterwards and again it has

risen slightly in 2011.

5. PRIME ASSETS TO TOTAL ASSETS

2007 2008 2009 2010 2011

5.89 9.39 8.86 6.85 6.86

INTERPRETATION: This ratio has increased in 2008 but afterwards it has declined and it

remained stable in 2010-2011.

6. NON PERFORMING LOANS TO LOANS

2007 2008 2009 2010 2011

3.36 3.06 1.92 1.46 1.39

INTERPRETATION: This ratio has been in the declining trend in all the five years, which is a

good sign.

7. RISK ADJUSTED MARGIN

2007 2008 2009 2010 2011

4.03 3.77 3.06 2.77 3.11

INTERPRETATION: The performance of the bank in this ratio has been in decline till 2010,

but in 2011 it has again increased from 2.77% to 3.11%.

59

8. TOTAL LOAN LOSS PROVISIONS TO LOANS

2007 2008 2009 2010 2011

0.00 0.04 0.32 0.39 0.26

INTERPRETATION: The bank has not made any provision for npa in 2007. But in 2009 and

2010 this ratio has increased a lot if compared with 2008. But again in 2011 the ratio has

declined.

STATE BANK OF MYSORE

1. CORE DEPOSIT TO TOTAL ASSETS

60

2007 2008 2009 2010 2011

82.07 84.65 82.04 83.04 81.30

INTERPRETATION: This ratio has shown a decline in deposits after 2010. It is only in the

year 2010 that it has increased as compared to 2009.

2. LOAN TO TOTAL DEPOSIT

2007 2008 2009 2010 2011

64.64 71.81 74.77 76.57 77.82

INTERPRETATION: The ratio has been in upward trend in all the 5 years.

3. TIME DEPOSIT TO TOTAL DEPOSIT

2007 2008 2009 2010 2011

64.31 64.49 68.05 68.13 71.12

INTERPRETATION: The performance is very good in this ratio as it remained in rising trend

in all the 5 years.

4. LIQUID ASSETS TO TOTAL ASSETS

2007 2008 2009 2010 2011

9.46 7.03 9.08 8.79 5.29

61

INTERPRETATION: The ratio shows that liquidity position is showing up and downs ,in 2008

the ratio has gone down then again it has risen and afterwards it again declined to the level of

5.29% in 2011 from the level of 9.08 in 2009.

5. PRIME ASSETS TO TOTAL ASSETS

2007 2008 2009 2010 2011

6.59 4.44 9.08 8.79 5.27

INTERPRETATION: The ratio shows that liquidity position is showing up and downs ,in 2008

the ratio has gone down then again it has risen and afterwards it again declined to the level of

5.27% in 2011 from the level of 9.08 in 2009.

6. NON PERFORMING LOANS TO LOANS

2007 2008 2009 2010 2011

4.73 3.39 2.33 1.71 1.44

INTERPRETATION: There has been a good improvement in this ratio. As it has declined

continuously and reached to the level of 1.44% in 2011 from 4.73% in 2007.

7. RISK ADJUSTED MARGIN

2007 2008 2009 2010 2011

4.85 4.13 3.70 3.52 3.12

INTERPRETATION: The ratio is continuously declining trend. Which is not a good sign.

8. TOTAL LOAN LOSS PROVISIONS TO LOANS

62

2007 2008 2009 2010 2011

1.46 1.27 0.25 0.10 0.21

INTERPRETATION: The bank has shown tremendous improvement in the years 2009 and

2010 as it is just 0.25 and 0.10 % respectively if compared with ratios of 2007 and 2008. But in

2011 this ratio has increased if compared with 2010.

STATE BANK OF PATIALA

1. CORE DEPOSIT TO TOTAL ASSETS

63

2007 2008 2009 2010 2011

84.11 57.68 82.56 82.24 86.13

INTERPRETATION: This ratio has seen a very sharpe decline in the year 2008 when this ratio

has gone down from the levels of 84.11% to 57.68%, but afterwards it again risen sharpely and

remained above the levels of 82%.

2. LOAN TO TOTAL DEPOSIT

2007 2008 2009 2010 2011

57.97 93.25 73.42 74.94 72.72

INTERPRETATION: This ratio seen a sharpe rise in the year 2008 when out of the total

deposits the bank has distributed 93% loans. But afterwards is again fell sharpely and remained

in the levels of 72 %.

