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DRAFT Report of The Credit Risk Management 02072014
DRAFT Report of The Credit Risk Management 02072014
Specialization: Finance
Batch: 2013-15
Under the guidance of
This project is submitted to you as per the course need of Masters of Management Studies
(MMS) during the completion of my two months internship at Bank of India.
I, Bhupesh Kumar Pannalal Jain from Guru Nanak Institute of management Studies, doing
my summer internship from Bank of India, Mumbai (Mulund West) Branch under the guidance
of Mr. Ryuchi Pawar (Credit Manager) and my guide Prof. Dr. Kapil Bopatkar . I have abided
to the rules of the banks and had a very good experience here with full support at my collage
and my place of internship at BOI end too. And, I would like to thank all of them who have
supported me throughout my project work.
Thanking you,
Jain Bhupesh
ACKNOWLEDGEMENT
With the blessing of God, I thank all my supporters at BoI who helped me through the project
work. I would like to thank specially Miss. Ryuchi Pawar mam my guiding star at Bank of
India, and one of the most importantly Prof. Kapil Bopatkar who all are the base pillars for my
project. Also I would like to thank Gurjeet Mam to give me such a wonderful opportunity.
Thanking you,
Jain Bhupesh
TABLE OF CONTENTS
Ch. No.
1
2
Particulars
Executive Report
Introduction to the topic
2.1 Loans and Advances
2.2 Steps in Sanctioning loans
2.3 Importance of Loans and Advances
2.4 Statistical Information
3 Sector information
3.1 Introduction
3.2 History
3.3 Current Scenario
3.4 Rates involved In banking
4 Company Details
4.1 Introduction
4.2 History
4.3 Memorable events at BOI
4.4 Department And functions
4.5 Other details
4.6 Financial Statements
5 Methodology
5.1 Literature review
5.2 Background Study
5.3 Problem Statement
5.4 Scope and advantages
5.5 Limitations
5.6 Hypotheses
6 Research Methodology
6.1 Research Design
6.2 Sources of data
6.3 Data collection
6.4 Population
6.5 Sampling method
6.6 Sampling frame
7 Data analysis
8 Results and findings
9 Conclusion
10 Suggestions and recommendations
11 Bibliography
Remarks
Page No.
1
25
3
4
5
5
6 11
7
8
9
11
12 - 18
13
13
14
14
15
16
19 21
20
20
20
20
20
21
22 23
23
23
23
23
23
23
24 28
29
29
29
30
Sr. No.
Page No.
Particulars
Table No.
1.
3.a
2.
3.b
10
3.
4.a
13
4.
4.b
16
5.
Interested in Loans
7.a
25
6.
7.b
25
7.
Loan period
7.c
26
8.
Banks preference
7.d
27
9.
7.e
27
10.
7.f
28
1. EXECUTIVE SUMMARY
An ancient and traditional form of money transactions done through money lenders is the
first place where the culture of bank breathed its first. Then an organized form of bank came
into existence known as the Imperial Bank which was then governed by the British government.
Latter we find many banks came up to serve post independence.
In the business and survival of any bank, its blood is the inflow of money as profits through
its main activity namely giving loans and advances. In previous days, loans were taken to be a
pure burden by the one who took it because of the ways opted by the lenders were not
appropriate. But, today the things are changing. People no longer take this matter as a burden
but as an opportunity to step up a level or a phase ahead with it. So the attraction towards credit
taking has increased along with the willingness to repay it back. But its not evenly distributed
as all banks dont have those attractive schemes. But as Roth bard says in his book mystery of
banking that for every bank creating money is the most important activity, so all banks must try
their level best.
Now after we have talked about the general need of banks, lets focus on to Bank of India. This
bank also gives the same banking facilities and a bit more service wise being a nationalized
bank. But its main competitor is State Bank of India (SBI) in the field of loans and advances
especially in home loans which are the long term income sources for any banks. So we need a
very good business plan and marketing team to boost up the performance to another fold of
success even though currently we are functioning on gross loan activities of about 144.84cr
aprox. And this can be done by collating with some builders or so as mentioned in my
suggestions and recommendations as this will not only open new business areas for the banks
but also raise its market value. And moreover we can support small business buds too.
