Ahemad301.pdf

University of Mumbai A study on Credit Risk Management of HDFC BANK A project submitted to University of Mumbai for partial completion of the degree of Bachelors of commerce (Accounting and Finance) Under the faculty of commerce By SAYYED AHEMAD HUSSAIN

Roll No. 44 Semester VI Under the guidance of Prof.Mubina Shaikh

SREE NARAYANA GURU COLLEGE OF COMMERCE P.L.LOKHANDE MARG, CHEMBUR, MUMBAI-400089 2018-19

SREE NARAYANA GURU COLLEGE OF COMMERCE P.L.LOKHANDE MARG, CHEMBUR, MUMBAI-400089

DECLARATION I the undersigned Mr...SAYYED AHEMAD HUSSAIN here by, declare that the work embodied in this project work titled Credit Risk Management of HDFC BANK forms my own contribution to the research work under the guidance of Prof.Mubina Shaikh is a result of my own research work and has not been previously submitted by any other university for any other degree/diploma to this or any other university.

Wherever reference has been made to previous work of other, it has been clearly indicated as such and included in the bibliography.

I hereby further declare that all information of this document has been obtained and presented in accordance with academic rules and ethical conduct.

SAYYED AHEMAD HUSSAIN

Place: CHEMBUR Date: 30. 3. 2019

SREE NARAYANA GURU COLLEGE OF COMMERCEP.L.LOKHANDE MARG, CHEMBUR, MUMBAI400089

CERTIFICATE This is to certify that Mr. SAYYED AHEMAD HUSSAIN has worked and duly completed her/his Project Work for the degree of Bachelor in Commerce (Accounting& Finance) under the Faculty of Commerce in the subject of and her/his project is entitled, “Credit Risk Management of HDFC BANK ” under my supervision.

I further certify that the entire work has been done by the learner under my guidance and that no part of it has been submitted previously for any Degree or Diploma of any University.

It is her/ his own work and facts reported by her/his personal findings and investigations.

Date of submission:

Project Guide External

Coordinator

Principal

Acknowledgment To list who all have helped me is difficult because they are so numerous and the depth is so enormous. I would like to acknowledge the following as being idealistic channels and fresh dimensions in the completion of this project. I take this opportunity to thank the University of Mumbai for giving me chance to do this project.

I would like to thank my Principal, Dr.RavindranKarathadi for providing the necessary facilities required for completion of this project. I take this opportunity to thank our Coordinator Miss. MamtaMeghnani for her moral support and guidance.

I would also like to express my sincere gratitude towards my project guide Prof.Mubina Shaikh whose guidance and care made the project successful. I would like to thank my College Library, for having provided various reference books and magazines related to my project.

Lastly, I would like to thank each and every person who directly or indirectly helped me in the completion of the project especially my Parents and Peers who supported me throughout my project.

SAYYED AHEMAD HUSSAIN

Date of submission:

INDEX Chapter No.

Title of Chapter

Page No.

1

Executive Summary

1

2

Introduction

2-22

3

Literature Review

23

4

Objective of Study

24

5

Company Profile

25-44

6

Research Methodology

45

7

Data Analysis & Interpretation

46 -54

8

Observations & Findings

55

9

Limitations of the Study

56

10

Recommendations & Suggestions

57

11

Conclusion

57-58

12

Webliography& Bibliography

59

13

Annexure

-

6

1

Chapter 1

EXECUTIVE SUMMARY

Credit risk is defined as the potential that a bank borrower or counterparty will fail to meet its obligations in accordance with agreed terms, or in other words it is defined as the risk that a firm customer and the parties to which it has lent money will fail to make promised payments is known as credit risk The exposure to the credit risks large in case of financial institutions, such commercial banks when firms borrow money they in turn expose lenders to credit risk ,the risk that the firm will default on its promised payments. As a consequence, borrowing exposes the firm owners to the risk that firm will be unable to pay its debt and thus be forced to bankruptcy

This study try to explore various parameters pertinent to credit risk management as it affect banks‘ financial performance. Such parameters covered in the study were; default rate, cost per loan assets and capital adequacy ratio. Financial report of HDFC banks were used to analyze which was presented in to analyze the data. The study revealed that all these parameters have an inverse impact on banks‘ financial performance; however, the default rate is the most predictor of bank financial performance. The recommendation is to advice banks to design and formulate strategies that will not only minimize the exposure of the banks to credit risk but will enhance profitability

2

CHAPTER NO .2 INTRODUTION TO CREDIT RISK MANAGEMENT

MEANING The word „credit‟ comes from the Latin word „credere‟, meaning „trust‟. When sellers transfer his wealth to a buyer who has agreed to pay later, there is a clear implication of trust that the payment will be made at the agreed date. The credit period and the amount of credit depend upon the degree of trust. Credit is an essential marketing tool. It bears a cost, the cost of the seller having To borrow until the customers payment arrives. Ideally, that cost is the price but, as most customer s pay later than agreed, the extra unplanned cost erodes the planned net profit

3

Risk is defined as uncertain resulting in adverse outcome, adverse in relation to planned objective or expectation. It is very difficult to find a risk free investment. An important input to risk management is risk assessment. Many public bodies such as advisory committees concerned with risk management. There are mainly three types of risk they are follows •

Market risk

•

Credit Risk

•

Operational risk

Risk analysis and allocation is central to the design of any project finance, risk management is of paramount concern. Thus quantifying risk along with profit projections is usually the first step in gauging the feasibility of the project. Once risk have been identified they can be allocated to participants and appropriate mechanisms put in place.

4

INTRODUCTUION & MEANING OF CREDIT RISK MANAGEMENT

With the advancing liberalization and globalization, credit risk management is gaining a lot of importance. It is very important for banks today to understand and manage credit risk. Banks today put in a lot of efforts in managing, modeling and structuring credit risk. Credit risk is defined as the potential that a borrower or counterparty will fail to meet its obligation in accordance with agreed term s. RBI has been extremely sensitive to the credit risk it faces on the domestic and international front Credit risk management is not just a process or procedure. It is a fundamental component of the banking function. The management of credit risk must be incorporated into the fiber of banks .Any bank today needs to implement efficient risk adjusted return one capital methodologies, and build cutting-edge portfolio credit risk management systems. Credit Risk comes full circle.

