CREDIT RISK MANAGEMENT BY PUBLIC

SECTOR BANK – A COMPARATIVE STUDY ON

PUNJAB NATIONAL BANK (PNB) AND STATE
BANK OF INDIA (SBI)

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 Chapter-1
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Risk Analysis and Risk Management has got much importance in the Indian Economy
during this liberalization period. The foremost among the challenges faced by the
banking sector today is the challenge of understanding and managing the risk. The very
nature of the banking business is having the threat of risk imbibed in it. Banks' main role
is intermediation between those having resources and those requiring resources. For
management of risk at corporate level, various risks like credit risk, market risk or
operational risk have to be converted into one composite measure.
In times of volatility and fluctuations in the market, financial institutions need to prove
their mettle by withstanding the market variations and achieve sustainability in terms of
growth and well as have a stable share value. Hence, an essential component of risk
management framework would be to mitigate all the risks and rewards of the products
and service offered by the bank. Thus the need for an efficient risk management
framework is paramount in order to factor in internal and external risks.
Credit risk is the oldest form of risk that is faced by the bankers across the globe. It is the
risk of default on loans. Credit risk is the biggest risk the bank face by the virtue of nature
of business, inherits. Important in a bank relationship is “know your client principles,” by
becoming familiar with the borrower. It is important that bank deal with customer with
sound reputation and creditworthiness. Therefore banks need to manage the credit risk in
their credit portfolio but also that in any individual credit or transaction. The effective
management of credit risk is a critical component of comprehensive risk management and
essential for the long success of a banking organization.
In banks and other financial institutions, risk plays a major part in the earnings of a bank.
The higher the risk, the higher the return, hence, it is essential to maintain a parity
between risk and return. Hence, management of Financial risk incorporating a set
systematic and professional methods especially those defined by the Basel II becomes an
essential requirement of banks. The more risk averse a bank is, the safer is their Capital
base.

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In recent decades credit risk has become pervasive. Companies borrow to make
acquisitions and to grow, small business borrow to expand their capacity and individuals
use credit for other purpose. Since exposure to credit risk continues to be the leading
source of problems in banks worldwide, banks and their supervisors should be able to
draw useful lessons from past experiences. Banks should now have a keen awareness of
the need to identify, measure, monitor and control credit risk as well as to determine that
they hold adequate capital against these risks and that they are adequately compensated
for risks incurred.
The deregulation and liberalization have made the risk management and ALM an
important function in banking, though the objectives related to risk management have
been properly set, banks are finding it difficult t implement the same.
The project was mainly aimed at finding out the steps taken by PNB to manage the assets
and liabilities. It also analyses the extent of implementation of the RBI guidelines by
Punjab National Bank (PNB).

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1.2 NEED AND RATIONALE OF THE STUDY

This research study will help us to examine the status of Indian banks with respect to the

sophistication level of risk rating models used by the Banks to calculate the various risks

faced by them. All this will help us to establish certain standards below which a Bank

should not operate as below it, it will be exposed to greater amount of risk and the

resultant consequences will have to be faced by the Bank itself. From finance and control

viewpoint such benchmarking will also help us calculate the viable amount of resources

that should be allocated to the risk management department so that it can work efficiently

on the R&D to further minimize the risks faced by them.

1.3 PURPOSE OF THE STUDY

The purpose of our project was a comparative study of credit risk management of SBI

and PNB. Risk Management is the application of proactive strategy to plan, lead,

organize, and control the wide variety of risks that are rushed into the fabric of an

organization’s daily and long-term functioning. Like it or not, risk has a say in the

achievement of our goals and in the overall success of an organization. Present paper is to

make an attempt to identify the risks faced by the banking industry and the process of risk

management. Credit risk in banks not only arises in course of direct lending when funds

are not repaid, it also arises in course of issuing guarantees or letters of credit when funds

will not be forthcoming upon crystallization of the liability, or in the course of

transactions involving treasury products when series of payments due from the

counterparty cease or are not forthcoming timely, or in case of trading of securities,

settlement is not effected or in case of cross border exposure where free transfer of

currency is restricted or creases. The list is however not exhaustive. Since, lending

activities are usually spread across all the branches and controlling offices of banks, and

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lending activities typically command more than half of all risk taking activities of a bank,

management of credit risk is very critical requirement of banks.

The project was based mainly on secondary research and review of existing literatures on

ALM and Risk Management of Banks in India. The Branch Managers of SBI and PNB

were also questioned to find out their extent of awareness regarding Risk Management.

The results showed that, PNB had a comprehensive structure for ALM and Risk

Management. The policies and systems were also in line with the RBI guidelines. But the

level of awareness regarding risk management in the operational level was generally low.

PNB has been following most of guidelines of RBI regarding risk management. But the

level of awareness regarding risk management at the operational level is still low.

Further, risk management mainly depends on factors external to the organization. Since

the external environment is not conducive for proper risk management, the Banks in India

have not bee able to practice Risk Management efficiently.

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 CHAPTER-2

COMPANY PROFILES

STAE BANK OF INDIA

The State Bank of India (SBI) is an Indian multinational, public sector banking and
financial services statutory body. It is a government corporation statutory body
headquartered in Mumbai, Maharashtra. SBI is ranked as 216th in the Fortune Global 500
list of the world's biggest corporations of 2019. It is the largest bank in India with a 23%
market share in assets, besides a share of one-fourth of the total loan and deposits market.

The bank descends from the Bank of Calcutta, founded in 1806, via the Imperial Bank of
India, making it the oldest commercial bank in the Indian subcontinent. The Bank of
Madras merged into the other two "presidency banks" in British India, the Bank of
Calcutta and the Bank of Bombay, to form the Imperial Bank of India, which in turn
became the State Bank of India in 1955. The Government of India took control of the
Imperial Bank of India in 1955, with Reserve Bank of India (India's central bank) taking
a 60% stake, renaming it the State Bank of India.

A 2005 stamp dedicated to the State Bank of India

Share of the Bank of Bengal, issued 13 May 1876

Seal of Imperial Bank of India.

Seal of Imperial Bank of India

The roots of the State Bank of India lie in the first decade of the 19th century when the
Bank of Calcutta later renamed the Bank of Bengal, was established on 2 June 1806. The
Bank of Bengal was one of three Presidency banks, the other two being the Bank of
Bombay (incorporated on 15 April 1840) and the Bank of Madras (incorporated on 1 July
1843). All three Presidency banks were incorporated as joint stock companies and were
the result of royal charters. These three banks received the exclusive right to issue paper
currency till 1861 when, with the Paper Currency Act, the right was taken over by the
Government of India. The Presidency banks amalgamated on 27 January 1921, and the

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re-organised banking entity took as its name Imperial Bank of India. The Imperial Bank
of India remained a joint stock company but without Government participation.

Pursuant to the provisions of the State Bank of India Act of 1955, the Reserve Bank of
India, which is India's central bank, acquired a controlling interest in the Imperial Bank
of India. On 1 July 1955, the Imperial Bank of India became the State Bank of India. In
2008, the Government of India acquired the Reserve Bank of India's stake in SBI so as to
remove any conflict of interest because the RBI is the country's banking regulatory
authority.

In 1959, the government passed the State Bank of India (Subsidiary Banks) Act. This
made eight banks that had belonged to princely states into subsidiaries of SBI. This was
at the time of the first Five Year Plan, which prioritised the development of rural India.
The government integrated these banks into the State Bank of India system to expand its
rural outreach. In 1963 SBI merged State Bank of Jaipur (est. 1943) and State Bank of
Bikaner (est.1944).

SBI has acquired local banks in rescues. The first was the Bank of Bihar (est. 1911),
which SBI acquired in 1969, together with its 28 branches. The next year SBI acquired
National Bank of Lahore (est. 1942), which had 24 branches. Five years later, in 1975,
SBI acquired Krishnaram Baldeo Bank, which had been established in 1916 in Gwalior
State, under the patronage of Maharaja Madho Rao Scindia. The bank had been the
Dukan Pichadi, a small moneylender, owned by the Maharaja. The new bank's first
manager was Jall N. Broacha, a Parsi. In 1985, SBI acquired the Bank of Cochin in
Kerala, which had 120 branches. SBI was the acquirer as its affiliate, the State Bank of
Travancore, already had an extensive network in Kerala.

There has been a proposal to merge all the associate banks into SBI to create a single
very large bank and streamline operations.

The first step towards unification occurred on 13 August 2008 when State Bank of
Saurashtra merged with SBI, reducing the number of associate state banks from seven to
six. On 19 June 2009, the SBI board approved the absorption of State Bank of Indore.
SBI holds 98.3% in State Bank of Indore. (Individuals who held the shares prior to its
takeover by the government hold the balance of 1.7%.)

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The acquisition of State Bank of Indore added 470 branches to SBI's existing network of
branches. Also, following the acquisition, SBI's total assets will approach ₹10 trillion.
The total assets of SBI and the State Bank of Indore were ₹9,981,190 million as of
March 2009. The process of merging of State Bank of Indore was completed by April
2010, and the SBI Indore branches started functioning as SBI branches on 26 August
2010.

On 7 October 2013, Arundhati Bhattacharya became the first woman to be appointed

Chairperson of the bank. Mrs. Bhattacharya received an extension of two years of service
to merge into SBI the five remaining associated banks.

State Bank of India (SBI) a Fortune 500 company, is an Indian Multinational, Public
Sector Banking and Financial services statutory body headquartered in Mumbai. The rich
heritage and legacy of over 200 years, accredits SBI as the most trusted Bank by Indians
through generations.

In 2020 SBI, the largest Indian Bank with 1/4th market share, serves over 45 crore
customers through its vast network of over 22,000 branches, 62617 ATMs/ADWMs,
71,968 BC outlets, with an undeterred focus on innovation, and customer centricity,
which stems from the core values of the Bank - Service, Transparency, Ethics, Politeness
and Sustainability.

The Bank has successfully diversified businesses through its various subsidiaries i.e SBI
General Insurance, SBI Life Insurance, SBI Mutual Fund, SBI Card, etc. It has spread its
presence globally and operates across time zones through 229 offices in 31 foreign
countries.

Growing with times, SBI continues to redefine banking in India, as it aims to offer
responsible and sustainable Banking solutions..

Operations

SBI provides a range of banking products through its network of branches in India and
overseas, including products aimed at non-resident Indians (NRIs). SBI has 16 regional
hubs and 57 zonal offices that are located at important cities throughout India.

Domestic presence

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Samriddhi Bhavan, Kolkata

SBI has over 24000 branches in India. In the financial year 2012–13, its revenue was
₹2.005 trillion (US$29 billion), out of which domestic operations contributed to 95.35%
of revenue. Similarly, domestic operations contributed to 88.37% of total profits for the
same financial year.

Under the Pradhan Mantri Jan Dhan Yojana of financial inclusion launched by
Government in August 2014, SBI held 11,300 camps and opened over 3 million accounts
by September, which included 2.1 million accounts in rural areas and 1.57 million
accounts in urban areas.

International presence

The State Bank of India branch located in Ramat Gan, Israel

As of 2014–15, the bank had 191 overseas offices spread over 36 countries having the
largest presence in foreign markets among Indian banks.

SBI operates several foreign subsidiaries or affiliates.

In 1989, SBI established an offshore bank, State Bank of India International (Mauritius)
Ltd. This then amalgamated with The Indian Ocean International Bank (which had been
doing retail banking in Mauritius since 1979) to form SBI (Mauritius) Ltd. Today, SBI
(Mauritius) Ltd has 14 branches – 13 retail branches and 1 global business branch at
Ebene in Mauritius. SBI Sri Lanka now has three branches located in Colombo, Kandy
and Jaffna. The Jaffna branch was opened on 9 September 2013. SBI Sri Lanka is the
oldest bank in Sri Lanka; it was founded in 1864.

State Bank of India branch at Southall, United Kingdom

In 1982, the bank established a subsidiary, State Bank of India, which now has ten
branches—nine branches in the state of California and one in Washington, D.C. The 10th
branch was opened in Fremont, California on 28 March 2011. The other eight branches in
California are located in Los Angeles, Artesia, San Jose, Canoga Park, Fresno, San
Diego, Tustin and Bakersfield.

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In Nigeria, SBI operates as INMB Bank. This bank began in 1981 as the Indo–Nigerian
Merchant Bank and received permission in 2002 to commence retail banking. It now has
five branches in Nigeria.

In Nepal, SBI owns 55% of "Nepal SBI Bank Limited". (The state-owned Employees
Provident Fund of Nepal owns 15% and the general public owns the remaining 30%.)
Nepal SBI Bank Limited has branches throughout the country.

In Moscow, SBI owns 60% of Commercial Bank of India, with Canara Bank owning the
rest.

In Indonesia, it owns 76% of PT Bank Indo Monex.

