A Project Report of t.v.haripriya

8/2/2019 A Project Report of t.v.haripriya

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A PROJECT REPORT

ON

RISK ASSESSMENT THROUGH IPO OF

BANK OF MAHARASHTRA.

SUBMITTED

BY

MS. T.V.HARIPRIYAMBA-II ( FINANCE+SYSTEMS)

UNDER THE GUIDANCE

OF

JAYANT OKE ASHOK.Y.SHEDSHALE

PUMBA Bank of Maharashtra

IN PARTIAL FULFILLMENT OF THE


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REQUIREMENTS FOR THE AWARD OF DEGREE

OF MASTERS OF BUSINESS ADMINISTRATION

DEPARTMENT OF MANAGEMENT SCIENCES

UNIVERSITY OF PUNE(PUMBA)

* (2005-2007) *


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Department of Management Sciences (PUMBA)

University of Pune

CERTIFICATE

This is to certify that the Summer Project report titled RISK

ASSESSMENT THROUGH IPO OF BANK OF

MAHARASHTRA. carried out at Lokmangal ,the central office

of Bank of Maharashtra Pune, has been submitted by Ms.

T.V.Haripriya, 2nd yearMBA Finance with additional in Systems

student of The Department of Management Sciences (PUMBA),

University of Pune, towards the partial fulfillment of the

requirement for the award of the Masters in BusinessAdministration (MBA) and the same has been satisfactorily

carried out under the guidance of JAYANT OKE during the

academic year 2005 - 2007.

Jayant Oke External Anil KeskarInternal Guide Examiner Head of Department

PUMBA PUMBA


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Acknowledgement

I take this opportunity to express my deep sense of gratitude and whole hearted thanks to MrAshok.Y.Shedshale of Bank of Maharashtra for giving me this opportunity to work as a

summer trainee. I wish to express my sincere thanks to the staff of Bank of Maharashtra for

their cooperation in this project.

I also like to express my indebtedness to Dr. Anil Keskar, Head of the Department,

PUMBA, Pune University and my internal guide Mr Jayant Oke for their constructive

cooperation, keen interest in the project and encouragement throughout the work .

T.V.HARIPRIYA

Table of content


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INTRODUCTION,. 01

1.1 Risk in banking business . .... 01

1.2 Profile of organization ........ 02

2.0 RESEARCH METHODOLOGY....04

2.1 Objective of the research04

2.2 Research approach 04

2.3 Data sources.. 04

2.4 Research on IPO 05

2.5 Why IPO.. .06

2.6 Basle committee. .. 08

3.0 THEORETICAL BACKGROUND 11

3.1 What is risk 11

3.2 Types of risk in banking sector............................................... 12

3.3 Risk management process.. 15

3.4 Essential components of risk management system 17

3.5 Regulatory initiatives by RBI.. 19

3.6 Types of risks21

3.6.1 Market risk.22

3.6.2 Credit Risk. 23

3.6.3 Operational risk 23

3.7 Role of management and.risk takers 24

3.8 Benefits of risk analysis and management25

4.0 Key finding ,analysis and interpretation......26

5.0 Conclusion and Recommendations 32

6.0 Bibliography 33

1.0 INTRODUCTION


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1.1 RISK IN BANKING BUSINESS

Banking in simple words is mobilisation of resources for deploying into assets to

generate optimum returns. Naturally ,there is an element of risk in such operation that needs

to be identified, measured, monitored and controlled.Assets or liabilities,both are prone to

risk. This calls for a robust risk management framework in banking business.

In the era of globalisation and liberalization of the economy and the resultant economic

scenario in India, risk has become inherent in any commercial activity owing to integration

of world economy and the increasing competition in market place. The plethora of financial

products, the advancements in technology and the multi channel delivery systems in modernbanking context have altered the landscape of banking and has brought the risk management

issues to the forefront.

The major types of risk are credit risk, interest rate risk, liquidity risk, foreign exchange

risk, operational risk, regulatory risk, reputational risk, equity price risk, commodity price

risk and legal risk.

