INTRODUCTION
Credit Risk can be defined as the likelihood of bank borrower or counterparty¶s failure in meeting obligations in accordance with the agreed terms. It is the major contributor to the overall lending risks. Credit risks may also arise on account of non-settlement of securities trading businesses and also because of the cessation of free transfer of currency or restricted repatriation in case of cross-border exposures.
Why manage Credit Risk?
By managing credit risk the bank creates and preserves the shareholder value by reducing the bad debts with the result that the capital can, in turn, be optimally utilized. Consequently, effective management of credit risk enhances shareholder value. Any credit risk management process should help in identifying proactive measures r ther a than reactive measures to tackle the impending credit risk. The primary goal of credit risk management is to maintain the credit risk exposure within acceptable limits and consequently maximize the risk-adjusted rate of return. Managing credit risk is a critical component of a comprehensive approach to risk management. The instruments or tools used to manage credit risk are: credit approving authority, prudential limits, risk ratings, risk pricing, portfolio management and loan review mechanism.
Aim of the Project
This Project is an attempt to understand the various concepts of Credit Risk Management and its Policies; it aims at highlighting the importance of Credit Risk Management for Banks. With increasing competition, credit risk management should be the thrust area for banks. Apart from setting acceptable level of credit risks, a quality index for credit approval should also be generated, since a sound credit policy will always be a competitive advantage to the Banks.
Need for the study
Credit Risk Management plays a vital role in the way banks perform, viz. It reflects the profitability, liquidity, and reduced Non-Performing Assets. The goal of credit risk management is to maximise a bank¶s risk adjusted rate of return by maintaining credit risk exposure within acceptable parameters. Banks need to deal with the credit risk inherent in the entire portfolio as well as the risk in individual credit transactions.
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Although loans form the largest and most obvious sources of credit risk, other source exist through the activities of bank while extending other off-balance sheet services or while investing in financial instruments. While observing the present scenario, one may find that banks are increasingly facing credit risk while indulging in inter-bank transactions, foreign exchange transactions, trade financing and also while extending guarantees and commitments. Credit risk management is a process that puts in place systems and procedures enabling a bank to:
y y y y
Identify and measure the risk involved in a credit proposition, both at the individual transaction and portfolio level. Evaluate the impact of exposure on bank¶s financial statements Assess the capability of risk-mitigators to hedge/insure risks. Design an appropriate risk management strategy to arrest ³risk-migration´.
Importance of Credit Risk Management
Focused approach to credit risk management is a must. Otherwise, banks are likely to be affected by market uncertainties that are so common to market driven economies. The project helps in understanding the clear meaning of credit Risk Management. It explains about the credit risk scoring and Rating of the Bank. And also Study of comparative study of Credit Policy with that of its competitor helps in understanding the fair credit policy of the Bank and Credit Recovery management of the Banks and also its key competitors.
Objectives of the Study
y y
To study the important aspects of credit risk management To analyse the position of SBI in comparison with other banks in case of loans financed and the financial statements that have to be verified by the Bank while sanctioning credit to any borrower
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Research Methodology and Design
Research design is the plan specifying the methods and procedures for collecting and analysing the needed information.
PRIMARY DATA : first hand information was obtained through discussions and questions with
the officials of Risk Management Department as a source of Primary Data
SECONDARY DATA : second hand information was obtained through various reports published
by Reserve Bank of India, guidelines issued by Basel Committee, and journals.
y y
Primary and Secondary data gathered have been analysed Various regulatory procedures issued by RBI have been studied
Scope of the Study
The boundary of the study is restricted to the information given by the SBI officials, the journals and various websites relating to this topic and RBI guidelines. The comparisons made in the analysis are limited to the period between 2007 to 2009.
Limitations of the Study
y y y
Confidential information of the Organisation cannot be disclosed as the matter of policy of the Organisation The project is limited to the data provided by the Bank The time constraint was a limiting factor, as more in-depth analysis could not be carried.
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Review of Literature
LONG TERM CAPITAL MANAGEMENT
ARTICLE by E. KALYAN BABU- RESEARCH ASSOCIATE AT ICFAI A private investment partnership, headquartered in Greenwich, Connecticut, was neither known to the public nor frequented by many Americans. Funds were invested by the biggies in the industry. In fact, the fund house gained popularity only after the stir it created in the financial markets. A fund so perfectly managed and hedged through its investments in derivative contracts was the apple in the eyes of the Wall Street, before it became a case in the history of fund management. This case depicts all types of risk failures and their triggers. The following are the reasons for the debacle of the hedge fund:
y
y y
The first culprits were the founders of the fund who left prudence to the wind and went into highly speculative trades. LTCM relied too much on theoretical market risk models and not enough on stress-testing, gap risk and liquidity risk The second culprits were the Banks, which gave far more credit, in aggregate, to LTCM, than they would have given a medium-size developing country. The third culprit was poor information. Scant disclosure of its activities as well as its exposures, by the LTCM, as with quite a few hedge funds, was a major factor in allowing the fund to use such unbelievable leverage. Overall, the collapse of LTCM was a net result of a host of loopholes in the risk management practices of not just the hedge fund, but also the lending banks and the regulators. At least now, it would be better if banks realize that efficient risk management is not a tool only for their betterment, but for the customers as well as by aiming to minimize their risk they would be able to put in checks and control over the activities of their customers and preserve their profitability.
CREDIT RISK MANAGEMNT: PRESCRIPTION FOR INDIAN BANKS By C. ANITHA
The following article provided certain tips to Indian banks for managing the credit risk. It drew the attention of the bankers to certain important default signals such as failure in the timely payment of installments, incorrect stock statements, frequent cheque dishonors, rising level of inventories, large and long outstanding receivables in the current account. She also observes that although these aspects are being taken care of by banks, it is only default and not by design. A well defined credit risk management framework is required to define all risk and proactive shuffling of the credit portfolios. The two main reasons for the Indian Banks sufferings are:
1. Banks do not have centralized database of its exposure 2. They have not followed the quantitative approach to the credit risk. Banks have very little data about the credit risk. Whatever data banks have are scattered. In addition to the development of market for managing credit risk, they require
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historical data to start the process. They do not have historical data nor have markets and instruments.
CREDIT DERIVATIVES- BANK PROTECT THYSELF
By K. SEETHAPATHI
This article describes the credit derivatives as tools to manage credit risk. Due to the default risk, exposure risk and recovery risk, it is difficult to predict the probability of quantum of recovery. Hence, it is advised that the banks and corporate can at best transfer their risk to another party. The available instruments in this behalf are known as credit derivatives, credit-linked note, first to default basket and synthetic credit default swaps. The article explains how credit derivatives are used in banks to mitigate credit risks in banks and prescribes certain measures to manage credit risk at micro level and macro level. It also suggests measures to avoid the concentration of credit in only certain pockets.
RISK MANAGEMENT- NUTS AND BOLTS By Saloni P Ramakrishna Senior Consultant, Business Solutions Reveleus
This article is a paper presented by Saloni P Ramakrishna at the Bank Economists Conference about the nuts and bolts of credit risk management. She makes a valid point for reorienting the approach to the credit risk management based on the credit risk framework of Basel II Accord. The three important building blocks identified are: Policy and strategy of a bank which is determined by the risk philosophy and risk appetite of the bank; organizational structure that should be drawn up objectively; and operations and systems. Based on Basel II, she discusses the item wise requirements, their implications to a bank, the type of processes that should be in place and the type of data that are required to capture the necessary details. She also advocates the Internal Ratings Based Approach for managing risks. IRB Approach focuses on the maintenance of overall level of regulatory capital to address the underlying credit risks and provides capital incentives relating to the standardized approach, i.e., providing reductions in the risk-weighted assets.
