redit rating management
TRANSCRIPT
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EXECUTIVE SUMMARY
TITLE OF THE PROJECT
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“Credit Risk Management in State ank !" India#
AC$%ROU&' OF PROJECT 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.
IMPORTA&CE OF THE PROJECT(
The proect helps in understanding the clear meaning of credit !isk "anagement #n $tate
%ank &f #ndia. #t explains about the credit risk scoring and !ating of the %ank. And also
$tudy of comparati'e study of Credit (olicy with that of its competitor helps in
understanding the fair credit policy of the %ank and Credit !eco'ery management of the
%anks and also its key competitors.
OJECTIVES OF PROJECT(
1. To $tudy the complete structure and history of $tate %ank &f #ndia.
). To know the different methods a'ailable for credit !ating and understanding the
credit rating procedure used in $tate %ank &f #ndia.
)
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*. To gain insights into the credit risk management acti'ities of the $tate %ank &f
#ndia.
+. To know the !%# uidelines regarding credit rating and risk analysis.
*
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I&'USTRY OVERVIE)
HISTORY(
%anking in #ndia has its origin as carry as the -edic period. #t is belie'ed that the
transition from money lending to banking must ha'e occurred e'en before "anu, the
great indu urist, who has de'oted a section of his work to deposits and ad'ances and
laid down rules relating to the interest. /uring the mogal period, the indigenous bankers
played a 'ery important role in lending money and financing foreign trade and
commerce. /uring the days of 0ast #ndia Company, it was to turn of the agency houses
top carry on the banking business. The general bank of #ndia was the first oint stock bank
to be established in the year 123.The others which followed were the %ank of industan
and the %engal %ank. The %ank of industan is reported to ha'e continued till 1453,
while the other two failed in the meantime. #n the first half of the 14 th Century the 0ast
#ndia Company established three banks6 The %ank of %engal in 1254, The %ank of
%ombay in 12+5 and The %ank of "adras in 12+*.These three banks also known as
presidency banks and were independent units and functioned well. These three banks
were amalgamated in 14)5 and The #mperial %ank of #ndia was established on the ) th
7an 14)1, with the passing of the $%# Act in 1488, the undertaking of The #mperial %ank
of #ndia was taken o'er by the newly constituted $%#. The !eser'e %ank which is the
Central %ank was created in 14*8 by passing of !%# Act 14*+, in the wake of swadeshi
mo'ement, a number of banks with #ndian "anagement were established in the country
namely (unab 9ational %ank :td, %ank of #ndia :td, Canara %ank :td, #ndian %ank :td,
The %ank of %aroda :td, The Central %ank of #ndia :td .&n 7uly 14 th 1434, 1+ "aor
%anks of the country were nationali;ed and in 18th April 1425 six more commercial
pri'ate sector banks were also taken o'er by the go'ernment. The #ndian %anking
industry, which is go'erned by the %anking !egulation Act of #ndia 14+4, can be broadlyclassified into two maor categories, non
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CURRE&T SCE&ARIO(
Currently =)515>, the o'erall banking in #ndia is considered as fairly mature in terms of
supply, product range and reach < e'en though reach in rural #ndia still remains a
challenge for the pri'ate sector and foreign banks. 0'en in terms of quality of assets andCapital adequacy, #ndian banks are considered to ha'e clean, strong and transparent
balance sheets < as compared to other banks in comparable economies in its region. The
!eser'e %ank of #ndia is an autonomous body, with minimal pressure from the
o'ernment
?ith the growth in the #ndian economy expected to be strong for quite some time
especially in its ser'ices sector, the demand for banking ser'ices especially retail
banking, mortgages and in'estment ser'ices are expected to be strong. "ergers @
Acquisitions., takeo'ers, are much more in action in #ndia.
