Thesis submitted to Visvesvaraya Technological University (VTU) in partial fulfillment for the award of the Degree
Master of Business Administration
Submitted by Mr.Mahadeva Swamy.M USN: 1RX12MBA01 Under the Guidance of
Internal Guide External Guide Dr.Tamizharasi M Jagan Mohan Asst. Professor Dy Gen Manager RNSIT Vijaya bank Bangalore Bangalore
R N S Institute of Technology Bangalore 560098 June 2014 Certificate from the Organization.
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Certificate from the Guide. This is to certify that the thesis/dissertation/project report titled Credit Risk Assessmemt at Vijaya Bank, submitted by Mr.Mahadeva Swamy.M to Visvesvaraya Technological University (VTU), for the award of degree of MBA is a record of bonafide research work carried out by him under my guidance and supervision. This has not been previously formed the basis for the award of any Degree, Diploma. Associateship, Fellowship or other similar title to the candidate.
Place: Bangalore Date:
Dr.Tamizharasi
Project Guide
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Declaration I hereby declare that titled the thesis/dissertation/project report Credit Risk Management at Vijaya Bank has been written by me during my study period under the guidance of Prof.Tamizharasi, Dept of MBA. I further declare that the thesis is the result of my own effort and has not been submitted earlier to any other university for the award of any degree, diploma, associateship, fellowship or other similar title.
Place: Bangalore Date: Mahadeva Swamy.M MBA IV Semester
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Acknowledgement I have a great pleasure in expressing my deep sense of gratitude to Mr. ASDF for giving me an opportunity to do a research project in his esteemed organization. I express my profound respect and sincere thanks to Prof. Tamizharasi for her invaluable guidance and scholarly advice through out the period of this study. My special thanks to the Principal for his supportive role, advice and valuable suggestions which helped me in successful completion of this project. I wish to record my heartfelt thanks to al my faculty members in the department for their encouragement in accomplishing this research work. Last but no way least; my thanks are due to all those who have helped me directly and indirectly in completion of this project.
Place: Date: Candidates Name
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Table of contents Page No. Executive summary 8 Chapter 1: Introduction 9 Chapter 2: Industry & Company Profile 16-46 Chapter 3: Theoretical Background of the study 50-63 Chapter 4: Data analysis & interpretation 64-96 Chapter 5: Summary of findings, suggestions & conclusions 97-99 Bibliography 100 Annexure 101-103
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LIST OF TABLES AND GRAPHS Sl. No. Titles Page No. 1. Board of Directors 28 2. Financial Statement of Vijaya Bank 47-49 3. Credit Risk Management Framework 55 4. Mapping Process 60 5. Risk weight Mapping of the Short Term Ratings of the domestic rating agencies:
62 6. Table internal ceiling of risk rating 65 7. Score Sheet for ACB Electricals Limited
67 8 Graphical Representation on Business Risk (ACB Electricals) 69 9. Graphical Representation on Financial Risk(ACB Electricals) 70 10. Graphical Representation on Management Risk(ACB Electricals) 72 11. Score Sheet for PQR Energy Limited
76-77 12. Graphical Representation on Business Risk (PQR Limited) 77 13. Graphical Representation on Completion Risk (PQR Limited) 78 14. Graphical Representation on Execution Risk (PQR Limited) 79 15. Graphical Representation on Financial Risk (PQR Limited) 81 Score Sheet for JKL Power Limited
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16. Graphical Representation on Business Risk (JKL Power Limited) 86 17. Graphical Representation on Completion Risk (JKL Power Limited) 88 18. Graphical Representation on Execution Risk (JKL Power Limited) 89 19. Graphical Representation on Financial Risk (JKL Power Limited) 91 20. Altman Z Score 95 21. Annexure 101-103
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EXECUTIVE SUMMARY This project is done on Credit Risk Management practices in Vijaya Bank In the fast growing world, banks are facing many types of risks among which Credit Risk stands at the top of the list. Hence, the topic is Credit Risk Management. One bank was chosen to understand the practices followed by them in depth which would apply to other banks in general. Vijaya Bank is one of the Public Sector Banks and is supposed to be in line with RBI guidelines. This helped in understanding the credit risk management practices followed by a bank in a better way. The process of Credit Risk Management is Identification, Measurement, Monitoring & Control. The bank follows these steps very clearly and has a sound Credit Risk Management system installed. Is has also installed a software for risk rating which was provided by CRISIL which is in turn in lines with RBI guidelines. The bank Net Profit has seen a growth of 234% & the total business is up by 16%. The banks deposits are up by 13% & the gross advances are up by 19%. The credit risk exposure is increased to 80064.90 as of Sep 30, 2011. The credit risk of the bank has decreased over the past 5 years. They have installed an integrated risk management system in line with BASEL II norms and RBI guidelines. They follow strict hedging policies to reduce credit risk of the banks. They take financial collaterals and guarantees to hedge their credit risk. Hence, all the policies and strategies have led to a sound credit risk management system.
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INTRODUCTION Brief Background of the research topic:- Risk management in Indian Banks is relatively a new practice, but has already shown to increase efficiency in governing of these banks as such procedures tend to increase the corporate governance of financial institutions. In times of volatility & fluctuations in the market, financial institutions prove themselves by withstanding the market variations & achieve sustainability in terms of growth & have a stable share value. Hence, an essential component of Risk Management framework would be needed to mitigate all risks & rewards of all products & services offered by the bank. Thus the need for an efficient Risk Management framework is paramount in order to factor internal & external risks.
The financial sector in various economies like that of India is undergoing a monumental change factoring into account world events such as the banking crisis across the globe. The 2007 recession in USA has highlighted the need for banks to incorporate the concept of Risk Management into their regular procedures. Ten various aspects is increasing global competition to Indian Banks by Foreign Banks, increasing deregulation, introduction of innovative products & financial instruments as well as innovation in delivery channels have highlighted the need for Indian Banks to be prepared in terms of Risk Management.
Indian Banks have been making great advancements in terms of technology, quality as well as stability such that they have started to expand & diversify at a rapid rate. However, such expansion brings these banks into the context of risk especially at the onset of increasing Globalization & Liberalization. In Banks and other financial institutions, risk plays a major role in the earnings of the banks. Higher the risk, higher the return, hence, it is essential to maintain a parity between risk & return. Hence, management of financial risk incorporating a set of systematic & professional methods especially those defined by the Basel II becomes essential requirement of the banks. The more risk averse the bank is, the safer is their capital base.
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Importance of Credit Risk Management:- The Credit Risk Management is the very important area the banking sector & there are wide prospects of growth & other financial institutions also face the problems which are financial in nature.
Also banking professional have to maintain a balance between the risks & rewards. For a large customer base banks need to have a variety of loan products. If bank lowers the interest rates for the loan it offers, it suffers.
In terms of equity banks must have substantial amount of capital on its reserve, but not too much that it misses the investment revenue, and not too littler that it leads itself to financial instability and to the risk of regulatory compliance.
Credit Risk Management is the risk assessment that comes in an investment. Risk often comes in investing and in the allocation of capital. The risks must be assessed so as to derive a sound investment decision. And such decision must be made by balancing between risks and returns.
Giving loans is a risky affair for banks sometimes and certain risks may also come when banks offer securities and other forms of investments. The risk of losses that results in default of payment by the debtors is kind of a risk that must be expected. A bank to keep substantial amount of capital to protect its solvency and to maintain its economic stability.
The greater the banks are exposed to risks; greater should be the amount of capital needed so as to maintain its solvency and stability.
Credit Risk Management must play its role to help the banks to be in compliance with Basel II Accord and other regulatory bodies.
For assessing the risks, banks should plan certain estimates, conduct monitoring, and perform reviews of performance of the banks. They should also loan review and portfolio analysis in order to determine the risks involved. A PROJECT ON CERDIT RISK MANAGEMENT
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Banks must be active in managing the risks in various securities and derivatives. Still progress has to be made for analyzing the credits and determining the probability of defaults and risks of losses.
PRESENT SITUATION: Indian Banking sector has proved to be very stringent during the times of economic crisis in India and has ensured the economy has not suffered due to global crisis as a result. How well the bank has been able to handle the credit default from their customers end and how the banks have been able to post decent profit figures at the year end.
OBJECTIVES: To study the credit risk faced by the Vijaya Bank To analyze the process of Credit Risk Management in Vijaya Bank To assess the credit risk of selected projects of Vijaya Bank
SCOPE OF THE STUDY: It is limited to the boundary of Bangalore City (Head Office)
METHODOLOGY: Type of Research: Descriptive Research- This is a descriptive research explaining what Vijaya Bank does with respect to Credit Risk Management.
DATA COLLECTION: Primary Data: Primary Data has been collected through personal interview by direct contact method. Personal interview and discussion was made with manager and other personnel in the bank for the purpose.
Secondary Data: This part of the data is collected through internet. A PROJECT ON CERDIT RISK MANAGEMENT
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LITERATURE REVIEW: R.S.Raghavan. (2003) - Author here talks about meaning of risks and the need for risk management initially. Different types of risks and losses as defined by the RBI guidelines are explained in detail. It also measures each type of risks by using VaR (Value at Risk) or worst case type analytical model to determine both expected and unexpected losses. It also talks about minimum capital requirement as per RBI guidelines.
Credit Risk and the tools for the management of the Credit Risk are also explained in detail. It is also said that credit risk is measured through probability of default (POD), loss given default (LGD) also through credit quality over time
Ms. Asha Singh (2013) - Here the researcher talks about various guidelines laid down by the RBI and also talks about various mitigation techniques. It says risk in inherent part of banks business and effective risk management is very essential for any banks financial soundness. It says credit risk primarily composed of two risks i.e. quantity of the risks, which is nothing but the outstanding loan balance as on the date of default and quality of the risk i.e. the severity of the loss defined by both probability of default as reduced by the recoveries that could be made in the event of default. Thus the credit risk is the combined outcome of Default Risk and Exposure Risk.
Somana Devi Thiagarajan, A.Ramachandran (2011) - In this article the study was carried out to measure the credit risk component of the Indian Scheduled Commercial Banking Sector by using the data of 10 years 2001-2010. It illustrates how credit risk ratios can be used to measure the credit risk in the banking sector. The results of the study indicate a consistent increase in the total loans to total assets ratio and the total loans to total deposits ratios for both public and private sector during the period of study. There was a gradual decrease in the ratio of non performing loans to total loans for both public and private sector banks from 2001-2008 but there was a gradual increase from 2009-2010 and that was significantly higher for private sector banks than for public sector banks.
Brigitte Gidbillion-Campus and Christophe J. Godlewskil (2005) - This research is about the two types of information bank has. One is hard information, which is present in balance A PROJECT ON CERDIT RISK MANAGEMENT
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sheet and produced with credit scoring, and is quantifiable and verifiable. Second is soft information, which is produced in bank relationship and is qualitative, non verifiable but manipulable. The results of the research show that the soft information allows the banker to decrease the capital allocation for VaR coverage. So that banker should be given sufficient incentive to not change the soft information as it is crucial input to risk management.
Prof. Dr. Srinivas Gumparthi (2012) - The need to reduce banks Non Performing Assets (NPA) level to match the competitors forms the primary reason/backbone for the development of the model. Also, the appropriate weights in the current system triggered the need for the development of the same. The model was constructed using two step method. Risks were assessed using a comprehensive score card. Discriminant analysis was used to classify the objects/records in to two or more groups based on the knowledge of some variables related to them. The analysis was used for the classification of assets in to performing and non performing assets based on the factors identified from the risk scorecard.