CHAPTERISATION CHAPTER I - INTRODUCTION CHAPTER II - COMPANY PROFILE CHAPTER III - To study the important aspects of credit risk management CHAPTER IV- To analyse the position of SBI in comparison with other banks in case of loans
financed and the financial statements that have to be verified by the Bank while sanctioning credit to any borrower
CHAPTER V- FINDINGS & RECOMMENDATIONS
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CHAPTER - II COMPANY PROFILE
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COMPANY PROFILE
STATE BANK OF INDIA
Regi ered Offi e St t B
B
C t l Offi 8t l M C M M i t M 400021 022-22883888 22022678 022-22855348 i t l i t @ i htt :// i i i
Telephone No Fax
E ail: Websi e: Group:
SB Group
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BOARD OF DIRECTORS
Central Board of State Bank of India (As on 13th May 2009)
Sr. No. Name of Director 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. Shri O.P. Bhatt Chairman Shri S.K. Bhattacharyya MD & CC&RO Shri R. Sridharan MD & GE(A&S) Dr. Ashok Jhunjhunwala Shri Dileep C. Choksi Shri S. Venkatachalam Shri. D. Sundaram Dr. Deva Nand Balodhi Sec. of SBI Act, 1955 Designation 19(a) 19(b) 19(b) 19(c) 19(c) 19(c) 19(c) 19(d) Chairman Managing Director Managing Director Director Director Director Director Director Director Director Director Director Director
T E PLACE TO SHARE THE NEWS ...«« SHARE THE VIEWS ««
Togetherness is the theme of this corporate logo of SB where the worl of banking services meet the ever changing customers needs and establishes a link that is like a circle, it indicates complete services towards customers. The logo also denotes a bank that it has prepared to do anything to go to any lengths, for customers.
The blue pointer represent the philosophy of the bank that is always looking for the growth and newer, more challenging, more promising direction. The key hole indicates safety and security.
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TRANSFORMATION JOURNEY OF SBI
The State Bank of India, the country¶s oldest Bank and a premier in terms of balance sheet size, number of branches, market capitalization and profits is today going through a momentous phase of Change and Transformation ± the two hundred year old Public sector behemoth is today stirring out of its Public Sector legacy and moving with an agility to give the Private and Foreign Banks a run for their money. The bank is entering into many new businesses with strategic tie ups ± Pension Funds, General Insurance, Custodial Services, Private Equity, Mobile Banking, Point of Sale Merchant Acquisition, Advisory Services, structured products etc ± each one of these initiatives having a huge potential for growth. The Bank is forging ahead with cutting edge technology and innovative new banking models, to expand its Rural Banking base, looking at the vast untapped potential in the hinterland and proposes to cover 100,000 villages in the next two years. It is also focusing at the top end of the market, on whole sale banking capabilities to provide India¶s growing mid / large Corporate with a complete array of products and services. It is consolidating its global treasury operations and entering into structured products and derivative instruments. Today, the Bank is the largest provider of infrastructure debt and the largest arranger of external commercial borrowings in the country. It is the only Indian bank to feature in the Fortune 500 list. The Bank is changing outdated front and back end processes to modern cus tomer friendly processes to help improve the total customer experience. With about 8500 of its own 10000 branches and another 5100 branches of its Associate Banks already networked, today it offers the largest banking network to the Indian customer. The Bank is also in the process of providing complete payment solution to its clientele with its over 8500 ATMs, and other electronic channels such as Internet banking, debit cards, mobile banking, etc. With four national level Apex Training Colleges and 54 learning Centre¶s spread all over the country the Bank is continuously engaged in skill enhancement of its employees. Some of the training programs are attended by bankers from banks in other countries. The bank is also looking at opportunities to grow in size in India as well as internationally. It presently has 82 foreign offices in 32 countries across the globe. It has also 7 Subsidiaries in India ± SBI Capital Markets, SBICAP Securities, SBI DFHI, SBI Factors, SBI Life and SBI Cards - forming a formidable group in the Indian Banking scenario. It is in the process of raising capital for its growth and also consolidating its various holdings. Throughout all this change, the Bank is also attempting to change old mindsets, attitudes and take all employees together on this exciting road to Transformation. In a recently concluded mass internal communication programme termed µParivartan¶ the Bank rolled out over 3300 two day workshops across the country and covered over 130,000 employees in a period of 100 days using about 400 Trainers, to drive home the message of Change and inclusiveness. The workshops fired the imagination of the employees with some other banks in India as well as other Public Sector Organizations seeking to emulate the programme.
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ASSOCIATE BANKS
State Bank of India has the following six Associate Banks (ABs) with controlling interest ranging from 75% to 100%. 1. State Bank of Bikaner and Jaipur (SBBJ) 2. State Bank of Hyderabad (SBH) 3. State Bank of Indore (SBIr) 4. State Bank of Mysore (SBM) 5. State Bank of Patiala (SBP) 6. State Bank of Travancore (SBT) The six ABs have a combined network of 4502 branches in India which are fully computerized and 2410 ATMs networked with SBI ATMs, providing value added services to clientele. The combined net profit of these banks increased by 12% over the previous year to reach Rs.2277.69 crores. Deposits and advances grew by 19% and 22%, respectively, during the year. The combined Net NPA ratio of all ABs was at 0.61% as on 31st March 2008.The highlights of performance of the six ABs for the year 2007-08 are as follows: (Rs. In crores) Deposits Loans Investments Total Assets Return on Assets No. of Branches 234168 178376 75147 268285 0.86% 4502
NON BANKING SUBSIDIARIES The Bank has the following Non-Banking Subsidiaries in India: 1. SBI Capital Markets Ltd 2. SBI Funds Management Pvt Ltd 3. SBI Factors & Commercial Services Pvt Ltd 4. SBI Cards & Payments Services Pvt. Ltd. (SBICPSL) 5. SBI DFHI Ltd 6. SBI General Insurance Company Limited
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JOINT VENTURES
The Bank has the following Joint Ventures in India: 1. 2. SBI Life Insurance Company Ltd (SBI LIFE) SBI General Insurance Company Limited
Mission statement:
To retain the Bank¶s position as premiere Indian Financial Service Group, with world class standards and significant global committed to excellence in customer, shareholder and employee satisfaction and to play a leading role in expanding and diversifying financial service sectors while containing emphasis on its development banking rule.
VISION STATEMENT:
j Premier Indian Financial Service Group with prospective world-class
standards of efficiency and professionalism and institutional values.
j Retain its position in the country as pioneers in Development banking. j Maximize the shareholders value through high-sustained earnings per
Share.
j An institution with cultural mutual care and commitment, satisfying and
Good work environment and continues learning opportunities.