As we know that there is scope in loans and advances as the attraction and utility of the same
is increasing, and so along with us the option for banks to see an upward growth curve.
The exposure to the credit risks large in case of financial institutions, such
commercial banks when firms borrow money they in turn expose lenders to credit
risk, the risk that the firm will default on its promised payments. As a consequence,
borrowing exposes the firm owners to the risk that firm will be unable to pay its debt
and thus be forced to bankruptcy.
CONTRIBUTORS OF CREDIT RISK:
Corporate assets
Retail assets
Non-SLR portfolio
May result from trading and banking book
Inter bank transactions
Derivatives
Settlement, etc
The internally oriented approach centers on estimating both the expected cost and
volatility of future credit losses based on the firms best assessment.
Future credit losses on a given loan are the product of the probability that the borrower
will default and the portion of the amount lent which will be lost in the event of default.
The portion which will be lost in the event of default is dependent not just on the
borrower but on the type of loan (eg., some bonds have greater rights of seniority than
others in the event of default and will receive payment before the more junior bonds).
To the extent that losses are predictable, expected losses should be factored into product
prices and covered as a normal and recurring cost of doing business. i.e., they should be
direct charges to the loan valuation. Volatility of loss rates around expected levels must
be covered through risk-adjusted returns.
So total charge for credit losses on a single loan can be represented by ([expected
probability of default] * [expected percentage loss in event of default]) + risk adjustment
* the volatility of ([probability of default * percentage loss in the event of default]).
Financial institutions are just beginning to realize the benefits of credit risk
management models. These models are designed to help the risk manager to project
risk, ensure profitability, and reveal new business opportunities. The model surveys
the current state of the art in credit risk management. It provides the tools to
understand and evaluate alternative approaches to modeling. This also describes
what a credit risk management model should do, and it analyses some of the popular
models.
The success of credit risk management models depends on sound design,
intelligent implementation, and responsible application of the model. While there has
been significant progress in credit risk management models, the industry must
continue to advance the state of the art. So far the most successful models have been
custom designed to solve the specific problems of particular institutions.
A credit risk management model tells the credit risk manager how to allocate
scarce credit risk capital to various businesses so as to optimize the risk and return
characteristics of the firm. It is important or understand that optimize does not mean
minimize risk otherwise every firm would simply invest its capital in risk less assets.
A credit risk management model works by comparing the risk and return
characteristics between individual assets or businesses. One function is to quantify
the diversification of risks. Being well-diversified means that the firms has no
concentrations of risk to say, one geographical location or one counterparty.
Market Risk
Banking Book
Operational
Other Risks
Other
2.1. The borrower clients, who are enjoying various bank facilities by way of
working capital and term loans, are required to submit the following
statements to the bank.
Half yearly and yearly balance sheet and profit and loss account.
Monthly statements of sales and purchases with outstanding creditors and debtors.
The following books of accounts are also necessarily to be made available every
month for verification by bank officials at the time of periodical inspection.
i) Sales and purchase registers supported by respective invoices.
ii) Stock registers giving details of stock holdings and movement of stock.
At last select the minimum of (A), (B), (C) and (D) as the sanction able
amount
NOTE: The project analyses the attractiveness of Loans and advances in the
market and the business through the same in a year (NPA is NOT considered;
only sanctioned amount is used) for the purpose.
It helps in maintaining a liquidity in the market: the short term loans are the loans under
money market also the long term loans plays an active role in mobilizing the funds in the
most appropriate manner.
It helps Loan facility beneficiaries in solving their financial needs:
Helps in the banks profit and growth continuity
3. SECTOR INFORMATION
3.1.INTRODUCTION
Banking in India, in the modern sense, originated in the last decades of the 18th
century. The first banks were Bank of Hindustan (1770-1829) and The General Bank of
India, established 1786 and since defunct. State Bank of India (SBI) is the oldest and still
working bank in India since June 1806. Before the existence of Reserve Bank of India
(RBI) in 1935, all the banks in our country was governed by the presidency banks which
was established under charters of British East India Company. The largest bank, and the
oldest still in existence, is the State Bank of India, which originated in the Bank of
Calcutta in June 1806, which almost immediately became the Bank of Bengal. This was
one of the three presidency banks, the other two being the Bank of Bombay and the Bank
of Madras, all three of which were established under charters from the British East India
Company. The three banks merged in 1921 to form the Imperial Bank of India, which,
upon India's independence, became the State Bank of India in 1955. For many years the
presidency banks acted as quasi-central banks, as did their successors, until the
Reserve was established in 1935. In 1969, Indian Government nationalized major banks
which are got to be known as profit making public sector undertaking banks (PSUs).
