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Project on credit risk in  indian banking system

Project on credit risk in indian banking system



Project on credit risk in indian banking system

Project on credit risk in indian banking system



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    Project on credit risk in  indian banking system Project on credit risk in indian banking system Document Transcript

    • SAAB MARFIN MBA RESEARCH METHODOLOGYCORPORATE BANKINGSTATEMENT OF PROBLEM:To study the emergence and evolution of the corporate banking as animportant division of the commercial banking and also to study the creditappraisal models supporting the increased activities of corporate lending bybanks.In today’s global Banking arena, Corporate Bankers are facing a string ofunprecedented and sweeping challenges in the areas like TreasuryManagement, Trade Finance, Risk Management, Compliance Management,Electronic Trading and Derivatives Markets. Compounding this are themounting complexities from ongoing regulatory changes, decreasingmargins and fierce competitionNEED FOR STUDY:Over the period of time, with the tremendous increase in the growth patternof industrial development, the need for the corporate loans have increasedmore than ever. So, the increasing trend urges the banks and financialinstitutions to focus on corporate banking as a separate division. So, theresearchers have preferred to study the concept of corporate banking and allthe operational aspects attached to it in the entire process.OBJECTIVE OF THE STUDY: CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 2
    • SAAB MARFIN MBA To study the banking industry, as a whole with the help of various analysis including SWOT analysis, PEST analysis and Porter’s Five Force analysis. To acquire basic knowledge about the corporate lending in India and its relevance with respect to banks. To analyze the credit risk models of both public bank and private bank and bring out its comparative picture on the basis of various parameters. To study credit risk management strategies of bank.RESEARCH DESIGN:A research design is the arrangement of the condition for collection andanalysis of data. Actually it is the blueprint of the research project. Theresearch type is descriptive research. The main objective of this design issearch primary and secondary data.The research primarily focuses on the secondary sources and first handinformation through focus group interviews.DATA COLLECTION:As the research type is descriptive, the method of data collection wasinformal.SOURCES:The relevant information were collected from both primary and secondarysources like follow up with bank managers web search, newspaper articles CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 3
    • SAAB MARFIN MBATOOLS:Focus group interviews with the managers of banks.BENEFICIARIES:For the banks:It will give them the in depth review of the various aspects involved in thecorporate banking with emphasis on the credit risk management.For the corporates:The report shows the comparative study of the credit appraisal andsanctioning procedure involved in the credit lending by banks as well asfinancial institutions. Secondly, they will also get the relevance of thecorporate lending by the banks and its various relevant aspects.For the management students:The report studies the entire banking industry from various aspects usingdifferent analytical tools. Secondly, it introduces into the world of creditlending and its trend in India. Moreover, it also shows the operationalprocedures involved in the corporate lending with emphasis on riskmodeling and credit risk management.LIMITATIONS OF THE STUDY:The scope of the report is mainly depends on the information extracted fromsecondary sources and the information given by the managers of banks. So,lack of the availability of the first hand information may act as a limitation tothe project report. CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 4
    • SAAB MARFIN MBA CHAPTER: 1AN OVERVIEW ON BANKING INDUSTRYIn recent years, the banking industry around the world has been undergoinga rapid transformation. In India also, the wave of deregulation of early 1990shas created heightened competition and greater risk for banks and otherfinancial intermediaries. The cross-border flows and entry of new playersand products have forced banks to adjust the product-mix and undertakerapid changes in their processes and operations to remain competitive. Thedeepening of technology has facilitated better tracking and fulfillment ofcommitments, multiple delivery channels for customers and faster resolutionof miscoordinations.Unlike in the past, the banks today are market driven and market responsive.The top concern in the mind of every banks CEO is increasing or at leastmaintaining the market share in every line of business against the backdropof heightened competition. With the entry of new players and multiplechannels, customers (both corporate and retail) have become morediscerning and less "loyal" to banks. This makes it imperative that banksprovide best possible products and services to ensure customer satisfaction.To address the challenge of retention of customers, there have been activeefforts in the banking circles to switch over to customer-centric businessmodel. The success of such a model depends upon the approach adopted bybanks with respect to customer data management and customer relationshipmanagement.Over the years, Indian banks have expanded to cover a large geographic &functional area to meet the developmental needs. They have been managing CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 6
    • SAAB MARFIN MBAa world of information about customers - their profiles, location, etc. Theyhave a close relationship with their customers and a good knowledge of theirneeds, requirements and cash positions. Though this offers them a uniqueadvantage, they face a fundamental problem.During the period of planned economic development, the bank productswere bought in India and not sold. What our banks, especially those in thepublic sector lack are the marketing attitude. Marketing is acustomer-oriented operation. What is needed is the effort on their part toimprove their service image and exploit their large customer informationbase effectively to communicate product availability. Achieving customerfocus requires leveraging existing customer information to gain a deeperinsight into the relationship a customer has with the institution, andimproving customer service-related processes so that the services are quick,error free and convenient for the customers.Furthermore, banks need to have very strong in-house research and marketintelligence units in order to face the future challenges of competition,especially customer retention. Marketing is a question of demand (customers)and supply (financial products & services, customer services through variousdelivery channels). Both demand and supply have to be understood in thecontext of geographic locations and competitor analysis to undertakefocused marketing (advertising) efforts. Focusing on region-specificcampaigns rather than national media campaigns would be a better strategyfor a diverse country like India.Customer-centricity also implies increasing investment in technology.Throughout much of the last decade, banks world-over have re-engineeredtheir organizations to improve efficiency and move customers to lower cost,automated channels, such as ATMs and online banking.As is proved by the experience, banks are now realizing that one of theirbest assets for building profitable customer relationships especially in a CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 7
    • SAAB MARFIN MBAdeveloping country like India is the branch-branches are in fact a keychannel for customer retention and profit growth in rural and semi-urban setup. However, to maximize the value of this resource, our banks need totransform their branches from transaction processing centers intocustomer-centric service centers. This transformation would help themachieve bottom line business benefits by retaining the most profitablecustomers. Branches could also be used to inform and educate customersabout other, more efficient channels, to advise on and sell new financialinstruments like consumer loans, insurance products, mutual fund products,etc.There is a growing realization among Indian banks that it no longer pays tohave a "transaction-based" operating model. There are active efforts todevelop a relationship-oriented model of operations focusing oncustomer-centric services. The biggest challenge our banks face today is toestablish customer intimacy without which all other efforts towardsoperational excellence are meaningless. The banks need to ensure throughtheir services that the customers come back to them. This is because a majorchunk of income for most of the banks comes from existing customers,rather than from new customers.Customer relationship management (CRM) solutions, if implemented andintegrated correctly, can help significantly in improving customer satisfactionlevels. Data warehousing can help in providing better transactionexperiences for customers over different transaction channels. This isbecause data warehousing helps bring all the transactions coming fromdifferent channels under the same roof. Data mining helps banks analyseand measure customer transaction patterns and behaviour. This can help alot in improving service levels.It must be noted, however, that customer-centric banking also involvesmany risks. The banking industry world over is being thrust into a wild newworld of privacy controversy. The banks need to set up serious governancesystems for privacy risk management. It must be remembered that customer CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 8
    • SAAB MARFIN MBAprivacy issues threaten to compromise the use of information technologywhich is at the very center of e-commerce and customer relationshipmanagement - two areas which are crucial for banks future.The critical issue for banks is that they will not be able to safeguardcustomer privacy completely without undermining the most excitinginnovations in banking. These innovations promise huge benefits, both forcustomers and providers. But to capture them, financial services companiesand their customers will have to make some critical tradeoffs. When thestakes are so high, nothing can be left to chance, which is why banks mustimmediately begin developing comprehensive approaches to the privacyissue.The customer centric business models based on the applications ofinformation technology are sustainable only if the banks protect clientconfidentiality in the process - which is the basic foundation of bankingbusiness.1.1 EVOLUTION OF BANKING IN INDIA CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 9
    • SAAB MARFIN MBABanking in India has its origin as early as the Vedic period. It is believed thatthe transition from money lending to banking must have occurred evenbefore Manu, the great Hindu Jurist, who has devoted a section of his workto deposits and advances and laid down rules relating to rates of interest.During the Mogul period, the indigenous bankers played a very importantrole in lending money and financing foreign trade and commerce. Duringthe days of the East India Company, it was the turn of the agency houses tocarry on the banking business.The General Bank of India was the first Joint Stock Bank to be established inthe year 1786. The others which followed were the Bank of Hindustan andthe Bengal Bank. The Bank of Hindustan is reported to have continued till1906 while the other two failed in the meantime. In the first half of the 19thcentury the East India Company established three banks; the Bank of Bengalin 1809, the Bank of Bombay in 1840 and the Bank of Madras in 1843. Thesethree banks also known as Presidency Banks were independent units andfunctioned well. These three banks were amalgamated in 1920 and a newbank, the Imperial Bank of India was established on 27th January 1921. Withthe passing of the State Bank of India Act in 1955 the undertaking of theImperial Bank of India was taken over by the newly constituted State Bank ofIndia.The Reserve Bank which is the Central Bank was created in 1935 by passingReserve Bank of India Act 1934. In the wake of the Swadeshi Movement, anumber of banks with Indian management were established in the countrynamely, Punjab National Bank Ltd, Bank of India Ltd, Canara Bank Ltd, IndianBank Ltd, the Bank of Baroda Ltd, the Central Bank of India Ltd. On July 19,1969, 14 major banks of the country were nationalized and in 15th April1980 six more commercial private sector banks were also taken over by thegovernment. CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 10
    • SAAB MARFIN MBAThe Indian banking can be broadly categorized into nationalized(government owned), private banks and specialized banking institutions. TheReserve Bank of India acts a centralized body monitoring any discrepanciesand shortcoming in the system. Since the nationalization of banks in 1969,the public sector banks or the nationalized banks have acquired a place ofprominence and has since then seen tremendous progress. The need tobecome highly customer focused has forced the slow-moving public sectorbanks to adopt a fast track approach. The unleashing of products andservices through the net has galvanized players at all levels of the bankingand financial institutions market grid to look anew at their existing portfoliooffering.Conservative banking practices allowed Indian banks to be insulated partiallyfrom the Asian currency crisis. Indian banks are now quoting a highervaluation when compared to banks in other Asian countries (viz. Hong Kong,Singapore, Philippines etc.) that have major problems linked to huge NonPerforming Assets (NPAs) and payment defaults. Co-operative banks arenimble footed in approach and armed with efficient branch networks focusprimarily on the ‘high revenue’ niche retail segments.The Indian banking has finally worked up to the competitive dynamics of the‘new’ Indian market and is addressing the relevant issues to take on themultifarious challenges of globalization. It has come a long way from being asleepy business institution to a highly proactive and dynamic entity. Banksthat employ IT solutions are perceived to be ‘futuristic’ and proactive playerscapable of meeting the multifarious requirements of the large customersbase. Private banks have been fast on the uptake and are reorienting theirstrategies using the internet as a medium The Internet has emerged as thenew and challenging frontier of marketing with the conventional physicalworld tenets being just as applicable like in any other marketing medium. CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 11
    • SAAB MARFIN MBAThis transformation has been largely brought about by the large dose ofliberalization and economic reforms that allowed banks to explore newbusiness opportunities rather than generating revenues from conventionalstreams (i.e. borrowing and lending).The banking in India is highly fragmented with 30 banking units contributingto almost 50% of deposits and 60% of advances. Indian nationalized banks(banks owned by the government) continue to be the major lenders in theeconomy due to their sheer size and penetrative networks which assuresthem high deposit mobilization. The Indian banking can be broadlycategorized into nationalized, private banks and specialized bankinginstitutions.The Reserve Bank of India acts as a centralized body monitoring anydiscrepancies and shortcoming in the system. It is the foremost monitoringbody in the Indian financial sector. The nationalized banks (i.e.government-owned banks) continue to dominate the Indian banking arena.Industry estimates indicate that out of 274 commercial banks operating inIndia, 223 banks are in the public sector and 51 are in the private sector.The private sector bank grid also includes 24 foreign banks that have startedtheir operations here. Under the ambit of the nationalized banks come thespecialized banking institutions. These co-operatives, rural banks focus onareas of agriculture, rural development etc., unlike commercial banks theseco-operative banks do not lend on the basis of a prime lending rate. Theyalso have various tax sops because of their holding pattern and lendingstructure and hence have lower overheads. This enables them to give amarginally higher percentage on savings deposits. Many of thesecooperative banks diversified into specialized areas (catering to the vastretail audience) like car finance, housing loans, truck finance etc. in order tokeep pace with their public sector and private counterparts, the co-operativebanks too have invested heavily in information technology to offer high-end CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 12
    • SAAB MARFIN MBAcomputerized banking services to its clients.Complementing the roles of the nationalized and private banks are thespecialized financial institutions or Non Banking Financial Institutions(NBFCs). With their focused portfolio of products and services, these NonBanking Financial Institutions act as an important catalyst in contributing tothe overall growth of the financial services sector. NBFCs offer loans forworking capital requirements, facilitate mergers and acquisitions, IPOfinance, etc. apart from financial consultancy services. Trends are nowchanging as banks (both public and private) have now started focusing onNBFC domains like long and medium-term finance, working caprequirements, IPO financing etc. to meet the multifarious needs of thebusiness community.1.2 STRUCTURE OF BANKING INDUSTRY:Banking system plays an important role in a country’s economy. It promotesgrowth and development of the country. Indian money market comprisesorganized and the unorganized institutions. The organized and unorganizedinstitutions in the Indian banking system serve a source of short term creditto agriculture, industry, trade and commerce. CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 13
    • SAAB MARFIN MBA In the Indian banking structure the Reserve Bank of India is the central bank. It regulates, direct and controls the banking and financial institutions in the country. There are three high banking institutions, namely, RBI, NABARD and EXIM Bank. There are separate financial institutions catering to the needs of different sectors of the economy. Development Banks, Investment Banks, Co-operative Banks, Land Development Banks, Commercial Banks in public and private sectors, NABARD, RRBs, EXIM Bank, etc. The indigenous bankers and moneylenders dominate unorganized sector. The Indian banking structure can be seen from the chart shown under: Apex Banking InstitutionRBI IDBI NABARD EXIM Bank SIDBINHB IRBI CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 14
    • SAAB MARFIN MBA Banking Institutions Commercial Regional Rural Co- operative Land Development Development Banks Banks Banks Banks Bank Public Private Foreign PAC’s CCB’s SCB’s PLD’s SLDB Sector Sector exchange Banks Bank Banks All India State Level LevelSBI and NationalisedSubsidiaries Banks IDBIICICI SIDBISFC’s SIDC Foreign Indian Non – Schedule Bank Scheduled Bank Bank CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 15
    • SAAB MARFIN MBAThe chart reveals that there are several apex banking institutions working atthe national level. RBI is the highest banking authority regulating, directingand controlling all the banking and financial institutions in the country.There are development banks, namely IDBI, SIDBI, ICICI at the national leveland State Financial Corporations and State Industrial DevelopmentCorporations which have been set-up.There are 29 public sector banks. Co-operative banks have three tier system.At the village level there is Primary Agriculture Co-operative Society(PACs), atthe district level there is Central Co-operative Bank and at the state levelthere is State Co-operative Bank. Co-operative banks provide short term andmedium loans to the agriculture sector. Land Development Banks providelong term agriculture credit. It comprises Primary Land DevelopmentBank(PLDB) at ht district level and State Land Development Bank(SLDB) at thestate level. RRBs provide loans and advances to the rural poor and NABARD isan apex body regulating, directing and controlling the financial and bankinginstitutions providing finance for the agriculture and rural development.TYPES OF BANKSModern age is the age of specialization with the changing situationworldwide, bank functions have also undergone a major change. Economicconditions and financial needs of a country are different than those of othercountries throughout the world. Some financial institutions deal in acceptingdeposits and making loans and advances to different sectors of the economy.Some institution makes loans and advances for medium and short term,while others are meant for long term advances. Some are financing industrialsector and foreign trade while others are advancing loans to agriculturesector. CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 16
