ICICI BankCredit Risk Management Strategies for Home Loan

7/30/2019 ICICI BankCredit Risk Management Strategies for Home Loan

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Project ReportOn

Credit Risk Management Strategies For Home Loan inICICI Bank Jabalpur

Submitted To-Director-Dr. Anil Kumar Dhagat

Gyan Ganga College of Technology, Jabalpur

Project GuideDr. Anil Kumar Dhagat

Submitted By- Sohit GuptaEnrolment No. - AW/3802


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ACKNOWLEDGEMENT

Working in this Project has been a great Learning experience for me. Thisreport gives immense pleasure to express sincere and heartfelt gratitudetoward faculty guide Dr. Anil Kumar Dhagat whose valuable guidance andencouragements throughout the project inspired me to take up new tasks

and complete them successfully.

I also extend my appreciation to Mr. Ashok Tiwari and Mr. PushkarMazumdarSr. Officer HSG loan, ICICI Bank, Jabalpur branch and Mr. Piyush Vishnoi,Care Ratings Manager, Jabalpur

I would like to thank all the personalities behind the successful completionof the project. I thank my friends and colleagues for the suggestions theyprovided to me time to time.

I am also indebted to Gyan Ganga College of Technology, Jabalpur for givingme opportunity to do this project.

SOHIT GUPTA


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S.No. Particulars Page No.

01 Objective Of Project 01

02 Research Methodology 02

03 Company Profile 03-07

04 Introduction 08-09

05 Body of Thesis 10-14

06 RBI Guidelines 15-16

07 SWOT Analysis 17

08 Credit Appraisal Process 18

09 Questionnaire 19

CONTENTS


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Objective of project:

1. To study the Credit risk management policy and strategies for Home

loan used by the ICICI Bank, Jabalpur.

2. To find out how the bank assesses and evaluates credit risk of the

Home loan proposals and what improvements can be effected in the

existing system.

3. To Study the Credit Risk Rating models are developed by the ICICI

Bank.


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Research Methodology

Primary Data:

Take a formal interview of Mr. Ashok Tiwari and Mr. Pushkar Mazumdar

Sr. Officer Home loans, ICICI Bank, Jabalpur.

Take a formal interview of Mr. Piyush Vishnoi, Manager, Credit

Analysis & Research ltd., Jabalpur

Secondary Data:

Reference book: Credit Risk Management Concept & Cases

Edited by C Vijay Chandra Kumar.

www.businesscreditsuccess.com

www.creditquest.com

www.icicibank.com

www.investopedia.com

www.rbi.org

www.risk-technology.com

www.wikipedia.com
http://www.businesscreditsuccess.com/http://www.creditquest.com/http://www.icicibank.com/http://www.investopedia.com/http://www.rbi.org/http://www.risk-technology.com/http://www.wikipedia.com/http://www.businesscreditsuccess.com/http://www.creditquest.com/http://www.icicibank.com/http://www.investopedia.com/http://www.rbi.org/http://www.risk-technology.com/http://www.wikipedia.com/


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COMPANY PROFILE

History of ICICI Bank

ICICI Bank is India's second-largest bank. The Bank has a network of about

573 branches and extension counters and over 2,000 ATMs. ICICI Bank was

originally promoted in 1994 by ICICI Limited, an Indian financial institution,

and was its wholly-owned subsidiary.

ICICI was formed in 1955 at the initiative of the World Bank, the

Government of India and representatives of Indian industry. The objectivewas to create a development financial institution for providing medium-term

and long-term project financing to Indian businesses.

In the 1990s, ICICI transformed its business from a development financial

institution offering only project finance to a diversified financial services

group offering a wide variety of products and services, both directly and

through a number of subsidiaries and affiliates like ICICI Bank.

In 1999, ICICI become the first Indian company and the first bank or

financial institution from non-Japan Asia to be listed on the NYSE. In 2001,

ICICI bank acquired Bank of Madura Limited.