The banks which did not embrace the governments ways got to be operated as
commercial banks or private sector banks. Further to improve the rural area National
Bank for Agriculture and Rural Development (NABARD) came into existence.
Indian Banking Industry currently employees 1,175,149, employees and has a total of
109,811 branches in India and 171 branches abroad and manages an aggregate deposit
of 67504.54 billion (US$1.1 trillion or 820 billion) and bank credit of 52604.59
billion (US$880 billion or 640 billion). The net profit of the banks operating in India
was 1027.51 billion (US$17 billion or 12 billion) against a turnover of 9148.59
billion (US$150 billion or 110 billion) for the fiscal year 2012-13. As per Census 2011,
58.7% households are availing banking services in the country. There are 102,343
branches of Scheduled Commercial Banks (SCBs) in the country, out of which 37,953
(37%) bank branches are in the rural areas and 27,219 (26%) in semi-urban areas,
constituting 63% of the total numbers of branches in semi-urban and rural areas of the
country. This has happened because of online services, computerization.
3.2.HISTORY
The system of banking is not a new concept but a well known and ancient form of
financing the society. We have heard and learned about Zamindars and money lenders in
olden times which still prevail in some areas of India. This is the basic stage of any
bank- the basic function of any bank. And this is present in our society from the Vedic
period. This is an example of an unorganized form of banking.
Then during the British rule, we were first time introduced to organized form of
banking through Union Bank of Calcutta in 1829. Since then many banks formed,
doomed and remained. During swadeshi movement, freedom fighters had started private
banks in Dakshina Kannada and Udupi district which were unified earlier and known by
the name South Canara. This is known as the "Cradle of Indian Banking
After independence The Government of India initiated measures to play an active
role in the economic life of the nation, and the Industrial Policy Resolution adopted by
the government in 1948 envisaged a mixed economy. This resulted into greater
involvement of the state in different segments of the economy including banking and
finance. The major steps to regulate banking includedthe establishment of Reserve
Bank of India (RBI). Then in 1960 nationalization of banks bill came into being where in
at first go 62 banks were nationalized then again in 1980, 6 more commercial banks were
nationalized. This took place during the period of Smt. Indira Gandhi being the Prime
Minister of India. Thus by now 91% of banking businesses in India was under the control
of Government of India. This sector saw a growth of 4% till 1990. In 1990s liberalization
took place. This was one more important stage in banking sector. Norms, rules
regulations were revised to suit the foreign banking companies to come to India. This
accelerated the growth of banking sector in India.
3.3.CURRENT SENARIO
The banks rules and regulations for all nationalized scheduled banks are made and formulated
by RBI as it is the apex of all banks. All banks which are included in the Second Schedule to the
Reserve Bank of India Act, 1934 are Scheduled Banks. These banks comprise Scheduled
Commercial Banks and Scheduled Co-operative Banks. Scheduled Commercial Banks in India
are categorized into five different groups according to their ownership and/or nature of
operation. These bank groups are:
https://www.google.co.in/search?q=bank+hierarchy+structure&newwindow
The above figure can be explained as, Reserve Bank of India (RBI) the apex
autonomous body for all banks. Under this we have three major classifications which as
all together forms a part of schedule banks. The rest sub classification goes as the figure
shows.
As per statistics, there are 16 Indian banks in India, 27 PSU banks, 82 Regional
Rural Banks (RRBs), 19 Pvt. Sector Banks and 32 foreign banks operating in India. The
figure below explains the same in a better way
After RBI came into regulating the banking policies many technologies and new methods
are introduced. Some are as follows
Statutory Liquidity Ratio (SLR): the minimum amount that bank must have in
liquid/cash form is 22.5% of total deposits of the bank.
