1. The document discusses credit risk management practices at SBI Kochi from 2013-2014. It provides background on credit risk and outlines key aspects of effective credit risk management like establishing appropriate risk environment, credit risk assessment, and portfolio management. 2. The theoretical background section defines terms like credit, risk, market risk, operational risk, and credit risk. It also discusses contributors to credit risk and key elements of credit risk management. 3. The document discusses credit rating and its use in credit decision making. It provides details on the rating tool used by SBI for assessing creditworthiness of borrowers, especially Small and Medium Enterprises.

1. 1
A STUDY ON RISK INVOLVED IN
CREDIT MANAGEMENT
OF
SBI KOCHI, 2013-14
CHAPTER 1
INTRODUCTION
Background of topic
Credit risk is defined as the potential that a bank borrower or counterparty will fail to
meet its obligations in accordance with agreed terms, or in other words it is defined as
the risk that a firm’s customer and the parties to which it has lent money will fail to
make promised payments is known as credit risk
The exposure to the credit risks large in case of financial institutions, such commercial
banks when firms borrow money they in turn expose lenders to credit risk, the risk that
the firm will default on its promised payments. As a consequence, borrowing exposes
the firm owners to the risk that firm will be unable to pay its debt and thus be forced to
bankruptcy.
Banking in our country is already witnessing the sea changes as the banking sector
seeks new technology and its applications. The best port is that the benefits are
beginning to reach the masses. Financial Institutions mainly Banks play a pivotal role in
matching a depositor and lenders and channeling money and making the economy more
efficient. Although there are different types of banks specialized for different purposes
and with different brands and capital structure, they are regulated by standards such as
the BASEL standards (to keep a minimum amount of capital) BASEL II etc.
Currently (2007), the overall banking in India is considered as fairly mature in terms of
supply, product range and reach - even though reach in rural India still remains a
challenge for the private sector and foreign banks. Even in terms of quality of assets and

2. 2
Capital adequacy, Indian banks are considered to have clean, strong and transparent
balance sheets - as compared to other banks in comparable economies in its region.
Credit risk (or counterparty risk) is increasingly faced by banks in their product
assortment (not only lending) and can be considered as the oldest and largest risk in
banking. Important in a bank relationship is the “know your client principle”, by
becoming familiar with the borrower and/or credit base. It is important that banks deal
with customers with sound reputation and creditworthiness. Therefore, banks need not
only manage the credit risk in their credit portfolio but also that in any individual credit
or transaction.
The relationship between credit risk and other risks should also be considered by banks.
The effective management of credit risk is a critical component of a comprehensive
approach to risk management and important to the long-term success of any banking
organization. Effective credit risk management process is a way to manage portfolio of
credit facilities.
Credit risk management encompasses identification, measurement, monitoring and
control of the credit risk exposures. The effective management of credit risk is a critical
component of comprehensive risk management and essential for the long term success
of a banking organisation.
The objectives of credit risk management are to:
 Evolve an integrated framework for charting/categorising various types of loans
and
advances, and determine implications on quality of credit and risk.
 Draw up suitable strategies at the corporate level to attain the prescribed
levels/quality of exposure and issue guidelines to Strategic Business Units
(SBUs). Benchmarks could be in term of recovery percentages, NPA levels,
volume of exposure, etc.
 Review the exposures and performance periodically.

3. 3
 Devise suitable control/monitoring mechanisms.
 Evolve and refine analytical tools to assess risk profiles, for ensuring healthy
portfolios and guarding against sickness.
Commercial banking plays a dominant role in commercial lending. Commercial banks
routinely perform investment banking activities in many countries by providing new
debt to their customers. The credit creation process works smoothly when funds are
transferred from ultimate savers to borrower. There are many potential sources of risk,
including liquidity risk, credit risk, interest rate risk, market risk, foreign exchange risk
and political risks. However, credit risk is the biggest risk faced by banks and financial
intermediaries. The credit risk’s indicators include the level of non- performing loans,
problem loans or provision for loan losses. Credit risk is the risk that a loan which has
been granted by a bank will not be either partially repaid on time or fully and where
there is a risk of customer or counterparty default. Credit risk management processes
enforce the banks to establish a clear process in for approving new credit as well as for
the extension to existing credit. These processes also follow monitoring with particular
care, and other appropriate steps are taken to control or mitigate the risk of connected
lending.
Credit granting procedure and control systems are necessary for the assessment of loan
application, which then guarantees a bank’s total loan portfolio as per the bank’s overall
integrity. It is necessary to establish a proper credit risk environment, sound credit
granting processes, appropriate credit administration, measurement, monitoring and
control over credit risk, policy and strategies that clearly summarize the scope and
allocation of bank credit facilities as well as the approach in which a credit portfolio is
managed i.e. how loans are originated, appraised, supervised and collected, a basic
element for effective credit risk management. Credit scoring procedures, assessment of
negative events probabilities, and the consequent losses given these negative migrations
or default events, are all important factors involved in credit risk management systems.
Most studies have been inclined to focus on the problems of developing an effective

4. 4
method for the disposal of these bad debts, rather than for the provision of a regulatory
and legal framework for their prevention and control.
The management of credit risk should receive the top management’s attention and the
process should encompass:
 Measurement of risk through credit rating/scoring;
 Risk pricing on a scientific basis;
 Controlling the risk through effective Loan Review Mechanism and portfolio
management; and
 Quantifying the risk through estimating expected loan losses i.e. the amount of loan
losses that bank would experience over a chosen time horizon (through tracking
portfolio behaviour over 5 or more years) and unexpected loan losses i.e. the
amount by which actual losses exceed the expected loss (through standard deviation
of losses or the difference between expected loan losses and some selected target
credit loss quantile).
A survey conducted in the United States found credit risk management as the best
practice in bank and above 90% of the bank in country have adopted the best practice.
Inadequate credit policies are still the main source of serious problem in the banking
industry as result effective credit risk management has gained an increased focus in
recent years. The main role of an effective credit risk management policy must be to
maximize a bank’s risk adjusted rate of return by maintaining credit exposure within
acceptable limits. Moreover, banks need to manage credit risk in the entire portfolio as
well as the risk in individual credits transactions.
Credit risk consists of primarily two components, viz, quantity of risk, which is nothing
but the outstanding loan balance as on the date of default and the quality of risk, viz, the
severity of loss defined by both probability of default as reduced by the recoveries that
could be made in the event of default. Thus credit risk is a combined outcome of
Default Risk and Exposure Risk.

