Seminar Satti

8/4/2019 Seminar Satti

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STUDYING RISK

MANAGEMENT

IN THE KAPURTHALA

CENTRAL CO-OPERATIVE BANKBy- SATWINDER SINGH

7210070005

RQ2701B47


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RESEARCH METHODOLOGY

The research methodology used is theDescriptive Research.

Descriptive research, also known as statistical

research, describes data and characteristicsabout the population being studied.


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DATA COLLECTION

1. Primary Data- It was collected through semi-structured interview, held with the FinanceManager and Senior manager in presence of

the other officials of The Kapurthala centralcooperative Bank Limited.

2. Secondary Data- It was collected from thepublished annual reports of the central

cooperative Bank and by reading variousbooks on Credit Risk Management , andrelevant Websites.


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SCOPE OF THE STUDY

The main reason to select RISKMANAGEMENT as a topic is to understandthe importance of the Role played by risk

management department and/or practiceswhen the bank lends money to its borrowers.


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Objective of Study

Understanding risk management conceptually.

Studying the various credit risk managementtechniques of public sector bank.

Understanding the importance of the credit riskmanagement and how useful it is to the publicsector banks and how it benefits them invarious ways.

SECONDARY OBJECTIVE Studying the difference between retail credit

management and credit risk managementpracticed by public sector banks.


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INTRODUCTION TO RISK

MANAGEMENT Any activity involves risk, touching all spheres oflife, whether it is personal or business. Anybusiness situation involves risk. To sustain its

operations, a business has to earnrevenue/profit and thus has to be involved inactivities whose outcome may be predictable orunpredictable. There may be an adverse

outcome, affecting its revenue, profit and/orcapital. However, the dictum No Risk, No Gainhold good here.


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WHAT IS RISK MANAGEMENT?

The standard definition of management isthat it is the process of accomplishingpreset objectives; similarly, risk

management aims at fulfilling the samespecific objectives. the process ofidentification, measurement,

monitoring and control of its activitiesbecomes paramount under riskmanagement.


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DEFINING RISK

The word RISK is derived from the Italian wordRisicare meaning to dare.

The four letters comprising of the word RISK

define its features.

R = Rare (unexpected)

I = Incident (outcome)

S = Selection (identification) K = Knocking (measuring, monitoring,

controlling)


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TYPES OF RISKS

The risk profile of an organization/banks may bereviewed from the following angles:

1. Business risks:Capital riskCredit riskMarket riskLiquidity risk

Business strategy and environment riskOperational riskGroup risk


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2. Control risks:

Internal Controls

Organization

Management (including corporategovernance)

Both these types of risk, however, are linked

to the three basic risk categories listedbelow:

Credit risk

Market risk

Organizational risk


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CREDIT RISK MANAGEMENT

According to the Basel Committee, Credit Risk ismost simply defined as the potential that aborrower or counter-party will fail to meet itsobligations in accordance with agreed terms.

The Reserve Bank of India (RBI) has definedcredit risk as the probability of losses associatedwith diminution in the credit quality of borrowers orcounter-parties. Credit risk management is subdivided as

1. Credit risk Identification 2. Credit risk Measurement

3. Credit risk Monitoring and Control

4. Credit risk Mitigation


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THE CREDIT RISK MANAGEMENTPROCESS OF THE BANK

The risk management process has four components:

1. Risk Identification :-While identifying risk bank iskeeping, the following points in mind:

All types of risks must be identified and their likely effect

in the short run is understood. The magnitude of each risk segment may vary from

bank to bank.

2. Risk Measurement :-

Directing the efforts of the bank to mitigate the risks

according to the harms of a particular risk factor to thebank.

Taking appropriate initiatives in planning the banksfuture threat areas and line of business and capitalallocation. The systems/techniques used to measure

risk depend upon the nature and complexity of a riskfactor.


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MANAGEMENT PROCESS OF

THE BANK (cont..)3.RISK MONITORING :- Risk monitoring activity ofthe bank ensure the following:

Each operating segment has clear lines ofauthority and responsibility.

Whenever the organizations principles andpolicies are breached, even if they may be to itsadvantage, must be analyzed and reported, to theconcerned authorities to aid in policy making.

In the course of risk monitoring, if it appears that itis in the banks interest to modify existing policiesand procedures, steps to change them should beconsidered.


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THE CREDIT RISK MANAGEMENTPROCESS OF THE BANK(cont..)

