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Acknowledgement I would like to thank, Mr.

Shivanappa of IMS, for the guidance t

hat she has given to me in the conduction of my project work. I express my profo
und thanks to Mr. Divakaran my teacher and guide, who has been magnanimous in gu
iding, encouraging and supporting me during this project and he/she guided me to
choose this immensely productive topic and it was because of his/her confidence
in me that I have been able to carry out such a study report. I also wish to th
ank all those respondents who were patient enough in giving answer to my questio
nnaire. I would like to extend my gratitude to my parents, friends for their con
sistent encouragement, suggestions and moral support.
Shivanappa HETs IMS, Hubli
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Chapter 1 Chapter 2 Rationale for the study Objective of the study Chapter 3 Cha
pter 4 Chapter 5 Title of the project Objective of the study
Scope of the study Profile of the company Theoretical Perceptive Research Method
ology Research Design Data collection methods / sources Sampling plan which shou
ld include sampling unit, sampling size and sampling methods via questionnaire m
ethods, interview methods, observations etc
Chapter 6 Chapter 7 Chapter 8 Chapter 9
Data analysis and interpretations using various charts and graphs Findings Limit
ations if any Expected contribution from the study
Page 2


Page 3


Credit risk is defined as the possibility of losses associated with diminution i
n the credit of quality of borrowers or counter parties. In a banks portfolio, l
osses stem from outright default due to inability or unwillingness of a customer
or counter party to meet commitments in relation to lending, trading, settlemen
t and other financial transactions. As credit risk is one of the challenging tas
ks to banks I have selected this topic for my study in order to know the various
types of risk and the types of strategies the banks use to mitigate the risk.
As part of its vision of using technology to provide affordable banking services
to the vast rural population of India, Canara bank has extend the performance a
nd cost benefits of enterprises Linux to its customers. With a modernized branch
infrastructure, Canara bank hopes to serve customers in a timely and efficient
manner, reinforcing its image of being a customer savvy bank
Page 4

About the Canara Bank: Founded in 1906, Canara Bank is one of the premier banks
in India, with a net work of 2578 branches across the country. The bank was the
first two launch networked ATMs in India and obtain and ISO certification. Canar
a bank has also achieved the distinction of being the countrys highest net profit
earner among nationalized banks for the year march 2007. The bank has already c
arved a niche in providing IT-based services such as networked ATMs, anywhere ba
nking, Telebanking, Remote access Terminals, Internet and Mobile banking, Debit
cards, etc. Canara bank a vision to help improve the economic condition of the c
ommon people of India by inculcating the habit of savings in rural areas As part
of its vision of using technology to provide affordable banking services to the
vast rural population of India, Canara bank has extend the performance and cost
benefits of enterprises Linux to its customers. With a modernized branch infras
tructure, Canara bank hopes to serve customers in a timely and efficient manner,
reinforcing its image of being a customer savvy bank
Page 5

Title of the project Objective of the study Scope of the study
Page 6

Title of the Project Credit risk Management at Canara Bank

Objective of the Study:
1. To know the methods to be implemented in banks. 2. To know the various method
s used by bank to mitigate credit risk. 3. To know the various types of credit r
isk in bank. 4. To know the executing methods used in managing credit risk.
Scope of the Study:
Geographical Scope The geographical scope of the study is limited to the boundar
y of Whitefield Maski city by Government of Karnataka. Theoretical Scope - The t
heoretical scope of the study is limited to analyzing the dynamics of corporate
salary accounts from the customers perspective in Branch Maski
Page 7


Page 8

Founded in 1906, Canara Bank is one of the premier banks in India, with a net wo
rk of 2578 branches across the country. The bank was the first two launch networ
ked ATMs in India and obtain and ISO certification. Canara bank has also achieve
d the distinction of being the countrys highest net profit earner among nationali
zed banks for the year march 2007. The bank has already carved a niche in provid
ing IT-based services such as networked ATMs, anywhere banking, Telebanking, Rem
ote access Terminals, Internet and Mobile banking, Debit cards, etc. Canara bank
a vision to help improve the economic condition of the common people of India b
y inculcating the habit of savings in rural areas. As part of its vision of usin
g technology to provide affordable banking services to the vast rural population
of India, Canara bank has extend the performance and cost benefits of enterpris
es Linux to its customers. With a modernized branch infrastructure, Canara bank
hopes to serve customers in a timely and efficient manner, reinforcing its image
of being a customer savvy bank
Founded as Canara Bank Hindu Permanent Fund in 1906, by late, Mr. Ammembal Sub
ba Rao Pai, a philanthropist, this small seed blossomed into a limited company a
s Canara Bank Ltd. in 1910 and became Canara Bank in 1969 after nationalizatio
n. A good bank is not only the financial heart of the community, but also one
with an. obligation of helping in every possible manner to improve the economic
conditions of the common people"
Page 9

Canara Bank Founding Principles

1. To remove Superstition and ignorance. 2. To spread education among all to sub
-serve the first principle. 3. To inculcate the habit of thrift and savings. 4.
To transform the financial institution not only as the financial heart of the c
ommunity but the social heart as well. 5. To assist the needy. 6. To work with s
ense of service and dedication. 7. To develop a concern for fellow human being a
nd sensitivity to the surroundings with a view to make changes/remove hardships
and sufferings. Sound founding principles, enlightened leadership, unique work c
ulture and remarkable adaptability to changing banking environment have enabled
Canara Bank to be a frontline banking institution of global standards. As Canara
bank founded in 1906, Canara Bank is one of the premier banks in India, with a
network of 2578 branches across the country. The bank was the first to launch ne
tworked ATMs in India and obtain an ISO Certification. Canara Bank has also achi
eved the distinction of being the country s highest net profit earner among nati
onalized banks for the year March 2007. The bank has already carved a niche in p
roviding IT -based services such as Networked ATMs, Anywhere Banking, Tele-banki
ng, Remote Access Tensional, Internet & Mobile Banking, Debit Cards, etc. Canara
Bank has a vision to help improve the economic condition of the common people o
f India by inculcating the habit of savings in rural areas.
Page 10

Canara Bank achieved 100% computerization very early in the course of its opera
tional history. It deployed a number of bank automation tools such as a customiz
ed Total Branch Automation (TBA) package called Integrated Branch Banking Softwa
re (18BS), which was developed by its subsidiary, Can Bank Computer Services Ltd
. (CCSL). IBBS was deployed on Novell NetWare at close to 1400 medium sized bran
ches across the country. Canara Bank follows a detailed tendering process for ne
w hardware purchases, in which contracts are awarded on the basis of bids. After
nearly a decade of deploying IBBS, the bank had purchased different types of ha
rdware from multiple vendors. As a result, standardization on Novell NetWare bec
ame difficult, and supporting the legacy IBBS application became a challenging t
ask. Moreover, IBBS was developed using Micro focus COBOL and designed to run in
a 16 bit DOS environment. With poor support for the TCP/IP protocol stack, the
NetWare servers running IBBS could not be integrated into the corporate network
easily. Essentially, the NetWare servers functioned as branch file servers, with
out any data connectivity. Regular maintenance of different versions of IBBS acr
oss 1400 branches was a painstaking effort in the absence of network support. Pa
tching, troubleshooting and version upgrades had to be conducted onsite. Branche
s in rural and remote areas were particularly difficult to access and required s
upport personnel to travel frequently. Also, the availability of certified hardw
are on NetWare was limited, which made adding new machines difficult. As Canara
Bank s customer base expanded, its banking services began to scale, creating an
immediate need for Internet Banking, Anywhere Banking (banking from any Can Bank
branch across the country) and an expanded ATM network. Novell NetWare s closed
legacy environment did not allow room to accommodate these new technologies. Ca
nara Bank had to purchase additional machines running Microsoft Windows to HETs I

interface with these new technologies, which was extremely inefficient from a ha
rdware utilization standpoint. New hardware and Microsoft Windows licenses strai
ned budgets and made new technology projects difficult to scale and sustain. Whe
n additional branches were added to the bank s network, procuring new servers th
at were certified to run on NetWare was difficult, as IHVs had ceased to provide
support for older versions of the as. Micro Focus had also ceased support for t
he COBOL version on which the IBBS package had been developed. A combination of
all these factors made migration attractive. Migrating the 1400 odd legacy NetWa
re servers posed another challenge: Canara Bank wanted to switch platforms but n
ot hardware. Deploying the latest as available, without going into a hardware re
fresh cycle that would cost millions of rupees was a challenging task. The bank
had amassed about a dozen different types of machines after a decade of deployin
g IBBS. This heterogeneous mix of hardware that spanned across more than1,000 se
rver 10,000destopsmadethe project very complex. Canara Bank began to look for a
platform that could deliver the latest innovation along with complete hardware
Future plan
Moving from the legacy NetWare platform to Red Hat Enterprise Linux has opened u
p significant opportunities for Canara Bank. With networking support now availab
le, Canara Bank is planning to deploy Red Hat Network Satellite to send updates
for both IBBS as well as the operating system to all distributed machines across
the country. Enterprise Linux has also made Remote Management and health monito
ring of remote servers possible. With the tremendous benefits provided by Enterpr
ise Linux, Canara Bank plans to move its Anywhere Banking and Internet Banking I
i steners to the Enterprise Linux platform. Enterprise Linux has provided Canara
Bank with the freedom and choice to develop a scalable growth plan, which was n
ot possible under NetWare s closed legacy environment. HETs INSTITUTE OF MANAGEME

