A

Winter project

On

“Credit Risk Management”

For the partial completion of graduation degree in BBA

From

Shri S V Patel College of Computer Science and Business Management,

Veer Narmad South Gujarat University

Submitted by: (Gohil Priti Ramji Bhai)

Submitted to: In charge principal Nisha Khurana Mr. Chintu Thakkar

DECLARATION

I, Gohil Priti R. hereby declare that the project work entitled “Analysis of Credit Risk Management of Varachha Co-Operative Bank submitted to Shri S. V. Patel College of Computer Science and Business Management affiliated to Veer Narmad South Gujarat University , is a record of an original work done by me under the guidance of Nisha Khurana. This project work has been performed for the partial completion of graduation degree in BBA.

Sign: ______________

Gohil Priti R.

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EXECUTIVE SUMMARY

The Varachha co-operative bank registered with registration no.2914 on date 27th January, 1995 and established with license no. UDB GUJ.1153-P on date 1st July ,1995 and after three and half month on date 16th October , 1995 the bank was started its work at the starting time it has share capital of RS.3.64 crore and 4484 members. When this bank started it was having thirteen directors in the first year

Credit Risk Management is the Regain confidence through better optimization of risk-adjusted pricing and returns.

The flow of credit in global financial markets slowed from a glacial pace to a virtual standstill. And credit markets have threatened to stay that way despite immense amounts of cash being pumped in by governments and central banks around the world.

The researcher wants to know the Credit Risk Management of the Varachha Bank. The researcher wants to know what is the risk, credit risk, various types of risk for the financial institution and what are the credit risk for the Varachha Bank.

The Researcher also wants to know that how Varachha Bank manage their risk by issuing the loan, cash credit, over draft, bill purchase & discount, and how to recover that from the customer. The researcher wants to know the measurement of the non performing assets of the varachha bank.

ACNOWLEGEMENT

This is great occasion for me to express to my deepest feeling of thanks to all those who have guided, advice, and supported me during my project in the Varachha Co-operative Bank.

I take this opportunity to thank Veer Narmad South Gujarat University, Surat for keeping such practical training for making the project report as a part of B.B.A. programmed.

I am highly indebted and grateful to our co-ordinator of Shri Shambhu bhai V.Patel College of Computer Scince & Business Management for his construct in taking training.

I am also heartily thankful to project guide Prof. Nisha Khurana who gives me a valuable guidelines.

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I am also thanking to Mr.kanjibhai r. Bhalala (Chairman), Mr. A.D.Bhalani (General Manager) and Mr.Sureshbhai Kakadiya(manager of Varachha Branch) and all the staff member (Kunalbhai, Prakashbhai, Ravibhai, Tusharbhai, Mukundbhai, Viarndrabhai, Yagneshbhai) of the Varachha Co-operative Bank Ltd. for their kind co-operation and constant encouragement during the period of training with their past experience & for their valuable & excellent co-operation in taking this training in various banking product & services.

Finally, I would like to thank to my parents, friends and all those who have directly or indirectly contributed during my training.

INDEX Serial No.

Particulars

Page No.

a) Company Certificate

b) College Certificate

c) Declaration

d) Acknowledgement

e) Executive Summery

1) INDUSTRY PROFILE

1.1) Introduction of Banking system

1.2) What is Bank?

1.3) Definition of Bank

1.4) Characteristics of bank

1.5) Definition of Banking

1.6) Structure of Co. operative bank

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2) COMPANY PROFILE 2.1) history

2.2) vital factor of varachha bank

2.3) objective

2.4) Mission

2.5) Structure of Varachha Bank

2.6) Financial Strength

3) Theoretical aspects of concept

3.1) What is Risk?

3.2) What is Risk Management?

3.3) Types of Risk in Financial Institution

4) Credit Risk Management

4.1) What is Credit Risk?

4.2) What is Credit Risk Management?

4.3) Management towards provision for profit distribution

5) Credit Risk Management in Loan

5.1) Meaning of Loan

5.2) Classification of Loan

5.3) Various types of Loan

5.4) Details of Loan

6) Recovery of Loans & Advances

4

6.1) Introduction

6.2) Performing & Non Performing Assets

6.3) Signals of Recovery

6.4) Performance of Recovery

6.5) Loan Recovery Management

7) Credit Risk Management In Investment

7.1) Investment in National Banks

7.2) Investment in Government Securities

8) Credit Risk Measurement

8.1) Non Performing Assets (NPA)

8.2) Credit Risk Assets Ratio (CRAR)

9) Research Methodology

9.1) Problem Identification

9.2) Research Design

9.3) Data Collection

10) Benefits of the study

11) Limitation of the study

12) SWOT Analysis

13) Findings

14) Conclusion

15) Bibliography

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CHAPTER – 1INDUSTRY PROFILE 1.1) Introduction of Banking system1.2) What is Bank?1.3) Definition of Bank1.4) Characteristics of bank1.5) Definition of Banking1.6) Structure of Co. operative bank

6

1.1) Introduction of Banking System:

Banking system occupies an important place in a nation’s economy. In other words the development is an inevitable precondition for the healthy rapid development of national economic structure. Banking institutions have contributed much in the development of the developed countries of the world and hence a banking institution is indispensable in a modern society. It plays a pivotal role in the economic development of a country and forms the core of the money market in an advanced country.

In a society banking is an important as blood in human body. Banks, as social organization, have to go out to the people and assist weaker sections in achieving their aspirations; they are, thus, to act as catalytic agents for the development of the country. Mobilizing resources wherever these be a channeling them towards productive purposes. New strategies have to be involved for industrial development, both in the small-scale and large-scale sectors and rather than confiding to the traditional way of storage and distribution finance of a short term nature, developmental finance and term lending have to be taken up by commercial banks, similarly, opening of branches in rural and urban areas and efficient customer services have assumed great importance.

After independence the Indian Government also has takes a series of steps to develop banking sector, because of considerable efforts of the government today we have number of banks in India. Indian banks contribute a lot in the development of agriculture, trade and industries.

1.2) What is BANK?

There is no clear-cut definition of Bank, Banking, and Banker. A Bank or Banker or Banking business is one which is engaged in trading in money depositing and lending and serving the society at large in achieving its objectives of economic progress and social well being.