    • SAAB MARFIN MBAIn broader sense of the term banks may be classified into followingcategories: Central Bank Commercial Banks Development Banks Investment Banks Co-operative Banks Foreign Exchange Banks Savings Banks Export-Import Bank Specialized National Banks Indigenous Bankers International Financial Institutions CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 17
    • SAAB MARFIN MBA1.3 GROWTH OF BANKING SECTOR(DECADE WISE)Pre-Liberalization: The growth of the Banking Sector in the preliberalization period can be analyzed as under.1971-80:This was the decade immediately following the Nationalization of 14commercial banks. Also the banking sector grew at the fastest pace in thisdecade. 1. Assets:The assets of the sector grew at 21.58 % CAGR 1 . They increased fromRS.82.52bn to Rs.582.33bn. This kind of growth was achieved due tomassive increase in the number of branches resulting in a spurt in depositmobilization. 2. Deposits:The deposits grew from Rs.64.79bn to Rs.439.87bn. at a CAGR 21.11 %. Thegrowth was higher in later part of the decade. This growth rate would havebeen higher had the current accounts grown at a rate higher than 18 %. This CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 18
    • SAAB MARFIN MBAindicates people’s preference for using bank as place to keep their savings.The bank was not used as a place to keep money to be used for transactionmotive. This is further clarified by the poor ratio of average current depositsto total deposits at 23.45 %. 3. Advances:The advances grew at 19.26 % CAGR from Rs.46.85bn to Rs.272.67bn. Alsothe growth was higher in the later part of the decade. Thus the advancesgrew at a pace slower than the deposits due to decreasing credit depositratio, which reduced from 72.30 % in 1970 to 61.99 % in 1980. 4. Net worth:The Net worth increased from Rs.1.16bn to Rs.5.33bn at a CAGR of 16.48 %.The Capital of the banks remained flat throughout the decade growing atjust 8.54 % and also the growth came in the later part of the decade. Thecapital increased form Rs.470.2mn to Rs.1.07bn.However, the Reserves grew at a healthy pace of 20 % CAGR from Rs.690mnto Rs.4.27bn. Thus the banks in this decade did not raise capital and fundedtheir growth from internal accruals. This resulted in a wide gap betweenReserves and Capital indicating the banks’ hunger for Capital.1981-90: 1. Assets:The growth of the sector was significantly subdued since the last decade.The assets grew at just 16.30 % CAGR compared to 21.58 % in the previousdecade. The total assets increased from Rs.582.33bn to Rs.2636.93bn. CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 19
    • SAAB MARFIN MBA 2. Deposits:Deposits increased from Rs.439.86bn to Rs.1820.46bn at a CAGR of 15.26 %.The current accounts remained the usual laggards in terms of growthgrowing at just 12.67 % CAGR. The term and saving deposits grew at aslightly faster pace of 16.17 % and 15.5 % CAGR. 3. Advances:Advances grew at a CAGR of 16.79 % from Rs.272.67bn to Rs.1287.85bn.This is due to the fact that the banks have stepped up their credit-depositratio from 62 % to 70.74 %. This indicates higher investment than saving inthe economy. 4. Net worth:The Net worth increased from Rs.5.33bn to Rs.47.1bn. Thus the net worthgrew at a whopping 24.33 % CAGR.The capital hungry banks went on capital raising spree in the latter half ofthe decade. Thus the capital grew at a CAGR of 34.53 %. In absolute terms,the capital soared from Rs.1.06bn at the beginning of the decade toRs.20.73bn at the end of the decade.The Reserves however grew at more or less constant pace of 19.97 % CAGRthroughout the decade.At the end of the decade the Capital had kept pace with the Reserves and thegap between them had significantly narrowed down.Post-Liberalization: The growth of this sector after 1991 can berepresented as under.1991-2000: 1. Assets: CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 20
    • SAAB MARFIN MBAThe rate of the sector further slowed down during this decade. The assetsgrew at a CAGR of 15.24 % from Rs.2636.93bn to Rs.11103.68bn. Thegrowth rate however, was greater in the later part of the decade indicatingfuture prospects of increase in growth. 2. Deposits:The deposits grew from Rs.1820.47bn to Rs.9003.06bn at a CAGR of16.69 %. There was a spurt in the last 3-4 years of the decade indicatingimproving trend. In this decade however, the savings accounts were thelaggards in terms of growth at 13.34 % CAGR. The term deposits grew at18.38 % and current deposits grew at 15.23 %. This reversal of trend ingrowth rates shows that the people are increasingly using banks to depositmoney to be used for transaction motive. 3. Advances:The advances increased from Rs.1287.85bn to Rs.4434.69bn at a CAGR of12.46 %. The lower growth in advances is due to the decline in credit-depositratio from 70.74 % in 1990 to 49.26 %. This shows there was a markeddecline in investment in this decade with savings exceeding investment. 4. Net worth:The Net worth grew at a feverish pace of 36.60 % CAGR, the highest in lastthree decades. This was mainly because the RBI opened the Banking sectorto Private sector. As many as 9 New Private Sector Banks started theiroperations in this period. They brought a lot of capital in the period 1993-95.However in the later half of the decade, capital growth was virtually nil.The Reserves grew at 37.54 % CAGR from Rs.26.36bn Rs.438.34bn. However,contrary to Capital the Reserves recorded exceptional growth in the later halfof the decade due to improving profits of private as well as public sectorbanks. However the gap between reserves and capital is once again widening. CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 21
    • SAAB MARFIN MBALiberalization and de-regulation process started in 1991-92 has made a seachange in the banking system. From a totally regulated environment, wehave gradually moved into a market driven competitive system. Our movetowards global benchmarks has been, by and large, calibrated and regulatordriven. The pace of changes gained momentum in the last few years.Globalization would gain greater speed in the coming years particularly onaccount of expected opening up of financial services under WTO. Four trendschange the banking industry world over, viz. 1) Consolidation of playersthrough mergers and acquisitions, 2) Globalisation of operations, 3)Development of new technology and 4) Universalisation of banking. Withtechnology acting as a catalyst, we expect to see great changes in thebanking scene in the coming years. The Committee has attempted tovisualize the financial world 5-10 years from now. The picture that emergedis somewhat as discussed below. It entails emergence of an integrated anddiversified financial system. The move towards universal banking has alreadybegun. This will gather further momentum bringing non-banking financialinstitutions also, into an integrated financial system.The traditional banking functions would give way to a system geared to meetall the financial needs of the customer. We could see emergence of highlyvaried financial products, which are tailored to meet specific needs of thecustomers in the retail as well as corporate segments. The advent of newtechnologies could see the emergence of new financial players doingfinancial intermediation. For example, we could see utility service providersoffering say, bill payment services or supermarkets or retailers doing basiclending operations. The conventional definition of banking might undergochanges.The competitive environment in the banking sector is likely to result inindividual players working out differentiated strategies based on theirstrengths and market niches. For example, some players might emerge as CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 23
    • SAAB MARFIN MBAspecialists in mortgage products, credit cards etc. whereas some couldchoose to concentrate on particular segments of business system, whileoutsourcing all other functions. Some other banks may concentrate on SMEsegments or high net worth individuals by providing specially tailoredservices beyond traditional banking offerings to satisfy the needs ofcustomers they understand better than a more generalist competitor.International trade is an area where India’s presence is expected to showappreciable increase. With the growth in IT sector and other IT EnabledServices, there is tremendous potential for business opportunities. Keepingin view the GDP growth forecast under India Vision 2020, Indian exports canbe expected to grow at a sustainable rate of 15% per annum in the periodending with 2010. This again will offer enormous scope to Banks in India toincrease their forex business and international presence. Globalizationwould provide opportunities for Indian corporate entities to expand theirbusiness in other countries. Banks in India wanting to increase theirinternational presence could naturally be expected to follow these corporatesand other trade flows in and out of India.Retail lending will receive greater focus. Banks would compete with oneanother to provide full range of financial services to this segment. Bankswould use multiple delivery channels to suit the requirements and tastes ofcustomers. While some customers might value relationship banking(conventional branch banking), others might prefer convenience banking(e-banking).One of the concerns is quality of bank lending. Most significant challengebefore banks is the maintenance of rigorous credit standards, especially inan environment of increased competition for new and existing clients.Experience has shown us that the worst loans are often made in the best oftimes. Compensation through trading gains is not going to support the CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 24
    • SAAB MARFIN MBAbanks forever. Large-scale efforts are needed to upgrade skills in credit riskmeasuring, controlling and monitoring as also revamp operating procedures.Credit evaluation may have to shift from cash flow based analysis to“borrower account behaviour”, so that the state of readiness of Indian banksfor Basle II regime improves. Corporate lending is already undergoingchanges. The emphasis in future would be towards more of fee basedservices rather than lending operations. Banks will compete with each otherto provide value added services to their customers.Structure and ownership pattern would undergo changes. There would begreater presence of international players in the Indian financial system.Similarly, some of the Indian banks would become global players.Government is taking steps to reduce its holdings in Public sector banks to33%. However the indications are that their PSB character may still beretained.Mergers and acquisitions would gather momentum as managements willstrive to meet the expectations of stakeholders. This could see theemergence of 4-5 world class Indian Banks. As Banks seek niche areas, wecould see emergence of some national banks of global scale and a numberof regional players.Corporate governance in banks and financial institutions would assumegreater importance in the coming years and this will be reflected in thecomposition of the Boards of Banks.Concept of social lending would undergo a change. Rather than being seenas directed lending such lending would be business driven. With SME sectorexpected to play a greater role in the economy, Banks will give greateroverall focus in this area. Changes could be expected in the deliverychannels used for lending to small borrowers and agriculturalists and CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 25
    • SAAB MARFIN MBAunorganized sectors (micro credit). Use of intermediaries or franchise agentscould emerge as means to reduce transaction costs.Technology as an enabler is separately discussed in the report. It would notbe out of place, however, to state that most of the changes in the landscapeof financial sector discussed above would be technology driven. In theultimate analysis, successful institutions will be those which continue toleverage the advancements in technology in re-engineering processes anddelivery modes and offering state-of-the-art products and servicesproviding complete financial solutions for different types of customers.Human Resources Development would be another key factor defining thecharacteristics of a successful banking institution. Employing and retainingskilled workers and specialists, re-training the existing workforce andpromoting a culture of continuous learning would be a challenge for thebanking institutions.1.5 BANKING INDUSTRY REFORMS AND VISION 2010“A vision is not a project report or a plan target. It is an articulation ofthe desired end results in broader terms” - A.P.J.Abdul KalamVision is of an integrated banking and finance system catering to all financialintermediation requirements of customers. Strong market players will striveto uncover markets and provide all services, combining innovation, quality,personal touch and flexibility in delivery. The growing expectations of thecustomers are the catalyst for our vision. The customer would continue to bethe centre-point of our business strategy. In short, you lose touch with the CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 26
    • SAAB MARFIN MBAcustomer, and you lose everything.It is expected that the Indian banking and finance system will be globallycompetitive. For this the market players will have to be financially strong andoperationally efficient. Capital would be a key factor in building a successfulinstitution. The banking and finance system will improve competitivenessthrough a process of consolidation, either through mergers and acquisitionsthrough strategic alliances.Technology would be the key to the competitiveness of banking and financesystem. Indian players will keep pace with global leaders in the use ofbanking technology. In such a scenario, on-line accessibility will be availableto the customers from any part of the globe; ‘Anywhere’ and ‘Anytime’banking will be realized truly and fully. At the same time ‘brick and mortar’banking will co-exist with ‘on-line’ banking to cater to the specific needs ofdifferent customers.Indian Banking system has played a crucial role in the socio-economicdevelopment of the country. The system is expected to continue to besensitive to the growth and development needs of all the segments of thesociety. The banking system that will evolve will be transparent in itsdealings and adopt global best practices in accounting and disclosuresdriven by the motto of value enhancement for all stakeholders.Financial Sector Reforms set in motion in 1991 have greatly changed the faceof Indian Banking. The banking industry has moved gradually from aregulated environment to a deregulated market economy. The marketdevelopments kindled by liberalization and globalization have resulted inchanges in the intermediation role of banks. The pace of transformation hasbeen more significant in recent times with technology acting as a catalyst.While the banking system has done fairly well in adjusting to the new marketdynamics, greater challenges lie ahead. Financial sector would be opened up CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 27
    • SAAB MARFIN MBAfor greater international competition under WTO. Banks will have to gear upto meet stringent prudential capital adequacy norms under Basel II. Inaddition to WTO and Basel II, the Free Trade Agreements (FTAs) such as withSingapore, may have an impact on the shape of the banking industry. Bankswill also have to cope with challenges posed by technological innovations inbanking. Banks need to prepare for the changes. In this context the need fordrawing up a Road Map to the future assumes relevance. The idea of settingup a Committee to prepare a Vision for the Indian Banking industry came upin IBA, in this background.Managing Committee of Indian Banks’ Association constituted a Committeeunder the Chairmanship of Shri S C Gupta, Chairman & Managing Director,Indian Overseas Bank to prepare a Vision Report for the Indian BankingIndustry. The composition of the Committee is given at the end of the report.The Committee held its first meeting on 23rd June 2003 at Mumbai. Prior tothe meeting the members were requested to give their thoughts on thefuture landscape of the banking industry. A discussion paper based on theresponses received from members was circulated along with a questionnaireeliciting views of members on some of the specific issues concerninganticipated changes in the banking environment. In the meeting, whichserved as a brainstorming session, members gave their Vision of the future.A second meeting of the Committee was held at Chennai on 7th August 2003to have further discussions on the common views, which emerged in the firstmeeting, and also to examine fresh areas to be covered in the study. CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 28
    • SAAB MARFIN MBAThe Vision Statement prepared by the Committee is based on commonthinking that crystallized at the meetings. In the Chennai meeting it wasdecided to form a smaller group from among the members to draft thereport of the Committee. The group met thrice to finalize the draft report.The report was adopted in the final meeting of the Committee held atMumbai.When we talk about the future, it is necessary to have a time horizon inmind. The Committee felt, it would be rather difficult to visualize thelandscape of banking industry say, 20 years hence due to the dynamicenvironment. While Government of India brought out India Vision 2020,the Committee is of the view that the pace of changes taking place in thebanking industry and in the field of Information Technology would renderany attempt to visualize the banking scenario in 2020, inconceivable.The entire financial services sector may undergo a dramatictransformation. It was, therefore, felt that we should set our goals for thenear future say, for 5-10 years hence and appropriately call this exercise“Banking Industry – Vision 2010”. The three main aspects focused inthe banking vision includes product innovation, process re-engineeringand technology.PRODUCT INNOVATION AND PROCESS RE-ENGINEERINGWith increased competition in the banking Industry, the net interestmargin of banks has come down over the last one decade. Liberalizationwith Globalization will see the spreads narrowing further to 1-1.5% as inthe case of banks operating in developed countries. Banks will look forfee-based income to fill the gap in interest income. Product innovationsand process re-engineering will be the order of the day. The changes willCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 29
    • SAAB MARFIN MBAbe motivated by the desire to meet the customer requirements and toreduce the cost and improve the efficiency of service. All banks willtherefore go for rejuvenating their costing and pricing to segregateprofitable and non-profitable business. Service charges will be decidedtaking into account the costing and what the traffic can bear. From theearlier revenue = cost + profit equation i.e., customers are charged tocover the costs incurred and the profits expected, most banks havealready moved into the profit =revenue - cost equation. This has beenreflected in the fact that with cost of services staying nearly equal acrossbanks, the banks with better cost control are able to achieve higherprofits whereas the banks with high overheads due to under-utilisation ofresources, un-remunerative branch network etc., either incurred losses ormade profits not commensurate with the capital employed. The newparadigm in the coming years will be cost = revenue - profit.As banks strive to provide value added services to customers, the marketwill see the emergence of strong investment and merchant bankingentities. Product innovation and creating brand equity for specializedproducts will decide the market share and volumes. New products on theliabilities side such as forex linked deposits, investment-linked deposits,etc. are likely to be introduced, as investors with varied risk profiles willlook for better yields. There will be more and more of tie-ups betweenbanks, corporate clients and their retail outlets to share a commonplatform to shore up revenue through increased volumes.CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 30
