Credit risk management3

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Credit risk management3

  1. 1. A STUDY ON CREDIT RISK MANAGEMENTAT SYNDICATE BANKIN PARTIAL FULFILLMENT OF THE REQUIREMENT FOR THE AWARD OF THE DEGREEMASTER OF BUSINESS ADMINISTRATION FROM OSMANIA UNIVERSITY SUBMITTED BY DVR POST GRADUATE INSTITUTE OF MANAGEMENT STUDIES KANDI, SANGAREDDY. 2009-2011 1
  2. 2. ACKNOWLEDGEMENT I would like to express my gratitude to our college PrincipalMr.D.SRINIVASULU or having given me the opportunity to work onthis project. It is indeed a great pleasure and a matter of immensesatisfaction for me to express my deep sense of gratitude andIndebtness to Ms.Subbalakshmi (Head of Department of BusinessAdministration) and my college lecturers for the continuous support theyhave given me.This project would not have been possible without efforts and guidanceof a KRISHNA MURTHY of SYNDICATE BANK HYDERABAD. I takeopportunity to time all those magnanimous persons who rendered theirsupport to this project.I would like to thank my project external guide, Ms.SUBBALAKSHMI forhis expert guidance and continuous guidance which lead to successfulcompletion of this project.I am thankful to my friends for sharing technical expertise with me inmaking this project successful. 2
  3. 3. DECLARATIONI hereby declare that this project titled CREDIT & RISK MANAGEMENTwith reference to SYNDICATE BANK submitted here is genuine andoriginal work of mine.This project report is submitted in partial fulfillment of the requirementfor the award of MASTER OF BUSINESS ADMINISTRATION degreefrom D V R COLLEGE OF POST GRADUATE INSTITUTE OFMANAGEMENT STUDIES, KANDI, HYDERABAD, for the year2009-2009.I also declare that this is result of my own efforts and has not beensubmitted to any other university for any other degree of diploma. 3
  4. 4. CONTENTS PAGE NO.CHAPTER I PROFILE OF BANKING INDUSTRY 5-7CHAPTER II INTRODUCTION 8-13 DESIGN OF STUDY 1. OBJECTIVES 2. NEED & IMPORTANCE 3. METHODOLOGY 4. SCOPE 5. LIMITATIONSCHAPTER III ORGANISATION PROFILE 14-36 PROFILE OF KOTAK MAHINDRA BANK TAXOMONY OF PERSONAL FINANCECHAPTER IV INTRODUCTION OF CREDIT & RISK 37-56 1. IMPORTANCE OF CREDIT & RISK 2. LEGAL ASPECTS OF RISK MANAGEMENTCHAPTER V FINDINGS AND ANALYSIS 57-77CHAPTER VI CONCLUSSION AND SUGGESTIONS 78-79ANNEXURES 80-85BIBLIOGRAPHY 85-89 4
  5. 5. INTRODUCTIONINTRODUCTION Finance may be defined as the “provision of money at the time it isrequired”. Finance refers to the management of flows of money throughan organization. It concerns with application of skills in the manipulation,use and control of money.Financial management refers to that part of the management activitywhich is concerned with the planning and controlling of firm’s financialresources. It deals with finding out various sources for raising funds forthe firm. The sources must be suitable and economical for the needs ofthe business. The most appropriate use of such funds also forms a partof financial management.The main objectives of finance function are:- 1Acquiring sufficient funds. 2Optimum utilization of funds. 3Increasing profitability. 4Maximizing shareholders wealth.In the present business context, a finance manager is expected to dofinancial forecasting and planning .Financial manager has to plan thefunds needed in the future. How these funds will be acquired and applied 5
  6. 6. is an important function of a finance manager. The sources of supply offunds are shares, debentures, financial institutions, commercial banks,etc. The pros and cons of various sources should be analyzed beforemaking a final decision. The cost of acquiring funds and the returns should becompared. Capital budgeting technique is used for this purpose. Theobjective of maximizing profits will be achieved only when funds areefficiently used and they do not remain idle at any time. A number ofmergers and consolidations take place in present competitive Industrialworld. A finance manager is supposed to assist management in makingvaluation etc. For this purpose, he should understand various methodsof valuing shares and others assets so that correct values are arrived. Cash is the best source for maintaining liquidity. It is required topurchase raw material, pay workers, meet other expenses, etc. Afinance manager is required to determine the need for liquid assets andthen arrange liquid assets in such a way that there is no scarcity offunds.DESIGN OF STUDYKotak Mahindra Bank personal loans are the largest business in thebank. The personal loan business is doubling every year. It is the mostprofitable business of the bank. Personal loans contribute substantiallyto the overall base line of the bank. Credit department is the back bone of personal loan business. Mainfunction of the credit is to assess the credit worthiness of an applicantand lending him appropriate amount based on such assessment and 6
  7. 7. subject to the terms, conditions and limitations of the policies.The term credit management has got importance from the time whenthere increased the pressure of competition and force of custompersuades to sell on credit. Credit is granted to facilitate the sales. Creditis appealing to those customers who cannot borrow from other sourcesdue to many reasons. The firm’s investment in accounts receivabledepends on how much it sells on credit and how long it takes to collectreceivables. Accounts receivables constitute one of most important assetcategory for firm which makes the firm to manage its credit well.The term credit management can be analyzed from various aspects like:Terms of payment, Credit policy variables, Credit evaluation, Creditgranting decision.Risk management is a process of managing the collection of managingthe collection of liabilities with an objective of increasing the cash flowswith minimum costs. It involves collecting in right time, right amount, inright terms. This process starts from identifying the amount of liabilities and tomake the collection successful. This does not end with mere collection.Besides collection, the difficulties and weak areas should also beascertained, which leads to development of an effective system for creditextension or sales and collection.OBJECTIVES OF THE STUDY: The main objectives of the study are: 1To study the effectiveness of credit process. 2To study the risk process followed in Syndicate bank. 7
  8. 8. 3To know and analyze the procedure of loan disbursement and its evaluation criteria. 4To study and analyze the factors contributing to default rate and their interrelations. 5To suggest suitable strategies for improving credit and risk management.NEED & IMPORTANCE OF THE STUDY:In today’s market scenario, one of the most critical areas to focus on isto protect the bank from bankruptcy. In such conditions Credit and RiskDepartment plays a key role in growth of banks. Any delay in realizingthe receivables would adversely affect the working capital, which in turneffects the overall financial management of a firm. No firm can besuccessful if it’s over dues are not collected, monitored and managedcarefully in time. Thus Risk management is important in sustaining thebank and its growth.PERIOD OF STUDY:The data obtained from the bank (syndicate bank) for the purpose ofcredit period and risk time from the customers. The information of thecustomers from different anglesto access the credit and riskmanagement for a period of THREE years. i.e. from 2007-2010.Credit period refers to the length of the time are allowed to pay theamountFor their purchase which is generally varied from 15 to 60 days, or 15 to 8
  9. 9. 90 days.RESEARCH METHODOLOGY:To fulfill the objectives of the study both primary and secondary data areused. The primary data was collected through interviewing all theexecutives and officials of the KMBL Somajiguda Hyderabad.The secondary data was collected from published records, website andreports of the KMBL. Mainly the data relating to credit proceduresfollowed by the bank and risk management was obtained throughmanager from bank database .The data for this purpose was obtainedfrom bank for a period of 3 years that is from. Based on the availabilityof the data, the analysis was made from different angles to assess thecredit and risk management of KMBL, Somajiguda Hyderabad.SCOPE OF THE STUDY: 1The study intended to cover the degree and extent of default by the customers of KMBL. In that direction the following has been done. 2The genesis of the company, its organs. And the range of activities have been studied and documented such study, it was thought, would uncover the weakness brought down as legacy from its line of entrepreneurs. 9
