Study of Risk Management Practices in Canara Bank

Dissertation Submitted to the Padmashree Dr. D.Y. Patil University in artial fulfillment of the re!uirements for the a"ard of the Degree of

M#S$%RS &' BUS&'%SS #DM&'&S$R#$&('

Submitted by) Prathvish.R.*athana +Roll 'o.,-,-./

Research 0uide)

Ms. S"eta 1umari

De artment of Business Management
Padmashree Dr. D.Y. Patil University CBD Bela ur2 'avi Mumbai

March 3,44

DECLARATION
I hereby declare that the dissertation Study of Risk Management Practices in Canara Bank submitted for the MBA Degree at Padmashree Dr.D.Y. Patil Universitys De artment of Business Management is my original !or" and the dissertation has not formed the basis for the a!ard of any degree# associate shi # fello!shi or any other similar titles.

Place$ Mumbai Date$

%ignature of the %tudent &Prathvish.'.(athana)

Certificate
+his is to certify that the dissertation entitled , Study of Risk Management Practices in Canara Bank is the bona fide research !or" carried out by Mr. Prathvish 'amchandra (athana student of MBA# at Padmashree Dr. D.Y. Patil Universitys De artment of Business Management during the year *--. /*-11# in artial fulfillment of the re0uirements for the a!ard of the Degree of Master in Business Management and that the dissertation has not formed the basis for the a!ard reviously of any degree# di loma# associate shi # fello!shi or any other similar title.

&Ms.%!eta 1umari)

Dr! R! "o#a$# Director# De artment of Business Mgt# Padmashree Dr. D.Y. Patil University

Place$ Mumbai Date$

AC%NO&LED"EMENT
In the first lace# I than" Ms. %!eta 1umari# De artment of Business Management# Padmashree Dr. D.Y. Patil University# 3avi Mumbai for having given me her valuable guidance for the ro4ect. 5ithout her hel it !ould have been im ossible for me to com lete the ro4ect. I !ould also li"e to than" the various eo le from 6anara Ban" !ho have rovided me !ith a lot of information and in fact even sharing some of the confidential com any documents and data 7 many of !hich I have used in this re ort and !ithout !hich this ro4ect could not have been com leted. I !ould be failing in my duty if I do not ac"no!ledge !ith a dee sense of gratitude the sacrifices made by my arents and thus have hel ed me in com leting the ro4ect !or" successfully.

Place$ Mumbai Date$

%ignature of the %tudent &Prathvish.'.(athana)

Executive Summary
Background of project topic:
'is" is defined as the otential that a ban" borro!er or counter arty !ill fail to meet its obligations in accordance !ith agreed terms# or in other !ords it is defined as the ris" that a firms customer and the arties to !hich it has lent money !ill fail to ma"e romised ayments is "no!n as ris". +he e9 osure to the ris"s is large in case of financial institutions# such commercial ban"s !hen firms borro! money they in turn e9 ose lenders to credit ris"# the ris" that the firm !ill default on its unable to ay its debt and thus be forced to ban"ru tcy. 'is" management is the analysis of ris" cou led !ith the im lementation of 0uality ris" controls. 'is" management is needed for ban"s and financial institutions# mainly because it insures a margin of safety that guarantees a levered financial firm:s solvency. +he un redictability and inherent ris"s associated !ith the financial mar"ets ma"es it vital for financial institutions and ban"s to im lement ris" management controls. +he level of 0uality ris" management olicy and controls can ma"e or brea" &literally) ban"s or financial institutions. romised ayments. As a conse0uence# borro!ing e9 oses the firm o!ners to the ris" that firm !ill be

<inancial ris" management is the ractice of creating economic value in a firm by using financial instruments to manage e9 osure to ris"# articularly credit ris" and mar"et ris". =ther ty es include <oreign e9change# %ha e# >olatility# %ector# ?i0uidity# Inflation ris"s# etc. %imilar to general ris" management# financial ris" management re0uires identifying its sources# measuring it# and lans to address them. <inancial ris" management can be 0ualitative and 0uantitative. As a s eciali@ation of ris" management# financial ris" management focuses on !hen and ho! to hedge using financial instruments to manage costly e9 osures to ris". In the ban"ing sector !orld!ide# the Basel Accords are generally ado ted by internationally active ban"s for trac"ing# re orting and e9 osing o erational# credit and mar"et ris"s.

mportance of t!e project:

+he ro4ect hel s in understanding the clear meaning of 'is" Management In 6anara Ban". It e9 lains about the credit ris"# mar"et ris" and o erational ris" scoring and 'ating of the Ban". By the analysis of 'is" Management in 6anara Ban"s !e get to "no! about the different ty e of ris"s involved in a Ban" and the im ortance of 'is" Management in todays ban"ing sector in India its sco e and the gro!th. +o find out the 'is" Management olices of 6anara Ban" and ho! they are successfully im lemented to tac"le various roblems. 'esearch methodology to be used for rimary and secondary data to be collection. +hough the 'is" Management in 6anara Ban" is very !ide and elaborated# still the ro4ect covers !hole sub4ect in concise manner.

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"it)e
$ist of "a*)es $ist of #**reviations Introduction Risk Management Risk Management Process .inancia$ Risk Management Ty#es of Risk Credit Risk Market Risk O#erationa$ Risk %*jectives of study Researc! Met!odo)ogy Data %ource Area of %tudy %am ling Plan 'esearch Instrument Analysis of Data $iterature Revie. Com#any Profi$e*Canara Bank Introduction 3istory .ounding Princi#$es Base$ II Introduction O45ecti6e Conce#t Tire I and Tire II Ca#ita$ Risk Management Practices in Canara Bank Credit Risk Strategies and Processes
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+he structure and organi@ation of the 6redit 'is" Management <unction T7e sco#e and nature of risk re#orting and 8 or measurement systems T7e res#onsi4i$ity of t7e committee Policies for hedging and C or mitigating ris" and strategies and rocesses for monitoring the continuing effectiveness of hedges C mitigants Loans #ast due and im#aired Mitigation of Credit Risk Policies and rocesses for collateral valuation and management Mitigation tec7ni9ues Market Risk +he structure and organi@ation of the relevant ris" management function T7e sco#e and nature of risk re#orting and 8 or measurement system Policies for hedging andCor mitigating ris" and strategies and rocesses for monitoring the continuing effectiveness of hedges C mitigants O#erationa$ Risk +he structure and organi@ation of the relevant ris" management function T7e sco#e and nature of risk re#orting and 8 or measurement system Policies for hedging andCor mitigating ris" and strategies and rocesses for monitoring the continuing effectiveness of hedges C mitigants O#erationa$ Risk Ca#ita$ assessment Credit Rating .rame:ork Introduction Need for Credit Rating Credit Rating Credit Rating .rame:ork at Canara Bank Draft guidelines on Dligibility# Periodicity etc.# a licable to manual rating model for 6MCDM E AFM o!er account Risk Assessment Mode$s
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Introduction Rating Mode$s Draft value statements for industrial accounts under manual model for 6MCDM E AFM o!er account Rating S7eet for Industria$ account Draft value statements for ne! accounts under manual model for 6MCDM E AFM o!er account Rating S7eet for Ne: account Draft value statements for +rading accounts under manual model for 6MCDM E AFM o!er account Rating S7eet for Trading account An a roach to value statements given in manual model for credit ris" rating of 6MCDM E AFM o!er account .or #ortfo$io under t7e standardi;ed a##roac7 Data Ana$ysis and Inter#retation Conc$usion Reference Section =uestionnaire Bi4$iogra#7y

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Significant Mi)estones Credit Risk 0uantitative 1isc)osure "ota) 3ross Credit Exposure 3eograp!ic 1istri*ution of exposures ndustry type distri*ution of exposures Residua) Maturity *reakdo.n of assets 'onperforming assets Mitigation of Credit risk 0uantitative disc)osure Market Risk 0uantitative disc)osure CR& at Canara Bank Risk graduation sca$e for Manua$ Rating Mode$ =uantitati6e disc$osure of

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#"M " MB R"3S 'E&" Mo; <9 RB B# "S# #M# 9aR %EC1 &S CR#R RMC CRMC #$MC %RMC EC# C1CRM #sync!ronous "ransfer Mode : #utomated "e))er Mac!ine nformation "ec!no)ogy nternet and Mo*i)e Banking Rea) "ime 3ross Sett)ement 'ationa) E)ectronic &und "ransfer Memorandum of ;nderstanding <oint 9enture nterna) Rating Based approac! Basic ndicator #pproac! Standardi=ed #pproac! #dvanced Measurement #pproac! 9a)ue at Risk %rgani=ation for Economic Cooperation and 1eve)opment &inancia) Sta*i)ity nstitute Capita) to Risk #ssessment Ratio Risk Management Committee Credit Risk Management Committee #sset $ia*i)ity Management Committee %perationa) Risk Management Committee Externa) Credit #ssessment nstitution Compre!ensive 1ata and System #rc!itecture on Credit Risk Management SME Sma)) Medium Enterprises MS Management nformation System R># Risk >eig!ted #ssets %1 %verdraft CC Cas! Credit 'P#s 'on Performing #ssets BCS Bank of nternationa) Sett)ements M& nternationa) Monetary &unds EC3C Export Credit and 3uarantee Cooperation C3"MSE Credit 3uarantee "rust for Micro and Sma)) E'"ERPR SES
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#sset $ia*i)ity Management Committee 3ross 1omestic Product %perationa) Risk Management 1epartment ?ead office Risk Management %ffice Reserve Bank of ndia Credit Risk &rame.ork Business Consu)ting Services Risk #ssessment Mode) 1eputy 3enera) Manager #ssistant 3enera) Manger Credit Rating and nformation Services of ndia $td( "erm $oans Pro*a*i)ity of 1efau)t $etter of Credit Risk #djustment Return on Capita) #sset Backed Securities

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C7a#ter ' '"R%1;C" %'

12

/( ntroduction

Human beings have tried to manage ris"s faced in their day/to/day life. 1ee ing inflammable material a!ay from fire# saving for ossible future needs# creation of a legal !ill are all e9am les of attem ts at managing ris". 'is" is the ossibility of the actual outcome being different from the e9 ected outcome. It includes both the do!nside and the u side otential. Do!nside otential is the ossibility of the actual results being adverse com ared to the e9 ected results. =n the other hand# u side otential is the ossibility of the actual results being better than the e9 ected results. /(/ Risk Management I'is" is the ossibility of something un leasant ha encountering loss or harm. 'is" rovides the basis for o ening or the chance of ortunity. +he terms ris"

and e9 osure have subtle differences in their meaning. 'is" refers to the robability of loss# !hile e9 osure is the ossibility of loss# although they are often used interchangeably. 'is" arises as a result of e9 osure. D9 osure to financial mar"ets affects most organi@ations# either directly or indirectly. 5hen an organi@ation has financial mar"et e9 osure# there is a ossibility of loss but also an o ortunity for gain or rofit. <inancial mar"et e9 osure may rovide strategic or com etitive benefits. 'is" is the li"elihood of losses resulting from events such as changes in mar"et rices. Dvents !ith a lo! robability of occurring# but that may result in a high loss# are
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articularly

troublesome because they are often not antici ated. Put another !ay# ris" is the robable variability of returns. %ince it is not al!ays ossible or desirable to eliminate ris"# understanding it is an im ortant ste in determining ho! to manage it. Identifying e9 osures and ris"s forms the basis for an a ro riate financial ris" management strategy. <inancial ris" arises through countless transactions of a financial nature# including sales and urchases# investments and loans# and various other business activities. It can arise as a result of legal transactions# ne! ro4ects# mergers and ac0uisitions# debt financing# the energy com onent of costs# or through the activities of management# sta"eholders# com etitors# foreign governments# or !eather. 5hen financial rices change dramatically# it can increase costs# reduce revenues# or other!ise adversely im act the services# and allocate ca ital. +here are three main sources of financial ris"$ 1. <inancial ris"s arising from an organi@ations e9 osure to changes in mar"et rices# such as interest rates# e9change rates# and commodity rices *. <inancial ris"s arising from the actions of# and transactions !ith# other organi@ations such as vendors# customers# and counter arties in derivatives transactions 2. <inancial ris"s resulting from internal actions or failures of the organi@ation# articularly eo le# rocesses# and systems. rofitability of an organi@ation. <inancial fluctuations may ma"e it more difficult to lan and budget# rice goods and

1;

<inancial ris" management is a rocess to deal !ith the uncertainties resulting from financial mar"ets. It involves assessing the financial ris"s facing an organi@ation and develo ing management strategies consistent !ith internal riorities and olicies. Addressing financial ris"s roactively may rovide an organi@ation !ith a com etitive advantage. =rgani@ations manage financial ris" using a variety of strategies and roducts. It is im ortant to understand ho! these roducts and strategies !or" to reduce ris" !ithin the conte9t of the organi@ations ris" tolerance and ob4ectives. /(+ Risk Management Process +he rocess of financial ris" management is an ongoing one. %trategies need to be im lemented and refined as the mar"et and re0uirements change. 'efinements may reflect changing e9 ectations about mar"et rates# changes to the business environment# or changing international olitical conditions# for e9am le. In general# the rocess can be summari@ed as follo!s$ J Identify and rioriti@e "ey financial ris"s. J Determine an a ro riate level of ris" tolerance. J Im lement ris" management strategy in accordance !ith olicy. J Measure# re ort# monitor# and refine as needed. 'is" management needs to be loo"ed at as an organi@ational a roach# as management of ris"s inde endently cannot have the desired effect over the long term. +his is es ecially necessary as ris"s result from various activities in the firm and the ersonnel res onsible for the activities do not al!ays understand the ris" attached to them. +he ste s in ris" management rocess are$ 1. 1etermining o*jectives: / determination of ob4ectives is the first ste in the ris" management function. +he ob4ective may be to rotect rofits# or to
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develo com etitive advantage. +he ob4ective of ris" management needs to be decided u on by the management. %o that the ris" manager may fulfill his res onsibilities in accordance !ith the set ob4ectives. *. dentifying Risks $/ Dvery organi@ation faces different ris"s# based on its business# the economic# social and olitical factors# the features of the industry it o erates in 7 li"e the degree of com etition# the strengths and !ea"ness of its com etitors# availability of ra! material# factors internal to the com any li"e the com etence and outloo" of the management# state of industry relations# de endence on foreign mar"ets for in uts# sales or finances# ca abilities of its staff and other innumerable factors. 2. Risk Eva)uation: - =nce the ris"s are identified# they need to be evaluated for ascertaining their significance. +he significance of a articular ris" de ends u on the si@e of the loss that it may result in# and the robability of the occurrence of such loss. =n the basis of these factors# the various ris"s faced by the cor orate need to be classified as critical ris"s# im ortant ris"s and not/so/im ortant ris"s. 6ritical ris"s are those that may result in ban"ru tcy of the firm. Im ortant ris"s are those that may not result in ban"ru tcy# but may cause severe financial distress. 8. 1eve)opment of po)icy: - Based on the ris" tolerance level of the firm# the ris" management olicy needs to be develo ed. +he time frame of the olicy should be com aratively long# so that the olicy is relatively stable. A olicy generally ta"es the form of a declaration as to ho! much ris" should be covered.
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;. 1eve)opment of strategy: - Based on the olicy# the firm then needs to develo the strategy to be follo!ed for managing ris". A strategy is essentially an action lan# !hich s ecifies the nature of ris" to be managed and the timing. It also s ecifies the tools# techni0ues and instruments that can be used to manage these ris"s. A strategy also deals !ith ta9 and legal roblems. Another im ortant issue that needs to be s ecified by the strategy is !hether the com any !ould try to ma"e rofits out of ris" management or !ould it stic" to covering the e9isting ris"s. A. mp)ementation: - =nce the olicy and the strategy are in lace# they are to be im lemented for actually managing the ris"s. +his is the o erational art of ris" management. It includes finding the best deal in case of ris" transfer# roviding for contingencies in case of ris" retention# designing and im lementing ris" control rograms etc. B. Revie.: - +he function of ris" management needs to be revie!ed eriodically# de ending on the costs involved. +he factors that affect the ris" management decisions "ee changing# thus necessitating the need to monitor the effectiveness of the decisions ta"en reviously.

/(, &inancia) Risk Management Broadly s ea"ing# ris" management can be defined as a disci line for ,?iving !ith the ossibility that future events may cause adverse effectsK. In the conte9t of ris" management in financial institutions such as ban"s or insurance com anies these adverse effects usually corres ond to large losses on a ortfolio of assets. % ecific e9am les include$ losses on a ortfolio of mar"et/traded securities such
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as stoc"s and bonds due to falling mar"et rices &a so/called mar"et ris" event)L losses on a ool of bonds or loans# caused by the default of some issuers or borro!ers &credit ris")L losses on a ortfolio of insurance contracts due to the occurrence of large claims &insurance/ or under!riting ris"). An additional ris" category is o erational ris"# !hich includes losses resulting from inade0uate or failed internal rocesses# fraud or litigation. In financial mar"ets# there is in general no so/called ,free lunchK or# in other !ords# no rofit !ithout ris". +his is the reason !hy financial institutions actively ta"e on ris"s. +he role of financial ris" management is to measure and manage these ris"s. Hence ris" management can be seen as a core com etence of an insurance com any or a ban"$ by using its e9 ertise and its ca ital# a financial institution can ta"e on ris"s and manage them by various techni0ues such as diversification# hedging# or re ac"aging ris"s and transferring them bac" to mar"ets# etc. /(- "ypes of Risk: 'is" faced by the ban" can be segmented into three se arable ty es from the management ers ective vi@. a. 'is"s that can be eliminated or avoided by sim le business ractices b. 'is"s that can be transferred to other business artici ants &eg. Insurance olicy) and c. 'is"s that can be actively managed at the Ban" level. 'is" is any real or otential event# action or omission# internal or e9ternal# !hich !ill have an adverse im act on the achievement of Ban"s defined ob4ectives. 'is" is inherent in every business. 'is" cannot be totally eliminated but is to be managed. 'is"s are to be categori@ed into high ris"# medium ris" and lo! ris" and then managed. 'is"s can be classified into three broad categories$
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1. 6redit 'is" *. Mar"et 'is" &Interest 'ate 'is"# ?i0uidity 'is") 2. = erational 'is" /(2 Credit Risk 6redit 'is" is defined as the I ossibility of losses associated !ith diminution in the credit 0uality of borro!ers or counter arties. In a ban"s ortfolio# losses stem from outright default due to inability or un!illingness of a customer or counter arty to meet commitments in relation to lending# trading# settlement and other financial transactions. 6redit ris" emanates from ban"s dealings !ith individuals# cor orate# ban"# financial institution or a sovereign. 6redit 'is" may ta"e the follo!ing forms$ J In the case of direct lendingL rinci al C and or interest amount may not be 'e aid. J In the case of treasury o erationsL the ayment or series of ayments due from the counter arties under the res ective contracts may not be forthcoming or ceases J In the case of securities trading businesses$ funds C securities settlement may not be effected J In the case of cross/border e9 osure$ the availability and free transfer of foreign currency funds may either cease or restrictions may be im osed by the sovereign. /(4 Market Risk Mar"et 'is" may be defined as the ossibility of loss to a ban" caused by changes in the mar"et variables. Mar"et 'is" is the ris" to the ban"s earnings and ca ital due to changes in the mar"et level of interest rates or rices of securities# foreign e9change and e0uities# as !ell as the volatilities of those rices.
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Segments of Market Risk 1. Liquidity Risk$ ?i0uidity ris" is the otential inability to meet the ban"s liabilities as they become due. It arises !hen the ban"s are unable to generate cash to co e !ith a decline in de osits or increase in assets. It originates from the mismatches in the maturity attern of assets and liabilities. 2. Interest Rate Risk: Interest rate ris" is the ris" !here changes in mar"et interest rates might adversely affect a ban"s financial condition. +he immediate im act of changes in interest rates is on the 3et Interest Income. 3. Foreign Exchange Risk: <oreign D9change 'is" may be defined as the ris" that a ban" may suffer losses as a result of adverse e9change rate movements during a eriod in !hich it has an o en osition# either s ot or for!ard# or a combination of the t!o# in an individual foreign currency. /(5 %perationa) risk = erational ris" is Ithe ris" of direct or indirect loss resulting from inade0uate or failed internal rocesses# eo le and systems or from e9ternal events. Internal rocesses include activities relating to accounting# re orting# o erations# ta9# legal# com liance and ersonnel management etc. Broadly the follo!ing can be grou ed under = erational 'is" 1. Internal <raud *. D9ternal <raud 2. 3on adherence of systems and rocedures 8. Poor documentation ;. Business disru tion due to 6om uter %ystems failure A. ?ac" of succession lanning B. <ailure of customer due diligence

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C7a#ter + %B<EC" 9ES %& S";1@

**

+( %*jectives of study

+o study broad outline of management of credit# mar"et and o erational ris"s associated !ith 6anara Ban". +o understand the im ortance of ris" management in 6anara Ban". +o study the roblem related to ris" management in 6anara Ban". +he study aims at learning the techni0ues involved to manage the various ty es 'is" of 6anara Ban". <uture of 'is" Management in 6anara Ban".

