Crm Tybaf.pdf

TITLE OF THE PROJECT “Credit Risk Management in HDFC Bank”

BACKGROUND OF PROJECT TOPIC: 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‟ s 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.

IMPORTANCE OF THE PROJECT The project helps in understanding the clear meaning of credit Risk Management In HDFC Bank. It explains about the credit risk scoring and Rating of the Bank. And also Study of comparative study of Credit Policy with that of its competitor helps in understanding the fair credit policy of the Bank and Credit Recovery management of the Banks and also its key competitors.

OBJECTIVES OF PROJECT 1.To Study the complete structure and history of HDFC Bank. 2.To know the different methods available for credit Rating and understanding the credit rating procedure used in HDFC Bank. 3.To gain insights into the credit is management activities of the HDFC Bank 4.To know the RBI Guidelines regarding credit rating and risk analysis. 5.Studying the credit policy adopted Comparative analyses of Public sector and private sector

INTRODUCTUION & MEANING OF CREDIT RISK MANAGEMENT INTRODUCTION 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 tom e e t i t s o b l i g a t i o n i n a c c o r d a n c e w i t h a g r e e d t e r m s . R B I h a s b e e n e x t r e m e l y 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 fundamentalc o m p o n e n t o f t h e b a n k i n g f u n c t i o n . T h e m a n a g e m e n t o f c r e d i t r i s k m u s t b e incorporated into the fiber of banks .Any bank today needs to implement ef ficient 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 f o r m a n a g e m e n t ' s a t t e n t i o n . I n t h e l a s t f e w d e c a d e s f i n a n c i a l i n s t i t u t i o n s h a v e 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 is 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 dea ling 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 h e r e x i s t i n g m a r k e t i s a h i n d r a n c e t o g r o w t h as a result, banks have created risk management mechanisms in order to facilitate their growth and to safeguard their interests.

MEANING A credit risk is the risk of default on a debt that may arise from a borrower failing to make required payments.[19] 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.[2]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.[3][4]

Losses can arise in a number of circumstances, for example:        

A consumer may fail to make a payment due on a mortage 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. 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[1] 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 life-cycles), 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. 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.[1] 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%).

TYPES OF CREDIT RISK MANAGEMENT A credit risk can be of the following types:[6] 

Credit default risk – 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.

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Concentration risk – The risk associated with any single exposure or group of exposures with the potential to produce large enough losses to threaten a bank's core operations. It may arise in the form of single name concentration or industry concentration.

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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.

1. Concentration risk Meaning : Concentration risk is 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.

Concentration risk can be calculated for a single bank loan or whole portfolio using a "concentration ratio". For a single loan, the concentration ratio is simply the proportion of the portfolio the loan represents (e.g. a $100 loan in a $1000 portfolio would have a ratio of 0.1 or 10%) For a whole portfolio, a her find ahl index is used to calculate the degree of concentration to a single name, sector of the economy or country. Separate concentration ratios must be calculated for each type of concentration. To illustrate, a portfolio with 10 equally sized loans would have a concentration ratio of 0.1 or 10%, whereas a portfolio of 10 loans - 9 equally sized and 1 equal to half the value of the portfolio would have a concentration ratio of 0.27 or 27%. The ratio is useful for bankers or investors at large to identify when a portfolio may be excessively exposed to the risk that a recession or downturn in one sector of the economy or another country may cause a high proportion of the bank's outstanding loans to default. Concentration risk is usually monitored by risk functions, committees and boards within commercial banks and is normally only allowed to operate within proscribed limits. It is also monitored by banking regulators and generally attracts a higher capital charge in banking regulation.

TYPES OF CONENTRATION 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 sectoral concentration risk, which can arise from uneven distribution of exposures to particular sectors, regions, industries or products

Monitoring and management 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.[2] A key component to the management of concentration risk is accurately defining thresholds across various concentrations to minimize the combined risks across concentrations.

2. Country risk MEANING: Country risk refers to the risk of investing or lending in a country, arising from possible changes in the business environment that may adversely affect operating profits or the value of assets in the country. For example, financial factors such as currency controls, devaluation or regulatory changes, or stability factors such as mass riots, civil war and other potential events contribute to companies' operational risks. This term is also sometimes referred to as political risk; however, country risk is a more general term that generally refers only to risks affecting all companies operating within or involved with a particular country. Political risk analysis providers and credit rating agencies use different methodologies to assess and rate countries' comparative risk exposure. 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.

ASSESSMENT Significant resources and sophisticated programs are used to analyze and manage risk Some companies run a credit risk department whose job is to assess the financial health of their customers, and extend credit (or not) accordingly. They may use in-house programs to advise on avoiding, reducing and transferring risk. They also use third party provided intelligence. Companies like Standard & Poor's, Moody's, Fitch Ratings, DBRS, Dun and Bradstreet, and Rapid Ratings International provide such information for a fee. For large companies with liquidly traded corporate bonds or Credit Default Swaps, bond yield spreads and credit default swap spreads indicate market participants assessments of credit risk and may be used as a reference point to price loans or trigger collateral calls. Most lenders employ their own models (credit scorecards) to rank potential and existing customers according to risk, and then apply appropriate strategies With products such as unsecured personal loans or mortgages, lenders charge a higher price for higher risk customers and vice versa With revolving products such as credit cards and overdrafts, risk is controlled through the setting of credit limits. Some products also require collateral, usually an asset that is pledged to secure the repayment of the loan. Credit scoring models also form part of the framework used by banks or lending institutions to grant credit to clients For corporate and commercial borrowers, these models generally have qualitative and quantitative sections outlining various aspects of the risk including, but not limited to, operating experience, management expertise, asset quality, and leverage and liquidity ratios, respectively. Once this information has been fully reviewed by credit officers and credit committees, the lender provides the funds subject to the terms and conditions presented within the contract (as outlined above).

Sovereign risk : Sovereign credit risk is the risk of a government becoming unwilling or unable to meet its loan obligations as happened to Cyprus in 2013. Many countries faced sovereign risk in the Great Recession of the late-2000s. This risk can be mitigated by creditors and stakeholders taking extra precaution when making investments or financial transactions with firms based in foreign countries. Five key factors that affect the probability of sovereign debt leading to sovereign risk are: debt service ratio, import ratio, investment ratio, variance of export revenue, and domestic money supply growth. The probability of loss increases with increases in debt service ratio, import ratio, variance of export revenue and/or domestic money supply growth. Frenkel, Karmann, Raahish and Scholtens also argue that the likelihood of rescheduling decreases as investment ratio increases, due to resultant economic productivity gains. However, Saunders argues that debt rescheduling can become more likely if the investment ratio rises as the foreign country could become less dependent on its external creditors and so be less concerned about receiving credit from these countries/investors.

Counterparty risk: A counterparty risk, also known as a default risk, is a risk that a counterparty will not pay as obligated on a bond, derivative, insurance policy, or other contract. Financial institutions or other transaction counterparties may hedge or take out credit insurance or, particularly in the context of derivatives, require the posting of collateral. Offsetting counterparty risk is not always possible, e.g. because of temporary liquidity issues or longer term systemic reasons. Counterparty risk increases due to positively correlated risk factors. Accounting for correlation between portfolio risk factors and counterparty default in risk management methodology is not trivial

Mitigation OF CREDIT RISK MANAGEMENT

Lenders mitigate credit risk in a number of ways, including: 

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Risk-based pricing – Lenders may charge a higher interest rate to borrowers who 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 loan-to-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:[22]  Periodically report its financial condition,  Refrain 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 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.[23] 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.