  10. 10. 3The process involved in loan disbursement has been studied to identify the weak area, follies committed in disbursement or in the design of disbursement process. The seeds of default are built in; hence the study of loan disbursement process has been attempted. 4The profile of the defaulters including location, stage of default, gender, age etc. has been studied and documented. The components of the profile have been presumed to be linked to the default. 5The risk process itself has the potential for some loans to be non recoverable hence to identify the probable causes, the risk process has been studied and documented. 6Based on the profile and the data of defaulted loans, an analysis has been made to establish the links between default and other variables like location of loan, amount of loan taken, gender, profession etc.LIMITATIONS OF THE STUDY: 1The study is limited to Hyderabad city only. 2The study has been done according to bank point of view. 3The study has been done without meeting the defaulters due to constraints of time. 10
  11. 11. COMPANY PROFILE THE PROFILE OF BANKING INDUSTRY Financial institutions today face enormous challenges as they defend their place inmarket; ordinarily they are simple business oriented or commercial concerns. They needto discover innovative ways to take on these challenges by making critical strategic insightsand emerging industry best practices, which strengthen approaches to fluctuating interestrates and uncertain investment yields to produce increased profitability and reduceearning volatility. A study of financial institutions in India can appropriately begin with a brief discussionof the regulatory framework of the country carried out by RESERVE BANK OF INDIA. Financial regulation is necessary to generate, maintain and promote confidence, trustand faith of people for its smooth functioning. Financial markets involve intermediaries oragencies, where RBI ensures investors protection, discloser to trustees, easy access, timelyand adequate information to interested parties. RESERVE BANK OF INDIA as the central bank of the country is the center of theIndian financial and monitory system. It is the oldest among the central banks in thedeveloping countries; it started functioning from April 1st 1935. 11
  12. 12. In framing various policies all the banks require to maintain close and continuouscollaboration with RBI and Government. The preamble of RBI states that “Reserve bank is expedient to regulate the issue ofbank notes and keeping of reserves with a view to securing monetary stability in India andgenerally to operate the currency and credit system of the country to its advantage”. To elaborate the above statement, functions of RBI helps us to understand the clearworkings of financial system in INDIA.Role and Functions of RBI:  Note issuing authority  Government banker  Bankers bank  Exchange control authority  Security authorityAbove functions of RBI are discussed as under.NOTE ISSUING AUTHORITY: The issue of currency note is one of the basic functions of RBI; the responsibility ofthe bank is not only to put currency into or withdraw it from circulation but also toexchange notes and coins of one denomination into those of other denomination asdemanded by public. The bank issues notes against the security of gold coins and goldbullion, foreign security, rupee coins Government of India security, and bills of exchange 12
  13. 13. and promissory notes as are eligible for purchase by the bank. At present bank issuesnotes in denominations of Rs. 10, 20, 50, 100, 500, and 1000.GOVERNMENT BANKER: The RBI is the banker to the Central and State Governments. It provides all thebanking services such as accepting of deposits, withdrawal of funds by cheques, makingpayment as well as receipts and collection of payments on behalf of the Governments. Asa banker to the Government, the bank can make “ways and means advances” to bothCentral and State Governments. Type of advances provided are normal or clean advances,secured advances and special advances.BANKERS BANK: RBI called as Bankers Bank because of its special relationship with commercial and co-operative banks and the major part of its business is with these kinds of banks. It controlsthe volume of reserves and determines the deposits or credits creating ability of banks.RBI is also said to be “bank of last resort or the lender of last resort”.EXCHANGE CONTROL AUTHORITY: RBI has to maintain the stability of the external value of the rupee. As far as externalsector is concerned, the task of RBI has (a) administer foreign exchange control, (b) choseexchange rate system and fix the rate of rupee, (c) manage exchange reserves, (d) tointeract with monetary authorities such as IMF, World Bank and Asian DevelopmentBanks. The RBI administers the exchange controls in terms of FOREIGN EXCHANGEMANAGEMENT ACT (FEMA), 1973.SECURING AUTHORITY: 13
  14. 14. The RBI has vast powers to supervise and control commercial and co-operative bankswith a view to developing adequate and sound banking system in the country. It hasfollowing authorities (a) issue license to new banks (b) issue license to setting up bankbranches (c) to prescribe minimum requirement for paid up capital and reserves, transferto reserve funds, maintain cash reserves and control liquid assets (d) inspects working ofbanks in India as well as in abroad, checks branch expansion, mobilization of depositsinvestment, credit portfolio management, credit upraise system, profit planning etc (e) toconduct investigations into complaints, irregularities and frauds in respect of banks (f) tocontrol methods of operations, appointments, reappointments, terminations of Chairmenand Chief Executive Officers of any private sector banks (g) to approve or forceamalgamation. 14
  15. 15. INDIAN BANKS PROFILE: RESERVE BANK OF INDIA (RBI) NATIONAL BANK OF AGRICULTURAL AND RURAL DEVELOPMENT (NABARD)STATE STATE URBANCO-OPERATIVE LAND CO-OPERATIVEBANKS (SCBs) DEVELOPMENT BANKS (UCBs)CENTRALCO-OPERATIVEBANKS (CCBs) PRIMARY AGRICULTURAL CREDIT SOCIETIES (PACSs) 15
  16. 16. 1.1 INDIAN BANK PROFILE  Total state co-operative banks (SCBs) till date are 28 banks.  Total primary agricultural credit societies under various CCBs are 2950.TECHNOLOGY IN BANKING INDUSTRY:  The advent of the internet and the popularity of personal computers presented both an opportunity and a challenge for the banking industry; hence online banking provides numerous benefits to businesses and end-users.  In order to bypass the time-consuming, paper-based aspects of traditional banking, online banking helps in using powerful computer networks to automate a number of daily transactions and to manage finance more quickly and efficiently.  With the comfort of a mouse click online banking provides the comfort of managing the finance by pay bills, transfer funds, file Government remittances and have investment and loan facilities.  Online banking sites generally execute and confirm transactions quicker than ATM, providing convenience of 24 hours a day and seven days week accessibility.  E-Banking has revolutionized the whole concept of Banking; it has become a necessary weapon changing the banking industry worldwide.  The customer should be taken into confidence as far as security is concerned; banks should extensively propagate the detailed security plan adopted to arrest frauds through E-Banking. 16
  17. 17.  Banks have come to realize survival in the new E-Economy depends on delivering their banking services on the internet while continuing to support their traditional infrastructure providing good security and customer satisfaction will survive.  Standard for secure electronic transactions (SET) on internet helps in security measures, digital authentication and verification of on-line identity in all E-Banking transactions, which increase consumer confidence.LATEST AMMENDMENTS OF RBI.  The RBI has cautioned against potential risk in the short and medium term on three key factors (1) Growth rates flattening out in some key industries, (2) higher oil prices and (3) continuing infrastructure constraints.  The RBI’s latest industrial outlook survey shows the current financial health of corporate India increased by 2.6 %.  Demand for bank credit has been largely driven by agricultural, industry and housing sector. Growth rate increased by 31.5 % compared to 24.9 % the preceding year.  The Reserve Bank Of India has signaled its policy of “inclusion” i.e., account with nil or minimum balance requirement as well as charges that would make such accounts accessible to vast sections of the population.  The RBI has granted general permission to banks to issue debit cards in tie up with non-bank entities. 17
  18. 18.  The quality of assets of Indian banks is now increasingly converging towards international benchmarks. The report on trends of banks in India by RBI.  Capital Adequacy Ratio (CAR) of banks, the most accepted measure of the soundness has improved to 12.5 % which are higher, the better.  The RBI issued guidelines on credit cards operations of banks to issue and ensures that there is on delay in dispatching bills. Unsolicited loans or other credit facilities should not be offered.  In the major development for the banking sector, the Government recently threw open the Asset Reconstruction companies (ARCs) to Foreign Direct Investment (FDI), permitting 49 % in the equity capital of ARCs.NATIONAL BANK FOR AGRICULTURAL AND RURAL DEVELOPMENT (NABARD)  NABARD was established on 12th July 1982 as a central or apex institution for financing agricultural and rural sector.  The Government and the RBI subscribe NABARD paid-up capital of rupees 100 crores equally.  NABARD is a co-coordinating agency, in respect of agricultural and rural development activities or policies of the Central and State Government, Planning Commission and other Institutions.  NABARD has set up Co-operative Development Fund (CDF) to improve management systems and skills in co-operative banks.  NABARD supports rural credit system by way of refinancing for short-term, production, marketing, medium-term and short-term loans relating to State Co- operative Banks (SCBs) and Regional Rural Banks (RRBs) 18
