Project Report

On

Credit Risk Management Strategies For Home Loan in ICICI Bank Jabalpur

Submitted ToDirector-Dr. Anil Kumar Dhagat

Gyan Ganga College of Technology, Jabalpur

Project Guide Dr. Anil Kumar Dhagat

Submitted By- Sohit Gupta Enrolment No. - AW/3802

ACKNOWLEDGEMENT
Working in this Project has been a great Learning experience for me. This report gives immense pleasure to express sincere and heartfelt gratitude toward faculty guide Dr. Anil Kumar Dhagat whose valuable guidance and encouragements throughout the project inspired me to take up new tasks and complete them successfully. I also extend my appreciation to Mr. Ashok Tiwari and Mr. Pushkar Mazumdar Sr. Officer HSG loan, ICICI Bank, Jabalpur branch and Mr. Piyush Vishnoi, Care Ratings Manager, Jabalpur I would like to thank all the personalities behind the successful completion of the project. I thank my friends and colleagues for the suggestions they provided to me time to time. I am also indebted to Gyan Ganga College of Technology, Jabalpur for giving me opportunity to do this project.

SOHIT GUPTA

CONTENTS
S.No. 01 02 03 04 05 06 07 08 09 Particulars Objective Of Project Research Methodology Company Profile Introduction Body of Thesis RBI Guidelines SWOT Analysis Credit Appraisal Process Questionnaire Page No. 01 02 03-07 08-09 10-14 15-16 17 18 19

Objective of project:
1. To study the Credit risk management policy and strategies for Home loan used by the ICICI Bank, Jabalpur. 2. To find out how the bank assesses and evaluates credit risk of the Home loan proposals and what improvements can be effected in the existing system. 3. To Study the Credit Risk Rating models are developed by the ICICI Bank.

Research Methodology
Primary Data: Take a formal interview of Mr. Ashok Tiwari and Mr. Pushkar Mazumdar Sr. Officer Home loans, ICICI Bank, Jabalpur. Take a formal interview of Mr. Piyush Vishnoi, Manager, Credit Analysis & Research ltd., Jabalpur Secondary Data: Reference book: Edited by Credit Risk Management Concept & Cases

C Vijay Chandra Kumar.

www.businesscreditsuccess.com www.creditquest.com www.icicibank.com www.investopedia.com www.rbi.org www.risk-technology.com www.wikipedia.com

COMPANY PROFILE
History of ICICI Bank
ICICI Bank is India's second-largest bank. The Bank has a network of about 573 branches and extension counters and over 2,000 ATMs. ICICI Bank was originally promoted in 1994 by ICICI Limited, an Indian financial institution, and was its wholly-owned subsidiary. ICICI was formed in 1955 at the initiative of the World Bank, the Government of India and representatives of Indian industry. The objective was to create a development financial institution for providing medium-term and long-term project financing to Indian businesses.

In the 1990s, ICICI transformed its business from a development financial institution offering only project finance to a diversified financial services group offering a wide variety of products and services, both directly and through a number of subsidiaries and affiliates like ICICI Bank. In 1999, ICICI become the first Indian company and the first bank or financial institution from non-Japan Asia to be listed on the NYSE. In 2001, ICICI bank acquired Bank of Madura Limited. ICICI Bank set up its international banking group in fiscal 2002 to cater to the cross border needs of clients and leverage on its domestic banking strengths to offer products internationally. ICICI Bank currently has subsidiaries in the United Kingdom, Canada and Russia, branches in Singapore and Bahrain and representative offices in the United States,

China, United Arab Emirates, Bangladesh and South Africa. Today, ICICI Bank offers a wide range of banking products and financial services to corporate and retail customers through a variety of delivery channels and through its specialised subsidiaries and affiliates in the areas of investment banking, life and non-life insurance, venture capital and asset management. You see, ICICI Bank is India's #2 bank (after State Bank of India ), with more than 700 branches and 3,200 ATMs nationwide. ICICI's retail banking group offers lending and deposit services to small businesses and individuals. Larger businesses are served by the corporate banking group, which offers finance services and treasury products. ICICI's rural and government banking unit offers micro-loans and agricultural banking. Foreign operations, as well as services related to international trade finance and expatriate Indians, fall under the international banking group. Other ICICI offerings include online banking, asset management, and insurance.