The State Bank of India already has a branch in Shanghai and plans to open one in
Tianjin.

In Kenya, State Bank of India owns 76% of Giro Commercial Bank, which it acquired for
US$8 million in October 2005.

In January 2016, SBI opened its first branch in Seoul, South Korea following the
continuous and significant increase in trade due to the Comprehensive Economic
Partnership Agreement signed between New Delhi and Seoul in 2009.

Former Associate Banks

SBI main branch at Mumbai lit up

Main Branch of SBI in Mumbai

SBI acquired the control of seven banks in 1960. They were the seven regional banks of
former Indian princely states. They were renamed, prefixing them with 'State Bank of'.
These seven banks were State Bank of Bikaner and Jaipur (SBBJ), State Bank of
Hyderabad (SBH), State Bank of Indore (SBN), State Bank of Mysore (SBM), State
Bank of Patiala (SBP), State Bank of Saurashtra (SBS) and State Bank of Travancore
(SBT). All these banks were given the same logo as the parent bank, SBI.

The plans for making SBI a single very large bank by merging the associate banks started
in 2008, and in September the same year, SBS merged with SBI. The very next year,
State Bank of Indore (SBN) also merged. In the same year, a subsidiary named Bharatiya

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Mahila Bank was formed. The negotiations for merging of the 6 associate banks (State
Bank of Bikaner and Jaipur, State Bank of Hyderabad, State Bank of Mysore, State Bank
of Patiala, State Bank of Travancore and Bharatiya Mahila Bank) by acquiring their
businesses including assets and liabilities with SBI started in 2016. The merger was
approved by the Union Cabinet on 15 June 2016. The State Bank of India and all its
associate banks used the same blue Keyhole logo. The State Bank of India wordmark
usually had one standard typeface, but also utilized other typefaces.

On 15 February 2017, the Union Cabinet approved the merger of five associate banks
with SBI. What was overlooked, however, were different pension liability provisions and
accounting policies for bad loans, based on regional risks.

State Bank of India Mumbai LHO

The State Bank of Bikaner & Jaipur, State Bank of Hyderabad, State Bank of Mysore,
State Bank of Patiala and State Bank of Travancore, and Bharatiya Mahila Bank were
merged with State Bank of India with effect from 1 April 2017.

Non-banking subsidiaries

Apart from five of its associate banks (merged with SBI since 1 April 2017), SBI's non-
banking subsidiaries include:

SBI Capital Markets Ltd

SBI Cards & Payments Services Pvt. Ltd. (SBICPSL)

SBI Life Insurance Company Limited

In March 2001, SBI (with 74% of the total capital), joined with BNP Paribas (with 26%
of the remaining capital), to form a joint venture life insurance company named SBI Life
Insurance company Ltd.

Other SBI service points

As of 31 March 2017, SBI group (including associate banks) has 59,291 ATMs.

Since November 2017, SBI also offers an integrated digital banking platform named
YONO.

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Listings and shareholding

As on 31 March 2017,[1] Government of India held around 61.23% equity shares in SBI.
The Life Insurance Corporation of India, itself state-owned, is the largest non-promoter
shareholder in the company with 8.82% shareholding.

Shareholders Shareholding

Promoters: Government of India 54.23%

FIIs/GDRs/OCBs/NRIs 18.17%

Banks & Insurance Companies 10.00%

Mutual Funds & UTI 8.29%

Others 9.31%

Total 100.0%

The equity shares of SBI are listed on the Bombay Stock Exchange, where it is a
constituent of the BSE SENSEX index, and the National Stock Exchange of India, where
it is a constituent of the CNX Nifty. Its Global Depository Receipts (GDRs) are listed on
the London Stock Exchange.

Employees

State Bank Institute of Credit and Risk Management, Gurugram

SBI is one of the largest employers in the country with 209,567 employees as on 31
March 2017, out of which there were 23% female employees and 3,179 (1.5%)
employees with disabilities. On the same date, SBI had 37,875 Scheduled Castes (18%),
17,069 Scheduled Tribes (8.1%) and 39,709 Other Backward Classes (18.9%)
employees. The percentage of Officers, Associates and Sub-staff was 38.6%, 44.3% and
16.9% respectively on the same date. Around 13,000 employees have joined the Bank in
FY 2016–17. Each employee contributed a net profit of ₹511,000 (US$7,400) during FY
2016–17.

Recent awards and recognition

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SBI was ranked 232nd in the Fortune Global 500 rankings of the world's biggest
corporations for the year 2016.

SBI was 50th most trusted brand in India as per the Brand Trust Report 2013, an annual
study conducted by Trust Research Advisory, a brand analytics company and
subsequently, in the Brand Trust Report 2014, SBI finished as India's 19th most trusted
brand in India.

Financial Performance

reported a net profit of ₹3,955 crore in the third quarter ended December 31, 2018
against a net loss of ₹ 2,416 crore in the year ago quarter.

The bottomline was boosted by a 21 per cent year-on-year (yoy) jump in net interest
income at ₹22,691 crore and 39 per cent y-o-y decline in total provisions at ₹8,670 crore.

ALSO READ: SBI back in black on credit growth; posts ₹945-cr profit in Sept quarter

Non-interest income, however, saw a 0.61 per cent y-o-y dip at ₹8,035 crore.

Gross non-performing assets (GNPAs) during the reporting quarter declined by ₹18,099
crore to stand at ₹1,87,765 crore as at December-end 2018.

GNPAs improved from 10.35 per cent of gross advances as at December-end 2017 to
8.71 per cent as at December-end 2018.

Net NPAs improved from 5.61 per cent of gross advances as at December-end 2017 to
3.85 per cent as at December-end 2018.

Whole bank advances registered a growth of 12 per cent y-o-y to ₹21,55,316 crore as on
December-end 2018. Within this, corporate advances grew by 21 per cent y-o-y; retail
personal loans were up 18 per cent; and small and medium enterprise loans increased by
9.50 per cent.

Deposits at the whole bank level grew by 7 per cent y-o-y to ₹28,30,538 crore as on
December 31, 2018.

PUNJAB NATIONAL BANK

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With over 68 million satisfied customers and more than 5800 offices including 8 overseas
branches, PNB has continued to retain its leadership position amongst the nationalized
banks. The bank enjoys strong fundamentals, large franchise value and good brand
image. Besides being ranked as one of India's top service brands, PNB has remained fully
committed to its guiding principles of sound and prudent banking. Apart from offering
banking products, the bank has also entered the credit card, debit card; bullion business;
life and non-life insurance; Gold coins & asset management business, etc. PNB has
earned many awards and accolades during the year in appreciation of excellence in
services, Corporate Social Responsibility (CSR) practices, transparent governance
structure, best use of technology and good human resource management.

Punjab National Bank (PNB) is an Indian multinational banking and financial services
company. It is a state-owned corporation based in New Delhi, India. The bank was
founded in 1894. As of 31 March 2017 the bank has over 80 million customers, 6,937
branches, and 10681 ATMs across 764 cities. The Bank is the second largest
government-owned commercial bank in India.
Since its humble beginning in 1895 with the distinction of being the first Swadeshi Bank
to have been started with Indian capital, PNB has achieved significant growth in business
which at the end of March 2011 amounted to Rs 5,55,005 crore. PNB is ranked as the 2nd
largest bank in the country after PNB in terms of branch network, business and many
other parameters. During the FY 2010-11, with 39.16% share of CASA to domestic
deposits, the Bank achieved a net profit of Rs 4433 crore. Bank has a strong capital base
with capital adequacy ratio of 12.42% as on Mar’11 as per Basel II with Tier I and Tier II
capital ratio at 8.44% and 3.98% respectively. As on March’11, the Bank has the Gross
and Net NPA ratio of 1.79% and 0.85% respectively. During the FY 2010-11, its ratio of
Priority Sector Credit to Adjusted Net Bank Credit at 40.67% & Agriculture Credit to
Adjusted Net Bank Credit at 19.30% was also higher than the stipulated requirement of
40% & 18% respectively.

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PNB has a banking subsidiary in the UK (PNB International Bank, with seven branches
in the UK), as well as branches in Hong Kong, Kowloon, Dubai, and Kabul. It has
representative offices in Almaty (Kazakhstan), Dubai (United Arab Emirates), Shanghai
(China), Oslo (Norway), and Sydney (Australia). In Bhutan it owns 51% of Druk PNB
Bank, which has five branches. In Nepal PNB owns 20% of Everest Bank Limited, which
has 50 branches. Lastly, PNB owns 84% of JSC (SB) PNB Bank in Kazakhstan, which
has four branches.
History
Punjab National Bank was registered on 19 May 1894 under the Indian Companies Act,
with its office in Anarkali Bazaar, Lahore, in present day Pakistan. The founding board
was drawn from different parts of India professing different faiths and of varying back-
ground with, the common objective of creating a truly national bank that would further
the economic interest of the country. PNB's founders included several leaders of the
Swadeshi movement such as Dyal Singh Majithia and Lala Harkishan Lal, Lala
Lalchand, Shri Kali Prosanna Roy, Shri E.C. Jessawala, Shri Prabhu Dayal, Bakshi Jaishi
Ram, and Lala Dholan Dass. Lala Lajpat Rai was actively associated with the
management of the Bank in its early years. The board first met on 23 May 1894. The
bank opened for business on 12 April 1895 in Lahore.

PNB has the distinction of being the first Indian bank to have been started solely with
Indian capital that has survived to the present. (The first entirely Indian bank, Oudh
Commercial Bank, was established in 1881 in Faizabad, but failed in 1958.)

PNB has had the privilege of maintaining accounts of national leaders such as Mahatma
Gandhi, Jawahar Lal Nehru, Lal Bahadur Shastri, Indira Gandhi, as well as the account of
the famous Jalianwala Bagh Committee.

Performance

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The Bank has been able to maintain its stakeholders’ interest by posting an improved
NIM of 5.96% in Mar’16. The Earning per Share improved to Rs 240.60 while the Book
value per share improved to Rs 854.20. Punjab National Bank continues to maintain its
frontline position in the Indian banking industry. In particular, the bank has retained its
NUMBER ONE position among the nationalized banks in terms of number of branches,
Deposit, Advances, total Business, Assets, Operating and Net profit in the year 2016-17.
The impressive operational and financial performance has been brought about by Bank’s
focus on customer based business with thrust on CASA deposits, Retail, SME & Agri
Advances and with more inclusive approach to banking; better asset liability
management; improved margin management, thrust on recovery and increased efficiency
in core operations of the Bank. The performance highlights of the bank in terms of
business and profit are shown below:

Bank always looked at technology as a key facilitator to provide better customer service
and ensured that its ‘IT strategy’ follows the ‘Business strategy’ so as to arrive at “Best
Fit”. The Bank has made rapid strides in this direction. All branches of the Bank are
under Core Banking Solution (CBS) since Dec’08, thus covering 100% of its business
and providing ‘Anytime Anywhere’ banking facility to all customers including customers
of more than 3200 rural & semi urban branches. The Bank has also been offering Internet
banking services to its customers which also enables on line booking of rail tickets,
payment of utilities bills, purchase of airline tickets, etc. Towards developing a cost
effective alternative channels of delivery, the Bank with 5050 ATMs has the largest ATM
network amongst Nationalized Banks.
With the help of advanced technology, the Bank has been a frontrunner in the industry so
far as the initiatives for Financial Inclusion is concerned. With its policy of inclusive
growth, the Bank’s mission is “Banking for Unbanked”. The Bank has launched a drive
for biometric smart card based technology enabled Financial Inclusion with the help of
Business Correspondents/Business Facilitators (BC/BF) so as to reach out to the last mile

16
customer. The Bank has started several innovative initiatives for marginal groups like
rickshaw pullers, vegetable vendors, dairy farmers, construction workers, etc. Bank has
launched a welfare scheme of adoption of village viz., “PNB VIKAS”. Under the
scheme, Bank has selected 117 villages (60 in lead districts and 57 in non lead district) in
different circles for all-round improvement in the living standards of the villagers.
Besides, Bank has formed “PNB PRERNA”, an association of the wives of the Bank’s
senior management. The association through its voluntary initiatives has undertaken
activities like distribution of food to the poor and needy, provision of computers, books,
stationary items to poor girl students at various orphanages and schools etc.

Backed by strong domestic performance, the Bank is planning to realize its global
aspirations. Bank has opened one branch each at Kabul and Dubai, two branches at Hong
Kong and an Off Shore Banking Unit at Mumbai. In addition to the above, Bank has
Representative offices at Almaty, Dubai, Shanghai and Oslo, a wholly owned subsidiary
in UK with 7 branches and a subsidiary each in Kazakhstan & Bhutan, and joint venture
with Everest Bank Ltd. Nepal. During the year, Bank acquired majority equity stake of
63.64% in Dana Bank of Kazakhstan.