Traditionally the primary risk of financial institutions has been credit risk arising through lending. As financial institutions entered new markets and traded new products, other risks such as market risk began to compete for management's attention. In the last few decades financial institutions have developed tools and methodologies to manage market risk. Recently the importance of managing credit risk has grabbed management's attention. Once again, the biggest challenge facing financial Institutions are credit risk. In the last decade, business and trade have expanded rapidly both nationally and globally. By expanding, banks have taken on new market risks and credit risks by dealing with new clients and in some cases new governments also. Even banks that do not enter into new markets are finding that the concentration of credit risk within here existing marketing is a hindrance to growth as a result; banks have created risk management mechanisms in order to facilitate their growth and to safeguard their interests.

5

Meaning of credit risk

A credit risk is the risk of default on a debt that may arise from a borrower failing to make required payments.In the first resort, the risk is that of the lender and includes lost principal and interest, disruption to cash flows, and increased collection costs. The loss may be complete or partial. In an efficient market, higher levels of credit risk will be associated with higher borrowing costs Because of this, measures of borrowing costs such as yield spreads can be used to infer credit risk levels based on assessments by market participants. Losses can arise in a number of circumstances,

for example: •A

consumer may fail to make a payment due on a mort age loan,

credit card, line of credit, or other loan. •A

company is unable to repay asset-secured fixed or floating charge debt.

•A

business or consumer does not pay a trade invoice when due.

•A

business does not pay an employee's earned wages when due.

6 •A

business or government bond issuer does not make a payment on a coupon or

principal payment when due. • An

insolvent insurance company does not pay a policy obligation.

• An

insolvent bank won't return funds to a depositor.

•A

government grants bankruptcy protection to an insolvent consumer or business.

To reduce the lender's credit risk, the lender may perform a credit check on the prospective borrower, may require the borrower to take out appropriate insurance, such as mortgage insurance, or seek security over some assets of the borrower or a guarantee from a third party.

• The

lender can also take out insurance against the risk or on-sell the debt to

another company. In general, the higher the risk, the higher will be the interest rate that the debtor will be asked to pay on the debt.

•

Credit risk mainly arises when borrowers are unable to pay due willingly or unwillingly.

Risk management is the identification, evaluation, and prioritization of risks (defined in ISO 31000 as the effect of uncertainty on objectives) followed by coordinated and economical application of resources to minimize, monitor, and control the probability or impact of unfortunate events or to maximize the realization of opportunities. Risks can come from various sources including uncertainty in financial markets, threats from project failures (at any phase in design, development, production, or sustainment lifecycles), legal liabilities, credit risk, accidents, natural causes and disasters, deliberate attack

From an adversary, or events of uncertain or unpredictable root-cause. There are two types of events i.e. negative events can be classified as risks while positive events are classified as opportunities.

Several risk management standards have been developed including the Project Management Institute, the National Institute of Standards and Technology, actuarial societies, and ISO standards.

Methods, definitions and goals vary widely according to whether the risk management method is in the context of project management, security, engineering, industrial processes, financial portfolios, actuarial assessments, or public health and safety.

7 Strategies to manage threats (uncertainties with negative consequences) typically include avoiding the threat, reducing the negative effect or probability of the threat, transferring all or part of the threat to another party, and even retaining some or all of the potential or actual consequences of a particular threat, and the opposites for opportunities (uncertain future states with benefits).

Certain aspects of many of the risk management standards have come under criticism for having no measurable improvement on risk; whereas the confidence in estimates and decisions seem to increase.For example, one study found that one in six IT projects were "black swans" with gigantic overruns (cost overruns averaged 200%, and schedule overruns 70%).

Definition

8

TYPES OF CREDIT RISK MANAGEMENT CONCENTRATION RISK CREDIT DEAFULT RISK COUNTRY RISK

9

TYPES OF RISK

CONCENTRATION RISK

Concentration riskis a banking term describing the level of risk in a bank's portfolio arising from concentration to a single counterparty, sector or country. The risk arises from the observation that more concentrated portfolios are less diverse and therefore the returns on the underlying assets are more correlated

.

10

TYPES OF CONCENTRATION RISK There are two types of concentration risk. These types are based on the sources of the risk. Concentration risk can arise from uneven distribution of exposures (or loan) to its borrowers. Such a risk is called name concentration risk. Another type is spectral concentration risk, which can arise from uneven distribution of exposures to particular sectors, regions, industries or products

1. Monitoring risk 2. Management risk

Most financial institutions have policies to identify and limit concentration risk. This typically involves setting certain thresholds for various types of risk. Once these thresholds are set, they are managed by frequent and diligent reporting to assess concentration areas and identify elevated thresholds. A key component to the management of concentration risk is accurately defining thresholds across various concentrations to minimize the combined risks across concentrations.

CREDIT DEFAULT RISK

11

The risk of loss arising from a debtor being unlikely to pay its loan obligations in full or the debtor is more than 90 days past due on any material credit obligation; default risk may impact all credit-sensitive transactions, including loans, securities and derivatives.

COUNTRY RISK

The risk of loss arising from a sovereign state freezing foreign currency payments (transfer/conversion risk) or when it defaults on its obligations (sovereign

risk); this type of risk is prominently associated with the country's

macroeconomic performance and its political stability.

Political risk analysis providers and credit rating agencies use different methodologies to assess and rate countries' comparative risk exposure

12 Credit rating agencies tend to use quantitative econometric models and focus on financial analysis, whereas political risk providers tend to use qualitative methods, focusing on political analysis. However, there is no consensus on methodology in assessing credit and political risks.

