49677018 Credit Risk Management 3

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A STUDY ON

CREDIT RISK MANAGEMENTAT

SYNDICATE BANK

IN PARTIAL FULFILLMENT OF THE REQUIREMENT FOR THE AWARD

OF THE DEGREE

MASTER OF BUSINESS ADMINISTRATION

FROM

OSMANIA UNIVERSITY

SUBMITTED BY

DVR POST GRADUATE INSTITUTE OF

MANAGEMENT STUDIES

KANDI, SANGAREDDY. 2009-2011

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ACKNOWLEDGEMENT

I would like to express my gratitude to our college PrincipalMr.D.SRINIVASULU or having given me the opportunity to work on

this project. It is indeed a great pleasure and a matter of immense

satisfaction for me to express my deep sense of gratitude and

Indebtness to Ms.Subbalakshmi (Head of Department of Business

Administration) and my college lecturers for the continuous support they

have given me.

This project would not have been possible without efforts and guidance

of a KRISHNA MURTHY of SYNDICATE BANK HYDERABAD. I take

opportunity to time all those magnanimous persons who rendered their

support to this project.

I would like to thank my project external guide, Ms.SUBBALAKSHMI for

his expert guidance and continuous guidance which lead to successful

completion of this project.

I am thankful to my friends for sharing technical expertise with me in

making this project successful.

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DECLARATION

I hereby declare that this project titled CREDIT & RISK MANAGEMENT

with reference to SYNDICATE BANK submitted here is genuine and

original work of mine.

This project report is submitted in partial fulfillment of the requirement

for the award ofMASTER OF BUSINESS ADMINISTRATION degree

fromD V R COLLEGE OF POST GRADUATE INSTITUTE OF

MANAGEMENT STUDIES, KANDI, HYDERABAD, for the year 2009-

2009.

I also declare that this is result of my own efforts and has not been

submitted to any other university for any other degree of diploma.

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CONTENTS PAGE

NO.

CHAPTER I PROFILE OF BANKING INDUSTRY 5-7

CHAPTER II INTRODUCTION 8-13

DESIGN OF STUDY

1. OBJECTIVES

2. NEED & IMPORTANCE

3. METHODOLOGY

4. SCOPE

5. LIMITATIONS

CHAPTER III ORGANISATION PROFILE 14-36

PROFILE OF KOTAK MAHINDRA BANK

TAXOMONY OF PERSONAL FINANCE

CHAPTER IV INTRODUCTION OF CREDIT & RISK 37-56

1. IMPORTANCE OF CREDIT & RISK

2. LEGAL ASPECTS OF RISK MANAGEMENT

CHAPTER V FINDINGS AND ANALYSIS 57-77

CHAPTER VI CONCLUSSION AND SUGGESTIONS 78-79

ANNEXURES 80-85

BIBLIOGRAPHY 85-89

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INTRODUCTION

INTRODUCTION

Finance may be defined as the provision of money at the time it is

required. Finance refers to the management of flows of money through

an organization. It concerns with application of skills in the manipulation,

use and control of money.

Financial management refers to that part of the management activity

which is concerned with the planning and controlling of firms financial

resources. It deals with finding out various sources for raising funds for

the firm. The sources must be suitable and economical for the needs of

the business. The most appropriate use of such funds also forms a part

of financial management.

The main objectives of finance function are:-

1 Acquiring sufficient funds.

2 Optimum utilization of funds.

3 Increasing profitability.

4 Maximizing shareholders wealth.

In the present business context, a finance manager is expected to do

financial forecasting and planning .Financial manager has to plan the

funds needed in the future. How these funds will be acquired and applied

is an important function of a finance manager. The sources of supply of5


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funds are shares, debentures, financial institutions, commercial banks,

etc. The pros and cons of various sources should be analyzed before

making a final decision.

The cost of acquiring funds and the returns should becompared. Capital budgeting technique is used for this purpose. The

objective of maximizing profits will be achieved only when funds are

efficiently used and they do not remain idle at any time. A number of

mergers and consolidations take place in present competitive Industrial

world. A finance manager is supposed to assist management in making

valuation etc. For this purpose, he should understand various methods

of valuing shares and others assets so that correct values are arrived.

Cash is the best source for maintaining liquidity. It is required to

purchase raw material, pay workers, meet other expenses, etc. A

finance manager is required to determine the need for liquid assets and

then arrange liquid assets in such a way that there is no scarcity of

funds.

DESIGN OF STUDY

Kotak Mahindra Bank personal loans are the largest business in the

bank. The personal loan business is doubling every year. It is the most

profitable business of the bank. Personal loans contribute substantially

to the overall base line of the bank.

Credit department is the back bone of personal loan business. Mainfunction of the credit is to assess the credit worthiness of an applicant

and lending him appropriate amount based on such assessment and

subject to the terms, conditions and limitations of the policies.

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The term credit management has got importance from the time when

there increased the pressure of competition and force of custom

persuades to sell on credit. Credit is granted to facilitate the sales. Credit

is appealing to those customers who cannot borrow from other sourcesdue to many reasons. The firms investment in accounts receivable

depends on how much it sells on credit and how long it takes to collect

receivables. Accounts receivables constitute one of most important asset

category for firm which makes the firm to manage its credit well.

The term credit management can be analyzed from various aspects like:

Terms of payment, Credit policy variables, Credit evaluation, Credit

granting decision.Risk management is a process of managing the collection of managing

the collection of liabilities with an objective of increasing the cash flows

with minimum costs. It involves collecting in right time, right amount, in

right terms.

This process starts from identifying the amount of liabilities and to

make the collection successful. This does not end with mere collection.

Besides collection, the difficulties and weak areas should also beascertained, which leads to development of an effective system for credit

extension or sales and collection.

OBJECTIVES OF THE STUDY:

The main objectives of the study are:

1 To study the effectiveness of credit process.

2 To study the risk process followed in Syndicate bank.

3 To know and analyze the procedure of loan disbursement and its

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evaluation criteria.

4 To study and analyze the factors contributing to default rate and

their interrelations.

5 To suggest suitable strategies for improving credit and riskmanagement.

NEED & IMPORTANCE OF THE STUDY:

In todays market scenario, one of the most critical areas to focus on is

to protect the bank from bankruptcy. In such conditions Credit and Risk

Department plays a key role in growth of banks. Any delay in realizingthe receivables would adversely affect the working capital, which in turn

effects the overall financial management of a firm. No firm can be

successful if its over dues are not collected, monitored and managed

carefully in time. Thus Risk management is important in sustaining the

bank and its growth.

PERIOD OF STUDY:

The data obtained from the bank (syndicate bank) for the purpose of

credit period and risk time from the customers. The information of the

customers from different anglesto access the credit and risk

management for a period of THREE years. i.e. from 2007-2010.

Credit period refers to the length of the time are allowed to pay the

amount

For their purchase which is generally varied from 15 to 60 days, or 15 to

90 days.

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RESEARCH METHODOLOGY:

To fulfill the objectives of the study both primary and secondary data are

used. The primary data was collected through interviewing all the

executives and officials of the KMBL Somajiguda Hyderabad.

The secondary data was collected from published records, website and

reports of the KMBL. Mainly the data relating to credit proceduresfollowed by the bank and risk management was obtained through

manager from bank database .The data for this purpose was obtained

from bank for a period of 3 years that is from. Based on the availability

of the data, the analysis was made from different angles to assess the

credit and risk management of KMBL, Somajiguda Hyderabad.

SCOPE OF THE STUDY:

1 The study intended to cover the degree and extent of default

by the customers of KMBL. In that direction the following has

been done.

2 The genesis of the company, its organs. And the range of

activities have been studied and documented such study, it

was thought, would uncover the weakness brought down aslegacy from its line of entrepreneurs.

3 The process involved in loan disbursement has been studied to

identify the weak area, follies committed in disbursement or in

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the design of disbursement process. The seeds of default are

built in; hence the study of loan disbursement process has

been attempted.

4 The profile of the defaulters including location, stage ofdefault, gender, age etc. has been studied and documented.

The components of the profile have been presumed to be

linked to the default.

