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1.1 Background of the study
§ Banks in general face 3 types of risks: Credit risk, market
risk, operating risk.
§ Credit risk is risk due to uncertainty in a counterparty's
(also called an obligor's or credit's) ability to meet its
obligations.
§ Investments are risky because of the change in their prices.
This volatility in the value of a bank's investment is known
as the market risk, as it is driven by the market.
§ Several events that are neither due to default by third party
nor because of the variation of the market may arise. These
events are called operational risks and can be attributed to
internal systems, processes, people and external factors.
1.2 Background of the topic

§ Credit risk is defined as when the borrower or counterparty


fails to meet its obligations in accordance with agreed
terms.
§ Aim of CRM: to maximize a bank's risk-adjusted rate of
return by maintaining credit risk exposure within
acceptable parameters.
§ The effective management of credit risk is essential to the
long-term success of any banking organization.
1.3 Nature of study

§ A descriptive study is conducted to study the ³Credit Risk


Management´ of Federal Bank Ltd., Aluva.
1.4 Objectives
(  !"
§ To study the credit risk management operations (assessment &
procedures) in Federal Bank Ltd.
§ To study different kinds of risks existing in Federal bank ltd.
 !"
§ To study the effect on risk management in capital adequacy
ratio of Federal Bank.
§ To identify the effect of Basel II norms regarding risk
management in banks.
§ To study the impact of asset quality on credit risk management
of the bank.
§ To analyze actual credit exposure of the bank.
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§ The financial services sector contributes 19% India's GDP


in FY 10.
§ Second-largest component after trade, hotels, transport and
communication.
- !%&' (  
§ Dourney of Indian Banking system can be segregated into 3 distinct
phases:
§ (- "
§ 1786- The General Bank of India, Bank of Hindustan, Bengal Bank
§ 1809- East India Company established Bank of Bengal
§ 1840- Bank of Bombay
§ 1843- Bank of Madras
§ 1865- Allahabad Bank
§ 1894- Punjab National Bank Ltd.
§ 1906-1913- Bank of India, Central bank of India, Bank of Baroda,
Canara Bank, Indian Bank, Bank of Mysore
§ 1920- Imperial Bank of India
§ 1935- RBI
§ Growth was slow & experienced periodic failures b/w 1913- 1948.
§ Approximately 1,100 banks, mostly small.
History of banking in India
§ The Banking Companies Act, 1949
§ Banking Regulation Act, 1949

§ (- "
§ Nationalization of Indian banks & up to 1991 prior to Indian
Banking sector reforms.
§ 1955- Nationalized Imperial Bank of India
§ 1960- 7 subsidiaries of SBI nationalized
§ 19th Duly, 1969- 14 banks nationalized
§ 1980- 7 banks nationalized (80% of banking segment ± Gov.
owned)
§ Nationalization lead to increase in deposits & advances.
History of banking in India
§ (- "
§ New phase of Indian Banking system with advent of Indian
Financial & Banking Sector Reforms after 1991.
§ Introduced many products & facilities in banking sector.
§ 1991- Narasimham Committee was setup
§ New phase brought in many changes:
§ Foreign banks
§ ATM stations
§ Customer service
§ Phone banking
§ Net banking
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§ IT based ³Core Banking solutions´


§ BPR implementation
§ 88 scheduled commercial banks
§ 28 public sector banks
§ 29 private banks
§ 31 foreign banks
§ 65,000 branches
§ 21,000 ATMs
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§ 1931- Incorporated as Travancore Federal Bank Ltd.


§ Founder- K.P. Hormis
§ 1945-Renamed as The Federal Bank Ltd.
§ Annual turnover- Rs. 75,000 crores.
§ Wide network 600 branches is almost all important cities
with more than 375 branches in Kerala.
§ 30% deposits by NRIs
§ CRISIL rating as P1+
Growth of Federal Bank Ltd.
Branches ATM

No. of units by 2002 412 36


No. of units by 2003 420 119
No. of units by 2004 440 204
No. of units by 2005 456 255
No. of units by 2006 472 320
No. of units by 2007 536 391
No. of units by 2008 600 517
No. of units by 2009 669 690
No. of units by 2010 737 775
900

800

700

600

500

400
Branches
300 ATM
200

100

0
No. of No. of No. of No. of No. of No. of No. of No. of No. of
units units units units units units units units units
by by by by by by by by by
2002 2003 2004 2005 2006 2007 2008 2009 2010
ü *
"
§ Develop into a stronger and more efficient and profitable
financial institution with a growing share of the
market, providing an expanding range of products and services to
a growing clientele within and outside the country, adopting best
industry practices and employing contemporary technology, and
be counted among the top private banks in the country.
ü 
"
§ Devote balanced attention to the interest and expectations of
stakeholders, and in particular: share holders, customers &
employees.
§ Pursue excellence in various facets of banking.
§ Adopt best industry practises.
ü "
§ h  
   