ICICI Bank set up its international banking group in fiscal 2002 to cater to

the cross border needs of clients and leverage on its domestic banking

strengths to offer products internationally. ICICI Bank currently has

subsidiaries in the United Kingdom, Canada and Russia, branches in

Singapore and Bahrain and representative offices in the United States,


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China, United Arab Emirates, Bangladesh and South Africa.

Today, ICICI Bank offers a wide range of banking products and financial

services to corporate and retail customers through a variety of delivery

channels and through its specialised subsidiaries and affiliates in the areas

of investment banking, life and non-life insurance, venture capital and asset

management.

You see, ICICI Bank is India's #2 bank (after State Bank of India ), with more

than 700 branches and 3,200 ATMs nationwide. ICICI's retail banking group

offers lending and deposit services to small businesses and individuals.

Larger businesses are served by the corporate banking group, which offersfinance services and treasury products. ICICI's rural and government

banking unit offers micro-loans and agricultural banking. Foreign operations,

as well as services related to international trade finance and expatriate

Indians, fall under the international banking group. Other ICICI offerings

include online banking, asset management, and insurance.

Management :

ICICI Bank is operating under the guidance and management of the following experts:

Ms. Chanda Kochhar,Managing Director & CEOMr. N. S. Kannan,Executive Director & CFOMr. K. Ramkumar,Executive Director

Mr. Rajiv Sabharwal,Executive Director

Board Members -Mr. K. V. Kamath, ChairmanDr. Swati PiramalMr. Homi R. KhusrokhanMr. Dileep ChoksiMr. Arvind KumarMr. M.S. RamachandranDr. Tushaar Shah


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Mr. V. Sridar

TIME LINE HISTORY OF ICICI

1955:

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1956:

1960:

1961:

1967:

1969:

1972:

1977:

1982:

1986:

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The Industrial Credit and Investment Corporation of India Limited(ICICI) incorporated at the initiative of the World Bank, theGovernment of India and representatives of Indian industry, with theobjective of creating a development financial institution for providingmedium-term and long-term project financing to Indian businesses.

Mr.A.Ramaswami Mudaliar elected as the first Chairman of ICICILimited.

ICICI emerges as the major source of foreign currency loans to Indianindustry. Besides funding from the World Bank and other multi-lateralagencies, ICICI also among the first Indian companies to raise fundsfrom International markets.

ICICI declared its first Dividend at 3.5%.

ICICI building at 163, Backbay Reclamation was inaugurated.

The first West German loan of DM 5 million from Kredianstalt wasobtained by ICICI.

ICICI made its first debenture issue for Rs.6 crore, which wasoversubscribed.

First two regional offices in Calcutta and Madras were opened.

Second entity in India to set-up merchant banking services.

ICICI sponsors the formation of Housing Development FinanceCorporation.Managed its first equity public issue.

Becomes the first ever Indian borrower to raise European CurrencyUnits.ICICI commences leasing business.

ICICI first Indian Institution to receive ADB Loans. First public issue byan Indian entity in the Swiss Capital Markets.


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:

1987:

1988:

1993:

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1994:

1996:

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1997:

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1998:

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1999:

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2000::

2001:

2002:

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ICICI along with UTI sets up Credit Rating Information Services ofIndia Limited, (CRISIL) India's first professional credit rating agency.

ICICI promotes Shipping Credit and Investment Company of IndiaLimited. (SCICI)

The Corporation made a public issue of Swiss Franc 75 million in

Switzerland, the first public issue by any Indian equity in the SwissCapital Market.

ICICI signed a loan agreement for Sterling Pound 10 million withCommonwealth Development Corporation (CDC), the first loan byCDC for financing projects in India.

ICICI promotes TDICI - India's first venture capital company.

ICICI sets-up ICICI Securities and Finance Company Limited in jointventure with J. P. Morgan.

ICICI sets up ICICI Asset Management Company.

ICICI sets up ICICI Bank.

ICICI becomes the first company in the Indian financial sector to raiseGDR.

ICICI announces merger with SCICI.