Carl Felsenfeld (2005) - outlined the patterns of international Banking regulation and the sources of governing law. He reviewed the present practices and evolving changes in the field of control systems and regulatory environment. The book dealt a wide area of regulatory aspects of Banking in the United States, regulation of international Banking, international Bank services and international monetary exchange. The work attempted in depth analysis of all aspects of Bank Regulation and Supervision. Money Laundering has been of serious concern worldwide. Its risk has wide ramifications. Money Laundering has lead to the fall of Banks like BCCI in the past. In this context the book on Anti-Money Laundering: International Practice and Policies by John Broome Published by Sweet and Maxwell (August 2005) reviews the developments in the area of Money Laundering. The author explains with reference to case studies the possible effects of Money Laundering. The book gives a comprehensive account of the existing rules and practices and suggests several improvements to make the control systems and oversight more failsafe.
Daniele Nouy (2006) - elaborates the Basel Core Principles for effective Banking Supervision, its innovativeness, content and the challenges of quality implementation. Core Principles are a set of supervisory guidelines aimed at providing a general framework for effective Banking supervision in all countries. They are innovative in the way that they were developed by a mixed drafting group and A PROJECT ON CERDIT RISK MANAGEMENT
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they were comprehensive in coverage, providing a checklist of the principal features of a well designed supervisory system. The core Principles specify preconditions for effective banking supervision characteristics of an effective supervisory body, need for credit risk management and elaborates on Principle 22 dealing with supervisory powers. Dearth of skilled human resources, poor financial strength of supervisor and consequent inability to retain talented staff, inadequate autonomy and the need for greater understanding of modern risk management techniques are identified as the main difficulties in quality implementation. The critical elements of infrastructure, legal framework that supports sound banking supervision and a credit culture that supports lending practices are the essence of a strong banking system. Widespread failures have occurred during a period of increased vulnerability that can be traced back to some regime change induced by policy or by external conditions
Jacques de Larosiere (2006) - Former Managing Director of the International Monetary Fund(31) discusses the implications of the new Prudential Framework. He explains at length how the new Regulatory code could have some dangerous side effects. The increased capital requirements as decided by the Basel Committee on Banking Supervision in September 2010 will affect the amount of own funds would affect the profitability of the Banks. The consequences of such increased capital requirements would incentivise the Banks to transfer certain operations that are heavily taxed in terms of capital requirements to shadow Banking to avoid the scope of regulation. The risks of such a practice might affect the financial stability. While the Central Banking authorities might contemplate registration and supervision of such shadow banking entities like the hedge funds and other pools, such a course might be more cumbersome than expected. The new regulation would result in the Banks to reduce activities with rather poor margins. For example they may reduce exposure to small and medium enterprises or increase credit costs or concentrate on more profitable but higher risk activities. He is also critical of the proposal of Basel to introduce an absolute leverage ratio that might push Banks to concentrate their assets in riskier operations. The author feels that the banking model which favours financial stability and economic growth might become the victim of the new prudential framework, and force Banks to search for assets with maximum returns despite the attendant risks.
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Crouhy, Gala, Marick 2008 - have summarized the core principles of Enterprise wide Risk Management. As per the authors Risk Management culture should percolate from the Board Level to the lowest level employee. Firms will be required to make significant investment necessary to comply with the latest best practices in the new generation of Risk Regulation and Management.. Generally firms did not institute a truly integrated set of Risk measures, methodologies or Risk Management Architecture. The ensuing decades will usher in a new set of Risk Management tools encompassing all the activities of a Corporation. The integrated Risk Management infrastructure would cover areas like Corporate Compliance, Corporate Governance, Capital Management etc. Areas like business risk, reputation risk and strategic risk also will be incorporated in the overall Risk Architecture more formally. As always it will be the Banks and the Financial Services firms which will lead the way in this evolutionary process. The compliance requirements of Basel II and III accords will also oblige Banks and Financial institutions to put in place robust Risk Management methodologies.
Hannan and Hanweck (2007) - felt that the insolvency for Banks becomes true when current losses exhaust capital completely. It also occurs when the return on assets (ROA) is less than the negative capital-asset ratio. The probability of insolvency is explained in terms of an equation p, 1/ (2(Z2). The help of Z-statistics is commonly employed by Academicians in computing probabilities.
LIMITATIONS OF THE STUDY: It is limited to only Vijaya Bank It is based on only limited availability documents Since the data regarding the Credit Risk Management is highly confidential, primary data availability was very limited. It also limited only to data availed through research papers and internet.
INDUSTRY OVERVIEW A PROJECT ON CERDIT RISK MANAGEMENT
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Modern Banking in Indian can be traced back to the establishment of Bank of Bengal Jan 02, 1809, the first joint stock bank sponsored by Government of Bengal and Government of the Royal Charter of British India Government. It was followed by the establishment of Bank of Bombay April 15, 1840 and the Bank of Madras, July 1, 1843. These three banks, known as the presidency banks, marked the beginning of the limited liability and the joint stock banking in India and were also vested with right of note issue.
In 1921, the three presidency banks were merged to form the Imperial Bank of India which had multiple roles and responsibilities and that functioned as commercial banks, a banker to the government and a bankers bank. Following the establishment of Reserve Bank of India (RBI) in 1935, the central banking responsibilities that the Imperial Bank of India was carrying out came to an end, leading it to become more of a commercial bank. At the time of independence of India, the capital and reserves of the Imperial Bank stood at Rs. 118 Million, deposits at Rs. 2751 million and advances at 723 million and a network of 172 branches and 200 sub offices spread all over the country.
In 1951, in the backdrop of central planning and the need to extend bank credit to the rural areas, the government constituted All India Rural Survey Committee, which recommended the creation of a state sponsored institution that will extend banking services to the rural areas. Following this, by an act of parliament passed in May 1955, State Bank of India was established in July 1955. In 1959, State Bank of India took over the eight former state-associated banks as its subsidiaries. To further accelerate the flow of credit flow to the rural areas and the vital sections of the economy such as agriculture, small scale industries, etc., that are of national importance, social control over the banks was announced in 1967 and a National Credit Council was setup in 1968 to asses the demand for credit by these sectors and determine resource allocations. The decade of 1960s also witnessed significant consolidations in Indian Banking Industry with more than 500 banks functioning in 1950s reduced to 89 by 1969.
For the Indian Banking Industry, July 19, 1969, as a landmark day, on which nationalization of 14 major banks were announced that each had a minimum of Rs.500 Million and above of aggregate deposits. In 1980, eight more banks were nationalized. In A PROJECT ON CERDIT RISK MANAGEMENT
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1976, the Regional Rural Banks Act came into being, that allowed opening of specialized regional rural banks to exclusively cater to the credit requirements in the rural areas. These banks were setup jointly by the Central Government, Commercial Banks and the respective local governments of the states in which these are located.
The period following the Nationalization was characterized by rapid rise in the banks business and helped in increasing national savings. Savings rate in the country leapfrogged from 10-12% in the two decades of 1950-70 to about 25% post nationalization period. Aggregate deposits which registered annual growth in the range of 10%-12% in the 1960s to about 19% in the 1970s and 1980s. Branch Network expanded significantly leading to increasing in the banking coverage.
Indian Banking, which experienced rapid growth following the nationalization, began to face pressures on asset quality by the 1980s. Simultaneously, the banking world everywhere was gearing up towards new prudential norms and operational standards pertaining to capital adequacy, accounting and risk management, transparency and disclosure etc. In the early 1990s, India embarked on an ambitious economic reforms programme in which banking sector reforms formed a major part. The committee on a financial system 1991, more popularly known as the Narasimham Committee prepared the blueprint of the reforms. A few of the major aspects of the reform included: a. Moving towards international norms in income recognition and other related aspects of accounting b. Liberalization of entry and exit norms leading to the establishment of several New private sector banks and entry of number of new foreign banks, c. Freeing of deposits and lending rates (except the savings deposit rates), d. Allowing public sector banks access to public equity markets for raising capital and diluting the government stake e. Greater transparency and disclosure standards in financial reporting, f. Suitable adoption of BASEL Accord on capital adequacy g. Introduction of technology in banking operation etc.
The reforms lead to major changes in the approaches of the banks towards aspects such as competition, profitably and productivity and the need and the scope for A PROJECT ON CERDIT RISK MANAGEMENT
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harmonization of global operational standards and adoption of best practices. Greater focus was given to deriving efficiency by improvement performance and rationalization of resources and greater reliance on technology including promoting in a big way computerization of banking operations and introduction of electronic banking.
The reforms lead to significant changes in the strength and sustainability of Indian Banking. In addition to significant growth in the business, Indian banks experienced sharp growth in the profitability, greater emphasis on prudential norms with higher provisioning levels, reduction in the non performing assets and surge in capital adequacy. All bank groups witnessed sharp growth in the performance and profitability. Indian Banking industry is preparing for smooth transition towards more intense competition arising from further liberalization of banking sector that was envisaged in the year 2009 as a part of the adherence to liberalization of the financial services industry.
HISTORY OF BANKING IN INDIA A PROJECT ON CERDIT RISK MANAGEMENT
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The first bank in India, though conservative, was established in 1786. From 1786 till today, the journey of Indian Banking system can be segregated into three distinct phases. They are as mentioned below. Early phase from 1786 to 1969 of Indian Banks Nationalization of Indian Banks and up to 1991 prior to Indian Banking Sector Reforms New phase of Indian Banking system with the advent of Indian Financial and Banking Sector Reforms after 1991.
Phase I: The General Bank of India was set up in the year 1786. Next came Bank of Hindustan and Bengal Bank. The East India Company established Bank of Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843) as independent units and called it Presidency Banks. These three banks were amalgamated in 1920 and Imperial bank of India was established which started as private shareholders bank, mostly European shareholders. In 1865, Allahabad bank was established and first time exclusively by Indians, Punjab National Bank Limited was set up in 1894 with headquarters at Lahore. Between 1906 and 1913, Bank of India, Central Bank of India, Bank of Baroda, Canara bank, Indian Bank and Bank of Mysore were setup. Reserve Bank of India came in 1935.
During the first phase the growth was very slow and the banks also experienced periodic failures between 1913 and 1948. There was approximately 1100 banks, mostly small. To streamline the functioning and activities of commercial banks, the Government of India came up with The Banking Companies Act, 1949 which was later changed to Banking Regulation Act, 1949 as per the amending Act of 1965 (Act No.23 of 1965). Reserve Bank of India was vested with extensive powers for the supervision of Banking in India as the Central Banking Authority.
During those days public had lesser confidence in the banks. As an aftermath deposit mobilization was slow. Abreast of it savings bank facility was provided by the Postal department was comparatively safer. Moreover, funds were largely given to traders.
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Government took major steps in this Indian Banking Sector Reforms after independence. In 1955, it nationalized Imperial bank of India with extensive banking facilities on a large scale especially in rural and semi urban areas. It formed State Bank of India to act as the principal agent of RBI and to handle banking transactions of the Union and State Government all over the country.
Seven Banks forming subsidiary of State Bank of India was nationalized in 1960. On July 19 th , 1969, major process of nationalization was carried out. It was the effort of then Prime Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in the country were nationalized.
Second phase of nationalization of Indian Banking Sector Reforms was carried out in 1980 with seven more banks. This step brought 80% of the banking segment in India under Government Ownership.
The following are the steps taken by the Government of India to regulate Banking Institutions in the country: 1949: Enactment of Banking Regulation Act 1955: Nationalization of State Bank of India 1959: Nationalization of SBI Subsidiaries 1961: Insurance cover extended to deposits 1969: Nationalization of 14 major banks 1971: Creation of Credit Guarantee Corporation 1975: Creation of Regional Rural Banks 1980: Nationalization of seven banks with deposits over 200 crore.
