APROJECT REPORT

ON

SUBMITTED IN PARTIAL FULFILLMENT OF THEREQUIREMENT OF AWARD THE DEGREE OF

BACHELOR OF BUSINESS ADMINISTRATION(BBA)

ByRAHUL SHARMA

Enrollment No. 0DL/

Under the Guidance of Mr. Dharmendra Singh

Through

SOFTDOT HITECH EDUCATION AND TRAINING INSTITUTE Pitampura, New Delhi-34Study Center Code-1006

ToDirectorate of Open and Distance Learning

Jamia Hamdard University, New Delhi-110062

STUDENT DECLARATION

I here by declare that the project report entitled on

“”

Submitted in partial fulfillmentOf the requirement to award the degree of

BACHLOR IN BUSINESS ADMINISTRATION

To

Jamia Hamdard university, this is my original work and not submitted for the award of any other degree, diploma in fellowship, of any other similar tital of

prizes

RAHUL SHARMAENROLLMENT NO.-ODL/

CERTIFICATION BY ORIGINALITY

This is to certify that the project “___” is an original work of RAHUL SHARMA as a sudent of BBA ENROLMENT NO.-ODL is being submitted in partitial fulfillment for the award of the degree of Bachelors in Business Administration from Jamia Hamdard University through our recognized center- Softdot Hi-Tech Education & Training Institute (1006), Pitampura, New Delhi-34

RAHUL SHARMA as a sudent of BBA Enrollment no. ENROLLMENT NO.-ODL/has worked out under the guidance of Ms. Vaishali Sharma and declares that no part of this project has been submitted for the award of any degree, diploma, fellowship or any other similar title of price earlier to this university or to any other university/institute for the fulfillment of the requirement of a coerce of study.

DR. DHARMENDRA SINGH(COORDINATOR)

CERTIFICATION BY EXAMINERS

The project report is submitted for the final year of Bachelor of Business Administration in the stream of management (BBA) by a student of Jamia Hamdard University - ENROLLMENT NO.-ODL/07/403/2659

Acadmic council of Softdot Hi-Tech Education & Training Institute, has decided the title “CREDIT NRISK MANAJMENT IN INDIAN BANKS” as an approved and acceptable project in the standard quality to the set norms of jamia Hamdard University and by the institute as a Bachelor of Business Administration (BBA) to the student MANISH KUMAR DAHIYA Enrollment no. ENROLLMENT NO.-ODL/07/403/2659 according to the norms of the university standards academically.

Certify By: Mr. G.S. Kalsi

Examiner: Mr. Vaishali Sharma

CONTENTS

S.NO. PARTICULARS PAGE NO.

1. EXECUTIVE SUMMARY 12. INTRODUCTION 23. TYPES OF RISKS IN A BANK 34. RISK MANAGEMENT

Approaches Process

5

5. BASEL COMMITTEE 76. CREDIT RISK

Credit Risk Management Factors on which credit risk depends Building blocks on Credit Risk Principles for managing credit risk Approaches to Credit Risk Management

101113142123

7. PUNJAB NATIONAL BANK Profile Credit Risk Management in PNB Financial Position Asset Quality Capital & Financial Ratios

272729394447

8. ICICI BANK Profile Risk Management Credit Risk Management Capital Adequacy Non-Performing Assets

484849505456

9. CANARA BANK Profile Risk Management Capital Adequacy Asset Quality

5757596060

10. ALLAHABAD BANK Profile Risk Management Financial Position Asset Quality & Capital Adequacy

6262636465

11. CONCLUSION 6612. BIBLIOGRAPHY 69

EXECUTIVE SUMMARY

This project is concerned with determining the credit risk faced by banks under consideration and tools used by these banks for managing the credit risk and thereafter comparing these banks on the basis of techniques used by them for credit risk management.

Banks considered for research purpose are: Punjab National Bank, ICICI Bank, Canara Bank and Allahabad Bank.

OBJECTIVES OF THIS PROJECT REPORT:

1 To determine credit risk faced by different Banks in India.2 To determine various tools and methods used by these Banks for managing the

credit risk faced by them.3 To determine whether or not there is any improvement in banks credit position due

to the use of such tools and methods.4 To compare the credit position of these banks.

The research work is done on the basis of secondary data available on the websites of the banks, annual reports, books etc.

STRUCTURE OF THE PROJECT

“RISK MANAGEMENT IN INDIAN BANKS”

OBJECTIVES OF THE PROJECT:

5 To determine various types of risks faced by different Banks in India.6 To determine various tools and methods used by these Banks for managing the risks

faced by them.7 To compare public sector banks and private sector banks according to the intensity of

risks faced by them and tools used by them to manage those risks.

Risk means deviation from expectation and Risk Management involves identification, measurement, monitoring and controlling risk.

This project is concerned with determining the risk faced by the banks under consideration and thereafter determining the risk management tools used by these banks.

Banks considered for research are Standard Chartered Bank, HDFC Bank, ICICI Bank, IDBI Bank, Allahabad Bank & Canara Bank.

An Exploratory Research will be conducted, as it would be mainly based on the secondary data available from the various secondary sources like websites, magazines, newspapers, textbooks, “consultative documents” from the publication of Banks etc.

However, personal interviews of some Bank Officials will also be conducted for extracting the essential information which not available through secondary sources.

Thereafter different Statistical Tools (like standard deviation, correlation etc.) will be applied on the collected data to extract the findings from it.

INTRODUCTION

Banking is an art & science of measuring & managing risks in lending and investment activities for commensurate profits based on the risk perceptions.

The face of banking in India is changing rapidly. The enhanced role of the banking sector in the Indian economy, the increasing levels of deregulation along with the increasing levels of competition have facilitated globalisation of the India banking system and placed numerous demands on banks. Operating in this demanding environment has exposed banks to various challenges and risks.

Risk is a situation wherein objective probability distribution of the values a variable can take is known, even though the exact values it take are not known. The objective probability is one which is supported by rigorous theory, past experience, and the laws of chance.

Risk means deviation from expectation. It can be defined as the chance that the expected or prospective advantage, gain, profit or return may not materialize; that the actual outcome of investment may be less than the expected outcome. The greater the variability or dispersion in the possible outcomes, or the broader the range of possible outcomes, the greater the risk. The measure of risk is Standard Deviation.

BIBLIOGRAPHY

WEBSITES:

1 www.pnbindia.com 2 www.icicibank.com 3 www.allahabadbank.com 4 www.canarabank.com5 www.google.com

6 Online Newspaper: Hindu Business Line

BOOKS:

1 Financial Institutions and Markets; By: L.M. BholeIndian Financial System; By: M.Y. Khan

EXECUTIVE SUMMARY

This project is concerned with determining the credit risk faced by banks under consideration and tools used by these banks for managing the credit risk and thereafter comparing these banks on the basis of techniques used by them for credit risk management.

Banks considered for research purpose are: Punjab National Bank, ICICI Bank, Canara Bank and Allahabad Bank.

OBJECTIVES OF THIS PROJECT REPORT:

To determine credit risk faced by different Banks in India. To determine various tools and methods used by these Banks for

managing the credit risk faced by them. To determine whether or not there is any improvement in banks credit

position due to the use of such tools and methods. To compare the credit position of these banks.

The research work is done on the basis of secondary data available on the

websites of the banks, annual reports, books etc.

INTRODUCTION

Banking is an art & science of measuring & managing risks in lending and investment activities for commensurate profits based on the risk perceptions.

The face of banking in India is changing rapidly. The enhanced role of the banking sector in the Indian economy, the increasing levels of deregulation along with the increasing levels of competition have facilitated globalisation of the India banking system and placed numerous demands on banks. Operating in this demanding environment has exposed banks to various challenges and risks.

Risk is a situation wherein objective probability distribution of the values a variable can take is known, even though the exact values it take are not known. The objective probability is one which is supported by rigorous theory, past experience, and the laws of chance.

Risk means deviation from expectation. It can be defined as the chance that the expected or prospective advantage, gain, profit or return may not materialize; that the actual outcome of investment may be less than the expected outcome. The greater the variability or dispersion in the possible outcomes, or the broader the range of possible outcomes, the greater the risk. The measure of risk is Standard Deviation.

TYPES OF RISKS IN A BANK

From the day a bank is granted its charter up until its final day of operation, it faces a wide variety of internal and external risks. Many banking risks arise from the common cause of mismatching. If banks had perfectly matched assets and liabilities (i.e. identical maturities, interest rate conditions and currencies), then the only risk faced by a bank would be credit risk. This sort of matching, however, would be virtually impossible, and in any event would severely limit the banks’ profit opportunities. Mismatching is an essential feature of banking business. As soon as maturities on assets exceed those of liabilities then liquidity risk arises. When interest rate terms on items on either side of the balance sheet differ, then interest rate risk arises. Sovereign risk appears if the international nature of each side of the balance sheet is not country-matched. Many of these risks are interrelated. These include:

Credit risk - Credit risk is also known as Default risk. It is the risk that a counterparty to a .financial transaction (the ‘borrower’) will fail to comply with its obligations to service debt, or that the counterparty will deteriorate in its credit standing i.e. it arises from the failure on the part of the borrower or debtor to pay the specified amount of interest and/or repay the principal, both at the time specified in the debt contract or covenant or indenture.

Liquidity risk covers all risks that are associated with a bank finding itself unable to meet its commitments on time, or only being able to do so by recourse to emergency borrowing.

Interest rate risk is the variability in return on security due to changes in the level of market interest rates, or it is the loss of principal of a fixed-return security due to an increase in the general level of interest rates i.e. it relates to risk of loss incurred due to changes in market

rates, for example, through reduced interest margins on outstanding loans or reduction in the capital values of marketable assets.

Market risk relates to risk of loss associated with adverse deviations in the value of the trading portfolio. Broadly refers to the risk that a bank’s earnings

and capital might be adversely affected by changes in interest rates, exchange rates or securities prices. This course focuses on how the risk posed by changes in interest rates may adversely affect a bank’s net income and capital position.

Exchange Rate or Currency Risk – it refers to cash-flow variability experienced by economic units engaged in international transactions or international exchange, on account of uncertain or unexpected changes in exchange rates.

Country risk is associated with the risks of incurring financial losses resulting from the inability and/or unwillingness of borrowers within a country to meet their obligations.

Solvency risk relates to the risk of having insufficient capital to cover losses generated by all types of risks.

Operational risk - The risk of loss or harm from unanticipated internal or external events that occur in the course of conducting business such as equipment breakdowns, “acts of God,” customer and employee fraud and undetected software errors.

