study on credit risk management of sbi cochi
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A STUDY ON RISK INVOLVED IN CREDIT MANAGEMENT
OF SBI KOCHI, 2013-14
CHAPTER 1INTRODUCTION
Background of topic
Credit risk is defined as the potential that a bank borrower or counterparty will fail to
meet its obligations in accordance with agreed terms, or in other words it is defined as
the risk that a firm’s customer and the parties to which it has lent money will fail to
make promised payments is known as credit risk
The exposure to the credit risks large in case of financial institutions, such commercial
banks when firms borrow money they in turn expose lenders to credit risk, the risk that
the firm will default on its promised payments. As a consequence, borrowing exposes
the firm owners to the risk that firm will be unable to pay its debt and thus be forced to
bankruptcy.
Banking in our country is already witnessing the sea changes as the banking sector
seeks new technology and its applications. The best port is that the benefits are
beginning to reach the masses. Financial Institutions mainly Banks play a pivotal role in
matching a depositor and lenders and channeling money and making the economy more
efficient. Although there are different types of banks specialized for different purposes
and with different brands and capital structure, they are regulated by standards such as
the BASEL standards (to keep a minimum amount of capital) BASEL II etc.
Currently (2007), the overall banking in India is considered as fairly mature in terms of
supply, product range and reach - even though reach in rural India still remains a
challenge for the private sector and foreign banks. Even in terms of quality of assets and
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Capital adequacy, Indian banks are considered to have clean, strong and transparent
balance sheets - as compared to other banks in comparable economies in its region.
Credit risk (or counterparty risk) is increasingly faced by banks in their product
assortment (not only lending) and can be considered as the oldest and largest risk in
banking. Important in a bank relationship is the “know your client principle”, by
becoming familiar with the borrower and/or credit base. It is important that banks deal
with customers with sound reputation and creditworthiness. Therefore, banks need not
only manage the credit risk in their credit portfolio but also that in any individual credit
or transaction.
The relationship between credit risk and other risks should also be considered by banks.
The effective management of credit risk is a critical component of a comprehensive
approach to risk management and important to the long-term success of any banking
organization. Effective credit risk management process is a way to manage portfolio of
credit facilities.
Credit risk management encompasses identification, measurement, monitoring and
control of the credit risk exposures. The effective management of credit risk is a critical
component of comprehensive risk management and essential for the long term success
of a banking organisation.
The objectives of credit risk management are to:
Evolve an integrated framework for charting/categorising various types of loans
and
advances, and determine implications on quality of credit and risk.
Draw up suitable strategies at the corporate level to attain the prescribed
levels/quality of exposure and issue guidelines to Strategic Business Units
(SBUs). Benchmarks could be in term of recovery percentages, NPA levels,
volume of exposure, etc.
Review the exposures and performance periodically.
2
Devise suitable control/monitoring mechanisms.
Evolve and refine analytical tools to assess risk profiles, for ensuring healthy
portfolios and guarding against sickness.
Commercial banking plays a dominant role in commercial lending. Commercial banks
routinely perform investment banking activities in many countries by providing new
debt to their customers. The credit creation process works smoothly when funds are
transferred from ultimate savers to borrower. There are many potential sources of risk,
including liquidity risk, credit risk, interest rate risk, market risk, foreign exchange risk
and political risks. However, credit risk is the biggest risk faced by banks and financial
intermediaries. The credit risk’s indicators include the level of non- performing loans,
problem loans or provision for loan losses. Credit risk is the risk that a loan which has
been granted by a bank will not be either partially repaid on time or fully and where
there is a risk of customer or counterparty default. Credit risk management processes
enforce the banks to establish a clear process in for approving new credit as well as for
the extension to existing credit. These processes also follow monitoring with particular
care, and other appropriate steps are taken to control or mitigate the risk of connected
lending.
Credit granting procedure and control systems are necessary for the assessment of loan
application, which then guarantees a bank’s total loan portfolio as per the bank’s overall
integrity. It is necessary to establish a proper credit risk environment, sound credit
granting processes, appropriate credit administration, measurement, monitoring and
control over credit risk, policy and strategies that clearly summarize the scope and
allocation of bank credit facilities as well as the approach in which a credit portfolio is
managed i.e. how loans are originated, appraised, supervised and collected, a basic
element for effective credit risk management. Credit scoring procedures, assessment of
negative events probabilities, and the consequent losses given these negative migrations
or default events, are all important factors involved in credit risk management systems.
Most studies have been inclined to focus on the problems of developing an effective
3
method for the disposal of these bad debts, rather than for the provision of a regulatory
and legal framework for their prevention and control.
The management of credit risk should receive the top management’s attention and the
process should encompass:
Measurement of risk through credit rating/scoring;
Risk pricing on a scientific basis;
Controlling the risk through effective Loan Review Mechanism and portfolio
management; and
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).
A survey conducted in the United States found credit risk management as the best
practice in bank and above 90% of the bank in country have adopted the best practice.
Inadequate credit policies are still the main source of serious problem in the banking
industry as result effective credit risk management has gained an increased focus in
recent years. The main role of an effective credit risk management policy must be to
maximize a bank’s risk adjusted rate of return by maintaining credit exposure within
acceptable limits. Moreover, banks need to manage credit risk in the entire portfolio as
well as the risk in individual credits transactions.
Credit risk consists of primarily two components, viz, quantity of risk, which is nothing
but the outstanding loan balance as on the date of default and the quality of risk, viz, the
severity of loss defined by both probability of default as reduced by the recoveries that
could be made in the event of default. Thus credit risk is a combined outcome of
Default Risk and Exposure Risk.