After the nationalization of banks, branches of public sector banks in India rose to approximately 800% in deposits and advances took a huge jump by 11000%.
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This phase has introduced many products and facilities in the banking sector in its reforms measure. In 1991, under the chairmanship of M Narasimham, a committee was set up by his name which worked for the liberalization of banking practices.
The country was flooded with foreign banks and their ATM stations. Efforts are being put to give a satisfactory service to its customers. Phone Banking and Net banking was introduced. The entire banking system became more convenient and swift. Time is given more importance than money.
The financial system of India has shown a great deal of resilience. It is sheltered from any crisis triggered by any external macro economics shock as other Asian Countries suffered. This is all due to a flexible change rate regime, the foreign reserves are high, the capital account is not yet fully convertible, and banks and their customers have limited foreign exchange exposure.
STRUCTURE OF INDIAN BANKING A PROJECT ON CERDIT RISK MANAGEMENT
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The Indian Banking Industry has Reserve Bank of India as a regulatory authority. This is a combination of both Public Sector banks, Private Sector Banks, Co-operative Banks and Foreign Banks. The Private Sector Banks are again split into old banks and new banks.
Scheduled Banks in India Scheduled Commercial Banks Scheduled Co operative Banks Public Sector Banks Private Sector Banks Foreign Banks in India Regional Rural Banks Nationalized Banks SBI and its Associates Old Private Sector Banks New Private Sector Banks A PROJECT ON CERDIT RISK MANAGEMENT
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The banking system in India has three tiers. They are, Scheduled Commercial Banks, the Regional Rural Banks, which operate in the rural areas, not covered by the scheduled banks and the Co operative and special purpose rural banks.
Public Sector Banks: Public Sector Banks are those in which the majority stake is held by the Government of India. Public Sector Banks together makeup the largest category in the Indian Banking System. There are currently 27 Public Sector Banks in India. They include SBI & its six associates banks, 19 nationalized banks. Public Sector Banks have taken a lead role in branch expansion, particularly in the rural areas.
Regional Rural Banks: Regional Rural Banks (RRBs) were established during 1976-1987 with a view to develop the rural economy. Each RRB is owned jointly by the Central Government, concerned State Government and a sponsoring Public Sector Commercial Bank. RRBs provide credit to small farmers, artisans, small entrepreneurs and agricultural labourers.
Private Sector Banks: In these banks, majority of the capital is held by the private individuals and corporate. Not all private sector banks were nationalized in 1969 and 1980. The private banks which were not nationalized are collectively known as Old Private Sector Banks and include banks such as The Jammu and Kashmir Bank., Lord Krishna Bank Ltd etc. In July 1993, as a part of banking reform process and as a measure to induce competition in the banking sector, RBI permitted private sector banks to enter India
Foreign Banks: These are the banks having their Head Office in a foreign country but they operate through branches all across the world. RBI permits these banks to operate either through branches or through wholly owned subsidiaries. The primary activity of most of the foreign banks has been in the corporate segment. However, some of the foreign banks also have made consumer financing as a part of their portfolio.
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Co-operative Banks: Co-operative banks cater to the financing need of agriculture, retail trade, small industries and self employed businessmen in urban, semi urban and rural areas of India. A distinctive feature of the co operative credit structure in India is its heterogeneity. The structure differs across urban and rural areas, across state and loan maturity. Urban areas are served by Urban Co operative Banks (UCBs), whose operations are limited to one state or stretch across states.
RBI and National Agriculture and Rural Development Bank (NABARD) have taken number of measures in recent years to improve financial soundness of Co operative banks.
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COMPANY PROFILE [VIJAYA BANK, HEAD OFFICE, MG ROAD, BANGALORE]
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BACKGROUND AND INCEPTION OF THE COMPANY:
Vijaya bank was founded on 23 rd October 1931 by Late.Shri A.B.Shetty and other enterprising farmers in Mangalore, Karnataka. The objective of the founders was essentially banking habit, thrift and entrepreneurship among the farming community of Dakshina Kannada district in Karnataka. The bank became Scheduled Bank in 1958. Initially, the banks operations were confined to Dakshina Kannada district and were later extended to other parts in Karnataka, followed by expansion into other states.
Vijaya Bank steadily grew into a large All India bank, with nine smaller banks merging with it during 1963-68. The credit for this merger as well as growth goes to Late.M.Sunder Ram Shetty, who was then the Chief Executive of the Bank. The Bank was nationalized on 15 th April 1980. At the time of nationalization, the bank had 571 branches with a deposit base of 390.44 crores. The Bank has built a network of 1149 branches, 43 Extension Counters and 376 ATMs as at 31.12.2009, that span all 28 states and 4 union territories in the Country.
Each branch provides efficient and effective services and significantly contributes to the growth of the individual and the nation.
OVERVIEW:
Vijaya bank today is a PAN India Institution, serving the diverse sections of the society. The bank has built a network of 1512 branches, 48 extension counters AND 1528 ATMs, that span all 28 states and 4 union territories in the country. The bank has the highest number of branches in its home state Karnataka.
Vijaya Bank offers a bouquet of innovative and attractive products and services to the customers. Vijaya Bank also incorporated the latest technology to provide best service to its customers.
The Bank offers several technology products, such as ATMs, Cash Deposit Machines, Debit and Credit Cards, Internet Banking, Mobile Banking, Phone Banking, Funds Transfer A PROJECT ON CERDIT RISK MANAGEMENT
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through RTGS and NEFT tec. All Branches and offices are under RTGS/NEFT. The bank also offers RuPay cards to its customers.
The driving force behind Vjaya23 Banks every initiative has been its 12000 strong dedicated workforce.
MANAGEMENT:
Today living up to the ideals of the visionaries of the bank, the management includes dedicated professionals, who bring with them a considerable amount of expertise and experience in the banking industry.
The bank has a three tier Organization Structure: Head Office Regional Office Branches
The head office hosts various functional departments that are instrumental in policy formulations and monitoring of the performances of the regions and branches.
The Banks 24 Regional Offices exercise immediate supervision and control over the branches under their jurisdiction.
Directors (effective from 19-06-2012) RBI Nominee Director Smt. Suma Varma Chief General Manager Reserve bank of India.
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BOARD OF DIRECTORS:
Sl. No. Name of Directors Designation 1. Shri.V.Kannan Chairman & Managing Director 2. Shri.K.Ramadas Shenoy Executive Director 3. Shri.B.S.Rama Rao Executive Director 4. Smt.Suma Varma RBI Nominee Director 5. Shri.V.K.Chopra Govt. Nominee Director 6. Shri.P.Vaidyanathan Shareholder Director 7. Smt. Bharati Rao Shareholder Director 8. Shri. Ashok Gupta Non Official Director 9. Shri.Prakash Chandra Nalwaya Non Official Director 10. Shri.H.Harish Ballal Officer Employee Director 11. Shri.Y.Muralikrishna Workman Director
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VISION, MISSION AND QUALITY POLICY:
VISION Bank is professionally managed with a good track record of customer loyalty and consistent profitability. The bank has the resilience to face the new challenges successfully an achieve the goals in vision by its management. Adopting ethical management practices, bank reiterates its commitment to fulfill national and social priorities, present sound financial position and above all to improve and meet the challenges posed by a customer driven banking industry.
MISSION The mission statement of any organization generally represents its long term goals and strategies. Every organization must have its own mission, which describes present business scope of the organization.
The mission statement of the Vijaya Bank is To emerge as a prime national bank backed by modern technology meeting customers aspirations with professional banking services and sustained growth contributing to national development.
QUALITY POLICY The Quality Policy of the Vijaya Bank is of providing Quicker and Better service and thereby achieving Customer Satisfaction.
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PRODUCT/ SERVICE PROFILE:
Today, personal finance is the fastest growing segment of the banks credit deployment. Among personal banking products, loans to salaried class occupy a prominent place. With this backdrop this loan product has been modified from time to time. The purpose for which this loan scheme can be used are purchase household articles/consumer durables, Childrens Education, Marriage and thread ceremony of self/dependents, medical expenses for self/dependants, obsequies expenses, repairs to own house, and any other purpose as to the satisfaction of the sanctioning authority. The quantum of loan provided shall be to the maximum of 10 times of the monthly gross salary out of which, the overdraft component shall not exceed 5 times of the gross salary. The loan has to be repaid with interest with in 5 years.
SAVINGS AND DEPOSITS:
Savings Bank V Payroll Savings Bank Account V Genuth Savings Bank Account V Balika Savings Bank Account V Platinum Savings bank Account
Current Account V Platinum Current Account
Term Deposits Recurring Deposits V Genuth Unnathi Recurring Deposits Bank Account Vijayashree Units Fixed Deposits V Balika Deposit Jeevan Nidhi Deposit Capital Gain Scheme A PROJECT ON CERDIT RISK MANAGEMENT
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Vijaya Tax Savings Scheme V Cash Certificate.
LOANS AND ADVANCES:
Retail Lending Schemes Vijaya Home Loan Education Loan Education Loan Vocational and Training Courses Personal Loan Vehicle Loan Loans to Transport Operators V vehicle Jewel Loans Vijaya Gold Cash Credit V Reverse Mortgage Loans for Trader V Restaurant V Secured Overdraft V Rent Loan against property Loan for medical practitioners V Equip V CAHSEW VIAJAYA MANGALA
Government Sponsored Schemes Prime Minister Rozgar Yojana Golden Jubilee Rural Housing Scheme Differential Rate of Interest Scheme Swarna Jayanti Gram Swarozgar Yojana Scheme for Liberation of Rehabilitation of Scavenger A PROJECT ON CERDIT RISK MANAGEMENT
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Special Schemes for women Debt waiver and Relief Beneficiaries Online Retail Loans Facilities to Minority Communities Finance for Flour, Rice and Dal mills Advances to agriculture, SSI and others Non Fund based facilities Loans against securities.
NRI SERVICES:
International Banking NRI Services NRE Accounts NRO Accounts FCNR(B) Accounts Helpline for NRIs Resident Foreign Currency Deposit Account(RFC) Remittances Facilities Remit2India FOREX Branches FOREX Market Information Forex Rates Card Rates Treasury Services USA Patriot Act Wolfs berg AML Certificate Service Charges
CARD SERVICES: Domestic Cards A PROJECT ON CERDIT RISK MANAGEMENT
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VISA Classic Debit Card MasterCard Classic Debit Card Vijaya Platinum Card VISA Gold Credit Card Verified by VISA Cards Global Cards Master Card Global Credit Card VISA Classic International Card VISA City Specific Card VISA Doctors Card VISA Nurses Card
Debit Cards VISA Debit Cards Gift Card Rupay KC FI Guidelines New Offers V Care U Policy
HELP DESK Branches NRI branches ATM Centers Interest Rates Service Charges Customer Relations A PROJECT ON CERDIT RISK MANAGEMENT
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Contact us Citizen Charter Ombudsman Fair Practice Codes Model Policy Codes SSI Charter List of Documents Download Forms Mobile Banking Net Banking Aadhaar status VePass Book BCSBI Codes HO Personnel Department SC ST & OBC Cell Cash Deposit KIOSK
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AREAS OF OPERATION
State/Union Territories Number of Branches Andaman & Nicobar 2 Andhra Pradesh 146 Arunachal Pradesh 5 Assam 18 Bihar 22 Chandigarh 6 Chhattisgarh 20 Daman and Due 1 Delhi 64 Goa 9 Gujarat 85 Haryana 26 Himachal Pradesh 7 Jammu and Kashmir 3 Jharkhand 10 Karnataka 587 Kerala 108 Madhya Pradesh 42 Maharashtra 134 Manipur 5 Meghalaya 5 Mizoram 3 Nagaland 5 Orissa 12 Pondicherry 2 Punjab 36 Rajasthan 33 Sikkim 1 Tamil Nadu 109 Tripura 2 A PROJECT ON CERDIT RISK MANAGEMENT
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Uttar Pradesh 115 Uttaranchal 6 West Bengal 50
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INFRASTRUCTURAL FACILITIES:
The Vijaya Bank has following infrastructural facilities; 1. CBS Branches 2. ATMs 3. Total Branch Mechanization(TBM) 4. Video Conferencing in HO,RO, CO 5. Internet Facility 6. Data Warehousing and mining 7. Real Time Gross Settlement(RTGS) in CBS Branches 8. Foreign Exchange Business 9. Treasury and Investment 10. Credit and Debit Card 11. Security arrangement 12. Close circuit TV and Time clock facility 13. Communication facility with cash van during cash remittance 14. Installation of hotline with currency chest 15. Strong ad safe room for currency chest 16. The Access Control System at all currency chests has been further strengthened as per RBI guidelines 17. Burglar Alarm system all branches 18. Automatic fire alarm system in all CBS branches 19. Fire Proof cabinet in all CBS branches
Head Office of the Vijaya Bank is located in the heart of the Garden City Bangalore, MG Road. The bank is one of the few banks in the country which uses Finacle Software and has 100% implementation, which in turn helps the bank to serve its customers more efficiently.
