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TERM PAPER

ON

“RISK ANALYSIS IN BANKING SECTOR”

FOR THE PARTIAL FULLFILMENT OF

POST-GRADUATE DIPLOMA IN MANAGEMENT

SUBMITTED TO: SUBMITTED BY:

Dr. VIDYA SHEKRI AAKSHI MAHAJAN (BM-010186)Finance faculty PANKAJ Kr. GOEL (BM-010199)

INSTITUTE OF MANAGEMENT STUDIES

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DECLARATION CERTIFICATE

We want to declare that we, students of 1st year of Post Graduate Diploma Of

Management, have prepared a research methodologies project entitled as ““RISK

ANALYSIS IN POWER SECTOR”, for the partial fulfillment of post graduate

diploma in management by our own efforts and research.

Aakshi Mahajan (BM-010186)Pankaj Kr. Goel(BM-010199)

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CERTIFICATE FROM THE HEAD

This is to certify that Aakshi Mahajan (BM 010186), Pankaj Kr. Goel(BM 010199),

students of 2ndyear of Post Graduate Diploma Of Management, have prepareda project entitled as “RISK ANALYSIS IN BANKING SECTOR “as a part of

partial fulfillment of requirement of post graduate diploma of management by

INSTITUTE OF MANAGEMENT STUDIES, GHAZIABAD.

Dr.VIDYA SHEKRI

(Faculty of finance)

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ACKNOWLEDGEMENT

No task whatever big or small can be completed without proper guidance and

encouragement. It gives us a great pleasure to our deep sense of gratitude and

reverence to every person who created a congenial atmosphere for successful

completion of this project.

We would like to express our gratitude and profound thanks to Dr. VIDYA

SHEKRI (faculty of finance), Institute of Management Studies, Ghaziabad

for his valuable sustained, guidance, invaluable suggestions and constant

encouragement without which it would not have been possible for us to

complete this project.

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EXECUTIVE SUMMARY

Indian banking sector has expanded in an exponential manner in the past decade offering

a wide range of services to rural, urban and metropolitan areas of the country. The

banking sector reform initiated by the Reserve Bank of India has created a competitive

environment for both public and private sector banks and is therefore vigorously

expanding their customer base to offer various services. In light of the recent global

financial crisis, risk measurement and management in the Indian banking sector is gaining

importance. Credit risk is the core of all banking activities to both private and public

sector banks. We have taken data for non performing assets of 27 public sector banks for

the period of 2006-2010.We found that non performing assets volume increased from

2006-2011.

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INTRODUCTION

Recent time has witnessed the world economy develop serious difficulties in terms of

lapse of banking & financial institutions and plunging demand. Prospects became

very uncertain causing recession in major economies. However, amidst all this chaos

India‟s banking sector has been amongst the few to maintain resilience.

A progressively growing balance sheet, higher pace of credit expansion, expanding

profitability and productivity akin to banks in developed markets, lower incidence of

nonperforming assets and focus on financial inclusion have contributed to making

Indian banking vibrant and strong. Indian banks have begun to revise their growth

approach and re-evaluate the prospects on hand to keep the economy rolling. The way

forward for the Indian banks is to innovate to take advantage of the new business

opportunities and at the same time ensure continuous assessment of risks.

A rigorous evaluation of the health of commercial banks, recently undertaken by the

Committee on Financial Sector Assessment (CFSA) also shows that the commercial

banks are robust and versatile. The single-factor stress tests undertaken by the CFSA

divulge that the banking system can endure considerable shocks arising from largepossible changes in credit quality, interest rate and liquidity conditions. These stress

tests for credit, market and liquidity risk show that Indian banks are by and large

resilient.

Current scenario reveals that in December 2011 Reserve bank of India has done a

stress test on Indian banks regarding the issue of increase in non performing assets

and they found that inter bank lending has increased.

Now Securitization laws changes to allow banks „buy‟ property seized from

defaulting borrowers. SARFAESI Act i.e. Securitization and reconstruction of

financial assets and enforcement of security act have been introduced last week in

order to avoid credit risk at banks.

Thus, it has become far more imperative to contemplate the role of the Banking

Industry in fostering the long-term growth of the economy. With the purview of

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economic stability and growth, greater attention is required on both political and

regulatory commitment to long term development programme.

RISK INVOLVED IN BANKING SECTOR

Banks face a number of risks in order to conduct their business, and how well these

risks are managed and understood is a key driver behind profitability, and how much

capital a bank is required to hold. Some of the main risks faced by banks include:

▪ Credit risk: Risk of loss arising from a borrower who does not make payments as

promised.

▪ Liquidity risk: Risk that a given security or asset cannot be traded quickly enough

in the market to prevent a loss (or make the required profit).

▪ Market risk: Risk that the value of a portfolio, either an investment portfolio or a

trading portfolio, will decrease due to the change in value of the market risk

factors.

▪ Operational risk: Risk arising from execution of a company's business functions.

▪ Reputational risk: A type of risk related to the trustworthiness of business.

The capital requirement is a bank regulation, which sets a framework on how banksand depository institutions must handle their capital. The categorization of assets and

capital is highly standardized so that it can be risk weighted.

