Edited Sbi Toc

Credit Risk Assessment in SBI & Its Improvements

ACKNOWLEDGEMENT

The path toward completion of an internship is hard and often times can seem quite difficult. It has

been an enriching and rewarding experience for me both professionally as well as personally. I would

like to express my thanks and appreciation to the many that have encouraged and lifted my feelings

along the way.

Firstly I would like to extend my deep sense of gratitude to Mr.Ashwini Sharma, Regional

relationship officer, SBI SME J P Nagar, Bangalore my project mentor who provided inspiration,

valuable guidelines, suggestions in the early stages of this report through the sense of enthusiasm that

he continually exuded.

I would also like to thank Prof Vijay Nishtala and Prof Madhavi Lokhande ,my project mentors who

helped me a lot during my internship program.

I am sure the immense learning that I have had from this project would help me stand in good stead in

the future.

I extend my heartiest thanks to all those persons whose willing cooperation led to the timely

completion of the project. Also I would like to thank all those who have helped me directly or

indirectly in completing the project.

In completing this study, I did my level best correcting my shortcomings to possible extent and I

sincerely hope that this report will serve its purpose.


Executive Summary .......................................................................................................................... 5

1. CHAPTER: 1 (INTRODUCTION) ................................................................................................... 6

1.1 Background of the Report.......................................................................................................6

1.2 Introduction of the Study........................................................................................................6

1.3 Statement of the Problem ......................................................................................................6

1.4 Rationale of the Study.............................................................................................................6

1.5 Scope of the Study ..................................................................................................................6

1.6 Objective of the Study ............................................................................................................7

1.7 Methodology of the study ......................................................................................................7

1.8 Benefit of the report ...............................................................................................................7

1.9 Limitation ................................................................................................................................8

2. CHAPTER 2: (Overview) .............................................................................................................. 9

2.1. Emergence of Risk management in Banks ..............................................................................9

2.2. Introduction ..........................................................................................................................10

2.3. COMPANY PROFILE ...............................................................................................................11

2.3.1 STATE BANK OF INDIA .................................................................................................11

2.3.2 ABOUT LOGO.................................................................................................................12

2.3.3 MISSION, VISION AND VALUES .....................................................................................13

2.4. SBI & ITS ASSOCIATES............................................................................................................14

2.5. PRODUCTS AND SERVICES ....................................................................................................15

2.6. SERVICES ...............................................................................................................................16

3.CHAPTER 3: (Credit Risk Management)........................................................................................ 19

3.1 THEORITICAL BACKGROUND OF CREDIT RISK.......................................................................19

3.1.1 CREDIT...........................................................................................................................19

3.1.2 RISK ...............................................................................................................................19

3.1.3 MARKET RISK.................................................................................................................19

3.1.4 OPERTIONAL RISK..........................................................................................................19

3.2 CREDIT RISK...........................................................................................................................20

3.2.1 CONTRIBUTORS OF CREDIT RISK...................................................................................20

3.2.2 KEY ELEMENTS OF CREDIT RISK MANAGEMENT...........................................................20

3.3 Credit rating ..........................................................................................................................21

3.3.1 Definition.......................................................................................................................21

3.3.2 Use in decision making..................................................................................................21

3.4 Rating tool for SME ...............................................................................................................21


3.4.1 Financial performance:- ................................................................................................22

3.4.2 Operating performance ................................................................................................23

3.4.3 Quality of management ................................................................................................23

3.5 Difficulty of measuring credit risk.........................................................................................28

3.6 APPRAISAL OF THE FIRMS POSITION ON BASIS OF OTHER PARAMETERS............................29

3.6.1 Managerial Competence...............................................................................................29

3.6.2 Technical Feasibility ......................................................................................................29

3.6.3 Commercial Viability .....................................................................................................29

3.6.4 Financial Viability ..........................................................................................................29

3.7 Credit investigation report....................................................................................................29

3.8 CRA Proposal .........................................................................................................................31

3.8.1 Illustration: A model of a CRA proposal ........................................................................31

3.9 Credit Files.............................................................................................................................34

3.9.1 Contents of the credit file .............................................................................................34

4. CHAPTER 4: (STUDY ON CREDIT RISK MANAGEMENT IN STATE BANK OF INDIA).................... 35

4.1 THE TERMS............................................................................................................................35

4.2 Treatment of advances-Major Categories ............................................................................35

4.3 Proposed Risk Weight Table .................................................................................................35

4.4 Risk weights...........................................................................................................................36

4.5 Components of Credit Risk ...................................................................................................37

4.6 SALIENT FEATURES OF CRA MODELS ....................................................................................38

4.6.1 (A) TYPE OF MODELS.....................................................................................................38

4.6.2 (B) TYPE OF RATINGS.....................................................................................................38

4.7 NEW RATING SCALES - FACILITY RATING: 16 RATING GRADES.............................................39

4.8 Short-term and Long-Term Ratings: .....................................................................................40

4.9 Competitors details...............................................................................................................40

4.10 POSITION OF STATE BANK OF INDIA IN LENDING.................................................................40

4.10.1 PRIVATE SECTOR BANK .................................................................................................40

4.10.2 PUBLIC SECTOR BANKS..................................................................................................41

4.11 Credit risk mitigation techniques – Guarantees ...................................................................42

4.11.1 Operational requirements for guarantees....................................................................42

4.11.2 Additional operational requirements for guarantees...................................................43

4.12 Qualitative Disclosures..........................................................................................................43

4.13 Quantitative Disclosures .......................................................................................................43

CHAPTER 5: (STUDY ON CREDIT POLICY)......................................................................................... 45


5.1 INTRODUCTION TO CREDIT POLICY ......................................................................................45

5.1.1 Credit Standards............................................................................................................45

5.1.2 Credit Terms..................................................................................................................45

5.1.3 Collection Efforts...........................................................................................................45

5.2 GOALS OF CREDIT POLICY .....................................................................................................46

5.2.1 OBJECTIVES ...................................................................................................................46

5.3 COMPARISON OF LOANS & ADVANCES OF STATE BANK OF INDIA WITH OTHER PUBLIC AND PRIVATE SECTOR BANKS ...................................................................................................................47

5.3.1 Interpretation................................................................................................................51

5.4 COMPARISON STUDY ON CREDIT RECOVERY MANAGEMENT..............................................52

5.5 PRIORITY SECTOR ADVANCES OF BANKS COMPARISON WITH OTHER PUBLIC SETOR BANKS54

5.5.1 Interpretations..............................................................................................................55

6. CHAPTER 6 : (FINDINGS).......................................................................................................... 56

6.1 Findings .................................................................................................................................56

6.2 LIMITATIONS .........................................................................................................................56

7. CHAPTER 7 : (RECOMMENDATIONS) ....................................................................................... 57

7.1 RECOMMENDATIONS............................................................................................................57

8. CHAPTER 8 : (CONCLUSION) .................................................................................................... 58

8.1 CONCLUSION.........................................................................................................................58

9. CHAPTER 9: (BIBLIOGRAPHY) .................................................................................................. 59


Executive Summary

Banking sector of India is one of the major sectors, which contributes significantly to the

national economy. State Bank of India is the oldest nationalised bank operating in India. It has

over the years created one of the largest networks among all the other banks in India. In this

report I tried to analyze the credit risk assessment process of State Bank of India. Behind the

success of the bank they efficiently analyze the credit risk and the other risk and handle the risk

in such a way that brings them the success.

The first part of the report contains about the background of the study, the literature review

and the research methodology of the report. In the background of the study there is statement

of the problem, rationale of the study, scope of the project and the objective of the project.

Second part of the report discusses about the organization overview, mission and vision of the

organization, goals and objectives, its operations and performance of the bank at a glance etc.

The third part of the report analyzes the topic as a whole about the credit risk, different types of

credit risk and the credit risk management process of the bank.

The fourth part of the report discusses about the major findings of the report.

The fifth part of the report covers some suggestion about the findings of the report and I

conclude the report with the conclusion part.


1. CHAPTER: 1 (INTRODUCTION)

1.1 Background of the Report

This internship report is originated as a partial fulfilment of the PGDM program of Welingkar

Institute of Management Development & Research. I have worked at State Bank of India, SME J P

Nagar branch for two months and the experience of working at State Bank of India has helped me to

match our theoretical knowledge with practical understanding. As an intern of State Bank of India I

was provided with the topic “Credit Risk Assessment in State Bank of India.”

1.2 Introduction of the Study

The report basically deals with “The Credit Risk Assessment in State Bank of India.”Credit

department plays a very important role in bank as they evaluate the risk and take decision about

giving loan to the customers. In this report I have tried to study the literatures statements about credit

risk management and also the credit operation of State Bank of India. I made a comparison study

between literatures statements and the actual activities of the bank.

1.3 Statement of the Problem

Credit Risk corresponds to potential financial loss as a result of customers’ inability to honour

the terms and conditions of credit facility. This report will mainly focus on managing credit risk by

providing proper satisfaction towards the customers as well as achieving organizations goals.