%ank is a financial institution that borrows money from the public and lends money to the
public for producti'e purposes. The #ndian %anking !egulation Act of 14+4 defines the
term %anking Company as Any company which transacts banking business in #ndia and
the term banking as A**e+ting "!r t,e +-r+!se !" .ending a.. in/estment !" de+!sits0
!" m!ne1 "r!m t,e +-2.i*0 re+a1a2.e !n demand !r !t,er3ise and 3it,dra3a. 21
*,e4-e0 dra"t !r !t,er3ise56
THE STRUCTURE OF I&'IA& A&$I&%(
The #ndian banking industry has !eser'e %ank of #ndia as its !egulatory Authority. This
is a mix of the (ublic sector, (ri'ate sector, Co
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CA!T $&?#9 T!00 /#BB0!09T $0CT&!$ &B %A9$D
i> (ublic $ector %anks
ii> (ri'ate $ector %anks
(ublic $ector %anks
$%# and 9ationali;ed !egional !ural
$E%$#/#A!#0$ %anks %anks
3
(ublic $ector %anks
9ationali;ed%anks
$%# @ itsAssociates
(ri'ate $ector %anks
&ld (ri'ate $ector %anks
$cheduled ErbanCo
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SI A&' SUSI'IARIES(
This group comprises of the $tate %ank of #ndia and its se'en subsidiaries 'i;.,
$tate %ank of (atiala, $tate %ank of yderabad, $tate %ank of Tra'ancore, $tate %ank of
%ikaner and 7aipur, $tate %ank of "ysore, $tate %ank of $aurashtra, $tate %ank of #ndia
State ank !" India =$%#> is the largest bank in #ndia. #f one measures by the
number of branch offices and employees, $%# is the largest bank in the world.
0stablished in 1253as %ank of %engal it is the oldest commercial bank in the #ndian
subcontinent. $%# pro'ides 'arious domestic, international and 9!# products and
ser'ices, through its 'ast network in #ndia and o'erseas. ?ith an asset base of F1)3
billion and its reach, it is a regional banking behemoth. The go'ernment nationali;ed the
bank in1488, with the !eser'e bank of #ndia taking a 35G ownership stake. #n recent
years the bank has focused on two priorities, 1>, reducing its huge staff through olden
handshakeschemes known as the -oluntary !etirement $cheme, which saw many of its
best and brightest defect to the pri'ate sector, and )>, computeri;ing its operations.
&ATIO&ALI9E' A&$S(
This group consists of pri'ate sector banks that were nationali;ed. The o'ernment of
#ndia nationali;ed 1+ pri'ate banks in 1434 and another 3 in the year 1425. #n early 144*,
there were )2 nationali;ed banks i.e., $%# and its subsidiaries plus )5 nationali;ed
banks. #n 144*, the loss making new bank of #ndia was merged with profit making
(unab 9ational %ank. ence, now only ) nationali;ed banks exist in #ndia.
RE%IO&AL RURAL A&$S(
These were established by the !%# in the year 148 of banking commission. #t was
established to operate exclusi'ely in rural areas to pro'ide credit and other facilities to
small and marginal farmers, agricultural laborers, artisans and small entrepreneurs.
http://en.wikipedia.org/wiki/Reserve_Bank_of_Indiahttp://en.wikipedia.org/wiki/Reserve_Bank_of_Indiahttp://en.wikipedia.org/wiki/Reserve_Bank_of_India
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PRIVATE SECTOR A&$S(
Pri/ate Se*t!r anks
&ld pri'ate new pri'ate$ector %anks $ector %anks
OL' PRIVATE SECTOR A&$S(
This group consists of the banks that were establishes by the pri'y sectors, committee
organi;ations or by group of professionals for the cause of economic betterment in their
operations. #nitially, their operations were concentrated in a few regional areas. owe'er,
their branches slowly spread throughout the nation as they grow.
&E) PRIVATE SECTOR A&$S(
These banks were started as profit orient companies after the !%# opened the banking
sector to the pri'ate sector. These banks are mostly technology dri'en and better managed
than other banks.
&ATIO&ALI9ATIO&(
The next significant milestone in #ndian %anking happened in late 1435s when the then
#ndira andhi go'ernment nationali;ed on 14th 7uly 14+4, 1+ maor commercial #ndian
banks followed by nationalisation of 3 more commercial #ndian banks in 1425.
The stated reason for the nationalisation was more control of credit deli'ery. After this,
until 1445s, the nationalised banks grew at a leisurely pace of around +G also called as
the indu growth of the #ndian economy.After the amalgamation of 9ew %ank of #ndia
with (unab 9ational %ank, currently there are 14 nationalised banks in #ndia.
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LIERALI9ATIO&(
#n the early 1445’s the then 9arasimha rao go'ernment embarked a policy of
liberali;ation and ga'e licences to a small number of pri'ate banks, which came to be
known as 9ew generation tech, o'erall, banking in #ndia is considered
as fairly mature in terms of supply, product range and reach
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1,555 AT"s. According to a report by #C!A :imited, a rating agency, the public sector
banks hold o'er 8 percent of total assets of the banking industry, with the pri'ate and
foreign banks holding 12.)G and 3.8G respecti'ely.