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COMPETITORS INFORMATION:
All banks of India are the competitors for the Vijaya Bank. Following are the list of competitors;
State Bank of India and its Associate Banks State Bank of India State bank of Bikaner and Jaipur State Bank of Hyderabad State Bank of Indore State Bank of Mysore State Bank of Patiala State Bank of Saurashtra State Bank of Travancore
Other Public Sector Banks (Nationalized Banks) Allahabad bank Andhra Bank Bank of Baroda Bank of India Bank of Maharashtra Canara Bank Central Bank of India Dena Bank Indian Bank Indian Overseas bank Oriental Bank of Commerce Punjab and Sind Bank Punjab National Bank Syndicate Bank UCO Bank Union Bank of India A PROJECT ON CERDIT RISK MANAGEMENT
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United Bank of India
Private Sector Banks: HDFC Bank ICICI Bank Induslnd Bank Kotak Mahindra Bank Axis Bank (then UTI Bank) Yes Bank Karnataka Bank
Foreign banks: ABN-AMRO Bank Abu Dhabi Commercial bank ltd. American Express bank Ltd. Barclays bank PLC BNP Paribas Citi Bank DBS Bank Ltd Deutsche bank AG HSBC Ltd Standard Chartered Bank State Bank of Mauritius
Other Institutional Competitors: Industrial Development Bank of India (IDBI) Industrial Finance Corporation of India (IFCI) Export Import Bank of India (EXIM Bank) Industrial Reconstruction bank of India (IRBI) now (Industrial Investment Bank of India) National bank for Agriculture and Rural Development (NABARD) Small Industries Development Bank of India (SIDB) A PROJECT ON CERDIT RISK MANAGEMENT
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Strength SWOT ANALYSIS:
SWOT Analysis is a strategic planning method used to evaluate the Strengths, Weakness, Opportunities and Threats involved in a project or in a business venture.
Strengths
1. The factors that have contributed to the success of the Vijaya Bank is its workforce because the bank has highly educated workforce, young and energetic with in the age group of 25-45 years, this helps the junior employees to learn from the experience of the senior employees. 2. The Bank is professionally managed. The Bank is one of the few banks in India which gives importance to technology in order to serve its customer better. It in one the Banks to use Finacle Software. 3. The Banks Strength lie in the management capabilities, focused strategy, speedy decision making. 4. There has been expansion of branches and ATMs during the last few years. 5. The Banks provide good infrastructural facilities to its staff and help them to concentrate more on their job. 6. The bank also has introduced various schemes catering to various segments in the society. 7. The Banks also takes pride of providing best customer service.
Opportunities Weakness Threats SWOT A PROJECT ON CERDIT RISK MANAGEMENT
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Weakness
1. The weakness the bank includes that the bank has majority of the branches in the southern regions 2. The second weakness of the bank is that of its aging workforce 3. The aging workforce may not immediately accept the change and adopt it as compared to younger generation. 4. There are a few problems with employees union.
Opportunities
1. The growth potential or the opportunities are very huge as the bank had mainly concentrated on the southern region of the country in its earlier years it has the opportunity to expand its business to other parts of the country wherein it can increase its customer base. 2. The Bank also has introduced mobile banking, Internet Banking, besides launching value additions like SMS alerts & Customer Utility bill payment and Air Ticket Booking, Movie Ticket Booking, Mobile Recharge, Corporate Fund Transfer, Temple Donation, fees payment etc, which contributes to value added service which can retain customers. 3. Further, Bank is also tied up for providing information related to FOREX, Import Export and also trading. 4. Vijaya Bank is targeting the younger generation and corporate banking so that they will have a wide scope for getting lions share with a strategic planning.
Threats:
1. As the banks majority business comes from the south any effect to the company here would have an adverse effect on the performance of the bank. 2. The Bank is relatively smaller when compared to other banks like SBI. ICICI Bank and few other banks. A PROJECT ON CERDIT RISK MANAGEMENT
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3. Since it is a smaller bank when compared to mightier banks like SBI, Canara Bank, the bank is always under a threat of being over taken by other banks in the industry.
MCKENSYS 7S FRAME WORK:
Mckinsey & Companiesm7s framework provides a useful way of studying internal working of the organization. The model was developed by Tom Peter and Robert Waterman, consultants of Mckensys & Company. The 7s Model was first published by them in the article Structure is not organization (1980) and in the book The Art of Japanese Management (1981) and In search of Excellence. The Mckensy Consulting Firm identified strategy as only one of the seven elements exhibited by the best managed companies. Strategy, Structure and Systems can be considered as hardware of success while Style, Staff, Skills and Shared Values can be seen as Software. Companies. In which these soft elements are present, are usually more successful at the implementation of the strategy.
Structure Strategy Skill Staff Systems Style Shared Values A PROJECT ON CERDIT RISK MANAGEMENT
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The functioning of the Vijaya Bank can be better understood with help of the following 7s The 7s are: Structure Skill Style System Strategy Staff Shared Values
1. Structure: It prescribes the formal relationship that should exist among various positions and activities. It is the duty of the top management to design organization structure for an organization. It is one of the critical tasks. The designing of the super structure involves issues like division of organization tasks and allocation of responsibilities between various departments. The hierarchy of superior subordinate relationship are defined by the organization charts which are formal documents that indicate the chain of command and the titles that have been assigned to the managers and other personnels. Organization charts indicates the employees position in the hierarchy and their relationship with in an organization.
The Bank has a three tier Organization Structure: Head Office, Regional Office & Branches.
The Head Office hosts various functional departments that are instrumental in policy formulations and monitoring of performances of the regions and branches. The Banks 20 Regional Offices exercise immediate supervision and control over the branches under their jurisdiction.
2. Skill: Skills refer to the fact that, employees have the4 skills needed to carry out the companys strategies. Skillful employees are the assets of the organization. Skills of A PROJECT ON CERDIT RISK MANAGEMENT
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the employees may be improved by giving them necessary training. The Bank believes that skillful employees contribute to the success of the Bank.
Development if the Human Resource is an important factor for the development of any industry. Banking is not an exception to that. It involves various aspects like continuous training, rewards by way of promotion, appreciations etc. The Banks HRD policy is guided by the Chinese Proverb If you are planning for one year, grow rice. If you are planning for twenty years plant trees. If you are planning for centuries, develop men.
Vijaya Bank has designed various training programmes for different levels, which includes product training. Forex, Treasury, Assets Management trainings and exclusive leadership and decision making trainings for the top level.
The bank has well experienced trainers and also sometimes hires trainers from outside firms for specific training.
Thus, Vijaya Bank provides ongoing opportunities for its employees to groom their skill set and to upgrade with latest skills to be competent in the industry and serve its customer better.
3. Style: It is one of the 7s that a top management can use to bring about change in the organization. According to Mckensys Framework, becomes evident through the patterns of action taken by the members of the top management team over a period of time. The McKensys framework considers style as more than a style of management.
Vijaya Bank follows a Top to down style of management. It also works in a Participative Style. The decisions are taken by the top management concerning matters related to an organization.
The decisions relating to department matters are taken by the departmental heads. The Bank follows a democratic leadership style which allows the employees to take part in A PROJECT ON CERDIT RISK MANAGEMENT
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the decision making process. Employees are free to give any ideas, suggestions etc. for the betterment of an organization. This will be taken with active consultation with employees.
4. System: System means formal and informal procedures that govern everyday activities. The decision making systems within the organization can range from management institutions to structured computer systems and formal and informal procedures that govern everyday activities of the bank.
The system of Vijaya Bank includes Computer System Training System & Control System.
5. Strategy: Strategy means actions company plans in response to or anticipation of challenges in the external environment. The Vijaya Bank. In order to respond to the changes, has formed the following action plan with specific reference to product, pricing.
Action plans on products are: Expansion of Branches and ATM network Achieve 100% mobile banking Expand the Corporate Banking Targeting child banking as they can be future prospects
Action planning on pricing are: Provide best interest rates on deposits and attract more customers Provide home loan at a lower rate of interest.
The successful implementation of these strategies or action plans helps the banks to gain competitive advantage over other banks.
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6. Staff: Staff means that the organization has hired able people, trained them well and assigned them to the right jobs. Staffs are human resource working in an organization. They are responsible for carrying various activities in an organization effectively and efficiently. Vijaya Bank has well trained, devoted and skilled staffs who work very hard for the success of the bank. The number of people employed by the bank stands at around 12000 employees, of which 7000 includes the clerical, sub staff and 5000 officers.
7. Shared Values: Shared Values refer to the guiding concepts, values and aspirations that unite an organization in some common purpose. They guide employees of any organization towards valued behavior. Important concerns and goals that are shared by most of the people in a group, that tend to shape group behavior, and that often persist overtime even with changes in group membership. Shared Values originally called as super ordinate goals; it is the guiding concepts and principles of the organization values and aspirations, often unwritten. They are also the things that influence a group to work together for a common goal. It acts as a guiding concept, fundamental ideas around which a business is built. So, it must be simple, usually stated at the abstract level, have a great meaning inside the organization even though outsiders may not see or understand them.