REDUCTION OF CREDIT RISK MANAGEMENT

Lenders mitigate credit risk in a number of ways, including: pricing – Lenders may charge a higher interest rate to borrowers who

• Risk-based

are more likely to default, a practice called risk-based pricing. LENDERS consider factors relating to the loan such as loan purpose, credit rating, and loanto value ratio and estimates the effect on yield (credit spread). • Covenants

– Lenders may write stipulations on the borrower, called covenants,

into loan agreements, such as: • Periodically • Refrain

[22]

report its financial condition,

from paying dividends, repurchasing shares, borrowing further, or other

specific, voluntary actions that negatively affect the company's financial position, and • Repay

the loan in full, at the lender's request, in certain events such as changes in

the borrower's debt-to-equity ratio or interest coverage ratio. • Credit

insurance and credit derivatives – Lenders and bond holders may hedge

their credit risk by purchasing credit insurance or credit derivatives. These contracts transfer the risk from the lender to the seller (insurer) in exchange for payment. The most common credit derivative is the credit default swap. • Tightening

– Lenders can reduce credit risk by reducing the amount of credit

extended, either in total or to certain borrowers. For example, a distributor selling

13

its products to a troubled retailer may attempt to lessen credit risk by reducing payment terms from net 30 to net 15. • Diversification

– Lenders to a small number of borrowers (or kinds of borrower)

face a high degree of unsystematic credit risk, called Concentration risk Lenders reduce this risk by diversifying the borrower pool. 

Deposit insurance – Governments may establish deposit insurance to guarantee bank deposits in the event of insolvency and to encourage consumers to hold their savings in the banking system instead of in cash

RISK V/S UNCERTAINTY

(Risk is not the same as uncertainty) In a business situation, any decision could be affected by a host of events: an abnormal rise in interest rates

14 Fall in bond prices, growing incidence of default by debtors, etc. A compact risk management system has to consider all these as any of them could happen at a future date, though the possibility may be low. Many professionals commonly use risk interchangeably with uncertainty in project management or more specifically in risk management

TYPES OF RISKS: The risk profile of an organization and in this case banks may be Reviewed from the following angles

• Business risk. • Non business risk.

15

1.

•

Businesss risk

The term business risks refers to the possibility of a commercial business making inadequate profits (or even losses) due to uncertainties - for example: changes in tastes, changing preferences of consumers, strikes, increased competition, changes in government policy, obsolescence etc.

•

Every business organization faces various risk elements while doing business.

•

Business risk implies uncertainty in profits or danger of loss and the events that could pose a risk due to some unforeseen events in future, which causes business to fail

•

For example, a company may face different risks in production, risks due to irregular supply of raw materials, machinery breakdown, labor unrest, etc.

•

In marketing, risks may arise due to fluctuations in market prices, changing trend s and fashions, errors in sales forecasting, etc.

•

In addition, there may be loss of assets of the firm due to fire, flood, earthquakes, riots or war and political unrest which may cause unwanted interruptions in the business operations.

•

Thus business risks may take place in different forms depending upon the nature of a company and its production.

•

Business risks can arise due to the influence by two major risks: internal risks (risks arising from the events taking place within the organization) and external risks (risks arising from the events taking place outside the organization

•

Internal risks arise from factors (endogenous variables, which can be influenced) such as:

•

human factors (talent management, strikes)

•

technological factors (emerging technologies)

•

physical factors (failure of machines, fire or theft)

•

operational factors (access to credit, cost cutting, advertisement)

16 •

External risks arise from factors (exogenous variables, which cannot be controlled) such as:

•

economic factors (market risks, pricing pressure)

•

natural factors (floods, earthquakes)

•

political factors (compliance demands and regulations imposed by governments)

•

Though corporate entities may have an image of risk aversion, they may continue to stake their reputations and indulge in their gambling propensities by sponsoring competitive sports teams.

Non business risk

•

This refers to risks that do not arise from the direct business of the organization.

•

Non business risks are typically outside the control of the Organization but may impact on the organization. For example, the risk of wider economic changes affecting the rate of interest on long-term sources of finance.

•

Non-business risk is a term normally found in risk and control and financial management.

17 •

All Organizations will face financial risk at some point and must evaluate potential losses and take action to reduce or eliminate such threats. Risk control is a technique that utilizes findings from risk assessments (identifying potential risk factors in a firm‗s Operations, such as technical and non-technical aspects of the business, financial policies, and other policies that may impact the well-being of the firm), and implementing changes to reduce risk in these areas.

What is risk management

Risk management is the process of identifying, assessing and controlling threats to an organization's capital and earnings.

18 These threats, or risks, could stem from a wide variety of sources, including financial uncertainty, legal liabilities, strategic management errors, accidents and natural disasters. IT security threats and data-related risks, and the risk management strategies to alleviate them, have become a top priority for digitized companies . As a result, a risk management plan increasingly includes companies' processes for identifying and controlling threats to its digital assets, including proprietary corporate data, a customer's personally identifiable information and intellectual property

Introduction: Since the early 2000s, several industry and government bodies have expandedregulatorycompliancerules that scrutinize companies' risk management plans, policies and procedures. In an increasing number of industries, boards of directors are required to review and report on the adequacy ofenterprise risk managementprocesses. As a result,risk analysis,internal auditsand other means of risk assessment have become major components of business strategy. Risk management standards have been developed by several organizations, including theNational Institute of Standards and Technologyand theISO.These standards are designed to help organizations identify specific threats, assess unique vulnerabilities to determine their risk, identify ways to reduce these risks and then implement risk reduction efforts according to organizational strategy. The ISO 31000 principles, for example, provideframeworksfor risk management process improvements that can be used by companies, regardless of the organization's size or target sector. The ISO 31000 is designed to "increase the likelihood of achieving objectives, improve the identification of opportunities and threats, and effectively allocate and use resources for risk treatment," according to the ISO website.

19 Although ISO 31000 cannot be used for certification purposes, it can help provide guidance for internal or external risk audit, and it allows organizations to compare their risk management practices with the internationally recognized benchmarks.

The ISO recommended the following target areas, or principles, should be part of the overall risk management process: •

The process should create value for the organization.

•

It should be an integral part of the overall organizational process.

•

It should factor into the company's overall decision-making process.

•

It must explicitly address any uncertainty.

•

It should be systematic and structured.

•

It should be based on the best available information.

•

It should be tailored to the project.

•

It must take into account human factors, including potential errors.

•

It should be transparent and all-inclusive.

•

It should be adaptable to change.