  19. 19.  NABARD oversees the entire rural credit system and to that extent, it has taken over a part of the job of the RBI. NABARD provides term loans and investment credits, which are technically feasible and financially viable on farm and non-farm sectors through SCBs and RRBs. NABARD undertakes inspection of co-operative Banks and RRBs without prejudice to the powers of the RBI. NABARD provides loans to State Government to enable them to contribute them to the share capital of SCBs and RRBs. NABARD has established Research and Development (R&D) fund to provide insights into the problems of agriculture and rural development through in-depth studies and applied research with innovative experiments. 19
  20. 20. BANK PROFILE:ANDHRA PRADESH STATE CO-OPERATIVE BANK Andhra Pradesh state co-operative bank (SYNDICATE) offers all types of banking servicethrough its 26 banking offices including Head Office, 22 Branches, 2 Extension counters situated inthe twin cities and having branches at Tirupathi and Vijayawada.The Bank actively guides the District Co-operative Bank (DCCBs) to withstand the stiff competitionencountered by them; greater emphasis was laid on the financial discipline at all levels in thecooperative credit structure. The Bank has continued its efforts to provide increased financialassistance to the farming community through the DCCBs and PACs by bridging the gap betweenthe assistance from NABARD and the credit requirements at the grass root level with its ownresources.The Government of Andhra basing on the recommendations of the Expert Committee restructuredthe PACs bringing down their number from 4464 to 2746 in the State ensuring on PACs at Mandallevel.Elections are conducted to all three-tiers of the PACs after restructuring. Democratically electedmanagements are in position at the PACs, DCCBs and SYNDICATE levels.The Government of Andhra Pradesh has accepted and decided to implement the revival packageoffered by the Government of India and accordingly entered into a memorandum of understandingwith the Government of India and NABARD. 20
  21. 21. BOARD OF MANAGEMENT /COMMITTEE OF ANDHRA PRADESH STATE CO-OPERATIVE BANK 2.1 TABLES. No. Names Representation 1. G.Sudheer, I.A.S Chairman Principal Secretary to Govt (coop. marketing)Dept. 2. Dr.C.Uma Malleshwar Rao,I.A.S Member CC & RCS 3. R.Ramakrishnaiah, I.A.S Member CC & RCS 4. P.Ramana Reddy Member CC & RCS 5. T.S.Appa Rao,I.A.S Member Principal secretary to Govt. (Finance & R &D) Dept. 6. J.R.Sarangal Member 21
  22. 22. C.G.M. NABARD7. V.Krishna Rao. Member C.G.M.NABARD8. M.Veerabhadraiah, I.A.S Member Managing Director SYNDICATE 22
  23. 23. PERFORMANCE HIGHLIGHTS DURING2008-2009: • State level best performance award for kharif 2007 lendings instituted by government of A.P., was awarded to the bank. • Own funds of the bank increased from Rs.1315.90 crores to Rs.1387.48 crores. • Borrowings of the bank increased from Rs.3123.52 crores to Rs. 4074.73 crores. • Disbursements under investment credit impressively increased from Rs.189.93 crores to Rs.367.87 crores during the year under report registering an increase by 51.63 %. • The net profit during2008-2009 is Rs.5.70 crores compared to Rs.4.84 crores of the previous year. • Investments portfolio of SYNDICATE has recorded an increase of 23.03% during the year and stood at Rs. 785.82 crores. • The deposits of SYNDICATE as on 31.3.2006 stood at Rs.1697.15 crores. • The deposits of DCCBs stood at Rs. 2417.30 crores as on 31.3.2006, registering decrease due to the prevailing adverse environment for cooperative banks. • The bank has been providing financial assistance to DCCBs and PACS for strengthening their infrastructural facilities. During the year 2007-06, SYNDICATE released an amount of Rs.4.14 lakhs to three DCCBs out of its development fund. 23
  24. 24. • Disbursements under short term crop loans increased from Rs. 2317.15 crores to Rs. 2981.73 crores during the year under report registering an increase by 28.68%.• 290 farmers clubs (VVV clubs) were established upto as on 31.3.2006.These clubs are functioning as dissemination centers for credit and related activities.• The SYNDICATE training institute has conducted 578 programs, imparting training to 18,106 participants under NABARD assistance scheme from the year 2004-2007to2008-2009.• Under retail banking, gold loans increased to Rs. 69.12 crores during the year 2007-06 as compared to Rs. 48.36 crores in previous year.• Loans amounting to Rs. 802.29 crores were rescheduled covering Rs. 7.29 crores liquidity support received from NABARD.• 32,55,651 farmer member of PACS were covered under the cooperative kisan credit card scheme upto 31.3.2006.• The financial assistance by the bank for working capital limits to cooperative sugar factories increased to Rs. 287.00 crores. 24
  25. 25. VISION OF THE SYNDICATE • To prepare development action plan at the apex level, DCCB level and at PACS level and organize implementation. • To cover all agricultural member of PACS under cooperative kisan credit card scheme to achieve 100 % coverage and also to provide timely and adequate credit support both short term and long term investments. • To improve the lending to the small and marginal farmers as also SC and ST agriculturists. • To provide more advances through Rythu Mirta Groups (RMGs) • To formulate and adopt appropriate strategy for improved loan recoveries and to reduce Non Performing Asstes (NPAs). • To ensure writing books of accounts and also ensure regular audit at all levels. • To ensure uniform accounts, Ledger maintenance at PACs level and DCCB level. • To provide ATM services at various important places in twin cities. • To provide anywhere banking services and Teller banking services. • To convert extension counters into full ledged branches. • To raise deposits upto Rs. 2040 crores. 25
  26. 26. • To computerize the operations of DCCBs and their branches.• To provide basic training and also periodical refresher courses to staff members at all level.• To reduce cost of management. 26
  27. 27. Introduction of credit and risk ManagementIntroduction of credit and risk managementCREDIT MANAGEMENTThe term credit management has got importance from the time whenthere increased the pressure of competition and force of custompersuades to sell on credit. Credit is granted to facilitate the sales. Creditis appealing to those customers who cannot borrow from other sourcesdue to many reasons. The firm’s investment in accounts receivabledepends on how much it sells on credit and how long it takes to collectreceivables. Accounts receivables constitute one of most important assetcategory for firm which makes the firm to manage its credit well.The term credit management can be analyzed from various aspects like: 1Terms of payment. 2Credit policy variables. 3Credit evaluation. 4Credit granting decision.i) Terms of payment vary widely in practice. The most accepted one inwhich arrangement is made wherein the trade cycle is financed partly byseller, partly by buyer and partly by some financial intermediary. Whengoods are sold on cash terms the payment is received either in advanceor on delivery. Credit sales are generally on open account. Consignmentand bill of exchange come under credit. 27
  28. 28. ii) Credit policy variables have the dimensions like credit standards,credit period, cash discount and collection effort. A firm has wide rangeof choice in respect of granting credit. At one end of spectrum, it maydecide not to grant credit to any customer, however strong his creditrating may be. At the other end, it may decide to grant credit to allcustomers irrespective of their credit rating. Between these twoextremes lie several possibilities, often the more practical ones.Credit period refers to the length of the time customers are allowed topay for their purchases which is generally varied from 15 days to 60days. Lengthening the credit period pushes sales up by inducing existingcustomers to purchase more and attracting additional customers. This isaccompanied by a larger investment in debtors and a higher incidence ofbad debts loss.Cash discounts are generally given by the firms to induce customers tomake prompt payments. The percentage discount and the percentagediscount and the period during which it is available are reflected in thecredit terms. Liberalizing the cash discount may mean that the discountpercentage is increased and the discount period are lengthen whichenhance the sales, reduce the average collection period and increase thecost of discount.The collection programme of the firm aims at timely collection ofreceivables. A rigorous collection programme tends to decrease sales,shorten the average collection period, reduce bad debt percentage, andincrease the collection expense and vice versa in case of lax collectionprogramme. 28