The power of Linux is not restricted by hardware limitations, as it can run on d

ifferent kinds of architectures. Canara Bank has managed to save crores of rupee
s in new hardware acquisition costs, by using a lightweight customized Linux dis
tribution on its existing hardware
The Bank Today
Canara Bank is one of the premier banks in the country, accredited with umpteen
distinctions. The present stature of the Bank is due to its strong fundamentals
and quality customer orientations. Profit making since inception, the Bank today
ep itomizes a perfect blend of commercial and social banking. For the year Marc
h 2007, the Bank clocked the highest net profit ( RS.1110 crore) among nationali
zed banks, with significant improvement in capital adequacy ratio (13.50%) and a
sset quality (net NPA ratio of 0.94%). The Bank has already carved a niche in pr
oviding IT -based services. With 100% computerization of the branches, the bank
provides a wide array of services, such as, Networked ATMs, Anywhere Banking, Te
lebanking, Remote Access Terminal also Internet & Mobile Banking, Debit Card etc
. The Bank was the first among banks to launch networked ATMs and obtain ISO Cer
tification. Commercial consideration has, no way, diluted the Bank s role in nat
ional priorities. Canara Bank is in fact the first bank to be conferred FICCl aw
ard for contribution to rural development.
Page 13


Anywhere Banking: Anywhere Banking is a technology-based, customer-friendly serv
ice designed to provide greater convenience to our customers. With Anywhere Bank
ing facility,once customer has an account with any of the select branches, Custo
mer can operate it From any other designated branch across 85 cities. FACILITIES
: Individuals I joint account holders (operated severally) maintaining Current I
58 I OD Accounts: I. Withdrawal of cash 2. Remittance of cash 3. Transfer of fu
nds 4. Balance enquiry 5. Issue of mini statement 6. Depositing local cheques fo
r collection 7. Purchase of Demand draft Firmsl Companies I Other Bodies maintai
ning Current I OD I OCC Accounts: 1. Transfer of funds between accounts; from on
e Anywhere Banking branch to another anywhere banking branch. 2. Depositing of l
ocal checks for collection and crediting to the respective account at any Anywhe
re Banking branch.
ELIGIBILITY: Account holders should have maintained a minimum average balance of
Rs.5,OOO / - in SB account and Rs.I 0,000/ - In Current account in the last six

1. Cash withdrawal up to Rs.50, OOO/ - per occasion 2. Transactions permitted on

production of identity card issued exclusively for
3. Facilities of both intra-city and inter-city transactions. 4. HOME CLEARING on line debit of checks drawn on our own A WB branches within the city / cleari
ng zone.
Tele services
Access information about your account right from your home, office or from anywh
ere over telephone, a round the clock teller answering the enquiries from anywhe
re presenting voice information at any time You can make the following enquiries
/requests over telephone: Balance in the account including clear balance. Last f
ive transactions in the account. Request for check book. Request for pass sheet.
Change in pass word. Fax on demand.
Note: The facility is password protected to ensure secrecy. Ask your Branch Mana
ger for details and enroll today itself the service is absolutely lice of cost
Personal Banking: Deposits Savings Bank Account Current Account
Page 15

Term Deposits - Fixed Deposits - Kamadhenu Deposits - Recurring Deposits - Can f

lexi Deposits
Loans & Advances
Retail Loan Products - Home Improvement Loan Can cash - Can mobile - Can budget
- Teachers Loan Card Services Insurance NRI - NRE (Non Resident External Rupee A
ccount) - NRO (Non Resident Ordinary Account) - FCNR (Foreign Currency Non Resid
ent Accounts -Banks) - RFC Deposits Loans & Advances - Housing Loan - Home Impro
vement - Can carry (Consumer Durables) - Can cash (Shares) - Can mobile(vehicle)
Page 16

General Facilities
-Safe Custody Services -Safe Deposits Locker -Nomination facility Other Services
/Facilities -N R I Branches -N R I Services -Remittance Facility -Facilities For
Returning Indians Rural Financing -Agriculture & Rural Credit -Kisan Credit -Lo
ans for setting up Agri Clinic -Minor Irrigation Loans -Farm Machinery Loans -Fa
rm Development Loans -Vehicle Loan for Agriculturists -Loans for Plantation Crop
Page 17


- Housing Loan - Loans to SSIs - Charter for SSIs - Other Priority Sector Loans
- Government Sponsored Schemes - Lead Bank Activities - Agricultural Consultancy
Social Banking
- Rural Development Schemes - CBJRDT Institutes - Women Development - Social Ban
king - Community Concerns - RUDSETIs
International Banking Services
Canara Bank entered fore arena in 1953 with the opening of its first Foreign Exc
hange Department in Mumbai Today Canara Bank the 4th largest Bank in India cater
ing to the cross border trade & remittances and financing of foreign trade.
Page 18

We finance exports at pre-shipment stage as well as post shipment stage, which c

an be availed either in foreign currency or Indian Rupee s. In addition we facil
itate for fainting. That is, discounting of deferred export receivables on with
out recourse basis from an overseas forfeiting agency. The Bank has been the pi
oneer in financing of LC based International Trade transactions in India. The Ba
nk not only finance at customers option in foreign currency at pre -shipment and
post- shipment stages at LIB OR related rates but also finance the import leg i
n foreign currency where imported inputs are required for exp0l1s. The Bank has
the expertise in handling project exports of goods and services. The Bank has an
excellent worldwide correspondent relationship and have the capability to handl
e any export, import, remittance and related transactions anywhere in the world
and in any currency. Non fund based transactions like adding confirmations to LC
, issuing inward and outward Bid bonds & guarantees, establishing LCs for import
into India, arranging buyer s credit at attractive terms etc. are our forte. Ca
nara Bank has a branch in London and holly owned subside in Hong Kong. We have a
joint venture with SBI at Moscow under the name Commercial Bank of India LLC. W
e have recently opened a Representative Office at Shanghai, People Republic of c
hina. They are engaged in Trade finance and have expertise on the Indian market
scenario. The Bank also manages 2 Exchange houses in the Gulf and arrangement wi
th 20 Exchange Houses and 18 Banks for drawing on DDs from Gulf Countries on our
select branches thought out India. The Bank has 5 fore dealing rooms located in
Mumbai, New Delhi, Calcutta, Chennai and Bangalore in India. We provide a whole
range of services and products like purchases and sale of 7 world currencies for
ward booking and other fore hedging instrument like currency swaps. HETs INSTITUT


Can Fin Homes Limited was established on 29.10.1987 as a Sponsored Entity of the
Bangle some of the premier financial institutions such as HDFC, UTI and NHB are
the co-promoters of the Company. Canara Bank holds 29.30% of equity in the Comp
any. Sri K Venkataramayya, General Manager of the Bank IS Managing Director of t
he Company. Apart from the Managing Director, the Board of Directors is complied
of top Executives of the Bank, institutional nominees of HDFC, UTI and NHB and
also professionals in the field of accounts/finance/Banking. The Registered Offi
ce of the Company is at No. 29, Sir M N Krishna Rao Park Road, Basavanagudi, Ban
galore 560 004. The Company has 41 branches and 5 Representative Office spread a
cross the country.
The prime objective and activity of the Company is to provide Ion g term finance
to individuals for construction or purchase of residential houses/flats and to
Companies or Corporations or Societies or Associations for the purpose of constr
uction or purchase of residential houses flats Over the years, the company has a
dded new products to their range and value addition is done to the existing prod
ucts to keep updated with the changing market scenario and the competition, whic
h is getting tougher with each passing HETs INSTITUTE OF MANAGEMENT STUDIES HUBLI
Page 20

day. Personal loans to the existing borrowers, loans for purchase of sites, insu
rance cover for loaners, etc., are some examples of innovation/value addition.

Bank s goodwill, the innate strength of the Company approach and an unflinching
business acumen have always kept the business on an envious platform making good
profits and paying rich dividends and their pragmatic ever since inspection.