( )  
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a  
 


  


BUSINESS DEPARTMENTS WITH SUPPORT DEPARTMENTS CONTROL DEPARTMENT AUTHORITIES WITH


BUSINESS RESPONSIBILITIES BUSINESS
Information Technology Dept Inspection & Audit Dept RESPONSIBILITIES
Î 
 
Operations Dept Vigilance Dept Regional Heads
Large Corporate Dept
Human Resources Dept
Treasury Dept
Legal Dept
( 
 
Finance & Accounts Dept
Retail Business Dept Corporate Service Dept
NRI Service Dept Corporate Planning Dept
 

 
( !'(
SME & Agri Business Dept

Asset Recovery Dept
Secretarial Dept

CEO͛s Secretariat
( !'(
Functions:
§ Overall management of risks faced by the bank.
§ Meeting risk management guidelines of the RBI.
§ Presenting quarterly progress to the board on implementation of RM
guidelines of RBI & reporting such progress reports to RBI on quarterly
or other prescribed intervals.
§ Implementing suitable framework for mitigating operational risks.
§ Risk aggregation & capital allocation.
§ Initiating all other functions related to risk management.
Hierarchy of IRMD
EXECUTIVE DIRECTOR

RISK MANAGEMENT
COMMITTEE

OPERATIONS RISK MGT


CREDIT RISK MGT MARKET RISK MGT DIVISION
DIVISION DIVISION
(HEADED BY THE SENIOR
(HEADED BY THE (HEADED BY THE SENIOR MANAGER)
CHIEF MANAGER) MANAGER)

OPERATIONS
MARKET RISK RISK
CREDIT RISK
MANAGEMENT MANAGEMENT
MANAGEMENT
COMMITTEE COMMITTEE
COMMITTEE
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Review Of Literature
§  !% !'(,===  =
§ There are two main areas of focus for risk management:
§ 
° To measure management that the business is aware of and in
control of current and future business prospects.
° To safeguard business assets and reputation of business
° To help in improving banks¶ operating performance and
shareholder value
° To support the achievement of strategic goals.
- 
§ To ensure fulfillment with regulatory requirements
§ To deliver competitive advantage
§ To reassure stakeholders and internal groups that the business is actively
managing risk.

§ &% !% !'(,www.federalbank.co.in)

â Increased Risk awareness


â Prioritization of Business risks
â Fewer unexpected and unwelcome surprise
â A better focus internally
â Reduced losses through process improvement developed by bank
â Providing a better basis for making key strategic decisions
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4.1 Data Collection
  %!!!
§ Annual Reports
§ Company Records
§ Data published on websites
§ Dournals
§ Websites
§ Manual book of Bank
§ Brochures
§ RBI website
4.2 Sample Selection Method Choice
§ Data of past 6 years (2004-2010) have been used
for calculations.
4.3 Tools Used For Data Collection
§ Capital Adequacy Ratio
§ Asset Quality
§ ENPA
§ Correlation
§ Bar diagram
§ Pie-chart
4.4 Limitations of the study

§ Lack of reliability.

§ Study conducted on present conditions.

§ Couldn¶t meet all relevant personnel.

§ Time constraint

§ Limited data
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Data Analysis & Presentation
/  ! !%

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§YAPITAL ADEQUAY RATIO
Yapital Adequacy Ratio = Yapital
Risk Weighted Assets
ear YRAR
2004-05 11.27
2005-06 13.75
2006-07 13.43
2007-08 22.46
2008-09 20.14
2009-10 21.23

The CRAR has rose to 21.23 in 2009-


2009-10 which was 11.27 in
2004--05. Thus, showing efficient management of credit risk as
2004
per Basel norms.
CAPITAL ADEQUACY RATIO

YRAR
25

20

15

YRAR
10

0
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
Y   4   !5 
 !&'!
&' #6678 69 #6698 6:

   :6 ::


  &'
 '! &' :77 :#

Y    &' :/9 :/;

   &' 69 +96

* &' ##.; #6.

Among Kerala based banks, Federal bank has the best CRAR of
20.14 compared to least CRAR at South Malabar Gramin bank.
Y   4   !5 
 !&'!
25

20

15

2007 ± 08
10 2008 ± 09

0
South Malabar Dhanalakshmi Catholic Syrian South Indian Federal Bank
Gramin Bank Bank Bank Bank
   !  !!!
3  !, !< !!!  
, !<
2004-05 8823 16820 .52

2005-06 11736 20642 .56

2006-07 14899 25089 .59

2007-08 18904 32506 .58

2008-09 22392 38850 .57

2009-10 26950 43605 .62

The ratio is showing an increasing trend at 0.62 in 2009-10


which implies proper balancing of advances & assets.
     !!!