  29. 29. 29
  30. 30. iii) Credit evaluation is an important element of credit managementwhich helps in establishing credit limits. This includes two types of errorslike: Type I error: A good customer is misclassified as a poor creditrisk. Type II error: A bad customer is misclassified as a good creditrisk.Both the errors are costly. Type I error leads to loss of profit on sales togood customers who are denied credit. Type II error results in bad debtlosses on credit sales made to risky customers. Proper credit evaluationcan mitigate the occurrence of such type of errors.Three broad approaches used for credit evaluation are 1Traditional credit analysis. 2Sequential credit analysis. 3Discriminant analysis. The traditional credit analysis calls for assessing a prospectivecustomer in terms of the “five C’s of credit”. 1Character of customer that is his willingness to honor his obligation. 2Capacity of the customer to meet credit obligations from the operating cash flows. 3Financial reserves in the form of capital of the customer. If customer has difficulty in meeting his credit obligations from operating cash flows then focus to his capital. 4Collateral security offered by customer in the form of pledged assets 30
  31. 31. is considered. 5Fifth C is general ECONOMIC CONDITIONS that affect the customer.For sake of simplicity, only three C’s are considered i.e. character,capacity and capital. The judgment of customer on these dimensions thecredit manager considers both quantitative and qualitative measures. Sequential credit analysis is most efficient method than traditional one.In this analysis, investigation is carried further if the benefit of suchanalysis outweighs it cost. To illustrate, consider three stages of creditanalysis: review of the past payment record, detailed internal analysisand credit investigation by an external agency. The credit analystproceeds from stage one to stage two only if there is no past paymenthistory and hence a detailed internal credit analysis is warranted.Likewise, the credit analyst goes from one stage two to stage three onlyif internal credit analysis suggests that the customer poses a mediumrisk and hence there is a need for external analysis.Numerical credit scoring is an improvement over traditional ones inwhich more systematic numerical are assigned to evaluate the customerunlike judgmental decisions made on basis of five C’s in traditional ones.In this the credit manager identifies the factors relevant for creditevaluation. Then weights are assigned to these factors and customersare rated based on these factors using suitable rating scale usually 5point or 7 point rating scale. Factor score is derived by multiplying factorweight with factor rate for each factor. Customer rating index is derivedby adding the entire factor score based on which customers areclassified. 31
  32. 32. Numerical credit scoring is ad hoc in nature as it is based on weightswhich are subjective in nature. The technique of discriminant analysis isemployed to construct better risk index. This method considers thefinancial ratios of the customers as the basic determinants of theircreditworthiness. The analysis is made based on these financial ratioswhich are considered to be essential for creditworthiness of customer.Risk classification is another method in which customers are classifiedinto various risk categories for credit investigation process.iv) Credit granting decision is important because once thecreditworthiness of a customer has been assessed the credit managerhas to decide whether the credit should be offered or not. It is generallydone based on the decision tree. The expected profit for the action‘refuse credit’ is 0. If the expected profit for the course of action ‘offercredit’ is positive, it is desirable to extend credit, otherwise not. Therepeat order is accepted only if the customer does not default on thefirst order. Once the customer pays on the first order, the probabilitythat he would default on the second order is less than the probability ofhis defaulting on the first order.RISK MANAGEMENT Once the credit is being granted to the customer the credit managerhas to find out the ways for timely collection of the credit given.Traditionally two methods have been commonly suggested like Dayssales outstanding and ageing schedule. Though these methods are 32
  33. 33. popularly used they have serious limitations as they are based on anaggregation of sales and receivables. To overcome the limitations oftraditional methods Collection matrix approach is used. 33
  34. 34. The days sales outstanding (DSO) at a given time t may be defined asthe ratio of accounts receivable outstanding at that time to average dailysales figure during the preceding 30 days, 60 days, 90 days, or someother relevant period.The ageing schedule (AS) classifies outstanding accounts receivables ata given point of time into different age brackets. The actual AS of thefirm is compared with some standard AS to determine whether accountsreceivable are in control. A problem is indicated if the actual AS shows agreater proportion of receivables, compared with the standard as, in thehigher age groups.Collection matrix is improvement over the traditional methods of riskmanagements. In order to study correctly the changes in the paymentbehavior of customer, it is helpful to look at the pattern of collectionsassociated with credit sales. From the collection, pattern one can judgewhether the collection is improving, stable, or deteriorating. A secondarybenefit of such an analysis is that it provides a historical record ofcollection percentages that can be useful in projecting monthly receiptsfor each budgeting period.FUNCTIONS OF EACH DEPARTMENTThe four main departments involved in loan process of KMBL are : 1)MARKETING 2)CREDIT 3)OPERATIONS 4)RISK 34
  35. 35. ORGANISATIONAL CHART OF MARKETING DEPARTMENT: REGIONAL MARKETING HEAD LOCATION LOCAITON MARKETING HEAD MARKETING HEAD LOCAITON MARKETING HEAD RELATIONSHIP MANAGER RELATIONSHIP MANAGER DIRECT SELLING AGENT DIRECT SELLING TEAM FLEET ON STREET FLEET ON STREETRegional Marketing Head (RMH) (heading entire region)Location Marketing Head (LMH) (heading entire location)Relationship Manager (RM) (for maintaining relationships with DSA andDST)DSA/DST – Direct Selling Agent (external) / Direct sales Team (internal)Fleet On Street (FOS) (for sourcing the case, making cold calls, 35
  36. 36. collecting relevant documents etc.) 36
  37. 37. Marketing department in personal finance is responsible for sourcing ofbusiness. This department works through network of DSA/DST and RM.RMs are responsible for managing relationships with DSA and DST. Thesales department is divided in to two units under the guidance of RMthat is A) DSA (DIRECT SELLING AGENT) B) DST (DIRECT SELLING TEAM)DSA is an outside party who is interested in sourcing prospective loancandidates into the bank. The bank studies the capacity of the partybringing applicants per month and gives certain targets and if the DSAagent reaches that target then the bank provides commission to the DSAagent. The bank does not involve in any activities of DSA directly. TheDSA agent has to maintain the telecallers and executives at his ownexpenses. The second category is DST which is called K-DIRECT in KotakMahindra Bank under whom telecallers, team leaders and executiveswork. All the office expenses and salaries are paid to them by KotakMahindra Bank their salaries are more compared to DSA. The personsworking under DST directly comes under the Kotak Mahindra Bank.Relationship Manager is in charge of the functions of K-DIRECT team. 37
  38. 38. ORGANISATIONAL CHART OF CREDIT DEPARTMENT: NATIONAL CREDIT HEADREGIONAL CREDIT HEAD REGIONAL CREDIT HEADLOCATION CREDIT HEAD LOCATIN CREDIT HEAD CREDIT MANAGER CREDIT MANAGER CENTRA PROCESSING AGENCYNCH - National Credit HeadRCH – Regional Credit HeadLCH – Location Credit HeadCM – Credit Manager (With in location)CPA – Central Processing Agency 38
  39. 39. After sourcing the files (loan applicants) in to the bank the second andcrucial step is being played by credit department. Here the sourced filesare examined thoroughly whether the required documents are furnishedor not.The hierarchical level is followed in this department. It is from top tobottom starting from National Credit Head to Central Processing Agency.Also at few places there are ACH (Area Credit Head). They occupy anintermediary position between RCH and LCH. While the Marketingdepartment is responsible for sourcing, the Credit department isresponsible for buying the business.OPERATIONS DEPARTMENT:After the completion of the process of sanctioning loan amount to thecustomer, the file goes to operations department where they have tolook after the entire operation of disbursement.The operation department will issue the cheque to the party. In thisdepartment all the PDC’s (Post Dated Cheques) and any other originalimportant documents are placed in the head office in Mumbai where allthe documents are preserved in a private security locker “NUCLEUS”which is fire proof and the bank pays for the storage of files. In Nucleus all the respective PDC’s of respective month on mentioneddates comes directly to the bank. The Kotak Mahindra Bank has itsclearing department with nationalized bank where it accepts all the 39