5. 5
RBI expects that banks take specific measures, mainly at the Corporate Level, for
implementing appropriate Credit Risk Management Systems in the bank. The policy
will involve the following:
 Policy framework
 Credit rating framework
 Credit risk models
 Portfolio management and Risk Limits
 Managing Credit Risk in Inter-Bank Exposure
 Credit Risk in Off-Balance Sheet Exposure
 Country Risk
 Loan Review Mechanism/Credit Audit
 RAROC(Risk adjusted return on capital) pricing/Economic profit
 Basel II Accord: Implications for Credit Risk Management
The banks are required to
 Ensure that their Risk Management functions considers the above issues as
applicable to the bank and put in place appropriate structures/systems. This will
ensure that Risk Based Supervision (RBS) is effective.
 Each bank must have a Credit Rating Framework to suit their requirements.
To implement effective credit risk management practice private banks are more serious
than state owned banks. A survey conducted by Kuo & Enders (2004) of credit risk
management policies for state banks in China and found that mushrooming of the
financial market; the state owned commercial banks in China are faced with the
unprecedented challenges and tough for them to compete with foreign bank unless they
make some thoughtful change. In this thoughtful change, the reform of credit risk
management is a major step that determines whether the state owned commercial banks
in China would survive the challenges or not.

6. 6

7. 7
1.1 LITERATURE REVIEW
Commercial banking plays a dominant role in commercial lending (Allen and Gale
20114). Commercial banks routinely perform investment banking activities in many
countries by providing new debt to their customers (Gande 2008). The credit creation
process works smoothly when funds are transferred from ultimate savers to borrower
(Bernanke 1993). There are many potential sources of risk, including liquidity risk,
credit risk, interest rate risk, market risk, foreign exchange risk and political risks
(Campbell, 2007). However, credit risk is the biggest risk faced by banks and financial
intermediaries (Gray, Cassidy, & RBA., 1997). The credit risk’s indicators include the
level of non- performing loans, problem loans or provision for loan losses (Jimenez &
Saurina, 2006). Credit risk is the risk that a loan which has been granted by a bank will
not be either partially repaid on time or fully and where there is a risk of customer or
counterparty default. Credit risk management processes enforce the banks to establish a
clear process in for approving new credit as well as for the extension to existing credit.
These processes also follow monitoring with particular care, and other appropriate steps
are taken to control or mitigate the risk of connected lending (Basel,1999).
Credit granting procedure and control systems are necessary for the assessment of loan
application, which then guarantees a bank’s total loan portfolio as per the bank’s overall
integrity (Boyd, 1993). It is necessary to establish a proper credit risk environment,
sound credit granting processes, appropriate credit administration, measurement,
monitoring and control over credit risk, policy and strategies that clearly summarize the
scope and allocation of bank credit facilities as well as the approach in which a credit
portfolio is managed i.e. how loans are originated, appraised, supervised and collected,
a basic element for effective credit risk management (Basel, 1999). Credit scoring
procedures, assessment of negative events probabilities, and the consequent losses
given these negative migrations or default events, are all important factors involved in
credit risk management systems (Altman, Caouette, & Narayanan, 1998). Most studies
have been inclined to focus on the problems of developing an effective method for the

8. 8
disposal of these bad debts, rather than for theprovision of a regulatory and legal
framework for their prevention and control (Campbell, 2007). Macaulay (1988)
conducted a survey in the United States and found credit risk management is best
practice in bank and above 90% of the bank in country have adopted the best practice.
Inadequate credit policies are still the main source of serious problem in the banking
industry as result effective credit risk management has gained an increased focus in
recent years. The main role of an effective credit risk management policy must be to
maximize a bank’s risk adjusted rate of return by maintaining credit exposure within
acceptable limits. Moreover, banks need to manage credit risk in the entire portfolio as
well as the risk in individual credits transactions. To implement effective credit risk
management practice private banks are more serious than state owned banks. A survey
conducted by (Kuo & Enders 2004) of credit risk management policies for state banks
in China and found that mushrooming of the financial market; the state owned
commercial banks in China are faced with the unprecedented challenges and
tough for them to compete with foreign bank unless they make some thoughtful change.
In this thoughtful change, the reform of credit risk management is a major step that
determines whether the state owned commercial banks in China would survive the
challenges or not. Research however faults some of the credit risk management policies
in place the broad framework and detailed guidance for credit risk assessment and
management is provided by the Basel New Capital Accord which is now widely
followed internationally (Campbell, 2007)

9. 9
1.2 THEORETICAL BACKGROUND
CREDIT
The word ‘credit’ comes from the Latin word ‘credere’, meaning ‘trust’. When sellers
transfer his wealth to a buyer who has agreed to pay later, there is a clear implication of
trust that the payment will be made at the agreed date. The credit period and the amount
of credit depend upon the degree of trust.
Credit is an essential marketing tool. It bears a cost, the cost of the seller having to
borrow until the customers payment arrives. Ideally, that cost is the price but, as most
customers pay later than agreed, the extra unplanned cost erodes the planned net profit.
RISK
Risk is defined as uncertain resulting in adverse outcome, adverse in relation to planned
objective or expectation. It is very difficult o find a risk free investment. An important
input to risk management is risk assessment. Many public bodies such as advisory
committees concerned with risk management. There are mainly three types of risk they
are follows:
• Market risk
• Credit Risk
• Operational risk
Risk analysis and allocation is central to the design of any project finance, risk
management is of paramount concern. Thus quantifying risk along with profit
projections is usually the first step in gauging the feasibility of the project. Once risks
have been identified they can be allocated to participants and appropriate mechanisms
put in place.
MARKET RISK
Market risk is the risk of adverse deviation of the mark to market value of the trading
portfolio, due to market movement, during the period required to liquidate the
transactions.