Mr.K.V.Kamath appointed the Managing Director and CEO of ICICI Ltd

ICICI was the first intermediary to move away from single prime rateto three-tier prime rates structure and introduced yield-curve basedpricing.

The name "The Industrial Credit and Investment Corporation of IndiaLimited" was changed to "ICICI Limited".

ICICI announces takeover of ITC Classic Finance.

Introduced the new logo symbolizing a common corporate identity forthe ICICI Group.

ICICI announces takeover of Anagram Finance.

ICICI launches retail finance - car loans, house loans and loans forconsumer durables.ICICI becomes the first Indian Company to list on the NYSE throughan issue of American Depositary Shares.

ICICI Bank becomes the first commercial bank from India to list itsstock on NYSE.


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ICICI Bank announces merger with Bank of Madura.

The Boards of ICICI Ltd and ICICI Bank approved the merger of ICICIwith ICICI Bank.

Moodys' assign higher than sovereign rating to ICICI.

Merger of ICICI Limited, ICICI Capital Services Ltd and ICICI Personal

Financial Services Limited with ICICI Bank.

INTRODUCTION

THEORETICAL BACKGROUND

The concept of Credit Risk

Credit Risk is the risk of default by borrower due to inability and/orunwillingness to repay his debts in accordance with the agreed terms and

conditions.

Debt: Bonds, loans and commercial paper are all examples of debt. Forexample, a company may look to borrow $1 million so they can buy acertain piece of equipment. In this case, the debt of $1 million will need tobe paid back (with interest owing) to the creditor at a later date.

What is credit?

Credit is a very heart of the banking. Indeed the word credit was derived

from the Latin credere which, means to trust or believe. Thus, credit

means faith or confidence that is engendered between a debtor and

creditor, which may result in the transfer of value in the present, the

payment being deferred to the future. Credit is often defined from two

platform: One, credit as a potentiality ans two as an actuality. In the case of


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former is defined as The power to obtain goods or service by giving a

promise to pay money on demand or at a specified date in the future while

in the case of the latter it is defined as the present right to a future

payment

From this generic understanding , we can define bank credit as an amount

of money that has been delivered by a bank to a customer in return for the

promise of interest and capital repayment in the future. It is simply an

exchange of rights an immediate right given to a borrower to use the

money against a future right given to the bank to demand money.

CREDIT MONITORING SYSTEMS HELPS IN:

It is a very crucial activity in credit risk management. It is a function of themanager/ credit department

Understanding the financial position of the borrower.

Confirming credit in compliance with the sanction terms.

Enduring that there is no deviations in the end use of fund, and is used

for the sanctioned purposes.

Ensuring that project cash-flows are being realized by the borrower.

Ensuring that securities/collaterals are in conformity with the

sanctioned-terms and have not deteriorated.

Identifying the potential problem loan accounts well in time which in

turn would help the bank to initiate corrective measures.

There are well known Credit Rating Agencies in India are:

1. Credit Rating Information Services of India Limited(CRISIL)

2. Investment Information and Credit Rating Agency of India (ICRA)


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3. Credit Information & Research Limited (CARE)

BODY OF THESIS

OPERATIONAL REVIEW OF ICICI BANK IN 2011-12

ICICI Bank continued to serve as the focal point for marketing, distribution

and servicing of home loan products.

In addition, your company keenly looks at every step in the entire value

chain of real estate, which starts as a land transaction and culminates in an

end user moving into a property, as a business opportunity for the

Company.

Retail housing customers expect greater transparency, reliability,

professional standards and convenience in the process of searching for their


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homes. The Company has made significant gains in the business of retail

property services through the brand ICICI Home Search.

The Company also made significant progress in the commercial real estate

space and provided advisory services to corporate and developers in the

aforesaid segment. This has driven growth in fee income.

The Company has started a separate business vertical that shall focus on

sourcing ICICI HFC Fixed Deposits. The objective is to optimize cost of

resources. ICICI HFC Fixed Deposits have received the highest credit ratings

of AAA by CARE and MAAA by ICRA.

