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

Organization Study

Submitted to

MAHATMA GANDHI UNIVERSITY, KOTTAYAM

In partial fulfillment of requirement for the award of

MASTERS DEGREE IN BUSINESS ADMINISTRATION

(2009-2011)

By

Subroto Chowdhury

Reg No: 10839

RAJAGIRI COLLEGE OF SOCIAL SCIENCESRAJAGIRI P.OKochi – 683104

DECLARATION

I, 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:

ACKNOWLEDGEMENT

I 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 Pg. No.

EXECUTIVE SUMMARY 1

1. ORGANISATIONAL STUDY 2

1.1INDUSTRY PROFILE 3

1.2 COMPANY PROFILE 16

HISTORY & INCORPORATION 17

REACH 19

PERFORMANCE 22

ORGANISATIONAL STRUCTURE 31

SWOT ANALYSIS 39

VISION 2013 47

2. PROBLEM CENTERED STUDYOF THE

ORGANISATION

49

2.1 TITLE OF STUDY 50

2.2 OBJECTIVES OF THE STUDY 50

2.3 RESEARCH METHODOLOGY 50

2.4 PROBLEM STATEMENT 50

2.5LIMITATIONS OF THE STUDY 50

2.6 BACKGROUND STUDY 51

3 DATA ANALYSIS & INTERPRETATION 62

4 FINDINGS 75

5 SUGGESTIONS 76

7 APPENDIX 78

8 BIBLIOGRAPHY 82

LIST OF TABLES

Table No. ParticularsPage No.

1.2.1

FINANCIAL EXPRESS / ERNST & YOUNG – SURVEY ON “INDIA’s BEST BANKS 22

1.2.2PERFORMANCE OF PUNJAB NATIONAL BANK AS ON

31.03.2010 23

1.2.3CAPITAL STRUCTURE OF PNB

23

1.2.4OTHER BUSINESS PERFORMANCE

PARAMETERS 25

2.6.1 CREDIT RISK RATING BY PNB through PNB Trac 57

2.6.2 CREDIT RISK RATING MODELS 58

2.6.3 INDUSTRY-WISE CREDIT EXPOSURE LIMITS 59

3.1.1FOREIGN OUTWARD BILLS PURCHASED (FOBP)

63

3.1.2 FOREIGN OUTWARD BILLS FOR COLLECTION 65

3.1.3FOREIGN OUTWARD BILLS NEGOTIATED UNDER

LETTER OF CREDIT 67

3.1.4 FOREIGN OUTWARD BILLS DISCOUNTED 69

LIST OF DIAGRAMS

Diagram

No.Particulars

Page

No.

1.2.1 DOMESTIC NETWORK 21

1.2.2 PERFORMANCE PROFILE 24

1.2.3 RATIO PRODUCTIVITY & MANKET SHARE 26

1.2.4 SUBSIDIARIES PERFORMANCE 27

1.2.5 SHARE PRICES OF PNB 28

1.2.6 VALUE FOR STAKEHOLDERS 29

1.2.7 SHAREHOLDING PATTERN 30

2.6.1 RISK MANAGEMENT DIVISION 61

2.6.2 ORGANISATIONAL STRUCTURE OF RMD 61

3.1.1 FOBP USANCE BILLS 64

3.1.2 FOBP SIGHT BILLS 64

3.1.3 FOBC SIGHT BILLS 65

3.1.4 FOBC USANCE BILLS 66

3.1.5 FOBNLC SIGHT BILLS 68

3.1.6 FOBNLC USANCE BILLS 68

3.1.7 FOBD SIGHT BILLS 70

3.1.8 FOBD SIGHT BILLS 70

3.1.9 OUTSTANDING BILLS (07-08) 71

3.1.10 OUTSTANDING BILLS (08-09) 72

3.1.11 OUTSTANDING BILLS (09-10) 72

3.1.12 OUTSTANDING SIGHT & USANCE BILLS (07-08) 73

3.1.13 OUTSTANDING SIGHT & USANCE BILLS (08-09) 74

3.1.14 OUTSTANDING SIGHT & USANCE BILLS (09-10) 74

Glossary

FOBP Foreign Outward Bills Purchased

FOBC Foreign Outward Bills for Collection

FOBNLC Foreign Outward Bills Negotiated under Letter of Credit

FOBD Foreign Outward Bills Discounted

L/C Letter of credit

RBI Reserve Bank of India

NPA Non Performing Assets

FDI Foreign Direct Investment

TSA The Standardized Approach

RMD Risk Management Division

CIBIL Credit Information Bureau of India

CRMD Credit Risk Management Division

CRMC Credit Risk Management Committee

PBT Profit before Tax

IRB Internal Ratings Based

ICAAP Internal Capital Adequacy Assessment Process

DA Documents Against Acceptance

DP Documents Against Payment

NTP Normal Transit Period

B/L Bill of Lading

EDW Electronic Data Warehouse

CRM Credit Risk Management

RTGS Real Time Gross Settlement

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Executive Summary

In 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 of banks 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 of banks 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 were

taken 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 the way 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.

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SECTION 1

ORGANISATION STUDY

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1.1 INDUSTRY PROFILE

BIRTH OF THE BANKING CONCEPT IN THE COUNTRY

Banking 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 1911, saw the establishment of banks inspired by the Swadeshimovement. The Swadeshi movement inspired local businessmen and political figures to found banks of and for the Indian community. A number of banks established then have

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survived to the present such as Bank of India, Corporation Bank, Indian Bank, Bank of Baroda, Canara Bank and Central Bank of India.

The fervor of Swadeshi movement lead to establishing of many private banks in Dakshina Kannada and Udupi district which were unified earlier and known by the name South Canara( South Kanara ) district. Four nationalized banks started in this district and also a leading private sector bank. Hence undivided Dakshina Kannada district is known as "Cradle of Indian Banking".

Post-independence

The partition of India in 1947 adversely impacted the economies of Punjab and West Bengal, paralyzing banking activities for months. India's independence marked the end of a regime of the Laissez-faire for the Indian banking. The Government of India initiated measures to play an active role in the economic life of the nation, and the Industrial Policy Resolution adopted by the government in 1948 envisaged a mixed economy. This resulted into greater involvement of the state in different segments of the economy including banking and finance. The major steps to regulate banking included:

In 1948, the Reserve Bank of India, India's central banking authority, was nationalized, and it became an institution owned by the Government of India.

In 1949, the Banking Regulation Act was enacted which empowered the Reserve Bank of India (RBI) "to regulate, control, and inspect the banks in India."

The Banking Regulation Act also provided that no new bank or branch of an existing bank could be opened without a license from the RBI, and no two banks could have common directors.

However, despite these provisions, control and regulations, banks in India except the State Bank of India, continued to be owned and operated by private persons. This changed with the nationalization of major banks in India on 19 July 1969.

Nationalization

By the 1960s, the Indian banking industry had become an important tool to facilitate the development of the Indian economy. At the same time, it had emerged as a large employer, and a debate had ensued about the possibility to nationalize the banking industry. Indira Gandhi, the-then Prime Minister of India expressed the intention of the GOI in the annual conference of the All India Congress Meeting in a paper entitled "Stray thoughts on Bank Nationalization." The paper was received with positive enthusiasm. Thereafter, her move was swift and sudden, and the GOI issued an ordinance and nationalized the 14 largest commercial banks with effect from the midnight of July 19, 1969. Jayaprakash Narayan, a national leader of India, described the step as a "masterstroke of political sagacity." Within two weeks of the issue of the ordinance, the Parliament passed the Banking Companies

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(Acquisition and Transfer of Undertaking) Bill, and it received the presidential approval on 9 August 1969.

A second dose of nationalization of 6 more commercial banks followed in 1980. The stated reason for the nationalization was to give the government more control of credit delivery. With the second dose of nationalization, the GOI controlled around 91% of the banking business of India. Later on, in the year 1993, the government merged New Bank of India with Punjab National Bank. It was the only merger between nationalized banks and resulted in the reduction of the number of nationalized banks from 20 to 19. After this, until the 1990s, the nationalized banks grew at a pace of around 4%, closer to the average growth rate of the Indian economy. The nationalized banks were credited by some, including Home minister P. Chidambaram, to have helped the Indian economy withstand the global financial crisis of 2007-2009.

Liberalization

In the early 1990s, the then Narsimha Rao government embarked on a policy of liberalization, licensing a small number of private banks. These came to be known as New Generation tech-savvy banks, and included Global Trust Bank (the first of such new generation banks to be set up), which later amalgamated with Oriental Bank of Commerce, Axis Bank(earlier as UTI Bank), ICICI Bank and HDFC Bank. This move, along with the rapid growth in the economy of India, revitalized the banking sector in India, which has seen rapid growth with strong contribution from all the three sectors of banks, namely, government banks, private banks and foreign banks.

The next stage for the Indian banking has been setup with the proposed relaxation in the norms for Foreign Direct Investment, where all Foreign Investors in banks may be given voting rights which could exceed the present cap of 10%, at present it has gone up to 74% with some restrictions.

The new policy shook the Banking sector in India completely. Bankers, till this time, were used to the 4-6-4 method (Borrow at 4%; Lend at 6%; Go home at 4) of functioning. The new wave ushered in a modern outlook and tech-savvy methods of working for traditional banks. All this led to the retail boom in India. People not just demanded more from their banks but also received more.

Currently (2007), banking in India is generally fairly mature in terms of supply, product range and reach-even though reach in rural India still remains a challenge for the private sector and foreign banks. In terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong and transparent balance sheets relative to other banks in comparable economies in its region. The Reserve Bank of India is an autonomous body, with minimal pressure from the government. The stated policy of the Bank on the Indian Rupee is to manage volatility but without any fixed exchange rate-and this has mostly been true.

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With the growth in the Indian economy expected to be strong for quite some time-especially in its services sector-the demand for banking services, especially retail banking, mortgages and investment services are expected to be strong. One may also expect M&As, takeovers, and asset sales.

In recent years critics have charged that the non-government owned banks are too aggressive in their loan recovery efforts in connection with housing, vehicle and personal loans. There are press reports that the banks' loan recovery efforts have driven defaulting borrowers to suicide.

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INDIAN BANKING SYSTEM

UNORGANISED SECTOR ORGANISED SECTOR

INDIGENOUS BANKERS

MONEY LENDERS

RESERVE BANK OF INDIA

COMMERCIAL BANKS

CO-OPERATIVE BANKS

SPECIALISED BANKS

SCHEDULED BANKS

NON- SCHEDULED BANKS

PUBLIC SECTOR BANKS

PRIVATE SECTOR BANKS

FOREIGN BANKS

SBI & OTHER ASSOCIATES

REGIONAL RURAL BANKS

NATIONALISED BANKS

STATE COOPERATIVE BANKS

DISTRICT COOPERATIVE BANKS

PRIMARY COOPERATIVEBANKS &SOCIETIES

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Characteristics of the Indian Banking

India has well developed, but not best run, banking system. The banking system is:

Indigenized - that is, it is made up of mainly indigenous, local and national, banks manned by local people.

Nationalized - the indigenous banks are mostly in public sector. New foreign and indigenous banks are emerging in the private sector, which is more competitive. India's banking is mixed economy.

Diversified - the system has many kinds of banks, such as commercial banks (some of which are foreign banks), specialized banks, rural banks. The diversity in banking is because of the diversity in banking needs. The diversity is the necessity. The diversity is a national solution. The presence of rural banks indicates that banking in India is geographically widespread and not concentrated in big cities. The diversity leads to expansion - the country's banking system is expanding with the recurrent edition of more banks, more bank branches. The Indian banking is essentially branch banking the public sector banks have branches all over India. The branch banking system suits the country most because of the system's inherent advantages and the country's growing banking needs due to its vast geography, vast demography, and vast economy. The indigenous banking has replaced the traditional moneylenders, who have worked only to perpetuate debt and poverty in the weaker sections of the society. The nationalization of banks has served to make finance accessible, affordable and productive for the weaker sections.

Unionized - the banking staff matters are handled by unions and this more or less affects customer service.,

Centrally administered - the country's central bank administers the banking sector of the country's economy.

Canalized- the nationalized banks' resources in particular are canalized toward country's economic development. They are invested in trade development, rural development, agriculture development (called green revolution), and industrial development. The nationalization paves the way for canalization. India's mechanization of agriculture is the courtesy of the country’s nationalized banks. India's banking system is not the result but the cause of the country's economic development.

Deposit- focused - the indigenous banks vie for deposits and this helps the country in capital formation for economic development acceleration and the bank manager in career development

Collateral -oriented - that is, the lending is heavily collateralized, in some cases unnecessarily additionally collateralized.

Bad debt ridden - the loans in public sector banks made for development purposes, particularly rural development, are mainly non-performing assets. This is because verification of end use of the loans is lacking. The political interference in poverty-

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alleviation banking programs in particular has made the public sector banks poor. Poverty-alleviation banking is political banking and political banking is not prudent banking.

Computerized - the computer is ledger, teller, cashier but in urban teller banking. The rural banking is more or entirely paper-based.

CURRENT SCENARIO & BANKING REFORMS

The broad theme of banking in the present is to achieve value addition beyond conventional products and services, to extend market size and carve niches for successfully competing for higher share of business. In this endeavour, co-creation of new products and services along with other players like mutual funds, pension funds, private equity partners, credit card and consumer finance companies, capital market intermediaries like brokerages, depositories, personal finance and wealth management advisors, insurance companies, infrastructure finance companies, micro-finance self-help groups, etc. is likely to be a win-win situation for most business associates. The rising aspirations of our economy growing at an accelerated pace of over 9% are pointing to the need for new products and services on the resources raising side as well as credit and advances. This process will see the banking segment emerge stronger and vibrant in the banking-financial services-insurance (BFSI) space. Within the dominant services sector, which accounts for nearly 60% of the economy, the BFSI segment will be a growth driver for the whole economy.