We are focused on Credit risk of banks for our project. Thus we‟ll be talking about

credit risk at banks and the current scenario of banking sector.

http://en.wikipedia.org/wiki/Financial_risk

http://en.wikipedia.org/wiki/Capital_requirement

http://en.wikipedia.org/wiki/Credit_risk


http://en.wikipedia.org/wiki/Liquidity_risk


http://en.wikipedia.org/wiki/Market_risk

http://en.wikipedia.org/wiki/Operational_risk


http://en.wikipedia.org/wiki/Reputational_risk



http://en.wikipedia.org/wiki/Bank_regulation

http://en.wikipedia.org/wiki/Bank_regulation




http://en.wikipedia.org/wiki/Market_risk




http://en.wikipedia.org/wiki/Financial_risk

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CREDIT RISK

Credit risk is an investor's risk of loss arising from a borrower who does not make

payments as promised. Such an event is called a default. Other terms for credit risk

are default risk and counterparty risk.

Investor losses include lost principal and interest, decreased cash flow, and increased

collection costs, which arise in a number of circumstances:

▪ A consumer does not make a payment due on a mortgage loan, credit card, line of

credit, or other loan

▪ A business does not make a payment due on a mortgage, credit card, line of credit,

or other loan

▪ A business or consumer does not pay a trade invoice when due

▪ A business does not pay an employee's earned wages when due

▪ A business or government bond issuer does not make a payment on a coupon or

principal payment when due

▪ An insolvent insurance company does not pay a policy obligation.

▪ An insolvent bank won't return funds to a depositor.

TYPES OF CREDIT RISK

Credit risk can be classified in the following way:

▪ Credit Default Risk - The risk of loss when the bank considers that the obligor is

unlikely to pay its credit obligations in full or the obligor is more than 90 days

past due on any material credit obligation; default risk may impact all credit-

sensitive transactions, including loans, securities and derivatives.

▪ Concentration Risk - The risk associated with any single exposure or group of

exposures with the potential to produce large enough losses to threaten a

bank's core operations. It may arise in the form of single name concentration

or industry concentration.

▪ Country Risk - The risk of loss arising when a sovereign state freezes foreign

http://en.wikipedia.org/wiki/Default_(finance)

http://en.wikipedia.org/wiki/Principal_sum

http://en.wikipedia.org/wiki/Interest

http://en.wikipedia.org/wiki/Cash_flow

http://en.wikipedia.org/wiki/Collection_cost

http://en.wikipedia.org/wiki/Mortgage_loan

http://en.wikipedia.org/wiki/Credit_card

http://en.wikipedia.org/wiki/Line_of_credit


http://en.wikipedia.org/wiki/Trade_credit

http://en.wikipedia.org/wiki/Wage

http://en.wikipedia.org/wiki/Bond_(finance)

http://en.wikipedia.org/wiki/Coupon_(bond)

http://en.wikipedia.org/wiki/Insurance_company

http://en.wikipedia.org/wiki/Bank

http://en.wikipedia.org/wiki/Derivative_(finance)

http://en.wikipedia.org/wiki/Derivative_(finance)

http://en.wikipedia.org/wiki/Bank

http://en.wikipedia.org/wiki/Insurance_company

http://en.wikipedia.org/wiki/Coupon_(bond)


http://en.wikipedia.org/wiki/Wage

http://en.wikipedia.org/wiki/Trade_credit



http://en.wikipedia.org/wiki/Credit_card

http://en.wikipedia.org/wiki/Mortgage_loan

http://en.wikipedia.org/wiki/Collection_cost

http://en.wikipedia.org/wiki/Cash_flow


http://en.wikipedia.org/wiki/Principal_sum

http://en.wikipedia.org/wiki/Default_(finance)

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currency payments (transfer/conversion risk) or when it defaults on its

obligations (sovereign risk).

ASSESSING CREDIT RISK

Significant resources and sophisticated programs are used to analyze and manage risk.

Some companies run a credit risk department whose job is to assess the financial

health of their customers, and extend credit accordingly. They may use in house

programs to advise on avoiding, reducing and transferring risk. They also use third

party provided intelligence. Companies like Standard & Poor's, Moody's Analytics,

Fitch Ratings, and Dun and Bradstreet provide such information for a fee.

Most lenders employ their own models (credit scorecards) to rank potential and

existing customers according to risk, and then apply appropriate strategies. With

products such as unsecured personal loans or mortgages, lenders charge a higher price

for higher risk customers and vice versa. With revolving products such as credit cards

and overdrafts, risk is controlled through the setting of credit limits. Some products

also require security, most commonly in the form of property.

Credit scoring models also form part of the framework used by banks or lending

institutions grant credit to clients. For corporate and commercial borrowers, these

models generally have qualitative and quantitative sections outlining various aspects

of the risk including, but not limited to, operating experience, management expertise,

asset quality, and leverage and liquidity ratios, respectively. Once this information has

been fully reviewed by credit officers and credit committees, the lender provides the

funds subject to the terms and conditions presented within the contract (as outlined

above).