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http://en.wikipedia.org/wiki/Automated_teller_machinehttp://en.wikipedia.org/wiki/Automated_teller_machine
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COMPA&Y PROFILE
STATE A&$ OF I&'IA(
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9ot only many financial institution in the world today can claim the antiquity and
maesty of the $tate %ank &f #ndia founded nearly two centuries ago with primarily intent
of imparting stability to the money market, the bank from its inception mobili;ed funds
for supporting both the public credit of the companies go'ernments in the three
presidencies of %ritish #ndia and the pri'ate credit of the 0uropean and #ndia merchants
from about 1235s when the #ndian economy book a significant leap forward under the
impulse of quickened world communications and ingenious method of industrial and
agricultural production the %ank became intimately in 'alued in the financing of
practically and mining acti'ity of the $ub< Continent Although large 0uropean and #ndian
merchants and manufacturers were undoubtedly thee principal beneficiaries, the small
man ne'er ignored loans as low as !s.155 were disbursed in agricultural districts against
glad ornaments. Added to these the bank till the creation of the !eser'e %ank in 14*8
carried out numerous Central H %anking functions.
Adaptation world and the needs of the hour has been one of the strengths of the %ank, #n
the post depression exe. Bor instance H when business opportunities become extremely
restricted, rules laid down in the book of instructions were relined to ensure that good
business did not go post. Iet seldom did the bank contra'enes its 'alue as depart from
sound banking principles to retain as expand its business. An inno'ati'e array of office,
unknown to the world then, was de'ised in the form of branches, sub branches, treasury
pay office, pay office, sub pay office and out students to exploit the opportunities of an
expanding economy. 9ew business strategy was also e'aded way back in 14* to render
the best banking ser'ice through prompt and courteous attention to customers.
AOUT LO%O(
1)
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THE PLACE TO SHARE THE &E)S 666::
SHARE THE VIE)S ::
Togetherness is the theme of this corporate loge of $%# where the world of banking
ser'ices meet the e'er changing customers needs and establishes a link that is like a
circle, it indicates complete ser'ices 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.
MISSIO&0 VISIO& A&' VALUES(
MISSIO& STATEME&T(
To retain the %ank’s position as premiere #ndian Binancial $er'ice roup, with worldclass standards and significant global committed to excellence in customer, shareholder
and employee satisfaction and to play a leading role in expanding and di'ersifying
financial ser'ice sectors while containing emphasis on its de'elopment banking rule.
1*
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VISIO& STATEME&T(
♦ (remier #ndian Binancial $er'ice roup with prospecti'e world
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9A"0 D Crouhy, ala, "arick
YEAR ( ;
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&AME ( Hannan and Han3e*k
YEAR ( ;
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&AME ( Patri*k H!n!,an
YEAR ( =B
TITLE ( USE OF U'%ETARY FU&'S I& RIS$ MA&A%EME&T
A%$T!ACT D explains the use of budgetary funds to help restructure a large failed
%ankJ%anking system and the 'arious consequences associated with it. The article discusses
how instruments can best be designed to restore %ank capital, liquidity and incenti'es. #t
considers how recapitalisation can be modelled to ensure right incenti'es for new
operatorsJmanagers to operate in a prudent manner ensuring good subsequent performance #t
discusses how o'ernment’s budget and the interest of the tax payer can be protected and
suggest that monetary policy should respond to the recapitalisation rather determine its
design.
&AME ( Rek,a Ar-nk-mar and $!tes,3ar
YEAR ( ;
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A&ALYSIS A&' I&TERPRETATIO&
PRO'UCTS(
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$tate %ank &f #ndia renders 'arieties of ser'ices to customers through the
following productsD
PERSO&AL LOA& PRO'UCT(
• $%# Term /eposits
• $%# !ecurring /eposits
• $%# ousing :oan
• $%# Car :oan
• $%# 0ducational :oan
• $%# (ersonal :oan
• $%# :oan Bor (ensioners
• :oan Against "ortgage &f (roperty
• :oan Against $hares @ /ebentures
• !ent (lus $cheme
• "edi
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• 9o cap on maximum loan amount for purchaseJ construction of houseJ flat
• &ption to club income of your spouse and children to compute eligible loan
amount
• (ro'ision to club expected rent accruals from property proposed to compute
eligible loan amount
• !epayment permitted upto 5 years of age
• Bree personal accident insurance co'er
• &ptional roup #nsurance from $%# :ife at concessional premium =Epfront
premium financed as part of proect cost>
SERVICES(
/&"0$T#C T!0A$E!I
$%# -#$?A IAT!A B&!0#9 T!A-0: CA!/
%!	 $0!-#C0$
!0-#$0/ $0!-#C0 CA!0$
AT" $0!-#C0$
#9T0!90T %A9#9
0 !%#0BT
$AB0 /0(&$#T :&C0!
