SUMMER TRAINING PROJECT REPORT

on
.
“CREDIT RISK MANAGEMENT (LOANS AND ADVANCES): A STUDY WITH
REFERENCE TO THE BIJNORE URBAN COOPRATIVE BANK ,BIJNORE”

Submitted In Partial Fulfillment Of The Requirement

For The Award f Degree

Of

Master of Business Administration

Session (2017-2018)

Dr. A.P.J. Abdul Kalam Technical University, Uttar Pradesh

SUBMITTED BY: - SUBMITTED TO:

RATI KHANA Dr. A.P.J. Abdul University
Mr. AJAY SINGH
Roll. No.1506870025 Kalam Tech

KUNWAR SATYAVIRA COLLEGE OF

MANAGEMENT BIJNORE

1
 DECLARATION

I, RATI KHANA hereby declare that the research work presented in this project report

entitled “CREDIT RISK MANAGEMENT: A STUDY WITH REFERENCE TO

THE BIJNORE URBAN COOPRATIVE BANK ,BIJNORE” for the fulfillment of

the award of Master of Business Administration from KS, Bijnore. It is based on my

work during the summer training in the bijnore cooperative bank . The project embodies

the result of original work and studies out by me and the contents of the project do not

form the basis for the award of any other degree to me or to anybody else.

Date: RATI KHANA

2
 ACKNOWLEDGEMENT

With great pleasure I express my heartiest thanks to Mrs. Savita Sharma & Mr. Anil

Dhawan (Manager), for giving me an opportunity to work under their guidance in their

esteem organization and providing me necessary resources for my project.

I would also thank my institution and my faculty members without whom this

project would have been a distant reality.

At last I would like to extend my sincere thanks to all the respondents to whom

I visited for giving their support and valuable information , which helps me in

completing my project work.

3
 TABLE OF CONTENTS

ACKNOWLEDGE

DECLARATION

Sr. No. Ratio Pg.

No.

1 Introduction 1

1.1 Nature of Study 2

1.2’ Scope of Study 2

1.3 Objective of the study 3

1.4 Sources of data collection 3

1.5 Tools used for Data Collection 4

1.6 Period of Study 4

1.7 Limitations of the study

2 Industry Profile 5

2.1 Recent Development in Global Banking Industry 6

2.2 Historical Background of Banking in India 6

2.3 Indian Banking Industry 7

4
 2.4 Current Scenario

2.5 Highlights of the Banks Performance

2.6 Challenges Facing Banking Industry in India

2.7 Major Players in Indian Banking Industry

3 Company Profile 10

3.1 Introduction 11

3.2 Vision 12

3.3 Mission 12

3.4 Objective 12

3.5 Technology Promotion Drive of The Bijnore 12

3.6 Urban Cooprative 12

3.7 Milestones 12

3.8 Future Perfect

3.10 Awards and Recognition 13

3.11 The Structure of The Bijnore Urban Cooprative 13

3.12 Main Objectives and Business of the banks 15

3.13 Various Departments of Bank 15

Logo and Corporate Colour

4 Credit Risk Management 19

4.1 Theoretical Background

5
 4.2 Aim of Credit Risk Management

4.3 Objective of Credit Risk Management

4.4 Measurement of Risk through credit rating/scoring

4.5 Committee for Credit Risk Management

4.6 Credit Risk Management Department

4.7 Methods of Credit Risk

5 Analysis and Interpretation 20

5.1 Analysis of Data 22

5.2 Capital Adequacy Ratio 23

5.3 Asset Quality 24

5.4 Earning per Non Performing Assets

5.5 Correlation

5.4 Analysis of Deposit Mix

6 Findings and Suggestions 41

6.1 Findings 42

6.2 Suggestions 42

7 Conclusion

6
 CHAPTER 1
INTRODUCTION

7
Introduction:

This project study has been undertaken under the Corporate Financial Management

Department and Integrated Risk Management Department to develop an insight in

to the risk management practices of the The Bijnore Urban Cooprative bank Ltd.

with special references to Credit Risk Management. The study focuses on the

implementation of tools like Maturity Gap Sensitivity

Scope of the Study

This study covers advance, loans, payables, receivables and income, and risk

management system of The Bijnore Urban Cooprative bank Ltd. and also an

overall aspect of capital adequacy, Non Performing Asset and Asset quality.

8
Nature of the Study

 A descriptive study is conducted to study the “Credit Risk Management” of

The Bijnore Urban Cooprative bank Ltd., Bijnore.

9
Objective of the Study

Primary Objectives:

 To study the credit risk management operations (assessment & procedures)

in The Bijnore Urban Cooprative bank Ltd..

 To study different kinds of risks existing in The Bijnore Urban Cooprative

bank Ltd..

Secondary Objectives:

 To study the effect on risk management in capital adequacy ratio of The

Bijnore Urban Cooprative.

 To identify the effect of Basel II norms regarding risk management in banks.

 To study the impact of asset quality on credit risk management of the bank.

 To analyze actual credit exposure of the bank.

10
Sources of data

Data collection from secondary sources

 Annual Reports

 Company Records

 Data published on websites

 Journals

 Websites

 Manual book of Bank

 Brochures

 RBI website

Tools used for Data Collection

 Capital Adequacy Ratio

 Asset Quality

 ENPA

 Correlation

 Bar diagram

 Pie-chart

11
Period of Study

The period of study was completed in the month of June and August, 2011.

12
Limitation of the Study

 Availability of literature is limited. The data for the project is mainly

compiled from the Credit Risk Management Statements of bank.

 A comprehensive outlook of Credit Risk Management could be projected.

 Lack of availability of confidential data

 Unavailability of Financial Data restricted to know the financial status of the

company

 Time constraint

13
 INDUSTRY PROFILE

BANK

A Bank is a financial institution that serves as a financial intermediary. Banker or

Bank is a financial institution that acts as a payment agent for customers, and

borrows and lends money. Banks act as payment agents by conducting checking or

current accounts for customers, paying cheques drawn by customers on the bank,

and collecting cheques deposited to customers' current accounts. Banks also enable

customer payments via other payment methods such as telegraphic transfer,

Electronic Fund Transfer at Point Of Sales, and automated teller machine (ATM).

BANKING INDUSTRY

The Banking Industry was once a simple and reliable business that took deposits

from investors at a lower interest rate and loaned it out to borrowers at a higher

rate. However deregulation and technology led to a revolution in the Banking

Industry that saw it transformed. Banks have become global industrial

powerhouses that have created ever more complex products that use risk and

14
securitization in models. Through technology development, banking services have

become available 24 hours a day, 365 days a week, through ATMs, at online

bankings, and in electronically enabled exchanges where everything from stocks to

currency futures contracts can be traded .

The Banking Industry at its core provides access to credit. In the lenders case,

this includes access to their own savings and investments, and interest payments on

those amounts. In the case of borrowers, it includes access to loans for the

creditworthy, at a competitive interest rate.

Banking services include transactional services, such as verification of account

details, account balance details and the transfer of funds, as well as advisory

services that help individuals and institutions to properly plan and manage their

finances. Online banking channels have become key in the last 10 years. Mortgage

banking has been encompassing for the publicity or promotion of the various

mortgage loans to investors as well as individuals in the mortgage business. Online

banking services has developed the banking practices easier worldwide.

The collapse of the Banking Industry in the Financial Crisis, however, means that

some of the more extreme risk-taking and complex securitization activities that

15
banks increasingly engaged in since 2000 will be limited and carefully watched, to

ensure that there is not another banking system meltdown in the future.

16
RECENT DEVELOPMENTS IN THE GLOBAL BANKING

INDUSTRY

A total asset of global banking industry is about hundred trillion in US $. Banking

and Insurance industry was affected by financial crisis of 2008. The crisis began

with the collapse of Lehman Brothers in the US, which rapidly spread all over the

world resulting to great economic recession after post war era. The credit crunch

and liquidity situation further worsen the market resulting too volatile market

condition. Government and central banks all over the world took necessary steps to

save global economy and market condition.

Global banking and insurance industry is expected to recover rapidly from

current economic recession supported by the growth in emerging market

economies. BRIC nations offer great potential to insurance industry due to their

huge population.