RISK MANAGEMENT SYSTEM IN ICICI BANK

Structure:

Risk Management Committee.

Asset Liabilities Management Committee

Operational Risk Management Committee

Credit Risk Management Committee

Credit Committees

Credit Audit & Review Division

Credit Policy & Risk Management Division.

Credit Risk Rating

Credit risk rating is a rating assigned to borrowers is based on an analysis of

their ability and willingness to repay the debt taken from the bank. This

rating is assigned on a scale, which generally has 6 to 8 levels. Companies

falling in the same credit risk category have similar probability of default.

Better the rating, lower is the probability of default. The probability of

default increases in an exponential manner as the credit risk rating

deteriorates.


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Uses of Credit Risk Rating

Credit risk rating is one of the important tools to decide in the following

matters:

Whether to lend to a borrower or not: The credit risk rating of a

borrower determines the appetite of the bank in determining exposure

level. A bank would be willing to lend to highly rated borrowers but would

not like exposure to borrowers with very poor credit risk rating.

Pricing: The risk premium to be charged to a borrower should be

determined by its credit risk rating. Borrowers with poor credit rating

should be priced high.

Risk Mitigants: The extent of collateral security required and the

need to step up margin requirements are linked to credit risk rating of a

borrower. The higher the risk category of a borrower, the greater should be

the value of collateral and/or the margins.

Product mix:There is need to gradually shift from the present form of

credit facility by way of Cash Credit limit to Term Lending in Working

Capital.

Level of decision-making: The delegation of loan sanction/approva

powers can be linked to the credit risk rating of a borrower. For low risk

borrowers, higher power of approval can be at the branch level to facilitate

faster sanctioning of loans thereby ensuring better customer service. For

higher risk borrowers, approval from higher levels may be considered.


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Frequency of renewal and monitoring: Renewal of facility in case

of high rated borrowers can be considered at longer intervals as compared

to low rated borrowers.

Credit risk ratings eventually help a bank to assign a probability of default

for borrower according to its risk category. This probability of default is

determined statistically from past data by observing the behavior of various

rated clients over a number of years. The expected losses from a loan can

be determined using this probability of default. This probability will then

help to determine the terms and conditions for the loans in terms of the

amount, interest rate to be charged, maturity etc.

Credit risk rating will be just one of the inputs which will be used in making

the credit decisions, besides other factors like collateral provided, period

and quality of relationship with the borrower, portfolio concentration etc.

Criteria of ICICI Bank for lending the Home loan


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As informed by Mr. Ashok Tiwari (ICICI Bank Sr. Officer, Home loans) Home

loan is divided into two parts are:

1) SAL(Salaried)

2) SEP (Self Employed Professionals)

i. Self employed professionals

ii. Self employed non-professionals

1) Salaried: Applicants whose salary is less than Rs.10000/- pm but

more than Rs.4000/- pm the bank charged 40% EMI from their salary

and applicants whose salary is above Rs.10000/- the bank charged

50% EMI from their salary.

2)Self Employed Professionals:

i. Self employed professionals This category is for Doctors,

Chartered Accountants, Architectures etc.

ii. Self employed non-professionals This category is for

businessman like Proprietors, Partnership businesses, Director ofthe company etc.

The bank give the loan for both professionals on their Loan to value

(LTV 80%) + Fixed Obligation to Income Ratio (FOIR 40%). Bank

sanctioned 120% loan of the professionals return.


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PROCESS OF THE SANCTIONING THE HOME LOAN PRAPOSAL

MIS Management Information System

FI Field Investigation

RCU Risk Containment Unit


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RBI GUIDELINES ON CREDIT RATING

Banks should have a comprehensive risk scoring/rating system that servesas a single point indicator of diverse risk factors of counter party and for

taking credit decisions in a consistent manner. To facilitate this, a

substantial degree of standardization is required in ratings across

borrowers. The risk rating system should be designed to reveal the overall

risk of lending, critical input for setting pricing and non-price terms of loans

as also present meaningful information for review and management of loan

portfolio. This risk rating, in short, should reflect the underlying credit risk

of the loan book. The rating exercise should also facilitate the credit

granting authorities some comfort in its knowledge of loan quality at any

moment of time.