#BT C0ME0$
"#C! C&/0$
B&!0#9 #9?A!/ !0"#TTA9C0$
ATM SERVICES (
$I&'S OF CAR'S ACCEPTE' AT STATE A&$ ATMs(
%esides $tate %ank AT"
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1> $tate %ank Credit Card
)> AT" Cards issued by %anks under bilateral sharing 'i;. Andhra %ank,Axis
%ank, %ank of #ndia, The %ank of !aasthan :td., Canara %ank, Corporation %ank, /ena
%ank, /BC %ank, #ndian %ank, #ndus #nd %ank, (unab 9ational %ank, EC& %ank
and Enion %ank of #ndia.
*> Cards issued by banks =other than banks under bilateral sharing> displaying "aestro,
"aster Card, Cirrus, -#$A and -#$A 0lectron logos
+> All /ebitJ Credit Cards issued by any bank outside #ndia displaying "aestro, "aster
Card, Cirrus, -#$A and -#$A 0lectron logos
STATE A&$ I&TER&ATIO&AL ATM@CUM@'EIT CAR'
ELI%IILITY(
All $a'ing %ank and Current Account holders ha'ing accounts with networked branches
and areD
• 12 years of age @ abo'e
• Account typeD $ole or 7oint with N0ither or $ur'i'orO J NAnyone or $ur'i'orO
• 9!0 account holders are also eligible but 9!& account holders are not.
E&EFITS(
• PCon'enience to the customers tra'eling o'erseas
• PCan be used as /omestic AT"
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• A'ailable at a nominal oining fee of !s. )55J<
• P/aily limit of E$ F 1555 or equi'alent at the AT" and E$ F 1555 or equi'alent at
(oint of $ale =(&$> terminal for debit transaction
•
(urchase (rotectionQup to !s. 8555J< and (ersonal Accident co'erQup to !s.),55,555J<
• PCharges for usage abroadD !s. 185R $er'ice Tax per cash withdrawal !s. 18 R
$er'ice Tax per enquiry.
STATE A&$ ATM@CUM@'EIT STATE A&$ CASH PLUSD
CAR'(
#ndia’s largest bank is proud to offer you unparalleled con'enience 'i;. $tate %ank AT"<
cum card. ?ith this card, there is no need to carry cash in your wallet.
Iou can now withdraw cash and make purchases anytime you wish to with your AT"<
cum
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%ill (ayment at &nline $%# =e will let you to pay your Telephone, "obile,
0lectricity, #nsurance and Credit Card bills electronically o'er our &nline $%# website
E@RAIL (
!!k 1!-r Rai.3a1s Ti*ket On.ine6
The facility has been launched wef #st $eptember )55* in association with #!CTC.
The scheme facilitates %ooking of !ailways Ticket &nline.
T,e sa.ient "eat-res !" t,e s*,eme are as -nder(
• All #nternet banking customers can use the facility.
• &n gi'ing payment option as $%#, the user will be redirected to onlinesbi.com.
After logging on to the site you will be displayed payment amount, T#/ 9o. and
!ailway reference no.
• . The ticket can be deli'ered or collected by the customer.
• The user can collect the ticket personally at 9ew /elhi reser'ation counter .
• The (ayment amount will include ticket fare including reser'ation charges,
courier charges and %ank $er'ice fee of !s 15J. The %ank ser'ice fee has been
wai'ed unto *1st 7uly )553.
SAFE 'EPOSIT LOC$ER (
)*
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Bor the safety of your 'aluables we offer our customers safe deposit 'ault or locker
facilities at a large number of our branches. There is a nominal annual charge, which
depends on the si;e of the locker and the centre in which the branch is located.
THEORETICAL AC$%ROU&' OF CRE'IT RIS$
MA&A%EME&T(
CRE'IT(
The word Scredit’ comes from the :atin word Scredere’, meaning Strust’. ?hen
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.
RIS$ (
!isk is defined as uncertain resulting in ad'erse out come, ad'erse in relation to
planned obecti'e or expectation. #t is 'ery difficult o find a risk free in'estment. An
important input to risk management is risk assessment. "any public bodies such as
ad'isory committees concerned with risk management. There are mainly three types of
risk they are follows
• "arket risk
• Credit !isk
• &perational risk
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MAR$ET RIS$(
"arket risk is the risk of ad'erse de'iation of the mark to market 'alue of the trading
portfolio, due to market mo'ement, during the period required to liquidate the
transactions.