5 The risk process itself has the potential for some loans to be

non recoverable hence to identify the probable causes, the risk

process has been studied and documented.

6 Based on the profile and the data of defaulted loans, ananalysis has been made to establish the links between default

and other variables like location of loan, amount of loan taken,

gender, profession etc.

LIMITATIONS OF THE STUDY:

1 The study is limited to Hyderabad city only.

2 The study has been done according to bank point of view.3 The study has been done without meeting the defaulters due

to constraints of time.

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COMPANY PROFILE

THE PROFILE OF BANKING INDUSTRY

Financial institutions today face enormous challenges as they

defend their place in market; ordinarily they are simple business

oriented or commercial concerns. They need to discover innovative ways

to take on these challenges by making critical strategic insights and

emerging industry best practices, which strengthen approaches to

fluctuating interest rates and uncertain investment yields to produce

increased profitability and reduce earning volatility.

A study of financial institutions in India can appropriately begin

with a brief discussion of the regulatory framework of the country carried

out by RESERVE BANK OF INDIA.

Financial regulation is necessary to generate, maintain and

promote confidence, trust and faith of people for its smooth functioning.

Financial markets involve intermediaries or agencies, where RBI ensures

investors protection, discloser to trustees, easy access, timely and

adequate information to interested parties.

RESERVE BANK OF INDIA as the central bank of the country is

the center of the Indian financial and monitory system. It is the oldest

among the central banks in the developing countries; it started

functioning from April 1st 1935.

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In framing various policies all the banks require to maintain close

and continuous collaboration with RBI and Government.

The preamble ofRBI states that Reserve bank is expedient to

regulate the issue of bank notes and keeping of reserves with a view to

securing monetary stability in India and generally to operate the

currency and credit system of the country to its advantage.

To elaborate the above statement, functions of RBI helps us to

understand the clear workings of financial system in INDIA.

Role and Functions ofRBI:

Note issuing authority

Government banker

Bankers bank

Exchange control authority

Security authority

Above functions of RBI are discussed as under.

NOTE ISSUING AUTHORITY:

The issue of currency note is one of the basic functions of RBI; the

responsibility of the bank is not only to put currency into or withdraw it

from circulation but also to exchange notes and coins of one

denomination into those of other denomination as demanded by public.

The bank issues notes against the security of gold coins and gold bullion,

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foreign security, rupee coins Government of India security, and bills of

exchange and promissory notes as are eligible for purchase by the bank.

At present bank issues notes in denominations of Rs. 10, 20, 50, 100,

500, and 1000.

GOVERNMENT BANKER:

The RBI is the banker to the Central and State Governments. It

provides all the banking services such as accepting of deposits,

withdrawal of funds by cheques, making payment as well as receipts and

collection of payments on behalf of the Governments. As a banker to the

Government, the bank can make ways and means advances to both

Central and State Governments. Type of advances provided are normal

or clean advances, secured advances and special advances.

BANKERS BANK:

RBI called as Bankers Bank because of its special relationship with

commercial and co-operative banks and the major part of its business is

with these kinds of banks. It controls the volume of reserves and

determines the deposits or credits creating ability of banks. RBI is also

said to be bank of last resort or the lender of last resort.

EXCHANGE CONTROL AUTHORITY:

RBI has to maintain the stability of the external value of the rupee.As far as external sector is concerned, the task of RBI has (a) administer

foreign exchange control, (b) chose exchange rate system and fix the

rate of rupee, (c) manage exchange reserves, (d) to interact with

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monetary authorities such as IMF, World Bank and Asian Development

Banks. The RBI administers the exchange controls in terms ofFOREIGN

EXCHANGE MANAGEMENT ACT (FEMA), 1973.

SECURING AUTHORITY:

The RBI has vast powers to supervise and control commercial and

co-operative banks with a view to developing adequate and sound

banking system in the country. It has following authorities (a) issue

license to new banks (b) issue license to setting up bank branches (c) to

prescribe minimum requirement for paid up capital and reserves,

transfer to reserve funds, maintain cash reserves and control liquid

assets (d) inspects working of banks in India as well as in abroad, checks

branch expansion, mobilization of deposits investment, credit portfolio

management, credit upraise system, profit planning etc (e) to conduct

investigations into complaints, irregularities and frauds in respect of

banks (f) to control methods of operations, appointments,

reappointments, terminations of Chairmen and Chief Executive Officers

of any private sector banks (g) to approve or force amalgamation.

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INDIAN BANKS PROFILE:

RESERVE BANK OF INDIA (RBI)

NATIONAL BANK OF AGRICULTURAL AND RURAL DEVELOPMENT

(NABARD)

STATE STATE URBAN

CO-OPERATIVE LAND CO-

OPERATIVE

BANKS (SCBs) DEVELOPMENT BANKS

(UCBs)

CENTRAL

CO-OPERATIVE

BANKS (CCBs)

PRIMARY

AGRICULTURALCREDIT

SOCIETIES (PACSs)

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1.1 INDIAN BANK PROFILE

Total state co-operative banks (SCBs) till date are 28 banks.

Total primary agricultural credit societies under various CCBs are2950.

TECHNOLOGY IN BANKING INDUSTRY:

The advent of the internet and the popularity of personal

computers presented both an opportunity and a challenge for the

banking industry; hence online banking provides numerous

benefits to businesses and end-users.

In order to bypass the time-consuming, paper-based aspects of

traditional banking, online banking helps in using powerful

computer networks to automate a number of daily transactions

and to manage finance more quickly and efficiently.

With the comfort of a mouse click online banking provides the

comfort of managing the finance by pay bills, transfer funds, file

Government remittances and have investment and loan facilities.

Online banking sites generally execute and confirm transactions

quicker than ATM, providing convenience of 24 hours a day and

seven days week accessibility.

E-Banking has revolutionized the whole concept of Banking; it has

become a necessary weapon changing the banking industry

worldwide.

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The customer should be taken into confidence as far as security is

concerned; banks should extensively propagate the detailed

security plan adopted to arrest frauds through E-Banking.

Banks have come to realize survival in the new E-Economy

depends on delivering their banking services on the internet while

continuing to support their traditional infrastructure providing good

security and customer satisfaction will survive.

Standard for secure electronic transactions (SET) on internet helps

in security measures, digital authentication and verification of on-

line identity in all E-Banking transactions, which increase consumer

confidence.

LATEST AMMENDMENTS OF RBI.

The RBI has cautioned against potential risk in the short and

medium term on three key factors (1) Growth rates flattening out

in some key industries, (2) higher oil prices and (3) continuing

infrastructure constraints.

The RBIs latest industrial outlook survey shows the current

financial health of corporate India increased by 2.6 %.

Demand for bank credit has been largely driven by agricultural,

industry and housing sector. Growth rate increased by 31.5 %

compared to 24.9 % the preceding year.

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The Reserve Bank Of India has signaled its policy of inclusioni.e.,

account with nil or minimum balance requirement as well as

charges that would make such accounts accessible to vast sections

of the population.

The RBI has granted general permission to banks to issue debit

cards in tie up with

non-bank entities.

The quality of assets of Indian banks is now increasingly

converging towards international benchmarks. The report on

trends of banks in India by RBI.

Capital Adequacy Ratio (CAR) of banks, the most accepted

measure of the soundness has improved to 12.5 % which are

higher, the better.

The RBI issued guidelines on credit cards operations of banks to

issue and ensures that there is on delay in dispatching bills.

Unsolicited loans or other credit facilities should not be offered.

In the major development for the banking sector, the Government

recently threw open the Asset Reconstruction companies (ARCs) to

Foreign Direct Investment (FDI), permitting 49 % in the equity

capital of ARCs.

NATIONAL BANK FOR AGRICULTURAL AND RURAL DEVELOPMENT

(NABARD)

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NABARD was established on 12th July 1982 as a central or apex

institution for financing agricultural and rural sector.

The Government and the RBI subscribe NABARD paid-up capital

of rupees 100 crores equally.

NABARD is a co-coordinating agency, in respect of agricultural

and rural development activities or policies of the Central and

State Government, Planning Commission and other Institutions.