Management :
ICICI Bank is operating under the guidance and management of the following experts: Ms. Chanda Kochhar, Managing Director & CEO Mr. N. S. Kannan, Executive Director & CFO Mr. K. Ramkumar, Executive Director Mr. Rajiv Sabharwal, Executive Director Board Members Mr. K. V. Kamath, Chairman Dr. Swati Piramal Mr. Homi R. Khusrokhan Mr. Dileep Choksi Mr. Arvind Kumar Mr. M.S. Ramachandran Dr. Tushaar Shah

Mr. V. Sridar

TIME LINE HISTORY OF ICICI

1955: The Industrial Credit and Investment Corporation of India Limited (ICICI) incorporated at the initiative of the World Bank, the Government of India and representatives of Indian industry, with the objective of creating a development financial institution for providing medium-term and long-term project financing to Indian businesses. Mr.A.Ramaswami Mudaliar elected as the first Chairman of ICICI Limited. : ICICI emerges as the major source of foreign currency loans to Indian industry. Besides funding from the World Bank and other multi-lateral agencies, ICICI also among the first Indian companies to raise funds 1956: from International markets. 1960: ICICI declared its first Dividend at 3.5%. 1961: ICICI building at 163, Backbay Reclamation was inaugurated. The first West German loan of DM 5 million from Kredianstalt was 1967: obtained by ICICI. 1969: ICICI made its first debenture issue for Rs.6 crore, which was oversubscribed. 1972: First two regional offices in Calcutta and Madras were opened. 1977: Second entity in India to set-up merchant banking services. 1982: ICICI sponsors the formation of Housing Development Finance Corporation. Managed its first equity public issue. 1986: Becomes the first ever Indian borrower to raise European Currency Units. : ICICI commences leasing business. ICICI first Indian Institution to receive ADB Loans. First public issue by : an Indian entity in the Swiss Capital Markets.

: ICICI along with UTI sets up Credit Rating Information Services of India Limited, (CRISIL) India's first professional credit rating agency. 1987: ICICI promotes Shipping Credit and Investment Company of India Limited. (SCICI) The Corporation made a public issue of Swiss Franc 75 million in 1988: Switzerland, the first public issue by any Indian equity in the Swiss Capital Market. 1993: ICICI signed a loan agreement for Sterling Pound 10 million with : Commonwealth Development Corporation (CDC), the first loan by CDC for financing projects in India. 1994: ICICI promotes TDICI - India's first venture capital company. 1996: ICICI sets-up ICICI Securities and Finance Company Limited in joint : venture with J. P. Morgan. ICICI sets up ICICI Asset Management Company. : ICICI sets up ICICI Bank. 1997: ICICI becomes the first company in the Indian financial sector to raise GDR. : ICICI announces merger with SCICI. : Mr.K.V.Kamath appointed the Managing Director and CEO of ICICI Ltd 1998: ICICI was the first intermediary to move away from single prime rate to three-tier prime rates structure and introduced yield-curve based pricing. : The name "The Industrial Credit and Investment Corporation of India 1999: Limited" was changed to "ICICI Limited". : ICICI announces takeover of ITC Classic Finance. Introduced the new logo symbolizing a common corporate identity for 2000: the ICICI Group. : ICICI announces takeover of Anagram Finance. 2001: ICICI launches retail finance - car loans, house loans and loans for consumer durables. 2002: ICICI becomes the first Indian Company to list on the NYSE through an issue of American Depositary Shares. : ICICI Bank becomes the first commercial bank from India to list its stock on NYSE.

ICICI Bank announces merger with Bank of Madura. The Boards of ICICI Ltd and ICICI Bank approved the merger of ICICI with ICICI Bank. Moodys' assign higher than sovereign rating to ICICI. Merger of ICICI Limited, ICICI Capital Services Ltd and ICICI Personal Financial Services Limited with ICICI Bank.

INTRODUCTION
THEORETICAL BACKGROUND The concept of Credit Risk Credit Risk is the risk of default by borrower due to inability and/or unwillingness to repay his debts in accordance with the agreed terms and conditions.

Debt: Bonds, loans and commercial paper are all examples of debt. For
example, a company may look to borrow $1 million so they can buy a certain piece of equipment. In this case, the debt of $1 million will need to be paid back (with interest owing) to the creditor at a later date.

What is credit?
Credit is a very heart of the banking. Indeed the word credit was derived from the Latin credere which, means to trust or believe. Thus, credit means faith or confidence that is engendered between a debtor and creditor, which may result in the transfer of value in the present, the payment being deferred to the future. Credit is often defined from two platform: One, credit as a potentiality ans two as an actuality. In the case of

former is defined as The power to obtain goods or service by giving a promise to pay money on demand or at a specified date in the future while in the case of the latter it is defined as the present right to a future payment From this generic understanding , we can define bank credit as an amount of money that has been delivered by a bank to a customer in return for the promise of interest and capital repayment in the future. It is simply an exchange of rights an immediate right given to a borrower to use the money against a future right given to the bank to demand money. CREDIT MONITORING SYSTEMS HELPS IN: It is a very crucial activity in credit risk management. It is a function of the manager/ credit department Understanding the financial position of the borrower. Confirming credit in compliance with the sanction terms. Enduring that there is no deviations in the end use of fund, and is used for the sanctioned purposes. Ensuring that project cash-flows are being realized by the borrower. Ensuring that securities/collaterals are in conformity with the sanctioned-terms and have not deteriorated. Identifying the potential problem loan accounts well in time which in turn would help the bank to initiate corrective measures.