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C7a#ter ) RESE#RC? ME"?%1%$%3@

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,( Researc! Met!odo)ogy
,(/ 1ata Source 1. Secondary data: +he secondary data is derived from the 'BI !ebsite and also from various site ertaining to credit ris" management. +he secondary data study com rises of understanding credit ris" management as a sub4ect and its various arameters. +hese arameters com rise of the various guidelines framed by 'BI for all ban"s for better credit ris" management. 2. Primary data: +he ro4ect commences !ith collecting information as regards the 'is" Management Practices in 6anara Ban" from Manager of Credit de t. <ort branch Mumbai and from 2- other branches of 6anara Ban" in and around Mumbai !ith the hel of 0uestionnaire# !hich consisted of 0uestions regarding the 'is" Management Practices in 6anara Ban". <urther# in de th "no!ledge is collected as regards the credit olicy of the Ban" and !hether it is in com liance !ith the 'BI norms and government guidelines set out for all the ban"s. <urther# every ban" follo!s certain ractices in order to mitigate the credit ris" and 6anara Ban" is no e9ce tion. %o# the credit ris" mitigation ractices of the ban" have been analy@ed to certain e9tent.

,(+ #rea of study

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6anara Ban" branches in Mumbai and 3avi Mumbai region !as underta"en for the research ur ose.

,(, Samp)ing p)an /(Samp)ing "ec!niAue 6onvenience sam ling techni0ue to be used. +(Samp)e Si=e +he sam le si@e to be ta"en !ill be 2- Managers from different banches all over Mumbai. ,(- Researc! instrument Data !as collected !ith the hel of 0uestionnaire having close /ended 0uestions. Intervie!ees !ere rovided a 0uestionnaire !hich they could fill u as er their choice. ,(2 #na)ysis of data 6ollected data !ill be coded# classified# tabulated and inter reted# based on the res onse received from res ondent a information charts# gra hs !ill be used. ro riate statistical tools li"e average# ercentage# ran"ing !ill be used and inferences be made. <or re resentation#

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C7a#ter , $ "ER#";RE RE9 E>

*B

-( $iterature Revie.
1. "it)e #ut!or mprint $ : : 'is" Management IIB< Macmillan Publishers Indi

#*out t!e Book Ban" <inancial Management has been !ritten "ee ing in vie! s ecific "no!ledge and s"ill needs of ban"ing advanced "no!ledge rofessionals desirous of gaining of ban"ing.

+he boo" deals !ith four im ortant areas of ban"ing# vi@.# International Ban"ing# 'is" Management# +reasury Management and Balance %heet Management. All the necessary conce ts of foreign e9change# international trade# a licability of U6PD6# 'BI and <DDAI guidelines# <DMA# role of D6F6 and DMIM ban" have been e9 lained in the boo". %imilarly# the conce t of ris"s in ban"s# measurement and management of various ris"s# the organi@ational structure of ris" management de artment as also the current guidelines of 'BI on ris" management have been covered. <urther# the conce ts and functions of treasury management# various instruments available to the treasury have also been e9 lained. Asset ?iability Management &A?M)# !hich has no! assumed a a riority area for ban"s# has also been dealt !ith ro riately. It contains various as ects of balance sheet management# 'BI

guidelines on A?M# asset classification# rovisioning# and the disclosures. +he underlying conce ts have been e9 lained in sim le language "ee ing the
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ractical as ects in focus. +he latest develo ments in the relevant fields have been incor orated and reference of the concerned !ebsites has been given# to enable the readers to ac0uire the cutting edge "no!ledge. #*out #ut!orBsC ndian nstitute of Banking D &inance B B&C formerly +he Indian Institute of Ban"ers# established in 1.*G# is a rofessional body of ban"s# financial institutions and their em loyees in India. During its G* years of service# IIB< has emerged as a remier institute in ban"ing and finance education for those em loyed in the sector# aiming for rofessional e9cellence. %ince its ince tion# the Institute has a!arded over ; la"h ban"ing and finance 0ualifications# vi@L (AIIB# 6AIIB# Di lomas and 6ertificates in s eciali@ed areas. +he edagogy of Distance ?earning offered by the Institute com rises &i) ublishing s ecific course!are for each a erCe9aminationL &ii) ublishing !or" boo"sL &iii) holding tutorials through accredited institutionsL &iv) organi@ing contact classesL &v) conducting virtual classesL &vi) offering e/learning through ortalL &vii) organi@ing cam us training for selected courses# etc.

+( "it)e #ut!or mprint

: $ $

Asset ?iability Management +. 'avi 1umar >ision Boo"

#*out t!e Book +he face of Indian financial sector changed forever !ith the initiation of economic reforms in 1..1. Deregulation and integration has led Indian ban"s and financial institutions into com etition both on the assets side as !ell as the liabilities side of the balance sheet# forcing them to assume greater and ne!er ris"s in their 0uest for
*.

higher returns. Accordingly# the need for ban"ers to be familiar !ith the ris"s to !hich they are e9 osed and the tools available for managing such ris"s assumes vital significance. +he U% savings and loan crisis in the early 1.G-s and the Asian crisis of the late 1..-s strongly underscored the dangers confronting ban"s and financial institutions !hich choose to ignore the im lications of interest rate ris" and li0uidity ris". Asset/liability management &A?M) rovides a macro/level frame!or" and a

so histicated tool for modern ris" management in ban"s. +his is an authoritative !or" on the fundamentals of A?M. +he boo" commences !ith an introduction to the ty es of ris"s confronting ban"s and goes on to describe the conce t# rationale and im lementation of asset/liability management$

'is" management in ban"s Interest rate ris" management D9change rate ris" management ?i0uidity ris" management 6redit ris" management A?M im lementation$ including 'BI guidelines.

+he conce tual under innings are highlighted !ith numerous e9am les dra!n from the Indian environment. +he author guides the reader through both the basic and finer nuances of asset/liability management# lucidly and !ith easy felicity. #*out #ut!or + 'avi 1umar &b.1.;B) the Dditor of the I6<AI/>ision series has had a brilliant academic career# including a University <irst and Fold Medal in BA&1.BA). His other academic 0ualifications include 6AIIB and 6<A&6hartered <inancial Analyst). +. 'avi 1umar has rich# multi/faceted e9 eriences in ban"ing# s anning t!enty years. During this eriod he also com leted several rofessional training courses
2-

from Ban"ers +raining 6ollege# Mumbai# 'BI %taff 6ollege# 6hina 3ational Institute of Ban" Management# Pune and U+I Institute of 6a ital Mar"ets. He !as the De uty 6hief =fficer of the <unds and Investments De artment of Andhra Ban" at its 6or orate =ffice. %!itching to academics# he is currently the Dean# Academic 5ing of the Institute of 6hartered <inancial Analysts of India &I6<AI) and also the editor of I6<AI ublications A3A?Y%+ and I6<AI 'DADD'. He is the author of the boo" Asset ?iability Management# also ublished by >ision Boo"

,( "it)e Ban"s #ut!or Pu*)is!er #*out t!e Book

$ +heory E Practice =f +reasury E 'is" Management In $ Indian Institute =f Ban"ing E <inance $ +a9mann Publications Pvt. ?td

+his boo" on +reasury And 'is" Management In Ban"s is a systematic and com rehensive overvie! of Modern +reasury And 'is" Management Practices in Ban"s. +reasury And 'is" Management in Ban"s have assumed an increasingly greater im ortance !ith the globali@ation of Indian <inancial Mar"ets. +oday# Ban"s are e9 osed to a multi licity o f ris"s. +herefore# officers !or"ing in the +reasury de artment of Ban"s need to retool# re/e0ui and fully u date themselves to meet the latest develo ments es ecially in 'is" Management And Derivative Instruments. +he boo" is based on the rich e9 erience of the team of authors# !ho are !ell "no!n in both the academic !orld and ban"ing. +he boo" is mainly oriented to!ards Ban"s# but it is also useful to students of management

-. "it)e #ut!or Pu*)is!er

: Fuide +o 'is" Management In Im orts And D9 orts In India : A4ay Fu ta : 5olters 1lu!er India Pvt ?td
21

#*out t!e Book Dvery organi@ation is e9 osed to uncertainties involved in im ortsCe9 orts. Fro!ing free trade agreements and internationali@ation of commodities due to outsourcing of intermediates has forced even the most conservative organi@ations to im ort ra! materials# com onents and intermediates# so as to remain cost effective and com etitive. +herefore# every moderate to big si@e organi@ation must identify the ris"s associated !ith such im orts. +his boo" rovides a guide not only to identify the business ris"s# be it commercial or legalL but also suggests as to ho! to build a com liance rogram. Dven the regulators !ant the im orters and e9 orters to be more la! abiding and ta9 com liant so that the stage. rocess of liberali@ation and sim lification of rocedures can be ta"en to its culmination

;. "it)e #ut!or Pu*)is!er #*out t!e Book

$ $ $

<inancing And 'is" Management Brealey And Myers +A+A McFra!/Hill

6or orate financial management is at its core a fluid and constantly challenging area. <inancing and 'is" Management ta"es you inside the fundamental 0uestion of ho! a cor oration generates ca ital. It introduces you to the sub4ect:s often/ conflicting ob4ectives and outlines !ays in !hich you can satisfy the greatest number of those ob4ectives# !hile ensuring that all areas of a cor oration o erate// and conflicts are resolved//under one consistent set of financial rules.

2*

4( "it)e #ut!or Pu*)is!er

$ $ $

<inancial 'is" Management Dun# Bradstreet +A+A McFra!/Hill

#*out t!e Book <inancial 'is" Management deals !ith ris" management in businesses# articularly in ban"s and financial institutions. It discusses the conce ts of ris"# its various sources and the need for ris" management. >arious ty es of ris" li"e credit ris"# mar"et ris"# o erational ris"# etc. are treated in detail. +he noo" also raises a!areness on the regulatory frame!or"# best ractices# legal issues# accountings issues# and ta9 issues relevant to ris" management and discusses in detail the three illars of Basel II. +o relate the conce ts and ractice of ris" management# case studies have been included from certain organi@ations !hich failed due to inade0uate ris" management.

5( "it)e #ut!or Pu*)is!er #*out t!e Book

: : :

Managing Indian Ban"s# 2D >asant 6 (oshi %age Publications India

+his revised and u dated edition of Managing Indian Ban"s$ +he 6hallenges Ahead e0ui s the senior management and middle management of ban"sCfinancial institutions in dealing !ith e9tremely com le9 issues that have come u in the ost sub rime lending crisis. Highlighting the !ay organi@ations can develo systems in a roactive manner to deal !ith the myriad roblems facing them# this boo" focuses on ma4or technological changes in the ban"ing sector ris" management integrating clic" and bric" ban"ing services roblems and solutions
22

!ith regard to ban"s balance sheet# cor orate lanning# cor orate ersonnel and e/ ban"ing +he authors argue that overcoming these challenges is the "ey to getting com etitive advantages and marching to!ards develo ing a sound mar"et for financial services. +his boo" !ould be hel ful for the students of ban"ing# financial management and ban" management. 6( "it)e #ut!or Pu*)is!er #*out t!e Book Managerial Accounting not only introduces you to the fundamental tools of managerial accounting but also rovides the insights you need in order to understand the !ays in !hich this field is evolving. +his te9t gives you a firm grounding in the !ide/ranging conce ts of managerial accounting# sho!ing their relevance to the overall management rocess. 1ey features N O<ocus on DthicsO segments# !hich ose ethical dilemmas or discuss ethical issues and then as" the student for his or her o inion about the issue. N 6overage of environmental cost management/a hot# ne! to ic in the field. N 3e! and u dated Managerial Accounting Practice edagogical bo9es. N <ocus and 6ontrast 6om anies$ =ne of the hallmar" features of the te9t is its ioneering of the focus com any a roach. Dach cha ter is !ritten around a realistic business that introduces the reader to the to ics of that cha ter. N %arbanes/=9ley Act N Build a % readsheet #*out "!e #ut!ors 'onald Hilton Professor of Accounting at 6ornell University# Professor Hilton teaches in the areas of managerial accounting and cost management systems. 5ith bachelor:s
28

: : :

Managerial Accounting BD 'onald Hilton# F 'amesh# M (ayadev +A+A McFra!/Hill

and master:s degrees in accounting from +he Pennsylvania %tate University# he received his Ph.D. from +he =hio %tate University. A 6ornell faculty member since 1.BB# Professor Hilton also has taught accounting at =hio %tate and the University of <lorida# !here he held the osition of 5alter (. Matherly Professor of Accounting. Prior to ursuing his doctoral studies# Hilton !or"ed for Peat# Mar!ic"# Mitchell and 6om any and served as an officer in the United %tates Air <orce. Professor Hilton is a member of the Institute of Management Accountants and has been active in the American Accounting Association. F 'amesh Associate Professor of 6enter for Public Policy of Indian Institute of Management# Bangalore. He is a <ello! of IIM# Ahmedabad !ith % eciali@ation in <inance and Accounts. He !as a Member of Indian Dconomic %ervice of Fovernment of India. He s eciali@es in 6ost Management# Management 6ontrol %ystems# and Performance Management. His interest is in a lying management accounting and control frame!or"s to services sector and ublic system domain. He !or"s in the areas of and health care# infrastructure# utilities# trans ort# soft!are and BP=# etc. He offers training rogrammes on modules on %trategic 6ost Management# +otal 6ost Management# +ransfer Pricing#>alue 6hain Analysis# Budgeting and Business Analytics# Performance management# etc. He has underta"en several consulting and evaluation studies in ublic system area for various International Agencies and 6entral Fovernment. M (ayadev Post/graduate in 6ommerce and obtained PhD in <inance from =smania University# Hyderabad. He is also an associate member of Indian Institute of Ban"ers &6AIIB) and reci ient of UF6/('< and I66%'/+eacher <ello!shi s. He is currently !or"ing as Associate Professor of <inance and 6ontrol area of Indian Institute of Management# Bangalore. He has more than eight years of e9 erience in teaching Accounting# 6or orate <inance and Ban"ing for Post/graduate and Doctoral rograms at both Indian Institute of Management Bangalore and ?uc"no!. He has ublished a ers in rofessional and research 4ournals in the areas of accounting# ban"ing and ris" management and resented a ers in national and international seminars. His resent research studies include PBasel/II and 6redit 'is"P and PMergers and Ac0uisitions in Ban"sP
2;

(ayadev !as visiting faculty to D%6P/DAP# Duro ean %chool of Management# Paris. He !as also member of consulting team and has underta"en ro4ects in the areas of accounting# finance and ban"ing for various national and international agencies +able of contents

8( "it)e #ut!or Pu*)is!er #*out t!e Book

: : :

6redit 'is" Management E Basel II Mohan Bhatia +A+A McFra!/Hill

5ith the entire financial sector across the globe !or"ing on the im lementation of the *--8 Basel II Accord in some form and intensity there is much !or" to be done at ban" level. 6redit 'is" Management E Basel II gives you the means to ut in lace the credit ris" measurement and management frame!or"# olicies# rocedures and ractices that are needed.

#*out "!e #ut!or Mo!an B!atia MSE &RM is Managing Princi al heading 'is"# Performance and 6om liance Practice at =racle <inancial %ervices 6onsulting s earheading consulting for Basel II# %olvency II# 'is" 0uantification and 6om liance for B<%I. Mohan has rovided consulting to tens of institutions in Americas# Duro e# Middle Dast# Africa and Asia Pacific enabling them to measure and manage ris"# erformance and com liance. Mohan is co/editor of (ournal of 'is" Model >alidation.

2A

/7( "it)e

$ Introduction to <oreign D9change E <inancial 'is"

Management #ut!or $ 'amesh ?a"shman Pu*)is!er $ 5olters 1lu!er India Pvt ?td #*out t!e Book +he foreign e9change mar"ets# in recent times# have turned highly volatile and turbulent and *--G taught business to rethin" about ris". Many business enter rises bas"ing in the glory of a booming mar"et suddenly reali@ed !hat it means to tac"le a volatile foreign e9change mar"et or meet ris" head on. 5hile the sub4ect is com le9# beginners and self learners often find the available boo"s on the sub4ect difficult to understand or highly mathematical for their comfort. +his boo" see"s to bridge that ga to enable the reader to get a fair "no!ledge on the sub4ect from !here heCshe can e9 lore the subtle nuances of the sub4ect from more advanced boo"s. +he accom anying sim le e9cel files should hel one to gra le !ith unavoidable com utations. +he boo" dra!s e9tensively from the training modules used by the author at various latforms and is structured to hel the lay reader understand the sub4ect. +he boo" tries to avoid 4argons and e9 lain conce ts in a language deci herable to the large ma4ority of the readers. %im licity scores over avoidable com le9ity and mar"et ractices are illustrated and e9 lained from live mar"et screens for better understanding. +he boo" is a must read title for any beginner in the sub4ect of ris" management or derivatives. . +he resence of an e9cel s readsheet in the enclosed 6D# detailing !ith various com utations and ricing ma"e the boo" a valuable reference material. >or)d "rade Centre B>"CC 5orld +rade 6entre &5+6) brings together business and government agencies involved in international trade# rovides essential trade services and stimulates the economy of the region it serves. 5+6 uts all the services associated !ith global commerce under one roof and it:s address gives a business rime and continuous access to resources essential for success in !orld trade. A 5orld +rade 6enter in any city is a business sho ing center# com lementing and su orting the e9isting services of rivate and government agencies. A 5+6 offers its members and tenants a !ide range of facilities and services. #*out t!e #ut!or
2B

'amesh ?a"shman graduated !ith a bachelor of commerce degree from University of Mumbai in the year 1.B;# ?ater he !ent to add additional 0ualifications of 6hartered Accountancy# 6ost Accountancy and ?a! all in the year 1.G-## res ectively from Institute of 6hartered Accountants of India# Institute of 6ost and 5or"s Accountants of India and University of Mumbai. He established his o!n ractice under the firm name 'amesh ?a"shman and 6om any# 6hartered Accountants in the year 1.G1# having !or"ed briefly !ith %har and +annan# 6hartered Accountants and 1.6.1hanna and 6om any# 6hartered Accountants. Bet!een 1.G1 and 1..* he !as involved in traditional ractice of audit# assurance# certification and ta9. He regularly a eared before the Income +a9 A ellate +ribunal as counsel for his clients and recorded substantial success in the matters re resented by him. %ince 1..* he chose to diversify into non traditional areas of international finance# valuation# derivatives# ris" management# cross border ac0uisitions and due diligence# advising clients on inta"e of rivate e0uity investments etc. +oday his ractice is substantially com rised of these areas. He is also an e9 ert on accounting for financial instruments# the area of great future otential due to the com le9ity surrounding the standards. Most of his "no!ledge and learning on these sub4ects is derived from self education and by attending short term courses or seminars. An Introduction to <oreign D9change and 'is" Management is his first boo"# originally !ritten as study notes for students of 5orld +rade 6entre undergoing a ost graduate course in foreign e9change and ris" management and later converted into a boo". He is also a visiting faculty !ith various Institutions and organisations !hich include$ %.P.(ain 6entre of Management at %inga ore and Dubai !here he teaches =ne credit course on Asset ?iability Management and =ne credit course on +reasury Management.