•

It should be continuously monitored and improved upon. The ISO standards and others like it have been developed worldwide to help organizations systematically implement risk management best practices. The ultimate goal for these standards is to establish common frameworks and processes to effectively implement risk management strategies. These standards are often recognized by international regulatory bodies, or by target industry groups. They are also regularly supplemented and updated to reflect rapidly changing sources ofbusiness risk. Although following these standards is usually voluntary, adherence may be required by industry regulators or through business contracts. Risk management strategies and processes All risk management plans follow the same steps that combine to make up the overall risk management process:

•

Risk identification.The company identifies and defines potential risks that may negatively influence a specific company process or project.

20 •

Risk analysis.Once specific types of risk are identified, the company then determines the odds of it occurring, as well as its consequences. The goal of the analysis is to further understand each specific instance of risk, and how it could influence the company's projects and objectives.

•

Risk assessment and evaluation. The risk is then further evaluated after determining the risk's overall likelihood of occurrence combined with its overall consequence.The company can then make decisions on whether the risk is acceptable and whether the company is willing to take it on based on its risk appetite.

•

Risk mitigation. During this step, companies assess their highest-ranked risks and develop a plan to alleviate them using specific risk controls. These plans include risk mitigation processes, risk prevention tactics and contingency plans in the event the risk comes to fruition.

•

Risk monitoring. Part of the mitigation plan includes following up on both the risks and the overall plan to continuously monitor and track new and existing risks. The overall risk management process should also be reviewed and updated accordingly

21

Two fundamental approaches to credit risk management:-

•

The internally oriented approach centers on estimating both the expected cost and volatility of future credit losses based on the firm‘s best assessment.

•

Future credit losses on a given loan are the product of the probability that the borrower will default and the portion of the amount lent which will be lost in the event of default.

•

The portion which will be lost in the event of default independent not just on the borrower but on the type of loan (e.g., some bonds have greater rights of seniority than others in the event of default and will receive payment before the more junior bonds).

•

To the extent that losses are predictable, expected losses should be factored into product prices and covered as a normal and recurring cost of doing business. I.e. they should be direct charges to the loan valuation. Volatility of loss rates around expected levels must be covered through risk-adjusted returns

22

Chapter 3 Literature Review This researcher work is an attempt to investigation on the Credit Management in the Nigeria Banking Industry. It is a based on how customer of the Bank expect their bankers to provide them with loans and advances to make up any short fall in their funds requirement for transactional motive. Again the banks ability to strike a balance between the customers need for and at the same time maintain profitable operations, depends upon a large extent on the credit policy. And its administration adopted by the bank. The study is divided in five chapters, its focused on the problems associated with the loans and advances, purpose of the study which is aimed at examine and actually finding out how the banking industry in Nigeria has been fairing in credit management with a view meeting the financial requirements and satisfaction of the various categories of customer like the private and governments sections, definition of terms.

Objective of the study and researcher question were used in the research. Also highlighted a brief introduction of literature review on the origin of bank lending, models and or theories relevant to research questions on a number of constraints in which the lending function has to be performed.

The current literatures based on the variable of the theories and models, hypothesis and research questions based on the variable considered lending.

Summary of the literature review is also highlighted.

The method used in collecting data for the study and analyzing which include primary and secondary data. The analysis of data gotten from the different methods, which include questionnaire analysis and personal interview used finding were also used.

The researcher used finding which include poor credit assessment counter order by supervisor staff on lending officers which affect their decision and the collaboration of some banks staff with customer to commit fraud on the bank also some recommendation and conclusion were made in order for the bank to thrive better and this will be beneficial to both the owner and the public suggestion for further research also made.

23

Chapter 4

OBJECTIVE OF STUDY

In the banking industry, understanding the objectives of credit risk management helps you as a consumer. Lenders face credit risk management with every loan they consider. Banks must create a delicate balance between strict credit risk policies and customer satisfaction. Conservative credit risk management policies, fast loan decisions and reasonable loan pricing achieve this balance of protecting loan portfolios while keeping bank customers satisfied with the institution. To know which quality of bank is performing well.

All lenders must reduce their risk of loan loss. Credit risk management is the most difficult potential loan loss to prevent.

Borrowers with consistently poor credit reports or excellent credit scores allow lenders to make easier approval and rejection decisions.

However, prospective borrowers with a mix of on-time payments and late payments create credit risk management challenges for lenders

24

Chapter 5

COMPANY PROFILE

25

HDFC BANK HOUSING DEVELOPMENT FINANCE CORPORATION

Not only many financial institution in the world today can claim the antiquity and majesty of the HDFC Bank with primarily intent of imparting stability to the money market, the bank from its inception mobilized funds for supporting both the public credit of the companies governments in the three presidencies of British India and the private credit of the European and India merchants from about 1860s when the Indian economy book a significant leap forward under the impulse of quickened world communications and ingenious method of industrial and agricultural production the Bank became intimately in valued in the financing of practically Adaptation world and the needs of the hour has been one of the strengths of the Bank, In the post-depression exe. For instance when business opportunities become extremely

26 restricted, rules laid down in the book of instructions were relined to ensure that good business did not go post. Yet seldom did the bank contravene its value as depart Formosan d banking principles to retain as expand its business. An innovative array of office, unknown to the world then, was devised in the form of branches, sub branches, treasury pay office, pay office, sub pay office and out students to exploit the opportunities of an expanding economy.

New business strategy was also evaded way back in 1937 to render the best banking service through prompt and courteous attention to customers.

Adaptation world and the needs of the hour has been one of the strengths of the Bank, in thepost-depression exe. For instance

When business opportunities become extremely restricted, rules laid down in the book of instructions were relined to ensure that good business did not go post. Yet seldom did the bank contravenes its value as depart Formosan d banking principles to retain as expand its business. An innovative array of office, unknown to the world then, was devised in the form of branches, sub branches, treasury pay office, pay office, sub pay office and out students to exploit the opportunities of an expanding economy. New business strategy was also evaded way back in 1937 to render the best banking service through prompt and courteous attention to customers.