1.2 ABOUT BANK OF MAHARASHTRA


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The Birth

Registered on 16th September 1935 with an authorized capital of Rs 10.00 lakh and

commenced business on 8th Feburary 1936.

The Childhood

Known as a common man's bank since inception, its initial help to small units has given birth

to many of today's industrial houses. After nationalization in 1969, the bank expanded

rapidly. It now has 1292 branches all over India. The Bank has the largest network of

branches by any Public sector bank in the state of Maharashtra.

The Adult

The bank has fine tuned its services to cater to the needs of the common man and

incorporated the latest technology in banking offering a variety of services.

Philosophy

Technology with personal touch.

Emblem

The Deepmal

With its many lights rising to greater heights.

The Pillar


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Our institution- Symbolising strength.

The Diyas

Our Branches- Symbolising service.

The 3 M's

Symbolising

Mobilisation of Money

Modernisation of Methods and

Motivation of Staff.

Aims

The bank wishes to cater to all types of needs of the entire family, in the whole country. Its

dream is "One Family, One Bank, Maharashtra Bank".

The Autonomy

The Bank attained autonomous status in 1998. It helps in giving more and more services with

simplified procedures without intervention of Government.

Our Social Aspect

The bank excels in Social Banking, overlooking the profit aspect; it has a good share

of Priority sector lending

2.0 RESEARCH METHODOLOGY


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2.1 Objective of the research

a) To know the types of risks involved in Banking sector .b) To study the risk management policy of the Bank of Maharashtra.

c) To find out how the bank assess and evaluate risk .

d) To compare Bank of Maharashtras performance with its peers.

2.2 Research Approach

In this project the data was mainly collected through secondary sources i.e data from

SEBI guidelines, banks internal data, journals, periodicals etc.

2.3 Data sources

Primary data:

For this type of data it was requisite to have a one-on-one interrogative conversation with

various representatives wherein information of their existing schemes was obtained

Secondary data:

i) Various books and relevent guidelines which are issued by SEBI.

ii) Existing information available at Bank of Maharashtra.

iii) Websites as detailed in bibliography .


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2.4 Research on IPOs

The Initial Public Offering (IPO) is particularly significant in that it usually marks the

transition between a start-up company and a successful venture. The prospectus issued by a

company planning to go public is designed to provide potential investors with relevant

information about the company as well as supplementary details about the investment

opportunity.

For the purposes of this research, the key section of an IPO prospectus is the listing

and description of Risk Factors are taken into consideration. A company issuing an IPO

prospectus is required by SEBI regulations and laws to delineate all known risks that the

company faces or will potentially face. When a company issues an IPO, attorneys and

underwriter agents conduct an intensive review of the company to determine all relevant

risks. The Risk Factors section serves to protect the company and issuing underwriters from

liability in the event that the company fails after the stock is issued. Since the parties

involved in the issue can be held legally liable if it fails to list any known risk, or any risk for

which it can be shown that the company should have known, there is a strong incentive to be

as accurate and complete as possible. For these reasons, the information on risk factors

contained in a prospectus should be more reliable and comprehensive than could be

collected by standard approaches such as surveys and interviews.

2.5 WHY IPO?


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One of the most important determinants of the success of a business is the nature of

the risks it confronts. Firms deal with risks of varying importance and understanding the

relative significance of these risks is crucial for developing effective strategies to deal with

them .The key driver in managing all business lines are enhancing risk adjusted expected

return. This is the common factor for all business lines.

But management practices vary across business lines and subgroups and activities

within each business lines as profitability of various business line/activities differ and so does

the risk factors associated with them. To model how firms perceive and subsequently deal

with risk, organizational researchers must identify the risks found in an organizational field.

To do so, identification and categorization of these risks requires both quantitative and

qualitative information.In this project the focus is at the stage in which companies make the

transition from being a private company to being a public company, that is, when a firm

issues its initial public offering (IPO).

We adopt this focus for several reasons:

Firms at the IPO stage have generally been operating long enough that they have

had a chance to experience the types of risks faced by even much older

companies.

Firms at this transition point are young enough that they are still operating in

highly uncertain environments. Firms at this stage are typically in a period of

rapid growth.


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Third, these firms are going through a highly institutionalized process, which

makes it feasible to study them systematically.