10. 10
OPERATIONAL RISK
Operational risk is one area of risk that is faced by all organizations. More complex the
organization more exposed it would be operational risk. This risk arises due to deviation
from normal and planned functioning of the system procedures, technology and human
failure of omission and commission. Result of deviation from normal functioning is
reflected in the revenue of the organization, either by the way of additional expenses or
by way of loss of opportunity. Technical breakdown and change in staff also account
for the operational risk.
CREDIT RISK
Credit risk is defined as the potential that a bank borrower or counterparty will fail to
meet its obligations in accordance with agreed terms, or in other words it is defined as
the risk that a firm’s customer and the parties to which it has lent money will fail to
make promised payments is known as credit risk.
The exposure to the credit risks large in case of financial institutions, such commercial
banks when firms borrow money they in turn expose lenders to credit risk, the risk that
the firm will default on its promised payments. As a consequence, borrowing exposes
the firm owners to the risk that firm will be unable to pay its debt and thus be forced to
bankruptcy.
CONTRIBUTORS OF CREDIT RISK
• Corporate assets
• Retail assets
• Non-SLR portfolio
• In case of guarantees, Letter of credit and Letter of comfort
• Securities trading business
• Treasury operations
• Derivatives
• Cross border exposure
• Collaterals accepted by the bank
• Settlement, etc

11. 11
KEY ELEMENTS OF CREDIT RISK MANAGEMENT
1.2 Establishing appropriate credit risk environment
1.3 Operating under sound credit granting process
1.4 Maintaining an appropriate credit administration, measurement & Monitoring
1.5 Ensuring adequate control over credit risk
1.6 Banks should have a credit risk strategy which in our case is

12. 12
Credit rating
Definition
Credit rating is the process of assigning a letter rating to borrower indicating
that creditworthiness of the borrower. Rating is assigned based on the ability of
the borrower (company).To repay the debt and his willingness to do so.The higher
rating of company the lower the probability of its default.
Use in decision making
Credit rating helps the bank in making several key decisions regarding credit including
1. whether to lend to a particular borrower or not; what price to charge?
2. what are the product to be offered to the borrower and for what tenure?
3. at what level should sanctioning be done, it should however be noted that credit
rating is one of inputs used in credit decisions.
There are various factors (adequacy of borrowers, cash flow, collateral provided, and
relationship with the borrower).Probability of the borrowers default based on past data.
Main features of the rating tool:-
comprehensive coverage of parameters extensive data requirement mix of
subjective and objective parameters includes trend analysis parameters are
benchmarked against other players in the segment captions of industry outlook
grade ratings broadly mapped with external rating agencies prevailing data.
Rating tool for SME
Internal credit ratings are the summary indicators of risk for the bank’s individual credit
exposures. It plays a crucial role in credit risk management architecture of any bank and
forms the cornerstone of approval process.

13. 13
Based on the guidelines provided by Boston Consultancy Group (BCG), SBI adopted
credit rating tool.
The rating tool for SME borrower assigns the following Weight ages to each one of the
four main categories i.e
(i) Scenario (I) : without monitoring tool
S No Parameters Weightages (%)
1 financial performance XXXX
2 operating performance XXXX
3 quality of management XXXX
4 industry outlook XXXX
(ii). Scenario (II): with monitoring tool [conduct of account]:- the weight age would be
conveyed separately on roll out of the tool. In the above parameters first three
parameters used to know the borrower characteristics. In fourth encapsulates the risk
emanating from the environment in which the borrower operates and depends on the
past performance of the industry its future outlook and macro economic factors.
Operating performance
S No Sub parameters Weightage
(%)
1. credit period allowed Xxxx
2. credit period availed Xxxx
3. working capital cycle Xxxx
4. Tax incentives Xxxx

14. 14
5. production related risk Xxxx
6. product related risk Xxxx
7. price related risk Xxxx
8. client risk Xxxx
9. fixed asset turnover Xxxx
Total Xxxxxx
Quality of management
S No sub parameters Weightages (%)
1. Hy / Track record of industrial unrest Xxxx
2 market report of management reputation Xxxx
3 history of FERA violation / ED enquiry Xxxx
4 Too optimistic projections of sales and other financials Xxxx
5 technical and managerial expertise Xxxx
6 capability to raise money Xxxx
Total Xxxxxx

15. 15
IN STATE BANK OF INDIA DFFERENT PARAMETERS USED TO GIVE
RATINGS AREAS FOLLOWS:-
FINANCIAL PARAMETERS
S.NO Indicator/ratio Score
F1(a) Audited net sales in last year Xxxx
F2(b) Audited net sales in year before last Xxxx
F1(c) Audited net sales in 2 year before last Xxxx
F1(d) Audited net sales in 3 year before last Xxxx
F1(e) Estimated or projected net sales in next year Xxxx
F2 NET SALES GROWTH RATE(%) Xxxx
F3 PBDIT growth rate(%) Xx
F4 Net sales(%) Xx
F5 ROCE(%) Xx
F6 TOL/TNW Xxx
F7 Current ratio Xxx
F8 DSCR Xxx
F9 Interest coverage ratio Xx
F10 Foreign exchange risk Xx
F11 Reliability of debtors Xx
F12 Operating cash flow Xx

16. 16
F13 Trend in cash accruals x
BUSINESS PARAMETERS
S.NO Indicator/ratio Score
B1 Credit period allowed(days) Xx
B2 Credit period availed(days) Xx
B3 Working capital cycle(times) Xx
B4 Production related risks Xx
B5 Product related risks X
B6 Price related risks X
B7 Fixed assets turnover X
B8 No. of yeas in business X
B9 Nature of clientele base X
MANAGEMENT PARAMETERS
SR. NO INDICATOR/RATIO SCORE
M1 HR policy X
M2 Track record in payment of statutory and other dues X
M3 Market report of management reputation X
M4 Too optimistic projections of sales and other financials X
M5 Capability to raise resources X
M6 Technical and managerial expertise X
M7 Repayment track record X
CONDUCT
PARAMETERS