Punjab National Bank has been ranked 38th amongst top 500 companies by The
Economic Times. PNB has earned 9th position among top 50 trusted brands in India.
Punjab National Bank India maintains relationship with more than 200 leading
international banks world wide. PNB India has Rupee Drawing Arrangements with 15
exchange companies in UAE and 1 in Singapore.

ACHIEVEMENTS

 Punjab National Bank announced its Q1FY2010 results on 29 July 2009,

delivering 62% y-o-y growth in net profits to Rs832 crore (Rs512cr),

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 substantially ahead of expectations on account of large treasury gains, apart
from healthy operating performance.
 While the bank’s deposit growth was reasonably robust at 4.4% sequentially
and 26.5% y-o-y, unlike the peers its growth in advances also remained strong
at 38% y-o-y.
 In spite of being at the forefront of PLR cuts, the bank posted a healthy
growth in Net Interest Income (NII) of 29% y-o-y.
 Other Income surged 113% y-o-y, driven by strong treasury gains of Rs355
crore during the quarter in line with industry trends, even as Fee income was
also robust at 45% y-o-y, on the back of strong balance sheet growth.
 Operating expenses were higher than expected on account of Rs150 crore of
provisions for imminent wage hikes.
 Gross and Net NPA ratios remained stable sequentially at 1.8% and 0.2%,
with the bank not adopting the guidelines of treating floating provisions as
part of tier 2 capital instead of adjusting against NPAs on express permission
from the RBI.

PRODUCTS AND SERVICES

Savings Fund Account - Total Freedom Salary Account, PNB Prudent Sweep, PNB
Vidyarthi SF Account, PNB Mitra SF
Account Current Account - PNB Vaibhav, PNB Gaurav, PNB Smart Roamer
Fixed Deposit Schemes - Spectrum Fixed Deposit Scheme, Anupam Account,
Mahabachat Schemes, Multi Benefit Deposit
Scheme Credit Schemes - Flexible Housing Loan, Car Finance, Personal Loan, Credit
Cards
Social Banking - Mahila Udyam Nidhi Scheme, Krishi Card, PNB Farmers Welfare
Trust
Corporate Banking - Gold Card scheme for exporters, EXIM finance

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Business Sector - PNB Karigar credit card, PNB Kushal Udhami, PNB Pragati Udhami,
PNB Vikas Udhami
Apart from these, and the PNB also offers locker facilities, senior citizens schemes, PPF
schemes and various E-services.

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 CHAPRER 3: LITERATURE REVIEW
The chapter is aimed at illustrating the basic concepts of ALM and risk management .It
deals with the different kinds of risks ,their implication and their measurement.

Asset Liability Management

Definition -

Asset/Liability Management is the process of Evaluating Actions to Control the risks and
reach the financial Goals of the company.

The salient features of ALM are as follows :-

· A/LM is a process.
· Evaluating Actions, is essential to a proper A/LM process.
· ALM involves controlling the Risks
· ALM is aimed at reaching the financial goals.
It is a critical part of the Bank’s Financial Management Process. Banks that employ
A/LM effectively tend to be higher performing than banks that view A/LM as a
“necessary evil.”

A/LM alone will not guarantee that the bank will be a higher performing bank, but it does
greatly increase the chances. So if the bank wants to have a better chance of being a
higher performing bank, then it must take A/LM seriously.

In layman’s term:-

A/LM is similar to a good diet and exercise program. Research has shown on the whole, a
good diet and exercise program will lengthen our lives, give us more energy, and actually
make us happier people. If the research is so overwhelming that diet and exercise are
good for us, then why do many of us hate to do it? The reason: it takes time and
discipline.

ALM is a similar concept “It will not guarantee the financial institution will “live longer”
or become more profitable. But performed properly, it will dramatically increase the
probability of success. A/LM is an integral part of the Financial Management Process,
which, includes Long Range Strategic Planning and the Budgeting Process.

20
ALM ,is the art of ensuring that the maturity profile of assets match that of liabilities. It
plays an important role, both as a risk management tool and a profit engine. It combines
the technique of asset management ,liability management and spread management into a
cohesive process leading to an integrated management of the total balance sheet .the
importance of ALM lies not in the elimination of risk but in managing it in such a manner
that an acceptable balance exists between profitability ,growth and risk.

Objectives of ALM

The primary objectives of ALM is not to eliminate risk ; but to manage it in such a way
that volatility of net interest income is minimized in the short term time horizon and net
economic value of the organization is protected in a long term time horizon. In banking
scenario, this would men controlling the volatility of net income, net interest margin,
capital adequacy, and liquidity risk and finally ensuring an acceptable balance between
profitability, growth, and risk.

A sound ALM system should focus on

· Review of interest rate outlook

· Fixation of interest/product pricing on both assets and liabilities
· Examining loan portfolio
· Examining investment portfolio
· Measuring foreign exchange risk
· Managing liquidity risk
· Review of actual performance vis-à-vis projections in respect of net profit, interest
spread and other balance sheet ratios
· Budgeting and strategic planning
· Examine the profitability of new products

ALCO (Asset Liability Management Committee)

The ALCO comprising of the senior management like chairman and managing director or
executive director, general managers in charge of treasure, credit, planning, strategy,
international banking, computer etc. is entrusted to operationalise the boards risk

21
management policy. ALCO decides the business strategy of the bank. It is the decision
making unit responsible for balance sheet planning from risk return perspective including
the strategic management of interest rate and liquidity risk. It takes a view of the interest
rate trend in the short, medium and long term horizon and decides on the funding mix
between fixed vs. floating rate funds and domestic vs. Foreign currency funds etc. for
evolving appropriate business strategy.

It identifies the thrust areas and new initiative in tune with its overall risk management
policy. It thus decided pricing of the product, resource allocation, sources, mix, maturity
profile of assets and liabilities and balance sheet structuring. It recognizes the trade off
between short term opportunities and building long term values. It understands risk –
reward relationship. It takes calculated risk, controls exposure and monitors results in
terms of internal and external parameters. Unambiguously, strategy formulation, strategic
management of market risk and overseeing its implementation are the key aspects of
ALCO management. However, ALCO is not directly involved in profit planning and
budgeting projections. Though the ALCO decides the business and risk management of
the bank, the department concerns are responsible for the implementations of ALCO’S
decisions.

ALCO and Branches

Branches are the Points Of Sales (POS) for banking products. So ALM must be well
understood by the front in sales forces and all support / advisory personnel as well.
Successful branch generate assets and liabilities with terms, rates, and volumes as per
ALCO wish list. In turn, ALCO wish list should appreciated ground level realities and
more importantly compulsions of the field functionaries. Hence ALCO’s strategies and
views must be shared with the field forces on an ongoing basis and fine tuned with the
feed back from the latter.

22
ALCO Support Group

The ALM support group at apex level consists of operating staff responsible for
analyzing, monitoring and reporting the risk profiles to the ALCO. It is an independent
middle office set up to track the magnitude of market risk on a real time basis. It
prepares, interest rate forecasts (simulations) showing the effects of various possible
changes in market conditions related to balance sheet and articulate the action needed to
adhere to bank’s internal limits.

It should comprise of experts in market risk management economists, statisticians and

general lists with operational experiences. It is functionally placed directly placed under
ALCO. It should be separated from Treasury Department and is not involved in the day
to day management of treasury. It appraises the top management / treasury / ALCO
about adherence to prudential / risk parameters and also aggregates the interest rate risk
exposures assumed by the bank at any point of time.

RELEVANCE OF ALM

The basic objective of all banks is to maximize income along with controlling risk
exposure. In ALM process, emphasis is on the interest margin or spread, liquidity and
capital thus giving banks desired flexibility for attaining optional level of income within
acceptable risk.

To understand the relevance of ALM , the understanding of the different risks that a bank
faces, while it operates, becomes important. The next chapter deals with definition,
classification and explanation of the different types of risks.

RISKS

Risk is a serious business -

Why do organizations take risks? The apt answer would be –to make some handsome
gains. Banks, the world over, because they live with money, are said to be financial risk

23
takers. Generally, it is said that “no risk-no gain”, but sometimes taking high risk
becomes disastrous for the organization.

Definition of Risk

Risk can be defined as follows:-

“Risk is the possibility of suffering loss”
“Risk is measure of probability and severity of adverse effects”
“Risk is the potential for realization of unwanted negative consequences of an event”.
In any transaction if there is a possibility of loss or peril then it is termed as risky
transaction.

Categories of risk and their corresponding management

There are many risks involved in all commercial activities. Banks also being the
commercial organization are facing many risks. Broadly the risks, banks are facing today
may be classified as under:

1. Liquidity Risk :- It is the potential inability to generate cash to cope with the
decline in deposits or increase in assets. Liquidity risk originates from mismatches in the
maturity patterns of assets and liabilities .Since banks deal with assets and liabilities with
varied maturity patterns and risk profile, they need to strike a trade-off between been
overtly liquid and relatively liquid.

An effective measurement and monitoring process assessing all of banks cash inflows
against its outflow to identify the potential for any net shortfalls going forward forms an
essential ingredient to overall liquidity risk management. This includes funding
requirements for off balance sheet commitments. As all banks are affected by changes in
the economic climate and market conditions, the monitoring of economic and market
trends is also a key to liquidity risk management.

Traditionally, banks have been relying on core deposits for their funding. However, in
today’s environment, banks have resorted to other means of sources also for managing
the liquidity on ongoing basis. Cash inflows arise from such things as maturing assets,

24
saleable non-maturing assets, access to deposit liabilities, established credit lines that can
be tapped and in developed world through asset securitization also. These need to be
matched against cash flows stemming from liabilities and contingent liabilities falling
due, especially committed lines of credit that can be drawn down. A maturity ladder is
therefore a useful device to compare cash outflows and cash inflows both on a day to day
basis and over a period of time. The banks historical experience of the patterns of flows
and knowledge of market conventions can also guide a bank’s decision on liquidity risk
management especially in a difficult scenario. Use of “what if” analysis situations can
also help in building different liquidity scenarios for practical applications. An effective
system of internal control in banks against liquidity risk will involve :-

· A strong control environment. An adequate process for identifying and evaluating

liquidity risk
· Establishment of policy and procedure for handling such risks
· An adequate information system
· Control review of adherence to established policies and procedures.

2. Commercial Risk:- When repayments of loans and advances granted by the bank
are not forthcoming (counter party or credit risk),The products (deposits or advances)
have become obsolete and there is no market for them, and competition for the bank has
increased in the market, these situations may be termed as commercial risk for a bank.
World over, Commercial Risk has proved to be the most critical of all risks.

3. Interest Rate Risk:- Interest Rate Risk is felt, when changes in the interest rate
structure put pressure on the net interest margin of the Bank. Interest rate risk may be
viewed from two different complementary perspectives - earning sensitivity to rate
fluctuations and price sensitivity of instruments/products to changes in interest rate.

Changes in interest rates can affect banks with regard to changes in

a) Market value of assets/liabilities and off balance sheet (OBS) items; ultimately
having impact on the value of net worth.

25
b) Net interest income arising out of mismatch in the repricing terms of the assets
and liabilities;

c) Net income as a result of changes in interest income;

d) Net income margin owing to changes in interest income and sensitivity of non-
interest income to rate changes and

e) Capital-asset ratio due to changes in net margin.

The supervisory capital requirements established by Basle Committee from the end of
1997 covers interest rate risks in the trading activities of banks. Accordingly, interest

Rate risks in the trading activities of banks. Accordingly, interest rate risk management
process has been constituted to include development of business strategy, the assumption
of assets and liabilities in banking and trading activities, as well as a system of internal
controls. The focus has been on the need for effective interest rate risk measurement,
monitoring, and control functions within the interest rate risk management process.

According to the studies conducted by Basle Committee based on working experience of

Banks in more than 100 countries, the banks are normally exposed to following forms of
interest rate risk.

a) Repricing risk
b) Yield curve risk
c) Basis risk
d) Optionality
( a) Repricing risk : arises from timing differences in the maturity (for fixed rate) and
repricing (for floating rate) of bank’s assets , liabilities and off balance sheet (OBS)
positions while such repricing mismatches are fundamental to the business of banking ,
they can expose a bank’s income and underlying economic value to unanticipated
fluctuations as interest rate varies. For instance, a bank that funded a long term fixed rate
loan with a short term deposit could face a decline in both the future income arising from

26
the position and its underlying value if the interest rate increases. These declines arises
because the cash flows on the loan are fixed over its lifetime , while the interest paid on
the funding is variable, and increases after the short term deposits matures.

(b) Yield Curve Risk : arises when unanticipated shifts of the yield curve have
adverse effects on a bank’s income or underlying economic value. For example, the
underlying economic value of a long position in 10 yr government bonds hedged by a
short position in 5yr government notes could decline sharply if the yield curve steepens,
even if the position is hedged against parallel movements in the yield curve.