As far as banking sector is concerned, there are some developments and trends which are playing out as per RBI/Govt. roadmaps indicated, while dynamics of foreign banks’ plans/liberalization of the sector/global factors cannot be fully visualized or predicted. However, Deposits at Rs 45,00,000 crores (reckoning CAGR of around 18%), Bank Credit around Rs 32,00,000 crores and Banking Sector market capitalization at Rs.6,00,000 crores are plausible estimates of the size of Indian banking sector by 2010. It would mean an increased monetisation of the economy and financial inclusion would have brought about 80% of the population availing banking services.

THE MACRO INTER-ACTION IN BFSI SECTOR

Globalisation and the expanding economy is reflected in the greater inter-action within the broad banking–financial services–insurance (BFSI) sector and with other sectors of the global economy. In the market place, this is manifested in new finance products like venture capital, top-up or mezzanine finance, private equity, variety of hybrid financial instruments, derivatives, cross-border deals, long term infrastructure finance, micro-finance, etc. New arrangements like Public-Private partnerships, build-own-operate-transfer, interest rate

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subventions for farmers, bancassurance ; new institutions like India Infrastructure Finance Corporation, Power Finance Corporation, multi-lateral aid and finance agencies are adding variety to a bouquet of financial services.

While inter-action between banks, money market, capital market, commodity futuresmarkets, foreign exchange markets and asset markets like realty/gold have increased;

The regulatory requirements, risk management guidelines and market segmentation have maintained the disparate character of these constituents of the overall financial sector. This has enabled cross-subsidization, selective interest regulation and regulatory interventions to work with significant impact.

With the Doha round difficulties in WTO negotiations persisting and contentious issues of agriculture, freer services and labour markets still awaiting resolution, major changes in international trade and services are not likely in the next three years. But yes, the tilt towards Asia would become increasingly visible. And so, increased flows of foreign direct investment, foreign institutional investment inflows and remittances to India, China and other Asian countries are expected.

BANKING POLICY PERSPECTIVES AND DYNAMICS:

The Indian Banking Sector is dominated by Public Sector Banks accounting for about 70% share of business. With expansion of Private Sector Banks and Foreign Banks in India, this business share is expected to go down, but Public Sector Banks are expected to retain the dominant share of over 60%.

As on March 2007, there were 82 Scheduled Commercial Banks, 96 Regional Rural Banks, 1815 Urban Co-operative Banks, 7 Development Finance Institutions, 13020 Non Banking Finance Companies, 11 Primary Dealers and numerous State Level/District/Primary Co-operative Banks. This indicates a lot of variety in institutions, business models and customers served. Govt. policies are encouraging consolidation in the financial sector by way of mergers, amalgamations and acquisitions. So, by 2010, the Banking Sector is likely to have fewer Indian Banks with increased overseas branches and more Foreign Banks.

The Finance Ministry has set a tentative time schedule of 2009 for allowing Foreign Banks to acquire Indian Private Sector Banks and other liberalization. With foreign currency reserves around US$ 225 billion today and significant addition in the years to come, the Govt. is following an increasingly liberal policy on the matter of capital account convertibility. While full convertibility may not materialize (due to not meeting essential conditions laid down by Tara pore Committee), there is comfort in meeting foreign exchange requirements and India’s investment grade external rating is recognition of its strengths. The banking sector has definitely benefited in this regard. However, though the international standing of Indian banks has improved significantly, their size is no match for international banks from

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developed countries or even Chinese banks. (Please see compilations by Business Standard Banking Annual 2006 given below)

Risk Management initiatives being calibrated by RBI are directing the banks towards better management of businesses and risks. Extensive use of internal and external credit ratings, bank ratings, Banking Codes and Standards Board of India promoting international best practices, score-based assessments and payment histories are all going to bring fairness, transparency and informed decision- making in the banking sector.

Current Scenario

The industry is currently in a transition phase. On the one hand, the PSBs, which are the mainstay of the Indian Banking system, are in the process of shedding their flab in terms of excessive manpower, excessive non Performing Assets (Npas) and excessive governmental equity, while on the other hand the private sector banks are consolidating themselves through mergers and acquisitions.

PSBs, which currently account for more than 78 percent of total banking industry assets are saddled with NPAs (a mind-boggling Rs 830 billion in 2000), falling revenues from traditional sources, lack of modern

technology and a massive workforce while the new private sector banks are forging ahead and rewriting the traditional banking business model by way of their sheer innovation andservice. The PSBs are of course currently working out challenging strategies even as 20 percent of their massive employee strength has dwindled in the wake of the successful Voluntary Retirement Schemes (VRS) schemes.

The private players however cannot match the PSB’s great reach, great size and access to low cost deposits. Therefore one of the means for them to combat the PSBs has been through the merger and acquisition (M& A) route. Over the last two years, the industry has witnessed several such instances. For instance, Hdfc Bank’s merger with Times Bank ICICI Bank’s acquisition of ITC Classic, Anagram Finance and Bank of Madura. Centurion Bank, Indusind Bank, Bank of Punjab, Vysya Bank are said to be on the lookout. The UTI bank- Global Trust Bank merger however opened a Pandora’s box and brought about the realization that all was not well in the functioning of many of the private sector banks.

Private sector Banks have pioneered internet banking, phone banking, anywhere banking, and mobile banking, debit cards, Automatic Teller Machines (ATMs) and combined various other services and integrated them into the mainstream banking arena, while the PSBs are still grappling with disgruntled employees in the aftermath of successful VRS schemes. Also, following India’s commitment to the WTO agreement in respect of the services sector, foreign banks, including both new and the existing ones, have been permitted to open up to 12 branches a year with effect from 1998-99 as against the earlier stipulation of 8 branches.Talks of government diluting their equity from 51 percent to 33 percent in November 2000 have also opened up a new opportunity for the takeover of even the PSBs. The FDI rules

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being more rationalized in Q1FY02 may also pave the way for foreign banks taking the M& A route to acquire willing Indian partners.

Meanwhile the economic and corporate sector slowdown has led to an increasing number of banks focusing on the retail segment. Many of them are also entering the new vistas of Insurance. Banks with their phenomenal reach and a regular interface with the retail investor are the best placed to enter into the insurance sector. Banks in India have been allowed to provide fee-based insurance services without risk participation invest in an insurance company for providing infrastructure and services support and set up of a separate joint-venture insurance company with risk participation.

Foreign banks are likely to succeed in their niche markets and be the innovators in terms of technology introduction in the domestic scenario. The outlook for the private sector banks indeed looks to be more promising vis-à-vis other banks. While their focused operations lower but more productive employee force etc will stand them good, possible acquisitions of PSU banks will definitely give them the much needed scale of operations and access to lower cost of funds. These banks will continue to be the early technology adopters in the industry, thus increasing their efficiencies. Also, they have been amongst the first movers in the lucrative insurance segment. Already, banks such as ICICI Bank and HDFC Bank have forged alliances with Prudential Life and Standard Life respectively. This is one segment that is likely to witness a greater deal of action in the future. In the near term, the low interest rate scenario is likely to affect the spreads of majors. This is likely to result in a greater focus on better asset-liability management procedures. Consequently, only banks that strive hard to increase their share of fee-based revenues are likely to do better in the future.

ANTICIPATED EVENTS

Stronger measures for addressing burgeoning fiscal deficit/trade deficit in USA. This will have far reaching impact on world trade, liquidity, strength of the US dollar, and international fund flows.

Major banking sector liberalization scheduled for 2009.

Initiatives on pension funds/regulations by Pension Fund Development and Regulatory Authority.

Policy consolidation on financial conglomerates in India – it would impact major public financial institutions and Special Purpose Vehicles.

DYNAMICS AND UNCERTAINTIES

Persuasive advisories from Finance Ministry, RBI for consolidation in the financial sector has not influenced mid-size banks. Hence newer measures/ directives are

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expected. The consolidation process has to gain momentum to enable Indian banks to acquire critical size to be ready for intense competition ahead.

Expansion, growth and earnings growth of Corporate India to impact the banking sector in terms of new/ additional business as also asset quality. Also, acquisitions abroad and international forays will show impact within next three years in terms of revenues, costs, profits, and management experience.

Real economy issues – SEZ developments, labour reforms, infrastructure deficiencies, recovery of development charges and utility costs to determine future public-private partnerships and recovery of infrastructure funding by banks etc. Inter-state taxation, new tax measures and other irritants, which impede economic growth affect financial sector indirectly by adverse impact on assets.

The Agriculture Conundrum – uncertainties, water management, laggard growth, funding issues, next wave technology.

Fortunes of Small and Medium Enterprises, which are heavily funded by banking sector.

Indian competitiveness is on test as India integrates with the world economy.

ISSUES AND CHALLENGES FOR INDIAN BANKING SECTOR

In the face of competition from multinational banks and their leverage of size, international presence and skills, the Indian banking sector is bound to feel the heat. While the leading financial conglomerates like ICICI Bank, SBI, PNB, BOB, UTI, LIC, GIC, Reliance, etc are gearing up, it is going to be a stiff challenge. More so, when the Indian banking sector is vying for international business (at home and abroad), for a higher share in the fee income pie, investment banking, resources raising and higher value products and services.

The growth prospects are more challenging for the dominant public sector banking segment – capital adequacy issues in the context of asset growth, government ownership issues and holding restrictions, human resources issues, competition from foreign banks/NBFCs/stronger new private sector banks in all new financial products, shifting of creamy best customers to competitors etc.

Challenge of serving the rural sector – agriculture, small and medium enterprises, artisans, cross-subsidization

Banks which move fast with cost-effective business models for financial inclusion can garner new business (an issue as well as a challenge)

Making longer term resources plans and implementing them – need for new deposit products, enhancing liquidity in the bond markets

Developing new skills for new products and services

IMPERATIVES FOR THE PUBLIC SECTOR BANKS A marketing thrust with customer acquisition and retention orientation has to be

reinforced to realize the business potential of the large branch networks.

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A makeover is required in terms of matching technology/human skills/efficiency parameters with the competition. For this, a workout involving management, workmen unions, officer unions, government is required. Compensation and way of restructuring / retraining / redeployment and infusion of new workforce are major issues awaiting resolution.

Risk/return/contribution have to be synchronized into the performance and rewards matrix.

Going forward, reforms addressing capital requirements, government ownership, incentives for improved performance have become an immediate requirement.

Business models for different businesses have to be updated.

CHANGES IN CUSTOMER INTERFACE / OPERATIONS

Technology is enabling new products and services to be offered like multi-city operations, frequent resets of interest and various combinations, multi-channel transaction facilitation, etc. This enables offer of specialized services of phone banking, seamless execution in savings-demat-settlement-borrowal accounts, biometric ATMs, mobile & net banking , etc.

Technological improvements are also facilitating customer segmentation based on customer revenue contributions/business activity profiles/various needclassifications. This has led to specialized service outlets like large corporate branch, mid-corporate branch, Premium (high value clientele) outlets, capital markets branch, etc. Customer Relationship Management is improving.

OPPORTUNITIES AHEAD

The take-off growth opportunities in the following segments require focused marketing efforts and innovative products and services:

Housing and Retail consumer loans.

Infrastructure projects (airports, cargo and logistics/ urban transportation/ roads/ ports, inland waterways, power, utilities etc) One estimate is over US $300 billion over the next five years.

New finance packages for increasing variety of agriculture and horticulture related inputs.

Automobile sector growth.

New products for small and medium enterprises.

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Indians are traditionally high savers and future planners. This factor shall ensure inflow of deposits, and need for insurance & pension products, mutual funds etc. (refer Appendix Table 11 & 12 of RBI Annual Report 2006-07 given below).

The growing prosperity shall require wealth management services, private equity funds and other new services.

Indigenous defence production and commercial exploitation of space are new growth opportunities.

Asset reconstruction/ liquidation/ asset sell-offs.

Investment banking opportunities - mergers & acquisitions, financial structuring, financing foreign acquisitions, resources raising in capital and debt markets in India and abroad, take-out financing, etc.

Derivatives - interest rate swaps, currency swaps, currency futures and other varied hedging and risk management measures.

The RBI Annual Report 2005-06 has acknowledged:….” The emphasis on financial inclusion will also lead to enhanced need for financial intermediation. The banking system has to respond adequately to these new challenges, opportunities and risks. Innovative channels for credit delivery for serving these new rural credit needs, encompassing full supply chain financing, covering storage, warehousing, processing and transportation from farms to market will have to be found”.

Besides the business activities mentioned above, global best practices and efficiencies in risk management, dynamic asset-liability management, balance-sheet management involving derivatives/securitization, etc. shall unfold new vistas in banking.

So, the “purveyors of money” will also be change-agents and growth-drivers.

16

1.2 COMPANY PROFILE

Head Office: 7, Bhikhaiji Cama Place, New Delhi 110 066, India.Tel: (91 11) 2610 2303; Fax (91 11) 26108741; E-mail: fpo@pnb.co.in; Website: www.pnbindia.com

(Constituted under the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 as Punjab National Bank on July 19, 1969. On April 13, 1987, the Head Office of theBank was changed from 5, Sansad Marg, New Delhi 110 001 to 7, Bhikhaiji Cama Place,

New Delhi 110 066).

VISION

"To be a Leading Global Bank with Pan India footprints and become a household brand in the Indo-Gangetic Plains providing entire range of financial products and services under one

roof"

MISSION

"Banking for the unbanked"

Established in 1895 at Lahore, undivided India, Punjab National Bank (PNB) has the distinction of being the first Indian bank to have been started solely with Indian capital.The bank was nationalized in July 1969 along with 13 other banks. From its modest beginning, the bank has grown in size and stature to become a front-line banking institution in India at present.

Punjab National Bank (PNB), was registered on May 19, 1894 under the Indian Companies Act with its office in Anarkali Bazaar Lahore. The Bank is the second largest government-owned commercial bank in India with about 5000 branches across 764 cities. It serves over 38 million customers. The bank has been ranked 248th biggest bank in the world by Bankers Almanac, London.