The Indian Banking Regulation Act, 1949 defines the Banking “As accepting for the purpose of lending or investment of deposits of money

7

from the public repayable on demand and withdraw able by cheque, draft”

1.3) DEFINITIONS OF A BANK:

“Bank is an establishment which makes an individual, such advance of money as may be required and safely made to which individuals entrust money when not needed by them for use.” - WALTER LEAF

“A Bank is an institution which collect money from those who have it to spare, who are saving it out of their income and lend this money who require it” G.CROWTHER 1.4) According to above definition these are three important characteristics.

i. Bank is doing money trading.ii. Bank collects deposits and provides interest on the deposits to

people.iii. Bank provides money or loan to people and collects interest on

that.

1.5) DEFINITION OF BANKING: “The business of banking may be defined as dealing in money and instrument of credit.”

- KENNETH MACKENZIN

“Banking means the accepting for the purpose or lending or investment of deposits of money from the public, repayable on demand and withdrawal by cheque, draft or order.”

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1.6) Structure of Co-operative Bank

h Co-Operative Banks:-Farmers in India are scattered all over the country and need short-term small borrowing for agricultural purposes. This need is not fulfilled by commercial banks which are unsuited for financing agriculture land which these farmers can offer to cover bank advances is not generally accepted as security by commercial banks. Therefore, special types of banks are necessary for the financing of agriculture. Co-Operative banks are best suitable for this purpose. The object of co-operative banks is to offer banking facilities to persons of limited means requiring credit for productive purpose in the use of the land and labor at their disposal.

The co-operative banking structure in India may be divided into three component part.

1. Primary Co-Operative banks “or” Credit societies:- The Primary co-operative credit society is an association of borrowers and non-borrowers residing in a particular locality. The funds of the society are derived from the share capital & deposits of members and loans from central co-operative banks. The borrowing power of the members as well as of the society is fixed. The loans are given to members for the purpose of cattle, fodder, fertilizers, pesticides, implements, etc.

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STATE CO-OPERATIVE BANK

CENTRAL CO-OPERATIVE BANK

PRIMARY CO-OPERATIVE BANK

2. Central Co-Operative Banks:-These are the federations of primary credit societies in a district, and are of two types – those having a membership of primary societies only and those having a membership of societies as well as individuals. The funds of the bank consist of share capital, deposits, loan & overdrafts from state co-operative banks and joint stocks. These banks finance member societies within the limits of the borrowing capacity of societies. They also conduct all the business of a joint - stock bank.

3. State C0-Operative Banks:-The state co-operative bank is a federation of central co-operative banks and acts as a watchdog of the co-operative banking structure in the state. Its funds are obtained from share capital from the Reserve Bank of India. The state co-operative banks lend money to central co-operative banks and primary societies and not directly to farmers. The principle one being the institution of provincial co-operative banks to serve as apex banks in the hierarchy of the co-operative pyramid.

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2) COMPANY PROFILE

2.1) HISTORY

The people in Saurastra, located in western part of Gujarat, are always depending upon the rain-fed cultivation. As a search for income generation in an alternate way for their survival, they have chosen Surat city, where there is a good scope for trade in Diamond and Textile sector. Well off people have entered into the trading sector and the others on labors front. In a phased manner, the population of the people, involved in diamond trade, belonging to Saurastra increased to a sizeable extent in Surat and in particular in the area of Varachha. It was become obvious for a necessity of a Bank for their own people; the efforts were taken by a well known philanthropist, story writer and columnist in local dailies, Mr. P. B. Dhakecha, founder chairman of the Bank. As such, The Varachha Cooperative Bank Ltd. came into existence on 16th October 1995 and Inauguration ceremony was done by on the hand of Shree Swami Sacchidanand. Some of their directors are belonging to diamond trade, who are official site holders of getting rough block diamonds from foreign countries. At the end of the first financial year the number of shareholders was 4484, Share Capital 57.44 lacks, Deposits Rs.2.70 crores, Advance Rs.2.07 crores and profit stood at 4.77 lacks

Our Bank has gradually developed the Banking activities and at the end of 5th year, with a network of 5 branches, the share capital and reserves raised to more than 8 crores and the deposits have crossed 100 crore mark, which is a rare phenomenon in Cooperative Banking Sector in all over India and the number of depositors have increased 58222. The Bank has been awarded with First Prize for the best performance among all Cooperative banks in Surat District during the FY.2000 - 01. At present the share capital and reserves raised to nearly 40 crores. The deposit is Rs.160.70 crores Advances 78.21 crores. Total 7 branches and 130 staff members. In spite of run in a cooperative sector in the year 2001, due to Madhavpura episode, the Bank has not only survived but also developed the base without any difficulty due to confidence reposed upon by the public with our Bank.

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We have introduced the system of quick delivery of vehicle loans, with minimum papers and documents, without any hidden charges. Other advances of our Bank have been spread over on the following categories:

Vehicle Loan Loan against gold ornaments

Loan on personal guarantees (Surety Loan)

Retail trade business

Professional and Self employed

Loan against Bank’s own deposits/NSC

Cash credit – hypothecation on stocks on trade

Technology Upgradation Finance (TUF) loan with subsidy

Besides the banking activity, the Bank has entered into the insurance business arrangement with IFFCO-TOKIO. We are also having tie-up arrangements with insurance companies on referral basis, as per RBI guidelines. We have covered with accident insurance cover for the shareholders, depositors and borrowers of the Bank and we have received settlement to the tune of Rs.1 crore from the insurance companies. The data pertaining to our Bank is being sent to Reserve Bank of India, banking regulator of the country, through e-Mail under offsite surveillance system (OSS) for the past 3 years.

Our Bank has been fully computerized banking system, right from inception and present programmed, front end Visual Basic and the back end (database) Oracle 10G Platform. We are having the staff members, most of them belonging to younger generation, with energetic and enthusiastic approach in Customer Service. The staff attendance is being controlled under Biometric device system. CCTV system is being installed to monitor the alertness of the entire banking activity, fitted with cameras at the vital points. Our Bank has introduced Mobile Banking and Any Branch Banking (ABB) in the year 2007. Our future plan is the introduction of on and off site ATMs and Core Banking System.

2.2) other vital factors of our Bank are as follows: One of the leading cooperative Banks in South Gujarat Audit grade, continuously at ‘A’, from the beginning

Any Branch Banking (ABB)

CCTV system is being installed to monitor the alertness of the entire banking activity, fitted with cameras at the vital points.