Credit risk has been shown to be particularly large and particularly damaging for very

large investment projects, so-called megaprojects. This is because such projects are

especially prone to end up in what has been called the "debt trap," i.e., a situation

where – due to cost overruns, schedule delays, etc. – the costs of servicing debt

becomes larger than the revenues available to pay interest on and bring down the debt

http://en.wikipedia.org/wiki/Standard_%26_Poor%27s

http://en.wikipedia.org/wiki/Moody%27s_Analytics

http://en.wikipedia.org/wiki/Fitch_Ratings

http://en.wikipedia.org/wiki/Dun_and_Bradstreet

http://en.wikipedia.org/wiki/Credit_scorecards

http://en.wikipedia.org/wiki/Collateral_(finance)

http://en.wikipedia.org/wiki/Megaprojects

http://en.wikipedia.org/wiki/Megaprojects

http://en.wikipedia.org/wiki/Collateral_(finance)

http://en.wikipedia.org/wiki/Credit_scorecards

http://en.wikipedia.org/wiki/Dun_and_Bradstreet

http://en.wikipedia.org/wiki/Fitch_Ratings

http://en.wikipedia.org/wiki/Moody%27s_Analytics

http://en.wikipedia.org/wiki/Standard_%26_Poor%27s

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Sovereign risk

Sovereign risk is the risk of a government becoming unwilling or unable to meet its

loan obligations, or reneging on loans it guarantees. The existence of sovereign risk

means that creditors should take a two-stage decision process when deciding to lend

to a firm based in a foreign country.

Counterparty risk

Counterparty risk, known as default risk, is the risk that an organization does not pay

out on a bond, credit derivative, credit insurance contract, or other trade or transaction

when it is supposed to. Even organizations who think that they have hedged their bets

by buying credit insurance of some sort still face the risk that the insurer will be

unable to pay, either due to temporary liquidity issues or longer term systemic issues.

Large insurers are counterparties to many transactions, and thus this is the kind of risk

that prompts financial regulators to act.

http://en.wikipedia.org/wiki/Default_risk


http://en.wikipedia.org/wiki/Credit_derivative

http://en.wikipedia.org/wiki/Credit_insurance

http://en.wikipedia.org/wiki/Liquidity

http://en.wikipedia.org/wiki/Liquidity


http://en.wikipedia.org/wiki/Credit_derivative


http://en.wikipedia.org/wiki/Default_risk

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MITIGATING CREDIT RISK

Lenders mitigate credit risk using several methods:

▪ Risk-based pricing: Lenders generally charge a higher interest rate to borrowers

who are more likely to default, a practice called risk-based pricing. Lenders

consider factors relating to the loan such as loan purpose, credit rating, and

loan-to-value ratio and estimates the effect on yield (credit spread).

▪ Covenants: Lenders may write stipulations on the borrower, called covenants, into

loan agreements:

▪ Periodically report its financial condition

▪ Refrain from paying dividends, repurchasing shares, borrowing further, or other

specific, voluntary actions that negatively affect the company's financial

position.

▪ Repay the loan in full, at the lender's request, in certain events such as changes in

the borrower's debt-to-equity ratio or interest coverage ratio.

▪ Credit insurance and credit derivatives: Lenders and bond holders may hedge

their credit risk by purchasing credit insurance or credit derivatives. These

contracts transfer the risk from the lender to the seller (insurer) in exchange

for payment. The most common credit derivative is the credit default swap.

▪ Tightening: Lenders can reduce credit risk by reducing the amount of credit

extended, either in total or to certain borrowers. For example, a distributor

selling its products to a troubled retailer may attempt to lessen credit risk by

reducing payment terms from net 30 to net 15.

▪ Diversification: Lenders to a small number of borrowers face a high degree of


http://en.wikipedia.org/wiki/Risk-based_pricing


http://en.wikipedia.org/wiki/Loan_purpose

http://en.wikipedia.org/wiki/Credit_rating

http://en.wikipedia.org/wiki/Loan-to-value_ratio

http://en.wikipedia.org/wiki/Credit_spread_(bond)

http://en.wikipedia.org/wiki/Loan_covenant



http://en.wikipedia.org/wiki/Dividend

http://en.wikipedia.org/wiki/Share_repurchase

http://en.wikipedia.org/wiki/Debt-to-equity_ratio

http://en.wikipedia.org/wiki/Times_interest_earned


http://en.wikipedia.org/wiki/Hedge_(finance)#Hedging_credit_risk



http://en.wikipedia.org/wiki/Credit_derivatives


http://en.wikipedia.org/wiki/Credit_default_swap



http://en.wikipedia.org/wiki/Distribution_(business)

http://en.wikipedia.org/wiki/Retailer

http://en.wikipedia.org/wiki/Retailer

http://en.wikipedia.org/wiki/Distribution_(business)




http://en.wikipedia.org/wiki/Hedge_(finance)#Hedging_credit_risk


http://en.wikipedia.org/wiki/Times_interest_earned

http://en.wikipedia.org/wiki/Debt-to-equity_ratio

http://en.wikipedia.org/wiki/Share_repurchase

http://en.wikipedia.org/wiki/Dividend


http://en.wikipedia.org/wiki/Credit_spread_(bond)

http://en.wikipedia.org/wiki/Loan-to-value_ratio

http://en.wikipedia.org/wiki/Credit_rating

http://en.wikipedia.org/wiki/Loan_purpose



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unsystematic credit risk, called concentration risk. Lenders reduce this risk

by diversifying the borrower pool.

