INTRODUCTION

According to American author and humorist Mark Twain: ”A banker is a

fellow who lends his umbrella when the sun is shining and wants it back the
minute it begins to rain.”Many troubled businesses seeding credit in
recent years might agree with Mr. Twain.

Indeed securing the large amounts of credit that many bus
inesses require can be acomplicated and challenging task loan
requests. Moreover, business loans, often called commercial and
industrial loans, rank among the most important assets that
commercial banks and their closest competitors hold. Corporate
finance is an area of finance dealing with financial decisions business
enterprises make and the tools and analysis used to make
these decisions. The primary goal of  corporate finance is to
maximize corporate value 

 While managing the firm's financial risks. Although it is in

principle different from managerial finance which studies the
financial decisions of all firms, rather than corporations alone, the
main concepts in the study of corporate finance are applicable to the
financial problems of all kinds of firms. The discipline can be divided
into long-term and short-term decisions and
techniques.Capital   investment decisions  are long-term 
choices about which projects receiveinvestment, whether to
finance that investment with equity or debt, and when or whether to pay
dividends to shareholders. On the other hand, the short term decisions
can be grouped dunder the heading "Working capital management".
This subject deals with the short-term balance of current assets and
current liabilities; the focus here is on managing cash,
Inventories and short-term borrowing and lending (such as the terms on credit
extended to customers).The terms corporate finance and corporate
financier are also associated with investment  banking. The typical
role of an investment bank is to evaluate the company's financial
needs and raise the appropriate type of capital that best fits those needs.
Corporate banking is a part of commercial banking but the part that average
depositor with deposits account never sees. It is a division of
commercial banking which extends the financial support to the
corporate for helping them achieve their organizational goals and
objectives.
While banks hold money and mortgages, lend money, extend or open
up a line of credit for the average depositors, it is business that needs
majorfinancialservicesto build plant, erect buildings, make structural
 Improvements  on  old ones and start new business ventures.

This is one of the most competitive, risky and financially lucrative

areas of doing business in today’s world .Commercial loans were the earliest
form of lending banks did in their move than 2000 year old history.
Later in the 20 thcentury finance companies, insurance firms, a
nd thriftinstitutions entered the business lending field. Today loan officers
skilled in evaluating the credit of businesses are usually among the most
experienced and highest paid people in the financial services field, along with
security under writers .As a part of commercial banking, corporate
banking is focused on analyzing and assessing the risk of the
business, establishing the creditworthiness of the business and
tryingto predict the likelihood of success or failure of business endea
vour. These are the professionals who help decide what business
initiatives will be taken and when, whether or not to expand the existing
businesses, help develop new markets so that new clients can be found and
help develop new products for e-commerce, the internet and the
international markets.

Multinationals corporations. Services include access to commer
cial banking products,including working capital facilities such as
domestic and international trade operations and funding, channel financing,
and overdrafts, as well as domestic and international payments, INR term
loans (including external commercial borrowings in foreign
currency), letters of guarantee etc.
project export finance teams, both onshore and offshore, to provide
structured solutions .The Corporate Bank in India was ranked 2nd overall in
the 2004 Greenwich Survey.
This portfolio is largely spread within 9 sector teams divided as under :

•Consumer Brands

•Industrials

•Energy and Utilities

•Telecommunications

•Automotive

•Healthcare

•Transport and Logistics

•Metals and Mining

•Media
EVOLUTION OF BANKING IN INDIA
Banking in India has its origin as early as the Vedic period. It is
believed that the transitionfrom money lending to banking must have
occurred even before Manu, the great Hindu Jurist,who has devoted a
section of his work to deposits and advances and laid down rules
relating torates of interest. During the Mogul period, the indigenous
bankers played a very important rolein lending money and financing
foreign trade and commerce. During the days of the East
IndiaCompany, it was the turn of the agency houses to carry on the
banking business.The General Bank of India was the first Joint Stock
Bank to be established in the year 1786.The others which followed
were the Bank of Hindustan and the Bengal Bank. The Bank
of Hindustan is reported to have continued till 1906 while the other
two failed in the meantime. Inthe first half of the 19
th
century the East India Company established three banks; the Bank
of Bengal in 1809, the Bank of Bombay in 1840 and the Bank
of Madras in 1843
.
These
three banks also known as Presidency Banks were independent units a
nd functioned well. Thesethree banks were amalgamated in
1920 and a new bank, the Imperial Bank of India
wasestablished on 27
th
January 1921
.
With the passing of the State Bank of India Act in 1955
theundertaking of the Imperial Bank of India was taken over by the
newly constituted State Bank of India.The Reserve Bank which is the
Central Bank was created in 1935 by passing Reserve Bank of India
Act 1934. In the wake of the Swadeshi Movement, a
number of banks with Indian management were established
in the country namely, Punjab National Bank Ltd, Bank of IndiaLtd,
Canara Bank Ltd, Indian Bank Ltd, the Bank of Baroda Ltd, the Central Bank
of India Ltd.On July 19, 1969, 14 major banks of the country were
nationalized and in 15
th
April 1980 sixmore commercial private sector banks were also taken
over by the government.The Indian banking can be broadly
categorized into nationalized (government owned), private banks
and specialized banking institutions. The Reserve Bank of India acts a
centralized bodymonitoring any discrepancies and shortcoming in the
system. Since the nationalization of banksin 1969, the public sector
banks or the nationalized banks have acquired a place
of prominenceand has since then seen tremendous progress. The need
to become highly customer focused hasforced the slow-moving public
sector banks to adopt a fast track approach. The unleashing
of  products and services through the net has galvanized
players at all levels of the banking andfinancial institutions market
grid to look anew at their existing portfolio offering.

Conservative banking practices allowed Indian banks to be insulated

partially from the Asiancurrency crisis. Indian banks are now quoting
a higher valuation when compared to banks inother Asian countries
(viz. Hong Kong, Singapore, Philippines etc.) that have major
problemslinked to huge Non Performing Assets (NPAs) and payment
defaults. Co-operative banks arenimble footed in approach and
armed with efficient branch networks focus primarily on
the‘high revenue’ niche retail segments.The Indian banking has
finally worked up to the competitive dynamics of the ‘new’
Indianmarket and is addressing the relevant issues to take 
on the multifarious  challenges  of globalization. It has come
a long way from being a sleepy business institution to a
highly proactive and dynamic entity. Banks that employ IT solutions
are perceived to be ‘futuristic’and proactive players capable of
meeting the multifarious requirements of the large customers base.
Private banks have been fast on the uptake and are reorienting their
strategies using theinternet as a medium The Internet has
emerged as the new and challenging  frontier of marketing
with the conventional physical world tenets being just as applicable
like in any other marketing medium.This transformation has been
largely brought about by the large dose of liberalization
andeconomic reforms that allowed banks to explore new b
usiness opportunities  rather thangenerating revenues from
conventional streams (i.e. borrowing and lending).The banking in
India is highly fragmented with 30 banking units contributing to
almost 50% of deposits and 60% of advances. Indian nationalized
banks (banks owned by the government)continue to be the major
lenders in the economy due to their sheer size and
penetrative networks which assures them high deposit
mobilization. The Indian banking can be broadlycategorized into
nationalized, private banks and specialized banking
institutions.The Reserve Bank of India acts as a centralized  
body monitoring  any discrepancies  andshortcoming in the
system. It is the foremost monitoring body in the Indian financial
sector.The nationalized  banks (i.e. government-owned 
banks) continue to dominate  the Indian banking
arena. Industry estimates indicate that out of 274 commercial banks
operating in India,223 banks are in the public sector and 51 are in the
private sector. The private sector bank gridalso includes 24 foreign
banks that have started their operations here. Under the ambit of the
nationalized banks come the specialized banking institutions. These
co-operatives, rural banksfocus
on areas of agriculture, rural development etc., unlike commerc
ial banks these co-operative banks do not lend on the basis of a
prime lending rate. They also have various taxsops because of their
holding pattern and lending structure and hence have lower
overheads.This enables them to give a marginally higher percentage
on savings deposits. Many of thesecooperative banks diversified into
specialized areas (catering to the vast retail audience)
like car finance, housing loans, truck finance etc. in order to
keep pace with their public
sector and private counterparts, the co-operative banks too have inve
sted heavily in informationtechnology to offer high-end computerized
banking services to its clients.Complementing the roles of the
nationalized and private banks are the specialized
financialinstitutions or Non Banking Financial Institutions
(NBFCs). With their focused portfolio of  products and services,
these Non Banking Financial Institutions act as an important catalyst
incontributing to the overall growth of the financial services
sector. NBFCs offer loans for working capital requirements,
facilitate mergers and acquisitions, IPO finance, etc. apart
fromfinancial consultancy services. Trends are now changing as
banks (both public and private)have now started focusing on NBFC
domains like long and medium-term finance, working
caprequirements, IPO financing etc. to meet the multifarious needs of
the business community.
AN OVERVIEW ON CORPORATE BANKING INDUSTRY
In recent years, the corporatebanking industr
y   a r o u n d   t h e   w o r l d   h a s   b e e n   u n d e r g o i n g   a   r a p i d transfor
mation. In India also, the wave of deregulation of early 1990s has
created heightened competition and greater risk for banks and
other financial intermediaries. The cross-border flows and entry
of new players and products have forced banks to adjust the product-
mix
andundertake rapid changes in their processes and operatio
ns to remain competitive.  Thedeepening of technology  has 
facilitated  better tracking and fulfillment of commitments,
multiple delivery channels for customers and faster resolution
of miscoordinations. Unlike in the past, the banks today are market
driven and market responsive.
The top concernin the mind of every bank's CEO is increasing or at
least maintaining the market share in everyline of business against the
backdrop of heightened competition.
With the entry of new players and multiple channels, customers (both
corporate and retail) have become more discerning and less "loyal" to
banks.
This makes it imperative that banks provide best possible products
and services to ensure customersatisfaction.
To address the challenge of retention of customers, there have
been active efforts in the banking circles to switch over to customer-
centric businessmodel. The success of such a model depends upon the
approach adopted by banks with respectto customer data management
and customer relationship management.Over the years, Indian banks have
expanded to cover a large geographic & functional area
tomeet the developmental  needs.
 They have been managing a world of information  aboutcu
stomers - their profiles, location, etc. They have a close relationship
with their customers anda good knowledge of their needs,
requirements and cash positions. Though this offers them aunique
advantage, they face a fundamental problem.During the period of
planned economic development, the bank products were bought in
Indiaand not sold. What our banks, especially those in the
public sector lack are the marketingattitude. Marketing is a
customer-oriented operation. What is needed is the effort on their
partto improve their service image and exploit their large customer
information base effectively to