  40. 40. PDC’s and disburse them to respective banks if it is cleared then itmentions the cleared member’s data and uncleared cheque data throughsoft copy that day evening to the operation department. The next daymorning the operation department will get the hard copy and they cometo know clearly the reasons for cheque bounce cases.Then the telecaller will follow up the customers and intimate them aboutthe cheque bounces and reasons for that and intimates them about thepenal charges and depending on the reply of the customer they furtherproceed. All the data is maintained in the system. 40
  41. 41. ORGANISATIONAL CHART OF RISK DEPARTMENT: NATIONAL HEAD REGIONAL RISK HEAD STATE RISK HEAD LOCAL RISK HEADBKT-1 PORTFOLIO BKT-3 PORTFOLIO BKT-2 PORTFOLIOMANAGER MANAGER MANAGER TEAM LEADER TEAM LEADER TEAM LEADER EXECUTIVESEXECUTIVES EXECUTIVES TELECALLER TELECALLER TELLE CALLERIn personal finance business whatever is sourced by the marketingdepartment and bought by the credit has great tenacity to go bad or nonperforming or delayed due to combined effect of various variables likefraud, negligence, intentional, etc.The inherent nature of personal loan arise the need of having separate 41
  42. 42. risk department(RD) to focus on timely collection and risk of loanagreements. There is primarily on collecting the money which wasfunded by combined efforts of marketing and credit.RD is responsible for controlling the losses by having a strong networkof collection agents and thus keeping the delinquency level undercontrol.PROCESS FLOW CHART (FILE MOVEMENT SYSTEM) FILE TO BE LOGGED IN FILE INVESTIGATION WILL BE SHOT ON THE CASE CREDIT DOES ANALYSIS CASE IN SACTIONED OR REJECTED 42
  43. 43. IF SANCTIONED,DISBURSEMENT AGREEMENT TO BE SIGNED AND PDC’S TO BE COLLECTED DISBURSEMENT TO BE LOGGED IN CHEQUE TO BE DELIVERED TO THE CUSTOMER STOPCredit Risk Management: Policy FrameworkRisk is inherent in all aspects of a commercial operation and coversareas such as customer services, reputation, technology, security,human resources, market price, funding, legal, regulatory, fraud andstrategy. However, for banks and financial institutions, credit risk is themost important factor to be managed. Credit risk is defined as thepossibility that a borrower or counterparty will fail to meet its obligationsin accordance with agreed terms. Credit risk, therefore, arises from thebanks dealings with or lending to a corporate, individual, another bank,financial institution or a country. Credit risk may take various forms,such as: • in the case of direct lending, that funds will not be repaid; 43
  44. 44. • in the case of guarantees or letters of credit, that funds will not be forthcoming from the customer upon crystallization of the liability under the contract; • in the case of treasury products, that the payment or series of payments due from the counterparty under the respective contracts is not forthcoming or ceases; • in the case of securities trading businesses, that settlement will not be effected; • in the case of cross-border exposure, that the availability and free transfer of currency is restricted or ceases.The more diversified a banking group is, the more intricate systems itwould need, to protect itself from a wide variety of risks. These includethe routine operational risks applicable to any commercial concern, thebusiness risks to its commercial borrowers, the economic and politicalrisks associated with the countries in which it operates, and thecommercial and the reputational risks concomitant with a failure tocomply with the increasingly stringent legislation and regulationssurrounding financial services business in many territories.Comprehensive risk identification and assessment are therefore veryessential to establishing the health of any counterparty.Credit risk management enables banks to identify, assess, manageproactively, and optimise their credit risk at an individual level or at anentity level or at the level of a country. Given the fast changing,dynamic world scenario experiencing the pressures of globalisation,liberalization, consolidation and disintermediation, it is important that 44
  45. 45. banks have a robust credit risk management policies and procedureswhich is sensitive and responsive to these changes.Strategy and PolicyIt is essential that each bank develops its own credit risk strategy orenunciates a plan that defines the objectives for the credit-grantingfunction. This strategy should spell out clearly the organisation’s creditappetite and the acceptable level of risk - reward trade-off at both themacro and the micro levels.The strategy would therefore, include a statement of the bank’swillingness to grant loans based on the type of economic activity,geographical location, currency, market, maturity and anticipatedprofitability. This would necessarily translate into the identification oftarget markets and business sectors, preferred levels of diversificationand concentration, the cost of capital in granting credit and the cost ofbad debts.A common feature of most successful banks is to establish anindependent group responsible for credit risk management. This willensure that decisions are made with sufficient emphasis on asset qualityand will deploy specialised skills effectively.In some organisations, the credit risk management team is responsiblefor the management of problem accounts, and for credit operations aswell. The responsibilities of this team are the formulation of creditpolicies, procedures and controls extending to all of its credit risksarising from corporate banking, treasury, credit cards, personal banking, 45
  46. 46. trade finance, securities processing, payment and settlement systems,etc.This team should also have an overview of the loan portfolio trends andconcentration risks across the bank and for individual lines ofbusinesses, should provide input to the Asset - Liability ManagementCommittee of the bank, and conduct industry and sectoral studies.Inputs should be provided for the strategic and annual operating plans.In addition, this team should review credit related processes andoperating procedures periodically.The credit risk strategy and policies should be effectively communicatedthroughout the organisation. All lending officers should clearlyunderstand the banks approach to granting credit and should be heldaccountable for complying with the policies and procedures.Keeping in view the foregoing, each bank may, depending on the size ofthe organization or loan book, constitute a high level Credit PolicyCommittee also called Credit Risk Management Committee or CreditControl Committee, etc. to deal with issues relating to credit policy andprocedures and to analyse, manage and control credit risk on a bankwide basis. The Committee should be headed by the Chairman/CEO/ED,and should comprise heads of Credit Department, Treasury, Credit RiskManagement Department (CRMD) and the Chief Economist. TheCommittee should, inter alia, formulate clear policies on standards forpresentation of credit proposals, financial covenants, rating standardsand benchmarks, delegation of credit approving powers, prudential limitson large credit exposures, asset concentrations, standards for loancollateral, portfolio management, loan review mechanism, risk 46
  47. 47. concentrations, risk monitoring and evaluation, pricing of loans,provisioning, regulatory/legal compliance, etc. Concurrently, each bankmay also set up Credit Risk Management Department (CRMD),independent of the Credit Administration Department. The CRMD shouldenforce and monitor compliance of the risk parameters and prudentiallimits set by the CPC. The CRMD should also lay down risk assessmentsystems, monitor quality of loan portfolio, identify problems and correctdeficiencies, develop MIS and undertake loan review/audit. Large banksmay consider separate set up for loan review/audit. The CRMD shouldalso be made accountable for protecting the quality of the entire loanportfolio. The Department should undertake portfolio evaluations andconduct comprehensive studies on the environment to test the 47