▪

Deposit insurance: Many governments establish deposit insurance to guaranteebank deposits of insolvent banks. Such protection discourages consumers from

withdrawing money when a bank is becoming insolvent, to avoid a bank run,

and encourages consumers to hold their savings in the banking system instead

of in cash.

http://en.wikipedia.org/wiki/Systematic_risk#Unsystematic_risk

http://en.wikipedia.org/wiki/Concentration_risk



http://en.wikipedia.org/wiki/Diversification_(finance)

http://en.wikipedia.org/wiki/Deposit_insurance


http://en.wikipedia.org/wiki/Bank_run

http://en.wikipedia.org/wiki/Bank_run


http://en.wikipedia.org/wiki/Diversification_(finance)


http://en.wikipedia.org/wiki/Systematic_risk#Unsystematic_risk

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CURRENT TREND

Bad loan growth in Indian banks this year has been over thrice the average growth inthe preceding five years. While most bad loans are in retail, priority sector and

infrastructure, RBI is worried about the power sector, which is going through a high

level of stress.

RBI on Thursday released its Financial Stability Report, which assess the ability of

the financial sector to survive various types of stress. The stress test results show that

bad loans will reduce bank profits and may also force some of them to raise capital.

Besides rising bad loans, the financial system could come under stress because of a

falling rupee and fleeing foreign investors.

RBI's stress test shows that if bad loans were to increase 150%, 20 banks representing

46% of bank lending in India would be forced to seek capital support as their core

capital adequacy would fall below the prescribed 6%. Considering that gross non-

performing assets of banks were at 2.01% in March 2011, a 150% increase would

translate to a gross NPA ratio of 5.02%.

An increase in the NPA of a bank suggests that there is a high probability of a large

number of credit defaults. This in turn affects the net-worth of the bank and also

erodes the value of the bank‟s asset. Historical evidence suggest that most bank

failures are directly associated with poor management of credit risk.

Banks will be allowed to take property seized from defaulting borrowers onto their

own books or in effect „buy‟ the asset they isolate, thus reducing their non performing

loans, according to a revised securitization law i.e. SARFAESI law awaiting

parliamentary sanction.

http://timesofindia.indiatimes.com/topic/RBI

http://timesofindia.indiatimes.com/topic/Financial-Stability-Report

http://timesofindia.indiatimes.com/topic/NPA

http://timesofindia.indiatimes.com/topic/NPA

http://timesofindia.indiatimes.com/topic/Financial-Stability-Report

http://timesofindia.indiatimes.com/topic/RBI

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LITERATURE REVIEW

1) Risk Management In BanksBy R.S. Raghavan

CA

Risk is inherent in any walk of life in general and in financial sectors in

particular. Till recently, due to regulate environment, banks could not

afford to take risks. But of late, banks are exposed to same competition

and hence are compelled to encounter various types of financial and non-

financial risks. Risks and uncertainties form an integral part of banking

which by nature entails taking risks. There are three main categories of

risks; Credit Risk, Market Risk & Operational Risk. Author has discussed

in detail. Main features of these risk as well as some other categories of

risks such as Regulatory Risk and Environmental Risk. Various tools and

techniques to manage Credit Risk, Market Risk and Operational Risk and

its various component, are also discussed in detail. Another has also

mentioned relevant points of Basel’s New Capital Accord’ and role of

capital adequacy, Risk Aggregation & Capital Allocation and Risk Based

Supervision (RBS), in managing risks in banking sector.

2) FOREIGN EXCHANGE RISK MANAGEMENT PRACTICES -

A STUDY IN INDIAN SCENARIO

Sathya Swaroop Debasish

Department of Business Management

By Fakir Mohan University

Vyasa Vihar, Balasore - 756019

Orissa, INDIA

Indian economy in the post-liberalization era has witnessed increasing

awareness of the need for introduction of various risk management

products to enable Hedging against market risk in a cost effective way. This

industry-wide, cross Sectional study concentrates on recent foreign

exchange risk management practices and derivatives product usage by

large non-banking Indian-based firms. The study is exploratory in nature

and aims at an understanding the risk appetite and FERM (Foreign

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Exchange Risk Management) practices of Indian corporate enterprises. This

study focuses on the activity of end-users of financial derivatives and is

confined to 501 non-banking corporate enterprises. A combination of

simple random and judgment sampling was used for selecting the

corporate enterprises and the major statistical tools used were Correlation

and Factor analysis. The study finds wide usage of derivative products forrisk management and the prime reason of hedging is reduction in volatility

of cash flows. VAR (Value-at-Risk) technique was found to be the preferred

method of risk evaluation by maximum number of Indian corporate.