Vijaya Bank goes for the following values: Customer Satisfaction Quick & better Service Loyal to the Customers Honesty
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FINANCIAL STATEMENT Balance Sheet Particulars 2013 2012 CAPITAL AND LIABILITIES Total Share Capital 1,695.54 1,695.54 Equity Share Capital 495.54 495.54 Share Application Money 0.00 0.00 Preference Share Capital 1,200.00 1,200.00 Reserves 3,863.11 3,279.15 Revaluation Reserves 0.00 277.53 Net Worth 5,558.65 5,252.22 Deposits 97,017.24 83,055.51 Borrowings 6,391.82 5,418.40 Total Debt 103,409.06 88,473.91 Other Liabilities & Provisions 2,014.05 2,037.88 Total Liabilities 110,981.76 95,764.01 ASSETS Cash & Balances with RBI 3,917.70 4,542.53 Balance with Banks, Money at Call 2,727.05 1,860.32 Advances 69,765.76 57,903.74 Investments 31,284.97 28,643.80 Gross Block 476.74 1,089.06 Accumulated Depreciation 0.00 602.11 Net Block 476.74 486.95 Capital Work In Progress 0.00 0.00 Other Assets 2,809.54 2,326.66 Total Assets 110,981.76 95,764.00 Contingent Liabilities 16,997.08 13,864.09 Bills for collection 0.00 3,630.44 Book Value (Rs) 87.96 76.17
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Profit & Loss Account Particulars 2013 2012 INCOME Interest Earned 9,051.88 7,988.13 Other Income 607.00 527.90 Total Income 9,658.88 8,516.03 EXPENDITURE Interest expended 7,173.88 6,084.59 Employee Cost 848.59 739.92 Selling and Admin Expenses 0.00 618.75 Depreciation 41.46 39.95 Miscellaneous Expenses 1,009.34 456.04 Preoperative Exp Capitalized 0.00 0.00 Operating Expenses 1,362.97 1,615.03 Provisions & Contingencies 536.42 239.63 Total Expenses 9,073.27 7,939.25 Mar '13 Mar '12
Net Profit for the Year 585.61 576.77 Extraordinary Items 0.00 4.23 Profit brought forward 934.97 911.96 Total 1,520.58 1,492.96 Preference Dividend 119.33 132.49 Equity Dividend 144.94 143.98 Corporate Dividend Tax 0.00 0.00 PER SHARE DATA (ANNUALIZED) Earning Per Share (Rs) 9.41 8.97 Equity Dividend (%) 25.00 25.00 Book Value (Rs) 87.96 76.17 APPROPRIATIONS Transfer to Statutory Reserves 297.32 236.54 Transfer to Other Reserves 0.00 -0.02 A PROJECT ON CERDIT RISK MANAGEMENT
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Proposed Dividend/Transfer to Govt. 264.27 276.47 Balance c/f to Balance Sheet 958.99 979.97 Total 1,520.58 1,492.96
Key Ratios Particulars 2013 2012 Current Ratio 0.73 0.03 Quick Ratio 37.98 31.78 Face Value 10.00 10.00 Dividend Per Share 2.50 2.50 Operating Profit Per Share (Rs) 11.23 10.36
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Theoretical Framework
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Credit: The word comes from the Latin word credere, meaning trust. When sellers transfer is wealth to a buyer who has agreed to pay later, there is a clear implication that the payment will be made at the agreed date. The credit period and the amount of credit depend upon the degree of trust.
The credit is an essential marketing tool. It bears the cost, the cost of the seller having to borrow until the customers payment arrives. Ideally, that cost is the price but, as most customers pay later than agreed, the extra unplanned cost erodes the planned net profit.
Introduction: Risk is a potential that events, either expected or unexpected, may have an adverse impact on the banks capital or earnings. Banks are now graduating from being financial intermediary to risk intermediary and hence there is a need to strike a balance between the two for achieving optimum trade off between risk and return. Greater the calculated and informed risk undertaken, higher the likely profits, as the profits is the successful reward for the risk undertaken in any business activity.
There are mainly there types of risks: Market Risk Credit Risk Operational Risk
Types of Financial Risks:
Financial Risks
Market Risk
Credit Risk Operational Risk A PROJECT ON CERDIT RISK MANAGEMENT
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Market Risk: Market risk is the risk of adverse deviation of the mark to market value of the trading portfolio, due to market environment, during the period required to liquidate the transactions.
Operational Risks: Operational risk is one area of the risk that is faced by all the organizations. More complex the organization, more exposed it would be to the operational risks. This risk arises due to the deviation from normal and planned functioning of the systems, procedures, technology and human failure of omissions and commissions. Result of deviation from normal functioning is reflected in the revenue of the organization, either by way of additional expenses or by way of losses of opportunity.
Credit Risk: Credit Risk is defined as the potential that a bank borrower or a counterparty will fail to meet its obligation in accordance with the agreed terms, or in other words, it is defined as the risk that a firms customer and the parties to which it has lent money will fail to make promised payments is known as Credit Risk.
The exposure to the credit risk is larger in case of financial institutions, such as, commercial banks. When firms borrow money, they in turn
expose lenders to the credit risk, the risk that a firm will default on its promised payments. As a consequence, borrowing exposes the firm owners to the risk that a firm will be unable to pay its debt and thus e forced to bankruptcy.
The progressive deregulation and liberalization of the Indian Financial Sector have offered banks tremendous business opportunities. At the same time, the increased competition has brought the exposure to various types of risks. The evolution of the new financial instruments in the market provides not only new opportunities for earning additional income, but also exposes the banks to new and greater risks, although some instruments allow the banks to hedge very risks. In such a scenario, it is essential to identify various risks to A PROJECT ON CERDIT RISK MANAGEMENT
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which banks business are exposed to, and formulate a policy to identify and quantify and mitigate these risks. Credit Risk Management at VIJAYA BANK
Credit Risks: Credit Risk is defined as the possibility of losses associated with diminution in the credit quality of the borrowers or counterparties. In a banks portfolio, losses stem from the outright default due to inability or unwillingness of a customer or a counterparty to meet commitments in relation to lending, trading, settlement and other financial transaction. Alternatively, losses result from reduction in portfolio value arising from actual or perceived deterioration in credit quality. The credit risks emanates from a banks dealings with an individual, corporate, bank, financial institution or a sovereign.
Credit Risk may take the following terms: In case of direct lending: principal/and or interest amount may not be repaid; In case of the guarantees or the Letters of Credit: funds may not be forthcoming from the constituents upon crystallization of the liability; I case of treasury operations: the payment or series of payments due from the counterparties under the respective contracts may not be forthcoming of ceases; In the case of securities trading business: funds/securities settlement may not be effected; In the case of cross border exposure: the availability and free transfer of foreign currency funds may either cease or restrictions may be imposed by the sovereign.
Scope of the Policy:
In nutshell this policy is designed to: Enhance the risk management capabilities to ensure orderly and healthy credit growth with in a bank Maintain overall asset quality Maintain Credit Risk exposure within acceptable paramaters/prudential exposures norms prescribed in a banks lending policy. A PROJECT ON CERDIT RISK MANAGEMENT
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Mitigate the reduce the risk associated with advances/lending by supporting/modifying/co-operating/fine-tuning the systems, procedures and controls. Manage the asset portfolio in an orderly manner the ensures, that a bank has adequate capital to hedge these risks.
Organizational set up: The organizational setup for the Credit Risk Management aspects is depicted as below
Board of Directors
Risk Management Committee of the Board (RMCB)
Credit Risk Management Committees
Risk Management Department
Role of the Board and RMCB: The Board of Directors is the ultimate authority in the bank to lay down the policies. The board can, however, form committees to oversee the risk management process, procedures and systems in the banks. Accordingly, the board has constituted a five member risk management committee of the Board with chairman and Managing Director as the head to oversee the policy and the strategy for implementation of Credit Risk Management system. In addition to the Executive Director, three independent Directors are also its members.
The RMCB shall oversee the risk management in the bank and provide directions on Credit Risk Management Systems, conduct and review of credit risk in the bank and suggest modifications in the role and responsibility of the Credit Risk Management Committee.
Credit Risk Management Committee: The role of the Credit Risk Management Committee, is mainly the implementation of the Credit Risk Management policy, comply with the directions of the Board and BMCB, overseeing the various risk management process and systems. Besides, it shall be responsible for laying down policy and Drawing up an MIS framework for Credit Risk Management and A PROJECT ON CERDIT RISK MANAGEMENT
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also monitor and manage the credit risk exposure of the bank. This committee would report to the Board/RMCB.
Credit Risk Management Framework: Credit Risk Management encompasses a host of management techniques, which help the bank in mitigating the adverse impact of credit risk. The Credit Risk Management Committee (CMRC) of a bank shall consist of the following members.
1. Chairman and Managing Director Chairman 2. Executive Director Member 3. General Manager-Risk Management Member 4. General Manager-Credit (O) Member 5. General Manager-Credit-R&R Member 6. General Manager-M.I.S Member 7. General Manager, Credit-Priority/Retail Member 8. General Manager, Credit-M.S.&C Member 9. Chief Vigilance Officer Invitee 10. Dy. General Manager-Risk Management Convener
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Risk Management Department:
The banks will have, at the functional level, a Risk Management Department (RMD) headed by an Executive in Top Management Cadre. The risk analysts / risk managers, Regional Risk Monitors / Officers covering credit, market and operational risks will report to the head of RMD
The RMD shall be responsible for identifying and assessing Bank Wide risks through the structured Risk Profile Template prescribed by the RBI or otherwise, and getting it vetted by Quality Assurance Team (specifically constituted for this purpose) and reporting to RBI at stipulated periodicity (presently on quarterly basis) the aspects pertaining to Credit Risk of the Bank.
The department shall review and adopt risk management systems, techniques and methodologies to identify, measure, manage and control the Credit Risk, and to review portfolio concentrations.
Credit Risk Rating: Risk rating reflects the underlying credit risk in the existing and or prospective exposure. The thrust area of the credit risk management is to measure, quantify, control as well as price the risk appropriately. Accordingly, Bank has implemented CRISIL Risk Rating software- Risk Assessment Model (RAM) for conducting risk rating of Retail and Non Retail Loans of the bank with exemptions for exposures fully secured by banks own deposits, gold & jewellery and staff loans.
RISK ASSESSMENT MODELS (RETAIL & NON RETAIL) The following modules are provided by CRISIL as part of their Risk Assessment Model:
Non-Retail Exposures: A. Simple Model for loans for Rs.2 lakhs and below (Hosted under Retail Scoring Models) A PROJECT ON CERDIT RISK MANAGEMENT
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B. Rating Model I- For exposure above Rs.2 lakhs and up to RS.1Crore for existing borrowers C. Rating Model II For exposure above Rs.2lakhs and up to Rs. 1Crore for new borrowers. D. In respect of loans beyond Rs. 1 Crore sector specific models are as follows: 1. Large Corporate With Projects, Without Projects, Green Field Projects 2. Large Trader 3. Bank 4. NBFC 5. SME (Manufacturing) 6. SME (Traders) 7. SME (Services) 8. Real Estate Developers 9. Brokers 10. Infrastructure Projects- Port 11. Infrastructure Projects- Road 12. Infrastructure Projects- Telecom 13. Infrastructure Projects- Power 14. Infrastructure Projects- Airport 15. Micro Financing Institutions 16. Sovereign Ratings 17. Object Finance
Retail Exposures: Retail Models are designed in respect of following type of retail sector 1. Home loans 2. Vehicle Loans 3. Personal Loans 4. Credit Cards 5. Educational Loans 6. Agriculture- Crop Loans 7. Agriculture- Tractor Loans A PROJECT ON CERDIT RISK MANAGEMENT
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8. Government Sponsored Schemes 9. Self Help Groups 10. Behavioral Models for all the above modules.
The Bank has put in place the credit risk rating framework as detailed below Sl No. Particulars Rating Model To be rated at pre sanction level by To be approved by 1. Retail Loans Retail Model of CRISIL RACPC/Branches in the absence of RACPC In the CRISIL rating software by the authority other than sanctioning authority at the pre sanction level and to be reviewed by the reviewing authority at the time of review of sanction 2. Non Retail Loans above Rs. 2 lakhs and below Rs. 1 crore Manual Model of bank customized by CRISIL Official Processing of the proposal at the branches/ ROs Authority other than sanctioning authority at pre sanction level 3. Non Retail loans of Rs. 1 crore and above and up to Rs 7.5 Crore CRISIL Model (RAM) Risk Rating Team at RO AGM/DGM, RMD at pre sanction level i.e. level 2 in CRISIL software. 4. Non Retail Loans above Rs.7.5 Crore CRISIL Model (RAM) Risk Rating Team at RMD, HO DGM/GM, RMD at pre sanction level i.e. level 2 in CRISIL Software
Adoption of External Credit Ratings:
External Credit Rating: In respect of credit risk, RBI has allowed the banks to adopt standardized Approach, in which the risk weights are allocated for the banks claims on corporate, Public Sector Entities and Exposures on Asset Finance Companies (AFCs), NBFC-IFC (Infrastructure Finance Companies) based on the credit ratings carried out by the recognized Credit Rating Agencies for this purpose.