(c) Basis Risk : arises from imperfect correlation in the adjustment of the rates
earned and paid on different instruments with otherwise similar repricing characteristics.
When interest rates changes, these differences can give rise to unexpected changes in the
cash flows and earnings spread between assets, liabilities and OBS instruments of similar
maturities or repricing frequencies for example a strategy of funding one year loan that
reprices monthly based on one month LIBOR, exposes the institution to the risk that the
spread between the two index rates may change unexpectedly.

The concept of basis risk is applicable for any set of two different interest rates. For
example, basis risk between thee following the following rates can be analyzed:

· Prime / LIBOR
· Treasury Bill / LIBOR
· Certificate of deposits / LIBOR
· LIBOR / Commercial Paper
· Prime / Certificate of Deposit
The reasons for basis risk depend on particula4r set of rates, for example, Prime / LIBOR
basis risks are as follows:

a) Prime is an administered rate while LIBOR is market rate. The LIBOR changes
everyday, but the prime changes infrequently.

27
b) In US context, prime is a rate applicable for loans in the US_LIBOR is applicable
for intermediated outside the US. Thus other things remaining the same, costs of
certain types of regulation (e.g. Deposit Insurance Premium Change) may impact
prime only and not LIBOR.

c) During a declining rate environment, Prime tends to lag changes in LIBOR,

leading to wider spread. In an increasing rate environment, there is an urgency to
increase Prime Rate, resulting in declining spread.

This kind of pricing is usual in products market also when costs are increasing, prices go
up quickly, when costs are declining, and prices go down slowly. The rate of change is
different in different environments.

(d) Optionality : option provides the holder the right but not the obligations to buy,
sell or in some manner alter the cash flow of an instrument or financial contract. Options,
may be in the form of standard alone instruments such as exchange traded options or
embedded within an otherwise standard instrument like the various type of bonds and
notes with caller put provisions, loans which give borrowers the right to repay balances
and various type of non-maturity deposit instruments which give depositors the right to
withdraw funds at any time, often without any penalties. If not adequately managed, the
asymmetrical pay off characteristic of options held both explicit and embedded are
generally exercised to the advantage of the holder and disadvantage of seller.

Effects of Interest Rate Risk

Interest rate risk affects both on banks earning as well as its economic value. Earnings,
comprising of net interest income i.e., difference between total interest income and total
interest expense has been the focus of main attention traditionally, and the impact of
interest rate change on net interest income has been accepted from time to time.
However, in the emerging new scenario increasing focus on fee-based income and other
non-interest bearing income and expenses have led to changes in the dimension of the
game. The non-interest income arising from many activities can also be highly sensitive

28
to market interest rates. In international arena, banks are providing the servicing and
loan-administration function for mortgage loan pools in return for a fee-based on the
volume of assets it administers. When interest rates fall, the servicing bank may
experience a decline in its fee income as the underlying mortgages get prepared. In
addition, even traditional sources of non-interest income such as transaction processing
fee are becoming more interest rate sensitive. This increased sensitivity has led both bank
management and supervisors to take a broader view of potential effects of changes in
market interest rates on bank earnings and to factor these broader effects into their
estimated earnings under different interest rates environment.

The economic value, of a bank’s assets, liabilities, and OBS position can get affected due
to fluctuation in interest rates. The economic value of a bank can be viewed as the present
value of banks expected net cash, defined as the expected cash flow on liabilities plus the
expected net cash flows on OBS positions. Since economic value considered the potential
impacting interest rate changes on the present value of all future cash flows, it provides a
comprehensive view of the potential long term effects of changes in interest rates. Than is
offered by the earlier earnings perspectives.

While the above two perspectives focus on the impact of changes in future interest rates
on a banks future performances, evaluation of impact past interest rate changes may have
on future performance is also of great significance. In particular instruments that are not
marked to market may already contain embedded gains or losses due to past rate
movements and may ultimately affect bank earnings. For example, a long term fixed rate
loan entered into when interest rates were low and refunded more recently with liabilities
bearing a higher rate of interest will over its remaining, represent a drain on banks
resources

4. Price Risk:- Price risk is a risk, which occurs die to changes in market price of
assets, liabilities or derivative contracts. This results in strain on the profitability of the
bank.

29
5. Operating Risk:- Operating risk is a result of failure of operating system in a
bank due to certain reasons like fraudulent activities, natural disaster, human error or
omission or sabotage, etc.

6. Solvency Risk:- Solvency risk occurs when the bank is landed in a chronic
situation of not able to meet its obligations. This type of risk give the ultimate impression
that the bank has failed.

7. Foreign Exchange risk:- It refers to potential impact of movement in foreign

exchange rates. The risk here is that the adverse fluctuations in exchange rates may result
in a loss. Foreign exchange risk arises when there are unhedged current mismatches in an
institution assets and liabilities. This risk persists until the open position is covered by
means of hedging transactions. The amount at risk is a function of the magnitude of the
potential exchange rate changes and the size and duration of the foreign currency
exposures. Indian banks normally do not undertake currency exposure for funding
operation (i.e. unhedged conversion of resources in one currency for funding assets in
another currency). Currency position in Indian banks is concentrated in dealing rooms
and these are subjected to constant monitoring through separate daylight and overnight
limits and exception reporting.

There are two types, of foreign exchange risk viz., transaction risk and translation risks.

(a) Transaction risk: This is observed when movements in price of a currency

upward or downward result in loss on a particular transaction. Transaction risk also
destabilizes the anticipated cash flows.

(b) Translation risk: In a situation of transnational risk, the balance sheet of a

bank when converted in home currency, undergoes a drastic change chiefly owing to
exchange rate movements and changes in the level of investments or borrowings in
foreign currency even without having transaction at a particular point of time.

30
8. Political risk:- Introduction of service tax or increase in income tax, freezing the
assets of the banks by the legal authority, etc. is termed as political risk.

9. Human risk:- Labour unrest, dispute among top executives, lack of motivation,
inadequate skills, and en-mass resignation by competent executives, problems faced by
banks after implementations of VRS etc lead to human risk.

10. Financial risk:- Non availability of liquid funds, strain on profitability due to low
interest rate regime and adverse changes in exchange rates, etc. are reasons responsible
for the financial risk.

11. Technology risk:- Obsolescence, mismatches, breakdowns, adoption of latest

technology by competitors etc. come under technology risk.

EXTENT OF IMPLEMENTATION OF R.B.I. GUIDELINES AND RISK

MANAGEMENT IN PUBLIC SECTOR BANKS
The chapter aims at exhibiting the degree of adherence of RBI guidelines by PNB. The
chapter is in the following format : G represents the RBI Guideline, and I represent
the extent of implementation of that guideline by PNB.

General Guidelines

1. G : "The RBI has suggested traditional gap analysis as a suitable method to measure
interest rate risk. The analysis begins with constructing a maturity gap report. This report
categorizes assets and liabilities according to the time remaining to their repricing or
maturity in specific time periods known as "repricing buckets".

I : The PNB has consistently divided its maturity patterns into time buckets for the past
three years and has published it in their annual reports.

2. G: RBI has defined that the broad parameters of risk management function should
encompass:

"Strong MIS for reporting, monitoring and controlling risks".

I: The Banks : MIS aim at providing timely and accurate information to the
management with the help of advanced information technology. Towards efficient data

31
management, oracle RDBMS has been introduced in the bank, and the process of
migration of existing MISLA programme to oracle environment has stated with the
development of Credit Information System, which will replace MISLA. These
initiatives will help in creating a corporate data warehouse.

Guideline with respect to credit risk

G : 1). Every bank should have a credit risk policy document approved by the board. The
document should include risk identification, risk measurement, risk grading /aggregation
techniques, reporting and risk control/mitigation techniques, documentation, legal issues
and management of problem loans.

2). Credit risk policies should also define target markets, Risk acceptance criteria. credit
approval authority ,credit origination /maintenance procedures and guidelines for
portfolio management.

3). The credit risk policies approved by the board should be communicated to branches /
controlling officers. All dealing officials should clearly understand the bank’s approach
for credit sanction and should be held accountable for complying with established
policies and procedures .

4). Senior management of a bank shall be responsible for implementing the credit risk
policy approved by the board.

I : All these procedure have been followed properly followed by the Bank.

The Credit Risk Assessment System designed by the bank caters to all these Guidelines.
The C.R.A. system has been discussed in detail in a separate chapter.

While the answer for the first and second points(see above) lie in C.R.A.
system(explained in the later chapter). The answer to the third policy was got from the
survey that we did. According to it, the Branch Managers were having a clear idea of
their credit policies but they were not aware of the fact that these policies were used to
control credit risk. But they were following guidelines or the Bank property.

The Bank manages the port folio of loan assets to limit concentration in terms of risk
quality, geography, industry, product, maturity and large exposures aggregates, by

32
providing a centralized to its credit portfolio and instituting a suitable monitoring
mechanism therefore.

The CRA system which covered all commercial and institutional units and commercial
accounts under small scale industries and agricultural segments, was reviewed and
revised by extending its coverage to NBFCS. The Bank Exposure Risk Index (B.E.R.I.)
model for setting exposure limits on domestic commercial banks was also reviewed and
revised. An Institution Risk Assessment (I.R.A.) model for assessing and calculating
exposure limits on financial institutions and primary dealers has been developed.

G : Each bank, may depending on the size of the organization or loan / investment book,
should constitute a Credit Risk Management Committee.

I: The management of credit risks pertaining to domestic loans is the responsibility of

the Credit Policy and Procedures Committee/Chief Credit Officer.

Operation / System – C.R.M.

G : Banks should establish proactive Credit Risk Management practices like annual /half
yearly industry studies and individual obligor reviews, periodic credit calls that are
documented, periodic visits of plants and business site and at least quarterly
management reviews of troubled exposures/ weak credits.

I : With a view to evolving quantitative and qualitative measures to be adopted in regard

to handling of the Bank's current exposure to various industries, and issuing guidelines
for taking up additional exposure, studies of important industries are regularly
conducted.

Credit Rating Framework

G : The grades (symbols, numbers, alphabets, descriptive terms) used in the internal
credit risk grading system should represent, without any ambiguity, the default risks
associated with an exposure risk.

I : The C.R.A. system provides a comprehensive framework (See C.R.A. system chapter)
to handle all these issues.

33
G : The grading system adopted in a CRF could be an alphabetic or numeric or an alpha
numeric scale.

I : State Bank follows a numeric scale (According to the Branch Managers) with mainly
of 5 levels from 1-5.

G : The credit risk models followed by banks should at the least, achieve the following :

 Result in differentiating the Credit Risk in different credit exposures of a bank.

 Identify concentration in the portfolios.
 Help in pricing of credit.
I : The C.R.A. system covers all these points comprehensively.

CAPITAL ADEQUACY

G : The Banks must maintain a minimum capital adequacy ratio of 9%.

I : PNB has properly followed the guidelines and has maintained a capital adequacy of
more than 9% for the past five years

Capital Adequacy Ratio

16
14.58
13.35
14 12.51 12.79
3.89 11.49
12
3.15 4.13
4.21
10 3.21
Tier - II
8
10.69
6 9.36 Tier - I
8.28 9.22
4
8.58
2

0
1998 1999 2000 2001 2002

Monitoring Country Risks Investment Analysts’ Meet – June 2001 14

G : Banks should monitor their country exposures on a weekly basis before switching
over to real time monitoring. However, exposures to high risk categories should be
monitored in a real time basis.

I : Access to data not available.

34
CREDIT AUDIT

G : A credit audit mechanism may be assigned to a specific department, whose functions

are the following :

To process Credit Audit Reports.

To analyze credit audit findings and advise the departments / functionaries concerned.

To follow up with controlling authorities.

To apprise the top management.

To process the responses received and arrange for closure of the relative credit audit
reports.

I : The Bank's system adheres to the best standards of corporate governance, through the
inspection and audit and credit audit. The functions of the first two come under the
scrutiny of the Audit Committee of the Bank's Board.

Since the introduction in 1996-97, three rounds of Credit Audit have been completed,
and the fourth round is in progress. The main functions of the Credit Audit System are as
per guidelines.

35
COMPARATIVE ANALYSIS

CREDIT RISK MANAGEMENT AT SBI BANK

Systems remain safe and banking operations are conducted in a secure way.
Miscellaneous Operations L Risk Management & Internal controls M Business
Intelligence Department N Customer Service & Community Services Banking

RISK MANAGEMENT & INTERNAL CONTROLS RISK MANAGEMENT IN SBI L.

1 Risk Management Structure

• An independent Risk Governance structure is in place for Integrated Risk Management

covering Credit, Market, Operational and Group Risks. This framework visualises
empowerment of Business Units at the operating level, with technology being the key
driver, enabling identification and management of risk at the place of origination.