  48. 48. RISK MANAGEMENTMEANING OF RISK Risk management is a process of managing the collection of managingthe collection of liabilities with an objective of increasing the cash flowswith minimum costs. It involves collecting in right time, right amount, inright terms.This process starts from identifying the amount of liabilitiesand to make the collection successful. This does not end with merecollection. Besides collection, the difficulties and weak areas should alsobe ascertained, which leads to development of an effective system forcredit extension or sales and collection. Risk management is an area of tremendous challenge. Riskmanagement is used to minimize bad debts through active accountdelinquency management. As the companies strive to increase their cashflows and improve customer relationships, the risk partner is moreimportant than any other.IMPORTANCE OF RISK In today’s market scenario, one of the most critical areas to focus on isto protect the bank from bankruptcy. In such conditions Risk departmentplays a key role in the growth of banks. Any delay in realizing thereceivables would adversely effect the working capital, which in turneffects the overall financial management of the firm.No firm can be successful if its overdue are not collected, monitored andmanaged carefully in time. Thus risk management is important in 48
  49. 49. sustaining the bank and its growth.RISK DEPARTMENT IN KMBLWhen all the doors are closed to collect the EMI from the customer thenit comes to risk department. In Syndicate bank the most importance isgiven to risk department. The risk department in KMBL follows bucketwise policies which starts from BUCKET 1.The cheques of the customers which got bounced will come to the riskdepartment where they pressurizes the customer and gets the EMIincluding penal and cheque bounce charges from customer.The first six months of the customer is very important for the riskdepartment which is called “INFANT DELIQUENCY” where the riskdepartment estimates whether the customer is going to be defaulter infuture.The risk department is very strong in KMBL where they follow the bucketsystem. The bucket system depends on “Days past dues”. For every 30days the bucket system shifts from one bucket to other depending onpending EMI amount.PROCESS FLOWINSERTIf the bank is unable to collect atleast one EMI from the customer frompast continuous 3 months then they book the case as non performance 49
  50. 50. assets.They claim the future calculated amount as loss so to avoid this type ofloss to the bank. They take lot of care to collect the EMI’s within thethree months with out fail to reduce the increase in the default ratiothrough bucket wise.The loss is calculated using the following formula:Future outstanding = EMI * lost amount + EMI * future turn amount. To control the defaulters’ ratio they started the necessary steps fromthe starting of the collection department. The flow of power is as shownin the flow chart from top level to bottom level.When the case comes to bucket 1 lot of pressure is made by portfoliomanager to stop the case not to extend to bucket 2. The bucket portfoliomanager plays a prominent role in risk department and he is paid morepay and perks. In similar way in bucket 2 the portfolio manager plays aprominent role to reduce the case not to extend to bucket 3. When thecase enters bucket 3 and portfolio manager is unable to collect at leastone EMI then the case is booked as non performance asset which is aloss to the bank. 50
  51. 51. LEGAL ASPECTS OF RISKWhen the file comes to bucket 3 there after making all pressures if theycould not get the amount they further proceed legally to collect themoney.The three main sections used to proceed legally are: 1Section 138 (NEGOTIABLE INSTRUMENTS ACT) 2Section 156 3Section 9Section 138Where any cheque drawn by a person on account maintained by himwith the banker for payment of any amount of money to another personfrom out of that account for the discharge, in a whole or in part, of anydebt or any liability, his return by bank unpaid, either because of theamount of money outstanding to the credit of that account by anagreement made with the bank. Such person shall be deemed to havecommitted an offence and shall without prejudice to any other provisionsof this act can be punished with imprisonment for a term which mayextend to one year or with a fine which may extend to twice the amountof cheque or with the both. Now the court has the power to order two-year imprisonment for cheque bounces under section 138 N.I. aPOST DATED CHEQUES A cheque post-dated remains bills of exchange till the date written on itand with effect from the said date shown on the face of it; it becomes a“cheque” under the act.Post dated cheque deemed to have been drawn on the date it bears –provision of section 138 (a) held. 51
  52. 52. ELECTRONIC CLEARENCE SERVICEElectronic clearance service contains six cheques among that fourcheques contain the EMI amount and one with full loan amount andanother with cleared amount each cheque is signed by the loanaccording to RBI rules.STANDARD INSTRUCTIONSThis type of instruction are produced when the loanee working in thesame bank and taking loan amount.SUMMONSThe chief ministerial officer of the court shall ordinarily sign summonsissued to witness. 1: These are the witness summons. 2: Accused summons to be signed by magistrates:Magistrates shall themselves sign summons to accused persons. Thecopy of the complaint may be sent with summons or warrant issued tothe accused under sub-Section (i) of section 204 of the code.Place of hearing to be stated:Every summons and every order of adjournment shall state the place inwhich the course to which it relates will be heard.Warrant bearing sign manual of the judge or the magistrate:All warrants should receive the sign of them from whose court they areissued.SECTION 156This case is claimed against the customer as cheating or forgery casewhere the customer might have given some fake documents to get aloan which might have mislead the bank. 52
  53. 53. Whoever by deceiving any person fraudulently or dishonestly include thepersons. So deceive to deliver property to any person or to consent thatany person shall retain any property intentionally include person sodeceived to do or omit to do anything which he would not do or omit ifhe were not so deceived, and which after omission cause or lively causedamage or harm to that person in body, mind, reputation and propertyis said to “cheat “Example 1.A by putting a counterfoil mark on an article intentionally deceives into a belief that this articles were made by celebrity manufacturer, and thus dishonestly induces Z to buy and pay for the articles ‘A cheats’. 2.A by pleading as diamonds articles which he knows are not diamonds intentionally deceives Z if he thereby dishonestly includes Z to land money, ‘A cheats’. i) Dibas sarkar vs. State 1989 Cr. LJ MOC 30 Cal. ii) Kakumukkala Krishnamurthy vs. State of AP AIR 1956 Sec.333Section 9This case is claimed against the customer as a property attachmentwhere the bank attacks the property of the customer. This section isvery rarely used. 53
  54. 54. ANALYSIS and FINDINGS:ANALYSIS and FINDINGSThe information or data of credit and risk management reference toSyndicate bank.Finding for last years of description for risk mode.NON PERFORMANCE ASSETS table shows the data of the nonperformance assets of the KMBL. MONTHS TARGET ACHIEVEMENTS (In lakhs) (In lakhs)April 09 1.56 0.41May 09 1.62 1.2June 09 1.77 1.3July 09 1.92 0.56Aug 09 2.11 1.72Sep 09 2.34 2.13Oct 09 2.58 0.60Nov09 2.83 0.61Dec 09 3.10 0.00Jan 10 3.37 1.9Feb 10 3.68 1.98Mar 10 4.01 0.32Total 30.89 12.73 54
  55. 55. NON PERFORMANCE ASSETS-IN LAKHS1)TARGETS: This is the amount given to book as loss for the riskdepartment in every month of non performance of asset.2)ACHIEVEMENTS: This is the amount booked as loss to riskdepartment achieved in every month. 55
  56. 56. PENAL CHARGES COLLECTEDFinding for last years of description for risk mode. MONTHS TARGET ACHIEVEMENTS (In lakhs) (In lakhs) Apr 07 0.26 0.19 May 07 0.29 0.32 June 07 0.32 0.52 July 07 0.36 0.30 Aug 07 0.40 0.83 Sep 07 0.43 0.32 Oct 07 0.47 0.66 Nov 07 0.52 0.77 Dec 07 0.56 0.65 Jan 08 0.61 0.59 Feb 08 0.65 0.81 Mar 08 0.70 1.29 Total 5.57 7.25 56
  57. 57. PENAL AMOUNT 1. TARGETS: This is the target penal amount given for risk department to collect. 2. ACHIEVEMENTS: This is the penal amount collected by risk department every month.Months Target (lakhs) Achievements (lakhs)April 2008 0.71 0.67 57 MONTH
  58. 58. May2008 0.74 0.53June 2008 0.77 0.80July 2008 0.80 0.74August 2008 0.82 1.21September 2008 0.87 1.22October 2008 0.90 0.93November 2008 0.91 0.75December 2008 0.93 0.95PENAL AMOUNT 1. TARGETS: This is the target penal amount given for risk department to collect. 2. ACHIEVEMENTS: This is the penal amount collected by risk department every month.Details of self clients of KMBL SEP RSENP SURR SAL SENP TOTAL 58
  59. 59. DEFAULTERS (%) 7 57 20 37 34 155DEFAULTERS 134043 409509 110438 412913 1298755 2365656AMNOUNT DEFAULTERS PERCENTAGE DEFAULTERS CLIENTS (%)1: SELF EMPLOYED PROFESSIONAL. (SEP) 72: RETAIL SELF EMPLOYED NON PROFESSIONAL.(RSENP) 573: SURROGATIVES. (SURR) 204:SALARIED (SAL) 375: SELF EMPLOYED NON PROFESSIONAL. (SENP) 34 TOTAL 155 59
  60. 60. DEFAULTERS PERCENTAGE 22% 5% SEP 36% RSENP SURR SAL 24% 13% SENPAnalysis of defaulters (%)1: SEP = 7/155 * 100 = 5%2: RSENP = 57/155 * 100 = 36%3: SURR = 20/155 * 100 = 13%4: SAL =37/155 * 100 = 24%5: SENP =34/155 *100 = 22% 60