4
RBI expects that banks take specific measures, mainly at the Corporate Level, for
implementing appropriate Credit Risk Management Systems in the bank. The policy
will involve the following:
Policy framework
Credit rating framework
Credit risk models
Portfolio management and Risk Limits
Managing Credit Risk in Inter-Bank Exposure
Credit Risk in Off-Balance Sheet Exposure
Country Risk
Loan Review Mechanism/Credit Audit
RAROC(Risk adjusted return on capital) pricing/Economic profit
Basel II Accord: Implications for Credit Risk Management
The banks are required to
Ensure that their Risk Management functions considers the above issues as
applicable to the bank and put in place appropriate structures/systems. This will
ensure that Risk Based Supervision (RBS) is effective.
Each bank must have a Credit Rating Framework to suit their requirements.
To implement effective credit risk management practice private banks are more serious
than state owned banks. A survey conducted by Kuo & Enders (2004) of credit risk
management policies for state banks in China and found that mushrooming of the
financial market; the state owned commercial banks in China are faced with the
unprecedented challenges and tough for them to compete with foreign bank unless they
make some thoughtful change. In this thoughtful change, the reform of credit risk
management is a major step that determines whether the state owned commercial banks
in China would survive the challenges or not.
5
1.1 LITERATURE REVIEW
Commercial banking plays a dominant role in commercial lending (Allen and Gale
20114). Commercial banks routinely perform investment banking activities in many
countries by providing new debt to their customers (Gande 2008). The credit creation
process works smoothly when funds are transferred from ultimate savers to borrower
(Bernanke 1993). There are many potential sources of risk, including liquidity risk,
credit risk, interest rate risk, market risk, foreign exchange risk and political risks
(Campbell, 2007). However, credit risk is the biggest risk faced by banks and financial
intermediaries (Gray, Cassidy, & RBA., 1997). The credit risk’s indicators include the
level of non- performing loans, problem loans or provision for loan losses (Jimenez &
Saurina, 2006). Credit risk is the risk that a loan which has been granted by a bank will
not be either partially repaid on time or fully and where there is a risk of customer or
counterparty default. Credit risk management processes enforce the banks to establish a
clear process in for approving new credit as well as for the extension to existing credit.
These processes also follow monitoring with particular care, and other appropriate steps
are taken to control or mitigate the risk of connected lending (Basel,1999).
Credit granting procedure and control systems are necessary for the assessment of loan
application, which then guarantees a bank’s total loan portfolio as per the bank’s overall
integrity (Boyd, 1993). It is necessary to establish a proper credit risk environment,
sound credit granting processes, appropriate credit administration, measurement,
monitoring and control over credit risk, policy and strategies that clearly summarize the
scope and allocation of bank credit facilities as well as the approach in which a credit
portfolio is managed i.e. how loans are originated, appraised, supervised and collected,
a basic element for effective credit risk management (Basel, 1999). Credit scoring
procedures, assessment of negative events probabilities, and the consequent losses
given these negative migrations or default events, are all important factors involved in
credit risk management systems (Altman, Caouette, & Narayanan, 1998). Most studies
have been inclined to focus on the problems of developing an effective method for the
6
disposal of these bad debts, rather than for theprovision of a regulatory and legal
framework for their prevention and control (Campbell, 2007). Macaulay (1988)
conducted a survey in the United States and found credit risk management is best
practice in bank and above 90% of the bank in country have adopted the best practice.
Inadequate credit policies are still the main source of serious problem in the banking
industry as result effective credit risk management has gained an increased focus in
recent years. The main role of an effective credit risk management policy must be to
maximize a bank’s risk adjusted rate of return by maintaining credit exposure within
acceptable limits. Moreover, banks need to manage credit risk in the entire portfolio as
well as the risk in individual credits transactions. To implement effective credit risk
management practice private banks are more serious than state owned banks. A survey
conducted by (Kuo & Enders 2004) of credit risk management policies for state banks
in China and found that mushrooming of the financial market; the state owned
commercial banks in China are faced with the unprecedented challenges and
tough for them to compete with foreign bank unless they make some thoughtful change.
In this thoughtful change, the reform of credit risk management is a major step that
determines whether the state owned commercial banks in China would survive the
challenges or not. Research however faults some of the credit risk management policies
in place the broad framework and detailed guidance for credit risk assessment and
management is provided by the Basel New Capital Accord which is now widely
followed internationally (Campbell, 2007)
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1.2 THEORETICAL BACKGROUND
CREDIT
The word ‘credit’ comes from the Latin word ‘credere’, meaning ‘trust’. When sellers
transfer his wealth to a buyer who has agreed to pay later, there is a clear implication of
trust that the payment will be made at the agreed date. The credit period and the amount
of credit depend upon the degree of trust.
Credit is an essential marketing tool. It bears a cost, the cost of the seller having to
borrow until the customers payment arrives. Ideally, that cost is the price but, as most
customers pay later than agreed, the extra unplanned cost erodes the planned net profit.
RISK
Risk is defined as uncertain resulting in adverse outcome, adverse in relation to planned
objective or expectation. It is very difficult o find a risk free investment. An important
input to risk management is risk assessment. Many public bodies such as advisory
committees concerned with risk management. There are mainly three types of risk they
are follows:
• Market risk • Credit Risk • Operational risk
Risk analysis and allocation is central to the design of any project finance, risk
management is of paramount concern. Thus quantifying risk along with profit
projections is usually the first step in gauging the feasibility of the project. Once risks
have been identified they can be allocated to participants and appropriate mechanisms
put in place.
MARKET RISK
Market risk is the risk of adverse deviation of the mark to market value of the trading
portfolio, due to market movement, during the period required to liquidate the
transactions.
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OPERATIONAL RISK
Operational risk is one area of risk that is faced by all organizations. More complex the
organization more exposed it would be operational risk. This risk arises due to deviation
from normal and planned functioning of the system procedures, technology and human
failure of omission and commission. Result of deviation from normal functioning is
reflected in the revenue of the organization, either by the way of additional expenses or
by way of loss of opportunity. Technical breakdown and change in staff also account
for the operational risk.
