Credit risk management3
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A STUDY ON CREDIT RISK MANAGEMENTAT SYNDICATE BANK IN PARTIAL FULFILLMENT OF THE REQUIREMENT FOR THE AWARD OF THE DEGREE MASTER OF BUSINESS ADMINISTRATION FROM OSMANIA UNIVERSITY SUBMITTED BY DVR POST GRADUATE INSTITUTE OF MANAGEMENT STUDIES 1
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Transcript of Credit risk management3
A STUDY ON
CREDIT RISK MANAGEMENTAT
SYNDICATE BANK
IN PARTIAL FULFILLMENT OF THE REQUIREMENT FOR THE AWARD OF THE
DEGREE
MASTER OF BUSINESS ADMINISTRATION
FROM
OSMANIA UNIVERSITY
SUBMITTED BY
DVR POST GRADUATE INSTITUTE OF MANAGEMENT
STUDIES
KANDI, SANGAREDDY. 2009-2011
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ACKNOWLEDGEMENT
I would like to express my gratitude to our college Principal
Mr.D.SRINIVASULU or having given me the opportunity to work on this
project. It is indeed a great pleasure and a matter of immense satisfaction
for me to express my deep sense of gratitude and Indebtness to
Ms.Subbalakshmi (Head of Department of Business Administration) and my
college lecturers for the continuous support they have given me.
This project would not have been possible without efforts and guidance of a
KRISHNA MURTHY of SYNDICATE BANK HYDERABAD. I take opportunity to
time all those magnanimous persons who rendered their support to this
project.
I would like to thank my project external guide, Ms.SUBBALAKSHMI for his
expert guidance and continuous guidance which lead to successful
completion of this project.
I am thankful to my friends for sharing technical expertise with me in making
this project successful.
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DECLARATION
I hereby declare that this project titled CREDIT & RISK MANAGEMENT
with reference to SYNDICATE BANK submitted here is genuine and original
work of mine.
This project report is submitted in partial fulfillment of the requirement for
the award of MASTER OF BUSINESS ADMINISTRATION degree from D V
R COLLEGE OF POST GRADUATE INSTITUTE OF MANAGEMENT
STUDIES, KANDI, HYDERABAD, for the year 2009-2009.
I also declare that this is result of my own efforts and has not been submitted to any other university for any other degree of diploma.
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CONTENTS PAGE NO.
CHAPTER I PROFILE OF BANKING INDUSTRY 5-7
CHAPTER II INTRODUCTION 8-13
DESIGN OF STUDY
1. OBJECTIVES
2. NEED & IMPORTANCE
3. METHODOLOGY
4. SCOPE
5. LIMITATIONS
CHAPTER III ORGANISATION PROFILE 14-36
PROFILE OF KOTAK MAHINDRA BANK
TAXOMONY OF PERSONAL FINANCE
CHAPTER IV INTRODUCTION OF CREDIT & RISK 37-56
1. IMPORTANCE OF CREDIT & RISK
2. LEGAL ASPECTS OF RISK MANAGEMENT
CHAPTER V FINDINGS AND ANALYSIS 57-77
CHAPTER VI CONCLUSSION AND SUGGESTIONS 78-79
ANNEXURES 80-85
BIBLIOGRAPHY 85-89
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INTRODUCTION
INTRODUCTION
Finance may be defined as the “provision of money at the time it is
required”. Finance refers to the management of flows of money through an
organization. It concerns with application of skills in the manipulation, use
and control of money.
Financial management refers to that part of the management activity which
is concerned with the planning and controlling of firm’s financial resources. It
deals with finding out various sources for raising funds for the firm. The
sources must be suitable and economical for the needs of the business. The
most appropriate use of such funds also forms a part of financial
management.
The main objectives of finance function are:-
1 Acquiring sufficient funds.
2 Optimum utilization of funds.
3 Increasing profitability.
4 Maximizing shareholders wealth.
In the present business context, a finance manager is expected to do
financial forecasting and planning .Financial manager has to plan the funds
needed in the future. How these funds will be acquired and applied is an
important function of a finance manager. The sources of supply of funds are
shares, debentures, financial institutions, commercial banks, etc. The pros
and cons of various sources should be analyzed before making a final
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decision.
The cost of acquiring funds and the returns should be compared.
Capital budgeting technique is used for this purpose. The objective of
maximizing profits will be achieved only when funds are efficiently used and
they do not remain idle at any time. A number of mergers and consolidations
take place in present competitive Industrial world. A finance manager is
supposed to assist management in making valuation etc. For this purpose,
he should understand various methods of valuing shares and others assets
so that correct values are arrived.
Cash is the best source for maintaining liquidity. It is required to purchase
raw material, pay workers, meet other expenses, etc. A finance manager is
required to determine the need for liquid assets and then arrange liquid
assets in such a way that there is no scarcity of funds.
DESIGN OF STUDY
Kotak Mahindra Bank personal loans are the largest business in the bank.
The personal loan business is doubling every year. It is the most profitable
business of the bank. Personal loans contribute substantially to the overall
base line of the bank.
Credit department is the back bone of personal loan business. Main
function of the credit is to assess the credit worthiness of an applicant and
lending him appropriate amount based on such assessment and subject to
the terms, conditions and limitations of the policies.
The term credit management has got importance from the time when there
increased the pressure of competition and force of custom persuades to sell
on credit. Credit is granted to facilitate the sales. Credit is appealing to those
customers who cannot borrow from other sources due to many reasons. The
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firm’s investment in accounts receivable depends on how much it sells on
credit and how long it takes to collect receivables. Accounts receivables
constitute one of most important asset category for firm which makes the
firm to manage its credit well.
The term credit management can be analyzed from various aspects like:
Terms of payment, Credit policy variables, Credit evaluation, Credit granting
decision.
Risk management is a process of managing the collection of managing the
collection of liabilities with an objective of increasing the cash flows with
minimum costs. It involves collecting in right time, right amount, in right
terms.
This process starts from identifying the amount of liabilities and to make
the collection successful. This does not end with mere collection. Besides
collection, the difficulties and weak areas should also be ascertained, which
leads to development of an effective system for credit extension or sales and
collection.
OBJECTIVES OF THE STUDY:
The main objectives of the study are:
1 To study the effectiveness of credit process.
2 To study the risk process followed in Syndicate bank.
3 To know and analyze the procedure of loan disbursement and its
evaluation criteria.
4 To study and analyze the factors contributing to default rate and their
interrelations.
5 To suggest suitable strategies for improving credit and risk
management.
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NEED & IMPORTANCE OF THE STUDY:
In today’s market scenario, one of the most critical areas to focus on is to
protect the bank from bankruptcy. In such conditions Credit and Risk
Department plays a key role in growth of banks. Any delay in realizing the
receivables would adversely affect the working capital, which in turn effects
the overall financial management of a firm. No firm can be successful if it’s
over dues are not collected, monitored and managed carefully in time. Thus
Risk management is important in sustaining the bank and its growth.
PERIOD OF STUDY:
The data obtained from the bank (syndicate bank) for the purpose of credit
period and risk time from the customers. The information of the customers
from different anglesto access the credit and risk management for a period
of THREE years. i.e. from 2007-2010.
Credit period refers to the length of the time are allowed to pay the amount
For their purchase which is generally varied from 15 to 60 days, or 15 to 90
days.
RESEARCH METHODOLOGY :
To fulfill the objectives of the study both primary and secondary data are
used. The primary data was collected through interviewing all the executives
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and officials of the KMBL Somajiguda Hyderabad.
The secondary data was collected from published records, website and
reports of the KMBL. Mainly the data relating to credit procedures followed
by the bank and risk management was obtained through manager from bank
database .The data for this purpose was obtained from bank for a period of 3
years that is from. Based on the availability of the data, the analysis was
made from different angles to assess the credit and risk management of
KMBL, Somajiguda Hyderabad.
SCOPE OF THE STUDY:
1 The study intended to cover the degree and extent of default by
the customers of KMBL. In that direction the following has been
done.
2 The genesis of the company, its organs. And the range of activities
have been studied and documented such study, it was thought,
would uncover the weakness brought down as legacy from its line
of entrepreneurs.