Further, in terms of the external techniques for risk hedging, the preference

is mostly in favor of forward contracts, followed by swaps and cross-

currency options This article throws light on various concerns of Indian

firms regarding derivative usage and reasons for non-usage, apart form

techniques of risk hedging, risk evaluation methods adopted, risk

management policy and types of derivatives used.

3) Selecting a Suitable Currency Options Hedging: Strategy for

Managing Foreign Exchange Risk

By CA. Gurvinder S. Gandhi

Manager Finance,

Canon India Pvt. Ltd., Gurgaon.

“Currency options” are derivative instruments that give the buyer of thisoption the right but not the obligation to execute a specified transaction in the

underlying currency pair. It gives the buyer the flexibility to execute

settlement of option or not. This article focuses on the dynamics of hedging

foreign exchange risk through currency options applications. The Currency

options are one of the best tool available to hedge foreign exchange exposures

in various foreign exchange market conditions, like volatile, stagnant, bullish,

bearish.

4) Exchange Rate Risk Measurement and Management:

Issues and approaches for firms

By Michael G. Papaioannou, Ph.D.

International monetary fund

Measuring and managing exchange rate risk exposure is important for

reducing a firm’s vulnerabilities from major exchange rate movements,

which could adversely aff ect profit margins and the value of assets. Thispaper reviews the traditional types of exchange rate risk faced by firms,

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namely transaction, translation and economic risks, presents the VAR

approach as the currently predominant method of measuring a firm’s

exchange rate risk exposure, and examines the main advantages and

disadvantages of various exchange rate risk management strategies,

including tactical vs. strategically and passive vs. active hedging. In

addition, it outlines a set of widely-accepted best practices in managingcurrency risk and presents some of the main hedging instruments in the

OTC and exchange-traded markets. The paper also provides some data on

the use of financial derivatives instruments, and hedging practices by US

firms.

5) Corporate Hedging for Foreign Exchange Risk in India

By Anuradha Sivakumar and Runa Sarkar

Industrial and Management Engineering Department

Indian Institute of Technology, Kanpur

Kanpur, India-208016

Derivative use for hedging is only to increase due to the increased global

linkages and volatile exchange rates. Firms need to look at instituting a sound

risk management system and also need to formulate their hedging strategy

that suits their specific firm characteristics and exposures.

In India, regulation has been steadily eased and turnover and liquidity in the

foreign currency derivative markets has increased, although the use is mainly

in shorter maturity contracts of one year or less. Forward and option

contracts are the more popular instruments. Regulators had initially only

allowed certain banks to deal in this market however now corporates can

also write option contracts. There are many variants of these derivatives

which investment banks across the world specialize in, and as the awareness

and demand for these variants increases,

RBI would have to revise regulations. For now, Indian companies are activelyhedging their foreign exchanges risks with forwards, currency and interest

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rate swaps and different types of options such as call, put, cross currency and

range-barrier options. The high use of forward contracts by Indian firms also

highlights the absence of a rupee futures exchange in India. However, the

Dubai Gold and Commodities Exchange in June, 2007 introduced Rupee-

Dollar futures that could be traded on its exchanges and had provided

another route for firms to hedge on a transparent basis. There are fears that RBI’s abilit y to control the partially convertible currency will be subdued by

this introduction but this issue is beyond the scope of this study. The partial

convertibility of the Rupee will be difficult to control if many exchanges offer

such instruments and that will be factor to consider for the RBI.

The Committee on Fuller Capital Account Convertibility had recommended that

currency futures might be introduced subject to risks being contained through

proper trading mechanism, structure of contracts and regulatory environment.

Accordingly, Reserve Bank of India in the Annual Policy Statement for the Year

2007-08 proposed to set up a Working Group on Currency Futures to study the

international experience and suggest a suitable framework to implement theproposal, in line with the current legal and regulatory framework.

6) Default Recovery Rates and LGD in Credit Risk Modeling and

Practice

By Edward I. Altman

Evidence from many countries in recent years suggests that collateral values andrecovery rates on corporate defaults can be volatile and, moreover, that they tend

to go down just when the number of defaults goes up in economic downturns.

This link between recovery rates and default rates has traditionally been neglected

by credit risk models, as most of them focused on default risk and adopted static

loss assumptions, treating the recovery rate either as a constant parameter or as a

stochastic variable independent from the probability of default. This traditional

focus on default analysis has been partly reversed by the recent significant

increase in the number of studies dedicated to the subject of recovery rate

estimation and the relationship between default and recovery rates. This paper

presents a detailed review of the way credit risk models; developed during the last

thirty years, treat the recovery rate and, more specifically, its relationship with theprobability of default of an obligor. We also review the efforts by rating agencies

to formally incorporate recovery ratings into their assessment of corporate loan

and bond credit risk and the recent efforts by the Basel Committee on Banking

Supervision to consider “downturn LGD” in their suggested requirements under

Basel II. Recent empirical evidence concerning these issues and the latest data on

high-yield bond and leverage loan defaults is also presented and discussed.