CREDIT RISK
Credit risk is defined as the potential that a bank borrower or counterparty will fail to
meet its obligations in accordance with agreed terms, or in other words it is defined as
the risk that a firm’s customer and the parties to which it has lent money will fail to
make promised payments is known as credit risk.
The exposure to the credit risks large in case of financial institutions, such commercial
banks when firms borrow money they in turn expose lenders to credit risk, the risk that
the firm will default on its promised payments. As a consequence, borrowing exposes
the firm owners to the risk that firm will be unable to pay its debt and thus be forced to
bankruptcy.
CONTRIBUTORS OF CREDIT RISK • Corporate assets • Retail assets • Non-SLR portfolio • In case of guarantees, Letter of credit and Letter of comfort • Securities trading business • Treasury operations • Derivatives • Cross border exposure • Collaterals accepted by the bank • Settlement, etc
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KEY ELEMENTS OF CREDIT RISK MANAGEMENT 1.2 Establishing appropriate credit risk environment 1.3 Operating under sound credit granting process 1.4 Maintaining an appropriate credit administration, measurement & Monitoring 1.5 Ensuring adequate control over credit risk 1.6 Banks should have a credit risk strategy which in our case is
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Credit rating
Definition
Credit rating is the process of
assigning a letter rating to
borrower indicating that
creditworthiness of the borrower.
Rating is assigned based on the
ability of the borrower
(company).To repay the debt and
his willingness to do so.The higher
rating of company the lower the
probability of its default.
Use in decision making Credit rating helps the bank in making several key decisions regarding credit including
1. whether to lend to a particular
borrower or not; what price to
charge?
2. what are the product to be offered
to the borrower and for what
tenure?
3. at what level should sanctioning be
done, it should however be noted
that credit rating is one of inputs
used in credit decisions.
There are various factors (adequacy of
borrowers, cash flow, collateral provided,
and relationship with the
borrower).Probability of the borrowers
default based on past data.
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Main features of the rating tool:-
comprehensive coverage of
parameters extensive data
requirement mix of subjective
and objective parameters
includes trend analysis
parameters are benchmarked
against other players in the
segment captions of industry
outlook grade ratings broadly
mapped with external rating
agencies prevailing data.
Rating tool for SME
Internal credit ratings are the summary
indicators of risk for the bank’s individual
credit exposures. It plays a crucial role in
credit risk management architecture of any
bank and forms the cornerstone of
approval process.
Based on the guidelines provided by
Boston Consultancy Group (BCG), SBI
adopted credit rating tool.
The rating tool for SME borrower assigns
the following Weight ages to each one of
the four main categories i.e
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(i) Scenario (I) : without monitoring tool
S No Parameters Weightages (%)
1 financial performance XXXX
2 operating performance XXXX
3 quality of management XXXX
4 industry outlook XXXX
(ii). Scenario (II): with monitoring tool
[conduct of account]:- the weight age
would be conveyed separately on roll out
of the tool. In the above parameters first
three parameters used to know the
borrower characteristics. In fourth
encapsulates the risk emanating from the
environment in which the borrower
operates and depends on the past
performance of the industry its future
outlook and macro economic factors.
Operating performance
S No Sub parameters
1. credit period allowed
2. credit period availed
3. working capital cycle
4. Tax incentives
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5. production related risk
6. product related risk
7. price related risk
8. client risk
9. fixed asset turnover
Total
Quality of management
S No sub parameters
1. Hy / Track record of industrial unrest
2 market report of management reputation
3 history of FERA violation / ED enquiry
4 Too optimistic projections of sales and other financials
5 technical and managerial expertise
6 capability to raise money
Total
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IN STATE BANK OF INDIA
DFFERENT PARAMETERS USED TO
GIVE RATINGS AREAS FOLLOWS:-
FINANCIAL PARAMETERS
S.NO Indicator/ratio
F1(a) Audited net sales in last year
F2(b) Audited net sales in year before last
F1(c) Audited net sales in 2 year before last
F1(d) Audited net sales in 3 year before last
F1(e) Estimated or projected net sales in next year
F2 NET SALES GROWTH RATE(%)
F3 PBDIT growth rate(%)
F4 Net sales(%)
F5 ROCE(%)
F6 TOL/TNW
F7 Current ratio
F8 DSCR
F9 Interest coverage ratio
F10 Foreign exchange risk
F11 Reliability of debtors
F12 Operating cash flow
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F13 Trend in cash accruals
BUSINESS PARAMETERS
S.NO Indicator/ratio
B1 Credit period allowed(days)
B2 Credit period availed(days)
B3 Working capital cycle(times)
B4 Production related risks
B5 Product related risks
B6 Price related risks
B7 Fixed assets turnover
B8 No. of yeas in business
B9 Nature of clientele base
MANAGEMENT PARAMETERS
SR. NO INDICATOR/RATIO
M1 HR policy
M2 Track record in payment of statutory and other dues
M3 Market report of management reputation
M4 Too optimistic projections of sales and other financials
M5 Capability to raise resources
M6 Technical and managerial expertise
M7 Repayment track record
CONDUCT PARAMETERS
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A1 Creation of charges on primary security
A2Creation of charges on collateral and execution of personal orcorporate guarantee
A3 Proper execution of documents
A4 Availability of search report
A5 Other terms and conditions not complied with
A6 Receipt of periodical data
A7 Receipt of balance sheet
B1Negative deviation in half yearly net sales vis-à-vis proportionateEstimates
B2 Negative deviation in annual net sales vis-à-vis estimates
B3Negative deviation in half yearly net profit vis-à-vis proportionateEstimates
B4Adverse deviation in inventory level in months vis-à-vis estimateLevel
B5Adverse deviation in receivables level in months vis-à-visestimated level
B6 Quality of receivable assess from profile of debtors
B7Adverse deviation in creditors level in months vis-à-vis estimatedLevel
B8 Compliance of financial covnants
B9 Negative deviation in annual net profit vis-à-vis estimates
17
C1 Audit report internal/statutory/concurrent/RBI
C2Conduct of account with other banks/lenders and information onconsortium