Firms going public have a unique source of data. A prospectus prepared for an

initial public offering has a wealth of data, and there is a strong legal incentive to

make it as complete and accurate as possible.

2.6 BASLE COMMITTEE:

One of the core activities of the regulators is proper supervision of the system. The Basle

committee had set certain guidelines for the bank supervisors. The Reserve Bank of India

had set up an advisory committee under the chairmanship of M S Verma and the committee

had submitted its report in May 2001. The committee recommended corporate governance,

internal controls, risk management, loan accounting transparency and disclosures, financial

conglomerates and cross border banking supervision. The supervisor should provide a safety

net to the financial system.

It is a committee of banking supervisory authorities, which has established by the Central

bank Governors of the group of Ten countries in 1975. It consists of senior representatives of

bank supervisory authorities and central banks from: Belgium, Canada, France, Italy, Japan,

Luxembourg, Netherlands, Switzerland, Sweden, UK and USA. It usually meets at the Bank

for International settlements in Basle, where its permanent secretariat is located.

The committee has stipulated in the five sections, the following eleven principles for banking

supervisory authorities to apply in assessing bank's management of interest rate risk.

Principle-1

Board of Directors, should approve strategies and policies with respect to interest rate, risk


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management and ensure that senior management takes the steps necessary to monitor and

control these risks.

Principle-2Senior management must ensure that appropriate policies/procedures/ resources are available.

Principle-3

Banks should clearly define the individuals/committees responsible for managing interest

rate risks. Larger/complex Banks should have independent unit for administration/design of

Banks interest rates/risk measurement, monitoring and control functions.

Principle-4

Banks interest rate, risk policies and procedures be clearly defined and consistent with nature

and complexity of their activities. Policies should be applied on the consolidated basis.

Principle-5

New products/activities to be introduced subject to adequate procedures and controls.

Principle-6

Assumptions underlying the system should be clearly understood by risk managers and Bank

management.

Principle-7

Banks must establish and enforce operating limits and other practices that maintain exposures

within levels consistent with their internal policies.

Principle-8

Banks should measure their vulnerability to loss under stressful market conditions including

the breakdown of key assumptions and consider their results at the time of review of policies.


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Principle-9

Banks must have adequate information systems for measuring, monitoring, controlling and

reporting interest rate exposures.

Principle-10

Banks must have an adequate system of internal controls i.e. regular independent reviews and

evaluations.

Principle-11

Supervisory authorities should obtain from banks sufficient and timely information.


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Basel II Encompasses enterprise risk

Minimum

CapitalRequirement = 8% ofRisk-weighted

Exposures

Market Risk

No Change MajorChanges

New elementadded

Risk of losses in onand off balance sheetpositions arising frommovements in market

prices

Credit Risk

Potential that a bankborrower or

counterparty will failto meet its obligations

in accordance withagreed terms

OperationalRisk

Risk of direct orindirect loss resultingfrom inadequate or

failed internalprocesses, people

and systems orexternal events

PILLAR 1

Minimum CapitalRequirements

PILLAR 2

Supervisory

Review

PILLAR 3

MarketDiscipline

Risk WeightsDefinition of

Capital

Credit RiskOperational

RiskMarket Risk

StandardizedApproach

Internal RatingsBased Approach

AssetSecuritization

Basic IndicatorApproach


AdvancedMeasurement

Approach

FoundationApproach

AdvancedApproach


Internal RatingsBased Approach

AlternateStandardized

Approach

Balance the flexibilityand freedom given to

banks


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3.0 THEORETICAL BACKGROUND

3.1 WHAT IS RISK?

Risks are uncertainties resulting in adverse outcome ,adverse in relation to planned

objective or expectations. Financial risks are uncertainties resulting in adverse variation of

profitability or outright losses.

The financial sector especially the banking industry in most emerging economies

including India is passing through a process of change. As the financial activity has become a

major economic activity in most economies, any disruption or imbalance in its infrastructure

will have significant impact on the entire economy. By developing a sound financial system,

the banking industry can bring stability within the financial markets.