communicate product availability. Achieving customer focus re
quires leveraging existingcustomer information to gain a
deeper insight into the relationship a customer has with
theinstitution, and improving customer service-related
processes so that the services are quick,error free and convenient
for the customers.Furthermore, banks need to have very strong in-
house research and market intelligence units inorder to face the future
challenges of competition, especially customer retention. Marketing is
aquestion of demand (customers) and supply (financial products &
services, customer servicesthrough various delivery channels).
Both demand and supply have to be understood in
thecontext of geographic
locations and competitor analysis to undertake focused
marketing(advertising)  efforts.  Focusing on region-
specific  campaigns  rather than national mediacampaigns
would be a better strategy for a diverse country like India.Customer-
centricity also implies increasing investment in technology.
Throughout much of thelast decade, banks world-over have re-
engineered their organizations to improve efficiency andmove
customers to lower cost, automated channels, such as ATMs
and online banking.As is proved by the experience, banks
are now realizing that one of their best assets
for  building profitable customer relationships
especially in a developing country like India is the branch-branches
are in fact a key channel for customer retention and profit growth in
rural andsemi-urban set up. However, to maximize  the
value of this resource,  our banks need totransform their bra
nches from transaction processing centers into customer-centric 
servicecenters. 

Customer relationship management (CRM) solutions, if implemented

and integrated correctly,can help significantly in improving customer
satisfaction levels. Data warehousing can help in

providing better transaction experiences for customers over different

transaction channels. Thisis because data warehousing helps bring
all the transactions coming from different channelsunder the
same roof. Data mining helps banks analyse and measure
customer
transaction patterns and behaviour. This can help a lot in improving s
ervice levels.It must be noted, however, that customer-
centric  banking also involves many risks. The banking
industry world over is being thrust into a wild new world of privacy
controversy.
The banks need to set up serious governance systems for privacy risk 
management. It must beremembered that
customer privacy issues threaten
to compromise the use of informationtechnology which is at
the very center of e-commerce and customer relationship management
-two areas which are crucial for banks' future.The critical issue
for banks is that they will not be able to safeguard
customer privacy completely without undermining the most
exciting innovations in banking. These
innovations promise huge benefits, both for customers and providers. 
But to capture them, financialservices companies and their customers
will have to make some critical tradeoffs. When thestakes are so high,
nothing can be left to chance, which is why banks must immediately
begindeveloping comprehensive approaches to the privacy issue. The
customer centric business models based on the applications of
information technology aresustainable only if the banks protect
client confidentiality in the process - which is the
basicfoundation of banking business.

STRUCTURE OF BANKING INDUSTRY:

Banking system plays an important role in a country’s
economy. It promotes growth anddevelopment of the country.
Indian money market comprises organized and the
unorganizedinstitutions. The organized and unorganized institutions
in the Indian banking system serve asource of short term credit to
agriculture, industry, trade and commerce.

In the Indian banking structure the Reserve Bank of India is the

central bank. It regulates, directand controls the banking and financial
institutions in the country. There are three high bankinginstitutions,
namely, RBI, NABARD and EXIM Bank. There are
separate financial institutionscatering to the needs of different
sectors of the economy. Development Banks,
InvestmentBanks, Co-operative Banks, Land Development
Banks, Commercial Banks in public and private sectors,
NABARD, RRBs, EXIM Bank, etc. The indigenous bankers and
moneylendersdominate unorganized sector.
 FUTURE LANDSCAPE OF INDIAN BANKING
Liberalization and de-regulation process started in 1991-92 has
made a sea change in the banking system. From a totally regulated
environment, we have gradually moved into a marketdriven
competitive system. Our move towards global benchmarks has
been, by and large,calibrated and regulator driven. The pace of
changes gained momentum in the last few years.Globalization would
gain greater speed in the coming years particularly on account of
expectedopening up of financial services under WTO. Four trends
change the banking industry worldover, viz. 1) Consolidation of
players through mergers and acquisitions, 2) Globalisation
of operations, 3) Development of new technology and
4) Universalisation of banking. With

technology acting as a catalyst, we expect to see great changes

in the banking scene in thecoming years. The Committee has
attempted to visualize the financial world 5-10 years fromnow. The
picture that emerged is somewhat as discussed below. It entails
emergence of anintegrated and diversified financial system. The
move towards universal banking has already begun. This will gather
further momentum bringing non-banking financial institutions also,
intoan integrated financial system.The traditional banking functions
would give way to a system geared to meet all the financialneeds of
the customer. We could see emergence of highly varied financial
products, which aretailored to meet specific needs of the customers in
the retail as well as corporate segments. Theadvent of new
technologies could see the emergence of new financial players doing
financialintermediation. For example, we could see utility service
providers offering say, bill
paymentservices or supermarkets  or retailers doing basic le
nding operations.  The conventional definition of banking might
undergo changes.The competitive environment in the banking
sector is likely to result in individual playersworking out
differentiated strategies based on their strengths and market niches.
For example,some players might emerge as specialists in mortgage
products, credit cards etc. whereas somecould choose to concentrate
on particular segments of business system, while outsourcing allother
functions. Some other banks may concentrate on SME
segments or high net worthindividuals by providing specially
tailored services beyond traditional banking offerings tosatisfy
the needs of customers they understand better than a more generalist
competitor.International trade is an area where India’s presence is
expected to show appreciable increase.With the growth in IT sector
and other IT Enabled Services, there is tremendous potential
for  business opportunities. Keeping in view the GDP growth forecast 
under India Vision 2020,Indian exports can be expected to grow at a
sustainable rate of 15% per annum in the periodending with
2010. This again will offer enormous scope to Banks in India
to increase their forex business and international
presence. Globalization would provide opportunities for Indian
corporate entities to expand their business in other countries. Banks in
India wanting toincrease their international presence could naturally
be expected to follow these corporates andother trade flows in and out
of India.

Retail lending will receive greater focus. Banks would compete with
one another to provide fullrange of financial services to this segment.
Banks would use multiple delivery channels to suitthe requirements
and tastes of customers. While some customers might value
relationship banking (conventional branch banking), others might
prefer convenience banking (e-banking).One of the concerns is
quality of bank lending. Most significant challenge before banks is
them a i n t e n a n c e   o f   r i g o r o u s   c r e d i t   s t a n d a r d s ,   e s p e c i a l l
y   i n   a n   e n v i r o n m e n t   o f   i n c r e a s e d competition for new
and existing clients. Experience has shown us that the worst
loans areoften made in the best of times. Compensation through
trading gains is not going to support the banks forever. Large-
scale efforts are needed to upgrade skills in credit risk measuring,cont
rolling and monitoring as also revamp operating procedures. Credit
evaluation may haveto shift from cash flow based analysis to
“borrower account behaviour”, so that the state of readiness
of Indian banks for Basle II
regime improves.  Corporate lending is alreadyundergoing
changes. The emphasis in future would be towards more of fee
based servicesrather than lending operations. Banks will
compete with each other to provide value addedservices to their
customers.Structure and ownership pattern would undergo changes.
There would be greater presence of international players in the Indian
financial system. Similarly, some of the Indian banks would become
global players. Government is taking steps to reduce its holdings in
Public sector banksto 33%. However the indications are that their
PSB character may still be retained.Mergers and acquisitions
would gather momentum as managements will strive to meet
theexpectations of stakeholders. This could see the emergence of 4-
5 world class Indian Banks. AsBanks seek niche areas, we could see
emergence of some national banks of global scale and anumber of
regional players.Corporate governance in banks and financial
institutions would assume greater importance inthe coming years and
this will be reflected in the composition of the Boards of
Banks.Concept of social lending would undergo a change. Rather than
being seen as directed lendingsuch lending would be business driven.
With SME sector expected to play a greater role in theeconomy,
Banks will give greater overall focus in this area. Changes could be
expected in the