Legal risk - The risk of loss or harm from unenforceable contracts, lawsuits or adverse judgments.

Reputational risk - The risk of loss or harm to a bank’s public image from negative publicity.

RISK MANAGEMENT

The banking industry has long viewed the problem of risk management as the need to control four of the above risks which make up most, if not all, of their risk exposure, viz., credit, interest rate, foreign exchange and liquidity risk. While they recognize counterparty and legal risks, they view them as less central to their concerns.

Risk Management is a discipline at the core of every financial institution and encompasses all the activities that affect its risk profile. It involves identification, measurement, monitoring and controlling risks to ensure that

a) The individuals who take or manage risks clearly understand it.b) The organization’s Risk exposure is within the limits established by Board of

Directors.c) Risk taking Decisions are in line with the business strategy and objectives set by

BOD.d) The expected payoffs compensate for the risks takene) Risk taking decisions are explicit and clear.f) Sufficient capital as a buffer is available to take risk

The acceptance and management of financial risk is inherent to the business of banking and banks’ roles as financial intermediaries. Risk management as commonly perceived does not mean minimizing risk; rather the goal of risk management is to optimize risk-reward trade -off. Notwithstanding the fact that banks are in the business of taking risk, it should be recognized that an institution need not engage in business in a manner that unnecessarily imposes risk upon it: nor it should absorb risk that can be transferred to other participants. Rather it should accept those risks that are uniquely part of the array of bank’s services.

In every financial institution, risk management activities broadly take place simultaneously at following different hierarchy levels:.

a) Strategic level: It encompasses risk management functions performed by senior management and BOD. For instance definition of risks, ascertaining institutions risk appetite, formulating strategy and policies for managing risks and establish adequate systems and controls to ensure that overall risk remain within acceptable level and the reward compensate for the risk taken.

b) Macro Level: It encompasses risk management within a business area or across business lines. Generally the risk management activities performed by middle management or units devoted to risk reviews fall into this category.

c) Micro Level: It involves ‘On-the-line’ risk management where risks are actually created. This is the risk management activities performed by individuals who take risk on organization’s behalf such as front office and loan origination functions. The risk management in those areas is confined to following operational procedures and guidelines set by management.

Traditional Risk Management Systems

Commercial banks are in the risk business. In the process of providing financial services, they assume various kinds of financial risks. So we need to determine an approach to examine large-scale risk management systems. The management of the banking firm relies on a sequence of steps to implement a risk management system. These can be seen as containing the following four parts:

Standards and reports

Position limits or rules

Investment guidelines or strategies

Incentive contracts and compensation

In general, these tools are established to measure exposure, define procedures to manage these exposures, limit individual positions to acceptable levels, and encourage decision makers to manage risk in a manner that is consistent with the firm's goals and objectives.

RISK MANAGEMENT APPROACHES:

AVOIDANCE TRANSFER SHARING LOSS CONTROL SEPARATION COMBINATION

RISK MANAGEMENT PROCESS:

IDENTIFICATION – The first step in risk management process is to identify the risk.

QUANTIFICATION – After identifying the risk we have to quantify it using techniques like Standard Deviation i.e. the quantification of the level of exposures.

POLICY FORMULATION – then we decide the alternative tools and find the best alternative and various policies are formulated.

Then using the engineering strategies to transform the exposures to the desired form.

MONITERING & REVIEW – Then the risk levels are monitered and reviewed and they are restored to the pre-determined standards.

BASEL COMMITTEE

Basel 1

In July 1988, the Basel Committee came out with a set of recommendations aimed at introducing minimum levels of capital for internationally active banks. These norms required the banks to maintain capital of at least 8 per cent of their risk-weighted loan exposures. Different risk weights were specified by the committee for different categories of exposure. For instance, government bonds carried risk-weight of 0 per cent, while the corporate loans had a risk-weight of 100 per cent.

Basel II

To set right these aspects, the Basel Committee came up with a new set of guidelines in June 2004, popularly known as the Basel II norms. These new norms are far more complex and comprehensive compared to the Basel I norms. Also, the Basel II norms are more risk-sensitive and they rely heavily on data analysis for risk measurement and management. They have given three pillars which act as guideline for implementation of Basel II.

Pillar 1

Basel II norms provide banks with guidelines to measure the various types of risks they face - credit, market and operational risks and the capital required to cover these risks.

Pillar II (Supervisory Reviews)

ensures that not only do the banks have adequate capital to cover their risks, but also

that they employ better risk management practices so as to minimise the risks. Capital cannot be regarded as a substitute for inadequate risk management practices. This pillar requires that if the banks use asset securitisation and credit derivatives and wish to minimise their capital charge they need to comply with various standards and controls. As a part of the supervisory process, the supervisors need to ensure that the regulations are adhered to and the internal measurement systems are standardised and validated.

Pillar III (Market Discipline)

This market discipline is brought through greater transparency by asking banks to make adequate disclosures. The potential audiences of these disclosures are supervisors, bank's customers, rating agencies, depositors and investors. Market discipline has two important components:

Market signalling in form of change in bank's share prices or change in bank's borrowing rates

Responsiveness of the bank or the supervisor to market signals.

What they Mean for banks?

Basel II norms are expected to have far-reaching consequences on the health of financial sectors worldwide because of the increased emphasis on banks' risk-management systems, supervisory review process and market discipline.

Active Risk Management

The new norms bring to fore not only the issues of bank-wide risk measurement but also of active risk management. This will help in better pricing of the loans in alignment with their actual risks. The beneficiary will be the customer with high credit-worthiness and ratings as they will be able to get cheaper loans.

Higher Risk Sensitivity

Higher risk sensitivity of the norms provides no incentive to lend to borrowers with declining credit quality. During economic downturns, corporate profits and ratings tend to decline. This can lead to banks pulling the plugs on lending to corporates with falling credit ratings, at a time when these companies will be in desperate need of credit. The opposite is expected during economic booms, when corporate credit worthiness

improves and banks will be more than willing to lend to corporates.

Lower Risk Weight Available Only for a Few Corporate

With better risk measurement practices in place the capital allocation for loans to quality borrowers are going to decrease. Banks can use this capital for other purposes to increase profits. But the population of rated corporate is small in India and most of them would have to be assigned a risk weight of 100 per cent.

The benefit of lower risk weight of 20 per cent and 50 per cent would, therefore, be available only for loans to a few corporates. The cover required for bad loans will increase exponentially with deteriorating credit quality, which can lead to an increase in capital requirement.

CREDIT RISK

Credit risk is the most obvious risk in banking, and possibly the most important in terms of potential losses. The default of a small number of key customers could generate very large losses and in an extreme case could lead to a bank becoming insolvent. The most important credit risk is the default risk. However, in some cases interest rate risk also comes under the credit risk. Default risk relates to the possibility that loans will not be paid or that investments will deteriorate in quality or go into default with consequent loss to the bank. Credit risk is not concerned to the risk that borrowers are unable to pay; it also includes the risk of payments being delayed, which can also cause problems for the bank. Capital markets react to a deterioration in a company’s credit standing through higher interest rates on its debt issues, a decline in its share price, and/or a downgrading of the assessment of its debt quality.

Credit risk arises from the potential that an obligor is either unwilling to perform on an obligation or its ability to perform such obligation is impaired resulting in economic loss to the bank.

Credit risk is defined as the possibility that a borrower or counterparty will fail to meet its obligations in accordance with agreed terms. Credit risk, therefore, arises from the banks' dealings with or lending to a corporate, individual, another bank, financial institution or a country. Credit risk may take various forms, such as:

in the case of direct lending, that funds will not be repaid;

in the case of guarantees or letters of credit, that funds will not be forthcoming from the customer upon crystallization of the liability under the contract;

in the case of treasury products, that the payment or series of payments due from the counterparty under the respective contracts is not forthcoming or ceases;

in the case of securities trading businesses, that settlement will not be effected;

in the case of cross-border exposure, that the availability and free transfer of currency is restricted or ceases.

In a bank’s portfolio, losses stem from outright default due to inability or unwillingness of a customer or counter party to meet commitments in relation to lending, trading, settlement and other financial transactions. Alternatively losses may result from reduction in portfolio value due to actual or perceived deterioration in credit quality. Credit risk emanates from a bank’s dealing with individuals, corporate, financial

institutions or a sovereign. For most banks, loans are the largest and most obvious source of credit risk; however, credit risk could stem from activities both on and off balance sheet. In addition to direct accounting loss, credit risk should be viewed in the context of economic exposures. This encompasses opportunity costs, transaction costs and expenses associated with a non-performing asset over and above the accounting loss.Credit risk can be further sub-categorized on the basis of reasons of default. For instance the default could be due to country in which there is exposure or problems in settlement of a transaction.

Credit risk not necessarily occurs in isolation. The same source that endangers credit risk for the institution may also expose it to other risk. For instance a bad portfolio may attract liquidity problem.

As a result of these risks, bankers must exercise discretion in maintaining a sensible distribution of liquidity in assets, and also conduct a proper evaluation of the default risks associated with borrowers. In general, protection against credit risks involves maintaining high credit standards, appropriate diversification, good knowledge of the borrower’s affairs and accurate monitoring and collection procedures.

CREDIT RISK MANAGEMENT

PHILOSOPHY BEHIND CREDIT RISK MANAGEMENT IS: “HIGHER THE RISK, HIGHER THE EXPECTED REWARD”

In general, credit risk management for loans involves three main principles:

• Selection• Limitation• Diversification.

First of all, selection means banks have to choose carefully those to whom they will lend money. The processing of credit applications is conducted by credit officers or credit committees, and a bank’s delegation rules specify responsibility for credit decisions.

Limitation refers to the way that banks set credit limits at various levels. Limit systems clearly establish maximum amounts that can be lent to specific individuals or groups. Loans are also classified by size and limitations are put on the proportion of large loans tototal lending. Banks also have to observe maximum risk assets to total assets, and should hold a minimum proportion of assets, such as cash and government securities, whose credit risk is negligible.

Credit management has to be diversified. Banks must spread their business over different types of borrower, different economic sectors and geographical regions, in order to avoid excessive concentration of credit risk problems. Large banks, therefore, have an advantage in this respect. The long-standing existence of the above procedures within banks is insufficient to address all credit risk problems. For example, the amount of a potential loss is uncertain since outstanding balances at the time of default are not known in advance. The size of the commitment is not sufficient to measure the risk, since there are both quantity and quality dimensions to consider.