Deregulation in the financial sector had widened the products range in the developed

markets. Some of the new products introduced are structured transaction, credit cards,

housing finance, derivatives and various off balance sheet items. Thus new vistas have

created multiple sources for banks to generate higher profits than the traditional financial

intermediation. Simultaneously they have opened new areas of risk also. Many unknown

issues that are intricately related to new products have exposed banks to various risks across

the globe and India is no exception.

During the past decade, the Indian banking industry continued to respond to the emerging

challenges of competition, risks and uncertainties. Risks originate in the forms of customer

default, funding a gap or adverse movements of markets. Measuring and quantifying risks is

neither easy nor intuitive. The regulators have made some sincere attempts to bring

prudential and supervisory norms conforming with international bank practices with an

intention to strengthen the stability of the banking system.


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3.2 TYPES OF RISKS IN BANKING

Banks in general face the following risks:

Operational risk

Market risk

o Liquidity

o Foreign Exchange

o Interest rate

o Commodity price risk

o Equity price risk

Credit Market

Transaction

Portfolio

The industry has undergone drastic changes in the last three decades. Horizontal

expansion of the financial markets, deregulation across the globe in financial markets and

stiff competition have led the banks to multiply their activities. Increased activities in the

industry have exposed the banks to more uncertainties and more risks.


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RISKS IN BANKING BUSINESS


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BUSINESS LINES SUBGROUPS ACTIVITIES

Corporate finance Merchant banking advisory

services, corporate financemunicipal.

Mergers and acquisitions,

underwriting, research debtand equity syndications,IPO.

Trading and sales Sales, market making. Fixed income ,equity.

Retail banking Retail banking

Private banking

Retail lending and

deposits,banking services.

Private lending anddeposits.

Payment and settlement External clients Payment and collection

Agency services Custody Escrow, depository receipts

Retail brokerage Retail brokerage Execution and full service.

The key driver in managing all business lines are enhancing risk adjusted expected

return. This is the common factor for all business lines . But management practices vary

across business lines and subgroups and activities within each business lines as profitability

of various business line/ activities differ and so does the risk factors associated with them.


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3.3 RISK MANAGEMENT PROCESS

Risk management is a process by which an organization ,say a bank

identifies,measures,monitors and controls its risk exposures.risk management is a continuous

process and not a one time activity.

Generally, Risk Management is the process ofmeasuring, orassessingriskand then

developing strategies to manage the risk. ,The manner in which a risk analysis is performed

varies from project to project,but regardless of it is carried out the result is always an

overview of the most important risk factors and the possible measures to control them

In ideal risk management, a prioritization process is followed whereby the risks with

the greatest loss and the greatestprobability of occurring are handled first, and risks withlower probability of occurrence and lower loss are handled later.

In general, the strategies employed include:

Transferring the risk to another party

Avoiding the risk

Reducing the negative effect of the risk, and

Accepting some or all of the consequences of a particular risk.
http://en.wikipedia.org/wiki/Measurementhttp://en.wikipedia.org/wiki/Risk_assessmenthttp://en.wikipedia.org/wiki/Riskhttp://en.wikipedia.org/wiki/Riskhttp://en.wikipedia.org/wiki/Strategyhttp://en.wikipedia.org/wiki/Losshttp://en.wikipedia.org/wiki/Probabilityhttp://en.wikipedia.org/wiki/Risk_assessmenthttp://en.wikipedia.org/wiki/Riskhttp://en.wikipedia.org/wiki/Strategyhttp://en.wikipedia.org/wiki/Losshttp://en.wikipedia.org/wiki/Probabilityhttp://en.wikipedia.org/wiki/Measurement


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THE ESSENTIAL COMPONENTS OF ANY RISK MANAGEMENT SYSTEM ARE

Enterprise Risk Management Framework

Internal Environment

Monitoring

Information

and

Communication

Risk

Response

Risk

Assessment

Objective

Setting

Event

Identification

Control

Procedures


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ESTABLISH THE CONTEXT:

Establishing the context includes planning the remainder of the process and

mapping out the scope of the exercise, the identity and objectives of stakeholders, the basis

upon which risks will be evaluated and defining a framework for the process, and agenda for

identification and analysis.