27

HISTORY

•

Banking in India has its origin as carry as the Vedic period. It is believed that the transition from money lending to banking must have occurred even before Manu, the great Hindu jurist, who has devoted a section of his work to deposits and advances and laid down rules relating to the interest. During the mogal period, the indigenous

•

Bankers played a very important role in lending money and financing foreign trade and commerce. During the days of East India Company, it was to turn of the agency house stop carry on the banking business. The general bank of India was the first joint stock bank to be established in the year 1786.

•

The others which followed were the Bank of Hindustan and the Bengal Bank. The Bank of Hindustan is reported to have continued till1906, while the other two failed in the meantime. In the first half of the 19

•

Century the East India Company established three banks; The Bank of Bengal in 1809, The Bank of Bombay in 1840 and The Bank of Madras in 1843.These three banks also known as presidency banks and were independent units and functioned well. These three banks Are amalgamated in 1920

•

The Imperial Bank of India was established on the 27 Jan 1921, with the passing of the SBI Act in 1955,

•

The undertaking of The Imperial Bank of India was taken over by the newly constituted SBI. The Reserve Bank which is the Central Bank was created in 1935 by passing of RBI Act 1934, in the wake of movement

28

•

A number of banks with Indian Management were established in the country namely Punjab National Bank Ltd, Bank of India Ltd , Canara Bank Ltd, Indian Bank Ltd, The Bank of Baroda Ltd, The Central Bank of India Ltd .

•

On July 19 1969, 14 Major Banks of the country were nationalized and in 15April 1980 six more commercial private sector banks were also taken over by the government.

•

The India n Banking industry, which is governed by the Banking Regulation Act of India 1949, can be broadly classified into two major categories, non-scheduled banks and scheduled banks.

•

Scheduled Banks comprise commercial banks and the co-operative banks

The Indian Banking System

Banking in our country is already witnessing the sea changes as the banking sector seeks new technology and its applications.

The best port is that the benefits are beginning to reach the masses. Earlier this domain was the preserve of very few organizations. Foreign banks with heavy investments in technology started giving some ―Out of the world‖ customer services.

But, such services were available only to selected few- the very large account holders. Then came the liberalization and with it a multitude of private banks, a large segment of the urban population now requires minimal time and space for its banking needs Reserve Bank of India Act 1934, banks are classified as scheduled banks and nonscheduled banks. The scheduled banks are those, which are entered in the Second

29 Schedule of RBI Act, 1934. Such banks are those, which have paid- up capital and reserves of an aggregate value of not less than Rs.5 lacks and which satisfy RBI that their affairs are carried out in the interest of their depositors.

All commercial banks Indian and Foreign, regional rural banks and state co-operative banks are Scheduled banks. Non Scheduled banks are those, which have not been included in the Second Schedule of the RBI Act, 1934.

The Reserve Bank of India is the supreme monetary and banking authority in the country and has the responsibility to control the banking system in the country. It keeps the reserves of all Commercial banks and hence is known as the Reserve Bank

The Structure of Indian Banking:

The Indian banking industry has Reserve Bank of India as its Regulatory Authority. This is a mix of the Public sector, Private sector, Co-operative banks and foreign banks. The private sector banks are again split into old banks and new banks The existing banking structure in India evolved over several decades, is elaborate and has been serving the credit and banking services needs of the economy.

30 There are multiple layers in today‘s banking structure to cater to the specific and varied requirements of different customers and borrowers . The structure of banking in India played a major role in the mobilization of savings and promoting economic development. In the post-financial sector reforms (1991) phase, the performance and strength of the banking structure improved perceptibly. Financial soundness of the Indian commercial banking system compares favorably with most of the advanced and emerging countries.

IMPORTANCE OF BANKING SECTOR IN A GROWING ECONOMY Banking industry has undergone a paradigm shift from providing ordinary banking services in the past to providing such complicated and crucial services like, merchant banking, housing finance, bill discounting etc. .This sector has become more active with the entry of new players like private and foreign banks. It has also evolved as a prime builder of the economy by understanding the needs of the same and encouraging the development by way of giving loans, providing infrastructure facilities and financing activities for the promotion of entrepreneurs and other business establishments

.For a fast developing economy like ours, presence of a sound financial system to mobilize and allocate savings of the public towards productive activities is necessary.

Commercial banks play a crucial role in this regard .The Banking sector in recent years has incorporated new products in their businesses, which are helpful for growth. The banks have started to provide fee-based services like, treasury operations, managing derivatives, options and futures, acting as bankers to the industry during the public offering, providing consultancy services, acting as an intermediary between twobusiness entities etc.

At the same time, the banks are reaching out to other end of customer requirements like, insurance premium payment, tax payment etc.

It has changed itself from transaction type of banking into relationship banking, where you find friendly and quick service suited to your needs.

31 This is possible with understanding the customer needs their value to the bank, etc. This is possible with the help of well-organized staff, computer based network for speedy transactions, products like credit card, debit card, health care, ATM etc. These are the present trend of services.

The customers at present ask for convenience of banking transactions, like 24hours banking, where they want to utilize the services whenever there is a need. The relationship banking plays a major and important role in growth, because the customers now has enough number of opportunities, and they choose according to their satisfaction of responses and recognition they get.

So the banks have to play cautiously, else they may lose out the place in the market due to competition, where slightest of opportunities are captured fast.

The HDFC bank has three key business segments

•

Wholesale Banking

32

•

The Bank‗s target market is primarily large, blue-chip manufacturing companies in the Indian corporate sector and to a lesser extent, small & mid-sized corporates and agribased businesses.

•

For these customers, the Bank provides a wide range of commercial and transactional banking services

•

Including working capital finance, trade services, transactional services, cash management, etc.

•

The bank is also a leading provider of structured solutions, which combine cash management services with vendor and distributor finance for facilitating superior supply chain management for its corporate customers.

•

Based on its superior product delivery / service levels and strong customer orientation, the Bank has made significant inroads into the banking consortia of a number of leading

•

Indian corporates including multinationals, companies from the domestic business houses and prime public sector companies.

•

It is recognized as a leading provider of cash management and transactional banking solutions to corporate customers, mutual funds, stock exchange members and bank

33

Treasury

•

The Treasury business is responsible for managing the returns and market risk on this investment portfolio. Within this business, the bank has three main product areas -

34 Foreign Exchange and Derivatives, Local Currency Money Market & Debt Securities, and Equities. •

With the liberalization of the financial markets in India, corporates need more sophisticated risk management information, advice and product structures.