3 The process involved in loan disbursement has been studied to
identify the weak area, follies committed in disbursement or in the
design of disbursement process. The seeds of default are built in;
hence the study of loan disbursement process has been
attempted.
4 The profile of the defaulters including location, stage of default,
gender, age etc. has been studied and documented. The
components of the profile have been presumed to be linked to the
default.
5 The risk process itself has the potential for some loans to be non
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recoverable hence to identify the probable causes, the risk process
has been studied and documented.
6 Based on the profile and the data of defaulted loans, an analysis
has been made to establish the links between default and other
variables like location of loan, amount of loan taken, gender,
profession etc.
LIMITATIONS OF THE STUDY:
1 The study is limited to Hyderabad city only.
2 The study has been done according to bank point of view.
3 The study has been done without meeting the defaulters due to
constraints of time.
COMPANY PROFILE
THE PROFILE OF BANKING INDUSTRY
Financial institutions today face enormous challenges as they defend their place in
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market; ordinarily they are simple business oriented or commercial concerns. They need to
discover innovative ways to take on these challenges by making critical strategic insights and
emerging industry best practices, which strengthen approaches to fluctuating interest rates and
uncertain investment yields to produce increased profitability and reduce earning volatility.
A study of financial institutions in India can appropriately begin with a brief discussion of
the regulatory framework of the country carried out by RESERVE BANK OF INDIA.
Financial regulation is necessary to generate, maintain and promote confidence, trust and
faith of people for its smooth functioning. Financial markets involve intermediaries or agencies,
where RBI ensures investors protection, discloser to trustees, easy access, timely and adequate
information to interested parties.
RESERVE BANK OF INDIA as the central bank of the country is the center of the Indian
financial and monitory system. It is the oldest among the central banks in the developing
countries; it started functioning from April 1st 1935.
In framing various policies all the banks require to maintain close and continuous
collaboration with RBI and Government.
The preamble of RBI states that “Reserve bank is expedient to regulate the issue of bank
notes and keeping of reserves with a view to securing monetary stability in India and generally
to operate the currency and credit system of the country to its advantage”.
To elaborate the above statement, functions of RBI helps us to understand the clear
workings of financial system in INDIA.
Role and Functions of RBI:
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Note issuing authority
Government banker
Bankers bank
Exchange control authority
Security authority
Above functions of RBI are discussed as under.
NOTE ISSUING AUTHORITY:
The issue of currency note is one of the basic functions of RBI; the responsibility of the
bank is not only to put currency into or withdraw it from circulation but also to exchange notes
and coins of one denomination into those of other denomination as demanded by public. The
bank issues notes against the security of gold coins and gold bullion, foreign security, rupee
coins Government of India security, and bills of exchange and promissory notes as are eligible
for purchase by the bank. At present bank issues notes in denominations of Rs. 10, 20, 50, 100,
500, and 1000.
GOVERNMENT BANKER:
The RBI is the banker to the Central and State Governments. It provides all the banking
services such as accepting of deposits, withdrawal of funds by cheques, making payment as
well as receipts and collection of payments on behalf of the Governments. As a banker to the
Government, the bank can make “ways and means advances” to both Central and State
Governments. Type of advances provided are normal or clean advances, secured advances and
special advances.12
BANKERS BANK:
RBI called as Bankers Bank because of its special relationship with commercial and co-
operative banks and the major part of its business is with these kinds of banks. It controls the
volume of reserves and determines the deposits or credits creating ability of banks. RBI is also
said to be “bank of last resort or the lender of last resort”.
EXCHANGE CONTROL AUTHORITY:
RBI has to maintain the stability of the external value of the rupee. As far as external sector
is concerned, the task of RBI has (a) administer foreign exchange control, (b) chose exchange
rate system and fix the rate of rupee, (c) manage exchange reserves, (d) to interact with
monetary authorities such as IMF, World Bank and Asian Development Banks. The RBI
administers the exchange controls in terms of FOREIGN EXCHANGE MANAGEMENT ACT
(FEMA), 1973.
SECURING AUTHORITY:
The RBI has vast powers to supervise and control commercial and co-operative banks with
a view to developing adequate and sound banking system in the country. It has following
authorities (a) issue license to new banks (b) issue license to setting up bank branches (c) to
prescribe minimum requirement for paid up capital and reserves, transfer to reserve funds,
maintain cash reserves and control liquid assets (d) inspects working of banks in India as well as
in abroad, checks branch expansion, mobilization of deposits investment, credit portfolio
management, credit upraise system, profit planning etc (e) to conduct investigations into
complaints, irregularities and frauds in respect of banks (f) to control methods of operations,
appointments, reappointments, terminations of Chairmen and Chief Executive Officers of any
private sector banks (g) to approve or force amalgamation.
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INDIAN BANKS PROFILE:
RESERVE BANK OF INDIA (RBI)
NATIONAL BANK OF AGRICULTURAL AND RURAL DEVELOPMENT
(NABARD)
STATE STATE URBAN
CO-OPERATIVE LAND CO-OPERATIVE
BANKS (SCBs) DEVELOPMENT BANKS (UCBs)
CENTRAL
CO-OPERATIVE
BANKS (CCBs)
PRIMARY
AGRICULTURAL
CREDIT
SOCIETIES (PACSs)
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1.1 INDIAN BANK PROFILE
Total state co-operative banks (SCBs) till date are 28 banks.
Total primary agricultural credit societies under various CCBs are 2950.
TECHNOLOGY IN BANKING INDUSTRY:
The advent of the internet and the popularity of personal computers presented both an
opportunity and a challenge for the banking industry; hence online banking provides
numerous benefits to businesses and end-users.
In order to bypass the time-consuming, paper-based aspects of traditional banking,
online banking helps in using powerful computer networks to automate a number of
daily transactions and to manage finance more quickly and efficiently.
With the comfort of a mouse click online banking provides the comfort of managing the
finance by pay bills, transfer funds, file Government remittances and have investment
and loan facilities.
Online banking sites generally execute and confirm transactions quicker than ATM,
providing convenience of 24 hours a day and seven days week accessibility.
E-Banking has revolutionized the whole concept of Banking; it has become a necessary
weapon changing the banking industry worldwide.
The customer should be taken into confidence as far as security is concerned; banks
should extensively propagate the detailed security plan adopted to arrest frauds
through E-Banking.16
Banks have come to realize survival in the new E-Economy depends on delivering their
banking services on the internet while continuing to support their traditional
infrastructure providing good security and customer satisfaction will survive.
Standard for secure electronic transactions (SET) on internet helps in security measures,
digital authentication and verification of on-line identity in all E-Banking transactions,
which increase consumer confidence.
LATEST AMMENDMENTS OF RBI.
The RBI has cautioned against potential risk in the short and medium term on three key
factors (1) Growth rates flattening out in some key industries, (2) higher oil prices and
(3) continuing infrastructure constraints.
The RBI’s latest industrial outlook survey shows the current financial health of
corporate India increased by 2.6 %.
Demand for bank credit has been largely driven by agricultural, industry and housing
sector. Growth rate increased by 31.5 % compared to 24.9 % the preceding year.
The Reserve Bank Of India has signaled its policy of “inclusion” i.e., account with nil or
minimum balance requirement as well as charges that would make such accounts
accessible to vast sections of the population.
The RBI has granted general permission to banks to issue debit cards in tie up with
non-bank entities.
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The quality of assets of Indian banks is now increasingly converging towards
international benchmarks. The report on trends of banks in India by RBI.
Capital Adequacy Ratio (CAR) of banks, the most accepted measure of the soundness
has improved to 12.5 % which are higher, the better.
The RBI issued guidelines on credit cards operations of banks to issue and ensures that
there is on delay in dispatching bills. Unsolicited loans or other credit facilities should
not be offered.
In the major development for the banking sector, the Government recently threw open
the Asset Reconstruction companies (ARCs) to Foreign Direct Investment (FDI),
permitting 49 % in the equity capital of ARCs.
NATIONAL BANK FOR AGRICULTURAL AND RURAL DEVELOPMENT (NABARD)
NABARD was established on 12th July 1982 as a central or apex institution for financing
agricultural and rural sector.
The Government and the RBI subscribe NABARD paid-up capital of rupees 100 crores
equally.