2G

C7a#ter 1 6=MPA3Y P'=<I?D / 6A3A'A BA31

2.

2( C%MP#'@ PR%& $E F C#'#R# B#'G

2(/ ntroduction: 5idely "no!n for customer centricity# 6anara Ban" !as founded by %hri Ammembal %ubba 'ao Pai# a great visionary and hilanthro ist# in (uly 1.-A# at Mangalore# then a small ort in 1arnata"a. +he Ban" has gone through the various hases of its gro!th tra4ectory over hundred years of its e9istence. Fro!th of 6anara Ban" !as henomenal# es ecially after nationali@ation in the year 1.A.# attaining the status of a national level layer in terms of geogra hical reach and clientele segments. Dighties !as characteri@ed by business diversification for the Ban". In (une *--A# the Ban" com leted a century of o eration in the Indian ban"ing industry. +he eventful 4ourney of the Ban" has been characteri@ed by several memorable milestones. +oday# 6anara Ban" occu ies a remier osition in the comity of Indian ban"s. 5ith an unbro"en record of rofits since its ince tion# 6anara Ban" has several firsts to its credit. +hese include$

?aunching of Inter/6ity A+M 3et!or" =btaining I%= 6ertification for a Branch Articulation of IFood Ban"ing 7 Ban"s 6iti@en 6harter 6ommissioning of D9clusive Mahila Ban"ing Branch ?aunching of D9clusive %ubsidiary for I+ 6onsultancy Issuing credit card for farmers Providing Agricultural 6onsultancy %ervices
8-

=ver the years# the Ban" has been scaling u its mar"et osition to emerge as a ma4or H&inancia) Cong)omerateH !ith as many as nine subsidiariesCs onsored institutionsC4oint ventures in India and abroad. As at (une *-1-# the Ban" has further e9 anded its domestic resence# !ith 2-;B branches s read across all geogra hical segments. 1ee ing customer convenience at the forefront# the Ban" rovides a !ide array of alternative delivery channels that include over *--A+Ms/ one of the highest among nationali@ed ban"s/ covering B2* centres# *AG1 branches roviding Internet and Mobile Ban"ing &IMB) services and *-.1 branches offering :Any!here Ban"ing: services. Under advanced ayment and settlement system# all branches of the Ban" have been enabled to offer 'eal +ime Fross %ettlement &'+F%) and 3ational Dlectronic <unds +ransfer &3D<+) facilities. 3ot 4ust in commercial ban"ing# the Ban" has also carved a distinctive mar"# in various cor orate social res onsibilities# namely# serving national riorities# romoting rural develo ment# enhancing rural self/em loyment through several training institutes and s earheading financial inclusion ob4ective. Promoting an inclusive gro!th strategy# !hich has been formed as the basic lan" of national olicy agenda today# is in fact dee ly rooted in the Ban":s founding rinci les. I# good *ank is not on)y t!e financia) !eart of t!e communityE *ut a)so one .it! an o*)igation of !e)ping in every possi*)e manner to improve t!e economic conditions of t!e common peop)eI. +hese insightful !ords of our founder continue to resonate even today in serving the society !ith a ur ose. +he gro!th story of 6anara Ban" in its first century !as due# among others# to the continued atronage of its valued customers# sta"eholders# committed staff and uncanny leadershi ability demonstrated by its leaders at the helm of affairs. 5e strongly
81

believe that the ne9t century is going to be e0ually re!arding and eventful not only in service of the nation but also in hel ing the Ban" emerge as a I3)o*a) Bank .it! Best PracticesI. +his 4ustifiable belief is founded on strong fundamentals# customer centricity# enlightened leadershi and a family li"e !or" culture. 2(+ ?istory: <ounded as :6anara Ban" Hindu Permanent <und: in 1.-A# by late %ri. Ammembal %ubba 'ao Pai# a hilanthro ist# this small seed blossomed into a limited com any as :6anara Ban" ?td.: in 1.1- and became 6anara Ban" in 1.A. after nationali@ation. "A good bank is not on y the !inancia heart o! the co""unity# but a so one $ith an ob igation o! he %ing in e&ery %ossib e "anner to i"%ro&e the econo"ic conditions o! the co""on %eo% e" - A. Subba Rao Pai. 2(, &ounding Princip)es 1. +o remove %u erstition and ignorance. *. +o s read education among all to sub/serve the first rinci le. 2. +o inculcate the habit of thrift and savings. 8. +o transform the financial institution not only as the financial heart of the community but the social heart as !ell. ;. +o assist the needy. A. +o !or" !ith sense of service and dedication.

8*

B. +o develo sufferings. %ound founding

a concern for fello! human being and sensitivity to the

surroundings !ith a vie! to ma"e changesCremove hardshi s and

rinci les# enlightened leadershi # uni0ue !or" culture and

remar"able ada tability to changing ban"ing environment have enabled Canara Bank to *e a front)ine *anking institution of g)o*a) standards( +he Ban" is a Fovernment of India underta"ing# and carries on all ban"ing business. +he Ban" !as brought into e9istence by an ordinance assed on the 1.th (uly 1.A. by the 6entral Fovernment. In terms of the ordinance the underta"ing of the 6anara Ban" ?td !as vested to and transferred to the ne! ban". +his ordinance !as re laced by the Ban"ing 6om anies &Ac0uisition and +ransfer of Underta"ing) Act# 1.A.. +his Act !as declared null E void by the %u reme 6ourt on the 1-th of <ebruary 1.B- and subse0uently the =rdinance !as romulgated. +hen the Ban"ing 6om anies &Ac0uisition and +ransfer of Underta"ing) Act# 1.B- !as assed and it !as made effective retros ectively from 1.th (uly 1.A..

Significant Mi)estones : @ear 1st (uly 1.-A 1.11.A. 1.BA 1.G2 1.G8 1.G; 1.GB 6anara Hindu Permanent <und ?td. formally registered !ith a ca ital of *--- shares of 's.;-C/ each# !ith 8 em loyees. 6anara Hindu Permanent <und renamed as 6anara Ban" ?imited 18 ma4or ban"s in the country# including 6anara Ban"# nationali@ed on (uly 1. 1---th branch inaugurated =verseas branch at ?ondon inaugurated 6ancard &the Ban"s credit card) launched Merger !ith the ?a"smi 6ommercial Ban" ?imited 6ommissioning of Indo Hong 1ong International <inance ?imited 6anban" Mutual <und E 6anfin Homes launched
82

1.G. 1.G./.1..*/.2 1..;/.A *--1/-* *--*/-2 *--2/-8 *--8/-; *--;/-A

*--A/-B

*--B/-G

*--G/-. *--./1-

6anban" >enture 6a ital <und started 6anban" <actors ?imited# the factoring subsidiary launched Became the first Ban" to articulate and ado t the directive rinci les of ,Food Ban"ingK. Became the first Ban" to be conferred !ith I%= .--* certification for one of its branches in Bangalore = ened a :Mahila Ban"ing Branch:# first of its "ind at Bangalore# for catering e9clusively to the financial re0uirements of !omen clientele. Maiden IP= of the Ban" ?aunched Internet E Mobile Ban"ing %ervices 1--Q Branch com uteri@ation Dntered 1--th Year in Ban"ing %ervice ?aunched 6ore Ban"ing %olution in select branches 3umber =ne Position in Aggregate Business among 3ationali@ed Ban"s 'etained 3umber =ne Position in Aggregate Business among 3ationali@ed Ban"s. %igned MoUs for 6ommissioning +!o (>s in Insurance and Asset Management !ith international ma4ors vi@.# H%B6 &Asia Pacific) Holding and 'obeco Froe 3.> res ectively ?aunching of 3e! Brand Identity Incor oration of Insurance and Asset Management (>s ?aunching of :=nline +rading: ortal ?aunching of a I6all 6entre %!itchover to Basel II 3e! 6a ital Ade0uacy <rame!or" +he Ban" crossed the coveted 's. 2 la"h crore in aggregate business +he Ban"s 2rd foreign branch at %hanghai commissioned +he Ban"s aggregate business crossed 's.8 la"h crore mar". 3et rofit of the Ban" crossed 's.2--- crore. +he Ban"s branch net!or" crossed the 2--- mar". +able1

As at (une *-1-# the total business of the Ban" stood at 's.8#1*#A8. crore.

88

C7a#ter B#SE$

8;

4( Base)
4(/ ntroduction: Base) is the second of the Basel Accords# !hich are recommendations on

ban"ing la!s and regulations issued by the Basel 6ommittee on Ban"ing %u ervision. +he ur ose of Basel II# !hich !as initially ublished in (une *--8# is to create an international standard that ban"ing regulators can use !hen creating regulations about ho! much ca ital ban"s need to ut aside to guard against the ty es of financial and o erational ris"s ban"s face. Advocates of Basel II believe that such an international standard can hel rotect the international financial system from the ty es of roblems that might arise should a ma4or ban" or a series of ban"s colla se. In theory# Basel II attem ted to accom lish this by setting u ris" and ca ital management re0uirements designed to ensure that a ban" holds ca ital reserves a ro riate to the ris" the ban" e9 oses itself to through its lending and investment ractices. Fenerally s ea"ing# these rules mean that the greater ris" to !hich the ban" is e9 osed# the greater the amount of ca ital the ban" needs to hold to safeguard its solvency and overall economic stability.

4!+ O45ecti6e$ 1. Dnsuring that ca ital allocation is more ris" sensitiveL *. %e arating o erational ris" from credit ris"# and 0uantifying bothL 2. Attem ting to align economic and regulatory ca ital more closely to reduce the sco e for regulatory arbitrage.
8A

5hile the final accord has largely addressed the regulatory arbitrage issue# there are still areas !here regulatory ca ital re0uirements !ill diverge from the economic. Basel II has largely left unchanged the 0uestion of ho! to actually define ban" ca ital# !hich diverges from accounting e0uity in im ortant res ects. +he Basel I definition# as modified u to the resent# remains in lace. 4(, Concept: Basel II uses a It!ree pi))arsI conce t 7 &1) minimum ca ital re0uirements &addressing ris")# &*) su ervisory revie! and &2) mar"et disci line. +he Basel I accord dealt !ith only arts of each of these illars. <or e9am le$ !ith res ect to the first Basel II illar# only one ris"# credit ris"# !as dealt !ith in a sim le manner !hile mar"et ris" !as an afterthoughtL o erational ris" !as not dealt !ith at all. "!e first pi))ar: +he first illar deals !ith maintenance of regulatory ca ital calculated for three ma4or com onents of ris" that a ban" faces$ credit ris"# o erational ris"# and mar"et ris". =ther ris"s are not considered fully 0uantifiable at this stage. +he credit ris" com onent can be calculated in three different !ays of varying degree of so histication# namely standardi@ed a roach# <oundation I'B and Advanced I'B. I'B stands for OInternal 'ating/Based A roachO. <or o erational ris"# there are three different a or BIA# standardi@ed a roaches / basic indicator a roach roach roach or AMA).

roach or +%A# and the internal measurement a

&an advanced form of !hich is the advanced measurement a <or mar"et ris" the referred a roach is >a' &value at ris").
8B

As the Basel * recommendations are hased in by the ban"ing industry it !ill move from standardi@ed re0uirements to more refined and s ecific re0uirements that have been develo ed for each ris" category by each individual ban". +he u side for ban"s that do develo their o!n bes o"e ris" measurement systems is that they !ill be re!arded !ith otentially lo!er ris" ca ital re0uirements. In future there !ill be closer lin"s bet!een the conce ts of economic rofit and regulatory ca ital. 6redit 'is" can be calculated by using one of three a 1. %tandardi@ed A roach *. <oundation I'B &Internal 'atings Based) A roach 2. Advanced I'B A roach +he standardi@ed a roach sets out s ecific ris" !eights for certain ty es of credit roaches$

ris". +he standard ris" !eight categories are used under Basel 1 and are -Q for short term government bonds# *-Q for e9 osures to =D6D Ban"s# ;-Q for residential mortgages and 1--Q !eighting on unsecured commercial loans. A ne! 1;-Q rating comes in for borro!ers !ith oor credit ratings. +he minimum ca ital re0uirement &the ercentage of ris" !eighted assets to be held as ca ital) remains at GQ# !ith common e0uity at *Q and +ier 1 ca at 9Q &source$ Pro osed basel 2 guidelines a credit ositive for India) <or those Ban"s that decide to ado t the standardi@ed ratings a develo ing the I'B a roach as a result. roach they !ill

be forced to rely on the ratings generated by e9ternal agencies. 6ertain Ban"s are

8G

"!e second pi))ar: +he second illar deals !ith the regulatory res onse to the first illar# giving regulators much im roved :tools: over those available to them under Basel I. It also rovides a frame!or" for dealing !ith all the other ris"s a ban" may face# such as systemic ris"# ension ris"# concentration ris"# strategic ris"# re utational ris"# li0uidity ris" and legal ris"# !hich the accord combines under the title of residual ris". It gives ban"s a o!er to revie! their ris" management system. "!e t!ird pi))ar: +his illar aims to romote greater stability in the financial system Mar"et disci line su lements regulation as sharing of information facilitates

assessment of the ban" by others including investors# analysts# customers# other ban"s and rating agencies. It leads to good cor orate governance. +he aim of illar 2 is to allo! mar"et disci line to o erate by re0uiring lenders to ublicly rovide details of their ris" management activities# ris" rating rocesses and ris" distributions. It sets out the ublic disclosures that ban"s must ma"e that lend greater insight into the ade0uacy of their ca itali@ation. 5hen mar"et lace artici ants have a sufficient understanding of a ban"s activities and the controls it has in lace to manage its e9 osures# they are better able to distinguish bet!een ban"ing organi@ations so that they can re!ard those that manage their ris"s rudently and enali@e those that do not. In India# 'BI has im lemented the Basel II standardi@ed norms on 21 March *--. and is moving to internal ratings in credit and AMA norms for o erational ris"s in ban"s. D9isting 'BI norms for ban"s in India &as on %e t *-1-)$ 6ommon e0uity &incl of buffer)$ 2.A Q& Buffer Basel * re0uirement re0uirements are @ero.)L +ier 1 re0uirement$ AQ. +otal 6a ital$ . Q of ris" !eighted assets. Basel 2 as"s for those
8.

ratios as B/G.;Q&8.;Q R*.;Q&conservation buffer) R -/*.;Q&seasonal buffer)) and G.;/11Q for tier 1 ca and 1-.; to 12.; for total ca ital: 'Pro osed Basel III Fuidelines$ A 6redit Positive for Indian( Ban"s In res onse to a 0uestionnaire released by the <inancial %tability Institute &<%I)# .; national regulators indicated they !ere to im lement Basel II# in some form or another# by *-1;. 4(- "ier / and "ier + capita): Ban"s ca ital structure consists of +ier 1 and +ier * ca ital. +he ma4or com onents of +ier 1 ca ital are e0uity share ca ital# e0uity share remium# statutory reserves# general reserves# s ecial reserve &%ection 2A&i)&viii)) and ca ital reserves &other than revaluation reserves). +ier * ca ital consists of subordinated debt# revaluation reserves# rovision for standard assets# s ecial reserve &s!a ) and investment reserve. +ier 1 ca ital is the core measure of a ban":s financial strength from a regulator:s oint of vie!. It is com osed of core ca ital# !hich consists rimarily of common stoc" and disclosed reserves &or retained earnings)# but may also include non/ redeemable non/cumulative referred stoc". 6a ital in this sense is related to# but different from# the accounting conce t of shareholders: e0uity. Both +ier 1 and +ier * ca ital !ere first defined in the Basel I ca ital accord and remained substantially the same in the re lacement Basel II accord. +ier * ca ital is senior to +ier 1# but subordinate to de osits and the de osit insurer:s claims. +hese include referred stoc" !ith fi9ed maturities and long/term debt !ith minimum maturities of over five years.

;-

Dach country:s ban"ing regulator# ho!ever# has some discretion over ho! differing financial instruments may count in a ca ital calculation. +his is a ro riate# as the legal frame!or" varies in different legal systems.

+he theoretical reason for holding ca ital is that it should rovide rotection against une9 ected losses. 3ote that this is not the same as e9 ected losses# !hich are covered by rovisions# reserves and current year rofits. In Basel I agreement# +ier 1 ca ital is a minimum of 8Q o!nershi e0uity but investors generally re0uire a ratio of 1-Q. "ier + capita) is a measure of a ban":s financial strength !ith regard to the second most reliable form of financial ca ital from a regulatory oint of vie!. +he forms of ban"ing ca ital !ere largely standardi@ed in the Basel I accord# issued by the Basel 6ommittee on Ban"ing %u ervision and left untouched by the Basel II accord. 3ational regulators of most countries around the !orld have im lemented these standards in local legislation. +ier 1 ca ital is considered the more reliable form of ca ital# !hich com rises the most 4unior &subordinated) securities issued by the firm. +hese include e0uity and 0ualifying er etual referred stoc". +here are several classifications of tier * ca ital. In the Basel I Accord# tier * ca ital is com osed of su lementary ca ital# !hich is categori@ed as undisclosed rovisions# hybrid instruments and reserves# revaluation reserves# general to an amount e0ual to that of the core ca ital.

subordinated term debt. %u lementary ca ital can be considered tier * ca itals u

;1

C7a#ter 2 R SG M#'#3EME'" PR#C" CES ' C#'#R# B#'G

;*

5( Risk Management practices in Canara Bank

5(/ Credit Risk: +he Ban" has ut in lace a robust 'is" Management Architecture !ith due focus not only on 6a ital o timi@ation# but also on rofit ma9imi@ation# i.e. to do ma9imum business out of the available ca ital !hich in turn ma9imi@e rofit or return on e0uity. Ban" is benchmar"ing on globally acce ted sound ris" management system# conforming to Basel II frame!or"# enabling a more efficient e0uitable and rudent allocation of resources. In 6a ital Planning rocess the Ban" revie!s$ 6urrent ca ital re0uirement of the Ban" +he targeted and sustainable ca ital in terms of business strategy and ris" a etite. 6a ital need and ca ital o timi@ation are monitored eriodically by the 6a ital Planning 6ommittee com rising +o D9ecutives. %ensitivity analysis is conducted 0uarterly on the movement of 6a ital Ade0uacy 'atio# considering the ro4ected gro!th in advances# investments in %ubsidiariesC (oint >entures and the im act of Basel II frame!or" etc. +he 6ommittee ta"es into consideration various o tions available for ca ital augmentation in tune !ith business gro!th and realignment of 6a ital structure duly underta"ing the scenario analysis for ca ital o timi@ation.
;2

6'A' of the Ban" is ro4ected to be !ell above the 1*Q in the medium term hori@on of 2 years# as rescribed in the I6APP Policy.