17

HISTORY & INCORPORATION

1895: PNB commenced its operations in Lahore. PNB has the distinction of being the first Indian bank to have been started solely with Indian capital that has survived to the present. PNB's founders included several leaders of the Swadeshi movement such as Dyal Singh Majithia and Lala HarKishen Lal, Lala Lalchand, Shri Kali Prosanna Roy, Shri E.C. Jessawala, Shri Prabhu Dayal, Bakshi Jaishi Ram, and Lala Dholan Dass. Lala Lajpat Raiwas actively associated with the management of the Bank in its early years.

1904: PNB established branches in Karachi and Peshawar.

1940: PNB absorbed Bhagwan Dass Bank, a scheduled bank located in Delhi circle.

1947: Partition of India and Pakistan at Independence. PNB lost its premises in Lahore, but continued to operate in Pakistan.

1951: PNB acquired the 39 branches of Bharat Bank (est. 1942); Bharat Bank became Bharat Nidhi Ltd.

1960s: PNB amalgamated Indo Commercial Bank (est. 1933) in a rescue

1961: PNB acquired Universal Bank of India.

1963: The Government of Burma nationalized PNB's branch in Rangoon (Yangon).

September 1965: After the Indo-Pak war the government of Pakistan seized all the offices in Pakistan of Indian banks, including PNB's head office, which may have moved to Karachi. PNB also had one or more branches in East Pakistan (Bangladesh).

1969: The Government of India (GOI) nationalized PNB and 13 other major commercial banks, on July 19, 1969.

1976 or 1978: PNB opened a branch in London.

1986: The Reserve Bank of India required PNB to transfer its London branch to State Bank of India after the branch was involved in a fraud scandal.

1986: PNB acquired Hindustan Commercial Bank (est. 1943) in a rescue. The acquisition added Hindustan's 142 branches to PNB's network.

1993: PNB acquired New Bank of India, which the GOI had nationalized in 1980.

1998: PNB set up a representative office in Almaty, Kazakhstan.

18

2003: PNB took over Nedungadi Bank, the oldest private sector bank in Kerala. At the time of the merger with PNB, Nedungadi Bank's shares had zero value, with the result that its shareholders received no payment for their shares.PNB also opened a representative office in London.

2004: PNB established a branch in Kabul, Afghanistan.PNB also opened a representative office in Shanghai.PNB established an alliance with Everest Bank in Nepal that permits migrants to transfer funds easily between India and Everest Bank's 12 branches in Nepal.

2005: PNB opened a representative office in Dubai.

2007: PNB established PNBIL - Punjab National Bank (International) - in the UK, with two offices, one in London, and one in South Hall. Since then it has opened a third branch in Leicester, and is planning a fourth in Birmingham.PNB partnered with Venture InfoTech Global (VIG) and American International Group (AIG) Consortium, to form a Joint Venture for credit card business in Bhutan. In the same year, PNB entered into a memorandum of understanding with India Infrastructure Finance Company (IFCL), to finance infrastructure projects in the country. Later in that year, the bank launched a pilot project on financial inclusion at Neemrana in Alwar district of Rajasthan as part of a plan to cover 75 million people by 2010.

2008: PNB opened a branch in Hong Kong. The Royal Monetary Authority of Bhutan approved to set up Druk PNB Bank Ltd, a joint venture bank between PNB and Bhutanese Promoters in December 2008.

2009: PNB opened a representative office in Oslo, Norway, and a second branch in Hong Kong, this in Kowloon. . Nagesh Pydah and MV Tanksale were appointed as the Directors of the bank in March 2009.

Oct 2009: K R Kamath was appointed as the Chairman and Managing Director at PNB. Inthe same month, the bank acquired about 63.64% stake in Dana Bank, Kazakhstan.

Nov 2009: PNB entered into an agreement with FIM Bank (Malta), Banca IFIS, Italy and Blend Financial Services Ltd, to set up a joint venture company for providing factoring, forfeiting and trade finance related business, in November 2009. In the same month, the bank entered into agreement to sell 81, 25,000 shares of UTI AMC at INR200 each (approximately $4.3 each)and 6,500 shares of UTI Trustee at INR11.92 per share (approximately $0.25 per share) to M/s.T Rowe Price Global Investment Services Ltd.

2010: PNB received permission to upgrade its representative office in the Dubai International Financial Centre to a branch.

19

PUNJAB NATIONAL BANK - A SAGA OF EXCELLENCE IN BANKING

With over 60 million satisfied customers and 5123 offices, PNB has continued to retain its leadership position among the nationalized banks. The bank enjoys strong fundamentals, large franchise value and good brand image. Besides being ranked as one of India's top service brands, PNB has remained fully committed to its guiding principles of sound and prudent banking.

As the Bank starts 116th

year, let me enumerate its performances & achievements till the year 2010.

REACH

PNB is ranked as the 3rd largest bank in the country (after SBI and ICICI Bank.

On the occasion of 116th Foundation Day on 13.4.2010, the Hon'ble Union Finance Minister,

Shri Pranab Mukherjee inaugurated the 5000th

branch of the Bank. The Bank declared 100% CBS in all 6 sponsored Regional Rural Banks with 1408 branches. It launched 'Project Namaskar' by commissioning 30 kiosks under Financial Inclusion.

The Bank presently has 60 million customers, 5123 branches, 3663 ATMs, 10 lac internets banking users and equipped with RTGS / NEFT, on-line railway / air ticket booking, on-line tax payment, global credit card, on-line trading and mobile banking. A professionally managed bank with a successful track record of Strategic business area covering the large Indo-Gangetic belt and the metropolitan centres. It has Strong correspondent banking relationships with more than 217 international banks of the world More than 50 renowned international banks maintain their Rupee Accounts with PNB. Well equipped dealing rooms; 20 different foreign currency accounts are maintained at major centres all over the globe. Rupee drawing arrangements with M/s UAE Exchange Centre,UAE, M/s Al Fardan Exchange Co. Doha, Qatar/s Bahrain Exchange Co, Kuwait, M/s Bahrain Finance Co, Bahrain/s Thomas Cook Al Rostamani Exchange Co. Dubai,UAE, and M/s Musandam Exchange, Besides the huge network of general banking branches, the Bank is providing specialized services through Large Corporate branches, Mid-corporate branches, Trade Finance branches, SME branches, International Banking branches and full range of international banking services in association with international banking correspondents throughout the world.

On-line payment of Govt. taxes (direct & indirect), bill payment services, booking of airline and rail tickets, depository services, range of investment services in association with SMC and IDBI Capital Services , credit cards, housing finance, investment in gilts/gold, international remittance facilities in association with 15 exchange companies in Gulf countries/ Singapore, etc. indicate the wide range of customer services offered.

20

The bank provides training, advisory services and extension services through 8 Farmer Training Centres and RUDSETI, Patna to farmers, landless labour, urban and rural poor and unemployed youth. The Bank is reaching out to remote and interior areas through its sponsored Regional Rural Banks and business facilitators and correspondents.

The wide-ranging customer service interface is further strengthened by 24/7 call centre on toll-free nos. 1800 180 2222/0124-2340000 along with websites at www.pnbindia.in / www.pnbindia.com.

SUBSIDIARIES

PNB Housing Finance Ltd.

PNB Gilts Ltd.

PNB Investment services ltd

PNB International Ltd., UK

Druk PNB Bank Ltd. in Bhutan

JOINT VENTURES

UTI Asset Management Co. P Ltd/ UTI Trustee Co. P Ltd ( Joint Ownership)

Asset Care Enterprises Ltd. (joint-venture asset reconstruction company)

Principal PNB Asset Management Co. PVT. Ltd

Principal Trustee Co. Pvt. Ltd

PNB Principal Financial Planners Pvt. Ltd

PNB Principal Insurance Broking Pvt. Ltd

Principal PNB Life Insurance Co. Ltd Everest Bank Ltd., Nepal (Joint Venture)

M/s India Factoring & Finance Solutions Pvt. Ltd;

INTERNATIONAL OPERATIONS

Branches at (2) Hongkong & (1)Kabul, (1) Dubai Representative Office at Almaty, Dubai, Shanghai & Oslo

PNB International Ltd., UK with 4 branches

Everest Bank Ltd., Nepal (Joint Venture)

REGIONAL RURAL BANKS

Haryana, HP,, UP, Rajasthan, Bihar and Punjab

21

FIGURE: 1.2.1

PERFORMANCE

PNB has retained the leadership position amongst public sector banks, having achieved highest business volume of Rs.4.37 lac crores (Deposits – Rs. 2.50 lakh crore + Advances-Rs. 1.87 lakh crore) for the year ended March 2010.

The Annual Survey of Financial Express, Mumbai and Ernst & Young published in February, 2010 have also placed PNB at No. 1 in the public sector banks category. Our international

rank has also improved from 250th

in 2008 to 239th

in 2009 amongst the Top 1000 Banks ranking released by `The Banker', London.

22

The above achievements, financial performance of the Bank and the inherent strength of the Bank (strong financials, CRAR, brand, pan-India presence, etc.) have been recognized by the stock markets by raising our stock price over Rs.1000 in March 2010.

PNB ranked as:

• 26th

amongst India’s top 500 listed companies by ‘ET 500”.

• 3rd

amongst group of Large Bank by ‘Business Today - KPMG Best Banks 2009 study’.

• 5th

amongst group of Large Banks by ‘Business World-PWC India’s Best Bank 2009 survey’.

• No. 1 in the Public Sector Banks' category by `Financial Express', Mumbai - Feb. 2010.

• PNB is Asia Pacific’s 2nd strongest bank as per, “The Asian Banker”, (Singapore)• PNB is ranked as 54th “Biggest Emerging Market Banks”, out of the list of 200 such

banks, as per the ‘Global Finance Magazine”;

FINANCIAL EXPRESS / ERNST & YOUNG – SURVEY ON “INDIA’s BEST BANKS”

TABLE: 1.2.1

Name Overall Rank 2009

Strength &Soundness

Growth Profitability

Efficiency Credit Quality

Best Public Sector Banks (27)

Punjab National Bank

1 1 5 1 9 1.5

Bank of Baroda 2 5 2 8 3 4

Indian Bank 3 2 13 3 6 5

Corporation Bank 4 4 10 6.5 2 6

Bank of India 5 10 4 2 1 20

Best New Pvt. Sector Bank (6)

HDFC Bank 1 1 1 2 4 4

Best Old Pvt. Sector Bank (13)

Federal Bank 1 1 3 4.5 1 6

Best Foreign Bank (12)

JP Morgan Chase Bank

1 8 7 1 2 2

23

• As per the survey, Amongst 27 Public Sector Banks, Punjab National Bank takes the top slot followed by Bank of Baroda, Indian Bank, Corporation Bank and Bank of India.

• Punjab National Bank has been ranked Number one in terms of Strength &

Soundness, Profitability and Credit Quality. However, it has been ranked at 5th

position in terms of growth and at 9th

position in terms of efficiency.

PERFORMANCE OF PUNJAB NATIONAL BANK AS ON 31.03.2010

TABLE: 1.2.2

CAPITAL STRUCTURE OF PNB

TABLE: 1.2.3

Rs. crore Deposit

YOY Growth%

CASA % Credit Growth% CD Rati

o

Total Busine

ss BANKS Mar‘

2010 2009 2010 ‘

Mar‘

09

Mar‘

10

Mar‘ 2010

09 10 Mar‘

2010

Mar’ 2010

PNB 249789

26.0 19.1 38.8 40.9 187030 29.5 20.9 74.9 436819

BOB 241400

26.5 25.5 34.9 35.7 177500 34.9 23.3 73.5 418900

BOI 229815

26.5 21.1 31.0 32.0 171834 25.9 20.2 74.8 401649

Canara 235000

21.3 25.7 30.1 31.0 169000 28.9 22.3 71.9 404000

Union 170100

33.5 22.6 30.7 32.0 121000 30.0 25.3 71.1 291100

Subjects

Mar’00

Mar’01

Mar’02 Mar’03 Mar’04 Mar’05 Mar’06 Mar’07 Mar’08 Mar’09

NetProfit

408.14

458.23 562.39 842.20 1108.69 1410.12 1439.31 1540.08 2048.76 3090.88

Equity/ Total share capital

212.24

212.24 212.24 265.30 265.30 315.30 315.30 315.30 315.30 315.30

Total Debt

48145.66

56804.33

64,532.05

76,475.66

89,205.46

105885.18

126372.10

141808.53

171903.79

214134.86

24

FIGURE: 1.2.2

25

OTHER BUSINESS PERFORMANCE PARAMETERS

As at 31st

March, 2010 Accounts Amount (Rs.crores)

Savings Accounts 361.27 lacs 78,404Recurring Deposit campaign 4.23 lacs 242Current Accounts Over 12 lacs 24,254Retail Schemes: - PNB Vidyarthi Accounts - Total Freedom Accounts - Tax Saver FD

43.08 lacs 2.29 lacs 0.61 lacs

Loans under Retail Lending Schemes 19,214Financial Inclusion – No Frill accounts 41.63 lacs Financial Inclusion – General Credit Cards issued

0.688 lacs

TABLE: 1.2.4

26

FIGURE: 1.2.3

27

FIGURE: 1.2.4

28

SHARE PRICES OF PNB

FIGURE: 1.2.5

29

FIGURE: 1.2.6

30

FIGURE: 1.2.7

31

ORGANISATIONALSTRUCTURE

Bank has its Corporate Office at New Delhi and supervises 65 Circle Offices under which the branches function. The delegation of powers is decentralized upto the branch level to facilitate quick decision making.