Critical to success in the banking and insurance is the knowledge of market trends,

product mix shifts, customer needs and effective market strategies. Our continuous

networking with customers and competitors creates complete visibility thus

helping our customers make confident business decisions.

17
The global financial crisis will bring about the most significant changes to the

American and European banks have seen in decades. There will be fundamental re-

regulation of the industry, ownership structures are shifting towards heavier state

involvement and investor scrutiny is rising strongly. Equity ratios will be

substantially higher. As a result, growth and profitability of the banking sector as a

whole are likely to decline.

INDIAN BANKING INDUSTRY

The Indian banking sector has witnessed wide ranging changes under the influence

of the financial sector reforms initiated during the early 1990s. The approach to

such reforms in India has been one of gradual and non-disruptive progress through

a consultative process. The emphasis has been on deregulation and opening up the

banking sector to market forces. The Reserve Bank has been consistently working

towards the establishment of an enabling regulatory framework with prompt and

effective supervision as well as the development of technological and institutional

infrastructure. Persistent efforts have been made towards adoption of international

benchmarks as appropriate to Indian conditions. While certain changes in the legal

infrastructure are yet to be effected, the developments so far have brought the

Indian financial system closer to global standards.

18
Historical Background of Banking in India

From the early Vedic period the giving and taking of credit in one form or the

other have existed in Indian Society. The bankers are the pillars of the Indian

society. Early days bankers were called as indigenous bankers. The development

of modern banking has started in India since the days of East India

Company. These banks mostly had no capital of their own and depended entirely

on deposits in India.

Indian banking comprises of players who include public sector banks, State bank

of India and its associates, private sector banks, scheduled banks, cooperative

banks, regional rural banks, foreign banks etc. The banking industry worldwide is

transformed concomitant with a paradigm shift in the Indian economy from

manufacturing sector to nascent service sector. Indian banking as a whole is

undergoing a change. Indian banks have always proved beyond doubt their

adaptability to mould themselves into agile and resilient organizations.

The first bank in India, General Bank of India was established in 1786. From 1786

till today, the journey of Indian banking system can be segregated into three

distinct phases.

They are as follows

19
  Early phase from 1786 to 1969 of Indian Banks.

 Nationalization of Indian banks and up to 1991 prior to Indian banking

sector reforms.

 New phase of Indian banking system with the advent of Indian Financial &

Banking sector Reforms after 1991.

Journey of Indian Banking system can be segregated into 3 distinct phases:

PHASE I:

 1786- The General Bank of India, Bank of Hindustan, Bengal Bank

 1809- East India Company established Bank of Bengal

 1840- Bank of Bombay

 1843- Bank of Madras

 1865- Allahabad Bank

 1894- Punjab National Bank Ltd.

 1906-1913- Bank of India, Central bank of India, Bank of Baroda, Canara

Bank, Indian Bank, Bank of Mysore

 1920- Imperial Bank of India

 1935- RBI

 Growth was slow & experienced periodic failures b/w 1913- 1948.

20
  Approximately 1,100 banks, mostly small

 The Banking Companies Act, 1949

 Banking Regulation Act, 1949

PHASE II:

 Nationalization of Indian banks & up to 1991 prior to Indian Banking sector

reforms.

 1955- Nationalized Imperial Bank of India

 1960- 7 subsidiaries of SBI nationalized

 19th July, 1969- 14 banks nationalized

 1980- 7 banks nationalized (80% of banking segment – Gov. owned)

 Nationalization lead to increase in deposits & advances.

PHASE III:

 New phase of Indian Banking system with advent of Indian Financial &

Banking Sector Reforms after 1991.

 Introduced many products & facilities in banking sector.

 1991- Narasimham Committee was setup

 New phase brought in many changes:

 Foreign banks

21
  ATM stations

 Customer service

 Phone banking

 Net banking

CURRENT SCENARIO

 Business Environment:

The Indian economy is on a growth path with the real GDP growth upwards

of 9%. Industrial and services sectors have accelerated growth while growth

in agricultural sector has continued to remain moderate. Inflation remained

an area of concern. There was however robust build up of foreign exchange

resources - close to $ 200 bn. Stock markets were buoyant while the Indian

Rupee continued to appreciate against US Dollar.

 Banking Scenario:

The future of the banking sector appears quite promising though there are

quite a few challenges to contend with. The customer is more discerning and

has a much wider access to technology and knowledge. Hence the

22
 imperative need to roll out innovative customized products which will be the

key differentiator amongst banks. Time and distance have shrunk and the

internet has greatly facilitated global reach and therefore, evolution of

delivery channels and interactive services have been a boon to banking. The

core banking solution platform is being increasingly adopted by the banks to

fully realize the opportunity thrown up by technology.

Unlike the previous year, credit growth of the system was not as profound but quite

robust nonetheless and resources though not really scarce, were a bit expensive.

RBI initiated various measures such as increase of reverse repo rate, higher CRR

prescriptions etc. which were aimed at moderating credit growth. To certain sector

specific instructions have also been issued by RBI to rein in expansion of Bank

credit to such sectors. All this ushered in a period of increasing cost, declining

yields and consequently pressure on margins. Healthy rebalancing of the credit

portfolio was the answer to this syndrome.

23
HIGHLIGHTS OF THE BANKS PERFORMANCE

The year gone by was an exceptional year for the Bank in terms of most

parameters. Net profit surged by 60% from Rs. 701 crores to Rs. 1123 crores and

the global business mix crossed the milestone mark of Rs. 200,000 crores to touch

Rs. 207,000 crores. While deposits grew by 27.6% to Rs. 119882 crores, the share

of low cost deposits hovered at 40% and your bank continues to be one of the few

banks with such a large share of low cost deposits. Credit expansion was a robust

30% touching an aggregate level of Rs.86791 crores. The growth has been quite

broad based encompassing various segments such as agriculture, industry, SME

and retail. Foreign branches accounted for a smart rise of 34% in advances.

Priority Sector not only constitutes the Bank's social commitment, but is

recognized today as a profitable business opportunity. With almost two third

branches in rural and semi urban areas, the bank has ably risen to the occasion.

While agriculture clocked a growth of 25% and constituted 18.5% of net bank

credit, priority sector grew by almost 23% and accounted for 45.5% of net bank

credit. The Bank could for the first time record net NPA below 1%. In fact on the

back of robust cash recoveries of Rs. 752 crores and upgradation of Rs. 132 core,

gross NPA slid by Rs. 379 crores to Rs. 2100 crores. Recoveries together with

24
prudent provisioning saw Net NPA falling sharply to Rs. 632 crores from Rs. 970

crores resulting in a healthy loan loss coverage ratio.3

Challenges facing Banking Industry in India

The banking industry in India is undergoing a major transformation due to changes

in economic conditions and continuous deregulation. These multiple changes

happening one after other has a ripple effect on a bank (Refer fig. 2.1) trying to

graduate from completely regulated seller market to completed deregulated

customers market.

 Deregulation:

This continuous deregulation has made the Banking market extremely

competitive with greater autonomy, operational flexibility and decontrolled

interest rate and liberalized norms for foreign exchange. The deregulation of

the industry coupled with decontrol in interest rates has led to entry of a

number of players in the banking industry. At the same time reduced

corporate credit off take thanks to sluggish economy has resulted in large

number of competitors batting for the same pie.

 New rules:

25
 As a result, the market place has been redefined with new rules of the game.

Banks are transforming to universal banking, adding new channels with

lucrative pricing and freebees to offer. Natural fall out of this has led to a

series of innovative product offerings catering to various customer segments,

specifically retail credit.

 Efficiency:

This in turn has made it necessary to look for efficiencies in the business.

Banks need to access low cost funds and simultaneously improve the

efficiency. The banks are facing pricing pressure, squeeze on spread and

have to give thrust on retail assets.

 Diffused Customer loyalty:

This will definitely impact Customer preferences, as they are bound to react

to the value added offerings. Customers have become demanding and the

loyalties are diffused. There are multiple choices, the wallet share is reduced

per bank with demand on flexibility and customization. Given the relatively

low switching costs; customer retention calls for customized service and

hassle free, flawless service delivery.