The more diversified a banking group is, the more intricate systems it would need, to protect itself from a wide variety of risks. These include the routine operational risks applicable to any commercial concern, the business risks to its commercial borrowers, the economic and political risks associated with the countries in which it operates, and the commercial and the reputational risks concomitant with a failure to comply with the increasingly stringent legislation and regulations surrounding financial services business in many territories. Comprehensive risk identification and assessment are therefore very essential to establishing the health of any counterparty.

Credit risk management enables banks to identify, assess, manage proactively, and optimise their credit risk at an individual level or at an entity level or at the level of a country. Given the fast changing, dynamic world scenario experiencing the pressures of globalisation, liberalization, consolidation and disintermediation, it is important that banks have a robust credit risk management policies and procedures which is sensitive and responsive to these changes.

The quality of the credit risk management function will be the key driver of the changes to the level of shareholder return. Low loan loss banks stage a quicker share price recovery than their peers, and in a credit downturn, the market rewards the banks with the best credit performance with a moderate price decline relative to their peers.

FACTORS ON WHICH CREDIT RISK DEPENDS

The credit risk depends on both internal and external factors.

EXTERNAL FACTORS

The external factors are: the state of the economy swings in commodity prices and equity prices foreign exchange rates and interest rates, etc.

INTERNAL FACTORS

The internal factors are:

deficiencies in loan policies and administration of loan portfolio which would cover weaknesses in the area of prudential credit concentration limits,

appraisal of borrowers' financial position , excessive dependence on collaterals and inadequate risk pricing, absence of loan review mechanism and post sanction surveillance, etc.

Such risks may extend beyond the conventional credit products such as loans and letters of credit and appear in more complicated, less conventional forms, such as credit derivatives or tranches of securitised assets.

BUILDING BLOCKS ON CREDIT RISK

In any bank, the corporate goals and credit culture are closely linked, and an effective credit risk management framework requires the following distinct building blocks: -

1. Strategy and Policy

This covers issues such as the definition of the credit appetite, the development of credit guidelines and the identification and the assessment of the credit risk.

2. Organisation

This would entail the establishment of competencies and clear accountabilities for managing the credit risk.

3. Operations/Systems

MIS requirements of the senior and middle management, and the development of tools and techniques will come under this domain.

1.      Strategy and Policy

1.1      It is essential that each bank develops its own credit risk strategy or enunciates a plan that defines the objectives for the credit-granting function. This strategy should spell out clearly the organisation's credit appetite and the acceptable level of risk - reward trade-off at both the macro and the micro levels.

1.2      The strategy would therefore, include a statement of the bank's willingness to grant loans based on the type of economic activity, geographical location, currency, market, maturity and anticipated profitability. This would necessarily translate into the identification of target markets and business sectors, preferred levels of diversification and concentration, the cost of capital in granting credit and the cost of bad debts.

1.3     The policy document should cover issues such as organizational responsibilities, risk measurement and aggregation techniques, prudential requirements, risk assessment and review, reporting requirements, risk grading, product guidelines, documentation, legal issues and management of problem loans. Loan policies apart from ensuring consistency in credit practices, should also provide a vital link to the other functions of the bank. It has been empirically proved that organisations with sound and well-articulated loan policies have been able to contain the loan losses arising from poor loan structuring and perfunctory risk assessments.

http://www.coolavenues.com/know/fin/svs_credit_3.php3

1.4      The credit risk strategy should provide continuity in approach, and will need to take into account the cyclical aspects of any economy and the resulting shifts in the composition and

quality of the overall credit portfolio. This strategy should be viable in the long run and through various credit cycles.

1.5      An organisation's risk appetite depends on the level of capital and the quality of loan book and the magnitude of other risks embedded in the balance sheet. Based on its capital structure, a bank will be able to set its target returns to its shareholders and this will determine the level of capital available to the various business lines.

1.6      Keeping in view the foregoing, a bank should have the following in place:

1. Dedicated policies and procedures to control exposures to designated higher risk sectors such as capital markets, aviation, shipping, property development, defence equipment, highly leveraged transactions, bullion etc.

2. Sound procedures to ensure that all risks associated with requested credit facilities are promptly and fully evaluated by the relevant lending and credit officers.

3. Systems to assign a risk rating to each customer/borrower to whom credit facilities have been sanctioned.

4. A mechanism to price facilities depending on the risk grading of the customer, and to attribute accurately the associated risk weightings to the facilities.

5. Efficient and effective credit approval process operating within the approval limits authorized by the boards.

6. Procedures and systems which allow for monitoring financial performance of customers and for controlling outstandings within limits.

7. Systems to manage problem loans to ensure appropriate restructuring schemes. A conservative policy for the provisioning of non-performing advances should be followed.

8. A process to conduct regular analysis of the portfolio and to ensure on-going control of risk concentrations.

Credit Policies and Procedures

The credit policies and procedures should necessarily have the following elements: -

Banks should have written credit policies that define target markets, risk acceptance criteria, credit approval authority, credit origination and maintenance procedures and guidelines for portfolio management and remedial management.

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 plant visits, and at least quarterly management reviews of troubled exposures/weak credits.

Business managers in banks will be accountable for managing risk and in conjunction with credit risk management framework for establishing and maintaining appropriate risk limits and risk management procedures for their businesses.

Banks should have a system of checks and balances in place around the extension of credit which are:

o An independent credit risk management function

o Multiple credit approvers

o An independent audit and risk review function

The Credit Approving Authority to extend or approve credit will be granted to individual credit officers based upon a consistent set of standards of experience, judgment and ability.

The level of authority required to approve credit will increase as amounts and transaction risks increase and as risk ratings worsen.

Every obligor and facility must be assigned a risk rating.

Banks should ensure that there are consistent standards for the origination, documentation and maintenance for extensions of credit.

Banks should have a consistent approach toward early problem recognition, the classification of problem exposures, and remedial action.

Banks should maintain a diversified portfolio of risk assets in line with the capital desired to support such a portfolio.

Credit risk limits include, but are not limited to, obligor limits and concentration limits by industry or geography.

In order to ensure transparency of risks taken, it is the responsibility of banks to accurately, completely and in a timely fashion, report the comprehensive set of credit risk data into the independent risk system.

2.      Organizational Structure

2.1      A common feature of most successful banks is to establish an independent group responsible for credit risk management. This will ensure that decisions are made with sufficient emphasis on asset quality and will deploy specialised skills effectively. In some organisations, the credit risk management team is responsible for the management of problem accounts, and for credit operations as well. The responsibilities of this team are the formulation of credit policies, procedures and controls extending to all of its credit risks arising from corporate banking, treasury, credit cards, personal banking, trade finance, securities processing, payment and settlement systems, etc. This team should also have an overview of the loan portfolio trends and

concentration risks across the bank and for individual lines of businesses, should provide input to the Asset - Liability Management Committee of the bank, and conduct industry and sectoral studies. Inputs should be provided for the strategic and annual operating plans. In addition, this team should review credit related processes and operating procedures periodically.

2.2      It is imperative that the independence of the credit risk management team is preserved, and it is the responsibility of the Board to ensure that this is not allowed to be compromised at any time. Should the Board decide not to accept any recommendation of the credit risk management team and then systems should be in place to have the rationale for such an action to be properly documented. This document should be made available to both the internal and external auditors for their scrutiny and comments.

2.3      The credit risk strategy and policies should be effectively communicated throughout the organisation. All lending officers should clearly understand the bank's approach to granting credit and should be held accountable for complying with the policies and procedures.

2.4      Keeping in view the foregoing, each bank may, depending on the size of the organization or loan book, constitute a high level Credit Policy Committee also called Credit Risk Management Committee or Credit Control Committee, etc. to deal with issues relating to credit policy and procedures and to analyse, manage and control credit risk on a bank wide basis. The Committee should be headed by the Chairman/CEO/ED, and should comprise heads of Credit Department, Treasury, Credit Risk Management Department (CRMD) and the Chief Economist. The Committee should, inter alia, formulate clear policies on standards for presentation of credit proposals, financial covenants, rating standards and benchmarks, delegation of credit approving powers, prudential limits on large credit exposures, asset concentrations, standards for loan collateral, portfolio management, loan review mechanism, risk concentrations, risk monitoring and evaluation, pricing of loans, provisioning, regulatory/legal compliance, etc. Concurrently, each bank may also set up Credit Risk Management Department (CRMD), independent of the Credit Administration Department. The CRMD should enforce and monitor compliance of the risk parameters and prudential limits set by the CPC. The CRMD should also lay down risk assessment systems, monitor quality of loan portfolio, identify problems and correct deficiencies, develop MIS and undertake loan review/audit. Large banks may consider separate set up for loan review/audit. The CRMD should also be made accountable for protecting the quality of the entire loan portfolio. The Department should undertake portfolio evaluations and conduct comprehensive studies on the environment to test the resilience of the loan portfolio.

  TYPICAL ORGANISATIONAL STRUCTURE http://www.coolavenues.com/know/fin/svs_credit_6.php3

http://www.coolavenues.com/know/fin/svs_credit_5.php3

http://www.coolavenues.com/know/fin/svs_credit_4.php33. Operations / Systems

3.1      Banks should have in place an appropriate credit administration, measurement and monitoring process. The credit process typically involves the following phases:

1. Relationship management phase i.e. business development.

2. Transaction management phase: cover risk assessment, pricing, structuring of the facilities, obtaining internal approvals, documentation, loan administration and routine monitoring and measurement.

3. Portfolio management phase: entail the monitoring of the portfolio at a macro level and the management of problem loans.

3.2      Successful credit management requires experience, judgement and a commitment to technical development. Each bank should have a clear, well-documented scheme of delegation of limits. Authorities should be delegated to executives depending on their skill and experience levels. The banks should have systems in place for reporting and evaluating the quality of the credit decisions taken by the various officers.

3.3      The credit approval process should aim at efficiency, responsiveness and accurate measurement of the risk. This will be achieved through a comprehensive analysis of the borrower's ability to repay, clear and consistent assessment systems, a process which ensures that renewal requests are analyzed as carefully and stringently as new loans and constant reinforcement of the credit culture by the top management team.

3.4      Commitment to new systems and IT will also determine the quality of the analysis being conducted. There is a range of tools available to support the decision making process. These are: -

Traditional techniques such as financial analysis.

Decision support tools such as credit scoring and risk grading.

Portfolio techniques such as portfolio correlation analysis.

The key is to identify the tools that are appropriate to the bank. Banks should develop and utilize internal risk rating systems in managing credit risk. The rating system should be consistent with the nature, size and complexity of the bank's activities.