1.4 Rationale of the Study

Now a day’s credit risk is a major risk for all banking institutions. Profitability of banks’

depends on this sector. Liquidity is another major issue for selecting this topic, because each and

every bank is now facing liquidity crisis, if they are not efficient enough to handle credit risk, they are

also facing more liquidity crisis. Most of the shares of the total revenue of the bank come from credit

operation and the existence of the bank depends on quality of assets portfolio. So, efficient

management of credit risk is a paramount importance. Credit risk is the loss associated with

degradation in the credit quality of borrowers of counter parties. In a bank’s portfolio, losses stems

from outright default due to the inability or unwillingness of the customer or counter party to meet

commitments in relation to leading, trading, settlement and other financial transaction. Alternatively,

losses result from reduction in portfolio value arising from actual or perceived determination in credit

quality. As the credit department plays a vital role in all these issues I have chosen this topic for my

report as well as it will help me to take different credit related decisions in different stages of my

future career.

1.5 Scope of the Study

This report has been prepared on the basis of experience gathered during the period of

internship. This study is limited with function of credit operation system and credit risk assessment of


State Bank of India. Most of the data used in the reporting of the study are from secondary sources.

All the data related to the reporting requirements are not available due to confidential reservation

practice for the benefit of the organization.

1.6 Objective of the Study

Specific Objectives

To understand the Credit Policy.

To identify the problems of Credit Assessment of State Bank of India.

To understand Credit Risk Management Policy of State Bank of India.

To identify the problem of CRM in State Bank of India.

To provide suggestions for the improvement of Credit Risk Management Policy of the Bank.

To compare the credit operation of bank with the literature statements.

1.7 Methodology of the study

I have got all the relevant information from my working experience with SBI, their Annual

report, some circular, various brochures, SBI web site and such.

Primary data

The primary data of this report is the information, which is gathered from SBI while I worked

with them.

Secondary data

The secondary data of this report are collected from SBI Annual report, and some reports.

Secondary Sources: Secondary data is collected in the following ways :-

Data gathered within the organisation itself.

Data gathered from texts.

Internet sources.

General reports

Annual reports

Official documents

Credit manuals of the bank

1.8 Benefit of the report

As a student, I have learned about a bank; I also have learned the report writing, as a

great deal of theory is included in this report. It will be also benefited for the people who are

interested to know about Credit Assessment in SBI.


1.9 Limitation

Objective of the practical internship is to have practical exposure for the students. My tenure

was for eight weeks only, which was somehow not sufficient. To prepare my internship report I faced

some limitation. Those are:

Due to the time constraint, the data has only been collected from the clients of SBI, J P Nagar

Branch, which may fail to represent the factual scenario of the relationship between

measurable variables.

The data collected are subjected to be inaccurate and imprecise.

Unavailability to required published documents.

Lack of my experience and efficiency to prepare the standard report.

Lack of comprehension and time customer was a major problem in the collection of data.

Large-scale research was not possible.

Time constraint was also one of the factors that curtailed the scope of the study.


2. CHAPTER 2: (Overview)

2.1. Emergence of Risk management in Banks

The banking environment consists of numerous risks that can impinge upon the profitability

of the banks. These multiple sources of risk give rise to a range of different issues. In an environment

where the aspect of the quantitative management of risks has become a major banking function, it is

of lesser importance to speak of the generic concepts. The different types of risks needs to be

carefully defined and such definitions provide a first basis for measuring risks on which the risk

management can be implemented.

There have been a number of factors that can be attributed to the stabilization of the banking

environment in nineties. Prior to that period, the industry was heavily regulated. Commercial banking

operations were basically restricted towards collecting resources and lending operations. The

regulators were concerned by the safety of the industry and the control of its money creation power.

The rules limited the scope of the operations of the various credit institutions and limited their risks as

well. It was only during the nineties that banks experienced the first drastic waves of change in the

industry. Among the main driving forces that played a crucial role in the changes were the inflating

role of the financial markets, deregulation of the banking sector and the increase in the competition

among the existing and emerging banks.

On the foreign exchanges front, the floating exchanges rates accelerated the growth of

uncertainty. Monetary policies favouring high levels of interest rates and stimulating their

intermediation was by far the major channel of financing the economy, disintermediation increased at

an accelerated pace. Those changes turned into new opportunities and threats for the players.

These waves of changes generated risks. Risks increased because of new competition, product

innovations, the shift from commercial banking to capital markets increased market volatility and the

disappearance of old barriers which limited the scope of operations for the various financial

institutions. There was a total and radical change in the banking industry. Here it is worth mentioning

that this process has been a continuous


2.2. Introduction

In the present world money is circulated all over the globe. Globalization, technological

advances and other factors money is circulating unimaginably. Financial Institutions mainly Banks

play a pivotal role in matching a depositor and lenders and channelling money and making the

economy more efficient. Although there are different types of banks specialized for different purposes

and with different brands and capital structure, they are regulated by standards such as the BASEL

standards (to keep a minimum amount of capital) BASEL II etc.

Banks offer a wide range of products and services to appeal to different customers and be

competitive in the market place. The State Bank of India was born with a new sense of social purpose

aided by the 480 offices comprising branches, sub offices and three Local Head Offices inherited

from the Imperial Bank. The concept of banking as mere repositories of the community's savings and

lenders to creditworthy parties was soon to give way to the concept of purposeful banking sub-serving

the growing and diversified financial needs of planned economic development. The State Bank of

India was destined to act as the pacesetter in this respect and lead the Indian banking system into the

exciting field of national development.

The competition in the banking industry has intensified more than ever before. Global

financial crisis, stock market crash, recessions and other factors affected the banking industry. So

banks should position themselves at a unique place in the minds of the customers by offering

attractive offers such as higher interest rates or by offering superior service to the customers. Services

include financial advice, flexible rates or dates of payment, portfolio management etc.

Nevertheless, the banking sector occupies an important place in India because of its

intermediary role; it ensures allocation and relocation of resources and keeps up the momentum of

economic activities. It plays a pivotal role in the economic development of the country and forms the

core at the money market.


2.3. COMPANY PROFILE

2.3.1 STATE BANK OF INDIA Not only many financial institution in the world today can claim the antiquity and majesty of

the State Bank Of India founded nearly two centuries ago with primarily intent of imparting stability

to the money market, the bank from its inception mobilized funds for supporting both the public credit

of the companies governments in the three presidencies of British India and the private credit of the

European and India merchants from about 1860s when the Indian economy book a significant leap

forward under the impulse of quickened world communications and ingenious method of industrial

and agricultural production the Bank became intimately in valued in the financing of practically and

mining activity of the Sub- Continent Although large European and Indian merchants and

manufacturers were undoubtedly thee principal beneficiaries, the small man never ignored loans as

low as Rs.100 were disbursed in agricultural districts against glad ornaments .Added to these the bank

till the creation of the Reserve Bank in 1935 carried out numerous Central – Banking functions.

Adaptation world and the needs of the hour has been one of the strengths of the Bank, In the

post depression exe. For instance – when business opportunities become extremely restricted, rules

laid down in the book of instructions were relined to ensure that good business did not go post. Yet

seldom did the bank contravenes its value as depart from sound banking principles to retain as expand

its business. An innovative array of office, unknown to the world then, was devised in the form of

branches, sub branches, treasury pay office, pay office, sub pay office and out students to exploit the

opportunities of an expanding economy. New business strategy was also evaded way back in 1937 to

render the best banking service through prompt and courteous attention to customers.

A highly efficient and experienced management functioning in a well defined organizational

structure did not take long to place the bank an executed pedestal in the areas of business,

profitability, internal discipline and above all credibility A impeccable financial status consistent

maintenance of the lofty traditions if banking an observation of a high standard of integrity in its

operations helped the bank gain a pre- eminent status. No wonders the administration for the bank was

universal as key functionaries of India successive finance minister of independent India Resource

Bank of governors and representatives of chamber of commercial showered economics on it.

Modern day management techniques were also very much evident in the good old days years

before corporate governance had become a puzzled the banks bound functioned with a high degree of

responsibility and concerns for the shareholders. An unbroken records of profits and a fairly high rate

of profit and fairly high rate of dividend all through ensured satisfaction, prudential management and

asset liability management not only protected the interests of the Bank but also ensured that the

obligations to customers were not met. The traditions of the past continued to be upheld even to this

day as the State Bank years itself to meet the emerging challenges of the millennium.

2.3.2 ABOUT LOGO

Slogans are:

1) The Nation banks on us

2) Pure banking nothing else

3) The Banker to every Indian

4) With you all the way.

Togetherness is the theme of this corporate loge of SBI where the world of banking services

meet the ever changing customers needs and establishes a link that is like a circle, it indicates

complete services towards customers. The logo also d

to go to any lengths, for customers.