0;#'" "#" 9E 1 SC$%S;RES BRs( in CroreC #M%;'" "EMS &a) 6a ital re0uirements for 6redit 'is" Portfolios sub4ect to %tandardi@ed A %ecuriti@ation D9 osures ,/(7,(+7/7 roach ,/(7,(+778

/+/85(26 '$

/7778(48 '$

&b) 6a ital re0uirements for Mar"et 'is" / %tandardi@ed Duration A roach Interest 'ate 'is" <oreign D9change 'is" &including gold) D0uity Position 'is" +8,(+5 4(52 +++(+, ,74(77 4(52 /55(54

&c) 6a ital re0uirements for = erational 'is" / Basic Indicator A roach 6,4(+5 /,(-, 6(2/,(,+ 6(-5 528(55 /-(/7 6(7/ /-(72 5(86

&d) +otal and +ier I 6'A' for the Ban" +otal 6'A' &Q) +ier I 6'A' &Q) &e) +otal and +ier I 6'A' for the 6onsolidated Frou +otal 6'A' &Q) +ier I 6'A' &Q) &f) +otal and +ier I 6'A' for the %ignificant %ubsidiary !hich are not under consolidated grou +otal 6'A' &Q) +ier I 6'A' &Q) "#B$E +

'# '#

'# '#

;8

+he Ban"s olicies maintain moderation in ris" a

etite and a healthy balance

bet!een ris" and return in a rudent manner. +he rimary ris" management goals are to ma9imi@e value for share holders !ithin acce table arameters and to the re0uirements of regulatory authorities# de ositors and other sta"eholders. +he guiding rinci les in ris" management of the Ban" com rise of 6om liance !ith regulatory and legal re0uirements# achieving a balance bet!een ris" and return# ensuring inde endence of ris" functions# and aligning ris" management and business ob4ectives. +he 6redit 'is" Management rocess of the Ban" is driven by a strong organi@ational culture and sound o erating rocedures# involving cor orate values# attitudes# com etencies# em loyment of business intelligence tools# internal control culture# effective internal re orting and contingency lanning. +he overall ob4ectives of the Ban"s 6redit 'is" Management are to$ Dnsure credit gro!th# both 0ualitatively and 0uantitatively that !ould be sectorally balanced# diversified !ith o timum dis ersal of ris". Dnsure adherence to the regulatory ortfolios. rudential norms on e9 osures and

Ade0uately enable to rice various ris"s in the credit e9 osure. <orm art of an integrated system of ris" management encom assing identification# measurement# monitoring and control.

5(+ Strategies and processes: In order to reali@e the above ob4ectives of 6redit 'is" Management# the Ban" rescribes various methods for 6redit 'is" identification# measurement# grading and aggregation techni0ues# monitoring and re orting# ris" control C mitigation
;;

techni0ues and management of roblem loans Ccredits. +he Ban" has also defined target mar"ets# ris" acce tance criteria# credit a on credit origination C maintenance rocedures. +he strategies are framed "ee ing in vie! various measures for 6redit 'is" Mitigation# !hich includes identification of thrust areas and target mar"ets# fi9ing of e9 osure ceiling based on regulatory guidelines and ris" a etite of the Ban"# 6oncentration 'is"# and the acce table level of ricing based on rating. +he Ban" from time to time !ould identify the otential and roductive sectors for lending# based on the erformance of the segments and demands of the economy. +he Ban" restricts its e9 osures in sectors !hich do not have gro!th otentials# based on the Ban"s evaluation of industries C sectors ta"ing into account the revailing economic scenario ros ects etc. +he o erational rocesses and systems of the Ban" relating to credit are framed on sound 6redit 'is" Management Princi les and are sub4ected to eriodical revie!. +he Ban" has com rehensive credit ris" identification rocesses as art of due diligence on credit ro osals. +o have focused attention to large 6or orates# s eciali@ed branches vi@. Prime 6or orate Branches have been set u in ma4or centres. <urther# 'etail Hubs have been set u for focused attention to 'etail ?ending Portfolio. %MD %ulabhs are the category of s eciali@ed centres for monitor their res ective ortfolios. In order to im rove the 0uality of a raisals and to ensure accelerated res onse to romoting and monitoring %MD lending business. +hese s eciali@ed centres are also intended to effectively manage and roval authorities# and guidelines

customers# articularly in res ect of high value credits# relationshi and a raisal
;A

functions are segregated bet!een the concerned branch and the 6ore 6redit Frou s at 6ircle =ffices. ?arge value cor orate e9 osures are largely monitored through s ecified branches.

5(, "!e structure and organi=ation of t!e Credit Risk Management &unction: 6redit 'is" Management %tructure in the Ban" is as under/ Board of Directors 'is" Management 6ommittee of the Board &'M6) 6redit 'is" Management 6ommittee &6'M6) Feneral Manager/'is" Management 5ing# H.= &6hief 'is" Management =fficer) 6redit 'is" Management De artment# 'is" Management 5ing 6redit %tatistics %ection# 'is" Management 5ing D9clusive 6redit Monitoring 5ing for focused attention on monitoring the 0uality of loan ortfolio# identifying the roblems and suggesting corrective measures 'is" Management E 6redit 'evie! %ection at 6ircle =ffices 6redit Monitoring =fficers at Branches for monitoring the <und Based limits of 's. 1 crore E above

5(- "!e scope and nature of risk reporting and : or measurement systems $
;B

'is" Management 6ommittee !as constituted on (anuary 1G# *--2. +he functions of the 'is" Management 6ommittee include the follo!ing$ J +o devise the olicy and strategy for integrated ris" management containing various ris" e9 osures of the Ban" including the 6redit 'is". J +o co/ordinate bet!een the 6redit 'is" Management 6ommittee &6'M6)# the Asset ?iability Management 6ommittee &A?M6) and = erational 'is" Management 6ommittee &='M6) and other ris" committees of the Ban". 5(2 "!e responsi*i)ity of t!e Committee inc)udes: %etting olicies and guidelines for mar"et ris" measurement# management and re orting Dnsuring that mar"et ris" management 'evie!ing and a rocesses &including eo le# systems# o erations# limits and controls) satisfy Ban"s olicy roving mar"et ris" limits# including triggers or sto /

losses for traded and accrual ortfolios A ointment of 0ualified and com etent staffL ensuring osting of 0ualified and com etent staff and of inde endent mar"et ris" managerCs etc. +he Ban" has ut in lace the 6redit 'is" Management Policy and the same has been circulated to all the branches. +he measurement of ris" is through a re sanction e9ercise of credit ris" rating and scoring models ut in lace by the Ban". +he Ban" has !ell laid do!n guidelines for identifying the arameters under each of these ris"s as also assigning !eighted scores thereto and rating them on a scale of G. +he Ban" also has a Policy in lace on usageCma ing of ratings assigned by the recogni@ed D6AIs &D9ternal 6redit Assessment Institutions) for assigning ris"
;G

!eights for the eligible credit e9 osures as er the guidelines of the 'BI on %tandardi@ed A roach for ca ital com utation. +he Ban" has ado ted I%tandardi@ed A roach for credit ortfolio for credit ris" measurement. +he Ban" has embar"ed u on a soft!are solution vi@. 6D6'M &6om rehensive Data and %ystem Architecture on 6redit 'is" Management) for establishing a robust credit data !arehouse for all MI% re0uirements# com utation of 'is" 5eighted Assets &'5A)# generate various credit related re orts for revie! of e9 osure and monitoring# and conducting analysis of credit ortfolio from various angles. +he main ob4ective of the olicy is to ensure that the o erations are in line !ith the e9 ectation of the management and the strategies of the to management are translated into meaningful directions to the o erational level. +he Policy sti ulates rudential limits on large credit e9 osures# standards for loan collateral# ortfolio management# loan revie! mechanism# ris" concentrations# ris" monitoring and evaluation# rovisioning and regulatory C legal com liance. +he Ban" identifies the ris"s to !hich it is e9 osed and a lies suitable techni0ues to measure# monitor and control these ris"s. 5hile the Board C 'is" Management 6ommittee of the Board devises the olicy and fi9es various credit ris" e9 osures# 6redit 'is" Management 6ommittee im lements these a roved by the Board C 'M6# monitors credit ris"s on a ban" !ide basis and ensures com liance of ris" limits. +he Ban" studies the concentration ris" by &a) fi9ing e9 osure limits for single and grou borro!ers &b) rating grade limits &c) industry !ise e9 osure limits olicies and strategies

;.

5(4 Po)icies for !edging and : or mitigating risk and strategies and processes for monitoring t!e continuing effectiveness of !edges : mitigants: +he Ban" rimarily relies on the borro!er:s financial strength and debt servicing ca acity !hile a roving credits. +he Ban" does not e9cessively rely on collaterals or guarantees as a source of re ayment or as a substitute for evaluating borro!er:s credit!orthiness. +he Ban" does not deny credit facilities to those assessed as credit !orthy for mere !ant of ade0uate collaterals. In order to manage the Ban"s credit ris" e9 osure# the Ban" has ado ted credit a raisal and a roval olicies and rocedures that are revie!ed and u dated by raisal and a roval rocess is broadly divided into credit roval# and dis ensation. the 'is" Management 5ing at Head office in consultation !ith other functional 5ings. +he credit a origination# a raisal# assessment and a

6or orate finance and ro4ect finance loans are ty ically secured by a first lien on fi9ed assets# normally consisting of ro erty# lant and e0ui ment. +he Ban" also ta"es security of ledge of financial assets li"e mar"etable securities and obtains cor orate guarantees and ersonal guarantees !herever a ro riate. 5or"ing 6a ital loans are ty ically secured by a first lien on current assets# !hich normally consist of inventory and receivables. +he Ban" has laid do!n detailed guidelines on documentation to ensure legal certainty of Ban":s charge on collaterals. +he Ban":s olicy is to ensure ortfolio diversification and evaluate overall etite of the Ban". +he

financing e9 osure in a articular industry C sector in the light of forecasts of gro!th and rofitability for that industry# and the ris" a Ban" monitors e9 osures to ma4or sectors of the economy and s ecifically e9 osure to various industries and sensitive sectors. D9 osure to industrial
A-

activities is sub4ected to the credit e9 osure ceilings fi9ed by the Ban" based on the analysis on erformance of the industry. +he Ban"s e9 osures to single and grou borro!ers as also substantial e9 osure is monitored and restricted !ithin the rudential ceiling norms advised by 'eserve Ban" of India from time to time. +he credit origination is through the grass root level ably assisted by the branch net !or" and the 6ircle =ffices. +he rocess of identification# a carried out before commencing an in de th a assessment. lication is raisal# due diligence and

+he credit a

roval rocess is a critical factor and commences !ith the mandatory

credit ris" rating of the borro!er as a re sanction e9ercise. +he measurement of 6redit 'is" associated !ith the borro!er evaluates indicative factors li"e# borro!ers financial osition# cash flo!s# activity# current mar"et trends# ast trends# management ca abilities# e9 erience !ith associated business entities# nature of facilities etc. +he Ban" has no! in lace centrali@ed rocessing centres for Housing and ersonal loans at select cities to ease credit dis ensation reduce turnaround time and ensure s eciali@ed attention. +he Ban" has an e9clusive set u for credit monitoring functions no!# after hiving off the same from 'is" Management 5ing. +his is to have greater thrust on ost sanction monitoring of loans and strengthen administering the various tools available under the Ban"s olicies on loan revie! mechanism. <or effective loan revie!# the Ban" has the follo!ing in lace$ 6redit Audit %ystem to identify# analy@e instances of non/com liance and rectification.
A1

'evie! of loan sanctioned by each sanctioning authority by the ne9t higher authority. Mid +erm 'evie! of borro!al accounts. Monitoring tools li"e 6redit Monitoring <ormat# Suarterly Information %ystems# Half Yearly = eration %ystems# %toc" Audits# % ecial 5atch ?ist Accounts# etc. 6redit Monitoring =fficers in charge of monitoring functions.

5(5 $oans past due and mpaired: As er the rudential norms a lied for income recognition# asset classification

and rovisioning# the Ban" considers follo!ing categories of loans and advances as 3on/ erforming Assets# !herein$ Interest andCor installment of rinci al remain overdue for a eriod of more than .- days in res ect of a +erm ?oan +he account remains Iout of order in res ect of an =verdraftC6ash 6redit &=DC66) +he bill remains overdue for a eriod of more than .- days in the case of Bills Purchased and Discounted In case of agricultural advances# interest andCor installment of rinci al remains overdue for * cro seasons &in res ect of short duration cro s) E 1 cro season &in res ect of long duration cro s) Any amount receivable that remains overdue for a eriod of more than .days in res ect of other accounts.
A*

Interest charged during any 0uarter is not serviced fully !ithin .- days from the end of the 0uarter.

0;#'" "#" 9E 1 SC$%S;RES aC "%"#$ 3R%SS CRE1 " EJP%S;RES &;'1 B#SE1 EJP%S;RES ,/(7,(+7/7 ,/(7,(+778 BRs in CroreC '%'F&;'1 B#SE1 EJP%S;RES ,/(7,(+7/7 ,/(7,(+778

%9ER#$$ CRE1 " EJP%S;RE +otal Fross 6redit D9 osures &after accounting offsets in accordance !ith the a licable accounting regime and !ithout ta"ing into account the effects of credit ris" mitigation techni0ues# e.g. collateral and netting)

/48,,-(4,

/,6+/8(-7

/+,45+(25

/2//2/(6-

"a*)e ,

B*C 3E%3R#P? C 1 S"R B;" %' %& EJP%S;RES EJP%S;RES &;'1 B#SE1 ,/(7,(+7/7 A2 ,/(7,(+778

BRs in CroreC '%'F&;'1 B#SE1 ,/(7,(+7/7 ,/(7,(+778

Domestic o erations =verseas o erations

/4+,24(2, /,-5,+(/4856(/7 ,-65(+4 "a*)e -

/+7+-,(7/ ,-+8(22

/-5-+,(6+ ,5+6(7+

BcC '1;S"R@ "@PE 1 S"R B;" %' %& EJP%S;RES SR '%( *.1 *.* &;'1 B#SE1 %;"S"#'1 '3 ,/(7,(+7/7 Mining and 0uarrying &ood Processing *.*.1 %ugar *.*.* Ddible >anas ati *.*.2 +ea *.*.8 =thers *.2 *.8 Beverage D "o*acco "exti)es *.8.1 6otton +e9tiles *.8.* (ute +e9tiles *.8.2 =ther +e9tiles *.; *.A *.B *.G *.. $eat!er Products D $eat!er =ils and /788 ,756 .;; 1B. 11G 1G*A ,24 62-4 2.-G .B 8;81 4-+ /85 /+-2 64+2 /8/8 A8 ,/(7,(+778 686 /442 AB; G1 2GB. +6, 45,5 *.*. 82BAG 2/, +5+ 6,4 65+/,46

BRs in CroreC '%' &;'1 B#SE1 %;"S"#'1 '3 ,/(7,(+7/7 /4/ /65 12; ** 2,5 /6G1 1 1-* /6 +6 +5 5++ /4+ ,/(7,(+778 /,+ +7 2 1B -+-6 8; *-2 5 /7 /7 --+ /,/

'1;S"R@

>ood and >ood Products Paper D Paper Products Petro)eumE Coa) Products and 'uc)ear &ue)s C!emica)s and C!emica)

Products *...1 <ertili@er *...* Drugs Pharmaceuticals *...2 Petro 6hemicals *...8 =thers *.1Ru**erE P)astic D t!eir Products E 181 GGG G.55/ ,2 /+,+ /776B-1. and 2-A; 2++/ 82B 8BG8 /--/ /7,2 +25,+5-/ 1.-.. 22B8 AB2B A; B1 B.;-B 278 /2+ /++4 -+4+ 2112 118. +,,7 2*. *--1 /-8/7,8 +/-/5,/, ..;B .A; 88.G G BA BG -/ / /6 ,42+ 2;11 181 ,5/5 *.* 28*; /7/ //5 ,4/5 ,254 **8G AAA A2B ; ;B A. /7 /6 ,2/2828 G,428 1;. 2;-/,7 457 ,,2+ ,,/*-1; AG* A1*

*.11 3)ass and 3)ass.are *.1* *.12 Cement Products and Cement

Basic Meta) and Meta) Products *.12.1 Iron and %teel *.12.* =ther Metal Metal Products

*.18 #)) Engineering *.18.1 Dlectronics *.18.* =thers 9e!ic)esE 9e!ic)e Parts *.1; and "ransport EAuipments *.1A 3ems D <e.e))ery *.1B Construction *.1G nfrastructure *.1G.1 Po!er *.1G.* +elecommunications *.1G.2 'oads E Ports

*.1G.8 =ther Infrastructure *.1. %t!er ndustries '1;S"R@ B"ota) of Sma))E Medium and $arge Sca)eC

2;21 444, 6527"a*)e 2

1G.2 /8-7 2,572

*; /788 /5-42

; /74+ /4555

BdC RES 1;#$ M#";R "@ BRE#G1%>' %& #SSE"S BRS ' CR%RE C M#";R "@ P#""ER' #19#'CES 546-(,7 B82,/(82C 424,(6B+8,/(2+C 6+84(-/ B+/2-(52C -,+7(22 B,/4-(4-C +/,,5(44 B/5+6/(88C /4++4(54 B54,-(75C +-427(84 B+/465(2+C AA '9ES"ME'"S B7(77C B7(77C /4+4(4, B867(55C 288(78 B//4-(4-C /,/8(/6 B//27(,4C ,2//(5, B+,/6(-6C /227(7B,,/5(6,C 22+(86 B+/2/(-6C &%RE 3' C;RRE'C@ #SSE"S 468(,7 B///(,-C /7-2(82 B/66,(6+C /,/-(78 B27/+(56C +58(/B-4-(6+C ,4/+(24 B/+42(4,C ,68,(8/ B/-5,(66C ,--8(-8 B267(-4C

7 to / day

+ to 5 days

6 to /- days

/2 to +6 days

+8 days to , mont!s %ver , mont!s D upto 4 mont!s %ver 4 mont!s D upto / year

%ver / year D upto , years

,7-48(+B+66-,(5/C /55/,(7, B/-722(47C ,+75/(66 B,78,,(42C /48,,-(4, B/,6+/8(-7C "a*)e 4

272-(/8 B56-,(25C 4727(,/ B6,,8(,7C -8-/+(67 B,72/7(-5C 48454(82 B25554(87C

5-7(26 B+7-,(65C 4-+(4/ B2+2(-/C 88-(86 B/74/(26C /444+(4/ B/--+,(28C

%ver , year D upto 2 years

%ver 2 years

"ota)

&+he figures of the revious year disclosed in the brac"ets under each figure)

BeC '%'FPER&%RM '3 #SSE"S: BRs in CroreC tems Fross 3PAs %ubstandard Doubtful 1 Doubtful * Doubtful 2 ?oss 3et 3PAs 3PA 'atios Fross 3PAs to Fross advances &Q) 3et 3PAs to 3et advances &Q) Movement of 3PAs &Fross) = ening balance Additions 'eductions AB /(2+ /(74 +/45(85 ,+44(,, +6-,(88 +287(,/ /(24 /(78 /+5+(4+ +,55(5/-6+(,8 +/45(85 #mount ,/(7,(+7/7 +287(,/ /82,(28 4+5(,8 FF FF 8(,, /588(57 ,/(7,(+778 +/45(85 /2/-(28 4-4(85 FF FF 4(-/ /275(+2

 6losing balance Movement of rovisions for 3PAs = ening balance Provisions made during the year 5rite/off 5rite bac" of e9cess rovisions 6losing balance Amount of 3on/ erforming investments Amount of investments rovisions held for 3on/ erforming 425(58 /-+4(/5 /+85(/4 FF 564(67 /88(58 /88(-5 ,5,(/7 877(77 4/2(,/ FF 425(58 /62(5+ /62(5+

Movement of rovisions for de reciation on investments = ening balance Provisions made during the eriod 5rite/off 5rite bac" of e9cess rovisions 6losing balance "a*)e 5 2-/(55 -8(,,48(+7 FF ++/(8/ /67(,/ -75(,2 -2(68 FF 2-/(55

5(6 M " 3#" %' %& CRE1 " R SG: Mitigation of credit ris"s and enhancing a!areness on identification of a ro riate

collateral ta"ing into account the s irit of Basel II C 'BI guidelines and = timi@ing the benefit of credit ris" mitigation in com utation of ca ital charge as er a roaches laid do!n in Basel II C 'BI guidelines. +he Ban" generally relies on 'is" Mitigation techni0ues li"e ?oan artici ation# 6eiling on D9 osures# Dscro! mechanism# <or!ard cover# higher margins# loan covenants# 6ollateral and insurance cover. >aluation methodologies are detailed in the 6redit 'is" Management Policy.