delivery channels used for lending to small borrowers and

agriculturalists and unorganizedsectors (micro credit). Use of
intermediaries or franchise agents could emerge as means
toreduce transaction costs.Technology as an enabler is separately
discussed in the report. It would not be out of place,however, to
state that most of the changes in the landscape of financial sector
discussed abovewould be technology driven. In the ultimate analysis,
successful institutions will be those whichcontinue to leverage the
advancements in technology in re-engineering processes and
deliverymodes and offering state-of-the-art  products and 
services providing complete  financial solutions for different
types of customers.Human Resources Development would be another
key factor defining the characteristics of asuccessful banking
institution. Employing and retaining skilled workers and
specialists, re-training the existing workforce and promoting a
culture of continuous learning would be achallenge for the
banking institutions.
TECHNOLOGY IN BANKING
Technology will bring fundamental shift in the functioning of banks. It would
not only helpthem bring improvements in their internal
functioning but also enable them to provide better customer
service. Technology will break all boundaries and encourage cross
border  banking business. Banks would have to undertake extensive B
usiness Process Re-Engineering and tackle issues like a) how best to deliver
products and services to customers b) designing an appropriate
organizational model to fully capture the benefits of technologyand
business process changes brought about. c) how to exploit technology
for derivingeconomies of scale and how to create cost efficiencies,
and d) how to create a customer -centric operation model.Entry of
ATMs has changed the profile of front offices in bank branches.
Customers nolonger need to visit branches for their day to day
banking transactions like cash deposits,withdrawals, cheque
collection, balance enquiry etc. E-banking and Internet banking
haveopened new avenues in “convenience banking”. Internet banking
has also led to reductionin transaction costs for banks to about a tenth of
branch banking.Technology solutions would make flow of information
much faster, more accurate andenable quicker analysis of data
received. This would make the decision making processfaster and
more efficient. For the Banks, this would also enable development of
appraisaland monitoring tools which would make credit management
much more effective. Theresult would be a definite reduction in
transaction costs, the benefits of which would beshared between banks
and customers.
While application of technology would help banks reduce their
operating costs in the longrun, the initial investments would be sizeable.
With greater use of technology solutions, weexpect IT spending of Indian
banking system to go up significantly.
One area where the banking system can reduce the invest
ment costs in technology applications is by sharing of
facilities. We are already seeing banks coming together toshare ATM
Networks. Similarly, in the coming years, we expect to see
banks and FIscoming together to share facilities in the area of
payment and settlement, back office processing, data
warehousing, etc. While dealing with technology, banks will have to
dealwith attendant operational risks. This would be a critical area the
Bank management willhave to deal with in future.Payment and Settlement
system is the backbone of any financial market
place.The present Payment and Settlement systems such as Struc
tured Financial MessagingSystem (SFMS), Centralised Funds 
Management System (CFMS), Centralized FundsTransfer
System (CFTS) and Real Time Gross Settlement System (RTGS) will
undergofurther fine-tuning to meet international standards. Needless
to add, necessary securitychecks and controls will have to be in place. In
this regard, Institutions such as IDRBT willhave a greater role to play.

STRATEGIC ANALYSIS OF BANKING INDUSTRY2.1 PORTER’S

FIVE FORCE ANALYSIS:
Prof. Michael Porter’s competitive forces Model applies to each and
every company aswell as industry.

With the process of liberalization, competition among the existing

banks has increased.Each bank is coming up with new products to
attract the customers and tailor made loansare provided. The quality of
services provided by banks has improved drastically.
•Potential Entrants
Previously the Development Financial Institutions mainly provided
project finance anddevelopment activities. But they have now entered
into retail banking which has resultedinto stiff competition among the
existing players
•Threats from Substitutes
Banks face threats from Non-Banking Financial Companies. NBFCs
offer a higher rate of interest.

•Bargaining Power of Buyers

Corporates can raise their funds through primary market or by issue of GDRs,
FCCBs. As aresult they have a higher bargaining power. Even in the case of
personal finance, the buyershave a higher bargaining power. This is mainly
because of competition.
•Bargaining power of Suppliers
With the advent of new financial instruments providing a
higher rate of returns to theinvestors, the investments in deposits is
not growing in a phased manner. The suppliersdemand a higher return
for the investments.
•Overall Analysis
The key issue is that how can banks leverage their strengths to have a
better future. Sincethe availability of funds is more and deployment
of funds is less, banks should evolve
new products and services to the customers. There should be rational t
hinking in sanctioningloans, which will bring down the NPAs. As there is
expected revival in the Indian
economy banks have a major role to play. Funding corporate at a low c
ost of capital is a major requisite.
2 SWOT ANALYSIS:
The banking sector is often taken as a proxy for the economy as a whole. The
performanceof bank should therefore, reflect “Trends in the Indian Economy”.
Due to the reforms in thefinancial sector, banking industry has
changed drastically with the opportunities to
thework with, new accounting standards new entrants and infor
mation technology. Thederegulation of the interest rate,
participation of banks in project financing has changed inthe
environment of banks.The performance of banking industry is done
through SWOT Analysis. It mainly helps toknow the Strengths and
Weakness of the industry and to improve will be known
throughconverting the opportunities into strengths. It also helps for
the competitive environmentamong the banks.

STRENGTHS

1.Greater securities of Funds
Compared to other investment options banks since its inception has been a
better avenue interms of securities. Due to satisfactory implementation
of RBI’s prudential norms bankshave won public confidence over several
years.

2.Banking network 
After nationalization, banks have expanded their branches in the country,
which has helped banks build large networks in the rural and urban
areas. Private banks allowed to operate but they mainly concentrate in
metropolis.

3.Large Customer Base

This is mainly attributed to the large network of the banking system.
Depositors in ruralareas prefer banks because of the failure of the NBFCs.

4.Low Cost of Capital

Corporate prefers borrowing money from banks because of low
cost of capital. Middleincome people who want money for personal
financing can look to banks as they offer atvery low rates of interests.
Consumer credit forms the major source of financing by banks
WEAKNESSES

1.Basel Committee
The banks need to comply with the norms of Basel committee but before that
it is challengefor banks to implement the Basel committee standard, which are
of international standard.

2. Powerful Unions
 Nationalization of Banks had a positive outcome in helping the India
n Economy as awhole. But this has also proved detrimental in
the form of strong unions, which have amajor influence in decision
making. They are against automation.

3. Priority Sector Lending

To uplift the society, priority sector lending was brought in during
nationalization. This isgood for the economy but banks have failed to
manage the asset quality and their intensionswere more towards fulfilling
government norms. As a result lending was done for non- productive
purposes.

4. High Non-Performing Assets

 Non-Performing Assets (NPAs) have become a matter of concern in
the banking industry.This is because of change in the Accounting
Standards (Prudential Norms). Net NPAs increased to large
extent of the total advances, which has to be reduced to
meet theinternational standards.
OPPORTUNITIES

1.Universal Banking
Banks have moved along the value chain to provide their customers
more products andservices. For example: - SBI is into SBI home
finance, SBI Capital Markets, SBI Bondsetc.

2.Differential Interest Rates
As RBI control over bank reduces, they will have greater flexibility to fix their
own interestrates which depends on the profitability of the banks.

3.High Household Savings

Household savings have been increasing drastically. Investment in financial
assets has alsoincreased. Banks should use this opportunity for raising funds.

4.Overseas Markets
Banks should tap the overseas market, as the cost of capital is very low.

5.Internet Banking
The advances in information technology have made banking easier.
Business transactionscan effectively carried out through internet banking.
THREATS

1.NBFCs, Capital Markets and Mutual funds

There is a huge investment of household savings. The investments in
NBFCs deposits,Capital Market Instruments and Mutual Funds are
increasing. Normally these instrumentsoffer better returns to investors.

2.Change in the Government Policy

The change in the government policy has proved to be a threat to the banking
sector.

3 . I n f l a t i o n
The interest rates go down with a fall in inflation. Thus, the
investors will shift hisinvestments to other profitable sectors.

4 . R e c e s s i o n
Due to the recession in the business cycle the economy
functions poorly and this has proved to be a threat to the banking
sector. The market oriented economy and globalizationhas resulted
into competition for market share. The spread in the banking sector is
verynarrow. To meet the competition the banks have to grow at a
faster rate and reduce theoverheads. They can introduce new products and
develop the existing services.
PEST ANALYSIS

POLITICAL/ LEGAL ENVIROMENT

Government and RBI policies affect the banking

sector. Sometimes looking into the political advantage
of a particular party, the Government declares some measures
to their  benefits like waiver of short-term agricultural loans, to attract
the farmer’s votes. By doingso the profits of the bank get affected. Various
banks in the cooperative sector are open
andrun by the politicians.  They exploit these banks for thei
r benefits.  Sometimes thegovernment appoints various chairmen of
the banks.Various policies are framed by the RBI looking at the
present situation of the country for  better control over the banks

ECONOMICAL ENVIROMENT

Banking is as old as authentic history and the modern

commercial banking aretraceable to ancient times. In India, banking has
existed in one form or the other from timeto time. The present era in banking
may be taken to have commenced with establishment of  bank of Bengal in
1809 under the government charter and with government participation
inshare capital. Allahabad bank was started in the year 1865
and Punjab national bank in1895, and thus, others followedEvery year
RBI declares its 6 monthly policy and accordingly the various measuresand
rates are implemented which has an impact on the banking
sector. Also the Union budget affects the banking sector
to boost the economy by giving certain concessions or facilities. If in
the Budget savings are encouraged, then more deposits will be
attractedtowards the banks and in turn they can lend more
money to the agricultural sector and
BENEFICIARIES

For the banks:

It will give them the in depth review of the various aspects involved
in the corporate banking with emphasis on the credit risk management.