Cash Reserve Ratio (CRR): the amount which a bank has to keep with bank as an
obligation, the rate is 4% of deposits of the bank.
REPO rate: the rate of interest at which RBI takes loan from banks for a period, the
rate is 8%
Reverse REPO rate: the rate at which a bank takes loan from RBI, the rate is 7%.
Core banking is a new form of banking is introduced wherein the customer can
transact from any branch of the bank where the account holding is there by use of CTS
technique.
MICR code is a code on a cheque that tells from which branch the cheque has been
drawn, this helps in cheque clearing and transfer of cheques.
Its assumed to be one of the booming sectors in India within a few years.
4. COMPANY DETAILS
4.1.INTRODUCTION
Bank of India (BoI) goes with its tag line Relationship beyond Banking is an Indian
state-owned commercial bank with headquarters in Mumbai, Maharashtra, India. The
bank became Government owned since nationalization in 1969. Bank of India has 4545
branches as on 31 December 2013, including 54 branches outside India, and about
ATMs. BoI is a founder member of SWIFT (Society for Worldwide Inter Bank
Financial Telecommunications), which facilitates provision of cost-effective financial
processing and communication services. The Bank completed its first one hundred years
of operations on 7 September 2006.
th
(4.a) Bank of India, Mumbai Main Branch, taken from Wikipedia on 9 May 2014.
4.2.HISTORY
It was the first in India promoted by Indian interests to serve all the communities of
India. At the time, banks in India were either owned by Europeans and served mainly the
interests of the European merchant houses or by different communities and served the
banking needs of their own community.
The promoters incorporated the Bank of India on 7 September 1906 under Act VI of
1882, with an authorized capital of Rs. 10 million divided into 100,000 shares each of Rs.
100. The promoters placed 55,000 shares privately, and issued 45,000 to the public by
way of IPO on 3 October 1906; the bank commenced operations on 1 November 1906.
The lead promoter of the Bank of India was Sir Sassoon J. David (18491926). He was
a member of the Sassoons, who in turn were part of a Bombay community of Baghdadi
Jews, which was notable for its history of social service. Sir David was a prudent banker
and remained the chief executive of the bank from its founding in 1906 until his death in
1926.
The first board of directors of the bank consisted of Sir Sassoon David, Sir Cowasjee
Jehangir, J. Cowasjee Jehangir, Sir Frederick Leigh Croft, Ratanjee Dadabhoy Tata,
Gordhandas Khattau, Lalubhai Samaldas, Khetsety Khiasey, Ramnarain Hurnundrai,
Jenarrayen Hindoomull Dani, and Noordin Ebrahim Noordin.
4.3.MEMORABLE EVENTS FOR BOI
2013: BoI opened a fully owned subsidiary in Botswana on 9 August 2013 (Bank
of India (Botswana) Ltd.).
1969: The Government of India nationalized the 14 top banks, including Bank of
India. In the same year, the People's Democratic Republic of Yemen nationalized
BoI's branch in Aden, and the Nigerian and Ugandan governments forced BoI to
incorporate its branches in those countries.
1921: BoI entered into an agreement with the Bombay Stock Exchange to manage
its clearing house.
In other years BoI has opened many branches in different foreign countries.
Saving Dept.:- the opening of a new savings account or current account after taking the
necessary documents is the activity done here.
Remittance Dept.:- this is a dept where in money can be transferred through system in a
day in real time may be called RTGS& NEFT. Clearing of cheques and disbursement of
pension are all part of this dept.
Cash dept.:- here the sensitive affair of accepting and giving cash is done
Term deposit dept.:- this is a investment facility were in the customer can keep their
funds for a specific period of time getting varied return opportunities as may be opted by
them and returns will be as per the interest rate.
NRI Dept.:- this dept. entertains and facilitates NRIs only in opening an Saving account
here in India and use it.
Card dept.:- this dept looks on to the function of plastic money that is ATM,
DEBIT(visa/master ), credit card, tele banking, internet banking.
Overseas Dept.:- the banking facilities to NRIs are done through this dept. also it looks
onto the affairs of export import of its client
DMat dept.: this is the dept which is a depository participant of NSDL and does the
shares and stock related business as guided by SEBI.