NABARD is a co-coordinating agency, in respect of agricultural and rural development
activities or policies of the Central and State Government, Planning Commission and
other Institutions.
NABARD has set up Co-operative Development Fund (CDF) to improve management
systems and skills in co-operative banks.
NABARD supports rural credit system by way of refinancing for short-term, production,
marketing, medium-term and short-term loans relating to State Co-operative Banks
(SCBs) and Regional Rural Banks (RRBs)
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NABARD oversees the entire rural credit system and to that extent, it has taken over a
part of the job of the RBI.
NABARD provides term loans and investment credits, which are technically feasible and
financially viable on farm and non-farm sectors through SCBs and RRBs.
NABARD undertakes inspection of co-operative Banks and RRBs without prejudice to
the powers of the RBI.
NABARD provides loans to State Government to enable them to contribute them to the
share capital of SCBs and RRBs.
NABARD has established Research and Development (R&D) fund to provide insights
into the problems of agriculture and rural development through in-depth studies and
applied research with innovative experiments.
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BANK PROFILE:
ANDHRA PRADESH STATE CO-OPERATIVE BANK
Andhra Pradesh state co-operative bank (SYNDICATE) offers all types of banking service through its
26 banking offices including Head Office, 22 Branches, 2 Extension counters situated in the twin cities
and having branches at Tirupathi and Vijayawada.
The Bank actively guides the District Co-operative Bank (DCCBs) to withstand the stiff competition
encountered by them; greater emphasis was laid on the financial discipline at all levels in the
cooperative credit structure. The Bank has continued its efforts to provide increased financial assistance
to the farming community through the DCCBs and PACs by bridging the gap between the assistance
from NABARD and the credit requirements at the grass root level with its own resources.
The Government of Andhra basing on the recommendations of the Expert Committee restructured the
PACs bringing down their number from 4464 to 2746 in the State ensuring on PACs at Mandal level.
Elections are conducted to all three-tiers of the PACs after restructuring. Democratically elected
managements are in position at the PACs, DCCBs and SYNDICATE levels.
The Government of Andhra Pradesh has accepted and decided to implement the revival package offered
by the Government of India and accordingly entered into a memorandum of understanding with the
Government of India and NABARD.
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BOARD OF MANAGEMENT /COMMITTEE OF
ANDHRA PRADESH STATE CO-OPERATIVE BANK
2.1 TABLE
S. No. Names Representation
1. G.Sudheer, I.A.S
Principal Secretary to Govt
(coop. marketing)Dept.
Chairman
2. Dr.C.Uma Malleshwar Rao,I.A.S
CC & RCS
Member
3. R.Ramakrishnaiah, I.A.S
CC & RCS
Member
4. P.Ramana Reddy
CC & RCS
Member
5. T.S.Appa Rao,I.A.S
Principal secretary to Govt.
(Finance & R &D) Dept.
Member
6. J.R.Sarangal Member
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C.G.M. NABARD
7. V.Krishna Rao.
C.G.M.NABARD
Member
8. M.Veerabhadraiah, I.A.S
Managing Director SYNDICATE
Member
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PERFORMANCE HIGHLIGHTS DURING2008-2009:
State level best performance award for kharif 2007 lendings instituted by government of A.P.,
was awarded to the bank.
Own funds of the bank increased from Rs.1315.90 crores to Rs.1387.48 crores.
Borrowings of the bank increased from Rs.3123.52 crores to Rs. 4074.73 crores.
Disbursements under investment credit impressively increased from Rs.189.93 crores to
Rs.367.87 crores during the year under report registering an increase by 51.63 %.
The net profit during2008-2009 is Rs.5.70 crores compared to Rs.4.84 crores of the previous
year.
Investments portfolio of SYNDICATE has recorded an increase of 23.03% during the year and
stood at Rs. 785.82 crores.
The deposits of SYNDICATE as on 31.3.2006 stood at Rs.1697.15 crores.
The deposits of DCCBs stood at Rs. 2417.30 crores as on 31.3.2006, registering decrease due to
the prevailing adverse environment for cooperative banks.
The bank has been providing financial assistance to DCCBs and PACS for strengthening their
infrastructural facilities. During the year 2007-06, SYNDICATE released an amount of Rs.4.14
lakhs to three DCCBs out of its development fund.
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Disbursements under short term crop loans increased from Rs. 2317.15 crores to Rs. 2981.73
crores during the year under report registering an increase by 28.68%.
290 farmers clubs (VVV clubs) were established upto as on 31.3.2006.These clubs are
functioning as dissemination centers for credit and related activities.
The SYNDICATE training institute has conducted 578 programs, imparting training to 18,106
participants under NABARD assistance scheme from the year 2004-2007to2008-2009.
Under retail banking, gold loans increased to Rs. 69.12 crores during the year
2007-06 as compared to Rs. 48.36 crores in previous year.
Loans amounting to Rs. 802.29 crores were rescheduled covering Rs. 7.29 crores liquidity
support received from NABARD.
32,55,651 farmer member of PACS were covered under the cooperative kisan credit card
scheme upto 31.3.2006.
The financial assistance by the bank for working capital limits to cooperative sugar factories
increased to Rs. 287.00 crores.
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VISION OF THE SYNDICATE
To prepare development action plan at the apex level, DCCB level and at PACS level and
organize implementation.
To cover all agricultural member of PACS under cooperative kisan credit card scheme to achieve
100 % coverage and also to provide timely and adequate credit support both short term and
long term investments.
To improve the lending to the small and marginal farmers as also SC and ST agriculturists.
To provide more advances through Rythu Mirta Groups (RMGs)
To formulate and adopt appropriate strategy for improved loan recoveries and to reduce Non
Performing Asstes (NPAs).
To ensure writing books of accounts and also ensure regular audit at all levels.
To ensure uniform accounts, Ledger maintenance at PACs level and DCCB level.
To provide ATM services at various important places in twin cities.
To provide anywhere banking services and Teller banking services.
To convert extension counters into full ledged branches.
To raise deposits upto Rs. 2040 crores.
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To computerize the operations of DCCBs and their branches.
To provide basic training and also periodical refresher courses to staff members at all level.
To reduce cost of management.
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Introduction of credit and risk Management
Introduction of credit and risk management
CREDIT MANAGEMENT
The term credit management has got importance from the time when there
increased the pressure of competition and force of custom persuades to sell
on credit. Credit is granted to facilitate the sales. Credit is appealing to those
customers who cannot borrow from other sources due to many reasons. The
firm’s investment in accounts receivable depends on how much it sells on
credit and how long it takes to collect receivables. Accounts receivables
constitute one of most important asset category for firm which makes the
firm to manage its credit well.
The term credit management can be analyzed from various aspects like:
1 Terms of payment.
2 Credit policy variables.
3 Credit evaluation.
4 Credit granting decision.
i) Terms of payment vary widely in practice. The most accepted one in which
arrangement is made wherein the trade cycle is financed partly by seller,
partly by buyer and partly by some financial intermediary. When goods are
sold on cash terms the payment is received either in advance or on delivery.
Credit sales are generally on open account. Consignment and bill of
exchange come under credit.
ii) Credit policy variables have the dimensions like credit standards, credit
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period, cash discount and collection effort. A firm has wide range of choice in
respect of granting credit. At one end of spectrum, it may decide not to grant
credit to any customer, however strong his credit rating may be. At the other
end, it may decide to grant credit to all customers irrespective of their credit
rating. Between these two extremes lie several possibilities, often the more
practical ones.
Credit period refers to the length of the time customers are allowed to pay
for their purchases which is generally varied from 15 days to 60 days.
Lengthening the credit period pushes sales up by inducing existing
customers to purchase more and attracting additional customers. This is
accompanied by a larger investment in debtors and a higher incidence of
bad debts loss.
Cash discounts are generally given by the firms to induce customers to make
prompt payments. The percentage discount and the percentage discount
and the period during which it is available are reflected in the credit terms.
Liberalizing the cash discount may mean that the discount percentage is
increased and the discount period are lengthen which enhance the sales,
reduce the average collection period and increase the cost of discount.