The blue pointer represent the philosophy of the bank that is always looking for the growth

and newer, more challenging, more promising direction. The key hole indicate




complete services towards customers. The logo also denotes a bank that it has prepared to do anything

to go to any lengths, for customers.


and newer, more challenging, more promising direction. The key hole indicates safety and security.




enotes a bank that it has prepared to do anything


s safety and security.


2.3.3 MISSION, VISION AND VALUES

MISSION STATEMENT:

To retain the Bank’s position as premiere Indian Financial Service Group, with world class

standards and significant global committed to excellence in customer, shareholder and employee

satisfaction and to play a leading role in expanding and diversifying financial service sectors while

containing emphasis on its development banking rule.

VISION STATEMENT:

Premier Indian Financial Service Group with prospective world-class standards of efficiency

and professionalism and institutional values.

Retain its position in the country as pioneers in Development banking.

Maximize the shareholders value through high-sustained earnings per share.

An institution with cultural mutual care and commitment, satisfying and good work

environment and continues learning opportunities.

VALUES:

Excellence in customer service

Profit orientation

Belonging commitment to Bank

Fairness in all dealings and relations

Risk taking and innovative

Team playing

Learning and renewal

Integrity

Transparency and Discipline in policies and systems.


2.4. SBI & ITS ASSOCIATES

There are seven other associate banks that fall under SBI. They all use the "State Bank of" name followed by the regional headquarters' name.

State Bank of Bikaner & Jaipur

State Bank of Hyderabad

State Bank of Indore

State Bank of Mysore

State Bank of Patiala State Bank of Saurashtra

State Bank of Travancore

State Bank of India is present in 32 countries, where it has 84 offices serving the international needs of the bank's foreign customers, and in some cases conducts retail operations. The focus of these offices is India-related business.

SBI has branches in these countries:

Australia

Bahrain Bangladesh

Belgium

Canada

Dubai

France Germany

Hong Kong

Israel

Japan


2.5. PRODUCTS AND SERVICES

State Bank Of India renders varieties of services to customers through the following products:

Personal Loan Product:

SBI Term Deposits

SBI Recurring Deposits

SBI Housing Loan

SBI Car Loan

SBI Educational Loan

SBI Personal Loan

SBI Loan For Pensioners

Loan Against Mortgage Of Property

Loan Against Shares & Debentures

Rent Plus Scheme

Medi-Plus Scheme

Rates Of Interest

SBI Housing loan

SBI Housing loan or Mortgage Loan schemes are designed to make it simple for you to make a choice

at least as far as financing goes.

'SBI-Home Loans' features:

No cap on maximum loan amount for purchase/ construction of house/ flat

Option to club income of your spouse and children to compute eligible loan amount

Provision to club expected rent accruals from property proposed to compute eligible loan

amount

Provision to finance cost of furnishing and consumer durables as part of project cost

Repayment permitted upto 70 years of age

Free personal accident insurance cover

Optional Group Insurance from SBI Life at concessional premium (Upfront premium

financed as part of project cost)

Interest applied on daily diminishing balance basis

'Plus' schemes which offer attractive packages with concessional interest rates to Govt.

Employees, Teachers, Employees in Public Sector Oil Companies.

Special scheme to grant loans to finance Earnest Money Deposits to be paid to Urban

Development Authority/ Housing Board, etc. in respect of allotment of sites/ house/ flat

No Administrative Charges or application fee


Prepayment penalty is recovered only if the loan is pre-closed before half of the original

tenure (not recovered for bulk payments provided the loan is not closed)

Provision for downward refixation of EMI in respect of floating rate borrowers who avail

Housing Loans of Rs.5 lacs and above, to avail the benefit of downward revision of interest

rate by 1% or more

In-principle approval issued to give you flexibility while negotiating purchase of a property

·Option to avail loan at the place of employment or at the place of construction

Attractive packages in respect of loans granted under tie-up with Central/ State Governments/

PSUs/ reputed corporates and tie-up with reputed builders (Please contact your nearest branch

for details)

2.6. SERVICES

Domestic treasury

Sbi vishwa yatra foreign travel card

Broking services

Revised service charges

ATM services

Internet banking

e-pay

e-rail

rbieft

Safe deposit locker

Gift cheques

Micro-codes

foreign inward remittances

ATM SERVICES

STATE BANK NETWORKED ATM SERVICES

State Bank offers you the convenience of over 8000 ATMs in India, the largest network in the

country and continuing to expand fast! This means that you can transact free of cost at the ATMs of

State Bank Group (This includes the ATMs of State Bank of India as well as the Associate Banks –

namely, State Bank of Bikaner & Jaipur, State Bank of Hyderabad, State Bank of Indore, State Bank

of Mysore, State Bank of Patiala, State Bank of Saurashtra, and State Bank of Travancore) and wholly

owned subsidiary viz. SBI Commercial and International Bank Ltd., using the State Bank ATM-cum-

Debit (Cash Plus) card.


KINDS OF CARDS ACCEPTED AT STATE BANK ATMs

Besides State Bank ATM-Cum-Debit Card and State Bank International ATM-Cum-Debit

Cards following cards are also accepted at State Bank ATMs: -

State Bank Credit Card

ATM Cards issued by Banks under bilateral sharing viz. Andhra Bank,Axis Bank, Bank of

India, The Bank of Rajasthan Ltd., Canara Bank, Corporation Bank, Dena Bank, HDFC

Bank, Indian Bank, Indus Ind Bank, Punjab National Bank, UCO Bank and Union Bank of

India.

Cards issued by banks (other than banks under bilateral sharing) displaying Maestro, Master

Card, Cirrus, VISA and VISA Electron logos

All Debit/ Credit Cards issued by any bank outside India displaying Maestro, Master Card,

Cirrus, VISA and VISA Electron logos

Note: If you are a cardholder of bank other than State Bank Group, kindly contact your Bank for the

charges recoverable for usage of State Bank ATMs.

STATE BANK INTERNATIONAL ATM-CUM-DEBIT CARD

Eligibility: All Saving Bank and Current Account holders having accounts with networked branches

and are:

18 years of age & above

Account type: Sole or Joint with “Either or Survivor” / “Anyone or Survivor”

NRE account holders are also eligible but NRO account holders are not.

Benefits:

Convenience to the customers traveling overseas Can be used as Domestic ATM-cum-Debit Card

Available at a nominal joining fee of Rs. 200/-

Daily limit of US $ 1000 or equivalent at the ATM and US $ 1000 or equivalent at Point of Sale (POS) terminal for debit transaction

Purchase Protection*up to Rs. 5000/- and Personal Accident cover*up to Rs. 2,00,000/-

Charges for usage abroad: Rs. 150+ Service Tax per cash withdrawal Rs. 15 + Service Tax per enquiry.

State Bank ATM-cum-Debit (State Bank Cash plus) Card:

India’s largest bank is proud to offer you unparalleled convenience viz. State Bank ATM-cum-Debit(Cash Plus) card. With this card, there is no need to carry cash in your wallet. You can now withdraw cash and make purchases anytime you wish to with your ATM-cum-Debit Card.

Get an ATM-cum-Debit card with which you can transact for FREE at any of over 8000 ATMs of State Bank Group within our country.


SBI GOLD INTERNATIONAL DEBIT CARDS

E-PAY:

Bill Payment at Online SBI (e-Pay) will let you to pay your Telephone, Mobile, Electricity, Insurance and Credit Card bills electronically over our Online SBI website

E-RAIL:

Book your Railways Ticket Online.

The facility has been launched wef Ist September 2003 in association with IRCTC. The scheme facilitates Booking of Railways Ticket Online.

The salient features of the scheme are as under:

All Internet banking customers can use the facility.

On giving payment option as SBI, the user will be redirected to onlinesbi.com. After logging on to the site you will be displayed payment amount, TID No. and Railway reference no.

The ticket can be delivered or collected by the customer. The user can collect the ticket personally at New Delhi reservation counter .

The Payment amount will include ticket fare including reservation charges, courier charges and Bank Service fee of Rs 10/. The Bank service fee has been waived unto 31st July 2006.

SAFE DEPOSIT LOCKER:

For the safety of your valuables we offer our customers safe deposit vault or locker facilities at a large number of our branches. There is a nominal annual charge, which depends on the size of the locker and the centre in which the branch is located.

NRI HOME LOAN

SALIENT FEATURE

Purpose of Loan

Loans to NRIs & PIOs can be extended for the following purposes:

To purchase/construct a new house / flat

To repair, renovate or extend an existing house/flat

To purchase an existing house/flat

To purchase a plot for construction of a dwelling unit.