The risk rating system should be drawn up in a structured manner,

incorporating, inter alia, financial analysis, projections and sensitivity,

industrial and management risks. The banks may use any number of

financial ratios and operational parameters and collaterals as also

qualitative aspects of management and industry characteristics that have

bearings on the creditworthiness of borrowers. Banks can also weigh the

ratios on the basis of the years to which they represent for giving


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importance to near term developments. Within the rating framework, banks

can also prescribe certain level of standards or critical parameters, beyond

which no proposals should be entertained. Banks may also consider

separate rating framework for large corporate/small borrowers, traders, etc.

that exhibit varying nature and degree of risk. Forex exposures assumed by

corporate who have no natural hedges have significantly altered the risk

profile of banks. Banks should, therefore, factor the unhedged market risk

exposures of borrowers also in the rating framework. The overall score for

risk is to be placed on a numerical scale ranging between 1-6, 1-8, etc. on

the basis of credit quality. For each numerical category, a quantitative

definition of the borrower, the loans underlying quality, and an analytic

representation of the underlying financials of the borrower should be

presented. Further, as a prudent risk management policy, each bank should

prescribe the minimum rating below which no exposures would be

undertaken.

Any flexibility in the minimum standards and conditions for relaxation and

authority, therefore, should be clearly articulated in the Loan Policy.

The credit risk assessment exercise should be repeated biannually (or even

at shorter intervals for low quality customers) and should be delinked

invariably from the regular renewal exercise. The updating of the credit

ratings should be undertaken normally at quarterly intervals or at least at

half-yearly intervals, in order to gauge the quality of the portfolio at periodicintervals. Variations in the ratings of borrowers over time indicate changes

in credit quality and expected loan losses from the credit portfolio. Thus, if

the rating system is to be meaningful, the credit quality reports should

signal changes in expected loan losses. In order to ensure the consistency

and accuracy of internal ratings, the responsibility for setting or confirming


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such ratings should vest with the Loan Review function and examined by an

independent Loan Review Group. The banks should undertake

comprehensive study on migration (upward lower to higher and downward

higher to lower) of borrowers in the ratings to add accuracy in expected

loan loss calculations.

SWOT Analysis

STRENGTHS WEAKNESSES

OPP

ORTUNITIES

S O Strategies

Strength: Large Capital base.

Opportunity: Market Expansion.

Strategy: Deep Penetration intoRural Market.

W O Strategies

Weakness: WorkforceResponsiveness.

Opportunity: Outsourcing of Non -Core Business.

Strategy: Outsource Customer Care& other E-Helps.


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THREAT

S

S T Strategies

Strength: Low operating costs

Threat: Increased Competitionfrom others Pvt. Banks.

Strategy: Steps to Ensure Loyaltyby old Customers.

W T Strategies

Weakness: Not Equal to InternationalStandards.

Threat: Entry of many ForeignBanks.

Strategy: Consider additionalbenefits

CREDIT APPRAISAL PROCESS

There are the main below contains which should be used when

Credit Manager appraises the file:

Applicant Name

Co-applicant Name

Educational Qualification

No. of dependents

Spouse income


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Assets

Experience

Investments

No. years lived in city

Past financial records

Stability & continuity of occupation

Saving history

Credit Manager is a complete solution for managing, reviewing andanalyzing credit applications, significantly reducing commercial applicationturnaround times while improving credit risk mitigation.

Overview of Credit Manager

Questionnaire

1) What is the Credit Risk in Home loans?

2) How can the bank manage the Credit Risk in Home loan?

3) What are the different policies used by Credit Manager to minimizing

the credit risk?


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4) How does the Credit Manager calculate the Credit risk?

5) What is the Credit appraisal process?

6) Which Credit risk rating model used by bank?

Documents

ICICI BankCredit Risk Management Strategies for Home Loan