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Bank has started E-payment facility for the customers of the Bank for the purpose of payment of Income-Tax.

Personalized Cheque Book are being issued to all the customers of the Bank. - RTGS/NEFT facility is also available.

2.3) OBJECTIVE OF BANK:

a) To encourage thrift and mutual Co-operating among its members.b) To create funds to be lend at moderate of interest to the members of

the bank in accordance with the processor specified in these byelawsc) To give possible help and necessary guidance to members of the bank in the conduct of business.To do every kind of trust and agency business and particularly do the work investment funds, sale of properties and of recovery or acceptance of money.D) To accept money document, security calculate article and goods every description for keeping them in safe custody or for sending them from one place to other.e) To act as a balancing center for surplus funds of co-operative societies.f) To organize and develop co-operative societies within the district.g) To redeem old debts

2.4) MISSION

Varachha co-operative bank is committed to satisfy its banking customers, share holders, employees and regulators through continually improving banking services, innovation in products, technology up gradation, knowledge of team work and strengthening customer relationship.

2.5) VISION

o Banking customer through faster services and invocative products.

o Share holder through regular dividend.

o Regulators through higher rating during inspection audits.

o Technically qualified staff to meet challenges of high-tech banking.

o Inter branch connectivity.

o Banker’s presence in metros.

o Introduction of full-fledged specialized branch.

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2.6) Financial Strength

SRNO

YEAR  SHARE HOLDER

S

CAPITAL

DEPOSITS

ADVANCES

NET PROFI

T

WORKING

CAPITAL

 No. of A/Cs.

AUDIT

CLASS

DIV.RATE

131-MAR-01

6887 2.51 101.03 55.21 3.67 115.83 63320 A 15.00%

231-MAR-02

7342 3.11 123.04 67.32 4.70 146.41 71836 A 15.00%

331-MAR-03

8148 3.44 129.79 67.25 4.73 159.35 80490 A 15.00%

431-MAR-04

8348 3.64 139.19 61.64 5.67 175.50 90940 A 15.00%

531-MAR-05

9170 3.95 136.27 64.55 3.24 175.07 95512 A 12.00%

631-MAR-06

9569 4.04 158.24 59.67 2.38 197.49 98501 A 12.00%

731-MAR-07

10717 4.31 162.97 73.26 1.51 208.38 102317 A 12.00%

831-MAR-08

11569 4.63 168.27 80.23 2.81 221.15 108906 A 12.00%

931-MAR-09

12669  5.24  171.57  92.03  3.02  226.96  10567

4 A  12.00%

1031-MAR-10

13566  5.91  224.16  94.89  3.15  279.11  12326

0 A  12.00%

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2.7) Structure of Varachha Bank

3) Theoretical Concept

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3.1) WHAT IS RISK? For the purpose of these guidelines financial risk in a banking organization is possibility that the outcome of an action or event could bring up adverse impacts. Such outcomes could either result in a direct loss of earnings / capital or may result in imposition of constraints on bank’s ability to meet its business objectives. Such constraints pose a risk as these could hinder a bank's ability to conduct its ongoing business or to take benefit of opportunities to enhance its business.

Regardless of the sophistication of the measures, banks often distinguish between expected and unexpected losses. 1) Expected losses are those that the bank knows with reasonable certainty will occur (e.g., the expected default rate of corporate loan portfolio or credit card portfolio) and are typically reserved for in some manner.2) Unexpected losses are those associated with unforeseen events (e.g. losses experienced by banks in the aftermath of nuclear tests, Losses due to a sudden down turn in economy or falling interest rates). Bank surely on their capital as a buffer to absorb such losses.

3.2) WHAT IS RISK MANAGEMENT? Risk Management is a discipline at the core of every financial institution and encompasses all the activities that affect its risk profile. It involves identification, measurement, monitoring and controlling risks to ensure that

a) The individuals who take or manage risks clearly understand it.b) The organization’s Risk exposure is within the limits established by Board of Directors.c) Risk taking Decisions are in line with the business strategy and objectives set by BOD.d) The expected payoffs compensate for the risks takene) Risk taking decisions are explicit and clear.f) Sufficient capital as a buffer is available to take risk

The acceptance and management of financial risk is inherent to the business of banking and banks’ roles as financial intermediaries. Risk management as commonly perceived does not mean minimizing risk; rather the goal of risk management is to optimize risk-reward trade -off. Notwithstanding the fact that banks are in the business of taking risk, it should be recognized that an institution need not engage in business in a manner that unnecessarily imposes risk upon it: nor it should absorb risk that can be transferred to other participants. Rather it should accept those risks that are uniquely part of the array of bank’s services.

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3.3) Types of Risk in Financial Institution. a. Credit riskb. Market riskc. Operational riskd. Liquidity riske. Reputation riskf. Volatility riskg. Settlement riskh. Profit riski. Systematic risk

1) Credit risk It is an investor's risk of loss arising from a borrower who does not make payments as promised. Such an event is called a default. Another term for credit risk is default risk.2) Market riskIt is the risk that the value of a portfolio, either an investment portfolio or a trading portfolio, will decrease due to the change in value of the market risk factors. The four standard market risk factors are stock prices, interest rates, foreign exchange rates, and commodity prices3) Operation risk

As the name implies, a risk arising from execution of a company's business functions. It is a very broad concept which focuses on the risks arising from the people, systems and processes through which a company operates. It also includes other categories such as fraud risks, legal risks, physical or environmental risks.

4) Liquidity riskIt is the risk that a given security or asset cannot be traded quickly enough in the market to prevent a loss (or make the required profit).5) Reputation risk

It is often called reputation risk, is a type of risk related to the trustworthiness of business. Damage to a firm's reputation can result in lost revenue or destruction of shareholder value, even if the company is not found guilty of a crime. Reputational risk can be a matter of corporate trust, but serves also as a tool in crisis prevention.

6) Volatility risk

Volatility risk in financial markets is the likelihood of fluctuations in the exchange rate of currencies. Therefore, it is a probability measure of the threat that an exchange rate movement poses to an investor's portfolio in a foreign currency. The volatility of the exchange rate is measured as standard deviation over a dataset of exchange rate movements.

7) Settlement risk

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It is the risk that a counterparty does not deliver a security or its value in cash per agreement when the security was traded after the other counterparty or counterparties have already delivered security or cash value per the trade agreement.