There are well known Credit Rating Agencies in India are:

1. Credit Rating Information Services of India Limited(CRISIL) 2. Investment Information and Credit Rating Agency of India (ICRA)

3. Credit Information & Research Limited (CARE)

BODY OF THESIS
OPERATIONAL REVIEW OF ICICI BANK IN 2011-12
ICICI Bank continued to serve as the focal point for marketing, distribution and servicing of home loan products. In addition, your company keenly looks at every step in the entire value chain of real estate, which starts as a land transaction and culminates in an end user moving into a property, as a business opportunity for the Company. Retail housing customers expect greater transparency, reliability, professional standards and convenience in the process of searching for their

homes. The Company has made significant gains in the business of retail property services through the brand ICICI Home Search. The Company also made significant progress in the commercial real estate space and provided advisory services to corporate and developers in the aforesaid segment. This has driven growth in fee income. The Company has started a separate business vertical that shall focus on sourcing ICICI HFC Fixed Deposits. The objective is to optimize cost of resources. ICICI HFC Fixed Deposits have received the highest credit ratings of AAA by CARE and MAAA by ICRA. RISK MANAGEMENT SYSTEM IN ICICI BANK Structure: Risk Management Committee. Asset Liabilities Management Committee Operational Risk Management Committee Credit Risk Management Committee Credit Committees Credit Audit & Review Division Credit Policy & Risk Management Division.

Credit Risk Rating Credit risk rating is a rating assigned to borrowers is based on an analysis of their ability and willingness to repay the debt taken from the bank. This rating is assigned on a scale, which generally has 6 to 8 levels. Companies falling in the same credit risk category have similar probability of default. Better the rating, lower is the probability of default. The probability of default increases in an exponential manner as the credit risk rating deteriorates.

Uses of Credit Risk Rating Credit risk rating is one of the important tools to decide in the following matters: Whether to lend to a borrower or not : The credit risk rating of a

borrower determines the appetite of the bank in determining exposure level. A bank would be willing to lend to highly rated borrowers but would not like exposure to borrowers with very poor credit risk rating. Pricing: The risk premium to be charged to a borrower should be Borrowers with poor credit rating

determined by its credit risk rating. should be priced high.

Risk Mitigants: The extent of collateral security required and the

need to step up margin requirements are linked to credit risk rating of a borrower. The higher the risk category of a borrower, the greater should be the value of collateral and/or the margins. Product mix: There is need to gradually shift from the present form of

credit facility by way of Cash Credit limit to Term Lending in Working Capital. Level of decision-making: The delegation of loan sanction/approval

powers can be linked to the credit risk rating of a borrower. For low risk borrowers, higher power of approval can be at the branch level to facilitate faster sanctioning of loans thereby ensuring better customer service. For higher risk borrowers, approval from higher levels may be considered.

Frequency of renewal and monitoring: Renewal of facility in case

of high rated borrowers can be considered at longer intervals as compared to low rated borrowers. Credit risk ratings eventually help a bank to assign a probability of default for borrower according to its risk category. This probability of default is determined statistically from past data by observing the behavior of various rated clients over a number of years. The expected losses from a loan can be determined using this probability of default. This probability will then help to determine the terms and conditions for the loans in terms of the amount, interest rate to be charged, maturity etc. Credit risk rating will be just one of the inputs which will be used in making the credit decisions, besides other factors like collateral provided, period and quality of relationship with the borrower, portfolio concentration etc.

Criteria of ICICI Bank for lending the Home loan

As informed by Mr. Ashok Tiwari (ICICI Bank Sr. Officer, Home loans) Home loan is divided into two parts are: 1) SAL(Salaried) 2) SEP (Self Employed Professionals) i. ii. Self employed professionals Self employed non-professionals

1) Salaried: Applicants whose salary is less than Rs.10000/- pm but more than Rs.4000/- pm the bank charged 40% EMI from their salary and applicants whose salary is above Rs.10000/- the bank charged 50% EMI from their salary. 2) Self Employed Professionals: i. Self employed professionals This category is for Doctors, Chartered Accountants, Architectures etc. ii. Self employed non-professionals This category is for

businessman like Proprietors, Partnership businesses, Director of the company etc. The bank give the loan for both professionals on their Loan to value (LTV 80%) + Fixed Obligation to Income Ratio (FOIR 40%). Bank sanctioned 120% loan of the professionals return.