3. TIME DEPOSIT TO TOTAL DEPOSIT

2007 2008 2009 2010 2011

68.37 70.42 72.76 74.11 77.40

INTERPRETATION: There has been a rising trend in this ratio in all the five years. The ratio

never gone down below the levels of 70%. Which is a good sign.

4. LIQUID ASSETS TO TOTAL ASSETS

2007 2008 2009 2010 2011

64

7.44 7.71 8.31 8.13 7.23

INTERPRETATION: The ratio has been in upwards trend till 2009 and afterwards it’s been in

declining stage.

5. PRIME ASSETS TO TOTAL ASSETS

2007 2008 2009 2010 2011

6.06 4.69 6.12 8.13 6.70

INTERPRETATION: The ratio has gone down in 2008 but afterwards remained in upward

trend but in 2011 it again fell to the levels of 6.70%

6. NON PERFORMING LOANS TO LOANS

2007 2008 2009 2010 2011

4.25 2.45 1.82 1.43 1.32

INTERPRETATION: The performance is very good as there is a continuous decline in the

npa’s. which is a good sign.

7. RISK ADJUSTED MARGIN

2007 2008 2009 2010 2011

4.07 3.34 2.91 2.39 2.42

INTERPRETATION: The performance is not good as the ratio is continuously declining.

65

8. TOTAL LOAN LOSS PROVISIONS TO LOANS

2007 2008 2009 2010 2011

0.33 -0.14 0.22 0.21 0.17

INTERPRETATION: In 2007 the ratio was 0.33% and in 2008 this ratio is in negative which

means that some of the npa has recovered or there is upward shift in the npa because of which

now bank has reversed the provision, which is a good thing.But in 2009 it has again risen but

after that for the years 2010 and 2011 it is declining.

STATE BANK OF SAURASHTRA

66

1. CORE DEPOSIT TO TOTAL ASSETS

2007 2008 2009 2010 2011

83.87 83.74 merged

INTERPRETATION: The ratio shows the stablity in 2007-08 and after that in 2009 its merged.

2. LOAN TO TOTAL DEPOSIT

2007 2008 2009 2010 2011

53.23 61.00 merged

INTERPRETATION: The ratio shows an increasing trend till2008 and after that in 2009 its

merged.

3. TIME DEPOSIT TO TOTAL DEPOSIT

2007 2008 2009 2010 2011

70.84 63.64 merged

INTERPRETATION: The ratio shows a declining trend till 2008 but in 2009 its merged.

4. LIQUID ASSETS TO TOTAL ASSETS

2007 2008 2009 2010 20

7.82 7.56 merged

67

INTERPRETATION: Theratio is stable in 2007-08 and after that in 2009 it merged.

5. PRIME ASSETS TO TOTAL ASSETS

2007 2008 2009 2010 2011

7.06 6.45 merged

INTERPRETATION: The ratio declined in 2008.than it merged.

6. NON PERFORMING LOANS TO LOANS

2007 2008 2009 2010 2011

2.74 1.86 merged

INTERPRETATION: This ratio shows an inefficient performance as the bank has been able to

reduce the npa. In 2 years the ratio shows a declining trend. Which is a good sign.

7. RISK ADJUSTED MARGIN

2007 2008 2009 2010 2011

4.52 3.37 merged

INTERPRETATION: The performance regarding this ratio cannot be said satisfactory as it is

not been able to retain margin as in 2007. The ratio shows a continuous decline.

8. TOTAL LOAN LOSS PROVISIONS TO LOANS

68

2007 2008 2009 2010 2011

0.87 0.32 merged

INTERPRETATION: The ratio in 2007 is 0.87% and in 2008 is 0.32% it means the ratio is

declined.

NOTE: STATE BANK OF SAURASHTRA HAS MERGED WITH STATE BANK OF

INDIA IN 2009.

STATE BANK OF TRAVANCORE

1.CORE DEPOSIT TO TOTAL ASSETS

2007 2008 2009 2010 201169

83.58 81.59 81.55 80.54 85.00

INTERPRETATION: In 2007 the ratio was 83.58% but afterwards it continues to decline till

2010 but it has increased by 5% in the year 2011 as compared to 2010.