17. 17
A1 Creation of charges on primary security X
A2
Creation of charges on collateral and execution of
personal or X
corporate guarantee
A3 Proper execution of documents X
A4 Availability of search report X
A5 Other terms and conditions not complied with X
A6 Receipt of periodical data X
A7 Receipt of balance sheet X
B1
Negative deviation in half yearly net sales vis-à-vis
proportionate X
Estimates
B2 Negative deviation in annual net sales vis-à-vis estimates X
B3
Negative deviation in half yearly net profit vis-à-vis
proportionate X
Estimates
B4
Adverse deviation in inventory level in months vis-à-vis
estimate X
Level
B5
Adverse deviation in receivables level in months vis-
à-vis X
estimated level
B6 Quality of receivable assess from profile of debtors X
B7
Adverse deviation in creditors level in months vis-à-vis
estimated X
Level
B8 Compliance of financial covnants X
B9 Negative deviation in annual net profit vis-à-vis estimates X

18. 18
C1 Audit report internal/statutory/concurrent/RBI X
C2
Conduct of account with other banks/lenders and
information on X
consortium
D1 Routing of proportionate turnover/business X
D2 Utilization of facilities(not applicable for term loan) X
D3
Over due discounted bills during the period under review within
the X
sanctioned terms then not applicable
D4
Devolved bill under L/c outstanding during the period under
review X
D5
Invoked BGs issued outstanding during the period under
review X
D6
Intergroup transfers not backed by trade transactions during the
period X
under review
D7
Frequency of return of cheques per quarter deposited by
borrower X
D8
Frequency of issuing cheques per quarter without sufficient
balance and X
returned
D9 Payment of interest or instalments X
D10
Frequency of request for AD HOC INCREASE OF LIMIS
during the last X
one year
D11 Frequency of over drawings CC account X

19. 19
E1
Status of
deterioration
in value of primary security or stock
depletion X
E2
Status of
deterioration in value of collateral security X
E3 Status of deterioration in personal net worth and TNW X
E4 Adequacy of insurance for the primary /collateral security X
F1 Labor situation/industrial relations X
F2 Delay or default in payments of salaries and statutory dues X
F3 Non co-operation by the borrower X
F4 Intended end-use of financing X
F5
Any other adverse feature/snon financial including corporate
governance X
issues suchasadverse publicity, strictures from regulators, pitical
risk and
adverse trade environment not covered
Difficulty of measuring credit risk
Measuring credit risk on a portfolio basis is difficult. Banks and financial
institutions traditionally measure credit exposures by obligor and industry. They have
only recently attempted to define risk quantitatively in a portfolio context e.g., a value-
at-risk (VaR) framework. Although banks and financial institutions have begun to
develop internally, or purchase, systems that measure VaR for credit, bank
managements do not yet have confidence in the risk measures the systems produce.
In particular, measured risk levels depend heavily on underlying assumptions
and risk managers often do not have great confidence in those parameters. Since credit

20. 20
derivatives exist principally to allow for the effective transfer of credit risk, the
difficulty in measuring credit risk and the absence of confidence in the result of risk
measurement have appropriately made banks cautious about the use of banks and
financial institutions internal credit risk models for regulatory capital purposes.
Credit Risk
The most obvious risk derivatives participants’ face is credit risk. Credit risk is
the risk to earnings or capital of an obligor’s failure to meet the terms of any contract
the bank or otherwise to perform as agreed. For both purchasers and sellers of
protection, credit derivatives should be fully incorporated within credit risk
management process. Bank management should integrate credit derivatives activity in
their credit underwriting and administration policies, and their exposure measurement,
limit setting, and risk rating/classification processes. They should also consider credit
derivatives activity in their assessment of the adequacy of the allowance for loan and
lease losses (ALLL) and their evaluation of concentrations of credit.
There a number of credit risks for both sellers and buyers of credit protection,
each of which raises separate risk management issues. For banks and financial
institutions selling credit protection the primary source of credit is the reference asset
or entity.
APPRAISAL OF THE FIRMS POSITION ON BASIS OF OTHER
PARAMETERS
1. Managerial Competence
2. Technical Feasibility
3. Commercial viability
4. Financial Viability

21. 21
Managerial Competence
Back ground of promoters Experience
Technical skills, Integrity & Honesty
Level of interest / commitment
Technical Feasibility
Location
Size of the Project
Factory bulding
Plant & Machinery
Process & Technology Inputs
Commercial Viability
Demand forecasting / Analysis
Market survey
Pricing policies Competition
Export policies
Financial Viability
Whether adequate funds are available at affordable cost to implement the
project Whether sufficient profits will be available
Whether BEP or margin of safety are satisfactory
What will be the overall financial position of the borrower in coming years.

22. 22
Credit investigation report
Branch prepares Credit investigation report in order to avoid consequence in
later stage Credit investigation report should be a part of credit proposal. Bank has to
submit the duly completed credit investigation reports after conducting a detailed credit
investigation as per guidelines.
Some of the guidelines in this regards as follow:
Wherever a proposal is to be considered based only on merits of flagships concerns
of the group, then such support should also be compiled in respect of subject flagship in
concern besides the applicant company.
In regard of proposals falling beyond the power of rating officer, the branch
should ensure participation of rating officer in compilation of this report.
The credit investigation report should accompany all the proposals with the fund
based limit of above 25 Lakhs and or non fund based of above Rs. 50 Lakhs.
The party may be suitably kept informed that the compilation of this report is one
of the requirements in the connection with the processing for consideration of the
proposal.
The branch should obtain a copy of latest sanction letter by existing banker or the
financial institution to the party and terms and conditions of the sanction should
studied in detail.