8) Profit risk

It is a risk management tool that focuses on understanding concentrations within the income statement and assessing the risk associated with those concentrations from a net income perspective.

9) Systematic risk

It is the risk of collapse of an entire financial system or entire market, as opposed to risk associated with any one individual entity, group or component of a system. It can be defined as "financial system instability, potentially catastrophic, caused or exacerbated by idiosyncratic events or conditions in financial intermediaries". It refers to the risks imposed by interlink ages and interdependencies in a system or market, where the failure of a single entity or cluster of entities can cause a cascading failure, which could potentially bankrupt or bring down the entire system or market. It is also sometimes erroneously referred to as "systematic risk".

4) Credit Risk Management

4.1) What is Credit Risk?As observed by RBI, Credit Risk is the major component of risk management system and this should receive special attention of the Top Management of a bank. Credit risk is the important dimension of various risks inherent in a credit proposal, as it involves default of the principal itself. Credit risk may arise due to internal -meaning faulty appraisal, inadequate monitoring, unwillingness on the part of borrower to honor commitments despite being capable or external factors such as government policies, industry related changes.

Credit Risk is the potential that a bank borrower/counter party fails to meet the obligations on agreed terms. There is always a scope for the borrower to default from commitments for one or the other reason resulting in crystallization of credit risk to the bank. These losses could take the form of outright default or alternatively, losses from changes in portfolio value arising from actual or perceived deterioration in credit quality that is short of default.

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Credit risk is inherent to the business of lending funds to the operations linked closely to market risk variables. The objective of credit risk management is to minimize the risk and maximize bank’s risk adjusted return by assuming and maintaining credit exposure within the acceptable parameters. Measurement of credit risk is crucial if the banks have to appropriately price their loan products, set suitable limits on amount of credit to be extended as well as the loss exposure it accepts from any particular counter party.

4.2) What is Credit Risk Management?

Regain confidence through better optimization of risk-adjusted pricing and returns.

The flow of credit in global financial markets slowed from a glacial pace to a virtual standstill. And credit markets have threatened to stay that way despite immense amounts of cash being pumped in by governments and central banks around the world.

But today, there are signs that the worst may be over and that a recovery may be imminent. What will it take for banks to regain enough confidence in the financial system to get credit markets moving smoothly – without risking another financial breakdown? Better credit risk management practices are essential.

4.3) MANAGEMENT TOWARDS PROVISION FOR PROFIT DISTRIBUTION:-

h Net Profit :- …………………

h Deducted Provision:-

E Reserve Fund 25%

E Share Dividend 12%

E Dividend Equalization Fund 2%

E Education Fund 2 Lac

E Building Fund 1.50 cr.

Total

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Distribution Profit = DP

Rest Profit = Net Profit – (DP)

h Rest Profit:-Deduction as per Sub-Rule:-

E Accident Annual Fund 5%

E Other Activity Fund 20%

E Donation Fund 10%

E Rebate Interest Fund 20%

E Jubilee Festival Fund 10%

E Staff Benefit Fund 10%

E Member Welfare Fund 20%

E C0-Operative Propaganda Fund 05%

100%

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5) Credit Risk Management in Loan

5.1) Meaning of Loan:-Loan are promises for future payment, they have to be repaid in periods beyond a year and are, therefore long-term liabilities. In other wards “When a banker makes an advance in a lump-sum which cannot be paid wholly or partly and which the customer has permission to withdraw subsequently, it is called a loan”

Loan is a method of lending under which bank gives credit to a borrower for a fixed period and for a specific purpose. Many a time a borrower needs funds for fixed assets or non respective type of activities and thus seeks money from the bank which is withdrawn in one lump-sum. If the borrower need again funds for such purpose, he has to negotiate with the bank for a loan again or to get his existing loan renewed. The loan amount is normally repaid in installments. Loan may be short-term, medium-term, or long-term.

The Varachha Co-Operative Bank also sanctioned advances with different type of loan. The granting of advances is one of the most important functions of the bank; and the test of a banker’s strength depends considerably on the quality of its advances & the promotion they bear to the total deposits.

5.2) Loans & advances are classified in to secured & unsecured.

h Secured Loan or Advance:-Secured loan or advance means a “Loan or advance made on the security of assets the market value of which is not at any time less than the amount of such loan or advance”

h Unsecured Loan or Advance:-An unsecured loan or advance means a “Loan or advance not so secured. A partly covered loan or advance is partly covered by the security of assets, the market value of such securities being less than the amount that has been lend or outstanding at any time.

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5.3) Kind of LoansGenerally Banks grant loans for different periods like shorts, medium and long and for different purpose. Broadly the loans granted by banks are classified follows;

1. Short Term Loans:-

Short term loans are granted to meet the working capital needs of the borrowers. These loans are granted against the security of tangible assets, mainly the movable assets like goods and commodities, share, debenture, etc.

2. Term Loans (Medium Loans):- Medium and long term loans are usually called term loans. These loans are granted for more than a year and meant for purchase of capital assets for the establishment of new units and for expansion or diversification of an existing unit. Such loans constitute a part of the project finance which Industrial enterprises are required to raises from different sources. These loans are usually secured by the tangible assets like land, building, plant & machinery, etc.

3. Composite Loans:-

When a loan is granted both for buying capital assets and for working capital purposes, it is called a composite loan. Such loans are usually granted to small borrowers, such as artisans, farmers industries, etc.

4. Consumption Loans:-

Though normally banks provide loans for productive purposes only, but as an exception loans are also granted on a limited scale to meet the medical needs or the educational expenses or expenses related to social ceremonies etc. of the needy persons. Such loans are called consumption loans.

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5.4) Various types of loans

Loan Type From

Amount To

Amount Rate (in

%)

Mortgage Loan 1 200000 14.00

Mortgage Loan 20000199999999

915.00

Surety Loan for Members 1 100000 14.00

Two Wheeler 1 100000 13.00

For New Car 10000199999999

912.00

Cash Credit / OD 1 500000 13.00

Cash Credit / OD 50000199999999

912.00

Machinery Term Loan 199999999

913.00

Machinery TUF Loan 199999999

913.00

Loan Against Gold Ornaments

1 100000 11.00

FD Loan     - -  + 2%

Self Employed Loan 199999999

911.00

NSC Loan 199999999

913.00

Consumer Durable Loan 199999999

914.00

Term Loan 1 200000 13.00

Term Loan 20000199999999

914.00

Housing Loan 1 2000000 12.00

Education Loan 1 1500000 11.00

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5.5) Details of Loans

1. Mortgage Loan and Housing Loan:-

The transfer of an interest in specific immovable property for the purpose of securing the payment of money advanced or to be advances by way of loan an existing or future debt or the performance of engagement which may give rise to a pecuniary liability.