2.LOAN TO TOTAL DEPOSIT

2007 2008 2009 2010 2011

61.53 72.57 80.00 79.59 77.81

INTERPRETATION: The ratio is in increasing trend till 2009 but afterwards it has declined

both in the year 2010-2011.

3.TIME DEPOSIT TO TOTAL DEPOSIT

2007 2008 2009 2010 2011

70.38 69.60 71.67 70.72 67.57

INTERPRETATION: The ratio has declined except in 2009 but the good thing is that it has not

gone down below the level of 69%.

4. LIQUID ASSETS TO TOTAL ASSETS

2007 2008 2009 2010 2011

9.80 4.34 6.98 8.40 4.96

70

INTERPRETATION: The ratio has declined sharply in year 2008 but afterwards it has

increased but again in 2011 it fell downward to the level of 4.96% from 8.40% in 2010. Which is

not a good sign.

5.PRIME ASSETS TO TOTAL ASSETS

2007 2008 2009 2010 2011

9.63 4.34 6.81 8.40 4.96

INTERPRETATION: The ratio has declined sharply in year 2008 but afterwards it has

increased but again in 2011 it fell downward to the level of 4.96% from 8.40% in 2010. Which is

not a good sign.

6.NON PERFORMING LOANS TO LOANS

2007 2008 2009 2010 2011

4.39 3.23 2.18 2.03 1.66

INTERPRETATION: There has been a significant improvement in the ratio if we compare all 5

years.

From 4.39% in 2007 the bank has bring down the npa’s to the level of just 1.66%.

7.RISK ADJUSTED MARGIN

2007 2008 2009 2010 2011

4.73 3.96 3.38 2.94 3.63

INTERPRETATION: This ratio has shown a declining trend till 2010 but again 2011 it has

increased it’s risk adjusted margin significantly. Which is a good sign.

71

8.TOTAL LOAN LOSS PROVISIONS TO LOANS

2007 2008 2009 2010 2011

0.40 0.24 0.28 0.37 0.18

INTERPRETATION: The ratio in 2007 this ratio is in 0.40%. But for the next three years it

has continuously increased but in 2011 this ratio has declined sharply to the level of 0.18%.

COMPARISON OF RATIOS WITH THE AVERAGE GROUP RATIO

CORE DEPOSIT TO TOTAL ASSETS

72

NAME OF THE BANK 2007 2008 2009 2010 2011

STATE BANK OF INDIA 76.87 74.48 74.94 73.88 75.97

STATE BANK OF BIKANER AND JAIPUR

81.36 78.85 82.53 82.88 84.59

STATE BANK OF HYDERABAD 82.84 83.74 84.61 81.32 81.4

STATE BANK OF INDORE 81.71 80.44 81.45 84.37 85.66

STATE BANK OF MYSORE 82.07 84.65 82.4 83.04 81.3

STATE BANK OF PATIALA 84.11 57.68 82.56 82.24 86.13

STATE BANK OF SAURASHTRA 83.87 83.74 merged

STATE BANK OF TRAVANCORE 83.58 81.59 81.55 80.54 85

INDUSTRY AVERAGE 82.42 78.46 81.96 80.57 83.00

INTERPRETATION

2007: In this year the group average of the core deposits to total assets ratio was 82.42%. State

Bank Of India, State Bank Of Bikaner And Jaipur, State Bank Of Indore, State Bank Of Mysore

have less ratio then the average ratio. Rest four banks have above average ratio.

2008: In this year the group average of the core deposits to total assets ratio was 78.46%. except

State Bank Of Patiala and State Bank Of India rest all banks have above average ratios. The

performance of State Bank Of Patiala was very bad as it has only 57.68% ratio as compared to

the group average of 78.46%.

73

2009: In this year the group average of the core deposits to total assets ratio was 81.96%. out of

eight three banks i.e State Bank Of India, State Bank Of Indore and State Bank Of Travancore

has less ratio as compared to group average.

2010: In this year the group average of the core deposits to total assets ratio was 80.57%. out of

eight three banks i.e State Bank Of India, State Bank Of Saurashtra and State Bank Of

Travancore has less ratio then the industry average but the performance of State Bank Of India

and State Bank Of Saurashtra is worse if compared with State Bank Of Travancore.