3.5      Banks must have a MIS, which will enable them to manage and measure the credit risk inherent in all on- and off-balance sheet activities. The MIS should provide adequate information on the composition of the credit portfolio, including identification of any concentration of risk. Banks should price their loans according to the risk profile of the borrower and the risks associated with the loans.

MEASURING CREDIT RISK .

The measurement of credit risk is of vital importance in credit risk management.A number of qualitative and quantitative techniques to measure risk inherent in credit portfolio are evolving. To start with, banks should establish a credit risk rating framework across all type of credit activities. Among other things, the rating framework may, incorporate:

1. Business Risk

Industry Characteristics Competitive Position (e.g. marketing/technological edge) Management

2. Financial Risk

Financial condition Profitability Capital Structure Present and future Cash flows

PRINCIPLES FOR THE MANAGEMENT OF CREDIT RISK

1. While financial institutions have faced difficulties over the years for a multitude of reasons, the major cause of serious banking problems continues to be directly related to lax credit standards for borrowers and counterparties, poor portfolio risk management, or a lack of attention to changes in economic or other circumstances that can lead to a deterioration in the credit standing of a bank's counterparties. This experience is common in both G-10 and non-G-10 countries.

2. Credit risk is most simply defined as the potential that a bank borrower or counterparty will fail to meet its obligations in accordance with agreed terms. The goal of credit risk management is to maximise a bank's risk-adjusted rate of return by maintaining credit risk exposure within acceptable parameters. Banks need to manage the credit risk inherent in the entire portfolio as well as the risk in individual credits or transactions. Banks should also consider the relationships between credit risk and other risks. The effective management of credit risk is a critical component of a comprehensive approach to risk management and essential to the long-term success of any banking organisation.

3. For most banks, loans are the largest and most obvious source of credit risk; however, other sources of credit risk exist throughout the activities of a bank, including in the banking book and in the trading book, and both on and off the balance sheet. Banks are increasingly facing credit risk (or counterparty risk) in various financial instruments other than loans, including acceptances, interbank transactions, trade financing, foreign exchange transactions, financial futures, swaps, bonds, equities, options, and in the extension of commitments and guarantees, and the settlement of transactions.

4. Since exposure to credit risk continues to be the leading source of problems in banks world-wide, 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 Basel Committee is issuing this document in order to encourage banking supervisors globally to promote sound practices for managing credit risk. Although the principles contained in this paper are most clearly applicable to the business of lending, they should be applied to all activities where credit risk is present.

5. The sound practices set out in this document specifically address the following areas: (i) establishing an appropriate credit risk environment; (ii) operating under a sound credit-granting process; (iii) maintaining an appropriate credit administration, measurement and monitoring process; and (iv) ensuring adequate controls over credit risk. Although specific credit risk management practices may differ among banks depending upon the nature and complexity of their credit activities, a comprehensive credit risk management program will address these four areas. These practices should also be applied in conjunction with sound practices related to the assessment of asset quality, the adequacy of provisions and reserves, and the disclosure of credit risk, all of which have been addressed in other recent Basel Committee documents.

6. While the exact approach chosen by individual supervisors will depend on a host of factors, including their on-site and off-site supervisory techniques and the degree to which external auditors are also used in the supervisory function, all members of the Basel Committee agree that

the principles set out in this paper should be used in evaluating a bank's credit risk management system. Supervisory expectations for the credit risk management approach used by individual banks should be commensurate with the scope and sophistication of the bank's activities. For smaller or less sophisticated banks, supervisors need to determine that the credit risk management approach used is sufficient for their activities and that they have instilled sufficient risk-return discipline in their credit risk management processes.

7. The Committee stipulates in Sections II through VI of the paper, principles for banking supervisory authorities to apply in assessing bank's credit risk management systems. In addition, the appendix provides an overview of credit problems commonly seen by supervisors.

8. A further particular instance of credit risk relates to the process of settling financial transactions. If one side of a transaction is settled but the other fails, a loss may be incurred that is equal to the principal amount of the transaction. Even if one party is simply late in settling, then the other party may incur a loss relating to missed investment opportunities. Settlement risk (i.e. the risk that the completion or settlement of a financial transaction will fail to take place as expected) thus includes elements of liquidity, market, operational and reputational risk as well as credit risk. The level of risk is determined by the particular arrangements for settlement. Factors in such arrangements that have a bearing on credit risk include: the timing of the exchange of value; payment/settlement finality; and the role of intermediaries and clearing houses.

APPROACHES TO CREDIT RISK MANAGEMENT

The Basel Committee has proposed two approaches for estimating regulatory capital, that is;

1. Standardised Approach

2. Internal Rating Based (IRB) Approach

1. THE STANDARDISED APPROACH TO CREDIT RISK

Under the Standardised Approach, the committee desires neither to produce net increase nor a net decrease, on an average, in minimum regulatory capital, even after accounting for operational risk.

Under the Standardised Approach, preferential risk weights in the range of 0, 20, 50, 100 and 150 percent would be assigned on the basis of external credit assessments.

Standardised approach to credit risk in Basel II:

The minimum capital requirements for the corporate, interbank and sovereign loan portfolios of a representative bank in each EMU country are evaluated by means of Monte-Carlo simulations depending on the credit rating agencies chosen by the bank to risk-weight its exposures. Three main results emerge from the analysis.

First, although the use of different combinations of credit rating agencies leads to significant differences in minimum capital requirements, these differences never exceed 10% of banks’ regulatory capital for loans to corporates, banks and sovereigns on average in the EMU.

Second, the standardised approach provides a small regulatory capital incentive for banks to use several credit rating agencies to risk-weight their exposures.

Third, the minimum capital requirements for the corporate, interbank and sovereign loan portfolios of EMU banks will be higher in Basel II than in Basel I. The incentive for banks to engage in regulatory arbitrage in the standardised approach to credit risk is limited.

Objectives of the Standardised Approach

The standardised approach is the simplest of the three broad approaches to creditrisk. The other two approaches are based on banks internal rating systems The standardised approach aligns regulatory capital requirements more closely with the key elements of banking risk by introducing a wider differentiation of risk weights and a wider recognition of credit risk mitigation techniques, while avoiding excessive complexity.Accordingly, the standardised approach should produce capital ratios more in line with the actual economic risks that banks are facing, compared to the present Accord. This should improve the incentives for banks to enhance the risk measurement and management capabilities and should also reduce the incentives for regulatory capital arbitrage.

The Risk Weights in the Standardised Approach:

Along the lines of the proposals in the consultative paper to the new capital

adequacy framework issued in June 1999,1 the risk weighted assets in the standardized approach will continue to be calculated as the product of the amount of exposures and supervisory determined risk weights. As in the current Accord, the risk weights will be determined by the category of the borrower: sovereign, bank, or corporate. Unlike in the current Accord, there will be no distinction on the sovereign risk weighting depending on whether or not the sovereign is a member of the Organisation for Economic Coordination.

2. INTERNAL RATING BASED(IRB) APPROACH

Under the IRB Approach, the committee’s ultimate goals are to ensure that the overall level of regulatory capital is sufficient to address the underlying credit risks and also provide capital incentives relative to the standardized approach, that is, a reduction in the risk weighted assets of 2 to 3 percent (foundation IRB approach) and 90 percent of the capital requirement under the foundation approach for the advanced IRB approach to encourage banks to adopt IRB approach for providing capital.

NOTE - Minimum Capital to Risk-weighted Assets Ratio (CRAR) should be 9 %.

• Need to have: rating models have to be

predictive (accurate ratings, significant discrimination between risk segments)

reliable (stable performance, consistent ratings)

developed quickly (volume!), consistently and safely

analysed, monitored and back-tested

combined with human judgment

massively documented.

• Nice to have: rating models have to be

easily taken into production, without any IT or other bottleneck

easily integrated in all relevant processes and applications (also in real-time or indirect channels)

easily (re-)used in marketing and sales processes

easily and safely managed, updated and replaced.

ANALYSIS & FINDINGS

PUNJAB NATIONAL BANKPNB…..the name you can BANK upon

PROFILEWith its presence virtually in all the important centres of the country, Punjab National Bank offers a wide variety of banking services which include corporate and personal banking, industrial finance, agricultural finance, financing of trade and international banking. Among the clients of the Bank are Indian conglomerates, medium and small industrial units, exporters, non-resident Indians and multinational companies. The large presence and vast resource base have helped the Bank to build strong links with trade and industry.

Punjab National Bank is serving over 3.5 crore customers through 4563 Offices including 421 extension counters - largest amongst Nationalized Banks.

Punjab National Bank with 112 year tradition of sound and prudent banking is one among 300 global companies and seven Indian companies which are expected to emerge as challengers to World’s leading blue chip companies. While among top 1000 world banks, “The Banker”, the leading magazine in London, has placed PNB at the 248th position, the bank features at 1308th position among Forbe’s Global 2000 list of global giants and fast growing companies.

At the same time, the bank has been conscious of its social responsibilities by financing agriculture and allied activities and small scale industries (SSI). Considering the importance of small scale industries bank has established 31 specialised branches to finance exclusively such industries.

Strong correspondent banking relationship which Punjab National Bank maintains with over 200 leading international banks all over the world enhances its capabilities to handle transactions world-wide. Besides, bank has Rupee Drawing Arrangements with 15 exchange companies in the Gulf and one in Singapore. Bank is a member of the SWIFT and over 150 branches of the bank are connected through its computer-based terminal at Mumbai. With its state-of-art dealing rooms and well-trained dealers, the bank offers efficient forex dealing operations in India.

The bank has been focussing on expanding its operations outside India and has identified some of the emerging economies which offer large business potential. Bank has set up representative offices at Almaty: Kazakhistan, Shanghai: China and in London. Besides, Bank has opened a full fledged Branch in Kabul, Afghanistan.

Keeping in tune with changing times and to provide its customers more efficient and speedy service, the Bank has taken major initiative in the field of computerization. All the Branches of the Bank have been computerized. The Bank has also launched aggressively the concept of "Any Time, Any Where Banking" through the introduction of Centralized Banking Solution (CBS) and over 2409 offices have already been brought under its ambit.

PNB also offers Internet Banking services in the country for Corporates as well as individuals. Internet Banking services are available through all Branches of the Bank networked under CBS.

Providing 24 hours, 365 days banking right from the PC of the user, Internet Banking offers world class banking facilities like anytime, anywhere access to account, complete details of transactions, and statement of account, online information of deposits, loans overdraft account etc. PNB has recently introduced Online Payment Facility for railway reservation through IRCTC Payment Gateway Project and Online Utility Bill Payment Services which allows Internet Banking account holders to pay their telephone, mobile, electricity, insurance and other bills anytime from anywhere from their desktop.