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7) MULTI-COUNTRY STUDY OF BANK CREDIT RISK

DETERMINANTS

By Nor Hayati Ahmad and Mohamed Ariff University Utara Malaysia

and Bond University, Australia

This paper presents fresh findings about key determinants of credit risk of

commercial banks in emerging economy banking systems compared with

developed economies. Australia, France, Japan and the US represent developed

economies; emerging economies are India, Korea, Malaysia, Mexico and Thailand.

Credit risk theories and empirical literature suggest eight credit risk determinants.

We find anywhere from two to four factors are alone significantly correlated with

credit risk of any one banking system. Regulatory capital is significant for

banking systems that offer multi products; management quality is critical in the

cases of loan-dominant banks in emerging economies. Contrary to theory orstudies, we find leverage is not correlated with credit risk in our test period. Data

transformations and statistical corrections ensured these results are reliable: Model

robustness was tested using AIC. The model developed here could be applied to

test more emerging economy banking systems to generalize our findings to other

economies.

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RESEARCH METHODOLOGY

Data collection:

The data is collected from Reserve Bank Of India website i.e. www.rbi.org.in. Data is

regarding nonperforming assets and total loans and advances of public sector bank of

India from period 2006-2010.

Data Analysis:

We have calculated Gross NPA ratio of each public sector bank by using the formula

Gross NPA ratio = (Gross NPA/total advances)*100

Thus we have made graphs for each year by taking NPA ratio on y-axis.

http://www.rbi.org.in/




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Non-Performing assets of PSU Banks for 2006-2010.

NAME OF THE BANK 2006 2007 2008 2009 2010

Allahabad Bank 1,183.83 1,093.60 1,009.23 1,077 1,221Andhra Bank 436.9 397.01 372.43 368 488

Bank of Baroda 2,263.83 1,972.40 1,858.11 1,664 2,196

Bank of India 2,219.28 1,930.51 1,782.80 2,190 4,481

Bank of Maharashtra 944.08 820.28 766.27 798 1,210

Canara Bank 1,784.21 1,487.19 1,391.47 2,139 2,505

Central Bank of India 2,684.18 2,571.98 2,349.84 2,320 2,458

Corporation Bank 625.57 624.57 584.42 559 651

Dena Bank 949.4 744.48 572.6 621 642

Indian Bank 650.47 532.21 473.31 426 459

Indian Overseas Bank 1,198.12 1,044.85 915.59 1,810 3,442Oriental Bank of

Commerce

2,116.31 1,454.05 1,280.10 1,058 1,469

Punjab and Sind Bank 941.5 290.84 135.53 161 206

Punjab National Bank 3,138.29 3,390.72 3,319.30 2,767 3,214

Syndicate Bank 1,500.20 1,553.05 1,759.66 1,592 2,005

UCO Bank 1,227.70 1,504.02 1,651.95 1,540 1,665

Union Bank of India 2,098.05 1,872.62 1,656.60 1,923 2,664

United Bank of India 744.3 816.92 760.73 1,020 1,372

Vijaya Bank 540.15 564.31 511.5 699 994

IDBI Bank Ltd. 938.48 1,380.62 1,376.68 1,436 2,129

State Bank of Bikaner and

Jaipur

10,269.52 463.03 437.31 490 612

State Bank of Hyderabad 388.73 350.83 311.94 486 646

State Bank of India 453.06 9,871.01 12,576.08 15,105 17,836

State Bank of Indore 362.93 294.21 265.39 301 493

State Bank of Mysore 398.13 383.77 359 368 595

State Bank of Patiala 542.95 524.41 520.94 574 1,007

State Bank of Travancore 609.95 540.11 570.83 549 642

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Total Advances of PSU Banks for 2006-2010.

NAME OF THE BANK 2006 2007.00 2008.00 2009.00 2010.00

Allahabad Bank 20410.86 28041.03 38816.54 53850.00 67833.33

Andhra Bank 17476.00 20895.26 26602.14 33454.55 61000.00

Bank of Baroda 31011.37 50574.36 74324.40 92444.44 168923.08

Bank of India 40350.55 52175.95 74283.33 128823.53 263588.24

Bank of Maharashtra 13486.86 14914.18 21893.43 30692.31 52608.70

Canara Bank 45748.97 64660.43 92764.67 178250.00 156562.50

Central Bank of India 28254.53 37275.07 48955.00 72500.00 91037.04

Corporation Bank 18399.12 24021.92 27829.52 37266.67 59181.82

Dena Bank 9787.63 11632.50 13965.85 25875.00 30571.43Indian Bank 15487.38 18352.07 24911.05 35500.00 51000.00

Indian Overseas Bank 22606.04 30730.88 39808.26 113125.00 137680.00

Oriental Bank of

Commerce

23256.15 24234.17 40003.13 46000.00 97933.33

Punjab and Sind Bank 5473.84 3029.58 5647.08 23000.00 29428.57

Punjab National Bank 52304.83 82700.49 94837.14 102481.48 178555.56

Syndicate Bank 28850.00 38826.25 58655.33 58962.96 105526.32

UCO Bank 24554.00 39579.47 56963.79 70000.00 83250.00

Union Bank of India 41961.00 49279.47 57124.14 87409.09 133200.00

United Bank of India 12201.64 17381.28 21131.39 37777.78 47310.34Vijaya Bank 18625.86 17634.69 22239.13 43687.50 52315.79