2011: In this year the group average of the core deposits to total assets ratio was 83%. State

Bank Of India, State Bank Of Hyderabad and State Bank Of Mysore has ratios less than of the

group average.

LOAN TO TOTAL DEPOSITS

NAME OF THE BANK 2007 2008 2009 2010 2011

74

STATE BANK OF INDIA 55.14 68.84 77.46 77.55 73.11

STATE BANK OF BIKANER AND JAIPUR

63.08 73.27 72.07 73.52 76.1

STATE BANK OF HYDERABAD 44.67 61.32 67.73 71.54 69.94

STATE BANK OF INDORE 65.48 71.28 76.85 73.79 76.28

STATE BANK OF MYSORE 64.64 71.81 74.77 76.57 77.82

STATE BANK OF PATIALA 57.97 93.25 73.42 74.94 72.72

STATE BANK OF SAURASHTRA 53.23 61 merged

STATE BANK OF TRAVANCORE 61.53 72.57 80 79.59 77.81

INDUSTRY AVERAGE 58.22 71.67 74.05 73.10 74.83

INTERPRETATION:

2007: In this year the average loan to total deposits ratio of the group was 58.22. out of the eight

banks four banks have more ratio then the average ratio. These banks are State Bank Of Bikaner

And Jaipur, State Bank Of Indore, State Bank Of Mysore, State Bank Of Travancore

2008: In this year the average loan to total deposits ratio of the group was 71.67 %. out of the

eight banks four banks have more ratio then the average ratio. These banks are State Bank Of

Bikaner And Jaipur, State Bank Of Mysore, State Bank Of Travancore, State Bank Of Patiala.

2009: In this year the average ratio of the group was 74.05%. out of eight four banks had ratio

more than the average industry ratio. These banks are State Bank Of Mysore, State Bank Of

Indore, State Bank Of India And State Bank Of Travancore.

2010: In this year the average loan to total deposits ratio of the group was 73.10%. out of six

banks five banks has more ratio than the average group ratio .These banks are State Bank Of

Indore, State Bank Of Bikaner And Jaipur State Bank Of Mysore, State Bank Of Patiala, State

Bank Of Travancore, State Bank Of India.

75

2011: In this year the average loan to total deposits ratio of the group was 74.83%. out of seven

four banks has more ratio than the average group ratio. These banks are State Bank Of Indore,

State Bank Of Mysore, State Bank Of Travancore And State Bank Of Bikaner And Jaipur

TIME DEPOSITS TO TOTAL DEPOSITS

NAME OF THE BANK 2007 2008 2009 2010 2011

STATE BANK OF INDIA 58.72 52.45 51.42 53.04 58.36

STATE BANK OF BIKANER AND JAIPUR

56.88 57.94 64.99 64.74 62.18

STATE BANK OF HYDERABAD 67.37 65.66 68.62 69.4 69.33

STATE BANK OF INDORE 69.17 69.17 70.82 68.27 69.79

STATE BANK OF MYSORE 64.31 64.49 68.05 68.13 71.12

STATE BANK OF PATIALA 68.37 70.42 72.76 74.11 77.4

STATE BANK OF SAURASHTRA 70.84 63.64 merged

STATE BANK OF TRAVANCORE 70.78 69.6 71.67 70.72 67.57

INDUSTRY AVERAGE 65.81 64.17 66.87 66.73 67.96

INTERPRETATION:

2007: In this year the average time deposits to total deposits ratio of the group was 65.81%.

except State Bank Of India, State Bank Of Bikaner And Jaipur all other banks has ratio above

than the average group ratio.

76

2008: In this year the average time deposits to total deposits ratio of the group was 64.17%.

State Bank Of India, State Bank Of Bikaner And Jaipur, State bank of saurashtra has ratios less

than the average group ratio.

2009: In this year the average time deposits to total deposits ratio of the group was 66.87%.

except State Bank Of India And State Bank Of Bikaner And Jaipur rest all other banks has ratios

above than the average group ratio. Out of the two State Bank Of India has very less time deposit

to total deposit ratio i.e 51.42% as compared to the group average.

