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A STUDY ON THE EXPOSURE OF CREDIT RISK IN EXPORT BILLS AT PUNJAB NATIONAL BANK

Organization StudySubmitted to

MAHATMA GANDHI UNIVERSITY, KOTTAYAMIn partial fulfillment of requirement for the award of

MASTERS DEGREE IN BUSINESS ADMINISTRATION(2009-2011) By

Subroto ChowdhuryReg No: 10839

RAJAGIRI COLLEGE OF SOCIAL SCIENCESRAJAGIRI P.O Kochi 683104

DECLARATIONI, Subroto Chowdhury , Ist year Master of Business Administration student of Rajagiri College of Social Sciences, Kochi, hereby declare that this project report titled A Study on the Exposure of Credit Risk in Export Bills in Punjab National Bank submitted to Mahatma Gandhi University, Kottayam in partial fulfillment of the requirement of the award of Masters Degree in Business Administration is my original work and effort and that it will not be submitted to any other University or institution for the award of any degree or diploma.

All information in this document has been obtained to use only for my academic purpose and is presented in accordance with the academic rules and ethical conduct under the guidance of Prof. Rakesh Krishnan, faculty, Rajagiri College of Social Sciences and Mr. D.Hari, Senior Manager and Mr. D.Chandranatha, Manager Forex, Punjab National Bank, K.G. Road, Bangalore

PLACE: DATE:

ACKNOWLEDGEMENTI would like to express my gratitude to, Dr. Joseph I Injodey, Principal Rajagiri College of Social Sciences, and his team for providing me the opportunity to be a part of Rajagiri Centre for Business Studies and undertaking this project.

I offer my profound gratitude to my guide Prof. Rakesh Krishnan, faculty of Rajagiri College of Social Sciences in whole heartedly helping me in successfully completing this project. I really thank Mr. D.Hari, Senior Manager and

Mr.D.Chandranatha, Manager - Forex, Punjab National Bank for their guidance in collecting necessary information and for their support in successfully completing this project. I thank my parents, teachers, GOD and all others who have directly or indirectly assisted me in doing this project and also for the help, support, interest and valuable hints they have provided.

TABLE OF CONTENTS

Title EXECUTIVE SUMMARY 1. ORGANISATIONAL STUDY 1.1INDUSTRY PROFILE 1.2 COMPANY PROFILE HISTORY & INCORPORATION REACH PERFORMANCE ORGANISATIONAL STRUCTURE SWOT ANALYSIS VISION 2013 2. PROBLEM CENTERED STUDYOF THE ORGANISATION 2.1 TITLE OF STUDY 2.2 OBJECTIVES OF THE STUDY 2.3 RESEARCH METHODOLOGY 2.4 PROBLEM STATEMENT 2.5LIMITATIONS OF THE STUDY 2.6 BACKGROUND STUDY 3 DATA ANALYSIS & INTERPRETATION 4 FINDINGS 5 SUGGESTIONS 7 8 APPENDIX BIBLIOGRAPHY

Pg. No. 1 2 3 16 17 19 22 31 39 47 49 50 50 50 50 50 51 62 75 76 78 82

LIST OF TABLES

Table No.

Particulars FINANCIAL EXPRESS / ERNST & YOUNG SURVEY ON INDIAs BEST BANKS PERFORMANCE OF PUNJAB NATIONAL BANK AS ON 31.03.2010 CAPITAL STRUCTURE OF PNB OTHER BUSINESS PERFORMANCE PARAMETERS CREDIT RISK RATING BY PNB through PNB Trac CREDIT RISK RATING MODELS INDUSTRY-WISE CREDIT EXPOSURE LIMITS FOREIGN OUTWARD BILLS PURCHASED (FOBP)

Page No. 22

1.2.1

1.2.2 1.2.3 1.2.4 2.6.1 2.6.2 2.6.3 3.1.1 3.1.2 3.1.3 3.1.4

23 23 25 57 58 59 63 65 67 69

FOREIGN OUTWARD BILLS FOR COLLECTION FOREIGN OUTWARD BILLS NEGOTIATED UNDER LETTER OF CREDIT FOREIGN OUTWARD BILLS DISCOUNTED

LIST OF DIAGRAMSDiagram No. 1.2.1 1.2.2 1.2.3 1.2.4 1.2.5 1.2.6 1.2.7 2.6.1 2.6.2 3.1.1 3.1.2 3.1.3 3.1.4 Particulars DOMESTIC NETWORK PERFORMANCE PROFILE RATIO PRODUCTIVITY & MANKET SHARE SUBSIDIARIES PERFORMANCE SHARE PRICES OF PNB VALUE FOR STAKEHOLDERS SHAREHOLDING PATTERN RISK MANAGEMENT DIVISION ORGANISATIONAL STRUCTURE OF RMD FOBP USANCE BILLS FOBP SIGHT BILLS FOBC SIGHT BILLS FOBC USANCE BILLS Page No. 21 24 26 27 28 29 30 61 61 64 64 65 66