4. RISK CONTROL :- There are appropriatemechanism to regulate or guide the operation ofthe risk management system in the entire bank

through a set of control devices i.e there riskmanagement committee.

Assessing risk profile techniques regularly toexamine how far they are effective in mitigating

risk factors in the bank. Analyzing internal and external audit feedback

from the risk angle and using it to activate controlmechanisms.


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CREDIT RISK MANGEMENTTECHNIQUES OF THE BANK

Risk taking is an integral part of management in abank. For example, if a particular bank decides to lendonly against its deposits, then its margins are boundto be very less indeed. However the bank may also

not be in a position to deploy all its lendable funds,since obviously takers for loans will be very andoccasional. As a result banks income will be low andits growth zero.

The basic techniques of an ideal credit riskmanagement culture are:

Certain risks are not to be taken even though there isthe likelihood of major gains or profit, like speculativeactivities.


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CREDIT RISK MANGEMENTTECHNIQUES OF THE BANK(cont..)

Transactions with sizeable risk content shouldbe transferred to professional risk institutions.For example, advances to small scale

industrial units and small borrowers should becovered by the Deposit & Credit InsuranceScheme in India. Similarly, export financeshould be covered by the Export Credit

Guarantee Scheme, etc.

The other risks should be managed by theinstitution with proper risk management

architecture.


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FORMS OF CREDIT RISK

The RBI has laid down the following forms of credit

risk:

Non-repayment of the principal of the loan and /or theinterest on it.

Contingent liabilities like letters of credit/guaranteesissued by the bank on behalf of the client---- amount notdeposited by the customer.

In the case of treasury operations, default by thecounter-parties in meeting the obligations.

In the case of securities trading, settlement not takingplace when its due.


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COMMON CAUSES OF CREDITRISK SITUATIONS FOR BANK

For any organization, especially one in banking-related activities, losses from credit risk are usuallyvery severe and not rare. It is therefore necessary tolook into the causes of credit risk. Broadly there arethree sets of causes, which are as follows:

CREDIT CONCENTRATION i.e. looking financialinformation of the person(capital base, tangibleassets)

CREDIT GRANTING AND/OR MONITORING

PROCESS proper monitoring of lended money tocustomer(usage of money)

CREDIT EXPOSURE IN THE MARKET ANDLIQUIDITY SENSITIVITY SECTORS. Loss to banksfund due to market ups and downs


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CREDIT RISK INNON-PERFORMING ASSETS

Non-performing assets (NPAs) ---- known as non-performing loans (NPLs) in many banks ------ aregenerally the outcome of ineffective or faulty creditrisk management by a bank.

WHY NPA IS A MATTER OF CONCERN TOBANKS?

Funds remain sunk without any returns in terms ofcash flows.

The credit cycle of banks gets chocked upcausing liquidity constraints.

Recycling of funds is affected.

MANAGEMENT OF RISK AT THE


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MANAGEMENT OF RISK AT THEKAPURTHALA CENTRAL COOPERATIVEBANK

Risk is an inherent part of The KapurthalaCentral Cooperative Bank business, andeffective Risk Compliance & Audit Group iscritical to achieving financial soundness andprofitability. With different policies andprocedures in place, The Kapurthala CentralCooperative Bank identifies, assess, monitorsand manages the principal risks:

Credit risk

Market Risk

Operational risk



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MANAGEMENT OF RISK AT THEKAPURTHALA CENTRAL COOPERATIVEBANK (CONT..)

Credit risk, the most significant risk faced byThe Kapurthala Central Cooperative Bank, ismanaged by the Credit Risk Compliance &

Audit Department (CRC & AD) whichevaluates risk at the transaction level as wellas in the portfolio context. The industryanalysts of the department monitor all major

sectors and evolve a sectoral outlook, which isan important input to the portfolio planningprocess.



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MANAGEMENT OF RISK AT THEKAPURTHALA CENTRAL COOPERATIVEBANK (CONT..)

The functions of this department include:

1. Review of Credit Origination &Monitoring:- to see credit ratings of different

cos.2. Design appropriate credit processes,

operating policies & procedures.

3. Portfolio monitoring:- to measure the

portfolio risk.4. Focused attention to structured financing

deals:- new product approval policy andmonitoring.

5. Monitor adherence to credit policies of


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MANAGEMENT OF RISK AT THE KAPURTHALACENTRAL COOPERATIVE BANK (CONT..)