IDBI Bank Ltd. 32361.38 69031.00 72456.84 75578.95 152071.43

State Bank of Bikaner

and Jaipur

311197.58 19292.92 19877.73 28823.53 38250.00

State Bank of Hyderabad 11106.57 16706.19 25995.00 54000.00 58727.27

State Bank of India 7551.00 274194.72 433657.93 503500.00 637000.00

State Bank of Indore 10997.88 9807.00 13967.89 21500.00 35214.29

State Bank of Mysore 9710.49 15990.42 19944.44 26285.71 45769.23

State Bank of Patiala 20109.26 27600.53 47358.18 41000.00 #VALUE!

State Bank of Travancore

14184.88 16878.44 25946.82 27450.00 37764.71

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NPA ratio for PSU banks

NAME OF THE BANK 2006 2007 2008 2009 2010

Allahabad Bank 5.80 3.90 2.60 2.00 1.80

Andhra Bank 2.5 1.9 1.4 1.1 0.8

Bank of Baroda 7.30 3.90 2.50 1.80 1.30

Bank of India 5.50 3.70 2.40 1.70 1.70

Bank of Maharashtra 7.00 5.5 3.50 2.6 2.30

Canara Bank 3.90 2.30 1.50 1.20 1.60

Central Bank of India 9.50 6.90 4.80 3.20 2.70

Corporation Bank 3.40 2.6 2.1 1.5 1.1

Dena Bank 9.70 6.4 4.1 2.4 2.1Indian Bank 4.20 2.9 1.9 1.2 0.9

Indian Overseas Bank 5.30 3.4 2.30 1.6 2.5

Oriental Bank of

Commerce

9.10 6.00 3.20 2.30 1.50

Punjab and Sind Bank 17.20 9.6 2.40 0.7 0.70

Punjab National Bank 6.00 4.10 3.50 2.70 1.80

Syndicate Bank 5.20 4 3 2.7 1.9

UCO Bank 5.00 3.80 2.90 2.20 2.00

Union Bank of India 5.00 3.80 2.90 2.20 2.00

United Bank of India 6.10 4.7 3.6 2.7 2.9Vijaya Bank 2.90 3.2 2.3 1.6 1.9

IDBI Bank Ltd. 2.90 2.00 1.90 1.90 1

State Bank of Bikaner and

Jaipur

3.30 2.4 2.2 1.7 1.6

State Bank of Hyderabad 3.50 2.1 1.20 0.9 1.10

State Bank of India 6.00 3.60 2.90 3.00 2.80

State Bank of Indore 3.30 3 1.9 1.4 1.4

State Bank of Mysore 4.10 2.4 1.80 1.4 1.30

State Bank of Patiala 2.70 1.9 1.10 1.4 _

State Bank of Travancore 4.30 3.2 2.20 2 1.70

8/3/2019 frm proj-1


0.002.004.006.008.00

10.0012.0014.00

16.0018.0020.00

A l l a h a b a d B a n k

A n d h r a B a n k

B a n k o f B a r o d a

B a n k o f I n d i a

B a n k o f M a h a r a s h t r a

C a n a r a B a n k

C e n t

r a l B a n k o f I n d i a

C

o r p o r a t i o n B a n k

D e n a B a n k

I n d i a n B a n k

I n d i a

n O v e r s e a s B a n k

O r i e n t a l B a n k o f …

P u n j a

b a n d S i n d B a n k

P u n j a b N a t i o n a l B a n k

S y n d i c a t e B a n k

U C O B a n k

U n i o n B a n k o f I n d i a

U n i t e d B a n k o f I n d i a

V i j a y a B a n k

I D B I B a n k L t d .