OPERTIO&AL RIS$(
&perational risk is one area of risk that is faced by all organi;ation s. "ore complex the
organi;ation more exposed it would be operational risk. This risk arises due to de'iation
from normal and planned functioning of the system procedures, technology and human
failure of omission and commission. !esult of de'iation from normal functioning is
reflected in the re'enue of the organi;ation, either by the way of additional expenses or
by way of loss of opportunity.
CRE'IT RIS$(
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
)8
FinancialRisks
Operational Risk
Market Risk
Credit Risk
Types of Binancial !isks
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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.
)3
StandardizedStandardized
Internal RatingsInternal Ratings
Credit Risk ModelsCredit Risk Models
Credit MitigationCredit Mitigation
Market RiskMarket Risk
Credit RiskCredit Risk
Other RisksOther Risks
RisksRisks
Trading BookTrading Book
Banking BookBanking Book
OperationalOperational
Other Other
Ste+s t! "!..!3 t! minimie di""erent t1+e !" risks(@
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CRE'IT RATI&%(
'EFI&ITIO&(
Credit rating is the process of assigning a letter rating to borrower indicating
that creditworthiness of the borrower.
!ating 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 I& 'ECISIO& MA$I&%(
Credit rating helps the bank in making se'eral key decisions regarding credit including
1. whether to lend to a particular borrower or not6 what price to charge
). what are the product to be offered to the borrower and for what tenure
*. at what le'el should sanctioning be done, it should howe'er be noted that credit
rating is one of inputs used in credit decisions.
There are 'arious factors =adequacy of borrowers, cash flow, collateral pro'ided, and
relationship with the borrower>
(robability of the borrowers default based on past data.
RATI&% TOOL FOR SME(
#nternal credit ratings are the summary indicators of risk for the bank’s indi'idual credit
exposures. #t plays a crucial role in credit risk management architecture of any bank and
forms the cornerstone of appro'al process.
%ased on the guidelines pro'ided by %oston Consultancy roup =%C>, $%# adopted
credit rating tool.
The rating tool for $"0 borrower assigns the following ?eight ages to each one of the
four main categories i.e.,
)
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iD S*enari! (
ID 3it,!-t m!nit!ring t!!.(
$ 9o (arameters ?eightages =G>
1 financial performance UUUU
) operating performance UUUU
* quality of management UUUU
+ industry outlook UUUU
iiD S*enari! (
IID )it, m!nit!ring t!!. 7*!nd-*t !" a**!-nt8(
The weight age would be con'eyed separately on roll out of the tool.#n the abo'e
parameters first three parameters used to know the borrower characteristics. #n fourth
encapsulates the risk emanating from the en'ironment in which the borrower operates
and depends on the past performance of the industry its future outlook and macro
economic factors.
FI&A&CIAL PERFORMA&CE(
$ 9o $ub parameters ?eightages
=in G>
1 9et sales growth rate=G> Uxxx
). (%/#T rowth rate =G> Uxxx
*. (%/#T J$ales =G> Uxxx+. T&:JT9? Uxxx
8. Current ratio Uxxx
3. &perating cash flow Uxxx
. /$C! Uxxx
)2
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2. Boreign exchange ratio Uxxx
4. 0xpected 'alues of /J0 of 85G of 9B% credit de'ol'es Uxxx
15. !ealisability of /ebtors Uxxx
11. $tate of export country economy Uxxx
1). Bund deputation risk Uxxx
Total Uxxxxx
OPERATI&% PERFORMA&CE(
$ 9o $ub parameters ?eightage
=G>1. credit period allowed Uxxx
). credit period a'ailed Uxxx
*. working capital cycle Uxxx
+. Tax incenti'es Uxxx
8. production related risk Uxxx
3. product related risk Uxxx
. price related risk Uxxx
2. client risk Uxxx
4. fixed asset turno'er Uxxx
Total Uxxxxx
UALITY OF MA&A%EME&T(
$ 9o sub parameters ?eightages =G>
1. ! (olicy J Track record of industrial unrest Uxxx
) market report of management reputation Uxxx
* history of B0!A 'iolation J 0/ enquiry Uxxx
+ Too optimistic proections of sales and other financials Uxxx8 technical and managerial expertise Uxxx
3 capability to raise money Uxxx
Total Uxxxxx
USI&ESS PARAMETERS(
)4
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$.9& #ndicatorJratio $core%1 Credit period allowed=days> Ux