The Company also took a major step in diversification by launching three Nonhous
ing Finance Products namely Premises Loan for practicing professionals (Venture)
, Mortgages Loans (Net worth) and Loan against rent receivables (Noncash) CANARA
BANK FACTORS LIMITED: Post Sale funds crunch is proving a handicap for many ind
ustries and business in the smooth cycling of capital. Canara Bank Factors Limit
ed (CFL) was established in 10.05.1991 to mitigate this problem of the industry
and business and ensure a smooth flow of capital in the entire cycle. This Compa
ny is promoted by our Bank along with Andhra Bank and SIDB!. The Registered offi
ce is at No. 17, Seshadri Road, Bangalore 56 0 009. The Company is now being hea
ded by Sri G R Seshadri as Managing Director a senior executive in the cadre of
Deputy General Manager deputed from the Bank. The Board of the Company consists
of Chairman & Managing Director, Executive Director and a General Manager of the
Bank, apart from the Managing Director. SIDBI and Andhra Bank have appointed th
eir nominees. There are 3 nonofficial Directors from the profession of audit/acc
ounts/ Banking/Finance. Has a network of 8 branches in southern and we stem part
of the courtly and proposes to add some more during the next financial year.

Factoring Services. To cater to the needs of the clientele, Company has always on
the look out for innovative and competitive products. Introduction {)f variants
of fact ling such as International Factoring/Export Factoring and Sub -variants
such as Invoice Discounting backed by LCs/Hundisffripartite Agreement s are exam
ples of their consistent Endeavour to design/redesign their products.
CRISIL has given the following RATING to the Company:
"PH" - indicating highest safety for short term debt program allover Commercial
Papers "FAA+" - indicating higher safety for Public Deposits "AA" - indicating h
igher safety for non-convertible debentures Has developed a well designed "Manag
ement Information System" (MIS) Prudential norms prescribed by RBI are strictly
complied with. Has developed in house "Internal Risk Evaluation System" (IRES) H
as attained Nil Net NPA position for 4 consecutive years 200 2-03, 2003-04, 2004
-05 and 2005-06 The Company is accredited with an ISO Certificate -"DIN EN ISO
9001:2000" by TUV CERT Certification body of Germany. Operations are fully compu
terized from Day one.
Page 22

In our economic environment, assistance for establishment of new ventures in the

field of industry is not easily forthcoming. To assist the new ventures, our Ba
nk had formed a Venture Capital Fund in the year 1989. The Fund is managed by Ca
nara bank Venture Capital Fund Ltd, a wholly owned Subsidiary of Canara Bank. Th
is is the only Company of its kind sponsored by a Public Sector Bank in the coun
try. Sri B Sudhakar Shetty, Asst General Manager of the Bank is heading the Comp
any as Managing Director. Apart from the Managing Director, the Company s Board
of Directors consists of our Chairman & Managing Director, Executive Director an
d a General Manager of the Bangle There are two non-official Directors, each dra
wn from the field of industry and Finance. The Registered Office is at No. 14, N
aveen Complex, 4th Floor, M G Road, Bangalore 560001. Activity: Trustee and Mana
ger of Canara bank Venture Capital Fund CANBANK COMPUTER SERVICES LIMITED: With
fast increasing impetus ~n information technology and extensive use of computers
in more and more spheres, the Bank found good opportunity for establishment of
a Company which can develop softwares and provide consultancy services to compute
r users. This thought of the Bank culminated in the establishment of CCSL on 13.
08 .1994. The Company is co-promoted by 2 other Public Sector Banks and 3 Privat
e Sector Banks. Canara Bank is holding 62.97% of the equity of the Company. The
Registered Office is situated at No. 14, Naveen Complex, 7 the Floor, M G Road,
Bangalore 560 001. B Sivaraman, Deputy General Manager of the Bank is heading th
e Company as Managing Director of the Company.
Page 23

Apart from the Managing Director, the Board of Directors consists of our Chairma
n & Managing Director and Executive Director. There is one Director each from Ba
nk of Baroda, Lakshmi Vilas Bank, ING Vysya Bank Limited and Vijay Bank on the B
oard Activities: CCSL designs and develops software for banks, financial institu
tions and Government Departments, with its extensive in-house infra-structure an
d proven technical expertise. All its products and Projects are well documented
and user -friendly, with on-line help, data encryption and audit features.
CCSL offers services in the following areas:
1 Software development . 2. Business Process Outsourcing 3. Training 4. Data war
ehousing Solution 5. Web based solution 6. Information Systems Audit 7. Consulta
ncy Service
This is the latest of the Subsidiaries of Canara Bank so far. Established on06.0
6.1996 and co-promoted by Corporation Bank and Bank of Baroda, is a Primary Deal
er Subsidiary accredited by RBI. Company is a wholly Owned Subsidiary of Canara
Bank since September 2004.


Registered Office is at 1-1, Kalahari heritage, Manikin Wada Building, 127,

Road, Foi T, Mumbai 400 023. Presently, the Company is under the stewardship
Sri D G Kamath as Managing Director who is a Deputy General Manager of the B
on second mint to the Company.


Page 24

The Board of the Company consists of our Chairman& Man aging Director, Executive
Director, 2 General Managers of the Bank and 2 Chartered Accountants and a form
er Banker.
Activity: Primary Dealer accredited by RBI for dealing III Government of India D
ated Securities and Treasury Bills. Strengthening Infrastructure in the Governme
nt Securities (G Sec) Market so as to make it vibrant, liquid and broad based. D
evelopment of Underwriting and Market Making capabilities. Improving Secondary M
arket Trading System.
With the mentioned objectives, GSTCL participates actively both III Security and
Money Market.

Reserve Bank of India, being the Regulator of Primary Dealers, sets certain goal
s in tons of Bidding Commitments and Success Ratio in the Primary auction of G S
ec and T Bills, to be accomplished by them which form the basis for renewal of P
D s license. GSTCL has the distinction of achieving these benchmarks consistentl
y since inception. Underwriting of G Sec in the auction is yet another obligatio
n cast on PDs.

Bond yields being the function of interest rate, the Company s asset portfolio i
s subject to market vagaries caused by factors like inflation, liquidity, govern
ment borrowing programmed, coupon, maturities of papers issued and also event ba
se risks. In order to manage and mitigate these risks the Company has well defin
ed and board approved investment policy so also Risk Management Policy.

As typical of a trader, the Company is encasing price volatility to earn profits

. Day-to-day operations are largely supported by Call and Repo Borrow wings. Thu
s efficient funds management holds key to improving profitability.

The Company is also into retailing G Sec to individual investors PF staffs/ Char
itable Institutions through 24 designated branches of the parent, Canara
Page 25

Bank. And also has put in place arrangements for retailing through Stock Exchang

Bank had established its Mutual Fund arm "Canara bank Mutual Fund" on 19.12.1987
for foraying into the Capital Market. CMF is an independent Trust governed by a
Board of Trustees,
When the RBI issued directives to form Asset Management Companies to manage the
assets of Mutual Funds and such other Trusts, Canara bank Investment Management
Services Limited was established by the Bank on 02.03.1993 as a Wholly Owned Sub
sidiary of the Bank, Sri N R Rarnanujam, Deputy General Manager of the Bank is a
t the helm of the Company as Managing Director. Two General Managers of the Bank
is also on the Board. There are four non-official Directors on the Board drawn
from various fields connected to finance, CANBANK FINANCIAL SERVICES LIMITED: Th
is is the first Subsidiary emerging from the stable of Canara Bank. Established
on 01.06.1987 as a Wholly Owned Subsidiary of the Bank, cantina was very quick t
o carve a niche for itself in the Merchant Banking arena as a premier institutio
n providing a host of financial services under one roof. Registered Office of th
e Company is housed at No. 14, Naveen Complex, 6 th Floor, M G Road, Bangalore 5
60 001. Sri M. S. Prabhu, Divisional Manager of the Bank is heading the Company
Executive Director. Apart from the Executive Director, the Board of Director con
sist of two General Managers of the Bank and a Chartered Accountant who is ;; no
n -official Nominee as Chairman. Activities: HETs INSTITUTE OF MANAGEMENT STUDIES
HUBLI Page 26

Activities of Cantina were curtailed post security scam of 1992. Cantina is pres
ently attending to matters like collection of lease rentals and realizations of
NAL WIN G OF HEAD OFFICE PERSON N EL WING: I. Personnel Management Section.. 2.
Industrial Relations Section. 3. Human Resources and Organisation Development Se
ction. 4. Head Office Staff Administration Section. 5. House Magazine and Librar
y Section. 6. Official Language Section. 7. Staff Training College 8. Recruitmen
t Cell. 9. SC/ST Cell.
Page 27

CORPORATE CREDIT WING 1. General Credit Sanctions-I Section.