The collection programme of the firm aims at timely collection of
receivables. A rigorous collection programme tends to decrease sales,
shorten the average collection period, reduce bad debt percentage, and
increase the collection expense and vice versa in case of lax collection
programme.
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iii) Credit evaluation is an important element of credit management which
helps in establishing credit limits. This includes two types of errors like:
Type I error: A good customer is misclassified as a poor credit risk.
Type II error: A bad customer is misclassified as a good credit risk.
Both the errors are costly. Type I error leads to loss of profit on sales to
good customers who are denied credit. Type II error results in bad debt
losses on credit sales made to risky customers. Proper credit evaluation can
mitigate the occurrence of such type of errors.
Three broad approaches used for credit evaluation are
1 Traditional credit analysis.
2 Sequential credit analysis.
3 Discriminant analysis.
The traditional credit analysis calls for assessing a prospective customer in
terms of the “five C’s of credit”.
1 Character of customer that is his willingness to honor his obligation.
2 Capacity of the customer to meet credit obligations from the operating
cash flows.
3 Financial reserves in the form of capital of the customer. If customer
has difficulty in meeting his credit obligations from operating cash
flows then focus to his capital.
4 Collateral security offered by customer in the form of pledged assets
is considered.
5 Fifth C is general ECONOMIC CONDITIONS that affect the customer.
For sake of simplicity, only three C’s are considered i.e. character, capacity
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and capital. The judgment of customer on these dimensions the credit
manager considers both quantitative and qualitative measures.
Sequential credit analysis is most efficient method than traditional one. In
this analysis, investigation is carried further if the benefit of such analysis
outweighs it cost. To illustrate, consider three stages of credit analysis:
review of the past payment record, detailed internal analysis and credit
investigation by an external agency. The credit analyst proceeds from stage
one to stage two only if there is no past payment history and hence a
detailed internal credit analysis is warranted. Likewise, the credit analyst
goes from one stage two to stage three only if internal credit analysis
suggests that the customer poses a medium risk and hence there is a need
for external analysis.
Numerical credit scoring is an improvement over traditional ones in which
more systematic numerical are assigned to evaluate the customer unlike
judgmental decisions made on basis of five C’s in traditional ones. In this the
credit manager identifies the factors relevant for credit evaluation. Then
weights are assigned to these factors and customers are rated based on
these factors using suitable rating scale usually 5 point or 7 point rating
scale. Factor score is derived by multiplying factor weight with factor rate for
each factor. Customer rating index is derived by adding the entire factor
score based on which customers are classified.
Numerical credit scoring is ad hoc in nature as it is based on weights which
are subjective in nature. The technique of discriminant analysis is employed
to construct better risk index. This method considers the financial ratios of
the customers as the basic determinants of their creditworthiness. The
analysis is made based on these financial ratios which are considered to be
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essential for creditworthiness of customer.
Risk classification is another method in which customers are classified into
various risk categories for credit investigation process.
iv) Credit granting decision is important because once the
creditworthiness of a customer has been assessed the credit manager has to
decide whether the credit should be offered or not. It is generally done based
on the decision tree. The expected profit for the action ‘refuse credit’ is 0. If
the expected profit for the course of action ‘offer credit’ is positive, it is
desirable to extend credit, otherwise not. The repeat order is accepted only if
the customer does not default on the first order. Once the customer pays on
the first order, the probability that he would default on the second order is
less than the probability of his defaulting on the first order.
RISK MANAGEMENT
Once the credit is being granted to the customer the credit manager has to
find out the ways for timely collection of the credit given. Traditionally two
methods have been commonly suggested like Days sales outstanding and
ageing schedule. Though these methods are popularly used they have
serious limitations as they are based on an aggregation of sales and
receivables. To overcome the limitations of traditional methods Collection
matrix approach is used.
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The days sales outstanding (DSO) at a given time t may be defined as the
ratio of accounts receivable outstanding at that time to average daily sales
figure during the preceding 30 days, 60 days, 90 days, or some other
relevant period.
The ageing schedule (AS) classifies outstanding accounts receivables at a
given point of time into different age brackets. The actual AS of the firm is
compared with some standard AS to determine whether accounts receivable
are in control. A problem is indicated if the actual AS shows a greater
proportion of receivables, compared with the standard as, in the higher age
groups.
Collection matrix is improvement over the traditional methods of risk
managements. In order to study correctly the changes in the payment
behavior of customer, it is helpful to look at the pattern of collections
associated with credit sales. From the collection, pattern one can judge
whether the collection is improving, stable, or deteriorating. A secondary
benefit of such an analysis is that it provides a historical record of collection
percentages that can be useful in projecting monthly receipts for each
budgeting period.
FUNCTIONS OF EACH DEPARTMENT
The four main departments involved in loan process of KMBL are :
1) MARKETING
2) CREDIT
3) OPERATIONS
4) RISK
ORGANISATIONAL CHART OF MARKETING DEPARTMENT:
32
LOCATION
MARKETING HEAD
LOCAITON MARKETING HEAD
Regional Marketing Head (RMH) (heading entire region)
Location Marketing Head (LMH) (heading entire location)
Relationship Manager (RM) (for maintaining relationships with DSA and DST)
DSA/DST – Direct Selling Agent (external) / Direct sales Team (internal) Fleet
On Street (FOS) (for sourcing the case, making cold calls, collecting
relevant documents etc.)
33
REGIONAL MARKETING HEAD
LOCAITON
MARKETING HEAD
RELATIONSHIP MANAGER RELATIONSHIP MANAGER
DIRECT SELLING AGENT DIRECT SELLING TEAM
FLEET ON STREET FLEET ON STREET
Marketing department in personal finance is responsible for sourcing of
business. This department works through network of DSA/DST and RM.
RMs are responsible for managing relationships with DSA and DST. The sales
department is divided in to two units under the guidance of RM that is
A)DSA (DIRECT SELLING AGENT)
B) DST (DIRECT SELLING TEAM)
DSA is an outside party who is interested in sourcing prospective loan
candidates into the bank. The bank studies the capacity of the party bringing
applicants per month and gives certain targets and if the DSA agent reaches
that target then the bank provides commission to the DSA agent. The bank
does not involve in any activities of DSA directly. The DSA agent has to
maintain the telecallers and executives at his own expenses.
The second category is DST which is called K-DIRECT in Kotak Mahindra
Bank under whom telecallers, team leaders and executives work. All the
office expenses and salaries are paid to them by Kotak Mahindra Bank their
salaries are more compared to DSA. The persons working under DST directly
comes under the Kotak Mahindra Bank. Relationship Manager is in charge of
the functions of K-DIRECT team.
34
ORGANISATIONAL CHART OF CREDIT DEPARTMENT:
NCH - National Credit Head
RCH – Regional Credit Head
LCH – Location Credit Head
CM – Credit Manager (With in location)
CPA – Central Processing Agency
35
NATIONAL CREDIT HEAD
REGIONAL CREDIT HEADREGIONAL CREDIT HEAD
LOCATION CREDIT HEAD LOCATIN CREDIT HEAD
CREDIT MANAGER
CREDIT MANAGER
CENTRA PROCESSING AGENCY
After sourcing the files (loan applicants) in to the bank the second and
crucial step is being played by credit department. Here the sourced files are
examined thoroughly whether the required documents are furnished or not.
The hierarchical level is followed in this department. It is from top to bottom
starting from National Credit Head to Central Processing Agency. Also at few
places there are ACH (Area Credit Head). They occupy an intermediary
position between RCH and LCH. While the Marketing department is
responsible for sourcing, the Credit department is responsible for buying the
business.
OPERATIONS DEPARTMENT :
After the completion of the process of sanctioning loan amount to the
customer, the file goes to operations department where they have to look
after the entire operation of disbursement.
The operation department will issue the cheque to the party. In this
department all the PDC’s (Post Dated Cheques) and any other original
important documents are placed in the head office in Mumbai where all the
documents are preserved in a private security locker “NUCLEUS” which is
fire proof and the bank pays for the storage of files.
In Nucleus all the respective PDC’s of respective month on mentioned dates
comes directly to the bank. The Kotak Mahindra Bank has its clearing
department with nationalized bank where it accepts all the PDC’s and
disburse them to respective banks if it is cleared then it mentions the
cleared member’s data and uncleared cheque data through soft copy that
day evening to the operation department. The next day morning the
36
operation department will get the hard copy and they come to know clearly
the reasons for cheque bounce cases.