2010: In this year the average time deposits to total deposits ratio of the group was 66.73%. out

of eight three banks has ratios less than that of the average group ratio. These banks are State

Bank Of India, State Bank Of Bikaner And Jaipur.

2011: In this year the average time deposits to total deposits ratio of the group was 67.96%.

three banks has ratio less than the average group ratio, these banks are State Bank Of India, State

Bank Of Bikaner And Jaipur, State Bank Of Travancore.

LIQUID ASSETS TO TOTAL ASSETS

NAME OF THE BANK 2007 2008 2009 2010 2011

77

STATE BANK OF INDIA 8.55 9.02 9.17 9.35 10.83

STATE BANK OF BIKANER AND JAIPUR

7.59 8.92 12.65 10.98 9.31

STATE BANK OF HYDERABAD 8.81 7.45 9.3 10.25 9.7

STATE BANK OF INDORE 7.1 9.89 8.86 6.92 7.01

STATE BANK OF MYSORE 9.46 7.03 9.08 8.79 5.29

STATE BANK OF PATIALA 7.44 7.71 8.31 8.13 7.23

STATE BANK OF SAURASHTRA 7.82 7.56 merged

STATE BANK OF TRAVANCORE 9.8 4.34 6.98 8.4 4.96

INDUSTRY AVERAGE 8.32 7.74 9.26 9.06 7.76

Interpretation:

2007: In this year the average liquid assets to total assets ratio of the group was 8.55%. Except

State Bank Of Bikaner And Jaipur, State Bank Of Indore all other banks has ratio above than the

average group ratio.

2008: In this year the average liquid assets to total assets ratio of the group was 7.74%. out of

eight only three banks has ratios above than the average group ratio, these are State Bank Of

India, State Bank Of Bikaner And Jaipur, State Bank Of Indore. State Bank of Travancore has

very poor ratio if compared with the average group ratio.

2009: In this year the average liquid assets to total assets ratio of the group was 9.26%. only

three banks has ratio above than the average group ratio, these are State Bank Of Bikaner And

Jaipur, State bank of Hyderabad . Out of these three State Bank Of Bikaner And Jaipur has very

high ratio if compared with the average group ratio.

78

2010: In this year the average liquid assets to total assets ratio of the group was 9.06%. Out of

eight these four banks State Bank Of Indore, State Bank Of Mysore, State Bank Of Patiala And

State Bank Of Travancore has less ratio than the average group ratio.

2011: In this year the average liquid assets to total assets ratio of the group was 7.76%. Out of

seven four banks State Bank Of Indore, State Bank Of Mysore. State Bank Of Patiala And State

Bank Of Travancore has ratios less than the average group ratio.

PRIME ASSETS TO TOTAL DEPOSIT

NAME OF THE BANK 2007 2008 2009 2010 2011

STATE BANK OF INDIA 4.79 4.51 6.06 7.66 8.52

STATE BANK OF BIKANER AND JAIPUR

5.17 6.3 10.9 10.98 8.72

STATE BANK OF HYDERABAD 8.24 6.58 8.28 10.25 9.07

STATE BANK OF INDORE 5.89 9.39 8.86 6.85 6.86

STATE BANK OF MYSORE 6.59 4.44 9.08 8.79 5.27

STATE BANK OF PATIALA 6.06 4.69 6.12 8.13 6.7

STATE BANK OF SAURASHTRA 7.06 6.45 merged

STATE BANK OF TRAVANCORE 9.63 4.34 6.81 8.4 4.96

INDUSTRY AVERAGE 6.68 5.84 7.81 8.83 7.16

Interpretation:

2007: In this year the average prime assets to total assets ratio of the group was 6.68%. out of

eight these banks i.e State Bank Of India, State Bank Of Bikaner And Jaipur,State Bank Of

79

Indore, State Bank Of Mysore, State Bank Of Patiala has ratios less than that of the average

group ratio.

2008 In this year the average prime assets to total assets ratio of the group was 5.84%. out of

eight these four banks i.e State Bank Of India,State Bank Of Mysore. State Bank Of Patiala,

State Bank Of Travancore has ratios less than that of the average group ratio.

2009: In this year the average prime assets to total assets ratio of the group was 7.81%. out of

eight these four banks i.e State Bank Of India, State Bank Of Patiala And State Bank Of

Travancore has ratios less than that of the average group ratio.