2. General Credit Sanctions-II Section 3. Export Import Credit and Development S
ection. 4. Project Finance Department 5. Technology Up gradation Fund Scheme Cel
RISK MANAGEMENT WING 1. Credit Policy Section. 2. Industrial Advisory Division.
3. Operational Risk Management Group. 4. Credit Statistics Section. 5. Credit R
eview And Monitoring Section. 6. Integrated Mid Office.
PRIORITY CREDIT WING 1. Priority Credit Section. 2. Agricultural Consultancy Ser
vices. 3. Small Scale Industries Division. 4. Regional Rural Banks Division. 5.
Rural Development Section. 6. Social Banking Cell.
Page 28

PLANNING AND DEVELOPMENT WING 1. Development Section. 2. Economic Research Secti

on. 3. Management Information and Planning Section. 4. Customer Service Section.
5. Publicity and Public Relations Section. 6. Corporate Merchant Banking Divisi
on. 7. Marketing, Research & Product Development Section. 8. Corporate Cash Mana
gement Services. RECOVERY WING 1. Recoveries Section. 2. NP A Management Section
. 3. Legal Section. 4. Sick Industries and Rehabilitation Section.
Page 29


1. 2. 3. 4. 5. 6 7 8 9 Furniture and Bills Section. Premises, Policy and Adminis
tration Section. Technical Cell. Records and Tappal Section. Premises and Estate
Section. Printing Section. Stationery Section. Central Security Cell. Estate Po
licy and Control Section.
b) Accounts and Taxation Department 1. 2. 3. 4. 5. 6. 7. 8. 9. Balance Sheet and
Central Accounts Section. Staff Provident Fund. Staff Welfare Fund. Pension Fun
d. Government Accounts Section. Executor, Trustee and Taxation Section. IBA Reco
nciliation Section. DD Reconciliation Section. ATM and Debit Card Reconciliation
2. Overseas Banking Division. HETs INSTITUTE OF MANAGEMENT STUDIES HUBLI Page 30

RETAIL BANKING AND SUBSIDIARIES WING a) Can card Division b) Retail Banking Div
ision 1. 2. 3. Retail Banking Division. Bank assurance Section. Cross Selling of
Mutual Fund Products Section.
c) Subsidiaries Division 1. Subsidiaries Section. Names of Subsidiaries and Asso
ciates a) Canbank Mutual Fund Limited. b) Canbank Factors Limited. c) Canfm Home
s Limited. d) Canbank Investment Management Services Limited. e) Canbank Compute
r Services Limited. f) Canbank Venture Capital Fund Limited. g) Gilt Securities
Trading Corporation Limited. h) Canbank Financial Services Limited.
INSPECTION WING. 1. 2. 3. 4. Planning Section. Follow Up Section. Review and Rep
orting Section. Information Systems Audit Section. Page 31

5. 6. 7.
Vigilance Department. Staff Administration Section. Organisation and Methods Sec
DEPARTMENT OF INFORMATION TECHNOLOGY- WING 1. 2. 3. 4. 5. 6. 7. 8. 9. Planning
Establishment & Training Group. Administrative Software Group. Service Units Sof
tware Group. Branch Software Group. Delivery Channel & Communication Group. Proc
urement Group. Payment System Group. New Projects Group. Core Banking Group.
The enhanced role of the banking sector in the Indian economy, the increasing le
vels of deregulation along with the increasing level of the competition have fac
ilitated globalization of the Indian banking system and placed numerous demands
on banks. Operating in this demanding environment has exposed banks to various c
hallenges. The last decade has witnessed major changes in the financial sector-n
ew banks, new financial institutions, new instruments, new windows and new oppor
tunities- and, along with all this, new challenges. While deregulation has opene
d up new vistas for banks to augment revenues, it has entailed greater competiti
on and consequently greater risks. Demands for new products, particularly deriva
tives, has required banks to diversify their product HETs INSTITUTE OF MANAGEMENT

mix and also effect rapid changes in their processes and operations in order to
remain competitive in the globalize environment. The benefits of globalization h
ave been well documented and are being increasingly recognized. Globalization of
domestic banks has also been facilitated by tremendous advancement in informati
on and communication technology. Globalization has thrown up lot of opportunitie
s but accompanied by concomitant risk. There is a growing realization that the a
bility of countries to conduct business across national borders and the ability
to cope with the possible downside risks would depend, inter alia, on the soundn
ess of the financial system and the strength of the individual participants. Ado
ptaion of appropriate prudential, regulatory, supervisory, and technological fra
mework on par with international best practices enables strengthening of the dom
estic banking system, which would help in fortifying it against the risks that m
ight arise out of globalization in India we had strengthened the banking sector
to face the pressures that may arise out of globalization by adopting the bankin
g sector reforms in a calibrated Mann followed the twin governing principles of
non-disruptive progress and consultative process. Legal prescriptions for owners
hip and governance of banks in banking regulation Act, 1949 have been supplement
ed regulatory prescriptions issued by RBI from time to time.
Page 33

Outsourcing risk:
Banks are increasingly using outsourcing for achieving strategic aims lading to
either ratio nationalization of operational costs are taping specialist expertis
e which is not available internally. Outsourcing may be defined as a banks use of
a third party, including an affiliated entity within a corporate group, to perfo
rm activities on a continuing base that would normally be undertaken by the bank
itself. Typically outsourced financial services include applications processing
(loan organization, credit card), document processing, investment management, m
arketing and research, supervision of loans data processing and bank office rela
ted activities etc.
Application of advanced technology:
Technology is a key driver in the banking industry, which creates new business m
odules and process, and also revolutionizes distribution channels. Banks which h
ave made in adequate investment in technology have consequently faced and erosio
n of there market shares. The beneficiaries are those banks which have invested
in technology. Adoption of technology also enhanced the quality of risk manageme
nt systems in banks. Recognizing the benefits of modernizing their technology in
frastructure banks is taking the right initiatives. While doing so, banks have f
our options to choose from: they can build a new system those selves, or buy bes
t of he modules, or buy a comprehensive solution, or outsource. In this context
banks need to clearly define their core competencies to be sure that they are in
vesting in the areas that will distinguish them from other market players, and g
ive them a competitive advantage. The global challenges which banks face or not
confined only to the global banks, these aspects are also highly relevant for ba
nks which are part of a globalized banking system. Further, over coming these ch
allenges by the other banks is excepted to not only stand them in good stead dur
ing difficult times but also augurs well for the banking system to which they be
long and will also equip them to launch themselves as a global bank.
Page 34


Page 35


The financial sector especially the banking industry III most emerging economies
including India is passing through a process of change. As the financial activi
ty has become a major economic activity in most economies, any disruption or imb
alance in its infrastructure will have significant impact on the entire economy.
By developing a sound financial system, the banking industry can bring stabilit
y within the financial markets. Deregulation in the financial sector had widened
the products range in the developed markets. Some of the new products introduce
d are LBOs, structured transaction, credit cards, housing finance, derivatives a
nd various off balance sheet items. Thus new vistas have created multiple source
s for banks to generate higher profits than the traditional financial intermedia
tion. Simultaneously they have opened new areas of risk also. Many unknown issue
s that are intricately related to new products have exposed banks to various ris
ks across the globe and India is no exception. During the past decade, the India
n banking industry continued to respond to the emerging challenges of competitio
n, risks and uncertainties. Risks originate in the forms of customer default, fu
nding a gap or adverse movements of markets. Measuring and quantifying risks is
neither easy nor intuitive. Our regulators have made some sincere attempts to br
ing prudential and supervisory norms conforming with international bank practice
s with an intention to strengthen the stability of the banking system.
Banks in general face the following
risk: Page 36

Liquidity Foreign E xchange C redit M arket Interstate Operational The industry

has undergone drastic changes in the last three decades. Horizontal
expansion of the financial markets, deregulation across the globe in financial m
arkets and stiff competition have led the banks to multiply their activities. In
creased activities in the industry have exposed the banks to more uncertainties
unds Management is a major activity of the banks. Liquidity management is an int
egral part of funds management. Banks mobilize the deposits and deploy funds in
advances and investments. Banks also float funds through various subsidiary serv
ices extended to their clients. There will be always a time gap between the avai
lability of resources and their deployment. Hence banks will often swing between
excess liquidity and liquidity crunch in their funds position. Liquidity manage
ment essentially deals with efficient handling of inflows and outflows of funds.
Section -I discusses the liquidity management in banks in India and across the
globe. Cash Management is a subset of the entire funds management. The lead time
is reduced in collection of cheques and other instruments by the banks, if they
introduce efficient cashmanagement services. From the bank s point of view it i
ncreases the fee based income. Cash management services are one innovative produ
ct introduced by the banks in the recent times. Section-II discusses the cash ma
nagement techniques adopted by banks and corporate clients.
Credit risk is as old as money. When the default rate increases in the portfolio