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The Bank shall adopt Standardized Approach initially to estimate the capital for credit risk based on External Credit Assessment, and through this policy, bank has put in place a framework containing detailed operational guidelines which should be adhered during credit evaluation and capital calculation process under BASEL II
Eligible Credit Rating Agencies:
In line with the final guidelines of RBI on BASEL II norms, ratings assigned by an eligible credit rating agencies is the basis for assigning the risk weight of the claim in respect of certain category of exposures.
In accordance with the principle laid down in the revised framework, the RBI ahs decided that banks may use the ratings of following domestic credit rating agencies for the purposes of risk weighting their claims for capital adequacy calculations. Accordingly the bank shall use the following rating agencies` external credit assessment for the purpose of risk weighting our claims on Corporate, Public Sector Entities, exposures on Asset Finance Companies (AFCs) and exposures to NBFC-IFCs (Infrastructure Finance Companies).
Domestic Exposure: a. Credit Analysis and Research Limited (CARE); b. CRISIL Limited (CRISIL) ; c. FITCH India (FITCH) ; and d. ICRA Limited (ICRA). e. Brickworks Ratings India Pvt Limited. f. SMERA (SME Rating Agency of India Ltd)
The RBI has decided that banks may use the ratings of the following international credit rating agencies for the purpose of risk weighting international (overseas) exposures for capital adequacy: Overseas Exposure a. Fitch b. Moodys; and A PROJECT ON CERDIT RISK MANAGEMENT
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c. Standard & Poors
Mapping Process:
Revised Framework recommends the development of a mapping process to assign the ratings used by eligible credit rating agencies to the risk weights available under the standardized risk weighting framework. The mapping process is required to result in a risk weight assessment consistent with that of level of credit risk. As suggested by CRISIL ltd in its rating model validation report, the existing mapping of internal rating with that of external rating based on predictive ability of capturing probability of default (PD) is mapped as under.
While carrying out rating in CRISIL RAM Model, it will be the endeavor to ensure the mapping of internal rating with the external rating. However, exception can be made based on banks own experience with the particular borrower, industry etc and judgment of the rating authorities.
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Long Term Ratings:
On the basis of the above factors as well as the data made available by the rating agencies, the ratings issued by the domestic credit rating agencies have been mapped to the appropriate risk weights applicable as per the Standardized Approach under the revised framework.
The rating risk weight mapping furnished in the table below shall be adopted by our bank:
Risk Weight Mapping of Long Term Ratings of the chosen domestic rating agencies:
Long Term Ratings of the chosen credit rating agencies operating in India Standardized Approach Risk Weights AAA 20% AA 30% A 50% BBB 100% BB & Below 150% Unrated * 100%
Where + or notation is attached to the rating, the corresponding main rating category risk weight should be used. For example: A+ or A- would be considered to be in the A rating category and assigned 50% risk weight.
If an issuer has a long term exposure with an external long term rating that warrants a risk weight of 150%, all unrated claims on the same borrower, whether short term or long term, shall also receive a 150 % risk weight, unless the bank uses recognized credit risk mitigation techniques for such claims.
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Short Term Ratings:
For risk weighting purpose, short term ratings are deemed to be issue specific. They can only be used to derive risk weights for claims arising from the rated facility. They cannot be generalized to other short term claims. In no event can a short term rating be used to support risk weight for an unrated long term claim. Short Term assessments may only be used for short term claims against banks and corporate.
The unrated short term claim on the borrower will attract risk weight of at least one level higher than the risk weight applicable to the rated short term claim on that borrower. If a short term rated facility to borrower attracts a 20% or 50% risk weights, unrated short term claims to the same borrower cannot attract risk weights lower than 30% or 100% respectively.
Similarly, if an issuer has a short term exposure with an external short term rating that warrants a risk weight of 150%, all unrated claims on the same borrower, whether long term or short term, should also receive a 150% risk weight, unless bank has recognized Credit Risk Mitigation techniques for such claims.
In respect of the issue4 specific short term ratings the following risk weight mapping shall be adopted by the bank as provided in the table below.
Risk weight Mapping of the Short Term Ratings of the domestic rating agencies: Short Term Ratings Risk Weights CARE CRISIL FITCH ICRA BRICKWORK SMERA Care A1 Crisil A1 Fitch A1 Icra A1 BWR A1 SERA A1 20% Care A2 Crisil A2 Fitch A2 Icra A2 BWR A3 SERA A2 30% Care A3 Crisil A3 Fitch A3 Icra A3 BWR A4 SERA A3 50% Care A4 Crisil A4 Fitch A4 Icra A4 BWR A5 SERA A4 100% Care D Crisil D Fitch D Icra D BWR D SERA D 150% UNRATED 100%
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The above risk weight mapping of both long term and short term ratings of the domestic rating agencies would be4 reviewed annually by the Reserve Bank.
Credit Risk in the Investments:
As certain magnitude of the credit risk is inherent in the investment portfolio, the proposals for the investment shall be subjected to same degree of credit risk analysis as any loan proposal. These proposals shall be subjected to a detailed appraisal and rating framework that factors in financial and non financial parameters. As stipulated by the Investment Policy, the entry level rating by external agencies, limits for the industry, maturity, duration etc shall be ensured in respect of investment proposals. There should ne a greater interaction between credit and treasury department to monitor the total exposure taken by the bank and the portfolio reviews cover total exposure, including investments.
Credit Risk in Off Balance Sheet Exposure: As a part of the overall credit risk mitigation, the bank adopts adequate framework as suggested in the investment policy for managing exposure in off balance sheet products/exposure with respect to directive contracts. The bank shall ensure that the exposure is within the limit fixed/ allowed with suitable hedging mechanism to avoid related risk in the process. As regards entertaining other credit related off balance sheet exposures, such as guarantees, Letters of Credit & other obligation, the proposal shall be subjected to usual credit risk appraisal, in compliance with various limits stipulated in the Lending Policy.
Credit Risk in Inter Bank Exposure: In the course of normal business, emanating from trade transactions, money placements in treasury management, the bank assumes exposures on other banks, thereby entailing and exposing the bank towards credit risk in inter bank exposure. The bank has already put in place a system for regular monitoring of exposure limits to banks/ financial institutions/primary dealers at Integrated Treasury Management Department.
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Analysis and Interpretation
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An internal ceiling, in tune with the risk rating of the borrower under each of the rating category is fixed as under:
To the Single Borrowers Permissible Exposure as % of Capital Funds SL no. Vijaya Bank Rating Grade Investment Grade Safety Level General Category Exceptional Circumstances with board approval Infrastructure Exceptional Circumstances for Govt. Infrastructure with Board Approval 1 VB1 Highest Safety 15.00% 20.00% 20.00% 25.00% 2 VB2 High Safety 12.50% 17.50% 17.50% 22.50% 3 VB3 High Safety 12.50% 17.50% 17.50% 22.50% 4 VB4 Adequate Safety 10.0% - 15.00% - 5 VB5 Moderate Safety 10.00% - 15.00% - 6 VB6 Moderate Safety 10.00% - 15.00% - 7 VB7 Minimum Safety 7.50% - 12.50% - Sub Investment Grade
8 VB8 Inadequate Safety 9 VB9 High Risk 10 VB10 Default No additional/Fresh exposures shall normally be granted on accounts rated below VB8, VB9 & VB10, in respect of new borrowers as well as existing borrowers. Conscious efforts are to be made to reduce the existing exposure gradually. A PROJECT ON CERDIT RISK MANAGEMENT
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CASE 1: Model name : Lager Corporate Model Company Name : ACB Electricals Limited Industry Name : Engineering Assessment Type : Company without Project
Rating Summary: Borrower Rating Score Previous Score Rating From Score To Score Rating Class Single Scale Rating 8.54 8.80 VB1 8.50 10.00 Investment Grade- Highest safety
Note: Borrowers rated VB1 are judged highest safety of timely payment.
Band Rating Grade Description 8.5-10.00 VB1 LC I Investment Grade-Highest Safety 7.5-8.5 VB2 LC II Investment Grade-High Safety 6.5-7.5 VB3 LC III Investment Grade-High Safety 5.75-6.5 VB4 LC IV Investment Grade-Adequate Safety 5.00-5.75 VB5 LC V Investment Grade-Moderate Safety 4.25-5.00 VB6 LC VI Investment Grade-Moderate Safety 3.50-4.25 VB7 LC VII Investment Grade-Minimum safety 2.50-3.50 VB8 LC VIII Sub-Investment Grade-Inadequate Safety 1.50-2.50 VB9 LC IX Sub-Investment Grade-High Risk 0.00-1.50 VB10 LC X Default
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The Company has scored as below in various risk categories: Company Rating is 8.54 Actually Scored by the company is as under: Industry Risk 5.81 Management Risk 8.89 Financial Risk 8.83 Business Risk 9.35
Analysis and Interpretation:
In the above summary table, the Company has scored above the minimum prescribed limit of 8.50 in all the previous years. As a result, the Company has been given a rating of VB1 In the case of borrower rating, though the companys current score has slipped to 8.54 from the previous score of 8.80, still the company has managed to score above the prescribed limit of 8.5. And thus, it scored Highest Safety Investment Category in its Rating Class.
0 1 2 3 4 5 6 7 8 9 10 Industry Risk Management Risk Financial Risk Business Risk 5.81 8.89 8.83 9.35 A PROJECT ON CERDIT RISK MANAGEMENT
Facility Type Grade Fund Based FR3 Non Fund Based FR3 Combined FR3
Score Sheet for ACB Electricals Limited: Risk Parameter Name Division Value Score Grade Strength/ Weakness Type: Company Industry Risk 5.81 IV Return on Capital Employed 10 Business Risk 9.35 I Operating Efficiency 9.40 S Bargaining Power with Suppliers 10 S Access to cost effective technology 10 S Availability of skilled labour 8 S Market position 9.30 S Brand Equity 10 S Project Management Skills 8 S After sales service 10 S
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Analysis & Interpretation: In this case, the business risk scores 9.35 as against stipulated company rating of 8.54 and thus the company is in a better position. Anything lower than 8.54 would put the company to the downgrade position. In case of bargaining power, since the company is the sole buyer from its supplier it enjoys highest scoring of 9.35 as other buyers cannot have influence over the company. Use of the most modern advanced technology, leading to operating costs being significantly lower than the industry norms Presence of extremely strong brands in the portfolio leads to sales being driven by the branded products As the company has a very good track record of timely, cost bound project but has suffered slight overruns in a few projects. Distribution backed by widespread after sales service network. Coverage and quality of sales support offered by the company regarded as the best in the industry.
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Financial Risk:
Risk Parameter Name Division Value Score Grade Strength/ Weakness Financial Risk 8.83 I Past Financials 13.89 10 S Total Outside Liabilities/Total Net worth past (Ratio) 1.38 6 Net Cash Accruals/Total Debt- Past (Ratio) 0.57 10 S Current Ratio-(Past) 1.43 9 S Interest Coverage Ratio-(Past) 83.91 10 S DSCR Past Ratio 24.90 10 S Net worth (past) 2,871,181.00 10 S ROCE Past % 21.98 10 S
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Analysis and Interpretation: Since the company scores 8.83 above the limit prescribed by the bank, it gets grade I in the financials satisfying the all requirements. Past financials has been pretty good of the company and is reflected in its rating of 9.29 and the being the strength of the company. Total outside Liability to Total Net Worth of a company scored 6.00. It states that that Net Worth of the company to Total outside Liability is slightly not up to the mark. Net Cash Accruals to Total Debt scored 10.00 which mentions cash accruals are very satisfying. Current ratio, Interest Coverage Ratio, DSCR, Net Worth, ROCE-all past scored 9, 10, 10, 10, 10 respectively adding to the strength of the company.