23. 23
Comments should be made wherever necessary, after making the
observations/lapses in the following terms of sanction.
Some of the important factors like funding of interest, re schedule of loans etc
terms and conditions should be highlighted.
Copy of statement of accounts for the latest 6 months period should be obtained by
the bank. To get the present condition of the party.
Remarks should be made by the bank on adverse features observed. (e.g., excess
drawings, return of cheques etc).
Personal enquiry should be made by the bank official with responsible official of
party’s present / other bankers and enquiries should be made with a elicit
information on conduct of account etc.
Care should be taken in selection of customers or creditors who acts as the
representative. They should be interviewed and compilation of opinion should be
done.
Enquiries should be made regarding the quality of product, payment
terms, and period of overdue which should be mentioned clearly in the
report. Enquiry should be aimed to ascertain the status of trading of the applicant
and to know their capability to meet their commitments in time.
To know the market trend branch should enquire the person or industry that is in
the same line of business activity.
In depth observation may be made of the applicant as to :
- whether the unit is working in full swing

24. 24
- number of shifts and number of employees
- any obsolete stocks with the unit
- capacity of the unit
- nature and conditions of the machinery installed
- Information on power, water and pollution control etc.
- information on industrial relation and marketing strategy

25. 25
CRA Proposal
The proposal is made considering 3 years balance sheet of a company to arrive at
a pricing based on its current rating. It includes many parameters.
Illustration: A model of a CRA proposal
Memorandum for the committee of CRA validation
1. CRA model used: Choose one form
a. Trading
b. Non – trading ( Regular)
c. Non – trading regular ( Diamond)
2. Borrower details (Name)
3. Particulars of CRA
a. Borrower Rating
i. Before country risk
ii. Final after country risk
b. External Rating
4. Proposal for validation of

26. 26
a. Borrower rating
b. Facility rating
5. Credit limits
6. Brief particulars of the borrower
a. Age, Succession planning
b. Collateral, Management
c. Name of the directors
d. Associate / Sister / Group company
7. Validation
a. Performance and financial indicators
b. Comments on variance in values
c. Performance under other relevant factors
i. Net Sales as a percentage of estimated net sales
ii. Profit as a percentage of estimated net profit
d. Moving average of company’s last 3 years ratio
e. Details in terms of loan.
8. Quarterly Sales

27. 27
a. Growth %
b. Average Growth
9. Comments on
a. Financial flexibility of the company
i. Raise funds through internal sources like internal accruals, scalable
assets.
ii. Raise resources through external sources based on the relationship
with banker, liquidity back up etc.
iii. Record in raising funds from capital market.
iv. Flexibility to defer its capex in case of weakening financial position etc.
b. Forex business details
c. Country risk
d. Justification for giving abnormal high or low
10.Conduct of Account ( Last 12 months)
11.Future Prospects
12.Entry Barriers

28. 28
13.Details of security available
14.CRMD guidelines on industry outlook
15. Non – compliance with regulation to bank’s laid down instruction with
regard to loan policy guidelines / Earlier prescription of sanctioning authority /
RMD exposure norms / Figuring in RBI / ECGC defaulters list / Major I & A audit
irregularities / Other risk factors etc.
16. Qualitative factors
17. Hurdle scores comparison
18.Risk Score
19.Certificate
20.Recommendation

29. 29
CHAPTER 2
RESEARCH METHODOLOGY
The research was taken in the light to study the risk involved in credit management in SBI
Kochi. The research was undertaken with the aim of getting an eagle’s view of how SBI
manage the credit risk.
OBJECTIVES OF THE STUDY
 To study the credit policies of SBI
 To compare the loans and advances of SBI with other public and private sector
banks
 To analyze the credit recovery management of SBI
 To study the priority sector advances of SBI in comparison with other public
sector banks
SCOPE AND LIMITATIONS
SCOPE
 It covers the key performing banks in the public and private banking sectors.
 The project has been from the angle of SBI Bank.
 The study only covers SBI branch in Cochin.
LIMITATIONS
 Only secondary data was used.
 Study was limited to Kochi city
 Only few banks were considered

30. 30
 The major limitation was time constraint which was only one months, but still
efforts have been made to put the picture as clear and candid as possible.
Type of research:
We would select the conclusive method in which we would go for descriptive research
design.
Descriptive research design is more structured and formal in nature. The objective of
these studies is to provide a comprehensive and detailed explanation of the phenomena
under study. Descriptive research, used often in social sciences and market research, is the
study of how a particular group, person, or thing behaves. Observations are noted without
influence.
Data Requirement:
We would consider secondary data.
Secondary data:
Secondary data is data collected by someone other than the user. Common sources of
secondary data include censuses, organizational records and data collected through
qualitative methodologies or qualitative research. The investigator conducting the
research collects primary data. Secondary data analysis saves time that would otherwise
be spent collecting data and, particularly in the case of quantitative data, provides larger
and higher-quality databases that would be unfeasible for any individual researcher to
collect on their own.
Types of data:
We would select only qualitative data.
Qualitative data: Dept interview
Data collection Plan:
 By telephonic interview with the AGM of SBI

31. 31
 By visiting websites like www.sbi.co.in, www.rbi.org, moneycontrol.com and
www.indiainfoline.com
Sampling Plan:
Target population:
Top level officers and bank managers.
Sampling technique:
We are planning to go for convenience sampling technique.
Convenience sampling technique:
Convenience sampling is a non-probability sampling technique where subjects are
selected because of their convenient accessibility and proximity to the researcher.