•

These and fine pricing on various treasury products are provided through the bank‗s Treasury team.

•

To comply with statutory reserve requirements, the bank is required to hold 25% of its deposits in government securities.

Retail Banking

•

The objective of the Retail Bank is to provide its target market customers a full range of financial products and banking services, giving the customer a one-stop window for all his/her banking requirements.

•

The products are backed by world-class service and delivered to customers through the growing branch network, as well as through alternative delivery channels like ATMs, Phone Banking, Net Banking and Mobile Banking.

35

•

The HDFC Bank Preferred program for high net worth individuals, the HDFC Bank Plus and the Investment Advisory Services programs have been designed keeping in mind needs of customers who seek distinct financial solutions, information and advice on various investment avenues

•

The Bank also has a wide array of retail loan products including Auto Loans, Loans against marketable securities, Personal Loans and Loans for Two-wheelers.

•

It is also a leading provider of Depository Participant (DP) services for retail customers, providing customers the facility to hold their investments in electronic form.

•

HDFC Bank was the first bank in India to launch an International Debit Card in association with VISA (VISA Electron) and issues the MasterCard Maestro debit card as well. The Bank launched its credit card business in late 2001. By March 2015, the bank had a total card base (debit and credit cards) of over 25 million.

•

The Bank is also one of the leading players in the ―merchant acquiring‖ business with over 235,000 Point-of-sale (POS) terminals for debit / credit cards acceptance at merchant establishments.

•

The Bank is well positioned as a leader in various net based B2C opportunities including a wide range of internet banking services for Fixed Deposits, Loans, Bill Payments, etc

ABOUT LOGO

36

WE UNDERSTAND YOUR WORLD……

Togetherness is the theme of this corporate loge of HDFC where the world of banking services meet the ever changing customers‘ needs and establishes a that is like a the are Is an Individual and the lines surrounding indicates the protective boundaries like a house shelters its occupants. The blue pointer represent the philosophy of the bank that is always looking for the growth and newer, more challenging, more promisingdirection. The key hole indicates safety and security.

PRODUCTS AND SERVICES PRODUCTS:

37

State Bank of India renders varieties of services to customers through the following products: Personal Loan Product:           

HDFC Housing Loan HDFC Car Loan HDFC Educational Loan HDFC Personal Loan HDFC Loan against Loan Property HDFC Term Loan Loan against Mortgage of Property Loan against Shares & Debentures Rent plus Scheme Media-Plus Scheme Rates of Interest

HDFC Housing loan No matter where you are in the world, Home makes owning a home in India, simpler. Get your dream home in India at attractive rates with flexible repayment options, minimum paperwork and a complete guidance at every step.

'HDFC-Home Loans'

•

No cap on maximum loan amount for purchase/ construction of house/ flat

•

Option to club income of your spouse and children to compute eligible loan amount

•

Provision to club expected rent accruals from property proposed to compute eligible loan amount Provision to finance cost of furnishing and consumer durables as part of project cost

38 •

Repayment permitted up to 70 years of age

•

Free personal accident insurance cover

•

Optional Group Insurance from HDFC Life at concessional premium (Upfront premium financed as part of project cost)

•

Interest applied on daily diminishing balance basis

•

Special scheme to grant loans to finance Earnest Money Deposits to be paid to Urban

•

Development Authority/ Housing Board, etc. in respect of allotment of sites/ house/ flat

•

No Administrative Charges or application fee

•

Prepayment penalty is recovered only if the loan is pre-closed before half of the original tenure (not recovered for bulk payments provided the loan is not closed)

•

In-principle approval issued to give you flexibility while negotiating purchase of a property

•

Option to avail loan at the place of employment or at the place of construction

•

Attractive packages in respect of loans granted under tie-up with Central/ State Governments/ PSUs/ reputed corporate and tie-up with reputed builders (Please contact your nearest branch for details)

39 •

Faster processing of loan with door step service

•

BROKING SERVICES

•

REVISED SERVICE CHARGES

•

ATM SERVICES

•

INTERNET BANKING

•

E-PAY

•

RBIEFT

•

SAFE DEPOSIT LOCKER

•

GIFT CHEQUES

•

IVR CODESFOREIGN INWARD REMITTANCES

ATM SERVICEs

40

HDFC BANK NETWORKED ATM SERVICES State Bank offers you the convenience of over2952 ATMs

In India, the largest network in the country and continuing to expand fast! This means that you can transact free of cost at the ATMs of HDFC Bank Group (This includes the ATMs of State Bank of India as well as the Associate Banks

Namely, State Bank of Bikaner & Jaipur , State Bank of Hyderabad, State Bank of Indore, State Bank of Mysore, State Bank

How is HDFC Bank different from other banks?

•

HDFC bank is considered to be one of the best performing new age private sector bank. It is among top 5 in all business parameters.

•

Here, I would like to mention few not so known facts about the bank.

1. Although it being an Indian bank, the majority shares are held by Foreign Institutional Investors. HDFC Bank Shareholding Pattern

41

2. It offers (or had offered) all kinds of financial products and services except one, Home loans. Yet, it holds one of largest portfolio of home loans.

3. Interesting! HDFC Ltd does not charge HDFC Bank a royalty for the use of its name however it can ask HDFC bank to change its name if its shareholding in the bank drops below a threshold level. Deepak Parekh, Chairman of HDFC Ltd., is not on the board of HDFC Bank but attends most of its board meetings as a 'special invitee.' HDFC Bank does not sell its own home loans but acts as a distributor of HDFC Ltd. in return for a commission and the right to buy back 70% of such loans. 4. To know more about this read, ‗A bank for the buck‗ by Tamal Bando padhyay 5. It has same CEO from day one. Mr. Aditya Puri. 6. It is one of first investors in National Stock Exchange (NSE) and Goods & Services Tax Network (GSTN). 7. It is one of those few companies that exceeded the performance of their parent company HDFC Ltd. 8. If they both merge, it would be largest Indian company by market capitalization. 9. HDFC Bank persuaded the CBDT to allow it to collect taxes by offering to deposit them with the tax authority in as little as 4 days (earlier PSU banks would take 2 weeks). 10. Today it is the second largest collector of direct tax after SBI

42

HDFC Bank Achievement

1 2

Best Performing Branch in Microfinance among private sector banks by NABARD,2016 Most Valued brand in India for third successive year

3

Best managed public company India

4

World‘s 30 best CEOs – aditya puri

5

6

Best In class straight through processing rates

Best Banking Performer, India In 2016 by Global Brands Magazine Award

43

The internally oriented approach centers on estimating both the expected cost and volatility of future credit losses based on the firm‘s best assessment.