For the corporate :

The report shows the comparative study of the credit appraisal
and sanctioning procedure involved in the credit lending by banks
as well as financial institutions. Secondly, they will also get the
relevance of the corporate lending by the banks and its various
relevant aspects.

For the management students:

The report studies the entire banking industry from various aspects
using different analytical tools. Secondly, it introduces into the world
of credit lending and its trend in India. Moreover, it also shows the
operational procedures involved in the corporate lending with
emphasis on risk mode ling and credit risk management.

LIMITATIONS OF THE STUDY:

The scope of the report is mainly depends on the information

extracted from secondary sourcesand the information given by the
managers of banks. So, lack of the availability of the firsthand
information may act as a limitation to the project report.
STATEMENT OF PROBLEM:
To study the emergence and evolution of the corporate banking as an
important division of the commercial banking and also to study
the credit appraisal models supporting the increased activities of
corporate lending by banks .In today’s global Banking arena,
Corporate Bankers are facing a string of unprecedented and sweeping
challenges in the areas like Treasury Management, Trade Finance, Risk
Management, Compliance Management, Electronic Trading and
Derivatives Markets. Compounding this are the mounting
complexities from ongoing regulatory changes, decreasing
margins and fierce competition
NEED FOR STUDY:
Over the period of time, with the tremendous increase in the
growth pattern of industrial development, the need for the
corporate loans have increased more than ever. So, the increasing
trend urges the banks and financial institutions to focus on
corporate banking as a separatedivision. So, the researchers have
preferred to study the concept of corporate banking and all the
operational aspects attached to it in the entire process.
OBJECTIVE OF THE STUDY:
• To study the banking industry, as a whole with the help of various
analysis includingSWOT analysis, PEST analysis and Porter’s Five Force
analysis.
• To acquire basic knowledge about the corporate lending in India and
its relevance with respect to banks.
• To analyze the credit risk models of both public bank and private
bank and bring out its comparative picture on the basis of various
parameters
• To study credit risk management strategies of bank.
RESEARCH DESIGN:

A research design is the arrangement of the condition for

collection and analysis of data .Actually it is the blueprint of
the research project. The research type is descriptive
research .The main objective of this design is search primary
and secondary data. The research primarily focuses on the
secondary sources and first hand information through focus
group interviews.

DATA COLLECTION:
As the research type is descriptive, the method of data collection was
informal.

SOURCES:
The relevant information were collected from both primary and
secondary sources like follow up with bank managers web search,
newspaper articles

TOOLS:
Focus group interviews with the managers of banks.
Micro-finance
The Reserve Bank has been making consistent efforts to strengt
hen credit delivery,improve customer service and encourage banks to
provide banking services to all segmentsof the population. Despite
considerable expansion of the banking system in India, largesegments
of the country’s population do not have access to banking
services.Expanding the outreach of banking services has, therefore,
been a major thrust area of the policy of the Government of India and
the Reserve Bank in recent years.The self-help group (SHG)-bank
linkage programme has emerged as the major micro-finance
programme in the country and is being implemented by commercial
banks, RRBsand co-operative banks. As on March 31, 2008 3.6
million SHGs had outstanding bank loans of Rs.17,000 crore, an
increase of 25 per cent over March 31, 2007 in respect
of number of SHGs credit linked. During 2007-08, banks
financed 1.2 million SHGs for Rs.8,849 crore. As at end-March
2008, SHGs had 5 million savings accounts with banksfor Rs.3,785
crore. 
Retail Credit
Continuing the strong growth in recent years, retail advances
increased by 40.9 per cent toRs.3,75,739 crore in 2007-08, which was
significantly higher than the overall credit growthof 31.0 per cent. As a
result, their share in total loans and advances increased during theyear.
Auto loans experienced the highest growth, followed by credit card
receivables, other  personal loans (comprising loans mainly to
professionals and for educational purposes) andhousing finance.
Loans for consumer durables increased by 17.3 per cent as against
thedecline of 39.1 per cent in the previous year.Major steps earlier taken
by the Reserve Bank of India were somewhat more
orientedtowards price stability and the related monitory instruments like the
bank rate, reverse reporate, repo rate and CRR were adjusted to rein in the
price instability. Naturally, the prioritywas inflation control for overall growth
of the economy and we must congratulate the RBIfor a wonderful job
done. The inflation today is at a moderate level and in line with
developed economy.With these steps taken by RBI, the latest scenario is that
the non-foodcredit growth got moderated, agricultural and service
sector credit went up but the retailcredit growth actually took a beating
due to northbound interest rates.Such positive impact on inflation helped the
economy for price stability and we feel what isimportant for India now is to
ensure that there is sufficient focus on growth of the economyalong with price
stability.
Lending to the Sensitive Sectors
Lending by SCBs to the sensitive sectors (capital market, real estate
and commodities)increased sharply during 2005-06 mainly on
account of a sharp increase in exposure to thereal estate market. Total
exposure of SCBs to the sensitive sectors consituted 18.9 per centof
aggregate bank loans and advances (comprising 17.2 per cent to real
estate, 1.5 per centto the capital market and 0.3 per cent to the
commodities sector). During 2008-2009 totallending to sensitive sector
increased by 19.1 percent in capital market.Among bank groups, new
private sector banks had the highest exposure to the sensitivesectors
(measured as percentage to total loans and advances of banks) mainly
due to theincrease in exposure to the real estate market, followed by foreign
banks, old private sector  banks and public sector banks.
MEASURES BY SIDBI
SIDBI has developed a Credit Appraisal & Rating Tool (C
ART) as well as a Risk Assessment Model (RAM) and a com
prehensive rating model for risk assessment of  proposals for SM
Es. The banks may consider to take advantage of these models asappr
opriate and reduce their transaction costs..Public Sector Banks are advised
to follow a transparent rating system with cost of credit being linked
to the credit rating of the
enterprise.SIDBI in association with Credit Information Bureau 
(India) Ltd. (CIBIL) expeditedsetting up a credit rating
agency.SIDBI in association with Indian Banks’ Association (IB
A) would collect and poolcommon data on risk in each
identified cluster and develop an IT-enabled
application,appraisal and monitoring system for small (including
tiny) enterprises. This would helpreduce transaction cost as well as
improve credit flow to small (including tiny) enterprisesin the
clusters.The National Small Industries Corporation has introduced a
Credit Rating Scheme for encouraging SSI units to get themselves
credit rated by reputed credit rating agencies.Public Sector
Banks will be advised to consider these ratings appropriately
and as per availability, and structure their rates suitably.
ROADMAP BY RBI
The Reserve Bank of India (RBI) has worked out the roadmap
for the Indian banks tograduate from the simpler approaches of the Basel
II framework to more advanced ones.Basel II is the second among Basel
Accords, which are primarily, recommendations on banking laws and
regulations issued by the Basel committee on banking supervision.It
sets up rigorous risk and capital management requirements aimed at ensuring
that a bank holds capital reserves appropriate to the risk it exposes
itself to through its lending andinvestment practices.Since March
2008, foreign banks operating in India and Indian banks having
presenceoutside the country have migrated to simpler approaches
under Basel II framework. Other commercial banks are required to
migrate to these norms by March 31,
2009.These include  standardised  approach for credit risk w
hich arising from default by borrowers, basic indicator approach
for operational risk (arising from day to operations of the banks such
robbery or power failure) and standardised duration approach for
marketrisk (arising from fluctuations in interest rate and share prices) which
affects the investmentand market portfolio of the
banks.In the framework, the RBI had earlier specified  the d
ate by which banks may fileapplication for approvals and the the
likely date by which approvals can be obtained fromthe central
bank.While banks have the discretion to adopt the advanced
approaches, they need to seek prior approval.Under market risk, banks
may apply to RBI for graduating to more advanced method of internal
models approach (IMA) by April 1, 2010 and then, RBI may approve
it by March31, 2011. IMA sets out a framework for applying capital
charges to the market risks (bothon balance sheet and off-balance
sheet) incurred by banks by an internal model. Thecurrent
standardised duration approach specifies a specific average duration of the
banks at
large, which the banks follow and make it a basis for applying capital charges
to only open positions.Similarly, for operational risk, banks may
graduate to standardised approach by April 1,2010 and RBI can approve
the plan by September 30, 2010. After that, they can graduate
toadvanced measurement  approach for operational  risk by 
April 1, 2011 and get RBIapproval by March 31, 2013.While
advanced measurement approach (AMA) sets the framework for
banks to developtheir own empirical model to quantify required
capital for operational risk, it can be usedafter they get regulatory
clearances.Under the standardised approach, a bank's activities are
divided into eight business lines:corporate finance, trading and sales,
retail banking, commercial banking , payment andsettlement, agency
services, asset management and retail brokerage. Within each
businessline, gross income is a broad indicator for the scale of business
operations and so, the scaleof operational risk exposure within each of these
business lines. The capital charge for each business line is calculated by
multiplying gross income by a factor .Currently, banks are using the basic
indicator approach as per which they must hold capitalfor operational risk
equal to the average over the previous three years of a fixed percentageof
positive annual gross
income.For credit risk, banks can use internal ratings-based 
approach which allows them todevelop their own model to
estimate the probability of default for individual clients
or groups of clients. Currently, banks use standardised approach
where they are required touse ratings from external credit rating
agencies to quantify the required capital for creditrisk.