CREDIT RATING BY BANK :- Bank is having acomprehensive risk scoring/rating system thatserves as a single point indicator of diverse riskfactors of a borrowers and for taking credit

decisions in a consistent manner. A substantialdegree of standardization is required in ratingsacross borrowers. The agency also needs todesign appropriate measures for various gradesof credit at an individual level or at a portfolio

level. These grades may generally be any of thefollowing forms:

Alphabet: AAA, AA, BBB, etc.

Number: I, II, III, IV, etc.


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MANAGEMENT OF RISK AT THE KAPURTHALACENTRAL COOPERATIVE BANK (CONT..)

CREDIT AUDIT :- Credit audit is defined asthe process of examining and verifying creditrecords from the viewpoint of compliance withlaid down policies, system procedures for thepayment of credit and their monitoring. Thiscovers the following

Portfolio review: Examining the quality of credit

and investment (quasi-control) portfolio andsuggesting measures for improvement.

Loan review: Review of the sanction processand status of post-sanction

process/procedures.


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MANAGEMENT OF RISK AT THE KAPURTHALA

CENTRAL COOPERATIVE BANK (CONT..)

Action points for review:

Verifying compliance with the banks policies andregulatory compliance with regard to sanction.

Examining the adequacy of documentation. Conducting the credit risk assessment.

Frequency of review:

The frequency of review varies depending on the

magnitude of risk (say, three months for high riskaccounts, and six months for average riskaccounts, one year for low-risk accounts).


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ANALYSIS

Managing credit risk is of utmost importanceas it helps the banks to reduce the risk ofNPAs (Non Performing Assets). Any venturetaken by any body today involves a certainamount of risk today. Without risk there can beno gain. As far as the banking industry goes,one of their main aims is giving loans (credit)to individuals and corporate for personal aswell as personal needs. Credit risk is closelyrelated with the business of lending. Thiscomprises a huge percentage of theirbusiness.


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(Cont)

The credit risk management function has becomethe centre of gravity, especially in a financially inservices industry like banking. Moreover they arenow using it as a tool to succeed over their

competition because credit risk managementpractices reduce risk and improve return oncapital.

Further a fact that was brought out and discussed

in the interviews was that in the corporate loansthe banks were not very hesitant to give loans tomost of the companies because the economy as awhole is doing well and thus all the sectors and

industries also.


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CONCLUSION

The bank although having its risk managementcommittee to managing the various riskespecially credit risk yet it has wide range ofNpas which is still uncovered. Due to which itsworking is very much effected. As this bankmainly deals with the agriculture sector of thesociety and no. of the defaults are by that only.

No new recruitment is there in the bank andsome employees dont even know to usecomputer in a well advanced ways.


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CONT

Bank is lacking in CBS ( centralized bankingsolution)system. In this they dont have any onlinefunctioning of the bank. Due to which work loadon the employees is much as they have to put

each and every transaction manually and alsothey have to keep big bundles of registers forkeeping the records.

Bank is mostly focusing on the credit risk only andnot on the other forms of the market risk and

operational risk. As bank dont have its website much useful and

knowledgeable data about the credit risk wasgathered from the semi-formal type personalinterview with the Senior manager and Financemanager of the bank.

S O C S


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BENEFITS OF CREDIT RISKMANAGEMENT

The stakeholders----especially shareholders,depositors (in the case of banks) and thegovernment---- are the beneficiaries since the

economic and social costs of poor credit riskpractices strengthens the confidence in theoperation of the organization concerned, besidesenabling systematic peer-level analysis and

comparison. It is also a fact that such practicesfacilitate forward-looking assessment, aided bythe tools of stress testing, credit VaR, etc. The endresult is certainly enhanced investor confidence

and returns.


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RECOMMENDATIONS

Establishment of an appropriate credit riskenvironment/ culture. This should operateunder a sound and independent credit

approval process. Maintaining appropriate credit administration,

measurement and monitoring processes.

Ensuring adequate controls over credit risk. Awareness of the implications of other forms of

risk, such as market risk and operational risk.


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LIMITATIONS OF THE STUDY

Reluctance and resistance on the part of theinterviewees (public sector bank ) to shareinformation as they considered it as

confidential. Visiting all public sector banks was not

possible.

Banks have certain rules and regulations forcredit giving process.


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