OB JE CTI VE S O F T HE STU D Y 1.Understanding credit risk management conceptually. 2. Studying the various private banks practicing credit risk management. 3.To make a depth study of the method in which the private banks in India go about credit risk management. 4.Studying the difference between retail credit risk management and corporate credit risk management practiced by private banks. 5. Understanding the importance of the credit risk management and how useful it is to the private banks and how it benefits them in various ways

PURPOSE OF THE STUDY The main reason to select “CREDIT RISK MANAGEMENT” as a topic is to understand the importance of the Role played by credit risk management department and or practices when the bank lends money to its borrowers. In this project, I have tried to understand the difference between corporate credit risk practical application

Retail credit risk management. The analysis andinterviews with industry personnel has given m e a practical and real lifeexposure to the banking scenario as far as the credit risk management goes , whereby I could correlate between the theory and their

RE SEA R CH ME T HODOLO GY D A TA CO LLECTI O N THE DATA COLLECTION I .E. THE RAW MATERIAL INPUT FOR THE PROJECT HAS BEENCOLLECTED KEEPING IN MIND THE OBJECTIVES OF THE PROJECT AND ACCORDIN GLYRELEVANT INFORMATION HAS BEEN FOUND . THE METHODOLOGY USED IS A DESCRIPTIVE METHOD OF THE

RESEARCH. FOLLOWING ARE THE SOURCES:

PRIMARY DATA

THE DATA REGARDING “CREDIT RISK MANAGEMENT” WAS COLLECTED THROUGH PRIMARY DATA : SEMI-STRUCTURED INTERVIEWS WERE CONDUCTED WITH MR. VIVEK PAL,MANAGER RAPG PERSONAL LOANS OF ICICI BANK, MR. BILAL ANWAR, CREDITANALYST OF IDBI BANK LTD., AND MR. SHAH JI JACOB, CHIEF MANAGER OF THE FEDERAL BANK LIMITED. THIS WAS DONE TO UNDERSTAND THE CURRENT PRACTICE SAND THE STYLE OF FUNCTIONING OF THE CREDIT RISK MANAGEMENT DEPARTMENTS OF PRIVATE BANKS.

SECO N D A RY D A TA

The data had been collected by reading various books on Credit Risk Management, Bank Quest, Bank Weekly and relevant Websites (refer Bibli ography). The data regarding the banks introduction and history was collectedfrom their official websites on the recommendations of the person sinterviewed. Also some part of the data was collected by referring to the RBI Bulletin, Bank Booklets, and Newsletter.

SAMPLING METHOD The Sampling Method was used to collect the data about thecurrent practices followed by the private banks in India as far as credit risk management goes.Only Private Banks have been taken because the purpose of this project was to understand the in-depth knowledge on Private Banks practicingCredit risk management.

LI MI TA TI O NS : 1. Reluctance and resistance on the part of the interviewees (Priva teB a n k s ) t o s h a r e i n f o r m a t i o n a s t h e y considered it as confidential.

2. Visiting all private sector banks was not possible. 3. Banks have certain rules and regulations.

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, 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.

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

(A). BUSSSINESS RISK. 1

Capital

2

Credit

3

MARKET

risk risk RISK

4. LIQUIDITY RISK 5. B u s in e s s s t r a t e g y a n d e n v i r o n m e n t r i s k 6.

G R O UP

RISK

1Internal Controls 2Control risk 3 Management (including corporate governance) 4Compliance

Both these types of risk, however, are linked to the three omnibus risk categories listed below: 1Cr edi t 2M ar ket

r isk ris k

3Organizational risk

WHAT IS RISK MANAGEMENT?

The standard definition of management is t h a t i t i s t h e p r o c e s s o f accomplishing preset objectives; similarly, risk management aims at fulfilling the same specific objectives. This means that an organization/bank, whether it’s a profit-seeking one or a non-profit firm, must have in place a clearly laid down parameter toc o n t a i n – if not totally eliminate the financially adverse effect s o f i t s a c t i v i t i e s . Hence, the process of identification, measurement, monitoring and control of its activities becomes paramount under risk management.

The organization/bank has to concentrate on the following issues:  Fixing a boundary within which the organization/bank will move in the matter of risk-prone activities.  The functional authorities must limit themselves to the defined risk boundary while achieving banks objectives.

 There should be a balance between the bank’s risk philosophy and its risk appetite.

IMPORTANCE OF RISK MANAGEMENT The Concern over risk management arose from the following developments:  In February 1995, the Barings Bank episode shook the markets and broughta b o u t t h e d o w n f a l l o f t h e o l d e s t m e r c h a n t b a n k i n t h e U K . I n a d e q u a t e regulation and the poor systems and practices of the bank were responsible for the disaster. All components of risk management – market risk, credit risk andoperational risk – were thrown overboard.  Shortly thereafter, in July 1997, there was the Asian financial crisis, broughta b o u t a g a i n b y t h e p o o r r i s k m a n a g e m e n t s y s t e m s i n b a n k s / f i n a n c i a l institutions coupled with perfunctory supervision by the regulatory authorities, such practices could have severely damaged t h e m o n e t a r y s y s t e m o f t h e various countries involved and had international ramifications.

By analyzing these two incidents, we can come to the following conclusions:  Risks do increase over time in a business, especi a l l y i n a g l o b a l i z e d environment.  INCREASING competition, the removal of barriers to entry to new business units b y m a n y c o u n t r i e s , h i g h e r o r d e r e x p e c t a t i o n s b y s t a k e h o l d e r s l e a d t o assumption of risks without adequate support and safeguards.  The external operating environment in the 21st century is noticeably different. It is not possible to manage tomorrow’s events with yesterday’s

systemsand p r o c e d u r e s a n d t o d a y ’ s h u m a n s k i l l s e t s . H e n c e r i s k m a n a g e m e n t h a s t o address such issues on a continuing basis and install safeguards from time to time with the tool of risk management.  Stakeholders in business are now demanding that their long-term interests be protected in a changing environment. They expect the organization to install appropriate systems to handle a worst-case situation. Here lies the task of a risk management system – providing returns and enjoying their confidence.

RISK PHILOSOPHY AND RISK APPETITE Ideally, the risk management system in any organization/bank must codify its risk philosophy and risk appetite in each functionally area of its business. Risk philosophy : It involves developing and maintaining a healthy portfolio within the boundary set by the legal and regulatory framework. Risk appetite: Is governed by the objective of m a x i m i z i n g e a r n i n g s w i t h i n t h e contours of risk perception. Risk philosophy and risk appetite must go hand-in-hand to ensure that the bank has strength and vitality.

RISK ORGANISATIONAL SET-UP While creating a balanced organizational structure, it must be borne in mind that the primary goal is not to avoid risks that are inherent in a particular business (for example, in the banking business lending is the dominant function, involving the risk of default by the borrower) but rather to steer them consciously and actively to ensure that the income generated is adequate to the assumption of risks.

PRINCIPLES IN RISK MANAGEMENT Any activity or group of activities needs to be done according to clear principleso r ` f u n d a m e n t a l t r u t h s ’ . I n r i s k m a n a g e m e n t , t h e f o l l o w i n g s e t o f p r i n c i p l e s dominates an organization’s operating environment. Close involvement at the top level not only at the policy formulation stage but also during the entire process of implementation and regular monitoring. The risk element in various segments within an organ i z a t i o n m a y v a r y depending on the type of activities they are involved in. For example, in bank the credit risk of loans to priority sectors may be perceived as being of `high frequency but low value’. On the other hand, the operational risk involved in large deposit accounts may be seen as `low frequency but high value’. The severity and magnitude of various types of risk in an organization must be clearly documented. The checks and safeguards must be stated in clear terms such that they operate consistently and effectively, and allow the power of flexibility. There should be clear times of responsibility and demarcation of duties of people managing the organization. Staff accountability must be clearly spelt out so that various risk segments are handled by various officers with full understanding and dedication, taking responsibility for their actions. After identification of risk areas, it is absolutely essential t hat these arem e a s u r e d , m o n i t o r e d a n d c o n t r o l l e d a s p e r t h e n e e d s a n d o p e r a t i n g environment of the organization. Hence, like the internal a udit of financial accounts, there has to he a system of `internal risk audit’. With regular risk a u d i t f e e d b a c k , t h e p r i n c i p l e s o f r i s k m a n a g e m e n t m a y b e l a i d d o w n o r changed. All the risk segments should operate in an integrated manner on an enterprisewide basis.