CRM STRATEGIES FOR CORPORATE BANKING4.1 RAROC

Risk-Adjusted Return on Capital –– RAROC–– is a measure of the
expected return onEconomic Capital over the life of an investment. This
prospective measure of risk-adjusted profitability allows for apples-to-
apples comparison of activities across risk types of  business.RAROC
helps senior management maximize shareholder value by addressing
strategic business questions such as:
•How much capital is needed to support the company’s enterprise-wide risks?

•Is the company over or under capitalized?

•A r e   i n d i v i d u a l   b u s i n e s s   u n i t s   c r e a t i n g   o r   d e s t r o y i n g  
s h a r e h o l d e r   v a l u e ? What opportunities for growth or diversification
exist within the company?

•How should the economics of the business be managed within regulatory and
ratingagency capital constraints?

•What is an optimal strategy for reinsurance?

RAROC allows for both relative comparisons  between bus
iness units and absolutecomparisons to shareholders’ minimum
required return on risk, or hurdle rate. A businessline is value-neutral if
its RAROC is equal to the hurdle rate. It creates value if its RAROCis higher
than the hurdle rate and destroys value if it is lower.
RAROC is computed by dividing risk-adjusted net income by the total
amount of economiccapital assigned based on the risk calculation.
RAROC allocates a capital charge to atransaction or a line of
business at an amount equal to the maximum expected loss (at a99%
confidence level) over one year on an after-tax basis. The higher the
volatility of
thereturns, the more capital is allocated.  The higher capita
l allocation  means that thetransaction has to generate cash flows
large enough to offset the volatility of returns, whichresults from the
credit risk, market risk, and other risks taken. The
RAROC processestimates the asset value that may prevail in the
worst-case scenario and then equates
thec a p i t a l   c u s h i o n   t o   b e   p r o v
i d e d   f o r   t h e   p o t e n t i a l   l o s s .
RAROC is an improvement over the traditional approach in that it
allows one to comparetwo businesses with different risk (volatility of
returns) profiles. A transaction may give ahigher return but at a higher
risk. Using a hurdle rate (expected rate of return), a lender canalso use the
RAROC principle to set the target pricing on a relationship or a
transaction.Although not all assets have market price
distribution, RAROC is a first step towardexamining an
institution's entire balance sheet on a mark-to-market basis - if
only tounderstand the risk-return trade-offs that have been made.
What is RAROC ?
RevenuesExpensesExpected Losses+ Return oneconomic
capital+ transfer values /prices
Capital required for 
Credit RiskMarket RiskOperational RiskRisk
AdjustedReturnRisk AdjustedCapital or EconomicCapital
RAROC
What is RAROC?
The concept of RAROC (Risk adjusted Return on Capital) is at the
\heartof Integrated Risk
 
Management.
RATING BASED METHODS:
Banks should have a comprehensive risk scoring / rating system that
serves as a single pointindicator of diverse risk factors
of a counterparty  and for taking credit decisions
in aconsistent manner. To facilitate this, a substantial degree
of standardization is required inratings across borrowers. The risk
rating system should be designed to reveal the overall risk of
lending, critical input for setting pricing and non-price terms of
loans as also presentmeaningful information for review and
management of loan portfolio. The risk rating, inshort, should
reflect the underlying credit risk of the loan book. The rating
exercise shouldalso facilitate the credit granting authorities some
comfort in its knowledge of loan quality atany moment of time.The
risk rating system should be drawn up in a structured manner,
incorporating,
inter alia
, financial analysis, projections and sensitivity, industrial and
management risks. Thebanks may use any number of financial
ratios and operational parameters and collaterals asalso
qualitative aspects of management and industry characteristics that
have bearings on thecreditworthiness of borrowers. Banks can also
weigh the ratios on the basis of the years towhich they represent for
giving importance to near term developments. Within the
ratingframework, banks can also prescribe certain level of standards
or critical parameters,
beyondw h i c h   n o   p r o p o s a l s   s h o u l d   b e   e n t e r t a i n e d .   B a n k
s   m a y   a l s o   c o n s i d e r   s e p a r a t e   r a t i n g framework for large
corporate / small borrowers, traders, etc. that exhibit varying nature
anddegree of risk. Forex exposures assumed by corporates who
have no natural hedges havesignificantly altered the risk
profile of banks. Banks should, therefore, factor the
unhedgedmarket risk exposures of borrowers also in the rating
framework. The overall score for risk isto be placed on a numerical
scale ranging between 1-6, 1-8, etc. on the basis of credit quality.For
each numerical category, a quantitative definition of the borrower, the
loan’s underlyingquality, and an analytic representation of the
underlying financials of the borrower should be
59

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

bank should prescribe
theminimum rating below which no exposures would be un
dertaken. Any flexibility  in theminimum standards and
conditions for relaxation and authority therefore should be
clearlyarticulated in the Loan Policy.The credit risk assessment
exercise should be repeated biannually (or even at shorterintervals
for low quality customers) and should be delinked
invariably from the
regularrenewal exercise. The updating  of the credit
ratings should be undertaken normally  atquarterly intervals
or at least at half-yearly intervals, in order to gauge the quality
of theportfolio at periodic intervals. Variations in the
ratings of borrowers over time indicate changes in credit
quality and expected loan losses from the credit portfolio. Thus, if the
ratingsystem is to be meaningful, the credit quality reports should
signal changes in expected loanlosses. In order to ensure the
consistency and accuracy of internal ratings, the
responsibilityfor setting or confirming  such ratings should v
est with the
Loan Review function ande x a m i n e d   b y   a n   i n d e p e n d e n
t Loan Review Group. The banks should undertake
comprehensive study on migration (upward – lower to higher
and downward – higher tolower) of borrowers in the ratings to add
accuracy in expected loan loss calculations.
Value At Risk 
The VaR method is employed to assess potential loss that
could crystalise on tradingposition or portfolio due to
variations in market interest rates and prices, using a
givenconfidence level, usually 95% to 99%, within a defined
period of time. The VaR methodshould incorporate the market
factors against which the market value of the trading positionis
exposed. The top management should put in place bank-wide
VaR exposure limits to thetrading portfolio (including forex and
gold positions, derivative products, etc.) which is thendisaggregated
across different desks and departments. The loss making tolerance
level shouldalso be stipulated to ensure that potential impact on
earnings is managed within acceptable
60