D1 Routing of proportionate turnover/business
D2 Utilization of facilities(not applicable for term loan)
D3Over due discounted bills during the period under review within thesanctioned terms then not applicable
D4Devolved bill under L/c outstanding during the period under review
D5Invoked BGs issued outstanding during the period under review
D6Intergroup transfers not backed by trade transactions during the periodunder review
D7Frequency of return of cheques per quarter deposited by borrower
D8Frequency of issuing cheques per quarter without sufficient balance andreturned
D9 Payment of interest or instalments
D10Frequency of request for AD HOC INCREASE OF LIMIS during the lastone year
D11 Frequency of over drawings CC account
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E1Status of deterioration
in value of primary security or stock depletion
E2Status of deterioration in value of collateral security
E3 Status of deterioration in personal net worth and TNW
E4 Adequacy of insurance for the primary /collateral security
F1 Labor situation/industrial relations
F2 Delay or default in payments of salaries and statutory dues
F3 Non co-operation by the borrower
F4 Intended end-use of financing
F5Any other adverse feature/snon financial including corporate governanceissues suchasadverse publicity, strictures from regulators, pitical risk andadverse trade environment not covered
Difficulty of measuring credit risk
Measuring credit risk on a
portfolio basis is difficult. Banks and
financial institutions traditionally
measure credit exposures by obligor and
industry. They have only recently
attempted to define risk quantitatively in
a portfolio context e.g., a value-at-risk
(VaR) framework. Although banks and
financial institutions have begun to
19
develop internally, or purchase, systems
that measure VaR for credit, bank
managements do not yet have confidence
in the risk measures the systems produce.
In particular, measured risk levels
depend heavily on underlying
assumptions and risk managers often do
not have great confidence in those
parameters. Since credit
derivatives exist principally to allow for
the effective transfer of credit risk, the
difficulty in measuring credit risk and the
absence of confidence in the result of risk
measurement have appropriately made
banks cautious about the use of banks and
financial institutions internal credit risk
models for regulatory capital purposes.
Credit Risk
The most obvious risk derivatives
participants’ face is credit risk. Credit
risk is the risk to earnings or capital of an
obligor’s failure to meet the terms of any
contract the bank or otherwise to perform
as agreed. For both purchasers and sellers
of protection, credit derivatives should be
fully incorporated within credit risk
management process. Bank management
should integrate credit derivatives activity
in their credit underwriting and
20
administration policies, and their
exposure measurement, limit setting, and
risk rating/classification processes. They
should also consider credit derivatives
activity in their assessment of the
adequacy of the allowance for loan and
lease losses (ALLL) and their evaluation
of concentrations of credit.
There a number of credit risks for
both sellers and buyers of credit
protection, each of which raises separate
risk management issues. For banks and
financial institutions selling credit
protection the primary source of credit is
the reference asset or entity.
APPRAISAL OF THE FIRMS
POSITION ON BASIS OF OTHER
PARAMETERS
1. Managerial Competence
2. Technical Feasibility
3. Commercial viability
4. Financial Viability
Managerial Competence
Back ground of promoters Experience
Technical skills, Integrity & Honesty
21
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Technical Feasibility
Location
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Size of
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Commercial Viability
23
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24
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Pricing policies Competition
Export policies
Financial Viability
Whether adequate funds are
available at affordable cost to
implement the project Whether
sufficient profits will be
available
Whether BEP or margin of safety are
satisfactory
What will be the overall financial position
of the borrower in coming years.
Credit investigation report
Branch prepares Credit
investigation report in order to avoid
25
consequence in later stage Credit
investigation report should be a part of
credit proposal. Bank has to submit the
duly completed credit investigation reports
after conducting a detailed credit
investigation as per guidelines.
Some of the guidelines in this regards as
follow:
Wherever a proposal is to be considered
based only on merits of flagships concerns
of the group, then such support should also
be compiled in respect of subject flagship
in concern besides the applicant company.
In regard of proposals falling beyond
the power of rating officer, the branch
should ensure participation of rating
officer in compilation of this report.
The credit investigation report should
accompany all the proposals with the
fund based limit of above 25 Lakhs and
or non fund based of above Rs. 50
Lakhs.
The party may be suitably kept
informed that the compilation of this
report is one of the requirements in the
connection with the processing for
consideration of the proposal.
26
The branch should obtain a copy of
latest sanction letter by existing banker
or the financial institution to the party
and terms and conditions of the
sanction should
studied in detail.
Comments should be made wherever
necessary, after making the
observations/lapses in the following
terms of sanction.
Some of the important factors like
funding of interest, re schedule of loans
etc terms and conditions should be
highlighted.
Copy of statement of accounts for the
latest 6 months period should be
obtained by the bank. To get the
present condition of the party.
Remarks should be made by the bank
on adverse features observed. (e.g.,
excess drawings, return of cheques
etc).
27
Personal enquiry should be made by
the bank official with responsible
official of party’s present / other
bankers and enquiries should be made
with a elicit information on conduct of
account etc.
Care should be taken in selection of
customers or creditors who acts as the
representative. They should be
interviewed and compilation of opinion
should be done.
Enquiries should be made regarding the
quality of product, payment
terms, and period of overdue which
should be mentioned clearly in the
report. Enquiry should be aimed to
ascertain the status of trading of the
applicant and to know their capability to
meet their commitments in time.