Risk tolerance limits for various categories must be in place and `exceptionr e p o r t i n g ’ m u s t b e p r o v i d e d f o r w h e n s u c h l i m i t s a r e e x c e e d e d d u e t o exceptional circumstances .In the terminology of finance, the term credit has an omnibus connotation. It not only includes all types of loans and advances (known as funded facilities) but also contingent items like letter of credit, guarantees and derivatives (also known as non-f u n d e d / n o n credit facilities). Investment in securities is also treated as c r e d i t exposure.

WHAT IS CREDIT RISK? “Probability of loss from a credit transaction “is the plain vanilla definition of credit risk. According to the Basel Committee, “Credit Risk is most simply defined as t h e p o t e n t i a l t h a t a b o r r o w e r o r c o u n t e r - p a r t y w i l l f a i l t o m e e t i t s o b l i g a t i o n s i n accordance with agreed terms” .The Reserve Bank of India (RBI) has defined credit risk as “the probability of losses associated with diminution in the credit quality of borrowers or counter-parties” .Though credit risk is closely related with the business of lending (that is BANKS) iti s I n f a c t a p p l i c a b l e t o a l l a c t i v i t i e s o f w h e r e c r e d i t i s i n v o l v e d ( f o r e x a m p l e , manufactures /traders sell their goods on credit to their customers).the first record of credit risk is reported to have been in 1800 B.C.

CREDIT RISK MANGEMENT---FUNCTIONALITY

The credit risk architecture provides the broad canvas and infrastructure to effectively identify, measure, manage and control credit risk -- bo that portfolio and individual levels--- in accordance with a banks risk principles, risk policies, risk process and risk appetite as a continuous feature. It aims to strengthen a n d i n c r e a s e t h e efficacy of the organization, while maintaining consistency a n d transparency. Beginning with the Basel Capital Accord-I in 1988 and the subsequentB a r i n g s e p i s o d e i n 1 9 9 5 a n d t h e A s i a n F i n a n c i a l C r i s i s i n 1 9 9 7 , t h e c r e d i t r i s k management function has become the centre of gravity , especially in a financially in services industry like banking.

RISK MANAGEMENT POLICIES Mere codification of risk principles is not enough. They need to be implemented through a defined course of action. Therefore a bank requires policies on managing all types of risks. These have to be drawn up keeping in mind the following elements: The risk management process must give appropriate weightage to the nature of each risk considering the bank’s nature of business and availability of skills e t s , i n f o r m a t i o n s y s t e m s e t c . A c c o r d i n g l y , t h e r e s h o u l d b e a c l e a r demarcation of risks and operating instructions. The methodology and models or risk evaluation must be built into the system. Action points of correcting deficiencies beyond tolerance le v e l s m u s t b e provided for in the policy. Risk policy documents have to be made for each segment-like credit risk, market risk or operational risk -within the framework of risk principle An appropriate MIS is a must for the smooth and successful operation of risk management activities in the bank. Data collection, collation and updating must be accurate and prompt. The organizational structure must be so designed as to fit its risk philosophy and risk appetite. Functional powers and responsibilities must be specified for the officials in charge of managing each risk segment.

 A back testing’ process-where the quality and accuracy of the actual risk m e a s u r e m e n t i s c o m p a r e d w i t h t h e r e s u l t s g e n e r a t e d b y t h e m o d e l a n d corrective actions taken-must be installed. There should be periodical reviews- preferably on semi annual basis- of therisk mitigating tools for each risk segment. Improvements must be initiated where necessary in the light of experience gained.  There should be a contingent planning system to handle crises situations thatelude planned safety nets.

THE CREDIT RISK MANAGEMENT PROCESS The word `process’ connotes a continuing activity or functi o n t o w a r d s a particular result. The process is in fact the last of the four wings in the entire risk management edifice – the other three being organizational structure, principles and policies. In effect it is the vehicle to implement a bank’s risk principles and policiesa i d e d b y b a n k s o r g a n i z a t i o n a l s t r u c t u r e , w i t h t h e s o l e o b j e c t i v e o f c r e a t i n g a n d maintaining a healthy risk culture in the bank.The risk management process has four components :1 . R i s k I d e n t i f i c a t i o n . 2.Risk Measurement 3.Risk Monitoring. 4.Risk Control. RISK IDENTIFICATION: While identifying risks, the following points have to be kept in mind: All types of risks (existing and potential) must be identified and their likelyeffect in the short run be understood. The magnitude of each risk segment may vary from bank to bank.

The geographical area covered by the bank may determine the coverage of itsrisk content. A bank that has international operations may experience differenti n t e n s i t y o f c r e d i t r i s k s i n v a r i o u s c o u n t r i e s w h e n compared with a puredomestic bank. Also, even within a b a n k , r i s k s w i l l v a r y i n i t d o m e s t i c operations and its overseas arms.

RISK MEASUREMENT: MEASUREMENT Means weighing the content and/or value, intensity, magnitude of any object against a yardstick. In risk measurement it is necessary toe s t a b l i s h c l e a r w a y s o f e v a l u a t i n g v a r i o u s r i s k c a t e g o r i e s , w i t h o u t w h i c h identification would not se r v e a n y p u r p o s e . U s i n g q u a n t i t a t i v e t e c h n i q u e s i n a qualitative framework will facilitate the following objectives: • Finding out and understanding the exact degree of risk elements in each category in the operational environment. • Directing the efforts of the bank to mitigate the risks according to the vulnerability of a particular risk factor. • Taking appropriate initiatives in planning the organization’s futuret h r u s t a r e a s a n d l i ne o f busine ss and cap ital a lloc ation . T h e systems/techniques used to measure risk depend up o n t h e n a t u r e a n d complexity of a risk factor. While a very simple qualitative assessment may be sufficient in some cases, sophisticated methodological/statistical may be necessary in others for a quantitative value. RISK MONITORING: Keeping close track of risk identification measurement activities in the light of the risk, principles and policies is a core function in a risk management system. For t h e s u c c e s s o f t h e s y s t e m , i t i s e s s e n t i a l t h a t t h e

operating wings perform their activities within the broad contours of the organizatio n s r i s k p e r c e p t i o n . R i s k monitoring activity should ensure the following: • Each operating segment has clear lines of authority and responsibility. • Whenever the organizations principles and policies are breached, even if t h e y m a y b e t o i t s a d v a n t a g e , m u s t b e a n a l y z e d a n d r e p o r t e d , t o t h e concerned authorities to aid in policy making. • In the course of risk monitoring, if it appears that it is in the banks interest t existing policies and procedures, steps to change them should be considered There must be an action plan to deal with major threat areas facing the bank in the future. • The activities of both the business and reporting wings are m o n i t o r e d striking a balance at all points in time. • Tracking of risk migration is both upward and downward.

RISK CONTROL: There must be appropriate mechanism to regulate or guide the operation o f the risk management system in the entire bank through a set o f c o n t r o l devices. These can be achieved through a host of management processes such as:

• Assessing risk profile techniques regularly to examine how far they areeffective in mitigating risk factors in the bank.

• Analyzing internal and external audit feedback from the risk angle and using it to activate control mechanisms.

• Segregating risk areas of major concern from ot h e r r e l a t i v e l y insignificant areas and exercising more control over them. Putting in place a well drawn -out-risk-focused audit system to provide i n p u t s o n r e s t r a i n t f o r o p e r a t i n g p e r s o n n e l s o t h a t t h e y d o n o t t a k e needless risks for short-term interests.

It is evident, therefore, that the risk management process through all its four wings facilitate an organization’s sustainability and growth. The importance of each wing depends upon the nature of the o r g a n i z a t i o n s activity, size and objective. But it still remains a fact that the importance of the entire process is paramount.