• Being alive to this imperative, efforts are on hand to enhance the degree of awareness at
the operating level in alignment with better risk management practices, Basel II
requirements and the overarching aim of the conservation and optimum use of capital.

• Keeping in view the changes which the Bank’s portfolios may undergo in stressed
situations, the Bank has in place a policy which provides a framework for conducting
Stress Tests at periodic intervals and initiating remedial measures wherever warranted.
The scope of the tests is constantly reviewed to include more stringent scenarios.

• Risk Management is perceived as an enabler for business growth and in strategic

business planning, by aligning business strategy to the underlying risks. This is achieved
by constantly reassessing the interdependencies / interfaces amongst each silo of Risk and
business functions. L.2 Basel II Implementation

• The Bank, as per RBI Guidelines, has migrated to Basel II as on 31st March 2008.
Simultaneously, processes have been set in train for fine-tuning systems & procedures, IT
capabilities and Risk Governance structure to meet the requirements of the Advanced
Approaches.

• Various initiatives such as migration to new Credit Risk Assessment Models,

independent validation of internal ratings and improvement in Loan Data Quality would

36
not only enable conservation of capital but also facilitate smooth migration to Advanced
Approaches. L.3 Credit Risk Management

• Credit Risk Management process encompasses identification, assessment,

measurement, monitoring and control of credit exposures. Well defined basic risk
measures such as CRA Models, Industry Exposure Norms, Counterparty Exposure
Limits, Substantial Exposure Limits, etc. have been put in place. L.4 Market Risk
Management

• Market Risk Management is governed by the Board approved Policies for Investment
and Trading in Bonds, Equities and Foreign Exchange.

• Exposure, Stop Loss, Duration Limits and Derivative Limits have been prescribed.
These limits along with other Management Action Triggers, are tracked daily and
necessary action initiated as required to control and manage Market Risk. L.5 Operational
Risk Management • The Bank manages Operational risks by ensuring maintenance of a
comprehensive system of Internal Controls and Policies .

• The objective of the Bank’s Operational Risk Management is to continuously review

systems and control mechanisms, create awareness of Operational Risk throughout the
Bank, assign risk ownership, alignment of risk management activities with business
strategy and ensuring compliance with regulatory requirements.

• The Policy applies to all business and functional areas within the Bank, and is
supplemented by operational systems, procedures and guidelines which are periodically
updated. L.6 Group Risk Management • The State Bank Group is recognised as a major
Financial Conglomerate and as a systemically important financial intermediary
with significant presence in various financial markets.

• Accordingly, it has become imperative, both from the regulatory point of view as well
as from the Group’s own internal control and risk management point of view, to oversee
the functioning of individual entities in the Group and periodically assess the overall
level of risk in the Group so as to facilitate optimal utilisation of capital resources and
adoption of a uniform set of risk practices across the Group Entities

37
. • The Group Risk Management Policy applies to all Associate banks, Banking and Non-
banking Subsidiaries and Joint Ventures of the State Bank Group under the jurisdiction of
specified regulators and complying with the relevant Accounting Standards

. • With a view to enabling the Group Entities to assess their material risks and adequacy
of the risk management processes and capital, all Group members, including Non-
banking Subsidiaries are encouraged to align their policies & operations with the Group,
vide Basel prescriptions and international best practices.

• Further, a Group Risk Management Committee has also been constituted to oversee the
matters relating to Group Risk by creating risk awareness across all Group entities,
ensuring periodic review of the policy and its compliance etc.

Asset Liability Management

• The Asset Liability Management Committee (ALCO) of the Bank is entrusted with the
evolvement of appropriate systems and procedures in order to identify and analyse
balance sheet risks and setting of bench mark parameters for efficient management of
these risks.

• ALM Department, being the support group to ALCO, monitors the Bank’s market risk
such as the liquidity risk, interest rate risk etc. by analyzing various ALM reports/
returns. The ALM department reviews the Bank’s ALM policy and complies with the
Bank’s/ RBI’s policy guidelines on an ongoing basis.

The Bank has successfully implemented Market Related Funds Transfer Pricing
(MRFTP) in all its business units for effective performance management and Interest
Rate Risk Management through execution of state-of-the-art ALM Tools. L.8 Internal
Controls L.8.1 The Bank has in-built internal control systems with well-defined
responsibilities at each level. Inspection & Management Audit (I&MA) Department of
the Bank carries out four streams of audits- Risk Focussed Internal Audit (RFIA), Credit
Audit, Information Systems Audit and Management Audit – covering different facets of
the Bank’s activities. I&MA Department also prescribes the processes, guidelines,
manual of operations and formats for the conduct of Concurrent Audit which is
administered by the Circles and carried out at branches with large deposits, advances and

38
other risk exposures and credit oriented BPR entities. The department, headed by the Dy.
Managing Director (I&MA), is functionally independent and reports to the Audit
Committee of the Bank’s Board (ACB). L.8.2 Risk Focussed Internal Audit The
Inspection system plays an important and critical role in introducing international best
practices in the internal audit function which is regarded as a critical component of
Corporate Governance. Risk Focussed Internal Audit, an adjunct to risk based
supervision as per RBI directives, has been introduced in the Bank’s audit system from
April 2003

. The audit of branches and BPR entities is conducted as per the periodicity approved by
ACB and RBI guidelines. During the year, audit of 6136 branches and 171 BPR entities
was conducted. L.8.3 Credit Audit Credit Audit aims at achieving continuous
improvement in the quality of the credit portfolio of the Bank by critically examining
individual large advances with exposures of Rs.10 crores and above. The audit examines
the probability of default, identifies risks and suggests risk mitigation measures. The
overall risk perception is also arrived at to initiate early remedial action to improve the
quality of credit portfolio. During the year, on-site Credit Audit was conducted in 289
branches, covering 4624 accounts with aggregate exposures of Rs.2,64,854 crores. L.8.4
Management Audit The Management Audit focusses on the effectiveness of risk
management in the processes and the procedures followed in the Bank and uses RBI Risk
Profile Templates as the basis.

The Management Audit universe comprises Corporate Centres Establishments;

Circles/Zonal Offices/On Locale Regional Offices/Regional Business Offices; Associate
Banks; Subsidiaries (Domestic/Foreign); Joint Ventures (Domestic/ Foreign), Regional
Rural Banks (RRBs) sponsored by the Bank; Representative Offices abroad and
Exchange companies managed by Bank. During the year, Management Audit was
conducted at 25 offices /establishments. L.8.5 Foreign Offices Audit I&MA Department
supervises internal audit of all foreign offices of the Bank, namely: (a) Home Office
Audit carried out by officials identified by I&MA Department. (b) Internal Audit
conducted either by an official of the Bank or by an outsourced firm of that country,
where foreign office is located. (c) Management Audit of Representative Offices, Joint
Ventures and Subsidiaries. During the year, 23 Foreign Offices/Representative Offices /

39
Subsidiaries were subjected to audit. Vigilance The Vigilance Department in the Bank is
headed by the Chief Vigilance Officer appointed with the concurrence of the Ministry of
Finance and Central Vigilance Commission. At each Local Head Office, the Vigilance
Department is headed by a senior official of the rank of Deputy General Manager. The
Department is manned by officers having knowledge/background of investigation,
disciplinary action matters and extensive experience in banking operations. The
Department oversees three primary aspects of vigilance viz. prevention, detection and
punishment. The Bank has a zero tolerance policy for fraud, corruption and financial
irregularities and encourages “Whistle blowing” as a matter of corporate culture.

BUSINESS INTELLIGENCE DEPARTMENT • The Business Intelligence Department

in the Bank constantly assesses, upgrades and fine tunes the growing information
requirements of various user departments and business units. The information takes care
of both decision support as well as statutory requirements. The Data Warehousing
Project, designed to be a single source for all data requirements, is also progressing
satisfactorily.

CUSTOMER SERVICE & COMMUNITY SERVICES BANKING N.1CUSTOMER

SERVICE

On July 01 2008, the Bank unveiled its new Vision statement which contains the distilled
essence of the views of over 1,40,000 staff who participated in a unique exercise
conceptualized and conducted by Human Resource Management Department to redefine
the Bank’s Mission, Vision and Values. The staff, who displayed understanding of the
challenges of achieving excellent customer service which alone will enable the Bank to
continue to maintain its leadership position in future, were overwhelmingly of the
opinion that the Bank’s vision should focus primarily on customer service. The Vision
statement- ‘My SBI, My Customer first. My SBI: First in customer satisfaction.’
appropriately reflects this view of our staff and shall be the guiding principle for the
Bank’s plans, activities and strategies.

The Bank has a well established grievances redressal mechanism. Toll-free helpline
numbers are available at all LHO centres. For product enquiries and technology related
issues, a dedicated 24x7 helpline is available to customers. As a part of BPR initiatives, a

40
Contact Centre has been established with toll free number for providing information on
products and account enquiries to customers on 24x7 basis.

Risk Management Policies of PNB

The Bank's risk management policies are based on the premise that the management of
risks can be segregated by types and the risks can be better comprehended by units most
capable of understanding them.

The primary responsibility for management of risks vests with the Central Board of the
Bank, who approve the risk management policies and structure of Risk Management.

An Integrated Risk Management Committee (IRMC) has been constituted at the upper
level to examine and decide upon the issues pertaining to Integrated Risk Management.

Market Risk Management:

The ALCO at the corporate center takes decisions in regard to appropriate systems and
procedures for identification measurement and management of market risks.

Operation Risks Management

Management of operational risks has been receiving focus and attention in the light of the
Basel Committee proposal to prescribe a capital charge for operational risk. The various
aspects of operation risks are looked into by various group heads in the corporate office.

An operational risk management committee (ORMC) has been constituted .Its functions
are:

1) Identification, measurement, control and mitigation of operational risks relating to

various types of activities of the bank .

2) Overseeing and review of internal control systems in the bank and considering
additions / modifications therein, as may be necessary.

3) Developing management information systems (MIS) for quantifying and

monitoring operational risks.

41
4) Evolving benchmarks, based on business activity aggregations, for the purpose of
quantifying operational risk on a bank – wide basis and setting up a mechanism
for regular review of the benchmarks.

5) Setting prudent limits for operational risks and monitoring system therefore.

6) Developing models for management of operational risks.

Conclusion for the chapter

Although the chapter has analyzed some of the major guidelines regarding risk
management, it has been able to analyze some of the finer features because of lack of
proper internal information.

CREDIT RISK ASSESSMENT OF PNB

Introduction
The chapter explains the Credit Risk Assessment (C.R.A.) system of PNB

The system of credit rating the proposals on various dimensions prescribed by the Bank
goes back to the year 1988. In this system, popularly known as the CRS (Credit Rating
System), two financial parameters depicting operating efficiency/ strength of the
borrowing unit and a few subjective aspects of the functioning of the unit were required
to be scored. The total score was then graded against a scale and the pricing was decided
on that basis. The Credit Risk Assessment models developed by the Bank has recognized
the following aspects. The models have also been customized for the various segments
and exposure levels etc, considering the specific requirements of different situations.
The model should reveal the overall risk of lending in the proposal, and
The model should also enable working out an optimal pricing level, depending on the risk
appetite of the lender (Bank) and other strategic considerations.

The Risk elements

In the Credit Risk Assessment system, all possible factors which go into appraising the
risk associated with a loan proposal have been taken into account. These factors have

42
been categorized broadly as under:-
1) Financial Risk,
2) Industrial Risk, and
3 ) Management Risk

These risk categories are rated separately as provided for in the relevant models. In order
to arrive at the overall risk rating, the factors duly weighted are aggregated and calibrated
to arrive at a single point indicator of the risk associated with the credit decision.

Financial Risk
The relevant ratios required for risk assessment of Working Capital and Term Loan
proposals are mentioned below.

Ratios for all eligible market segments (except NBFC)

W C Ratios
1. Current Ratio
2. TOL / TNW
3. PBDIT/ Interest
4. PAT/ Net sales (%)
5. ROCE or ROZ (%)
6. (Inventory Receivables)/ Net Sales (in days)
TL Ratios
1. Project Debt/ Equity
2. TOL/ TNW (Maximum over amortization period)
3. Gross Av. DSCR of the Project
4. Gross Av. DSCR for all loans
5. Terms of repayment (Years)
Ratios for NBFC market segment (WC only)
1. Current Ratio
2. TOL/ NOF
3. Over dues / Demand raised (%)

43
4. NPA/ Working Assets (%)
5. Interest Coverage Ratio
6. Expenses / TTA (%)
7. PAT/ Total Income (Net of other non recurring income)
8. Collection efficiency

The parameters/ financial ratios of Working Capital credit proposals have been graded
into six levels each (from 0 to 5) ranging from the lowest risk level to the caution risk
level. The lowest risk level corresponds to the best financial score and has been awarded
the maximum score of 5. On the other hand, the caution risk level corresponds to the least
acceptable situation in respect of that parameter and is awarded with the minimum score
of 0. Besides, the various WC financial parameters have been assigned different weights.
The sum total of the risk weighted scores is 100.