NABARD has set up Co-operative Development Fund (CDF) to

improve management systems and skills in co-operative banks.

NABARD supports rural credit system by way of refinancing for

short-term, production, marketing, medium-term and short-term

loans relating to State Co-operative Banks (SCBs) and Regional

Rural Banks (RRBs)

NABARD oversees the entire rural credit system and to that

extent, it has taken over a part of the job of the RBI.

NABARD provides term loans and investment credits, which are

technically feasible and financially viable on farm and non-farm

sectors through SCBs and RRBs.

NABARD undertakes inspection of co-operative Banks and RRBs

without prejudice to the powers of the RBI.

NABARD provides loans to State Government to enable them to

contribute them to the share capital of SCBs and RRBs.

NABARD has established Research and Development (R&D) fund

to provide insights into the problems of agriculture and rural

development through in-depth studies and applied research with

innovative experiments.

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BANK PROFILE:

ANDHRA PRADESH STATE CO-OPERATIVE BANK

Andhra Pradesh state co-operative bank(SYNDICATE) offers all types

of banking service through its 26 banking offices including Head Office, 22

Branches, 2 Extension counters situated in the twin cities and having branches

at Tirupathi and Vijayawada.

The Bank actively guides the District Co-operative Bank (DCCBs) to withstand

the stiff competition encountered by them; greater emphasis was laid on the

financial discipline at all levels in the cooperative credit structure. The Bank has

continued its efforts to provide increased financial assistance to the farming

community through the DCCBs and PACs by bridging the gap between the

assistance from NABARD and the credit requirements at the grass root level

with its own resources.

The Government of Andhra basing on the recommendations of the Expert

Committee restructured the PACs bringing down their number from 4464 to

2746 in the State ensuring on PACs at Mandal level.

Elections are conducted to all three-tiers of the PACs after restructuring.

Democratically elected managements are in position at the PACs, DCCBs and

SYNDICATE levels.

The Government of Andhra Pradesh has accepted and decided to implement

the revival package offered by the Government of India and accordingly

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entered into a memorandum of understanding with the Government of India

and NABARD.

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BOARD OF MANAGEMENT /COMMITTEE OF

ANDHRA PRADESH STATE CO-OPERATIVE BANK

2.1 TABLE

S. No. Names Representation

1. G.Sudheer, I.A.S

Principal Secretary to

Govt

(coop. marketing)Dept.

Chairman

2. Dr.C.Uma Malleshwar

Rao,I.A.S

CC & RCS

Member

3. R.Ramakrishnaiah,

I.A.S

CC & RCS

Member

4. P.Ramana Reddy

CC & RCS

Member

5. T.S.Appa Rao,I.A.S

Principal secretary to

Govt.

(Finance & R &D) Dept.

Member

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6. J.R.Sarangal

C.G.M. NABARD

Member

7. V.Krishna Rao.

C.G.M.NABARD

Member

8. M.Veerabhadraiah,

I.A.S

Managing Director

SYNDICATE

Member

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PERFORMANCE HIGHLIGHTS DURING2008-2009:

State level best performance award for kharif 2007 lendings instituted by

government of A.P., was awarded to the bank.

Own funds of the bank increased from Rs.1315.90 crores to Rs.1387.48

crores.

Borrowings of the bank increased from Rs.3123.52 crores to Rs. 4074.73

crores.

Disbursements under investment credit impressively increased from

Rs.189.93 crores to Rs.367.87 crores during the year under report

registering an increase by 51.63 %.

The net profit during2008-2009 is Rs.5.70 crores compared to Rs.4.84

crores of the previous year.

Investments portfolio of SYNDICATE has recorded an increase of

23.03% during the year and stood at Rs. 785.82 crores.

The deposits of SYNDICATE as on 31.3.2006 stood at Rs.1697.15

crores.

The deposits of DCCBs stood at Rs. 2417.30 crores as on 31.3.2006,

registering decrease due to the prevailing adverse environment for

cooperative banks.

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The bank has been providing financial assistance to DCCBs and PACS

for strengthening their infrastructural facilities. During the year 2007-06,

SYNDICATE released an amount of Rs.4.14 lakhs to three DCCBs out of

its development fund.

Disbursements under short term crop loans increased from Rs. 2317.15

crores to Rs. 2981.73 crores during the year under report registering an

increase by 28.68%.

290 farmers clubs (VVV clubs) were established upto as on

31.3.2006.These clubs are functioning as dissemination centers for credit

and related activities.

The SYNDICATE training institute has conducted 578 programs,

imparting training to 18,106 participants under NABARD assistance

scheme from the year 2004-2007to2008-2009.

Under retail banking, gold loans increased to Rs. 69.12 crores during the

year

2007-06 as compared to Rs. 48.36 crores in previous year.

Loans amounting to Rs. 802.29 crores were rescheduled covering Rs.

7.29 crores liquidity support received from NABARD.

32,55,651 farmer member ofPACS were covered under the cooperativekisan credit card scheme upto 31.3.2006.

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The financial assistance by the bank for working capital limits to

cooperative sugar factories increased to Rs. 287.00 crores.

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VISION OF THE SYNDICATE

To prepare development action plan at the apex level, DCCB level and at

PACS level and organize implementation.

To cover all agricultural member of PACS under cooperative kisan credit

card scheme to achieve 100 % coverage and also to provide timely and

adequate credit support both short term and long term investments.

To improve the lending to the small and marginal farmers as also SC and

ST agriculturists.

To provide more advances through Rythu Mirta Groups (RMGs)

To formulate and adopt appropriate strategy for improved loan

recoveries and to reduce Non Performing Asstes (NPAs).

To ensure writing books of accounts and also ensure regular audit at alllevels.

To ensure uniform accounts, Ledger maintenance at PACs level andDCCB level.

To provide ATM services at various important places in twin cities.

To provide anywhere banking services and Teller banking services.

To convert extension counters into full ledged branches.

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To raise deposits upto Rs. 2040 crores.

To computerize the operations of DCCBs and their branches.

To provide basic training and also periodical refresher courses to staffmembers at all level.

To reduce cost of management.

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Introduction of credit and risk Management

Introduction of credit and risk management

CREDIT MANAGEMENT

The term credit management has got importance from the time when

there increased the pressure of competition and force of custom

persuades to sell on credit. Credit is granted to facilitate the sales. Credit

is appealing to those customers who cannot borrow from other sources

due to many reasons. The firms investment in accounts receivabledepends on how much it sells on credit and how long it takes to collect

receivables. Accounts receivables constitute one of most important asset

category for firm which makes the firm to manage its credit well.

The term credit management can be analyzed from various aspects like:

1 Terms of payment.

2 Credit policy variables.3 Credit evaluation.

4 Credit granting decision.

i) Terms of payment vary widely in practice. The most accepted one in

which arrangement is made wherein the trade cycle is financed partly by

seller, partly by buyer and partly by some financial intermediary. When

goods are sold on cash terms the payment is received either in advanceor on delivery. Credit sales are generally on open account. Consignment

and bill of exchange come under credit.

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ii) Credit policy variables have the dimensions like credit standards,

credit period, cash discount and collection effort. A firm has wide range

of choice in respect of granting credit. At one end of spectrum, it may

decide not to grant credit to any customer, however strong his creditrating may be. At the other end, it may decide to grant credit to all

customers irrespective of their credit rating. Between these two

extremes lie several possibilities, often the more practical ones.

Credit period refers to the length of the time customers are allowed to

pay for their purchases which is generally varied from 15 days to 60

days. Lengthening the credit period pushes sales up by inducing existingcustomers to purchase more and attracting additional customers. This is

accompanied by a larger investment in debtors and a higher incidence of

bad debts loss.

Cash discounts are generally given by the firms to induce customers to

make prompt payments. The percentage discount and the percentage

discount and the period during which it is available are reflected in thecredit terms. Liberalizing the cash discount may mean that the discount

percentage is increased and the discount period are lengthen which

enhance the sales, reduce the average collection period and increase the

cost of discount.