the bank< it may lead to its total collapse. To circumvent the c re d it risk, t
he system tries to design innovative products. Section-III discusses the credit
risk management in banks. The Basle committee defines the operational risk as "t
he risk of direct or indirect loss resulting from inadequate or failed internal
processes, people and systems or from external events". This definition excludes
operational: risk but includes legal risk. Such operational risks can be broadl
y classified into four categories as information technology risk, human resource
risk, loss to assets risk and relationship risk. Quantification of operational
risk is a major challenge to the .risk management group of the bank: Section IV
attempts to elucidate few issues involved in the operational risk management. O
ne of the core activities of the regulators is proper of the system. The Basle c
ommittee had set certain guidelines for the bank s. The Reserve Bank of India ha
d set up an advisory committee under the chain Ulship of M S Verma and the commi
ttee had submitted its report in May 2001. The committee recommended corporate g
overnance, internal controls, risk management, loan accounting transparency and
disclosures, financial conglomerates and cross border banking supervision. The s
upervisor should provide a safety net to the financial system. Section -V discus
ses the important issues of any risk management technique. Section-VI consists o
f two case studies. It briefly discusses the risk management Technique s to be a
dopted by banks. Derivatives are the hedging instruments which help minimize the
risks. But a 300 year old investment bank collapsed because of its exposure to
derivatives. The Barings collapse is a classic example of failure of supervisio
n and incidence of human sours risk. In the global scenario, the increased credi
t risk arises due to two reasons. Banks have been forced to lend to riskier clie
nts because well-rated corporates have moved away from banks as they have access
to low cost funds through disinter mediation. The other reason is the lurking f
ear of global recession. Recession in the economy could lead to low industrial o
utput which may lead to defaults by the industry under recession culminating int
o credit risk. Hence, the markets are in search of new credit risk HETs INSTITUTE

management models. Credit derivatives which were a new innovation in the market
stood the real test in 1997 during the Asian financial crisis. Several European
and US banks which were exposed to high risk areas in Korea, Philippines and Tha
iland were able to save themselves from losses as they could hedge themselves wi
th credit derivatives. The papers "Credit Risk Management - Models and Judgments
" and "Use of Credit Derivati ves" discuss the critical operational issues in ma
naging credit risk through credit derivatives. In the recent times, we have witn
essed runs on the banks - mainly the Urban Cooperative Banks like Madhavpura Coo
p Bank in Gujarat/Mumbai, Charminar Bank, a scheduled bank in Hyderabad and many
others. When the banks give the signals of distress, the depositors panic and r
un for their money. As per the existing rules, Deposit Insurance and Credit Guar
antee Corporation of India (DICGC) guarantees the depositors money up to one la
kh rupees subject to certain conditions. Till now, the banks used to pay the ins
urance premium for the deposits they hold to get insurance coverage from DICGC.
Now the committee set up by the RBI under the Chairmanship of J Captor suggested
that the risk premium is to be paid which Is sensitive to the probability of th
e bank in question going bankrupt. The paper "What Makes Banks Fragile tries to
compute the volatility of banks assets and deposit insurance premium with an il
lustrate on and presents a view point of fixing higher deposit insurance premium
if reserve requirements are to be phased out.
Page 39

Credit Risk Management at Canara

Credit risk is defined as the possibility of losses associated with diminution i
n the credit quality of borrowers or counter parties. In a bank s portfolio, los
ses stem from outright default due to inability or unwillingness of a customer o
r counter party to meet commitments in relation to lending, trading, settlement
and other financial transactions. Alternatively, losses result from reduction in
portfolio value arising from actual or perceived deterioration in credit qualit
y. Credit risk emanates from a bank s dealings with an individual, corporate, ba
nk, financial institution or a so vereign. Credit risk takes in the following fo
rms: 1. In the case of direct lending: principal/and or interest amount not be r
epaid; 2. In the case of guarantees or letters of credit: funds not forthcoming
from the constituents upon crystallization 0 f the liability. 3. In the case of
treasury operations: the payment or series of payments due from the counter part
ies under the respective contracts may not be forthcoming or ceases; 4. In the c
ase of securities trading businesses: funds/ securities settlement may not be ef
Page 40

Credit Risk Management In this backdrop, it is imperative that Canara bank has c
redit risk management system, which is sensitive and responsive to these factors
. The effective management of credit risk is a critical component of comprehensi
ve risk management and ie essential for the long-term success of Canara banking
organisation. Credit risk managemnt encompasses identification, measurement, mon
itoring and control of the credit risk sources. The Bank has put in place a unif
ied risk management architecture to attain global best practices for effective i
mplementation of risk management initiatives in consistence with the Basle II fr
amework and RBI guidelines. The Board of Directors drives the Risk Management in
itiatives in the Bank. The Risk Management Committee of the Board is operational
. Top Executive Committees for Credit Risk, Operational Risk and Market Risk Man
agement oversee and monitor the respective risk management processes and procedu
res. Asset Liability Committee (ALCO) meets periodically for effective and proac
tive ALM in the Bank. An exclusive Risk Management Wing at the Head Office is fu
nctioning as a nodal centre for overall implementation of various risk managemen
t initiatives across the Bank. Integrated Mid Office of both domestic and Forex
Treasury are functioning under the Risk Management Wing for effective and indepe
ndent supervision and monitoring of Market Risk in investment and forex function
s. Risk Management Sections are functioning at all the 34 Circle Offices of the
Bank as an extended arm of the Risk Management Wing at the Corporate Office. The
Bank has put in place various risk management policies, which include policy fo
r management of Credit Risk, Market Risk, Operational Risk, Asset Liability, Liq
uidity Risk, Country Risk, Counterparty Bank Risk, Corporate Governance, Disclos
ures, Collateral Management, Stress Testing, Compliance Functions, Disaster Reco
very and Business Continuity Planning, Business Lines, Outsourcing, Group Risk,
Legal Risk etc. The Bank has also framed risk management policies for its overse
as branches. These policies are being reviewed and fine tuned annually.
Page 41


Page 42

Building Blocks of Credit Risk Management at Canara Bank

In a bank, an effective credit risk management framework would , omprise of the
following distinct building blocks:

Policy and Strategy Organizational Structure Operations/ Systems

Policy and Strategy

The Board of Directors shall be responsible for approving and periodic a II y re
viewing the credit risk strategy and significant credit risk policies.
Credit Risk Policy
1. Bank has credit risk policy document approved by the Board. The document incl
ude risk identification, risk measurement, risk grading/ aggregation techniques,
reporting and risk controlV mitigation techniques, documentation, legal issues
and management of problem loans. 2. Credit risk policies defined target markets,
risk acceptance criteria, credit approval authority, credit origination! mainte
nance procedures and guidelines for portfolio management. 3. The credit risk pol
icies approved by the Board communicated to branches/controlling offices. All de
aling officials should clearly understand the barne s approach for credit sancti
on and are held accountable for complying with established policies and procedur
es. 4. Senior management of a Canara bank shall be responsible for implementing
the credit risk policy approved by the Board. HETs INSTITUTE OF MANAGEMENT STUDIE
S HUBLI Page 43

Credit Risk Strategy 1. Each branch of Canara bank should develop, with the appr
oval of its Board, its own credit risk strategy or plan that establishes the obj
ectives guiding the Canara bank s credit-granting activities and adopt necessary
policies/ procedures for conducting such activities. This strategy should spell
out clearly the organisation s credit appetite and the acceptable level of risk
-reward trade-off for its activities. 2. The strategy would, therefore, include
a statement of the Canara bank s willingness to grant loans bas ed on the type
of economic activity, geographical location, currency, market, maturity and anti
cipated profitability. This would necessarily translate into the identification
of target markets and business sectors, preferred levels of diversification and
concentration, the cost of capital in granting credit and the cost of bad debts.
Credit risk Management Committee (CRMC] Each Canara bank may, depending on the
size of the organization or loan! Investment book, constitute a high level Credi
t Risk Management Committee (CRMC). The Committee should be headed by the Chairm
an and should comprise of heads of Credit Department, Treasury, Credit Risk Mana
gement Department (CRMD) and the Chief Economist. The functions of the Credit Ri
sk Management Committee should be as under:
1. Responsible for the implementation of the credit risk policy/ strategy approv
ed by the Board. 2. Monitor credit risk on a Canara bank wide basis and ensure c
ompliance with limits approved by the Board. 3. Recommend to the Board, for its
approval, clear policies on standards for presentation of credit proposals, fina
ncial covenants, rating standards and benchmarks, 4. Decide delegation of credit
approving powers, prudential limits on large credit exposures, standards for lo
an collateral, portfolio management, loan review mechanism, risk
Page 44

concentrations, risk monitoring and evaluation, pricing of loans, provisioning,

regulatory/legal compliance, etc.
Concurrently, Canara bank set up Credit Risk Management Department (CRIVID), ind
ependent of the Credit Administration Department.
The CRMD does the followings :
1. Measure, control and manage credit risk on a Canara bank -wide basis within t
he limits set by the Board/ CRMC
Enforce compliance with the risk parameters and prudential limits set by t.he Bo
ard! CRMC.
3. Lay down riskassesment system develop loan/ investment portfolio. identify pr
oblems, correct deficiencies and undertake loan review/audit. Large Canara banks
could consider separate set up for loan review/audit. 4. Accountable for protec
ting the quality of the entire loan! investment portfolio. The Department undert
akes portfolio evaluations and makes comprehensive studies on the environment to
test the resilience of the loan portfolio Operations 1st Systems Canara banks h
ave an appropriate credit administration, credit risk measurement and monitoring
processes. The credit administration process typically involved the following
Relationship management phase i.e. business development. Transaction management
phase covers risk assessment, loan pricing, structuring the facilities, internal
approvals, documentation, loan administration, on going monitoring and risk mea
Portfolio management phase entails monitoring of the portfolio at a macro level
and the management of problem loans.
4. On the basis of the broad management framework stated above, the Canara banks
Page 45

following credit risk measurement and monitoring procedures:

5. Canara banks established proactive credit risk management practices like annu
al / half yearly
industry studies and individual obligor reviews (recently established) periodic
credit calls that are documented, periodic visits of plant and business site, an
d at least quarterly management reviews of troubled exposures/weak credits
Canara bank has system of checks and balances in place for credit viz.: 1. 2. 3.
4. 5. 6. 7. 8. 9.
extension of
Separation of credit risk management from credit sanction Multiple credit approv
ers making financial sanction subject to approvals at various stages viz. credit
ratings, risk approvals, credit approval grid, etc. An independent audit and ri
sk review function. The level of authority required to approve credit will incre
ase as amounts and transaction risks increase and as risk ratings worsen. Every
obligor and facility must be assigned a risk rating. Mechanism to price faciliti
es depending on the risk grading of the customer, and to attribute accurately th
e associated risk weightings to the facilities. Banks ensure that there are cons
istent standards for the origination, documentation and maintenance for extensio
ns of credit Banks has a consistent approach towards early problem recognition,
the classification of problem exposures, and remedial action. Banks maintain a d
iversified portfolio of risk assets; have a system to conduct regular analysis o
f the portfolio and to ensure ongoing control of risk concentrations. Credit ris
k limits include, obligor limits and concentration limits by industry or geograp
hy. The Boards should authorize efficient and effective credit approval processe
s for operating within the approval emits.
11. Bank has systems and procedures for monitoring financial performance of cust
omers and for controlling outstanding within limits. 12. A conservative policy f
or provisioning in respect of non -performing advances adopted. HETs INSTITUTE OF

Credit Risk Rating [CRR]

Canara bank concern with following risk while rating them: 1. 2. 3. 4. Financial
risk Industry risk Business risk Market risk
Treatment of Credit risk at bank.
The unsecured portion of NPA accounts net of specific provisions is also to be s
ubject to risk weighting mechanism; unsecured portion means the NP A amount obta
ined after deducting the eligible and guarantee amounts. The risk weights for NP
A accounts are as follows: Other than residential mortgage loans When specific p
rovisions are < 20% of NPA risk weights amount 150% When specific provisions are
at least 20% of NPA risk weight is 100% When specific provisions are at least 5
0% of NPA risk weight amounts to 50% Fully Covered by Plant and Machinery and La
nd and Building When specific provision reaches at least 15% of NPA risk weight
amount 100% Residential Mortgage loans Generally risk weight applicable is 100%
If specific provisions are at least 20% of NPA risk weights amount to 75%
Page 47

An Illustration
Credit Risk assessment at branch level (Traffic Island Branch) Major Segments Sc
ores Scores assessed Level of Risk allotted (1) Assessment areaCredit ~ CreditGrowth Trend Credit- Quality Non-Fund based exposure Adequacy of portfolio Total
10 20 05 05 40 05 08 03 02 18 I Low I Low I Medium Low Low
Branch Authorities (Authority to sanction loans to Corporate)
Branch Office: Braches allowed transaction loan from I to 75 lacks for respectiv
e sectors. Regional Office: If loan amount is more than 75 lacks then that propo
sal goes to regional office, Regional office has authority to sanction from 75 l
acks to 3 crores for industries. Circle Office: Circle office has authority of s
anctioning loan from 3 crores and above.
Factors considered for sanction loans:

1) Individual Capacity. 2) Securities 3) Additional securities 4) Prompt repayme

nt of L02. 5) Deposits in Banks
Individual Capacity: Bank considers individual capacity h) repayment of loan wit
h term or agreed term with bank and also considers his transaction with bank if
any. Securities: Bank considers securities of borrowers while lending money to h
im. Ex: Shares cel1ificate, Insurance policies Additional Securities: Banks cons
ider or accept additional securities like land, home and other securities while
sanctioning new loan to customers when customers has existing loan in bank. Prom
pt repayment of Loan: Existing transaction or previous transact ion consider whi
le grant new loan to customers/ Clients. His prompt repayment of loan consider f
or new loans. Bank Deposits Bank deposits with bank or any other banks consider
as security for loans.
Existing Credit Risk Management at Canara Bank HETs INSTITUTE OF MANAGEMENT STUDI
ES HUBLI Page 49

Follow up clients/Customers. Recovery systems. Review of loan. Additional securi
ties Providing additional loans to make repayment of existing loans. Loan Review
Mechanism. Low and High credit risk ratings. Low interest rate for high credit
rating companies High interest rate for low credit rating companies Single/group
borrower limits Authorities to branches Authorities to Committees.
Following Up customers/Clients:
Bank remind borrowers to repay loan and interest according to term and condition
which he has agreed while taking loan from banks, and also ensure that ifhe fai
ls to pay the loanwhat is next step of banks.
Recovery Systems:
Bank directly collect dues from customers They have separate department, which l
ook \after all matters related to recovery of loan. Review of loan: If the amoun
t not recovered within specified term mentioned as per the policy of bank, bank
goes for review of loan if required.
Additional Securities:

Additional securities will be taken from the customer in two situations: 1) If e

xisting loan extended by the bank. 2) When additional loan is given to the custo
mer in addition to existing loan. Low and High credit risk ratings. Interest rat
e is depend on credit worthy nests of the company, if the credit worthy Ness of
the company is high he will be charged low interest, opposite is the case for lo
w credit worthiness Following Securities as eligible for treatment as Credit ris
k mitigates: 1) Bank Deposits 2) Gold Jewellery ( Benchmarked to 99.99 purity) 3
) State Govt securities 4) Central Govt securities 5) National Saving Certificat
es, Vikas Patras and Kisan Vikas Patras 6) Life Insurance Policies 7) Equities (
Including convertible bonds) 8) Mutual fund securities 9) Land and Building
Plant and Machinery
Page 51

Guarantors Types
State Government Central Government Public Sector Entities Banks Primary Dealers
Substitution approach
In this approach risk weight of the guarantor replace the lisk weight of the bor
rower provided it result in application of a lower risk weight, thus only guaran
tee issued by entities with a lower risk weight provides credit risk mitigation
effect in the form of lower capital charges. Proportional Cover This method is t
aken note of is that the risk mitigation effect will be available to the extent
of protection provided b Guarantor and the remaining unprotected portion carry t
he risk weight applicable to borrower. Thus in order to avail capital relief it
is necessary that the following details on guarantors are captured: Name of the
Guarantor Extent of Guarantee cover available Customer type of the guarantor
Techniques for Measuring Credit Risk

In the measurement of credit risk, models may be classified along three differen
t dimensions: 1. 2. 3. The techniques employed, The domain of applications in th
e credit process and The products to which they are applied.
Techniques: The following are the more commonly used techniques:
Econometric Techniques such as linear and multiple discriminate analysis,
Multiple regression, logic analysis and probability of default, etc
Neural networks are computer-based systems that use the same data employed in th
e econometric techniques but arrive at the decision model using alternative impl
ementations of a trial and error method.
3 Itemization models are mathematical programming techniques that discover the o
ptimum weights for borrower and loan attributes that minimize lender error and m
aximize profits.
Rule-based or expert are characterized by a set of decision rules, a knowledge b
ase consisting of data such as industry financial ratios, and a structured inqui
ry process to be used by the analyst in obtaining the data on a particular borro
Hybrid Systems In these systems simulation are driven in part by a direct causal
relationship, the parameters of which are determined through estimation techniq
Page 53

Domain of application: These models are used in a variety of domains: Credit app
roval Models are used on a stand alone basis or in conjunction with a judgementa
l override system for approving credit in the consumer lending business. The use
of such models has expanded to include small business lending. They are general
ly not used in approving large corporate loans, but they may be one of the input
s to a decision. Credit rating determination: Quantitative models are used in de
riving shadow bond rating for unrated securities and commercial loans. These r
atings in turn influence portfolio limits and other lending limits used by the i
nstitution. In some instances, the credit rating predicted by the model is used
within an institution to challenge the rating assigned by the traditional credit
analysis process. Credit risk models may be used to suggest the risk premier th
at should be charged in view of the probability of loss and the size of the loss
given default. Using a mark -tomarket model, an institution may evaluate the co
sts and benefits of holding a financial asset. Unexpected losses implied by a cr
edit model may be used to set the capital charge in pricing. Instruments of Cred
it Risk Management Credit Risk Management encompasses a host of management techn
iques, which help the banks in mitigating the adverse impacts of credit risk. 1.
Credit Approving Authority Each bank should have a carefully formulated scheme
of delegation of powers. The banks should also evolve multi-tier credit approvin
g system where the loan proposals HETs INSTITUTE OF MANAGEMENT STUDIES HUBLI Page