The five ratios for Term Loan proposals have also been similarly graded into six levels (0
to 5). However, in this case, all the five ratios command equal weights and the risk
weighted Term Loan scores adds up to 25.

Weights given to the Working Capital ratios

Working Capital Weight ratios (except NBFC)
Current Ratio 5(25%)
TOL / TNW 5(25%)
PBDIT / Interest 2(10%)
PAR / Net sales (%) 2(10%)
ROCE or ROA (%) 2(10%)
(Inventory +Receivables) Net Sales (in days) 4(20%)

Industry Risk
A credit analyst is required to select a specific value statement (out of the list of value
statements prescribed by the Bank), which, in his/ her opinion, describes/ matches the
industry situation vis-à-vis the borrowing unit to the closest possible extent. This would

44
enable that specific aspect of industry risk o the unit to be assigned a score. The process
of subjective assessment of the industry risk elements of a credit proposal (usually done
by all the credit analysts) would thus get transformed into an objective/ quantifiable risk
assessment system.

Industry Risk parameters (non-NBFC)

1. Competition/ Market
2. Industry Cyclicality
3. Regulatory
4. Technology
5. Inputs Profile
6. User Profile

Though the above parameters (on which the industry risk aspects are required to be
examined) are the same for all market segments, the importance and degree of relevance
of these parameters may vary in different situations. This has necessitated prescription of
separate set of value statements for different situations. This has necessitated prescription
of separate set of value statements for different market segments i.e. C&I (manufacturing,
trade & NBFC separately), SSI and Agriculture segments.

The prescribed value statements in respect of each of the above parameters range in a five
point scale i.e. from 0 to 4. Further, each level has a reasonable no. of alternatives,
thereby facilitating proper choice making.

Industry Risk parameters (NBFC)

* Competition and Market
* Industry Cyclicality
* Regulatory
* User Profile

45
Management Risk
Assessment of Management Risk aspects in a credit proposal is, perhaps, the most
important area of risk assessment, especially where the management has not been time-
tested. As in the case of assessment of industry-specific risks, the Bank has prescribed a
set of value statements on the various aspects of management-specific risks as well. The
credit analyst is required to select a statement in respect of each management risk
parameter, which most closely matches with his/ her perception of the borrowing unit.
The Management risk factors
The Management risk factors embodied in the risk assessment models for all the market
Segments have been broadly classified into five categories.
* Integrity
* Track Record
* Structure & Systems
* Expertise
* Capital Market perceptions (except SSI & Agriculture segments)

The Industry/ Management risk factors for Trade segment

The C&I (trade) risk assessment models use a combined Industry/ Management risk
parameters, where assessem5tn of the management-specific risks are emphasized upon.
The combined risk parameters are given below:
* Competition/ Market
* Product characteristics
* Integrity
* Track Record
* Expertise, competence & commitment
* Structure & Systems

Important Notes:
Minimum score against “Integrity” for a new connection should be 3.
A new Company can be awarded a maximum score of 2 against “Track Record”, if
sufficient evidence is available.

46
Against “Capital Market perception”, a maximum score of 1 can be awarded for a new
company.

Financial ratios (financial risk parameters)

Working Capital credit facilities (all market segments except NBFCs)

1. Current Ratio (Weight:, Maximum Score possible : 25 out of 100)

Current Ratio is, by far, the most important indicator of liquidity. It is indicated as the
ratio of Current Assets to Current Liabilities. For the C&I (non-trade, non-NBFC) and
high value SSI and Agriculture loan accounts, the CR of 1.33 is the benchmark value, but
the top category borrowers should be those well above the benchmark, say above 1.50.
CR below 1.14 is considered critical because it reflects that the margins have deteriorated
by more than 50% from the benchmark CR of 1.33. For Trade segments and SSI/
Agriculture (Simplified models – see the chapter on models), relaxations have been
provided in this regard.

2. TOL / TNW (Weight: 5, Maximum Score possible: 25 out of 100)

This ratio is a measure of the structural strength of the borrowing company and is an
equally important indicator of its financial risk aspects. In respect of units where the
quantum of borrowing is high, the desired level of this ratio would be as low as possible
(i.e. the borrowing should be matched with equity, the promoters' stake ). However, if the
ratio crosses the level of 4, it is regarded as a critical risk. The ideal TOL/TNW ratio
would vary across industries, and this aspect is taken care of by an industry comparison
(please see chapter on financial risk on comparative parameters).

3. PBDIT / Interest (times) (Weight: 2, Maximum Score possible: 10 out of l00).

This is also referred to as the Interest Coverage ratio. In the current context, the servicing
capability of loan obligations is very crucial. This ratio which indicates the number of

47
times the gross earnings cover the interest payable, is an indicator of the measure of
comfort provided by the profitability / cash accrual from the operations of the company.
This ratio can be worked out as (PET + Depreciation + Interest ) / Interest.

4. PAT / Net Sales (% ) (Weight : 2, Maximum Score possible: 10 out of 100)

This is an overall reflection of profitability , in the ultimate sense and provides the
strength for further growth of the corporate this ratio has been preferred over Operating
Profit ratio in our credit risk models because it reflects the ultimate accretion to TNW).

ROCE or ROA (%) (Weight: 2, Maximum Score possible: 10 out of 100)

In the CRA models adopted by the Bank, ROCE stands for Return on Total Capital
Employed and ROA stands for Return on Total Assets. Both the ratios carry the same
meaning for the purpose of our model. This is calculated as the ratio of PBDIT to total
Capital employed. The total Capital has also been interpreted as the total Assets. This
ratio is a measure of the gross earnings which the capital employed in the business yields.
Though this could vary from industry to industry , it represents the basic efficiency of the
total funds employed and the capacity for concomitant servicing of its various
components.

1. (Inventory + Receivables) / Net Sales (days) (Weight: 4, Maximum Score possible:

20 out of 100)

This reflects the turnover period of the major items of the current assets. The higher the
figure, the slower the turnover of current assets and in general, the risk is higher. This
varies across industries and some general guidelines of RBI are also referred to while
examining this aspect. In general, it is expected that Working Capital should be turned
over at least twice. Thus, if the ratio shows that the Working Capital assets have a
holding period of more than six months level, the situation warrants a caution.

48
Term loan facilities

The ratios considered for examining the risk aspects of Term Loan facilities are given
below. Whereas the relevant ratios for the Working Capital credit facilities may be the
actual or projected ones depending on whether the borrowing company is existing or
new, the ratios considered for Term facilities are all based on projections. Unlike the
exercise of credit risk assessment in Working Capital credit facilities, all the relevant
ratios representing financial risk parameters in Term credit facilities carry equal weights.

Project Debt/ Equity ratio

In general, the Debt-Equity gearing is the most important indicator for assessing risk in
term exposures. For high value loan accounts, i.e. for C&I and high value SSI and
Agriculture accounts, a conventional gearing ratio upto 1.5 has been taken as the lowest
risk level. The "gearing level above 2.0 has been regarded as the critical risk area. These
benchmark figures have '. Been relaxed for Trade segment and simplified models of SSI /
Agriculture ": borrowing companies.

2. TOL/ TNW (Maximum during the period repayment)

Apart from the Debt / Equity gearing ratio for the particular project, the overall TOL /
TNW gearing during the period of the loan is also required to be considered by a credit
analyst. The maximum value of TOL / TNW over the repayment period of the loan is
considered for this purpose in order to gauge the risk level of the project.

3. Gross Average DSCR (Project)

The Gross Average Debt Service Coverage ratio for the project is the average ratio of
( PAT + Depreciation & other non cash expenses + Interest on TL ) for the project to
(Annual principal repayment obligations + Interest on TL ) for the project over the
repayment period of the project.

49
4. Gross Average DSCR (for the whole company for all loans)

This ratio should be calculated in the above manner for the company as a whole over the
repayment period. Both the ratios are important for the purpose of risk analysis, one for
the individual project and the other, for the company as a whole. In case, however, one of
these two DSCRs can not be readily worked out / available, this should be normalized
( explained in the step by step guide to CRA)

5. Terms of Repayment

In a term lending proposition, a better Debt Service Coverage ratio can be worked out
merely by extending the repayment period. On the other hand, the longer the period, the
greater is the uncertainty , and greater the risk. A total exposure period of up to 5 years
has been regarded as the lowest risk proposition and that beyond 10 as critical. The
'Terms of Repayment' figure includes moratorium period.

(Note: These parameters are graded on a 5 point scale from 5 to I with the critical risk
scoring 0. In case the term loan is for an expansion cum modernization project and
separate project parameters like D/E., DSCR etc. are not available, the total score can be
grossed up to 25.)

Financial Risk (on comparative parameters)

The items of Financial risk i.e. (i) the latest financials as compared to the average
financials of the company over a period of time and (ii) the latest financials as compared
to the latest industrial average available, are scored against a scale with a maximum score
of 8.

This comparison is done while computing the financial risk score o the Working Capital
credit facilities. For the purpose of comparison, only four out of the six WC financial
ratios have been considered relevant. These are: (i) Current Ratio, (ii) TOL / TNW, (iii)
PAT / Net sales (%), and (iv) (Inventory + Receivables) Net Sales (in days)

50
Historical comparison

The above financials of the company (latest figures) are compared with the company’s
historical average in respect of these financials and scored. There may be three
possibilities of the results of comparison. These are: ‘Better’, ‘At Par’ and ‘Worse’. The
scores against these results are 2, 1 and 0 respectively. The parameters of comparison are
the following:

Se. No. Financial Parameters Better At Par Worse

Scores 2 1 0
1 Current Ratio Greater than
Equal to Less than the
average plus 0.03
average plus or average minus
minus a 0.03
variation of
0.03
2 TOL / TNW Less than average Equal to Greater than the
average plus or average plus
minus a 0.20
variation of
0.20
3 PAT / Net Sales Greater than Equal to Less than the
average plus 0.50 average plus or average minus
minus a 0.50
variation of
0.50
4 (Inventory + Less than average Equal to Greater than the
Receivables) / Net minus 15 days average plus or average plus 15
Sales (in days) minus a days
variation of 15
days

The above latest financials of the company are required to be compared with average
financials over the last 3 / 5 years of data depending on its availability. Besides, in respect
of Current Ratio, a score of 2 or 1 i.e. ‘Better’ or ‘At Par’ can be awarded only when the
CR has improved from 1.33 and above.

51
Qualitative financial factors

The magnitude of financial risk embodied in a credit proposal is also indicated by the
qualitative financial factors. These factors indicate the non transparent risks i.e. risks
which may not be apparent at the material time but which may crystallize into real
liabilities, and get translated into figures.

 Contingent Liabilities

* Claims against liabilities under Excise Duty / Disputes

* Corporate Guarantees given

* Claims against the Co. not acknowledged as Debt.

 Auditor’s qualifying Remarks

Qualifying remarks like non-provisioning of expenses or recognizing income which has

not accrued etc. would prompt the analyst to provide for the required amounts, resulting
into an adverse impact on the financials/ profitability of the company.

 Accounting Policies

* Valuation of Inventories

* Capitalization

* Depreciation

* Revaluation etc.

In order to quantify the qualitative financial factors, the following steps would prove
useful for a credit analyst.

52
1. Asses the possibilities of each / all of the above contingencies crystallizing into
real liabilities and gauge the impact on profitability.

2. For impact on TNW ( NOF in case of NBFCs) of 10% and probability of

occurrence > 50%, a negative score of 10 can be given.