The collection programme of the firm aims at timely collection of

receivables. A rigorous collection programme tends to decrease sales,shorten the average collection period, reduce bad debt percentage, and

increase the collection expense and vice versa in case of lax collection

programme.

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iii) Credit evaluation is an important element of credit management

which helps in establishing credit limits. This includes two types of errors

like:

Type I error: A good customer is misclassified as a poor creditrisk.

Type II error: A bad customer is misclassified as a good credit

risk.

Both the errors are costly. Type I error leads to loss of profit on sales to

good customers who are denied credit. Type II error results in bad debt

losses on credit sales made to risky customers. Proper credit evaluationcan mitigate the occurrence of such type of errors.

Three broad approaches used for credit evaluation are

1 Traditional credit analysis.

2 Sequential credit analysis.

3 Discriminant analysis.

The traditional credit analysis calls for assessing a prospective

customer in terms of the five Cs of credit.

1 Character of customer that is his willingness to honor his

obligation.

2 Capacity of the customer to meet credit obligations from the

operating cash flows.3 Financial reserves in the form of capital of the customer. If

customer has difficulty in meeting his credit obligations from

operating cash flows then focus to his capital.

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4 Collateral security offered by customer in the form of pledged

assets is considered.

5 Fifth C is general ECONOMIC CONDITIONS that affect the

customer.

For sake of simplicity, only three Cs are considered i.e. character,

capacity and capital. The judgment of customer on these dimensions the

credit manager considers both quantitative and qualitative measures.

Sequential credit analysis is most efficient method than traditional one.

In this analysis, investigation is carried further if the benefit of suchanalysis outweighs it cost. To illustrate, consider three stages of credit

analysis: review of the past payment record, detailed internal analysis

and credit investigation by an external agency. The credit analyst

proceeds from stage one to stage two only if there is no past payment

history and hence a detailed internal credit analysis is warranted.

Likewise, the credit analyst goes from one stage two to stage three only

if internal credit analysis suggests that the customer poses a mediumrisk and hence there is a need for external analysis.

Numerical credit scoring is an improvement over traditional ones in

which more systematic numerical are assigned to evaluate the customer

unlike judgmental decisions made on basis of five Cs in traditional ones.

In this the credit manager identifies the factors relevant for credit

evaluation. Then weights are assigned to these factors and customersare rated based on these factors using suitable rating scale usually 5

point or 7 point rating scale. Factor score is derived by multiplying factor

weight with factor rate for each factor. Customer rating index is derived

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by adding the entire factor score based on which customers are

classified.

Numerical credit scoring is ad hoc in nature as it is based on weightswhich are subjective in nature. The technique of discriminant analysis is

employed to construct better risk index. This method considers the

financial ratios of the customers as the basic determinants of their

creditworthiness. The analysis is made based on these financial ratios

which are considered to be essential for creditworthiness of customer.

Risk classification is another method in which customers are classifiedinto various risk categories for credit investigation process.

iv) Credit granting decision is important because once the

creditworthiness of a customer has been assessed the credit manager

has to decide whether the credit should be offered or not. It is generally

done based on the decision tree. The expected profit for the action

refuse credit is 0. If the expected profit for the course of action offercredit is positive, it is desirable to extend credit, otherwise not. The

repeat order is accepted only if the customer does not default on the

first order. Once the customer pays on the first order, the probability

that he would default on the second order is less than the probability of

his defaulting on the first order.

RISK MANAGEMENT

Once the credit is being granted to the customer the credit manager

has to find out the ways for timely collection of the credit given.

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Traditionally two methods have been commonly suggested like Days

sales outstanding and ageing schedule. Though these methods are

popularly used they have serious limitations as they are based on an

aggregation of sales and receivables. To overcome the limitations oftraditional methods Collection matrix approach is used.

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The days sales outstanding (DSO) at a given time t may be defined as

the ratio of accounts receivable outstanding at that time to average daily

sales figure during the preceding 30 days, 60 days, 90 days, or some

other relevant period.

The ageing schedule (AS) classifies outstanding accounts receivables at

a given point of time into different age brackets. The actual AS of the

firm is compared with some standard AS to determine whether accounts

receivable are in control. A problem is indicated if the actual AS shows a

greater proportion of receivables, compared with the standard as, in the

higher age groups.

Collection matrix is improvement over the traditional methods of risk

managements. In order to study correctly the changes in the payment

behavior of customer, it is helpful to look at the pattern of collections

associated with credit sales. From the collection, pattern one can judge

whether the collection is improving, stable, or deteriorating. A secondary

benefit of such an analysis is that it provides a historical record ofcollection percentages that can be useful in projecting monthly receipts

for each budgeting period.

FUNCTIONS OF EACH DEPARTMENT

The four main departments involved in loan process of KMBL are :

1) MARKETING

2) CREDIT

3) OPERATIONS

4) RISK

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ORGANISATIONAL CHART OF MARKETING DEPARTMENT:

LOCATION

MARKETING HEAD

LOCAITONMARKETING HEAD

Regional Marketing Head (RMH) (heading entire region)

Location Marketing Head (LMH) (heading entire location)

Relationship Manager (RM) (for maintaining relationships with DSA and

DST)

DSA/DST Direct Selling Agent (external) / Direct sales Team (internal)

Fleet On Street (FOS) (for sourcing the case, making cold calls,

collecting relevant documents etc.)37

REGIONAL MARKETING HEAD

LOCAITON

MARKETING HEAD

RELATIONSHIP MANAGER RELATIONSHIP MANAGER

DIRECT SELLING AGENT DIRECT SELLING TEAM

FLEET ON STREET FLEET ON STREET


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Marketing department in personal finance is responsible for sourcing of

business. This department works through network of DSA/DST and RM.

RMs are responsible for managing relationships with DSA and DST. Thesales department is divided in to two units under the guidance of RM

that is

A)DSA (DIRECT SELLING AGENT)

B) DST (DIRECT SELLING TEAM)

DSA is an outside party who is interested in sourcing prospective loan

candidates into the bank. The bank studies the capacity of the party

bringing applicants per month and gives certain targets and if the DSA

agent reaches that target then the bank provides commission to the DSA

agent. The bank does not involve in any activities of DSA directly. The

DSA agent has to maintain the telecallers and executives at his own

expenses.The second category is DST which is called K-DIRECT in Kotak

Mahindra Bank under whom telecallers, team leaders and executives

work. All the office expenses and salaries are paid to them by Kotak

Mahindra Bank their salaries are more compared to DSA. The persons

working under DST directly comes under the Kotak Mahindra Bank.

Relationship Manager is in charge of the functions of K-DIRECT team.

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ORGANISATIONAL CHART OF CREDIT DEPARTMENT:

NCH - National Credit Head

RCH Regional Credit HeadLCH Location Credit Head

CM Credit Manager (With in location)

CPA Central Processing Agency

39

NATIONAL CREDIT HEAD

REGIONAL CREDIT HEADREGIONAL CREDIT HEAD

LOCATION CREDIT HEAD LOCATIN CREDIT HEAD

CREDIT MANAGER

CREDIT MANAGER

CENTRA PROCESSING AGENCY


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After sourcing the files (loan applicants) in to the bank the second and

crucial step is being played by credit department. Here the sourced files

are examined thoroughly whether the required documents are furnishedor not.

The hierarchical level is followed in this department. It is from top to

bottom starting from National Credit Head to Central Processing Agency.

Also at few places there are ACH (Area Credit Head). They occupy an

intermediary position between RCH and LCH. While the Marketing

department is responsible for sourcing, the Credit department isresponsible for buying the business.

OPERATIONS DEPARTMENT:

After the completion of the process of sanctioning loan amount to the

customer, the file goes to operations department where they have to

look after the entire operation of disbursement.

The operation department will issue the cheque to the party. In this

department all the PDCs (Post Dated Cheques) and any other original

important documents are placed in the head office in Mumbai where all

the documents are preserved in a private security locker NUCLEUS

which is fire proof and the bank pays for the storage of files.