32. 32
CHAPTER 3
COMPANY PROFILE
3.1 STATE BANK OF INDIA
State Bank of India (SBI) is a multinational banking and financial services company based in
India. It is a government-owned corporation with its headquarters in Mumbai, Maharashtra. As
of December 2013, it had assets of US$388 billion and 17,000 branches, including 190 foreign
offices, making it the largest banking and financial services company in India by assets. The
bank traces its ancestry to British India, through the Imperial Bank of India, to the founding in
1806 of the Bank of Calcutta, making it the oldest commercial bank in the Indian Subcontinent.
Bank of Madras merged into the other two presidency banks—Bank of Calcutta and Bank of
Bombay—to form the Imperial Bank of India, which in turn became the State Bank of
India. Government of India owned the Imperial Bank of India in 1955, with Reserve Bank of
India taking a 60% stake, and renamed it the State Bank of India. In 2008, the government took
over the stake held by the Reserve Bank of India.SBI is a regional banking behemoth and has
20% market share in deposits and loans among Indian commercial banks.
SBI has five associate banks, all use the State Bank of India logo, which is a blue circle, and all
use the "State Bank of" name, followed by the regional headquarters' name:
 State Bank of Bikaner & Jaipur
 State Bank of Hyderabad
 State Bank of Mysore
 State Bank of Patiala
 State Bank of Travancore
State Bank of India is the largest state-owned banking and financial services company in India.
The Bank provides banking services to the customer. In addition to the banking services, the

33. 33
Bank through their subsidiaries, provides a range of financial services, which include life
insurance, merchant banking, mutual funds, credit card, factoring, security trading, pension fund
management and primary dealership in the money market. The Bank operates in four business
segments, namely Treasury, Corporate/ Wholesale Banking, Retail Banking and Other Banking
Business. The Treasury segment includes the investment portfolio and trading in foreign
exchange contracts and derivative contracts. The Corporate/ Wholesale Banking segment
comprises the lending activities of Corporate Accounts Group, Mid Corporate Accounts Group
and Stressed Assets Management Group. The Retail Banking segment consists of branches in
National Banking Group, which primarily includes personal banking activities, including lending
activities to corporate customers having banking relations with branches in the National Banking
Group. SBI provides a range of banking products through their vast network of branches in India
and overseas, including products aimed at NRIs. The State Bank Group, with over 16,000
branches, has the largest banking branch network in India. The State bank of India is the 10th
most reputed company in the world according to Forbes. The bank has 156 overseas offices
spread over 32 countries. They have branches of the parent in Colombo, Dhaka, Frankfurt, Hong
Kong, Johannesburg, London and environs, Los Angeles, Male in the Maldives, Muscat, New
York, Osaka, Sydney, and Tokyo. They have offshore banking units in the Bahamas, Bahrain,
and Singapore, and representative offices in Bhutan and Cape Town. State Bank of India was
incorporated in the year 1955.
In 2000 the Bank has embarked upon the expansion of its ATM network in the twin cities of
Hyderabad and Secunderabad. The Bank has become the first government owned financial
institution to join the rank of companies declaring interim dividend. The Bank has proposed to
come out with an issue under private placement of unsecured, non-convertible, subordinated
bonds in the nature of promissory notes of Rs 1 lakh each aggregating Rs 600 crores with an
option to retain oversubscription of up to Rs 40 crores.
SBI provides easy access to money to its customers through more than 8500 ATMs in India. The
Bank also facilitates the free transaction of money at the ATMs of State Bank Group, which
includes the ATMs of State Bank of India as well as the Associate Banks – State Bank of

34. 34
Bikaner & Jaipur, State Bank of Hyderabad, State Bank of Indore, etc. You may also transact
money through SBI. Commercial and International Bank Ltd by using the State Bank ATM-cum-
Debit (Cash Plus) card.
The demographic profile of select customers of State Bank of India reveals that, 67.2 percent of
them are male. In term of age, it is evident that 27.6 percent of the customers are falling in the
age group ranging between 31-40 years. Graduates accounted for 37.6 percent. Business and
profession people dominated the sample with 44.8 percent and 22 percent respectively. In term
of marital status, 87.2 percent of the respondents were married. The income statistics revealed
that 32.8 percent of the customers were earning their income between Rs.2,50,001-
Rs.5,00,000 yearly.
The Banking profile of the customers reveals that 53.2 percent of the select customers maintain
current account in State Bank of India. 53.6 percent of them are having banking experience
ranging between 6-10 years. The convenience of all the customers would be greatly enhanced by
an electronic, 24 hour branch. As a result 90.4 percent of the respondents prefer e-banking rather
then conventional banking system. 59.2 percent of the respondents have e-banking experience
ranging between 1-3 years. 41.6 percent of the respondents use e-banking channels

35. 35
ABOUT LOGO
THE PLACE TO SHARE THE NEWS ...……
SHARE THE VIEWS ……
Togetherness is the theme of this corporate loge of SBI where the world of banking services
meet the ever changing customers needs and establishes a link that is like a circle, it indicates
complete services towards customers. The logo also denotes a bank that it has prepared to do
anything to go to any lengths, for customers.
The blue pointer represent the philosophy of the bank that is always looking for the growth and
newer, more challenging, more promising direction. The key hole indicates safety and security.

36. 36
MISSION, VISION AND VALUES
MISSION STATEMENT:
To retain the Bank’s position as premiere Indian Financial Service Group, with world class
standards and significant global committed to excellence in customer, shareholder and employee
satisfaction and to play a leading role in expanding and diversifying financial service sectors
while containing emphasis on its development banking rule.
VISION STATEMENT:
 Premier Indian Financial Service Group with prospective world-class
Standards of efficiency and professionalism and institutional values.
 Retain its position in the country as pioneers in Development banking.
 Maximize the shareholders value through high-sustained earnings per
Share.
 An institution with cultural mutual care and commitment, satisfying and
Good work environment and continues learning opportunities.

37. 37
VALUES:
 Excellence in customer service
 Profit orientation
 Belonging commitment to Bank
 Fairness in all dealings and relations
 Risk taking and innovative
 Team playing
 Learning and renewal
 Integrity
 Transparency and Discipline in policies and systems.