 Misaligned mindset:

26
 These changes are creating challenges, as employees are made to adapt to

changing conditions. There is resistance to change from employees and the

Seller market mindset is yet to be changed coupled with Fear of uncertainty

and Control orientation. Acceptance of technology is slowly creeping in but

the utilization is not maximized.

 Competency Gap:

Placing the right skill at the right place will determine success. The

competency gap needs to be addressed simultaneously otherwise there will

be missed opportunities. The focus of people will be on doing work but not

providing solutions, on escalating problems rather than solving them and on

disposing customers instead of using the opportunity to cross sell.

Strategic options with banks to cope with the challenges

Leading players in the industry have embarked on a series of strategic and tactical

initiatives to sustain leadership. The major initiatives include:

 Investing in state of the art technology as the back bone to ensure reliable

service delivery

27
  Leveraging the branch network and sales structure to mobilize low cost

current and savings deposits

 Making aggressive forays in the retail advances segment of home and

personal loans

 Implementing organization wide initiatives involving people, process and

technology to reduce the fixed costs and cost per transaction

 Focusing on fee based income to compensate for squeezed spread, (e.g.

CMS, trade services)

 Innovating Products to capture customer ‘mind share’ to begin with and later

the wallet share

 Improving the asset quality as per Base II norms

In this era of increasing competition, banks will have to benchmark themselves

against the best in the world. For a resilient and strong banking and financial

system, the banks need to tackle issues like increase in profitability, efficiency, and

productivity while achieving economies of scale through consolidation and

exploring available cost-effective solutions.

28
Major Players in the Indian Banking Industry:

Indian banking has grown much stronger than its Asian counterparts in recent

years, in terms of both performance indices and product range. The continued

deregulation of deposits and interest on loans have led to a greater understanding

of capital structure, increased competition and autonomy, as well as technological

upgradation.

56 of India’s domestic banks account for 95% of assets. In terms of net profit, the

State Bank of India is the main bank followed by ICICI bank, Punjab National

bank and Canara Bank (Figure 7.30) .

29
Fig: 2.1 Indian Top Five Player in Banking

30
COMPANY PROFILE

31
 THE BIJNORE URBAN COOPRATIVE

A co-operative bank, which started small in the district Bijnore, has now emerged

to become the first and largest multi-state Urban Co-operative Bank in Uttar

Pradesh. The Bijnore Urban Cooprative Bank is not just focused on being

completely technology driven but has dedicated itself to become an approachable

solution to all the banking needs of the modern Indian user.

Vision

To serve the lowest strata of society with the best products at the best prices and

the best technology- driven customer service, at the same time being a model

employer for the national industry and emerging as a global role model in the small

banking sector.

Message from the team

We aim to dedicate our energy towards serving the rural and urban sector in the

most transparent manner and providing them with modern technology driven

services at the most affordable rates. Also, we possess a team of dedicated

professionals who wholeheartedly dedicate their efforts to provide the best quality

of customer services.

32
Board of Directors

Always inspiring us and driving us towards success is a team that is determined,

focused, exemplary and has constantly acted as our guiding light.

Mr. Yashvir Kumar Gupta – Chairman

Mr. S.P. Gulati – Vice Chairman

Mr. Sudhakar Agarwal – Director

Mr. V.K.Dhingra – Director

Mr. Sanjay Gupta – Director

Dr. Sanjeev Mittal – Director

Mr. Sarvesh Singhal – Director

Dr. Kamal Kant Gupta – Director

Mr. Arun Kumar Malik – Director

Mr. Satyasheel Rao – Director

Mr. Suveer Kumar Gupta – MD & CEO

Corporate Tie-Ups

The Bijnore Urban Cooprative Bank ensures that all clients are secured and offered

with the best of policies and arrangements. That’s why we have corporate tie-ups

33
with various well renowned and trusted organizations for you to choose from and

select the best policy.

Oriental Insurance Company Limited: The Bijnore Urban Cooprative bank tied up

with Oriental Insurance to provide General Insurance policies to its clients.

Established in 1947, Oriental Insurance Company has more than 1800 operating

offices and covers policies to serve both the rural and urban sector.

Star Health and Allied Insurance Company: The Bijnore Urban Cooprative Bank

has tied up with Star Health and Allied Insurance Company to provide Health

Insurance policies to its clients. Established in 2006, Star Health and Allied

Insurance Company is solely dedicated to providing medical insurance policies at

affordable rates to the public.

ICICI Lombard General Insurance Company Limited: ICICI Lombard General

Insurance Company Ltd is rated as one of the largest private sector general

insurance companies in India. They offer insurance coverage for auto, health,

travel, home and more.

LIC (Life Insurance Corporation of India): The Bijnore Urban Cooprative Bank

has tied up with LIC to provide Life insurance policies to its clients. Being one of

the most trusted and well-renowned life insurers in the country, LIC is one of the

top choices for timely settlement and claims.

34
Bajaj Allianz: The Bijnore Urban Cooprative Bank has tied up with Bajaj Allianz

to provide life insurance policies to its clients.

Awards and Recognition

Striving towards excellence every year

When efforts are recognized and acknowledged, it is bliss. Our team at The Bijnore

Urban Cooprative Bank works immensely hard to deserve the accolades it has

received over the years.

The Bijnore Urban Cooprative Bank has received The Best I.T. Head FCBA

Award 2016.

The Bank has been adjudged with India’s Top 100 Co- operative Banks 2015

Awards and received ‘Certificate of Excellence’ by BitStreamMediawoks, one of

the fastest growing technology media, events and integrated marketing companies

in the Asia Pacific region.

The Bank has received “Young Achiever’s Award” by Hindustan Media Ventures,

a leading newspaper in North India.

Mr. Suveer Kumar Gupta, the MD & CEO of the Bank has been awarded The Best

Youth CEO under Mid-Sized Co-operative Bank category in the FCBA Awards for

2015 by Banking Frontiers – one of the leading magazines in the coop – banking

sector.

35
MAIN OBJECTIVES AND BUSINESS OF THE BANK

1. To establish and carry on the business of banking al registered office of the

company and at such branches

2. Carrying on the business of accepting deposit of money on current account

and to carry on the business of banking

3. The borrowing, raising or taking up money, the lending or advancing of

money either upon or without security, the drawing, making, accepting,

discounting, buying, selling, collecting and dealing in the Bill of exchange,

promissory notes, coupons and other instruments and securities, the buying,

selling and dealing in bullion and foreign exchange, dealing in other

instruments like share, bond, etc.

4. Contracting for public and private loans and negotiating the issuing it

5. Acts as the agent of the Government or local authorities or any other than

the business of managing agent.

6. Carrying out all such things as are incidental or conductive to te promotion

or advancement of the business of the company

7. To undertake and carry on all other forms of business as may be permissible

for banking company

36
From the modest beginning of the bank in 1929, today the bank has reached to the

status of one of the most performing private sector banks in the country working

through network of 584 branches. Just like any other bank, reforms made its

impacts on The Bijnore Urban Cooprative also.

There are a number of departments functioning in the working of the bank. Every

department is having its own functional areas, powers and responsibilities.

The Various Departments Include:

 Human Resource Development Department

 Training and Development Department

 Support Service Department

 Corporate Financial Management Department

 Integrated Risk Management Department

 Computer Department

 Secretarial Department

 Credit Control Department

 Inspectiogn Department & Vigilance Department

 Accounts Department

37
  Marketing Department

 Legal Department

Logo and Corporate colour

New logo and corporate colour of the bank was launched in 5 thMarch, 2007. The

new logo should pronounce the birth of next generation bank and the corporate

colour should match bank work to the stake holders and services to bank

customers.

‘S’ projects a Safe, Solid, Smart, Strong, Secular, Shinning, Schooled, Seasoned,

and Straight forward bank, Cardinal Red represents Energy, Creativity, Warmth,

and Love.

The credit rating system is essentially one point indicator of an individual credit

exposure and is used to identify, measure, and monitor the credit risk of individual

proposal. At the whole bank level, credit rating system enables tracking the health

of banks entire credit portfolio.