Then the telecaller will follow up the customers and intimate them about the
cheque bounces and reasons for that and intimates them about the penal
charges and depending on the reply of the customer they further proceed.
All the data is maintained in the system.
37
ORGANISATIONAL CHART OF RISK DEPARTMENT :
NATIONAL HEAD
In personal finance business whatever is sourced by the marketing
department and bought by the credit has great tenacity to go bad or non
performing or delayed due to combined effect of various variables like fraud,
negligence, intentional, etc.
The inherent nature of personal loan arise the need of having separate risk
department(RD) to focus on timely collection and risk of loan agreements.
There is primarily on collecting the money which was funded by combined
efforts of marketing and credit.
38
REGIONAL RISK HEAD
STATE RISK HEAD
LOCAL RISK HEAD
BKT-1 PORTFOLIO
MANAGERBKT-2 PORTFOLIO
MANAGER
BKT-3 PORTFOLIO
MANAGER
TEAM LEADER TEAM LEADER TEAM LEADER
EXECUTIVES
EXECUTIVESEXECUTIVES
TELECALLER TELLE CALLERTELECALLER
RD is responsible for controlling the losses by having a strong network of
collection agents and thus keeping the delinquency level under control.
PROCESS FLOW CHART (FILE MOVEMENT SYSTEM)
FILE TO BE LOGGED IN
CREDIT DOES ANALYSIS
39
FILE INVESTIGATION WILL BE SHOT ON THE CASE
CASE IN SACTIONED OR REJECTED
IF SANCTIONED,DISBURSEMENT AGREEMENT TO BE
SIGNED AND PDC’S TO BE COLLECTED
DISBURSEMENT TO BE LOGGED IN
CHEQUE TO BE DELIVERED TO THE CUSTOMER
STOP
Credit Risk Management: Policy Framework
Risk is inherent in all aspects of a commercial operation and covers areas
such as customer services, reputation, technology, security, human
resources, market price, funding, legal, regulatory, fraud and strategy.
However, for banks and financial institutions, credit risk is the most
important factor to be managed. Credit risk is defined as the possibility that
a borrower or counterparty will fail to meet its obligations in accordance with
agreed terms. Credit risk, therefore, arises from the banks' dealings with or
lending to a corporate, individual, another bank, financial institution or a
country. Credit risk may take various forms, such as:
in the case of direct lending, that funds will not be repaid;
in the case of guarantees or letters of credit, that funds will not be
forthcoming from the customer upon crystallization of the liability
under the contract;
in the case of treasury products, that the payment or series of
payments due from the counterparty under the respective contracts is
not forthcoming or ceases;
in the case of securities trading businesses, that settlement will not be
effected;
in the case of cross-border exposure, that the availability and free
transfer of currency is restricted or ceases.
The more diversified a banking group is, the more intricate systems it would
need, to protect itself from a wide variety of risks. These include the routine
operational risks applicable to any commercial concern, the business risks to
its commercial borrowers, the economic and political risks associated with
40
the countries in which it operates, and the commercial and the reputational
risks concomitant with a failure to comply with the increasingly stringent
legislation and regulations surrounding financial services business in many
territories. Comprehensive risk identification and assessment are therefore
very essential to establishing the health of any counterparty.
Credit risk management enables banks to identify, assess, manage
proactively, and optimise their credit risk at an individual level or at an entity
level or at the level of a country. Given the fast changing, dynamic world
scenario experiencing the pressures of globalisation, liberalization,
consolidation and disintermediation, it is important that banks have a robust
credit risk management policies and procedures which is sensitive and
responsive to these changes.
Strategy and Policy
It is essential that each bank develops its own credit risk strategy or
enunciates a plan that defines the objectives for the credit-granting function.
This strategy should spell out clearly the organisation’s credit appetite and
the acceptable level of risk - reward trade-off at both the macro and the
micro levels.
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.
A common feature of most successful banks is to establish an independent
group responsible for credit risk management. This will ensure that decisions
41
are made with sufficient emphasis on asset quality and will deploy
specialised skills effectively.
In some organisations, the credit risk management team is responsible for
the management of problem accounts, and for credit operations as well. The
responsibilities of this team are the formulation of credit policies, procedures
and controls extending to all of its credit risks arising from corporate
banking, treasury, credit cards, personal banking, trade finance, securities
processing, payment and settlement systems, etc.
This team should also have an overview of the loan portfolio trends and
concentration risks across the bank and for individual lines of businesses,
should provide input to the Asset - Liability Management Committee of the
bank, and conduct industry and sectoral studies. Inputs should be provided
for the strategic and annual operating plans. In addition, this team should
review credit related processes and operating procedures periodically.
The credit risk strategy and policies should be effectively communicated
throughout the organisation. All lending officers should clearly understand
the bank's approach to granting credit and should be held accountable for
complying with the policies and procedures.
Keeping in view the foregoing, each bank may, depending on the size of the
organization or loan book, constitute a high level Credit Policy Committee
also called Credit Risk Management Committee or Credit Control Committee,
etc. to deal with issues relating to credit policy and procedures and to
analyse, manage and control credit risk on a bank wide basis. The
Committee should be headed by the Chairman/CEO/ED, and should comprise
heads of Credit Department, Treasury, Credit Risk Management Department
(CRMD) and the Chief Economist. The Committee should, inter alia,
formulate clear policies on standards for presentation of credit proposals, 42
financial covenants, rating standards and benchmarks, delegation of credit
approving powers, prudential limits on large credit exposures, asset
concentrations, standards for loan collateral, portfolio management, loan
review mechanism, risk concentrations, risk monitoring and evaluation,
pricing of loans, provisioning, regulatory/legal compliance, etc. Concurrently,
each bank may also set up Credit Risk Management Department (CRMD),
independent of the Credit Administration Department. The CRMD should
enforce and monitor compliance of the risk parameters and prudential limits
set by the CPC. The CRMD should also lay down risk assessment systems,
monitor quality of loan portfolio, identify problems and correct deficiencies,
develop MIS and undertake loan review/audit. Large banks may consider
separate set up for loan review/audit. The CRMD should also be made
accountable for protecting the quality of the entire loan portfolio. The
Department should undertake portfolio evaluations and conduct
comprehensive studies on the environment to test the
43
RISK MANAGEMENT
MEANING OF RISK
Risk management is a process of managing the collection of managing the
collection of liabilities with an objective of increasing the cash flows with
minimum costs. It involves collecting in right time, right amount, in right
terms.This process starts from identifying the amount of liabilities and to
make the collection successful. This does not end with mere collection.
Besides collection, the difficulties and weak areas should also be
ascertained, which leads to development of an effective system for credit
extension or sales and collection.
Risk management is an area of tremendous challenge. Risk management is
used to minimize bad debts through active account delinquency
management. As the companies strive to increase their cash flows and
improve customer relationships, the risk partner is more important than any
other.
IMPORTANCE OF RISK
In today’s market scenario, one of the most critical areas to focus on is to
protect the bank from bankruptcy. In such conditions Risk department plays
a key role in the growth of banks. Any delay in realizing the receivables
would adversely effect the working capital, which in turn effects the overall
financial management of the firm.
No firm can be successful if its overdue are not collected, monitored and
managed carefully in time. Thus risk management is important in sustaining
the bank and its growth.
44
RISK DEPARTMENT IN KMBL
When all the doors are closed to collect the EMI from the customer then it
comes to risk department. In Syndicate bank the most importance is given to
risk department. The risk department in KMBL follows bucket wise policies
which starts from BUCKET 1.
The cheques of the customers which got bounced will come to the risk
department where they pressurizes the customer and gets the EMI including
penal and cheque bounce charges from customer.
The first six months of the customer is very important for the risk
department which is called “INFANT DELIQUENCY” where the risk
department estimates whether the customer is going to be defaulter in
future.
The risk department is very strong in KMBL where they follow the bucket
system. The bucket system depends on “Days past dues”. For every 30 days
the bucket system shifts from one bucket to other depending on pending EMI
amount.