HEAD OFFICE

CIRCLE OFFICES (65)

BRANCHES (5123)

ORGANISATIONAL HIERARCHY

Chairman & Managing Director

CMD Sh. K. R. Kamath

32

Executive Directors

Sh. M.V.Tanksale

Executive Director

Sh. Nagesh Pydah

Executive Director

Directors

Smt. Ravneet Kaur

Govt. of India Nominee Director

Sh. L.M.Fonseca

Reserve Bank of India Nominee Director

Sh. Gautam P. Khandelwal

Part-time Non-Official Director

Sh. Vinod Kumar Mishra

Part-time Non-Official Director

Sh. Mushtaq A Antulay

Part-time Non-Official Director

Sh. Devinder Kumar Singla

Share Holder Director

Sh. G R Sundaravadivel

Share Holder Director

Sh. Tribhuwan Nath Chaturvedi

Share Holder Director

Sh. Mohinder Paul Singh Workmen Employees

Director

Sh. Pradeep Kumar

Officer Employee Director

GENERAL MANAGERS &BOARD OF DIRECTORS

Chief General Managers

R. I. S. Sidhu Ranjan Dhawan I. D. Singh

General Managers(Head office)

R. K. Gupta Jagat Ram

A. K. Gupta K. G. Sharma B. C. Nigam

Sudeshna Sharma Ms Archana Bhargava Krishnan Ramiah

S. K. Dubey V. K. Khanna G. Banerjee

Sushma Bali V. Srinivasan Madanjit Singh

K. Bhaskar B. P. Sharma Ajay Mishra

33

GENERAL MANAGERS(FIELD)

S. S. Bhandari B.P .CHOPRA N. K. Mehta

S. Ranganathan R. K. Dubey S. S. Chopra

S. P. Singh V. K.Sood N. C. Jain

R. K. Ummat Rohtash Kumar V. M. Sharma

DEPUTY GENERAL MANAGER

ASSISTANT GENERAL MANAGER

CHIEF MANAGER

SENIOR MANAGER

MANAGER

OFFICER

CLERK

Deputy General Manager & Assistant General Manager are also appointed as Regional & Zonal Manager.

34

ORGANIZATIONAL INITIATIVES IN 2009-10 – CHANGES RESPONDING TO NEW REQUIREMENTS / BUSINESS

VERTICALS:

• After migration to 3-tier structure organization over a year back, it was felt necessary to create new Circles, as also enhance roles of Field General

Managers. Accordingly, with effect from 1st

April, 2010, the total number of Circles has increased to 65 with certain branches / geographical re-allocation and 10 Field General Managers have assumed charge in their respective command areas.

• SME Division at H.O. is managing the SME vertical and current accounts portfolio is also monitored in the Division. In order to provide thrust to MSME Advances, 523 Specialised MSME/SME focus branches have been identified to provide focused attention to this segment of the business.

• Financial Inclusion Division headed by General Manager is overseeing the Financial Inclusion initiatives. 8 Financial Inclusion Back Offices at Delhi, Chandigarh, Hyderabad, Patna, Lucknow, Jaipur, Shimla and Raipur have started functioning and many ICT – based projects have been initiated. Other initiatives / Projects include Bhamashah Project in Rajasthan, Financing of Rickshaw pullers, Weavers’ Project, Mother Dairy Project in Bulandshahar, Financing Self Help Groups, Inclusion of Construction Workers, etc.

• Retail Lending Hub & Spoke arrangement has been restructured and Retail Asset Branches under the new set up have started functioning in all circles.

• International Banking Service Branch, New Delhi is looking after all inward foreign remittances and E-bay New Delhi is dealing with opening of accounts linked to inward foreign remittances from abroad. International Trade Finance Branch, New Delhi is a new centralized arrangement for dealing with all trade finance transactions including issue of foreign letters of credit / negotiation of export bills, etc. for all branches of the Bank.

35

Under Branchless banking model of financial inclusion, the bank is implementing 46 projects in 17 States. Out of these, 38 are technology based financial inclusion projects while other 8 are credit driven projects.

• Newly established Credit Monitoring Division has taken over credit monitoring and follow up activities under Credit Follow Up Department and also taken over loan review mechanism under Credit Audit and Review Department.

• 20 Financial Literacy and Counselling Centres are functioning to provide guidance and assistance to customers.

CIRCLE OFFICES

AGRA DELHI KANPUR RAIPUR

AHMEDABAD DHARAMSHALA KAPURTHALA RAJKOT

ALIGARH FAIZABAD KASHIPUR RANCHI

ALWAR FEROZEPUR KOZHIKODE ROHTAK

AMRITSAR GAYA KOLKATA SAHARANPUR

ARRAH GORAKHPUR KARNAL SHIMLA

BANGALORE GUWAHATI KURUKSHETRA SRI GANGANAGAR

BAREILY HAMIRPUR LUCKNOW SRINAGAR

BHARATPUR HARIDWAR LUDHIANA TRICHY

BHATINDA HISSAR MANDI VARANASI

BHOPAL HOSHIARPUR MEERUT

BHUBHANESHWAR

HYDERABAD MIDNAPORE

BIHAR SHARIF INDORE MORADABAD

BULAND SHAHAR JAIPUR MUMBAI

BURDWAN JALANDHAR MUZZAFARNAGAR

CHANDIGARH JAMMU MUZZAFARPUR

CHANDIGARH-B JABALPUR NAGPUR

36

CHENNAI JHANSI PATNA

DARBHANGA JODHPUR PUNE

BACK OFFICES

o IBD FARIDABAD

ZONAL AUDIT OFFICE

o ZAO FARIDABAD

DEPARTMENTS & DIVISIONS OF PUNJAB NATIONAL BANK

1)Board & Coordination division 21) Financial Inclusion

2) Compliance Division 22) Management information system3)Corporate Marketing division 23) Marketing division4)Credit Administration Division 24)Merchant Banking5)Credit Audit Review 25)OSPD6)Credit card Division 26)Printing & Stationary7)Merchant Acquiring business 27)PR & Publicity8)Customer care 28)PSLB 9) Finance 29)Retail Banking Division10)Fraud Prevention 30)Risk Management Division11)General Administration Department

31)Security

12)Government business – pension 32)Share13)Human Resource Department 33)Special Management Division14)International Banking Division 34)SME15)Inspection & Audit Department 35)Training Department16) Insurance cell 36)Treasury17) IT department 37)Transaction Banking Division18) Law division 38) Strategic Planning & Business

Process19)MARD20)MASD

37

PRODUCTS & SERVICES OF PUNJAB NATIONAL BANK

SME & PSLB PRODUCTS

1. Scheme For Financing Traders2. PNB GRAMIN CHIKITSAK

3. Advance Against Future Lease Rentals

4. Scheme For Financing Professionally Qualified Medical Practitioners

MUTUAL FUND & THIRD PARTY PRODUCTS

1. Principal PNB AMC (Mutual Fund Scheme)

2. UTI AMC (Mutual Fund Scheme)3. Depository Operations (DEMAT A/C & Online Trading4. PNB Oriental Royal Mediclaim Policy5. Gold Coin Business (on consignment basis)

IT PRODUCTS

1. ATM / DEBIT CARD (Mobile & Biometric ATM’s)2. GLOBAL CREDIT CARD3. WORLD TRAVEL CARD

LIABILLITY A/C’S

1. PNB MITRA: Savings Fund account For Financial Inclusion (no frills account)

2. PNB SMART ROAMER : Current account & Earn Interest Like FD account

3. PNB Spectrum Fixed Deposit4. PNB Prudent Sweep (Saving account & earn interest like FD account)

38

5. PNB Total Freedom account :Salary account For Corporate Employees)

6. PNB Floating Rate Fixed Deposit Scheme7. PNB Tax Saver Deposit Scheme8. Senior Citizen Savings Scheme (2004)9. PNB Vidyarthi Saving Fund account10.PNB Growth Fixed Deposit Scheme (single deposit 1crore-5 crore)11.PNB Bulk Fixed Deposit Scheme(single deposit above 5 crores)12.MIBOR Linked Notice Deposit Scheme13.PNB Flexi RD Deposit Scheme14.Recurring Deposit Scheme15.Capital Gains Account Scheme-198816.Balika Shiksha Fixed Deposit Scheme

EARNING PRODUCTS

1. Advance Against Gold /Silver Jewellery/Ornaments2. PNB Sarthi (Conveyance Loan Scooter/Motor Cycle/Moped/Bicycle3. Car Loan4. Education Loan5. Personal Loan For Pensioners6. Housing Loan ( Public)7. Personal Loan For Public8. Mortgage Loan Against IP9. PNB Baghban Scheme

CUSTOMERS & CLIENTS OF PUNJAB NATIONAL BANK K.G.ROAD

SATI EXPORTS LTD

BAL PHARMA LTD PRAKASH ROADLINES LTD

BAJAJ HOME APPLIANCES LTD

KARLE INTERNATIONAL LTD

39

SWOT ANALYSIS OF THE BANK

Strength Weaknesses

Fundamentally sound bank

57 Million strong customer base

PAN – INDIA Presence

Well-entrenched Brand Image

Dominant position in Indo-Gangetic Plain –No competition

A leader amongst Public Sector Banks

High proportion of customer base in deposits

Strong Risk Management Practices

Redefined processes through technology initiatives like CBS, ATM, Internet Banking

100% CBS branches

High tech platform incorporating EDW, CRM etc.

Large network of branches with 76% in Rural & Semi-urban areas

Strong controlling & internal audit inspection & checking

Expanding overseas network- subsidiaries /jv’s

Predominant presence in less developed areas leading to high operating cost

Complacency (Structural & Environmental)

Weak & Inconsistent MIS rendering decision making difficult

Limited International presence. Low NRI business

More dependence on conventional low margin business

No Income from Financial Products such as Insurance, Mutual Fund, Credit Card etc.

“State” Ownership has affected level playing field and competitive ability

Less flexibility in dealing with strategic HR & operational issues

Imbalance in distribution/ deployment of staff

Inadequate skills for modern banking

Changing environment, adoption of technological advancement,

marketing of products requires change in the mind-set of employees

Low per employee productivity

40

Threats Opportunities

Aggressive marketing by competitor banks

Expansion of peer Banks/Private Sector Banks in Indo-Gangetic belt eroding our dominance

Loss of savings business to Mutual Fund/ Insurance Products which are aggressively marketed as being more remunerative

Technological parity of competitor banks

Aggressive strategy and innovative products, larger risk appetite of other banks

Regulatory norms being more stringent

Share holders demand higher returns.

Rural India is the next growth horizon with an opportunity 3 times the size of Urban India

Financial Inclusion is a clear-cut opportunity with overall exposure to formal services of finance being about 20%

Great opportunity for expanding business with over 60% population outside the banking service net

IT Initiative creating a back bone for increasing reach. It provides an opportunity to go beyond the Brick & Mortar

Bank has a visionary leadership which can transform the bank

Large workforce of 58398 number of employees. Each and every employee has to believe we can do it, usher in change in our attitudes/conventional wisdom, be a learner willing to adapt to the changing banking environment

Threats have since been converted into Opportunities.

41

BEST PRACTICES & NEW INITIATIVES & INNOVATIONS

Best Practices:

Adoption and adherence to Code of Commitment towards Customers

Adoption and adherence to Commitment towards MSE borrowers

Multiple communication channels with customers - Branches, Circle Offices through Chief Host, E-mails, PNB Sparsh website, other websites, other touch points

Updates on products, services, service charges, customer notifications on websites

Benefit of better risk management / asset liability management practices has enabled lowest Prime Lending Rate in the industry / other competitive pricing.

Customer Orientation / Customer Conveniences:

Customer Care Centre, H.O. – Regular customer interaction and feedback –Customer Grievance Redressal Mechanism

PNB Sparsh website – Customer Access 24/7 x 365 (www.sparshpnb.net)

Other Customer Services – www.pnbindia.in / www.pnbindia.com (Corporate website) – www.netpnb.com (Internet Banking website) – www.pnbcard.in (Credit Card) – https://pnb.in (Corporate E-mail) – www.pnb.net.in (Depository Services) –www.pnbnet.org.in (on-line education loan website) – www.pnb.org.in (e-procurement website) – Customer Care No. 1800 180 2222 for MTNL/BSNL Users (Toll Free) – 0124-234000 – Credit Card Customer Helpline 1800 180 2345 (Toll Free for MTNL/BSNL Users) – 0120 4616200.

Regular interaction with customers at all offices - 15th

of every month

Branch Customer Service Committee Monthly Meetings.

Regulatory Compliances:

5th

Social and Corporate Governance Award under the category of “Best Corporate Social Responsibility Practice” 2010 awarded by Bombay Stock Exchange;

Corporate Governance: Golden Peacock Award for Excellence in Corporate Governance (2009) presented by Institute of Directors, Delhi;

Gold Trophy of SCOPE Meritorious Award for Excellence in Corporate Governance 2009 by Standing Conference of Public Enterprises.

RBI has recognized the bank’s risk management compliance and preparations for advanced measurement approach .

42

IT Supported Initiatives – Transaction Banking Division Developments:

PNB ATM Network has expanded to 3544 ATMs as on 31.03.2010;

ATM transactions reconciliation has been centralized, which is assisting branches and customers;

Internet Banking Services:

“Single Window” view to all accounts with Bank (quick view, statement of accounts, account details).

Transfer of funds – Inter-Bank and Intra Bank.

Online Payments towards Railway/airlines tickets. utility bills (telephone, water, electricity etc), donations, subscriptions, insurance premiums, Mutual Funds etc., PNB Credit card dues, Online payments towards government taxes, duties, fees etc.(like Excise Service, Income, Corporate Taxes etc.).

Online Share Trading.

Account Administration/Account Management (setting workflow rules/limits) Trade finance.

Upload /MIS/Reconciliation features

E-freight for Railways

ECS/NECS :

ECS – Funds transfer from one a/c to many other a/c or many a/c to one a/c. ECS (Credit) - From single a/c to many a/c e.g. Salary, Pension, Dividend, IT

Refund, IPO refund etc.

ECS (Debit) – From many a/c to single a/c e.g. Telephone Bill, Electricity Bill, EMI of Loans, Tax Collection etc.