%) Credit period a'ailed=days> Ux
%* ?orking capital cycle=times> Ux
%+ (roduction related risks Ux%8 (roduct related risks U
%3 (rice related risks U
% Bixed assets turno'er U
%2 9o. of yeas in business U
%4 9ature of clientele base U
MA&A%EME&T PARAMETERS(
$!. 9& #9/#CAT&!J!AT#& $C&!0"1 ! policy U
") Track record in payment of statutory and other dues U
"* "arket report of management reputation U
"+ Too optimistic proections of sales and other financials U
"8 Capability to raise resources U
"3 Technical and managerial expertise U
" !epayment track record U
CO&'UCT PARAMETERS(
A1 Creation of charges on primary security U
A) Creation of charges on collateral and execution of personal
or corporate guarantee
U
A* (roper execution of documents U
A+ A'ailability of search report U
A8 &ther terms and conditions not complied with U
A3 !eceipt of periodical data U
A !eceipt of balance sheet U
%1 9egati'e de'iation in half yearly net sales 'is
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estimate le'el
%8 Ad'erse de'iation in recei'ables le'el in months 'is U
/* &'er due discounted bills during the period under re'iew within the
sanctioned terms then not applicable
U
/+ /e'ol'ed bill under :Jc outstanding during the period under re'iew U
/8 #n'oked %s issued outstanding during the period under re'iew U
/3 #ntergroup transfers not backed by trade transactions during the
period under re'iew
U
/ Brequency of return of cheques per quarter deposited by borrower U
/2 Brequency of issuing cheques per quarter without sufficient balance
and returned
U
/4 (ayment of interest or installments U
/15 Brequency of request for A/ &C #9C!0A$0 &B :#"#$ during
the last one year
U
/11 Brequency of o'er drawings CC account U
01 $tatus of deterioration in 'alue of primary security or stock
depletion
U
0) $tatus of deterioration in 'alue of collateral security U
0* $tatus of deterioration in personal net worth and T9? U
0+ Adequacy of insurance for the primary Jcollateral security U
*1
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B1 :abor situationJindustrial relations U
B) /elay or default in payments of salaries and statutory dues U
B* 9on co and
their e'aluation of concentrations of credit.
There a number of credit risks for both sellers and buyers of credit protection, each of
which raises separate risk management issues. Bor banks and financial institutions sellingcredit protection the primary source of credit is the reference asset or entity.
A PORTFOLIO APPROACH TO CRE'IT RIS$ MA&A%EM&T(
$ince the 1425s, %anks and financial institutions ha'e successfully applied modern
portfolio theory ="(T> to market risk. "any banks and financial institutions are now
using earnings at risk =0a!> and -alue at !isk =-a!> models to manage their interest rate
and market !#$ 0U(&$E!0$. Enfortunately, howe'er, e'en through credit risk
remains the largest risk facing most banks and financial institutions, the application of
"(T to credit risk has lagged.
The slow de'elopment toward a portfolio approach for credit risk results for the
following factorsD
*)
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< The traditional 'iew of loans as hold
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approach is that it has difficulty and measuring concentration risk. Concentration risk
refers to additional portfolio risk resulting from increased exposure to a borrower or to a
group of correlated borrowers. for example the high correlation between energy and real
estate prices precipitated a large number of failures of banks that had credit
concentrations in those sectors in the mid 1425s.
CRE'IT I&VESTI%ATIO& REPORT(
%ranch prepares Credit in'estigation report in order to a'oid consequence in later stage
Credit in'estigation report should be a part of credit proposal. %ank has to submit the
duly completed credit in'estigation reports after conducting a detailed credit in'estigation
as per guidelines.
CRE'IT FILES(
#t’s the file, which pro'ides important source material for loan super'ision in regard to
information for internal re'iew and external audit. %ranch has to maintain separate credit
file compulsorily in case of :oans exceeding !s 85 :akhs which should be maintained
for quick access of the related information.