2010: In this year the average prime assets to total assets ratio of the group was 8.83%. out of

eight five banks has less ratio than that of the average group ratio, these are State Bank Of India,

State Bank Of Travancore, State Bank Of Patiala, State Bank Of Mysore, State Bank Of Indore.

2011: In this year the average prime assets to total assets ratio of the group was 7.16%. out of

seven for banks has ratios less than that of average group ratio. These banks are State Bank Of

Indore, State Bank Of Mysore, State Bank Of Travancore, State Bank Of Patiala.

NON PERFORMING LOANS TO LOANS

NAME OF THE BANK 2007 2008 2009 2010 2011

80

STATE BANK OF INDIA 6.15 3.97 2.96 3.08 2.87

STATE BANK OF BIKANER AND JAIPUR

3.33 2.45 2.26 1.74 1.64

STATE BANK OF HYDERABAD 3.55 2.17 1.25 0.87 1.11

STATE BANK OF INDORE 3.36 3.06 1.92 1.46 1.39

STATE BANK OF MYSORE 4.73 3.39 2.33 1.71 1.44

STATE BANK OF PATIALA 4.25 2.45 1.82 1.43 1.32

STATE BANK OF SAURASHTRA 2.74 1.86 merged

STATE BANK OF TRAVANCORE 4.39 3.23 2.18 2.03 1.66

INDUSTRY AVERAGE 4.06 2.82 1.98 1.72 1.63

Interpretation:

2007: In this year the average non performing loans to loans ratio of the group was 4.06%. out

of eight these four banks State Bank Of India, State Bank Of Mysore, State Bank Of Patiala.

State Bank Of Travancore has more ratio than the average group ratio.

2008: In this year the average non performing loans to loans ratio of the group was 2.82%.

these four banks State Bank Of India, State Bank Of Indore, State Bank Of Mysore State Bank

Of Travancore has more ratio than the average group ratio.

2009: In this year the average non performing loans to loans ratio of the group was 1.98%.

these four banks State Bank Of India, State Bank Of Bikaner And Jaipur, State Bank Of

Travancore, State Bank Of Mysore has more ratio than that of the average group ratio.

81

2010: In this year the average non performing loans to loans ratio of the group was 1.72%.

these three banks State Bank Of India, State Bank Of Bikaner And Jaipur and State Bank Of

Travancore has more ratio than that of average group ratio.

2011: In this year the average non performing loans to loans ratio of the group was 1.63%.

these three banks has more ratio than that of the average group ratio. The name of banks are

State Bank Of India, State Bank Of Bikaner And Jaipur, And State Bank Of Travancore

RISK ADJUSTED MARGIN

NAME OF THE BANK 2007 2008 2009 2010 2011

STATE BANK OF INDIA 4.32 4.63 3.6 3.29 3.22

STATE BANK OF BIKANER AND JAIPUR

5.58 4.36 3.93 1.8 2.21

STATE BANK OF HYDERABAD 3.96 3.61 3.6 2.95 2.74

STATE BANK OF INDORE 4.03 3.77 3.06 2.77 3.11

STATE BANK OF MYSORE 4.85 4.13 3.7 3.52 3.12

STATE BANK OF PATIALA 4.07 3.34 2.91 2.39 2.42

STATE BANK OF SAURASHTRA 4.52 3.37 merged

STATE BANK OF TRAVANCORE 4.73 3.96 3.38 2.94 3.63

INDUSTRY AVERAGE 4.51 3.90 3.40 2.76 2.92

Interpretation:

82

2007: In this year the average risk adjusted margin of the group was 4.51%. these four banks State Bank Of India, State Bank Of Hyderabad, State Bank Of Indore , State Bank Of Patiala has less ratio than that of the average group ratio.

2008: In this year the average risk adjusted margin of the group was 3.90%. these four banks

State Bank Of Hyderabad, State Bank Of Indore State Bank Of Patiala, State Bank Of Saurashtra

has less ratio than that of the average group ratio.

2009: In this year average risk adjusted margin of the group was 3.40%. these four banks State

Bank Of Indore, State Bank Of Patiala, State Bank Of Travancore has less ratio than that of the

average group ratio.

