Credit Risk Management RESEARCH DESIGN OBJECTIVES OF THE STUDY Understanding credit risk management conceptually.

Studying the various private banks practicing credit risk management. To make a depth study of the method in which the private banks in India goabout credit risk management. Studying the difference between retail credit risk management and corporatecredit risk management practiced by private banks. Understanding the importance of the credit risk management and how usefulit is to the private banks and how it benefits them in various ways. PURPOSE OF THE STUDY The main reason to select CREDIT RISK MANAGEMENT as a topic is tounderstand the importance of the Role played by credit risk management departmentand/or practices when the bank lends money to its borrowers.In this project, I have tried to understand the difference between corporatec r e d i t r i s k m a n a g e m e n t a n d retail credit risk management. The analysis andi n t e r v i e w s w i t h i n d u s t r y p e r s o n n e l h a s given me a practical and real life exposure to the banking scenario as far as the credit risk manag emen t go es, whereby I could correlate between the theory and their practical application. 1

Credit Risk Management RESEARCH METHODOLOGY DATA COLLECTION The data collection i.e. the raw material input for the project has beenc o l l e c t e d k e e p i n g i n m i n d the objectives of the project and a c c o r d i n g l y relevant information has been found. The methodology used is a descriptivemethod of the Research. Following are the sources: PRIMARY DATA The data regarding CREDIT RISK MANAGEMENT was collectedthrough primary data:Se mi -structured interviews were conducted with MR. Vivek Pal,Manager RAPG personal loans of ICICI bank, Mr. Bilal Anwar, Credit Analyst of IDBI BANK LTD., and Mr. Shahji Jacob, Chief Manager of TheFEDERAL BANK Limited. This was done to understand the current practicesan d t h e st y le o f functioning of the credit risk management d e p a r t m e n t s o f private banks. SECONDARY DATA The data had been collected by reading various books on Credit Risk M a n a g e m e n t , Bank Quest, Bank Weekly and relevant W e b s i t e s ( r e f e r Bibliography). 2

Credit Risk Management The data regarding the banks introduction and history was collectedf r o m t h e i r o f f i c i a l websites on the recommendations of the p e r s o n s interviewed. Also some part of the data was collected by referring to the RBIBulletin, Bank Booklets, and Newsletter. SAMPLING METHOD The Sampling Method was used to collect the data about thecurrent practices followed by the private banks in India as far as credit risk management goes.Only Private Banks have been taken because the purpose of this project was to understand the in-depth knowledge on Private Banks practicingCredit risk management. LIMITATIONS: Reluctance and resistance on the part of t h e i n t e r v i e w e e s ( P r i v a t e Banks) to share information as they considered it as confidential. Visiting all private sector banks was not possible. Banks have certain rules and regulations. 3

Credit Risk Management INTRODUCTION With the advancing liberalization and globalization, credit risk management isgaining a lot of importance. It is very important for banks today to understand andmanage credit risk. Banks today put in a lot of efforts in managing, modeling and structuring credit risk.Credit risk is defined as the potential that a borrower or counterparty will fail tom e e t i t s o b l i g a t i o n i n a c c o r d a n c e w i t h a g r e e d t e r m s . R B I h a s b e e n e x t r e m e l y sensitive to the credit risk it faces on the domestic and international front.Credit risk management is not just a process or procedure. It is a fundamentalc o m p o n e n t o f the banking function. The management of credit risk m u s t b e incorporated into the fiber of banks.Any bank today needs to implement efficient risk adjusted return on capitalmethodologies, and build cutting-edge portfolio credit risk management systems.Credit Risk comes full circle. Traditionally the primary risk of financial institutionshas been credit risk arising through lending. As financial institutions entered newmarkets and traded new products, other risks such as market risk began to competef o r man age men t's attention . In the last f ew d ecades fin an cial institu tions h av e developed tools and methodologies to manage market risk.Recently the importance of managing credit risk has grabbed management'sattention. Once again, the biggest challenge facing financial institutions is credit risk.In the last decade, business and trade have expanded rapidly both nationally andglobally. By expanding, banks have taken on new market risks and credit risks bydealing with new clients and in

some cases new governments also. Even banks thatdo not enter into new markets are finding that the concentration of credit risk withint h e i r e x i s t i n g m a r k e t i s a h i n d r a n c e t o g r o w t h . As a result, banks have created risk management mechanisms in order tofacilitate their growth and to safeguard their interests. 4

Credit Risk Management The challenge for financial institutions is to turn credit risk into an opportunity.While banks attention has returned to credit risk, the nature of credit risk has changedover the period.Credit risk must be managed at both the individual and the portfolio levels andt h a t t o o b o t h f o r retail and corporate. Managing credit risks requires s p e c i f i c knowledge of the counterpartys (borrowers) business and financial condition. Whilethere are already numerous methods and tools for evaluating individual, direct credittransactions, comparable innovations for managing portfolio credit risk are only just becoming available.Likewise much of traditional credit risk management is passive. Such activityh as includ ed tran sactio n li mits d etermin ed b y the custo mer's cred it rating , th etran saction 's ten or, and the ov erall ex posu re lev el. No w there are mo re active management techniques. C R E D I T R I S K M A N A G E M E N T P H I L O S O P H Y Mostly all banks today practice credit risk management. They understand theimpo rtance of cred it risk man ag emen t and thin k of it as a lad der to g ro wth b y reducing their NPAs. Moreover they are now using it as a tool to succeed over their competition because credit risk management practices reduce risk and improve returncapital. 5