    • SAAB MARFIN MBABanks will increasingly act as risk managers to corporate and otherentities by offering a variety of risk management products like options,swaps and other aspects of financial management in a multi currencyscenario. Banks will play an active role in the development of derivativeproducts and will offer a variety of hedge products to the corporatesector and other investors. For example, Derivatives in emerging futuresmarket for commodities would be an area offering opportunities forbanks. As the integration of markets takes place internationally,sophistication in trading and specialized exchanges for commodities willexpand. As these changes take place, banking will play a major role inproviding financial support to such exchanges, facilitating settlementsystems and enabling wider participation.Bancassurance is catching up and Banks / Financial Institutions havestarted entering insurance business. From mere offering of insuranceproducts through network of bank branches, the business is likely toexpand through self-designed insurance products after necessarylegislative changes. This could lead to a spurt in fee-based income ofthe banks.Similarly, Banks will look analytically into various processes and practicesas these exist today and may make appropriate changes therein to cutcosts and delays. Outsourcing and adoption of BPOs will become moreand more relevant, especially when Banks go in for larger volumes ofretail business. However, by increasing outsourcing of operationsthrough service providers, banks are making themselves vulnerable toproblems faced by these providers. Banks should therefore outsourceonly those functions that are not strategic to banks’ business. Forinstance, in the wake of implementation of 90 days’ delinquency normsCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 31
    • SAAB MARFIN MBAfor classification of assets, some banks may think of engaging externalagencies for recovery of their dues and in NPA management.Banks will take on competition in the front end and seek co-operation inthe back end, as in the case of networking of ATMs. This type ofco-opetition will become the order of the day as Banks seek to enlargetheir customer base and at the same time to realize cost reduction andgreater efficiency.TECHNOLOGY IN BANKINGTechnology will bring fundamental shift in the functioning of banks. Itwould not only help them bring improvements in their internalfunctioning but also enable them to provide better customer service.Technology will break all boundaries and encourage cross border bankingbusiness. Banks would have to undertake extensive Business ProcessRe-Engineering and tackle issues like a) how best to deliver products andservices to customers b) designing an appropriate organizational modelto fully capture the benefits of technology and business process changesbrought about. c) how to exploit technology for deriving economies ofscale and how to create cost efficiencies, and d) how to create a customer- centric operation model.Entry of ATMs has changed the profile of front offices in bank branches.Customers no longer need to visit branches for their day to day bankingtransactions like cash deposits, withdrawals, cheque collection, balanceCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 32
    • SAAB MARFIN MBAenquiry etc. E-banking and Internet banking have opened new avenues in“convenience banking”. Internet banking has also led to reduction intransaction costs for banks to about a tenth of branch banking.Technology solutions would make flow of information much faster, moreaccurate and enable quicker analysis of data received. This would makethe decision making process faster and more efficient. For the Banks, thiswould also enable development of appraisal and monitoring tools whichwould make credit management much more effective. The result wouldbe a definite reduction in transaction costs, the benefits of which wouldbe shared between banks and customers.While application of technology would help banks reduce their operatingcosts in the long run, the initial investments would be sizeable. Withgreater use of technology solutions, we expect IT spending of Indianbanking system to go up significantly.One area where the banking system can reduce the investment costs intechnology applications is by sharing of facilities. We are already seeingbanks coming together to share ATM Networks. Similarly, in the comingyears, we expect to see banks and FIs coming together to share facilitiesin the area of payment and settlement, back office processing, datawarehousing, etc. While dealing with technology, banks will have to dealwith attendant operational risks. This would be a critical area the Bankmanagement will have to deal with in future.Payment and Settlement system is the backbone of any financial marketplace.The present Payment and Settlement systems such as Structured FinancialMessaging System (SFMS), Centralised Funds Management System (CFMS),CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 33
    • SAAB MARFIN MBACentralized Funds Transfer System (CFTS) and Real Time GrossSettlement System (RTGS) will undergo further fine-tuning to meetinternational standards. Needless to add, necessary security checks andcontrols will have to be in place. In this regard, Institutions such asIDRBT will have a greater role to play. CHAPTER: 2STRATEGIC ANALYSIS OF BANKING INDUSTRY2.1 PORTER’S FIVE FORCE ANALYSIS:Prof. Michael Porter’s competitive forces Model applies to each and everycompany as well as industry. This model with regards to the BankingIndustry is presented below:CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 34
    • SAAB MARFIN MBA (2) Potential Entrants is high as Development Financial Institutions as well as Private and foreign banks have entered in a (5) big way.(1) (4) Organizing Power Rivalry among Bargaining Power of the Supplier is Existing Firms of Buyers is high high. With new has increased with as corporate can financial liberalization. New raise funds easily instruments they products and due to high are asking higher improved competition. return on customer services investment. is the focus. (3) Threat from Substitute is high due to competition from NBFCs & Insurance companies as they offer a higher rate of interest than banks. Rivalry among existing firmsWith the process of liberalization, competition among the existing bankshas increased. Each bank is coming up with new products to attract thecustomers and tailor made loans are provided. The quality of servicesprovided by banks has improved drastically.CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 35
    • SAAB MARFIN MBA Potential EntrantsPreviously the Development Financial Institutions mainly provided projectfinance and development activities. But they have now entered into retailbanking which has resulted into stiff competition among the existingplayers Threats from SubstitutesBanks face threats from Non-Banking Financial Companies. NBFCs offer ahigher rate of interest. Bargaining Power of BuyersCorporates can raise their funds through primary market or by issue ofGDRs, FCCBs. As a result they have a higher bargaining power. Even inthe case of personal finance, the buyers have a higher bargaining power.This is mainly because of competition. Bargaining power of SuppliersWith the advent of new financial instruments providing a higher rate ofreturns to the investors, the investments in deposits is not growing in aphased manner. The suppliers demand a higher return for theinvestments. Overall AnalysisThe key issue is that how can banks leverage their strengths to have abetter future. Since the availability of funds is more and deployment offunds is less, banks should evolve new products and services to thecustomers. There should be rational thinking in sanctioning loans, whichwill bring down the NPAs. As there is expected revival in the Indianeconomy banks have a major role to play. Funding corporate at a low costof capital is a major requisite.CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 36
    • SAAB MARFIN MBA2.2 SWOT ANALYSIS:The banking sector is often taken as a proxy for the economy as a whole.The performance of bank should therefore, reflect “Trends in the IndianEconomy”. Due to the reforms in the financial sector, banking industryhas changed drastically with the opportunities to the work with, newaccounting standards new entrants and information technology. Thederegulation of the interest rate, participation of banks in projectfinancing has changed in the environment of banks.The performance of banking industry is done through SWOT Analysis. Itmainly helps to know the Strengths and Weakness of the industry and toimprove will be known through converting the opportunities intostrengths. It also helps for the competitive environment among the banks.STRENGTHS 1. Greater securities of FundsCompared to other investment options banks since its inception has beena better avenue in terms of securities. Due to satisfactory implementationof RBI’s prudential norms banks have won public confidence over severalyears. 2. Banking networkAfter nationalization, banks have expanded their branches in the country,which has helped banks build large networks in the rural and urban areas.CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 37
    • SAAB MARFIN MBAPrivate banks allowed to operate but they mainly concentrate inmetropolis. 3. Large Customer BaseThis is mainly attributed to the large network of the banking system.Depositors in rural areas prefer banks because of the failure of the NBFCs. 4. Low Cost of CapitalCorporate prefers borrowing money from banks because of low cost ofcapital. Middle income people who want money for personal financingcan look to banks as they offer at very low rates of interests. Consumercredit forms the major source of financing by banksWEAKNESSES 1. Basel CommitteeThe banks need to comply with the norms of Basel committee but beforethat it is challenge for banks to implement the Basel committee standard,which are of international standard.2. Powerful UnionsNationalization of Banks had a positive outcome in helping the IndianEconomy as a whole. But this has also proved detrimental in the form ofstrong unions, which have a major influence in decision making. They areagainst automation.3. Priority Sector LendingCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 38
    • SAAB MARFIN MBATo uplift the society, priority sector lending was brought in duringnationalization. This is good for the economy but banks have failed tomanage the asset quality and their intensions were more towardsfulfilling government norms. As a result lending was done fornon-productive purposes.4. High Non-Performing AssetsNon-Performing Assets (NPAs) have become a matter of concern in thebanking industry. This is because of change in the Accounting Standards(Prudential Norms). Net NPAs increased to large extent of the totaladvances, which has to be reduced to meet the international standards.OPPORTUNITIES 1. Universal BankingBanks have moved along the value chain to provide their customers moreproducts and services. For example: - SBI is into SBI home finance, SBICapital Markets, SBI Bonds etc. 2. Differential Interest RatesAs RBI control over bank reduces, they will have greater flexibility to fixtheir own interest rates which depends on the profitability of the banks. 3. High Household SavingsHousehold savings have been increasing drastically. Investment infinancial assets has also increased. Banks should use this opportunity forraising funds. 4. Overseas MarketsBanks should tap the overseas market, as the cost of capital is very low.CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 39
    • SAAB MARFIN MBA 5. Internet BankingThe advances in information technology have made banking easier.Business transactions can effectively carried out through internet banking.THREATS 1. NBFCs, Capital Markets and Mutual fundsThere is a huge investment of household savings. The investments inNBFCs deposits, Capital Market Instruments and Mutual Funds areincreasing. Normally these instruments offer better returns to investors. 2. Change in the Government PolicyThe change in the government policy has proved to be a threat to thebanking sector. 3. InflationThe interest rates go down with a fall in inflation. Thus, the investors willshift his investments to other profitable sectors. 4. RecessionCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 40
    • SAAB MARFIN MBADue to the recession in the business cycle the economy functions poorlyand this has proved to be a threat to the banking sector. The marketoriented economy and globalization has resulted into competition formarket share. The spread in the banking sector is very narrow. To meetthe competition the banks have to grow at a faster rate and reduce theoverheads. They can introduce new products and develop the existingservices.2.3. PEST ANALYSISPOLITICAL/ LEGAL ENVIROMENTGovernment and RBI policies affect the banking sector. Sometimeslooking into the political advantage of a particular party, the Governmentdeclares some measures to their benefits like waiver of short-termagricultural loans, to attract the farmer’s votes. By doing so the profits ofthe bank get affected. Various banks in the cooperative sector are openand run by the politicians. They exploit these banks for their benefits.Sometimes the government appoints various chairmen of the banks.Various policies are framed by the RBI looking at the present situation ofthe country for better control over the banksCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 41
    • SAAB MARFIN MBAECONOMICAL ENVIROMENT Banking is as old as authentic history and the modern commercialbanking are traceable to ancient times. In India, banking has existed inone form or the other from time to time. The present era in banking maybe taken to have commenced with establishment of bank of Bengal in1809 under the government charter and with government participation inshare capital. Allahabad bank was started in the year 1865 and Punjabnational bank in 1895, and thus, others followed Every year RBI declares its 6 monthly policy and accordingly thevarious measures and rates are implemented which has an impact on thebanking sector. Also the Union budget affects the banking sector toboost the economy by giving certain concessions or facilities. If in theBudget savings are encouraged, then more deposits will be attractedtowards the banks and in turn they can lend more money to theagricultural sector and industrial sector, therefore, booming the economy.If the FDI limits are relaxed, then more FDI are brought in India throughbanking channels.SOCIAL ENVIROMENT Before nationalization of the banks, their control was in the handsof the private parties and only big business houses and the effluentsections of the society were getting benefits of banking in India. In 1969government nationalized 14 banks. To adopt the social development inthe banking sector it was necessary for speedy economic progress,consistent with social justice, in democratic political system, which is freefrom domination of law, and in which opportunities are open to all.CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 42
    • SAAB MARFIN MBAAccordingly, keeping in mind both the national and social objectives,bankers were given direction to help economically weaker section of thesociety and also provide need-based finance to all the sectors of theeconomy with flexible and liberal attitude. Now the banks provide varioustypes of loans to farmers, working women, professionals, and traders.They also provide education loan to the students and housing loans,consumer loans, etc. Banks having big clients or big companies have to provide serviceslike personalized banking to their clients because these customers do notbelieve in running about and waiting in queues for getting their workdone. The bankers also have to provide these customers with specialprovisions and at times with benefits like food and parties. But the banksdo not mind incurring these costs because of the kind of business theseclients bring for the bank. Banks have changed the culture of human life in India and havemade life much easier for the people.TECHNOLOGICAL ENVIROMENT Technology plays a very important role in bank’s internal controlmechanisms as well as services offered by them. It has in fact given newdimensions to the banks as well as services that they cater to and thebanks are enthusiastically adopting new technological innovations fordevising new products and services. The latest developments in terms of technology in computer andtelecommunication have encouraged the bankers to change the conceptof branch banking to anywhere banking. The use of ATM and Internetbanking has allowed ‘anytime, anywhere banking’ facilities. AutomaticCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 43
    • SAAB MARFIN MBAvoice recorders now answer simple queries, currency accountingmachines makes the job easier and self-service counters are nowencouraged. Credit card facility has encouraged an era of cashless society.Today MasterCard and Visa card are the two most popular cards usedworld over. The banks have now started issuing smartcards or debit cardsto be used for making payments. These are also called as electronicpurse. Some of the banks have also started home banking throughtelecommunication facilities and computer technology by using terminalsinstalled at customers home and they can make the balance inquiry, getthe statement of accounts, give instructions for fund transfers, etc.Through ECS we can receive the dividends and interest directly to ouraccount avoiding the delay or chance of loosing the post. Today banks are also using SMS and Internet as major tool ofpromotions and giving great utility to its customers. For example SMSfunctions through simple text messages sent from your mobile. Themessages are then recognized by the bank to provide you with therequired information. All these technological changes have forced the bankers to adoptcustomer-based approach instead of product-based approach.CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 44
    • SAAB MARFIN MBA CHAPTER: 3CORPORATE BANKING: AN OVERVIEW3.1 INTRODUCTION:According to American author and humorist Mark Twain: ”A banker is afellow who lends his umbrella when the sun is shining and wants it backthe minute it begins to rain.”Many troubled businesses seeding credit in recent years might agree withMr. Twain. Indeed securing the large amounts of credit that manybusinesses require can be a complicated and challenging task loanrequests. Moreover, business loans, often called commercial andindustrial loans, rank among the most important assets that commercialbanks and their closest competitors hold.Corporate finance is an area of finance dealing with financial decisionsbusiness enterprises make and the tools and analysis used to make thesedecisions. The primary goal of corporate finance is to maximize [1]corporate value while managing the firms financial risks. Although it isin principle different from managerial finance which studies the financialdecisions of all firms, rather than corporations alone, the main conceptsin the study of corporate finance are applicable to the financial problemsof all kinds of firms.The discipline can be divided into long-term and short-term decisionsand techniques. Capital investment decisions are long-term choicesabout which projects receive investment, whether to finance thatinvestment with equity or debt, and when or whether to pay dividends toshareholders. On the other hand, the short term decisions can begrouped under the heading "Working capital management". This subjectCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 45
    • SAAB MARFIN MBAdeals with the short-term balance of current assets and current liabilities;the focus here is on managing cash, inventories, and short-termborrowing and lending (such as the terms on credit extended tocustomers).The terms corporate finance and corporate financier are also associatedwith investment banking. The typical role of an investment bank is toevaluate the companys financial needs and raise the appropriate type ofcapital that best fits those needs.Corporate banking is a part of commercial banking but the part thataverage depositor with deposits account never sees. It is a division ofcommercial banking which extends the financial support to the corporatefor helping them achieve their organizational goals and objectives. Whilebanks hold money and mortgages, lend money, extend or open up a lineof credit for the average depositors, it is business that needs majorfinancial services to build plant, erect buildings, make structuralimprovements on old ones and start new business ventures. This is oneof the most competitive, risky and financially lucrative areas of doingbusiness in today’s world.Commercial loans were the earliest form of lending banks did in theirmove than 2000 year old history. Later in the 20th century financecompanies, insurance firms, and thrift institutions entered the businesslending field. Today loan officers skilled in evaluating the credit ofbusinesses are usually among the most experienced and highest paidpeople in the financial services field, along with security underwriters.As a part of commercial banking, corporate banking is focused onanalyzing and assessing the risk of the business, establishing thecreditworthiness of the business and trying to predict the likelihood ofsuccess or failure of business endeavour. These are the professionalsCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 46