PROCESS FLOW
INSERT
If the bank is unable to collect atleast one EMI from the customer from past
continuous 3 months then they book the case as non performance assets.
They claim the future calculated amount as loss so to avoid this type of loss
45
to the bank. They take lot of care to collect the EMI’s within the three
months with out fail to reduce the increase in the default ratio through
bucket wise.
The loss is calculated using the following formula:
Future outstanding = EMI * lost amount + EMI * future turn amount.
To control the defaulters’ ratio they started the necessary steps from the
starting of the collection department. The flow of power is as shown in the
flow chart from top level to bottom level.
When the case comes to bucket 1 lot of pressure is made by portfolio
manager to stop the case not to extend to bucket 2. The bucket portfolio
manager plays a prominent role in risk department and he is paid more pay
and perks. In similar way in bucket 2 the portfolio manager plays a
prominent role to reduce the case not to extend to bucket 3. When the case
enters bucket 3 and portfolio manager is unable to collect at least one EMI
then the case is booked as non performance asset which is a loss to the
bank.
46
LEGAL ASPECTS OF RISK
When the file comes to bucket 3 there after making all pressures if they
could not get the amount they further proceed legally to collect the money.
The three main sections used to proceed legally are:
1 Section 138 (NEGOTIABLE INSTRUMENTS ACT)
2 Section 156
3 Section 9
Section 138
Where any cheque drawn by a person on account maintained by him with
the banker for payment of any amount of money to another person from out
of that account for the discharge, in a whole or in part, of any debt or any
liability, his return by bank unpaid, either because of the amount of money
outstanding to the credit of that account by an agreement made with the
bank. Such person shall be deemed to have committed an offence and shall
without prejudice to any other provisions of this act can be punished with
imprisonment for a term which may extend to one year or with a fine which
may extend to twice the amount of cheque or with the both. Now the court
has the power to order two-year imprisonment for cheque bounces under
section 138 N.I. a
POST DATED CHEQUES
A cheque post-dated remains bills of exchange till the date written on it and
with effect from the said date shown on the face of it; it becomes a “cheque”
under the act.
Post dated cheque deemed to have been drawn on the date it bears –
provision of section 138 (a) held.
47
ELECTRONIC CLEARENCE SERVICE
Electronic clearance service contains six cheques among that four cheques
contain the EMI amount and one with full loan amount and another with
cleared amount each cheque is signed by the loan according to RBI rules.
STANDARD INSTRUCTIONS
This type of instruction are produced when the loanee working in the same
bank and taking loan amount.
SUMMONS
The chief ministerial officer of the court shall ordinarily sign summons issued
to witness.
1: These are the witness summons.
2: Accused summons to be signed by magistrates:
Magistrates shall themselves sign summons to accused persons. The copy of
the complaint may be sent with summons or warrant issued to the accused
under sub-Section (i) of section 204 of the code.
Place of hearing to be stated:
Every summons and every order of adjournment shall state the place in
which the course to which it relates will be heard.
Warrant bearing sign manual of the judge or the magistrate:
All warrants should receive the sign of them from whose court they are
issued.
SECTION 156
This case is claimed against the customer as cheating or forgery case where
the customer might have given some fake documents to get a loan which
might have mislead the bank.
Whoever by deceiving any person fraudulently or dishonestly include the
48
persons. So deceive to deliver property to any person or to consent that any
person shall retain any property intentionally include person so deceived to
do or omit to do anything which he would not do or omit if he were not so
deceived, and which after omission cause or lively cause damage or harm to
that person in body, mind, reputation and property is said to “cheat “
Example
1. A by putting a counterfoil mark on an article intentionally deceives
into a belief that this articles were made by celebrity manufacturer,
and thus dishonestly induces Z to buy and pay for the articles ‘A
cheats’.
2. A by pleading as diamonds articles which he knows are not diamonds
intentionally deceives Z if he thereby dishonestly includes Z to land
money, ‘A cheats’.
i) Dibas sarkar vs. State 1989 Cr. LJ MOC 30 Cal.
ii) Kakumukkala Krishnamurthy vs. State of AP AIR 1956
Sec.333
Section 9
This case is claimed against the customer as a property attachment where
the bank attacks the property of the customer. This section is very rarely
used.
ANALYSIS and FINDINGS:
49
ANALYSIS and FINDINGS
The information or data of credit and risk management reference to
Syndicate bank.
Finding for last years of description for risk mode.
NON PERFORMANCE ASSETS table shows the data of the non performance
assets of the KMBL.
MONTHS
TARGET
(In lakhs)
ACHIEVEMENTS
(In lakhs)
April 09 1.56 0.41
May 09 1.62 1.2
June 09 1.77 1.3
July 09 1.92 0.56
Aug 09 2.11 1.72
Sep 09 2.34 2.13
Oct 09 2.58 0.60
Nov09 2.83 0.61
Dec 09 3.10 0.00
Jan 10 3.37 1.9
Feb 10 3.68 1.98
Mar 10 4.01 0.32
Total 30.89 12.73
NON PERFORMANCE ASSETS-IN LAKHS
50
1) TARGETS: This is the amount given to book as loss for the risk
department in every month of non performance of asset.
2) ACHIEVEMENTS: This is the amount booked as loss to risk
department achieved in every month.
PENAL CHARGES COLLECTED
Finding for last years of description for risk mode.
51
MONTHS TARGET
(In lakhs)
ACHIEVEMENTS
(In lakhs)
Apr 07 0.26 0.19
May 07 0.29 0.32
June 07 0.32 0.52
July 07 0.36 0.30
Aug 07 0.40 0.83
Sep 07 0.43 0.32
Oct 07 0.47 0.66
Nov 07 0.52 0.77
Dec 07 0.56 0.65
Jan 08 0.61 0.59
Feb 08 0.65 0.81
Mar 08 0.70 1.29
Total 5.57 7.25
PENAL AMOUNT
52
1. TARGETS: This is the target penal amount given for risk department
to collect.
2. ACHIEVEMENTS: This is the penal amount collected by risk
department every month.
Months Target (lakhs) Achievements (lakhs)
April 2008 0.71 0.67
May2008 0.74 0.53
June 2008 0.77 0.80
July 2008 0.80 0.74
53
MONTH WISE
August 2008 0.82 1.21
September 2008 0.87 1.22
October 2008 0.90 0.93
November 2008 0.91 0.75
December 2008 0.93 0.95
PENAL AMOUNT
1. TARGETS: This is the target penal amount given for risk department
to collect.
2. ACHIEVEMENTS: This is the penal amount collected by risk
department every month.
Details of self clients of KMBL
SEP RSENP SURR SAL SENP TOTAL
54
DEFAULTERS (%) 7 57 20 37 34 155
DEFAULTERS
AMNOUNT
134043 409509 110438 412913 1298755 2365656
DEFAULTERS PERCENTAGE
DEFAULTERS CLIENTS
(%)
1: SELF EMPLOYED PROFESSIONAL. (SEP) 7
2: RETAIL SELF EMPLOYED NON PROFESSIONAL.(RSENP) 57
3: SURROGATIVES. (SURR) 20
4:SALARIED (SAL) 37
5: SELF EMPLOYED NON PROFESSIONAL. (SENP) 34
TOTAL 155
55
DEFAULTERS PERCENTAGE
5%
36%
13%24%
22% SEP
RSENP
SURR
SAL
SENP
Analysis of defaulters (%)
1: SEP = 7/155 * 100 = 5%
2: RSENP = 57/155 * 100 = 36%
3: SURR = 20/155 * 100 = 13%
4: SAL =37/155 * 100 = 24%
5: SENP =34/155 *100 = 22%
DEFAULTERS AMOUNT PERCENTAGE
56
Defaulters Amount
1: SELF EMPLOYED PROFESSIONAL. 1,34,043
2: RETAIL SELF EMPLOYED NON PROFESSIONAL. 4,09,509
3: SURROGATIVES. 1,10,438
4: SALARIED. 4,12,913
5: SELF EMPLOYEDN ON PROFESSIONAL. 12,98,755
DEFAULTERS AMOUNT PERCENTAGE
6%17%
5%
17%
55%
SEP
RSENP
SURR
SAL
SENP
57
Analysis of Defaulters amount (%)
1: SEP = 134043/2365656 * 100 = 6%
2: RSENP =409509/2365656 * 100 = 17%
3: SURR = 110438/2365656 * 100 = 5%
4: SAL = 412913/2365656 * 100 = 17%
5: SENP =1298755/2365656 *100 = 55%
TABLE: 1 The statement showing default on the lines of repayment period
NUMBER OF DAYS DEFAULT
REPAYMENT
PERIOD
30
DAYS
60
DAYS
90
DAYS
ABOVE
90DAYS
ROW
TOTAL
[0 YRS – 2 YRS] 14
(58)
2
(8)
3
(13)
5
(21)
24
[2 YRS - 3 YRS] 91
(76)
11
(9)
7
(6)
10
(9)
119
[3 YRS – 4YRS] 9
(75)
1
(8)
1
(8)
1
(9)
12
58
COLUMN TOTAL 114
(74)
14
(9)
11
(7)
16
(10)