The first mortgage by way of deposit of title deeds of immovable properties and hypothecation of movable properties. As the creation of mortgage then The Varachha Co-Operative Bank gives loan on this type of mortgage. Bank sanction loan up to 70% to 75% of whole mortgage. This loan is based on installment when ever any installment is not paid regularly. So bank notice them and covered some charges from that transaction. This loan is repayment within 2 to 3 years.

In other, Bank also provide housing loan in previous year. This is given residential purpose and the loan is based on installment and its repayment within the maximum 5 year so that this is known as long term loan. Under this loan big/huge proportion amount are sanctioned by The Varachha Co-Operative Bank.

Loan Particular Component

Margin

Stamp Duty

Rebate

Mortgage Loan (Up to 2 Lac)

14% 35% 0.25% 1%

(Above 2 Lac)

15% 0.25% 2%

Housing Loan 12% 0.25% 1%

h Requirement of the Loan:-

h Basic Document Are:-

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Housing tax bill Xerox

Light bill Xerox

Xerox of driving license

Two photo of loan applicant

Income proof / Evident

Xerox for rationing card

h Basic Document for grantors:-

Above document are applicable for both grantors

h Other Documents:-

Original copy of housing documents are submitted to bank

Any one grantor’s housing document is need

h Housing Loan available for following purpose;

1) Purchase of residential & non-residential properties.

2) Self construction.

3) Improvement /extension of existing property.

4) Loan against property.

h Target Customers:

1) Salaried

2) Traders /Shop Owners

3) Businessmen

2. Machinery Loan:-

Generally this type of loan is lending to applicant who want to adopt new technology, for expanding his business. So The Varachha Co-Operative Bank sanctioned of this loan. Firstly bank need quotation of any dealer who furnish the new technology to them and loan applicant need to collect require document and fill the form. At last bank sanctioned loan up

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to 75% to 80% and Bank gives pay order of total quotation amount and remain margin also paid by applicant in this bank.

h Rate of Interest:-

Machinery Loan Component

Rebate

Stamp Duty

(Up to 5 lacks)

13% 1% 200

(Above 5 lacks)

14% 2% 200

h Requirement for Machinery Loan:-

Each basic document is needed for loan applicant as well as both grantors.

Evident of share holder

Photo copy of permit

Invoice of purchasing new machinery

Evident of place

Machinery list & Xerox of bills

Statement of sales – purchase of last three months

3. Vehicle Loan:-

The Varachha Co-Operative Bank provide vehicle loan for helping those people who are interested to his repayment with installment under term & condition of The Varachha Co-Operative Bank and, The Earache Co-Operative Bank also gives rebate to his loan applicant. The vehicle loan should be completed within 24 installment i.e.2 years.

Generally loan of vehicle is completed within the 2 years but above one lace loan or generally four wheeler loan is completing within the 3 years with monthly installment.

h Rate of Interest:-

Particular Component

Rebate

Stamp Duty

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Vehicle Loan (Up to 1 lace)

13% 1% 200

(Above 1 lace) 14% 1% 200

h Rebate:-

Rebate is deducted from the interest of total sanction loan, its sophisticated facility is provided by The Varachha Co-Operative Bank to them. Who borrowed loan from The Earache Co-Operative Bank.

h Requirement For Vehicle loan :-

All Basic Document are needed

For loan applicant as well as two grantors

Director Signature is require for recommendation

Photo copy of property file is submitted to bank

Duplicate copy of city survey

R.C. (Register Certificate) Book of vehicle is kept by particular banks. When totally installment of vehicle loan is closed at that time R.C. Book and other original documents are given to them. Whenever any loan holder essential of that book so banks can gives Xerox of that book at any time.

4. Cash Credit & Over Draft:-

A cash credit is an arrangement by which a banker allows his customer to borrow money up to a certain limit against either a bond of credit by one or more sureties or against securities. This is the most common mode of borrowing by large commercial and industrial. Because of advantage that a customer need not borrow the whole amount at one time but may draw such amounts as he requires at different times. He may deposit in the bank such surplus amount as may be with him for the time being. The banker, while granting cash credit. These types of advances are based on renewal because after one year, cash credit has to be renewed and pay interest regularly of each three month.

In others, when a customer require temporary accommodation, he may be allowed to overdrew o his current account, usually against collateral securities, and pay interest on the amount actually used by him. These facilities are provided by the bank because it helps in any contingency situation and to solve other problem which related to short term capital.

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Rate of Interest:-�

Particular Component

Stamp Duty

Cash Credit (Up to 5 laces)

13% 0.25%

(Above 5 laces)

12% 0.25%

Over Draft (Up to 2 laces)

14% 0.25%

(Above 2 laces)

15% 0.25%

h Requirement for Cash Credit & Over Draft:-

All Basic documents are needed for loan applicant as well as both grantors.

Evident of Share holder

Evident of other income of proprietor or partner

Firms last three years balance sheet or Income tax return copy

Provision sheet last of firm

Partner document if firm occur partnership firm

Statement of last six months of form’s account in the bank or other banks

To include certificate of company registration & Articles of Association if applicant is private Ltd. Company

5. Bill Purchase or Bill Discount:-

Another important method of lending by The Varachha Co-Operative Bank is purchasing and discounting of bills. There is a difference between collection of bills and purchase and discount of bills. In collection of bills, the bank collects the amount of the bills from the drawer and credits the amount of the bill to the drawer’s account before the realization of the bill and, thus, lends money to the customer. All the bill purchase and discounted by bank are, therefore, Shows in its Balance sheet as part of loans and advances.

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Purchase and discounting of bills is an important method of lending and has certain distinct advantages such as safety of funds, facility of refinance from Reserve Bank, certainty of payment, no risk of fluctuations in the value of the bill and profit to the bank. This loan is not based on installment but it has to be repaid up to 90 day with otherwise applicant pay 2% more on that loan as a penalty.

h Rate of Interest:-

Particular Component

Stamp Duty

Bill purchase & Discount

(Up to 90 days)

14% 0.25%

(Above 90 days)

16% 0.25%

h Requirement for Bill Purchase & Discount:-

All Basic documents are needed for loan applicant as well as both grantors.