AG

Ban" acce ts guarantees from individuals !ith considerable net !orth and the 6or orate. =nly guarantees issued by entities !ith a lo!er ris" !eight than the counter arty shall be acce ted to get the rotection for the counter arty e9 osure. All ty es of securities eligible for mitigation are easily reali@able financial securities. As such# resently no limit C ceiling has been rescribed to address the concentration ris" in credit ris" mitigates recogni@ed by the Ban"

5(8 Po)icies and processes for co))atera) va)uation and management: 6ollaterals and guarantees ro erly ta"en and managed !ould serve to$ mitigate the ris" by roviding secondary source of re ayment in the event of borro!er:s default on a credit facility due to inade0uacy in e9 ected cash flo! or not gain control on the source of re ayment in the event of defaultL rovide early !arning of a borro!er:s deteriorating re ayment abilityL and = timi@e ris" !eighted assets and to address 'esidual 'is"s ade0uately. rocess and ractices of the Ban" cover the entire rotection of collateral value# validity of

6ollateral Management

activities com rising security and

collaterals and guarantees# and valuation C eriodical ins ection.

1.

9a)uation: Both the <i9ed and the 6urrent Assets obtained to secure the loans granted by the Ban" are sub4ected to valuation by values em anelled by the Ban". Monetary limits of the accounts# asset classification of the borro!er# !hich is to be sub4ected to valuation# eriodicity of valuation# are rescribed in the Ban"s olicy guidelines.

A.

2.

1escription of t!e main types of co))atera) taken *y t!e Bank: +he main ty es of collateral commonly used by the Ban" as ris" mitigants com rises of Inventories# Boo" debts# Plant E Machineries# ?and E Building# Fold (e!ellery# <inancial 6ollaterals &i.e. Ban" De osits# Fovernment %ecurities issued directlyC by ostal de artments# e0uity shares of limited com anies a roved by the Ban"# ?ife Insurance Policies# Units of Mutual <unds etc.)# different categories of moveable E immoveable assets C ro erties etc.

2. Main types of 3uarantor counterparty and t!eir credit.ort!iness: +he Ban" obtainsCacce ts guarantees of sovereign# sovereign entities &including BI%# IM<# Duro ean 6entral Ban"s# D6F6 and 6F+M%D. Besides# the Ban" also obtains Personal or 6or orate guarantee having ade0uate net !orth# as an additional comfort for mitigation of 6redit 'is" !hich can be translated into a direct claim on the guarantor# and are unconditional and irrevocable. +he 6redit!orthiness of the guarantor is normally not lin"ed to or affected by the borro!ers financial osition. +he Ban" also acce ts guarantee given by %tate C 6entral Fovernment as a security comfort. %uch Fuarantees remain continually effective until the facility covered is fully re aid or settled or released.

8. Credit Risk Mitigation recogni=ed *y t!e Bank for t!e purpose of reducing capita) reAuirement under 'e. Capita) #deAuacy &rame.ork BBase) 'ormsC: +he Ban" has recogni@ed 6ash# Ban":s o!n De osits# Fold E Fold (e!ellery as 6redit 'is" Mitigations for the ur ose of reducing ca ital re0uirement under the 3e! 6a ital Ade0uacy <rame!or" &Basel II 3orms).

;. nformation a*out risk concentration .it!in t!e mitigation taken: +he Ban" is in the rocess of utting in lace a data !arehouse for a robust Management Information %ystem to facilitate management of 6redit 'is"
B-

and evaluation of effectiveness of collateral management including ris" concentrations of collaterals.

QUANTITATIVE DISCLOSURES: (Rs. in Crore) SL NO PARTICULARS AMOUNT 31.03.2010 31.03.200

The total exposure (after, where applicable, on- or off balance sheet netting) that is covered by eligible financial collateral after the application of haircuts for each separately disclosed credit risk portfolio. The total exposure (after, where applicable, on- or off-balance sheet netting) that is covered by guarantees credit derivatives (whenever specifically per!itted by "#$) %or each separately disclosed portfolio T%&'e "

1! 12.!

12"#1. 2

1#!3#.2$

11!21. 0

5(/7 Mitigation "ec!niAues: +he Ban" is re0uired to have a system for monitoring the overall com osition and 0uality of the various ortfolios since credit related roblems in ban"s is concentration !ithin the credit ortfolio. It can ta"e many forms and can arise !henever a significant number of credits have similar ris" characteristics. Also the Ban" !ill not necessarily forego boo"ing sound credits solely on the basis of concentration. Ban" may use alternatives to reduce or mitigate concentration. %uch measures !ill include a. ricing for additional ris"# artici ation in order to reduce de endency on a b. increased holdings of ca ital to com ensate for the additional ris"# c. ma"ing use of loan articular sector of economy or grou of related borro!ers
B1

d. <i9ing e9 osure limits for borro!ers and for various industrial sectors e. 6ollateral security in addition to main securities sti ulating asset coverage ratio on case to case basis f. Personal Fuarantees C 6or orate Fuarantees having reasonable net !orth g. Dscro! mechanism for meeting the financial commitments on time =ther additional mechanisms such as loan sales# credit derivatives# securiti@ation rograms and other secondary mar"ets also have been suggested by 'BI.

5(// M#RGE" R SG: +he overall ob4ective of mar"et ris" management is to create shareholder value by im roving the Ban"s com etitive advantage and reducing loss from all ty es of mar"et ris" loss events. 5hile overall leadershi and control of the ris" management frame!or" is rovided by 'is" Management 5ing# the business units are em o!ered to set strategy for ta"ing ris"s and manage the ris"s. All issues or limit violations of a re/determined severity &materiality# fre0uency# nature) are escalated to the 'is" Management 5ing !here the actions to address them are determined by the a ro riate authorities. +he business units are res onsible for im lementing the decision ta"en.
B*

+he rocess aims to Dstablish a ro/active mar"et ris" management culture to cover mar"et ris"s. 6om ly !ith all relevant legislation and regulatory re0uirements relating to Mar"et 'is" Develo consistent 0ualities in evolving olicies E rocedures relating to identification# measurement# management# monitoring# controlling and revie!ing of Mar"et 'is". Dstablish limit structure and triggers for various "inds of mar"et ris" factors Dstablish efficient monitoring mechanism by setting u a strong re orting system. Ado t inde endent and regular evaluation of the mar"et ris" measures.

5(/+ "!e structure and organi=ation of t!e re)evant risk management function: Mar"et 'is" Management structure of the Ban" is as under/ 1. Board of Directors *. 'is" Management 6ommittee of the Board 2. Asset ?iability Management 6ommittee &A?6=) 8. Mar"et 'is" Management 6ommittee ;. Feneral Manager/' M 5ing &6hief 'is" Management officer) A. Mar"et 'is" Management De artment# 'is" Management 5ing H=

B2

/ /

Integrated Mid =ffice Asset ?iability Management %ection

5(/, "!e scope and nature of risk reporting and:or measurement systems: +he Ban" has ut in lace various e9 osure limits for mar"et ris" management such as =vernight limit# Intraday limit# Aggregate Fa limit# %to ?oss limit# >a' limit# Bro"er +urnover limit# 6a ital Mar"et D9 osure limit# Product/!ise D9 osure limit# Issuer/!ise D9 osure limit etc. A ris" re orting system is in lace for monitoring the ris" limits across different levels of the Ban". +he rates used for mar"ing to mar"et for ris" management or accounting ur oses are inde endently verified. +he re orts are used to monitor erformance and ris"# manage business activities in accordance !ith the Ban"s strategy. +he re orting system ensures timelines# reasonable accuracy !ith automation# highlight ortfolio ris" concentrations# and include !ritten commentary. +he re orts are fle9ible and enhance decision/ma"ing rocess. Dealing room activities are centrali@ed# and system is in lace to monitor the intraday e9 osure on real time basis. +he re orting formats E the fre0uency are eriodically revie!ed to ensure their ade0uacy for ris" monitoring# measuring and mitigation.

5(/- Po)icies for !edging and:or mitigating risk and strategies and processes for monitoring t!e continuing effectiveness of !edges:mitigants:

B8

>arious Board a

roved olicies vi@.# Mar"et 'is" Management Policy# 6ountry

'is" Management Policy# 6ounter arty Ban" 'is" Management Policy# Investment Policy# ?i0uidity 'is" Management Policy and A?M Policy are ut in lace for mar"et ris" management. Mar"et 'is" Management Policy rovides the frame!or" for ris" identification# assessment and measurement and mitigation# ris" limits E triggers# ris" monitoring and re orting. +he Ban" has develo ed an internal model for country ris" rating based on various arameters li"e FDP gro!th# inflation# trade balance etc for ris" categori@ation of the countries to allocate limit for ta"ing e9 osure to various countries. +he Ban" has in lace a scoring model for categori@ation of foreign ban"s under 6ounter arty 'is" Management Policy. +he various e9 osure limits are set based on the oints secured by the counter arties as er the scoring matri9. ?i0uidity 'is" Management Policy lays do!n various guidelines to ensure that the li0uidity osition is comfortable at times of stress by formulating contingency funding lan. +olerance levels are incor orated under each time frame and any breach of it !ould signal a forthcoming li0uidity constraint.

QUANTITATIVE DISCLOSURES (Rs. in Crore) SL NO (%) (&) (/) PARTICULARS In)eres) R%)e Ris* E,-i). Posi)ion Ris* (orei0n E1/2%n0e Ris* T%&'e AMOUNT O( CAPITAL REQUIREMENT 31.03.2010 2 3.2+ 222.23 #.+! 31.03.200 30#.00 1++.+# #.+!

B;

5(/2 %PER#" %'#$ R SG: +he = erational 'is" Management rocess of the Ban" is driven by a strong organi@ational culture and sound o erating rocedures# involving cor orate values# attitudes# com etencies# internal control culture# effective internal re orting and contingency lanning. Policies are ut in lace for effective management of = erational 'is" in the Ban".

BA

5(/4 "!e structure and organi=ation of t!e re)evant risk management function: +he = erational 'is" Management %tructure in the Ban" is as under$ 1. Board of Directors *. 'is" Management 6ommittee of the Board 2. = erational 'is" Management 6ommittee &='M6) 8. FM of 'is" Management 5ing# H= &6hief 'is" Management =fficer) ;. ='M % ecialists in functional 5ings# H= A. = erational 'is" Management De artment &='MD)# H= B. 'is" =fficers 7 +he nominated D9ecutive at 6irclesC+reasury 5ing G. 'is" Management and 6redit 'evie! %ections at 6ircles .. 'is" Management =fficers &'.M.=) at BranchesC=ffices.

5(/5 "!e scope and nature of risk reporting and:or measurement systems: +he 'is" re orting consists of o erational ris" loss incidentsCevents occurred in branchesCoffices relating to eo le# rocess# technology and e9ternal events. +he data collected from different sources are used for re aration of 'is" Matri9 consisting of B loss event ty es and G business lines recogni@ed by the 'BI. 5(/6 Po)icies for !edging and:or mitigating risk and strategies and processes for monitoring t!e continuing effectiveness of !edges:mitigants:
BB

+he Ban" has ut in lace the follo!ing olices ertaining to = erational 'is" Management. %perationa) Risk Management Po)icy: +he Policy covers the terms of = erational 'is"# ris" management structure# identification# assessment# measurement and monitoring of = erational 'is". %utsourcing Po)icy: +he Policy covers all ty es of outsourcing arrangements including financial services entered into by the Ban" !ith a service rovider located in India or else!here. +he Policy also covers the activities# !hich are art of core function of the management and are not ermitted to be outsourced. Po)icy on nsurance Cover for %perationa) Risks: +he Policy covers role of insurance in o erational ris" management as a mitigation measure# ob4ectives and advantages of insurance olicy# evaluation !hile ta"ing insurance olicies etc. Business )ine Po)icy: Based on 'BI guidelines# Business line Policy is ut in lace# !hich is being revie!ed annually.

$ega) Risk Management Po)icy: +he Ban" has ut in lace ?egal 'is" Management Policy# !hich covers ob4ectives# assessment# nature# mitigation of ?egal 'is" etc. Po)icy on Business Continuity P)an for %verseas Branc!es: +he Ban" has ut in lace olicies for Business 6ontinuity Plan !hich covers ?ondon# Hong 1ong# %hanghai Branches.

Comp)iance Po)icy: +he Ban" has in lace a 6om rehensive 6om liance Policy. As er the Policy ado ted by the Ban"# suitable organi@ational structure has been laid do!n defining the roles and res onsibilities for 6om liance =fficers of various 5ings# De artments# %ubsidiaries# 6ircle =ffices# other o erating units# branches both in India and abroad as also D9change Houses abroad# so as to address grou !ide and multi 4urisdictional 6om liance 'is". %uitable re orting system is also ut in lace to ensure effective im lementation of 6om liance Policy Ban" !ide.

BG

5(/8 %perationa) Risk capita) assessment: +he Ban" has ado ted Basic Indicator A roach for calculating ca ital charge for = erational 'is"# as sti ulated by the 'eserve Ban" of India. Basic indicator a roach# %tandardised a roach and Advanced Measurement ly the Basic

A roach are the three methodologies allo!ed under Basel II for arriving at the ca ital charge for o erational ris". 'BI has advised the ban"s to a a Indicator A roach to migrate to Basel II in the beginning. Under Basic indicator roach# ban"s have to hold ca ital for o erational ris" e0ual to a fi9ed ercentage of the average of ositive annual gross income over the revious 2 years. +hus# ca ital charge under Basic indicator a !here# J 1Bia T 6a ital charge under Basic Indicator A roach J FI T +otal gross income over the revious three years J A T 1;Q J n T 3o. of years i.e 2 years for !hich income is ositive. roach 1Bia T &FI C n) 9 A#

B.

C7a#ter / CRE1 " R#" '3 &R#ME >%RG BCR&C

6( CRE1 " R#" '3 &R#ME >%RG BCR&C

6(/ ntroduction: 6redit 'ating <rame!or" &6'<) is one of the ris" measurement techni0ues the ban"s use to a great e9tent under ris" management system. +his is used rimarily
G-

to standardi@e and uniformly communicate the 4udgment in credit selection rocedure and not as a substitute to the vast lending e9 erience accumulated by the Ban"s rofessional staff. In line !ith the guidelines of 'BI# the Ban" has ro osed to bring in all the borro!ed accounts &%tandard accounts) !ith limits of 's.* la"h and above under the urvie! of credit ris" rating. Ho!ever# the rating model that !ill be a lied varies according to the ty e C e9tent of e9 osure to suit the borro!ers activities. +he Ban" is utili@ing their o!n internal 6redit 'ating Model for grading the borro!ed accounts so far. +he grades used in the internal credit ris" grading system should re resent !ithout any ambiguity# the default ris"s associated !ith an e9 osure. +his system shall also enable the Ban" to underta"e com arison of ris" for the ur ose of analysis and decision ta"ing. 3umber of grades used in 6'< de ends on the antici ated s read in credit 0uality of the e9 osure of the Ban". +he more the number of grades on the rating scale# the more the re0uirement of information. Hence# 'BI suggests that the Ban" can initiate the ris" grading activity on a relatively smaller scale initially and introduce ne! categories as the ris" gradation im roves. As suggested by 'BI the . level in the grading scale and the cut off level for ,Acce table and unacce table credit ris"K are$ +he calibration on the rating scale !ill allo! rescri tion of limits on the ma9imum 0uantum of e9 osure ermissible for any credit ro osal. +he 0uantum

!ould de end on the credit score on the 6'<. +he Ban" normally does not ta"e any fresh e9 osure in the unacce table level of scale of ris". Any ta"eover of fresh borro!ers to com ly !ith the follo!ing norms$
G1

1) Minimum 6urrent 'atio of 1.22 consistently for the last 2 years. *) Minimum 6urrent 'atio of 1.1B and 2) 6urrent 'atio of at least 1.-- is sti ulated for e9ce tional cases. As regards e9it# the Ban"s ?oan Policy ermits for e9it even !hen the account remains under %tandard category if any !arning signals are seen. +he other mode available# if com lete e9it is felt im ossible# by containing the e9 osure at the same level# ris" artici ation and o t for recovery !herever !arranted. +he assignors of ris" ratings utili@e bench mar" or re s ecified standards for assessing the ris" rofile of the borro!er# es ecially# the financial ratios# are directly com ared !ith the s ecified bench mar"s. <urther assignment of !eightage is related to the level of the ris" arameters !hich !eigh more for altering the ris" rofile of the borro!er. 6(+ 'eed for Credit Risk Rating: +he need for 6redit 'is" 'ating has arisen due to the follo!ing$ 1. 5ith dismantling of %tate control# deregulation# globali@ation and allo!ing things to sha e on the basis of mar"et conditions# Indian Industry and Indian Ban"ing face ne! ris"s and challenges. 6om etition results in the survival of the fittest. It is therefore necessary to identify these ris"s# measure them# monitor and control them. *. It rovides a basis for 6redit 'is" Pricing i.e. fi9ation of rate of interest on lending to different borro!ers based on their credit ris" rating thereby balancing 'is" E 'e!ard for the Ban". 2. +he Basel Accord and conse0uent 'eserve Ban" of India guidelines re0uires that the level of ca ital re0uired to be maintained by the Ban" !ill be in
G*

ro ortion to the ris" of the loan in Ban":s Boo"s for measurement of !hich ro er 6redit 'is" 'ating system is necessary. 8. +he credit ris" rating can be a 'is" Management tool for ros ecting fresh borro!ers in addition to monitoring the !ea"er arameters and ta"ing remedial action. +he 6redit 'is" 'ating method is used by Ban":s 6redit officers# U +o gather "ey information about ris" areas of a borro!er and U +o arrive at a ris" score credit!orthinessCdegree of ris". 6(, Credit Rating: +he Bank considers rating of a *orro.a) account as an important too) to manage t!e credit risk associated .it! any *orro.er and according)y a Kt.o dimensiona) credit rating systemK !as introduced in the Ban". %oft!are driven rating C scoring models for different segments have been customi@ed to suit the Ban"s re0uirements. 6redit 'ating 1. =bligor 'ating <inancial Parameters Managerial Parameters Industrial Parameters = erational Parameters
G2

that

!ould

reflect

the

borro!er:s

*. <acility 'ating &6ollateral %ecurities) AAA ?o!est 'is" AA A ?o!er ris" ?o! 'is"

BBB Moderate ris" 7 Dntry ?evel BB B 6 D D High ris" Higher ris" Highest ris" Absolute ris" 6aution ris"

6(- CR& at Canara Bank: +he conce t of 6redit ris" rating !as introduced in our Ban" vide H= cir 1AGC.. in res ect of H= Po!er accounts &Under manufacturing activity only) having an e9 osure of 's. G crores and above. +he e9ercise has so far been underta"en only as a ost sanction e9ercise and not used as a re sanction tool. As er 'BI guidelines on Integrated 'is" Management of Ban"s# all e9 osures across the Ban" have to be ris" rated. In this regard# IBM/B6%# Ban" a <rame!or" for the Ban". ointed 6onsultants recommended the follo!ing in res ect of 6redit 'is" Management

S#'C" %' '3 P%>ER DFM A3D AB=>D

1E"# $S %& EJP%S;RES C%9ERE1 +y ically large G8

R#" '3 M%1E$ 'is" Assessment

value 6'I%I?%

e9 osures. &i.e. above 's. *-- lacs) 6MCDM A3D AFM +y ically medium si@ed D9 osures. &i.e. above 's.2lacs) B'A36H P=5D' A66=U3+ +y ically small value D9 osures. "a*)e /7

Model &'AM)

Manual 'ating Model.