VALUES:
j Excellence in customer service j Profit orientation j Belonging commitment to Bank j Fairness in all dealings and relations j Risk taking and innovative
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STATE BANK OF INDIA -FINANCIAL HIGHLIGHTS-2005-2009
Rs. in Billion Deposits Advances Investments Total Assets FY2005 3670.48 1377.58 1970.98 4598.83 FY 2006 3800.46 1579.33 1625.34 4940.29 FY2007 4355.21 2023.74 1491.49 5665.65 FY 2008 5374.05 2616.41 1895.01 7215.26 FY 2009 7420.73 3373.30 2759.54 9644.32
Interest Income
324.28
359.80
394.91
489.50
637.88
Interest Expenses Net Interest Income Non-Interest Income
184.83
203.90
234.37
319.29
429.15
139.45
155.89
160.54
170.21
208.73
71.20
74.35
57.69
86.95
126.91
Total Operating Income Staff Expenses Overhead Expenses
210.65 69.07
230.24 81.23
218.23 79.33
257.16 77.86
335.64 97.47
31.67
36.02
38.91
48.23
59.01
Total Operating Expenses
100.74
117.25
118.24
126.09
156.49
Operating Profit
109.91
112.99
100
131.07
179.15
Total Provisions Net Profit
66.86 43.05
68.93 44.07
54.59 45.41
63.78 67.29
87.94 91.21
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PROFIT AND LOSS ACCOUNT
Mar '06
Mar '07
Mar '08
Mar '09
Mar '10
12 mths Income Interest Earned Other Income Total Income Expenditure Interest expended Employee Cost Selling and Admin Expenses Depreciation Miscellaneous Expenses Preoperative ExpCapitalized Operating Expenses Provisions & Contingencies Total Expenses
Net current assets
Current assets, loans & advances Less : current liabilities & provisions 35,112.76 37,733.27 44,417.03 83,362.30 25,292.31 60,042.26 22,380.84 55,538.17
80,336.70 1,10,697.57
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Mar ' 10
Total net current assets Miscellaneous expenses not written -45,223.94 -
Mar ' 09
-72,964.30 -
Mar ' 08
-38,945.27 -
Mar ' 07
-34,749.95 -
Mar ' 06
-33,157.32 -
Total Notes:
Book value of unquoted investments Market value of quoted investments Contingent liabilities Number of equity shares outstanding (Lacs)
CHAPTER - III
TO STUDY THE IMPORTANT ASPECTS OF CREDIT RISK MANAGEMENT
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To study the important aspects of credit risk management
Risk
Risk is inherent in all aspects of a commercial operation and covers areas such as customer services, reputation, technology, security, human resources, market price, funding, legal, and regulatory, fraud and strategy. Risk has been present always in the banking business but the discussion on managing the same has gained prominence only lately. Bankers world -wide have come to realize that the growing deregulation of local markets and their gradual integration with global markets have deepened their anxieties. With growing sophistication in banking operations, while lending and deposit-taking have continued to remain the mainstay of a majority of commercial banks However, for banks and financial institutions, credit risk is the most important factor to be managed. Credit risk is defined as the possibility that a borrower or counter party will fail to meet its obligations in accordance with agreed terms. Credit risk, therefore, arises from the banks dealings with or lending to a corporate, individual, another bank, financial institution or a country. Managing risk is increasingly becoming the single most important issue for the regulators and financial institutions. These institutions have over the years recognized the cost of ignoring risk. However, growing research and improvements in information technology have improved the measurement and management of risk. It¶s but natural therefore, capital adequacy of a bank has become an important benchmark to assess its financial soundness and strength. The idea is that banks should be free to engage in their asset-liability management as long as a level of capital sufficient to cushion their potential losses backs them. In other words, capital requirement should be determined by the risk profile of a bank.
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Importance of Risk Management
Risk Management does not aim at risk reduction. Risk Management enables banks to bring their risk levels to manageable proportions without severely reducing their income. It enables a bank to take the required level of exposures in order to meet its profits targets. This balancing act between the risk levels and profits needs to be well planned.
Risk Management is important in:
y y y y y y y
Implementation of strategy Development of competitive advantages Measurement of capital adequacy and solvency Aiding decision making Aiding pricing decisions Reporting and controlling of risks Management of portfolio transaction
The major risks in banking business are: Liquidity Risk Interest Rate Risk Market Risk Default or Credit Risk, and Operational Risk Reputation Risk
LIQUIDITY RISK The liquidity risk of banks arises from funding of long term assets by short-term liabilities, thereby making the liabilities subject to rollover or refinancing risk. Funding liquidity risk is defined as the inability to obtain funds to meet cash flow obligations. For banks, funding liquidity risk is crucial. The liquidity risk in banks manifest in different dimensions:
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Funding Risk: This risk arises from the need to replace net outflows due to unanticipated withdrawal of deposits Time Risk: This arises from the need to compensate for non-receipt of expected inflows of funds i.e. performing assets turning into non-performing assets Call Risk: This arises due to crystallization of contingent liabilities. This may also arise when a bank may not be able to undertake profitable business opportunities when it arises
INTEREST RATE RISK
IRR is the exposure of a bank¶s financial condition to adverse movements in interest rates. IRR refers to potential impact on Net Interest Income or Market value of Equity caused by unexpected changes in market interest rates. IRR can be viewed in two ways: Its impact is on the earnings of the bank or its impact on the economic value of the bank¶s assets, liabilities and OBS positions.
y y y y y y
Gap or Mismatch Risk Yield Curve Risk Basis Risk Embedded Option Risk Reinvestment Risk Net Interest Position Risk
MARKET RISK
Market risk is the risk of adverse deviations of the mark-to-market value of the trading portfolio, due to market movements, during the period required to liquidate the transactions. This results from adverse movements in the level or volatility of the market prices of interest rate instruments, equities, commodities and currencies. This risk occurs when assets are sold before their stated maturities. In the financial market, bond prices and yields are inversely related.
FOREX RISK : It is the risk that a bank may suffer losses as a result of adverse exchange
rate movements during a period in which it has an open position either spot or forward, or a combination of the two, in an individual foreign currency
MARKET LIQUIDITY RISK: This risk arises when a bank is unable to conclude a
large transaction in a particular instrument near the current market price
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OPERATIONAL RISK It is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. Strategic risk and reputation risk are not a part of operational risk. It may loosely be comprehended as any risk which is not categorized as market or credit risk. It includes fraud risk, communication risk, documentation risk, cultural risk, etc. The Operational Risks can be classified into three categories: CAUSE-BASED People oriented causes- negligence, incompetence Process oriented (Transaction based) causes- organisational and product complexity, business volume fluctuation etc y Process oriented (Operational control based) causes- inadequate segregation of duties, lack of management supervision and procedures y Technology oriented causes- poor technology and telecom, obsolete applications, poor design, development and training y External causes- natural disasters, operational failure of third party or political context EFFECT- BASED
y y y Legal liability y Regulatory, compliance and taxation penalties y Loss or damage to assets y Restitution y Loss of recourse y Write-downs EVENT- BASED y y y y y y
Internal Fraud External Fraud Employment practices and workplace safety Clients, products and business practices Damage to physical assets Business disruption and system failures
DEFAULT or CREDIT RISK
Credit Risk is most simply defined as the potential of a bank borrower or counterparty to fail to meet its obligations in accordance with agreed terms. For most banks, loans are the largest and most obvious source of credit risk. Credit risk has two components: Portfolio Risk and Transaction Risk
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Transaction Risk is further divided into:
y
y
Default Risk: it is driven by the potential failure of a borrower to make promised payments, either partly or wholly. In the event of default, a fraction of the obligations will normally be paid. This is known as recovery rate. Downgrade Risk: If a borrower does not default, there is still risk due to worsening in credit quality. This results in the possible widening of the credit-spread. This is downgrade risk. Loans are not usually market to market. The only important factor is whether or not the loan is in default today.