In Nucleus all the respective PDCs of respective month on mentioned

dates comes directly to the bank. The Kotak Mahindra Bank has its

clearing department with nationalized bank where it accepts all the

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PDCs and disburse them to respective banks if it is cleared then it

mentions the cleared members data and uncleared cheque data through

soft copy that day evening to the operation department. The next day

morning the operation department will get the hard copy and they cometo know clearly the reasons for cheque bounce cases.

Then the telecaller will follow up the customers and intimate them about

the cheque bounces and reasons for that and intimates them about the

penal charges and depending on the reply of the customer they further

proceed. All the data is maintained in the system.

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ORGANISATIONAL CHART OF RISK DEPARTMENT:

NATIONAL HEAD

In personal finance business whatever is sourced by the marketing

department and bought by the credit has great tenacity to go bad or non

performing or delayed due to combined effect of various variables like

fraud, negligence, intentional, etc.

The inherent nature of personal loan arise the need of having separate

42

REGIONAL RISK HEAD

STATE RISK HEAD

LOCAL RISK HEAD

BKT-1 PORTFOLIO

MANAGERBKT-2 PORTFOLIO

MANAGER

BKT-3 PORTFOLIO

MANAGER

TEAM LEADERTEAM LEADER TEAM LEADER

EXECUTIVESEXECUTIVESEXECUTIVES

TELECALLER TELLE CALLERTELECALLER


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risk department(RD) to focus on timely collection and risk of loan

agreements. There is primarily on collecting the money which was

funded by combined efforts of marketing and credit.

RD is responsible for controlling the losses by having a strong networkof collection agents and thus keeping the delinquency level under

control.

PROCESS FLOW CHART (FILE MOVEMENT SYSTEM)

FILE TO BE LOGGED IN

CREDIT DOES ANALYSIS

43

FILE INVESTIGATION WILL BE SHOT ON THE CASE

CASE IN SACTIONED OR REJECTED


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Credit Risk Management: Policy Framework

Risk is inherent in all aspects of a commercial operation and covers

areas such as customer services, reputation, technology, security,

human resources, market price, funding, legal, regulatory, fraud and

strategy. However, for banks and financial institutions, credit risk is the

most important factor to be managed. Credit risk is defined as the

possibility that a borrower or counterparty will fail to meet its obligations

in accordance with agreed terms. Credit risk, therefore, arises from the

banks' dealings with or lending to a corporate, individual, another bank,

financial institution or a country. Credit risk may take various forms,

such as:

in the case of direct lending, that funds will not be repaid;

44

IF SANCTIONED,DISBURSEMENT AGREEMENT TO BE

SIGNED AND PDCS TO BE COLLECTED

DISBURSEMENT TO BE LOGGED IN

CHEQUE TO BE DELIVERED TO THE CUSTOMER

STOP


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in the case of guarantees or letters of credit, that funds will not be

forthcoming from the customer upon crystallization of the liability

under the contract;

in the case of treasury products, that the payment or series of

payments due from the counterparty under the respective

contracts is not forthcoming or ceases;

in the case of securities trading businesses, that settlement will

not be effected;

in the case of cross-border exposure, that the availability and free

transfer of currency is restricted or ceases.

The more diversified a banking group is, the more intricate systems it

would need, to protect itself from a wide variety of risks. These include

the routine operational risks applicable to any commercial concern, the

business risks to its commercial borrowers, the economic and political

risks associated with the countries in which it operates, and the

commercial and the reputational risks concomitant with a failure to

comply with the increasingly stringent legislation and regulations

surrounding financial services business in many territories.

Comprehensive risk identification and assessment are therefore very

essential to establishing the health of any counterparty.

Credit risk management enables banks to identify, assess, manage

proactively, and optimise their credit risk at an individual level or at anentity level or at the level of a country. Given the fast changing,

dynamic world scenario experiencing the pressures of globalisation,

liberalization, consolidation and disintermediation, it is important that

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banks have a robust credit risk management policies and procedures

which is sensitive and responsive to these changes.

Strategy and Policy

It is essential that each bank develops its own credit risk strategy or

enunciates a plan that defines the objectives for the credit-granting

function. This strategy should spell out clearly the organisations credit

appetite and the acceptable level of risk - reward trade-off at both the

macro and the micro levels.

The strategy would therefore, include a statement of the banks

willingness to grant loans based on the type of economic activity,

geographical location, currency, market, maturity and anticipated

profitability. This would necessarily translate into the identification of

target markets and business sectors, preferred levels of diversification

and concentration, the cost of capital in granting credit and the cost of

bad debts.

A common feature of most successful banks is to establish an

independent group responsible for credit risk management. This will

ensure that decisions are made with sufficient emphasis on asset quality

and will deploy specialised skills effectively.

In some organisations, the credit risk management team is responsible

for the management of problem accounts, and for credit operations as

well. The responsibilities of this team are the formulation of creditpolicies, procedures and controls extending to all of its credit risks

arising from corporate banking, treasury, credit cards, personal banking,

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trade finance, securities processing, payment and settlement systems,

etc.

This team should also have an overview of the loan portfolio trends and

concentration risks across the bank and for individual lines of

businesses, should provide input to the Asset - Liability Management

Committee of the bank, and conduct industry and sectoral studies.

Inputs should be provided for the strategic and annual operating plans.

In addition, this team should review credit related processes and

operating procedures periodically.

The credit risk strategy and policies should be effectively communicated

throughout the organisation. All lending officers should clearly

understand the bank's approach to granting credit and should be held

accountable for complying with the policies and procedures.

Keeping in view the foregoing, each bank may, depending on the size of

the organization or loan book, constitute a high level Credit Policy

Committee also called Credit Risk Management Committee or CreditControl Committee, etc. to deal with issues relating to credit policy and

procedures and to analyse, manage and control credit risk on a bank

wide basis. The Committee should be headed by the Chairman/CEO/ED,

and should comprise heads of Credit Department, Treasury, Credit Risk

Management Department (CRMD) and the Chief Economist. The

Committee should, inter alia, formulate clear policies on standards for

presentation of credit proposals, financial covenants, rating standardsand benchmarks, delegation of credit approving powers, prudential limits

on large credit exposures, asset concentrations, standards for loan

collateral, portfolio management, loan review mechanism, risk

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concentrations, risk monitoring and evaluation, pricing of loans,

provisioning, regulatory/legal compliance, etc. Concurrently, each bank

may also set up Credit Risk Management Department (CRMD),

independent of the Credit Administration Department. The CRMD shouldenforce and monitor compliance of the risk parameters and prudential

limits set by the CPC. The CRMD should also lay down risk assessment

systems, monitor quality of loan portfolio, identify problems and correct

deficiencies, develop MIS and undertake loan review/audit. Large banks

may consider separate set up for loan review/audit. The CRMD should

also be made accountable for protecting the quality of the entire loan

portfolio. The Department should undertake portfolio evaluations andconduct comprehensive studies on the environment to test the

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RISK MANAGEMENT

MEANING OF RISK

Risk management is a process of managing the collection of managing

the collection of liabilities with an objective of increasing the cash flows

with minimum costs. It involves collecting in right time, right amount, in

right terms.This process starts from identifying the amount of liabilities

and to make the collection successful. This does not end with mere

collection. Besides collection, the difficulties and weak areas should also

be ascertained, which leads to development of an effective system forcredit extension or sales and collection.

Risk management is an area of tremendous challenge. Risk

management is used to minimize bad debts through active account

delinquency management. As the companies strive to increase their cash

flows and improve customer relationships, the risk partner is more

important than any other.

IMPORTANCE OF RISK

In todays market scenario, one of the most critical areas to focus on is

to protect the bank from bankruptcy. In such conditions Risk department

plays a key role in the growth of banks. Any delay in realizing the

receivables would adversely effect the working capital, which in turn

effects the overall financial management of the firm.

No firm can be successful if its overdue are not collected, monitored and

managed carefully in time. Thus risk management is important in

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sustaining the bank and its growth.

RISK DEPARTMENT IN KMBL

When all the doors are closed to collect the EMI from the customer then

it comes to risk department. In Syndicate bank the most importance is

given to risk department. The risk department in KMBL follows bucket

wise policies which starts from BUCKET 1.