GOAL OF CREDIT RISK MANGEMENT The international regulatory bodies felt that a clear and well laid risk management system is the first prerequisite in ensuring the safety and stability of the system. The following are the goals of credit risk management of any bank/financial organization: Maintaining risk-return discipline by k e e p i n g r i s k e x p o s u r e w i t h i n acceptable parameters. • Fixing proper exposure limits keeping in view the risk philosophy and risk appetite of the organization. • Handling credit risk both on an “entire portfolio” basis and o n a n “individual credit or transaction” basis. • Maintaining an appropriate balance between credit risk and other risks – like market risk, operational risk, etc. •

Placing equal emphasis on “banking book credit risk” (for example loans and advances on the banks balance sheet/books), “trading book r i s k ” ( s e c u r i t i e s / b o n d s ) a n d “ o f f b a l a n c e s h e e t r i s k ” ( d e r i v a t i v e s , guarantees, L/Cs, etc.) Impartial and value-added control input from credit risk management to protect capital. Providing a timely response to business requirements efficiently. Maintaining consistent quality and efficient credit process.

Creating and maintaining a respectable and credit risk mana g e m e n t culture to ensure quality credit portfolio. Keeping “consistency and transparency “as the watchwords in cr edit risk management.

CREDIT RISK MANGEMENT TECHNIQUES Risk –taking is an integral part of management in an enterprise. For example, if a particular bank decides to lend only against its deposits, the nits margins are bound to be very slender indeed. However the bank may also not be in a position to deploy all its lendable funds, since obviously takers for loans will be very and occasional.

Credit Risk Managent The basic techniques of an ideal credit risk management culture are:

• Certain risks are not to be taken even though there is the likelihoodof major gains or profit, like speculative activities.

• Transactions with sizeable risk content should be transferred to professional risk institutions. For example, advances to small scale industrial units and small borrowers should be covered by the Deposit & Credit Insurance Scheme in India. Similarly, e x p o r t finance should be covered by the Export Credit Guarantee Scheme ,etc.

• The other risks should be managed by the institution with proper risk management architecture.

Thus I conclude that credit management techniques are a m i x t u r e o f r i s k avoidance, risk transfer and risk assumption. The importance of each of these will depend on the organizations nature of activities, its size, capacity and above all its risk philosophy and risk appetite.

FORMS OF CREDIT RISK

Credit Risk Management The basic techniques of an ideal credit risk management culture are: • Certain risks are not to be taken even though there is the likelihoodof major gains or profit, like speculative activities. • Transactions with sizeable risk content should be transferred to professional risk institutions. For example, advances to small scalei n d u s t r i a l u n i t s a n d s m a l l b o r r o w e r s s h o u l d b e c o v e r e d by theDeposit & Credit Insurance Scheme in India. S i m i l a r l y , e x p o r t finance should be covered by the Export Credit Guarantee Scheme,etc. • The other risks should be managed by the institution with proper risk management architecture.T h u s I c o n c l u d e t h a t c r e d i t m a n a g e m e n t t e c h n i q u e s a r e a m i x t u r e o f r i s k avoidance, risk transfer and

risk assumption. The importance of each of these willdepend on the organizations nature of activities , its size, capacity and above all its risk philosophy and risk appetite.

FORMS OF CREDIT RISK The RBI has laid down the following forms of credit risk: • Non-repayment of the principal of the loan and /or the interest on it. • Contingent liabilities like letters of credit/guarantees issued by the bank on behalf of the client and upon crystallization---- amount not deposited by the customer. • In the case of treasury operations, default by the counter-parties in meeting the obligations. • In the case of securities trading, settlement not taking place when it’s due. • In the case of cross – border obligations, any default arising from the flow of foreign exchange

COMMON CAUSES OF CREDIT RISK SITUATIONS For any organization, especially one in banking-related activities, losses from credit risk are usually very severe and non infrequent. It is therefore necessary to l o o k i n t o t h e c a u s e s o f c r e d i t r i s k v u l n e r a b i l i t y . B r o a d l y t h e r e a r e t h r e e s e t s o f causes, which are as follows: • CREDIT CONCENTRATION •

CREDIT GRANTING AND/OR MONITORING PROCESS • C R E D I T E X P O S U R E I N T H E M A R K E T A N D Q U I D I T Y SENSITIVITY SECTORS.

L I

CREDIT CONCENTRATION Any kind of concentration has its limitations. The cardinal principle is that all eggs must not be put in the same basket. Concentrating credit on any one obligor /group or type of industry /trade can pose a threat to the lenders well b e i n g . I n t h e c a s e o f b a n k i n g , t h e e x t e n t o f c o n c e n t r a t i o n i s t o b e j u d g e d according to the following criteria: The institution’s capital base paid-up capital +reserves & surplus, etc). The institutions total tangible The institutions prevailing risk level . The alarming consequence of concentration is the likelihood of large losses at one time or in succession without an opportunity to absorb the shock. Credit concentration may take any or both of the following forms: • Common/ correlated concentration: for example, exchange rated evaluation and its effect on foreign exchange derivative counter- par Conventional: in a single borrower/group or in a particular sector like steel, petroleum, etc. •ties.

INEFFECTIVE CREDIT GRANTING AND / OR MONITORING PROCESS:

A strong appraisal system and pre- sanction care are basic requisites in the credit delivery system. This again needs to be supplemented by an appropriate and prompt post-disbursement supervision and follow-up system. The history of finance is replete with cases of default due to ineffective credit granting and/or monitor ring systems and practices in an organization, however effective, need to be subjected to improvement from time to time in the light of developments in the market place.

CREDIT EXPOSURE IN TH E MARKET AND LIQUIDIT Y - SENSITIVE SECTORS: Foreign exchange derivates contracts, letter and of credit and liquidity back up lines etc. while being remunerative; create sudden hiccups in the organizations financial base. To guard against rude shock, the organization must have in place a Compact Analytical System to check for the customer’s vulnerability to liquidity problems. In this context, the Basel Committee states that, “Market and liquidity-sensitive exposures, because they are probabilistic, can be correlated with credit-worthiness of the borrower”

COMPONENTS (BUILDING BLOCKS) OF CREDIT RISK MANAGEMENT

The entire credit risk management edifice in a bank rests upon the following three building blocks, in accordance with RBI guidelines:

1 FORMULATION OF CREDIT RISK POLICY AND STRATEGY: All banks cannot use the same policy and strategy, even though they may be similar in many respects. This is because each bank has a different risk policy and risk appetite. However one aspect that is common for any bank is thati t m u s t h a v e a n a p p r o p r i a t e p o l i c y f r a m e w o r k c o v e r i n g r i s k i d e n t i f i c a t i o n , measurement , monitoring and control. In such a policy initiative, there must be risk control/mitigation measures and also clear lines of authority, autonomy and accountability of operating officials. As a matter of fact, the policy document must provide flexibility to make the best use of risk-reward opportunities. Risk strategy which is a functional element involving the implementation of risk policy is concerned more with safe and profitable credit operations. it takes in to account t y p e s o f economic / business activity to which credit is to be e x t e n d e d , i t s geographical location and suitability, scope of diversification, cyclical aspects of the economy and above all means and ways of existing when the risk become too high.

2. CREDIT RISK ORGANISATION STRUCTURE: Depending upon a banks nature of activity, and above all its r i s k philosophy and risk appetite , the organization structure is formed taking care of the core functions of risk identification, risk measurement, risk monitoring and risk control .The RBI has suggested the following guidelines for banks: •

The Board of Directors would be in the superstructure, with a role in the overall risk policy formulation and overseeing. • There has to be a board-level sub-committee called the Risk Management Committee (RMC) concerned with integrated risk management. That is, framing policy issues on the basis of the overall policy prescriptions of the Board and coming up with an implementation stratege T h i s s u b shouldc o m p r i s e t h e c h i e f e x e c u t i v e o f f i c e r a n d h e a d s o f t h e C r e d i t R i s k Management and Market and Operational Risk Management Committee. A Credit Risk Management Committee (CRMC) should function under t h e s u p e r v i s i o n o f t h e R M C . T h i s c o m m i t t e e s h o u l d b e h e a d e d b y t h e CEO/executive director and should inc lude heads of credit, treasury, the Credit Risk Management Department (CRMD) and the chief economist.