    • SAAB MARFIN MBAwho help decide what business initiatives will be taken and when,whether or not to expand the existing businesses, help develop newmarkets so that new clients can be found and help develop new productsfor e-commerce, the internet and the international markets.Corporate Banking represents the wide range of banking and financialservices provided to domestic and international operations of large localcorporate and local operations of multinationals corporations. Servicesinclude access to commercial banking products, including working capitalfacilities such as domestic and international trade operations and funding,channel financing, and overdrafts, as well as domestic and internationalpayments, INR term loans (including external commercial borrowings inforeign currency), letters of guarantee etc.The Investment Banking and Markets division of various bank bringstogether the advisory and financing, equity securities, asset management,treasury and capital markets, and private equity activities to complete theCIBM structure and provide a complete range of financial products to ourclients. Increasingly, ECA financing is being considered by customers andwe work closely with our project export finance teams, both onshore andoffshore, to provide structured solutions.The Corporate Bank in India was ranked 2nd overall in the 2004Greenwich Survey.This portfolio is largely spread within 9 sector teams divided as under : Consumer Brands Industrials Energy and Utilities Telecommunications AutomotiveCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 47
    • SAAB MARFIN MBA Healthcare Transport and Logistics Metals and Mining Media3.2 STRUCTURE OF CREDIT LENDING (CORPORATE) ININDIA:Banks, finance companies, and competing business lenders grant manydifferent types of commercial loans. Among the most widely used formsof business credit are the following:SHORT-TERM BUSINESS LOANS: Self-liquidating inventory loans Working capital loans Interim construction financing Security dealer financing Retailer and equipment financing Asset-based loans (accounts receivable financing, factoring, and inventory financing) Syndicated loansLONG-TERM BUSINESS LOANS:CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 48
    • SAAB MARFIN MBA Term loans to support the purchase of equipment, rolling stock, and structures Revolving credit financing Project loans Loans to support acquisitions of others business firmsSHORT-TERM LOANS TO BUSINESS FIRMS:Self-Liquidating Inventory LoansHistorically, commercial banks have been the leaders in extending shortterm credit to businesses. These loans were used to finance the purchaseof inventory, raw materials or finished goods to sell. In this case the termof the loan begins when cash in needed to purchase inventory and endswhen cash is available in the firm’s account to write the lender a checkfor the balance of its loan.Working Capital LoansWorking capital loans provide businesses with short run credit, lastingfrom few days to about one year. Working capital loans are most oftenused to fund the purchase of inventories in order to put goods on shelvesCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 49
    • SAAB MARFIN MBAor to purchase raw materials; thus, they come closest to the traditionalself-liquidating loan described previously.Frequently, the working capital loan is designed to cover seasonal peaksin the business customer’s production levels and credit needs. Normally,working capital loans are secured by accounts receivable or by pledges ofinventory and carry a floating interest rate on the amounts actuallyborrowed against the approved credit line. A commitment fee is chargedon the unused portion of the credit line and sometimes on the entireamount of funds made available.Interim Construction FinancingA popular form of secured short term lending is the interim constructionloan, used to support the construction of homes, apartments, officebuildings, shopping centers, and other permanent structures. The financeis used while the construction is going on but once the constructionphase is over, this short term loan usually is paid off with a longer termmortgage loan issued by another lender, such as insurance company ofpension fund. Recently, some commercial banks have issued‘minipermanent’ loans, providing funding for construction and the earlyoperation of a project for as long as five to seven years.Retailer and Equipment FinancingBanks support installment purchases of automobiles, appliances,furniture, business equipment, and other durable goods by financing thereceivables that dealers selling these goods take on when they writeinstallment contracts to cover customer purchases. In turn, thesecontracts are reviewed by banks and other lending institutions with whomthe dealers have established credit relationships. If they meet acceptableCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 50
    • SAAB MARFIN MBAcredit standards, the contracts are purchased by lenders at an interestrate that varies with the risk level of each borrower, the quality ofcollateral pledged, and the term of each loan.Asset-Based FinancingAn increasing portion of short-term lending by banks and other lendersin recent years has consisted of asset based loans, credit secured by theshorter term assets of a firm that are expected to roll over into cash inthe future. Key business assets used for many of these loans are accountsreceivables and inventories of raw materials or finished goods. The lendercommits funs against a specific percentage of the book value ofoutstanding credit accounts or against inventory.In most loans collateralized by accounts receivable and inventory, theborrowing firm retains title to the assets pledged, but sometimes title ispassed to the lender, which then assumes the risk that some of thoseassets will not pay out as expected. The most common example of thisarrangement is factoring, where the bank actually takes on theresponsibility of collecting the accounts receivable of one of its businesscustomers. It typically assesses a higher discount rate and lends a smallerfraction of the book value of the customer’s accounts receivable becausethe lender incurs both additional expense and additional risk with afactored loan.Syndicated LoanA type of large corporate loan that is increasingly used today is thesyndicated loan. This is typically a loan or loan package extended to acorporation by a group of banks and other institutional lenders. TheseCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 51
    • SAAB MARFIN MBAloans may be “drawn” by the borrowing company, with the funds used tosupport business operations or commercial expansion, or “undrawn”,serving as lines of credit to back a security issue or other venture. Banksengage in syndicated loans both to spread the heavy risk exposures ofthese large loans, often involving hundreds of lakhs or crore of rupees incredit for each loan, and to earn fee income.LONG-TERM LOANS TO BUSINESS FIRMS:Term Business LoansTerm loans are designed to fund long and medium term businessinvestments, such as the purchase of equipment or the construction ofCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 52
    • SAAB MARFIN MBAphysical facilities, covering a period longer than one year. Usually theborrowing firm applies for a lump sum loan based on the budgeted costof its proposed project and then pledges to repay the loan in a series ofinstallments.Term loans normally are secured by fixed assets e.g. Plant and Equipmentowned by the borrower and may carry either a fixed or a floating interestrate. That rate is normally higher than on shorter term business loansdue to the lender’s greater risk exposure from such loans.Revolving Credit FinancingA revolving credit line allows a business customer to borrow up to a prespecified limit, repay all or a portion of the borrowing, and re borrows asnecessary until the credit line matures. One of the most flexible of all theforms of business loans, revolving credit is often granted without specificcollateral to secure the loan and may be short term or caver a period aslong as three, four, or five years. This form of business financing isparticularly popular when the customer is highly uncertain about thetiming of future cash flows or about the exact magnitude of the futureborrowings needs.Loan commitments are usually of two types namely, 1. Formal Loan Commitment, and 2. Confirmed Credit Line.Formal Loan Commitment is a contractual promise to lend to a customerup to a maximum amount of money at a set interest rate or rate markupover the prevailing base loan rate. Whereas, Confirmed Credit Line is alooser form of loan commitment where the banks indicate its approval ofCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 53
    • SAAB MARFIN MBAcustomer’s request for credit in an emergency, though the prices of sucha credit line may not be set in advance and the customer may have littleintention to draw upon the credit line.Long-Term Project LoansThe most risky of all business loans are project loans, credit to financethe construction of fixed assets designed to generate a flow of revenue infuture periods. Prominent examples include oil refineries, pipelines,mines, power plants and harbor facilities. Project loans are usuallygranted to several companies jointly sponsoring a large project.Project loans may be granted on a recourse basis, in which the lender canrecover funds from the sponsoring companies if the project does not payout as planned. At the other end, loan may be extended on a nonrecourse basis, in which no sponsor guarantees; the project stands orfalls on its own merits. Many such loans require that the project‘ssponsors pledge enough of their own capital to see the project throughto completion.CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 54
    • SAAB MARFIN MBA Term Loan / Deferred Payment Guarantees In case of term loans and deferred payment guarantees, the project report is obtained from the customer, who may have been compiled in-house or by a firm or consultants/ merchant bankers. Term loan is provided to support capital expenditures for setting up new ventures as also for expansion, renovation etc. The technical feasibility and economic viability is vetted by the Bank and wherever it is felt necessary. Banks normally expects at least 20% contribution of Promoter’s contribution. But the promoter contribution may vary largely in mega projects. Therefore, there cannot be a definitive benchmark. The sanctioning authority will have the necessary discretion to permit deviations.CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 55
    • SAAB MARFIN MBA3.3 EMERGENCE OF CORPORATE BANKING IN INDIAThe bank lending has expanded in a number of emerging marketeconomies, especially in Asia and Latin America, in recent years. Bankcredit to the private sector, in real terms, was rising at a high rate.Several factors have contributed to the significant rise in bank lending inemerging economies such as strong growth, excess liquidity in bankingsystems reflecting easier global and domestic monetary conditions, andsubstantial bank restructuring. The recent surge in bank lending hasbeen associated with important changes on the asset side of banksíbalance sheet. First, credit to the business sector - historically the mostimportant component of banksí assets – has been weak, while the shareof the household sector has increased sharply in several countries.Second, banksí investments in Government securities increased sharplyuntil 2004-05. As a result, commercial banks continue to hold a verylarge part of their domestic assets in the form of Government securities -a process that seems to have begun in the mid-1990s.There has been a sharp pick up in bank credit in India in recent years.The rate of growth in bank credit which touched a low of 14.4 per cent in2002-03, accelerated to more than 30.0 per cent in 2004-05, the ratewhich was maintained in 2005-06. The upturn in the growth rate of bankcredit can be attributed to several factors. One, macroeconomicperformance of the economy turned robust with GDP growth rateshovering between 7.5 per cent and 8.5 per cent during the last few years.Two, the hardening of sovereign yields from the second half of 2003-04CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 56
    • SAAB MARFIN MBAforced banks to readjust their assets portfolio by shifting frominvestments to advances. While the share of gross advances in totalassets of commercial banks grew from 45.0 per cent to 54.7 per cent thatof investments declined from 41.6 per cent to 32.1 per cent in the lastfew years.However, the credit growth has been broad-based making banks lessvulnerable to credit concentration risk. The declining trend of prioritysector loans in 2001-02 in the credit book of banks was due toprudential write offs and compromise settlements of a large number ofsmall accounts which was reversed from 2002-03 on the strength of aspurt in the housing loan portfolio of banks. Even though credit toindustry and other sectors have also picked up, their share in total loanshas declined marginally. Retail loans, which witnessed a growth of over40.0 per cent in 2004-05 and again in 2005-06, have been the primedriver of the credit growth in recent years. Retail loans as a percentage ofgross advances increased from 22.0 per cent in March 2004 to 25.5 percent in March 2006. The cyclical uptrend in the economy along with theconcomitant recovery in the business climate brings with it improvedabilities of the debtors to service loans, thereby greatly improving banksasset quality. Despite the sharp rise in credit growth in recent years, notonly the proportional levels of gross non-performing loans (NPLs) havedeclined, but the absolute levels of gross NPLs declined significantly.Several factors have contributed to the marked improvement in the Indianbanksí asset quality. One, banks have gradually improved their riskmanagement practices and introduced more vigorous systems andscoring models for identifying credit risks. Two, a favourablemacroeconomic environment in recent years has also meant that manyentities and units of traditionally problematic industries are nowperforming better. Three, diversification of credit base with increasedfocus on retail loans, which generally have low delinquency rates, hasCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 57
    • SAAB MARFIN MBAalso contributed to the more favourable credit risk profile. Four, severalinstitutional measures have been put in place to recover the NPAs. Theseinclude Debt Recovery Tribunals (DRTs), Lok Adalats (peopleís courts),Asset Reconstruction Companies (ARCs) and corporate debt restructuringmechanism (CDRM). In particular, the Securitisation and Reconstruction ofFinancial Assets and Enforcement of Security Interest (SARFAESI) Act,2002 for enforcement of security interest without intervention of thecourts has provided more negotiating power to the banks for resolvingbad debts.CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 58
    • SAAB MARFIN MBASectoral Deployment of Gross Bank CreditDuring 2008-09 total deployment of gross bank credit increased toRs.1.87,515 crores from Rs.1,69.536 crores in 2008-07Non-food bank credit increased sharply during 2005-06. The creditgrowth was broad based. Credit to services (including personal loans andother services) increased by 52.8 per cent in 2005-06, accounting for58.3 per cent of incremental non-food gross bank credit (NFGBC).Personal loans increased sharply in recent years mainly on account ofhousing loans. Real estate loans more than doubled. Other personal loanssuch as credit card outstanding and education loans also recorded sharpincreases of 59.3 per cent and 96.5 per cent, respectively.Priority Sector AdvancesCredit to the priority sector decreased to 34.1 per cent in the previousyear against 39.5 in 2008. In terms of revised guidelines on lending topriority sector , broad category of advances under priority sector includeagriculture, micro and small enterprises, retail trade, micro-credit,education and housing.The agriculture and housing sectors were the major beneficiaries, whichtogether accounted for more than two-third of incremental priority sectorlending. Credit to small scale industries also accelerate. Severalfavourable policy initiatives undertaken by the Central Government andthe Reserve Bank including, inter alia, the policy package for stepping upof credit to small and medium enterprises (SMEs) announced on August10, 2005, have had a positive impact. At the individual bank-level, all thenationalised banks, and all but two of the State Bank group (State Bank ofIndia and State Bank of Patiala) were able to meet the priority sectortarget of 40 per cent of NBC. However, only ten PSBs (Allahabad Bank,CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 59
    • SAAB MARFIN MBAAndhra Bank, Bank of India, Indian Bank, Indian Overseas Bank, PunjabNational Bank, Syndicate Bank, State Bank of Bikaner and Jaipur, StateBank of Indore and State Bank of Saurashtra) were able to achieve thesubtargets for agriculture, while the sub-target for weaker sections wasmet by eight PSBs (Allahabad Bank, Andhra Bank, Bank of India, IndianBank, Indian Overseas Bank, Punjab National Bank, Syndicate Bank andState Bank of Patiala).Lending to the priority sector by foreign banks constituted 34.6 per centof net bank credit as on the last reporting Friday of March 2006, whichwas well above the stipulated target of 32 per cent. The share of exportcredit in total netbank credit at 19.4 per cent was significantly above theprescribed sub-target of 12.0 per cent. Foreign banks, however, fell alittle short of the sub-target of 10.0 per cent in respect of lending to SSIs.Special Agricultural Credit PlansThe Reserve Bank had advised public sector banks to prepare SpecialAgricultural Credit Plans (SACP) on an annual basis in 1994. The SACPmechanism for private sector banks was made applicable from 2005-06,as recommended by the Advisory Committee on Flow of Credit toAgriculture and Related Activities from the Banking System(Chairman:Prof. V.S. Vyas) and announced in the Mid-term Review ofAnnual Policy for 2004-05. Public sector banks were advised to makeefforts to increase their disbursements to small and marginal farmers to40.0 per cent of their direct advances under SACP by March 2007. Thedisbursement to agriculture under SACP by public sector banksaggregated Rs.94,278 crore during 2005-06, which was much above thetarget of Rs.85,024 crore and the disbursement of Rs.65,218 croreduring 2004-05. The disbursement by private sector banks during2005-06 at Rs.31,119 crore was above the target of Rs.24,222 crore.CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 60
    • SAAB MARFIN MBA3.21 Public sector banks were advised to earmark 5.0 per cent of theirnet bank credit to women. At end-March 2006, aggregate credit towomen by public sector banks stood at 5.37 per cent of their net bankcredit with 22 banks achieving the target. A consortium of select publicsector banks was formed, with the State Bank of India as the leader of theconsortium, to provide credit to the Khadi and Village IndustriesCommission (KVIC). These loans are provided at 1.5 per cent below theaverage prime lending rates of five major banks in the consortium. Anamount of Rs.322 crore was outstanding at end-July 2006 out of Rs.738crore disbursed by the consortium under the scheme.Micro-financeThe Reserve Bank has been making consistent efforts to strengthen creditdelivery, improve customer service and encourage banks to providebanking services to all segments of the population. Despite considerableexpansion of the banking system in India, large segments of the country’s population do not have access to banking services.Expanding the outreach of banking services has, therefore, been a majorthrust area of the policy of the Government of India and the Reserve Bankin recent years.The self-help group (SHG)-bank linkage programme has emerged as themajor micro-finance programme in the country and is beingimplemented by commercial banks, RRBs and co-operative banks. As onMarch 31, 2008 3.6 million SHGs had outstanding bank loans ofRs.17,000 crore, an increase of 25 per cent over March 31, 2007 inrespect of number of SHGs credit linked. During 2007-08, banksfinanced 1.2 million SHGs for Rs.8,849 crore. As at end-March 2008,SHGs had 5 million savings accounts with banks for Rs.3,785 crore.CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 61