2010: In this year the average risk adjusted margin of the group was 2.76%. these three banks

State Bank Of Bikaner And Jaipur, State Bank Of Patiala has less ratio than that of the average

group ratio.

2011: In this year the average risk adjusted margin of the group was 2.92%. these three banks

State Bank Of Bikaner And Jaipur, State Bank Of Hyderabad And State Bank Of Patiala has less

ratio than that of the average group ratio.

TOTAL LOAN LOSS PROVISION TO LOANS

83

NAME OF THE BANK 2007 2008 2009 2010 2011

STATE BANK OF INDIA 0.59 0.06 0.42 0.48 0.46

STATE BANK OF BIKANER AND JAIPUR

0.38 0.27 0.37 0.3 0.25

STATE BANK OF HYDERABAD 0 0.41 0.16 -0.09 0.31

STATE BANK OF INDORE 0 0.04 0.32 0.39 0.26

STATE BANK OF MYSORE 1.46 1.27 0.25 0.1 0.21

STATE BANK OF PATIALA 0.33 -0.14 0.22 0.21 0.17

STATE BANK OF SAURASHTRA -0.87 0.32 merged

STATE BANK OF TRAVANCORE -0.4 0.24 0.28 0.37 0.18

INDUSTRY AVERAGE 0.19 0.31 0.27 0.27 0.26

Interpretation:

2007: In this year the average total loan loss provision to loans ratio of the group was 0.19%.

State Bank Of Hyderabad and State Bank Of Indore has not made provisions at all. State Bank

Of Saurashtra And State Bank Of Travancore has ratio in negative which is a good sign. Rest

four banks has ratio more than that of the average group ratio.

2008: In this year the average total loan loss provision to loans ratio of the group was 0.31%.

these three banks State Bank Of Hyderabad, State Bank Of Mysore, State Bank Of Saurashtra

84

has ratios more than that of the average group ratio. State Bank Of Patiala has ratio in negative

which is good sign. Rest all other banks has ratio below the average group ratio.

2009: In this year the average total loan loss provision to loans ratio of the group was 0.27%.

these four banks i.e State Bank Of India, State Bank Of Bikaner And Jaipur, State Bank Of

Indore, State Bank Of Travancore has more ratio than that of the average group ratio.

2010: In this year the average total loan loss provision to loans ratio of the group was 2.82%.

these four banks State Bank Of India, State Bank Of Bikaner And Jaipur, State Bank Of Indore,

State Bank Of Travancore has more ratio than that of the average group ratio. State Bank Of

Hyderabad has ratio in negative which is a good sign.

2011: In this year the average total loan loss provision to loans ratio of the group was 0.26%.

only two banks State Bank Of India And State Bank Of Hyderabad has ratio more than that of

the average group ratio.

85

FINDINGS OF THE STUDY

CORE DEPOSITS TO TOTAL ASSETS RATIO:- State Bank Of India’s ratio

remained below the average group ratio in the four years i.e 2007, 2009, 2010, 2011.

State bank of Patiala ratio has been the highest in two years(2007 & 2011) as compared

to the group average ratio. It is only once in the year (2008) that its ratio has gone down

below the average group ratio.

LOAN TO TOTAL DEPOSITS RATIO:- State Bank Of Hyderabad has the lowest

ratio in the years 2007, 2009, 2011 and the State Bank Of Saurashtra has the lowest ratio

in the years 2007 and 2008 as compared to group average ratio. On the other hand state

bank of Travancore has the highest ratio in two years 2009 & 2010 as compared to group

average ratio.

TIME DEPOSITS TO TOTAL DEPOSITS RATIO:- State Bank Of Patiala has the

highest ratio consecutively for four years(2008-2011) as compared to average group

ratio. On the other hand State Bank Of India has lowest ratio for consecutively four

years(2008-2011) as compared to average group ratio.

LIQUID ASSETS TO TOTAL ASSETS RATIO:- State Bank Of Bikaner And Jaipur

has the highest ratio in two years(2009 & 2010) as compared to the average group ratio.

On the other hand State Bank Of Travancore has the lowest ratio in three years (2008,

2009, 2011) as compared to average group ratio. It is only once in 2007 that it has the

highest ratio.