3. For lower impact, lower score can be awarded.

4. For marginal impact, i.e. < 1%, no negative score is warranted.

Models for Credit Risk Assessment and their application :

Depending on the market segment and the extent of exposure proposed in favour of a
client borrower, three different models for Credit Risk Assessment have been introduced
by the Bank. The major features of these models are as under:

53
COMPARATIVE EQUITY SHARE DATA OF SBI & PNB
PNB SBI
PNB/
    Mar- Mar-
SBI
2020 2020
R
High 214 321 66.6%
s
R
Low 93 233 39.9%
s
Income per share R
176.5 283.8 62.2%
(Unadj.) s
-
Earnings per share R
-45.7 2.6 1,771.
(Unadj.) s
8%
-
Cash flow per share R
-79.6 54.2 147.0
(Unadj.) s
%
Dividends per share R
0 0 -
(Unadj.) s
Avg Dividend yield % 0 0 -
Book value per R
153.9 262.8 58.6%
share (Unadj.) s
Shares outstanding 2,760 8,924.
m 30.9%
(eoy) .57 59
Bonus/Rights/
- - -
Conversions
Avg Price / Income
x 0.9 1.0 89.0%
ratio
Avg P/E ratio x -3.4 107.5 -3.1%
353.7
Avg P/CF ratio x 13.4 3.8
%
Avg
Price/Bookvalue x 1.0 1.1 94.5%
ratio
Dividend payout % 0 0 -
R
423,4 2,473,
Avg Mkt Cap s 17.1%
71 004
m

54
 PNB SBI
PNB/
    Mar- Mar-
SBI
2020 2020
`0
No. of employees 74.9 257.3 29.1%
00
R
Total wages & 92,42 437,95
s 21.1%
salary 4 0
m
R
Avg. s 6,505 9,847.
66.1%
income/employee T .6 2
h
R
Avg. s 1,234 1,702.
72.5%
wages/employee T .0 4
h
R
- -
Avg. net s
1,682 89.4 1,882.
profit/employee T
.7 4%
h
R
487,2 2,533, 19.2
Interest income s
49 221 %
m
R
88,83 773,65 11.5
Other income s
3 2 %
m
R
335,3 1,558, 21.5
Interest expense s
04 675 %
m
R
151,9 974,54 15.6
Net interest income s
45 7 %
m
R
136,4 1,148, 11.9
Operating expense s
26 003 %
m
R -
15,51 -
Gross profit s 173,45
9 8.9%
m 6
Gross profit margin % 3.2 -6.8 -
46.5

55
 %
R
Provisions/ 157,5 628,56 25.1
s
contingencies 77 6 %
m
R -
- 699.
Profit before tax s 198,4
28,370 5%
m 62
R
Extraordinary Inc
s 0 0 -
(Exp)
m
R
-
Minority Interest s -188 1.8%
10,509
m
R
Prior Period Items s 0 2,815 0.0%
m
R -
- 123.
Tax s 72,61
59,061 0%
m 8
R - -
Profit after tax s 126,0 22,996 548.
m 31 0%

INCOME DATA

PNB SBI
PNB/
    Mar- Mar-
SBI
2020 2020

R
487,24 2,533,22
Interest income s 19.2%
9 1
m
R
Other income s 88,833 773,652 11.5%
m
R
335,30 1,558,67
Interest expense s 21.5%
4 5
m

56
 R
151,94
Net interest income s 974,547 15.6%
5
m
R
136,42 1,148,00
Operating expense s 11.9%
6 3
m
R
-
Gross profit s 15,519 -8.9%
173,456
m
Gross profit margin % 3.2 -6.8 -46.5%
R
Provisions/ 157,57
s 628,566 25.1%
contingencies 7
m
R -
Profit before tax s 198,46 -28,370 699.5%
m 2
R
Extraordinary Inc
s 0 0 -
(Exp)
m
R
Minority Interest s -188 -10,509 1.8%
m
R
Prior Period Items s 0 2,815 0.0%
m
R
-
Tax s -59,061 123.0%
72,618
m
R -
-
Profit after tax s 126,03 22,996
548.0%
m 1
-
Net profit margin % -25.9 0.9 2,849.3
%
R
22,268,53
Advances s 4,387,980 19.7%
7
m
Deposits R 6,484,390 29,405,41 22.1%
s 1

57
 m
Credit/
x 67.7 75.7 89.4%
Deposit ratio
Yield on
% 7.4 7.5 99.4%
advances
Cost of
% 4.7 4.8 98.4%
deposits
Net Interest
% 2.0 2.7 75.0%
Margin
R
Net fixed
s 63,743 407,031 15.7%
assets
m
R
Share capital s 5,521 8,925 61.9%
m
R
Free
s 268,284 2,336,032 11.5%
reserves
m
R
Net worth s 424,851 2,344,957 18.1%
m
R
Borrowings s 653,297 4,137,477 15.8%
m
R
11,192,47
Investments s 2,059,102 18.4%
8
m
R
38,884,67
Total assets s 7,789,949 20.0%
1
m
Debt/equity
x 16.8 14.3 117.5%
ratio
-
Return on
% -1.6 0.1 2,735.7
assets
%
-
Return on
% -29.7 1.0 3,024.9
equity
%

58
 Capital
adequacy % 9.2 12.9 71.6%
ratio
Net NPAs % 11.2 3.0 373.4%

CASH FLOW

PN
B
Mar SBI PNB/
 
- Mar-2020 SBI
202
0
From R
295,56
Operation s -1,402 -0.5%
0
s m
From R
Investmen s -11,032 -8,568 128.8%
ts m
From R
1,642.5
Financial s 73,524 4,476
%
Activity m
R
Net 302,23
s 61,091 20.2%
Cashflow 2
m

CHAPTER-4

RESEARCH METHODOLOGY
4.1 PROBLEM STATEMENT

Risk Management could be practiced only when the conditions and the market facilitates

risk management. Hence, SBI and PNB should try to develop the markets of different

tools like FRAs, credit swaps etc. Banks should be given freedom to announce PLR

across the term curve so as to give them an additional tool to match their duration gaps.

Banks should also be permitted to extend their duration gaps. Banks should also be

59
permitted to extend fixed rate loans to borrowers. In the part of PNB, I would be better if

it raises the awareness level of risk management at the operational level for efficient

implementations of its policies.

4.2 OBJECTIVES OF THE STUDY

The basic objective of the study is to analyze the various models of credit risk assessment

and management area for a bank; along with implications of regulations such as BASEL

II and bank’s strategy to manage these risks.

The main objectives of this study are:

1. To identify the importance of risk management system in public sector banks.

2. To analyze the credit risk assessment system of PNB and SBI

3. To measure risks, doing a data modeling and along with credit risk assessment

in PNB & SBI

4. To analyze various types of risks as per guidelines by BASEL risk committee.

60
4.3 SOURCES OF DATA

Primary data

‘Questionnaire’ will be prepared and sent to selected six banks to ascertain their degree of

readiness for risk management on various parameters and information is collected

through in depth personal interview of senior officers and employees of PNB. The sample

size of the respondents were limited to 50. Sampling area has been selected in the PNB

branches of Delhi.

Secondary data
A manuscript is very important trustworthy and priceless basis of information. Many
researchers make use of this fundamental source. Manuscript is nothing of this imperative
source but printed evidence that contains important information about a problem or
characteristics of learning. It may be purchased material, journals, bank’s annual reports,
and internal search etc. The composed data process will be critically examined and
analyzed in the final report.

Information has also been obtained through desk research such as

 Books

 Journals

 Annual reports of the banks

 Indian Bank Association Bulletin

 RBI Bulletin

 Report on trends and progress of banking in India

 Websites

61
Apart from the conducting this research work on the basis of these information’s, various
techniques of risk management etc. shall be used in the present study. To present a broad
view so far the purpose of the analysis and to make it easy to understand the
problem/concept of a few graphs and tables shall also be presented. In each chapter, the
analysis have to be compared with credit risk management of the company under study.

4.4 JUSTIFICATION OF METHODOLOGY

As the objectives are clearly set, we went for conclusive research directly. Our conclusive
research includes with primary and secondary data collection.

RESEARCH DESIGN

The study will be descriptive in nature. Here efforts will be made to analyze the risk

management being followed by various banks.

Deliberate sampling technique is used for the study. This sampling method involves

purposive or deliberate selection of particular units of the world for constituting a sample

that represents the population.

The sample size of the respondents were limited to 100.

Sampling area has been selected in the PNB and SBI branches of Delhi.

Classification of data – through pie charts and bar diagrams

Tools Applied

The data collected were moderated for the study. The major tools applied for the analysis

of the data are ratios and percentages.

SCOPE OF THE STUDY

The scope of this study involves analyzing and measuring credit risk assessment of public

sector banks. The present study evaluates key performance indicators of various banks in

62
terms of credit deposit ratio, net interest margin, spread, overhead efficiency, Gap

analysis and maturity ladder. While putting the risk management in place banks often

find it difficult to collect reliable data. The challenge is mainly in the area of operational

risk where there is dearth of reliable historic data and not a great deal of clarity on the

measurement of such risk..

63
 CHAPTER -5

DATA ANALYSIS AND FINDINGS

Does the BOD approve/ periodically review the credit risk strategy?

Response

Strongly Agree Neither agree Disagree Strongly

Agree or nor disagree
(2) (4)
disagree
(1) (5)
(3)

35 17 20 17 11

1
2
3
4
5

Analysis

In response to Question No. 1, most of the respondents agree that Board of Directors
approve/ periodically review the credit risk strategy. The board of directors should have
responsibility for approving and periodically (at least annually) reviewing the credit risk
strategy and significant credit risk policies of the bank. The strategy should reflect the
bank’s tolerance for risk and the level of profitability the bank expects to achieve for
incurring various credit risks.

64
Does the bank/ DFI have the credit policy duly approved by the BOD?

Strongly Agree Neither agree Disagree Strongly

Agree or nor disagree
(2) (4)
disagree
(1) (5)
(3)

36 28 22 9 5

1
2
3
4
5

Analysis

36& of respondents totally agreed while 28% agreed that bank/ DFI have the credit
policy duly approved by the Board of Directors.

65
Is the credit policy commensurate with the overall risk management policy?

Response

Strongly Agree Neither agree Disagree Strongly

Agree or nor disagree
(2) (4)
disagree
(1) (5)
(3)

31 27 25 12 5

1
2
3
4
5

Analysis

31% of people totally agreed that the credit policy commensurate with the overall risk
management policy.

66
 Has the management given due consideration to the target market while devising
credit risk policy?

Response

Strongly Agree Neither agree Disagree Strongly

Agree or nor disagree
(2) (4)
disagree
(1) (5)
(3)

36 28 22 9 5

1
2
3
4
5

Analysis

In response to this question, 36% of respondents totally agreed that the management
given due consideration to the target market while devising credit risk policy while 22%
are neutral.

67
Does the policy provide continuity in approach and take into account the cyclical aspect
of the country’s economy?
Response

Strongly Agree Neither agree Disagree Strongly

Agree or nor disagree
(2) (4)
disagree
(1) (5)
(3)

31 32 19 12 6

1
2
3
4
5

Analysis

The data shows that 63% respondents agreed that the policy provide continuity in
approach and take into account the cyclical aspect of the country’s economy. While the
strategy would be reviewed periodically and amended, as deemed necessary, it should be
viable in long term and through various economic cycles.

68
Has the credit policy been properly communicated down the line?

Response

Strongly Agree Neither agree Disagree Strongly

Agree or nor disagree
(2) (4)
disagree
(1) (5)
(3)

31 32 19 12 6

1
2
3
4
5

Analysis

In order to be effective these policies must be clear and communicated down the line.
Further any significant deviation/exception to these policies must be communicated to the
top management/board and corrective measures should be taken. It is the responsibility of
senior management to ensure effective implementation of these policies.

69
Does the policy clearly spell out the roles and responsibilities of individuals?.

Response

Strongly Agree Neither agree Disagree Strongly

Agree or nor disagree
(2) (4)
disagree
(1) (5)
(3)

10 15 20 30 25

1
2
3
4
5

Analysis

Major no. of employees disagree with they feel that the policy clearly spell out the roles
and responsibilities of individuals

70
Does the credit policy spell out an appropriate process for reporting and approval of
credit extension beyond prescribed limits?

Strongly Agree Neither agree Disagree Strongly

Agree or nor disagree
(2) (4)
disagree
(1) (5)
(3)

20 32 17 19 12

1
2
3
4
5

Analysis

52% respondents think that the credit policy spell out an appropriate process for reporting
and approval of credit extension beyond prescribed limits. An important element of credit
risk management is to establish exposure limits for single borrowers and group of
connected borrowers. Institutions are expected to develop their own limit structure while
remaining within the exposure limits set. The size of the limits should be based on the
credit strength of the obligor, genuine requirement of credit, economic conditions and the
institution’s risk tolerance.

71
Is credit risk controlled and monitored on an integrated basis and regularly reported to the
senior management?

Strongly Agree Neither agree Disagree Strongly

Agree or nor disagree
(2) (4)
disagree
(1) (5)
(3)

68 18 6 4 4

1
2
3
4
5

Analysis

68% respondents totally agreed that credit risk controlled and monitored on an integrated
basis and regularly reported to the senior management.

72
Does the policy provide details about loan pricing strategy?

Strongly Agree Neither agree Disagree Strongly

Agree or nor disagree
(2) (4)
disagree
(1) (5)
(3)

40 34 20 4 2

1
2
3
4
5

Analysis

40% respondents totally agreed that the policy provide details about loan pricing strategy.
It is utmost important that due consideration should be given to the risk reward trade –off
in granting a credit facility and credit should be priced to cover all embedded costs.
Relevant terms and conditions should be laid down to protect the institution’s interest.