FUNCTIONS OF CRMC: • Implementation of Credit Risk Policy. • Monitoring credit risk on the basis of the risk limits fixed by the board and ensuring compliance on an ongoing basis. • Seeking the board’s approval for standards for entertaining credit/investment proposals and fixing benchmarks and financial covenants. • Micro-management of c r e d i t e x p o s u r e s , f o r e x a m p l e , r i s k s concentration/diversificati on, pricing, collaterals, portfolio review, provisional/compliance aspects, etc. Besides setting up macro-level functionaries on a committee basis each bank is required to put in place a Credit Risk Management Department (CRMD),whose functions have been prescribed by the RBI

FUNCTIONS OF CRMD

Measuring, controlling and managing credit risk on a bank – wide basis within the limits set by the board/CRMC. Enforce compliance with the risk parameters and prudential limits set by the Board/CRMC. Lay down risk assessment systems, develop an MIS, monitor the quality of loan /investment portfolio, identify problems, correct deficiencies and undertake loan review /audit. Be accountable for protecting the quality of th e e n t i r e loan/investment portfolio

3.CREDIT RISK OPERATION & SYSTEM FRAMEWORK: Measurement and monitoring, along with control aspects, in credit risk determine the vulnerability or otherwise of an organization while extendingc r e d i t , i n c l u d i n g d e p l o y m e n t o f f u n d s i n t r a d a b l e s e c u r i t i e s . A s p e r R B I guidelines, this should involve three clear phases: • Relationship management with the clientele with an eye on business development. • Transaction management involving fixing the quantum, tenor and pricing and to document the s a m e i n c o n f o r m i t y w i t h s t a t u t o r y / regulatory guidelines. • Portfolio management, signifying appraisal/evaluation on a portfolio basis rather than on an individual basis (which is covered by the two earlier points) with a special thrust on management of nonperforming items. In the light of all the above three phases, a bank has to map

its risk management activities (identification, measurement, monitoring and control). It has to emphasize on the following aspects: • There should be periodic focused industry studies identifying, in particular, stagnant and dying sectors. • Hands-on supervision of individual credit accounts through halfyearly/annual reviews of financial, position of collaterals and obligor ’s internal and external business environment. Credit sanctioning authority and credit risk approving authority to be separate.

Level of credit sanctioning authority is to be hi g h e r i n proportion to the amount of credit. Installation of a credit audit system in–house or handed-out to a competent external organization. An appropriate credit rating system to operate. Pricing should be linked to the risk rating of an account --higher the risk, higher the price. Credit appraisal and periodic reviews----t o g e t h e r w i t h enhancement when necessary--- should be uniform, but operate flexibly. • There should be a consistent approach (keeping in vi e w prudential guidelines wherever existing) in the identific a t i o n classification and recovery of non-performing accounts. • A compact system to avoid excessive concentration of credit should operate with portfolio analysis. • There should be a clearly laid down process of risk reporting of data/information to the controlling / regulatory authorities. • A conservative long provisionary policy should be in place so that all non performing assets are provided for, not only as per regulatory requirements but also with some additional cush ioning(some banks in India provide for a fixed percentage-----usually0.25%------of standard assets).

• T h e r e s h o u l d b e d e t a i l e d d e l e g a t i o n o f p o w e r s , d u t i e s a n d res ponsibilities of officials dealing with credit. • There should be sound Management Information System. These make it clear that operations/systems in credit risk management becomereally effective tools only when they are led by principles of consistency and transparency.

Rating implies an assessment or evaluation of a person, property, project or affairsa g a i n s t a s p e c i f i c y a r d s t i c k / b e n c h m a r k s e t f o r t h e p u r p ose. In credit rating, theobjective is to assess/evaluate a par t i c u l a r c r e d i t p r o p o s i t i o n ( w h i c h i n c l u d e s investment) on the basis of certain parameters. The outcome indicates the degree of credit reliability and risk. These are classified into various grades according to the yardstick/benchmark set for each grade. Credit rating involves both quantitative and qualitative evaluations. While financial analysis covers a host of factors such as the firm ’s competitive strength within the industry/trade, likely effects on the firm’s business of any major technological changes, regulatory/legal changes, etc., which are all management factors .The Basel Committee has defined credit rating as a summary indicator of the risk inherent in individual credit, embodying an assessment of the risk of loss due tot h e d e f a u l t c o u n t e r p a r t y b y c o n s i d e r i n g r e l e v a n t q u a n t i t a t i v e a n d q u a l i t a t i v e inf ormation. Thus, credit rating is a tool for the measurement or quantification of credit risk.

WHO UNDERTAKES CREDIT RATING ? There is no restriction on anyone rating another bank as long as it serves their purpose. For instance, a would-be employee may like to do a rating before deciding to j o i n a f i r m . I n t e r n a t i o n a l l y r a t i n g a g e n c i e s l i k e S t a n d a r d & P o o r ’ s ( S & P ) a n d Moody’s are well known. In India, the four

authorized rating agencies are CRISIL,I C R A , C A R E , a n d F I T C H . T h e y u n d e r t a k e r a t i n g e x e r c i s e s g e n e r a l l y w h e n a n organization wants to issue debt instruments like commercial paper, bonds, etc. their r a t i n g s f a c i l i t a t e i n v e s t o r d e c i s i o n s , a l t h o u g h n o r m a l l y t h e y d o n o t h a v e a n y statutory/regulatory liability in respect of a rated instrument. This is because rating is o n l y a n opinion on the financial ability of an organization to honor payments of principal and/or interest on a debt instrument, as and when they are dye in future .However, since the rating agencies have the expertise in their field and are not taintedw i t h a n y b i a s , t h e i r r a t i n g s a r e h a n d y f o r m a r k e t participants and regulatory Banks do undertake structured rating exercises with q u a n t i t a t i v e a n d qualitative inputs to support a credit decision, whether it is sanction or rejection. However they may be influenced By the rating ---whether available---- of an instrument of a particular party by an external agency even though the purpose of a bank’s credit rating may be an omnibus o n e - - - t h a t i s t o c h e c k a b o r r o w e r ’ s c a p a c i t y a n d c o m p e t e n c e - - - - w h i l e t h a t o f a n external agency may be limited to a particular debt instrument.

UTILITY OF CREDIT RATING In a developing country like India, the biggest source s o f f u n d s f o r a n organization to acquire capital assets and / o r f o r w o r k i n g c a p i t a l r e q u i r e m e n t a r e commercial banks and development financial institutions. Hence credit rating is oneo f t h e most important tools to measure, monitor and control credit risk both ati n d i v i d u a l a n d p o r t f o l i o l e v e l s . O v e r a l l , t h e i r u t i l i t y m a y b e v i e w e d f r o m t h e following angles: • Credit selection/rejection.

Evaluation of borrower in totality and of any particular exposure/facility. Transaction-level analysis and credit pricing and tenure. Activity -wise/sectorwise portfolio study keeping in view the macro-level position. Fixing \ outer limits for taking up/ maintaining an exposure arising out of risk rating. Monitoring exposure already in the books and deciding exit s t r a t e g i e s i n appropriate cases. Allocation of risk capital for poor graded credits. Avoiding over- concentration of exposure in specifi c risk grades, which may not be of major concern at a particular point of time, but may in future pose problems if the concentration continues.

with Clarity and consistency, together transparency in rating a particular borrower/exposure, ena b l i n g a p r o p e r c o n t r o l m e c h a n i s m t o c h e c k r i s k s associated in the exposure .Basel-II has summed up the utility of credit rating in this way:“Internal risk ratings are an important tool in monitoring credit risk. Internal risk ratings should be adequate to support the identification and measurement of risk from all credit risk exposures and should be integrated into an institution’s overall analysis of credit risk and capital adequacy. The ratings system should provide detailed ratings for all assets, not only for criticized or problem assets. Loan loss reserves should be included in the credit risk assessment capital adequacy for.”