To purchase furnishings and consumer durables, as a part of the project cost

AGRICULTURE / RURAL

State Bank of India Caters to the needs of agriculturists and landless agricultural labourers through a network of 6600 rural and semi-urban branches. here are 972 specialized branches which have been set up in different parts of the country exclusively for the development of agriculture through credit deployment. These branches include 427 Agricultural Development Branches (ADBs) and 547 branches with Development Banking Department (DBDs) which cater to agriculturists and 2 Agricultural Business Branches at Chennai and Hyderabad catering to the needs of hitech commercial agricultural project


3.CHAPTER 3: (Credit Risk Management)

3.1 THEORITICAL BACKGROUND OF CREDIT RISK

3.1.1 CREDIT

The word ‘credit’ comes from the Latin word ‘credere’, meaning ‘trust’. When sellers transfer

his wealth to a buyer who has agreed to pay later, there is a clear implication of trust that the payment

will be made at the agreed date. The credit period and the amount of credit depend upon the degree of

trust.

Credit is an essential marketing tool. It bears a cost, the cost of the seller having to borrow

until the customers payment arrives. Ideally, that cost is the price but, as most customers pay later

than agreed, the extra unplanned cost erodes the planned net profit.

3.1.2 RISK

Risk is defined as uncertain resulting in adverse outcome, adverse in relation to planned objective

or expectation. It is very difficult o find a risk free investment. An important input to risk management

is risk assessment. Many public bodies such as advisory committees concerned with risk management.

There are mainly three types of risk they are follows

• Market risk• Credit Risk• Operational risk

Risk analysis and allocation is central to the design of any project finance, risk management is

of paramount concern. Thus quantifying risk along with profit projections is usually the first step in

gauging the feasibility of the project. Once risks have been identified they can be allocated to

participants and appropriate mechanisms put in place.

3.1.3 MARKET RISK

Market risk is the risk of adverse deviation of the mark to market value of the trading

portfolio, due to market movement, during the period required to liquidate the transactions.

3.1.4 OPERTIONAL RISK

Operational risk is one area of risk that is faced by all organizations. More complex the

organization more exposed it would be operational risk. This risk arises due to deviation from normal

and planned functioning of the system procedures, technology and human failure of omission and

commission. Result of deviation from normal functioning is reflected in the revenue of the


organization, either by the way of additional expenses or by way of loss of opportunity. Technical

breakdown and change in staff also account for the operational risk.

3.2 CREDIT RISK

Credit risk is defined as the potential that a bank borrower or counterparty will fail to meet its

obligations in accordance with agreed terms, or in other words it is defined as the risk that a firm’s

customer and the parties to which it has lent money will fail to make promised payments is known as

credit risk.

The exposure to the credit risks large in case of financial institutions, such commercial banks

when firms borrow money they in turn expose lenders to credit risk, the risk that the firm will default

on its promised payments. As a consequence, borrowing exposes the firm owners to the risk that firm

will be unable to pay its debt and thus be forced to bankruptcy.

3.2.1 CONTRIBUTORS OF CREDIT RISK

• Corporate assets• Retail assets• Non-SLR portfolio• In case of guarantees, Letter of credit and Letter of comfort• Securities trading business• Treasury operations• Derivatives• Cross border exposure• Collaterals accepted by the bank• Settlement, etc

3.2.2 KEY ELEMENTS OF CREDIT RISK MANAGEMENT

• Establishing appropriate credit risk environment• Operating under sound credit granting process• Maintaining an appropriate credit administration, measurement & Monitoring• Ensuring adequate control over credit risk• Banks should have a credit risk strategy which in our case is communicated

throughout the organization through credit policy.


3.3 Credit rating

3.3.1 Definition

Credit rating is the process of assigning a letter rating to borrower indicating that

creditworthiness of the borrower. Rating is assigned based on the ability of the borrower

(company).To repay the debt and his willingness to do so.The higher rating of company the lower the

probability of its default.

3.3.2 Use in decision making

Credit rating helps the bank in making several key decisions regarding credit including

1. whether to lend to a particular borrower or not; what price to charge?

2. what are the product to be offered to the borrower and for what tenure?

3. at what level should sanctioning be done, it should however be noted that credit rating is one

of inputs used in credit decisions.

There are various factors (adequacy of borrowers, cash flow, collateral provided, and relationship

with the borrower).Probability of the borrowers default based on past data.

Main features of the rating tool:-

comprehensive coverage of parameters

extensive data requirement

mix of subjective and objective parameters

includes trend analysis

13 parameters are benchmarked against other players in the segment

captions of industry outlook

8 grade ratings broadly mapped with external rating agencies prevailing data.

3.4 Rating tool for SME

Internal credit ratings are the summary indicators of risk for the bank’s individual credit exposures. It

plays a crucial role in credit risk management architecture of any bank and forms the cornerstone of

approval process.

Based on the guidelines provided by Boston Consultancy Group (BCG), SBI adopted credit rating

tool.

The rating tool for SME borrower assigns the following Weight ages to each one of the four main

categories i.e


(i) Scenario (I) : without monitoring tool

S No Parameters Weightages (%)

1 financial performance XXXX

2 operating performance XXXX

3 quality of management XXXX

4 industry outlook XXXX

(ii). Scenario (II): with monitoring tool [conduct of account]:- the weight age would be conveyed

separately on roll out of the tool. In the above parameters first three parameters used to know the

borrower characteristics. In fourth encapsulates the risk emanating from the environment in which the

borrower operates and depends on the past performance of the industry its future outlook and macro

economic factors.

3.4.1 Financial performance:-S No Sub parameters Weightages

(in %)

1 Net sales growth rate(%) Xxxx

2. PBDIT Growth rate (%) Xxxx

3. PBDIT /Sales (%) Xxxx

4. TOL/TNW Xxxx

5. Current ratio Xxxx

6. Operating cash flow Xxxx

7. DSCR Xxxx

8. Foreign exchange ratio Xxxx

9. Expected values of D/E of 50% of NFB credit devolves Xxxx

10. Realisability of Debtors Xxxx


11. State of export country economy Xxxx

12. Fund deputation risk Xxxx

Total Xxxxxx

3.4.2 Operating performance

S No Sub parameters Weightage

(%)

1. credit period allowed Xxxx

2. credit period availed Xxxx

3. working capital cycle Xxxx

4. Tax incentives Xxxx

5. production related risk Xxxx

6. product related risk Xxxx

7. price related risk Xxxx

8. client risk Xxxx

9. fixed asset turnover Xxxx

Total Xxxxxx

3.4.3 Quality of management

S No sub parameters Weightages (%)