38
Most banks in India have put in place the system of internal credit rating. While

most of the banks have developed their own models, a few banks have adopted

credit rating models designed by rating agencies. Credit rating models take into

account various types of risks viz. financial, industry and management, etc

associated with a borrowal unit. The exercise is generally done at the time of

sanction of new borrowal account and at the time of review/renewal of exercising

credit facilities.

39
 CREDIT RISK

MANAGEMENT
THEORITICAL BACKGROUND

In course of banks lending involves a number of risks. In addition to the risks

related to creditworthiness of the counterparty, the banks are also exposed to

interest rate, forex and country risks.

Unlike market risks, where the measurement, monitoring, control etc. are to a great

extent centralized. Credit risks management is a decentralized function or activity.

This is to say that credit risk taking activity is spread across the length and breadth

of the network of branches, as lending is a decentralized function. Proper a

sufficient care has to be taken for appropriate management of credit risk.

Credit risk is an investor's risk of loss arising from a borrower who does not make

payments as promised. Such an event is called a default. Another term for credit

risk is default risk.

40
Credit risk or default risk involves inability or unwillingness of a customer or

counterparty to meet commitments in relation to lending, trading, hedging,

settlement and other financial transactions.

Definition:

Credit Risk may be defined as, “the risk of default on the part of the borrower”.

The lender always faces the risk of the counter party not repaying the loan or not

making the due payment in time. This uncertainty of repayment by the borrower is

also known as default risk.

Aim of CRM:

The main aim of CRM is to maximize a bank's risk-adjusted rate of return by

maintaining credit risk exposure within acceptable parameters.

Objective of CRM:

41
The objective of credit risk management is to minimize the risk and maximize

banks risk adjusted rate of return by assuming and maintaining credit exposure

within the acceptable parameters.

The Credit Risk is generally made up of:-

1. Transaction risk or default risk, and

2. Portfolio risk.

The portfolio risk in turn comprises intrinsic and concentration risk.

The credit risk of a bank’s portfolio depends on:-

1. External factors: The external factors are the state of the economy, rates and

interest rates, trade restrictions, economic sanctions, wide swings in

commodity/equity prices, foreign exchange rates and interest rates, trade

restrictions, economic sanctions, Government policies, etc.

2. Internal factors: The internal factors are deficiencies in absence of prudential

credit concentration limits, loan policies/administration, inadequately defined

lending limits for Loan Officers/Credit Committees, deficiencies in appraisal of

borrowers financial position, excessive dependence on collaterals and inadequate

risk pricing, absence of loan review mechanism and post sanction surveillance, etc.

42
Another variant of credit risk is counterparty risk. The counterparty risk arises

from non-performance of the trading partners. The non-performance may arise

from counterparty’s refusal/inability to perform due to adverse price movements or

from external constraints that were not anticipated by the principal. The

counterparty risk is generally viewed as a transient financial risk associated with

trading rather than standard credit risk.

The management of credit risk should receive the top management’s attention and

the process should encompass:

Measurement of risk through credit rating/scoring:

(a) Quantifying the risk through estimating expected loan losses i.e. the amount of

loan losses that bank would experience over a chosen time horizon (through

tracking portfolio behavior over 5 or more years) and unexpected loss (through

standard deviation of losses or the difference between expected loan losses and

some selected target credit loss quantile);

(b) Risk pricing on a scientific basis; and

(c) Controlling the risk through effective Loan Review Mechanism and portfolio

management.

43
Committee for CRM:

The credit risk management process should be articulated in the bank’s Loan

Policy, duly approved by the Board. Each bank should constitute a high

level Credit Policy Committee, also called Credit Risk Management

Committee or Credit Control Committee etc. to deal with issues relating to

credit policy and procedures and to analyze, 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 standards and

benchmarks, delegation of credit approving powers, prudential limits on large

credit exposures, asset concentrations, standards for loan collateral, portfolio

management, loan review mechanism, risk concentrations, risk monitoring and

evaluation, pricing of loans, provisioning, regulatory/legal compliance, etc.

44
Credit Risk Management Department (CRMD)

Concurrently, each bank should also set up Credit Risk Management

Department (CRMD), independent of the Credit Administration Department. The

CRMD should enforce 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 and conduct

comprehensive studies on the environment to test the resilience of the loan

portfolio.

The effective management of credit risk is essential to the long-term success of any

banking organization.

45
Risk is a multi-facet concept. In the context of construction industry, it could be the likelihood of

the occurrence of a definite event/factor or combination of events/factors which occur during the

whole process of construction to the detriment of the project a lack of predictability about

structure outcome or consequences in a decision or planning situation, the uncertainty associated

with estimates of outcomes – there is a chance that results could be better than expected as well

as worse than expected etc. In addition to the different definitions of risk, there are various ways

for categorizing risk for different purposes too. Some categorize risks in construction projects

broadly into external risks and internal risks while others classify risk in more detailed categories

of political risk, financial risk, market risk, intellectual property risk, social risk, safety risk, etc.

The classification is shown in the figure 2.1. The typology of the risks seems to depend mainly

upon whether the project is local (domestic) or international. The internal risks are relevant to all

projects irrespective of whether they are local or international. International projects tend to be

subjected to the external risk such as unawareness of the social conditions, economic and

political scenarios, unknown and new procedural formalities, regulatory framework and

governing authority, etc.

Risk is inherent and difficult to deal with, and this requires a proper management framework

both of theoretical and practical meanings. Risk management is a formal and orderly process of

systematically identifying, analysing, and responding to risks throughout the life-cycle of a

project to obtain the optimum degree of risk elimination, mitigation and/or control. Significant

improvement to construction project management performance may be achieved from adopting

the process of risk management.

The types of exposure to risk that an organization is faced with are wide-ranging and vary from

one organization to another. These exposures could be the risk of business failure, the risk of

46
project financial losses, the occurrences of major construction accidents, default of business

associates and dispute and organization risks. It is desirable to understand and identify the risks

as early as possible, so that suitable strategy can be implemented to retain particular risks or to

transfer them to minimize any likely negative aspect they may have.

Figure 2.1 Hierarchical risks involved in a project

The risk management process begins with the initial identification of the relevant and potential

risks associated with the construction project. It is of considerable importance since the process

of risk analysis and response management may only be performed on identified potential risks.

Risk analysis and evaluation is the intermediate process between risk identification and

management. It incorporates uncertainty in a quantitative and qualitative manner to evaluate the

potential impact of risk. The evaluation should generally concentrate on risks with high

probabilities, high financial consequences or combinations there of which yield a substantial

financial impact. Once the risks of a project have been identified and analysed, an appropriate

method of treating risk must be

adopted. Within a framework of risk management, contractors also should decide how to handle

or treat each risk and formulate suitable risk treatment strategies or mitigation measures. These

mitigation measures are generally based on the nature and potential consequences of the risk.

The main objective is to remove as much as possible the potential impact and to increase the

level of control of risk. More the control of one mitigation measure on one risk, the more

effective the measure is. The process of risk management does not aim to remove completely all

risks from a project. Its objective is to develop an organized framework to assist decision makers

to manage the risks, especially the critical ones, effectively and efficiently.

47
2.2 PROJECT RISK MANAGEMENT

Risk management in a project encompasses identifying influencing factors that could potentially

negatively impact a project’s cost schedule or quality baselines; quantifying the associated

potential impact of the identified risk; and implementing measures to manage and mitigate the

potential impact. The riskier the activity is, the costlier the consequences if the wrong decision is

made. Businesses would like to quantify risk for many reasons. Knowing how much risk is

involved will help decide if costly measures to reduce the level of risk are justifiable. It can also

help to decide if sharing the risk with an insurance company is justified. Some risks, such as

natural disasters, are virtually unavoidable and affect many people. All choices in life involve

risk. Risks cannot be totally avoided, but the choice can be made so that risk is minimized.

Risk = Probability of an event × Consequence of loss due to that event

Per event Graphical representation of risk ratings can be made by plotting graph between

probability and seriousness, Figure 2.2 explains this.