38. 38
CHAPTER 4
ANALYSIS AND INTERPRETATION
Introduction
From this chapter we would be able to analyse and interpret the objectives of the study. The data
like advances amount, loan recovered amount, loan out-standing, etc of different banks in
different years are considered here, which are collected from RBI website, SBI website,
moneycontrol.com website and personally from the branch manager of SBI.
4.1 CREDIT POLICIES OF STATE BANK OF INDIA.
Credit policy:
 The credit policy document is a document which carefully specifies the do’s and don'ts
while sanctioning the loan proposals.
 As loan proposals differ widely from each other, there cannot be a strict methodology for
accepting or rejecting the proposals.
 Instead, guidelines can be given within the credit policy for the decision makers to enable
them to screen out loans, which can be out rightly rejected.
 Loans that can be sanctioned without any reference to the top management and proposals
that require a certain amount of top-level decision-making.
 The credit policy of a bank consists of five major components.
RBI Guidelines for credit policy:

39. 39
 As per RBI’s guidelines at least 40% of the net bank credit should be given to the priority
sector, of which 18% would be for Agriculture and 10% to the weaker sections of the
society.
 RBI, NABARD and State Level Bankers Committee (SLBC) govern the credit policy and
procedures with respect to agricultural sector.
 Depending on the segments, the policies and procedures could differ substantially.
 The introduction of Service Area Approach in 1989 prompted each bank’s branch to
prepare its own Service Area Plan based on the village profile, skills and available
resources. Such Service Area Plans would then be integrated with the annual growth plan
of a bank’s branch.
SBI Credit policy
For the highest rated (AAA) firms, the bank now gives working capital loans at its base
rate, or the minimum lending rate. For the next lot of AA-rated firms, the bank gives
loans at base rate plus 25 basis points, and for BBB-rated loans, the working capital loans
are given at base rate plus 0.65 basis points. A basis point is one-hundredth of a
percentage point.
4.1 THE TABLE BELOW SHOWS ADVANCES OF PUBLIC SECTOR BANKS TO
PRIORITY SECTOR PERCENT.
Name of the Bank
Percent
Total agricultural
advances (%)
Weaker section
(%)
Total priority sector
advances
(%)
Canara Bank 15.7 6 48.2
Syndicate Bank 17.4 10.1 39.9
IDBI Ltd. 2.2 0.3 15.2
SBI 12.6 5.4 41

40. 40
Interpretation:
From the above table, we can understand that SBI is complying with the Credit policy guidelines
issued by RBI. The other top performing banks mentioned above like Canara bank is issuing
more credit than the prescribed rate by RBI, which is generating more risk to the bank, whereas
the other two banks are not even withstanding with the credit policy issued by RBI.
4.2 THE BELOW TABLE SHOWS THE COMPARISON OF LOANS &
ADVANCES OF STATE BANK OF INDIA WITH OTHER PUBLIC AND
PRIVATE SECTOR BANKS
Public Sector Banks: Syndicate Bank, Canara Bank, Corporation Bank
Private Sector Banks: HDFC Bank, ICICI Bank, UTI Bank
Criteria for selection: These banks are selected as they are the top performing banks and
they have high loan lending capacity.
Variables: Loan amount of different banks.
Amounts in Million
Name of the Bank 2009 2010 2011 2012 2013
Amount Amount Amount Amount Amount
State Bank Of India 4167681.96 5425032.04 6319141.52 7567194.48 8675788.90
Syndicate Bank 640510.11 815322.69 904063.59 1067819.20 1236201.77
Canara Bank 1072380.40 1382194.00 1693346.30 2112682.92 2324898.18
Corporation Bank 391855.74 485121.60 632025.62 868504.04 1004690.20
HDFC Bank 634268.93 988830.47 1258305.93 1599826.65 1954200.29

41. 41
ICICI Bank 2256160.82 2183108.49 1812055.97 2163659.01 2537276.57
UTI Bank 596611.44 815567.65 1043409.46 1424078.28 1697595.38
Figure 4.1: The loans and advances of SBI and other public and private sector banks
Interpretation:
Considering the above figure we can say that year on year the amount of advances lent by State
Bank of India has increased which indicates that the bank’s business is really commendable and
the Credit Policy it has maintained is absolutely good. Whereas other banks do not have such
0
5000000
10000000
15000000
20000000
25000000
30000000
35000000
2013
2012
2011
2010
2009

42. 42
good business SBI is ahead in terms of its business when compared to both Public Sector and
Private Sector banks, this implies that SBI has incorporated sound business policies.
4.2 THE TABLE BELOW SHOWS THE CREDIT RECOVERY MANAGEMENT OF
SBI
Variables: Loan issued amount, loan recovered amount and outstanding loan to be
recovered of SBI.
Year Loans Issued Recovered Outstanding
2010 157933.54 91601.4 66332.09
2011 202374.46 120210.43 82164.03
2012 261641.54 163264.32 98377.22
2013 337336.49 263264.32 74072.17

43. 43
Figure 4.2: The credit risk management of SBI
Interpretation:
From the figure we can say that till the year 2012 outstanding loans had increased up to 30%
but due to the improved credit policy of SBI its outstanding rate decreased to 23% in the year
2013.
4.3 THE TABLE BELOW SHOWS THE PRIORITY SECTOR ADVANCES OF SBI
IN COMPARISON WITH OTHER PUBLIC SETOR BANKS
Public Sector Banks: Syndicate Bank
Canara Bank
Corporation Bank
Criteria for selection: These banks are selected because they are performing with low
NPA.
Varriables: Total Agriculture Advances, Weaker Section Advances, Total
0
50000
100000
150000
200000
250000
300000
350000
400000
2010 2011 2012 2013
AxisTitle
SBI loans, recovery and outstanding
Loans Issued
Recovered
Outstanding

44. 44
Priority Sector Advances
S.No Name of the Bank
(Amount)
Total Agriculture
Advances (Amount)
Weaker Section
Advances (Amount)
Total
Priority
Sector
Advances
1 STATE BANK OF
INDIA
30516 19883 82895
2 SYNDICATE BANK 5870.94 3267.71 14626.62
3 CANARA BANK 12032 4423 30937
4 CORPORATION
BANK
1934.80 665.32 9043.74
Figuer 4.3: The priority sector advances of sbi in comparison with other public sector
banks
0
10000
20000
30000
40000
50000
60000
70000
80000
90000
Total Agriculture
Advances
Weaker Section Advances
Total Priority Sector
Advances