Another step taken by PNB in meeting the changing aspirations of its clientele is the launch of its Debit card, which is also an ATM card. It enables the card holder to buy goods and services at over 99270 merchant establishments across the country. Besides, the card can be used to withdraw cash at more than 25000 ATMs, where the 'Maestro' logo is displayed, apart from the PNB's over 1094 ATMs and tie up arrangements with other Banks.

 

ANALYSIS & FINDINGS  

PNB…..the name you can BANK upon The credit risk rating system provides a common language and uniform framework across bank for assessing credit risk. The system enables the bank to evaluate and track risk on individual obligors on a continuing basis. And most importantly, it enables banks to track and manage risk on portfolio basis also. In order to create and stabilize robust credit risk management system, bank has been continuously monitoring the ratings and their migration. To provide a standard definition and benchmarks under the credit risk rating system, seven rating grades for performing loans have been specified.

CREDIT RISK RATING SYSTEM

PNB TRAC is an internally developed centralised web based software application for assessment of credit risk in a borrowal account. It incorporates all rating models on a single platform and enables on line rating of borrowers. The data is stored in a centralized server, which makes the data collection and storage easier. Preventive Monitoring System is put in place to track the changes in the account based on the the adverse signals observed in the operations of account and select performance parameters. It ranks accounts on a scale of 1-10.

TOOLS FOR CREDIT RISK IN PNB Various Credit risk rating models are used to rate the borrower on a scale of seven rating grades.

1. Large Corporate Borrowers ( Bank exposure more than Rs.15 crore)2. Mid Corporate Borrowers ( Bank exposure from Rs.5 crore to less than

Rs.15 crore)3. Small Borrowers -- I(Bank exposure from Rs.20 lacs to less than Rs.5 crore)4. Small Borrowers – II ( Bank exposure from Rs.2 lacs to less than Rs.20

Lacs)5. NBFCs Rating Model6. New Projects Rating Model7. Banks and Financial Institutions Rating Model8. New Business Rating Model9. Half Yearly Review of Rating10.Facility Rating Model11. Industry Exposure limits12.Segment wise Retail Rating

To ensure the quality and consistency of credit risk ratings, vetting of the rating is also done. The credit risk rating of a borrower becomes due for updation after the expiry of 12 months from the month of previous rating. Thus fresh rating in the accounts is conducted annually. Out of the seven rating grades, B and above are treated as Investment Grade. The average annual default rates in these rating grades is under 2 %.

CREDIT RISK MANAGEMENT THROUGH RATING SYSTEM

The Bank has in place a multi-tier credit approving system. In order to enable the field functionaries to take expeditious decisions and also to attract quality accounts, higher loaning powers have been vested with various level of officials for better rated borrowers. No fresh exposure is taken in 'C'& 'D' rated accounts. However, Management Committee of the Board is empowered to consider proposals in respect of fresh exposure in such accounts. Adhoc/additional/enhancement facility in 'C'& 'D' rated accounts is to be sanctioned by authority not below the level of Zonal head and in exception circumstances.

Exposure is not taken in industries considered unfavorable. However in case the Zonal head finds a bankable proposal, then such sanction is given only by the Board of the bank. The pricing of the facility is linked with credit risk rating in case of rated accounts. Interest rate is charged depending upon the quality of asset. Better-rated accounts are priced at lower rate of interest as compared to low rated accounts. Where the borrowers like to know about the rationale of their rating, they are informed about their weak areas such as Financial, Business/Industry, Management or Conduct of Accounts and the steps they can take to improve their rating.

AVERAGE ANNUAL DEFAULT RATES UPTO 31.3.2005

PROBABILITY OF DEFAULT FOR RATED ACCOUNTS

COMPARATIVE AVERAGE ANNUAL DEFAULT RATE

PREVENTIVE MONITORING SYSTEM (PMS)

Credit Monitoring/Post-sanction follow up is an important ingredient of sound Credit Management System and calls for monitoring of the health/conduct of borrowal accounts on regular intervals. It is also pivotal for improving the Asset (Credit Portfolio) Quality of the bank. It is an action oriented post sanction monitoring tool that tracks and evaluates the health of a borrowal account on regular basis. The aim is to minimise the loan losses by focusing on accounts showing “ Early Warning” signals of deterioration.

SALIENT FEATURES OF PMS

Comprehensive –Covers indicators of conduct of account, business performance etc.

Objective - Health of the account is reflected as a single numerical score.

Diagnostic - The reasons behind deterioration are analysed for taking remedial steps.

Memory - Unsatisfactory features or irregularities are accounted for one year.

Preventive - Timely action / corrective measures can be taken in Early Warning Category Accounts.

Continuous monitoring of health & conduct of account. Captures negative signals in respect of 27 parameters. PMS rank is an input to credit risk rating.PMS rank is calibrated on a scale of 1-10.

Bank initiates necessary actions on accounts showing early warning signals through PMS or having ‘C’ or ‘D’ (high) risk-rating.

CREDIT RISK ASSESSMENT SOFTWARE MODEL(RAM)

PNB also uses RAM for managing credit risk faced by it.

RAM is internal rating software designed to assist a Bank or financial institution address issues raised by the Internal Rating based approach of the New Basel Accord (Basel II).

RAM is an easy to use Internal Rating software installed in the central server of an institution and accessible throughout the organization. RAM guides a user to assess the credit risk of various categories of borrowers such as Large Corporates, Small and Medium Enterprises, Traders, Banks, Infrastructure Companies, Green-Field Projects, Banks, Non-Banking Financial Companies, Capital Market Brokers, etc

CRISIL by virtue of being the fourth largest rating agency in the world has over the years been very successful in rating companies belonging to various categories and has been able to predict with a high degree of probability, the default risk of such companies. It is this rating experience, which is encapsulated in RAM.

RAM is a highly parametric software which can be easily customized to the user environment right from Workflows, user-interfaces as well as various reports for Management Information System.

RAM is also capable of incorporating any number of rating models through a Visual Basic based client interface.

RAM follows a pre-designated (customizable) workflow approach to credit risk assessment and begins with assessment of "Financial Risk", "Industry Risk", "Business Risk" and "Management Risk". It then follows a "Christmas Tree" approach drilling down to assessment of various minute factors. Once the credit risk assessment is done by the first level officer, the assessment can either be approved or modified at various higher levels in the risk hierarchy. Audit trails capture all modifications/changes/comments at each level. The final rating or grading is based on the weighted average score of all assessed factors.

Powerful features like Financial Analysis Tool (FAT), Facility Risk Rating module (FRR) and an intelligent feature called 'Virtual Guide' which guides an analyst or officer to probe deeper into the account being rated. These features and other such, make RAM a complete Credit Risk Management Software which performs much more than just rating the obligor and enables the Risk Manager to analyze the credit risk take a 360 degree view of the account being rated.

RAM is a web-based application, available on a Java 2 Enterprise Edition (J2EE) framework, which is platform independent. The database is ORACLE 9i.

FINANCIAL POSITION

GROWING SIZE OF PNB

(Rs. In Crore)

Largest network amongst nationalized banks with 4563 offices.

OPERATING PROFIT

PARTICULARS 30.06.07 30.06.07 Growth (%)

Interest Income 3363 2630 27.9

Interest Expenses 1985 1348 47.3

Net Interest Income 1378 1282 7.5

Non-Interest Income 432 293 47.4

Net Total Income 1810 1575 25.8

Operating Expenses

a) Staff Expenses

b) Other Operating Expenses

877

641

236

697

479

218

25.8

33.8

8.4

OPERATING PROFIT (Excl. loss on transfer of Securities)

933 878 6.2

NET PROFIT

(Rs. in Crore)

PARTICULARS 30.06.07 30.06.06 Growth (%)

Operating Profit(excl. loss on transfer of securities)

933 878 6.2 %

LESS: Loss on transfer of securities(net of dep. Held)

69 Nil

LESS: Provisions for

a) NPAs

b) Dep. on Investments(Net of Dep. Held against securities transferred)

c) Others

138

86

14

26

364

- 26

PROFIT BEFORE TAX 626 514 21.7 %

LESS: Provision for Taxes 201 146

NET PROFIT 425 368 15.4 %

NON INTEREST INCOME

Excluding the loss incurred on Transfer of securities to HTM portfolio.

CREDIT PORTFOLIO

Yield on Advances increased to 10.23% (Jun’07) from 8.76% (Jun’06)

Advances rose to Rs 95,640 cr at the end of june’07 showing a YOY growth of 23.3%.

C/D ratio increased to 67.1% as at Jun’07 compared to 66.2% in Jun’06.

The eight Large Corporate Branches (LCBs) account for around 18.2% of Bank’s net credit at the end of Jun’07 compared to 16.2% in Jun’06.

During FY07, bank’s PLR was increased from 10.75 % in April’06 to 12.25% in Mar’07. During Q1 FY 08, PLR further increased to 13 %.

Focus Area – Agriculture & SME

(Rs. In Crore)

2/3 of our branches are in Rural/ Semi-urban area with predominance in the Indo-Gangetic plain where major economic activity is agriculture which gives us a natural advantage in disbursing agriculture credit.

Bank has a long tradition of lending to agriculture and it has given us reasonable returns.

Towards empowering farmers bank has set up 8 ‘Farmers’ Training Centres’ which provide free training to farmers, rural women & unemployed youth.

Catering to niche segments through 101 Specialised Branches.

Focus Area - Retail Credit

Retail credit constitutes 22.7% of Net credit as on 30th June 2007.• Outstanding Retail credit increased by 21.7% to Rs 22,035 crore as on 30th June’07 compared to Rs 18,172 crore as on 30th Jun’06.• Education loan is the area of thrust for the bank. As at 30th June’07 the outstanding under education loan increased by 40%.• Loan to traders increased by 47%.• Housing loan showed an increase of 18%.• Gross NPA in retail advances was about 2% as at 30th Jun’07

42 Hub & Spoke models to cater the need of retail segment.

ASSET QUALITY

Improving Asset Quality is a Focus area of Bank.

GROSS NPA

3162

3709

2800

3000

32003400

3600

3800

30.06.06 30.06.07

Rs.

in

Cro

res

GROSS NPA

GROSS NPA AS A % OF GROSS CREDIT

3.98

3.81

3.7

3.75

3.8

3.85

3.9

3.95

4

30.06.06 30.06.07

%

GROSS NPA ASA % OF GROSSCREDIT

Gross NPA of PNB has increased from Rs. 3162 crores in June’06 to Rs. 3709 crores in June’07. However, Gross NPA as a % of Gross credit has reduced from 3.98 % to 3.81 %. Though in absolute terms Gross NPA has increased from 2006 to 2007 but in comparative terms it has been decreased. This shows that PNB has effective credit risk management system due to which it has been able to reduce the percentage of defaults as compared to its gross credit.