METHODS OF CREDIT RATING 1.Through the cycle: In this method of credit rating, the condition of the obligor and/or position of exposure are assessed assuming the “worst point in business cycle”. There may be a strong element of subjectivityo n t h e e v a l u a t o r ’ s p a r t w h i l e g r a d i n g a p a r t i c u l a r c ase. It is alsod i f f i c u l t t o i m p l e m e n t t h e m

e t h o d w h e n large and varied

t h e

n u m b e r

o f borrowers/exposures is

2.Point-in-time: A rating scheme based on the current condition of the b o r r o w e r / e x p o s u r e . T h e i n p u t s f o r t h i s m e t h o d a r e p r o v i d e d b y financial statements, current market position of the trade / business, corporate governance, overall management expertise, etc. In India banks usually adopt the point-in-time method because: • It is relatively simple to operate while at the same ti me p r o v i d i n g a f a i r e s t i m a t e o f t h e r i s k g r a d e o f a n obligor/exposure. • It can be applied consistently and objectively. • Periodical review and downgrading are possible depending upon the position

SCORES / GRADES IN CREDIT RATING: The main aim of the credit rating system is the measurement or quantification of credit risk so as to specifically identify the probability of default (PD), exposure at default (EAD) and loss given default (LGD).Hence it needs a tool to implement the credit rating method (generally the point in time method).The agency also needs to design appropriate measures for various grades of credit at an individual level or at a portfolio level. These grades may generally be any of the following forms: 1Alphabet: AAA, AA, BBB, etc. 2 N u m b e r : I , I I , I I I , I V , e t c . The fundamental reasons for various grades are as follows: • Signaling default risks of an exposure. • Facilitating comparison of risks to aid decision making. •

Compliance with r e g u l a t o r y o f a s s e t c l a s s i f i c a t i o n b a s e d o n r i s k exposures. • Providing a flexible means to ultimately measure the credit risk of anexposure.

HOW CREDIT AUDITS ARE TO BE CONDUCTED 1) An inhouse department may be set up with professionally q u a l i f i e d a n d experienced people.2) In the alternative, an arrangement may be made with professionals’ institutions to undertake such an audit (business process outsourcing)3) Credit audit is to be restricted to the records mentioned with respect to appraisal, post-sanction supervision and follow up.4) Credit audit does not usually involve the physical verification of securities/visit borrower’s factory/premises.5) The credit audit process may cover all credit records/documents or a statistical sampling of a batch of records. According to RBI g u i d e l i n e s , i n b a n k s / f i n a n c i a l institutions, all fresh credit decisions and renewal cases in the past three-six months (preceding the date of commencement of the credit) should be subjected to the credita u d i t p r o c e s s . A r a n d o m s e l e c t i o n o f 5 1 0 % m a y b e m a d e f r o m t h e r e s t o f t h e portfolio.6 ) C r e d i t audit is an ongoing process. However, for individual a c c o u n t s , t h e frequency depends upon the quality of the a c c o u n t s . T h e a u d i t m a y e v e n b e o n a quarterly basis in the case of high-risk accounts.7) Large banks/financial institutions usually prefer to cover credit audit with a cut-off s i z e ( s a y , i n d i v i d u a l e x p o s u r e s o f R s 3 - 5 c r o r e s a n d o v e r ) o n a h a l f - y e a r l y b a s i s through their inhouse officials.

RBI Guidelines on Credit Audit

Credit audit examines compliance with extant sanctions and post sanction processes/procedures laid down by the bank from time to time and is concerned with the following aspects:-

OBJECTIVES OF CREDIT AUDIT: Improvement in the quality of the credit portfolio-Reviewing the sanction process and compliance status of large loans.-Feedback on regulatory compliance.-Independent review of credit risk assessment.-Picking up early warning signals and suggesting remedial measures.-Recommending corrective action to improve credit quality, credit administration and credit skills of staff, etc.

HDFC Bank Introduction

HDFC Bank Limited (Housing Development Finance Corporation) is an Indian banking and financial services company headquartered in Mumbai, Maharashtra. It has 88,253 permanent employees as of 31 March 2018and has a presence in Bahrain, Hong Kong and Dubai. HDFC Bank is India’s largest private sector lender by assets. It is the largest bank in India by market capitalization as of February 2016.] It was ranked 69th in 2016 BrandZ Top 100 Most Valuable Global Brands.

Not only many financial institution in the world today can claim the antiquity a ndmajesty 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 communicationsand ingenious method of industrial and agricultural production the Bank became intimately in valued in the financing of practically and mining activity of the Sub- Continent Although large European and Indian merchants and manufacturers were undoubtedly thee principal beneficiaries, the small man never ignored loans as low asRs.100 were disbursed in agricultural districts against glad ornaments. Added to these the bank till the creation of the Reserve Bank in 1935 carried out numerous Cen tral – Banking functions. 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 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 fromsound 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 op portunities 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 .A highly efficient and experienced management functioning in a well defined organizational structure did not take long to place the bank an executed pedestal in the are as of business, profitability, internal discipline and above all credibility A impeccable Financial status consistent maintenance of the lofty traditions if banking an observation of a high standard of integrity in its operations helped the bank gain a pre- eminent status. No wonders the administration for the bank was universal as key functio naries of Indiasuccessive finance minister of independent India Resource Bank of governors and representatives of chamber of commercial showered economics on it .Modern day management techniques were also very much evident in the good old day ‟s years before corporate governance had become a puzzled the banks bound functioned with a high degree of responsibility and concerns for the shareholders. An unbroken record of profits and a fairly high rate of profit and fairly high rate of dividend all through ensured satisfaction, prudential management and asset liability management not only

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 ATM SERVICES  INTERNET BANKING  E-PAY  RBIEFT  SAFE DEPOSIT LOCKER  GIFT CHEQUES  IVR CODES FOREIGN INWARD REMITTANCES

ATM SERVICES HDFC BANK NETWORKED ATM SERVICES Bank offers State you the convenience of over 2952 ATMs and 3,119

Bank branches in India, the largest network in the country and continuing to expand fast! This means 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 that you can transact free of Patiala, State Bank of Saurashtra , and State Bank of Travancore) and wholly owned subsidiary viz

KINDS OF CARDS ACCEPTED AT STATE BANK ATMs Besides State Bank ATM-Cum-Debit Card and State Bank International ATMCum-Debit Cards following cards are also accepted at State Bank ATMs : -1) HDFC Credit Card 2) ATM Cards issued by Banks under bilateral sharing viz. Andhra Bank, Axis Bank, Bank of India, The Bank of Rajasthan Ltd., Bank, Corporation Bank, Dena Bank, HDFC Bank, Indian Bank, Indus land Bank, Punjab National Bank, UCO Bank and Union Bank of India. 3) Cards issued by banks (other than banks under bilateral sharing) displaying Maestro, Master Card, Cirrus, VISA and VISA Electron logos 4) All Debit/ Credit Cards issued by any bank outside India displaying Maestro, Master Card, Cirrus, VISA and VISA Electron logos Note: If you are a cardholder of bank other than HDFC Bank Group, kindly contact your Bank for the charges recoverable for usage of HDFC Bank ATMs.

Eligibility:  All Saving Bank and Current Account holders having accounts with networked branches and are18 years of age & above  Account type: Sole or Joint with “Either or Survivor” / “Anyone or Survivor”  NRE account holders are also eligible but NRO account holders are not.