(i) Risk Identification-

The naming and defining of each type of risk associated with a transaction or

type of product or service.After establishing the context, the next step in the process of

managing riskis to identify potential risks. Risks are about events that, when triggered, will

cause problems. Hence, risk identification can start with the source of problems, or with the

problem itself.

Source analysis:

Risk sources may be internal or external to the system that is the target of risk

management. Examples of risk sources are: stakeholders of a project, employees of a

company

Problem analysis:

Risks are related to identified threats. For example: the threat of losing money,

the threat of abuse of privacy information or the threat of accidents and casualties. The

threats may exist with various entities, most important with shareholder, customers and

legislative bodies such as the government.

The chosen method of identifying risks may depend on culture, industry practice and

compliance.

.
http://en.wikipedia.org/wiki/Riskhttp://en.wikipedia.org/wiki/Risk


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RISK ASSESSMENT:

Once risks have been identified, they must then be assessed as to their potential severity

of loss and to the probability of occurrence. These quantities can be either simple to

measure, in the case of the value of a lost building, or impossible to know for sure in

the case of the probability of an unlikely event occurring. Therefore, in the

assessment process it is critical to make the best educated guesses possible in order to

properly prioritize the implementation of the risk management plan.

Risk assessment should produce such information for the management of the

organization that the primary risks are easy to understand and that the risk management

decisions may be prioritized.

The most significant factor in risk management seems to be that

1.) risk assessment is performed frequently and

2.) it is done using as simple methods as possible

Risk Measurement-

The Risk Measurement is estimation of the size, probability and timing of potential loss

under various scenarios

Risk Control-

The framing of policies and guidelines that define the risk limits not only at the

individual level but also for particular transactions
http://en.wikipedia.org/wiki/Risk_assessmenthttp://en.wikipedia.org/wiki/Risk_assessment


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3.5 Regulatory Initiatives taken by RBI

The regulatory initiatives taken by the Reserve Bank of India include:

Ensuring that the banks have suitable risk management framework oriented

towards their requirements dictated by the size and complexity of business, risk

philosophy, market perceptions and the expected level of capital. The framework

adopted by banks would need to be adaptable to changes in business size, market

dynamics and introduction of innovative products by banks in future.

Introduction of Risk Based Supervision (RBS) in 23 banks on a pilot basis.

Encouraging banks to formalize their Capital Adequacy Assessment Programme

(CAAP) in alignment with business plan and performance budgeting system.This, together with adoption of Risk Based Supervision would aid in factoring the

Pillar II requirements under Basel II.

Enhancing the area of disclosures (Pillar III), so as to have greater transparency

Building capacity for ensuring the regulators ability for identifying and

permitting eligible banks to adopt IRB / Advanced Measurement approaches.


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Claims on banks

The claims denominated in Indian Rupees on banks operating in India will be risk weighted

as under:

(i) All exposures to scheduled banks, will be assigned a risk weight one

category less favourable than the Sovereign. Hence all claims on these

banks will be risk weighted at 20%.

(ii) All exposures on other banks will be assigned a risk weight of 100%.

The claims denominatedin foreign currency on banks will be risk weighted as under as perthe ratings assigned by international rating agencies.

Credit

Assessment of

S &P

AAA

to AA-

A+ to

A-

BBB+

to

BBB-

BB+ to

B-

Below

B-

Unrated

Moodys Aaa

to

Aa

A Baa Ba

to

B

Below

B

Risk weight 20 % 50 % 50 % 100 % 150 % 50 %

However, the claims denominated in foreign currency on a bank which is funded in that

currency will be risk weighted at 20%.


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3.6 TYPES OF RISKS:

Risk Types in Banking

There are two t ypes of influnces that cause variations in returns-the external and internal

influences.external influences to a firm or a company cannot be controlled.on the other hand

the internal influences which can be controlled to a large degree.

1) SYSTEMATIC RISKS:

In investments those forces that are uncontrollable ,external and broad in their effect are

called sources of systematic risk.Economics , political and sociological changes rae sources

of systematic risk.

2) UNSYSTEMATIC RISKS:

It is that portion of the total risk that is unique or peculiar to a firm or an industry.