To know the market trend branch
should enquire the person or industry
that is in the same line of business
activity.
In depth observation may be made of the
applicant as to :
- whether the unit is working in full
swing
28
- number of shifts and number of
employees
- any obsolete stocks with the unit
- capacity of the unit
- nature and conditions of the machinery
installed
- Information on power, water and
pollution control etc.
- information on industrial relation and
marketing strategy
29
CRA Proposal
The proposal is made considering
3 years balance sheet of a company to
arrive at a pricing based on its current
rating. It includes many parameters.
Illustration: A model of a CRA
proposal
Memorandum for the committee of CRA
validation
1. CRA model used: Choose one form
a. Trading
b. Non – trading ( Regular)
c. Non – trading regular
( Diamond)
2. Borrower details (Name)
3. Particulars of CRA
a. Borrower Rating
i. Before country risk
30
ii. Final after country
risk
b. External Rating
4. Proposal for validation of
a. Borrower rating
b. Facility rating
5. Credit limits
6. Brief particulars of the borrower
a. Age, Succession planning
b. Collateral, Management
c. Name of the directors
d. Associate / Sister / Group
company
7. Validation
a. Performance and financial
indicators
b. Comments on variance in
values
c. Performance under other
relevant factors
31
i. Net Sales as a
percentage of
estimated net sales
ii. Profit as a
percentage of
estimated net profit
d. Moving average of
company’s last 3 years ratio
e. Details in terms of loan.
8. Quarterly Sales
a. Growth %
b. Average Growth
9. Comments on
a. Financial flexibility of the
company
i. Raise funds through
internal sources like
internal accruals,
scalable assets.
ii. Raise resources
through external
sources based on
the relationship
32
with banker,
liquidity back up
etc.
iii. Record in raising funds from capital market.
iv. Flexibility to defer its capex in case of weakening financial position etc.
b. Forex business details
c. Country risk
d. Justification for giving abnormal high or low
10.Conduct of Account ( Last 12 months)
11.Future Prospects
12.Entry Barriers
13.Details of security available
14.CRMD guidelines on industry
outlook
15. Non – compliance with
regulation to bank’s laid down
instruction with regard to loan
policy guidelines / Earlier
prescription of sanctioning
33
authority / RMD exposure norms /
Figuring in RBI / ECGC defaulters
list / Major I & A audit
irregularities / Other risk factors etc.
16. Qualitative factors
17. Hurdle scores comparison
18.Risk Score
19.Certificate
20.Recommendation
34
CHAPTER 2
RESEARCH METHODOLOGY
The research was taken in the light to
study the risk involved in credit
management in SBI Kochi. The research
was undertaken with the aim of getting an
eagle’s view of how SBI manage the credit
risk.
OBJECTIVES OF THE STUDY
To study the credit policies of SBI
To compare the loans and advances
of SBI with other public and
private sector banks
To analyze the credit recovery
management of SBI
To study the priority sector
advances of SBI in comparison
with other public sector banks
SCOPE AND LIMITATIONS
SCOPE
35
It covers the key performing
banks in the public and private
banking sectors.
The project has been from the
angle of SBI Bank.
The study only covers SBI
branch in Cochin.
LIMITATIONS
Only secondary data was used.
Study was limited to Kochi city
Only few banks were considered
The major limitation was time
constraint which was only one
months, but still efforts have been
made to put the picture as clear and
candid as possible.
Type of research:
We would select the conclusive method in
which we would go for descriptive
research design.
Descriptive research design is more
structured and formal in nature. The
objective of these studies is to provide a
comprehensive and detailed explanation of
the phenomena under study. Descriptive
research, used often in social sciences and
market research, is the study of how a
particular group, person, or thing behaves.
Observations are noted without influence.
36
Data Requirement:
We would consider secondary data.
Secondary data:
Secondary data is data collected by
someone other than the user. Common
sources of secondary
data include censuses, organizational
records and data collected through
qualitative methodologies or qualitative
research. The investigator conducting the
research collects primary data. Secondary
data analysis saves time that would
otherwise be spent collecting data and,
particularly in the case of quantitative data,
provides larger and higher-
quality databases that would be unfeasible
for any individual researcher to collect on
their own.
Types of data:
We would select only qualitative data.
Qualitative data: Dept interview
Data collection Plan:
By telephonic interview with the
AGM of SBI
By visiting websites like
www.sbi.co.in, www.rbi.org,
37
moneycontrol.com and
www.indiainfoline.com
Sampling Plan:
Target population:
Top level officers and bank managers.
Sampling technique:
We are planning to go for convenience
sampling technique.
Convenience sampling technique:
Convenience sampling is a non-probability
sampling technique where subjects are
selected because of their convenient
accessibility and proximity to the
researcher.
38
CHAPTER 3
COMPANY PROFILE
3.1 STATE BANK OF INDIA
State Bank of India (SBI) is a multinational banking and financial services company based in
India. It is a government-owned corporation with its headquarters in Mumbai, Maharashtra. As
of December 2013, it had assets of US$388 billion and 17,000 branches, including 190 foreign
offices, making it the largest banking and financial services company in India by assets. 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.
Bank of Madras merged into the other two presidency banks—Bank of Calcutta and Bank of
Bombay—to form the Imperial Bank of India, which in turn became the State Bank of
India. Government of India owned the Imperial Bank of India in 1955, with 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 is a regional banking behemoth and has
20% market share in deposits and loans among Indian commercial banks.
SBI has five associate banks, all use the State Bank of India logo, which is a blue circle, and all
use the "State Bank of" name, followed by the regional headquarters' name:
State Bank of Bikaner & Jaipur
State Bank of Hyderabad
State Bank of Mysore
State Bank of Patiala
State Bank of Travancore
State Bank of India is the largest state-owned banking and financial services company in India.