Benefits:    

Convenience to the customers traveling overseas Can be used as Domestic ATM-cum-Debit Card Available at a nominal joining fee of Rs. 200/Daily limit of Rs. 50,000 or equivalent at the ATM and Rs. 50,000 or equivalent at Point of Sale (POS) terminal for debit transaction  Purchase Protection*up to Rs. 5000/- and Personal Accident cover*up to Rs.2,00,000/ Charges for usage abroad: Rs. 150+ Service Tax per cash withdraw

Operational requirements for guarantees

i) A guarantee (counter-guarantee) must represent a direct claim on the protection provider and must be explicitly referenced to specific exposures or a pool of exposures, so that the extent of the cover is clearly defined and incontrovertible. The guarantee must be irrevocable; there must be no clause in the contract that would allow the protection provider unilaterally to cancel the cover or that would increase the effective cost of cover as a result of deteriorating credit quality in the guaranteed exposure. The guarantee must also be unconditional; there should be no clause in the guarantee outside the direct control of the bank that could prevent the protection provider from being obliged to payout in a timely manner in the event that the original counterparty fails to make the payment(s) due.(ii) All exposures will be risk weighted after taking into account risk mitigation available in the form of guarantees. When a guaranteed exposure is classified as non -performing ,the guarantee will cease to be a credit risk multi gant and no adjustment would be permissible on account of credit risk mitigation in the form of guarantees. The entire outstanding, net of specific provision and net of realis able value of eligible collaterals /credit risk mitigants, will attract the appropriate risk weight

HIGHLIGHTS OF THE BANKS PERFORMANCE The year gone by was an exceptional year for the Bank in terms of most parameters. Net profit surged by 60% from Rs. 701 crores to Rs. 1123 crores and the global business mix crossed the milestone mark of Rs. 200,000 crores to touch Rs. 207,000 crores. While deposits grew by 27.6% to Rs. 119882 crores, the share of low cost deposits hovered at 40% and your bank continues to be one of the few banks with such a large share of low cost deposits. Credit expansion was a robust30% touching an aggregate level of Rs.86791 crores. The growth has been quite broad based encompassing various segments such as agriculture, industry, SME and retail. Foreign branches accounted for a smart rise of 34% in advances.

Priority Sector not only constitutes the Bank's social commitment, but isrecognized today as a profitable business opportunity. With almost two thirdbranches in rural and semi urban areas, the bank has ably risen to the occasion.While agriculture clocked a growth of 25% and constituted 18.5% of net bank credit, priority sector grew by almost 23% and accounted for 45.5% of net bank credit. The Bank could for the first time record net NPA below 1%. In fact on the back of robust cash recoveries of Rs. 752 crores and up gradation of Rs. 132 core, gross NPA slid by Rs. 379 cores to Rs. 2100 crores. Recoveries together with prudent provisioning saw Net NPA falling sharply to Rs. 632 crores from Rs. 970crores resulting in a healthy loan loss coverage ratio

Two fundamental approaches to credit risk management:-

1 . The internally oriented approach centers on estimating both the expected cost and Volatility of future credit losses based on the firm ‟s best assessment. 2. 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 is dependent 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).3. 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 riskadjusted returns. So total charge for credit losses on a single loan can be represented by ([expected probability of default] * [expected percentage loss in event of defa ult]) + risk adjustment * the volatility of ([probability of default * percentage loss in theevent of default]).Financial institutions are just beginning to realize the benefits of credit risk management models. These models are designed to help the risk manager to projectrisk, ensure profitability, and reveal new business opportunities. The model surveysthe current state of the art in credit risk management. It provides the tools tounderstand and evaluate alternative approaches to modeling. This also describes whata credit risk management

model should do, and it analyses some of the popular models.The success of credit risk management models depends on sound design,intelligent implementation, and responsible application of the model. While therehas been significant progress in credit risk management models, the industry mustcontinue to advance the state of the art. So far the most successful models have been custom designed to solve the specific problems of particular institutions.A credit risk management model tells the credit risk manager how to allocate scarcecredit risk capital to various businesses so as to optimize the risk and returncharacteristics of the firm. It is important or understand that optimize does not meanminimize risk otherwise every firm would simply invest its capital in risk lessassets. A credit risk management model works by comparing the risk and returncharacteristics between individual assets or businesses. One function is to quantifythe diversification of risks. Being welldiversified means that the firms has noconcentrations of risk to say, one geographical location or one counterparty.

Operational requirements for guarantees i) A guarantee (counter-guarantee) must represent a direct claim on the protection provider and must be explicitly referenced to specific exposures or a pool of exposures,so that the extent of the cover is clearly defined and incontrovertible. The guarantee must be irrevocable; there must be no clause in the contract that would allow the protection provider unilaterally to cancel the cover or that would increase the effective cost of cover as a result of deteriorating credit quality in the guaranteed exposure. The guarantee mustalso be unconditional; there should be no clause in the guarantee outside the directcontrol of the bank that could prevent the protection provider from being obliged to payout in a timely manner in the event that the original counterparty fails to make the payment(s)due.(ii) All exposures will be risk weighted after taking into account risk mitigation availablein the form of guarantees. When a guaranteed exposure is classified as non-performing,the guarantee will cease to be a credit risk mitigant and no adjustment would be permissible on account

of credit risk mitigation in the form of guarantees. The entireoutstanding, net of specific provision and net of realisable value of eligible collaterals /credit risk mitigants, will attract the appropriate risk weight

Additional operational requirements for guarantees In addition to the legal certainty requirements in paragraphs 7.2 above, in order for a guarantee to be recognized , the following conditions must be s satisfied:(i) On the qualifying default/non-payment of the counterparty, the bank is able in a timely manner to pursue the guarantor for any monies outstanding under the documentation governing the transaction. The guarantor may make one lump sum payment of all monies under such documentation to the bank, or the guarantor may assume the future payment obligations of the counterparty covered by the guarantee. The bank must have the right to receive any such payments from the guarantor without first having to take legal actions in order to pursue the counterparty for payment.(ii)The guarantee is an explicitly documented obligation assumed by the guarantor.(iii)Except as noted in the following sentence, the guarantee covers all types of payments the underlying obligor is expected to make under the documentation governing the transaction, for example notional amount, margin payments etc. Where a guarantee covers payment of principal only, interests and other uncovered payments

COMPARISON STUDY ON CREDIT RECOVERY MANAGEMENT For the year 2004 NAME OF THE BANK

LOAN ISSUED

RECOVERD

OUTSTANDING

STATE BANK OF INDIA Syndicate Bank

157933.54

91601.4

66332.09

24646.62

11562.11

9084.5

CANNARA BANK

47638.62

27058.74

20579.88

7500

6389.72

Corporation Bank 14889.72

Interpretations:

SBI ‟s direct agriculture advances as compared to other banks is 10.5% of the Net Bank ‟s Credit, which shows that Bank has not lent enough credit to direct agriculture sector.  In case of indirect agriculture advances, SBI is granting 3.1% of Net Banks Credit ,which is less as compared to Canara Bank, Syndicate Bank and Corporation Bank.SBI has to entertain indirect sectors of agriculture so that it can have more number of borrowers for the Bank.  SBI has advanced 13.6% of Net Banks Credit to total agriculture and 8.9% to weaker section and 37% to priority sector, which is less as compared with other Bank

RISK MANAGEMENT POLICIES

1 Mere codification of risk principles is not enough. They need to be implemented through a defined course of action. Therefore a bank requires policies on managing all types of risks. These have to be drawn up keeping in mind the following elements

2 The risk management process must give appropriate weight age to the nature of each risk considering the bank’s nature of business and availability of skills e t s , i n f o r m a t i o n s y s t e m s e t c . A c c o r d i n g l y , t h e r e s h o u l d b e a c l e a r demarcation of risks and operating instructions. 3 The methodology and models or risk evaluation must be built into the system. 4 Action points of correcting deficiencies beyond toler a n c e l e v e l s m u s t b e provided for in the policy.5 5 Risk policy documents need to be uniform for all types of risks and, in fact, it may not be practicable. Therefore, separate policy documents have to be made for each segment-like credit risk, market risk or operational risk-within the framework of risk principles.6 6 An appropriate MIS is a must for the smooth and successful operation of risk management activities in the bank. Data collection, collation and updating must be accurate and prompt7 7 The organizational structure must be so designed as to fit its risk philosophy and risk appetite. Functional powers and responsibilities must be specified for the officials in charge of managing each risk segment.8 8 A `back testing’ process-where the quality and accuracy of the actual risk m e a s u r e m e n t i s c o m p a r e d w i t h t h e r e s u l t s g e n e r a t e d b y t h e m o d e l a n d corrective actions taken-must be installed. 9 There should be periodical reviews- preferably on semiannual basis- of the risk mitigating tools for each risk segment. Improvements must be initiated where necessary in the light of experience gained. 10 There should be a contingent planning system to handle crises situations that elude planned safety nets.