Risks associated with credit portfolio as a whole is termed Portfolio risk. Portfolio Risk has two components:
y
y
Intrinsic Risk: If a portfolio is fully diversified, i.e. diversified across geographies, industries, borrowers, markets etc, equitably, then the portfolio risk is reduced to a minimum level. This minimum level corresponds to the risks in the economy in which it is operating. This is Intrinsic Risk Concentration Risk: If the portfolio is not diversified that is to say that it has higher weight in respect of a borrower or geography or industry etc, the portfolio gets concentration risk
Credit Risk Policy:
y
Every bank should have a credit risk policy approved by the board. The document should include Risk identification, risk measurement, risk grading/ aggregation techniques, reporting and risk control/ mitigation techniques, documentation, legal issues and management of problems loans.
y
For controlling credit risk, Corporate Risk will, with the approval of the Board, establish suitable credit policies and procedures. The credit policies and processes will spell out the prudential exposure ceilings, the quantum and nature of exposure that can be taken on a borrower, the credit standards that a credit should meet, the appraisal, approval & monitoring systems to be followed, the pricing & security framework of a credit, the remedial actions to be taken, etc., in managing credit.
y
The credit risk policies approved by the Board should be communicated to branches/ controlling offices. All managers and senior managers should clearly understand the bank's approach for credit sanction and should be held accountable for complying with established policies and procedures.
y
Corporate Risk along with Corporate Banking and the Branch Heads will ensure compliance, by all concerned functionaries, with these policies in order to inculcate a
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sound credit risk management attitude. Aggregate credit risk will be contained within the risk appetite of the Bank. The Bank will price an exposure and set aside loan loss reserves appropriate to the expected loss from the credit risk position assumed. It will maintain adequate capital to cushion the unexpected loss for that risk position.
Credit Risk Management Strategy :y
Building and sustaining a high quality of credit portfolio giving an improving riskadjust yield to the Bank.
y
Limiting the Bank's exposure to certain categories of risk, which it understands and is in a position to manage within its risk appetite.
Developing greater ability to recognize and avoid & manage potential problems. The functions of Credit Risk Management will essentially be to:
y y y y
Identify measure, monitor and control the credit risk of the Bank. Enforce implementation of the credit risk policy / strategy approved by the Board. Develop credit policies and procedures. Design and validate risk measurement systems, capital allocation models and pricing frameworks
y y y y
Monitor and protect portfolio quality / maximization of profits Undertake loan reviews Identify risk opportunities and challenges. Ensure that the credit granting function conforms to the strategy, policy and limits set by the Board and that the role-responsibilities for line management are clearly spelt out.
y
Propagate a healthy credit culture across the Bank.
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Basel Committee
Central Bank Governors of the Group of Ten Countries formed Committee of Banking supervisory authorities in 1975.This Committee usually meets at the Bank of International Settlement (BIS) in Basel, Switzerland. Hence it has come to be known as the Basel Committee. The Basel Committee provided the framework for Capital Adequacy in 1988, which is known as the Basel 1 accord. The Basel 1 norms for risk weights were more of a straightjacket nature. For example, all exposures to sovereigns were given 0% risk weight. All bank exposures had a risk weight of 20%. Corporate advances had a risk weight of 100%. Such rigid approach without any consideration for the strengths or weaknesses of individual entities was the main shortcoming of the Basel 1 accord. The position that an excellent corporate such as L&T could have less risk weight than some of the banks was not recognised under this accord. This accord continued for about fifteen years, of course with some modifications from time to time. The first round of proposal for changes in the Basel 1 accord came up for deliberations and consultative process in june1999. After five years of deliberations, the framework for capital adequacy was finalised with the approval of all the ten members of the Basel Committee in June 2004. The fundamental objective of the committee was to revise the 1988 accord and strengthen the soundness and stability of the banking system. The revised framework would promote the adoption of stronger risk management practices by banks. The revised framework provides greater use of assessment of risk provided by Banks internal systems as inputs to capial t calculations. The Basel-II accord is expected to establish a minimum level of capital for internationally active banks. The new capital accord will require banks to manage risks by not only allocating regulatory capital but also by disclosing greater risk information incentives for banks to invest and increase the sophistication of their internal risk management capabilities in order to gain reductions in capital. The Basel-II accord rests on three pillars
First Pillar
- Minimum capital requirements
1. Capital for Credit Risk (a) Standardised approach (b) Internal rating based (IRB) approaches (i) Foundation approach (ii) Advanced approach
2. Capital for Market Risk
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(a) Standardised method (i) Maturity method (ii) Duration method
(b) Internal models method 3. Capital for Operational Risk (a) Basic Indicator Approach (b) Standardised Approach (c) Advanced Measurement Approach
Second Pillar - Supervisory review process
1. Evaluate risk assessment 2. Ensure soundness and integrity of bank¶s internal processes to assess the adequacy of capital 3. Ensure maintenance of minimum capital with PCA for shortfall 4. Prescribe differential capital, where necessary i.e. where the internal processes are slack
Third Pillar
- Market discipline
1. Enhance disclosures 2. Core disclosures and supplementary disclosures 3. Timely at least semi-annual disclosures Thus the Basel-II accord does not merely prescribe minimum capital requirement, but envisages processes of supervisory review and market discipline. The revised framework is more risk sensitive than the 1988 accord. There are incentives for those banks, which have better risk management capabilities. The capital ratio continues to be calculated using the definition of regulatory capital and riskweighted assets. Tier 1 or core capital consists of paid up capital, free reserves and unallocated surpluses, less specified deductions Tier 2 or supplementary capital comprises subordinated debt of more than five years maturity, loan reserves, revaluation reserves, investment fluctuation reserves. It is restricted to 100% of tier 1 capital as before and long term subordinated debt may not exceed 50% of tier 1 capital
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Tier 3 capital consists of short term subordinated debt for the sole purpose of meeting a proportion of the capital requirement for market risk. The scope of risk weighted assets is expanded to include certain additional aspects of market risk and also operational risk. The Total Risk Weighted Assets = Risk weighted assets for credit risk + 12.5*capital requirement for market risk + 12.5* capital requirement for operational risk
Capital Adequacy Ratio = Regulatory capital/Total risk weighted assets
Basel Committee on Credit Risk Management
Sound credit risk assessment and valuation for loans:
Principle 1 A bank¶s board of directors and senior management are responsible for ensuring that the
bank has appropriate credit risk assessment processes and effective internal controls commensurate with the size, nature and complexity of its lending operations to consistently determine provisions for loan losses in accordance with the bank¶s stated policies and procedures, the applicable accounting framework and supervisory guidance.
Principle 2 A bank should have a system in place to reliably classify loans on the basis of credit risk. Principle 3 A bank¶s policies should appropriately address validation of any internal credit risk
assessment models.
Principle 4 A bank should adopt and document a sound loan loss methodology, which addresses risk
assessment policies, procedures and controls, for assessing credit risk, identifying problem loans and determining loan loss provisions in a timely manner.
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Principle 5 A bank¶s aggregate amount of individual and collectively assessed loan loss provisions
should be adequate to absorb estimated credit losses in the loan portfolio.
Principle 6 A bank¶s use of experienced credit judgment and reasonable estimates are an essential part of
the recognition and measurement of loan losses.