Figure 2.2 Graphical representations of risk rating

2.3 RISK ASSESSMENT

Risk assessment is defined in this study as a technique that aims to identify and estimate risks to

personnel and property impacted upon by a project. Traditional risk assessment for construction

has been synonymous with probabilistic analysis. Such approaches require events to be mutually

exclusive, exhaustive, and conditionally independent. However, construction involves many

variables, and it is often difficult to determine causality, dependence and correlations. As a

result, subjective analytical methods that rely on historical information and the experiences of

48
individuals and companies have been used to assess the impact of construction risk and

uncertainty.

2.4 DETERMINATION OF RISK

There are mainly two methods to determine risk, namely the quantitative and the qualitative

approach. The quantitative approach relies on statistical calculation to determine risk, its

probability of occurrence, and its impact on a project. A common example of the quantitative

approach is decision tree analysis, applying probabilities to two or more outcomes. Another

approach is the Monte Carlo simulation, which generates a value from a probability distribution

and other factors.

The qualitative approach relies on judgments, using criteria to determine outcome. A common

qualitative approach is a precedence diagramming method, which uses ordinal numbers to

determine priorities and outcomes. An example of a qualitative approach is to list in descending

order specific processes of a project, the risk or risks associated with each process, and the

control or controls that may or should exist for each risk.

2.5 RISK EXPOSURE

Several factors can expose projects to higher than normal risk.

• Team size -The larger the team, the higher the probability of a problem arising. For example,

communications can be more difficult as the number of participants increases. The number of

interactions among people increases and thus they require greater coordination.

49
• History -Newer projects are riskier because the processes have not been refined. The more

times a project of a similar nature has been done, the greater the likelihood of success.

• Staff expertise and experience -If the staff lacks direct experience and knowledge of the

subject, people will struggle to learn as they go along, robbing the project of time and possibly

introducing errors.

• Complexity -The more sophisticated a project, there is a greater the opportunity of a mistake or

problem.

• Management stability -Management stability implies unity of direction, which in turn means

reaching goals. Management irritability can lead to unrealistic scheduling and inefficient use of

resources.

• Time compression -If a schedule is highly compressed, then the risks are magnified. Having

more time means greater flexibility and the opportunity to prevent or mitigate the impact of

errors.

• Resource availability -The more resources that are available, the greater the ability to respond

to problems as they arise. For example, more money brings greater ability to secure equipment or

people when needed. Plentiful resources, of course, do not guarantee protection from risk;

however they do provide the means to respond to it.

2.6 GENERAL TYPES OF RISKS

Risks can be viewed as business, technical, or operational. A technical risk is the inability to

build the product that will satisfy requirements. An operational risk is the inability of the

customer to work with core team members. Risks are either acceptable or unacceptable. An

50
acceptable risk is one that negatively affects a task on the non-critical path. An unacceptable risk

is one that negatively affects the critical path. Risks are either short or long term. A short-term

risk has an immediate impact, such as changing the requirements for a deliverable. A long-term

risk has an impact sometime in the distant future, such as releasing a product without adequate

testing. Risks are viewed as either manageable or unmanageable. A manageable risk is one you

can live with, such as a minor requirement change. An unmanageable risk is impossible to

accommodate, such as a huge turnover of core team members. Finally, risks are either internal or

external. An internal risk is peculiar to a project, such as the inability to get the parts of a product

to

work. An external risk originates from outside the scope of the project, such as when senior

management arbitrarily cuts funding by 20 percent.

• Delivery/operation risk

The ability to overcome the risk of delivering and operating the project as conceived. This risk

factor involves issues or concerns associated with actual engineering, procurement, construction

execution, and operation of the project, including non-traditional approaches such as a public

owner’s use of design-build contracts.

• Technology risk

The ability to overcome the technological risks of the project. This risk factor involves issues or

concerns associated with the technologies involved in the execution methods and operational

technology of the project.

51
• Financial risk

The ability to overcome the financial risk of the project through to final completion and

operation. This risk factor involves issues or concerns associated with the financing of the

project, including the execution period and operations or equity financing.

• Procurement-contractual risk

The ability to overcome the risks associated with the procurement of, or contracting for, the

execution and operation of the project. This risk factor involves issues or concerns associated

with the contractual and procurement approaches-systems-processes used for both project

execution and operation.

• Political risk

The ability to overcome the political risk of the project, including local, state, and national

political opposition and code and regulatory impediments. This risk

factor involves issues or concerns associated with the local, regional, and national political and

regulatory situation confronting the project.

• Environmental risk

The ability to overcome the environmental risks of the project. This risk factor involves issues or

concerns associated with the environmental problems, concerns, and activities confronting the

project during the project execution and the project operation.

• Social risk

52
The ability to overcome the social risks of the project. This risk factor involves issues or

concerns associated with the social and cultural impacts of the project to the community and

region within which it is to be located.

• Economic risk

The ability to overcome the economic impact risks of the project. This risk factor involves issues

or concerns associated with the macroeconomic impact of the project to the community and

region within which it is to be located.

• Reserves risk -an operations risk factor

Addresses the extent of reserves and contingency to be transported, and not only the anchor field,

but also reserve risk associated with the prospects and discoveries in the area.

• Credit risk -a financial risk factor

Customer credit risk is a new risk issue stemming from the large inflow of small capital

independents and the formation of many Limited Liability Corporations without any real assets.

• Engineering risk-a technology risk factor

The exploration and production requirements are continuously pushing the deepwater envelope.

A large risk consideration is that the meteorological-ocean data current and waves is empirical

and is changing with new measurement information becoming available every year.

53
• Materials risks -a procurement risk factor

The huge costs of projects are driving the search for the cheapest material that meets

specifications which is to be fabricated in a location that has the least cost-often in different

countries.

• Weather risks -an environmental risk factor

Wave currents (storm risks) are plaguing many off-shore projects, yet are increasingly

uninsurable.

• Insurance risks -an economic risk factor

The global reinsurance market currently has severe capital restrictions that are restricting access

to project insurance.

• People risks -a social risk factor

Changing social relationships and forced cultural changes of linear projects, like pipe-lines, are

destabilizing local support and long term operability conditions.

• Interface risks -a delivery risk factor

The risk that several different contractors working on different segments of a project are not

being managed in the design phase, as more work must be executed on a fast track basis under

design-build delivery methods.

54
• Underground risks -a technology risk factor

The unknowns underground will always be a source of risk that affects execution resources and

methodologies.

• Joint venture risks -a financial risk factor

Projects requires many stakeholders to be joint ventures to spread financial risk, which is also

forcing differing institutional approaches and cultures to clash and increasing, not diminishing,

financial risk sharing, although such risk issues are not fundamentally analyzed when joint

ventures are established .

• Design-build risks -a procurement/contractual risk factor

Execution management practices that are not accustomed to design-build stakeholder

expectations and industry practices are reducing design-build benefits and exacerbating impacts

of risks as they emerge during project execution, especially because many of the key “players”

are over-committed.

• Security risks -a political risk factor

Projects of all types are required in many unstable parts of the world, but the militant and

terrorist threat and sophistication is well beyond that heretofore experienced.

• “Green” risks -an environmental risk factor:

55
Projects experience increased environmental concerns in developed, developing, and

underdeveloped countries with equal ferocity, which impacts acceptable construction

methodologies and resource use.

• Right of way risks -a social risk factor

Right of way issues are increasingly causing delay as through indigenous populations

experiencing broader democratic approaches are asserting rights to extract social improvement

with consequently larger cost to projects.

• Payment risks -an economic risk factor

In both developing and underdeveloped countries, projects are financed privately through

concessions that require payment for the commodity

transported, which requires both a risky impact on the economy and a culture shift from the

perception of having to pay for what is considered a right.

2.7 SOURCES OF RISK IN CONSTRUCTION PROJECTS

The common sources of risk in construction projects are listed below:

• Misunderstanding of contract terms and conditions.