The Bank provides banking services to the customer. In addition to the banking services, the
39
Bank through their subsidiaries, provides a range of financial services, which include life
insurance, merchant banking, mutual funds, credit card, factoring, security trading, pension fund
management and primary dealership in the money market. The Bank operates in four business
segments, namely Treasury, Corporate/ Wholesale Banking, Retail Banking and Other Banking
Business. The Treasury segment includes the investment portfolio and trading in foreign
exchange contracts and derivative contracts. The Corporate/ Wholesale Banking segment
comprises the lending activities of Corporate Accounts Group, Mid Corporate Accounts Group
and Stressed Assets Management Group. The Retail Banking segment consists of branches in
National Banking Group, which primarily includes personal banking activities, including lending
activities to corporate customers having banking relations with branches in the National Banking
Group. SBI provides a range of banking products through their 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. The State bank of India is the 10th
most reputed company in the world according to Forbes. The bank has 156 overseas offices
spread over 32 countries. They have branches of the parent in Colombo, Dhaka, Frankfurt, Hong
Kong, Johannesburg, London and environs, Los Angeles, Male in the Maldives, Muscat, New
York, Osaka, Sydney, and Tokyo. They have offshore banking units in the Bahamas, Bahrain,
and Singapore, and representative offices in Bhutan and Cape Town. State Bank of India was
incorporated in the year 1955.
In 2000 the Bank has embarked upon the expansion of its ATM network in the twin cities of
Hyderabad and Secunderabad. The Bank has become the first government owned financial
institution to join the rank of companies declaring interim dividend. The Bank has proposed to
come out with an issue under private placement of unsecured, non-convertible, subordinated
bonds in the nature of promissory notes of Rs 1 lakh each aggregating Rs 600 crores with an
option to retain oversubscription of up to Rs 40 crores.
SBI provides easy access to money to its customers through more than 8500 ATMs in India. The
Bank also facilitates the free transaction of money at the ATMs of State Bank Group, which
includes the ATMs of State Bank of India as well as the Associate Banks – State Bank of
40
Bikaner & Jaipur, State Bank of Hyderabad, State Bank of Indore, etc. You may also transact
money through SBI. Commercial and International Bank Ltd by using the State Bank ATM-cum-
Debit (Cash Plus) card.
The demographic profile of select customers of State Bank of India reveals that, 67.2 percent of
them are male. In term of age, it is evident that 27.6 percent of the customers are falling in the
age group ranging between 31-40 years. Graduates accounted for 37.6 percent. Business and
profession people dominated the sample with 44.8 percent and 22 percent respectively. In term
of marital status, 87.2 percent of the respondents were married. The income statistics revealed
that 32.8 percent of the customers were earning their income between Rs.2,50,001-
Rs.5,00,000 yearly.
The Banking profile of the customers reveals that 53.2 percent of the select customers maintain
current account in State Bank of India. 53.6 percent of them are having banking experience
ranging between 6-10 years. The convenience of all the customers would be greatly enhanced by
an electronic, 24 hour branch. As a result 90.4 percent of the respondents prefer e-banking rather
then conventional banking system. 59.2 percent of the respondents have e-banking experience
ranging between 1-3 years. 41.6 percent of the respondents use e-banking channels
41
ABOUT LOGO
THE PLACE TO SHARE THE NEWS ...……
SHARE THE VIEWS ……
Togetherness is the theme of this corporate loge of SBI where the world of banking services
meet the ever changing customers needs and establishes a link that is like a circle, it indicates
complete services towards customers. The logo also denotes a bank that it has prepared to do
anything to go to any lengths, for customers.
The blue pointer represent the philosophy of the bank that is always looking for the growth and
newer, more challenging, more promising direction. The key hole indicates safety and security.
42
MISSION, VISION AND VALUES
MISSION STATEMENT:
To retain the Bank’s position as premiere Indian Financial Service Group, with world class
standards and significant global committed to excellence in customer, shareholder and employee
satisfaction and to play a leading role in expanding and diversifying financial service sectors
while containing emphasis on its development banking rule.
VISION STATEMENT:
¨ Premier Indian Financial Service Group with prospective world-class
Standards of efficiency and professionalism and institutional values.
¨ Retain its position in the country as pioneers in Development banking.
¨ Maximize the shareholders value through high-sustained earnings per
Share.
¨ An institution with cultural mutual care and commitment, satisfying and
Good work environment and continues learning opportunities.
43
VALUES:
¨ Excellence in customer service
¨ Profit orientation
¨ Belonging commitment to Bank
¨ Fairness in all dealings and relations
¨ Risk taking and innovative
¨ Team playing
¨ Learning and renewal
¨ Integrity
¨ Transparency and Discipline in policies and systems.
44
CHAPTER 4
ANALYSIS AND INTERPRETATION
Introduction
From this chapter we would be able to analyse and interpret the objectives of the study. The data
like advances amount, loan recovered amount, loan out-standing, etc of different banks in
different years are considered here, which are collected from RBI website, SBI website,
moneycontrol.com website and personally from the branch manager of SBI.
4.1 CREDIT POLICIES OF STATE BANK OF INDIA.
Credit policy:
The credit policy document is a document which carefully specifies the do’s and don'ts
while sanctioning the loan proposals.
As loan proposals differ widely from each other, there cannot be a strict methodology for
accepting or rejecting the proposals.
Instead, guidelines can be given within the credit policy for the decision makers to enable
them to screen out loans, which can be out rightly rejected.
Loans that can be sanctioned without any reference to the top management and proposals
that require a certain amount of top-level decision-making.
The credit policy of a bank consists of five major components.
RBI Guidelines for credit policy:
45
As per RBI’s guidelines at least 40% of the net bank credit should be given to the priority
sector, of which 18% would be for Agriculture and 10% to the weaker sections of the
society.