 
0.64
0.62
0.6
0.58
0.56
0.54 Ratio
0.52
0.5
0.48
0.46
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
  ! !!!

3  ! !!!  


, !< , !<
2004-05 5799 16820 .34
2005-06 6272 20642 .30
2006-07 7032 25089 .28
2007-08 10026 32506 .30

2008-09 12118 38850 .31


2009-10 12982 43605 .30

The ratio is constant at 0.30 during 2009-10 and shows good


maintenance of investments & assets.
  !  !!!

 
0.4

0.35

0.3

0.25

0.2
Ratio
0.15

0.1

0.05

0
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
ASSET QUALIT


( =!  !!!
3

( , !<   !!! ((
, !<
2004-05 194.51 16820 1.15 %

2005-06 111.60 20642 .54 %

2006-07 65.05 25089 .26 %

2007-08 43.20 32506 .13 %

2008-09 68.12 38850 .18 %

2009-10 128.79 43605 .29%

The percentage of Net NPA to Total assets has increased to 0.29%


during 2009-10. This indicates an unsound asset quality.


(   !!!
Percentage
1.40%

1.20%

1.00%

0.80%

0.60% (ercentage

0.40%

0.20%

0.00%
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10


( =!   !
ear Net NPA Advances Percentage
, !< , !<
2004-05 194.51 8823 2.2 %

2005-06 111.60 11736 .96 %

2006-07 65.05 14899 .43 %

2007-08 43.20 18904 .23 %

2008-09 68.12 22392 .30 %

2009-10 128.79 26950 .48%

During 2009-10 the percentage rose to 0.48% showing an


increasing trend due to poor management. Recession also plays a
role in this increase from 2008.


( =!   !
Percentage
2.50%

2.00%

1.50%

(ercentage
1.00%

0.50%

0.00%
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

(
? ??


§ The bank can quantify the credit risk on the basis of the
level of NPA¶s. The following expression quantifies the
credit risk of the bank.


( >,&$ <$,
( =!$ <


( ? Earning per Non Performing Assets

( 8 Non Performning Assets
 ? Total Assets
&8 Earnings before tax
Y  !' %* &'
3 & 
( 
(
, !< , !< , !<
2004-05 90.0859 16820 194.51 0.46

2005-06 225.2057 20642 111.60 2.02

2006-07 292.7328 25089 65.05 4.5

2007-08 368.0538 32506 43.20 8.6

2008-09 500.4936 38850 68.12 7.4

2009-10 464.5451 43676 128.79 3.7

The ENPA during 2009-10 has come down to 3.7


 (
(% ( !!!
ENPA
10
9
8
7
6
5
?N(A
4
3
2
1
0
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
Y 0 

Y  5! !  !


3 ! !  !
, !< , !<

2004-05 15192 8823

2005-06 17878 11736

2006-07 21584 14899

2007-08 25913 18905

2008-09 32,198 22392

2009-10 36,058 26,950

The deposits has increased over the years thus leading to an


increase in the advances.
Y  5! !@  !
40000

35000

30000

25000

20000 Deposits
Advances
15000

10000

5000

0
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
Y  5! !
(% 

! !
(% 
3 , !<
, !<

2004-05 15192 90.01

2005-06 17878 225.20

2006-07 21584 292.73

2007-08 25913 368.05

2008-09 32198 472.01

2009-10 36058 502.29

Increase in deposits have also lead to an increase in the Net


profit during 2009-10.
Y  &5! !
% 

40000

35000

30000

25000

20000 Deposits
Net (rofit
15000

10000

5000

0
2004-05 2005-06 2006-07 2007-08 2008-092009-10
Y  5  !
(% 
ear Advances
Net Profit , !<
, !<

2004-05 8823 90.01

2005-06 11736 225.20

2006-07 14899 292.73

2007-08 18905 368.05

2008-09 22392 472.01

2009-10 26950 502.29

Thee Net profit has increased to 502.29 in 2009-


Th 2009-10 while it was
only 90.01 in 2004-
2004-05.
Y  5  !
(% 
30000

25000

20000

15000 Advances
Net (rofit
10000

5000

0
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
Analysis of Deposit Mix
Analysis of Deposit Mix
ear Demand Savings Term Total
Deposits Deposits Deposits Deposits
, !< , !< , !< , !<
2004-05 861 2864 11467
15192
2005-06 938 3534 13406
17878
2006-07 1216 4229 16138
21583
2007-08 1464 5036 19412
25912
2008-09 1442 6445 24210
32097
2009-10 1831 7611 26615
36057
40000