Principle 7 A bank¶s credit risk assessment process for loans should provide the bank with the
necessary tools, procedures and observable data to use for assessing credit risk, accounting for loan impairment and determining regulatory capital requirements.
Principle 8 Banking supervisors should periodically evaluate the effectiveness of a bank¶s credit risk
policies and practices for assessing loan quality.
Principle 9 Banking supervisors should be satisfied that the methods employed by a bank to calculate
loan loss provisions produce a reasonable and prudent measurement of estimated credit losses in the loan portfolio that are recognized in a timely manner.
Principle 10 Banking supervisors should consider credit risk assessment and valuation policies and
practices when assessing a bank¶s capital adequacy.
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Credit rating
Definition:-
Credit rating is the process of assigning a letter rating to borrower indicating there creditworthiness of the borrower. Rating is assigned based on the ability of the borrower (company). To repay the debt and his willingness to do so. The higher the rating of company the lower the probability of default. Use in decision making:Credit rating helps the bank in making several key decisions regarding credit including 1. Whether to lend to a particular borrower or not; what price to charge? 2. What are the products to be offered to the borrower and for what tenure? 3. At what level should sanctioning be done, it should however be noted that credit rating is one of inputs used in credit decisions. There are various factors (adequacy of borrowers, cash flow, collateral provided, and relationship with the borrower) Probability of the borrowers default based on past data. Main features of the rating tool: comprehensive coverage of parameters extensive data requirement mix of subjective and objective parameters includes trend analysis 13 parameters are benchmarked against other players in the segment captions of industry outlook 8 grade ratings broadly mapped with external rating agencies prevailing data.
Evolution of Credit Risk Rating Systems y Position in India o Regulatory Health-Code System (1980s) o Internal Credit Rating Systems of banks y In both cases, no explicit linkages with capital requirements y Loan pricing and Loan monitoring
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CREDIT RATING MODEL
Score Obtained (in percent) 9 and above 8 to 89 6 to 79 to 64 Rating to be Assigned Prime AAA AA A
Rating Migration Matrix
% % +
+ % % % % %
+
ota
+
% % % %
% % % %
% % % %
% % %
%
% % %
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CHAPTER - IV
CASE STUDY OF CREDIT SANCTION BY SBI & DATA ANALYSIS
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PART 1- CASE STUDY OF CREDIT SANCTION BY SBI
When any company approaches SBI for loan, the following are the financial statements and other details that have to be submitted by the company to the bank. These documents are obtained to ascertain the financial health of the company, there projections based on the past achievements and the liquidity position of the company. Corporate Governance practices followed: XYZ LTD is a listed company. The company is following the corporate governance practices as under. S. No 1. Corporate Governance Practices The procedure adopted for selection, orientation and succession of the Directors. The Directors and their Core competences. Accounting Standard followed Existence of independent audit committee and its functioning. Corporate Governance practices followed The company is adopting a clear-cut policy in selection, orientation and succession of the directors as required by the Companies Act 1956 and SEBI guidelines. Directors are appointed after approval of resolution in AGM. All the Directors appointed by the company are well experienced and competent in their respective fields. The company is following accounting standards as prescribed by the Companies Act 1956 & ICAI. The Board of Directors of the company constituted Audit Committee consisting of three independent Directors, with the role and responsibilities duly defined and in accordance with the applicable statutory and other requirements The company is transparent in disclosure of financial information, executive compensation and the same has been brought out clearly in the Audited Balance Sheet.
2. 3. 4.
5.
Transparency in disclosure of financial information, executive compensation etc.
Brief write-up on industry/sector and company¶s standing (domestic / international) in the industry including market share, future growth strategies, comments on recent news reports, etc. ( To mention / dovetail Premarketing Committee Presentation, if applicable)
Industry Scenario
y The size of the global ceutical industry is estimated at around USD 550 billion and it
has been recording a CAGR of about 9% over the last five years. The size of the domestic ceutical industry is estimated at around 1.30% of the global ceutical industry i.e. around USD 7.15 billion (around Rs 29,000 crores). The Indian ceutical industry, which was a mere processor of imported raw materials with annual sales of around Rs
32
400 crores in 70s, at present meets 95% of domestic needs. The domestic output has increased at CAGR of about 13% over the last three decades.
y India has emerged as a major player in the global ceutical industry. Globally, the Indian
ceutical industry ranks 4th in terms of volume and 13th in terms of value. The domestic ceutical industry can be divided into four categories i.e. Bulk Drugs (API), Formulations, Contract Research and Miscellaneous (Ayurveda, Homeopathy etc.). The API, Formulations and Contract Research segments account for about 85% of the domestic market.
y
The domestic API (Active products, has a
Ingredients) industry has a portfolio of nearly 500
turnover of around Rs 16,000 crores and it caters to various
therapeutic segments; including latest ones i.e. Anti Cancer, Cardio Vascular, Central Nervous System etc. Besides, the country has the largest number of US FDA approved manufacturing facilities outside USA. In view of these advantages, the domestic API industry is expected to record a CAGR of about 12% over the next 4 ± 5 years; with major therapeutic segments being Oncology, Cardio Vascular and Central Nervous System. «.. (Source: Crisinfac).
Company¶s Prospects
XYZ LTD with all its regulatory compliant facilities, regulatory filings, overseas acquisitions, well established R&D and participation in WHO, UN and PEPFAR programmes is capable of utilizing the emerging opportunities effectively. XYZ LTD has acquired /generic companies, to consolidate its position in Canada, UK and Malta. These companies help XYZ LTD in expanding its market. Recently, XYZ LTD has been allotted 40 acres of land along with 35 acres of lands to XYZ LTD Healthcare Ltd (a subsidiary of XYZ LTD) in the proposed SEZ at Polepally village, Jadcherla Mandal, Mahaboobnagar district of A.P. by Andhra Pradesh Industrial Infrastructure Corporation (APIIC) on lease valid for 60 years. XYZ LTD plans to set up a formulations facility exclusively for exports. The project cost of SEZ would be about Rs 160 crores and is to be funded by part of FCCB funds. The project would be implemented over a period of three years approximately. XYZ
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LTD projects contribution of this project at about USD 200 Mio in the first year of operations after completion of project. News paper report: (Business Standard ± 03.10.2008) Indian companies that raised foreign currency convertible bonds (FCCBs) to finance growth and acquisition plans during the Bull Run in the stock markets are in a Catch 22 situation. The conversion price of their FCCBs is several times higher than their current market prices, leaving the companies with two options. One is to reset the price at current market price, a move that could dilute promoter holdings (since it would entail issuing more equity shares). The other is to redeem the bonds, which could increase debt obligations that are already substantial in some cases. XYZ LTD also had issued FCCBs. While we do not perceive any risk now the risk factor arising out of this is examined and commented upon under µRisks and mitigating factors¶
Indebtedness / Exposure & Capital Charge:
Company Indebtedness Fund based Non fund based Existing Proposed Group Existing Proposed Proposed exposure Credit conversion factor FB 100% LC 50%* BG 50% (perf.) Risk weight
115.00 95.00
180.00 110.00
205.00 95.00
270.00 110.00 380.00 --380.00
TOTAL 210.00 290.00 300.00 (Indebtedness) Investment ---Leasing ---TOTAL 210.00 290.00 300.00 (Exposure) Capital charge for Total exposure 5.17 * 100% interchangeability between LC and BG limits
20%**
** As per External Credit Rating Agency µFitch Ratings India Pvt. Ltd.¶
Rating by µFitch Ratings India Pvt. Ltd.¶ Fund Based limits Non fund based limits A+ F1+ Highest credit quality. Indicates the strongest capacity for timely payment of financial commitments
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Capital charge for the total proposed exposure: Facility Limits Credit Conversion Factor 100% 50% 50%
(Rs. in crores) Risk Weighted Asset 36.00 20% 8.60 2.40 47.00 Capital Charge @ 11
Risk Weight as per External Rating
FB NFB LC BG Total Sharing Pattern
180.00 86.00 24.00
5.17
Sharing Pattern (WC) ± Multiple Banking Arrangement Major Bank: SBH
Name of Bank SBI SBH SBI Group Other Banks ICICI Bank IDBI Bank HDFC Bank Andhra Bank Canara Bank Standard Chartered Bank Total Term Loans: Name of the Bank
Figures in brackets indicate the estimates considered at the time of earlier renewals) * cannot be estimated as the product mix differs as per the specification of the buyers
Interpretation: 2007-08 During the year 2007-08 the company achieved 95.18% of the estimated sales and recorded a growth of 18.96% over the previous year. 2008-09 The company¶s estimated sales in 2008-09 represent a growth of 30.13% growth over the previous year. The investment undertaken by the company for backward integration, capacity build up is almost over. During the quarter ended 30.06.08 the company recorded sales of Rs.647.00 crores, a growth of 34.79% over the corresponding quarter of the previous year, which is in line with the estimated growth of 30.13% for the current year and it is expected that the company is able to achieve the estimated growth. 2009-10 The company projected a growth of 30.02% over 2008-09. Going by the past trend the same is considered achievable.