RBI, NABARD and State Level Bankers Committee (SLBC) govern the credit policy and
procedures with respect to agricultural sector.
Depending on the segments, the policies and procedures could differ substantially.
The introduction of Service Area Approach in 1989 prompted each bank’s branch to
prepare its own Service Area Plan based on the village profile, skills and available
resources. Such Service Area Plans would then be integrated with the annual growth plan
of a bank’s branch.
SBI Credit policy
For the highest rated (AAA) firms, the bank now gives working capital loans at its base
rate, or the minimum lending rate. For the next lot of AA-rated firms, the bank gives
loans at base rate plus 25 basis points, and for BBB-rated loans, the working capital loans
are given at base rate plus 0.65 basis points. A basis point is one-hundredth of a
percentage point.
4.1 THE TABLE BELOW SHOWS ADVANCES OF PUBLIC SECTOR BANKS TO PRIORITY SECTOR PERCENT.
Name of the Bank Percent
Total agricultural advances (%)
Weaker section
(%)
Total priority sector advances
(%)
Canara Bank 15.7 6 48.2
Syndicate Bank 17.4 10.1 39.9
IDBI Ltd. 2.2 0.3 15.2
SBI 12.6 5.4 41
46
Interpretation:
From the above table, we can understand that SBI is complying with the Credit policy guidelines
issued by RBI. The other top performing banks mentioned above like Canara bank is issuing
more credit than the prescribed rate by RBI, which is generating more risk to the bank, whereas
the other two banks are not even withstanding with the credit policy issued by RBI.
4.2 THE BELOW TABLE SHOWS THE COMPARISON OF LOANS &
ADVANCES OF STATE BANK OF INDIA WITH OTHER PUBLIC AND
PRIVATE SECTOR BANKS
Public Sector Banks: Syndicate Bank, Canara Bank, Corporation Bank
Private Sector Banks: HDFC Bank, ICICI Bank, UTI Bank
Criteria for selection: These banks are selected as they are the top performing banks and
they have high loan lending capacity.
Variables: Loan amount of different banks.
Amounts in Million
Name of the Bank 2009 2010 2011 2012 2013
Amount Amount Amount Amount Amount
State Bank Of India 4167681.96 5425032.04 6319141.52 7567194.48 8675788.90
Syndicate Bank 640510.11 815322.69 904063.59 1067819.20 1236201.77
Canara Bank 1072380.40 1382194.00 1693346.30 2112682.92 2324898.18
Corporation Bank 391855.74 485121.60 632025.62 868504.04 1004690.20
HDFC Bank 634268.93 988830.47 1258305.93 1599826.65 1954200.29
ICICI Bank 2256160.82 2183108.49 1812055.97 2163659.01 2537276.57
47
UTI Bank 596611.44 815567.65 1043409.46 1424078.28 1697595.38
Figure 4.1: The loans and advances of SBI and other public and private sector banks
Interpretation:
Considering the above figure we can say that year on year the amount of advances lent by State
Bank of India has increased which indicates that the bank’s business is really commendable and
the Credit Policy it has maintained is absolutely good. Whereas other banks do not have such
good business SBI is ahead in terms of its business when compared to both Public Sector and
Private Sector banks, this implies that SBI has incorporated sound business policies.
48
State
Bank O
f India
Syndica
te Ban
k
Canara
Bank
Corporation Ban
k
HDFC Ban
k
ICICI Ban
k
UTI Ban
k0
5000000
10000000
15000000
20000000
25000000
30000000
35000000
20132012201120102009
4.2 THE TABLE BELOW SHOWS THE CREDIT RECOVERY MANAGEMENT OF
SBI
Variables: Loan issued amount, loan recovered amount and outstanding loan to be
recovered of SBI.
Year Loans Issued Recovered Outstanding
2010 157933.54 91601.4 66332.09
2011 202374.46 120210.43 82164.03
2012 261641.54 163264.32 98377.22
2013 337336.49 263264.32 74072.17
2010 2011 2012 2013
0
50000
100000
150000
200000
250000
300000
350000
400000
SBI loans, recovery and outstanding
Loans IssuedRecoveredOutstandingAxis Title
49
Figure 4.2: The credit risk management of SBI
Interpretation:
From the figure we can say that till the year 2012 outstanding loans had increased up to 30%
but due to the improved credit policy of SBI its outstanding rate decreased to 23% in the year
2013.
4.3 THE TABLE BELOW SHOWS THE PRIORITY SECTOR ADVANCES OF SBI
IN COMPARISON WITH OTHER PUBLIC SETOR BANKS
Public Sector Banks: Syndicate Bank
Canara Bank
Corporation Bank
Criteria for selection: These banks are selected because they are performing with low
NPA.
Varriables: Total Agriculture Advances, Weaker Section Advances, Total
Priority Sector Advances
S.No Name of the Bank
(Amount)
Total Agriculture
Advances (Amount)
Weaker Section
Advances (Amount)
Total
Priority
Sector
Advances
1 STATE BANK OF
INDIA30516 19883 82895
2 SYNDICATE BANK 5870.94 3267.71 14626.62
3 CANARA BANK 12032 4423 30937
50
4 CORPORATION
BANK
1934.80 665.32 9043.74
STATE
BANK OF INDIA
SYNDICATE
BANK
CANARA BANK
CORPORATION BANK
0100002000030000400005000060000700008000090000
Total Agriculture AdvancesWeaker Section AdvancesTotal Priority Sector Advances
Figuer 4.3: The priority sector advances of sbi in comparison with other public sector
banks
4.4 THE BELOW TABLE SHOWS THE PRIORITY SECTOR ADVANCES OF PUBLIC
SECTOR BANKS IN PERCENTAGES ARE AS FOLLOWS:
Name of the BankTotal
Agriculture
Advances
Weaker
Section
Advances
Total
Priority
Sector
Advances
% Net Banks Credit % Net Banks Credit % Net Banks Credit
STATE BANK OF 13.6 8.9 37.0
51
INDIA
SYNDICATE BANK 18.0 10.0 44.9
CANARA BANK 15.7 5.9 41.4
CORPORATION
BANK
9.0 3.1 41.9
STATE
BANK OF INDIA
SYNDICATE
BANK
CANARA BANK
CORPORATION BANK
0
5
10
15
20
25
30
35
40
45
50
Total AgricultureWeaker Section AdvanceTotal Priority Sector Advance
Figure 4.4: Priority sector advances of public sector banks in percentage
Interpretations:
SBI’s total agriculture advances as compared to other banks is 13.6% of the Net Bank’s
Credit, which shows that Bank has not lent enough credit to agriculture sector. SBI has to
entertain agriculture sector loans so that it can have more number of borrowers for the bank.