NET NPA

266

926

0

100

200

300

400

500

600

700

800

900

1000

30.06.06 30.06.07

Rs.

in

C

RO

RE

NET NPA

NET NPA AS A % OF NET CREDIT

0.35

0.98

0

0.2

0.4

0.6

0.8

1

1.2

30.06.06 30.06.07

%

NET NPA AS A % OFNET CREDIT

Net NPA of PNB has increased drastically from Rs. 266 crores in 30.6.06 to Rs. 926 in 30.6.07 and also Net NPA as a % of Net Credit has increased from .35 % in ‘06 to .98 % in ’07 which shows that overall there is some flaw in credit risk management system of PNB which it should take care of.

CAPITAL & FINANCIAL RATIOS

Comfortable Capital Adequacy Ratio

PARTICULARS JUNE ‘07 JUNE ‘06 MARCH’07CRAR (%)

Tier ITier II

12.419.163.25

12.299.692.60

12.298.933.36

FINANCIAL RATIOS (%)AVG. RETURN ON ADVANCES

10.23 8.76 9.17

AVG COST OF DEPOSITS 5.46 4.38 4.53

The CRAR of PNB has increased from 12.29 % in June ’06 to 12.41 % in june’07 which means that there is an increase in banks’ capital as compared to its risk weighted assets which is good for the bank.

ICICI BANK

PROFILE

ICICI Bank is India's second-largest bank with total assets of Rs. 3,767.00 billion (US$ 96 billion) at December 31, 2007 and profit after tax of Rs. 30.08 billion for the nine months ended December 31, 2007. ICICI Bank is second amongst all the companies listed on the Indian stock exchanges in terms of free float market capitalisation. The Bank has a network of about 955 branches and 3,687 ATMs in India and presence in 18 countries. ICICI Bank offers a wide range of banking products and financial services to corporate and retail customers through a variety of delivery channels and through its specialised subsidiaries and affiliates in the areas of investment banking, life and non-life insurance, venture capital and asset management. The Bank currently has subsidiaries in the United Kingdom, Russia and Canada, branches in Unites States, Singapore, Bahrain, Hong Kong, Sri Lanka, Qatar and Dubai International Finance Centre and representative offices in United Arab Emirates, China, South Africa, Bangladesh, Thailand, Malaysia and Indonesia. Our UK subsidiary has established branches in Belgium.

ICICI Bank's equity shares are listed in India on Bombay Stock Exchange and the National Stock Exchange of India Limited and its American Depositary Receipts (ADRs) are listed on the New York Stock Exchange (NYSE).

ANALYSIS & FINDINGS  

RISK MANAGEMENT

As a financial intermediary, we are exposed to risks that are particular to our lending, transaction banking and trading businesses and the environment within which we

operate. Our goal in risk management is to ensure that we understand, measure and monitor the various risks that arise and that the organization adheres strictly to the policies and procedures, which are established to address these risks.ICICI Bank is primarily exposed to credit risk, market risk, liquidity risk, operational risk and legal risk.

ICICI Bank has three centralized groups: the Global Risk Management Group the Compliance Group and the Internal Audit Group ;

with a mandate to identify, assess and monitor all of ICICI Bank's principal risks in accordance with well-defined policies and procedures.

The Global Risk Management Group is further organized into: the Global Credit Risk Management Group the Global Market and Operational Risk Management Group.

In addition, theCredit and Treasury Middle Office Groups and the Global Operations Group monitor operational adherence toregulations, policies and internal approvals.

The Global Risk Management Group, Middle Office Groups and Global Operations Group report to a whole time Director.

The Compliance Group reports to the Audit Committee of the board of directors and the Managing Director and CEO.

The Internal Audit Group reports to the Audit Committee of the board of directors. These groups are independent of the business units and coordinate with representatives of the business units to implement ICICI Bank's risk management methodologies.

Committees of the board of directors have been constituted to oversee the various risk management activities. The Audit Committee provides direction to and also monitors the quality of the internal audit function.

The Risk Committee reviews risk management policies in relation to various risks including portfolio, liquidity, interest rate, investment policies and strategy, and regulatory and compliance issues in relation thereto. The Credit Committee reviews developments in key industrial sectors and our exposure to these sectors as well as to large borrower accounts. The Asset Liability Management Committee is responsible for managing the balance sheet and reviewing the asset-liability position to manage ICICI Bank's liquidity and market risk exposureThe Compliance Group is responsible for the regulatory and anti-money laundering compliance of ICICI Bank.

CREDIT RISK

Credit risk is the risk that a borrower is unable to meet its financial obligations to the lender. We measure, monitor and manage credit risk for each borrower and also at the portfolio level. We have standardized credit approval processes, which include a well-established procedure of comprehensive credit appraisal and rating. We have developed internal credit rating methodologies for rating obligors. The rating factors in quantitative, qualitative issues and credit enhancement features specific to the transaction. The ratingserves as a key input in the approval as well as post-approval credit processes. Credit rating, as a concept, has been well internalised within the Bank. The rating for every borrower is reviewed at least annually. Industry knowledge is constantly updated through field visits and interactions with clients, regulatory bodies and industry experts. In our retail credit operations, all products, policies and authorisations are approved by the Board or a Board Committee or pursuant to authority delegated by the Board. Credit approval authority lies only with our credit officers who are distinct from the sales teams. Our credit officers evaluate credit proposals on the basis of the approved product policy and risk assessment criteria. Credit scoring models are used in the case of certain products like credit cards. External agencies such as field investigation agencies and credit processing agencies are used to facilitate a comprehensive due diligence process including visits to offices and homes in the case of loans to individual borrowers. Before disbursements are made, the credit officer conducts a centralised check on the delinquencies database and review of the borrower’s profile. We continuously refine our retail credit parameters based on portfolio analytics. It also draws upon reports from the Credit Information Bureau (India) Limited (CIBIL).

CREDIT RISK MANAGEMENT BY ICICI BANK

Credit risk, the most significant risk faced by ICICI Bank, is managed by the Credit Risk Compliance & Audit Department (CRC & AD) which evaluates risk at the transaction level as well as in the portfolio context. The industry analysts of the department monitor all major sectors and evolve a sectoral outlook, which is an important input to the portfolio planning process. The department has done detailed studies on default patterns of loans and prediction of defaults in the Indian context. Risk-based pricing of loans has been introduced.

The functions of this department include:

Review of Credit Origination & Monitoring -Credit rating of companies/structures -Default risk & loan pricing -Review of industry sectors -Review of large exposures in industries/ corporate groups/ companies -Ensure Monitoring and follow-up by building appropriate systems such as CAS

Design appropriate credit processes, operating policies & proceduresPortfolio monitoring

-Methodology to measure portfolio risk -Credit Risk Information System (CRIS) Focused attention to structured financing deals

-Pricing, New Product Approval Policy, Monitoring Monitor adherence to credit policies of RBI

 

During the year, the department has been instrumental in reorienting the credit processes, including delegation of powers and creation of suitable control points in the credit delivery process with the objective of improving customer response time and enhancing the effectiveness of the asset creation and monitoring activities.

Availability of information on a real time basis is an important requisite for sound risk management. To aid its interaction with the strategic business units, and provide real time information on credit risk, the CRC & AD has implemented a sophisticated information system, namely the Credit Risk Information System. In addition, the CRC & AD has designed a web-based system to render information on various aspects of the credit portfolio of ICICI Bank.

ICICI Bank also uses RAM to manage its credit risk.

1. Credit Risk Assessment Procedures for Corporate Loans

In order to assess the credit risk associated with any financing proposal, ICICI Bank assesses a variety of risks relating to the borrower and the relevant industry. Borrower risk is evaluated by considering:

• the financial position of the borrower by analyzing the quality of its financial statements, its past financialperformance, its financial flexibility in terms of ability to raise capital and its cash flow adequacy;• the borrower's relative market position and operating efficiency; and• the quality of management by analyzing their track record, payment record and financial conservatism.Industry risk is evaluated by considering:• certain industry characteristics, such as the importance of the industry to the economy, its growth outlook,cyclicality and government policies relating to the industry;• the competitiveness of the industry; and• certain industry financials, including return on capital employed, operating margins and earnings stability.After conducting an analysis of a specific borrower's risk, the Global Credit Risk Management Group assigns a credit rating to the borrower. ICICI Bank has a scale of

10 ratings ranging from AAA to B, an additional default rating of D and short-term ratings from S1 to S8. Credit rating is a critical input for the credit approval process.ICICI Bank determines the desired credit risk spread over its cost of funds by considering the borrower's credit rating and the default pattern corresponding to the credit rating. Every proposal for a financing facility is prepared by the relevant business unit and reviewed by the appropriate industry specialists in the Global Credit RiskManagement Group before being submitted for approval to the appropriate approval authority. The approval process for non-fund facilities is similar to that for fund-based facilities. The credit rating for every borrower is reviewed at least annually. ICICI Bank also reviews the ratings of all borrowers in a particular industry upon the occurrence of any significant event impacting that industry.Working capital loans are generally approved for a period of 12 months. At the end of the 12 month validity period (18 months in case of borrowers rated AA- and above), ICICI Bank reviews the loan arrangement and the credit rating of the borrower and takes a decision on continuation of the arrangement and changes in the loan covenants as may be necessary.

2.Project Finance Procedures3.Corporate Finance Procedures4.Working Capital Finance Procedures5.Credit Monitoring Procedures for Corporate Loans -The Credit Middle Office Group monitors compliance with the terms and conditions for credit facilities prior todisbursement. It also reviews the completeness of documentation, creation of security and insurance policies for assets financed. All borrower accounts are reviewed at least once a year.

Retail Loan Procedures Small Enterprises Loan Procedures Rural and Agricultural Loan Procedures Credit Approval Authorities

CREDIT RATINGS

ICICI Bank’s credit ratings by various credit rating agencies at March 31, 2007 are given below:

CAPITAL ADEQUACY

(1) USD 750 million (Rs. 32.60 billion) of foreign currency bonds raised for Upper Tier II capital have been excluded from the above capital adequacy ratio computation, pending clarification required by RBI regarding certain terms of these bonds. If these bonds were considered as Tier II capital, the total capital adequacy ratio would be 12.81%.