PROCESS OF THE SANCTIONING THE HOME LOAN PRAPOSAL

MIS Management Information System FI Field Investigation RCU Risk Containment Unit

RBI GUIDELINES ON CREDIT RATING Banks should have a comprehensive risk scoring/rating system that serves as a single point indicator of diverse risk factors of counter party and for taking credit decisions in a consistent manner. substantial degree of standardization is To facilitate this, a in ratings across required

borrowers. The risk rating system should be designed to reveal the overall risk of lending, critical input for setting pricing and non-price terms of loans as also present meaningful information for review and management of loan portfolio. This risk rating, in short, should reflect the underlying credit risk of the loan book. moment of time. The risk rating system should be drawn up in a structured manner, incorporating, inter alia, financial analysis, projections and sensitivity, industrial and management risks. The banks may use any number of financial ratios and operational parameters and collaterals as also qualitative aspects of management and industry characteristics that have bearings on the creditworthiness of borrowers. Banks can also weigh the ratios on the basis of the years to which they represent for giving The rating exercise should also facilitate the credit granting authorities some comfort in its knowledge of loan quality at any

importance to near term developments. Within the rating framework, banks can also prescribe certain level of standards or critical parameters, beyond which no proposals should be entertained. Banks may also consider separate rating framework for large corporate/small borrowers, traders, etc. that exhibit varying nature and degree of risk. Forex exposures assumed by corporate who have no natural hedges have significantly altered the risk profile of banks. Banks should, therefore, factor the unhedged market risk exposures of borrowers also in the rating framework. The overall score for risk is to be placed on a numerical scale ranging between 1-6, 1-8, etc. on the basis of credit quality. For each numerical category, a quantitative definition of the borrower, the loans underlying quality, and an analytic representation of the underlying financials of the borrower should be presented. Further, as a prudent risk management policy, each bank should prescribe the minimum rating below which no exposures would be undertaken. Any flexibility in the minimum standards and conditions for relaxation and authority, therefore, should be clearly articulated in the Loan Policy. The credit risk assessment exercise should be repeated biannually (or even at shorter intervals for low quality customers) and should be delinked invariably from the regular renewal exercise. The updating of the credit ratings should be undertaken normally at quarterly intervals or at least at half-yearly intervals, in order to gauge the quality of the portfolio at periodic intervals. Variations in the ratings of borrowers over time indicate changes in credit quality and expected loan losses from the credit portfolio. Thus, if the rating system is to be meaningful, the credit quality reports should signal changes in expected loan losses. In order to ensure the consistency and accuracy of internal ratings, the responsibility for setting or confirming

such ratings should vest with the Loan Review function and examined by an independent Loan Review Group. The banks should undertake comprehensive study on migration (upward lower to higher and downward higher to lower) of borrowers in the ratings to add accuracy in expected loan loss calculations.

SWOT Analysis
STRENGTHS O P P O R T U N I T I E S S O Strategies Strength: Large Capital base. Opportunity: Market Expansion. Opportunity: Outsourcing of Non Core Business. Strategy: Deep Penetration into Rural Market. Strategy: Outsource Customer Care & other E-Helps. WEAKNESSES W O Strategies Weakness: Responsiveness. Workforce

S T Strategies T H R E A T S Strength: Low operating costs

W T Strategies Weakness: Not Equal to International Standards. Entry of many Foreign

Threat: Increased CompetitionThreat: from others Pvt. Banks. Banks. Strategy: Steps to Ensure Loyalty by old Customers. Strategy: benefits

Consider

additional

CREDIT APPRAISAL PROCESS

There are the main below contains which should be used when Credit Manager appraises the file: Applicant Name Co-applicant Name Educational Qualification No. of dependents Spouse income

 Assets Experience Investments No. years lived in city Past financial records Stability & continuity of occupation Saving history
Credit Manager is a complete solution for managing, reviewing and analyzing credit applications, significantly reducing commercial application turnaround times while improving credit risk mitigation.
Overview of Credit Manager

Questionnaire 1) What is the Credit Risk in Home loans?

2) How can the bank manage the Credit Risk in Home loan?

3) What are the different policies used by Credit Manager to minimizing the credit risk?

4) How does the Credit Manager calculate the Credit risk?

5) What is the Credit appraisal process?

6) Which Credit risk rating model used by bank?