Interpretation: 2007-08 PAT grew by 31.55% over the previous year and is 117% of the estimates 2008-09 The company estimates the PAT at Rs.291.81 crores which is marginally less than the previous year as the provision for the losses on account of restatement of FCCBs. The company expects forex fluctuation losses for the year 2008-09 to be around Rs.80.00 crores. For the quarter ended 30.06.08 the company posted a net profit of Rs.39.90 crores.
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The company has incurred a forex fluctuation loss of Rs.56.00 crores for the quarter as against a forex gain of Rs.28.90 crores in the corresponding quarter of the previous year. However the operating margins of the company (excluding the forex loss) have grown to 19.30% as against 11.90% of the corresponding quarter of the previous year, as per the published results for the quarter ended 30.06.08. Hence the company is confident of achieving the PAT as estimated. 2009-10 The projected PAT represents a growth of 94.97% over 2008-09. The growth is due to low profit estimated in 2008-09 on account of anticipated forex losses as envisaged by the company as of now. However the growth in PAT/Net Sales is in tune with the past trends by registering a growth of 170 basis points over 2007-08. PUC: 31.03.2007 Audited 26.67 (29.13) (Rs in crores) 31.03.2010 Projected 26.88
31.03.2008 Audited 26.88 (26.86)
31.03.2009 Estimated 26.88
Interpretation: 2007-08 The increase during 2007-08 is due to conversion of 4,500 FCCB bonds into 374,046 equity shares of Rs.5.00 each at a premium of Rs.517.036 and issue of ESOPs 2008-09 & 2009-10 The Paid up capital is proposed to be maintained at the level of Rs.26.88 crores during both the years. Tangible Net Worth (Rs in crores) 31.03.2007 Audited 994.71 (1396.49) 450.71 (731.17) 2.38 (1.48) 5.24 (2.83) 31.03.2008 Audited 1292.05 (1246.61) 689.90 (599.84) 1.73 (1.86) 3.24 (3.86) 31.03.2009 Estimated 1563.39 871.66 1.55 2.77 31.03.2010 Projected 2115.33 1373.60 1.16 1.79
TNW Adj. TNW TOL/TNW TOL/Adj.TNW
Interpretation: 2007-08 TNW has improved from Rs.994.71 crores to Rs.1292.05 crores with the retention of profits 2008-09 The estimated improvement in TNW in the current year is on account of retention of profits. 2009-10 TOL/TNW is improving and the trend is considered satisfactory
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Movement in TNW (Past three years) Movement in TNW 2006 Audited Opening TNW + PAT + Inc. in Equity / Premium Dec / Inc in Reserves +/- Change in Int.Assets +/- Adj. of prior year exp. - Dividend payment Closing in TNW 862.85 85.20 1.25 20.56 20.01 9.28 940.57 2007 Audited 940.57 225.02 0.03 -190.21* 34.91 -15.61 994.71 2008 Audited 994.71 296.02 0.21 20.84** 0.82 -20.55 1292.05
Two subsidiaries of XYZ LTD , viz., Senor Organics Pvt Ltd and XYZ LTD Life Sciences Ltd, were permitted to be merged with XYZ LTD as per High Court of Andhra Pradesh order dated 21.6.07. The two subsidiaries were making losses and these losses were adjusted through the securities premium account of XYZ LTD. The other details relating to Securities Premium account consisted of reduction in investments value (Rs 82.53 crores), Product development costs (Rs 53.69 crores), and adjustment for receivables written off (Rs 31.32 crores), reduction in value of fixed assets (Rs 12.00 crores) and FCCB expenses (Rs 10.67) crores. Premium on conversion of FCCB (Rs.19.34cr.)and exercise of ESOPS(Rs.1.50cr.)
Comments:
TNW is on an increasing trend and is considered satisfactory
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Synopsis of Balance Sheet:
Sources of funds 2006-07 (Audited) 26.67 902.65
(Rs. in crores) 2007-08 (Audited) 26.88 1193.72
Share Capital Reserves and Surplus
Secured Loans : short term : long term Unsecured Loans Deferred Tax Liability Total Application of Funds Fixed Assets (Gross Block) Less Depreciation Net Block Capital Work in Progress Investments Inventories Sundry debtors Cash & bank balances Loans & advances to subsidiaries and group companies Loans & advances to others ( Less : Current liabilities ) (Less : Provisions ) Net Current Assets Misc. Expenditure (To the extent not written off or adjusted ) Total
Unsecured Loans: Consists of FCCBs issued during2005-06 and 2006-07, sales tax deferment loan and temporary short term loans (Rs. in crores) As on FCCBs of USD 1000 each (balance as on date) Exchange rate(Rs./USD) FCCBs value Sales tax deferment loan Short term loan from banks Total 43.46 1129.96 70.43 90.00 1290.39 40.10 1024.56 72.03 77.19 1173.78 260000 31.03.2007 255500 31.03.2008
The short term loans were corporate loans obtained from Bank of India and Nova Scotia Bank to augment net working capital requirement.
(Marks scored in borrower rating / facility rating to be mentioned).