•

Future credit losses on a given loan are the product of the probability that the borrower will default and the portion of the amount lent which will be lost in the event of default.

•

The portion which will be lost in the event of default independent not just on the borrower but on the type of loan (e.g., some bonds have greater rights of seniority than others in the event of default and will receive payment before the more junior bonds).-

•

To the extent that losses are predictable, expected losses should be factored into product prices and covered as a normal and recurring cost of doing business.

•

i.e. They should be direct charges to the loan valuation.

•

Volatility of loss rates around expected levels must be covered through risk-adjusted returns

44

Chapter 6

RESEARCH METHODOLOGY In view of growing complexity of banks business and the dynamic operating environment, risk management has become very significant, especially in the financial sector. Risk at the apex level may be visualized as the probability of a bank‘s financial health being impaired due to one or more contingent factors. While the parameters indicating the banks‗ health may vary from net interest margin to market value of equity, the factor which can cause the important are also numerous. For instance, these could be default in repayment of loans by borrowers, change in value of assets or disruption of operation due to reason like technological failure.

While the first two factors may be classified as credit risk and market risk, generally banks have all risks excluding the credit risk and market risk as operational risk. Risk Analysis, in a broad sense, is any method — qualitative and/or quantitative — for assessing the impacts of risk on decisions.

Different Risk Analysis methods are used that blend both qualitative and quantitative techniques. The goal of any of these methods is to help the decision-maker choose a course of action, given a better understanding of the possible outcomes that could occur.

Risk Management is the application of proactive strategy to plan, lead, organize, and control the wide variety of risks that are rushed into the fabric of an organizations daily and long-term functioning. Like it or not, risk has a say in the achievement of our goals and in the overall success of an organization. There are many methods for investigation of risk management. In this chapter researcher has discussed about research methodology used for this study

45

Chapter 7 Data Analysis & Interpretation.

1 ARE YOU DEALING WITH HDFC BANK ON?

ARE YOU

DAILY

WEEKLY

MONTHLY

OTHERS

50

30

17

3

DEALING WITH HDFC BANK ON? %

50 45 40 35

DAILY

30

WEEKLY

25

MONTHLY

20

OTHERS

15 10 5 0 %

ANALYSIS AND INTERPRETATION:-

 Dealing with hdfc bank on daily basis is very high as compare to other i.e. weekly , monthly ,and others

46

2

THE IMPORTANCE OF RISK MANAGEMENT IN HDFC BANK OF Credit Risk

RATE THE IMPORTANCE OF RISK MANAGEMENT IN HDFC BANK

VERY HIGH

HIGH

MEDIUM

LOW

CREDIT RISK

50

20

20

10

Credit Risk

50 40 30 20 10 0 CREDIT RISK VERY HIGH

HIGH

MEDIUM

LOW

ANALYSIS AND INTERPRETATION:

THE IMPORTANCE OF RISK MANAGEMENT IN HDFC BANK



IN TERMS OF Credit is 50% i.e. Very high as compare to others.

47

3 .RATE THE IMPORTANCE OF RISK MANAGEMENT IN HDFC BANK OF MARKET RISK ?

RATE THE IMPORTANCE OF RISK MANAGEMENT IN HDFC BANK

VERY HIGH

HIGH

MEDIUM

LOW

MARKET RISK

40

30

25

5

Chart Title

40 35 30 25 20 15 10 5 0 Category 1 Very High

High

Medium

Low

ANALYSIS AND INTERPRETATION:

THE RISK MANAGEMENT IN HDFC BANK



IN TERMS OF market risk is 40%i.e. Very high as compare to others.

48

.4 RATE THE IMPORTANCE OF RISK MANAGEMENT IN HDFC BANK OF LIQUIDITY RISK ?

RATE THE VERY HIGH IMPORTANCE OF RISK MANAGEMENT IN HDFC BANK OF MARKET RISK LIQUIDITY 70 RISK

HIGH

MEDIUM

LOW

20

30

10

Chart Title

70 60 50 40 30 20 10 0 LIQUIDITY RISK Very High

High

Medium

Low

ANALYSIS AND INTERPRETATION:

THE RISK MANAGEMENT IN HDFC BANK



IN TERMS of liquidity risk is 70% i.e. Very high as compare to others.

49

5.RATE THE IMPORTANCE OF RISK MANAGEMENT IN HDFC BANK OF OPERATIONAL RISK ?

RATE THE

VERY

IMPORTANCE

HIGH

HIGH

MEDIUM

LOW

20

10

5

OF RISK MANAGEMENT IN HDFC BANK OF OPERATIONAL RISK OPERATIONAL

60

RISK

Chart Title

60 50 40 30 20 10 0 OPERATIONAL RISK Very High

High

Medium

Low

ANALYSIS AND INTERPRETATION:

THE RISK MANAGEMENT IN HDFC BANK



IN TERMS of operational risk is 60% i.e. Very high as compare to others.

50

6 RATE THE IMPORTANCE OF RISK MANAGEMENT IN HDFC BANK OF

INTREST RISK?

RATE THE IMPORTANCE OF RISK MANAGEMENT IN BANKING INDUSTRY

Ver

Hig

Mediu

Lo

y

h

m

w

INTRES

45

35

5

15

Hig h

T RSIK

Chart Title

50 40 30 20 10 0 RATE THE IMPORTANCE OF RISK MANAGEMENT IN BANKING INDUSTRY Very High

High

Medium

L;ow

ANALYSIS AND INTERPRETATION:

THE RISK MANAGEMENT IN HDFC BANK



IN TERMS of interest risk is 45% i.e. Very high as compare to others.