    • SAAB MARFIN MBARetail CreditContinuing the strong growth in recent years, retail advances increasedby 40.9 per cent to Rs.3,75,739 crore in 2007-08, which was significantlyhigher than the overall credit growth of 31.0 per cent. As a result, theirshare in total loans and advances increased during the year. Auto loansexperienced the highest growth, followed by credit card receivables,other personal loans (comprising loans mainly to professionals and foreducational purposes) and housing finance. Loans for consumer durablesincreased by 17.3 per cent as against the decline of 39.1 per cent in theprevious year.Major steps earlier taken by the Reserve Bank of India were somewhatmore oriented towards price stability and the related monitoryinstruments like the bank rate, reverse repo rate, repo rate and CRR wereadjusted to rein in the price instability. Naturally, the priority wasinflation control for overall growth of the economy and we mustcongratulate the RBI for a wonderful job done. The inflation today is at amoderate level and in line with a developed economy.With these stepstaken by RBI, the latest scenario is that the non-food credit growth gotmoderated, agricultural and service sector credit went up but the retailcredit growth actually took a beating due to northbound interest rates.Such positive impact on inflation helped the economy for price stabilityand we feel what is important for India now is to ensure that there issufficient focus on growth of the economy along with price stability.Lending to the Sensitive SectorsLending by SCBs to the sensitive sectors (capital market, real estate andcommodities) increased sharply during 2005-06 mainly on account of asharp increase in exposure to the real estate market. Total exposure ofSCBs to the sensitive sectors consituted 18.9 per cent of aggregate bankCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 62
    • SAAB MARFIN MBAloans and advances (comprising 17.2 per cent to real estate, 1.5 per centto the capital market and 0.3 per cent to the commodities sector). During2008-2009 total lending to sensitive sector increased by 19.1 percent incapital market.Among bank groups, new private sector banks had the highest exposureto the sensitive sectors (measured as percentage to total loans andadvances of banks) mainly due to the increase in exposure to the realestate market, followed by foreign banks, old private sector banks andpublic sector banks.MEASURES BY SIDBISIDBI has developed a Credit Appraisal & Rating Tool (CART) as well as aRisk Assessment Model (RAM) and a comprehensive rating model for riskassessment of proposals for SMEs. The banks may consider to takeadvantage of these models as appropriate and reduce their transactioncosts..CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 63
    • SAAB MARFIN MBA Public Sector Banks are advised to follow a transparent rating systemwith cost of credit being linked to the credit rating of the enterprise. SIDBI in association with Credit Information Bureau (India) Ltd. (CIBIL)expedited setting up a credit rating agency. SIDBI in association with Indian Banks’ Association (IBA) would collectand pool common data on risk in each identified cluster and develop anIT-enabled application, appraisal and monitoring system for small(including tiny) enterprises. This would help reduce transaction cost aswell as improve credit flow to small (including tiny) enterprises in theclusters.The National Small Industries Corporation has introduced a Credit RatingScheme for encouraging SSI units to get themselves credit rated byreputed credit rating agencies. Public Sector Banks will be advised toconsider these ratings appropriately and as per availability, and structuretheir rates suitably.ROADMAP BY RBIThe Reserve Bank of India (RBI) has worked out the roadmap for theIndian banks to graduate from the simpler approaches of the Basel IIframework to more advanced ones.CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 64
    • SAAB MARFIN MBABasel II is the second among Basel Accords, which are primarily,recommendations on banking laws and regulations issued by the Baselcommittee on banking supervision.It sets up rigorous risk and capital management requirements aimed atensuring that a bank holds capital reserves appropriate to the risk itexposes itself to through its lending and investment practices.Since March 2008, foreign banks operating in India and Indian bankshaving presence outside the country have migrated to simplerapproaches under Basel II framework. Other commercial banks arerequired to migrate to these norms by March 31, 2009.These include standardised approach for credit risk which arising fromdefault by borrowers, basic indicator approach for operational risk(arising from day to operations of the banks such robbery or powerfailure) and standardised duration approach for market risk (arising fromfluctuations in interest rate and share prices) which affects theinvestment and market portfolio of the banks.In the framework, the RBI had earlier specified the date by which banksmay file application for approvals and the the likely date by whichapprovals can be obtained from the central bank.While banks have the discretion to adopt the advanced approaches, theyneed to seek prior approval.Under market risk, banks may apply to RBI for graduating to moreadvanced method of internal models approach (IMA) by April 1, 2010 andthen, RBI may approve it by March 31, 2011. IMA sets out a frameworkfor applying capital charges to the market risks (both on balance sheetand off-balance sheet) incurred by banks by an internal model. TheCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 65
    • SAAB MARFIN MBAcurrent standardised duration approach specifies a specific averageduration of the banks at large, which the banks follow and make it a basisfor applying capital charges to only open positions.Similarly, for operational risk, banks may graduate to standardisedapproach by April 1, 2010 and RBI can approve the plan by September 30,2010. After that, they can graduate to advanced measurement approachfor operational risk by April 1, 2011 and get RBI approval by March 31,2013.While advanced measurement approach (AMA) sets the framework forbanks to develop their own empirical model to quantify required capitalfor operational risk, it can be used after they get regulatory clearances.Under the standardised approach, a banks activities are divided intoeight business lines: corporate finance, trading and sales, retail banking,commercial banking , payment and settlement, agency services, assetmanagement and retail brokerage. Within each business line, grossincome is a broad indicator for the scale of business operations and so,the scale of operational risk exposure within each of these business lines.The capital charge for each business line is calculated by multiplyinggross income by a factor .Currently, banks are using the basic indicator approach as per which theymust hold capital for operational risk equal to the average over theprevious three years of a fixed percentage of positive annual grossincome.For credit risk, banks can use internal ratings-based approach whichallows them to develop their own model to estimate the probability ofdefault for individual clients or groups of clients. Currently, banks useCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 66
    • SAAB MARFIN MBAstandardised approach where they are required to use ratings fromexternal credit rating agencies to quantify the required capital for creditrisk. CHAPTER: 4 CRM STRATEGIES FOR CORPORATE BANKING4.1 RAROCRisk-Adjusted Return on Capital –– RAROC–– is a measure of theexpected return onEconomic Capital over the life of an investment. This prospective measureof risk-adjusted profitability allows for apples-to-apples comparison ofactivities across risk types of business.RAROC helps senior management maximize shareholder value byaddressing strategic business questions such as: How much capital is needed to support the company’s enterprise-wide risks? Is the company over or under capitalized? Are individual business units creating or destroying shareholder value? What opportunities for growth or diversification exist within the company? How should the economics of the business be managed within regulatory and rating agency capital constraints?CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 67
    • SAAB MARFIN MBA What is an optimal strategy for reinsurance?RAROC allows for both relative comparisons between business units andabsolute comparisons to shareholders’ minimum required return on risk,or hurdle rate. A business line is value-neutral if its RAROC is equal tothe hurdle rate. It creates value if its RAROC is higher than the hurdle rateand destroys value if it is lower.COMPUTATIONRAROC is computed by dividing risk-adjusted net income by the totalamount of economic capital assigned based on the risk calculation.RAROC allocates a capital charge to a transaction or a line of business atan amount equal to the maximum expected loss (at a 99% confidencelevel) over one year on an after-tax basis. The higher the volatility of thereturns, the more capital is allocated. The higher capital allocation meansthat the transaction has to generate cash flows large enough to offset thevolatility of returns, which results from the credit risk, market risk, andother risks taken. The RAROC process estimates the asset value that mayprevail in the worst-case scenario and then equates the capital cushion tobe provided for the potential loss.RAROC is an improvement over the traditional approach in that it allowsone to compare two businesses with different risk (volatility of returns)profiles. A transaction may give a higher return but at a higher risk. Usinga hurdle rate (expected rate of return), a lender can also use the RAROCprinciple to set the target pricing on a relationship or a transaction.Although not all assets have market price distribution, RAROC is a firststep toward examining an institutions entire balance sheet on aCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 68
    • SAAB MARFIN MBAmark-to-market basis - if only to understand the risk-return trade-offsthat have been made.What is RAROC ? Revenues -Expenses What is RAROC? -Expected Losses + Return on Risk Adjusted economic capital Return + transfer values / prices RAROC Risk Adjusted Capital required Capital or for Economic Capital •Credit Risk •Market Risk The concept of RAROC (Risk adjusted Return on Capital) is at the4.2 RATING BASED METHODS: Management. heart of Integrated RiskB anks should have a comprehensive risk scoring /rating system that serves as a single pointindicator of diverse risk factors of a counterparty and for taking credit decisions in aconsistent manner. To facilitate this, a substantial degree of standardization is required inratings across borrowers. The risk rating system should be designed to reveal the overall riskof lending, critical input for setting pricing and non-price terms of loans as also presentmeaningful information for review and management of loan portfolio. The risk rating, inshort, should reflect the underlying credit risk of the loan book. The rating exercise shouldalso facilitate the credit granting authorities some comfort in its knowledge of loan quality atany moment of time.The risk rating system should be drawn up in a structured manner, incorporating, interalia, financial analysis, projections and sensitivity, industrial and management risks. Thebanks may use any number of financial ratios and operational parameters and collaterals asalso qualitative aspects of management and industry characteristics that have bearings on thecreditworthiness of borrowers. B anks can also weigh the ratios on the basis of the years toCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 69
    • SAAB MARFIN MBAwhich they represent for giving importance to near term developments. W ithin the ratingframework, banks can also prescribe certain level of standards or critical parameters, beyondwhich no proposals should be entertained. Banks may also consider separate ratingframework for large corporate /small borrowers, traders, etc. that exhibit varying nature anddegree of risk. Forex exposures assumed by corporates who have no natural hedges havesignificantly altered the risk profile of banks. Banks should, therefore, factor the unhedgedmarket risk exposures of borrowers also in the rating framework. The overall score for risk isto be placed on a numerical scale ranging between 1- 1- etc. on the basis of credit quality. 6, 8,For each numerical category, a quantitative definition of the borrower, the loan’s underlyingquality, and an analytic representation of the underlying financials of the borrower should bepresented. Further, as a prudent risk management policy, each bank should prescribe theminimum rating below which no exposures would be undertaken. Any flexibility in theminimum standards and conditions for relaxation and authority therefore should be clearlyarticulated in the L oan Policy.The credit risk assessment exercise should be repeated biannually (or even at shorterintervals for low quality customers) and should be delinked invariably from the regularrenewal exercise. The updating of the credit ratings should be undertaken normally atquarterly intervals or at least at half-yearly intervals, in order to gauge the quality of theportfolio at periodic intervals. Variations in the ratings of borrowers over time indicatechanges in credit quality and expected loan losses from the credit portfolio. Thus, if the ratingsystem is to be meaningful, the credit quality reports should signal changes in expected loanlosses. In order to ensure the consistency and accuracy of internal ratings, the responsibilityfor setting or confirming such ratings should vest with the L oan Review function andexamined by an independent L oan Review Group. The banks should undertakecomprehensive study on migration (upward – lower to higher and downward – higher tolower) of borrowers in the ratings to add accuracy in expected loan loss calculations.Value At Risk The VaR method is employed to assess potential loss that could crystalise on tradingposition or portfolio due to variations in market interest rates and prices, using a givenconfidence level, usually 95% to 99% , within a defined period of time. The VaR methodCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 70
    • SAAB MARFIN MBAshould incorporate the market factors against which the market value of the trading positionis exposed. The top management should put in place bank-wide VaR exposure limits to thetrading portfolio (including forex and gold positions, derivative products, etc.) which is thendisaggregated across different desks and departments. The loss making tolerance level shouldalso be stipulated to ensure that potential impact on earnings is managed within acceptablelimits. The potential loss in Present Value Basis Points should be matched by the MiddleOffice on a daily basis vis- vis the prudential limits set by the B oard. The advantage of à-using VaR is that it is comparable across products, desks and Departments and it can bevalidated through ‘back testing’. However, VaR models require the use of extensivehistorical data to estimate future volatility. VaR model also may not give good results inextreme volatile conditions or outlier events and stress test has to be employed tocomplement VaR. The stress tests provide management a view on the potential impact oflarge size market movements and also attempt to estimate the size of potential losses due tostress events, which occur in the ’ tai ls’ of the loss distribution. Banks may also undertakescenario analysis with specific possible stress situations (recently experienced in somecountries) by linking hypothetical, simultaneous and related changes in multiple risk factorspresent in the trading portfolio to determine the impact of moves on the rest of the portfolio.VaR models could also be modified to reflect liquidity risk differences observed across assetsover time. International banks are now estimating Liquidity adjusted Value at Risk (L aVaR)by assuming variable time horizons based on position size and relative turnover. In anenvironment where VaR is difficult to estimate for lack of data, non-statistical concepts suchas stop loss and gross/ positions can be used. netCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 71
    • SAAB MARFIN MBA4.3 INSPECTION METHODOLGYThe supervision of commercial banks and financial institutions is vestedin the Reserve Bank in terms of the provisions of the Banking RegulationAct, 1949 and the Reserve Bank of India Act, 1934. This task is carriedout by the Department of Banking Supervision (DBS) under the guidanceof the BFS. The basic objective of supervision of banks is to assess thesolvency, liquidity and operational health of banks. The onsite inspectionof banks referred to as Annual Financial Inspection (AFI) is conductedannually (except in the case of State Bank of India in which case it isdone once in twoyears). For this purpose, the unit of inspection is the Head Office (HO) ofthe bank. A team of Inspecting Officers from the Reserve Bank led by thePrincipal Inspecting Officer (PIO) visits the bank and conducts theinspection based on the internationally adopted CAMEL (Capital Adequacy,Asset Quality, Management, Earnings, Liquidity) model, modified asCAMELS (S for Systems and Control) to suit the needs of the Indianbanking system. The focus of the AFI in recent years has been onsupervisory issues relating to securitisation, business continuity plan,disclosure requirements and compliance with other existing guidelines. Inorder to have an overall perspective, units of the bank throughout thecountry are also taken up for inspection either by the same teaminspecting the HO or by additional teams from the Regional Offices (RO)of the Reserve Bank. These units could be treasury operations, specialisedbranches and controlling offices in general, where there may be concernsrelating mainly to frauds, NPAs and exposure to sensitive sectors. Majorfindings of these other unit inspections areincorporated in the Report. The timeframe for carrying out the inspectionof the corporate HO of the bank is two to three months. The inspectionreport is generally finalisedCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 73
    • SAAB MARFIN MBAwithin four months. On completion of the inspection, the RO of theReserve Bank,under whose jurisdiction the HO of the bank is situated, issues theinspection report to the bank for perusal, corrective action andcompliance. Further, a detailed discussion on the findings of theinspection and the road ahead is conducted by the Reserve Bank with theCEO/CMD and other senior functionaries of the bank and a monitorableaction plan is decided and/or supervisory action is taken, whereverwarranted. The findings recorded in the inspection report along with theresponses of the CEO/CMD of the bank are placed before the BFS. Basedon the findings of the inspection and other inputs, a supervisory rating isassigned to the bank. Efforts are afoot to move to a risk basedsupervision (RBS)approach, which envisages the monitoring of banks by allocatingsupervisory resources and focusing supervisory attention depending onthe risk profile of each institution.The process involves continuous monitoring and evaluation of theappropriateness of the risk management system in the supervisedinstitution in relation to its business strategyand exposures, with a view to assessing its riskiness.CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 74
    • SAAB MARFIN MBA4.4 RISK MANAGEMENT IN BANKSRisk is inherent in any commercial activity and banking is no exception tothis rule. Rising global competition, increasing deregulation,introduction of innovative products and delivery channels have pushedrisk management to the forefront of today’s financial landscape. Abilityto gauge the risks and take appropriate position will be the key tosuccess. It can be said that risk takers will survive, effective riskmanagers will prosper and risk averse are likely to perish. In theregulated banking environment, banks had to primarily deal with creditor default risk. As we move into a perfect market economy, we have todeal with a whole range of market related risks like exchange risks,interest rate risk, etc. Operational risk, which had always existed in thesystem, would become more pronounced in the coming days as we havetechnology as a new factor in today’s banking. Traditional riskmanagement techniques become obsolete with the growth of derivativesand off-balance sheet operations, coupled with diversifications. TheCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 75
    • SAAB MARFIN MBAexpansion in E-banking will lead to continuous vigilance and revisions ofregulations.Building up a proper risk management structure would be crucial for thebanks in the future. Banks would find the need to develop technologybased risk management tools. The complex mathematical modelsprogrammed into risk engines would provide the foundation of limitmanagement, risk analysis, computation of risk-adjusted return oncapital and active management of banks’ risk portfolio. Measurement ofrisk exposure is essential for implementing hedging strategies.Under Basel II accord, capital allocation will be based on the risk inherentin the asset. The implementation of Basel II accord will also strengthenthe regulatory review process and, with passage of time, the reviewprocess will be more and more sophisticated. Besides regulatoryrequirements, capital allocation would also be determined by the marketforces. External users of financial information will demand better inputsto make investment decisions. More detailed and more frequentreporting of risk positions to banks’ shareholders will be the order of theday. There will be an increase in the growth of consulting services suchas data providers, risk advisory bureaus and risk reviewers. Thesereviews will be intended to provide comfort to the bank managementsand regulators as to the soundness of internal risk management systems.Risk management functions will be fully centralized and independentfrom the business profit centres. The risk management process will befully integrated into the business process. Risk return will be assessedfor new business opportunities and incorporated into the designs of thenew products. All risks – credit, market and operational and so on will becombined, reported and managed on an integrated basis. The demandfor Risk Adjusted Returns on Capital (RAROC) based performanceCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 76