are approved by an Approval Grid or a Committee . The credit facilities above

a specified limit may be approved by the Grid or Committee , comprising at l
east 3 or 4 officers and invariably one officer should represent the CRMD, who h
as no volume and profit targets. Banks can also consider credit approving commit
tees at various operating levels i.e. large branches (where considered necessary
), Regional Offices, Zonal Offices, Head Offices, etc. Banks could consider dele
gating powers for sanction of higher limits to the Approval Grid or the Commi
ttee for better rated / quality customers. The spirit of the credit approving s
ystem may be that no credit proposals should be approved or recommended to highe
r authorities, if majority members of the Approval Grid or Committee do not
agree on the creditworthiness of the borrower. In case of disagreement, the spec
ific views of the dissenting member/s should be recorded. The banks should also
evolve suitable framework for reporting and evaluating the quality of credit dec
isions taken by various functional groups. The quality of credit decisions shoul
d be evaluated within a reasonable time, say 3 - 6 months, through a welldefined
Loan Review Mechanism. 2. Prudential Limits In order to limit the magnitude of
credit risk, prudential limits should be laid down on various aspects of credit:
a) Stipulate benchmark current/debt equity and profitability ratios, debt servi
ce coverage ratio or other ratios, with flexibility for deviations. The conditio
ns subject to which deviations are permitted and the authority therefore should
also be clearly spelt out in the Loan Policy; b) Single/group borrower limits, w
hich may be lower than the limits prescribed by Reserve Bank to provide a filter
ing mechanism; d) maximum exposure limits to industry, sector, etc. should be se
t up. There must also be systems in place to evaluate the exposures at reasonabl
e intervals and the limits should be adjusted especially when a pm1icular sector
or industry faces slowdown HETs INSTITUTE OF MANAGEMENT STUDIES HUBLI Page 55

or other sector/industry specific problems. The exposure limits to sensitive sec

tors, such as, advances against equity shares, real estate, etc., which are subj
ect to a high degree of asset price volatility and to specific industries, which
are subject to frequent business cycles, may necessarily be restricted. Similar
ly, high-risk industries, as perceived by the bank, should also be placed under
lower portfolio limit. Any excess exposure should be fully backed by adequate co
llaterals or strategic considerations. e) Banks may consider maturity profile of
the loan book, keeping in view the market risks inherent in the balance sheet,
risk evaluation capability, liquidity, etc. 3 Risk Rating Banks should have a co
mprehensive risk scoring / rating system that serves as a single point indicator
of diverse risk factors of counterparty and for taking credit decisions in a co
nsistent manner. To facilitate this, a substantial degree of standardization is
required in ratings across borrowers. The risk rating system should be designed
to reveal the overall risk of lending, critical input for setting pricing and no
n -price terms of loans as also present meaningful information for review and ma
nagement of loan portfolio. The risk rating, in short, should reflect the underl
ying credit risk of the loan book. The rating exercise should also facilitate th
e credit granting authorities some comfort in its knowledge of loan quality at a
ny moment of time. 4 Risk Pricing Risk-return pricing is a fundamental tenet of
risk management. In a risk -return setting, borrowers with weak financial positi
on and hence placed in high credit risk category should be priced high. Banks sh
ould evolve scientific systems to price the credit risk, which should have a bea
ring on the expected probability of default. The pricing of loans normally shoul
d be linked to risk rating or credit quality. The probability of default could b
e derived from the past behavior of the loan portfolio, which is the function of

Banks should build historical database on the portfolio quality and provisioning
/ charge off to equip themselves to price the risk. But value of collateral, ma
rket forces, perceived value of accounts, future business potential, portfolio/i
ndustry exposure and strategic reasons may also play important role in pricing.
Flexibility should also be made for revising the price (risk premier) due to cha
nges in rating / value of collaterals over time. Large sized banks across the wo
rld have already put in place Risk Adjusted Return on Capital (RAROC) framework
for pricing of loans, which calls for data on portfolio behavior And allocation
of capital commensurate with credit risk inherent in loan proposals. Under RAROC
framework, lender begins by charging an interest mark -up to cover the expected
loss - expected default rate of the rating category of the borrower. The lender
then allocates enough capital to the prospective loan to cover some amount of u
nexpected loss- variability of default rates. Generally, international banks all
ocate enough capital so that the expected loan loss reserve or provision plus al
located capital cover 99% of the loan loss outcomes. Portfolio Management The ex
isting framework of tracking the Non Performing Loans around the balance sheet d
ate does not signal the quality of the entire Loan Book. Banks should evolve pro
per systems for identification of credit weaknesses well in advance. Most of int
ernational banks have adopted various portfolio management techniques for gaugin
g asset quality. The CRMD, set up at Head Office should be assigned the responsi
bility of periodic monitoring of the portfolio. The portfolio quality could be e
valuated by tracking the migration (upward or downward) of borrowers from one ra
ting scale to another. This process would be meaningful only if the borrower-wis
e ratings are updated at quarterly / half-yearly intervals. Data on movements wi
thin grading categories provide a useful insight into the nature and composition
of loan book. The banks could also consider the following measures to maintain

1) Evaluate the rating-view distribution of borrowers In vanous industry, busine

ss segments, 2) Exposure to one industry/sector should be evaluated on the basis
of overall rating distribution of borrowers in the sector/group. In this contex
t, banks should weigh the pros and cons of specialization and concentration by i
ndustry group. In cases where port folio exposure to a single industry is badly
performing, the banks may increase the quality standards for that specific indus
6. Loan Review Mechanism (LRM) LRM is an effective tool for constantly evaluatin
g the quality of loan book and to bring about qualitative improvements in credit
administration. Banks should, therefore, put in place proper Loan Review Mechan
ism for large value accounts with responsibilities assigned in various areas suc
h as, evaluating the effectiveness of loan administration, maintaining the integ
rity of credit grading process, assessing the loan loss provision, portfolio qua
lity, etc. The complexity and scope of LRM normally vary based on banks size, t
ype of operations and management practices. It may be independent of the C RMD o
r even separate Department in large banks. The main objectives of LRM could be:

To identify promptly loans which develop credit weaknesses and initiate timely c
orrective action; To evaluate portfolio quality an~ isolate potential problem ar
eas; To provide information for determining adequacy of loan loss provision; To
assess the adequacy of and adherence to, loan policies and procedures, and to mo
nitor Compliance with relevant laws and regulations. To provide top management w
ith information on credit administration, including credit Sanction process, ris
k evaluation and post-sanction follow-up.

Page 58

Accurate and timely credit grading is one of the basic components of an effectiv
e LRM. Credit grading involves assessment of credit quality, identification of p
roblem loans, and assignment of risk ratings. A proper Credit Grading System sho
uld support evaluating the p0l1folio quality and establishing loan loss provisio
ns. Given the importance and subjective nature of credit rating, the credit rati
ngs awarded by Credit Administration Department should be subjected to review by
Loan Re view Officers who are independent of loan administration. The Risk Mana
gement Group of the Basle Committee on Banking Supervision has released a consul
tative paper on Principles for the Management of Credit Risk. The Paper deals wi
th various aspects relating to credit risk management. The Paper is enclosed for
information of banks. 6. Qualification and Independence The Loan Review Officer
s should have sound knowledge in credit appraisal, lending practices and loan po
licies of the bank they should also be well versed in the relevant laws/regulati
ons that affect lending activities. The independence of Loan Review Officers sho
uld be ensured and the findings of the reviews should also be reported directly
to the Board or Committee of the Board. 7. Frequency and Scope of Reviews The Lo
an Reviews are designed to provide feedback on effectiveness of credit sanction
and to identify incipient deterioration in portfolio quality. Reviews of high va
lue loans should be undertaken usually within three months of sanction /renewal
or more frequently when factors indicate a potential for deterioration in the cr
edit quality. The scope of the review should cover all loans above a cut -off li
mit. In addition, banks should also target other accounts that present elevated
risk characteristics. At least 3040% of the portfolio should be subjected to LRM
in a year to provide reasonable assurance that all the major credit risks embed
ded in the balance sheet have been tracked. Depth of Reviews HETs INSTITUTE OF MA

The loan reviews should focus on: Approval process; Accuracy and timeliness of c
redit ratings assigned by loan officers; Adherence to internal policies and proc
edures, and applicable laws / regulations; Compliance with loan convents; Post-s
anction follow-up; Sufficiency of loan documentation; Portfolio quality; and Rec
ommendations for improving portfolio quality The findings of Reviews should be d
iscussed with line Managers and the corrective actions should be elicited for al
l deficiencies. Deficiencies that remain unresolved should be reported to top ma
nagement. The Risk Management Group of the Basle Committee on Banking Supervisio
n has released a consultative paper on Principles for the Management of Credit R
isk. The Paper deals with various aspects relating to credit risk management. Th
e Paper is enclosed for information of banks. Early warning: Credit models are u
sed to flag potential problems in the portfolio to facilitate early corrective a
ction. Common credit language: Credit models may be used to select assets from a
pool to construct a portfolio acceptable to investors at the time of asset secu
ritization or to achieve the minimum credit quality needed to obtain the desired
credit rating. Underwriters may use such models for due diligence on the portfo
lio (such as a collateralized pool of commercial loans).
Page 60