Same document used in this loan like case credit and over draft loan.

In some cases applicant Present it PAN Number as document for residential purpose and to Measure his credit grade.

6. Term Loan:-

In the last few years, The Earache Co-Operative Bank has started giving medium & long term advances. Popularly known as term loans so far, the only source of term loans to business and industry were the specialized financial institutions set up for this purpose.

The basic point in term lending is that the borrower should utilize the amount in such a way as to repay the loan as well as the interest accruing thereon from the anticipated income earned by the use of that loan itself. This is the reason why banker evaluates the technical and economic viability of the project for which the loan is sought and also the repaying capacity of the borrowing concern.

h Rate of Interest:-

Particular Component

Stamp Duty

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Term Loan (Up to 2 laces)

13% 0.25%

(Above 2 laces)

14% 0.25%

hRequirement for Term Loan:-

All Basic documents are needed for loan applicant as well as both grantors.

Same documents used in term loan like Cash Credit Loan and Overdraft Loan

7. Gold Loan:-

The Earache Co-Operative Bank gives loan on gold. It main motive behind this only to accomplish satisfaction of loan applicant, when any applicant need money in short time & with short procedure type of loan is fulfilled short & loan time objective. Because this loans payment on reward basis, it means loan applicant should pay only interest in every three month. Gold Loan is sanctioned of Rs.2000/- on each 10gm gold so gold loan is crucial part of the loan system. The Earache Co-Operative Bank issued more part of loan on gold because Gold Loan is safety one. This loan is based on renewed so while repayment of this loan no need to pay regularly but applicant have to renew at end of year and pay only its total interest & renew charge i.e. stamp duty.

h Rate of Interest :- Gold Loan = 11% per annum

h Stamp Duty :- 0.25% Gold Loan

h Requirement for Gold Loan:-

All basic document are needed for loan applicant as well as both grantors

Checking certificate by Authorized Goldsmith

8. Fixed Deposit Loan & NSC – KVP Loan:-

The Bank provide loan like against Fixed Deposit & National Saving Certificate Loans purpose it. In fixed deposit loan, applicant take loan on his fixed deposit certificate during this time certificate lien under the

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Bank. Therefore applicants have to paid duty for lien procedure and no need for more documentation in this loan.

This loan is based on renewal and any applicants invest his money in Fixed Deposit scheme with different rate. Then Bank can gives loan to applicant by increasing 2% more on Fixed Deposit Loan.

In other National Saving Certificate & Kinas Visas Patra loans are also issued by the bank because customers often approach banks for small advances against NSC & KVP.

Before making an advance on the security of the National Saving Certificate & Kinas Visas Patra. The Banker should take an applicant in the prescribed form from the borrower in whose name the certificate stand. These certificates should then be sent to the concerned post office or the issuing authority for transfer to the lending bank’s name. The banker should grant the advance only after made on the certificate or after new certificates are issued in the name of the bank.

h Rate of Interest:-

Particular Component Stamp Duty

Fixed Deposit F.D. scheme + 2%

100

NSC – KVP Loan

13% 100

h Requirement for F.D. Loan and NSC – KVP Loan:-

All basic documents are needed for loan applicant as well as two grantors.

Certificate of F.D. & NSC - KVP

9. Surety Loan Staff loan & Self employed loan:-

The Earache Co-Operative Bank is issued this type of short term loan. It gives only governmental clerk Bank issuing loan up to Rs. 30,000/- with – few document requirement for them, and also provide Down – Payment facilities.

In others requirement of staff – loan , self – employed loan & as same as surety loan , Bank’s urge is internally help to his staff , by giving staff loan with 0% per annum.

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Whereas self – employed loan is given to salary employee (Blue collar job) it is differ from staff loan and surely loan as compare to percentage.

Whereas self employed loan is given to salary employed. Loan procedure & requirement are same but its percentage from is different with each other’s i.e. given below

h Rate of Interest:-

h Requirement for Salary employer (Blue Collar’s Job):-

Salary employer must present salary certificate which is

approved by appointing organization. Who are appointing to employee or cut off installment into salary i.e. called cut off certificate it is presented by organization as per the bank’s specimen cut off certificate or certificate of other family earning members

Salary employer ought to two grantors who are work in same organization or working under that organization and also necessary certificate of salary of two grantors.

Salary employer should attach Xerox copy of light bills and ration card for address proof.

6) Recovery of Loans & Advances

Particular Component

Stamp Duty

Self – Employed Loan

(Up to 2 laces)

15% 220

(Above 2 laces)

16% 500

Surety Loan (Up to 2 laces)

15% 220

(Above 2 laces)

16% 500

Staff Loan 6% 220

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6.1) IntroductionOne of the most important problems faced by banks in recent years is the problem of recovery of loans. The rate of recovery in some areas of the country and some types of loans have ranged between forty and fifty percent which is not a good sign of banking development. Naturally this curtails then recycling or funds and affects the profitability of banks. It does not mean that Banks should become indifferent to the needs of priority sectors or weaker sections of society, but any laxity in recovery would be self-defeating. It is necessary to take a fresh look at the existing legal provisions and introduce penal action against willful defaulters. Some suggestions like recovery of term loans under the public demands Recovery Act, appointment of special officers exclusively to look after the recovery.

Increase industrial & firm sickness of bank financed units and distributing trends in recovery of term sector loans threaten to further setup the already eroded profitability of banks.

The Reserve Bank of India has advised banks, which provide “loan tonic” to the economy, to adopt a three pronged strategy to remain financial health:

Efficient recycling of resources;

Improvement of productivity: and

Streamlining of overseas branch operation

6.2) Performing & Non Performing Assets:-Any amount of loan given by the bank is termed as performing asset if the interest and loan installments are being repaid regularly to the bank by the borrower.

In case interest and installment of principle are in default for two quarters then this is termed as non performing assets.

Note:-The Varachha Co-Operative Bank had introduced new improvement change for Non Performing Assets system. In current time when loan applicants are not pay regular installment & interest during 180 days i.e. 6 months, so that type of account is transferred to Non Performing Assets Account. The Varachha obliging Bank had implemented on 1stApril, 2002. Which is curtailed of transferred to Non Performing Assets Account i.e. 90 days.