PRIME ASSETS TO TOTAL ASSETS RATIO:- State Bank Of Bikaner And Jaipur

has the highest ratio in the year 2009 & 2010 as compared to average group ratio. On the

86

other hand State Bank Of India( 2007 & 2009) and state bank of Travancore(2008 &

2011) has the lowest ratios as compared to group average ratio.

NON PERFORMING LOANS TO LOANS RATIO:- State Bank Of India has the

highest ratio in all the five years as compared to average group ratio, although it has

managed to bring down its NPA’s. on the other hand State Bank Of Saurashtra(2007-

2008) and State Bank Of Hyderabad(2010-2011) has the lowest ratio as compared to

group average ratio.

RISK ADJUSTED MARGIN :- State Bank Of Bikaner And Jaipur has remain on both

the sides. It has the highest ratio in the year 2007 & 2009 and has the lowest ratio in the

year 2010 & 2011. State Bank of Patiala has also the lowest ratio in the year 2008 &

2009 as compared to group average ratio.

TOTAL LOAN LOSS PROVISION TO LOANS:- State Bank Of Patiala(2008 &

2011) and State Bank Of Saurashtra (2007 & 2008) has the lowest ratio as compared to

average group ratio. On the other hand State Bank Of Mysore(2007-2008) and State Bank

Of India(2009-2011) has the highest ratio as compared to the average group ratio.

87

CONCLUSION

The analysis of the ratios shows that there is no trend emerges for the state bank group regarding

liquidity and credit risk. But while calculating liquidity risk with the help of prime assets to

total assets and liquid assets to total assets ratio it is seen that the State Bank Of Travancore

liquidity position have been very up and down in 5 years. And in calculating the credit risk it is

seen that State Bank Of India remained in worst performer in two ratios. In Non Performing

Loans To Loans Ratio it have been in the worst performer for all the five years if its ratio is

compared with the average industry ratio. Although it has managed to bring down its NPA’s

from 2007 to 2011. And in the second ratio for measuring the credit risk i.e Total Loan Loss

Provision To Loans it have been in the worst performer category from 2009-2011. So State

Bank Of India should try to manage its loan activities efficiently in future. But the otherwise the

position is satisfactory and there are no signs of worry for the largest and the strongest group of

banks in India.

In future there will be more challenges for the state bank group

to manage the credit and liquidity risk as now its associates banks are merging in State Bank Of

India. Recently State Bank Of Saurashtra has merged into the State Bank Of India and because

of the increasing competition from the private banks. As also world is world is shrinking and

economies are becoming interdependent on each other so there will be lot of challenges in the

future.

But banks should always keep in mind that these two risks i.e credit risk and liquidity risk

cannot be eliminated as these arises from the basic activities of banks, but if properly managed

can be mitigated to an extent.

88

BIBLIOGRAPHY

BOOKS-:

T. Ravi Kumar(2005), “ASSET LIABILITY MANAGEMENT”, 2ND Edition, Vision

Books.

Ajay Kumar, D.P Chatterjee, C. Chandershekhar, D.G Patwardhan(2007) , “RISK

MANAGEMENT”, Indian Institute Of Banking And Finance, Macmillan India Ltd.

Dun & Bradstreet(2009) “FINANCIAL RISK MANAGEMENT” Tata McGraw Hill Publications.

Justin Paul & Padmalatha Suresh (2007) “MANAGEMENT OF BANKING AND FINANCIAL SERVICES” Dorling Kindersley (India) Pvt Ltd.

RESEARCH PAPERS:-

Brian Gray (1998), “CREDIT RISK IN THE AUSTRALIAN BANKING SECTOR”

S.K Bagchi (2005) “CREDIT RISK MITIGATION – IMPLICATIONS OF BASEL II PRESCRIPTIONS IN INDIAN BANKING”

V.N.Sethuraman (2008) “LIQUIDITY RISK MANAGEMENT DEMYSTIFIED”

Dr. Y. Sree Rama Murthy (2003) “A STUDY ON FINANCIAL RATIOS OF

MAJOR COMMERCIAL BANKS”

Imola Driga (2004) “MEANS OF REDUCING CREDIT RISK”

WEBSITES:-

www.rbi.org.in

89

90