The risks can be categorized as:

3.6.1 MARKET RISK

This risk arises from adverse changes in market variables such as interest rates,forex rates

,equity price and commodity price. Even a small change in these variables can cause

substancial changes in the income and economic value of the bank.


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Market Risk takes the following forms:

Liquidity Risk:

Liquidity is the ability to meet commitments as and when they are due and ability toundertake new transactions when they are profitable.Liquidity risk may emanate in any of

the following situations-

(a) Net outflow of funds arising out of withdrawals/non renewal of deposits

(b) Non recovery of cash receipts from recovery of loans

(c) Conversion of contingent liabilities into fund based commitment.

(d) Increased an ailment of sanctioned limits

Interest Rate Risk:

This risk arises due to fluctuations in the interest rates. It can result in reduction in the

revenues of the bank due to fluctuations in the interest rates which are dynamic and which

change differently for assets and liabilities. With the deregulated era interest rates are

market determined and banks have to fall in line with the market trends even though it may

stifle their Net Interest margins

Foreign Exchange Risk :

Risk may arise on account of maintenance of positions in forex operations and it involves

currency rate risk, transaction risks (profits/loss on transfer of earned profits due to time lag)

and transportation risk (risks arising out of exchange restrictions)

Cmmodity price risk:

Commodity price risk is defined as the probability of loss associated with the dealings of a

commodity .eg.agricultural products,oil.


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Euity price risk:

Equity price risk is the probability of loss due to changes in equity price

3.6.2 CR EDIT RISK:

This is the risk of non recovery of loan or the risk of reduction in the value of asset. The

credit risk also includes the pre-payment risk resulting in loss of opportunity to the bank to

earn higher interest income. Credit Risk also arises due excess exposure to a single borrower,

industry or a geographical area. The element of country riskis also present which is the risk

of losses being incurred due to adverse foreign exchange reserve situation or adverse political

or economic situations in another country.

Technology Risk:

This risk is associated with computers and the communication technology which is being

increasingly introduced in the banks. This entails the risk of obsolescence and the risk of

losing business to better technologically

Strategic Risk:

This is the risk arising out of certain strategic decisions taken by the banks for sustaining

themselves in the present day scenario for example decision to open a subsidiary may run

the risk of losses if the subsidiary does not do good business.

3.6.3 OPERATIONAL RISK:

Operational risk in bank arises due to failure of integrated systems in highly automated

technology,internal control external frauds and security issues in E-commerce, risk

in outsourcing, mergers and legal or other risk arising out risk mitigation s of market and

credit risks.


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Regulatory risk:

It is the risk of loss arising out of failure to comply with regulatory or legal requirement

in the relevant jurisdiction in which the bank operates.this may even lead to loss of license to

operate a banking company.

Reputaional risk:

It is the risk of loss of reputation faced by bank on account of any act of commision or

omission on part of the bank or its employees or on account of any adverse publicity in any

of the print or visual media or otherwise.

Legal risk:

It arises when there is likelihood pf the banks legal right being adversly afevted and

when the bank would not be in a position to enforce a contract against another party.

3.7 Role of Management, Risk Takers Within the Banks,

Supervisory Authorities

Managements priority will be to ensure that they comply with the regulators

requirements at best cost and risk to the bank.

Senior officers will need to look at the risk model frequently with a good technical

understanding. Such feedback and involvement bodes well for the integration of

modeling and compliance with the process of risk management in the bank.

However the dilemma faced by banks in the face of mandatory compliance with the

new Basel accord is the level of capital adequacy.


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Regulators minimum must be kept with a pool of risks which give the best

cost/benefit trade off. Anything in addition for safety would constraint growth and

limit risk taking.

To limit the adverse impact of a high level of capital adequacy, a reality check with

actual market conditions or in the alternative, a stress testing to verify the potential

losses in situations of high event risk must be performed to optimize capital and meet

regulators requirements.

3.8 BENEFITS OF RISK ANALYSIS AND RISK MANAGEMENT:

The benifts of Risk Analysis and Risk management are as follows:

Perceptions of risk can be better defined.