NECS is centralized National Electronic Clearing Services:

Mandate Capturing in the CBS which is pre-requisite for commencement of NECS (Debit) has commenced

NEFT & RTGS:

Educate & persuade customers using traditional mode of remittance .i.e. Drafts etc customers to adopt NEFT/RTGS channels.

Each Urban/Metro branch of the Circle to execute at least three NEFT transactions per day and each semi Urban branch of the Circle to execute one transaction per day.

Circle Head to focus on such branches not sending NEFT

43

SIX TECHNOLOGY MILESTONES :

1. PNB Mobile Banking – Manual SMS, Thin client GPRS, Thick Client SMS, Thick client GPRS

Manual SMS (Pull SMS) can be used on each mobile phone (Facilities like view A/C balance, A/C Stmt. Request, Online mini Stmt, Self transfer of funds, online stop cheque, cheque book request, cheque status inquiry are available in Manual SMS.)

Thin Client GPRS can be used on mobiles with browsing capabilities of GPRS (Additional facilities like A/C details, A/C Stmt, Bill payments, Offline request for NEFT & RTGS are available in this flavour).

2. PNB Smart Invest (ASBA) – IPO / FPO retail applications supported by blocked accounts

3. PNB Xpress Remit – Faster NRI remittances

4. PNB Merchant acquiring business – All types of point of sales (POS) transactions –acquiring merchant establishments

5. PNB World Travel Card – Pre-loaded foreign currency card - $, Euro, GBP

6. PNB Prepaid Card Revised Automatic Business Continuity Plan – Automatic branch level back up

data in CBS and other provisions.

Enhanced IT Security features

Enterprise-wide Data Warehouse: Multiple source systems like CBS, Credit Card, ATM Switch, Debit Card etc are

integrated Facilitates quicker access to statements since they are pre-published. More than 205

reports ( Control, Analytical , Statistical reports) published Acts as source system for point solutions like AML, CRM, Risk Solutions etc Facilitates Analytics based on data enabling informed decision making.

Indicative Analysis

Top Customers in different portfolio of each branch / circle Compare growth/ performance of individual branches in circle on various parameters

(including negative performance) on year on year basis Analyze above data for a subset of branches based on branch size, location, business

group, district etc. Performance of branches / circles in various segments over a period of time.

44

Cash Management Services

Bank had entered into tie-up with some foreign banks for offering them collection facility.

Bank has started DD drawing arrangement with several Foreign and Private sector banks. This product gives benefit of both float and commission income.

Training has been provided to all branches handling CMS operations and staff of IT section of concerned circle offices.

To transfer the benefit of CMS operations to the branches : 100% earning is now been distributed among the collecting branch only.

To pass on the benefit of float to the collecting branches in their special current account (CMS collection account) opened at the respective branches.

Recent Initiatives in The Process of Implementation:

1. Lending Automation & Processing System (LAPS)

It will facilitate the automation of whole loan processing cycle from initial to final point.

Loan Origination Module – It facilitates the maintaining of customer profile, taking leads from various sources and sanctioning/rejecting the loans based on the eligibility criteria, credit score etc.

Loan Collection Module: This modules facilitates post sanction follow up, like automatic reminder, sending emails to defaulter in case the instalments is not paid and various other follow up activities.

2. SINGLE WINDOW CONCEPT - Focus on implementation at all branches

The guidelines for implementation of Single Window Concept were issued by HO: IAD circular letter 76/09 & 7/10 vide which following services are to be provided on all Single Window Counters in the branches

All Cash Payments upto Rs 20,000/ - (to start with) All Cash Receipts up 25,000/- (to start with) Entering of all Cash / transfer / clearing transactions and passing cash/ transfer/

clearing transactions within vested powers Govt Business activities at approved branches Payment of Demand Draft upto 20,000/- Updation of Passbook , issue of statement of Accounts Entry of standing instructions. Stop Payment, Customer Master Data updation,

Account Master updation, Cheque Book Issue and related activities

45

Single Windows Concept

• Enquiry, Account closing , DD Issue, Pay Order, Remittance (NEFT / RTGS) Bills • Any other work as per requirement of the branch and as per the job profile of the CTO

3. Strengthening of Circle Help Desks

The knowledge gap of the staff manning the Circle Help Desks to be reduced

4. Customised SME credit rating models are under development which shall facilitate credit process in MSE segment of advances.

AWARDS & ACHIEVEMENTS OF PUNJAB NATIONAL BANK

1. "Best IT Team of the Year Award"- at the IDRBT Banking Technology awards for the year 2005-06.

2. SKOTCH Challenger Award- for Change Management for the year 2005-06.3. Best IT User in Banking & Financial Services Industry – 2004- by NASSCOM in

partnership with Economic Times.4. Golden Peacock Award- for Excellence in Corporate Governance - 2005 by Institute

of Directors.5. FICCI's Rural Development Award- for Excellence in Rural Development – 2005.6. Skotch Challenger Award for Exemplary use of Technology- for becoming a pioneer

in Public Banks – 2005.7. Golden Peacock National Training - 2004 & 2005- by Institute of Directors.8. National Award for Excellence in SSI Lending- Ranked 2nd for 4 consecutive years -

2002, 2003, 2004 & 2005.9. Banking Technology Awards 2004- Runner up in 'Best IT Team of the Year Award

2005'- Jointly Adjudged by IBA, Finacle & TFCI.10. Money Outlook Award – 2004- Runner up in 'Best Bank (public Sector) of the year

Award' -2005.11. Niryat Bandhu Gold Trophy- for excellence in export performance for consecutive

years 2001, 2002 & 2003 by Federation of Indian Exporters Organization (FIEO).12. 21st Amongst Top 500 Companies- by the leading Financial Daily The Economic

Times, June 2005.13. 9th amongst India's Top 50 Most Trusted Service Brands- A.C Nielson Survey, The

Economic Times Dec 2004.14. FICCI's Rural Development Award- Award for excellence in rural development 2005.15. Amity Global Corporate Excellence Award- Amity Business School, Noida has

conferred the Award to PNB, after an in-depth research to analyse the strengths and core competencies of the Global 500 companies and banks which have already made an indelible most admired impression on the Indian economy. 2008 & 2007 & 2005.

46

16. National Award For Excellence in lending to Tiny sector- First Prize by By Ministry of Small Scale Industries.2006.

17. Computer Associates Excellence Award- Excellence in EMS Roll Out. 2007.18. IDRBT Banking Technology Awards- Best IT Team of the Year Award 2006,200819. Dun & Bradstreet Award for “Priority Sector Lending including Financial

Inclusion”2009.20. National Award for Excellence in Lending for Institutional Finance in Propagating

KVI Programmes in NORTH ZONE- Khadi & Village Industry Commission, Ministry of Micro, Small & Medium Enterprises, Govt. of India(Interest Subsidy Eligibility Certificate Scheme)2009.

21. National Award for Excellence in Lending for Institutional Finance in Propagating KVI Programmes in CENTRAL ZONE- Khadi & Village Industry Commission, Ministry of Micro, Small & Medium Enterprises, Govt. of India .

22. National Award for Excellence in Lending for Institutional Finance in Propagating KVI Programmes in NATIONAL LEVEL- Khadi & Village Industry Commission, Ministry of Micro, Small & Medium Enterprises, Govt. of India .

23. India Pride Award by dainik Bhaskar and Daily News analysis- Excellence in PSU 2009.

24. Indira Gandhi Rajbhasha Shield- Promoting Hindi 2009.25. Emerson Uptime Champion Awards 2009.26. “Best Info Sphere Warehouse Solution” Award by IBM 2009 (for implementation of

Enterprise Wide Data Warehouse.

47

VISION 2013Vision represents aspiration levels, more importantly, the need to develop aspiration, structure, processes, people in an integrated way for sustainable growth in the future. Even though aspirations may change, the structure, process and people need flexibility for adapting to the dynamic, even changing competitive environment .Accordingly, the honourable Board of Directors in the meeting held in Shimla in May 2008, proposed the concept of Vision 2013 and set goals which were to be achieved in the next 5 years to position the Bank as the “Number One Bank” in the country. In this respect Vision 2013 is far more challenging, comprehensive and road map for our Bank in the future.

PNB VISION 2013 – PROJECT NAMASKAR

a) QUANTITATIVE DIMENSIONS

• Deposits to increase from Rs.166457 Crores in March 2008 to Rs.582000 Crores in March 2013, at an average growth of 32%.

• Advances to increase from Rs.119502 Crores in March 2008 to Rs.418000 Crores in March 2013, at an average growth of 28%.

• Total business to increase from Rs.285959 Crores in March 2008 to Rs.1000000 Crores in March 2013, at an average growth of 28%.

• Operating Profit to increase from Rs.4006 Crores in March 2008 to Rs.15000 Crores in March 2013 with a CAGR of 30.2%.

• Net Profit to increase from Rs.2049 Crores in March 2008 to Rs.7500 Crores in March 2013, at an average growth of 30%.

• The Return on Assets [RoA] to increase from 1.15% in March 2008 to 1.30% in March 2013 [This ratio is comparable to the RoA of the Peer Banks and is also better than all bank’s ratio of 1% as on March 08].

• The Return on Equity [RoE] to increase from 19% in March 2008 to 21% in March 2013.

• Customer base to increase from 3.7 Crores in March 2008 to 15 Crores in March 2013.

• Number of touch points to be 100000 by March 2013.

48

• To have a rural coverage of 100000 villages in the Indo-Gangetic Plains by March 2013.

b) QUALITATIVE DIMENSIONS

A leader and front runner amongst nationalized banks In Financial Inclusion

In all domestic operations

In adopting best risk management practices

In adopting global best practices in Corporate Governance & Corporate Social Responsibility

In HR policies to raise skills, morale and productivity To be Global Bank

Among the top 3 Indian banks with global presence in Middle East, South East Asia, China, UK, Australia, Canada, etc.

Bring best global practices to effectively compete with global players in India. Become a Universal Bank

provider of complete range of financial services

To be the most profitable bank amongst nationalized banks by focusing on : Fee based income/off-balance sheet exposures

Mid Cap segment, Retail lending, SME Advances & Agriculture Reduction in Gross NPAs

Expenditure Control

Low cost deposits Ensuring higher spreads (return on advances minus cost of deposits/funds)

Capitalize on IT initiatives Provide more value added services

Expand reach of ATMs Back Office Centralization of all CBS branches

Promote internet banking

Provide IT advisory services to other banks

Explore options of in-organic growth

Merger of Private/Public Sector Banks

Enlargement of customer base and retention of existing customers.

Ensure smooth transition to adopting Basel II norms ahead of schedule. Develop robust Management Information System for better decision making & policy

prescription.

Further entrench brand image of the Bank.

49

SECTION 2

PROBLEM CENTERED STUDY OF THE

ORGANISATION

50

2.1 Title:

A study on the Exposure of Credit Risk in Export Bills at Punjab National Bank

2.2 Objectives of the study:

Understand the working of various post shipment credit instruments.

To identify the key problem areas in realisation of export bills & also the risk of default faced by the bank so that one can suggest ways to minimize the risk.

To study the scope of risk management department and the various activities involved

2.3 Research Methodology:

Type of Research – Comparative Research aimed at identifying some of the key problem areas in the field of export bill financing

Data Source & Statistical tools : This problem area has been arrived at or explored after studying the data on the export bills for the last three years using certain analytical tools , such as ratios, percentages, charts & graphs.

Data collection tool was – Secondary Data - Websites and company’s internal data, direct observation and unstructured interviews, internal circulars , documents , books internal website,

2.4 Problem Statement:

“Credit risk” is the possibility of loss associated with changes in the credit quality of the borrowers or counter parties. The counter parties may include individual, small & medium enterprises, corporate, bank, financial institution, or a sovereign. In a bank’s portfolio, losses stem from outright default due to inability or unwillingness of a borrower or counter party to honour commitments in relation to lending, settlement and other financial transactions. Prior to default, there is no way to discriminate unambiguously between firms that will default and those that will not. At best we can only make probabilistic assessments of the likelihood of default.. Here in this project we are trying to assess the export bills credit risk and suggest the ways of mitigation of the credit risks to an extent.

2.5 Limitations of the Study:.

Time constraint was also a prime limitation.

Data about export bills of only three years was available

51

2.6 BACK GROUND STUDY

EXPORT FINANCE

Export finance is a short term working capital finance allowed to an exporter. An exporter may avail financial assistance from any bank provided following two requirements are satisfied:

1) Timely availability of credit: funds should be available to the exporter at the required time. To ensure availability of funds to eligible borrowers’ Reserve bank has prescribed time schedule to commercial banks for speedy sanctioning of export credit limits. Further, banks are advised to achieve the target of 12% of their total net bank credit under export finance.

2) Cost of funds should be affordable: In order to compete in the international market our exporter may require credit facility at the cheapest interest rate. Since interest subsidy has been withdrawn from 1991, new products (export finance schemes) are made available to the exporters at a comparatively cheaper interest rates.

POST- SHIPMENT FINANCE

Post shipment finance is essentially an advance against receivables, which will be in the form of shipping documents. the responsibility of an Advance will be felt more in case of post shipment advances because Reserve bank will be monitoring the realisation of full proceeds of individual shipments through Advance . Some of the major exchange control regulations concerning export finance at the post shipment stage are as follows:

a) Exporter should have an IEC no. and each shipment should accompany the prescribed declaration (GR/SDF/PP/SOFTEX) form in which the value of export will be declared and duly certified by the customs authority.

b) Shipping documents along with relative declaration form must be submitted to an AD within 21 days from the date of shipment. If there is any genuine delay beyond the control of the exporter , AD has been delegated with powers to condone the delay and accept the shipping documents even after 21 days from date of shipment.

c) The payment should be received in an approved manner within the prescribed time. For Realisation of export proceeds countries all over the world has been divided into 2 groups i.e., Asian Clearing Union (ACU) and Non ACU countries.