The cheques of the customers which got bounced will come to the risk

department where they pressurizes the customer and gets the EMI

including penal and cheque bounce charges from customer.

The first six months of the customer is very important for the risk

department which is called INFANT DELIQUENCY where the risk

department estimates whether the customer is going to be defaulter in

future.

The risk department is very strong in KMBL where they follow the bucket

system. The bucket system depends on Days past dues. For every 30

days the bucket system shifts from one bucket to other depending on

pending EMI amount.

PROCESS FLOW

INSERT

If the bank is unable to collect atleast one EMI from the customer from

past continuous 3 months then they book the case as non performance

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assets.

They claim the future calculated amount as loss so to avoid this type of

loss to the bank. They take lot of care to collect the EMIs within thethree months with out fail to reduce the increase in the default ratio

through bucket wise.

The loss is calculated using the following formula:

Future outstanding = EMI * lost amount + EMI * future turn amount.

To control the defaulters ratio they started the necessary steps from

the starting of the collection department. The flow of power is as shownin the flow chart from top level to bottom level.

When the case comes to bucket 1 lot of pressure is made by portfolio

manager to stop the case not to extend to bucket 2. The bucket portfolio

manager plays a prominent role in risk department and he is paid more

pay and perks. In similar way in bucket 2 the portfolio manager plays a

prominent role to reduce the case not to extend to bucket 3. When thecase enters bucket 3 and portfolio manager is unable to collect at least

one EMI then the case is booked as non performance asset which is a

loss to the bank.

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LEGAL ASPECTS OF RISK

When the file comes to bucket 3 there after making all pressures if they

could not get the amount they further proceed legally to collect themoney.

The three main sections used to proceed legally are:

1 Section 138 (NEGOTIABLE INSTRUMENTS ACT)

2 Section 156

3 Section 9

Section 138

Where any cheque drawn by a person on account maintained by him

with the banker for payment of any amount of money to another person

from out of that account for the discharge, in a whole or in part, of any

debt or any liability, his return by bank unpaid, either because of the

amount of money outstanding to the credit of that account by an

agreement made with the bank. Such person shall be deemed to have

committed an offence and shall without prejudice to any other provisions

of this act can be punished with imprisonment for a term which may

extend to one year or with a fine which may extend to twice the amount

of cheque or with the both. Now the court has the power to order two-

year imprisonment for cheque bounces under section 138 N.I. a

POST DATED CHEQUES

A cheque post-dated remains bills of exchange till the date written on it

and with effect from the said date shown on the face of it; it becomes a

cheque under the act.

Post dated cheque deemed to have been drawn on the date it bears

provision of section 138 (a) held.

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ELECTRONIC CLEARENCE SERVICE

Electronic clearance service contains six cheques among that four

cheques contain the EMI amount and one with full loan amount and

another with cleared amount each cheque is signed by the loanaccording to RBI rules.

STANDARD INSTRUCTIONS

This type of instruction are produced when the loanee working in the

same bank and taking loan amount.

SUMMONS

The chief ministerial officer of the court shall ordinarily sign summons

issued to witness.

1: These are the witness summons.

2: Accused summons to be signed by magistrates:

Magistrates shall themselves sign summons to accused persons. The

copy of the complaint may be sent with summons or warrant issued to

the accused under sub-Section (i) of section 204 of the code.

Place of hearing to be stated:Every summons and every order of adjournment shall state the place in

which the course to which it relates will be heard.

Warrant bearing sign manual of the judge or the magistrate:

All warrants should receive the sign of them from whose court they are

issued.

SECTION 156This case is claimed against the customer as cheating or forgery case

where the customer might have given some fake documents to get a

loan which might have mislead the bank.

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Whoever by deceiving any person fraudulently or dishonestly include the

persons. So deceive to deliver property to any person or to consent that

any person shall retain any property intentionally include person sodeceived to do or omit to do anything which he would not do or omit if

he were not so deceived, and which after omission cause or lively cause

damage or harm to that person in body, mind, reputation and property

is said to cheat

Example

1. A by putting a counterfoil mark on an article intentionally

deceives into a belief that this articles were made by celebrity

manufacturer, and thus dishonestly induces Z to buy and pay for

the articles A cheats.

2. A by pleading as diamonds articles which he knows are not

diamonds intentionally deceives Z if he thereby dishonestly

includes Z to land money, A cheats.i) Dibas sarkar vs. State 1989 Cr. LJ MOC 30 Cal.

ii) Kakumukkala Krishnamurthy vs. State of AP AIR 1956

Sec.333

Section 9

This case is claimed against the customer as a property attachment

where the bank attacks the property of the customer. This section is

very rarely used.

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ANALYSIS and FINDINGS:

ANALYSIS and FINDINGS

The information or data of credit and risk management reference to

Syndicate bank.

Finding for last years of description for risk mode.

NON PERFORMANCE ASSETS table shows the data of the nonperformance assets of the KMBL.

MONTHS

TARGET

(In lakhs)

ACHIEVEMENTS

(In lakhs)

April 09 1.56 0.41

May 09 1.62 1.2

June 09 1.77 1.3July 09 1.92 0.56

Aug 09 2.11 1.72

Sep 09 2.34 2.13

Oct 09 2.58 0.60

Nov09 2.83 0.61

Dec 09 3.10 0.00

Jan 10 3.37 1.9

Feb 10 3.68 1.98

Mar 10 4.01 0.32

Total 30.89 12.73

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NON PERFORMANCE ASSETS-IN LAKHS

1) TARGETS: This is the amount given to book as loss for the risk

department in every month of non performance of asset.

2) ACHIEVEMENTS: This is the amount booked as loss to risk

department achieved in every month.

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PENAL CHARGES COLLECTED

Finding for last years of description for risk mode.

MONTHS TARGET

(In lakhs)

ACHIEVEMENTS

(In lakhs)

Apr 07 0.26 0.19

May 07 0.29 0.32

June 07 0.32 0.52

July 07 0.36 0.30

Aug 07 0.40 0.83Sep 07 0.43 0.32

Oct 07 0.47 0.66

Nov 07 0.52 0.77

Dec 07 0.56 0.65

Jan 08 0.61 0.59

Feb 08 0.65 0.81

Mar 08 0.70 1.29

Total 5.57 7.25

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PENAL AMOUNT

1. TARGETS: This is the target penal amount given for risk

department to collect.

2. ACHIEVEMENTS: This is the penal amount collected by risk

department every month.

Months Target (lakhs) Achievements (lakhs)April 2008 0.71 0.67

58

MONTH


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May2008 0.74 0.53June 2008 0.77 0.80July 2008 0.80 0.74August 2008 0.82 1.21September 2008 0.87 1.22

October 2008 0.90 0.93November 2008 0.91 0.75December 2008 0.93 0.95

PENAL AMOUNT

1. TARGETS: This is the target penal amount given for risk

department to collect.

2. ACHIEVEMENTS: This is the penal amount collected by risk

department every month.