Actions taken inside and outside the organisation can be communicated in a better

manner and thus it improves credibility of plans.

Risks that occur very often reations to theses situations lead to better contingency

planning.

Whenn ways of preventing or avoiding risks are found out ,it provides afeedback into

the desiging and planning process.

Responsible selection and contingency planning in a sort of feed-forward into the

construction and operation of projects for mitigating the impact of risks.

Project exposure to risks can be reduced and the experience provides insight,

knowledge and confidence for better decision making.


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4.0 KEY FINDINGS, ANALYSIS AND INTERPRETATION

NAME OF THE BANK: BANK OF MAHARASHTRA

1)ORGANISATION

- MAJOR INDUSRY: Financial

- SUB INDUSTRY: Commercial banks

2)STRUCTURE

-SHAREHOLDING PATTERN :

promoters holding : 76.77%

non-promoters holding : 4.93%

others : 18.30 %

-GEOGRAPHICAL SPREAD AND BRANCH NETWORK:

The bank operates through 1291 branch offices,31 extension counter in 22states and 2

union territories.

Of this 600 branches would be covered under the Core Banking Solution by

December 2007 covering 85 per cent of the business.

The bank would be opening another 37 branches across the country by March 31.


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Concentrated presence:

BOM has around 72% of its branches located in just one state, i.e. Maharashtra.

While this signifies the Bank's strong presence in the western region, this

concentration is of concern as the bank is likely to miss out on growth opportunities

in other regions of the country.

Also, competition from private sector banks is rising, thus concentration in a single

region may be harmful in the long-term

3) BUSINESS PROFILE:

The groups principal activities are provide banking and other financial services to

corporate and private customers.

The bank offers personal banking, cash management, retail loans and other financial

services.

4) KEY ISSUES OF CONCERN

The net interest margin (NIM) was 2.7 per cent, below the industry average of above 3 per

cent.

This was due to the accounting policy for transfer of government securities from the

available for sale category to the held to maturity.

During the year, the bank has transferred about Rs 1,800-crore worth of securities

taking advantage of the RBI's provisions allowing for such transfers once every year.

The losses booked on account of this transfer was netted from interest earnings,

leading to a lower NIM.

If the bank had netted the amortisation amount from other income, the NIM would have been

3.3 per cent within the industry average.


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5) BALANCE SHEET TRENDS :

-CAPITAL : Rs.4305200.00

-ASSETS : Rs.312145137.00

-DEPOSITS : Rs.269061875.00

-BORROWINGS : Rs.4883804.00

-PROFITS :

There was a sharp drop in net profit growth.the net profit was down from 177cr in2004-05 to 51 cr in 2005-06.

Bank of Maharashtra's net profit for the second quarter of the current fiscal is Rs

61.29 crore

-NPAS:

.Poor operational efficiencies:

While NPAs has been a menace for the Indian banking sector, BOM's NPAs are a

bigger threat to its growth prospects. BOM's NPAs is much higher than those of its peers

in the public sector. To reduce these levels, the Bank would have to provide for higher

provisioning going forward, thus affecting its profitability.

Despite being a well established bank it scores low on the operational front

indicating that the bank may still be suffering from a PSU hangover


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Poor reports on operations:

A working group (Verma committee) was set up by the Reserve Bank (RBI) to assessweak and potentially weak banks. The committee concluded that BOM failed to

comply with certain parameters, for which it was categorized under the second

category of compliance.

BOM has also been pulled up by the RBI for flaws in its systems, which include areas

like asset classification, income recognition, provisioning and credit purposes. This

reflects poorly on the image of the bank

Potential for NPA reduction:

A significant part of BOM's investments have a maturity period of over 5 years, thus

indicating un-booked profits in its books. So the bank may be able to profit on these

investments going forward (assuming that interest rates remain stable) and hence it will be

able to provide aggressively for NPAs going forward

6) PEER GROUP ANALYSIS

The net and gross non-performing assets (NPAs) as a percentage of advances have also

come down for all commercial banks.