THE CREDIT RISK MANAGEMENT PROCESS The word `process’ connotes a continuing act ivity or function towards a particular result. The process is in fact the last of the four wings in the entire risk management edifice – the other three being organizational structure, principles and policies. In effect it is the vehicle to implement a bank’s risk principles and policiesaided by banks organizational structur e, with the sole objective of creating andmain taining a healthy risk culture in the bank. The risk management process has four components:

1Risk Identification. 2.RiskMeasurement. 3 risk monitoring 4.Risk Control

1. RISK IDENTIFICATION: While identifying risks, the following points have to be kept in mind: • All types of risks (existing and potential) must be identified and their likely effect in the short run be understood. • The magnitude of each risk segment may vary from bank to bank. • The geographical area covered by the bank may determine the coverage of its risk content. A bank that has international operations may experience different intensity of credit risks in various countries when compared with a pure domestic bank. Also, even within a bank, risks will vary in it domestic operations and its overseas arms.

RISK MEASUREMENT MEASUREMENT means weighing the contents and/or value, intensity,magnitude of any object against a yardstick. In risk measurement it is necessary toe s t a b l i s h c l e a r w a y s o f e v a l u a t i n g v a r i o u s r i s k c a t e g o r i e s , w i t h o u t w h i c h id entification would not serve any purpose. Usi ng quantitative techniques in aqualitative framework will facilitate the following objectives: Finding out and understanding the exact degree of risk elements in each category in the operational environment. Directing the efforts of the bank to mitigate the risks according to the vulnerability of a particular risk factor. Taking appropriate initiatives in planning the org anization’s futuret h r u s t a r e a s a n d l i n e of business and capital allocatio n . T h e systems/techniques used to measu r e r i s k d e p e n d u p o n t h e n a t u r e a n d complexi ty of a risk factor. While a very simple qualitative assessment may be sufficient in some cases, sophisticated

methodological/statistical may benecessary in others for a quantitative value

RISK MONITORING: Keeping close track of risk identification measurement activities in the light of the risk, principles and policies is a core function in a risk management system. For the success of the system, it is essential that the operating wings perform their activities within the broad contours of t he organizations risk perception. Risk monitori ng activity should ensure the following: Each operating segment has clear lines of authority and responsibility. Whenever the organizations principles and policies are breached, even if t h e y m a y b e t o i t s a d v a n t a g e , m u s t b e a

n a l y z e d a n d r e p o r t e d , t o t h e concerned authorities to aid in policy making. In the course of risk monitoring, if it appears that it is in the banks interest to modify existing policies and procedures, steps to change them should be considered. There must be an action plan to deal with major threat areas facing the bank in the future. The activities of both the business and report ing wings are monitored striking a balance at all points in time. Tracking of risk migration is both upward and downward.

RISK CONTROL: There must be appropriate mechanism to regulate or guide the operationof the risk management system in the entire bank through a set of controldevices. These can be achieved through a host of management processes suchas:

Assessing risk profile techniques regularly to examine how far they areeffective in mitigating risk factors in the bank. Analyzing internal and external audit feedback from the risk angle andusing it to activate control mechanisms. Segregating risk areas of major conce r n f r o m o t h e r r e l a t i v e l y insignificant areas and exercising more control over them. Putting in place a well drawn-out-risk-focused audit system to provide inputs on restraint for operating personnel so that they do not take needless risks for short-term interests. It is evident, therefore, that the risk management process through allits four wings facilitate an organization’s sustainability and growth. Theimportance of each wing depends upon the nature of the organizations activity, size and objective. But it still remains a fact that the importance of the entire process is paramount. Rating implies an assessment or evaluation of a person, property, project or affairsagainst a specific yardstick/benchmark s et for the purpose. In credit rating, theobjecti ve is to assess/evaluate a particular credit pr oposition (which includesinvestment) on the

basis of certain parameters. The outcome indicates the degree of credit reliability and risk. These are classified into various grades according to theyardstick/benchmark set for each grade. Credit rating involves both quantitative andqualitative evaluations. While financial analysis covers a host of factors such as thefirm’s competitive strength within the industry/trade, likely effects on the firm’s business of any major technological changes, regulatory/legal changes, etc., which areall management factors.The Basel Committee has defined credit rating as a summary indicator of therisk inherent in individual credit, embodying an assessment of the risk of loss due tothe default counterparty by considering relevant quantitative an d qualitative information. Thus, credit rating is a tool for the measurement or quantification of credit risk. There is no restriction on anyone rating another bank as long as it serves their purpose. For instance, a wouldbe employee may like to do a rating before deciding to join a firm. Internationally rating agencies like Standard & Poor’s(S&P) andMoody’s are well known. In India, the four authorized rating

agencies are CRISIL,ICRA, CARE, and FITCH. They unde rtake rating exercises generally when anorgani zation wants to issue debt instruments like commercial paper, bonds, etc. their r a t i n g s f a c i l i t a t e i n v e s t o r d e c i s i o n s , a l t h o u g h n o r m a l l y t h e y d o n o t h a v e a n y sta tutory/regulatory liability in respect of a rated instrument. This is because rating isonly an opinion on the financial ability of an organization to honor payments of principal and/or interest on a debt instrument, as and when they are dye in future.However, since the rating agencies have the expertise in their field and are not taintedw i t h a n y b i a s , t h e i r r a t i n g s a r e h a n d y for market participants

RECOM ME N DAT ION S

1 The Bank should keep on revising its Credit Policy which will help Bank ‟s effort to correct the course of the policies 2The 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. 3 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 regularlyand promptly 4 Bank should not issue entire amount of loan to agriculture sector at a time, it should release the loan in installments. If the climatic conditions are good then they have to release remaining amount. 5 SBI has to reduce the Interest Rate. 6 SBI has to entertain indirect sectors of agriculture so that it can have more number of borrowers for the Bank.

CONCLUSION the project undertaken has helped a lot in gaining knowledge of the “Credit Policy andCredit Risk Management” in Nationalized Bank with special reference to State Bank Of

India. Credit Policy and Credit Risk Policy of the Bank has become very vital in thesmooth operation of the banking activities. Credit Policy of the Bank provides theframework to determine (a) whether or not to extend credit to a customer and (b) howmuch 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.

“Credit Policy” and “Credit Risk Management” is a vast subject and it is very difficult to cover all the aspects within a short period. However, every effort has been made to cover most of the important aspects, which have a direct bearingon improving the financial performance of Banking Industry  To sum up, it would not be out of way to mention here that the State Bank Of India has given special inputs on “Credit Policy” and “Credit Risk Management”. In pursuance of the instructions and guidelines issued by the Reserve Bank of India, the State bank Of India is granting and expanding creditto all sectors.  The concerted efforts put in by the Management and Staff of State Bank Of India has helped the Bank in achieving remarkable progress in almost all theimportant parameters. The Bank is marching ahead in the direction of achievingthe Number-1 position in the Banking Industry.

BOOKS REFERRED:

1 M.Y.Khan and P.K.Jain, Management Accounting (Third Edition), Tata McGrawHill.2. 2 M.Y.Khan and P.K.Jain, Financial Management (Fourth Edition), Tata McGrawHill.3. 3 D.M.Mittal, Money, Banking, International Trade and Public Finance (EleventhEdition), Himalaya Publishing House.

WEB SITES

.

1 www.sbi.co.in 2.www.icicidirect.com 3.www.rbi.org4. 4www.indiainfoline.com 5www.google.com

BANKS INTERNAL RECOREDS 1.Annual Reports of State bank Of India (2003-2007) 2 State bank Of India Manuals

3 Circulars sent to all Branches, Regional Offices and all the Departments of Corporate Offices.