Management Risks:
Risk Parameter Name Division Value Score Grade Strength/ Weakness Management Risk 8.89 I Management 9.66 S Working Capital Management 8 S Corporate Governance 10 S Experience in the industry 10 S Managerial Competence 10 S Business & Financial Policy 10 S Ability to meet the sales projection 8 S Ability to meet the profit projection 6 Past Payment Record 10 S Past payment & track record 10 S
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Analysis and Interpretation: Management Risk scores 8.89 well above the limit. Companys management being good at the top level has scored a 9.66 rating as against the rating norms Working Capital Management has got the rating of 8.00 signifying the efficient working capital management by the company. The capability of the company with respect to wealth creation for all stakeholders while adopting sound corporate governance practices is the highest. Top Management is very highly experienced in the industry. Senior Management personnel are considered as among the most knowledgeable in the industry. Management is highly qualified, and perceived to be of exceptional quality. The quality of senior personnel provides the company a definite competitive advantage. Extremely conservative management.. Diversifications, if any, are in related areas, and have been implemented in a phase wise manner, so as to avoid strain on existing cash flows. The company avoids high risk investments. The company has been able to meet the sales target adding to the competitive advantage.
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Facility Gradation:
Score Grade Description 5.00 FR1 The % effective Loss Given Default (LGD) is none or the least suggesting that at the event of default the loss to bank is least or none. 20.00 FR2 The % effective Loss Given Default (LGD) is marginally more than that calculated for FR1 grade suggesting that at the event of default the loss to the bank will be minimal 35.00 FR3 The % effective Loss Given Default (LGD) is slightly more than that calculated for FR 2 grade suggesting that at the event of default the banks losses are marginally higher than the FR2 Grades. 50.00 FR4 The %effective Loss Given Default (LGD) is slightly more than that calculated for FR3 Grade suggesting that at the event of default the banks losses are marginally higher than FR3 grades 65.00 FR4 The % effective Loss Given Default (LGD) is significant. 75.00 FR6 The % effective Loss Given Default (LGD) though slightly lesser than the facilities rated as FR 7 , the bank is exposed is significant losses at the event of default 85.00 FR7 The % effective Loss Given Default (LGD) is marginally lesser than the facilities rated as FR8 suggesting that at the event of losses the bank is exposed to huge losses. 95.00 FR8 The % effective Loss Given Default (LGD) is the highest suggesting that at the event of losses the banks losses will be maximum.
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Combined Gradation:
Score Grade Description 0.00 CR1 The Expected Loss is nil or least suggesting that at the event of default loss to bank is least or none. 0.14 CR 2 The Expected Loss is marginally more than that calculated for CR1 grade suggesting that at the event of default loss to the bank will be minimal 0.44 CR3 The Expected Loss is slightly more than that calculated for CR 2 grade suggesting that at the event of default the banks losses are marginally higher than the CR 2 Grade. 1.29 CR4 The Expected Loss is slightly more than that calculated for CR 3 grade suggesting that at the event of default the banks losses are marginally higher than the CR 3 Grade 2.89 CR 5 The Expected Loss is at the moderate levels 5.27 CR 6 The Expected Loss is higher than that calculated for CR 5 Grades 13.21 CR 7 The Expected Loss is significant. 24.66 CR 8 The Expected Loss is on the higher side 28.64 CR9 The Expected Loss is marginally lesser than the facilities rated as CR 10 suggesting that at the event of default the bank is exposed to huge losses 100.00 CR 10 The Expected Loss is the highest suggesting that at the event of default the loss to the bank is maximum.
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CASE 2 Company Name : PQR Energy Limited Industry Name : Power Generation- Private Assessment Type : Company with Project
Rating Summary: Borrower Rating Score Previous Score Rating From Score To Score Rating Class Single Scale Rating 4.38 5.00 VB8 3.75 5.00 Sub- Investment Grade- Inadequate Safety
Note: Borrowers rated VB8 are judged to carry inadequate safety of timely payment. While they are less susceptible to default than VB9 grade in the immediate future.
The Company has scored as below in various risk categories: Project Rating is 4.38 Actually Scored by the company is as under:
Industry Risk 8.00 Business Risk 3.62 Completion Risk- Build Phase 3.05 Financial Risk- Build Phase 5.01 Stabilization Risk-Build Phase 2.00 Other Key Risks 5.00 Execution Risks- Build Phase 2.90
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Facility Rating % Effective LGD EL% Obligor Rating Facility Rating Combined Rating Other Term Loans 58.65 14.47 VB8 FR4 CR7
Facility Type Grade Fund Based FR4 Combined FR4
Score Sheet for PQR Energy Limited: Risk Parameter Names Division Value Score Grade Strength/Weaknes s Type: Project Industry Risk 8.00 II Demand Supply Gap 8.00 S Impact of Govt. Regulation 8.00 S
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Business Risk: Risk Parameter Names Division Value Score Grade Strength/Weakness Business Risk 3.62 VII Market Position 2.73 W Counterparty Risk 4 W Operating Efficiency 4.00 W Plant Load Factor 4 W Operation & Maintenance Risk 4 W
Analysis and Interpretation: Business Risk parameter scores 3.62 as against 4.38 prescribed by the bank and thus is in the weaker position as of now Market Position and counter party risk is at 2.73 & 4 which is again weaker for the company as a result has scored 2.73 & 4.00 well below the limit. Operating efficiency, Plant Load Factor, Operation & Maintenance Risk scores 4.00 each signifying its weakness.
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Completion Risk Build Phase Risk Parameter Names Division Value Score Grade Strength/Weakness Completion Risk- Build Phase 3.05 P3 Key Completion Risk- Build Phase 3.08 W Gestation Period 2.00 W Funding Risk-Build Phase 3.00 W Financial Flexibility- Build Phase 3.00 Clearances 3.00
Analysis and Interpretation: Completion Risk is well below 4.38 as specified by the bank as the company has scored 3.05. it highlights the weakness of the company in its management. Gestation Period has scored just 2.00 less that half of the specified rate Funding Risks has moderate hurdles being faced/ expected for tie up of the funds. Financial Flexibility scores 3.00 as it has sponsors with moderate ability to raise additional funds from various sources including own sources.
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Execution Risk- Build Phase:
Risk Parameter Names Division Value Score Grade Strength/Weakness Execution Risk Build Phase 2.90 P3 Construction- Build Phase 2.58 W Contractor Creditworthiness- Build Phase 3.00 Safeguards in Contracts- Build Phase 3.00 Technology Build Phase 3.00 Reputation of Design Consultant- Build Phase 4.00 S
Analysis and Interpretation: Execution Risk has scored a 2.90 of the company that tell the bank that the company I sure to face the hurdles in its execution leading to risk in payments 0 0.5 1 1.5 2 2.5 3 3.5 4 A PROJECT ON CERDIT RISK MANAGEMENT
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Even during the construction phase, the company scores 2.58 below the limit specified by the bank and again revealing the weakness in the construction. Contractors Creditworthiness being moderate has scored 3.00 The contracts as it is with minimal level of safeguards, scores only 3.00 In terms of technology, even though the company has with it proven technology, it has some limitations associated with the technology as a result of which it has been able to score 3.38 While in Reputation of a design consultant, it scores 4.00 and that being the strength of the company.
Financial Risk- Building Phase:
Risk Parameter Names Division Value Score Grade Strength/Weakness Financial Risk- Building Phase 5.01 V Degree of exposure to Interest Risk/ Currency Risk Build Phase 2.00 W Breakeven- Build Phase 8.57 S DSCR- Build Phase 4.29 S Internal Rate of Return- Build Phase 4.29 S Debt/Equity Ratio- Build Phase 5.71 S Sensitivity to Revenue- Build Phase 5.71 S Sensitivity to Project Cost- Build Phase 5.71 S
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Analysis and Interpretation: Financial Risk has scored 5.01 as it is with moderate safety and securing grade V Degree of exposure to Interest Risk/ Currency Risk is at mere 2.00 highlighting the weakness and its instability Breakeven scored the highest with a rating of 8.57 showing companys ability to recover the costs DSCR with a rating of 4.29 is also at the safer level IRR also has scored a rating of 4.29 showing its position in its returns Debt to Equity ratio has a well balanced ratio and has scored 5.71 and that being the strength of the company Sensitivity to revenue has 5.71 scoring that says that the company in not so sensitive during building phase. Sensitivity to project cost is at 5.71 score that tell that the company is pretty well insulated from sudden hikes in the cost of project in the market.
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Facility Gradation: Score Grade Description 5.00 FR1 The % effective Loss Given Default (LGD) in none or the least suggesting that at the event of default the loss to the bank is least or none. 20.00 FR2 The % effective Loss Given Default (LGD) in marginally more than that calculated for FR1 Grade suggesting that at the event of default the loss to the bank is minimal 35.00 FR3 The % effective Loss Given Default (LGD) in slightly more than that calculated for FR2 Grade suggesting that at the event of default the loss to the bank is marginally higher than the FR2 Grades 50.00 FR4 The % effective Loss Given Default (LGD) in slightly more than that calculated for FR3 Grade suggesting that at the event of default the loss to the bank is marginally higher than the FR3 Grades 65.00 FR5 The % effective Loss Given Default (LGD) is significant 75.00 FR6 The % effective Loss Given Default (LGD) though slightly lesser than the facilities rated as FR7, the bank is exposed to significant losses at the event of default 85.00 FR7 The % effective Loss Given Default (LGD) is marginally lesser than A PROJECT ON CERDIT RISK MANAGEMENT
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the facilities rated as FR8 suggesting that at the event of default the bank is exposed to huge losses. 95.00 FR8 The % effective Loss Given Default (LGD) is the highest suggesting that at the event of default the loss to the bank is maximum
Combined Gradation: Score Grade Description 0.00 CR1 The Expected Loss is nil or least suggesting that at the event of default the loss to the bank is least or none. 0.14 CR2 The Expected Loss is marginally more than that calculated for CR1 grade suggesting that at the event of default the loss to the bank is minimal 0.44 CR3 The Expected Loss is slightly more than that calculated for CR2 grade suggesting that at the event of default the loss to the bank is marginally higher than the CR 2 Grades 1.29 CR4 The Expected Loss is slightly more than that calculated for CR3 grade suggesting that at the event of default the loss to the bank is marginally higher than the CR3 Grades 2.89 CR5 The Expected Loss is at moderate levels 5.27 CR6 The Expected Loss is higher than that calculated for CR5 grades. 13.21 CR7 The Expected Loss is significant 24.66 CR8 The Expected Loss is on the Higher side 28.64 CR9 The Expected Loss is marginally lesser than the facilities rated as CR10 suggesting that at the event of default the bank is exposed to huge losses 100.00 CR10 The Expected Loss is the highest suggesting that at the event of default the loss to the bank is maximum
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CASE 3 Model Name : Infrastructure Model- Power Company Name : JKL Power Limited Industry Type : Infra Power Generation Central Utilities Assessment Type : Build Phase Project Industry Name : Infra Power Generation Central Utilities
Rating Summary: Borrower Rating Score Previous Score Rating Form Score To Score Rating Class Single Scale Rating 6.25 6.25 VB6 6.25 8.00 Investment Grade- Moderate Safety
Note: Borrower rated VB6 are judged to offer moderate safety of timely payment of interest and principal for the present. There is only a marginal difference in the degree of safety provided by borrowers rated VB5
The Company has scored as below in rating: Project Rating is 6.50 Industry Risk 8.00 Business Risk 5.87 Completion Risk- Build Phase 3.45 Financial Risk- Build Phase 5.90 Stabilization Risk- Build Phase 3.00 Execution Risk- Build Phase 3.55
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Facility Rating % Effective LGD EL % Obligor Rating Facility Rating Combined Rating Other Term Loans 51.62 2.73 VB6 FR4 CR4 Bank Guarantee Others 46.46 2.45 VB6 FR3 CR4
Facility Type Grade Fund Based FR4 Non Fund Based FR3 Combined FR3
Score sheet for JKL Power Limited: Risk Parameter Names Division Value Score Grade Strength/Weakness Industry Risk 8.00 II Demand Supply Gap 8.00 S Impact of Govt. Directives 8.00 S
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Business Risk:
Risk Parameter Names Division Value Score Grade Strength/Weakne ss Business Risk 5.97 IV Market Position 6.50 Cost Base of the Project 6.00 Operating Efficiency 5.60 Plant Load Factor 6.00 Plant availability factor 4.00 W Operation and maintenance Risk 6.00 Fuel Risk 6.00
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Analysis and Interpretation: The Business scores 5.87 as it is with minimum safety in the said project. Market position and Counter Party risk has scored 6.5 and 6.00 which is reasonable in the above table. Cost base of the project, since it is moderately competitive but not clearly best cost among the industry, it scores 6.00 Operating efficiency of the project stands at 5.60 which is not efficient enough that calls for improved efficiency Plant Load Factor, since it ranges between 60% -70%, it scores 6.00 and is needed to improve on this. Plant availability factor, since it has no other units elsewhere it scores 4.00 and is at the weakest point. Operational and Maintenance risk scores 6.00 with reasonable maintenance. Fuel Risk, as there is a smooth supply of quality fuels it scored 6.00.
