redit rating management

8/18/2019 redit rating management

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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!/

%!&#9 $0!-#C0$

!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

*)


33/45

< 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

*+


35/45

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


36/45

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


37/45

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

*


38/45

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


39/45

;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


40/45

• #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


41/45

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


42/45

• #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.

+)


43/45

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


44/45

ILIO%RAPHY

++


45/45

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.

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