    • SAAB MARFIN MBAmeasures will increase. RAROC will be used to drive pricing, performancemeasurement, portfolio management and capital management.Risk management has to trickle down from the Corporate Office tobranches or operating units. As the audit and supervision shifts to a riskbased approach rather than transaction orientation, the risk awarenesslevels of line functionaries also will have to increase. Technology relatedrisks will be another area where the operating staff will have to be morevigilant in the coming days.Banks will also have to deal with issues relating to Reputational Risk asthey will need to maintain a high degree of public confidence for raisingcapital and other resources. Risks to reputation could arise on account ofoperational lapses, opaqueness in operations and shortcomings inservices. Systems and internal controls would be crucial to ensure thatthis risk is managed well.The legal environment is likely to be more complex in the years to come.Innovative financial products implemented on computers, new riskmanagement software, user interfaces etc., may become patentable. Forsome banks, this could offer the potential for realizing commercial gainsthrough licensing.Advances in risk management (risk measurement) will lead totransformation in capital and balance sheet management. Dynamiceconomic capital management will be a powerful competitive weapon.The challenge will be to put all these capabilities together to create,sustain and maximise shareholders’ wealth. The bank of the future hasto be a total-risk-enabled enterprise, which addresses the concerns ofvarious stakeholders’ effectively.CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 77
    • SAAB MARFIN MBARisk management is an area the banks can gain by cooperation andsharing of experience among themselves. Common facilities could beconsidered for development of risk measurement and mitigation toolsand also for training of staff at various levels. Needless to add, with theestablishment of best risk management systems and implementation ofprudential norms of accounting and asset classification, the quality ofassets in commercial banks will improve on the one hand and at the sametime, there will be adequate cover through provisioning for impairedloans. As a result, the NPA levels are expected to come downsignificantly. CHAPTER: 5AN OVERVIEW OF PUNJAB NATIONAL BANK LTDCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 78
    • SAAB MARFIN MBA5.1 PNB PROFILE With over 38 million satisfied customers and 4668 offices, PNB has continued to retain its leadership position among the nationalized banks. The bank enjoys strong fundamentals, large franchise value and good brand image. Besides being ranked as one of Indias top service brands, PNB has remained fully committed to its guiding principles of sound and prudent banking. Apart from offering banking products, the bank has also entered the credit card & debit card business; bullion business; life and non-life insurance business; Gold coins & asset management business, etc. Since its humble beginning in 1895 with the distinction of being the first Indian bank to have been started with Indian capital, PNB has achieved significant growth in business which at the end of March 2009 amounted to Rs 3,64,463 crore. Today, with assets of more than Rs 2,46,900 crore, PNB is ranked as the 3rd largest bank in the country (after SBI and ICICI Bank) and has the 2nd largest network of branches (4668 including 238 extension counters and 3 overseas offices).During the FY 2008-09, with 39% share of low cost deposits, the bank achieved a net profit of Rs 3,091 crore, maintaining its number ONE position amongst nationalized banks. Bank has a strong capital base with capital adequacy ratio as per Basel II at 14.03% with Tier I and Tier II capital ratio at 8.98% and 5.05% respectively as on March’09. As on March’09, the Bank has the Gross and Net NPA ratio of only 1.77% and 0.17% respectively. During the FY 2008-09, its’ ratio of priority sector credit to adjusted net bank credit at 41.53% & agriculture credit to adjusted net bank credit at 19.72% was also higher than the respective national goals of 40% & 18%.CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 79
    • SAAB MARFIN MBA PNB has always looked at technology as a key facilitator to provide better customer service and ensured that its ‘IT strategy’ follows the ‘Business strategy’ so as to arrive at “Best Fit”. The bank has made rapid strides in this direction. Alongwith the achievement of 100% branch computerization, one of the major achievements of the Bank is covering all the branches of the Bank under Core Banking Solution (CBS), thus covering 100% of it’s business and providing ‘Anytime Anywhere’ banking facility to all customers including customers of more than 2000 rural branches. The bank has also been offering Internet banking services to the customers of CBS branches like booking of tickets, payment of bills of utilities, purchase of airline tickets etc.Towards developing a cost effective alternative channels of delivery, the bank with more than 2150 ATMs has the largest ATM network amongst Nationalised Banks. With the help of advanced technology, the Bank has been a frontrunner in the industry so far as the initiatives for Financial Inclusion is concerned. With it’s policy of inclusive growth in the Indo-Gangetic belt, the Bank’s mission is “Banking for Unbanked”. The Bank has launched a drive for biometric smart card based technology enabled Financial Inclusion with the help of Business Correspondents/Business Facilitators (BC/BF) so as to reach out to the last mile customer. The BC/BF will address the outreach issue while technology will provide cost effective and transparent services. The Bank has started several innovative initiatives for marginal groups like rickshaw pullers, vegetable vendors, diary farmers, construction workers, etc. The Bank has already achieved 100% financial inclusion in 21,408 villages.CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 80
    • SAAB MARFIN MBA Backed by strong domestic performance, the bank is planning to realize its global aspirations. In order to increase its international presence, the Bank continues its selective foray in international markets with presence in Hongkong, Dubai, Kazakhstan, UK, Shanghai, Singapore, Kabul and Norway. A second branch in Hongkong at Kowloon was opened in the first week of April’09. Bank is also in the process of establishing its presence in China, Bhutan, DIFC Dubai, Canada and Singapore. The bank also has a joint venture with Everest Bank Ltd. (EBL), Nepal. Under the long term vision, Bank proposes to start its operation in Fiji Island, Australia and Indonesia. Bank continues with its goal to become a household brand with global expertise. Amongst Top 1000 Banks in the World, ‘The Banker’ listed PNB at 250th place. Further, PNB is at the 1166th position among 48 Indian firms making it to a list of the world’s biggest companies compiled by the US magazine ‘Forbes’. New Delhi, Jan 5: The Delhi-based Punjab National Bank (PNB) has received the necessary approvals for patenting its rating model -- PNB Trac -- for its entire category of lending. The loans with exposure of above Rs 20 lakh have been rated individually, while loans with exposure under Rs 20 lakh have been rated segment-wise on portfolio basis as per the terms of Basel II accord. This means that the bank would be able to do credit ratings on its own for its lendings.CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 81
    • SAAB MARFIN MBA In terms of rating, PNB already has data for default rates for the last five years. "The results of the exercise are extremely satisfactory," BM Mittal, chief general manager, PNB, said, when contacted. The default rates and migration matrix are comparable to that of leading credit international rating agencies such as Standard & Poors, Moodys, Fitch and with international benchmarks. The default rates are also within the limits given in Basel-II. Mittal added that the bank is fully equipped to implement the stringent norms. "Though the deadline for the Basel II norms implementation has been extended by Reserve Bank of India, PNB is ready to come up with the parallel run," he added.Financial Performance:Punjab National Bank continues to maintain its frontline position in theIndian banking industry. In particular, the bank has retained its NUMBERONE position among the nationalized banks in terms of number ofbranches, Deposit, Advances, total Business, operating and net profit inthe year 2008-09. The impressive operational and financial performancehas been brought about by Bank’s focus on customer based businesswith thrust on SME, Agriculture, more inclusive approach to banking;better asset liability management; improved margin management, thruston recovery and increased efficiency in core operations of the Bank.The performance highlights of the bank in terms of business and profitare shown below:*Respective figure for the corresponding financial yearParameters Mar07 Mar08 Mar09 CAGROperating Profit* 3617 4006 5744 26.02CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 82
    • SAAB MARFIN MBANet Profit* 1540 2049 3091 41.67Deposit 139860 166457 209760 22.47Advance 96597 119502 154703 26.55Total Business 236456 285959 364463 24.15(Rs.Crores) ORGANIZATIONAL STRUCTURE OF PUNJAB NATIONAL BANK Head OfficeCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 83
    • SAAB MARFIN MBA Circle Offices (58) Branches (4267)5.2 CORPORATE BANKING AT PNBPNB has introduced a new scheme for property owners having theirproperty situated in Metro/Urban/ Semi Urban/rural centres and whohave let out such properties.EligibilityCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 84
    • SAAB MARFIN MBAProperty Owners having their properties situated in metro, urban,semi-urban and rural areas who have leased out such properties to thefollowing: (i) Public Sector Undertakings / Govt. / Semi / State Govt. & reputed corporates, Banks, Financial Institutions, Insurance Companies and Multinational Companies. (ii) Reputed private schools/colleges (approved by/affiliated to State Board/University/ AICTE/ any other govt. body). (iii) Reputed private hospitals/ nursing homes.Nature & Extent of loanRemaining period of the lease Quantum of Loan (Maximum uptofollowing %age of theCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 85
    • SAAB MARFIN MBA future lease rentalsreceivable for unexpired period of lease)Upto 3 years 80Beyond 3 years & upto 5 years 70Beyond 5 years & Upto 7 years 65Beyond 7 years & Upto 10 years 55*Branches while financing under the scheme should ensure that the TDS,wherever applicable have been taken into account.SecurityAssignment of lease rentals.Equitable mortgage of the leased property or any other immovableproperty:- In case of loans having repayment period upto 5 years, the amount of loan should not exceed the value of the property mortgaged. In case of loans having repayment period beyond 5 years, the amount of loan should not exceed 75% of the value of the property mortgaged.CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 86
    • SAAB MARFIN MBAIn case of Company - Personal Guarantee of promoter directors. Rate of interest Repayment Maximum 120 monthly installments or remaining period of lease whichever is less. Processing Fee 0.70% of the loan amount + Service Tax & Education Cess Documentation Charges Rs.270/- upto Rs.2 Lac + Service Tax & Education Cess Rs.450/- over Rs.2 Lac + Service Tax & Education Cess Exim FinanceServices offered to Exporters Pre-shipment finance in foreign currency and Indian rupees Post-shipment finance in foreign currency and Indian rupees Handling export bills on collection basis Outward remittances for purposes as permitted under Exchange Control guidelines Inward remittances including advance paymentsCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 87
    • SAAB MARFIN MBA Quoting of competitive rates for transactions Maintenance of Exchange Earners Foreign Currency (EEFC) accounts Assistance in obtaining credit reports on overseas parties Forfeiting for medium term export receivablesServices offered to Importers Establishment of Import Letters of Credit covering import into India and handling of bills under Letter of Credit Handling of import bills on collection basis Remittance of advance payment against imports Offering utilisation of PCFC ( pre-shipment credit in foreign currency) for imports Credit reports on overseas suppliersExchange Earners Foreign Currency (EEFC) Deposits SchemeThe Exchange Earners Foreign Currency (EEFC) Deposits Scheme wasstarted by RBI in the year 1992 with the introduction of LiberalisedExchange Rate Management System. Under this scheme, the recipient ofCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 88
    • SAAB MARFIN MBAinward remittances, exporters and other eligible bodies are allowed tokeep a portion of their inward remittances / export proceeds in foreigncurrency with the banks in India which can later be utilised forpermissible purposes.PNB sets up connectivity with the Customs Deptt. for the benefit ofexporters/importers:To provide efficient service to our importer/exporter clients, PNB has setup connectivity with the Customs Department to facilitate payment ofcustom duty and receipt of duty draw back by the importer/exporterclients through the electronic media. Under this system of Electronic DataInterchange (EDI), Custom Authorities process the shipping bills and alsoeffect on line payment of duty draw back for exporters. Further, theyundertake processing of Bill of Entry and deposit of custom duty forimports. This is a pilot project in the country successfully implemented atIndira Gandhi International Airport, Custom House branch of PNB. Thishas now been replicated at PNBs extension counters at Inland ContainerDepot, Tughlakabad, Delhi and Patpar Ganj, Delhi.CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 89
    • SAAB MARFIN MBA LOANS TO MANUFACTURING INDUSTRIES To set up SSI units, for purchase of fixed assets and meeting working capital needs. PURPOSE For acquisition of fixed assets (plant, machinery, land, building, tools, etc.). For working capital requirements within the ceiling limits of Rs 3 lakh / Rs 5 lakh as the case may be. ELIGIBILITY FOR FINANCING SSI Technically qualified entrepreneurs and / or those having adequate technical practical experience in a particular field of technology. MARGIN For Term Loan (i) Upto Rs 2 lakh Nil (ii) Above Rs 2 lakh Upto Rs 3 lakh 10% (iii) Above Rs 3 lakh Upto Rs 4 lakh 15% (iv) Above Rs 4 lakh Upto Rs 5 lakh 20% AMOUNT OF LOANCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 90
    • SAAB MARFIN MBA Maximum Rs 3 lakh in case of individuals and Rs 5 lakh in case of partnership firms or joint stock companies. (In case of ancillary unit or industry with joint financing of SF / Bank higher assistance of Rs 5 lakh for individual and Rs 10 lakh for groups). REPAYMENT 5 to 7 years for term loan including moratorium period. COLLATERAL SECURITY No collateral security for loans upto Rs 5 lakh. For loans in excess of Rs 5 lakh and upto Rs 25 lakh no collateral security required, if the unit is having good track record & financial position. In other cases collateral security or third party guarantee is asked only in cases where primary security is inadequate or for other valid reasons and not as a matter of routine. LOCATION OF PROJECT Preferably the unit should be set up in an industrial estate where there is provision for suitable accommodation with the requisite facilities such as water, power, transport and communication. Project set up in industrial areas, zones or sites specifically declared as undeveloped by the State Government, concerned agencies / departments will be considered. The required accommodation should, as far as possible, be acquired on rental or hire-purchase basis. This will ensure that the investment in fixed assets is made for purchase of theCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 91
    • SAAB MARFIN MBA required machinery and equipment, thereby enabling the entrepreneurs to make the best use of our financial assistance. CHAPTER: 6AN OVERVIEW OF ICICI BANK LTD6.1 ICICI PROFILEICICI Bank is Indias second-largest bank with total assets of about Rs. 1trillion and a network of about 540 branches and offices and over 1,000ATMs. ICICI Bank offers a wide range of banking products and financialservices to corporate and retail customers through a variety of deliverychannels and through its specialized subsidiaries and affiliates in theareas of investment banking, life and non-Banking , venture capital, assetmanagement and information technology. ICICI Banks equity shares arelisted in India on stock exchanges at Chennai, Muzaffarnagar, Kolkataand Vadodara, the Stock Exchange, Mumbai and the National StockExchange of India Limited and its American Depositary Receipts (ADRs)are listed on the New York Stock Exchange (NYSE).CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 92
    • SAAB MARFIN MBAICICI Bank was originally promoted in 1994 by ICICI Limited, an Indianfinancial institution, and was its wholly owned subsidiary. ICICIsshareholding in ICICI Bank was reduced to 46% through a public offeringof shares in India in fiscal 1998, an equity offering in the form of ADRslisted on the NYSE in fiscal 2000, ICICI Banks acquisition of Bank ofMadura Limited in an all-stock amalgamation in fiscal 2001, andsecondary market sales by ICICI to institutional investors in fiscal 2001and fiscal 2002. ICICI was formed in 1955 at the initiative of the WorldBank, the Government of India and representatives of Indian industry. Theprincipal objective was to create a development financial institution forproviding medium-term and long-term project financing to Indianbusinesses. In the 1990s, ICICI transformed its business from adevelopment financial institution offering only project finance to adiversified financial services group offering a wide variety of productsand services, both directly and through a number of subsidiaries andaffiliates like ICICI Bank. In 1999, ICICI become the first Indian companyand the first bank or financial institution from non-Japan Asia to be listedon the NYSE.After consideration of various corporate structuring alternatives in thecontext of the emerging competitive scenario in the Indian bankingindustry, and the move towards universal banking, the managements ofICICI and ICICI Bank formed the view that the merger of ICICI with ICICIBank would be the optimal strategic alternative for both entities, andwould create the optimal legal structure for the ICICI groups universalbanking strategy. The merger would enhance value for ICICI shareholdersthrough the merged entitys access to low-cost deposits, greateropportunities for earning fee-based income and the ability to participatein the payments system and provide transaction-banking services. TheCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 93
    • SAAB MARFIN MBAmerger would enhance value for ICICI Bank shareholders through a largecapital base and scale of operations, seamless access to ICICIs strongcorporate relationships built up over five decades, entry into newbusiness segments, higher market share in various business segments,particularly fee-based services, and access to the vast talent pool of ICICIand its subsidiaries. In October 2001, the Boards of Directors of ICICI andICICI Bank approved the merger of ICICI and two of its wholly owned retailfinances subsidiaries, ICICI Personal Financial Services Limited and ICICICapital Services Limited, with ICICI Bank. The merger was approved byshareholders of ICICI and ICICI Bank in January 2002, by the High Courtof Gujarat at Ahmedabad in March 2002, and by the High Court ofJudicature at Mumbai and the Reserve Bank of India in April 2002.Consequent to the merger, the ICICI groups financing and bankingoperations, both wholesale and retail, have been integrated in a singleentity.6.2 CORPORATE BANKING AT ICICI BANKEscrow AccountAt ICICI Bank, we extend the trust you have in us by providing you withescrow services for safe custody of assets or for revenue streams. TheseCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 94