155
** Figures in parenthesis denote the row wise percentage.
Effective risk (%) in terms of period
1) 14/24*100=58
2) 91/ 199*100=76
3) 9/12*100=75
The distribution of defaulters with respect to repayment period is visible in
table 1. According to the table more number of defaulters are lying in bucket
1, 74% of the defaulters are in bucket 1 followed by 10% in above 90 days
and 9% in bucket 2 and 7% in bucket 3. The same is reflected in the
categories of 2-3 years and 3-4 years repayment period where as in 0-2
years repayment period 58% of defaulters are in 30 days 21% in above 90
days, 13% in 90 days and 8% in 60 days.
It implies the bank has been focusing to control and reduce the number of
defaulters in other than 30 days bucket further it also implies the repayment
period is not a factor which influence on number of defaulters.
Table: 2 The statement showing default on the lines of profession
NUMBER OF DAYS DEFAULT
59
PROFESSION 30
DAYS
60
AYS
90
DAYS
ABOVE
90DAYS
ROW
TOTAL
TECHNICAL 26
(0.65)
5 3 6 40
BUSINESS 75
(0.77)
6 7 9 97
COLUMN TOTAL 101 11 10 15 137
**figures in parenthesis denote the row wise percentage.
Here business category is defined as the income category based on their
non-salaried and non-professional incomes where they use their business
skills, RSENP, SENP comes under this category.
Technical profession, these are the persons having an income either from
salary or from their professional qualification. SEP, SALARIED comes under
this category.
NULL HYPOTHESIS: H0:
There is no relationship between profession and number of defaulters
P1=P2
ALTERNATE HYPOTHESIS: H1:
There is relationship between profession and default rate. The business
professions are more than the technical profession.
60
P1<P2 (Left tailed test)
Test of proportions Z=P1-P2/√P (1-P) (1/n1+1/n2)
Where P1=26/40=0.65
P2=75/97=0.77
P=P1+P2/n1+n2
Where n1=40 , N2=97
Therefore P=0.74
Z=0.65-0.77/√ (0.74) (1-0.74) (1/40+1/97)
= -1.46
The calculated value of test of proportion is -1.46
The table value of test of proportion is -1.645 at 95% confidence level.
Therefore the calculated value lies in rejection rejoin, so null hypothesis is
accepted
Therefore there is no relationship between the profession and the number of
defaulters.
61
TABLE: 3 The statement showing default on the lines of gender.
NUMBER OF DAYS DEFAULT
SEX
30
DAYS
60
DAYS
90
DAYS
ABOVE
90DAYS
ROW
TOTAL
MALE 95
(0.72)
11 11 15 132
FEMALE 20
(0.87)
1 1 1 23
COLUMN
TOTAL
115 12 12 16 155
**figures in parenthesis denote the row wise percentage.
NULL HYPOTHESIS: H0:
There is no relationship between sex and number of defaulters
P1=P2
ALTERNATE HYPOTHESIS: H1:
There is relationship between sex and number of defaulters. Female
are more in number than male.
P1<P2 (Left tailed test)
Test of proportions Z=P1-P2/√P (1-P) (1/n1+1/n2)
62
Where P1=95/132=0.72
P2=20/23=0.87
P=P1+P2/n1+n2
Where n1=132 , N2=23
Therefore P=0.74
Z=0.72-0.87/√(0.74) (1-0.74) (1/132+1/23)
= -1.52
The calculated value of test of proportion is -1.52
The table value of test of proportion is -1.645 at 95% confidence level.
Therefore the calculated value lies in rejection rejoin, so null hypothesis is
accepted
Therefore there is no relationship between the sex and the number of
defaulters.
63
TABLE: 4 To find the relationship between AMOUNT OF LOAN and DAYS
DEFAULT RATE.
NUMBER OF DAYS DEFAULT RATES
AMOUNT of LOAN
30
DAYS
60
DAYS
90
DAYS
ABOVE
90DAYS
ROW
TOTAL
[RS 0 – RS 1,00,000] 54
(0.77)
4 6 6 70
[RS1,00,000 – RS
2,00,000]
32
(0.64)
7 3 8 50
[RS 2,00,000 – RS
5,00,000]
22
1
2
1
26
[RS 5,00,000 – RS
7,00,000]
2
0
0
1
3
[RS7,00,000- RS
10,00,000]
6 0 0 0 6
COLUMN TOTAL 116 12 11 16 155
*figures in parenthesis denote row wise percentage.
64
NULL HYPOTHESIS: H0:
Percentage of defaulters within 30 days period do not differ significantly
between the amount borrowed 0-1 lack and 1 lack-2 lack
P1=P2
ALTERNATE HYPOTHESIS: H1:
Percentage of defaulters within 30 days period differ significantly between
the amount borrowed 0-1 lack and 1 lack-2 lack.
P1>P2 (Right tailed test)
Test of proportions Z=P1-P2/√P (1-P) (1/n1+1/n2)
Where P1=54/70=0.77
P2=32/50=0.64
P=P1+P2/n1+n2
Where n1=70
N2=50
Therefore P=0.72
Z=0.77-0.64/√ (0.72) (1-0.72) (1/70+1/50)
= 1.566
The calculated value of test of proportion is 1.566
The table value of test of proportion is 1.645 at 95% confidence level.
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Therefore the calculated value lies in rejection rejoin, so null hypothesis is
accepted
Therefore there is no relationship between the loan amount and the number
of defaulters.
Note: The hypothesis is tested between first two slots i.e. amount range Rs
0-1 lack and Rs 1 lack-2 lack.
TABLE 5: Statement showing default on line of location.
NUMBER OF DAYS DEFAULT
LOCATION
30
DAYS
60
DAYS
90
DAYS
ABOVE
90DAYS
ROW
TOTAL
NEW
HYDERABAD
41 6 4 7 58
SECUNDERABAD 30 3 5 5 43
RANGA REDDY
DISTRICT 29 3 3 4 39
COLUMN TOTAL 100 12 12 16 140
**figures in parenthesis denote row wise percentage.
Observed
frequency
Expected
frequency
(oi-ei)2 (oi.-ei) 2/ei
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(oi) (ei)
NEW
HYDERABAD 41
34
49
1.44
SECUNDERABAD 30
33
9 0.27
RANGA REDDY
DISTRICT
29
--------
100
---------
33
---------
100
----------
16 0.48
--------
chisquare
=2.19
--------
NULL HYPOTHESIS: H0:
Categories in 30 days are equally distributed
P1=P2
ALTERNATIVE HYPOTHESIS: H1:
Categories in 30 days are not equally distributed
P1=P2
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Chi square value is 2.19
Critical value at 95% confidence level is 5.99.
Chi square value is less than critical value so null hypothesis is accepted.
Therefore location of the loanees not influence on the defaulters (in 30 days
category).
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CONCLUSION
CONCLUSION
Periodically customer meet should be conducted and category wise the
best customer should be appreciated and if possible rewarded by way
of cash prize or in kind. This helps in creating good publicity for the
bank as well as to penetrate in to market.
Post disbursement contact with the loanee should be maintained. This
process not only builds report but also gives important clues about
loanee’s ability to honour the payment responsibility. At the same time
this also leads to good customer care.