Completion Risk Build Phase Risk Parameter Names Division Value Score Grade Strength/Weakness Completion Risk- Build Phase 3.75 W Gestation Period- Build Phase 4.00 S Clearance- Build Phase 4.00 S Funding Risk- Build Phase 3.00 W Financial Flexibility- Build Phase 3.00 Transparency in bidding process- Build Phase 3.00
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Analysis and Interpretation: Completion Risk in the build phase scored mere 3.45 and is the weakest and also reveals the completion to be hit with uncertainties. Gestation period- build phase stands at 4.00 as it ranges between 6-12months Clearances during the build phase- All the critical and the most significant clearances are obtained. Very few clearances are pending which are in the final stage of being procured. Funding Risk scored 3.00 which is at its weakest as it is a new project, there is a bit of reluctance in lending funds to the company. Financial Flexibility scored same score of 3.00 as above as the sponsors with moderate ability to raise additional funds from various sources including own sources. Transparency in bidding- As it lacks transparency in certain aspects which may lead to undue favour to same players.
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Execution Risk- Build Phase
Risk Parameter Names Division Value Score Grade Strength/Weakne ss Execution Risk 3.80 Construction- Build Phase 3.67 W Contractor Credit Worthiness- Build Phase 3.00 Safeguards in the contracts Build Phase 4.00 S Technology- Build Phase 3.38 W Reputation of a Design Consultant- Build Phase 4.00 S Contactor Experience- Build Phase. 4.00 S
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Analysis and Interpretation: Execution Risk scored 3.55 and highlights it is a sub investment grade category Construction Risk scored 3.67 which is also weaker which is alarming Safeguards in the contracts, as it ensures high level of safeguards, it scored good ratings. As there are some limitations associated with the technology it is weak in this project. Since the Reputation of a design consultant is well established name in the country, it scored better. As the contractor has reasonably good experience in the projects of similar nature, it proves to be strength of the company.
Stabilization Risk- Build Phase:
Risk Parameter Names Division Value Score Grade Strength/Weakne ss Stabilization Risk- Build Phase 3.00
Financial Risks-Build Phase: Risk Parameter Names Division Value Score Grade Strength/Weakne ss Financial Risk- Build Phase 5.90 Degree of exposure to Interest risk / Currency Risk 4.00 S Breakeven Build Phase 10.00 S DSCR- Build Phase 5.71 S Internal Rate of Return- Build Phase 7.14 S Debt/Equity Ratio- Build Phase 2.86 Sensitivity to revenue- Build Phase 5.71 S Sensitivity to Project Cost- Build phase 5.71 S A PROJECT ON CERDIT RISK MANAGEMENT
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Analysis and Interpretation: Financial Risk scored 5.90 which is below the prescribed rating of 6.25 and is slightly weaker in financial terms. Degree of exposure to interest risk/ currency risk is the strength of the company as it scored 4.00 Breakeven scored rating of 10.00 which is quite a good strength. DSCR ratio got a rating of 5.71 IRR was rated 7.14 being the strength of the project Debt / Equity ratio is not so strong that reveals that the project debt equity composition is not appropriate. Sensitivity to revenue is strong enough of the project and is not vulnerable for the external factors that would hamper the revenue yielding capability of the project.
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Score Grade Description 5.00 FR1 The % effective Loss Given Default (LGD) is none or the least suggesting that at the event of the default the loss to the bank is least or none 20.00 FR2 The % effective Loss Given Default (LGD) is marginally more than that calculated for FR1 grade suggesting that at the event of default the loss to the bank will be minimal 35.00 FR3 The % effective Loss Given Default (LGD) is slightly more than that calculated for FR2 grade suggesting that at the event of default the banks losses are marginally higher than the FR2 grades 50.00 FR4 The % effective Loss Given Default (LGD) is slightly more than that calculated for FR3 grade suggesting that at the event of default the banks losses are marginally higher than the FR3 grades 65.00 FR5 The % effective Loss Given Default (LGD) is significant. 75.00 FR6 The % effective Loss Given Default (LGD) though slightly lesser than the facilities rated as FR7, the bank is exposed to significant losses at the event of default. 85.00 FR7 The % effective Loss Given Default (LGD) is marginally lesser than the facilities rated as FR8, suggesting that at the event of default the bank is exposed to huge losses 95.00 FR8 The % effective Loss Given Default (LGD) is highest suggesting that the loss to the bank is maximum at the event of default
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Combined Gradation:
Score Grade Description 0.00 CR1 The Expected Loss is nil or least suggesting that at the event of default the loss to the bank is least or none 0.14 CR2 The Expected Loss is marginally more than that calculated for CR1 grade suggesting that at the event of default loss to the bank will be minimal 0.44 CR3 The Expected Loss is slightly more than that calculated for CR2 grade suggesting that at the event of default the banks losses are marginally higher than the CR2 grades. 1.29 CR4 The Expected Loss is slightly more than that calculated for CR3 grade suggesting that at the event of default the banks losses are marginally higher than the CR3 grades. 2.89 CR5 The Expected Loss is at moderate levels 5.27 CR6 The Expected Loss is higher than that calculated for CR5 grade 13.21 CR7 The expected loss is significant 24.66 CR8 The Expected Loss is on the higher side 28.64 CR9 The Expected Loss is marginally lesser than the facilities rated as CR10 suggesting that at the event of default the bank is exposed to huge losses 100.00 CR10 The Expected Loss is the highest suggesting that at the event of default the loss to the bank is maximum
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APPLICATION OF ALTMAN Z SCORE.
Definition of 'Altman Z-Score'
The output of a credit-strength test that gauges a publicly traded manufacturing company's likelihood of bankruptcy. The Altman Z-score is based on five financial ratios that can be calculated from data found on a company's annual 10K report. The Altman Z-score is calculated as follows:
Z-Score = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E Where, A = Working Capital/Total Assets B = Retained Earnings/Total Assets C = Earnings Before Interest & Tax/Total Assets D = Market Value of Equity/Total Liabilities E = Sales/Total Assets
A score below 1.8 means the company is probably headed for bankruptcy, while the companies with scores with above 3.00 are not likely to go bankrupt.
NYU Stern Finance Professor, Edward Altman, developed the Altman Z-score formula in 1967. In 2012, he released an updated version called the Altman Z-score Plus, that can be used to evaluate both public and private companies, both manufacturing and nonmanufacturing companies and both U.S. and non-U.S. companies. Investors can use Altman Z-scores to help determine whether they should buy or sell a particular stock if they're concerned about the underlying company's financial strength. The Altman Z-score Plus can be used to evaluate corporate credit risk
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CASE 1: ACB Electricals Limited: Rs in Lacs Working Capital : 19403.00 Total Assets : 31,859.30 Retained Earnings : 29,954.58 Earnings Before Interest & Tax : 10,615.95 Market Value of Equity : 489.52.00 Total Liabilities : 31,859.30 Sales : 48,915.84
A. Working Capital/ Total Assets = 0.61 B. Retained Earnings/Total Assets = 0.94 C. EBIT/Total Assets = 0.33 D. Market Value of Equity/Total Liabilities = 0.06 E. Sales/Total Assets = 1.54
Interpretation: Since the company has scored above 3.00 i.e. 4.713, the company is doing pretty well and not likely to go bankrupt.
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Findings The bank has a credit risk management policy in place The bank uses credit rating system to assess the credit risk as a part of loam lending mechanism They use standardize approach for credit risk management currently and are fine tuning to upgrade to advanced approaches as per RBI guidelines. They also have implemented an integrated risk management system as per RBI guidelines They mitigate credit risk exposure through diversifications, collaterals and guarantees. The credit risk exposure of the bank has decreased considerably in the past years as a result of sound risk management policy The risk weights associated with banks products are in line with RBI guidelines They have regular trainings for their credit risk management teams on the policies and the guidelines. They rely in the ratings provided by the agencies like CRISIL/CARE/ICRA as per RBI guidelines. The bank follows a sound credit risk management and credit risk mitigation policy which is proven by the decreasing credit risk exposure of the bank. The bank has adhered to RBI guidelines and has implemented BASEL II norms and an integrated risk management system and risk rating software.
The credit risk policies and strategies of the bank have improved and the bank is in a better position
The study shows that compliance with BASEL II norms has helped the bank to improve their profitability through better credit risk management systems
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Recommendations They can invest in securitization as securitization exposures are nil. They have to start preparing for BASEL III norms which might come into effect in the near future They can further decrease their credit risk exposures with better credit risk management policies and advanced approaches as per RBI guidelines Banks should include credit risk component in yearly forecast based on multiple market scenarios
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CONCLUSION
The project undertaken has helped a lot in gaining knowledge of the Credit Policy and Credit Risk Management in the Nationalized Bank with special reference to VIJAYA BANK. The Credit Policy of the bank has become very vital in the smooth operation of banking activities. Credit Policy of the bank provides the framework to determine; Whether or not to extend credit to customer and How mush credit to extend. The project has certainly enriched the knowledge about the effective management of Credit Policy in the bank.
Credit Policy and Credit Risk Management is a vast subject and it is very difficult to cover all the aspects with a short period of time. However, every effort has been made to cover most of the important aspects, which have direct bearing on improving financial performance of the bank.
To sum up, it would not be out of way to mention here that the VIJAYA BANK has given special inputs on Credit Policy and Credit Risk Management. In pursuance of the instructions and guidelines issued by the RBI, VIJAYA BANK is granting and expanding credit to all sectors.
The concerted efforts put in by the Management and the Staff of the VIJAYA BANK has helped the bank in achieving remarkable progress in almost all the important parameters.