  61. 61. DEFAULTERS AMOUNT PERCENTAGEDefaulters Amount1: SELF EMPLOYED PROFESSIONAL. 1,34,0432: RETAIL SELF EMPLOYED NON PROFESSIONAL. 4,09,5093: SURROGATIVES. 1,10,4384: SALARIED. 4,12,9135: SELF EMPLOYEDN ON PROFESSIONAL. 12,98,755 DEFAULTERS AMOUNT PERCENTAGE 6% SEP 17% RSENP SURR 55% 5% SAL 17% SENP 61
  62. 62. Analysis of Defaulters amount (%)1: SEP = 134043/2365656 * 100 = 6%2: RSENP =409509/2365656 * 100 = 17%3: SURR = 110438/2365656 * 100 = 5%4: SAL = 412913/2365656 * 100 = 17%5: SENP =1298755/2365656 *100 = 55% TABLE: 1 The statement showing default on the lines of repaymentperiod NUMBER OF DAYS DEFAULT REPAYMENT 30 60 90 ABOVE ROW PERIOD DAYS DAYS DAYS 90DAYS TOTAL [0 YRS – 2 YRS] 14 2 3 5 24 (58) (8) (13) (21) [2 YRS - 3 YRS] 91 11 7 10 119 (76) (9) (6) (9) 62
  63. 63. [3 YRS – 4YRS] 9 1 1 1 12 (75) (8) (8) (9) COLUMN TOTAL 114 14 11 16 155 (74) (9) (7) (10)** Figures in parenthesis denote the row wise percentage.Effective risk (%) in terms of period 1) 14/24*100=58 2) 91/ 199*100=76 3) 9/12*100=75The distribution of defaulters with respect to repayment period is visiblein table 1. According to the table more number of defaulters are lying inbucket 1, 74% of the defaulters are in bucket 1 followed by 10% inabove 90 days and 9% in bucket 2 and 7% in bucket 3. The same isreflected in the categories of 2-3 years and 3-4 years repayment periodwhere as in 0-2 years repayment period 58% of defaulters are in 30days 21% in above 90 days, 13% in 90 days and 8% in 60 days.It implies the bank has been focusing to control and reduce the numberof defaulters in other than 30 days bucket further it also implies therepayment period is not a factor which influence on number ofdefaulters. 63
  64. 64. Table: 2 The statement showing default on the lines of profession NUMBER OF DAYS DEFAULT PROFESSION 30 60 90 ABOVE ROW DAYS AYS DAYS 90DAYS TOTAL TECHNICAL 26 5 3 6 40 (0.65) BUSINESS 75 6 7 9 97 (0.77) COLUMN TOTAL 101 11 10 15 137**figures in parenthesis denote the row wise percentage.Here business category is defined as the income category based on theirnon-salaried and non-professional incomes where they use theirbusiness skills, RSENP, SENP comes under this category.Technical profession, these are the persons having an income eitherfrom salary or from their professional qualification. SEP, SALARIEDcomes under this category.NULL HYPOTHESIS: H0:There is no relationship between profession and number of defaulters P1=P2 64
  65. 65. ALTERNATE HYPOTHESIS: H1:There is relationship between profession and default rate. The businessprofessions are more than the technical profession. P1<P2 (Left tailed test)Test of proportions Z=P1-P2/√P (1-P) (1/n1+1/n2)Where P1=26/40=0.65 P2=75/97=0.77 P=P1+P2/n1+n2Where n1=40 , N2=97Therefore P=0.74Z=0.65-0.77/√ (0.74) (1-0.74) (1/40+1/97) = -1.46The calculated value of test of proportion is -1.46The table value of test of proportion is -1.645 at 95% confidence level.Therefore the calculated value lies in rejection rejoin, so null hypothesisis acceptedTherefore there is no relationship between the profession and thenumber of defaulters. 65
  66. 66. TABLE: 3 The statement showing default on the lines of gender. NUMBER OF DAYS DEFAULT 30 60 90 ABOVE ROW SEX DAYS DAYS DAYS 90DAYS TOTAL MALE 95 11 11 15 132 (0.72) FEMALE 20 1 1 1 23 (0.87) COLUMN 115 12 12 16 155 TOTAL**figures in parenthesis denote the row wise percentage.NULL HYPOTHESIS: H0: There is no relationship between sex and number of defaulters P1=P2ALTERNATE HYPOTHESIS: H1: There is relationship between sex and number of defaulters.Female are more in number than male. P1<P2 (Left tailed test)Test of proportions Z=P1-P2/√P (1-P) (1/n1+1/n2) 66
  67. 67. Where P1=95/132=0.72 P2=20/23=0.87 P=P1+P2/n1+n2Where n1=132 , N2=23Therefore P=0.74Z=0.72-0.87/√(0.74) (1-0.74) (1/132+1/23) = -1.52The calculated value of test of proportion is -1.52The table value of test of proportion is -1.645 at 95% confidence level.Therefore the calculated value lies in rejection rejoin, so null hypothesisis acceptedTherefore there is no relationship between the sex and the number ofdefaulters. 67
  68. 68. TABLE: 4 To find the relationship between AMOUNT OF LOAN and DAYSDEFAULT RATE. NUMBER OF DAYS DEFAULT RATES 30 60 90 ABOVE ROWAMOUNT of LOAN DAYS DAYS DAYS 90DAYS TOTAL[RS 0 – RS 1,00,000] 54 4 6 6 70 (0.77)[RS1,00,000 – RS 32 7 3 8 502,00,000] (0.64)[RS 2,00,000 – RS 22 1 2 1 265,00,000][RS 5,00,000 – RS 2 0 0 1 37,00,000][RS7,00,000- RS 6 0 0 0 610,00,000]COLUMN TOTAL 116 12 11 16 155*figures in parenthesis denote row wise percentage. 68
  69. 69. NULL HYPOTHESIS: H0:Percentage of defaulters within 30 days period do not differ significantlybetween the amount borrowed 0-1 lack and 1 lack-2 lack P1=P2ALTERNATE HYPOTHESIS: H1: Percentage of defaulters within 30 days period differ significantlybetween the amount borrowed 0-1 lack and 1 lack-2 lack. P1>P2 (Right tailed test)Test of proportions Z=P1-P2/√P (1-P) (1/n1+1/n2)Where P1=54/70=0.77 P2=32/50=0.64 P=P1+P2/n1+n2Where n1=70 N2=50Therefore P=0.72Z=0.77-0.64/√ (0.72) (1-0.72) (1/70+1/50) = 1.566The calculated value of test of proportion is 1.566 69
  70. 70. The table value of test of proportion is 1.645 at 95% confidence level.Therefore the calculated value lies in rejection rejoin, so null hypothesisis accepted Therefore there is no relationship between the loan amount and thenumber of defaulters.Note: The hypothesis is tested between first two slots i.e. amount rangeRs 0-1 lack and Rs 1 lack-2 lack.TABLE 5: Statement showing default on line of location. NUMBER OF DAYS DEFAULT 30 60 90 ABOVE ROWLOCATION DAYS DAYS DAYS 90DAYS TOTALNEW 41 6 4 7 58HYDERABADSECUNDERABAD 30 3 5 5 43RANGA REDDYDISTRICT 29 3 3 4 39COLUMN TOTAL 100 12 12 16 140 70
  71. 71. **figures in parenthesis denote row wise percentage. Observed Expected frequency frequency (oi-ei)2 (oi.-ei) 2/ei (oi) (ei)NEW 1.44HYDERABAD 41 34 49SECUNDERABAD 30 33 9 0.27RANGA REDDY 29 33 16 0.48DISTRICT -------- --------- ----- 100 100 --- --------- ---------- chisquare =2.19 ----- --- NULL HYPOTHESIS: H0: Categories in 30 days are equally distributed P1=P2 71
  72. 72. ALTERNATIVE HYPOTHESIS: H1:Categories in 30 days are not equally distributed P1=P2Chi square value is 2.19Critical value at 95% confidence level is 5.99.Chi square value is less than critical value so null hypothesis is accepted.Therefore location of the loanees not influence on the defaulters (in 30days category). 72
  73. 73. CONCLUSIONCONCLUSION • Periodically customer meet should be conducted and category wise the best customer should be appreciated and if possible rewarded by way of cash prize or in kind. This helps in creating good publicity for the bank as well as to penetrate in to market. • Post disbursement contact with the loanee should be maintained. This process not only builds report but also gives important clues about loanee’s ability to honour the payment responsibility. At the same time this also leads to good customer care. • There should be good coordination among sales department, credit department and risk department where they should go through the loanee’s profile and should sanction the amount through proper stringent verification when the amount is huge. • Future status of loanees business, if he is a business man, should be assessed. Reserves, environment, competition, capabilities etc. should be considered before sanctioning a loan based on past performance. Future should be analyzed as to whether the business would sustain in future, the products are going to match the future needs or not should be analyzed. Future analysis is more important for a new customer than to an old customer. Whereas, in case of employee, the job security, skill base, proof of past financial discipline, property owned etc. should be considered. Simply not with numerical parameters but also with other qualitative factors. • Government employee is also an important segment, bulk applicants can be attracted by influencing the undertaking office or 73
  74. 74. accounts officer of the concerned department for taking letters to see that installments payments are directly deducted from their salaries. This segment is definitely useful in boosting up the loan selling if proper verification and strict scrutanisation is done with corresponding undertaking officers. Good rapport with government officers by risk department will help in recovering the targeted amounted from government employee’s proper branch network and good force in risk department will solve if there is any transfer of employees.• To safeguard the loan and improve the risk especially when there is a probability of mobility of a loan for example: in case of a personal loan property attachment or guaranteed of government employee is to be taken.Hence such defaulters can be reduced. 74