3.1.5 3.1.6 3.1.7 3.1.8 3.1.9 3.1.10 3.1.11 3.1.12 3.1.13 3.1.14

FOBNLC SIGHT BILLS FOBNLC USANCE BILLS FOBD SIGHT BILLS FOBD SIGHT BILLS OUTSTANDING BILLS (07-08) OUTSTANDING BILLS (08-09) OUTSTANDING BILLS (09-10) OUTSTANDING SIGHT & USANCE BILLS (07-08) OUTSTANDING SIGHT & USANCE BILLS (08-09) OUTSTANDING SIGHT & USANCE BILLS (09-10)

68 68 70 70 71 72 72 73 74 74

GlossaryFOBP FOBC FOBNLC FOBD L/C RBI NPA Foreign Outward Bills Purchased Foreign Outward Bills for Collection Foreign Outward Bills Negotiated under Letter of Credit Foreign Outward Bills Discounted Letter of credit Reserve Bank of India Non Performing Assets

FDI TSA RMD CIBIL CRMD CRMC PBT IRB ICAAP DA DP NTP B/L EDW CRM RTGS

Foreign Direct Investment The Standardized Approach Risk Management Division Credit Information Bureau of India Credit Risk Management Division Credit Risk Management Committee Profit before TaxInternal Ratings Based Internal Capital Adequacy Assessment Process

Documents Against Acceptance Documents Against Payment Normal Transit Period Bill of Lading Electronic Data Warehouse Credit Risk Management Real Time Gross Settlement

Executive SummaryIn these five decades since independence, banking in India has evolved through four distinct phases: Foundation phase: Can be considered to cover 1950s and 1960s till the nationalisation ofbanks in 1969. The focus during this period was to lay the foundation for a sound banking system in the country. As a result the phase witnessed the development of necessary legislative framework for facilitating re-organisation and consolidation of the banking system, for meeting the requirement of Indian economy.

Expansion phase: Had begun in mid-60s but gained momentum after nationalisation ofbanks and continued till 1984. A determined effort was made to make banking facilities available to the masses. However this weakened the lines of supervision and affected the quality of assets of banks and pressurized their profitability and brought competitive efficiency of the system at low ebb.

Consolidation Phase: The phase started in 1985 when a series of policy initiatives weretaken by RBI which saw marked slowdown in the branch expansion. Attention was paid to improving house-keeping, customer service, credit management, staff productivity and profitability of banks. Measures were also taken to reduce the structural constraints that obstructed the growth of money market.

Reforms Phase: The macro-economic crisis faced by the country in 1991 paved theway for extensive financial sector reforms which brought deregulation of interest rates, more competition, technological changes, prudential guidelines on asset classification and income recognition, capital adequacy, autonomy packages etc. This Project which is basically done in the area of export finance basically analyses the credit risk of export bills & finds ways & solutions with the help of credit risk mitigation techniques to minimize the credit risk of export bills . it also focuses deeply on the organisational achievements & structure of Punjab national bank. The project also highlights all the main areas of post shipment credit. The research is done after deep study of RBI & Fedai guidelines. I sincerely hope that it will be not only being useful to the organisation but also foe academic purposes.

1

SECTION 1ORGANISATION STUDY

2

1.1

INDUSTRY PROFILE

BIRTH OF THE BANKING CONCEPT IN THE COUNTRYBanking in India originated in the last decades of the 18th century. The first banks were The General Bank of India which started in 1786, and the Bank of Hindustan, both of which are now defunct. The oldest bank in existence in India is the State Bank of India, which originated in the Bank of Calcutta in June 1806, which almost immediately became the Bank of Bengal. This was one of the three presidency banks, the other two being the Bank of Bombay and the Bank of Madras, all three of which were established under charters from the British East India Company. For many years the Presidency banks acted as quasi-central banks, as did their successors. The three banks merged in 1921 to form the Imperial Bank of India, which, upon India's independence, became the State Bank of India. Indian merchants in Calcutta established the Union Bank in 1839, but it failed in 1848 as a consequence of the economic crisis of 1848-49. The Allahabad Bank, established in 1865 and still functioning today, is the oldest Joint Stock bank in India. It was not the first though. That honor belongs to the Bank of Upper India, which was established in 1863, and which survived until 1913, when it failed, with some of its assets and liabilities being transferred to the Alliance Bank of Shimla. When the American Civil War stopped the supply of cotton to Lancashire from the Confederate States, promoters opened banks to finance trading in Indian cotton. With large exposure to speculative ventures, most of the banks opened in India during that period failed. The depositors lost money and lost interest in keeping deposits with banks. Subsequently, banking in India remained the exclusive domain of Europeans for next several decades until the beginning of the 20th century. Foreign banks too started to arrive, particularly in Calcutta, in the 1860s. The Comptoire d'Escompte de Paris opened a branch in Calcutta in 1860, and another in Bombay in 1862; branches in Madras and Pondicherry, then a French colony, followed. HSBC established itself in Bengal in 1869. Calcutta was the most active trading port in India, mainly due to the trade of the British Empire, and so became a banking center. The first entirely Indian joint stock bank was the Oudh Commercial Bank, established in 1881 in Faizabad. It failed in 1958. The next was the Punjab National Bank, established in Lahore in 1895, which has survived to the present and is now one of the largest banks in India. The period between 1906 and