    • SAAB MARFIN MBAservices are customised to meet your needs. Some of the escrow servicesoffered are in relation to the following: Project financing Debt repayments Sale purchase transactions Mergers and acquisitionsFeatures Specialised and dedicated services Risk reduction in new relationships Security towards contingencies Mandatory in certain transactionsBenefits Simplified documentation Customised transaction structure Online tracking of your escrow accountFixed DepositCorporates can invest their surplus funds in fixed deposits for a widerange of tenures. The minimum deposit amount is Rs.10,000. Otherfeatures of the account are:Funding through a debit to the operative account/cheque for clearingWhile interest is compounded quarterly, payment of interest is quarterly,monthly or on maturityInterest payouts can be through credit to your account or throughbankers chequeBenefits Wide range of tenuresCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 95
    • SAAB MARFIN MBA Choice of investment plans Partial withdrawal permitted Availability of auto-renewal facilityStructured FinanceIn the Structured Finance space, our approach is totally client-centric. Webelieve that every problem is unique and therefore we endeavour todevelop and offer the widest range of solutions tailored to addressspecific requirements of each client. Services offered are: Structured finance for Corporate clientsThe Structured Finance Group aims to enable its corporate clients accessfunds through cost efficient structures. The groups strength lies in itsexperience and expertise in providing tailor-made solutions afterunderstanding the clients requirements.To deliver these customized structures, it leverages on ICICI Banks globalpresence, industry expertise, large underwriting capability andcomprehensive product suite. Strong capabilities in end-to-end solutionsand timely execution have enabled ICICI Bank to become one of theleading arrangers and underwriters of structured finance transactions.The Structured Finance Group provides an array of services to its clientsincluding: Acquisition finance Asset-backed finance Receivables purchase Subordinated debtCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 96
    • SAAB MARFIN MBA Convertibles / Hybrid instruments Non-recourse structuresInvestment opportunities in securitized debt instrumentsWe offer a plethora of investment opportunities in securitised debtinstruments (SDIs) involving both Pass-Through and Pay-Throughstructures which: offer a premium in yield to corporate debt instruments having similar risk profiles are customizable to meet both quantum and tenor requirements of the investors have well-diversified risk profiles could be customized (using different levels of credit protection) to meet the specific risk appetites of the investors could be offered as collateral by the investors at a later date for additional leveragingFor clients desirous of growth through the inorganic route, we canstructure solutions around sale of specific asset category(ies) as per theclients needs.Further, we could also structure solutions for clients desirous of gettinginvolved in market making or investing at specific points in time throughstructuring of appropriate Put Options.CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 97
    • SAAB MARFIN MBASecuritization & structured finance advisory solutionsWe help structure selling or buying of asset portfolios (in whole or inpart) for clients through securitisation or otherwise, thereby effectivelylimiting their exposures to future risks arising out of such asset pools.We can even offer to buy such identified asset pools from clients if thecommercials suit the Banks risk-return appetite.Being involved in more than 100 securitisation transactions till date, wecan provide advice to clients for structuring securitisation transactionefficiently. We have the distinction of structuring and placing some of thelargest securitisation transactions in the Indian market including thesolitary transaction which exceeded USD 1.00 billion in size.Traditionally Corporate borrowing has been on the basis of strength orweakness of balance sheet, with the credit quality of the borrower beingthe single most important factor. But of late the borrowings are beingclosely linked to the value of the asset or the revenue earning capabilityof the asset. This could be achieved by means of appropriate structuringwherein customized borrowing propositions could be evolved fordifferent business.A few examples of such structured financing could entail evolvingsolutions around dealer financing, vendor financing, transporterfinancing, brand financing, Export & Packing Credit (EPC) contractfinancing, investment monetisation, etc.Leveraging on our rich experience and wide reach in the Indian debtmarkets, we can provide arranging services for clients interested insecuritising their assets.CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 98
    • SAAB MARFIN MBABeing a SEBI registered Category - I merchant banker, we can provideunderwriting services for securitisation transactions originated byclients.We can also provide protection to the client from interest rate /currency risks for their structured finance exposures through interestrate swaps, currency swaps and associated derivatives.We can also provide protection to the client from credit risks for theirstructured finance exposures by tailoring suitable credit protectionofferings.We can also participate in market making or investing at specific pointsin time through structuring of appropriate Put Options.Dealer financingDealers of large corporates can be provided finance which can be eitherwith a limited recourse (on a first loss basis) to the corporate or based onthe creditworthiness of the dealer and its relationship with themanufacturer. Bill discounting / Web-based financing with/withoutrecourse, Cash credit / Demand loan facilities, Financing for auto dealers,could be some of the examples in this space.Vendor financingVendor financing can be structured as a direct line of credit to thevendors specifically to be used for supplies to the company or as arevolving line for discounting bills raised by the vendors on the company.The former can be integrated into the Internet banking model of ICICICREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 99
    • SAAB MARFIN MBABank and a web-based vendor financing structure can be created. Theweb-based structure would offer the company the convenience ofoperating the credit line of the vendors for making payments through thenet immediately after accepting goods. Vendor financing programs canbe set up for specific vendors recommended by the company. Throughthe widespread branch network of ICICI Bank, the program can includevendors at multiple locations.Transporter financingThis is a product designed to finance the truck operators who arededicated transport service providers to a company. The truck operatorsare typically small players and hence have limited sources for raisingfunds. It is likely that the vehicles used by them have been financed at ahigh cost which they would indirectly be passed on to the company in theform of increased freight rates. A financing facility could be set up for thetruck operators with some support from the corporates they serve, whichcould be used for refinancing their existing vehicles or could be used forexpansion of their fleet in line with the companys growth requirements.Brand financingBorrowings could be structured against security of specific brand(s) or asale and lease back of the brand(s). Borrowers could even be financed tofund purchase of a brand. In the first option, the brand would bemortgaged in the name of the lender and only in the event of default ofthe loan would the brand be transferred to the lender. The lender couldalternatively purchase the brand from the borrowing company and lease /license it out to the same entity. After expiry of the lease / license periodthe brand could either revert to the company or be sold to someone else.In the second option, the loan could be given to the company exclusivelyCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 100
    • SAAB MARFIN MBAfor purchasing the brand/s which would then be mortgaged in the nameof the lender.Investment monetizationThis is a product designed to cater to the requirement of the businessgroups to streamline the cross-holdings within their own groupcompanies. A Trust could be set up to acquire the intra-group crossholdings from the various companies in the group at current marketprices. To fund this, the Trust would issue Pass-through Certificates(PTCs) to the lender. The take-out could be through a put optionprovided by the identified holding company of the group wherein thelender could sell the PTCs to the put option provider at a pre-determinedprice on a fixed date. The deal could be secured through a pledge ofshares.Project Finance GroupICICI Bank Project Finance Group (PFG) has developed comprehensivedomain expertise and knowledge in the infrastructure & manufacturingsector, having ensured timely financial closure of several big ticketprojects. PFG has unmatched capabilities of discovering, creating andstructuring project finance transactions.Group structurePFG is the “One Stop Shop” fulfilling the funding requirements ofGreenfield & Brownfield projects in infrastructure & manufacturing sector.It comprises of three sub-groups as follows:CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 101
    • SAAB MARFIN MBA Infrastructure Finance Group (IFG): IFG caters to the funding requirement in the infrastructure sector like Power, Telecom, Roads, Ports, Airports, Railways and Urban infrastructure. Manufacturing Projects group (MPG): MPG caters to the funding requirement in the manufacturing sector like Oil & Gas, Steel, Aluminium, Cement, Auto, and Mining Infrastructure Equity Group (IEG): IEG is engaged in providing equity support to projects in various established as well as upcoming sectors.The project finance team of ICICI Bank has developed substantial insightin the dynamics and trends in the infrastructure sector, having assistedthe Government of India in formulating policies relating to varioussegments of the infrastructure sector. The unique insight andunderstanding thus derived from the exercise has not only enabled ICICIBank to provide optimum solutions to its clients, but has also providedICICI Bank with an appropriate decision support for strategic measures,going forward.Service offeringsPFG provide a wide range of services including the following: Rupee term loans Foreign currency term loans External Commercial Borrowings Subordinated debt and mezzanine financing Export Credit Agency backed funding Non fund based facilities like Letter of Credit, Bank Guarantee, Supplier’s Credit, Buyer’s Credit etc. Equity fundingCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 102
    • SAAB MARFIN MBATechnology FinanceThe Technology Finance Group (TFG) of ICICI Bank implements variousprogrammes for international agencies such as World Bank and USAID.The programmes currently running are designed to help the industry andinstitutions undertake collaborative R&D and technology developmentprojects. These programmes focus on the following sectors: Biotechnology/ Healthcare Electrical Electronics & communication Energy Environment Materials Manufacturing/ Control technologies Financial/ Security servicesThe core group handling these programmes assists projects, whichintroduce new concepts, products, and processes that will have a positiveimpact on the industry and help in improving competitiveness andoperational efficiencies.The programmes being implemented are:Technology Development and Commercialization (TDC) programmeCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 103
    • SAAB MARFIN MBAThe objective of this programme is to facilitate technology development,commercialisation and strengthen Indo-US technology collaboration. Tilldate, the Technology Finance Group has assisted 29 projects. Privatesector companies which would like to commercialize innovative concepts,products and processes in the areas of energy, environment & healthcareare eligible for concessional Rupee Term Loans up to a maximum of 50%of the project cost. The repayment is structured as per project andprogramme requirements.Guidelines for Financial AssistanceThe project is evaluated in terms of innovative content, likely impact onindustry and Indo-US linkages. The company is requested to submit aproject profile covering the following information: Brief particulars of the company Project title Description of existing facilities Current development activities Proposed commercialisation project Innovative content of the project in terms of comparison with current methods and aim of project in quantitative terms Major steps/ activities involved in proposed EE/ESCO/DSM project Brief on product / processes to be developed Brief particulars of the work already carried out Details on Indo-US technology collaboration (if any) Cost of project with breakup and proposed means of financing Schedule of implementation Business plan for commercialisation Details on market size, demand/supply drivers, etc.The programme is currently under renewalCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 104
    • SAAB MARFIN MBAThe objective of this programme is to stimulate technology developmentthrough private investment in R&D and strengthen industry & technologyinstitution (TI) collaboration. The companies eligible for availing thesefacilities should be from the private sector undertaking R&D incollaboration with TI.Following are the eligible sectors Biotechnology/ Healthcare Electrical Electronics & communication Energy Environment Materials Manufacturing/ Control technologies Financial/ Security servicesThe facilities include concessional Rupee Term Loans of up to 50% of theeligible project cost. The repayment is structured as per project andprogramme requirements. Till date the SPREAD has assisted 120 projects.Guidelines for Financial Assistance: To avail the facilities, the companiesare requested to submit a project profile covering the followinginformation: Project title Brief particulars of the company Description of existing facilities Current R&D activities Proposed R&D project Collaborating technology institution Brief on product / processes to be developed Innovative content of the project in terms of comparison with current practice and aim of project in quantitative termsCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 105
    • SAAB MARFIN MBA Major steps / activities involved in proposed R&D Break-up of activities to be taken up by the company and by the Technology Institution Brief particulars of the work already carried out Cost of project with breakup and proposed means of financing Schedule of implementation Business plan for commercialisation Details on market size, demand/supply drivers, etc.The project is evaluated in terms of Innovative content & likely impact Contribution from the technology institution Commercial potential.DOCUMENTSPlease return the form along with the following documents1. Firm/Company profile2. List of 5 major suppliers and customers including contact person andcontact no3. Constitution documents4. Audited financial statements of last 3 years along with IT return andtax audit report and schedules and notes to accounts5. Bank statement of the last 6 months6. IT PAN card of concern (entity) and all Promoters / Directors / Partners7. Provisional Balance Sheet and P/L a/c of ...............-................... ascertified by proprietor / partner / directorProjected Balance Sheet and P/L a/c of ....,...........-................... ascertified by proprietor / partner / directorCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 106
    • SAAB MARFIN MBA8. Proprietors / Partners/Directors personal ITR and Balance Sheet of last1 year - CA certified/signed by individual9. Current performance ( P/L & Balance Sheet ) from April ........................,.... to till date10. VAT assessment order or sales tax registration certificate or shop &establishment or VAT returnFor Limited Co.11. Latest list of Directors12. Form no: 32 and shareholding pattern or annual returnFor Partnership13. Registration certificate in case of partnership/application forregistrationProperty papers (for loan against collaterals)14. Title deed15. Completion certificate & occupancy certificate16. Tax receipts & sanction planAdditional documents for loan against credit card securitisation17. CA certified last 12 months credit card sales of Master & Visa only(excluding Dinners & Amex)If applicable18. Loan no of ICICI Bank loans (if any)19. Latest 1 year audited financials of sister concern (If any)20. Agreement with principal (if any) - Applicable to distributors/soleselling agents/franchisee etc.21. Existing Banks sanctions letter (if applicable).22. Any other document as required and deemed fit.CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 107
    • SAAB MARFIN MBA CHAPTER: 7AN OVERVIEW OF BLISS PHARMA LTD7.1 PHARMA INDUSTRYThe Indian pharmaceutical industry is a success story providingemployment for millions and ensuring that essential drugs at affordableprices are available to the vast population of this sub-continent.”Richard GersterThe Indian Pharmaceutical Industry today is in the front rank of India’sscience-based industries with wide ranging capabilities in the complexfield of drug manufacture and technology. A highly organized sector, theIndian Pharma Industry is estimated to be worth $ 4.5 billion, growing atabout 8 to 9 percent annually. It ranks very high in the third world, interms of technology, quality and range of medicines manufactured. Fromsimple headache pills to sophisticated antibiotics and complex cardiaccompounds, almost every type of medicine is now made indigenously.Playing a key role in promoting and sustaining development in the vitalfield of medicines, Indian Pharma Industry boasts of quality producersand many units approved by regulatory authorities in USA and UK.International companies associated with this sector have stimulated,assisted and spearheaded this dynamic development inCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 108
    • SAAB MARFIN MBAthe past 53 years and helped to put India on the pharmaceutical map ofthe world.The Indian Pharmaceutical sector is highly fragmented with more than20,000 registered units. It has expanded drastically in the last twodecades. The leading 250 pharmaceutical companies control 70% of themarket with market leader holding nearly 7% of the market share. It is anextremely fragmented market with severe price competition.The pharmaceutical industry in India meets around 70% of the countrysdemand for bulk drugs, drug intermediates, pharmaceutical formulations,chemicals, tablets, capsules, orals and injectibles. There are about 250large units and about 8000 Small Scale Units, which form the core of thepharmaceutical industry in India (including 5 Central Public Sector Units).These units produce the complete range of pharmaceutical formulations,i.e., medicines ready for consumption by patients and about 350 bulkdrugs, i.e., chemicals having therapeutic value and used for production ofpharmaceutical formulations.Following the de-licensing of the pharmaceutical industry, industriallicensing for most of the drugs and pharmaceutical products has beendone away with. Manufacturers are free to produce any drug dulyapproved by the Drug Control Authority. Technologically strong andtotally self-reliant, the pharmaceutical industry in India has low costs ofproduction, low R&D costs, innovative scientific manpower, strength ofnational laboratories and an increasing balance of trade. ThePharmaceutical Industry, with its rich scientific talents and researchcapabilities, supported by Intellectual Property Protection regime is wellset to take on the international market.CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 109
    • SAAB MARFIN MBA7.2 CASE FACTS7.2.1. COMPANY PROFILEBliss Gvs Pharma Limited was incorporated on 11th December, 1984 asPublic Limited Company. It is listed on Bombay and Delhi Stock Exchange.The Manufacturing Plant is located at Palghar (approximately 90 kmsfrom Bombay) in an industrial area which is well developed with allinfra-structural facilities. The plant is 1.5 kms. from Palghar RailwayStation on the Western Railway. The companys most unique product isToday Vaginal Contraceptive, a safe female contraceptive aimed atfurthering planned parenthood and is also an established method forpreventing conceptionBliss Gvs Pharma Limited was incorporated on 11th December, 1984 asPublic Limited Company. It is listed on Bombay and Delhi Stock Exchange.The Manufacturing Plant is located at Palghar (approximately 90 kmsfrom Bombay) in an industrial area which is well developed with allCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 110