Exports to the group of ACU countries (Myanmar, Bangladesh, Pakistan, Iran and Sri Lanka) should be realised in ACU dollars (US dollars). Other Than ACU countries, realisation of export proceeds can be in any freely convertible currencies.

DIFFERENT TYPES OF POST SHIPMENT ADVANCES

I. Export Bills Purchased / Discounted II. Export Bills Negotiated

III. Advance Against Export bills sent on collection basis

52

IV. Advance against Exports on consignment basis.V. Advance Against undrawn balances

VI. Advance against Duty Drawback.

EXPORT BILLS PURCHASED / DISCOUNTED – DA & DP BILLS (NON L/C BILLS)

The export bills, representing genuine international trade transactions, strictly drawn in terms of the sale contract / live firm contract /order may be discounted or purchased by the banks. Proper limit should be sanctioned to the exporter for purchase of export bills facility. Since the export is not covered under Letter of Credit, risk of non- payment may arise. The risk is more pronounced in case of documents under acceptance. In order to safe guard the interest of the bank and also the exporter, ECGC offers coverage of credit risks through their guarantees / policies at the post shipment stage. The bank will normally be covering the advance under Whole Turnover Post Shipment Guarantee Scheme. In addition to this guarantee the exporter should be advised to go for a separate buyer wise policy also. By having this additional policy, wider coverage will be available to the exporter in case of any risk.

1. EXPORT BILLS NEGOTIATED : ( Bills Drawn under Letter of Credit):

When export documents, drawn under LC, are presented to the bank for negotiation, they should be scrutinized carefully with the terms and conditions of the LC. The operation of letter of credit is governed by Uniform Customs & Practices for Documentary Credits (1993 Revision) of the International Chamber of Commerce, Brochure No.500.

All the documents tendered should be strict in accordance with the L/C terms. It is to be noted that the LC issuing bank undertakes to honour its commitment only if the beneficiary submits the stipulated documents conforming to LC terms. Even the slightest deviation from those terms & conditions specified in the L/C can give an excuse to the issuing bank for refusing the payment to the negotiating bank which might have already paid the beneficiary.

Some of the discrepancies commonly observed are listed below:

1. Late negotiation- Submission of documents after the expiry of the L/C2. Late shipment of goods3. Late presentation of documents even when the L/C is current – documents not

submitted within the limitation period if specified in the L/C or within 21 days from date of shipment

4. Drawings in excess of L/C amount5. Shipments made from and shipped to ports other than those stipulated in L/C.6. Partial shipments / Trans shipments/ effected, not authorised by the L/C.7. Bill of Lading / AWB not properly signed, not properly dated and not properly

stamped. Alterations, if any, not properly authenticated.8. Presentation of insufficient and/or incomplete set of B/L.

53

9. Presentation of claused Bill of Lading/ received for shipment Bill of lading / Short Form Bill of Lading / Charter party Bill of lading /- when not permitted in the L/C.

10. Presentation of bill of lading in which ‘On Board’ notation not dated.11. Inconsistency in the weight declared in the invoice and the weight list and

other documents.12. Presentation of documents , like invoice , packing list , weight list, insurance

certificate / policy , certificate of origin , inspection certificate , Bill of Lading / AWB that , are inconsistent with each other.

13. Inadequate insurance cover14. Presentation of insurance documents unsigned, undated, unstamped and drawn

in a different currency other than the currency of the L/C. Insurance document dated after the date of shipment.

15. Description of goods including charges in the invoice not authorised by L/C.16. Incomplete or incorrect Drafts / Bills of Exchange.17. Insufficient number of copies of various documents as called for in the L/C.18. Non submission of certain Documents as called for in L/C.

THE above discrepancies, which are commonly found, should be considered as deviation from the terms and conditions of the L/C. and the opening / issuing bank may refuse documents even if the discrepancies are not materially significant.

ADVANCES AGAINST EXPORT BILLS SENT ON COLLECTION BASIS:

At Times the exporter might have fully utilised his bills limit and in certain other cases the bills drawn under L/C may have some discrepancies. In such cases the bills will be sent on collection basis. In some cases the exporter himself may request for sending the bills on collection basis anticipating the strengthening of the foreign currency. Banks may allow advance against these collection bills to an exporter. Concessive rate of interest can be charged for this advance unto the transit in the case of DP bill and the transit period plus Usance Period. In the case of Usance Bills depending on the type of drawing. Beyond this period, the interest rate will be subject to the various rates prescribed by RBI depending upon the Usance of the bill.

For computing the eligible transit period (NTP), the period will commence from the date of acceptance of the export documents at the branch for collection and not from the date of advance.

Before extending this facility to the exporter, branch should ensure that they have proper delegated sanctioning powers to allow such facility. In some banks sanctioning of advances against collection of bills is vested with their respective higher authorities.

54

RISK MANAGEMENT POLICY OF PNB

Risk management is the process by which a bank identifies, measures, monitors and controls its risk exposures to ensure that

Risks are understood

Risks are within tolerances set by the Board of Directors

Decisions having inherent risks are consistent with strategic business objectives

Risk taking decisions are explicit and clear

The expected return compensates for the risk taken

Capital allocation is consistent with risk exposures

The banks performance incentives are aligned with risk tolerances.

The guiding principles for evolving robust and dynamic risk management practices include: - Board of Directors and top management’s responsibility - Risk evaluation/measurement - Framework for managing risk - Independent review

- Integration of all risks

Detailed operational guidelines, prudential exposure norms etc. are contained in respective policies such as Credit Management & Risk Policy, ALM Policy, Investment Policy and Operational Risk Management Policy etc.

Risk Management Approach:

Bank’s risk management approach is based on three pillars for each of the three risks i.e. Credit, Market and Operational Risk. The three pillars being:

• Policy and Tools • Organization and Processes • Skills and Capabilities

The Board of Directors decides the overall risk management policies and approves the Credit Management & Risk policy, Investment policy, ALM policy, Operational Risk Management policy, Policy for internal capital adequacy assessment process (ICAAP), Credit Risk Mitigation & Collateral Management Policy and Stress Testing Policy, containing the direction and strategies for integrated management of the various risk exposures of the Bank. The time schedule for implementation of the Advanced Approaches of Basel II has been prescribed by RBI. The time schedule prescribed is for ‘Internal Models Approach (IMA) for Market Risk’, ‘The Standardized Approach (TSA) & Advanced Measurement Approach (AMA) for Operational Risk’ and ‘Internal Ratings Based (IRB) Approach for Credit Risk (Foundation- as well as Advanced IRB)’. Bank shall continue its journey for migration to advanced approaches.

55

CREDIT RISK

“Credit risk” is the possibility of loss associated with changes in the credit quality of the borrowers or counter parties. The counter parties may include individual, small & medium enterprises, corporate, bank, financial institution, or a sovereign. In a bank’s portfolio, losses stem from outright default due to inability or unwillingness of a borrower or counter party to honour commitments in relation to lending, settlement and other financial transactions. a credit risk may be defined as the risk that a counter party to a transaction will fail to perform according to the terms and conditions of the contract, thus causing the holder of the claim to suffer a loss. Banks all over the world are very sensitive to credit risk in various financial sectors like loans, trade financing, foreign exchange, swaps, bonds, equities, and interbank transactions.

CREDIT RISK RATING BY PNB through PNB Trac

Information Required

Name of the borrower: For example: BAL Pharma Limited

Constitution: Public ltd company/Private ltd company/JHF/Partnership

Industry: For Example :( Pharmaceutical – Bulk Drugs

Activity: For Example: Manufacturing of Bulk Drugs & Formulations

Credit risk rating is based on four major parameters:

Parameters 1)Financial Evaluation

2) Business & Industry Evaluation

3)Management Evaluation

4)Conduct Evaluation

Weight 40 25 25 10

FINANCIAL EVALUATION

It is evaluated based upon following parameters:

Growth Rate

Profitability Cash Flows

Past Financial

Absolute Comparison

Solvency

Liquidity Debt Coverage

Return On Capital Employed

56

Profitability

Future Risk

Impact Of Contingent Liability

Foreign Transaction Risk Impact Of Merger / Demerger/Expansion On Key Financials

Cash Flow Adequacy Impact of Financials on Future Financials

Subjective Assessment of Financials

Transparency in Accounting

Quality of Inventory Reliasibility of Debtors

Quality of Inventory/Advances made to group other Companies

Trend Adjustment: Adjustment for Financial Trend

Net Sales PBDT

Operating Cash Flow/Total Debt Tangible Net worth for last 5 years

BUSINESS AND INDUSTRY EVALUATION

Parameters for evaluation

Operational Efficiency Evaluation

Operating Leverage

Net sales/Operation Assets Inventory Turnover

Raw material consumed/ Net sales

Credit Period Allowed

Market Position Evaluation

Competitive Position: Expected sales growth, Market Dominance, Market share, Trend in Market share.

Input Related Risk: Availability of Raw material and other Critical Inputs, Dependence on Imports.

Production Related Risk: Capacity utilisation risk, State of technology used, patent & proprietary technology.

Price Competitiveness : Economies of scale, Pricing Flexibility, Buyer’s Power

Marketing : Long term contracts /Assured off takes, Direct Marketing Setup.

57

INDUSTRY RISK EVALUATION For Example: Pharmaceutical Bulk Drugs industry This type of Evaluation can be done through various industry research reports like ICRA reports, CRISIL reports.

MANAGEMENT EVALUATION:

Actual Gross Sales

Targeted Sales

Actual PBT

Targeted PBT

Subjective Assessment of Management

1. Management Set Up & Corporate Governance2. Commitment & Sincerity3. Track Record In Execution of Projects4. Track Record in Debt Repayment5. Track Record in Industrial Relations 6. Financial Strength/ Flexibility/Group Support7. Capital Market Perception

Conduct Of Account Evaluation

1. Preventive Monitoring System Rating 2. Status of account3. Operations in account4. Submission of Financial data statement

Based on these parameters the bank evaluates and comes to a final rating of the borrower

Score Obtained Rating DescriptionAbove 80.00 PNB AAA Minimum RiskAbove 77.00 upto 80.00 PNB AA+ Marginal riskAbove 72.00 upto 77.00 PNB AA Marginal riskAbove 70.00 upto 72.00 PNB AA- Marginal riskAbove 67.00 upto 70.00 PNB A+ Modest RiskAbove 62.00 upto 67.00 PNB A Modest RiskAbove 60.00 upto 62.00 PNB A- Modest RiskAbove 57.00 upto 60.00 PNB BB+ Average RiskAbove 52.00 upto 57.00 PNB BB Average RiskAbove 50.00 upto 52.00 PNB BB- Average RiskAbove 47.50 upto 50.00 PNB B+ Marginally Acceptable RiskAbove 42.50 upto 47.50 PNB B Marginally Acceptable RiskAbove 40.00 upto 42.50 PNB B- Marginally Acceptable RiskAbove 30.00 upto 40.00 PNB C High Risk30.00 and Below PNB D Caution

TABLE: 2.6.1

58

Credit Risk Rating Models:

To measure risk in individual borrowal accounts, the bank has identified various segments viz. large corporate, mid corporate, small, NBFC, New projects, Banks, Retail, etc. Borrowers in these segments reflect similarity of potential credit risk factors and as such can be rated using the single model for the segment. Parameter under these models captures potential credit risk both internal as well as external, which may affect the credit quality of aborrower. The credit risk rating awarded to a borrower is subject to review from time to time. These models have already been implemented at the field level and results of these models are regularly monitored to calibrate/ refine the models. The bank is also aggregating the credit risk in its rated portfolio and monitoring the same. Advance portfolio risk identification and measurement models shall be adopted by the bank on completing the measurement of credit risk in its entire portfolio. All existing borrowers above a thresh hold limits are also subject to a continuous preventive monitoring system. This system helps in identifying accounts developing adverse signals to initiate corrective measures. The bank also has system of identifying and monitoring weak accounts which develop incipient sickness. Experience gained through these systems is used in refining the various models. Further, it is also ensured that business unit while framing schemes of lending also identify potential new credit risk factors so as to analyze the impact of same and correspondingly provide for mitigation. The bank has developed the following models/tools:

Sr.No. Credit Risk Rating Model

Applicability

Total Limits Sales

1 Large Corporate Above Rs. 15 Crore (OR)

Above Rs.100 Crore, except Trading concerns

2 Mid Corporate Above Rs.5 Cr and up to Rs.15 Cr. (OR)

Above Rs.25 Cr and up to Rs.100 Cr.

All trading concerns falling in the Large Corporate category shall also be rated under this model

3 Small Loans Above Rs.50 lakh & up to Rs.5 Cr (AND)

Up to Rs.25 Cr.

4 Small Loans II Above Rs.2 lakh & up to Rs.50 lakhs

5 NBFC All Non Banking Financial Companies irrespective of Limit

6 New Projects Rating model

Above Rs. 5 Cr. (OR)

Cost of Project above Rs.15 Cr.

59

7 Entrepreneur New Business Model

Borrower setting up new business and requiring finance above Rs 20 lac upto Rs. 5 Cr (AND)

Cost of Project upto Rs.15 Cr.

However, all new trading business irrespective of limits shall be rated under this model

8 Half Yearly Review of Rating

i) Listed companies.

OR

ii)Availing limits (FB+NFB) above Rs.50.00 crores from our bank.

9 Facility Rating Framework

Assigning rating to facility sanctioned to the borrower based on default rating and securities available

10 Credit Risk Rating models for Banks/ FI

All banks and Financial Institutions

TABLE: 2.6.2

Industry-wise Credit Exposure Limits:

A. Industry / Sector Proposed ceiling for next 12 months or till review of limits (Rs. in Crore)

1.

All Engineering 60002. Automobiles Incl. Trucks, Motors 1000

3.

Cement & cement products 60004. Chemicals (Others) 2000

5.

Coal 5006.

Computer Software 5007.

Construction 60008.

Cotton Textiles 6000

60

9.

Fertilisers 200010.

Food Processing 600011.

Gems & Jewellery 100012.