S t a t e

B a n k o f B i k a n e r …

S t a t e B a

n k o f H y d e r a b a d

S t a t e B a n k o f I n d i a

S t a t

e B a n k o f I n d o r e

S t a t e

B a n k o f M y s o r e

S t a t

e B a n k o f P a t i a l a

S t a t e B a n k o f …

NPA Ratio of 2006

NPA Ratio of 2006

0.00

2.00

4.00

6.00

8.00

10.00

12.00

A

l l a h a b a d B a n k

A

n d h r a B a n k

B

a n k o f B a r o d a


B a n k o

f M a h a r a s h t r a

C a n a r a B a n k

C e n t r a

l B a n k o f I n d i a

C o r

p o r a t i o n B a n k

D e n a B a n k

I n d i a n B a n k

I n d i a n O v e r s e a s B a n k


P u n j a b

a n d S i n d B a n k

P u n j a b N

a t i o n a l B a n k

S

y n d i c a t e B a n k

U C O B a n k

U n i o n


U n i t e d


V i j a y a B a n k


S t a t e B

a n k o f B i k a n e r …

S t a t e B a n k

o f H y d e r a b a d


S t a t e B a n k o f I n d o r e

S t a t e B

a n k o f M y s o r e

S t a t e B a n k o f P a t i a l a


NPA of 2007

NPA of 2007

8/3/2019 frm proj-1


0.00

1.00

2.00

3.004.00

5.00

6.00


A n d h r a B a n k



B a n

k o f M a h a r a s h t r a

C a n a r a B a n k

C e n

t r a l B a n k o f I n d i a

C o r p o r a t i o n B a n k

D e n a B a n k

I n d i a n B a n k

I n d i a n O v e r s e a s B a n k


P u n j a b a n d S i n d B a n k

P u n j a

b N a t i o n a l B a n k

S y n d i c a t e B a n k

U C O B a n k

U n

i o n B a n k o f I n d i a

U n i t e d B a n k o f I n d i a

V i j a y a B a n k


S t a t e B a n k o f B i k a n e r …



S t a

t e B a n k o f I n d o r e

S t a t

e B a n k o f M y s o r e

S t a

t e B a n k o f P a t i a l a


NPA RATIO of 2008

NPA RATIO of 2008

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50


A n d h r a

B a n k


B a n k

o f I n d i a

B a n k o f M a h a r a s h t r a

C a n a

r a B a n k

C e n t r a l B a n k

o f I n d i a

C o r p o r a t i o n B a n k

D e n a B a n k

I n d i a n B a n k

I n d i a n O v e r s e

a s B a n k

O r i e n t a l B a n k o f C o m m e r c e

P u n j a b a n d S i n d B a n k


S y n d i c a

t e B a n k

U C O B a n k

U n i o n B a n k

o f I n d i a

U n i t e d B a n k

o f I n d i a

V i j a

y a B a n k


S t a t e B a n k o f B i k a

n e r a n d …

S t a t e B a n k o f H y d e r a b a d

S t a t e B a n k

o f I n d i a

S t a t e B a n k o

f I n d o r e

S t a t e B a n k o f

M y s o r e


S t a t e B a n k o f T r a v a n c o r e

NPA RATIO of 2009

NPA RATIO of 2009

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FINDINGS

The NPA ratio indicates the quality of credit portfolio of the banks. High gross NPA

ratio indicates the low credit portfolio of bank and vice-a – versa. We can see that the

Punjab and Sind Bank has the higher gross NPA ratio of 9.7% followed by Dena

Bank with 9.1% in 2006 and 2007.In 2008 Central Bank of India has the highest NPA

ratio as depicted by graph. Thus it shows that the credit risk of banks stated above was

high due to high volume of non performing assets.it is also depicted that the NPA

ratio of Andhra Bank and Canara Bank was low during 2006-2009which shows that at

that time they were having high credit portfolio. But in 2010 they also show highNPA ratio. Thus their credit portfolio came down in 2010.

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

A l l a

h a b a d B a n k

A n d

h r a B a n k

B a n

k o f B a r o d a

B

a n k o f I n d i a

B a n k o f M

a h a r a s h t r a

C

a n a r a B a n k

C e n t r a l B

a n k o f I n d i a

C o r p o

r a t i o n B a n k

D e n a B a n k

I n d i a n B a n k

I n d i a n O v

e r s e a s B a n k

O r i e

n t a l B a n k o f …

P u n j a b a n

d S i n d B a n k


S y n

d i c a t e B a n k

U C O B a n k

U n i o n B

a n k o f I n d i a

U n i t e d B

a n k o f I n d i a

V i j a y a B a n k


S t a t e B a n k o f B i k a n e r a n d …

S t a t e B a n k o f H y d e r a b a d

S t a t e B

a n k o f I n d i a

S t a t e B a n k o f I n d o r e

S t a t e B a n

k o f M y s o r e


S t a t e B a n k o f

T r a v a n c o r e

NPA RATIO of 2010

NPA RATIO of 2010

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LIMITATIONS

The major limitation was data availability. We have taken data for public

sector banks only as data for private sector banks was not available. Thus

research is limited to public sector banks only.

The time period was limited to only 5 years i.e. from 2006-2010.

8/3/2019 frm proj-1


CONCLUSION

India as an emerging economy has withstood the recent global financial meltdown

and posted a decent GDP growth when many major economies were in recession.

This is mainly due to the robust macroeconomic policies of the government and the

prudent financial policies and regulations implemented in a timely manner by the

regulatory body the Reserve Bank of India (RBI). The public and private sector banks

have been managing the credit risk effectively during the past decade. Although the

NPA level had decreased from the all time high in the 1990s to all time low in 2008,

the gradual increase of the NPA during the past two years is posing concern for many

analysts. Since the lagged NPA is the major contributing factor for the current NPA,

the commercial banks must have prudent credit policies to avert any ill affect of the

credit risk. The GDP growth in the Indian economy is helping the banking sector in

having their Non-Performing loans at an acceptable level. Since most studies predict a

two year lag period between the boom in credit growth and the growth in NPA, the

banking sector must be vigilant in managing the NPAs in the coming years.

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REFERENCES

http://www.eurojournals.com/finance.htm

www.rbi.org.in

Banking Annual (October 2003) published by business standard.









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