    • SAAB MARFIN MBAinfra-structural facilities. The plant is 1.5 kms. from Palghar RailwayStation on the Western Railway. The companys most unique product isToday Vaginal Contraceptive, a safe female contraceptive aimed atfurthering planned parenthood and is also an established method forpreventing conception.Bliss Gvs Pharma Limited has the most modern plant to manufactureFemale Contraceptives, Soft Pessaries and Suppositories. Its most popularproduct is Today Vaginal Contraceptive pessaries containing Nonoxynol9. Bliss also manufactures to U.S. specification vaginal pessaries ofClotrimazole & Povidone Iodine in addition to Anal Suppositories fortreatment of Piles.BLISS complies with all norms laid down by Food & Drug Administrationfor manufacture of its products and maintains high International GMPstandards.BLISS also manufactures wide range of Pessary Formulations, SuppositoryFormulations, Calcium Preparation, Protein Powders, Iron Preparation,Antibiotics, Analgesic & Antipyretics, Respiratory, Anti-inflammatory,Dermatological Preparations, Anti-Diarrhoeal products.7.2.2. LOCATIONIt is a sophisticated automatic plant situated at Palghar (approx. 90 kmsaway from Mumbai City) in an Industrial area which is well-developedwith all Infra-structural facilities. This site is around 1.5 kms away fromPalghar Railway Station on the Western Railway and is well-connected byRoad and Rail to most parts of the country, including Mumbai.The plant aims to be as the most modern and one of its kinds in Indiansub-continent, to manufacture suppositories. Complete overhaul andannual maintenance has kept the plant in excellent condition and fullyoperational with minimum down time. Spares and consumables aremaintained at proper levels to prevent unnecessary delays and theCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 111
    • SAAB MARFIN MBAcompany has made efforts to employ a qualified Maintenance Engineersince production should not be hampered in any way.7.2.3. AWARDS AND ACCOLADESBliss GVS Pharma receives award from PharmexilIn recognition of commendable performance in exports ofpharmaceuticals Bliss GVS Pharma has announced that the company hasreceived an Award from Pharmexcil, Outstanding Export PerformanceAward in the recognition of commendable performance in the exports ofpharmaceuticals in the category of Small Scale Industries for the year2008-2009.7.2.4. PRODUCTSAntimalarial Alaxin Gvither P-Alaxin Gsunate LonartAnal Suppositories Rectol Poroxicam ParafenCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 112
    • SAAB MARFIN MBA Vomitin Slipizem Anomex Prochloperazine Conlax Xtacy Meloxicam Rectcin GlycerinVaginal Pessaries Imazole Gvgyl Terconazole Vagid Gvgyl - N Clindemycin Povid / Gevid Blissfast / Klovinal Gynanfort Micozole Blissnox / Wellgynax Ecozole VagikitGeneral Lofnac Comit Zinvite Funbact-A Aceclofenac Gudapet Gvfluc Clamoxin Gbactin407.3 FINANCIAL DATABALANCE SHEET AS AT 31ST MARCH 2009 (Rs. In crores)Balance sheet Mar 09 Mar 08Sources of fundsCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 113
    • SAAB MARFIN MBAOwners fundEquity share capital 10.31 6.45Share application money - -Preference share capital - -Reserves & surplus 87.2 55.43Loan fundsSecured loans 2.41 12.23Unsecured loans - -Total 99.93 74.1Uses of fundsFixed assetsGross block 34.53 21.3Less : revaluation reserve - -Less : accumulated depreciation 10.17 6.6Net block 24.36 14.7Capital work-in-progress 0.13 0.04Investments - -Net current assetsCurrent assets, loans & 102.56 92.75advancesLess : current liabilities & 27.12 33.39provisionsTotal net current assets 75.44 59.37CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 114
    • SAAB MARFIN MBAMiscellaneous expenses not - -writtenTotal 99.93 74.1Profit loss account Mar 09 Mar 08IncomeOperating income 132.96 102.4ExpensesCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 115
    • SAAB MARFIN MBAMaterial consumed 69.84 44.59Manufacturing expenses 2.43 2.09Personnel expenses 2.64 2Selling expenses 6.71 4.58Adminstrative expenses 12.03 7.35Expenses capitalised - -Cost of sales 93.65 60.62Operating profit 39.31 41.77Other recurring income 0.19 0.09Adjusted PBDIT 39.49 41.86Financial expenses 2.26 1.38Depreciation 3.59 2.93Other write offs - -Adjusted PBT 33.64 37.55Tax charges 2.77 1.27Adjusted PAT 30.87 36.28Non recurring items 6.71 -1.16Other non cash adjustments -0.03 0.98Reported net profit 37.55 36.09Earnigs before appropriation 73.14 39.01Equity dividend 1.55 0.65Preference dividend - -Dividend tax 0.26 0.11Retained earnings 71.33 38.25 CHAPTER: 8Case study analysis8.1. ICICI RATING MODELCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 116
    • SAAB MARFIN MBAICICI Bank’s corporate banking strategy is based on providing customizedfinancial solutions to clients, tailored to meet their specific requirements.The corporate banking strategy focuses on careful management of creditrisk and adequate return on risk capital through risk-based pricing andproactive portfolio management, rapid growth in fee-based services andextensive use of technology to deliver high levels of customer satisfactionin a cost effective manner.Financial performance Manufacturing Max. Co.Score ScoreParameter Range Score WeightTurnover/total >= 750 mn 5 4% 5 20 20income 550 to 750 4 mn 400 to 550 3 mn 250 to 400 2 mn 100 to 250 1 mn <100 mn 0Turnover >=15% 5 2% 5 10 10Growth 12% to 15% 4 9% to 12% 3 6% to 9% 2 3% to 6% 1 <3% 0Operating >=18% 5 5% 5 25 25margin 16% to 18% 4(PBDIT/TOI%) 13% to 16% 3CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 117
    • SAAB MARFIN MBA 10% to 13% 2 6% to 10% 1 <6% 0Interest >=5 times 5 2% 5 10 10coverage ratio 4 to 5 times 4 3 to 4 times 3 2 to 3 times 2 1.5 to 2 times 1 <1.5 times 0Total debt to <=4 5 4% 5 20 20net cash 4 to 6 4accruals 6 to 7 3 7 to 8 2 8 to 10 1 >10 0Debtors <=60 days 5 3% 2 15 6collection 60 to 90 4period 90 to 120 3 120 to 150 2 150 to 180 1 >180 days 0Networth >=200 mn 5 2% 5 10 10 150 to 200 4 mn 100 to 150 3 mn 50 to 100 mn 2 30 to 50 mn 1 <30 mn 0TOL/TNW <=1 5 5% 1 25 5 1 to 1.25 4 1.25 to 1.5 3 1.5 to 1.75 2 1.75 to 2.5 1 >2.5 0Current ratio >=1.75 times 5 4% 5 20 20CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 118
    • SAAB MARFIN MBA 1.33 to 1.75 4 1.25 to 1.33 3 1.15 to 1.25 2 1 to 1.15 1 <1 0Inventory to <=30 days 5 2% 0 10 0turnover ratio 30 to 45 4 45 to 60 3 60 to 75 2 75 to 90 1 >90 days 0No. of years More than 10 5 6% 3 30 18Profitable years Minimum 10 4 years Minimum 8 3 years Minimum 5 2 years Minimum 2 1 years Less than 2 0 yearsPAT (%) >=6% 5 2% 5 10 10 5% to 6% 4 4% to 5% 3 3% to 4% 2 2% to 3% 1 <2% 0Total 41% 46 205 154CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 119
    • SAAB MARFIN MBABusiness segment and market positionParameter Range Score Weight Max. Co,s Score ScoreIndustry Positive 5 6%(Classification given Moderately 4in Annexure F) positive Stable 3 3 (crisil 30 18 site) Moderately 1 negative Negative 0Contracts in hand / >=40% of 5 5% 3 25 15confirmed orders/ last yearsassured off take turnover 30% to 40% 4 of last years turnover 20% to 30% 3 of last years turnover 10% to 20% 2 of last years turnover 0% to 10% of 1 last years turnover No contracts 0 / confirmed ordersBargaining power High 5 5% 25 15 Moderate 3 3 Low 1 Nil 0CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 120
    • SAAB MARFIN MBAProduct range Wide 5 4% 20 15 Niche 3 3 Limited 1 Single 0No. of large 5 5 3% 3 15 9customerscontributing to >5% 4 4of turnover) 3 3 2 2 1 1 0 0Length of >= 5 years 5 3% 5 15 15association with 3 to 5 years 4large customers 2 to 3 years 3 1 to 2 years 2 6 months to 1 1 year < 6 months 0% of turnover from 30% to 50% 5 3%large customers of turnover between 20% 4 4 15 12 to 30% or 50% to 60% between 15% 3 to 20% or 60% to 70% between 2 10%to 15% or 70% to 80% between 5%to 1 10% or 80% to 90% <5% or >90% 0Total 29% 24 145 99CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 121
    • SAAB MARFIN MBAP arameter Range S core Weight Max Cos.score scoreBusiness vintage (years) 0 – 10 3% 5 15 15P ersonal networth of promoters 0 – 50 3%(R s. in mn)Constitution of the entity P ublic limited 5 3% company 5 15 15 P rivate limited 4 company Registered 3 partnership firm Unregistered 2 partnership firm/HUF S ole proprietorship 1 concernTrade reference/ Market feedback E xcellent 5 4% 20 12about promoters Very Good 4 Good 3 3 Above average 2 Average 1 Below average 0 CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 122
    • SAAB MARFIN MBAP romoters financial flexibility E xcellent 5 3% (deposits/investment 4 s >=100.0 mn) 5 15 15 5 15 15 Good 3 (deposits/investme nts 50.0 to 70.0 mn) Above average 2 (deposits/investme nts 20.0 to 50.0 mn) Average 1 (deposits/investme nts 10.0 to 20.0 mn) Below average 0 (deposits/investme nts <10.0 mn)Promoters payment record with Excellent 5 2% 5 10 10other Very Good 4banks/FIs/NBFCs/creditors Good 3 Promoters /management CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 123
    • SAAB MARFIN MBA Above average 2 Average 1 Below average 0Total 18% 28 90 82Collateral Security Manufacturing MAX SCORE COs. SCOREP arameter Range S core WeightCollateral as % of >=35% 5 6% 5 30 30limits 30% to 35% 4 25% to 30% 3 20% to 25% 2 15% to 20% 1 <15% 0Corporate Guarantee AAA or AA+ 5 6% 4 30 24(Rating of Guarantor) AA 4 AA- 3.5 A+ 3 A 2.5 A- 2 BBB 1Total 12% 9 60 54 CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 124
    • SAAB MARFIN MBAOVERALL TOTAL 500 389CREDIT RATINGCategory S core range Trading and Manufacturing servicesA 85 and above 80 100B 65-85 60 80C 55-65 40 50COMPANY NAME SCORE CATEGORY EXPOSURE LIMIT BLISS PHARMA 77.8 B 80 millions CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 125
    • SAAB MARFIN MBA 8.2. PNB CREDIT RATING MODEL Bank has developed online comprehensive risk rating system that serves as a single point indicator of diverse risk factors of counter-party and for taking credit decisions in a consistent manner. The risk rating system is drawn up in a structured manner, incorporating different factors such as borrower’s specific characteristics, industry specific characteristics etc. Bank is also undertaking periodic validation exercise of its rating models and also conducting migration and default rate analysis to test robustness of its rating models.Name of borrower : Bliss Pharma LtdBranch Office : Large Corporate Branch,MumbaiConstitution : Public Limited Company CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 126
    • SAAB MARFIN MBAS Benc S Benr mar c cmN k o ark Benc Scoreo Cos Bencmark Sco Valu r Val Bencma mark award. Parameters value Value re e e ue Score rk Value Score Value Score ed1 Financials: >2. 50 & >4.0 upt 0 & [ o 1.00 & >5.00 OR upto 2 4.0 uptoI TOL:TNW 2.47 <0 [0] 5.00 ] 0 [4] 2.50 [6] <1.00 [8] 6.00 >1. 25 & 1.00 upt & [ o >1.50 & upto 2 1.5 uptoIi Current Ratio 3.36 <1.00 [0] 1.25 ] 0 [4] 2.00 [6] >2.00 [8] 8.00 8% & upt 4% & [ o 12% & 35.92 upto 2 12 uptoIii ROCE % <4% [0] 8% ] % [4] 16% [6] >16% [8] 8.00 >4.0 >3 0 & [ & Inventory & Debtors upto 2 upt 2 & uptoIv Holding (Months) 3.13 >5 [0] 5.00 ] o4 [4] 3 [6] <2.00 [8] 4.00V Score under past financials 26.00 Subjective Assessment of Financials 85 %& 80% upt & o 90% & Reliability of Annual 80% & upto 90 uptovi Financial Statements below 85% % 95% >95% (-)V Discounting Factor for (-) 20 -30.0ii scre inder (vi) above. (-) 50% 30% % (-) 10% NIL 0% Net score underV Financial afteriii discounting (v-vii) 18.00 Estimated cash profit 303.0 <100% [0] 100 [ 125 [ [0] [6] >250 [8] 8.00 CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 127
    • SAAB MARFIN MBA of current year to Net 9% % & 2 %& 4 % Repayment upto ] upt ]Ix obligations of current 125 o year % 175 % NET SCORE OFA FINANCIALS (viii+ix)2 BUSINESS/INDUSTRY Posit Pos ive itiv grow e th of gro mini wth mum of 5% min duri imu ng m Positive any 5% growth one for of year any minimu out 2 m 5% of yea for past rs, consecu 3 out tively 2 Positive year of years growth of s pas during minimum Growth of and t 3 past 5% for last less than posit yea 3rd year 3 years 5% or ive rs & continousl negative grow and expecte y and growth th of exp d to expected during the mini ect continu to last 3 mum ed e continue years 5% is [ to [ during during consecutiv expe 2 con 4 current current 8.0i Expected Sales Growth ely. [0] cted ] tinu ] year. [6] year. 0 CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 128
    • SAAB MARFIN MBA to e conti dur nue ing duri cur ng ren curre t nt yea year. r.Positive growth of minimum 5% is expected to continue in the current year High depe nden ce on Eas supp y Adequa liers ava te /inst ilab availibli abilit ility ty at Scarcity/lo y of [ of [ competi Availability of w supp 1 inp 2 tive BuyersIi inputs availability [0] lies ] uts ] prices [3] market [4] 2.00 Go od Qu alit Qual y/N Standar ity or d not ms Quality main [ mai [ & Post Production/Pro Poor taine 1 ntai 2 Sales MarketIii duct Strength Quality [0] d ] ned ] Services [3] Leader [4] 2.00 Inad Sati equa sfa te cto Good cust ry Marketi Poor omer cus ng Customer base to Networ base/ / [ mer [ k/Growi Marketing marketing mark 1 bas 2 ng SellersIv Strength network [0] eting ] e/ ] Market [3] market [4] 3.00 CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 129
    • SAAB MARFIN MBA netw mar ork keti ng net wor k TOTAL SCORE OF BUSINESS/INDB USTRY 15.003 MANAGEMENT: % Achievement of Sales vis-à-visi estimates 92.00% Sales Achievement 132.95 75 & >80 & >90 & 145(40% upto upto upto 3.0 Sales Target ) <75% [0] 80% 90% 95% >95% 0 Actual Profits vis--vis Estimatedii Profits 89.00% Profit 75 & >80 & >90 & Achievement 40.26 upto upto upto 2.0 Profit Target 45(20%) <75% [0] 80% 90% 95% >95% 0 Propri Propriet Propri Partne etorsh orship etorsh rship ip >5 >10 ip >15 years years >15 years upto but years or Pvt. 10 upto 15 or Ltd. years years Partne Co. standi or rship >10 ng or Partner >2 Years Propriet Partne ship >5 Years or orship rship Years and Public upto 5 upto but upto Ltd years 5 upto 10 15 Comp standing Years standin years any / standi g or Pvt or >5 Partners ng ltd. Pvt.ltd years hip upto but Co.>2 .>5 in Constitution/Es 2 Years >2 years years busin 4.0iii tablishment standing years upto 2 upto ess 0 CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 130
    • SAAB MARFIN MBA or Pvt years 10 operat ltd. standin years ion Co. or g or or any any Public other other Ltd consti constit Comp tution utions any s such as upto havin Co-op. 5 g Societie years upto s etc. but>2 2 >2 years years years standi standi standin ng ng g Poor/wil Margi Integrity/Com lful nally Beyon mitment & defaulte Accep Satifact Reliab d 3.0iv Sincerity r table ory le Doubt 0 No irregu larity durin g past 3 No years Occasi No irregu & onally irregula larity capab Irregu rities durin le of lar during g past repayi Irregular due to past 1 3 ng on for over intere years/n years/ dema 3 st/no o no nd/no months/ statut statutor statut statut statutor ory y ory ory Track Record in y liabilit liabilitie liabilit liabilit Debt liabilitie ies s ies ies Repayment and s overd overdu overd overd 3.0v Statutory Dues overdue ue e ue ue 0 TOTAL SCORE OF 15.C MANAGEMENT 004 CONDUCT OF ACCOUNT CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 131
    • SAAB MARFIN MBA [ [ Conduct of Un-satisfa 3 6 Very 6.0I Accounts ctory [0] Average ] Good ] Good [9] Excellent [12] 0 Delay in Delay in submissi submissio on not Occasio n beyond exceedin nally 30 days of g 30 days delayed due date/ of due but Timely lack of date but reliable submiss reliability reliable data/ ion/relia Submission of data/ren renewal ble and reliabilities data/rene ewal overdu data/ren Prompt of Feedback wal overdue e >30 ewal submission/r statements & overdue >60 days days & overdue eliable Other beyond 90 & upto upto 60 upto 30 data/renewal 6.0ii Information days 90 days days days not overdue 0 TOTAL SCORE FOR CONDUCT 12.D OF ACCOUNT 00 TOTAL SCORE (A+B+C+D)E (E) FOR TERM5 LOAN: Debt-Equity >1.50 1.00 & Ratio of >3.00 >2.00 & & upto upto 8.0i Company 0.02 or <0 [0] upto 3.00 [2] 2.00 [4] 1.50 [6] <1.00 [8] 0 DSCR/Repaymeii nt Period: a) In case of existing companies >1.75 2.25 & already availing 1.25 & & upto upto N.A TL/DPG: OR N.A. <1.25 upto 1.75 2.25 2.50 >2.5 . b) In case of existing companies proposes to >4 & >3 & avail fresh term >6 >5 & upto upto 5 upto 4 3 years or loan/DPG years 6 years years years below 4 12.F TOTAL FOR TL 00 CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 132
    • SAAB MARFIN MBA GRAND TOTAL SCOREG (E+F) Out of total 120 80 Adjusted Score Out of total 100 (G*100/120) 66.67 Score >80 >70 & upto >60 & >50 & >40 & >30 & upto 30 and 85 upto 70 upto 60 upto 50 40 below Grade AAA AA A BB B C D CREDIT RISK RATING A 8.3. COMPARATIVE ANALYSIS ICICI model is divided into five parameters viz Promoters/ management, business and market position, financial performance, transaction history and collateral and each parameter is divided in various sub parameters while PNB model is divided in four CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 133
    • SAAB MARFIN MBA parameters viz financials, business/industry, management, conduct of account and each parameter is relatively divided in less number of sub parameters compared to ICICI bank Collateral securities are not considered by PNB whereas these parameters are included in ICICI model. PNB bank should consider collateral securities of a company while evaluating and rating company as collateral securities are important to judge company’s soundness. Transaction history of a company is considered by ICICI in detail as compared to PNB model. ICICI bank considers various sub parameters under transaction history like cheque bouncing, LC devolvement and utilization of fund based limits that are lacking in PNB bank. ICICI bank focuses on company’s relationship with customer in detail as it is important to measure stability of a company and demand of its products and services in market whereas PNB does not consider company’s relations with customer. Personal networth of promoters and their flexibility is considered by ICICI bank whereas PNB bank does not consider. ICICI model gives weightage along with score whereas in PNB model only scores are given to each parameter. In ICICI credit rating model separate score and weightage is given to all sub parameters along with parametersCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 134
    • SAAB MARFIN MBA Bliss pharma scores 77.8 and category - B as per ICICI model whereas it scores 66.67 and category - A as per PNB model In case if total exposure of an individual borrower exceeds maximum exposure according to scorecard special approval is needed as per ICICI model whereas there is no such limit in PNB modelCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 135
    • SAAB MARFIN MBA CHAPTER 99.1 RECOMMENDATIONS TO PNB PNB bank should consider personal net worth of promoters, promoters financial flexibility and their payment records with other banks, financial institutions, creditors and non financial institutions while rating a company to evaluate efficiency of a company and its repayment abilities. PNB bank should conduct in depth study of a company viz it should consider customers of a company and transaction history in detail to judge its stability in market. As PNB bank ignores weightage of each parameters, scores loses its relevance. Bank should consider weightage for each parameter along with each sub parameter. PNB bank should include maximum exposure limit in its credit rating model to be very specific and clear.CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 136
    • SAAB MARFIN MBA9.2 RECOMMENDATIONS TO COMPANY Bliss pharma should reduce its inventory turnover ratio for effective utilization of resources. It should reduce debtor’s collection period for smooth running of business cycle and working capital cycle. Company should increase its trade reference to increase its brand image. The company should increase its ratio between total outstanding liabilities and total net worth to avail more credit from banks at easier terms. For this purpose it has to increase its networth and reduce its outstanding liabilities.CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 137
    • SAAB MARFIN MBA CHAPTER 10 CONCLUSION During my project I realized that a credit analyst must own multi-disciplinary talents like financial, technical as well as legal know-how about corporate lending and credit rating model for the purpose of lending loan A study of both private bank and public bank enhanced my knowledge and I gained a great learning experience During the study I learnt how the theoretical financial analysis aspects are used in practice during the term loan finance assessment The credit appraisal for term loan finance system has been devised in a systematic way. There are clear guidelines on how the credit analyst or lending officer has to analyze a loan proposal Credit Appraisal Model of both PNB and ICICI bank are based on sound principles of lending Method of lending of both banks is different.CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 138
    • SAAB MARFIN MBA Compared to PNB model, ICICI model is complicated as ICICI considers more aspects and in detail compared to PNB. Both banks follow inventory and receivable norms as suggested by RBI.BIBLIOGRAPHYWEB LINKS:www.rbi.comwww.icicibank.comwww.crisil.comwww.pnb.comwww.moneycontrol.comwww.icicidirect.comLITERATURE SURVEY Economics timesCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 139