ICICI Bank is subject to the capital adequacy requirements of the RBI, which are primarily based on the capital adequacy accord reached by the Basel Committee of Banking Supervision, Bank of International Settlements in 1988. It is required to maintain a minimum ratio of total capital to risk adjusted assets of 9.0%, at least half of which must be Tier I capital.

Its total capital adequacy ratio calculated in accordance with the RBI guidelines at year-end fiscal 2007 was 11.69%, including Tier I capital adequacy ratio of 7.42% and Tier II capital adequacy ratio of 4.27%. In accordance with the RBI guidelines, the risk-weighted assets at year-end fiscal include home loans to individuals at a risk weightage of 75%, other consumer loans and capital market exposure at a risk weightage of 125%. Commercial real estate exposure and investments in venture capital funds have been considered at a risk weightage of 150%. The risk-weighted assets at year-end fiscal 2006 and year end fiscal 2007 also include the impact of capital requirement for market risk on the held for trading and available for sale portfolio. Deferred tax asset amounting to Rs. 6.10 billion and unamortised amount of expenses on Early Retirement Option Scheme amounting to Rs. 0.50 billion at year-end fiscal 2007, have been reduced from Tier I capital while computing the capital adequacy ratio.

Classification of gross assets (net of write-offs and unpaid interest on non-performing assets).

(1) Includes loans, debentures, lease receivables and excludes preference shares.(2) All amounts have been rounded off to the nearest Rs. 10.0 million.

NON-PERFORMING ASSETS

(1) Net of write-offs and interest suspense.(2) Excludes preference shares.(3) Customer assets include advances and credit substitutes like debentures and bonds.(4) All amounts have been rounded off to the nearest Rs. 10.0 million.

CANARA BANK

Widely known for its customer centricity, Canara Bank was founded by Shri Ammembal Subba Rao Pai, a great visionary and philanthropist, in July 1906, at a small port in Mangalore, Karnataka. The Bank has undergone various phases in its growth path over hundred years of its existence. The growth of Canara Bank was phenomenal, especially after nationalization in the year 1969, attaining the status of a national level player in terms of geographical reach and clientele segments. Eighties was characterized by business diversification for the Bank. In June 2006, the Bank completed a century of operation in the Indian banking industry. The eventful journey of the Bank was strewn with many memorable milestones. Today, Canara Bank occupies a premier position in the comity of Indian banks, emerging as the largest nationalized bank in India in terms of aggregate business volume for 2006-07. With an unbroken record of profits since its inception, Canara Bank has several firsts to its credit. These include:

Launching of Inter-City ATM Network

Obtaining ISO Certification for a Branch

Articulation of ‘Good Banking’ – Bank’s Citizen Charter

Commissioning of Exclusive Mahila Banking Branch

Launching of Exclusive Subsidiary for IT Consultancy

First Bank in India to issue credit card for farmers

First Bank in India to provide Agricultural Consultancy Services

Over the years, the Bank has been scaling up its market position to emerge as a major 'Financial Conglomerate' with as many as nine subsidiaries/sponsored institutions/joint ventures in India and abroad. As at December 2007, the Bank has further expanded its domestic presence, with 2641 branches spread across all geographical segments. In view of the centrality of customer convenience, the Bank provides a wide array of alternative delivery channels that include over 1900 ATMs- covering 680 centres, 1157 branches providing Internet and Mobile Banking (IMB) services and 1833 branches offering 'Anywhere Banking' services. Under advanced payment and settlement system, 1693 branches of the Bank offer Real Time Gross Settlement (RTGS) and National Electronic Funds Transfer (NEFT).

Canara Bank has made a distinctive mark in various corporate social responsibilities, namely, serving national priorities, promoting rural development, enhancing rural self-employment through several training institutes, spearheading financial inclusion objective etc. Promoting an inclusive growth strategy, which forms the basic plank of

national policy agenda today, is in fact deeply rooted in the Bank's founding principles. "A good bank is not only the financial heart of the community, but also one with an obligation of helping in every possible manner to improve the economic conditions of the common people". These insightful words of our founder continue to resonate even today in serving the society with a purpose.

The growth story of Canara Bank in its first century was due, among others, to the continued patronage of its valued customers, stakeholders, committed staff and uncanny leadership ability demonstrated by its leaders at the helm of affairs. We strongly believe that the next century is going to be equally rewarding and eventful not only in service of the nation but also in helping the Bank emerge as a "Global Bank with Best Practices". This justifiable belief is founded on strong fundamentals, customer centricity, enlightened leadership and a family like work culture.

ANALYSIS & FINDINGS  

RISK MANAGEMENT IN CANARA BANK

In Canara Bank, Risk is managed by using following tools:

A scientific Risk Based Internal Audit system is used for complete and objective compliance with the Risk Based Supervision system.

Credit Risk Assessment Software Model (RAM) as discussed earlier is used for managing Credit Risk faced by Canara Bank.

Canara Bank's Net profit for the first half year of FY08 recorded a 16.18% growth (Y-O-Y) to reach Rs.642 crore, after making a total provision of Rs.620 crore, compared to a net profit level of Rs.553 crore for the corresponding period of last year. Net profit for the second quarter of the FY08 reached Rs.402 crore as compared to Rs.362 crore in the corresponding quarter a year ago, recording a y-o-y growth of 11%. Sequentially, net profit for Q2 registered a 67% growth over Q1 in the current financial. Operating profit for Q2 stood at Rs.650 crore, recording a growth of 8.41% as against Rs.600 crore for the same period last year.

Earnings Per Share (EPS) (not annualized) improved from Rs.13.48 as at September 2006 to Rs.15.66 as at September 2007. Book value rose to Rs.213.32 as at September 2007 from Rs.184.95 for the corresponding period last year. Return on Average Assets for the Q2 remained at 0.97% as compared to 1.05% for the same quarter a year ago.

Capital to Risk Weighted Assets Ratio as at September 2007 worked out to 13.89% vis-à-vis the regulatory minimum of 9%. The Bank is fully geared up to make a smooth transition to the new capital adequacy framework under Basel II norms from March 2008. The Bank has already commenced parallel run. In the medium term, the Bank aims to maintain a 12% CRAR as per Basel II norms.

With a strong 39% Y-o-Y growth in the interest income from core lending operations, the Bank's total income registered a 36% growth to touch Rs.7815 crore as against Rs.5733 crore for the same period of the previous year. Non-interest income for the half year amounted to Rs.952 crore, registering a 76% growth. Total expenditure for the half year under review stood at Rs.6552 crore .

CAPITAL ADEQUACY

PARTICULARS 30.09.06 30.09.07

CRAR 12.27 % 13.89 %

The CRAR of Canara Bank has increased from 12.27 % to 13.89 % which is a good indicator of bank’s performance because it shows that banks’ capital in comparison to its risk-weighted assets have increased.

ASSET QUALITY

PARTICULARS 30.09.06 30.09.07

GROSS NPA RATIO (%) 2.13 % 1.66 %

NET NPA RATIO .99 % .99 %

Asset quality of the Bank exhibited further improvement as at September 2007. Backed by a cash recovery of Rs.423 crore, Bank's gross NPA ratio came down from 2.13% as at September 2006 to 1.66% as at September 2007 while the net NPA ratio remained at 0.99%.

RATING OF CANARA BANK GIVEN BY MOODY’S

.Moody’s assigns a bank financial strength rating (BFSR) of D+ to Canara Bank (CB), which translates into a Base line Credit Assessment (BCA) of Baa#, reflecting the bank's important nationwide franchise and strong market position as the fourth-largest commercial bank in India. The rating also takes into account the increasingly competitive operating environment and the challenges the bank faces in modernizing its operations and processes. Although there have been some signs of revival in the Indian industrial sector in the past few years, we believe that the banks still have to contend with a high level of credit risk. CB's focus on retail, small and medium-sized enterprise (SM E) and agricultural lending over the past few years has helped its

loan diversification, which in the past was dominated by corporate credits. The BFSR also encompasses the bank's strong links with corporates.

ICRA reaffirms LAAA rating to Canara Bank`s bond programsLeading credit agency, ICRA reaffirmed the LAAA rating to the outstanding lower tier II bond and infrastructure bond programs of Canara Bank (Canara).The rating indicates highest credit quality and the rated instruments carry the lowest credit risk.

ICRA has also reaffirmed the A1+ rating to the certificate of deposit program of Canara Bank (Q, N,C,F)* indicating highest credit quality. Instruments rated in this category carry the lowest credit risk in the short term. Canara`s ratings factor in the implicit sovereign support enjoyed by the bank in its role as the largest Nationalised Bank in the country, the strong brand franchise in the corporate sector and improvement in asset quality as depicted by the declining credit costs.

The ratings also take into account the competitive operating cost structure, given the bank`s large branch network and the comfortable regulatory capitalisation levels and liquidity position. While Canara`s core profitability has been declining as a result of the shrinking interest spreads (1.62% during nine-months ended December 2007) and relatively low core fee income levels (0.56% during nine-months ended December 2007), ICRA believes that the management`s efforts to reduce high cost deposits and rebalance the credit portfolio could start generating higher interest spreads over the medium term.

Meanwhile, the bank`s efforts to improve fee income levels, including revamping the operations of subsidiaries, and the gains on its trading book could support profitability. The bank has been maintaining a relatively superior operating cost structure but the inevitable investments required to upgrade its technology platform to cover more branches under CBS (Core Banking Solution) and Basel II requirements could adversely impact the operating cost levels.

Q - Quote, N - News, C - Chart, F – Financials

ALLAHABAD BANK

PROFILE

The Oldest Joint Stock Bank of the Country, Allahabad Bank was founded on April 24, 1865 by a group of Europeans at Allahabad. At that juncture Organized Industry, Trade and Banking started taking shape in India. Thus, the History of the Bank spread over three Centuries - Nineteenth, Twentieth and Twenty-First.

Twenty-First Century 

October, 2002 The Bank came out with Initial Public Offer (IPO), of 10 crores share of face value Rs.10 each, reducing Government shareholding to 71.16%.

April, 2005 Follow on Public Offer (FPO) of 10 crores equity shares of face value Rs.10 each with a premium of Rs.72, reducing Government shareholding to 55.23%.

June, 2006 The Bank Transcended beyond the National Boundary, opening Representative Office at Shenzen, China.

Oct, 2006 Rolled out first Branch under CBS.February, 2007 The Bank opened its first overseas branch at Hong Kong.March 2007 Bank's business crossed Rs.1,00,000 crores mark.