Existing CRA based on Audited balance Sheet as on Validated on 31.03.2007 20.11.2007
Proposed 31.03.2008 04.09.2008
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Risks and mitigating factors
Critical risks perceived Intense competition for generic drugs, very long period for development & commercialization of new molecules and rapid pace of innovation resulting in older molecules being phased out for more effective new molecules may put both bottom line and top line under strain. Company¶s inability to obtain necessary regulatory approvals for products or failure of the product at any stage may disturb its revenue projections. The company continues to carry risks of competition, litigation and delays or denials of regulatory approvals The company had issued FCCBs of USD 55.50 mio and USD 200 mio due for redemption in 2010 and 2011 respectively. The conversion price of the first lot(USD 55.50 mio) at Rs.522.036 a share and the second lot (USD 200 mio) at Rs.1014.06 a share are high compared to the current price of Rs.277.40 a share and hence may not attract conversion to equity. Redemption might put heavy The current frequent downturns in the stock markets are not expected to continue for a long time. With 2 more years left before redemption is due, the share price is expected to rise to desired level to attract conversion of FCCBs to equity before redemption. The company¶s auditors in their auditors¶ report stated as the outcome of the redemption cannot be presently determined; no provision has been made for this liability that may arise as contingency. In the event the FCCBs are redeemed the company Mitigating factors The company has been gearing up for the post patent regime by investing in subsidiaries to enter into regulated and emerging markets, upgrading manufacturing facilities, increasing capacities, investing in R&D substantially and complying with various statutory requirements. This will help the company to face challenges without any difficulty
pressure on the company as redemption reserve is would be able to meet from internal accruals. As on 31.03.08 the not being built up. The estimated value of company has free reserves of Rs.1193.72 crores and they are redemption is approximately Rs.1,700.00 crores estimated to go to Rs.2010.45 crores. Hence they may not experience any difficulty at the material time. The TOL/TNW ratio as on 31.03.08 stands at 1.73 which allows them to go for adequate borrowing in case of need. As such the company is confident of meeting this liability whenever it is due.
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Warning signals / Major irregularities in Inspection report / Credit Audit:/Other reports
Report I/A Audit Report Credit Audit Reports Other Audit Reports Qualification if any, in Auditors report
Date 18.07.2007 26.07.2007 -31.03.2008
Warning Signal / Comments Major irregularities NIL
(Rs. crores) Security Details Value and basis of valuation Date of opinion report
Primary Security
Hypothecation of all chargeable current assets of the company on paripassu basis with other working capital bankers under MBA. Second charge on company¶s fixed assets on paripassu basis with working capital bankers under MBA 1. ShriP.V.Rama Prasad Reddy 2. Shri K Nityananda Reddy For SBI For others 59.69% 59.69%
-902.52 (WDV as on 31.03.08) 2.04 2.85
--
Collateral Security
--
Guarantee
03.10.2008
Collateral coverage %
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LOAN POLICY: DEVIATIONS AND COMPLIANCE: a. Whether names of promoters, directors, company, group concerns figure in defaulter/willful defaulters list: RBI defaulters¶ list dated : 30.09.07 : No Name of the director Default in connection with: Remarks (Name of the company) Justification for considering continuation / enhancement Not Applicable in facilities) Wilful defaulters¶ list dated : Name of the director 31.12.07 Default in connection with: (Name of the company : No Remarks
Justification for considering continuation / enhancement Not Applicable in facilities) ECGC caution list No Dt.31.07.08 CIBIL dt. 30.09.07 No
Deviations in Loan Policy
Parameters Indicative Min/Max level as per loan policy 1.33 3.00 1.75:1 2:1 20% 15% 7.53% 7.5% 15% Company's level as on 31.03.2008 1.53 1.73 Not Applicable Not Applicable Not Applicable 0.45% 0.45% 0.45% 0.56% --
1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
Liquidity TOL/TNW Average gross DSCR (TL) Debt / equity Promoters contribution Prudential norms FB exposure to the industry Substantial exposure : Borrower Substantial exposure : Group Others
Brief comments only if there is deviation (Not more than 5 lines) No Deviation
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Environmental and sustainability implications
XYZ Ltd.(XYZ LTD ) has an effective environment, health and safety(EHS)
management system and a dedicated team is vested with the responsibility of implementation of the same. Some of the critical action points of the system are Manufacturing activities are managed in strict compliance with regulations and operating procedures established The principles, standards and solutions adopted follow the best international practices Operational management are based on state-of-the-art criteria in terms of environmental protection Technological processes aim at promoting products which are compatible with the environment
Statutory dues/other contingent liabilities
Dues Statutory dues Contingent liabilities Level (Rs in crores) NIL 36.65 Impact on financial position Not Applicable As against a TNW of Rs.1292.05 crores, the contingent liabilities disclosed in the audited balance sheet as on 31.03.2008 represent disputed demands for direct and indirect taxes amounting Rs.36.65 crores and represent 2.84% of TNW. These pertain to different years starting from 2002-03. These disputes are pending at various levels of the tax authorities. The company considers these matters as normal business issues and is confident of absorbing the same in case they are crystallized. This has been factored in the CRA rating.
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Recommendation for sanction / approval. XYZ LTD has been banking with us since 1997 Overall earnings for the branch during 2008-09 are estimated at Rs.12.03 crores XYZ Ltd.(XYZ LTD ) is among the top six ceutical companies in India and is the largest bulk drug player in the domestic market The exports constitute over 60% of the total sales Our foreign exchange exposure on the company is expected to increase A sizable chunk of business is expected to be gives to us upon commencement of XYZ LTD¶s new facility coming up at SEZ at Polepally village, Jadcherla mandal, Mahaboobnagar district, A.P. External credit rating agency Fitch has assigned A+/F1+ to XYZ LTD¶s bank loan facilities which indicate the strongest capacity for timely payment of financial commitments.
Assessment of WC facilities:
(If the assessment of the WC limits is based on any other parameters, please specify them along with an explanation) Inventory & receivable levels: (Months) Inventory/Payments Actuals Estimated Projected 2008 2009 2010 Raw material -Imported 2.18 2.50 2.50 -Domestic 3.99 3.50 3.00 SIP 1.62 1.50 1.50 FG 0.22 0.25 0.25 Receivables 4.24 4.21 3.96 S Creditors 1.96 1.45 1.47
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RM (Indigenous)/ RM (Imported): The holding levels are mostly in tune with the past trends and considered acceptable. Finished Goods: .The levels are in tune with past trends. Receivables: The holding levels of are mostly at the same level as considered in the past and are acceptable. The sundry creditors period is estimated to be brought down from 1.96 months to 1.45 months as per the current practices of the company to reduce dependence on trade creditors.
Assessed Bank Finance Assessed Bank Finance Actuals Estimated Projected
Year Total CA Other CL WC Gap Net WC Bank finance NWC/TCA(%) BF/TCA(%) OCL/TCA(%) Interpretation:
The company is found eligible for bank finance of Rs.750.00 crores. Our share of 20% of ABF at Rs.150.00 crores is recommended for sanction accordingly. Other parameters like NWC/TCA and OCL/TCA are satisfactory. BF/TCA which is expected to slightly go up in 2008-09 is expected to come down in 2009-10.