1. Hy / Track record of industrial unrest Xxxx

2 market report of management reputation Xxxx

3 history of FERA violation / ED enquiry Xxxx

4 Too optimistic projections of sales and other financials Xxxx


5 technical and managerial expertise Xxxx

6 capability to raise money Xxxx

Total Xxxxxx

IN STATE BANK OF INDIA DFFERENT PARAMETERS USED TO GIVE RATINGS AREAS

FOLLOWS:-

FINANCIAL PARAMETERS

S.NO Indicator/ratio Score

F1(a) Audited net sales in last year Xxxx

F2(b) Audited net sales in year before last Xxxx

F1(c) Audited net sales in 2 year before last Xxxx

F1(d) Audited net sales in 3 year before last Xxxx

F1(e) Estimated or projected net sales in next year Xxxx

F2 NET SALES GROWTH RATE(%) Xxxx

F3 PBDIT growth rate(%) Xx

F4 Net sales(%) Xx

F5 ROCE(%) Xx

F6 TOL/TNW Xxx

F7 Current ratio Xxx

F8 DSCR Xxx

F9 Interest coverage ratio Xx

F10 Foreign exchange risk Xx

F11 Reliability of debtors Xx

F12 Operating cash flow Xx


F13 Trend in cash accruals x

BUSINESS PARAMETERS

S.NO Indicator/ratio Score

B1 Credit period allowed(days) Xx

B2 Credit period availed(days) Xx

B3 Working capital cycle(times) Xx

B4 Production related risks Xx

B5 Product related risks X

B6 Price related risks X

B7 Fixed assets turnover X

B8 No. of yeas in business X

B9 Nature of clientele base X

MANAGEMENT PARAMETERS

SR. NO INDICATOR/RATIO SCORE

M1 HR policy X

M2 Track record in payment of statutory and other dues X

M3 Market report of management reputation X

M4 Too optimistic projections of sales and other financials X

M5 Capability to raise resources X

M6 Technical and managerial expertise X

M7 Repayment track record X

CONDUCT PARAMETERS


A1 Creation of charges on primary security X

A2 Creation of charges on collateral and execution of personal or

corporate guarantee

X

A3 Proper execution of documents X

A4 Availability of search report X

A5 Other terms and conditions not complied with X

A6 Receipt of periodical data X

A7 Receipt of balance sheet X

B1 Negative deviation in half yearly net sales vis-à-vis proportionate

estimates

X

B2 Negative deviation in annual net sales vis-à-vis estimates X

B3 Negative deviation in half yearly net profit vis-à-vis proportionate

estimates

X

B4 Adverse deviation in inventory level in months vis-à-vis estimate

level

X

B5 Adverse deviation in receivables level in months vis-à-vis

estimated level

X

B6 Quality of receivable assess from profile of debtors X

B7 Adverse deviation in creditors level in months vis-à-vis estimated

level

X

B8 Compliance of financial covnants X

B9 Negative deviation in annual net profit vis-à-vis estimates X

Unit inspection report observations X


C2 Audit report internal/statutory/concurrent/RBI X

C3 Conduct of account with other banks/lenders and information on

consortium

X

D1 Routing of proportionate turnover/business X

D2 Utilization of facilities(not applicable for term loan) X

D3 Over due discounted bills during the period under review within the

sanctioned terms then not applicable

X

D4 Devolved bill under L/c outstanding during the period under review X

D5 Invoked BGs issued outstanding during the period under review X

D6 Intergroup transfers not backed by trade transactions during the period

under review

X

D7 Frequency of return of cheques per quarter deposited by borrower X

D8 Frequency of issuing cheques per quarter without sufficient balance and

returned

X

D9 Payment of interest or instalments X

D10 Frequency of request for AD HOC INCREASE OF LIMIS during the last

one year

X

D11 Frequency of over drawings CC account X

E1 Status of deterioration in value of primary security or stock depletion X

E2 Status of deterioration in value of collateral security X

E3 Status of deterioration in personal net worth and TNW X

E4 Adequacy of insurance for the primary /collateral security X


3.5 Difficulty of measuring credit risk

Measuring credit risk on a portfolio basis is difficult. Banks and financial institutions

traditionally measure credit exposures by obligor and industry. They have only recently attempted to

define risk quantitatively in a portfolio context e.g., a value-at-risk (VaR) framework. Although banks

and financial institutions have begun to develop internally, or purchase, systems that measure VaR for

credit, bank managements do not yet have confidence in the risk measures the systems produce.

In particular, measured risk levels depend heavily on underlying assumptions and risk

managers often do not have great confidence in those parameters. Since credit derivatives exist

principally to allow for the effective transfer of credit risk, the difficulty in measuring credit risk and

the absence of confidence in the result of risk measurement have appropriately made banks cautious

about the use of banks and financial institutions internal credit risk models for regulatory capital

purposes.

Credit Risk

The most obvious risk derivatives participants’ face is credit risk. Credit risk is the risk to

earnings or capital of an obligor’s failure to meet the terms of any contract the bank or otherwise to

perform as agreed. For both purchasers and sellers of protection, credit derivatives should be fully

incorporated within credit risk management process. Bank management should integrate credit

derivatives activity in their credit underwriting and administration policies, and their exposure

measurement, limit setting, and risk rating/classification processes. They should also consider credit

derivatives activity in their assessment of the adequacy of the allowance for loan and lease losses

(ALLL) and their evaluation of concentrations of credit.

There a number of credit risks for both sellers and buyers of credit protection, each of which

raises separate risk management issues. For banks and financial institutions selling credit protection

the primary source of credit is the reference asset or entity.

F1 Labor situation/industrial relations X

F2 Delay or default in payments of salaries and statutory dues X

F3 Non co-operation by the borrower X

F4 Intended end-use of financing X

F5 Any other adverse feature/snon financial including corporate governance issues suchasadverse publicity, strictures from regulators, pitical risk and adverse trade environment not covered

X


3.6 APPRAISAL OF THE FIRMS POSITION ON BASIS OF OTHER PARAMETERS

1. Managerial Competence

2. Technical Feasibility

3. Commercial viability

4. Financial Viability

3.6.1 Managerial Competence Back ground of promoters

Experience Technical skills, Integrity & Honesty

Level of interest / commitment in project

Associate concerns

3.6.2 Technical Feasibility Location

Size of the Project

Factory building

Plant & Machinery

Process & Technology

Inputs / utilities

3.6.3 Commercial Viability Demand forecasting / Analysis

Market survey Pricing policies

Competition

Export policies

3.6.4 Financial Viability Whether adequate funds are available at affordable cost to implement the project

Whether sufficient profits will be available

Whether BEP or margin of safety are satisfactory

What will be the overall financial position of the borrower in coming years.

3.7 Credit investigation report

Branch prepares Credit investigation report in order to avoid consequence in later stage Credit

investigation report should be a part of credit proposal. Bank has to submit the duly completed credit

investigation reports after conducting a detailed credit investigation as per guidelines.

Some of the guidelines in this regards as follow:

Wherever a proposal is to be considered based only on merits of flagships concerns of the group, then such support should also be compiled in respect of subject flagship in concern besides the applicant company.


In regard of proposals falling beyond the power of rating officer, the branch should ensure participation of rating officer in compilation of this report.

The credit investigation report should accompany all the proposals with the fund based limit of above 25 Lakhs and or non fund based of above Rs. 50 Lakhs.

The party may be suitably kept informed that the compilation of this report is one of the requirements in the connection with the processing for consideration of the proposal.

The branch should obtain a copy of latest sanction letter by existing banker or the financial institution to the party and terms and conditions of the sanction should studied in detail.

Comments should be made wherever necessary, after making the observations/lapses in the following terms of sanction.

Some of the important factors like funding of interest, re schedule of loans etc terms and conditions should be highlighted.

Copy of statement of accounts for the latest 6 months period should be obtained by the bank. To get the present condition of the party.

Remarks should be made by the bank on adverse features observed. (e.g., excess drawings, return of cheques etc).

Personal enquiry should be made by the bank official with responsible official of party’s present / other bankers and enquiries should be made with a elicit information on conduct of account etc.

Care should be taken in selection of customers or creditors who acts as the representative. They should be interviewed and compilation of opinion should be done.

Enquiries should be made regarding the quality of product, payment terms, and period of overdue which should be mentioned clearly in the report. Enquiry should be aimed to ascertain the status of trading of the applicant and to know their capability to meet their commitments in time.

To know the market trend branch should enquire the person or industry that is in the same line of business activity.

In depth observation may be made of the applicant as to :- whether the unit is working in full swing- number of shifts and number of employees- any obsolete stocks with the unit- capacity of the unit- nature and conditions of the machinery installed- Information on power, water and pollution control etc.- information on industrial relation and marketing strategy


3.8 CRA Proposal

The proposal is made considering 3 years balance sheet of a company to arrive at a pricing based on its current rating. It includes many parameters.

3.8.1 Illustration: A model of a CRA proposalMemorandum for the committee of CRA validation

1. CRA model used: Choose one form a. Tradingb. Non – trading ( Regular)c. Non – trading regular ( Diamond)

2. Borrower details (Name)3. Particulars of CRA

a. Borrower Ratingi. Before country risk

ii. Final after country riskb. External Rating

4. Proposal for validation of a. Borrower ratingb. Facility rating

5. Credit limits6. Brief particulars of the borrower

a. Age, Succession planningb. Collateral, Managementc. Name of the directorsd. Associate / Sister / Group company

7. Validationa. Performance and financial indicators

S.No Financial Parameters Last 3 years audited data

Current year estimation

1 Net Sales

2 Export Sales

3 Operating Profit

4 Total Assets (TA)

5 Total Current Assets

6 Net Working Capital

7 Total Outside Liability (TOL)

8 Profit After Tax (PAT)

9 PAT / Net Sales

10 Retained Profit


11 Retained Profit / TA

12 Net Cash Accrual (NCA)

13 NCA / Total Debt

14 PBDIT

15 PBDIT / Interest

16 PUC

17 Total Net Worth (TNW)

18 Adjusted TNW

19 TOL / TNW

20 TOL / Adjusted TNW

21 (Inventory / Net Sales) + (Receivables / Gross Sales) in days

22 Current Ratio

b. Comments on variance in valuesc. Performance under other relevant factors

i. Net Sales as a percentage of estimated net salesii. Profit as a percentage of estimated net profit

d. Moving average of company’s last 3 years ratio

S.No Financial Parameters Moving Average ( Last 3 years)

Projected( Next Year)

1 TOL / TNW 1.95 2.15

2 Current Ratio 1.33 1.29

3 ROCE % 17.90% 16.91%

4 PBDIT / Interest 4.22 2.55

5 PAT / Net Sales (%) 5.92% 4.28%

6 Retained Profit / TA 6.17% 4.48%

7 Net Cash Accruals / Total Debt % 12.95% 10.21%

8 (Inventory / Net Sales) + (Receivables / Gross Sales)

147 145

e. Details in terms of loan.8. Quarterly Sales


Sales in the last 2 quarters preceding the date of Risk Assessment

Particulars September 2012 December 2012

Sales

Sales in the corresponding quarters in the preceding year

Particulars September 2011 December 2011

Sales

a. Growth %b. Average Growth

9. Comments ona. Financial flexibility of the company

i. Raise funds through internal sources like internal accruals, scalable assets.ii. Raise resources through external sources based on the relationship with

banker, liquidity back up etc.iii. Record in raising funds from capital market.iv. Flexibility to defer its capex in case of weakening financial position etc.

b. Forex business detailsc. Country riskd. Justification for giving abnormal high or low

10. Conduct of Account ( Last 12 months)

S.No Particulars Comments

1 Irregularity in CC, Term Loan and Other Accounts

2 Devolvement of Letter of credit

3 Invocation of Bank guarantee

4 Over dues to other Banks / Financial Institutions

5 Routing of Sales

6 Adherence to sanction terms

7 Completion of documentation formalities

8 Timely submission of financial data / Balance sheet / Stock statement

9 Investment in group company

11. Future Prospects12. Entry Barriers13. Details of security available14. CRMD guidelines on industry outlook


15. Non – compliance with regulation to bank’s laid down instruction with regard to loan policy guidelines / Earlier prescription of sanctioning authority / RMD exposure norms / Figuring in RBI / ECGC defaulters list / Major I & A audit irregularities / Other risk factors etc.