51 7 RATE THE IMPORTANCE OF RISK MANAGEMENT IN HDFC BANK OF FOREIGN EXCHANGE BANK? RATE THE IMPORTANCE OF RISK MANAGEMENT IN HDFC BANK

Very

High

Medium

Low

15

55

20

High

FOREIGN

10

EXCHANGE BANK

Chart Title

60 50 40 30 20 10 0 FOREIGN EXCHANGE BANK Series 1

High

Medium

Low

ANALYSIS AND INTERPRETATION:

THE RISK MANAGEMENT IN HDFC BANK



IN TERMS of foreign exchange bank is 10% i.e. Very low as compare to others.

52

8 .RATE THE IMPORTANCE OF RISK MANAGEMENT IN HDFC BANK OF OTHER?

RATE THE IMPORTANCE OF RISK MANAGEMENT IN HDFC BANK

Very

Other

60

High

Medium

Low

30

8

2

High

Chart Title

60 50 40 30 20 10 0 RATE THE IMPORTANCE OF RISK MANAGEMENT IN BANKING INDUSTRY Very h-High

High

Medium

Series 4

ANALYSIS AND INTERPRETATION:

THE RISK MANAGEMENT IN HDFC BANK



IN TERMS of other risk is 60% i.e. Very high as compare to others.

53

9

DO YOU FEEL SECURE TO INVESTING IN HDFC BANK ?

DO YOU FEEL SECURE TO

YES

NO

80

20

INVESTING IN HDFC BANK ANSWER

8 0 7 0 6 0 5 0 4 0 3 0 2 0 1 0 0

Y E N S O

A N S W E R

ANALYSIS AND INTERPRETATION 

AS PER the above diagram a study show 80% feel secure while investing hdfc bank i.e. very high.



20 % of the reaming didn‘t feel secure to invest in hdfc bank.

54

Chapter 8

FINDING The research study carried out at HDFC Bank under the topic ―CREDIT RISK MANAGEMENT in banking- a study of HDFC bank‖ to fulfill the said motive turned out to be useful in understanding the various policies and practices used by the bank to manage the different types of risk that arise in banking As per the above diagram (1) it show of risk management in hdfc bank in terms of credit is 50% i.e. very high as compare to others As per the above diagram (2) the risk management in hdfc bank in terms of market risk is 40% i.e. very high as compare to others As per the above diagram (3) the risk management in hdfc bank in terms of liquidity risk is 70% i.e. very high as compare to others As per the above diagram (4) the risk management in hdfc bank in terms of operational risk is 60% i.e. very high as compare to others.

As per the above diagram (5) the risk management in hdfc bank in terms interest risk of is 45% i.e. very high as compare to others. As per the above diagram (6) the risk management in hdfc bank in terms of foreign exchange bank is 10% i.e. very low as compare to others. As per the above diagram (7) the risk management in hdfc bank in terms of other risk is 60% i.e. very high as compare to others As per the above diagram (8) the customer feels very secure while investing hdfc bank 80%i.e. very high As per the above diagram(9) its show dealing with hdfc bank are daily basis is very high as compare to weekly and monthly , others .

55

Chapter 9

LIMITATION OF STUDY •

The time constraint was a limiting factor, as more in depth analysis could not be carried.

•

Some of the information is of confidential in nature that could not be divulged for the study.

The present study was not out of limitations. But it was a great opportunity for me to know the banking activities OF HDFC BANK

56

Chapter 10

RECOMMENDATIONAND SUGGESTION

•

The Bank should keep on revising its Credit Policy which will help Bank‗s effort to correct the course of the policies

•

The Chairman and Managing Director/Executive Director should make modifications to the procedural guidelines required for implementation of the Credit Policy as they may become necessary from time to time on account of organizational needs.

•

Banks has to grant the loans for the establishment of business at a moderate rate of interest. Because of this, the people can repay the loan amount to bank regularly and promptly.

57

Chapter 11 Conclusion

•

The management of credit risk is possible only with its measurement.

•

Models are the tools to effectively measure the risk exposure of various financial institutions.

•

With the correct measure of the credit risk, its management will become effective and efficient. This research work concentrates on developing an approach to measure the credit risks associated with various borrowers of a bank. For this the major assessment parameters for the bank are taken as the predictor variables. There are many approaches to developing credit risk model which have been discussed already in interim report.

•

It is difficult to say conclusively, which of the approaches has the best ability to predict default, each having its pros and cons. The stock price-based model is conceptually appealing, as there is an explicit theoretical foundation of this model.

•

On the other hand, accounting-based statistical methods rely more on statistical relationships rather than on any financial principle .However, with the absence of any theoretical structure, accounting based statistical approach which also forms the basis of my study can act more flexibly by incorporating or excluding the explanatory variables depending on their information content.

•

It is more prudent to look at these two approaches as supplementing each other by providing additional information, which the other does not possess. The choice depends on the individual business circumstances and portfolio specifics of each bank. Depending on the circumstances, it may sometimes be prudent to use both types of methodologies simultaneously to refine the credit decision system of the bank.

•

The availability of data is a major constraint for such studies and with the availability of more accurate data such findings can be even more useful for a bank. The credit risk modeling may indeed prove to result in better internal risk management a t banking

58 institutions. However, key hurdles, principally concerning data limitations and model validation, must be cleared before models may be used in the process of setting regulatory capital requirements.

•

The project undertaken has helped a lot in gaining knowledge of the ―Credit Policy and Credit Risk Management‖ in Nationalized Bank with special reference to HDFC BANK

•

India. Credit Policy and Credit Risk Policy of the Bank has become very vital in the smooth operation of the banking activities. Credit Policy of the Bank provides the framework to determine

•

(a) whether or not to extend credit to a customer and

•

(b) How much credit to extend. The Project work has certainly enriched the knowledge about the effective management of ―Credit Policy‖ and ―Credit Risk Management‖ in banking sector.

59

Chapter 12

BIBLIOGRAPHY . •

www.hdfc.co.in2.

•

www.icicidirect.com3.

•

www.rbi.org4.

•

www.indiainfoline.com

•

www.google.com

60

.