6.3) Signal of RecoveryAs per The Varachha Co-Operative Bank it having signal of recovery are mentioned below. The Varachha Co-Operative Bank depend three signals for recovery of any kind of Loan & Advances.

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If the loan applicants are paid its installment late or out dated i.e. installment should be paid within at last date of 10th of every month by loan applicants

When amount of over dues 500 or more are indicated signal of recovery

In the case of interest & credit type of loan in this situation loan applicant have to paid interest at end of three month. If applicants become late i.e. so another signal of recovery at a time he will have to pay 3% more on the rest of interest amount.

6.4)Performance of Recovery1. ORAL REMAINDER:-

If any loan & advances applicants are come under recovery stages, so first of all orally reminder them because many applicants are comes into this stage from misunderstanding and to forget date of last installment.

2. WRITTEN OVER DUE REMAINDER:-

After orally reminder applicants are not pay his installment or interest regularly, so at a time bank delivered statement of his account with overdue amount that is known as written overdue reminder for this procedure bank impose charge i.e. Notice Charge and Bank debited of 10/- to particular loan applicant account.

3. TELEPHONIC REMINDER:-

The telephonic reminder just like oral reminder but this reminder gives to them, after writing overdue reminder. For the telephonic reminder bank get latest contact number of loan applicant consequently easily communicate any where & any time.

4. PERSONAL REQUEST:-

After telephonic reminder applicant are not pay regularly. Personal request is done and directly contact to them and understand his personal problem and make easy way to them for installment. Banks also gives more due date and extend it, for submitting his loan.

5. REQUEST TO GUARANTORS:-

If applicant is not pay after doing personal request, then bank request to guarantor of loan applicant. This is good way to recover of any kind of loan. While this time grantors also compel to them for repayment of loan and advances.

6. NOTICE BY BANK:-

After requesting to grantor loan borrower not pay any installment or interest at a time bank transferred to his account in Non- performing

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Assets and Bank assume that applicant has been cheating to bank. While this time bank notice to them and to take charge 100/- for this procedure.

7. ADVOCATE NOTICE:-

Finally loan applicant not gives response to above recovery’s performance. At last bank gives final notice i.e. advocate notice. In this notice advocate give last warning to them for repayment of loan. Otherwise advocate enter case against loan applicant in to court. For this procedure advocate takes some charge as minimum of Rs.300/-.

8. COURT MATTER:-

When any case entered in to court according to Indian Panel Code IPC 138, Bank can clearance its loan like after sanctioning the loan. Bank takes three bank and signed cheque from loan & advances applicant as per the court rule. Bank with draw amount by filling amount in bank & signed cheque and that particular cheque is credited to their account at last that type of account closed with this procedure.

So above performance for recovery is important to reduce over dues and Non Performing Assets of particular bank. And to establish of good image for bank, every banks should follow above performance and role for recovery of Loans & Advances.

6.5) Loan Recovery Management

Gross NPA

Provisions against N.P.A.

Net

N.P.A.Year No.

of Loan A/c

Total Loan

No. of A/c

Amount

Percentage

31-03-06

5153 5966.51

52 284.65 4.77 401.25 0%

31-03-07

6534 9325.57

41 245.84 3.36 421.70 0%

31-03-08

8999 8022.86

37 221.02 2.75 454.88 0%

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31-03-09

9215 9203.17

31 212.93 2.31 498.54 0%

31-03-‘10

9939 9488.67

23 222.63 2.35 587.00 0%

Interpretation

In loan recovery management there is the number of loan accounts & total loan is increasing in comparison with the past data there is also increase in the provisions against NPA of the bank & decrease in the number of accounts that convert in to NPA and also decrease the gross NPA of the bank and bank’s net NPA is zero from the year of 2006 to 2010. It shows the good performance of the bank in loan recovery & bank had improved in managing its risk.

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7) Credit Risk Management in INVESTMENT

7.1) Investment of Varachha Bank in other National Banks

No

Current Account in other bank

Amount of 2009 in Rs.

Amount of 2010 in Rs.

Fixed Deposits in other banks

Amount of 2009 in Rs.

Amount of 2010 in Rs.

1 Indus India Bank Ltd.

1,96,381

MMC Bank Ltd.

32,25,798 32,25,798

2 HDFC Bank Ltd.

5,00,987

38,57,022 IDBI Bank Ltd.

2,00,00,000

1,00,00,000

3 ICICI Bank Ltd.

73,566 1,12,54,862

State Bank Of Maisur.

3,12,57,022

2,10,95,049

4 IDBI Bank Ltd

57,69,091

1,07,43,763

SBI & Subsidiary

15,86,84,026

12,55,040,334

5 AXIS Bank Ltd

56,48,318

1,05,51,610

Nationalize Bank

17,82,68,503

6 BOB Bank Ltd

5,09,227

26,737 Surat District Co-Ope. Bank Ltd.

8,00,00,000

8,00,00,000

7 Tamilnadu Mark.Ltd.

22,58,128

11,35,568 BOB Bank Ltd

95,00,000

8 Kotak Mahindra Bank Ltd.

28,59,861

45,79,163

9 YES Bank Ltd

50,00,000

2,81,10,03

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7.2) Investment in Government Securities

Interpretation

In Credit Risk in Investment, there is investment in terms of Current & Fixed Deposit accounts of the Varachha Bank in many Nationalize Banks and there is also investment in Government and also the investment is

No

Investment in Government Securities

Amount (2009)

Amount (2010)

1 Central & State Government Surety

77,50,00,000

117,94,47,922-00

2 Other acceptable Trust Surety

_ _

3 Investment in Share of Co-operative Institutions

55,100 55,100-00

Total 775,055,100

1,179,503,022

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increasing with the past year so we can say that bank is in safer side & it can manage its risk.

8) Credit Risk Measurement

The measurement of credit risk is of vital importance in credit risk management. A number of qualitative and quantitative techniques to measure risk inherent in credit portfolio are evolving. To start with, banks should establish a credit risk rating framework across all type of credit activities.

8.1) NPA

Action for enforcement of security interest can be initiated only if the secured asset is classified as Non Performing Asset.