16. Qualitative factors17. Hurdle scores comparison18. Risk Score19. Certificate20. Recommendation

3.9 Credit Files

It’s the file, which provides important source material for loan supervision in regard to information for internal review and external audit. Branch has to maintain separate credit file compulsorily in case of Loans exceeding Rs 50 Lakhs which should be maintained for quick access of the related information.

3.9.1 Contents of the credit file basic information report on the borrower

milestones of the borrowing unit

competitive analysis of the borrower

credit approval memorandum

financial statement

copy of sanction communication

security documentation list

Dossier of the sequence of events in the accounts

Collateral valuation report

Latest ledger page supervision report

Half yearly credit reporting of the borrower

Quarterly risk classification

Press clippings and industrial analysis appearing in newspaper

Minutes of latest consortium meeting

Customer profitability

Summary of inspection of audit observation

Credit files provide all information regarding present status of the loan account on basis of credit

decision in the past. This file helps the credit officer to monitor the accounts and provides concise

information regarding background and the current status of the account


4. CHAPTER 4: (STUDY ON CREDIT RISK MANAGEMENT IN STATE BANK OF INDIA)

4.1 THE TERMS

Credit is Money lent for a period of Time at a Cost (interest)

Credit Risk is inability or unwillingness of customer or counter party to meet commitments

Default/ Willful default

Losses due to fall in credit quality real / perceived

4.2 Treatment of advances-Major Categories

Governments

PSEs (public Sector Enterprises)

Banks

Corporate

Retail

Claims against residential property

Claims against commercial real estate

4.3 Proposed Risk Weight Table

Option 1 = Risk Weight based on risk weight of the country

Option 2a = Risk weight based on assessment of individual bank

Credit

Assessment

AAA to

AA-

A+ to

A-

BBB+

to BBB-

BB+

To B-

Below

B-

Unrated

Sovereign(Govt.&

Central Bank)

0% 20% 50% 100% 150% 100%

Claims on Banks

Option 1 20% 50% 100% 100% 150% 100%

Option 2a 20% 50% 50% 100% 150% 50%

Option 2b 20% 20% 20% 50% 150% 20%

Corporate 20%


Option 2b = Risk Weight based on assessment of individual banks with claims of original maturity of

less than 6 months.

Retail Portfolio( subject to qualifying criteria) - 75%

Claims Secured by residential property - 35%

Non Performing Assets:

• If specific provision is less than 20% 150%

• If specific provision is more than 20% 100%

Simple approach similar to Basel I

Roll out from March 2008

Risk weight for each balance sheet & off balance sheet item. That is, FB & NFB, both.

Risk weight for Retail reduced

Risk weight for Corporate - according to external rating by agencies approved by RBI and

registered with SEBI

Lower risk weight for smaller home loans (< 20 lacs)

Risk weight for unutilized limits = (Limit- outstanding) >0 Importance of reporting limit data

correctly (If a limit of Rs.10 lacs is reported in Limit field as Rs.100 lacs, even with full

utilisation of actual limit, Rs. 90 lacs will be shown as unutilised limit, and capital allocated

against such fictitious data at prescribed rates).

4.4 Risk weights

Central Government guaranteed – 0%

State Govt. Guaranteed – 20%

Scheduled banks (having min. CRAR) – 20%

Non-scheduled bank (having min. CRAR) -100%

Home Loans (LTV < 75%)

Less than Rs 20 lakhs – 50%

Rs 20 lakhs and above – 75%

Home Loans (LTV > 75%) – 100%

Commercial Real estate loans – 150%

Personal Loans and credit card receivables- 125%


Staff Home Loans/PF Lien noted loans – 20%

Consumer credit (Personal Loans/ Credit Card Receivables) – 125%

Gold loans up to Rs 1 lakh – 50%

NPAs with provisions <20% 150%

-do- 20 to < 50% 100%

-do- 50% and above 50%

Restructured/ rescheduled advances – 125%

Credit Conversion Factors (CCFs) to be applied on off balance sheet items [NFB] &

unutilised limits before applying risk weights.

Some important CCFs –

Documentary LCs – 20% (Non- documentary - 100%);

Perf. Guarantees – 50%, Fin. Gtees- 100%,

Unutilised limits – 20% (up to 1 year), 50% (beyond 1 year)

4.5 Components of Credit Risk

=== Size of Expected Loss

1. What is the probability of a

default (NPA)?

2. How much will be the likelyexposure in the case the advance becomes NPA?

3. How much of that exposure is the bank going to lose?

“Expected Loss“

Probability of Default

(Frequency)

Exposure at Default

Loss Given Default

“Severity”

EL =

=

=

=

=

PD

X

EAD

X

LGD


4.6 SALIENT FEATURES OF CRA MODELS

4.6.1 (A) TYPE OF MODELS

S. Exposure Level (FB + NFB Non – Trading Sector Trading SectorNo. Limits ) (C&I , SSI , AGL) ( Trade & Services)(i) Over Rs. 5.00 crore Regular Model Regular Model(ii) Rs 0.25 crore to Rs. 5.00 crore Simplified Model Simplified Model

4.6.2 (B) TYPE OF RATINGS

S. No. Model Type of Rating(i) Regular Model Borrower Rating

Facility Rating(ii) Simplified Model Borrower RatingNew Rating Scales – Borrower Rating: 16 Rating Grades

There are different rating given to the different banks. For example

S. No. Borrower Rating Range of scores Risk level Comfort Level

1 SB1 94-100 Virtually Zero risk Virtually Absolute safety2 SB2 90-93 Lowest Risk Highest safety3 SB3 86-89 Lower Risk Higher safety4 SB4 81-85 Low Risk High safety5 SB5 76-80 Moderate Risk with Adequate Adequate safety

Cushion6 SB6 70-75 Moderate Risk Moderate Safety7 SB7 64-698 SB8 57-63 Average risk Above Safety Threshold9 SB9 50-5610 SB10 45-49 Acceptable Risk Safety Threshold

(Risk Tolerance Threshold)11 SB11 40-44 Borderline risk Inadequate safety12 SB12 35-39 High Risk Low safety13 SB13 30-34 Higher risk Lower safety14 SB14 25-29 Substantial risk Lowest safety15 SB15 <24 Pre-Default Risk (extremely Nil

Vulnerable to default)16 SB16 - Default Grade

Bank has introduced New Rating Scales for borrower for giving loans. Rating is

given on the basis of scores out of 100. Bank gives loans to the borrower as per their rating

like SBI gives loans to the borrower up to SB8 rating as it has average risk till SB8 rating.

From SB9 rating the risk increases. So banks does not give loans after SB8 rating.


4.7 NEW RATING SCALES - FACILITY RATING: 16 RATING GRADES

S FACILITY RANGE RISK LEVEL COMFORTNO GRADES OF LEVEL

SCORES1 FR1 94-100 Virtually Zero Risk Virtually Absolute Safety2 FR2 87-93 Lowest Risk Highest Safety3 FR3 80-86 Lower Risk Higher Safety4 FR4 73-79 Low Risk High Safety5 FR5 66-72 Moderate Risk with Adequate Safety

Adequate Cushion6 FR6 59-65 Moderate Moderate7 FR7 52-58 Risk Safety8 FR8 45-51 Average Risk Above Safety

Threshold9 FR9 38-44

Acceptable Risk Safety Threshold10 FR10 31-37 (Risk Tolerance Threshold)11 FR11 24-30 High Risk Low Safety

12 FR12 17-23 Higher Risk Lower Safety

13 FR13 11-16 Substantial Risk Lowest Safety14 FR14 5-1015 FR15 1-4 Highest Risk

NIL16 FR16 0


4.8 Short-term and Long-Term Ratings:

For Exposures with a contractual maturity of less than or equal to one year (except Cash

Credit, Overdraft and other Revolving Credits) Short-term Ratings given by ECAIs will

be applicable.

For Domestic Cash Credit, Overdraft and other Revolving Credits irrespective of the period

and Term Loan exposures of over 1 year, Long Term Ratings given by ECAIs will be

applicable.