   

RISK MANAGEMENT IN ALLAHABAD BANK

ANALYSIS & FINDINGS  

The aim and objective of Risk Management Practice is to ensure stability and efficiency in the operation of the Bank. While establishing the Risk Management Practice, the Bank has adopted a comprehensive approach, align with the best practice in the Industry covering Organizational structure, Risk Policies, Risk processes, Risk Mitigation and Risk audit, all in order to identify, manage, monitor and control various categories of risks. The Bank has also adopted an integrated approach at the committee level to put in place a robust Risk Management System.

The Bank is updating / fine-tuning systems and procedures, technological capabilities, Risk structure etc. to meet the requirements of the guidelines. The Bank proposes to migrate to the final guidelines given by the RBI for embracing Basel II norms. The Bank initiated parallel run exercise in line with RBI guidelines. The CRAR as per existing norms (Basel I) stands at 12.52% while under parallel run of Basel II norms, it works out to be 11.65% if we take March, 07 figures.

Improvement in Risk Management practices has been integrated with the betterment of asset quality through introduction of proper credit management practices.

Centralised Credit Appraisal Cells have been created at Zonal Offices with proper networking arrangement for better processing of credit proposals and prompt decisions.

Improved credit monitoring measures have already been put in place for insulating the Bank from future loan losses.

Allahabad Bank also uses RAM for managing its Credit Risk.The Bank has established a structured, dynamic, proactive and integrated Credit Risk Management System to proper identification & quantification of the credit risk associated with the credit proposals.

The Bank has developed various risk rating module for credit risk rating. The Bank has also devised risk rating module exclusively for SSI & SME sector.

In regard to Operational Risk, the Bank has framed policy and procedural guidelines for implementation as per the extant guidelines of Reserve Bank of India.

FINANCIAL POSITION

The highlights of the performance for the quarter-ended June 2007 are summarised as under:

The Business of the Bank has crossed Rs.1,03,000 crore mark as at June-end 2007. The Business of the Bank stood at Rs.1,03,379 crores as on 30.06.2007 as against Rs.82,621 crores corresponding date previous year.

Year-on-Year basis, the Business increased by 25.13%.(During April-June, 2007 : 1.89%)

Working Funds crosses Rs.70,000 crore mark to reach Rs.71,484 as on June-end, 2007

Total Deposit of the Bank went up to Rs.62,819 crores as on 30.6.2007 from Rs.49,773 crores as on 30.6.2006 and Rs.59,544 crores as on 31.3.2007.

Year-on-Year basis, Total Deposits grew by 26.21% (During April-June, 2007 : 5.50%)

Market Share in aggregate deposits increased to 2.34% as at June-end 2007 from 2.26% as at June-end 2006.

Gross Credit was Rs.40,560 crores as on 30.6.2007 as against Rs.32,848 crores as on 30.6.2006 and Rs.41914 crores as on 31.3.2007

Year-on-Year basis, the Gross Credit increased by 23.48%.

Market share in advances also increased to 2.16% from 2.13% during this period.

Gross Credit to Total Deposit ratio was 64.57% as at June-end 2007 as against 66.0% as at June-end, 2006.

Operating Profit increased from Rs.207.43 crores during April-June'06 to Rs.288.87 crores during April-June'07, registering a growth of 39.26% during the period.

Net Profit of the Bank was Rs.200.40 crores during April-June'07 as against Rs.128.25 crores in the corresponding period last year registering a growth of 56.26%.

ASSET QUALITY

PARTICULARS 30.06.06 30.06.07 31.03.07

Gross NPA to Gross Advances Ratio (%)

3.67 % 2.46 % 2.61 %

Net NPA to Net Advances Ratio (%)

.81 % .76 % 1.07 %

Capital Adequacy Ratio or CRAR

12.24 % 12.71 % 12.52 %

Gross NPA to Gross Advances further declined to 2.46% as at June-end 2007 from 3.67% as at June-end 2006 and 2.61% as at March-end 2007.

Net NPA to Net Advances ratio also reduced to 0.76% as at June-end 2007 from 0.81% as at June-end 2006 and 1.07% as at March-end,2007.

Capital Adequacy Ratio was 12.71% as at June-end 2007 which is above the stipulated norm of 9%, as against 12.24% as on 30.6.2006 and 12.52% as on 31.3.2007.

Net Interest Margin (NIM) remains steady at 2.97% as on 30.6.2007 compared to position as on 31.3.2007.

As at June-end 2007, Earning per share (EPS) stood at Rs.17.94 as against Rs.11.48 as on 30.6.2006 and Rs.16.79 as on 31.3.2007. Book Value was Rs.104.23 increased from Rs.84.30 as on 30.6.2007 and Rs.100.22 as on 31.3.2007.

Return on Assets improved from 0.99% as on 30.6.2006 to Rs.1.18% as on 30.6.2007.

Business per employee rose from Rs.4.04 crores as on 30.6.2006 to Rs.5.02 crores as on 30.6.2007. As on 31.3.2007, the amount stood at Rs.4.56 crores.

Business per branch improved from Rs.41.31 crores to Rs.49.06 crores during the period.

CONCLUSION

We know that on the basis of size the ranking of four banks considered for research work are:

1. ICICI Bank2. Punjab National Bank3. Canara Bank4. Allahabad Bank

All these banks identify, measure and then manage the risk faced by them.

Punjab National Bank (PNB) measures, monitors and manage credit risk for each borrower and also at the portfolio level.

It uses various techniques for this purpose like: Credit Policy Rating of Borrower Models for Credit Risk Rating Credit Risk Rating for Performing Loans PNB TRAC for online rating of borrowers Preventive Monitering System (PMS) for monitering conduct of borrowel A/c on

regular basis. It updates the ratings of its borrowers annually. Credit Risk Assessment Software Model (RAM) for assessing the credit risk

faced by it.

The Gross NPA as a % of Gross Advances has reduced from 3.98 % in Jun’06 to 3.81 % in Jun’07 i.e. by 4.2 %.

Net NPA as a % of Net Advances Ratio has increased from .35 % in June ‘06 to .98 % in Jun’07 i.e. by 180 %.

The CRAR of PNB has increased from 12.29 % in June ’06 to 12.41 % in June ’07 i.e. by .976 %

ICICI Bank measures, monitors and manage credit risk for each borrower and also at the portfolio level.It has made specific department for performing the various activities for credit risk management. These departments are:

Global Credit Risk Management Group Credit Risk Compliance & Audit Department (CRC & AD) which evaluates risk at

the transaction level as well as in the portfolio context.

It used credit risk rating system and RAM for managing and assessing its credit risk respectively.

Gross NPA has increased from Rs. 22.73 billion in Mar’06 to Rs. 41.68 billion in Mar’07 i.e. by 83.36 %.

Net NPA as a % of Net Advances has also increased from .71 in Mar’06 to % to .98 % in Mar’07 i.e. by 38.03 %.

CRAR has decreased from 13.35 % in Mar’06 to 11.69 % in Mar’07 i.e. by 12.43 %.

Canara Bank also uses various techniques for managing its credit risk like:

Credit rating system Risk based Internal Audit System RAM

Its ratio of Gross NPA as a % of Gross Advances has reduced from 2.13 % in Sep’06 to 1.66 % in Sep’07 i.e. by 22.07 %.Its Net NPA as a % of Net Advances remained constant at .99 % in Sep’07 also as compared to Sep’06.Its CRAR has increased from 12.27 % as on Sep’06 to 13.89 % as on 30 Sep’07 i.e. by 13.20 %.

Allahabad Bank uses a comprehensive approach, aligned with the best practice in the Industry covering Organizational structure, Risk Policies, Risk processes, Risk Mitigation and Risk audit, all in order to identify, manage, monitor and control various categories of risks. The Bank has also adopted an integrated approach at the committee level to put in place a robust Risk Management System.

Various credit monitoring measures are used by the bank and RAM is also used by the bank.

The ratio of Gross NPA as a % of Gross Advances has decreased from 3.67 % in Jun’06 to 3.46 % in Jun’07 i.e. by 5.72 %.

The ratio of Net NPA as a % of Net Advances has also reduced from .81 % in Jun’06 to .76 % in Jun’07 i.e. by 6.17 %.

CRAR for Allahabad Bank has increased from 12.24 % in Jun’06 to 12.71 % in Jun’07 i.e. by 3.84 %.

In comparison to itself, Allahabad Bank has shown a great improvement as both Gross NPA and Net NPA ratio are decreasing and CRAR is increasing.

Therefore, finally we can conclude that if we consider the performance of individual banks in comparison to their own performance then Canara Bank is at the top position because its Gross NPA a % of Gross Advances has reduced by 22.07 % and Net NPA as a % of Net Advances has remained constant at 99 % which shows that it has been able to manage its credit risk effectively due to which its NPA has decreased. Moreover its CRAR is highest among the all four banks and has increased by 13.20 % in Sep’07 (i.e 13 .89 %) as compared to Sep’06 (12.27 %).

Allahabad Bank is at the second position because in its case both Net NPA as a % of Net Advances and Gross NPA as a % of Gross Advances have decreased by 6.17 % and 5.72 % and also the CRAR has increased by 3.84 % and is 12.71 % in June’07.

At the third position is the Punjab National Bank as its Gross NPA as a % of Gross advances has decreased by 4.2 % but Net NPA as a % of Net advances has increased drastically by 180 %.However, it CRAR has increased by .976 % i.e. to 12.41 % as on Jun’07.

ICICI Bank is at the last position in case of managing its credit risk because its Gross NPA has increased from Rs. 22.73 billion in Mar’06 to Rs. 41.68 billion in Mar’07.Its Net NPA as % of Net Advances has increased by 38.03 % till Mar’07 as compared to Mar’06.Its CRAR has also decreased by 12.43 % till Mar’07 (i.e. .98 %) as compared to Mar’06 (.71 %).

Thus, we can conclude finally that Canara Bank manages its Credit Risk most effectively, then is Allahabad Bank, then is Punjab National Bank and at last is the ICICI Bank which has not managed is credit risk effectively due to which its NPA’s are increasing even though it has made so many departments for managing credit risk and is also using so many software’s for it. This shows that there is certainly some flaw in its credit risk management system and also in credit management system of PNB.

Thus, these banks need to improve upon their credit risk management system as it is very important for their growth prospectus.

BIBLIOGRAPHY

WEBSITES:

www.pnbindia.com www.icicibank.com www.allahabadbank.com www.canarabank.com www.google.com

Online Newspaper: Hindu Business Line

BOOKS:

Financial Institutions and Markets; By: L.M. Bhole

Indian Financial System; By: M.Y. Khan