Iron & Steel 1080013.

Jute Textiles 50014.

Leather & Leather products 100015.

Mining 100016.

Other Metals & Metal Products 200017.

Other Textiles 600018.

Paper & Paper products 200019.

Petroleum 1080020.

Pharmaceuticals 200021.

Rubber & Rubber products 50022.

Sugar 360023.

Tea 50024.

Tobacco & Tobacco products 50025.

Vegetable Oils (Incl. Vanaspati) 2000

B. Infrastructure1.

Ports 60002.

Power 133003.

Roads & Bridges 60004.

Telecommunication 60005.

Other Infrastructure 8400

TABLE: 2.6.3

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FIGURE: 2.6.1

FIGURE: 2.6.2

62

SECTION 3DATA ANALYSIS & INTERPRETATION

63

Foreign Outward Bills Purchased (FOBP)

The following is a table showing various facts & figures about foreign outward bills purchased in Punjab National Bank K.G road Bangalore for last three years.

TABLE: 3.1.1

FOBP (Foreign outward Bills Purchased)

1-4-2007 --31-3-2008 1-4-2008--31-3-2009 1-4-2009--31-3-2010

SIGHT USANCE SIGHT USANCE SIGHT USANCE

No of Bills Lodged 16 6 141 58 228 158Total bills for the year 16 6 152 64 233 186Total Amount Lodged (rs) 12049234 3695699 157970077 72183150 161360939 154101272No of Bills Realised 5 0 146 33 173 106Total Amount Realised (rs) 6051494 0 159108650 49944816 121513788 10041428No of Bills Delinked 0 0 1 3 0 7Total Amount Delinked(rs) 0 0 1697760 620703 0 3682818In Delinked :No of Bills Recovered 0 0 0 2 0 4No of Bills Outstanding 0 0 0 1 0 3Total Amount Outstanding (rs) 0 0 0 134550 0 1423512

Total Bills Outstanding 11 6 5 28 60 73

INTERPRETATION: As can be seen from the above graphs & tables: The Total No of Bills (Usance & Sight) has considerably increased from 07bills lodged is positive, The levyears in both sight & usance bills in each of the three financial years from 2007 to 2010. We can very well see that in year 07year 09-10 there are 73 sight bills which are outstanding, in the same way

6

64

186

1

FOBP USANCE BILLSTotal No Of Bills

16

152

233

1

Total No of Bills

64

FIGURE: 3.1.1

FIGURE: 3.1.2

As can be seen from the above graphs & tables: The Total No of ) has considerably increased from 07-08 to 09-10.the increase in the

bills lodged is positive, The level of outstanding bills is increasingly high in almost all the sance bills in each of the three financial years from 2007 to 2010. We

that in year 07-08 there are 6 sight bills which were outstanding &sight bills which are outstanding, in the same way in Usance bills 11

186

033

106

628

FOBP USANCE BILLSTotal No Of Bills No of Bills Realised Outstanding Bills

233

5

146173

11 5

FOBP SIGHT BILLSTotal No of Bills No of Bills Realised Outstanding Bills

As can be seen from the above graphs & tables: The Total No of 10.the increase in the high in almost all the

sance bills in each of the three financial years from 2007 to 2010. We sight bills which were outstanding & in the

in Usance bills 11

73

60

bills were outstanding but in 09-also indicated in the same i.e. improper &

Foreign Outward Bills for Collection (FOBC)

FOBC (Foreign O

1-4-2007 -- 31-3

SIGHT USANCE

No of Bills Lodged 50Total Bills for the year 50Total Amount Lodged (rs) 36631740 84859529No of Bills Realised 40Total Amount Realised (rs) 28105951 87417236Total Bills Outstanding 10

The following is a table showing various facts &Punjab National Bank K.G road Bangalore for last three years.

50

226 252

1

Total No of Bills

65

-10 it has increased to 60 bills. The prime reason for this is also indicated in the same i.e. improper & incomplete realisation of bills.

Foreign Outward Bills for Collection (FOBC)

FOBC (Foreign Outward Bills For Collection)

3-2008 1-4-2008 -- 31-3-2009 1-4-2009

USANCE SIGHT USANCE SIGHT

27 216 86 173

27 226 87 252

8485952915558768

3 595394309285342

26 147 32 140

87417236 96315203 243856499505982

1 79 55 112

The following is a table showing various facts & figures about foreign outward bills for collection in Punjab National Bank K.G road Bangalore for last three years.

TABLE: 3.1.2

FIGURE: 3.1.3

40

147 140

1079

112

FOBC SIGHT BILLSTotal No of Bills No of Bills Realised Outstanding Bills

bills. The prime reason for this is

2009 -- 31-3-2010

USANCE

173 151

252 2069285342

5 82571225

140 739505982

4 41046935

112 133

figures about foreign outward bills for collection in

112

INTERPRETATION: As can be seen from the above graphs & tables: The Total No of Bills (Usance & Sight) has considerably increased from 07bills lodged is positive, The levyears in both sight & usance bills in each of the three financial years frocan very well see that in year 07year 09-10 there are 112 sight bills which are outstanding, in the same way in Usance bills it was only one bill which was outstanding but in 0outstanding. The prime reason for this is also indicated in the same i.e. improper & incomplete realisation of bills. Number of sight bills realised have declined from 147 (08to 140(09-10), it is clearly seen that the number of bills realised in Usance bills is not enough comparing the rise in the number of bills.

27

87

206

1

FOBC USANCE BILLSTotal No of Bills

66

FIGURE : 3.1.4

As can be seen from the above graphs & tables: The Total No of ) has considerably increased from 07-08 to 09-10.the increase in the

bills lodged is positive, The level of outstanding bills is increasingly high in almost all the sance bills in each of the three financial years from 2007 to 2010. We

can very well see that in year 07-08 there are 10 sight bills which were outstanding & in the 10 there are 112 sight bills which are outstanding, in the same way in Usance bills it

was only one bill which was outstanding but in 09-10 it has increased to 133 bills which are outstanding. The prime reason for this is also indicated in the same i.e. improper &

. Number of sight bills realised have declined from 147 (08een that the number of bills realised in Usance bills is not enough

comparing the rise in the number of bills.

26 32

73

1

55

FOBC USANCE BILLSTotal No of Bills No Of Bills Realised Outstanding Bills

As can be seen from the above graphs & tables: The Total No of 10.the increase in the high in almost all the

m 2007 to 2010. We 08 there are 10 sight bills which were outstanding & in the

10 there are 112 sight bills which are outstanding, in the same way in Usance bills it 10 it has increased to 133 bills which are

outstanding. The prime reason for this is also indicated in the same i.e. improper & . Number of sight bills realised have declined from 147 (08-09)

een that the number of bills realised in Usance bills is not enough

133

67

Foreign Outward Bills Negotiated Under Letter Of Credit (FOBNLC)

TABLE: 3.1.3

The following is a table showing various facts & figures about foreign outward bills for collection in Punjab National Bank K.G road Bangalore for last three years.

FOBNLC (Foreign Bills Negotiated under LC)

1-4-2007--31-3-2008 1-4-2008--31-3-20091-4-2009--31-3-2010

SIGHT USANCE SIGHT USANCE SIGHT USANCE

No of Bills Lodged 6 16 18 10 19 23Total Bills for the year 6 16 20 14 22 23Total Amount Lodged (rs)

6774220 15828616

33210639 8038367 88512993

11945903

No of Bills Realised 4 11 17 14 22 23Total Amount Realised (rs)

5877493 11236698

21654250

12226803

100966109

11945903

No of Bills Delinked 0 3 0 0 0 0Total Amount Delinked(rs) 0 2859450 0 0 0 0In Delinked :No of Bills Recovered 0 2 0 0 0 0No of Bills Outstanding 0 1 0 0 0 0Total Amount Outstanding (rs) 0 0 0 406895 0 1423512Total bills outstanding 2 2 3 0 0 0

INTERPRETATION: As can be seen from the above graphs & tables: The Total No of Bills (Usance & Sight) has increased from 07positive, The level of outstanding bills is lowbills in each of the three financial years from 2007 to 2010. We can very well see 07-08 there are only 2sight bills which were outstanding & sight bills which are outstanding, in the same way in Usance bills outstanding & in the year 09-10 there are no bills which are outstanding

6

20 22

1

FOBNLC SIGHT BILLSTotal No. Of Bills

1614

23

1

FOBNLC USANCEBILLSTotal No of Bills

68

FIGURE: 3.1.5

FIGURE: 3.1.6

As can be seen from the above graphs & tables: The Total No of increased from 07-08 to 09-10.the increase in the bills lodged is

el of outstanding bills is low in almost all the years in both sight &ls in each of the three financial years from 2007 to 2010. We can very well see

sight bills which were outstanding & in the year 09-10 there are no sight bills which are outstanding, in the same way in Usance bills there are only 2 bills

10 there are no bills which are outstanding. The prime reason

4

1722

2 3

FOBNLC SIGHT BILLSTotal No. Of Bills No of Bills Realised Outstanding Bills

1114

23

20

FOBNLC USANCEBILLSTotal No of Bills No of Bills Realised Outstanding Bills

As can be seen from the above graphs & tables: The Total No of 10.the increase in the bills lodged is

in almost all the years in both sight & usance ls in each of the three financial years from 2007 to 2010. We can very well see that in year

10 there are no are only 2 bills

. The prime reason

0

0

69

for this is also indicated in the same i.e. proper & complete realisation of bills. Number of sight bills & usance realised have shown increasing trend.

Foreign Outward Bills Discounted ( FOBD )

FOBD (Foreign Outward Bills Discounted)

1-4-2007 -- 31-3-2008 1-4-2008 -- 31-3-20091-4-2009 -- 31-3-

2010

SIGHT USANCE SIGHT USANCE SIGHT USANCE

No of Bills Lodged 83 3 45 6 18 6Total Bills for the year 83 3 52 7 18 6Total Amount Lodged (rs) 298188976 10,68,388 213009271

5162997 17477350

4379321

No of Bills Realised 76 2 50 7 19 0Total Amount Realised (rs) 283048344 801957 227906295

5429428 17986097 0

No of Bills Delinked 2 0 2 0 0 0Total Amount Delinked(rs) 888271 0 4162615 0 0 0

In Delinked :No of Bills Recovered 1 0 1 0 0 0No of Bills Outstanding Partial 0 1 0 0 0Total Amount Outstanding (rs) 23256 0 159310 0 0 0Total bills outstanding 5 1 0 0 0 6

The following is a table showing various facts & figures about foreign outward bills discounted in Punjab National Bank K.G road Bangalore for last three years

TABLE: 3.1.4

83

52

18

1

FOBD SIGHT BILLSTotal No of Bills Realised

3

76

1

FOBD USANCE BILLS Total No of Bills

70

FIGURE: 3.1.7

FIGURE: 3.1.8

76

50

185 0

FOBD SIGHT BILLSTotal No of Bills Realised No of Bills Realised Outstanding Bills

2

7

01

0

FOBD USANCE BILLS Total No of Bills No of Bills Realised Outstanding Bills

0

6

INTERPRETATION: As can be seen from the above graphs &Bills (Usance & Sight) has decreasednumber of bills. The level of outstanding bills is low in almost all the years in each of the three financial years from 20there are only 5 sight bills which were outstanding & which are outstanding, in the same way in Usance bills in the year 09-10 there are 6 bills which are outstandingindicated in the same i.e. properalarming as there is a declining trend in the realization of bills.

YEARWISE ANALYSIS OF VARIOUS OUTSTANDING

16%

29%

OUTSTANDING BILLS (07FOBP

71

As can be seen from the above graphs & tables: The Total No of Sight) has decreased from 07-08 to 09-10. there is a decline in the trend of

el of outstanding bills is low in almost all the years in each of the three financial years from 2007 to 2010. We can very well see that in year 07

sight bills which were outstanding & in the year 09-10 there are no which are outstanding, in the same way in Usance bills there is only one bill outstanding &

10 there are 6 bills which are outstanding. The prime reason for this is alindicated in the same i.e. proper realisation of sight bills. The status of the usance bills is alarming as there is a declining trend in the realization of bills.

ALYSIS OF VARIOUS OUTSTANDING EXPORT BILLS

FIGURE: 3.1.9

45%

10%

OUTSTANDING BILLS (07-08)FOBP FOBNLC FOBD FOBC

tables: The Total No of there is a decline in the trend of

el of outstanding bills is low in almost all the years in sight bills in that in year 07-08

10 there are no sight bills there is only one bill outstanding & . The prime reason for this is also . The status of the usance bills is

ALYSIS OF VARIOUS OUTSTANDING

79%

OUTSTANDING BILLS (08

64%

OUTSTANDING BILLS (09FOBP

72

FIGURE: 3.1.10

FIGURE: 3.1.11

19%2%

0%

OUTSTANDING BILLS (08-09)FOBP FOBNLC FOBD FOBC

35%

0%1%

OUTSTANDING BILLS (09-10)FOBP FOBNLC FOBD FOBC

0%

INTERPRETATION: As can be seen from the above pie charts: In the year (07bills outstanding in FOBP is highest i.e. 45% &has a share of 16% & FOBNLC has a share of 10% respectively. In the year (08percentage of bills outstanding in FOBC has increased from 45% to 79%, Also we can very well see that there is a decrease in the level oFOBNLC i.e.10%to 2% and FOBD i.e. 16% to nil. In the year (09outstanding bills in FOBC is highest with 64%, while 35% of FOBP bills are also outstanding in the year , FOBNLC is reduced to nil whereas

YEAR WISE ANALYSIS OF OUTSTANDING SIGHT & USANCE EXPORT BILLS

USANCE26%

OUTSTANDING BILLS (07

73

: As can be seen from the above pie charts: In the year (07-08) percentage of bills outstanding in FOBP is highest i.e. 45% & FOBC is second highest with 29%, FOBD has a share of 16% & FOBNLC has a share of 10% respectively. In the year (08percentage of bills outstanding in FOBC has increased from 45% to 79%, Also we can very well see that there is a decrease in the level of outstanding in FOBP i.e. 45% to19%, FOBNLC i.e.10%to 2% and FOBD i.e. 16% to nil. In the year (09-10) percentage of outstanding bills in FOBC is highest with 64%, while 35% of FOBP bills are also outstanding in the year , FOBNLC is reduced to nil whereas FOBD has a share of 1% during the period.