limits. The potential loss in Present Value Basis Points should

be matched by the MiddleOffice on a daily basis vis-à-vis the
prudential limits set by the Board. The advantage of using VaR
is that it is comparable across products, desks and Departments
and it can
bevalidated  through ‘back testing’.  However, VaR models 
require the use of extensive historical data to estimate future
volatility. VaR model also may not give good results
ine x t r e m e   v o l a t i l e   c o n d i t i o n s   o r   o u t l i e r   e v e n t s   a n d   s t r
e s s   t e s t   h a s   t o   b e   e m p l o y e d   t o complement VaR. The
stress tests provide management a view on the potential impact
of large size market movements and also attempt to estimate the size
of potential losses due tostress events, which occur in the
’tails’
of the loss distribution. Banks may also
undertakescenario  analysis with specific  possible  stress sit
uations (recently  experienced in somecountries) by linking
hypothetical, simultaneous and related changes in multiple risk
factorspresent in the trading portfolio to determine the impact of
moves on the rest of the portfolio.VaR models could also be modified
to reflect liquidity risk differences observed across assetsover time.
International banks are now estimating Liquidity adjusted Value at
Risk (LaVaR)by assuming variable time horizons based on
position size and relative turnover. In an environment where
VaR is difficult to estimate for lack of data, non-statistical concepts
suchas stop loss and gross/net positions can be used.
61
INSPECTION METHODOLGY
The supervision of commercial banks and financial institutions is
vested in the ReserveBank in terms of the provisions of the Banking
Regulation Act, 1949 and the Reserve Bank of India Act, 1934. This
task is carried out by the Department of Banking
Supervision(DBS) under the guidance of the BFS. The basic
objective of supervision of banks is toassess the solvency, liquidity
and operational health of banks. The onsite inspection of  banks
referred to as Annual Financial Inspection (AFI) is conducted
annually (except in thecase of State Bank of India in which case it is done
once in twoyears). For this purpose, the unit of inspection is the Head Office
(HO) of the bank. A teamof Inspecting Officers from the Reserve Bank led by
the Principal Inspecting Officer (PIO)visits the bank and conducts the
inspection based on the internationally adopted CAMEL(Capital
Adequacy, Asset Quality, Management, Earnings, Liquidity) model,
modified asCAMELS (S for Systems and Control) to suit the needs of the
Indian banking system. Thefocus of the AFI in recent years has been on
supervisory issues relating to
securitisation, business continuity plan, disclosure requirements and c
ompliance with other existingguidelines. In order to have an overall
perspective, units of the bank throughout the countryare also taken up for
inspection either by the same team inspecting the HO or by additionalteams
from the Regional Offices (RO) of the Reserve Bank. These units
could be treasuryoperations, specialised branches and controlling
offices in general, where there may beconcerns relating mainly to frauds,
NPAs and exposure to sensitive sectors. Major findingsof these other unit
inspections areincorporated in the Report. The timeframe for carrying
out the inspection of the corporateHO of the bank is two to three months.
The inspection report is generally finalisedwithin four months. On completion
of the inspection, the RO of the Reserve Bank,under whose jurisdiction the
HO of the bank is situated, issues the inspection report to
the bank for perusal, corrective action and compliance. Further, a deta
iled discussion on thefindings of the inspection and the road ahead is
conducted by the Reserve Bank with theCEO/CMD and other
senior functionaries of the bank and a monitorable action plan
isdecided and/or supervisory action is taken, wherever warranted. The
findings recorded inthe inspection report along with the responses of
the CEO/CMD of the bank are placed
63
before the BFS. Based on the findings of the inspection and other inpu
ts, a supervisoryrating is assigned to the bank. Efforts are afoot to move to a
risk based supervision (RBS)approach, which envisages the monitoring of
banks by allocating supervisory resources andfocusing supervisory attention
depending on the risk profile of each institution.The process involves
continuous monitoring and evaluation of the appropriateness of therisk
management system in the supervised institution in relation to its business
strategyand exposures, with a view to assessing its riskiness.
64
RISK MANAGEMENT IN BANKS
Risk is inherent in any commercial activity and banking is no exception to
this
rule. Risingglobal competition, increasing deregulation, introduct
ion of innovative products anddelivery channels have
pushed risk management
to the forefront of today’s financiallandscape.
Ability to gauge the risks and take appropriate position will be the key
tosuccess. It can be said that
risk takers will survive, effective risk managers will prosper and risk
averse are likely to perish
.
In the regulated banking environment, banks had to primarily deal
with credit or default risk. As we move into a perfect market
economy, wehave to deal with a whole range of market related risks
like exchange risks, interest raterisk, etc. Operational risk, which had
always existed in the system, would become more pronounced in
the coming days as we have technology as a new factor in today’s
banking.Traditional risk management techniques become obsolete
with the growth of derivativesand off-balance sheet operations,
coupled with diversifications. The expansion in E- banking will
lead to continuous vigilance and revisions of regulations.Building up
a proper risk management structure would be crucial for the
banks in thefuture. Banks would find the need to develop technology
based risk management
tools.The complex mathematical models programmed into risk e
ngines would provide thefoundation of limit management, risk 
analysis, computation of risk-adjusted return oncapital and active
management of banks’ risk portfolio. Measurement of risk exposure
isessential for implementing hedging strategies.Under Basel II accord, capital
allocation will be based on the risk inherent in the asset. Theimplementation
of Basel II accord will also strengthen the regulatory review process
and,with passage of time, the review process will be more and more
sophisticated. Besidesregulatory requirements, capital allocation would also
be determined by the
market forces.External users of financial information will demand 
better inputs to make investmentdecisions.  More detailed an
d more frequent reporting  of risk positions to banks’share
holders will be the order of the day. There will be an increase
in the growth of consulting services such as data providers, risk
advisory bureaus and risk reviewers. These
65

reviews will be intended to provide comfort to the bank

managements and regulators as tothe soundness of internal risk
management systems.Risk management functions will be fully
centralized and independent from the
business profit centres. The risk management process will be fully int
egrated into the business process. Risk return will be assessed for
new business opportunities and incorporated intothe designs of the
new products. All risks – credit, market and operational and so
on will be combined, reported and managed on an integrated
basis. The demand for Risk AdjustedReturns on Capital (RAROC) based
performance measures will increase. RAROC
will beused to drive pricing, performance measurement, portfol
io management and capitalmanagement.Risk management has to
trickle down from the Corporate Office to branches or
operatingunits. As the audit and supervision shifts to a risk based
approach rather than
transactionorientation, the risk awareness levels of line
functionaries also will have to increase.Technology related risks will
be another area where the operating staff will have to be morevigilant in the
coming days.Banks will also have to deal with issues relating to
Reputational Risk as they will need tomaintain a high degree of public
confidence for raising capital and other resources. Risks toreputation
could arise on account of operational lapses, opaqueness in
operations andshortcomings in services. Systems and internal controls
would be crucial to ensure that thisrisk is managed well.The legal
environment is likely to be more complex in the years to
come. Innovativefinancial products implemented on computer
s, new risk management software, user interfaces etc., may
become patentable. For some banks, this could offer the potential
for realizing commercial gains through licensing.Advances in risk
management (risk measurement) will lead to transformation in capital
and balance sheet management. Dynamic economic capital manage
ment will be a powerful
competitive weapon. The challenge will be to put all these capabilities
together to create,sustain and maximise shareholders’ wealth. The
bank of the future has to be a total-risk-enabled enterprise, which
addresses the concerns of various stakeholders’ effectively.Risk
management is an area the banks can gain by cooperation and sharing
of
experienceamong themselves. Common facilities could be consi
dered for development of risk measurement and mitigation tools and
also for training of staff at various levels. Needlessto add, with the
establishment of best risk management systems and implementation
of  prudential norms of accounting and asset classification, the quality
of assets in
commercial banks will improve on the one hand and at the same time, 
there will be adequate cover through provisioning for impaired loans. As a
result, the NPA levels are expected to comedown significantly.
2 STRUCTURE OF CREDIT LENDING (CORPORATE
)IN INDIA:
Banks, finance companies, and competing business lenders grant
many different types of commercial loans. Among the most widely used
forms of business credit are the following:
SHORT-TERM BUSINESS LOANS:

Self-liquidating inventory loans

Working capital loans

Interim construction financing

Security dealer financing

Retailer and equipment financing

Asset-based loans (accounts receivable  financing, 
factoring,  and inventoryfinancing)

Syndicated loans
LONG-TERM BUSINESS LOANS:

Term loans to support the purchase of equipment, rolling stock, and structures

Revolving credit financing

Project loans

Loans to support acquisitions of others business firms
41
SHORT-TERM LOANS TO BUSINESS FIRMS:
Self-Liquidating Inventory Loans
Historically, commercial banks have been the leaders in
extending short term credit to businesses. These loans were
used to finance the purchase of inventory, raw materials or finished
goods to sell. In this case the term of the loan begins when
cash in needed to purchase inventory and ends when cash is
available in the firm’s account to write the lender a check for the
balance of its loan.
Working Capital Loans
Working capital loans provide businesses with short run credit, lasting
from few days toabout one year. Working
capital loans are most often used to fund the purchase of i
nventories in order to put goods on shelves or to purchase raw
materials; thus, they comeclosest to the traditional self-liquidating loan
described previously.Frequently, the working capital loan is designed to
cover seasonal peaks in the businesscustomer’s production levels and
credit needs. Normally, working capital loans are secured by
accounts receivable or by pledges of inventory and
carry a floating interest rate on theamounts actually borrowed against
the approved credit line. A commitment fee is chargedon the unused
portion of the credit line and sometimes on the entire amount of funds
madeavailable.
Interim Construction Financing
A popular form of secured short term lending is the interim
construction loan, used tosupport the construction of homes,
apartments, office buildings, shopping centers, andother permanent
structures. The finance is used while the construction is going on but oncethe
construction phase is over, this short term loan usually is paid off with
a longer term
42

mortgage loan issued by another lender, such as insurance

company of pension fund.Recently, some commercial banks have
issued ‘minipermanent’ loans, providing fundingfor construction and the
early operation of a project for as long as five to seven years.
Retailer and Equipment Financing
Banks support installment purchases of automobiles, appliance
s, furniture, businessequipment, and other durable goods by
financing the receivables that dealers selling thesegoods take on when
they write installment contracts to cover customer purchases. In
turn,these contracts are reviewed by banks and other lending institutions with
whom the dealershave established credit relationships. If they meet acceptable
credit standards, the contractsare purchased by lenders at an interest rate that
varies with the risk level of each borrower,the quality of collateral pledged,
and the term of each loan.
Asset-Based Financing
An increasing portion of short-term lending by banks and other
lenders in recent years hasconsisted of asset based loans, credit
secured by the shorter term assets of a firm that areexpected to roll
over into cash in the future. Key business assets used for many of
theseloans are accounts receivables and inventories of raw
materials or finished goods. Thelender commits funs against a
specific percentage of the book value of outstanding creditaccounts or
against inventory.In most loans collateralized by accounts
receivable and inventory, the borrowing firmretains title to the
assets pledged, but sometimes title is passed to the lender, which
thenassumes the risk that some of those assets will not pay out as expected.
The most commonexample of this arrangement  is
factoring
,   w h e r e   t h e   b a n k   a c t u a l l y   t a k e s   o n   t h e responsibility
of collecting the accounts receivable of one of its business
customers. Ittypically assesses a higher discount rate and lends a
smaller fraction of the book value of the customer’s accounts
receivable because the lender incurs both additional expense
andadditional risk with a factored loan.
43