Details of self clients of KMBL

SEP RSENP SURR SAL SENP TOTAL

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DEFAULTERS (%) 7 57 20 37 34 155

DEFAULTERS

AMNOUNT

134043 409509 110438 412913 1298755 2365656

DEFAULTERS PERCENTAGE

DEFAULTERS CLIENTS

(%)

1: SELF EMPLOYED PROFESSIONAL. (SEP) 7

2: RETAIL SELF EMPLOYED NON PROFESSIONAL.(RSENP) 57

3: SURROGATIVES. (SURR) 20

4:SALARIED (SAL) 37

5: SELF EMPLOYED NON PROFESSIONAL. (SENP) 34

TOTAL 155

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DEFAULTERS PERCENTAGE

5%

36%

13%

24%

22% SEP

RSENP

SURR

SAL

SENP

Analysis of defaulters (%)

1: SEP = 7/155 * 100 = 5%

2: RSENP = 57/155 * 100 = 36%

3: SURR = 20/155 * 100 = 13%

4: SAL =37/155 * 100 = 24%

5: SENP =34/155 *100 = 22%

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DEFAULTERS AMOUNT PERCENTAGE

Defaulters Amount

1: SELF EMPLOYED PROFESSIONAL. 1,34,043

2: RETAIL SELF EMPLOYED NON PROFESSIONAL. 4,09,509

3: SURROGATIVES. 1,10,438

4: SALARIED. 4,12,913

5: SELF EMPLOYEDN ON PROFESSIONAL. 12,98,755

DEFAULTERS AMOUNT PERCENTAGE

6%17%

5%

17%

55%

SEP

RSENP

SURR

SAL

SENP

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Analysis of Defaulters amount (%)

1: SEP = 134043/2365656 * 100 = 6%

2: RSENP =409509/2365656 * 100 = 17%

3: SURR = 110438/2365656 * 100 = 5%

4: SAL = 412913/2365656 * 100 = 17%

5: SENP =1298755/2365656 *100 = 55%

TABLE: 1 The statement showing default on the lines of repayment

period

NUMBER OF DAYS DEFAULT

REPAYMENT

PERIOD

30

DAYS

60

DAYS

90

DAYS

ABOVE

90DAYS

ROW

TOTAL

[0 YRS 2 YRS] 14

(58)

2

(8)

3

(13)

5

(21)

24

[2 YRS - 3 YRS] 91

(76)

11

(9)

7

(6)

10

(9)

119

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[3 YRS 4YRS] 9

(75)

1

(8)

1

(8)

1

(9)

12

COLUMN TOTAL 114

(74)

14

(9)

11

(7)

16

(10)

155

** Figures in parenthesis denote the row wise percentage.

Effective risk (%) in terms of period

1) 14/24*100=58

2) 91/ 199*100=76

3) 9/12*100=75

The distribution of defaulters with respect to repayment period is visible

in table 1. According to the table more number of defaulters are lying inbucket 1, 74% of the defaulters are in bucket 1 followed by 10% in

above 90 days and 9% in bucket 2 and 7% in bucket 3. The same is

reflected in the categories of 2-3 years and 3-4 years repayment period

where as in 0-2 years repayment period 58% of defaulters are in 30

days 21% in above 90 days, 13% in 90 days and 8% in 60 days.

It implies the bank has been focusing to control and reduce the numberof defaulters in other than 30 days bucket further it also implies the

repayment period is not a factor which influence on number of

defaulters.

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Table: 2 The statement showing default on the lines of profession

NUMBER OF DAYS DEFAULTPROFESSION 30

DAYS

60

AYS

90

DAYS

ABOVE

90DAYS

ROW

TOTAL

TECHNICAL 26

(0.65)

5 3 6 40

BUSINESS 75(0.77)

6 7 9 97

COLUMN TOTAL 101 11 10 15 137

**figures in parenthesis denote the row wise percentage.

Here business category is defined as the income category based on their

non-salaried and non-professional incomes where they use their

business skills, RSENP, SENP comes under this category.

Technical profession, these are the persons having an income either

from salary or from their professional qualification. SEP, SALARIED

comes under this category.

NULL HYPOTHESIS: H0:

There is no relationship between profession and number of defaulters

P1=P2

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ALTERNATE HYPOTHESIS: H1:

There is relationship between profession and default rate. The business

professions are more than the technical profession.P1


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TABLE: 3 The statement showing default on the lines of gender.


SEX

30DAYS

60DAYS

90DAYS

ABOVE90DAYS

ROWTOTAL

MALE 95

(0.72)

11 11 15 132

FEMALE 20

(0.87)

1 1 1 23

COLUMNTOTAL

115 12 12 16 155

**figures in parenthesis denote the row wise percentage.


There is no relationship between sex and number of defaultersP1=P2


There is relationship between sex and number of defaulters.

Female are more in number than male.

P1


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Where P1=95/132=0.72

P2=20/23=0.87

P=P1+P2/n1+n2

Where n1=132 , N2=23

Therefore P=0.74

Z=0.72-0.87/(0.74) (1-0.74) (1/132+1/23)

= -1.52

The calculated value of test of proportion is -1.52

The table value of test of proportion is -1.645 at 95% confidence level.

Therefore the calculated value lies in rejection rejoin, so null hypothesis

is accepted

Therefore there is no relationship between the sex and the number of

defaulters.

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TABLE: 4 To find the relationship between AMOUNT OF LOAN and DAYS

DEFAULT RATE.

NUMBER OF DAYS DEFAULT RATES

AMOUNT of LOAN

30

DAYS

60

DAYS

90

DAYS

ABOVE

90DAYS

ROW

TOTAL

[RS 0 RS 1,00,000] 54

(0.77)

4 6 6 70

[RS1,00,000 RS

2,00,000]

32

(0.64)

7 3 8 50

[RS 2,00,000 RS

5,00,000]

22

1

2

1

26

[RS 5,00,000 RS

7,00,000]

2

0

0

1

3

[RS7,00,000- RS

10,00,000]

6 0 0 0 6

COLUMN TOTAL 116 12 11 16 155

*figures in parenthesis denote row wise percentage.

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Percentage of defaulters within 30 days period do not differ significantly

between the amount borrowed 0-1 lack and 1 lack-2 lackP1=P2


Percentage of defaulters within 30 days period differ significantly

between the amount borrowed 0-1 lack and 1 lack-2 lack.

P1>P2 (Right tailed test)

Test of proportions Z=P1-P2/P (1-P) (1/n1+1/n2)

Where P1=54/70=0.77

P2=32/50=0.64

P=P1+P2/n1+n2

Where n1=70

N2=50

Therefore P=0.72

Z=0.77-0.64/ (0.72) (1-0.72) (1/70+1/50)

= 1.566

The calculated value of test of proportion is 1.566

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The table value of test of proportion is 1.645 at 95% confidence level.

Therefore the calculated value lies in rejection rejoin, so null hypothesis

is acceptedTherefore there is no relationship between the loan amount and the

number of defaulters.

Note: The hypothesis is tested between first two slots i.e. amount range

Rs 0-1 lack and Rs 1 lack-2 lack.

TABLE 5: Statement showing default on line of location.


LOCATION

30

DAYS

60

DAYS

90

DAYS

ABOVE

90DAYS

ROW

TOTAL

NEW

HYDERABAD

41 6 4 7 58

SECUNDERABAD 30 3 5 5 43

RANGA REDDY

DISTRICT 29 3 3 4 39

COLUMN TOTAL 100 12 12 16 140

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**figures in parenthesis denote row wise percentage.


Categories in 30 days are equally distributed

P1=P2

72

Observed

frequency(oi)

Expected

frequency(ei)

(oi-ei)2 (oi.-ei) 2/ei

NEW

HYDERABAD 41

34

491.44

SECUNDERABAD 30

33

9 0.27

RANGA REDDY

DISTRICT

29

--------

100

---------

33

---------

100

----------

16 0.48

-----

---

chisquare

=2.19

-----

---


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ALTERNATIVE HYPOTHESIS: H1:

Categories in 30 days are not equally distributed

P1=P2

Chi square value is 2.19

Critical value at 95% confidence level is 5.99.

Chi square value is less than critical value so null hypothesis is accepted.

Therefore location of the loanees not influence on the defaulters (in 30

days category).

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CONCLUSION

CONCLUSION

Periodically customer meet should be conducted and category wisethe best customer should be appreciated and if possible rewarded

by way of cash prize or in kind. This helps in creating good

publicity for the bank as well as to penetrate in to market.

Post disbursement contact with the loanee should be maintained.

This process not only builds report but also gives important clues

about loanees ability to honour the payment responsibility. At the

same time this also leads to good customer care. There should be good coordination among sales department, credit

department and risk department where they should go through the

loanees profile and should sanction the amount through proper

stringent verification when the amount is huge.

Future status of loanees business, if he is a business man, should

be assessed. Reserves, environment, competition, capabilities etc.

should be considered before sanctioning a loan based on pastperformance. Future should be analyzed as to whether the

business would sustain in future, the products are going to match

the future needs or not should be analyzed. Future analysis is

more important for a new customer than to an old customer.

Whereas, in case of employee, the job security, skill base, proof of

past financial discipline, property owned etc. should be considered.

Simply not with numerical parameters but also with otherqualitative factors.