4.5.OTHER DETAILS
State Bank Of India, Punjab National Bank and bank of Baroda are the major
competitors for BOI along with other public as well as private sector banks.
Products and facilities we find here in this bank is the tradional loan giving,
account holding like SB A/c or current a/c, Forex, DMat account holding, real
time fund transfer and many financial activities.
Also other products like Short Term and long term Loans taken and given, share
capital, fixed assets.
The market price of each share of BOI as on 13th may2014 is 252Rs (information
taken from money control.com)
(4.b)
The
details
is
taken
from
th
Sources: Dion Global Solutions Limited as on 10th May 2014, taken from Money Control.com
Sources: Dion Global Solutions Limited as on 10th May 2014, taken from Money Control.com
Sources: Dion Global Solutions Limited as on 13th May 2014, taken from Money Control.com
5. METHODOLOGY
5.1.LITERATURE REVIEW
Commercial banking plays a dominant role in commercial lending (Allen & Gale,
2004).Commercial banks routinely perform investment banking activities in many countries
byproviding new debt to their customers (Gande, 2008). The credit creation process
workssmoothly when funds are transferred from ultimate savers to borrower (Bernanke,
1993).There are many potential sources of risk, including liquidity risk, credit risk, interest rate
risk,market risk, foreign exchange risk and political risks (Campbell, 2007). However, credit
riskis the biggest risk faced by banks and financial intermediaries (Gray, Cassidy, &
RBA.,1997). The credit risks indicators include the level of non- performing loans, problem
loans or provision for loan losses (Jimenez & Saurina, 2006). Credit risk is the risk that a loan
International
Journal
of
Marketing,
Financial
Research____________________ ISSN 2277- 3622
Services
&
Management
them to compete with foreign bank unless they make some thoughtful change. In this
thoughtful change, the reform of credit risk management is a major step that determines
whether the state owned commercial banks in China would survive the challenges or not.
Research however faults some of the credit risk management policies in place the broad
framework and detailed guidance for credit risk assessment and management is provided by the
Basel New Capital Accord which is now widely followed internationally (Campbell,2007).state
owned banks. A survey conducted by Kuo & Enders (2004) of credit risk management Macaulay
(1988) conducted a survey in the United States and found credit risk management is best
practice in bank and above 90% of the bank in country have adopted the best practice.
48integrity (Boyd, 1993). It is necessary to establish a proper credit risk environment, sound
credit risk management (Basel, 1999). Credit scoring procedures, assessment of negative
OBJECTIVES OF PROJECT
5.4.SCOPE
The way of attracting people to credit as the number is very much low
Making people aware of its secondary benefit
Try to find out innovative solution to the problem.
New field for business can be explored for the bank
5.5.LIMITATIONS
The main hurdle of NPA is not considered.
It takes that all are willing to apply without considering their need after they are fully aware
5.6.Recommendation
The Bank should keep on revising its Credit Policy which will help Banks effort to correct
the course of the policies
The Chairman and Managing Director/Executive Director should make modifications to
the procedural guidelines required for implementation of the Credit Policy as they may
become necessary from time to time on account of organizational needs.
Banks has to grant the loans for the establishment of business at a moderate rate of
interest. Because of this, the people can repay the loan amount to bank regularly and
promptly.
6. RESEARCH METHODOLOGY
Data collection method
To fulfill the objectives of my study, I have taken both into considerations viz primary &
secondary data.
Primary data: Primary data has been collected through personal interview by direct
contact method. The method which was adopted to collect the information is Personal
Interview method.
Personal interview and discussion was made with manager and other personnel in the
organization for this purpose.
Secondary data: The data is collected from the Magazines, Annual reports, Internet,
Text books.
The various sources that were used for the collection of secondary data are
o Internal files & materials
o Websites Various sites like www. sharekhan.com
www.indiainfoline.com
www.boi.co.in
www.investopedia.com
www..wikepedia.com and other site
Findings:
Recovery of Credit: BOI recovery of Credit during the year 2006 is 62.4%
Compared to other Banks recovery policy is very good, hence this reduces NPA
6.1.RESEARCH DESIGN
Understanding the problem
Formulating hypothesis
Analyzing the data/information
Deriving solution to the problem
6.2.SOURCE/S OF DATA
There is primary data from the survey and secondary data from the bank records
interest in Credit
40
30
20
Series 1
10
0
YES
NO
(7.a) graph
Interpretation:
The people showing interest in taking loan is high (i.e. 35) is there. Its the place of
opportunity which needed to be grabbed.