C!ntents !" t,e *redit "i.eD
basic information report on the borrower
milestones of the borrowing unit
competiti'e analysis of the borrower
credit appro'al memorandum
financial statement
copy of sanction communication
security documentation list
/ossier of the sequence of e'ents in the accounts
Collateral 'aluation report
*+
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Credit files pro'ide all information regarding present status of the loan account on basis
of credit decision in the past. This file helps the credit officer to monitor the accounts and
pro'ides concise information regarding background and the current status of the account
MaG!r Categ!ries(
W o'ernments
W ($0s =public $ector 0nterprises>
W %anks
W Corporate
W !etail
W Claims against residential property
W Claims against commercial real estate
T)O APPROACHES(
H $tandardised Approach and
H #nternal !atings %ased Approach =in future H to be notified by !%# later>
Hnot to be co'ered now
STA&'AR'ISE' APPROACH(
The standardi;ed approach is conceptually the same as the present accord, but is
more risk sensiti'e. The bank allocates risk to each of its assets and off balance sheet
positions and produces a sum of risk weighted asset 'alues. Arisk weight of 155G means
that an exposure is included in the calculation of risk weighted assets 'alue, which
translates into a capital charge equal to 4G of that 'alue. #ndi'idual risk weight currently
depends on the broad category of borrower =i.e so'ereign, banks or corporate>. Ender the
new accord the risk weights are to be refined by reference rating pro'ided by an external
credit assessment institution= such as rating agency> that meets strict demands.
*8
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COMPETITORS 'ETAILS
#n /harwad "ain competitors of $tate %ank of #ndia are #C#C# %ank in pri'ate
sector banks and $yndicate %ank and Corporation %ank #n public sector.
#n $%#, it can be better understood with gi'en (ie diagram as follows. D
POSITIO& OF STATE A&$ OF I&'IA I& LE&'I&%
PRIVATE SECTOR A&$D(
*3
$tandardi;edApproach
#nternal !ating%ased Approach
$ecuriti;ationBramework
Boundation#!%
Ad'anced#!%
Credit !isk
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A&$ LE&'I&% I& Cr
$tate %ank &f #ndia )4
#C#C# bank 18
/BC 8
ET# )8
POSITIO& OF STATE A&$ OF I&'IA I& LE&'I&%
PULIC SECTOR A&$S D(
A&$ LE&'I&% I& Cr
$tate %ank &f #ndia )4
$yndicate %ank )3
*
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Canara %ank )*
Corporation %ank )8
In t!ta. .ending0 State ank O" India is in "irst +.a*e re.ati/e.1 in P-2.i* Se*t!r
anks6
%ank’s in'estments in accounts recei'able depends onD =a> the 'olume of credit sales, and
=b> the collection period. There is one way in which the financial manager can affect the
'olume of credit sales and collection period and consequently, in'estment in accounts
recei'ables. That is through the changes in credit policy. The term credit policy is used to
refer to the combination of three decision 'ariablesD =1> credit standards, =)> credit terms,
and =*> collection efforts, on which the financial manager has influence.
=D Credit StandardsD
Credit $tandards are criteria to decide the types of customers to whom goods could
be sold on credit. #f a firm has more slow
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;D Credit Terms(
Credit Terms specify duration of credit and terms of payment by customers.
#n'estment in accounts recei'ables will be high if customers are allowed extended time
period for making payments.
D C!..e*ti!n E""!rts(
Collection efforts determine the actual collection period. The lower the collection period,
the lower the in'estment in accounts recei'able and higher the collection period, the
higher the in'estment in accounts recei'able.
OJECTIVES(
T,e main !2Ge*ti/es !" anks Credit P!.i*1 are(
• A balanced growth of the credit portfolio which does not compromise safety.
• Adoption of a forward
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• #n case of indirect agriculture ad'ances, $%# is granting *.1G of 9et %anks Credit,
which is less as compared to Canara %ank, $yndicate %ank and Corporation %ank.$%# has to entertain indirect sectors of agriculture so that it can ha'e more number of borrowers for the %ank.
FI&'I&%S0
RECOMME&'ATIO&S CO&CLUSIO&
+5
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FI&'I&%S(
• (roect findings re'eal that $%# is sanctioning less Credit to agriculture, as
compared with its key competitor’s 'i;., Canara %ank, Corporation %ank,$yndicate %ank
• Re*!/er1 !" Credit( $%# reco'ery of Credit during the year )553 is 3).+G
Compared to other %anks $%# Ss reco'ery policy is 'ery good, hence this reduces 9(A
• T!ta. Ad/an*es( As compared total ad'ances of $%# is increased year by year.
• $tate %ank &f #ndia is granting credit in all sectors in an 0quated "onthly
#nstallments so that any body can borrow money easily
• (roect findings re'eal that $tate %ank &f #ndia is lending more credit or
sanctioning more loans as compared to other %anks.