Portfolio Model A roach

+he u graded 6'I%I?s 'AM model for DFM Po!er accounts and above has been got a roved by the Board and is introduced in Bangalore 6ircle initially on a ilot basis and shall be got e9tended to all circles in a hased manner.

6(2 1raft guid)ines on E)igi*i)ityE Periodicity etc(E app)ica*)e to manua) rating mode) for CM:1M D #3M po.er accounts: +he Manual Model develo ed by the Ban" is a licable in res ect of all accounts

falling under the 6MCDM and AFM o!ers e9ce ting the follo!ing categories$ 1. ?oans under 'etail lending schemes# e9ce ting loans under +raders %cheme# but including educational loans. *. Individual non riority loans for non roductive ur ose. 2. Agricultural loans including gold loans. 8. Any other schematic loans. ;. %taff loans.

G;

A. >aluable %ecurity loans and other loans against the a roved securities. B. Premises loans

rime security of

+he models are designed for 2 categories vi@.# Industrial accounts# +rading accounts and 3e! accounts. +his is based on the remise that any activity underta"en for roductive ur ose can be classified under these broad categories. Activities such as 6onstruction contractors# 'eal Dstate# 6ommission Agents etc may not strictly fall into either industrial or trading activity. Ho!ever# for the limited ur ose of ris" rating a borro!er coming under the above categories# the follo!ing may be ta"en note of$ 1. 6onstruction contractors# 'eal Dstate may be brought under industrial accounts model. *. 6ommission agents or any intermediary activity may be brought under trading model. If manufacturing activity is not there# ma4or ortion of the sales is by trading# then it may be ta"en under trading model. ,3e! accountsK for the limited ur ose of ris" rating may include accounts !hich have dealings !ith our ban" u to a eriod of * years. In res ect of +erm loans# !herever ro4ect a raisal is re0uired to be underta"en#

rating e9ercise of such accounts may be underta"en after recei t of P<Ds re ort duly ta"ing into account the ris" factors as erceived by P<DCP<6. In res ect of term loans to traders# there is no s ecific rovision for +? arameters in the ro osed model. Ho!ever# any term loan for a trader !ould li"ely to involve only urchase of items such as office e0ui ments# construction of office s ace etc and as such the e9isting model itself can be made use of.
GA

In res ect of arties en4oyingCsee"ing only non fund based limits also# the rating e9ercise has to be underta"en e9ce ting in instances !here 1--Q margin is available. In res ect of 6onsortium accountsCMBA accounts# !here our Ban"s share falls !ithin 6MCDM E AFM o!ers# rating shall be done using this model. Periodicity: 'is" 'ating of a borro!al account shall be done before sanction of a fresh loanClimits and rene!al of limits !ith a eriodicity not e9ceeding one year. In res ect of accounts# !here the tenability of limits have been e9tended# ris" rating shall be carried out on the e9 iry date of limits# even though rene!al of limits have not ta"en lace. In res ect of single transaction +erm ?oans &!here the arty is not en4oying any 56 limits) rating shall be done annually. 'is" rating shall be done based on audited balance sheet only. In case of non/availability of AB% as at the time of rene!al# rating shall be done based on the revious years AB%# if not done already. If it is done already# the same shall be continued. In such cases# rating shall be done immediately on recei t of AB% !ithout !aiting for rene!al. #ut!ority for rating: +he recommending Authority for the 6redit 'is" rating shall be the Manager &6redit)# in res ect of >?BCD?Bs and the Manager in/charge# '= in res ect of '= o!er accounts. %anctioning authority !ill be vested !ith the o!er for confirming the rating of an account. In res ect of D?BC>?Bs# the rating !ill be done at the branch level itself and the rating !ill be confirmed by the res ective AFMC6M of the branch. In
GB

res ect of '= o!er accounts# branches shall ensure to furnish all the re0uired articulars to the concerned '= !hile submitting the credit re ort at the time of rene!al &as er the Anne9ure). +here may be instances of borro!al accounts falling under higher authoritys o!ers# than AFMCDM for reasons such as current ratio less than 1# grou conce t# ta"eover of borro!al accounts etc. In such cases# '=s after obtaining relevant articulars from the branch ris" rate the account and the same shall form a art of the ro osal. In short# for the ur ose of ris" rating an account under Manual model# the 0uantum of limit ro osed shall be the guiding factor and not the sanctioning authority !herever the sanctioning authority ha the ran" of AFM. +here may also be cases# !here an account !hich is falling under normal branch o!ers but comes under '= o!ers for any of the reason such as current ratio is less than 1# grou conce t etc. In such accounts# ris" rating as er manual model need not be underta"en since for branch o!er accounts se arate ortfolio model a roach !ill be ut in lace in due course. licable only in case of %tandard assets. ens to be above

3ormally# ris" rating e9ercise is a

Ho!ever# there may be accounts !hich may fall into substandard category# !here the unit is running and the ban" may be contem lating revivalCrehabilitation. Hence# ris" rating e9ercise may have to be carried out in such cases also !here o erations are ermitted&either holding on o eration or regular rene!alCe9tension) in the account till such time# a final decision is ta"en on the account to initiate recovery ste s or other!ise. In res ect of accounts !hich are classified DoubtfulC?oss assets and also accounts !hich are mar"ed for recovery# all such accounts may be classified under IHighest
GG

'is" category.&'is" rating of such accounts may not be ossible for !ant of re0uired articulars) Ho!ever# if rehabilitation is ta"en u after the account is transferred to DoubtfulC?oss or ?PD category# then the same shall be ris" rated before any rehabilitation is ta"en u . Due to enhancement in limits in bet!een t!o rene!als andCor due to single transactionCadhoc limits# an account may come under the urvie! of 6MCDM or AFM o!er.& reviously# the account !ould have been under branch o!ers and might not have been ris" rated ) In such cases# the ris" rating e9ercise has to be underta"en and the branch shall furnish necessary ro osal. +hough I+'ADD'% %6HDMD is brought under the urvie! of 'etail lending schemes# accounts under +raders scheme falling under 6MCDM EAFM o!ers !ill have to be ris" rated. +he grade allotted to an account during the ris" rating shall be mentioned in the Mid +erm 'evie! of the account and the ma4or ris" factors# if any# may be commented u on. &a licable only in res ect of AFM o!er accounts) articulars along !ith the

<or any borro!al account to be graded above Frade > &i.e. III# I># >) the borro!er has to necessarily obtain a minimum score of *. under <inancial 'is".

G.

C7a#ter 0 R SG #SSESME'" M%1E$S

0! Risk Assessment Mode$s

8(/ ntroduction:

.-

6redit ris" assessment and measurement is through the internal rating rocess. Ban" !ould enlarge the system to ca ture various credit ris" com onents &Probability of Default# ?oss Fiven Default) over a eriod and in tune !ith the Ban"s re aredness for ada tion of advanced a roaches on ca ital ade0uacy frame!or" of Basel II. +he ris" rating of eligible borro!ers is a re sanction e9ercise as er Ban"s olicy. +he measurement of ris" is achieved through the credit ris" rating and scoring models ut in lace by the Ban". +he credit ris" assessment hel s the Ban" to measure !hether the otential borro!ers !ill be able to meet their loan obligation in accordance !ith the contractual agreements. All borro!ers !ith limit of * la"hs and above are to be rated individually and under the a ro riate ris" rating models develo ed for the ur ose. +he rating !ill be based on financial re orts as !ell as recent information available !ith the Ban". 8(+ Rating Mode): +he 6redit 'is" 'ating is conducted using any of the follo!ing 8 models as a licable. /( Risk #ssesment Mode) BR#MC: +his model is a licable for the borro!al accounts !ith sanctioned limit of over 's.* crore.

+( Manua) Mode): +his is a licable for borro!al accounts !ith sanctioned limit of over 's.*- lacs and not more than 's.* crore.

,( Sma)) 9a)ue Mode):

.1

+his model is a licable for borro!al accounts !ith sanctioned limit of 's.*.-- la"hs and not more than 's.*-.-- la"hs.

-( Portfo)io Mode): +he Borro!al accounts of aggregate limits belo! 's. * lacs and borro!al accounts !here financial statements are ris" rated under ortfolio model# duly grou ing the accounts as near homogenous ool based on category of borro!ers and loan schemes C segment. +he model covers rating of borro!al accounts classified under Priority and non riority segments. +he riority sector loans include both Direct and Indirect Agricultural loans# and 3on riority sector loans include those under schematic lending under 'etail schemes.

+he Ban" has several models under 'AM develo ed for sub4ecting the borro!ers to 6redit 'is" 'ating and the models are s ecific for segments vi@. ?arge cor orate# ?arge traders# %mall traders# M%MD# 3B<6# %toc" Bro"ers# Infrastucture# Freenfield ro4ects# 'eal estate sector# Ban"s C <Is and %ervices. 6redit ris" is measured as a function of financial# industry# business and management ris". +he rocess of rating identifies and assesses the relevant internal and e9ternal ris" factor leading to the ris" elements. +he Ban" has laid do!n guidelines for identifying the arameters under each of these ris"s as also assigning !eighted scores thereto and rating them on a scale of G. Accordingly# all the eligible borro!al accounts of credit limit of 's. * la"hs and above are sub4ected to credit ris" rating. 6redit 'is" 'ating shall also be a management information tool for measuring the credit !orthiness of borro!ers. It also acts as on ongoing monitoring tool and hel s in identifying !arning signals facilitating corrective action.
.*

+he 'is" rating models are sub4ected to revie!. As and !hen the need is felt# the models are revie!ed and refined based on the ris" erce tion# ast e9 erience and changes in the Ban"s lending olicy. Ban" shall revie! the a ro riateness of the rating system and validity of grading criteria on an ongoing basis. =nce the ris" rating e9ercise at 6ircle under 'AM stabili@es and MI% related to rating !ill be available# the follo!ing measures !ill be attem ted$ %ti ulating 0uantitative e9 osure cealing based on rating categories.

D9 and the a licability of Pricing of credit lin"ed to credit ris" rating to more e9 osure.

Using credit ris" rating decision ma"ing tool in res ect of all accounts. 6onducting migration analysis and estimation of robability of defaults of different segments of business.

D9it olicy 7 In order to define the D9it olicy formally# Ban" need to have a default model to redict the Probability of Default &PD). At resent the Ban"s e9it olicy sti ulates that account rated as High ris" shall be monitored closely and decision ta"en for e9it from the e9 osure.

.2

Risk gradation sca)e for manua) rating mode) .ou)d *e as under:

%vera)) Risk Score Range B%;" %& /27C V1-VG; but W1-VB- but W G; V;; but W BV8- but W ;; W than 8-

Risk 3rade L

1E& ' " %' %& R SG

3R#1E 1E& ' " %'

?o! 'is" / ?' 2 9 9 9 9 9 3ormal 'is" Moderate 'is" High 'is" 7 H' 1 High 'is" 7 H' * High 'is" / H' 2 "a*)e //

F==D Average standing Average standing !ith !ith relatively relatively !ith higher lo!er

Belo! average higher standing

relatively

Belo! average !ith relatively lo!er standing Poor

L "!ere .i)) *e no grade under D in Manua) Mode) Rating as t!e rating is capped at 3rade as suggested *y BM M BCS(

.8

8(, 1raft va)ue statements for industria) accounts under manua) mode) for

CM:1MD #3M po.er accounts

B/C Management 0ua)ity : (a) Management Experience : i) ii) iii) iv) +he romoters have been in the trade for more than a decade and are !ell e9 erienced. +hough the romoters are in the trade over ; years# they are !ell su orted by e9 erienced rofessional directorsCem loyees. +he romoters are in the trade for 8 to ; years but rofessional bac" u Ce9 erience is lac"ing. Management is totally ne! in the venture !ithout ade0uate rofessional e9 ertise. ! 5 4

(b) Succession p"anning : i) ii) iii) iv) +here is a !ell defined delegation of duties and res onsibilities and the unit is run !ith a good strategy for succession Delegation and role lay is !ell defined but no lans for succession. +he management de ends on a fe! rofessionals !ithout any lan for succession +here is one man sho! in the conduct of affairs of the 6om any. ! # $

(c) %inancia" contro" : i) ii) iii) iv) Management has got a rigid control over financial deviations from the lan are negligible. lanning and 4

<inancial lanning is satisfactory but deviations leading to tem orary aberrations are observed. 3o definite future ca ital lan but is having satisfactory control over finances. <re0uent changes in financial lan and lac" of effective control in .; ! #

e9 enditure

(&) 'abour Re"ations : i) ii) iii) iv) Maintaining e9cellent industrial relations and no stri"eClabour unrest over the ast 2 to ; years. ?abour relations are satisfactorily maintained !ith occasional disru tions. 6hances of disru tions due to labour relations are envisaged due to lac" of olicy guidelines. 6hances of disru tions due to labour relations are high. ! # $

B+C &inancia) ReportingE M SE Rene.a) of )imits : (a) Submission of A(S)P(S* Rene+a" papers : i) ii) iii) iv) %ubmission is !ithin one month from balance sheet dateCe9 iry date %ubmission is !ithin 2 months from balance sheet dateCe9 iry date Delay in submission is !ithin A months from balance sheet dateCe9 iry date Inordinate delay &more than A months) observed ! 5 4

(b) Submission of %ee& (ack ,ata : i) ii) iii) iv) %ubmissions is rom t !ithin the sti ulated date %ubmission is satisfactory# !ithin a normal delay of B days from the due date Delay of more than a !ee" but !ithin 1; days from the sti ulated date 3ot being submitted regularly. # 5 4

B,C #ccount Be!aviour:"rack Record :

.A

(a)Repa-ment of .nsta"ment).nterest),e/o"/ement Returns 3ransgressions : i) ii) iii) iv) 3o such irregularity during the revie! eriod

of

'0)01e2ue

)(i"" 4 5 4 !

3o such irregularity during the revie! eriod e9ce ting for occasional transgressions Delay in ayment of interestCfre0uent transgressions are observed during the revie! eriod Delay in ayment of instalmentCinterest# occasional devolvement# gre0uent transgressions# invocation of BF etc.

(b) 0omp"iance of Sanction 3erms : i) ii) iii) iv) All sanction terms com lied !ith !ithin the s ecified time frame. %anction terms are com lied !ithin 2 months including II chargeC(oint documentation. %anction terms are com lied !ithin one month E II chargeC(oint documentation !ithin A months. Delay in com liance of sanction terms is more than a month and II chargeC(oint documentation more than A months. # 5 4

(c) Passing of 3urno/er in t1e Account : i) ii) iii) iv) Dntire turnover assed on to usC rorate business turnover assed on to us %hortfall in turnover negligibleC4ustifiable assed on in the accountC rorate share is ! # $

+urnover assed on in the account is not satisfactory. +urnover assed on in the account is oor

B/C Business Risk : (a) 0ompetition an& Market Risk : .B

i) ii) iii) iv)

6om etition is steady and im roving mar"et share 6om anyCfirm is one of the fe! leading commodities that are dealt in layers dealing in the

6 4 5

6hances of losing mar"et share is there in vie! of insi id sales gro!th Insignificant mar"et share and no gro!th in sales

(b) .n&ustr- profi"e : i) ii) iii) iv) +he gro!th otential of the industry is very high +he gro!th otential of the industry is satisfactory +he gro!th otential of the industry is marginal +here is no otential for gro!th in the industry 4 5 4 !

(c) ,esirabi"it- of Exposure to t1e .n&ustr- : i) ii) iii) iv) +he industry ros ects are good &as in i E ii above) and the e9 osure is desirable. +he industry ros ects are marginal but the com anys gro!th is e9cellent and the e9 osure is desirable. +he industry ros ects are marginal but the 6om anys dealing !ith the ban" are satisfactory. +he industry ros ects are oor# the com anys gro!th is average# the e9 osure is not desirable # 5 4

(&) 3ec1no"og- ,e/e"opment : i) ii) iii) +he 6om any is having a good 'ED de artment and is e0ui ed to fact latest technological develo ment +he 6om any is ca able of facing technological advancement +he 6om any re0uires attention in the area of technological advancement 5 4 !

.G

iv)

+he 6om any is not e0ui ed to fact technological advancement

B+C Product C!aracteristics : (a) A/ai"abi"it- of substitutes)bran&e& pro&ucts : i) ii) iii) iv) Has a range of roducts and has an e9clusive niche mar"etCavailability of substitution may not im act. Has an established brand that is !ell receivedCcaters to an established brand# availability of substitution may not im act Product range is narro!Csmall chea er im act substitutesCbranded roducts !ill im act. %ingle roduct com any and maintaining sustained gro!th is difficult. 5 5 4

(b) En/ironmenta")Regu"ator- risk : i) ii) iii) iv) 3o regulatoryCenvironmental ris" is e9isting DnvironmentalC'egulatory ris" are ade0uately ta"en care of by the com any. Dnvironmental ris" e9ists and re0uires constant vigil. 'egulatory ris" !ill not im act. Demanding environment# regulatory norms # 5 4

(c) Export potentia" : i) ii) iii) iv) >ery good e9 ort otential and !ell e9 loited 3o e9 ort otential but local demand is very good 3o e9 ort otential but local demand is satisfactory. 3o e9 ort otential and local demand is sluggish ! # $

(&) .nputs accessibi"it- :

..

i) ii) iii) iv)

Dasy availability# steady rice# availability of substitute in uts etc. Fenerally availableCmore or less steady rice !ith ade0uate su ly

5 5

Highly de endent on critical ra! materials and rice variation cannot be assed on to customers D9tremely seasonal availability !ith e9treme rice fluctuations !