• Design changes and errors

• Poorly coordinated work

• Poor estimates

56
• Poorly defined roles and responsibilities

• Unskilled staff

• Natural hazards

• Political and legal problems

2.8 OVERVIEW OF RISK MANAGEMENT

Project Risk Management includes the processes concerned with identifying, analyzing, and

responding to project risk. It includes maximizing the results of positive events and minimizing

the consequences of adverse events. Figure 2.3 provides an overview of the following major

processes:

15

Figure2.3 Overview Risk Management

The processes shown in figure 2.3 interact with each other and with the processes in the other

knowledge areas as well. Each process may involve effort from one or more individuals or

groups of individuals based on the needs of the project. Each process generally occurs at least

once in every project phase. Risk identification and risk quantification are sometimes treated as a

single process, and the combined process may be called risk analysis or risk assessment. Risk

response development is sometimes called response planning or risk mitigation. Risk response

57
development and risk response control are sometimes treated as a single process, and the

combined process may be called risk management (PMI 1996).

2.9 MAJOR PROCESSES OF PROJECT RISK MANAGEMENT

Risk management involves four processes, namely

1. Risk Identification Determining which risks are likely to affect the project and documenting

the characteristics of each.

2. Risk Quantification Evaluating risks and risk interactions to assess the range of possible

project outcomes.

3. Risk Response Development Defining enhancement steps for opportunities and responses to

threats.

4. Risk Response Control Responding to changes in risk over the course of the project.

2.9.1 Risk identification

Risk identification consists of determining which risks are likely to affect the project and

documenting the characteristics of each. Risk identification is not a onetime event; it should be

performed on a regular basis throughout the project. Risk identification should address both

internal and external risks. Internal risks are things that the project team can control or influence,

such as staff assignments and cost estimates. External risks are things beyond the control or

influence of the project team, such as market shifts or government action. Risk involves only the

58
possibility of suffering harm or loss. In the project context, however, risk identification is also

concerned with opportunities (positive outcomes) as well as threats (negative outcomes).

2.9.1.1 Tools and techniques for risk identification

Risk can be identified by the following methods: (A.K.Garg 2005)

1. Brainstorming

2. Workshops

3. Interviews

4. Questionnaire survey

5. Feed back from similar projects

6. Use of specialists

7. Previous experience

59
2.9.2 Risk quantification

Risk quantification involves evaluating risks and risk interactions to assess the range of possible

project outcomes. It is primarily concerned with determining which risk

events warrant response. It is complicated by a number of factors including, but not limited to:

• Opportunities and threats can interact in unanticipated ways (e.g., schedule delays may

force consideration of a new strategy that reduces overall project duration).

• A single risk event can cause multiple effects, as when late delivery of a key component

produces cost overruns, schedule delays, penalty payments, and a lower-quality product.

• Opportunities for one stakeholder (reduced cost) may be threats to another (reduced

profits).

• The mathematical techniques used can create a false impression of precision and

reliability.

2.9.2.1 Tools and techniques for risk quantification

• Expected monetary value. Expected monetary value, as a tool for risk quantification, is

the product of two numbers:

• Risk event probability-an estimate of the probability that a given risk event will occur.

60
• Risk event value-an estimate of the gain or loss that will be incurred if the risk event does

occur. Distort the result by equating a small loss with a high probability to a large loss with a

small probability. The expected monetary value is generally used as input to further analysis

(e.g., in a decision tree) since risk events can occur individually or in groups, in parallel or in

sequence.

• Statistical sums. Statistical sums can be used to calculate a range of total project costs

from the cost estimates for individual work items. (Calculating a range of probable project

completion dates from the activity duration estimates requires simulation) The range of total

project costs can be used to quantify the relative risk of alternative project budgets or proposal

prices.

• Simulation. Simulation uses a representation or model of a system to analyze the behaviour or

performance of the system. The most common form of simulation on a project is

schedule simulation using the project network as the model of the project. Most schedule

simulations are based on some form of Monte Carlo analysis. This technique, adapted from

general management, “performs” the project many times to provide a statistical distribution of

the calculated results. The results of a schedule simulation may be used to quantify the risk of

various schedule alternatives, different project strategies, different paths through the network, or

individual activities. Schedule simulation should be used on any large or complex project since

traditional mathematical analysis techniques such as the Critical Path Method (CPM) and the

Program Evaluation and Review Technique (PERT) do not account for path convergence and

thus tend to underestimate project durations. Monte Carlo analysis and other forms of simulation

61
can also be used to assess the range of possible cost outcomes. Decision trees. A decision tree is

a diagram that depicts key interactions among decisions and associated chance events as they are

understood by the decision maker. The branches of the tree represent either decisions or chance

events are examples of a decision tree.

62
Methods of Credit Risk:

Some of the commonly used methods to measure credit risk are:

1. Ratio of non performing advances to total advances;

2. Ratio of loan losses to bad debt reserves;

3. Ratio of loan losses to capital and reserves;

4. Ratio of loan loss provisions to impaired credit;

5. Ratio of bad debt provision to total income; etc.

Managing credit risk has been a problem for the banks for centuries. As had been

observed by John Medlin, 1985 issue of US banker.

“Balancing the risk equation is one of the most difficult aspects of banking. If you

lend too liberally, you get into trouble. If you don’t lend liberally you get

criticized”.

Over the tears, bankers have developed various methods for containing credit risk.

The credit policy of the banks generally prescribes the criteria on which the bank

extends credit and, inter alia, provides for standards.

63
DATA ANALYSIS &

INTERPRETATION

64
 Analysis of Data

1) CAPITAL ADEQUACY RATIO

Capital adequacy ratios (CAR) are a measure of the amount of a bank's core

capital expressed as a percentage of its risk-weighted asset.

Capital adequacy ratio is the ratio which determines the bank's capacity to meet the

time liabilities and other risks such as credit risk, operational risk, etc. In the most

simple formulation, a bank's capital is the "cushion" for potential losses, and

protects the bank's depositors and other lenders. Banking regulators in most

countries define and monitor CAR to protect depositors, thereby maintaining

confidence in the banking system.

CAR can be viewed from two aspects:

a) Total advancement to total assets

b) Total investment to total assets

Capital Adequacy Ratio is defined as,

CAR = Capital

Risk Weighted Assets

65
 Table No:5.1Capital Adequacy Ratio

YEAR 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

BASEL I 11.08 13.8 13.89 14.73 13.17

BASEL II 14.76 15.39 14.01

Interpretation: The CRAR has declined to 13.17 in 2010-11 which was 14.73 in

2009-10. Thus, it is showing slight inefficient management of credit risk as per

Basel norms.

Chart No:5.1 Capital Adequacy Ratio

18

16

14

12

10
BASEL I
8
BASEL II
6

0
2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

66
 a) Total Advances to Total Assets

Table No:5.2 Total Advances to total assets

(Crore)

Year Advances Assets Ratio

2006-2007 7,919 13,653 0.58

2007-2008 10,454 17,090 0.61

2008-2009 11,848 20,379 0.58

2009-2010 15,823 25,534 0.62

2010-2011 20,489 32,820 0.62

Interpretation: The ratio is showing an increasing trend at 0.62 in 2010-11 which

implies proper balancing of advances & assets.

Chart No:5.2 Total Advances to total assets

67
 Ratio
0.63
0.62 0.62 0.62
0.61 0.61
0.6
0.59
Ratio
0.58 0.58 0.58
0.57
0.56
0.55
2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

b) Total Investment to Assets

Table No:5.3 Total Investments to Assets

(Crore)

Year Investment Assets Ratio

2006-2007 3430 13,653 0.25

2007-2008 4572 17,090 0.27

2008-2009 6075 20,379 0.3

2009-2010 7156 25,534 0.28

2010-2011 8924 32,820 0.27

68
Interpretation: The ratio is showed an increasing trend till from 2006-07 to 2008-

09 and from 2009-10 it decreased; it shows inefficiency in maintenance of

investments & assets

Chart No: 5.3: Total Investments to Assets

Ratio
0.35

0.3 0.3
0.27 0.28 0.27
0.25 0.25

0.2

0.15 Ratio

0.1

0.05

0
2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

69
2) ASSET QUALITY

Asset quality is related to the left-hand side of the bank balance sheet. Bank

managers are concerned with the quality of their loans since that provides

earnings for the bank. Loan quality and asset quality are two terms with

basically the same meaning. Government bonds and T-bills are considered as

good quality loans whereas junk bonds, corporate credits to low credit score

firms etc. are bad quality loans. A bad quality loan has a higher probability of

becoming a non-performing loan with no return.