  75. 75. SUGGESTION SUGGESTION• A loanee’s political affiliation and his past career in politics have to be investigated before disbursing the loan amount in order to reduce the hardships involved in collecting the amount.• Proper verification of documents and evaluation of stocks and assets of business people before sanctioning such loans is essential to avoid overvaluation by the employees. For this a technical person is to be appointed who has entire knowledge of risk, legal aspects and technical process where thorough verification can be done.• To detect the fraud by the sales people whose intention is to usually just sourcing the loans applications the risk department head along with sales department head should select the cases randomly and visit the places for inspection in every month first week where they can find the exact picture and at the same time can ascertained the scope for fraud.• In terms of customer wise loan amount the percentage of self employed non professionals is more and special attention should be given while disbursing the loan amounts.• Risk management should be a proactive process and hence its role should not be limited to the post default activity it should develop a system to track the possible pitfalls in each sanction from the 75
  76. 76. very beginning. AnnexureAnnexureCredit department is the back bone of personal loan business. Mainfunction of the credit is to assess the credit worthiness of an applicantand lending him appropriate amount based on such assessment andsubject to the terms, conditions and limitations of the policies. Comprehensive credit information, which provides details pertaining tocredit facilities already availed by the borrower as well as his paymenttrack record, has become the need of an hour. Credit risk is defined asthe possibility that a borrower or counterparty will fail to meet itsobligations in accordance with agreed terms. Credit risk, therefore,arises from the banks dealings with or lending to a corporate, individual,another bank, financial institution or a country. Credit risk management enables banks to identify, assess, manageproactively, and optimise their credit risk at an individual level or at anentity level or at the level of a country. Given the fast changing,dynamic world scenario experiencing the pressures of globalisation,liberalization, consolidation and disintermediation, it is important thatbanks have a robust credit risk management policies and procedureswhich is sensitive and responsive to these changes. The strategy would therefore, include a statement of the bank’swillingness to grant loans based on the type of economic activity,geographical location, currency, market, maturity and anticipated 76
  77. 77. profitability. This would necessarily translate into the identification oftarget markets and business sectors, preferred levels of diversificationand concentration, the cost of capital in granting credit and the cost ofbad debts.In some organisations, the credit risk management team is responsiblefor the management of problem accounts, and for credit operations aswell. The responsibilities of this team are the formulation of creditpolicies, procedures and controls extending to all of its credit risksarising from corporate banking, treasury, credit cards, personal banking,trade finance, securities processing, payment and settlement systems,etc.The credit risk strategy and policies should be effectively communicatedthroughout the organisation. All lending officers should clearlyunderstand the banks approach to granting credit and should be heldaccountable for complying with the policies and procedures.To deal with issues relating to credit policy and procedures and toanalyse, manage and control credit risk on a bank wide basis.Credit risk is not really manageable for very small companies (i.e., thosewith only one or two customers). This makes these companies veryvulnerable to defaults, or even payment delays by their customers. Lenders will trade off the cost/benefits of a loan according to its risksand the interest charged. But interest rates are not the only method tocompensate for risk. Protective covenants are written into loanagreements that allow the lender A recent innovation to protect lendersand bond holders from the danger of default are credit derivatives, most 77
  78. 78. commonly in the form of credit defaulters swap. These financialcontracts allow companies to buy protection against defaults from a thirdparty, the protection seller. The protection seller receives a periodic fee(the credit spread) as compensation for the risk it takes, and in return itagrees to buy the debt should a credit event ("default") occur.Employees of any firm also depend on the firms ability to pay wages,and are exposed to the credit risk of their employerRisk management is used to minimize bad debts through active accountdelinquency management in right time, right amount, in right terms.Anydelay in realizing the receivables would adversely effect the workingcapital, which in turn effects the overall financial management of thefirm.CREDIT RISK IS FACED BYFaced by lenders to consumersMost lenders employ their own models (credit scoreboard) to rankpotential and existing customers according to risk, and then applyappropriate strategies. With products such as unsecured personal loansor mortgages, lenders charge a higher price for higher risk customersand vice versa. With revolving products such as credit cards andoverdrafts, risk is controlled through careful setting of credit limits.Some products also require security, most commonly in the form ofproperty. 78
  79. 79. Faced by lenders to businessLenders will trade off the cost/benefits of a loan according to its risksand the interest charged. But interest rates are not the only method tocompensate for risk. Protective covenants are written into loanagreements that allow the lender some controls. These covenants may: • limit the borrowers ability to weaken his balance sheet voluntarily e.g., by buying back shares, or paying dividends, or borrowing further. • allow for monitoring the debt by requiring audits, and monthly reports • allow the lender to decide when he can recall the loan based on specific events or when financial ratios like debt/equity, or interest coverage deteriorate.A recent innovation to protect lenders and bond holders from the dangerof default are credit derivatives, most commonly in the form of creditdefaulters swap. These financial contracts allow companies to buyprotection against defaults from a third party, the protection seller. Theprotection seller receives a periodic fee (the credit spread) ascompensation for the risk it takes, and in return it agrees to buy thedebt should a credit event ("default") occur.Faced by businessCompanies carry credit risk when, for example, they do not demand up-front cash payment for products or services.[1] By delivering the productor service first and billing the customer later - if its a business customer 79
  80. 80. the terms may be quoted as NET-30- the company is carrying a riskbetween the delivery and payment.Significant resources and sophisticated programs are used to analyzeand manage risk. Some companies run a credit risk department whosejob is to assess the financial health of their customers, and extend credit(or not) accordingly. They may use in house programs to advise onavoiding, reducing and transferring risk. They also use third partyprovided intelligence. Companies like MOODYS and DUNBRADSTREETprovide such information for a fee.For example, a distributors selling its products to a troubled retailersmayattempt to lessen credit risk by tightening payment terms to "net 15", orby actually selling fewer products on credit to the retailer, or evencutting off credit entirely, and demanding payment in advance. Suchstrategies impact on sales volume but reduce exposure to credit risk andsubsequent payment defaults.Credit risk is not really manageable for very small companies (i.e., thosewith only one or two customers). This makes these companies veryvulnerable to defaults, or even payment delays by their customers.The use of a collection agency is not really a tool to manage credit risk;rather, it is an extreme measure closer to a write down in that thecreditor expects a below-agreed return after the collection agency takesits share (if it is able to get anything at all). 80
  81. 81. Faced by individualsConsumers may also face credit risk in a direct form as depositors atbanks or as investors/lenders. They may also face credit risk whenentering into standard commercial transactions by providing a deposit totheir counterparty, e.g. for a large purchase or a real estate rental.Employees of any firm also depend on the firms ability to pay wages,and are exposed to the credit risk of their employer.In some cases, governments recognize that an individuals capacity toevaluate credit risk may be limited, and the risk may reduce economicefficiency; governments may enact various legal measures ormechanisms with the intention of protecting consumers against some ofthese risks. Bank deposits, notably, are insured in many countries (tosome maximum amount) for individuals, effectively limiting their creditrisk to banks and increasing their willingness to use the banking system. 81
  82. 82. BIBLIOGRAPHYBIBLIOGRAPHYwww.kotak.comwww.wikipedia.orgwww.rmahq.orgwww.syndicate bank .comwww.rbi.org 82

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