B,C Customer:Supp)ier re)ations!ips : (a) Sprea& of customer an& re"ations1ip : i) ii) iii) iv) Dstablished long lasting relationshi !ith clientsCsu !ell s read out clientele base 'elationshi and s read of clientele base is satisfactory 6lientele base re0uires im rovement. Alternate su develo ed. liers need to be ! liers and has a 4 5

3arro! clientele base !ith one or t!o clients &such as govt.Csemi/ govt.CP%U) and su ly chain not !ell established.

(b) 7oo& "ong term contracts : i) ii) iii) iv) ?ong term contracts com aniesCre uted firms !ith !ell established Blue/6hi 5 4 ! #

6ontracts are on rene!alCrollover basis and continuity of contracts ensured % ecific big contracts on one time basis re0uiring constant contacts for re eat orderCrene!al 6ontracts are for smaller amount !ithout a clause for rene!alCroll overCre eat orders

(c) Marketing 8et+ork : i) 5ell established mar"eting net !or" 1--

ii) iii) iv)

3o se arate mar"eting net!or" but satisfactory mar"eting ractices are follo!ed Mar"eting effort re0uires im rovement Mar"eting efforts are not satisfactory.

! # $

&inancia)s : (#) Earning)7ro+t1 3ren&s : i) ii) iii) iv) 6onsistent gro!th in rofit and sales for the ast 2 to ; years 6onsistent gro!th in rofit and sales for the ast 2 to ; years !ith slight fluctuation in one or * years. +here is fluctuation in gro!th both under sales and rofit but there is no cause for concern Fro!th in sales is average and gro!th in declining in ast 2 to ; years. rofits is stagnant or #$ 6 5

(!) ,.S.0.R (in case of 3erm 'oan on"-) : i) ii) iii) iv) V 1.B; V 1.;- W 1.B; V 1.*; W 1.;W 1.*; 6 4 5

(a) (ank borro+ing to sa"es (in case of 9orking 0apita" "imits) : i) ii) iii) iv) U to *-Q V *-Q W *;Q V *;Q W 2;Q V 2;Q 1-1 6 4 5

( ) 3:')389 : i) ii) iii) iv) *.; and less V *.; W 2.; V 2.; W 8.; V 8.; 6 4 5

(4) :perating P(.,3):perating .ncome : i) ii) iii) iv) V G.; V B W G.; V ;.; W B W ;.; 6 5 4 !

(5) 'i2ui&it- : (a) 0urremt Ratio : i) ii) iii) iv) 1.22 1.*; W 1.22 1.88 W 1.*; W 1.18 ! # 4

(b) .n/entor- ; Recei/ab"es)Sa"es (,a-s) : i) ii) iii) iv) W .- days V .- days W 1*- days V 1*- days W 1;- days V 1;- days ! # 4

1-*

(5) Ac1ie/ement of Pro<ection /is-=-/is estimates : i) ii) iii) iv) V .;Q V G; W .; V B- W G; W B6 5 5

8(- Rating s!eet of #BC BPC $"1( M ndustria) account mode) Scoring S!eet Parameters

B/) Management >ua"it-:

1-2

S)( 'o( i) ii) iii) iv) Management D9 erience %uccession on lanning <inancial control ?abour relations %ub/total &A)

"ota) Marks ; 2 8 2 1;

Marks #.arded

Remarks

B+) %inancia" reporting* M.S* Rene+a" of "imits: S)( 'o( i) ii) %ubmission of AB%CPB%# 'ene!al a ers %ubmission of feed bac" data %ub/total &B) "ota) Marks ; ; 1Marks #.arded Remarks

B,) Account be1a/iour)3rack recor& : S)( 'o( i) 'e ayment of instalmentC int.Cdevolvement of ?6C 6he0ueCbill returnsC+ransgression 6om liance of sanction terms Passing of turnover in the account "ota) Marks B Marks #.arded Remarks

ii) iii)

; 2

1-8

%ub/total &6)

1;

"%"#$ SC%RE &%R M#'#3EME'" 0;#$ "@ B#NBNCC

"ota) Marks -7

Marks #.arded

Business Risk
B/) 0ompetition an& Market Risk: S)( 'o( i) ii) iii) iv) 6om etition Industry rofile Desirability of e9 osure to the industry +echnology develo ment %ub/total &A) "ota) Marks G B ; ; *; Marks #.arded Remarks

B+) Pro&uct c1aracteristics : S)( 'o( i) ii) Availablity of substitutesC branded roducts DnvironmentalC'egulatory 'is" "ota) Marks A ; Marks #.arded Remarks

1-;

iii) iv)

D9 ort otential In uts accessibility %ub/total &B)

2 A *-

B,) 0ustomer)Supp"ier re"ations1ips : S)( 'o( i) ii) iii) % read of customer and relationshi Food long term contracts Mar"eting 3et !or" %ub/total &6) "ota) Marks B ; 2 1; Marks #.arded Remarks

"%"#$ SC%RE &%R B;S 'ESS R SG B#NBNCC

"ota) Marks 47

Marks #.arded

&inancia)s
S)( 'o( i) ii) DarningCFro!th trends D%6' or Ban" borro!ing to sales "ota) Marks 1G Marks #.arded Remarks

1-A

iii) iv) v)

+=?C+35 = erating PBID+C = erating Income ?i0uidity B.1 6urrent ratio B.* Inventory R 'eceivablesC%ales

G G

8 8

vi)

Achievement of ro4ection vis/X/vis estimates +=+A?

;-

9
S)( 'o( i) ii) iii)

Summary
"%"#$

%core for Management Suality %core for Business ris" %core for financials "%"#$

8(2 1raft va)ue statements for ne. accounts under manua) mode) for

CM:1MD #3M po.er accounts

Management 0ua)ity :
(a) Management Experience : i) Promoters are having e9 erience in the line of activity for more than !$

1-B

1- years ii) iii) iv) Promoters are having e9 erience in the line of activity bet!een ; and 1- years Promoters are having e9 erience in the line of activity less than ; Yrs. 3o e9 erience #5 #$ 5

(b) 3ec1nica" >ua"ification : i) ii) iii) iv) =ne or more Promoters are technically 0ualified Promoters have availed the services of +echnocrat De ends u on e9 erienced technician !ithout engaging rofessional eo le 3o su ort for technical "no!ledge !$ #5 #$ 5

(c) Market Reports : i) ii) iii) iv) Highly satisfactory !ith good re utation 'e uted family and satisfactory re ort <irst generation romoterCs not much heard for in the mar"et Promoters !ith bad trac" recordCUnsatisfactory re orts !$ #5 #$ 5

Business Risk :
(a) 0ompetition : i) ii) iii) iv) A fe! layers e9ist in this line &?ine of activity) Many layers e9ist but there is room for more layers Additional layers can survive only !ith 0uality roducts =verca acity e9ists in the industry #5 #! #$ 5

1-G

(b) .n&ustr- Profi"e : i) ii) iii) iv) +he gro!th otential of the industry is high +he gro!th otential of the industry is satisfactory. +he gro!th otential of the industry is marginal +here is no otential for gro!th in the industry #5 #! ? 5

(c) Pro&uct 01aracteristics : i) ii) iii) iv) Has a range of roducts and has an e9clusive niche mar"etCavailability of substitution may not im act Has an established brand that is !ell receivedCcaters to an established brand availability of substitution may not im act Product range is narro!Csmall chea er im act substitutesCbranded roducts !ill im act %ingle roduct com any and maintaining sustained gro!th is difficult #$ 6 5

(&) Marketing : i) ii) iii) iv) =ne or more romoters have ade0uate mar"eting e9 erience %e arate mar"eting divisionC3et!or" ta"es care of mar"eting 3o se arate mar"eting net!or" but follo!s satisfactory mar"eting ractices Mar"eting re0uires im rovement #$ 6 5

&inancia)s : (a) 0apita" : i) ii) Promoters sta"e in the business is more than ;-Q Promoters sta"e in the business is more than *;Q 1-. #$ 6

iii) iv)

Promoters sta"e consists of unsecured borro!ings !hich are available for subordination Promoters sta"e is yet to be tied u

(b) Abi"it- to mobi"ise fun&s : i) ii) iii) iv) Highly ca able %atisfactory De endence on mar"et borro!ings 3ot satisfactory #$ 6 5

(c) Pro<ections : i) ii) iii) iv) 6onservative estimate and easily achievable 'easonable estimate and achievable = timistic estimates and re0uires roning do!n Highly o timistic and not viable #$ 6 5

(&) Pro<ecte& ,S0R (in case of 3' on"-) : i) ii) iii) iv) V 1.B;Q V 1.;-Q W 1.B;Q V 1.*;Q W 1.;-Q W 1.*;Q #$ 6 5

(e) Pro<ecte& (( : Sa"es : i) ii) U to 1;Q V 1;Q W *-Q 11#$ 6

iii) iv)

V *-Q W *;Q V *;Q

111

8(4 SC%R '3 S?EE" &%R 'E> #CC%;'"S

Management 0ua)ity :
S)( 'o( aY bY cY Management D9 erience +echnical 0ualification Mar"et re orts "ota) "ota) Marks ***47 Marks #.arded Remarks

Business Risk :
S)( 'o( aY bY cY dY 6om etition Industry rofile Product characteristics Mar"eting "ota) "ota) Marks 1; 1; 1127 Marks #.arded Remarks

&inancia)s :
S)( 'o( aY bY cY 6a ital Ability to mobili@e funds Pro4ection "ota) Marks 11111* Marks #.arded Remarks

dY

Pro4ected D%6' "ota) BEC

1-7

Summary Score for Management 0ua)ity Score for Business Risk Score for &inancia)s "ota)

112

8(5 1raft va)ue statements for "rading accounts under manua) mode) for

CM:1MD #3M po.er accounts

B/C Management 0ua)ity :

(a) Management Experience : i) ii) iii) iv) +he romoters have been in the trade for more than a decade and are !ell e9 erienced. +hough the romoters are in the trade over ; years# but less than 1years +he romoters are in the trade for less than ; Management is totally ne! in the venture. 5 4 ! #

(b) Succession p"anning : i) ii) iii) iv) <amily business and no cause for concern Promoters are young and have family bac" u Promoters are old but succession by family members is e9 ected Promoters are old and no bac" u for succession 5 4 ! #

B+C &inancia) ReportingE M SE Rene.a) of )imits :

(a) Submission of A(S)P(S : i) ii) iii) iv) %ubmission is !ithin one month from Balance %heet date %ubmission is !ithin three months from Balance %heet date %ubmission is more than three months but less than A months %ubmission is above A months ! # 4

118

(b) Submission of %ee& back &ata : i) ii) iii) iv) %ubmission is !ithin a !ee" from the due date %ubmission is !ithin 1; days from the due date. %ubmission is !ithin 2- days from the due date. %ubmission is more than 2- days from the due date. ! # $

(c) Rene+a" of "imits : i) ii) iii) iv) ?imits are rene!ed !ithin 1 month ?imits are rene!ed !ithin 2 months ?imits are rene!ed after 2 months but less than A months ?imits are rene!ed !ith a delay of more than A months ! # $

B, C #ccount Be!aviour:"rack record :

(a) Repa-ment of interest : i) ii) iii) iv) Interest is aid rom tly !ithin a !ee" Interest is aid !ithin 1; days Interest is aid !ithin 2- days Delay in ayment of interest is more than 2- days ! # 5

(b) 3ransgressions : i) ii) iii) iv) 3o transgressions during the revie! eriod +ransgressions in the account are not fre0uent and are regulari@ed rom tly ! # 5

+ransgressions in the account are not fre0uent but slight delay observed in regulari@ation +ransgressions is fre0uent !ith delay in regularisation4

11;

(c) 0omp"iance of sanction terms : i) ii) iii) iv) %anction terms are rom tly com lied !ith %anction terms are com lied !ithin one month %anction terms are com lied !ithin three months Delay in com liance !hich is more than 2 months ! # 5

(&) 3urno/er in t1e accounts : i) ii) iii) iv) +urnover in the account is reflecting the actual turnover +urnover in the account is more than the actual sales but 4ustified +urnover in the account is not as er actual sales but no cause for concern +urnover in the account is not satisfactory ! # 5

(e) 01e2ue)(i"" return in t1e account : i) ii) iii) iv) +here are no che0uesCbills returns in the account +here are occasional 6he0ueCbills returns 6he0ueCbills returns observed leading to tem orary imbalance <re0uent che0uesCbills returns in the account ! # 5

(f) :peration in t1e account : i) ii) iii) = eration in the account is satisfactory +ransfers to sister concern observed but only for trading activity <re0uent transfers to sister concern re0uiring clarification 11A ! 5

iv)

<re0uent transfer to sister concernCdebits not activity

ertaining to trade

Business Risk :
(a) 0ompetition : i) ii) iii) iv) +here is no com etition in the nearby area 6om etition is e9isting but not a threat 6om any has to e9ist among stiff com etitionCfaces difficulty in sustaining gro!th Heavy com etition leading to ins id gro!th #5 #! ? 5

(b) 'ocationa" a&/antage : i) ii) iii) iv) ?ocated in an area !ith huge demand ?ocated among com etitors but standing is long &V 1- years) ?ocated among com etitors but !ith a standing of ; to 1- years 3o locational advantage #5 #! #$ 5

(c) 0ommo&ities tra&e& : i) ii) iii) iv) +raded commodities have consistent demand !ith no seasonal fluctuation Demand fluctuation !ould not im act the gro!th Demand fluctuation results in constant revision according to mar"et trend High fluctuation on demand leading to oor gro!th #$ 6 5

(&) Market perception : 11B

i) ii) iii) iv)

6ash and carry business leading to constant cash flo! Available credit from the su customers lier matches e9tension of credit to

#$ 6 5

?argely de endent on credit sales !ith satisfactory reali@ation ?argely de endent on credit sales but reali@ation is oor

&inancia)s :
(a) Earning)7ro+t1 tren&s : i) ii) iii) iv) 6onsistent gro!th in rofit and sales for the ast 2 to ; years 6onsistent gro!th in rofit and sales for the ast 2 to ; years !ith slight fluctuation in one or * years +here is fluctuation in gro!th both under sales and rofit but there is no cause for concern Fro!th in sales is average and gro!th in declining in ast 2 to ; years. rofits is stagnant or # 5 5

(b) 3:')389 : i) ii) iii) iv) *.; and less V*.; W 2.; V2.; W 8.; V 8.; 6 4 5

(c) 0urrent ratio : i) ii) iii) iv) 1.22 and above 1.*; and W 1.22 1.18 and W 1.*; W 1.18 11G # 5 5

(&) .n/entories ; ,ebtors)sa"es (&a-s) : i) ii) iii) iv) W .- days .- days but W to 1*- days 1*- days but W to 1;- days More than 1;- days # 5 5

(&) .n/entories ; ,ebtors)sa"es (&a-s) : i) ii) iii) iv) W .- days .- days but W to 1*- days 1*- days but W to 1;- days More than 1;- days # 5 5

(e) Sun&r- 0re&itors)Purc1ases : i) ii) iii) iv) W .- days .- days but W to 1*- days 1*- days but W to 1;- days More than 1;- days # 5 5

(f) Stock 1o"&ing /is-=-/is sa"es) : i) ii) iii) iv) W 1 month V 1 month W * months V * months W 2 months V 2 months # 5 5

(g) 8et Profit)Sa"es : 11.

i) ii) iii) iv)

V G.; V B W G.; V ;.; W B W ;.;

5 5

(1) (ank (orro+ings to Sa"es : i) ii) iii) iv) U to *-Q V *-Q W *;Q V *;Q W 2;Q V 2;Q # 5 5

8(6 Scoring s!eet for "rading account

B/C Management 0ua)ity :

S)( 'o( aY bY Management D9 erience %uccession Planning "ota)B#C "ota) Marks ; ; /7 Marks #.arded Remarks

1*-

B+C &inancia) ReportingE M SE Rene.a) of )imits :

S)( 'o( aY bY cY %ubmission of AB%CPB% %ubmission of feed bac" data 'ene!al of ?imits "ota) BBC "ota) Marks 8 2 2 /7 Marks #.arded Remarks

B,C #ccount *e!aviour:"ract record :

S)( 'o( aY bY cY dY eY fY 'e ayment of interest +ransgressions 6om liance of sanction terms +urnover in the account 6he0ue return = eration in the account "ota) BCC "ota) Marks ; ; ; ; ; ; ,7 Marks #.arded Remarks

"%"#$ B#C N BBC N BCC

27

B/C Business Risk :

S)( 'o( aY 6om etition "ota) Marks 1; Marks #.arded Remarks

1*1

bY cY dY

?ocational advantage 6ommodities traded Mar"et erce tion "ota)B1C

1; 1127

&inancia)s :
S)( 'o( aY bY cY dY eY fY gY hY DarningCgro!th trend +=?C+35 6urrent ratio Inventory E DebtorsC%ales %undry creditorsC urchases %toc" holding vis/X/vis sales 3et rofitC%ales Ban" borro!ings $ %ales "ota) BEC "ota) Marks A G A A A A A A 27 Marks #.arded Remarks

"%"#$ B#C N BBC N BCC N B1C N BEC

/27

1**

8(8 #n approac! to va)ue statements given in manua) mode) for credit risk rating of CM:1M D #3M po.er account +he com ilation of value statements furnished in the Manual model re0uires the follo!ing in uts$ 1) Bac"ground of the romoters. *) Brief details about the industryCtradeCbusiness in !hich the borro!er is engaged. 2) Details about the roduct in !hich the borro!er is dealing in including latest technological develo ment# if any. 8) Mar"et re orts about the borro!erCgeneral trend in the industryCtradeCbusiness. ;) 6om etition E mar"eting.
1*2

A) ?atest audited financial statements. B) +rac" record of the borro!er !ith our Ban". G) =ther details connected !ith conduct of the account# submission of feedbac" data etc. All the above information is not resently sought for in the relevant a lication

form# though ma4ority of the information is sought for in res ect of industrial accounts. In res ect of traders and other business# branches are utili@ing 3< ;8G# !here the above details are not incor orated. %uitable modifications in the a lication form incor orating all the above details shall be ta"en u once the manual model stabili@es. +ill then# branches may use the enclosed format to collect the necessary in ut data. +he format is re ared in the form of 0uestionnaire and is common for all the three models. De ending on the model to be used# the a ta"en u licable 0uestions may be for filling u . =nce the format is com leted# all the necessary

information for scoring the value statements can be e9tracted from the same. If any of the arametersCvalue statements are not a converted on a rorate basis. Dg. +echnology Develo ment &industrial accounts model)$ +his may not be a licable to many of the small firms. 3o mar"s need be given for this value statement in such cases. =f the mar"s scored out of *- under Business ris" for a firm is# say 1*# then the same may be converted as 1; out of *; !hile the total score evaluating the total score. licable# then no score need be

given for such arameters and the score arrived at after such e9clusions shall be

1*8

1.