Credit
20
15
10
Series 1
5
0
Housing
Credit
Personal
Credit
Credit
against
TDR
Vehicle Education
Credit
loan
Others
(7.b) graph
Note: a single person in some cases have demand for more than one type of loan, so the
total is more than 35 i.e. the people interested to take loans.
Interpretation:
Home loan is the major loan that attracts people to invest into, followed by personal, vehicle
others (business loan and travel loans) and at last loans against TDR which has no attraction.
Loan period
16
14
12
10
8
Series 1
6
4
2
0
Less than 1yr
1yr - 5yrs
5yrs - 10yrs
(7.c) graph
Interpretation:
We have a long term income source for banks as people are willing to keep their loan tenure for
more than 10years, and then there are some for 1year 5 years too. 5years 10 years and less
than 1year is followed latter.
Q4. Which Bank is preferred by you for making more transactions relating to Credit &
advances?
Bank prefered
18
16
14
12
10
8
6
4
2
0
Series 1
Bank of India
Other Nationalized
Bank
Interpretation:
Other Nationalized banks (especially State Bank of India) is the first preference followed by
BOI preference and then Pvt Banks for taking loans by people.
Installments
35
30
25
20
Series 1
15
10
5
0
Monthly
Quaterly
Halfyearly
Annual
(7.e) graph
Interpretation:
People want or prefer to pay off their installments in monthly basis. Quarterly is the second
preference.
Series 1
Businessman
Serviceman
Self-employed
Others
(7.f) graph
Interpretation:
The view point is that businessman takes the maximum number and amount of loan followed
by service man, self-employed and at last others like housewives.
10. CONCLUSION
The project undertaken has helped a lot in gaining knowledge of the Credit Policy and Credit
Risk Management in Nationalized Bank with special reference to State Bank Of India. Credit
Policy and Credit Risk Policy of the Bank has become very vital in the smooth operation of the
banking activities. Credit Policy of the Bank provides the framework to determine (a) whether
or not to extend credit to a customer and (b) how much credit to extend. The Project work has
certainly enriched the knowledge about the effective management of Credit Policy and
Credit Risk Management in banking sector.
Credit Policy and Credit Risk Management is a vast subject and it is very difficult
to cover all the aspects within a short period. However, every effort has been made to
cover most of the important aspects, which have a direct bearing on improving the
financial performance of Banking Industry
To sum up, it would not be out of way to mention here that the State Bank Of India
has given special inputs on Credit Policy and Credit Risk Management. In
pursuance of the instructions and guidelines issued by the Reserve Bank of India, the
State bank Of India is granting and expanding credit to all sectors.
The concerted efforts put in by the Management and Staff of State Bank Of India has
helped the Bank in achieving remarkable progress in almost all the important
parameters. The Bank is marching ahead in the direction of achieving the Number-1
position in the Banking Indus
Associate with good builders to give Credit to the one who are registering flats in their
buildings, this will not only enhance our business.
Similar as above, can be done with automobile companies and collages of professional
courses.
Make aware about Credit against TDR.
Give small amounts as business loans for those who are trying to set up there own seeing
that the bank is not in great risk.
SECTOR
http://en.wikipedia.org/wiki/Banking_in_India taken on 9th May 2014
http://www.equitymaster.com/research-it/sector-info/bank/BankingSector-Analysis-Report.asp on 12th May 2014
http://www.allbankingsolutions.com/DATA.htm taken on 17/4/2014 for
rates
http://financialservices.gov.in/banking/listofbanks.asp for list of banks in
different types, taken on 17/4/2014
https://www.google.co.in/search?q=bank+hierarchy+structure&newwind
ow=1&tbm=isch&tbo=u&source=univ&sa=X&ei=8td4U6mgL4bJuAS0y
YGADw&ved=0CCgQsAQ&biw=1600&bih=799 on 11/5/2014