For Overseas exposures, irrespective of the contractual maturity, Long Term Ratings given by

IRAs will be applicable.

Rating assigned to one particular entity within a corporate group cannot be used to risk weight

other entities within the same group.

4.9 Competitors details

In Bangalore Main competitors of State Bank of India are ICICI Bank in private sector banks

and Syndicate Bank and Corporation Bank In public sector. In SBI, it can be better understood with

given Pie diagram as follows:

4.10 POSITION OF STATE BANK OF INDIA IN LENDING

4.10.1 PRIVATE SECTOR BANK

BANK LENDING IN Cr

State Bank Of India 29

ICICI bank 15

HDFC 5

AXIS 25


4.10.2 PUBLIC SECTOR BANKS

BANK LENDING IN Cr

State Bank Of India 29

Syndicate Bank 26

Canara Bank 23

Corporation Bank 25

State Bank Of India

ICICI bank

HDFC

AXIS

0 10 20 30 40

LENDING IN Cr

LENDING IN Cr


In total lending, State Bank of India is in first place relatively in Public Sector Banks.

4.11 Credit risk mitigation techniques – Guarantees

Where guarantees are direct, explicit, irrevocable and unconditional banks may take account

of such credit protection in calculating capital requirements.

A range of guarantors are recognised. As under the 1988 Accord, a substitution approach will

be applied. Thus only guarantees issued by entities with a lower risk weight than the

counterparty will lead to reduced capital charges since the protected portion of the

counterparty exposure is assigned the risk weight of the guarantor, whereas the uncovered

portion retains the risk weight of the underlying counterparty.

Detailed operational requirements for guarantees eligible for being treated as a CRM are as

under:

4.11.1 Operational requirements for guaranteesa. A guarantee (counter-guarantee) must represent a direct claim on the protection

provider and must be explicitly referenced to specific exposures or a pool of

exposures, so that the extent of the cover is clearly defined and incontrovertible. The

guarantee must be irrevocable; there must be no clause in the contract that would

allow the protection provider unilaterally to cancel the cover or that would increase

the effective cost of cover as a result of deteriorating credit quality in the guaranteed

exposure. The guarantee must also be unconditional; there should be no clause in the

guarantee outside the direct control of the bank that could prevent the protection

provider from being obliged to pay out in a timely manner in the event that the

original counterparty fails to make the payment(s)due.

b. All exposures will be risk weighted after taking into account risk mitigation available

in the form of guarantees. When a guaranteed exposure is classified as non-

State Bank Of India

ICICI bank

HDFC

AXIS

0 10 20 30 40

LENDING IN Cr

LENDING IN Cr


performing, the guarantee will cease to be a credit risk mitigant and no adjustment

would be permissible on account of credit risk mitigation in the form of guarantees.

The entire outstanding, net of specific provision and net of realisable value of eligible

collaterals / credit risk mitigants, will attract the appropriate risk weight.

4.11.2 Additional operational requirements for guarantees

In addition to the legal certainty requirements in paragraphs 7.2 above, in order for a

guarantee to be recognised, the following conditions must be satisfied:

a. On the qualifying default/non-payment of the counterparty, the bank is able in a

timely manner to pursue the guarantor for any monies outstanding under the

documentation governing the transaction. The guarantor may make one lump sum

payment of all monies under such documentation to the bank, or the guarantor may

assume the future payment obligations of the counterparty covered by the guarantee.

The bank must have theright to receive any such payments from the guarantor

without first having to take legal actions in order to pursue the counterparty for

payment.

b. The guarantee is an explicitly documented obligation assumed by the guarantor.

c. Except as noted in the following sentence, the guarantee covers all types of payments

the underlying obligor is expected to make under the documentation governing the

transaction, for example notional amount, margin payments etc .Where a guarantee

covers payment of principal only, interests and other uncovered payments.

4.12 Qualitative Disclosures

(a) The general qualitative disclosure requirement (paragraph 10.13 ) with respect to credit risk,

including:

Definitions of past due and impaired (for accounting purposes);

Discussion of the bank’s credit risk management policy;

4.13 Quantitative Disclosures

(b) Total gross credit risk exposures24, Fund based and Non-fund based separately.

(c) Geographic distribution of exposures25, Fund based and Non-fund based separately

Overseas Domestic

(d) Industry26 type distribution of exposures, fund based and non-fund based separately

(e) Residual contractual maturity breakdown of assets,

(g) Amount of NPAs (Gross)

Substandard

Doubtful 1


Doubtful 2

Doubtful 3

Loss

(h) Net NPAs

(i) NPA Ratios

Gross NPAs to gross advances

Net NPAs to net advances

(j) Movement of NPAs (Gross)

Opening balance

Additions

Reductions

Closing balance

(k) Movement of provisions for NPAs

Opening balance

Provisions made during the period

Write-off

Write-back of excess provisions

Closing balance

(l) Amount of Non-Performing Investments

(m) Amount of provisions held for non-performing investments

(n) Movement of provisions for depreciation on investments Opening balance

Provisions made during the period

Write-off

Write-back of excess provisions

Closing balance


CHAPTER 5: (STUDY ON CREDIT POLICY)

5.1 INTRODUCTION TO CREDIT POLICY

Bank’s investments in accounts receivable depends on:

(a) the volume of credit sales, and

(b) the collection period.

There is one way in which the financial manager can affect the volume of credit sales and collection

period and consequently, investment in accounts receivables. That is through the changes in credit

policy.

The term credit policy is used to refer to the combination of three decision variables:

(1) credit standards,

(2) credit terms, and

(3) collection efforts, on which the financial manager has influence.

5.1.1 Credit Standards

Credit Standards are criteria to decide the types of customers to whom goods could be sold on

credit. If a firm has more slow-paying customers, its investment in accounts receivable will increase.

The firm will also be exposed to higher risk of default.

5.1.2 Credit Terms

Credit Terms specify duration of credit and terms of payment by customers. Investment in

accounts receivables will be high if customers are allowed extended time period for making payments.

5.1.3 Collection Efforts

Collection efforts determine the actual collection period. The lower the collection period, the

lower the investment in accounts receivable and higher the collection period, the higher the

investment in accounts receivable.


5.2 GOALS OF CREDIT POLICY

A firm may follow a lenient or a stringent credit policy. The firm following a lenient credit

policy tends to sell on credit to customers on very liberal terms and standards; credits are granted for

longer periods even to those customers whose creditworthiness is not fully known or whose financial

position is doubtful. In contrast, a firm following a stringent credit policy sells on credit on a highly

selective basis only to those customers who have proven creditworthiness and who are financially

strong. In practice, follow credit policies are ranging between stringent to lenient.

Firms use credit policy as a marketing tool for expanding sales. In declining market, it may be

used to maintain the market share. Credit Policy helps to retain old customers and create new

customers by weaning them away from competitors. In a growing market, it is used to increase the

firm’s market share. Under a highly competitive situation or recessionary economic conditions, a firm

may loose its credit policy to maintain sales or to minimize erosion of sales.

5.2.1 OBJECTIVESThe main objectives of Bank’s Credit Policy are:

A balanced growth of the credit portfolio which does not compromise safety.

Adoption of a forward-looking and market responsive approach for moving into profitable

new areas of lending whish emerge, within the pre determined exposure ceilings.

Sound risk management practices to identify, measure, monitor and control credit risks.

Maximize interest yields from the credit portfolio through a judicious management of varying

spreads for loan assets based upon their size, credit rating and tenure

Ensure due compliance of various regulatory norms, including CAR, Income Recognition and

Asset Classification.

Accomplish balanced deployment of credit across various sectors and geographical regions.

Achieve growth of credit to priority sectors / sub sectors and continue to surpass the targets

stipulated by Reserve Bank of India.

Use pricing as a tool of competitive advantage ensuring however that earnings are protected.

Develop and maintain enhanced competencies in credit management at all levels through a

combination of training initiatives and dissemination of best practices.


5.3 COMPARISON OF LOANS & ADVANCES OF STATE BANK OF INDIA WITH OTHER PUBLIC AND PRIVATE SECTOR BANKS

For the year 2008: (*Amt in millions)

Name Of the Banks Amt of advances

State Bank Of India 4167681.96

Syndicate Bank 640510.11

Canara Bank 1072380.40

Corporation Bank 391855.74

HDFC Bank 634268.93

ICICI Bank 2256160.82

UTI Bank 596611.44

0 2000000 4000000

State Bank Of India

Syndicate Bank

Canara Bank

Corporation Bank

HDFC Bank

ICICI Bank

UTI Bank

Amt of advances

Amt of advances








HDFC Bank 988830.47


UTI Bank 815567.65

0 2000000 4000000 6000000

State Bank Of India

Syndicate Bank

Canara Bank

Corporation Bank

HDFC Bank

ICICI Bank

UTI Bank

Amt of advances

Amt of advances








HDFC Bank 1258305.93


UTI Bank 1043409.46

0 2000000400000060000008000000

State Bank Of India

Syndicate Bank

Canara Bank

Corporation Bank

HDFC Bank

ICICI Bank

UTI Bank

Amt of advances

Amt of advances










UTI Bank 1424078.28

0 2 4 6 8

State Bank Of India

Syndicate Bank

Canara Bank

Corporation Bank

HDFC Bank

ICICI Bank

UTI Bank

Millions

Amt of advances

Amt of advances










UTI Bank 1697595.38

5.3.1 Interpretation

Considering the above data we can say that year on year the amount of advances lent by

State Bank of India has increased which indicates that the bank’s business is really commendable and

the Credit Policy it has maintained is absolutely good. Whereas other banks do not have such good

business SBI is ahead in terms of its business when compared to both Public Sector and Private Sector

banks, this implies that SBI has incorporated sound business policies in its bank.