Syndicated Loan
A type of large corporate loan that is increasingly used today is the syndicated
loan. This istypically a loan or loan package extended to a corporation
by a group of banks and other institutional lenders. These loans may
be “drawn” by the borrowing company, with thefunds used to support
business operations or commercial expansion, or “undrawn”, servingas lines
of credit to back a security issue or other venture. Banks engage in syndicated
loans both to spread the heavy risk exposures of these large loans,
often involving hundreds of lakhs or crore of rupees in credit for each loan,
and to earn fee income.
LONG-TERM LOANS TO BUSINESS FIRMS:
44
Term Business Loans
Term loans are designed to fund long and medium term business
investments, such as the purchase of equipment or the construction
of physical facilities, covering a period longer than one year.
Usually the borrowing firm applies for a lump sum loan based
on
the budgeted cost of its proposed project and then pledges to repay th
e loan in a series of installments.Term loans normally are secured by
fixed assets e.g. Plant and Equipment owned by
the borrower and may carry either a fixed or a floating interest rate. T
hat rate is normallyhigher than on shorter term business loans due to
the lender’s greater risk exposure fromsuch loans.
Revolving Credit Financing
A revolving credit line allows a business customer to borrow up to a
pre specified limit,repay all or a portion of the borrowing, and re
borrows as necessary until the credit linematures. One of the most
flexible of all the forms of business loans, revolving credit isoften
granted without specific collateral to secure the loan and may be short term or
caver a period as long as three, four, or five years. This form
of business financing
is particularly popular when the customer is highly uncertain about th
e timing of future cash flows or about the exact magnitude of the future
borrowings needs.Loan commitments are usually of two types
namely,1.Formal Loan Commitment,
and2.Confirmed  Credit Line.Formal Loan Commitment is a
contractual promise to lend to a customer up to a maximumamount of
money at a set interest rate or rate markup over the prevailing base
loan rate.
45

Whereas, Confirmed Credit Line is a looser form of loan commitment

where the banksindicate its approval of customer’s request for credit in an
emergency, though the prices of such a credit line may not be set in
advance and the customer may have little intention todraw upon the
credit line.
Long-Term Project Loans
The most risky of all business loans are project loans, credit to finance
the construction of fixed assets designed to generate a flow of revenue
in future periods. Prominent examplesinclude oil refineries, pipelines,
mines, power plants and harbor facilities. Project loans areusually granted to
several companies jointly sponsoring a large project.Project loans may be
granted on a recourse basis, in which the lender can recover fundsfrom
the sponsoring companies if the project does not pay out as planned. At the
other end,loan may be extended on a non recourse basis, in which no
sponsor guarantees; the projectstands or falls on its own merits. Many such
loans require that the project‘s sponsors pledgeenough of their own capital to
see the project through to completion.
Term Loan / Deferred Payment Guarantees
46

•
In case of term loans and deferred payment guarantees, the
project report isobtained from the customer, who may have been
compiled in-house or by a firmor consultants/ merchant bankers.
•
Term loan is provided to support capital expenditures  for 
setting up newventures as also for expansion, renovation etc.
•
The technical feasibility and economic viability is vetted by the
Bank andwherever it is felt necessary.
•
Banks normally expects at least 20% contribution of Promoter’s
contribution.But the promoter contribution may vary largely in mega
projects. Therefore,there cannot be a definitive benchmark.
•
The sanctioning  authority  will have the necessary discreti
on to permitdeviations.
3 EMERGENCE OF CORPORATE BANKING IN INDIA
47
The bank lending has expanded in a number of emerging market
economies, especially inAsia and Latin America, in recent years. Bank
credit to the private sector, in real terms, wasrising at a high rate. Several
factors have contributed to the significant rise in bank
lendingin emerging economies such as strong growth, exces
s liquidity  in banking systemsreflecting  easier global and 
domestic  monetary conditions,  and substantial  bank restruct
uring. The recent surge in bank lending has been associated with important
changeson the asset side of banksí balance sheet. First, credit to the
business sector - historicallythe most important component of banksí
assets – has been weak, while the share of thehousehold sector has
increased sharply in several countries. Second, banksí investments
inGovernment securities increased sharply until 2004-05. As a result,
commercial bankscontinue to hold a very large part of their
domestic assets in the form of Governmentsecurities - a process that
seems to have begun in the mid-1990s.There has been a sharp pick up in bank
credit in India in recent years. The rate of growth in bank credit which
touched a low of 14.4 per cent in 2002-03, accelerated to more than
30.0 per cent in 2004-05, the rate which was maintained in 2005-06.
The upturn in the growthrate of bank credit can be attributed to several
factors. One, macroeconomic performance of the economy turned robust
with GDP growth rates hovering between 7.5 per cent and 8.5 per
cent during the last few years. Two, the hardening of sovereign yields
from the secondhalf of 2003-04 forced banks to readjust their assets portfolio
by shifting from investmentsto advances. While the share of gross
advances in total assets of commercial banks grewfrom 45.0 per cent
to 54.7 per cent that of investments declined from 41.6 per cent to
32.1 per cent in the last few years.However, the credit growth has
been broad-based making banks less vulnerable to creditconcentration
risk. The declining trend of priority sector loans in 2001-02 in the credit
book of banks was due to prudential write offs and compromise settlements of
a large number of small accounts which was reversed from 2002-03 on
the strength of a spurt in the housingloan portfolio of banks. Even
though credit to industry and other sectors have also pickedup, their
share in total loans has declined marginally. Retail loans,
which witnessed a
48
growth of over 40.0 per cent in 2004-05 and again in 2005-06, have
been the prime
driver of the credit growth in recent years. Retail loans as 
a percentage of gross advancesincreased from 22.0 per cent in
March 2004 to 25.5 per cent in March 2006. The cyclicaluptrend in the
economy along with the concomitant recovery in the business climate
bringswith it improved abilities of the debtors to service loans, thereby
greatly improving
banksasset quality.  Despite  the sharp rise in credit growth 
in recent years, not only the proportional levels of gross non-
performing loans (NPLs) have declined, but the absolutelevels of gross
NPLs declined significantly. Several factors have contributed to the
markedimprovement in the Indian banksí asset quality. One,
banks have gradually improved their risk management practices and
introduced more vigorous systems and scoring models for identifying
credit risks. Two, a favourable macroeconomic environment in recent years
hasalso meant that many entities and units of traditionally
problematic industries are now performing better. Three,
diversification of credit base with increased focus on retail
loans,which generally have low delinquency rates, has also
contributed to the more favourablecredit risk profile. Four, several
institutional measures have been put in place to recover
the NPAs. These include Debt Recovery Tribunals (DRTs),
 Lok Adalats
(peopleís
courts),Asset Reconstruction Companies (ARCs) and corporate 
debt restructuring mechanism(CDRM). In particular, the Securi
tisation and Reconstruction of Financial Assets andEnforcemen
t of Security Interest (SARFAESI) Act, 2002 for enforcement o
f securityinterest without intervention of the courts has
provided more negotiating power to the banks for resolving bad
debts.
49

Sectoral Deployment of Gross Bank Credit

During 2008-09 total deployment of gross bank credit increased to
Rs.1.87,515 crores fromRs.1,69.536 crores in 2008-07 Non-
food bank credit increased sharply during 2005-06. The credit growth 
was broad based. Credit to services (including personal loans and
other services) increased by 52.8 per cent in 2005-06, accounting for
58.3 per cent of incremental non-food gross bank credit(NFGBC).
Personal loans increased sharply in recent years mainly on account of
housingloans. Real estate loans more than doubled. Other
personal loans such as credit cardoutstanding and education loans also
recorded sharp increases of 59.3 per cent and 96.5 per cent, respectively.
Priority Sector Advances
Credit to the priority sector decreased to 34.1 per cent in the previous
year against 39.5 in2008. In terms of revised guidelines on
lending to priority sector , broad category of advances under
priority sector include agriculture, micro and small enterprises, retail
trade,micro-credit, education and
housing.The agriculture and housing sectors were the major bene
ficiaries, which together accounted for more than two-third of
incremental priority sector lending. Credit to smallscale industries
also accelerate. Several favourable policy initiatives undertaken by
theCentral Government and the Reserve Bank including,
inter alia,
the policy package for stepping up of credit to small and medium
enterprises (SMEs) announced on August 10,2005, have had a
positive impact. At the individual bank-level, all the nationalised
banks,and all but two of the State Bank group (State Bank of India
and State Bank of Patiala)were able to meet the priority sector target of 40
per cent of NBC. However, only ten PSBs(Allahabad Bank, Andhra Bank,
Bank of India, Indian Bank, Indian Overseas Bank, Punjab National
Bank, Syndicate Bank, State Bank of Bikaner and Jaipur,
State Bank of Indoreand State Bank of Saurashtra) were able to achieve the
subtargets for agriculture, while thesub-target for weaker sections was
met by eight PSBs (Allahabad Bank, Andhra Bank,
50