In the public sector:

Bank Net NPA %

Dena Bank 3Central Bank of India, Bank of

Maharashtra, Punjab & Sind Bank and

Uco Bank

2-3

13 other public sector banks < 1


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Only three banks net NPAs have risen during the year, that too marginally.

For instance, Punjab National Banks net NPA rose from 0.20 per cent to 0.29 per

cent

and that of Vijaya Banks from 0.59 per cent to 0.85 per cent.

In the case of State Bank of Indore, the net NPA level has almost doubled from 1 per

cent to 1.83 per cent, but on a very low base.

Public sector banks remained a drag with just 5.57 per cent growth in net profit

Nine public sector banks reported a drop in net profits and, in some cases, the slide

was very sharp. At least five of them saw a second successive drop in net profit

growth in as many years. These are Andhra Bank, Bank of Maharashtra, Central

Bank of India, Oriental Bank of Commerce, UCO Bank, United Bank India, Union

Bank, Vijaya Bank and State Bank of Bikaner & Jaipur

Private banking segment:

Bank Net NPA %

Seven private banks < 1

Eight private banks 1-2

Development Credit Bank 4.5

IndusInd Bank > 2

Note : private banks average net profit rose by over 41 per cent and that of foreign banks

by 54.76 per cent.

7) EXTENT OF COMPUTERISATION


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The bank is also in the process of computerization of all its branches, which is

likely to improve productivity further.

8) FUTURE PROSPECTS

Growth initiatives:

BOM has had a healthy record of business growth, especially advances over the

last five years (advances have recorded a CAGR of 22% in the last five years).

Its use of technology is also enabling it to offer a wider array of services to its

customers. However, implementation of various initiatives typically takes time in

public sector banks and hence achievement of targets may be sometime away.

Bank of Maharashtra has set a target to ensure that its business crossed over Rs

1.10 lakh crore by 2010, the bank had surpassed the business landmark of Rs

50,000 crore. Of the 1.10 lakh crore business, the deposits would be around Rs

65000 crore and advances Rs 45000 crores. The low cost deposits in total

deposits comprising 43 per cent reflected a strong growth performance of the

bank.

Various initiatives launched by the bank such as human resources development,

training and technology had yielded better results with regard to overall

performance of the bank.

Intend bringing down our non performing asset ratio down to 1 per cent .

Focus of the bank would be to raise low-cost resources. The low-cost resources

comprising CASA (Current and Savings Accounts) comprised 43 per cent of the

bank's working funds. Itintends to raise CASA to 45 per cent .

5.0. CONCLUSION AND RECOMMENDATIONS:


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Conclusion:

Skills for internal model development, testing and maintenance is inadequate and will

take considerable time to develop internally.

The banks would have to resort to external help and rethink their organizationalstructures and training of staff to gear their institutions up for compliance

Recommendations:

Following are the recommendations that I like to suggest regarding risk management in

bank.

Software up gradation in the existing software that calculate credit risk rating in the

bank.

Bank must have adequate information systems for measuring ,monitoring,controlling

and reporting liquidity risk.

Bank needs some changes in existing components of credit risk regarding

implementation of BASEL II in 2007.

Training should provide to the risk management department personnel.

Models should be changed or update by considering previous data or information.

There are four primary areas of internal controls:

1. organisational structures (definitions of duties and responsibilities, discretionary

limits for loan approval, and decision-making procedures);

2. accounting procedures (reconciliation of accounts, control lists, periodic trial

balances, etc.);

3. the "four eyes" principle (segregation of various functions, cross-checking, dual

control of assets, double signatures, etc.); and physical control over assets and

investments. The bank should improve upon these internal controls.

6.0 BIBLIOGRAPHY


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6.1 Books

Risk based internal audit in banks by D.P.Gupta and R.K.Gupta

Project risk management by D van well-stam,F Lindenaar,B van den bunt.

Bank Finance by H.R. Machiraju

Risk Management by S.B.Verma

Risk Management in Banking by Joel Basis

6.2 Websites

www.rbi.org.in

www.bankofmaharashtra.org.in
http://www.rbi.org.in/http://www.bankofmaharashtra.org.in/http://www.rbi.org.in/http://www.bankofmaharashtra.org.in/

A Project Report of t.v.haripriya

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