0 2000000 4000000 6000000

State Bank Of India

Syndicate Bank

Canara Bank

Corporation Bank

HDFC Bank

ICICI Bank

UTI Bank

Amt of advances

Amt of advances


5.4 COMPARISON STUDY ON CREDIT RECOVERY MANAGEMENT


Name Of The Banks

Loans Issued Recovered Outstanding

State Bank Of India 157933.54 91601.4 66332.09

Syndicate Bank 20646.62 11562.11 9084.5

Canara Bank 47638.62 27058.74 20579.88

Corporation Bank 14889.72 7500 6389.72

HDFC Bank 17744.51 9670.75 8073.76

ICICI Bank 60757,36 34631.70 26125.66

UTI Bank 9362.92 4615.55 4447.40

For the year 2005:

Name Of The Banks Loans Issued Recovered Outstanding


Syndicate Bank 26729.21 15422.75 11306.46

Canara Bank 60421.40 35044.42 25376.96

Corporation Bank 18546.36 10478.70 8067.67

HDFC Bank 25566.30 14291.56 11274.74

ICICI Bank 88991.75 52327.15 36664.60

UTI Bank 15602.92 8550.40 7052.52


For the year 2006:



Syndicate Bank 36466.24 21879.74 14386.50

Canara Bank 79425.69 48446.67 30976.02


HDFC Bank 35061.26 20125.61 14936.10

ICICI Bank 143029.89 88392.47 54637.46

UTI Bank 22314.24 12429.03 9885.20

For the year 2007:



Syndicate Bank 51670.44 31879.74 19790.7

Canara Bank 98505.69 68449.67 30056.02


HDFC Bank 46944.78 30125.16 16819.62

ICICI Bank 164484.38 98392.47 66091.91

UTI Bank 36876.48 22429.03 14447.45


5.5 PRIORITY SECTOR ADVANCES OF BANKS COMPARISON WITH OTHER PUBLIC SETOR BANKS

S.No Name of the Bank

Direct Agriculture

Advances

Indirect

Agriculture

Advances

Total

Agriculture

Advances

Weaker

Section

Advances

Total

Priority

Sector

Advances

Amount Amount Amount Amount Amount

1 STATE BANK OF INDIA 23484 7032 30516 19883 82895

2 SYNDICATE BANK 4406.33 1464.64 5870.94 3267.71 14626.62

3 CANARA BANK 8348 3684 12032 4423 30937

4 CORPORATION BANK 963.58 971.22 1934.80 665.32 9043.74

PRIORITY SECTOR ADVANCES OF PUBLIC SECTOR BANKS IN PERCENTAGES ARE AS FOLLOWS:

S.No Name of the Bank

Direct Agriculture

Advances

Indirect

Agriculture

Advances

Total

Agriculture

Advances

Weaker

Section

Advances

Total

Priority

Sector

Advances

% Net Banks Credit

% Net Banks Credit

% Net Banks Credit

% Net Banks Credit

% Net Banks Credit

1 STATE BANK OF INDIA 10.5 3.1 13.6 8.9 37.0

2 SYNDICATE BANK 13.5 4.5 18.0 10.0 44.9

3 CANARA BANK 11.2 4.9 15.7 5.9 41.4

4 CORPORATION BANK 4.5 4.5 9.0 3.1 41.9


5.5.1 Interpretations

SBI’s direct agriculture advances as compared to other banks is 10.5% of the Net Bank’s Credit, which shows that Bank has not lent enough credit to direct agriculture sector.

In case of indirect agriculture advances, SBI is granting 3.1% of Net Banks Credit, which is less as compared to Canara Bank, Syndicate Bank and Corporation Bank. SBI has to entertain indirect sectors of agriculture so that it can have more number of borrowers for the Bank.

SBI has advanced 13.6% of Net Banks Credit to total agriculture and 8.9% to weaker section and 37% to priority sector, which is less as compared with other Bank.


6. CHAPTER 6 : (FINDINGS)

6.1 Findings

Project findings reveal that SBI is sanctioning less Credit to agriculture, as compared with its key competitor’s viz., Canara Bank, Corporation Bank, Syndicate Bank

Recovery of Credit: SBI recovery of Credit during the year 2006 is 62.4% Compared to other Banks SBI ‘s recovery policy is very good, hence this reduces NPA

Total Advances: As compared total advances of SBI is increased year by year. State Bank Of India is granting credit in all sectors in an Equated Monthly Installments

so that any body can borrow money easily

Project findings reveal that State Bank Of India is lending more credit or sanctioning

more loans as compared to other Banks.

State bank Of India is expanding its Credit in the following focus areas:

• SBI Term Deposits• SBI Recurring Deposits• SBI Housing Loan• SBI Car Loan• SBI Educational Loan• SBI Personal Loan• etc

In case of indirect agriculture advances, SBI is granting 3.1% of Net Banks Credit, which is less as compared to Canara Bank, Syndicate Bank and Corporation Bank. SBI has to entertain indirect sectors of agriculture so that it can have more number of borrowers for the Bank.

SBI’s direct agriculture advances as compared to other banks is 10.5% of the Net Bank’s Credit, which shows that Bank has not lent enough credit to direct agriculture sector.

Credit risk management process of SBI used is very effective as compared with other

banks.

6.2 LIMITATIONS

The time constraint was a limiting factor, as more in depth analysis could not be carried. Some of the information is of confidential in nature that could not be divulged for the

study.


7. CHAPTER 7 : (RECOMMENDATIONS)

7.1 RECOMMENDATIONS

The Bank should keep on revising its Credit Policy which will help Bank’s effort to correct the course of the policies

The Chairman and Managing Director/Executive Director should make modifications to the procedural guidelines required for implementation of the Credit Policy as they may become necessary from time to time on account of organizational needs.

Banks has to grant the loans for the establishment of business at a moderate rate of interest. Because of this, the people can repay the loan amount to bank regularly and promptly.

Bank should not issue entire amount of loan to agriculture sector at a time, it should release the loan in instalments. If the climatic conditions are good then they have to release remaining amount.

SBI has to reduce the Interest Rate.

SBI has to entertain indirect sectors of agriculture so that it can have more number of borrowers for the Bank.


8. CHAPTER 8 : (CONCLUSION)

8.1 CONCLUSION

The project undertaken has helped a lot in gaining knowledge of the “Credit Policy and Credit

Risk Assessment” in Nationalized Bank with special reference to State Bank Of India. Credit Policy

and Credit Risk Policy of the Bank has become very vital in the smooth operation of the banking

activities. Credit Policy of the Bank provides the framework to determine

(a) Whether or not to extend credit to a customer and

(b) How much credit to extend.

The Project work has certainly enriched the knowledge about the “credit risk assesment” in banking

sector.

To sum up, it would not be out of way to mention here that the State Bank Of India has

given special inputs on “Credit Policy” and “Credit Risk Assessment”. In pursuance of the

instructions and guidelines issued by the Reserve Bank of India, the State bank Of India is

granting and expanding credit to all sectors.

The concerted efforts put in by the Management and Staff of State Bank Of India has

helped the Bank in achieving remarkable progress in almost all the important parameters.

The Bank is marching ahead in the direction of achieving the Number-1 position in the

Banking Industry.


9. CHAPTER 9: (BIBLIOGRAPHY)

BOOKS REFERRED:

1. M.Y.Khan and P.K.Jain, Management Accounting (Third Edition), Tata McGraw Hill.2. M.Y.Khan and P.K.Jain, Financial Management (Fourth Edition), Tata McGraw Hill.3. D.M.Mittal, Money, Banking, International Trade and Public Finance (Eleventh Edition),

Himalaya Publishing House.

WEB SITES

1. www.sbi.co.in2. www.icicidirect.com3. www.rbi.org4. www.indiainfoline.com5. www.google.com

BANKS INTERNAL RECORDS:

1. Annual Reports of State bank Of India (2003-2012)2. State bank Of India Manuals3. Circulars sent to all Branches, Regional Offices and all the Departments of Corporate Offices.

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