73
 CHAPTER 6

CONCLUSION, RECOMMENDATIONS AND

LIMITATIONS OF THE STUDY

CONCLUSION

The banks spent most of their resources towards analyzing the financial risk of the client
and converse that risk into an opportunity. The business of banking, especially that of
lending is full of risk, and analyzing whether it is worth taking a particular risk is the art
of managers at branches, and the head office's risk management committee. Banks spend
much of their time and effort analyzing the financial risk of clients i.e. companies and
individuals. Findings of the study shows that Punjab National Bank frequently analyze
their liquidity position under normal and stress scenarios .

The gap analysis as well as assessment of maturity patterns showed that SBI and PNB
has been efficient enough in handling its assets and liability mismatch. The gap analysis
showed a gradual increase in the difference between the Rate Sensitive Liabilities and the
Rate Sensitive Assets. The interest rates in turn were following a downward trend for the
particular period. This showed that SBI and PNB has strategically increased its gap with
reference to interest rates.

Regarding the maturity patterns, PNB has properly followed RBI guidelines, except for
the year 2014, when the 15 – 28 day bucket’s mismatch exceeded more than 20% of the
cash flow.

SBI has also followed other policies of RBI guidelines consistently.

This shows SBI’s sincerity and dedication to follow an effective risk management policy.

The survey done by us showed that although PNB has a good risk management policy, it
was not conveyed it up to the operational level, comprehensively. We also found out that:

i) PNB gives importance to Credit – Risk Management, when compared to other risks.

ii) The decisions regarding interest rate risks are mainly taken by the top management.

III) SBI has a good risk management culture.

74
iv) The bank has understood the importance of MIS for proper risk management and has
gone into a technology drive to fulfill the necessity.

v) The bank’s risk management policies are based on the premise that the management
of risks can be segregated by types, and the risks can be better comprehended by units
most capable of understanding them.

vi) For management of each risks a separate committee has been formed.

Regarding credit risks, SBI has a comprehensive policy and system to attend to all the
factors related to credit risk management.

PNB has been good enough in framing the policies and implementing them internally.
Hence, it is the external factors which needs to be fine tuned for good risk management.

The bank staff at the operational level are not aware of what exactly ALM and risk
management is (although they are practicing it, or they are told to do so). So the bank
should conduct training programmes etc. to make aware the above mentioned human
resources the technical intricacies of ALM and risk management.

On the external front there are quite a few issues to be resolved as to create a conducive
policy environment at the macro level. Unless the deregulation process initiated by the
Reserve Bank of India (RBI) at the right earnest is taken to its logical conclusion, the
Indian banks may not be in a position to reap desired benefits out of the reform process.

Interest rates on both deposits and lending sides being the main plank of deregulation
process, are not fully liberalized; there by causing severe distortions in the asset liability
portfolios of banks. There are controls from the RBI in the form of cap rate in term
deposits up to one year, fixed rate for savings deposits and administered lending rate
structure for loans up to Rs.2 Lakhs as also export credit. The concept of Prime Lending
Rate (PLR) to get diluted when lower rates are prescribed for those sectors where both
transaction costs and risks cost is substantially higher. Besides, in a free market, ideally
interest rate should be inversely related to the size of the loan which is the reverse case in
India. Moreover, concessionality in lending rates and multiple rate prescriptions are total
anathema to interest rate deregulation which really restricts Indian banks from deciding
interest rates purely on the bases of market realities.

75
In a complete market, logically, stronger banks should offer lowest rates for deposit
mobilization in comparison to weaker banks. The recent experiences , however, present
an altogether opposite trend where stronger banks offered the maximum prescribed rate
of short term deposits. The essence of deregulated interest rates doe not mean being
allowed to pay higher rates; but fix rates with reference to cost, risk and other market
trends.

Besides, whenever interest rates are feed there is a tendency among banks to arrive at an
informal consensus over rates without any reference to asset liability mismatch of a
particular bank or market conditions thereby not only defeating the very objective of
deregulation but also denying the customer the best rate. In lending rates also when the
fixation of PLR is left to the individual banks, I effect, almost all banks follow the rate
decided by the PNB and a few major nationalized banks. Denial of price differentiation in
free market effectively means taking away competition from a competitive environment.

In the matter of deployment of resources also, freedom given to banks are less than
adequate. The talk of deregulation – be it in the areas of reduction SLR or elsewhere, is
basically confined to theory. Due to the fact that fiscal deficit of the government has not
reduced to the desired level, banks are indirectly forced to subscribe to the government
securities, even after holding the SLR securities much IN excess of what is stipulated.
This dilutes the concept of asset liability management in banks, especially, when the
interest of such securities are less than the lending rate. Similarly, high level of Cash
Reserve Ratio (CRR), non – payment of interest, and other policy constraints which are
impeding the emergence of an effective ALM framework in banks.

Besides, public sector banks should not be allowed to make loss as they are allowed so
freely now. This would put indirect pressure on the management to look into the areas
where bank’s exposure to interest rate risks are beyond the tolerance level or even within
the accepted risk bearing capacity they would manage their assets and liabilities in a such
a way that the impact of interest rate risk is minimized.

While introducing the interest rate deregulation I this country, one of the most important
characteristics which must have been considered is the vast geographical expanse of the
country and the disparate degree of development across various regions. In view of the

76
diversity it is imperative to offer freedom to bank to fix the interest rate on deposits
according to the local competition and other economic parameters.

Looking to the different cost structure of different banks at different centers, RBI should
also consider permitting banks to offer different interest rate fair deposits in different
mark segments and with respect to various deport sizes. If branches of tow different
public sector banks, under the same government ownership can offer different interest
rats, why cannot two branches of the same bank can offer different rates I different
locations. Even going a step further, banks should be allowed to offer varied interest rates
in retail market to different customer segments to be determined by deposit size.

RECOMMENDATIONS

The Punjab National Bank should establish a system that helps identify problem loan
ahead of time when there may be more options available for remedial measures. Once the
loan is identified as problem, it should be managed under a dedicated remedial process.

A bank’s credit risk policies should clearly set out how the bank will manage problem
credits. Banks differ on the methods and organization they use to manage problem
credits. Responsibility for such credits may be assigned to the originating business
function, a specialized workout section, or a combination of the two, depending upon the
size and nature of the credit and the reason for its problems. When a bank has significant
credit-related problems, it is important to segregate the workout function from the credit
origination function. The additional resources, expertise and more concentrated focus of a
specialized workout section normally improve collection results.

A problem loan management process encompass following basic elements.

a. Negotiation and follow-up. Proactive effort should be taken in dealing with obligors to
implement remedial plans, by maintaining frequent contact and internal records of
follow-up actions. Often rigorous efforts made at an early stage prevent institutions from
litigations and loan losses

b. Workout remedial strategies. Some times appropriate remedial strategies such as

restructuring of loan facility, enhancement in credit limits or reduction in interest rates
help improve obligor’s repayment capacity. However it depends upon business condition,

77
the nature of problems being faced and most importantly obligor’s commitment and
willingness to repay the loan. While such remedial strategies often bring up positive
results, institutions need to exercise Managing credit risk with great caution in adopting
such measures and ensure that such a policy must not encourage obligors to default
intentionally. The institution’s interest should be the primary consideration in case of
such workout plans. It needs not mention here that competent authority, before their
implementation, should approve such workout plan.

c. Review of collateral and security document. Institutions have to ascertain the loan
recoverable amount by updating the values of available collateral with formal valuation.
Security documents should also be reviewed to ensure the completeness and
enforceability of contracts and collateral/guarantee.

d. Status Report and Review Problem credits should be subject to more frequent review
and monitoring. The review should update the status and development of the loan
accounts and progress of the remedial plans. Progress made on problem loan should be
reported to the senior management

It is important for banks to use deregulated deposit rates as a level for regulating asset
liability profiles of bank. This will be so only if deposits are priced on the basis of funds
position and the expected asset deployment. But in reality hardly any bank places the
deposit mobilization process with strict reference to the prospective areas of asset
deployment. Banks are accepting deposits of 30 days maturity without having any scope
of creating corresponding assts resulting in a deliberate assert – liability mismatch.
Similarly, co – operative and other smaller banks are parking their surplus funds in 30
days deposits enjoying a return of around 8% in turn banks are placing these funds either
in call money market at easy rates or Treasury Bills. Besides, in the recent past, when the
call money market behaved tightly, almost all the banks jacked up their interest rates on
short term deposits with a view to get over the liquidity problem by taking advantage of
the freedom to fix interest rates on term deposits bypassing the rigorous process of
solving that the problem through management of discretionary liabilities like CDs and
inter – bank deposits. It is, therefore, strongly felt that there is an urgent need to widen
and deepen the short term money market by introducing short term matching instruments

78
which will facilitate deployment of short term resources. When banks are mobilizing
deposits in short term maturities there should be enough matching instrument and a ready
market for deployment of the same. Lack of enough matching instruments in the money
market tends to intensify the asset liability mismatch. Unless the gap is filled, such
mismatch cannot be removed.

What is required now is the removal of the artificial barriers – both organizational and
regulatory – so as to hasten up the emergence of a vibrant banking system.

Further attempts must also be made to make the derivative market (which is still in a
nascent stage )into a matured market, for this would encourage banks to hedge their risks
by off balance sheet means.

LIMITATIONS OF THE STUDY

 The non transparency which is a perennial feature of Indian banks restricted us in

getting the true picture regarding risk management.
 The secondary data was taken from the annual reports of the PNB and SBI Bank.
It may be possible that the data shown in the annual reports may be window
dressed which does not show the actual position of the banks.
 Due to constraints of time and resources, the study is likely to suffer from certain
limitations.

 Reluctance of the people to provide complete information about

themselves can affect the validity of responses.

79
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M.Y.Khan & P.K.Jain, Financial Management, (Delhi, Fourth Edition, 2015)

Sethi J. and Bhatia N., Elements of Banking and Insurance, Delhi, Prentice Hall, 2018)

Subbarao Srinivasa (2019), Risk Management – Banking Industry, Treasury

Management, June 2019.

Dutta. S.K (2016), “Credit Risk Management in Banks” The Journal of Indian Institute of
Banking and Finance, 32-37.

Gulati, Rachita & Goswami, Anju & Kumar, Sunil, 2019. "What drives credit risk in the
Indian banking industry? An empirical investigation," Economic Systems, Elsevier, vol.
43(1), pages 42-62.

Sathya Varathan, Priya Kalyanasundaram and S.Tamilenthi (2017) “Credit policy and
credit appraisal of canara bank using ratio analysis”, International Multidisciplinary
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Maheshwari & Maheshwari, Banking Law and Practices, Himalaya Publishing Pvt Ltd,
Allahabad, pp.152.

Pandey, I.M. Financial Management, Vikas Publishing. House Pvt. Ltd. 2016, pp. 633.

Mishra Aswini Kumar, Analyzing Soundness in Indian Banking: A CAMEL Approach

(2019)

Dr Y.G.Sivram, T.S.Ramakrishna Rao and K.Seethapathi.(2018) ICFAI Publications,

The Indian Banking System.

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https://www.valueresearchonline.com/funds/newsnapshot.asp?schemecode=2298

80
http://www.wbiconpro.com/london%20banking/Rosman(114).pdf

https://www.businesstoday.in/sectors/banks/union-bank-q4-results-profit-after-tax-
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 QUESTIONNAIRE

1. Does the BOD approve/ periodically review the credit risk strategy?

o Totally Agree o Agree o Neutral o Disagree o Totally Disagree

2.Does the bank/ DFI have the credit policy duly approved by the BOD? o Totally Agree
o Agree o Neutral o Disagree o Totally Disagree

3. Is the credit policy commensurate with the overall risk management policy? o Totally
Agree o Agree o Neutral o Disagree o Totally Disagree

4. Has the management given due consideration to the target market while devising credit
risk policy? o Totally Agree o Agree o Neutral o Disagree o Totally Disagree

5. Does the policy provide continuity in approach and take into account the cyclical
aspect of the country’s economy? o Totally Agree o Agree o Neutral o Disagree o Totally
Disagree

6. Has the credit policy been properly communicated down the line? o Totally Agree o
Agree o Neutral o Disagree o Totally Disagree

7. Does the policy clearly spell out the roles and responsibilities of individuals? o Totally
Agree o Agree o Neutral o Disagree o Totally Disagree

8. Does the credit policy spell out an appropriate process for reporting and approval of
credit extension beyond prescribed limits? o Totally Agree o Agree o Neutral o Disagree
o Totally Disagree

9. Is credit risk controlled and monitored on an integrated basis and regularly reported to
the senior management? o Totally Agree o Agree o Neutral o Disagree o Totally Disagree

10. Does the policy provide details about loan pricing strategy? o Totally Agree o Agree
o Neutral o Disagree o Totally Disagree

82