This can be calculated using two ratios:

a) Net NPA’s to total assets, and

b) Net NP’s to total advances.

70
a) Net NPA’s to Total Assets

This ratio helps in identifying the quality of the asset of the bank. It can be

calculated by dividing Net NPA by Total assets. Lesser the ratio shows the

good quality of the asset.

Table No:5.4:Net NPA’s to Total Assets

(Crore)

Year Net NPA Total Assets Percentage

2006-2007 77.81 13,653 0.56

2007-2008 33.97 17,090 0.19

2008-2009 134.31 20,379 0.66

2009-2010 61.57 25,534 0.24

2010-2011 60.02 32,820 0.18

Interpretation: The percentage of Net NPA to Total assets has decreased to 0.18%

during 2010-11. This indicates a sound asset quality.

Chart No:5.4: Net NPA’s to Total Assets

71
 Percentage
0.7
0.66
0.6
0.56
0.5

0.4

0.3 Percentage
0.24
0.2 0.19 0.18
0.1

0
2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

b) Net NPA’s to Total Advances

Net NPA shows the level of net NPA on net advances given by the bank. It

can be calculated by dividing net NPA by net advances. Higher the ratio

more will be the alarming situation for the bank and vice-versa.

Table No:5.5: Net NPA’s to Total Advances

(Crore)

Year Net NPA Advances Percentage

2006-2007 77.81 7,919 0.98

2007-2008 33.97 10,454 0.32

2008-2009 134.31 11,848 1.13

2009-2010 61.57 15,823 0.39

2010-2011 60.02 20,489 0.29

72
Interpretation: The percentage is showing an decreasing trend from the period

2008-2009 to 2010-11, 0.29% due to good management.

Chart No: 5.5: Net NPA’s to Total Advances

Percentage
1.2
1.13
1 0.98

0.8

0.6
Percentage
0.4 0.39
0.32 0.29
0.2

0
2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

3) EARNING PER NON PERFORMING ASSETS

An NPA is defined as a loan asset, which has ceased to generate any income for

a bank whether in the form of interest or principal repayment.

Exposure to Credit Risk

73
  The bank can quantify the credit risk on the basis of the level of NPA’s. The

following expression quantifies the credit risk of the bank.

Earning per Non Performing Asset ( ENPA) can be calculated using the following

formulae:

ENPA = (EBT/TA) / (NPA’s/ TA)

ENPA- Earning per Non Performing Assets

NPA – Non Performning Assets

TA - Total Assets

EBT– Earnings before tax

74
Credit Risk ratio of The Bijnore Urban Cooprative

Table No:5.6: Earning per Non Performing Assets

(Crore)

Year EBT TA NPA ENPA

2006-2007 160.33 13,653 77.81 2.2

2007-2008 246.95 17,090 33.97 7

2008-2009 303.23 20,379 134.31 2.14

2009-2010 381.32 25,534 61.57 7.2

2010-2011 467.05 32,820 60.02 7

Interpretation: The ENPA during 2010-11 has come down to 7 from 7.2

Chart No:5.6: Earning per Non Performing Assets

ENPA
8
7 7 7.2 7
6
5
4
ENPA
3
2 2.2 2.14

1
0
2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

75
4) CORRELATION

Correlation refers to any of a broad class of statistical relationships involving

dependence. The correlation coefficient is a measure of linear association

between two variables. Use the Correlation transformer to determine the

extent to which changes in the value of an attribute (such as length of

employment) are associated with changes in another attribute (such as

salary).

Following are some of the correlation analysis made:

a) Correlation between deposits and advances:

It shows the relationship between deposits and advances in the bank over a

period of time.

b) Correlation between deposits and net profit:

It shows the relationship between deposits and net profit in the bank over a

period of time.

c) Correlation between net profit and advances:

76
 It shows the relationship between net profit and advances in the bank over a

period of time.

a) Correlation between Deposits and Advances

Table No: 5.7: Correlation between Deposits and Advances

(Crore)

Year Deposits Advances

2006-2007 12240 7,919

2007-2008 15156 10,454

2008-2009 18093 11,848

2009-2010 23011 15,823

2010-2011 29720 20,489

Interpretation: The deposits have increased over the years thus leading to an

increase in the advances.

Chart No: 5.7: Correlation between Deposits and Advances

77
 35000
29720
30000

25000 23011
20,489
20000 18093
15156 15,823 Deposits
15000 12240 Advances
11,848
10,454
10000 7,919

5000

0
2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

b) Correlation between Deposits and Net Profit

Table No:5.8: Correlation between Deposits and Net Profit

(Crore)

Year Deposits Net Profit

2006-2007 12240 104.12

2007-2008 15156 151.62

2008-2009 18093 194.75

2009-2010 23011 233.76

2010-2011 29720 292.56

78
Interpretation: Increase in deposits has also lead to an increase in the Net profit

during 2010-11.

Chart No: 5.8: Correlation between Deposits and Net Profit

35000
29720
30000

25000 23011

20000 18093
15156 Deposits
15000 12240 Net Profit

10000

5000
104.12 151.62 194.75 233.76 292.56
0
2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

79
 c) Correlation between Advances and Net Profit

Table No:5.9:Correlation between Advances and Net Profit

Year Advances Net profit

2006-2007 7,919 104.12

2007-2008 10,454 151.62

2008-2009 11,848 194.75

2009-2010 15,823 233.76

2010-2011 20,489 292.56

Interpretation: The Net profit has increased to 292.56 in 2010-11 while it was

only 104.12 in 2006-07.

Chart No: 5.9: Correlation between Advances and Net Profit

80
 22,500
20,489
20,000

17,500 15,823
15,000

12,500 11,848
10,454 Advances
10,000
7,919 Net profit
7,500

5,000

2,500
104.12 151.62 194.75 233.76 292.56
0
2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

5) Analysis of Deposit Mix

Table No:5:10: Analysis of Deposit Mix

(Crore)

Demand Savings Total

Year deposits deposit Term deposits deposits

2006-2007 619 2311 9310 12240

2007-2008 773 2876 11507 15156

2008-2009 846 3460 13787 18093

81
2009-2010 1052 4271 17688 23011

2010-2011 1201 5203 23316 29720

Chart No: 5:10: Analysis of Deposit Mix

35000
30000
25000
20000 Demand deposits
15000 Savings deposit
10000 Term deposits
5000 Total deposits
0

82
 a) Percentage of Demand Deposits to Total Deposit

Table No:5.11:Percentage of Demand Deposits to Total Deposit

(Crore)

Demand

Year deposit total deposit % of deposits

2006-2007 619 12240 5.06

2007-2008 773 15156 5.1

2008-2009 846 18093 4.68

2009-2010 1052 23011 4.57

2010-2011 1201 29720 4.04

Interpretation: The proportion was 5.06% in 2006-07 & is 4.04% in 2010-11,

which is shows an decreasing trend in percentage

83
Chart No: 5.11:Percentage of Demand Deposits to Total Deposit

% to total deposits
6

5 5.06 5.1
4.68 4.57
4 4.04

2 % to total deposits

84
 b) Percentage of Savings Deposits to Total Deposits

Table No: 5.12:Percentage of Savings Deposits to Total Deposits

(Crore)

Saving % of total

Year deposit Total deposit deposit

2006-2007 2311 12240 18.88

2007-2008 2876 15156 18.98

2008-2009 3460 18093 19.12

2009-2010 4271 23011 18.56

2010-2011 5203 29720 17.51

Interpretation: The proportion was 18.88% in 2006-07 & has increased to 19.12

in 2008-09.and later during 2009-10 to 2010-2011 it has decreased.

Chart No: 5.12:Percentage of Savings Deposits to Total Deposits

85
 % to total deposit
19.5

19 19.12
18.88 18.98
18.5 18.56

18

17.5 17.51 % to total deposit

17

16.5

c) Percentages of Term Deposits to Total Deposits

Table No: 5.13: Percentages of Term Deposits to Total Deposits

(Crore)

Term % of total

Year deposit total deposit deposit

2006-2007 9310 12240 76.06

2007-2008 11507 15156 75.92

2008-2009 13787 18093 76.2

2009-2010 17688 23011 76.87

2010-2011 23316 29720 78.45

86
Interpretation: The proportion is showing a consistent relation from 2006-07

from 76.06 to 2010-11 78.45.