Succession P)aning: +his may be a crucial factor in such of those firms !hich are totally de endent on the romoters vast e9 erience or de endent on any one individuals technical e9 ertise. If the ro rietorC artner on !hom the business is de endent u on is aged&say above A; years old) the ris" factor is high. %imilarly# com anies de ending on any one individuals e9 ertise !ithout ade0uate delegation of duty !ill have higher ris" in the event of such erson leaving the unit suddenly.

*. &inancia) Contro): +his may be ascertained on the firms strategy to meet its financial re0uirements. =ccasions !here the firm is a roaching the ban" too fre0uently for adhocC%+ limits# fre0uent modifications in the term loan ro osal# failure to raise unsecured borro!ings envisaged# fre0uent over dra!ings in the accounts are some of the indicators for lac" of sufficient financial control.

2. $a*our Re)ation: 3ormally labour disru tions may not ha en in mid si@ed firms. Ho!ever if the unit is labour intensive# this is one of the "ey rise factors. <re0uent changes in s"illed man o!er are one of the indicators that the unit is facing difficulties in retaining s"illed labour force.

8. ndustry Profi)e: Dach year 'M !ing# H=# Bangalore revie!s ma4or industries and grou the same into three categories. BranchesC'=s to refer the concerned ?DFM for assuring the industry rofile. <urther IAD# 'M !ing eriodically ublishes rofiles of various industries !hich may also be referred to# besides u dating the "no!ledge through financial eriodicals !hich run articles on the rofile of various industries.

;. "ec!no)ogica) 1eve)opment: If the roduct of any industry is li"ely to become outdated because of faster technological develo ment# the ris" factors !ill be high. <or e9am le# manufacturing of blac" and !hite +>s
1*;

are outdated by introduction of colour +>s. Here again# flat monitors in colour +>s are slo!ly re lacing the e9isting curved monitors etc. +his ris" is redominant in consumer durable industries.

A. Su*stitutes:Branded products: Many units face the ris" of chea im orts availability. Ds ecially various china made roducts are available at cut throat rices in o en mar"etCgrey mar"ets. ?i"e!ise# if the roducts manufactured by our borro!er are facing com etition from branded roducts# then the same !ill ose a ris" factor.

B. Marketing 'et.ork: Many mid ca com anies may not have a mar"eting net!or" as such. Ho!ever their methodsCstrategies for securing orders# mar"eting their roducts have to be en0uired into. +he borro!er may sim ly de end on one cor orate client !ithout e9 anding their clientele base. 5hile a mar"eting net!or" as such may not be re0uired in many cases# it is essential to ensure that the borro!er has alternate strategies to tac"le mar"et otential.

G. "rading Concerns: In res ect of traders# under non riority# it is observed that the branches obtain a lication forms in 3< ;8G. %ince this format may not contain many of the articulars re0uired for ris" rating an account# branches have to necessarily obtain the re0uired articulars in a se arate anne9ure by having dialogue !ith the borro!er# till such time suitable modified format is devised. It may also be observed that the traders model contains lesser areas !here value statements have to be assessed based on the borro!ers rofile as generally# traders may not be !illing to furnish a host of statistical data. Branches have to assess only the arameters under com etition# locational advantage# mar"et erce tion and succession lanning !ith the hel of borro!ers vie!s. All other arameters are self e9 lanatory and are easily accessible.

1*A

.. 'e. #ccounts: <or evaluating the value statements connected !ith the financial ro4ections in a ne! account# branches may refer similar industrial accounts in their ortfolio and based on the installed ca acity# o erating ca acity# erformance of such units# a vie! may be formed. 5herever# the accounts are sub4ected to P<6s a raisal# the vie!s of the a raisal re ort by P<6 may be ta"en as the base for evaluating the value statements. %ince the credit ris" rating e9ercise is a ne! conce t at branch level# !e have made an effort to oint out various intricacies involved in carrying out such an e9ercise. +hese oints enumerated above may be treated only as a guiding factor for ris" rating an account. Ultimately# the sanctioning authoritys individual erce tion based on various factors !ould determine the ris" rated grade of each account. +here is sco e for sub4ectivity !hile evaluating some of the value statements. +he rinci al aim of the branches shall be to remove the element of sub4ectivity cree ing into the ris" rating to the ma9imum e9tent ossible.

.10 &or portfo)ios under t!e standardi=ed approac!:

'ame of t!e credit rating agencies used: +he Ban" has a

roved

follo!ing 6redit 'ating Agencies. Domestic 6redit 'ating Agencies$ 6'I%I?# 6A'D# <I+6H India E I6'A. International 6redit 'ating Agencies$ %tandard E Poor# Moody:s# <I+6H. +he Ban" has also entered into Memorandum of Understanding &M=U) !ith the a rating all ty es of e9 osures. "ypes of exposure for .!ic! eac! agency is used: All the above agencies are a roved for rating all ty es of e9 osures. A descri tion of the rocess used to transfer ublic issue ratings onto com arable assets in the ban"ing boo"s$
1*B

roved Domestic

6redit 'ating Agencies vi@. 6'I%I?# 6A'D# I6'A and <I+6H India for

+he Ban" uses only ublicly available solicited ratings that are valid and revie!ed by the recogni@ed D9ternal 6redit 'ating Agencies# referred as D9ternal 6redit Assessment Institutions &D6AI). 5herever available# the Ban" uses <acility 'ating or Ban" ?oan 'ating for ris" !eighting the borro!er:s e9 osures. 5here Issuer 'ating is available# the Ban" uses such ratings unless the ban" loan is s ecifically rated. +he Ban" does not simultaneously use the rating of one D6AI for one e9 osure and that of another D6AI for another e9 osure of the same borro!er# unless the res ective e9 osures are rated by only one of the chosen D6AIs. <urther# the Ban" does not use rating assigned to a articular entity !ithin a cor orate grou to ris" !eight other entities !ithin the same grou . 'unning limits such as 6ash 6redit are treated as long term e9 osures and accordingly# long term ratings are used for assigning ris" !eights for such e9 osures. 5hile ma ingCa lying the ratings assigned by the D6AIs# the Ban" is guided by the regulatory guidelinesCBan":s Board a roved Policy. 5here e9 osuresC borro!ers have multi le ratings from the chosen D6AIs# the Ban" has ado ted the follo!ing rocedure for ris" !eight calculations$ If there are t!o ratings accorded by chosen D6AIs# !hich ma into different ris" !eights# the higher ris" !eight is a lied. If there are three or more ratings accorded by the chosen D6AIs !hich ma into different ris" !eights# the ratings corres onding to the lo!est * ratings are referred to and higher of those t!o ris" !eights is a lied.

QUANTITATIVE DISCLOSURES 1*G

P%r)i/-'%rs (UND 4ASED 31.03.2010 #elow 1&&' risk weight 1&&' risk weight (ore than 1&&' risk weight )educted ("isk (itigants * +ollaterals , -uarantees) 10!" !. + $!!01. 1 1+ 3#.+! 223 !.13 T%&'e 12

A3o-n) NON5(UND 4ASED 31.03.2010 "!2 $."! 3+2#3.30 1!##1.2! 1#!#!.$1 31.03.200 11+021.3# 33+23."# $0#.#2 $+!!.+$

31.03.200 2 0. 2 21#3 .+ 220$.#! 32$ .32

No)e: E%r'ier 6or M%r/2 200 7 Ris* Mi)i0%n)s (6%/)orin0 on'. Co''%)er%'s) 8ere 9e9-/)e9 6ro3 )2e e1:os-re %n9 on'. ne) e1:os-re 8%s 6-rnis2e9 in )2e res:e/)i;e ris* &-/*e)s %n9 /o''%)er%' :or)ion 9e9-/)e9 8%s s2o8n se:%r%)e'.. T2e /-rren) 9is/'os-res in )2e ris* &-/*e)s %re 3%9e &%se9 on 0ross e1:os-res (i.e. 8i)2o-) 9e9-/)in0 )2e ris* 3i)i0%n)s Co''%)er%'s < =-%r%n)ees).

1*.

C7a#ter '( 1#"# #'#$@S S #'1 '"ERPRE"#" %'

/7( 1ata #na)ysis and nterpretation

1. Does your organi@ation have a documented ris" management olicyP

12-

S ales No
0%

Y es 100%

Almost all the branches of 6anara Ban" have a documented 'is" Management olicy. *. In ursuing organi@ations ob4ectives# you vie!s ris" as$

S ales
an opportunity 10%

a threat 90%

About .-Q of the branch managers of 6anara Ban" see ris" hindrance or threat to the rogress of the organi@ation.
121

2. Ho! im ortant is effective ris" management to the achievement of your organi@ations ob4ectivesP

'is" management ractices hel s to eliminate the various 6redit # Mar"et # = erational ris" in the !or"ing of the organi@ation# so .-Q of the branch managers of 6anara Ban" thin" ris" management is very im ortant in achiving the organi@ational ob4ectives.

8. Dffective ris" management can im rove your organi@ations erformance

12*

S trongly disagree 0% Agree 30%

S ales
Disagree 0% Nutral 10%

S trongly agree 60%

About A-Q of the branch managers thin" that ris" management ractices hel s in eliminating ris" and im roves organi@ations erformance. ;. Has training been rovided by your organi@ation on$ a. 'is"

a. 'is" olicy# rocedures and ractices

122

a. 'is" ta"ing

128

All the branch managers have been rovided training in 'is" and in 'is" olicy# rocedures and ractices# but only G-Q of them are trained in 'is" ta"ing ractices since the ractices are ne! in some branches. A. 5hat tools and techni0ues do you use for identifying ris"s$

+he most !idely used techni0ue for ris" identification is the o erational modeling# since it is very accurate. But in some branches the e9amine the condition based on their ast e9 erience and 4udgment. %ome even use audit and hysical ins ection.

B. +y es of models used for 'is" assessment

12;

All the four models are used de ending u on the situation. 2( Risk #ssesment Mode) BR#MC: +his model is a licable for the borro!al accounts !ith sanctioned limit of over 's.* crore. 4( Manua) Mode): +his is a licable for borro!al accounts !ith sanctioned limit of over 's.*- lacs and not more than 's.* crore. 5( Sma)) 9a)ue Mode): +his model is a licable for borro!al accounts !ith sanctioned limit of 's.*.-- la"hs and not more than 's.*-.-- la"hs. 6( Portfo)io Mode): +he Borro!al accounts of aggregate limits belo! 's. * lacs and borro!al accounts !here financial statements are ris" rated under ortfolio model# duly grou ing the accounts as near homogenous ool based on category of
12A

borro!ers and loan schemes C segment. +he model covers rating of borro!al accounts classified under Priority and non riority segments. +he riority sector loans include both Direct and Indirect Agricultural loans# and 3on riority sector loans include those under schematic lending under 'etail schemes.

But the most used one is the manual model. G. Monitoring the effectiveness of ris" management is an integral art of routine management re orting.

In about A-Q branches of the 6anara Ban" monitoring the effectiveness of ris" management is an integral art of routine management re orting.

12B

.. Are the ris" management rocesses !ithin your organi@ation sub4ect to audit or other 0uality assurance mechanism$

In about .-Q of the branches of 6anara Ban" ris" management rocesses are sub4ect to audit or other 0uality assurance mechanism$ 1-. Your organi@ation is able to allocate a management olicy and ractice. ro riate resources in su ort of ris"

12G

About B-Q of the branch managers agree that that they are rovide !ith a ro riate resources in su ort of ris" management olicy and ractice.

11. =verall# at !hat stage of ris" management ractice develo ments do you consider your organi@ation to be at$

12.

+he 'is" management ractices in almost all the branches of 6anara Ban" is !ell develo ed.

1*. In the last ; years the level of ris" faced by your branch has$

18-

In last five years the ris" level in the branches of 6anara Ban" has increased.

181

C7a#ter '' C%'C$;S %'

//( Conc)usion
Conc)usion:
18*

'is" is inherent in any commercial activity and ban"ing is no e9ce tion to this rule. 'ising global com etition# increasing deregulation# introduction of innovative roducts and delivery channels have ushed ris" management to the forefront of todays financial landsca e. Ability to gauge the ris"s and ta"e a ro riate osition !ill be the "ey to success. It can be said that ris" ta"ers !ill survive# effective ris" managers !ill ros er and ris" averse are li"ely to erish. In the regulated ban"ing environment# ban"s had to rimarily deal !ith credit or default ris". As !e move into a erfect mar"et economy# !e have to deal !ith a !hole range of mar"et related ris"s li"e e9change ris"s# interest rate ris"# etc. = erational ris"# !hich had al!ays e9isted in the system# !ould become more ronounced in the coming days as !e have technology as a ne! factor in todays ban"ing. +raditional ris" management techni0ues become obsolete !ith the gro!th of derivatives and off/balance sheet o erations# cou led !ith diversifications. +he e9 ansion in D/ban"ing !ill lead to continuous vigilance and revisions of regulations. Building u a ro er ris" management structure !ould be crucial for the ban"s in the future. Ban"s !ould find the need to develo engines !ould ris" ortfolio. technology based ris" management tools. +he com le9 mathematical models rogrammed into ris" rovide the foundation of limit management# ris" analysis# Measurement of ris" e9 osure is essential for im lementing com utation of ris"/ad4usted return on ca ital and active management of ban"s hedging strategies. Under Basel II accord# ca ital allocation !ill be based on the ris" inherent in the asset. +he im lementation of Basel II accord !ill also strengthen the regulatory revie! rocess and# !ith assage of time# the revie! rocess !ill be more and more so histicated. Besides regulatory re0uirements# ca ital allocation !ould
182

also be determined by the mar"et forces.

D9ternal users of financial information

!ill demand better in uts to ma"e investment decisions. More detailed and more fre0uent re orting of ris" ositions to ban"s shareholders !ill be the order of the day. +here !ill be an increase in the gro!th of consulting services such as data roviders# ris" advisory bureaus and ris" revie!ers. soundness of internal ris" management systems. 'is" management functions !ill be fully centrali@ed and inde endent from the business rofit centers. +he ris" management rocess !ill be fully integrated into the business rocess. 'is" return !ill be assessed for ne! business o ortunities and incor orated into the designs of the ne! roducts. All ris"s 7 credit# mar"et and o erational and so on !ill be combined# re orted and managed on an integrated basis. +he demand for 'is" Ad4usted 'eturns on 6a ital &'A'=6) based erformance measures !ill increase. 'A'=6 !ill be used to drive ricing# erformance measurement# ortfolio management and ca ital management. 'is" management has to tric"le do!n from the 6or orate =ffice to branches or o erating units. As the audit and su ervision shifts to a ris" based a roach rather than transaction orientation# the ris" a!areness levels of line functionaries also !ill have to increase. +echnology related ris"s !ill be another area !here the o erating staff !ill have to be more vigilant in the coming days. Ban"s !ill also have to deal !ith issues relating to 'e utational 'is" as they !ill need to maintain a high degree of ublic confidence for raising ca ital and other resources. 'is"s to re utation could arise on account of o erational la ses# o a0ueness in o erations and shortcomings in services. %ystems and internal controls !ould be crucial to ensure that this ris" is managed !ell.
188

+hese revie!s !ill be

intended to rovide comfort to the ban" managements and regulators as to the

+he legal environment is li"ely to be more com le9 in the years to come. Innovative financial roducts im lemented on com uters# ne! ris" management soft!are# user interfaces etc.# may become atentable. <or some ban"s# this could offer the otential for reali@ing commercial gains through licensing.

Suggetions for Canara Bank +he Ban" should strive hard to establish strong credit system and controls. +his should cover loan a rovals# loan rating and revie! and ortfolio management. 6ontrol should be rigorously im lemented to ensure effectiveness. +he lending olicy e9ce tions should be brought do!n to rare minimum. Pro erly orientation of ne! entrants in credit functions. In credit rating ma9imum !eightage is given on sub4ective arameters than of statistical# this should be corrected. >arious innovative mar"eting strategies should be em loyed by the mar"eting staff so that they are in a osition to convert more of their de osits into advances.

18;

RE&ERE'CE SEC" %'

#ppendix /
0;ES" %''# RE 1. Does your organi@ation have a documented ris" management olicyP a. Yes
18A

b. 3o *. In ursuing organi@ations ob4ectives# you vie!s ris" as$ a. a threat b. an o ortunity

2. Ho! im ortant is effective ris" management to the achievement of your organi@ations ob4ectivesP a. >ery Im ortant b. Im ortant c. 3ot at all

8. Dffective ris" management can im rove your organi@ations erformance a. %trongly Disagree b. Disagree c. 3eutral d. Agree %trongly e. Agree ;. Has training been rovided by your organi@ation on$ b. 'is" c. 'is" olicy# rocedures and ractices d. 'is" ta"ing
18B

A. 5hat tools and techni0ues do you use for identifying ris"s$ a. audits or hysical ins ection. b. brainstorming. c. e9amination of localCoverseas e9 erience. d. %5=+ &strengths# !ea"nesses# o e. intervie!Cfocus grou discussion. f. 4udgmental. g. surveysC0uestionnaires. h. scenario analysis. i. 4. ". o erational modeling. ast organi@ational e9 erience. rocess analysis. ortunities# threats) analysis.

B. +y es of models used for 'is" assessment a. Manual b. 'is" Assesment Model&'AM) c. %mall >alue Model d. Portfolio Model G. Monitoring the effectiveness of ris" management is an integral art of routine
18G

management re orting. a. %trongly Disagree b. Disagree c. 3eutral d. Agree %trongly e. Agree

.. Are the ris" management rocesses !ithin your organi@ation sub4ect to audit or other 0uality assurance mechanism$ a. Yes b. 3o 1-. Your organi@ation is able to allocate a management olicy and ractice. a. %trongly Disagree b. Disagree c. 3eutral d. Agree %trongly e. Agree 11. =verall# at !hat stage of ris" management ractice develo ments do you consider your organi@ation to be at$ a. Best Practice
18.

ro riate resources in su

ort of ris"

b. 5ell Develo ed c. 'easonably 5ell Develo ed d. Basic e. 3on D9istent 1*. In the last ; years the level of ris" faced by your branch has$ a. Increased b. Decreased c. 3ot 6hanged d. 3ot %ure

#ppendix + Bi*)iograp!y:

1;-

1. Asset ?iability Management by +. 'avi 1umar. *. 6redit 'is" Management E Basel II by Mohan Bhatia. 2. 6over story &Maga@ine). 8. <inancing and 'is" Management by Brealey And Myers. ;. <inancial 'is" Management by Dun# Bradstreet. A. Fuide +o 'is" Management In Im orts And D9 orts In India by A4ay Fu ta.

B. Introduction to <oreign D9change E <inancial 'is" Management by Rames! $aks!man. G. Managerial Accounting BD by 'onald Hilton# F 'amesh# M (ayadev.

.. Managing Indian Ban"s# 2D by >asant 6 (oshi.

1-. =utloo" &Maga@ine).

11. 'is" Management by IIB<. 1*. +heory E Practice =f +reasury E 'is" Management In Ban"s by ndian nstitute %f Banking D &inance. 12. !!!.rbi.org.in
1;1

18. htt s$CC!!!.canaraban".inC 1;. 5i"i edia 1A. !!!.iirm!orld.org.inC 1B. !!!.gar .orgC 1G. !!!.theirm.orgC 1.. !!!. algrave/4ournals.comCrmC *-. =ther Internet sites &Foogle)

1;*