Non Performing Asset means an asset or account of borrower, which has been classified by a bank or financial institution as sub-standard, doubtful or loss asset, in accordance with the directions or guidelines relating to asset classification issued by RBI.

Provisions against Non Performing Assets in 2010

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N.P.A. against total loan =2.35%

Net N.P.A. against total loan = 0.00%

Amount in Lakh.

Overdue Loans

classification No. of a/c

Amount

(A) Total Loan 7739 9488.67

237.36

587.00

1)Standard assets

7716 9266.04

37.06

2)N.P.A. 23 222.63 200.30

a)Sub Standard Assets

02 24.81 2.48

b)Doubtful up to 1 year

1 to 3 year

More than 3 year

c)Loss Assets 21 197.82 197.82

B) Provisions

1)Provision against standard assets

41.51

2)Bad & doubtful debt reserve

179.76

3)provision against N.P.A

365.73

Total 7739 9488.67

237.36

587.00

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9) Research Methodology

9.1) Problem Identification:-

It is an investor's risk of loss arising from a borrower who does not make payments as promised. Such an event is called a default. Another term for credit risk is default risk.

To understand the nature & the effect of the Credit Risk in the bank.

To study when why where & which result Credit Risk is formulation & criteria for the Credit Risk.

9.2) Research Design There are three types of research design.

Research Design

Exploratory Descriptive Causal

Focus on idea Focus on Focus on

Delivery Characteristics Knowing

Base on secondary Well- Cause & effect

Data Structured relation

Not rigid Rigid in nature Base on Reasoning

The Researcher used Exploratory Research Design.

9.3) Data Collection

There are two sources of data collection

1. primary source of data collection

2. secondary source of data collection

Here researcher uses the secondary source of data for the study of the Credit Risk Management of the Varachha Bank. The annual report of the VCB for the two years provides the financial information regarding the performance of the bank. The data of the bank related to the Credit Risk Management of the bank provided useful information regarding the nature of Credit Risk Management of the bank.

9.4) Data collection forms:- 41

a) Observation Method

Data collected three observations. A keep researcher with integrity would in position to observe &

record data accurately. Attitude, Opinion, motivation, can be observed. Without knowledge of sample data are gathered.

b) Survey Method

Personal

Telephonic

Mail

The Researcher used Observation Method for data collection.

10) BENEFIT OF THE STUDY

It gives the knowledge about the reasons for the rising Credit Risk in co-operative sector bank.

It provides the knowledge how these banks manage its Credit Risk and keeps them within tolerance level as per the RBI norms.

It helped to know what strategies these banks adopt to reduce its risk when the bank feels that recovery is impossible.

11) Limitation of the study

Lack of experience of researcher. There is inadequacy of some data for the preparation of the project.

12) SWOT Analysis

During the project work two months at Earache co-operative bank, I find out some strength, weaknesses, opportunities and threats by SWOT analysis are as under:

Strength:-

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a) Customer segmented well staff and effective implementation of Customer Relationship Management and Quality Management System.

b) In the area of Varachha bank is the boon for uneducated people by friendly advice and better services and really it yield lump sum amount of profit and deposits.

c) Varachha bank got “award of excellence” of the best co-operative bank in Surat city it shows the best banking operation.

Weakness:-

a) Intent for show the growth of bank.b) There are lack of linking performance and reward.

Opportunities:-

a) In coming soon varachha co-operative bank is having proposal for three branches at citilight, adajan. It’s great opportunity to cover most area of Surat.

b) Because of continued growth strategy, it build good image among the customers and public and reliance on varachha co-operative bank, so it has opportunity to prove the proved “growth pulls growth” Threats:-

a) There are strict rules and deposit for opening saving or current account is high in compare to other co-operative banks, so it can create bed image among customers and public and it can be limitation for slow inflow of opening account.b) In the modern era, varachha bank is not providing ATM facility and also

credit and debit card, so it can be threats for varachha bank.

13) FINDINGS:-

Provide better & fast service to customer.

Bank continuously gets audit class “A” in every year.

The Varachha Co-operative bank gets awards of best activity in Surat district.

The staff members of bank are very well experience and trained.

The customer can know their balance & other transaction related his a/c through Visual Account terminal Machine.

The profit of the bank is at increasing rate.

The bank has fully computerized system.

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There is lack of importance on marketing management.

Bank has a good image of its main branch as well as service provide that image can also be build up by providing that kind of service at all other branches.

The bank can attract more customers through their well services.

It has not more than 7 branches in Surat so far the Varachha Co-operative Bank has to face the competition with other bank because bank provides other policies & other facility.

14) CONCLUSION:-

Credit Risk is an investor's risk of loss arising from a borrower who does not make payments as promised. Such an event is called a default. Another term for credit risk is default risk.

The Varachha Co-operative Bank provides the money on credit base to their customers by various ways.

In case of credit risk management of the bank get the various documents from the customers as a legal proof of their credit.

In case of loan recovery management there is the number of loan accounts & total loan is increasing in comparison with the past data there is also increase in the provisions against NPA of the bank & decrease in the number of accounts that convert in to NPA and also decrease the gross NPA of the bank and bank’s net NPA is zero from the year of 2006 to 2010. It shows the good performance of the bank in loan recovery & bank had improved in managing its risk.

In case of Credit Risk in Investment, there is investment in terms of Current & Fixed Deposit accounts of the Varachha Bank in many Nationalize Banks like Indus India bank, HDFC, ICICI, BOB, AXIS, Tamilnadu Mark Ltd., Kotak Mahindra , YES bank, SBI, MMC,IDBI etc. and there is also investment in Government Securities Central & State Government Surety, Other acceptable Trust Surety, Investment in Share of Co-operative Institutions etc. and also the investment is increasing with the past year so we can say that bank is in safer side &it can manage its risk.

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In case of Credit Risk Measurement bank’s condition of provisions against non performing assets there is decrease in the accounts of overdue loans & in amount of overdue loans in comparison of year 2009 with 2010. And in movements of Credit Risk to Assets Ratio (CRAR) is increasing. In 2009 is 31.23% & in 2010 it is 32.08% which indicate the good signal for the bank.

15) BIBLIOGRAPHY

Books

1) Research methodology - G.C.berri

2) Banking system - B.S.shah

Website

www.varachhabank.com

Annual Report Of Bank

1) Annual Report of Bank (2008-09)

2) Annual Report of Bank (2009-10)

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