Bank of India, Indian Bank, Indian Overseas Bank, Punjab National Bank,
Syndicate Bank and State Bank of Patiala).Lending to the priority sector
by foreign banks constituted 34.6 per cent of net bank creditas on the
last reporting Friday of March 2006, which was well above the stipulated
target of 32 per cent. The share of export credit in total
netbank credit at 19.4 per cent was significantly above the
prescribed sub-target of 12.0 per cent. Foreign banks, however, fella little short
of the sub-target of 10.0 per cent in respect of lending to SSIs.
Special Agricultural Credit Plans
The Reserve Bank had advised public sector banks to prepare Special
Agricultural CreditPlans (SACP) on an annual basis in 1994. The
SACP mechanism for private sector bankswas made applicable from
2005-06, as recommended by the Advisory Committee on Flowof Credit to
Agriculture and Related Activities from the Banking System
(Chairman:Prof.V.S. Vyas) and announced in the Mid-term Review of
Annual Policy for 2004-05. Publicsector banks were advised to
make efforts to increase their disbursements to small
andmarginal farmers to 40.0 per cent of their direct advances under SACP by
March 2007. Thedisbursement to agriculture under SACP by public sector
banks aggregated Rs.94,278 croreduring 2005-06, which was much above the
target of Rs.85,024 crore and the disbursementof Rs.65,218 crore during
2004-05. The disbursement by private sector banks during 2005-06 at
Rs.31,119 crore was above the target of Rs.24,222 crore. 3.21 Public
sector bankswere advised to earmark 5.0 per cent of their net
bank credit to women. At end-March2006, aggregate credit to
women by public sector banks stood at 5.37 per cent of their net bank
credit with 22 banks achieving the target. A consortium of select
public sector bankswas formed, with the State Bank of India as the
leader of the consortium, to provide creditto the
 Khadi
and Village Industries Commission (KVIC). These loans are provided
at 1.5 per cent below the average prime lending rates of five major
banks in the consortium. Anamount of Rs.322 crore was outstanding at
end-July 2006 out of Rs.738 crore disbursed bythe consortium under the
scheme.
BANKING INDUSTRY REFORMS AND VISION 2010
“A vision is not a project report or a plan target. It is an articulation
of the desired endresults in broader terms” - A.P.J.Abdul Kalam
20
Vision is of an integrated banking and finance system catering to all
financial intermediationrequirements of customers. Strong market
players will strive to uncover markets
and provide all services, combining innovation, quality, personal touc
h and flexibility indelivery. The growing expectations of
the customers are the catalyst for our vision. Thecustomer would
continue to be the centre-point of our business strategy. In short,
youlose touch with the customer, and you lose everything.It is
expected that the Indian banking and finance system will be globally
competitive. For thisthe market players will have to be financially
strong and operationally efficient. Capitalwould be a key factor in
building a successful institution. The banking and
financesystem will improve competitiveness through a process of
consolidation, either throughmergers and acquisitions
through strategic alliances.Technology would be the key to the
competitiveness of banking and finance system. Indian players
will keep pace with global leaders in the use of banking technology.
In such ascenario, on-line accessibility will be available to the
customers from any part of theglobe; ‘Anywhere’ and ‘Anytime’
banking will be realized truly and fully. At the sametime ‘brick and
mortar’ banking will co-exist with ‘on-line’ banking to cater to
thespecific needs of different customers.Indian Banking system has
played a crucial role in the socio-economic development of
thecountry. The system is expected to continue to be sensitive
to the growth and developmentneeds of all the segments of
the society. The banking system that will evolve will be transparentin
its dealings and adopt global best practices in accounting and
disclosures driven by the mottoof value enhancement for
all stakeholders.Financial Sector Reforms set in motion in
1991 have greatly changed the face of Indian Banking
.
The banking industry has moved gradually from a regulated
environment to
aderegulated  market economy. The market developments  k
indled by liberalization  andglobalization  have resulted
in changes in the intermediation role
of banks. The pace of transformation has been more significant in
recent times with technology acting as a catalyst.While the banking
system has done fairly well in adjusting to the new market dynamics,
greater challenges lie ahead. Financial sector would be opened up for
greater international competitionunder WTO. Banks will have to gear
up to meet stringent prudential capital adequacy norms
21

under Basel II. In addition to WTO and Basel II, the Free Trade
Agreements (FTAs) such aswith Singapore, may have an impact
on the shape of the banking industry. Banks will alsohave to
cope with challenges posed by technological innovations in
banking. Banks need
to prepare for the changes. In this context the need for drawing up a R
oad Map to the futureassumes relevance. The idea of setting up a
Committee to prepare a Vision for the IndianBanking industry
came up in IBA, in this
background.Managing Committee  of Indian Banks’ Associat
ion constituted  a Committee  under theChairmanship of Shri S
C Gupta, Chairman & Managing Director, Indian Overseas Bank
to prepare a Vision Report for the Indian Banking Industry. The
composition of the Committee isgiven at the end of the report.The
Committee held its first meeting on 23
rd
June 2003 at Mumbai. Prior to the meeting themembers were
requested to give their thoughts on the future landscape of the banking
industry.A discussion paper based on the responses received from
members was circulated along with aquestionnaire eliciting views of
members on some of the specific issues concerning
anticipatedchanges in the banking environment. In the meeting, which
served as a brainstorming session,members gave their Vision of
the future. A second meeting of the Committee was held
atChennai on 7
th
August 2003 to have further discussions on the common views, which
emergedin the first meeting, and also to examine fresh areas to be
covered in the study.
22

The Vision Statement prepared by the Committee is based on

common thinking thatcrystallized at the meetings. In the Chennai
meeting it was decided to form a smaller groupfrom among the members
to draft the report of the Committee. The group met thrice tofinalize the
draft report. The report was adopted in the final meeting of the Committee
heldat Mumbai.When we talk about the future, it is necessary
to have a time horizon in mind. The Committee felt, it would
be rather difficult to visualize the landscape of banking industrysay,
20 years hence due to the dynamic environment. While Government
of India broughtout India Vision 2020, the Committee is of the view
that the pace of changes taking placein the banking industry and in
the field of Information Technology would render anyattempt
to visualize the banking scenario in 2020, inconceivable. The
entire financialservices sector may undergo
a dramatic transformation. It was, therefore, felt that weshould
set our goals for the near future say, for 5-10 years hence and appropriately
call thisexercise “
Banking Industry – Vision 2010
”. The three main aspects focused in the banking vision includes
product innovation, process re-engineering and technology.
PRODUCT INNOVATION AND PROCESS RE-
ENGINEERING
With increased competition in the banking Industry, the net interest
margin of banks hascome down over the last one decade. Liberalization
with Globalization will see the spreadsnarrowing further to 1-1.5% as
in the case of banks operating in developed countries.Banks will
look for fee-based income to fill the gap in interest income. Product
innovationsand process re-engineering will be the order of the day. The
changes will be motivated bythe desire to meet the customer
requirements and to reduce the cost and improve theefficiency
of service. All banks will therefore go for rejuvenating their costing
and pricingto segregate profitable and non-profitable
business. Service charges will be decided takinginto account the
costing and what the traffic can bear. From the earlier 
revenue = cost +profit
equation i.e., customers are charged to cover the costs incurred
and the profits
23

expected, most banks have already moved into the

profit =revenue - cost
equation. Thishas been reflected in the fact that with cost of services
staying nearly equal across banks,the banks with better cost control are
able to achieve higher profits whereas the banks withhigh overheads due to
under-utilisation of resources, un-remunerative branch network etc.,either
incurred losses or made profits not commensurate with the capital
employed. Thenew paradigm in the coming years will be
cost = revenue - profit
.As banks strive to provide value added services to customers,
the market will see theemergence of strong investment and
merchant banking entities. Product innovation andcreating brand
equity for specialized products will decide the market share and
volumes. New products on the liabilities side such as forex linked dep
osits, investment-linkeddeposits, etc. are likely to be introduced, as
investors with varied risk profiles will look for  better yields. There will be
more and more of tie-ups between banks, corporate clients andtheir
retail outlets to share a common platform to shore up revenue
through increasedvolumes.
24

Banks will increasingly act as risk managers to corporate and other

entities by offering avariety of risk management products like
options, swaps and other aspects of
financialm a n a g e m e n t   i n   a   m u l t i   c u r r e n c y   s c e n a r i o .   B a n
k s   w i l l   p l a y   a n   a c t i v e   r o l e   i n   t h e development of
derivative products and will offer a variety of hedge products
to thecorporate sector and other investors. For example, Derivatives
in emerging futures marketfor commodities would be an area offering
opportunities for banks. As the integration of markets takes place
internationally, sophistication in trading and specialized exchanges
for commodities will expand. As these changes take place, banking
will play a major role in providing financial support to such
exchanges, facilitating settlement systems and enablingwider
participation.Bancassurance is catching up and Banks / Financial 
Institutions have started enteringinsurance business. From mere
offering of insurance products through network of
bank  branches, the business is likely to expand through self-designed 
insurance products after necessary legislative changes. This could lead to
a spurt in fee-based income of the banks.Similarly, Banks will look
analytically into various processes and practices as these existtoday
and may make appropriate changes therein to cut costs and
delays. Outsourcing andadoption of BPOs will become more and more
relevant, especially when Banks go in for larger volumes of retail
business. However, by increasing
outsourcing of operationsthrough service providers, banks are
making themselves vulnerable to problems faced bythese
providers. Banks should therefore outsource only those
functions that are notstrategic to banks’ business. For
instance, in the wake of implementation of 90 days’delinquency
norms for classification of assets, some banks may think of engaging
externalagencies for recovery of their dues and in NPA management.
25

Banks will take on competition in the front end and seek co-operation in the
back end, as inthe case of networking of ATMs. This type of 
co-opetition
will become the order of theday as Banks seek to enlarge their
customer base and at the same time to realize costreduction and
greater efficiency.