35000

30000

25000
Demand Deposits
20000 Savings Deposits
Term Deposits
15000 Total Deposits

10000

5000

0
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
((%! ! ! 
3   ! ! A 
! !, !< , !< ! !
2004-05 861 15192 5.66
2005-06 938 17878 5.24

2006-07 1216 21583 5.63


2007-08 1464 25912 5.64
2008-09 1442 32097 4.49
2009-10 1831 36057 5.07

The proportion was 5.66% in 2004-


2004-05 & is 5.07% in 2009
2009--10.
((%! ! ! 
A ! !
6

3
% to Total Deposits

0
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
((% (!! ! ! !
ear Savings Total % to Total
Deposits, !< Deposits, !< Deposits

2004-05 2864 15192 18.9

2005-06 3534 17878 19.8

2006-07 4229 21583 19.6

2007-08 5036 25912 19.4

2008-09 6445 32097 20.0

2009-10 7611 26615 28.59

The proportion was 18.9% in 2004-


2004-05 & has
increased to 28.59 in 2009-
2009-10.
((% (!! ! ! !

A ! !


35
30
25
20
15
% to Total Deposits
10
5
0
((!%! ! ! !
3 !   ! ! A 
, !< , !< ! !

2004-05 11467 15192 75.3

2005-06 13406 17878 74.9

2006-07 16138 21583 74.7

2007-08 19412 25912 74.9

2008-09 24210 32097 75.4

2009-10 26615 73.8


36057

The proportion is showing a consistent relation from


2004--05 from 75.3 to 2009
2004 2009--10 73.8.
((!%! ! ! !
A ! !
76

75.5

75

74.5

74 % to Total Deposits

73.5

73
Y -!%* ' #66

Y 0 ( Y
 * 2 

2 Lakhs ± 50 lakhs 30

50 Lakhs ± 500 lakhs 20

500 Lakhs and above 15

Retail loans 35

The bank shows a high percentage of 35% in


lending retail loans.
Y 0  !

2 Lakhs ± 50 lakhs
35% 30%
50 Lakhs ± 500
lakhs
500 Lakhs and
above
20% Retail loans
15%
Y;
@Y ! !
6.1 Findings of the study
§ The CRAR has rose to 21.23 in 2009-10 which was 11.27 in 2004-
05. Thus, showing efficient management of credit risk as per Basel
norms.
§ Among Kerala based banks, Federal bank has the best CRAR of
20.14 compared to least CRAR at South Malabar Gramin bank.
§ The ratio of total advances to total assets show an increasing trend
at 0.62 in 2009-10 which implies proper balancing of advances &
assets.
§ The ratio of total investment to total assets is constant at 0.30
during 2009-10 and shows good maintenance of investments &
assets.
§ The percentage of Net NPA to Total assets has increased to 0.29%
during 2009-10. This indicates an unsound asset quality.
§ During 2009-10 the percentage of Net NPA advances rose to
0.48% showing an increasing trend due to poor management.
Recession also plays a role in this increase from 2008.
*  (!%!
§ The ENPA during 2009-10 has come down to 3.7
§ The deposits has increased over the years thus leading to an
increase in the advances.
§ Increase in deposits have also lead to an increase in the Net profit
during 2009-10.
§ Increase in advances has also lead to an increase in Net profit to
502.29 in 2009-
2009-10 while it was only 90.01 in 2004-
2004-05.
§ The proportion of demand deposits to total deposit was 5.66% in
2004--05 & is 5.07% in 2009
2004 2009--10.
§ The proportion of savings deposits to total deposit was 18.9% in
2004--05 & has increased to 28.59 in 2009
2004 2009--10.
§ The proportion of term deposits to total deposit is showing a
consistent relation from 2004-
2004-05 from 75.3 to 2009-
2009-10 73.8.
§ Federal bank shows a high percentage of 35% in lending retail
loans.
6.2 Recommendations
§ Bank should establish a system that helps identify
problem loan ahead of time when there may be more
options available for remedial measures.
§ Banks should disclose to the public, information on
the level of risk and policies for risk management.
§ Bank should take measures to improve its asset
quality, so that the credit risk can be minimized.
§ The bank must put maximum effort to attract the
fixed deposits which contribute significantly towards
the enhancement of banks profitability.
§ The bank should maintain a good proportion in their
deposits and advances.
6.2 Conclusions
§ The effectiveness of credit risk management rests where the
credit quality is maintained by the bank.
§ Basel III is likely to improve the risk management systems
of banks as the banks aim for adequate capitalization to
meet the underlying credit risks and strengthen the overall
financial system of the country
§ Formerly, people were not much bothered about the
banking services but now they are comparing banks based
on the services offered.
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