Government employee is also an important segment, bulk

applicants can be attracted by influencing the undertaking office or

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accounts officer of the concerned department for taking letters to

see that installments payments are directly deducted from their

salaries. This segment is definitely useful in boosting up the loan

selling if proper verification and strict scrutanisation is done withcorresponding undertaking officers. Good rapport with government

officers by risk department will help in recovering the targeted

amounted from government employees proper branch network

and good force in risk department will solve if there is any transfer

of employees.

To safeguard the loan and improve the risk especially when there

is a probability of mobility of a loan for example: in case of apersonal loan property attachment or guaranteed of government

employee is to be taken.Hence such defaulters can be reduced.

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SUGGESTION

SUGGESTION

A loanees political affiliation and his past career in politics have to

be investigated before disbursing the loan amount in order to

reduce the hardships involved in collecting the amount.

Proper verification of documents and evaluation of stocks and

assets of business people before sanctioning such loans is

essential to avoid overvaluation by the employees. For this a

technical person is to be appointed who has entire knowledge of

risk, legal aspects and technical process where thorough

verification can be done.

To detect the fraud by the sales people whose intention is to

usually just sourcing the loans applications the risk department

head along with sales department head should select the cases

randomly and visit the places for inspection in every month first

week where they can find the exact picture and at the same time

can ascertained the scope for fraud.

In terms of customer wise loan amount the percentage of self

employed non professionals is more and special attention should

be given while disbursing the loan amounts.

Risk management should be a proactive process and hence its role

should not be limited to the post default activity it should develop

a system to track the possible pitfalls in each sanction from the76


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very beginning.

AnnexureAnnexure

Credit department is the back bone of personal loan business. Main

function of the credit is to assess the credit worthiness of an applicant

and lending him appropriate amount based on such assessment and

subject to the terms, conditions and limitations of the policies.

Comprehensive credit information, which provides details pertaining tocredit facilities already availed by the borrower as well as his payment

track record, has become the need of an hour. Credit risk is defined as

the possibility that a borrower or counterparty will fail to meet its

obligations in accordance with agreed terms. Credit risk, therefore,

arises from the banks' dealings with or lending to a corporate, individual,

another bank, financial institution or a country.

Credit risk management enables banks to identify, assess, manage

proactively, and optimise their credit risk at an individual level or at an

entity level or at the level of a country. Given the fast changing,

dynamic world scenario experiencing the pressures of globalisation,

liberalization, consolidation and disintermediation, it is important that

banks have a robust credit risk management policies and procedures

which is sensitive and responsive to these changes.

The strategy would therefore, include a statement of the banks

willingness to grant loans based on the type of economic activity,

geographical location, currency, market, maturity and anticipated

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profitability. This would necessarily translate into the identification of

target markets and business sectors, preferred levels of diversification

and concentration, the cost of capital in granting credit and the cost of

bad debts.

In some organisations, the credit risk management team is responsible

for the management of problem accounts, and for credit operations as

well. The responsibilities of this team are the formulation of credit

policies, procedures and controls extending to all of its credit risks

arising from corporate banking, treasury, credit cards, personal banking,

trade finance, securities processing, payment and settlement systems,

etc.

The credit risk strategy and policies should be effectively communicated

throughout the organisation. All lending officers should clearly

understand the bank's approach to granting credit and should be held

accountable for complying with the policies and procedures.

To deal with issues relating to credit policy and procedures and toanalyse, manage and control credit risk on a bank wide basis.

Credit risk is not really manageable for very small companies (i.e., those

with only one or two customers). This makes these companies very

vulnerable to defaults, or even payment delays by their customers.

Lenders will trade off the cost/benefits of a loan according to its risks

and the interest charged. But interest rates are not the only method tocompensate for risk. Protective covenants are written into loan

agreements that allow the lender A recent innovation to protect lenders

and bond holders from the danger of default are credit derivatives, most

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commonly in the form of credit defaulters swap. These financial

contracts allow companies to buy protection against defaults from a third

party, the protection seller. The protection seller receives a periodic fee

(the credit spread) as compensation for the risk it takes, and in return itagrees to buy the debt should a credit event ("default") occur.

Employees of any firm also depend on the firm's ability to pay wages,

and are exposed to the credit risk of their employer

Risk management is used to minimize bad debts through active account

delinquency management in right time, right amount, in right terms.Any

delay in realizing the receivables would adversely effect the working

capital, which in turn effects the overall financial management of the

firm.

CREDIT RISK IS FACED BY

Faced by lenders to consumers

Most lenders employ their own models (credit scoreboard) 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 careful setting of credit limits.

Some products also require security, most commonly in the form of

property.

Faced by lenders to business

Lenders will trade off the cost/benefits of a loan according to its risks

and the interest charged. But interest rates are not the only method to79


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compensate for risk. Protective covenants are written into loan

agreements that allow the lender some controls. These covenants may:

limit the borrower's ability to weaken his balance sheet voluntarily

e.g., by buying back shares, or paying dividends, or borrowing

further.

allow for monitoring the debt by requiring audits, and monthly

reports

allow the lender to decide when he can recall the loan based on

specific events or when financial ratios like debt/equity, or interest

coverage deteriorate.

A recent innovation to protect lenders and bond holders from the danger

of default are credit derivatives, most commonly in the form of credit

defaulters swap. These financial contracts allow companies to buy

protection against defaults from a third party, the protection seller. The

protection seller receives a periodic fee (the credit spread) as

compensation for the risk it takes, and in return it agrees to buy the

debt should a credit event ("default") occur.

Faced by business

Companies carry credit risk when, for example, they do not demand up-

front cash payment for products or services.[1] By delivering the product

or service first and billing the customer later - if it's a business customer

the terms may be quoted as NET-30- the company is carrying a risk

between the delivery and payment.

Significant resources and sophisticated programs are used to analyze

and manage risk. Some companies run a credit risk department whose

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http://en.wikipedia.org/wiki/Credit_Risk#_note-0http://en.wikipedia.org/wiki/Credit_Risk#_note-0


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job is to assess the financial health of their customers, and extend credit

(or not) accordingly. They may use in house programs to advise on

avoiding, reducing and transferring risk. They also use third party

provided intelligence. Companies like MOODYS and DUNBRADSTREETprovide such information for a fee.

For example, a distributors selling its products to a troubled retailersmay

attempt to lessen credit risk by tightening payment terms to "net 15", or

by actually selling fewer products on credit to the retailer, or even

cutting off credit entirely, and demanding payment in advance. Such

strategies impact on sales volume but reduce exposure to credit risk and

subsequent payment defaults.

Credit risk is not really manageable for very small companies (i.e., those

with only one or two customers). This makes these companies very

vulnerable to defaults, or even payment delays by their customers.

The use of a collection agency is not really a tool to manage credit risk;

rather, it is an extreme measure closer to a write down in that thecreditor expects a below-agreed return after the collection agency takes

its share (if it is able to get anything at all).

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Faced by individuals

Consumers may also face credit risk in a direct form as depositors at

banks or as investors/lenders. They may also face credit risk whenentering into standard commercial transactions by providing a deposit to

their counterparty, e.g. for a large purchase or a real estate rental.

Employees of any firm also depend on the firm's ability to pay wages,

and are exposed to the credit risk of their employer.

In some cases, governments recognize that an individual's capacity to

evaluate credit risk may be limited, and the risk may reduce economic

efficiency; governments may enact various legal measures or

mechanisms with the intention of protecting consumers against some of

these risks. Bank deposits, notably, are insured in many countries (to

some maximum amount) for individuals, effectively limiting their credit

risk to banks and increasing their willingness to use the banking system.

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BIBLIOGRAPHY

BIBLIOGRAPHY

www.kotak.com

www.wikipedia.org

www.rmahq.org

www.syndicate bank .com

www.rbi.org
http://www.kotak.com/http://www.wikipedia.org/http://www.rmahq.org/http://www.rbi.org/http://www.kotak.com/http://www.wikipedia.org/http://www.rmahq.org/http://www.rbi.org/

Documents

49677018 Credit Risk Management 3