YEAR WISE ANALYSIS OF OUTSTANDING SIGHT & USANCE EXPORT BILLS

FIGURE: 3.1.12

SIGHT74%

USANCE

OUTSTANDING BILLS (07-08)

08) percentage of FOBC is second highest with 29%, FOBD

has a share of 16% & FOBNLC has a share of 10% respectively. In the year (08-09) percentage of bills outstanding in FOBC has increased from 45% to 79%, Also we can very

f outstanding in FOBP i.e. 45% to19%, 10) percentage of

outstanding bills in FOBC is highest with 64%, while 35% of FOBP bills are also outstanding FOBD has a share of 1% during the period.

YEAR WISE ANALYSIS OF OUTSTANDING SIGHT & USANCE EXPORT BILLS

INTERPRETATION: As can be seen from the above pie charts: In the year (07percentage of bills outstanding in sight bills is greater than usance bills i.e. 74% whereas usance has a share of 26%. In the year (08whereas usance bills are very much closer i.e.49%. In the year (09outstanding in sight is 45% whereas usance bills are greater than sight bills i.e. 55%.

USANCE49%

OUTSTANDING BILLS (08

USANCE55%

OUTSTANDING BILLS (09

74

FIGURE: 3.1.13

FIGURE: 3.1.14

As can be seen from the above pie charts: In the year (07percentage of bills outstanding in sight bills is greater than usance bills i.e. 74% whereas usance has a share of 26%. In the year (08-09) percentage of bills outstanding in sight is 51%

as usance bills are very much closer i.e.49%. In the year (09-10) percentage of bills outstanding in sight is 45% whereas usance bills are greater than sight bills i.e. 55%.

SIGHT51%

OUTSTANDING BILLS (08-09)

SIGHT45%

OUTSTANDING BILLS (09-10)

As can be seen from the above pie charts: In the year (07-08) percentage of bills outstanding in sight bills is greater than usance bills i.e. 74% whereas

09) percentage of bills outstanding in sight is 51% 10) percentage of bills

outstanding in sight is 45% whereas usance bills are greater than sight bills i.e. 55%.

75

4 FINDINGS

1. There is a positive increasing trend in the total no. of bills in FOBP. Foreign Outward Bills Purchased faces a fair amount of credit risk among all other bills. FOBP also has the highest outstanding amount among all the export bills i.e. rs 39847151 (sight) and also rs 144059844 (Usance).The level of outstanding bills is in an increasing trend.This is causing a lot of concern to the bank.

2. There is an increasing trend in the total no. of bills in FOBC. Foreign Outward Bills collection faces the highest amount of credit risk as it has the highest amount of outstanding bills in comparison to all other export bills in almost all the financial years.

3. The bank has done very well in Foreign Outward Bills Negotiated under Letter of Credit. A bill which is protected with a letter of credit is usually a very safe transaction. As there is a bank of the counter party also involved and also the information about the party is available through the Exim bank too. The bank basically deals with the documents and it has to scrutinize and carefully judge the documents otherwise it has to face the consequences of the discrepancies.

4. Total No of Bills (Usance & Sight) has shown an declining trend in Foreign Outward Bills Discounted .The level of outstanding bills is low in almost all the years in sight bills in each of the three financial years from 2007 to 2010. The prime reason for this is also indicated in the same i.e. proper realisation of sight bills. The status of the usance bills is alarming as there is a declining trend in the realization of bills.

5. It can be concluded from the analysis that the sight bills have not performed well in comparison to the usance bills. There is more percentage of outstanding bills in sight bills than usance bills in the years 07-08 & 08-09. The situation have changed in the year09-10 where usance bills have more percentage of outstanding bills than sight bills.

76

5 SUGGESTIONS

1. ECGC Cover

Branches should ensure that the export bills tendered by the customer are either covered under the whole Turnover Post Shipment Guarantee of ECGC or a separate policy has been obtained wherever required. The incumbent-in-charge must go through the conditions of ECGC Policy/Guarantee to ensure that Bank’s interest is safeguarded .In cases where specific approval of ECGC is required to cover post shipment credit under the Guarantee issued to bank, branches purchasing the documents must ensure that necessary approval from ECGC is obtained and the limit fixed by ECGC, if any, is adhered to.

2. Steps to strengthen the rating exercise:

In order to stabilize and create robust credit risk management system, bank should continuously monitor the ratings and their migration. Seminars, workshops, regular visits of senior officials and video conferences should be conducted regularly to equip the CRMD officials to monitor the migration and reduce deviation. Notes on rating migrations are placed to CRMC for information.

The credit risk rating of a borrower shall become due for updating after the expiry of 12 months from the month of confirmation of rating or 18 months from the date of balance sheet on the basis of which credit risk rating was assigned, whichever is earlier.

3. Use of CIBIL data and RBI defaulters list

With the aim of taking informed credit decisions, the bank has become a member of Credit Information Bureau of India, an institution set up for creation of the database in respect of the borrowers of banks/FIs and sharing the same with its member banks. Credit Information Report (CIR) should be drawn while considering fresh/enhanced/renewal proposal. This initiative helps the bank in better credit decisions thereby resulting in lower NPAs.

In cases where name of a company appears in the RBI list of defaulters and the Director(s) of such company are also Director(s) in another company seeking credit facilities from bank, such case should not normally be considered. However, sanctioning

77

authority not below the level of Circle Head can take a view in this regard after conducting due diligence exercise.

4. Credit Risk Mitigation techniques

When taking collateral, banks should calculate their adjusted exposure to a counterparty for capital adequacy purposes in order to take account of the effects of that collateral. Banks are required to adjust both the amount of the exposure to the counterparty and the value of any collateral received in support of that counterparty to take account of possible future fluctuations in the value of either, occasioned by market movements. as well as of the eligible financial collaterals.

5. External Credit assessments

Bank must use the ratings of the following domestic credit rating agencies (arranged in alphabetical order) for the purposes of risk weighting their claims for capital adequacy purposes:

a) Credit Analysis and Research Limited; b) CRISIL Limited; c) FITCH India; and d) ICRA Limited.

Bank must also use the ratings of the following international credit rating agencies (arranged in alphabetical order) for the purposes of risk weighting their claims for capital adequacy purposes where specified:

a. Fitch; b. Moody’s; and c. Standard & Poor’s

78

6. APPENDIX

SAFEGUARDS SUGGESTED BY RBI IN RESPECT OF ADVANCES AGAINST BILLS

1) Branches should be circumspect in discounting bills drawn by front companies of industrial groups.

2) Bills financing should be part of the working capital credit limit provided to the borrower after proper appraisal of the working capital needs.

3) The standing and credit worthiness of the borrower as well as the Drawee of the bills should be carefully looked into.

4) At the collecting branches, the bills should be promptly presented for payment on due dates and fate should be informed to the sending branch.

5) For the purpose of retirement of bills, the borrower should not be allowed fresh facility of bills purchase/discount.

6) Cheque purchase facilities should not be permitted as a matter of routine but should be extended to prime customers and that too, sparingly.

7) It has to be ensured that bills facilities are not disproportionate in relation to the business of the borrower, the drawees are credit worthy and are not associates and the documents are genuine.

8) In the case of documentary bills, the railway receipts/motor transport receipts/bills of lading tendered therewith should be scrutinised carefully to verify their genuineness, the quality and quantity of merchandise covered by them, the date of issue, etc. and ensure that transport receipts are from approved carriers and not stale.

9) At the time of discounting the accepted bills, it is to be ensured that confirmation in regard to the acceptance is obtained from drawees, especially where the bill amounts are large or where there may be reasons to suspect the genuineness of the bill or acceptance.

10) Bills covering film prints must not be treated as Documentary bills. These should be treated as clean D/Ds and powers exercised accordingly and such facilities should be allowed only to first class parties who are considered good for unsecured advances.

11) Bills received for collection should be sent to such of the branches or branches of scheduled bank (where bank does not have a branch) for collection as are situated nearest to the drawee's place of business/residence. In case no other bank's branch is situated at the place, the bill may be sent to drawee's bank directly after obtaining written authority from the party.

12) While discounting Usance bills, it is to be ensured that the bills so discounted have arisen out of the actual movement of goods. For this purpose, the relative invoices as also the documents like RRs/MTRs should be verified and in respect of

79

local sales, the bills should be supported by either receipted delivery orders/challans or invoices receipted by the drawees concerned.

13) Purchase of clean bills covering local sale of goods where bills are not drawn on parties connected with borrower or his selling agent may be allowed as per vested loaning powers.

14) Branches should be selective in choosing new borrowers desiring facilities against discounting or purchase of documentary bills, and have to be equally selective while discounting/purchasing bills even from existing customers.

15) While purchasing/discounting/negotiating bills under LCs or otherwise, branches should establish genuineness of underlying transactions/documents.

SAFEGUARDS:

Safeguards to be observed by branches purchasing/discounting and receiving export bills are given hereunder:

a) Discounting Branches

While accepting Bills accompanied by carrier receipts for their discounting, the Branches should properly scrutinise the documents and satisfy that:

1. Bills purchased and discounted have arisen out of genuine trade transactions and are made for movement of goods.

2. Bills are not drawn on self or allied/associate concerns of the borrower unless proper sanction is held.

3. Bills purchased/discounted are within the sanctioned limits of the party.

4. Carrier receipt should be of a transport operator, whose name appears on the approved list of the bank and is in the Special Format as laid down by the IBA Scheme and should carry special endorsement printed in RED between two parallel lines indicating that the consignee copy of MTR is to be used for borrowing from the bank.

5. Register should be maintained wherein the details of all the bills received back unpaid should be recorded and in future, bills drawn on such parties may not be accepted for discounting.

6. As soon as the Bills accompanied by carrier receipts are discounted, a notice of lien under registered post should simultaneously be sent to the destination office of the transport company to enable the transporter to detect if any MTRs have been issued unauthorisedly or fraudulently by anybody. A copy of such notice of lien should also be endorsed to the Drawee branch.

80

7. At the time of discounting the accepted bills/hundies, confirmation in regard to acceptance is obtained from drawees especially where the bill amounts are large or where there are reasons to suspect the genuineness of the bill or acceptance.

8. Names of the drawees on which the bills are drawn must be got approved from the Circle head, where so provided in the sanction.

9. While recording entries in the DD purchased Register, it should be ensured that all relevant information is properly recorded and in the column 'From whom Purchased' the name of the company concerned as also the name of the beneficiary must invariably beindicated to help facilitating subsequent follow up and realisation of amount from the reimbursing offices.

10. CR on the drawees of the bills must be collected and placed on record of the Bank.

11. Usance of the bills should not be more than the period mentioned in the sanction.

12. It should be ensured that the bills are properly drawn and stamped and are payable where there are offices of the bank or other scheduled commercial bank.

CREDIT RISK MANAGEMENT

PD The Probability of Default is the likelihood that a loan will not be repayed and fall into default. This PD will be calculated for each company who have a loan. The credit history of the counterparty and nature of the investment will all be taken into account to calculate the PD figures. Many banks will use external ratings agencies such as Standard and Poors. However, banks are also encouraged to use their own Internal Rating Methods as well.

LGD The amount of funds that is lost by a bank or other financial institution when a borrower defaults on a loan. Academics suggest that there are several methods for calculating the loss given default, but the most frequently used method compares actual total losses to the total potential exposure at the time of default

EAD A total value that a bank is exposed to at the time of default. Each underlying exposure that a bank has is given an EAD value and is identified within the bank's internal system. Using the internal ratings board (IRB) approach, financial institutions will often use their own risk management default models to calculate their respective EAD systems

RAROC An adjustment to the return on an investment that accounts for the element of risk. Risk-adjusted return on capital (RAROC) gives decision makers the ability to compare the

81

returns on several different projects with varying risk levels. RAROC was popularized by Bankers Trust in the 1980s as an adjustment to simple return on capital (ROC).

For a collateralised transaction, the exposure amount after risk mitigation is calculated as follows:

E* = max {0, [E x (1 + He) - C x (1 - Hc - Hfx)]} Where: E* = the exposure value after risk mitigation E = current value of the exposure for which the collateral qualifies as a risk Mitigants He = haircut appropriate to the exposure C = the current value of the collateral received Hc = haircut appropriate to the collateral Hfx = haircut appropriate for currency mismatch between the collateral and Exposure

The exposure amount after risk mitigation (i.e., E*) will be multiplied by the risk weight of the counterparty to obtain the risk-weighted asset amount for the collateralised transaction. Sovereign will include Reserve Bank of India, DICGC and CGTSI, which are eligible for zero per cent risk weight. Banks may apply a zero haircut for eligible collateral where it is a National Savings Certificate, Kisan Vikas Patras, surrender value of insurance policies and banks’ own deposits. The standard supervisory haircut for currency risk where exposure and collateral are denominated in different currencies is eight per cent.

82

6. Bibliography

Books

1. Export Finance published by Foreign Exchange Dealers Association Of India2. Documentary Credits published by Foreign Exchange Dealers Association Of India3. Banking Ready Reckoner 2010 Published by Punjab National Bank4. Sundaram & Varshaney(2006), Banking Theory law & Practice ,S.Chand publishers

New Delhi

Websites

1. www.rbi.org.in2. www.fedai.org.in3. www.pnbindia.com4. www.allbankingsolutions.com5. www.iccindiaonline.com6. www.lcviews.com7. www.coastlinesolutions.com8. www.investopedia.com9. www.moneycontrol.com10. www.buzzingstocks.com11. www.sitpro.org.uk/trade