• $tate bank &f #ndia is expanding its Credit in the following focus areasD
1 $%# Term /eposits
) $%# !ecurring /eposits
* $%# ousing :oan
+ $%# Car :oan
8 $%# 0ducational :oan
3 $%# (ersonal :oan Xetc
+1
http://www.sbi.co.in/viewsection.jsp?id=0,1,19,114http://www.sbi.co.in/viewsection.jsp?id=0,1,19,114,190http://www.sbi.co.in/viewsection.jsp?id=0,1,20,115http://www.sbi.co.in/viewsection.jsp?id=0,1,20,117http://www.sbi.co.in/viewsection.jsp?id=0,1,20,118http://www.sbi.co.in/viewsection.jsp?id=0,1,20,119http://www.sbi.co.in/viewsection.jsp?id=0,1,19,114http://www.sbi.co.in/viewsection.jsp?id=0,1,19,114,190http://www.sbi.co.in/viewsection.jsp?id=0,1,20,115http://www.sbi.co.in/viewsection.jsp?id=0,1,20,117http://www.sbi.co.in/viewsection.jsp?id=0,1,20,118http://www.sbi.co.in/viewsection.jsp?id=0,1,20,119
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• #n case of indirect agriculture ad'ances, $%# is granting *.1G of 9et %anks Credit,
which is less as compared to Canara %ank, $yndicate %ank and Corporation %ank.$%# has to entertain indirect sectors of agriculture so that it can ha'e more number of borrowers for the %ank.
• LIMITATIO&S(
1. The time constraint was a limiting factor, as more in depth analysis could not becarried.
). $ome of the information is of confidential in nature that could not be di'ulged for the study.
*. 0mployees were not co operati'e.
RECOMME&'ATIO&S (
• The %ank should keep on re'ising its Credit (olicy which will help %ank’s effort
to correct the course of the policies
• The Chairman and "anaging /irectorJ0xecuti'e /irector should make
modifications to the procedural guidelines required for implementation of the
Credit (olicy as they may become necessary from time to time on account of organi;ational needs.
• %anks has to grant the loans for the establishment of business at a moderate rate of
interest. %ecause of this, the people can repay the loan amount to bank regularlyand promptly.
• %ank should not issue entire amount of loan to agriculture sector at a time, it
should release the loan in installments. #f the climatic conditions are good thenthey ha'e to release remaining amount.
• $%# has to reduce the #nterest !ate.
• $%# has to entertain indirect sectors of agriculture so that it can ha'e more number
of borrowers for the %ank.
+)
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CO&CLUSIO& (
The proect undertaken has helped a lot in gaining knowledge of the NCredit (olicy and
Credit !isk "anagementO in 9ationali;ed %ank with special reference to $tate %ank &f
#ndia. Credit (olicy and Credit !isk (olicy of the %ank has become 'ery 'ital in the
smooth operation of the banking acti'ities. Credit (olicy of the %ank pro'ides the
framework to determine =a> whether or not to extend credit to a customer and =b> how
much credit to extend. The (roect work has certainly enriched the knowledge about the
effecti'e management of NCredit (olicyO and NCredit !isk "anagementO in banking
sector.
• NCredit (olicyO and NCredit !isk "anagementO is a 'ast subect and it is 'ery
difficult to co'er all the aspects within a short period. owe'er, e'ery effort has
been made to co'er most of the important aspects, which ha'e a direct bearing
on impro'ing the financial performance of %anking #ndustry• To sum up, it would not be out of way to mention here that the $tate %ank &f
#ndia has gi'en special inputs on NCredit (olicyO and NCredit !isk
"anagementO. #n pursuance of the instructions and guidelines issued by the
!eser'e %ank of #ndia, the $tate bank &f #ndia is granting and expanding credit
to all sectors.
• The concerted efforts put in by the "anagement and $taff of $tate %ank &f
#ndia has helped the %ank in achie'ing remarkable progress in almost all the
important parameters. The %ank is marching ahead in the direction of achie'ing
the 9umber
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ILIO%RAPHY
++
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OO$S REFERRE'(
1. ".I.han and (..7ain, "anagement Accounting =Third 0dition>, Tata "crawill.
). ".I.han and (..7ain, Binancial "anagement =Bourth 0dition>, Tata "crawill.
*. /."."ittal, "oney, %anking, #nternational Trade and (ublic Binance =0le'enth0dition>, imalaya (ublishing ouse.
)E SITES(
=6 www.sbi.co.in
;6 www.icicidirect.com
6 www.rbi.org?6 www.indiainfoline.com
>6 www.google.com
A&$S I&TER&AL RECORE'S(
1. Annual !eports of $tate bank &f #ndia =)55*). $tate bank &f #ndia "anuals*. Circulars sent to all %ranches, !egional &ffices and all the /epartments of
Corporate &ffices.