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Assessment of Earning Per Capital / Foreign Bill Discounted limits : EPC/PCFC Limit: (Rs. In crores) Estimated Export Sales Estimated cost of Export Sales Average procurement/processing time Cost of export orders outstanding at any time (1755*6/12) Less: Margin on EPC(10%) EPC Limit assessed EPC Limit recommended(our share)
1950.00 1755.00 6 months 877.50 87.75 789.75 or say 750.00 150.00
Assessment of Foreign Bill Discounted/Export Bills Receivable Limits (Rs. in crores) Sl. No 1 2 3 3 4. 5. Particulars Estimated Export Sales Average credit allowed on exports FBD limit eligible FBD Limit assessed FBD Limit requested Our share 1950.00 5 months 812.20 750.00 750.00 150.00
The average credit period allowed is 5 months which is in line with the past trends. EPC/PCFC/FBD/EBR limits have been assessed at Rs.750.00 crores and our share is Rs.150.00 crores
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PART 2 - DATA ANALYSIS
COMPETITORS DETAILS: The Main competitors of State Bank of India are ICICI Bank in private sector banks and Syndicate Bank, Canara Bank and Corporation Bank in public sector. The credit policies adopted by SBI can be better understood by the following representation: COMPARISON OF LOANS & ADVANCES OF STATE BANK OF INDIA WITH OTHER PUBLIC AND PRIVATE SECTOR BANKS For the year 2007: Name Of the Banks Series 1 State Bank Of India Syndicate Bank Canara Bank Corporation Bank HDFC Bank ICICI Bank UTI Bank Amt of advances(Cr) Series 2 202374.46 26729.21 60421.40 18546.37 25566.30 88991.75 15602.92
Amt of advances (Cr)
250000 200000 150000 100000 50000 0
Amt of advances
50
For the year 2008: Name Of the Banks Series 1 State Bank Of India Syndicate Bank Canara Bank Corporation Bank HDFC Bank ICICI Bank UTI Bank Amt of advances(Cr) Series 2 261641.54 36466.24 79425.69 23962.43 35061.26 143029.89 22314.23
Amt f a va ces( r)
300000 250000 200000 150000
100000 50000
Amt of advances(Cr)
0
51
For the year 2009: Name Of the Banks Series 1 State Bank Of India Syndicate Bank Canara Bank Corporation Bank HDFC Bank ICICI Bank UTI Bank Amt of advances(Cr) Series 2 337336.49 51670.44 98505.69 29949.65 46944.78 164484.38 36876.48
Amt of advances(Cr)
400000 350000 300000 250000 200000 150000 100000 50000 0
Amt of advances(Cr)
Interpretation: Considering the above data we can say that year on year the amount of advances lent by State Bank of India has increased on comparison with other Banks which indicates that the bank¶s business is really commendable and the Credit Policy it has adopted is absolutely good. SBI is ahead in terms of its business when compared to both Public Sector and Private Sector banks, this implies that SBI has incorporated sound business policies in its bank.
52
COMPARITIVE STUDY ON CREDIT RECOVERY MANAGEMENT For the year 2007: Name Banks State Bank Of India Syndicate Bank Canara Bank Corporation Bank HDFC Bank ICICI Bank UTI Bank Of The Loans Issued(Cr) 202374.46 26729.21 60421.40 18546.36 25566.30 88991.75 15602.92 120210.43 15422.75 35044.42 10478.70 14291.56 52327.15 8550.40 82164.03 11306.46 25376.96 8067.67 11274.74 36664.60 7052.52 Recovered(Cr) Outstanding(Cr)
For the year 2009: Name Of The Banks State Bank Of India Syndicate Bank Canara Bank Corporation Bank H C Bank Loans Issued 337336.49 51670.44 98505.69 29949.65 46944.78 164484.38 36876.48 Recovered 263264.32 31879.74 68449.67 15898.21 30125.16 98392.47 22429.03 Outstanding 74072.17 19790.7 30056.02 14051.44 16819.62 66091.91 14447.45
ICICI Bank UTI Bank
3 0000 300000 2 0000 200000 1 0000 100000 0000 0
PRIORITY SECTOR ADVANCES OF BANKS COMPARISON WITH OTHER PUBLIC SETOR BANKS Total Name of the Bank S.No Direct Agriculture Advances Indirect Total Weaker Priority Agriculture Agriculture Advances Amount (Cr) 7032 1464.64 3684 971.22 Advances Amount (Cr) 30516 5870.94 12032 1934.80 Section Sector Advances Advances Amount (Cr) 1 2 3 4 STAT BANK O IN IA SYN ICAT BANK CANARA BANK COR ORATION BANK 23484 4406.33 8348 963.58 Amount (Cr) 19883 3267.71 4423 665.32 Amount (Cr) 82895 14626.62 30937 9043.74
90000 80000 70000 60000 0000
Indirec Agr Advs
20000 10000 0
0
ST TE B NK OF IN IA
SYN ICATE BANK
CANARA BANK
CORPORATION BANK
5@3
To
97
30000
We er Sc Advs
Priority Advs
876
40000
To
Agr Advs
4354 2
rec Agr c
re
6
3
21 0 ) )
(
56
CHAPTER - V
FINDINGS & RECOMMENDATIONS
57
FINDINGS&RECOMMENDATIONS
Findings:
y Project findings reveal that SBI is sanctioning less Credit to agriculture, as compared with its key competitor¶s viz., Canara Bank, Corporation Bank, Syndicate Banketc y
Recovery of Credit: SBI recovery of Credit during the year 2008 is 62.4% Compared to other Banks. SBI µs recovery policy is very good, hence this reduces NPA
y Total Advances: On comparison, total advances of SBI has increased year on year. y
State Bank Of India
is granting credit in all sectors in an Equated Monthly
Installments so that anybody can borrow money easily
y
Project findings reveal that State Bank of India is lending more credit or sanctioning more loans as compared to other Banks
y
State bank Of India is expanding its Credit in the following focus areas: 1 SBI Term Deposits 2 SBI Recurring Deposits 3 SBI Housing Loan 4 SBI Car Loan 5 SBI Educational Loan 6 SBI Personal Loan «etc.
Recommendations:
y
SBI¶s direct agriculture advances as compared to other banks is 10.5% of the Net Bank¶s Credit, which shows that Bank has not lent enough credit to direct agriculture sector. In case of indirect agriculture advances, SBI is granting 3.1% of Net Banks Credit, which is less as compared to Canara Bank, Syndicate Bank and Corporation Bank. SBI has to entertain indirect sectors of agriculture so that it can have more number of borrowers for the Bank. SBI has advanced 13.6% of Net Banks Credit to total agriculture and 8.9% to weaker section and 41% to priority sector, which is less as compared with other Bank.
58
y
y
Learning¶s From Internship
Credit risk management is the core aspect in the present environment; I have done my Internship in State Bank of India keeping in mind the following aspects: 1. Overall view of credit risk management 2. Compared the credit portfolio of SBI with other banks 3. Macro level assessment of credit risk management of SBI with other Public and Private Sector Banks 4. Micro level assessment of credit risk management by SBI to its borrower with an example 5. While taking into account the credit risk policy of SBI, I have dealt in-depth of Basel Recommendations(NARSIMHAM COMMITTEE), which is an important aspect of Macro level of Credit Risk Management 6. I learnt about the credit creation policies for sanctioning loans to various sectors 7. I could study the risk management techniques such as Internal Rating and Risk Weights adopted by the Bank to different customers depending on various factors 8. The four categories under which the customer is generally placed are INCOMPETENCE LOW CAPITAL HIGH RISK AGGRESSION HIGH CAPITAL HIGH RISK
RISK AVERSION LOW CAPITAL LOW RISK
RISK MANAGEMENT HIGH CAPITAL LOW RISK
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REFERENCES
Books:
CREDIT RISK MANAGEMENT Concepts and Cases C. Vijaychandra Kumar
RISK MANAGEMENT Indian Institute Of Banking and Finance
ESSENTIAL OF RISK MANAGEMENT Michel Crouhy, Dan Galai, Robert Mark