In case of weaker section advances, SBI is granting 8.9% of Net Banks Credit, which is less
as compared to Syndicate Bank. SBI has advanced 37% to priority sector, which is less as
compared with other Bank.
52
4.5 RISK CONTROLLED STRATEGY FOLLOWED BY MANAGER
Policy and Strategy
The manager shall be responsible for approving and periodically reviewing the credit risk
strategy and significant credit risk policies.
Credit Risk Policy
Every bank should have a credit risk policy document approved by the Board. The
document should include risk identification, risk measurement, risk grading/ aggregation
techniques, reporting and risk control/ mitigation techniques, documentation, legal issues and
management of problem loans.
Credit risk policies should also define target markets, risk acceptance criteria, credit
approval authority, credit origination/ maintenance procedures and guidelines for portfolio
management.
The credit risk policies approved by the Board should be communicated to
branches/controlling offices. All dealing officials should clearly understand the bank’s approach
for credit sanction and should be held accountable for complying with established policies and
procedures.
Senior management of a bank shall be responsible for implementing the credit risk policy
approved by the Board.
53
Credit Risk Strategy
Each bank should develop, with the approval of its Board, its own credit risk strategy or plan
that establishes the objectives guiding the bank’s credit-granting activities and adopt necessary
policies/ procedures for conducting such activities. This strategy should spell out clearly the
organisation’s credit appetite and the acceptable level of risk-reward trade-off for its activities.
The strategy would, therefore, include a statement of the bank’s willingness to grant loans based on the type of economic activity, geographical location, currency, market, maturity and anticipated profitability. This would necessarily translate into the identification of target markets and business sectors, preferred levels of diversification and concentration, the cost of capital in granting credit and the cost of bad debts.
The credit risk strategy should provide continuity in approach and also take into account the cyclical aspects of the economy and the resulting shifts in the composition/ quality of the overall credit portfolio. This strategy should be viable in the long run and through various credit cycles.
Senior management of a bank shall be responsible for implementing the credit risk strategy approved by the Board.
54
55
CHAPTER 5
FINDINGS AND CONCLUSION
Project findings reveal that SBI is sanctioning less Credit to agriculture, as compared with its key competitor’s viz., Canara Bank and Syndicate Bank.
Recovery of Credit: Credit recovery of SBI during the past few years is increasing gradually, which indicates SBI ‘s recovery policy is very good, hence this reduces NPA.
Total Advances: As compared total advances of SBI is increased year by year.
State bank Of India is expanding its Credit in the following focus areas:
1. SBI Recurring Deposits2. SBI Housing Loan3. SBI Car Loan4. SBI Educational Loan5. SBI Personal Loan6. SBI Term Deposits
In case of indirect agriculture advances, SBI is granting 3.1% of Net Banks Credit, which is less as compared to Canara Bank, Syndicate Bank and Corporation Bank. SBI has to entertain indirect sectors of agriculture so that it can have more number of borrowers for the Bank.
SBI’s direct agriculture advances as compared to other banks is 10.5% of the Net Bank’s Credit, which shows that Bank has not lent enough credit to direct agriculture sector.
Credit risk management process of SBI used is very effective as compared with other
banks.
56
CONCLUSION
The project undertaken has helped a lot in gaining knowledge of the credit policy and credit risk
management in State Bank of India. Credit Policy and Credit Risk Policy of the Bank has
become very vital in the smooth operation of the banking activities. Credit Policy of the Bank
provides the framework to determine (a) whether or not to extend credit to a customer and (b)
how much credit to be extended. The Project work has certainly enriched the knowledge about
the effective management of credit policy and credit risk management in banking sector.
In pursuance of the instructions and guidelines issued by the Reserve Bank of India, the State
bank Of India is granting and expanding credit to all sectors. The concerted efforts put in by the
Management and Staff of State Bank Of India has helped the Bank in achieving remarkable
progress in almost all the important parameters. The Bank is marching ahead in the direction of
achieving the Number-1 position in the Banking Industry.
57
CHAPTER 6
RECOMMENDATIONS
SBI is complying with the credit policy guidelines issued by RBI and it should maintain
it in the same pace.
SBI’s lending capacity is better than the other top performing private and public sector
banks like Canara bank, IDBI, Syndicate bank, etc. but it should also keep into
consideration of the risk factors involved in lending loans. By considering the risk factor
it would be able to control or reduce its bad loans.
Banks has to grant the loans for the establishment of business at a moderate rate of
interest, because of this, the people can repay the loan amount to bank regularly and
promptly.
Bank should not issue entire amount of loan to agriculture sector at a time, it should
release the loan in installments. If the climatic conditions are good then they can release
remaining amount.
The manager should keep on revising its Credit Policy, which will help Bank’s effort to
correct the course of the policies. The Chairman and Managing Director/Executive
Director should make modifications to the procedural guidelines required for
implementation of the Credit Policy as they may become necessary from time to time
because of organizational needs.
58
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