Chart No: 5.13: Percentages of Term Deposits to Total Deposits

% of total deposit
79
78.5 78.45
78
77.5
77 76.87
76.5
76 76.06 76.2
75.92 % to total deposit
75.5
75
74.5

87
FINDINGS &

SUGGESTIONS

88
 FINDINGS

 The BUC has declined to 13.17 in 2010-11 which was 14.73 in 2009-10.

Thus, it is showing slight inefficient management of credit risk as per Basel

norms.

 The ratio is showing an increasing trend at 0.62 in 2010-11 which implies

proper balancing of advances & assets.

 The ratio is showed an increasing trend till from 2006-07 to 2008-09 and

from 2009-10 it decreased; it shows inefficiency in maintenance of

investments & assets

 The percentage of Net NPA to Total assets has decreased to 0.18% during

2010-11. This indicates a sound asset quality.

 The percentage is showing a decreasing trend from the period 2008-2009 to

2010-11, 0.29% due to good management.

 The ENPA during 2010-11 has come down to 7 from 7.2

 The deposits have increased over the years thus leading to an increase in the

advances.

 Increase in deposits has also lead to an increase in the Net profit during

2010-11.

 The Net profit has increased to 292.56 in 2010-11 while it was only 104.12

in 2006-07.

89
 The percentage of demand deposits to total deposits was 5.06% in 2006-07

& is 4.04% in 2010-11, which is shows an decreasing trend in percentage

 The percentage of savings deposits to total deposit was 18.88% in 2006-07

& has increased to 19.12 in 2008-09.and later during 2009-10 to 2010-2011

it has decreased.

 The percentage of term deposits to total deposits is showing a consistent

relation from 2006-07 to 2010-11 from 76.06 to 78.45.

90
SUGGESTIONS

 Bank should establish a system that helps identify problem loan ahead of

time when there may be more options available for remedial measures.

 Banks should disclose to the public, information on the level of risk and

policies for risk management.

 Bank should take measures to improve its asset quality, so that the credit risk

can be minimized.

 The bank must put maximum effort to attract the fixed deposits which

contribute significantly towards the enhancement of banks profitability.

 The bank should maintain a good proportion in their deposits and advances.

91
CONCLUSION

92
CONCLUSION

The The Bijnore Urban Cooprative with a new logo and image marches on. With

branches all over India and a clientele across the world, the bank is considered one

of the most pro active banks in India with a competent tech savvy team of

professional at the core of services. In 2009-10 The Bijnore Urban Cooprative

could present an outstanding performance which was beyond market expectations

despite the challenging economic scenario where the bank operates. The Bijnore

Urban Cooprative, the bank that focuses on technology and service delivery, has

always come up with innovative banking products to meet the growing demands of

the customers.

Largely concentrated in the semi-urban areas of the Southern states of India, SIB's

profitable, cost-efficient and technologically up-to-date network constitutes a

reasonably attractive stand alone franchise. The Bank's Deposit franchise includes

a niche NRI customer base that contributes a meaningful 17% of deposits and

gives it a distinguishing cost advantage over several of its peers. At the same time,

the Bank is trading at the cheapest valuations among peers.

93
Even though, the banking sector all over the world has been affected by the

recession due to the global meltdown in economy, especially the US banking

system, The Bijnore Urban Cooprative proved its competence not only in terms of

increased profit but also in providing boundless customer service. Among so many

players and competitive products, The Bijnore Urban Cooprative could maintain its

premier and prestigious position only with the support of the customers. This show

how bank functions and how the bank fulfills its mission and mission.

SIB's overall strategy and execution has been creditable over the past few years,

with the Bank maintaining its market share even in CASA deposits. While bank

expects a loss in market share for the peer group that the Bank belongs to,

however, based on the Bank's track record, and keeping in mind the importance of

customer loyalty in the Banking Industry, The Bijnore Urban Cooprative expects

the bank to deliver profitable growth above the average growth rate of its peer

group

 The effectiveness of credit risk management rests where the credit quality is

maintained by the bank.

94
 Basel III is likely to improve the risk management systems of banks as the

banks aim for adequate capitalization to meet the underlying credit risks and

strengthen the overall financial system of the country

 Formerly, people were not much bothered about the banking services but

now they are comparing banks based on the services offered.

95
Annexure – I Financial Statements

PROFIT AND LOSS A/C OF THE BIJNORE URBAN COOPRATIVE BANK

LTD..

Mar 2011 Mar 2010 Mar 2009 Mar 2008 Mar 2007
Rs. Cr. Rs. Cr Rs. Cr Rs. Cr Rs. Cr
INCOME :
Interest Earned 1935.72 1686.92 1291.23 976.61
Other Income 255.61 167.62 147.73 121.54
Total 2191.33 1854.54 1438.96 1098.15
Total 1957.57 1659.79 1287.34 994.03
II. Expenditure
Interest expended 1367.43 1164.04 915.10 609.09
Payments to/Provisions for
226.32 214.18 146.35 133.23
Employees
Operating Expenses &
85.19 71.60 62.05 51.93
Administrative Expenses
Depreciation 16.76 13.90 12.19 11.78
Other Expenses, Provisions &
128.35 89.46 71.54 145.71
Contingencies
Provision for Tax 142.92 88.54 47.28 25.29
Fringe Benefit tax 0.00 0.75 0.40 0.75
Deferred Tax -9.40 17.32 32.43 16.25
Total 2191.33 1854.54 1438.96 1098.15
Total 1957.57 1659.79 1287.34 994.03
III. Profit & Loss
Reported Net Profit 233.76 194.75 151.62 104.12
Extraordinary Items -0.03 0.50 -0.11 17.69
Adjusted Net Profit 233.79 194.25 151.73 86.43
Prior Year Adjustments 0.00 0.00 0.00 0.00
Profit brought forward 14.67 9.08 8.19 6.48
IV. Appropriations
Transfer to Statutory Reserve 58.45 49.00 38.00 26.81
Transfer to Other Reserves 120.24 100.50 81.00 55.01
Trans. to Government
52.71 39.66 31.73 20.59
/Proposed Dividend
Balance carried forward to
17.03 14.67 9.08 8.19
Balance Sheet
Equity Dividend % 40.00 30.00 30.00 25.00
Earnings Per Share-Unit Curr 20.02 16.72 16.26 14.36
Earnings Per Share(Adj)-Unit 20.02 16.72 13.01 11.49

96
Curr
Book Value-Unit Curr 129.83 113.76 126.34 100.10

97
Annexure – II BALANCE SHEET

BALANCE SHEET OF THE BIJNORE URBAN COOPRATIVE

BANK LTD..

Mar 2011 Mar 2010 Mar 2009 Mar 2008 Mar 2007
Rs. Cr Rs. Cr Rs. Cr Rs. Cr Rs. Cr
SOURCES OF FUNDS :
Capital 113.01 113.01 90.41 70.41
Reserves Total 1372.28 1191.00 1070.58 653.55
Equity Share Warrants 0.00 0.00 0.00 0.00
Equity Application Money 0.00 0.00 0.00 0.00
Deposits 23011.52 18092.33 15156.12 12239.21
Borrowings 330.96 412.01 27.58 32.51
Other Liabilities & Provisions 706.27 571.06 745.24 656.90
TOTAL LIABILITIES 25534.04 20379.41 17089.93 13652.58
APPLICATION OF FUNDS :
Cash & Balances with RBI 1390.94 997.74 973.65 699.67
Balances with Banks & money
596.73 1038.13 729.00 1245.81
at Call
Investments 7155.61 6075.20 4572.23 3430.13
Advances 15822.92 11847.91 10453.75 7918.91
Fixed Assets 152.54 136.32 112.75 89.59
Other Assets 415.30 284.11 248.55 268.47
Miscellaneous Expenditure not
0.00 0.00 0.00 0.00
written off
TOTAL ASSETS 25534.04 20379.41 17089.93 13652.58
Contingent Liability 2729.74 2194.05 2105.35 1640.58
Bills for collection 257.46 222.29 181.85 168.15

98