45. 45
4.4 THE BELOW TABLE SHOWS THE PRIORITY SECTOR ADVANCES OF PUBLIC
SECTOR BANKS IN PERCENTAGES ARE AS FOLLOWS:
Name of the Bank
Total
Agriculture
Advances
Weaker
Section
Advances
Total
Priority
Sector
Advances
% Net Banks Credit % Net Banks Credit % Net Banks Credit
STATE BANK OF
INDIA
13.6 8.9 37.0
SYNDICATE BANK 18.0 10.0 44.9
CANARA BANK 15.7 5.9 41.4
CORPORATION
BANK
9.0 3.1 41.9

46. 46
Figure 4.4: Priority sector advances of public sector banks in percentage
Interpretations:
SBI’s total agriculture advances as compared to other banks is 13.6% of the Net Bank’s
Credit, which shows that Bank has not lent enough credit to agriculture sector. SBI has to
entertain agriculture sector loans so that it can have more number of borrowers for the bank.
In case of weaker section advances, SBI is granting 8.9% of Net Banks Credit, which is less
as compared to Syndicate Bank. SBI has advanced 37% to priority sector, which is less as
compared with other Bank.
4.5 RISK CONTROLLED STRATEGY FOLLOWED BY MANAGER
0
5
10
15
20
25
30
35
40
45
50
STATE BANK
OF INDIA
SYNDICATE
BANK
CANARA BANK CORPORATION
BANK
Total Agriculture
Weaker Section Advance
Total Priority Sector Advance

47. 47
Policy and Strategy
The manager shall be responsible for approving and periodically reviewing the credit risk
strategy and significant credit risk policies.
Credit Risk Policy
 Every bank should have a credit risk policy document approved by the Board. The
document should include risk identification, risk measurement, risk grading/ aggregation
techniques, reporting and risk control/ mitigation techniques, documentation, legal issues and
management of problem loans.
 Credit risk policies should also define target markets, risk acceptance criteria, credit
approval authority, credit origination/ maintenance procedures and guidelines for portfolio
management.
 The credit risk policies approved by the Board should be communicated to
branches/controlling offices. All dealing officials should clearly understand the bank’s approach
for credit sanction and should be held accountable for complying with established policies and
procedures.
 Senior management of a bank shall be responsible for implementing the credit risk policy
approved by the Board.
Credit Risk Strategy
 Each bank should develop, with the approval of its Board, its own credit risk strategy or plan
that establishes the objectives guiding the bank’s credit-granting activities and adopt necessary
policies/ procedures for conducting such activities. This strategy should spell out clearly the
organisation’s credit appetite and the acceptable level of risk-reward trade-off for its activities.

48. 48
 The strategy would, therefore, include a statement of the bank’s willingness to grant
loans based on the type of economic activity, geographical location, currency, market,
maturity and anticipated profitability. This would necessarily translate into the
identification of target markets and business sectors, preferred levels of diversification
and concentration, the cost of capital in granting credit and the cost of bad debts.
 The credit risk strategy should provide continuity in approach and also take into account
the cyclical aspects of the economy and the resulting shifts in the composition/ quality of
the overall credit portfolio. This strategy should be viable in the long run and through
various credit cycles.
Senior management of a bank shall be responsible for implementing the credit risk strategy
approved by the Board.

49. 49
CHAPTER 5
FINDINGS AND CONCLUSION
 Project findings reveal that SBI is sanctioning less Credit to agriculture, as compared with
its key competitor’s viz., Canara Bank and Syndicate Bank.
 Recovery of Credit: Credit recovery of SBI during the past few years is increasing
gradually, which indicates SBI ‘s recovery policy is very good, hence this reduces NPA.
 Total Advances: As compared total advances of SBI is increased year by year.
 State bank Of India is expanding its Credit in the following focus areas:
1. SBI Recurring Deposits
2. SBI Housing Loan
3. SBI Car Loan
4. SBI Educational Loan
5. SBI Personal Loan
6. SBI Term Deposits
 In case of indirect agriculture advances, SBI is granting 3.1% of Net Banks Credit, which
is less as compared to Canara Bank, Syndicate Bank and Corporation Bank. SBI has to
entertain indirect sectors of agriculture so that it can have more number of borrowers for
the Bank.
 SBI’s direct agriculture advances as compared to other banks is 10.5% of the Net Bank’s
Credit, which shows that Bank has not lent enough credit to direct agriculture sector.
 Credit risk management process of SBI used is very effective as compared with other
banks.

50. 50
CONCLUSION
The project undertaken has helped a lot in gaining knowledge of the credit policy and credit risk
management in State Bank of India. Credit Policy and Credit Risk Policy of the Bank has
become very vital in the smooth operation of the banking activities. Credit Policy of the Bank
provides the framework to determine (a) whether or not to extend credit to a customer and (b)
how much credit to be extended. The Project work has certainly enriched the knowledge about
the effective management of credit policy and credit risk management in banking sector.
In pursuance of the instructions and guidelines issued by the Reserve Bank of India, the State
bank Of India is granting and expanding credit to all sectors. The concerted efforts put in by the
Management and Staff of State Bank Of India has helped the Bank in achieving remarkable
progress in almost all the important parameters. The Bank is marching ahead in the direction of
achieving the Number-1 position in the Banking Industry.

51. 51
CHAPTER 6
RECOMMENDATIONS
 SBI is complying with the credit policy guidelines issued by RBI and it should maintain
it in the same pace.
 SBI’s lending capacity is better than the other top performing private and public sector
banks like Canara bank, IDBI, Syndicate bank, etc. but it should also keep into
consideration of the risk factors involved in lending loans. By considering the risk factor
it would be able to control or reduce its bad loans.
 Banks has to grant the loans for the establishment of business at a moderate rate of
interest, because of this, the people can repay the loan amount to bank regularly and
promptly.
 Bank should not issue entire amount of loan to agriculture sector at a time, it should
release the loan in installments. If the climatic conditions are good then they can release
remaining amount.
 The manager should keep on revising its Credit Policy, which will help Bank’s effort to
correct the course of the policies. The Chairman and Managing Director/Executive
Director should make modifications to the procedural guidelines required for
implementation of the Credit Policy as they may become necessary from time to time
because of organizational needs.

52. 52
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