There should be good coordination among sales department, credit
department and risk department where they should go through the
loanee’s profile and should sanction the amount through proper
stringent verification when the amount is huge.
Future status of loanees business, if he is a business man, should be
assessed. Reserves, environment, competition, capabilities etc. should
be considered before sanctioning a loan based on past performance.
Future should be analyzed as to whether the business would sustain in
future, the products are going to match the future needs or not should
be analyzed. Future analysis is more important for a new customer
than to an old customer. Whereas, in case of employee, the job
security, skill base, proof of past financial discipline, property owned
etc. should be considered. Simply not with numerical parameters but
also with other qualitative factors.
Government employee is also an important segment, bulk applicants
can be attracted by influencing the undertaking office or accounts
officer of the concerned department for taking letters to see that
installments payments are directly deducted from their salaries. This
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segment is definitely useful in boosting up the loan selling if proper
verification and strict scrutanisation is done with corresponding
undertaking officers. Good rapport with government officers by risk
department will help in recovering the targeted amounted from
government employee’s proper branch network and good force in risk
department will solve if there is any transfer of employees.
To safeguard the loan and improve the risk especially when there is a
probability of mobility of a loan for example: in case of a personal loan
property attachment or guaranteed of government employee is to be
taken.Hence such defaulters can be reduced.
SUGGESTION
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SUGGESTION
A loanee’s political affiliation and his past career in politics have to be
investigated before disbursing the loan amount in order to reduce the
hardships involved in collecting the amount.
Proper verification of documents and evaluation of stocks and assets of
business people before sanctioning such loans is essential to avoid
overvaluation by the employees. For this a technical person is to be
appointed who has entire knowledge of risk, legal aspects and
technical process where thorough verification can be done.
To detect the fraud by the sales people whose intention is to usually
just sourcing the loans applications the risk department head along
with sales department head should select the cases randomly and visit
the places for inspection in every month first week where they can find
the exact picture and at the same time can ascertained the scope for
fraud.
In terms of customer wise loan amount the percentage of self
employed non professionals is more and special attention should be
given while disbursing the loan amounts.
Risk management should be a proactive process and hence its role
should not be limited to the post default activity it should develop a
system to track the possible pitfalls in each sanction from the very
beginning.
Annexure
Annexure
71
Credit department is the back bone of personal loan business. Main function
of the credit is to assess the credit worthiness of an applicant and lending
him appropriate amount based on such assessment and subject to the
terms, conditions and limitations of the policies.
Comprehensive credit information, which provides details pertaining to
credit facilities already availed by the borrower as well as his payment track
record, has become the need of an hour. Credit risk is defined as the
possibility that a borrower or counterparty will fail to meet its obligations in
accordance with agreed terms. Credit risk, therefore, arises from the banks'
dealings with or lending to a corporate, individual, another bank, financial
institution or a country.
Credit risk management enables banks to identify, assess, manage
proactively, and optimise their credit risk at an individual level or at an entity
level or at the level of a country. Given the fast changing, dynamic world
scenario experiencing the pressures of globalisation, liberalization,
consolidation and disintermediation, it is important that banks have a robust
credit risk management policies and procedures which is sensitive and
responsive to these changes.
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.
In some organisations, the credit risk management team is responsible for
the management of problem accounts, and for credit operations as well. The
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responsibilities of this team are the formulation of credit policies, procedures
and controls extending to all of its credit risks arising from corporate
banking, treasury, credit cards, personal banking, trade finance, securities
processing, payment and settlement systems, etc.
The credit risk strategy and policies should be effectively communicated
throughout the organisation. All lending officers should clearly understand
the bank's approach to granting credit and should be held accountable for
complying with the policies and procedures.
To deal with issues relating to credit policy and procedures and to analyse,
manage and control credit risk on a bank wide basis.
Credit risk is not really manageable for very small companies (i.e., those with
only one or two customers). This makes these companies very vulnerable to
defaults, or even payment delays by their customers.
Lenders will trade off the cost/benefits of a loan according to its risks and
the interest charged. But interest rates are not the only method to
compensate for risk. Protective covenants are written into loan agreements
that allow the lender A recent innovation to protect lenders and bond holders
from the danger of default are credit derivatives, most commonly in the form
of credit defaulters swap. These financial contracts allow companies to buy
protection against defaults from a third party, the protection seller. The
protection seller receives a periodic fee (the credit spread) as compensation
for the risk it takes, and in return it agrees to buy the debt should a credit
event ("default") occur.
Employees of any firm also depend on the firm's ability to pay wages, and
are exposed to the credit risk of their employer
Risk management is used to minimize bad debts through active account
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delinquency management in right time, right amount, in right terms.Any
delay in realizing the receivables would adversely effect the working capital,
which in turn effects the overall financial management of the firm.
CREDIT RISK IS FACED BY
Faced by lenders to consumers
Most lenders employ their own models (credit scoreboard) to rank potential
and existing customers according to risk, and then apply appropriate
strategies. With products such as unsecured personal loans or mortgages,
lenders charge a higher price for higher risk customers and vice versa. With
revolving products such as credit cards and overdrafts, risk is controlled
through careful setting of credit limits. Some products also require security,
most commonly in the form of property.
Faced by lenders to business
Lenders will trade off the cost/benefits of a loan according to its risks and the
interest charged. But interest rates are not the only method to compensate
for risk. Protective covenants are written into loan agreements that allow
the lender some controls. These covenants may:
limit the borrower's ability to weaken his balance sheet voluntarily
e.g., by buying back shares, or paying dividends, or borrowing further.
allow for monitoring the debt by requiring audits, and monthly reports
allow the lender to decide when he can recall the loan based on
specific events or when financial ratios like debt/equity, or interest
coverage deteriorate.
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A recent innovation to protect lenders and bond holders from the danger of
default are credit derivatives, most commonly in the form of credit
defaulters swap. These financial contracts allow companies to buy protection
against defaults from a third party, the protection seller. The protection
seller receives a periodic fee (the credit spread) as compensation for the risk
it takes, and in return it agrees to buy the debt should a credit event
("default") occur.
Faced by business
Companies carry credit risk when, for example, they do not demand up-front
cash payment for products or services.[1] By delivering the product or service
first and billing the customer later - if it's a business customer the terms may
be quoted as NET-30- the company is carrying a risk between the delivery
and payment.
Significant resources and sophisticated programs are used to analyze and
manage risk. Some companies run a credit risk department whose job is to
assess the financial health of their customers, and extend credit (or not)
accordingly. They may use in house programs to advise on avoiding,
reducing and transferring risk. They also use third party provided
intelligence. Companies like MOODYS and DUN BRADSTREETprovide such
information for a fee.
For example, a distributors selling its products to a troubled retailersmay
attempt to lessen credit risk by tightening payment terms to "net 15", or by
actually selling fewer products on credit to the retailer, or even cutting off
credit entirely, and demanding payment in advance. Such strategies impact
on sales volume but reduce exposure to credit risk and subsequent payment
defaults.
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Credit risk is not really manageable for very small companies (i.e., those with
only one or two customers). This makes these companies very vulnerable to
defaults, or even payment delays by their customers.
The use of a collection agency is not really a tool to manage credit risk;
rather, it is an extreme measure closer to a write down in that the creditor
expects a below-agreed return after the collection agency takes its share (if
it is able to get anything at all).
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Faced by individuals
Consumers may also face credit risk in a direct form as depositors at banks
or as investors/lenders. They may also face credit risk when entering into
standard commercial transactions by providing a deposit to their
counterparty, e.g. for a large purchase or a real estate rental. Employees of
any firm also depend on the firm's ability to pay wages, and are exposed to
the credit risk of their employer.
In some cases, governments recognize that an individual's capacity to
evaluate credit risk may be limited, and the risk may reduce economic
efficiency; governments may enact various legal measures or mechanisms
with the intention of protecting consumers against some of these risks. Bank
deposits, notably, are insured in many countries (to some maximum amount)
for individuals, effectively limiting their credit risk to banks and increasing
their willingness to use the banking system.
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BIBLIOGRAPHY
BIBLIOGRAPHY
www.kotak.com
www.wikipedia.org
www.rmahq.org
www.syndicate bank .com
www.rbi.org
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