Collection strategies: Credit models may be used in deciding on the best collect
ion or workout strategy to pursue. If, for example, a credit model indicates tha
t a borrower is experiencing short term liquidity problems rather than a decline
in credit fundamentals, then an appropriate workout may be devised. Credit Risk
Models: Approaches The literature on quantitative risk modeling has two differe
nt approaches to credit risk measurement. The first approach is the development
of statistical models through analysis of historical data. This approach was fre
quently used in the last two decades. The second type of modelling approach trie
s to capture distribution of the firm s asset -value over a period of time. The
statistical approach tries to rate the firms on a discrete or continuous scale.
The linear model introduced by Altman (1967), also known as the Z -score Model,
separates defaulting firms from non-defaulting ones on the basis of carat in fin
ancial ratios. Altman, Hartwell, and Peck (1995,1996) have modified the original
Z -score model to develop a model specific to emerging markets. This model is k
nown as the Emerging Market Scoring (EMS) model. The second type of modeling app
roach tries to capture distribution of the financial asset value over a period o
f time. This model is based on the expected default frequency (EDF) model. It ca
lculates the asset value of a film from the market value of its equity using an
option pricing based approach that recognizes equity as a call option on the und
erlying asset of the firm. It tries to estimate the asset value path of the firm
over a time horizon. The default risk is the probability of the estimated asset
value falling below a prespecified default point. This model is based conceptua
lly on Merton s (1974) contingent hassock and has been working very well for est
imating default risk in a liquid market.
Page 61

Closely related to credit risk models are portfolio risk models. In the last thr
ee years, important advances have been made in modeling credit risk in lending p
ortfolios. The new models are designed to quantify credit risk on a portfolio ba
sis, and thus are applied at the time of diversification as well as portfolio ba
sed pricing. These models estimate the loss distribution associated with the P0l
1folio and identify the risky components by assessing the risk contribution of e
ach member in the portfolio. Banks may adopt any model depending on their size,
complexity, risk bearing capacity and risk appetite, etc. However, the credit ri
sk models followed by banks should, at the least, achieve the following: 1. Resu
lt in differentiating the degree of credit risk in different credit exposures of
a bank. The system could provide for transaction -based or borrower-based ratin
g or both. It is recommended that all exposures are to be rated. Restricting ris
k measurement to only large sized exposures may fail to capture the p0l1folio ri
sk in entirety for variety of reasons. For instance, a large sized exposure for
a short time may be less risky than a small sized exposure for a long time. 2. I
dentify concentration in the portfolios 3. Identify problem credits before they
become NPAs 4. Identify adequacy/ inadequacy of loan provisions 5. Help in prici
ng of credit
Recognize variations in macro-economic factors and a possible impact under alter
native scenarios
7. Determine the impact on profitability of transactions and relationship.
Page 62


Page 63


Primary data: Primary data collected through the interaction with chief manager,
senior manager and bank staff. Secondary Data: Secondary data collected from ba
nk circulars, bank guidelines book and internet. Brief Findings Current system o
f credit risk management Canara Bank has a system of checks and balance in place
of extension of credit. The aspect covered under the present system is multiple
credit approvals, independt audit and risk review and risk rating system for va
rious categories of system and corresponding pricing mechanism. The bank maintai
ns a diversified portfolio of risk assets, and ensures on going control of risk
considerations .All credit exposures above RS 5 Crores are assigned risk waiting
assigned by domestic credit rating agencies recognized by RBI The credit risk m
anagement system at the branch level has been maped out in detail 1. Internal ra
ting based (IRB) approach the standardized approach adopted so far, provides inc
entives to banks improving their credit risk management techniques. 2. Banks may
have discretion and flexibility in defining the exposure classes, such as corpo
rate, project finance, etc. 3. Unless suitable modified, the adoption of the new
Accord in its present format would result in significant increase in the capita
l charge for banks.
Page 64


Page 65

OUTLOOK FOR 2010-11 The International Monetary Fund (IMF), in its World Economic
Outlook, April 2010 raised its forecast for world economic growth in 2010 to 4.
2% as against a 0.6% contraction in 2009. However, IMF forecasted that advanced
economies would not exit the global recession until the middle of 2010 and emerg
ing economies, which are increasingly driven by domestic growth factors, will co
ntinue to drive global recovery. Financial year 2010-11 started on a positive no
te for Indian economy with major macro economic parameters performing well. Indu
strial growth and exports have been showing steady increase and the continued st
rong growth in manufacturing indicates the resilience of domestic demand. A stro
ng saving and investment rate, favourable capital market conditions and improved
capital flows and positive business outlook will also help the economy towards
a faster revival. Going forward, the strong domestic demand and sustained increa
se in per capita income will ensure faster economic growth. Thrust on inclusive
growth and focus on the rural economy would propel the growth engine of the econ
omy further. Indian economy will remain one of the fastest growing economies in
the world in view of the expected recovery in agricultural production, industria
l output, demand for higher exports and the revival of global economy. The RBI i
n its Annual Monetary Policy Statement for 2010-11 placed real GDP growth for 20
10-11 at 8%, with an upward bias. The RBI envisages containing money supply (M3)
at around 17% in consonance with the outlook on growth and inflation. While agg
regate deposits of SCBs are projected to grow at 18%, adjusted non-food credit i
s likely to record a growth of 20% during 2010-11, as indicated by the RBI. The
annual policy also endeavors to contain inflation at a benign level of 5.5%, wit
h a medium term goal of 3%.
Page 66

Canara Bank crossed three major milestones during 2009-10. First, its total busi
ness crossed the Rs.400000 crore marks, signifying a growth of 24.3%. Second, Ne
t profit crossed Rs.3000 crore to reach Rs.3021 crore, up by Rs.45.8%. Third, th
e Banks branch network crossed the 3000 mark to reach 3046, with an addition of 3
14 branches during the year For Canara Bank, 2009-10 was a year of reckoning and
crossing of milestones. It was a year of robust performance on the business fro
nt coupled with unprecedented gains in profits and profitability. Continued buoy
ancy in core business operations and costs containment helped the Bank to sustai
n and enhance the top line earnings while maintaining a stronger bottom line.
Net profit reached an all time high of Rs. 3021 crore, signifying a strong 45.8%
growth y-o-y and substantially higher than Rs. 2072 crore recorded during the
preceding year. Operating profit recorded a 27.7% growth to reach a level of Rs.
5061 crore.
Return on average assets (RoAA) for the year stood at 1.30%, well above the inte
rnational benchmark of 1%. Cost to Income ratio declined by 288 basis points to
40.73%. Profit per employee, moved up to Rs.7.36 lakh compared to Rs.4.97 lakh i
n the previous financial year.
Page 67

Dividend of 100% for 2009-10

Divide nd and Earnings per share
80 70 60 50 40 30 20 10 0 38.17
8.0 Earnings Per Share Dividend Per Share 8.0
10.0 8.0 6.0 4.0 2.0 0.0
conformity with its commitment to enhance value for shareholders, the Bank showe
d steady improvement in Earnings Per Share (EPS) and Book Value. While Book Valu
e increased to Rs.305.83 as at March 2010 as compared to Rs.244.87 for the previ
financial, EPS rose to Rs.73.69 for the year ended March 2010 compared to Rs.50.
55 a year ago. A dividend of 100%, amounting to Rs.410 crore, was recommended by
the Board of Directors of the Bank for 2009-10.
Key Financial Ratios (%)
Cost of Funds Yield on Funds Cost of Deposits Yield on Advances Yield on Investm
ents Spread as a % to AWF* Net Interest Margin (NIM) Operating Expenses to AWF R
eturn on Avg. Assets (RoAA) Return on Avg. Net worth Business per Employee (Rs.
in Crore) Profit per Employee (Rs. in Lack)
6.32 8.72 6.87 10.79 7.94 2.40 2.78 1.56 1.06 22.61 7.80 4.97
5.65 8.10 6.12 9.81 7.52 2.45 2.80 1.50 1.30 26.76 9.83 7.36 Page 68

Book Value (Rs.) Earnings per Share (Rs.)

AWF - Average Working Funds
244.87 50.55
305.83 73.69
Income and Expenditure Analysis The Banks interest income recorded a y-o-y growth
of 9.5% to reach Rs.18752 to crore compared Rs.17119
previous financial. Non-interest income increased to Rs. 2858 crore, recording a
robust growth of 23.7%.
Concerted focus on mobilization of low cost deposits and strong resistance to hi
gh cost
preferential rate deposits helped the Bank to reduce the cost of deposits to 6.1
2% from against 10.79% in March 2009 due to low interest rates. Interest spread
increased to 2.45% from 2.41% as at March 2009. While interest expenditure margi
nally increased to Rs.13071 crore, the Bank reasonably contained its rise in non
-interest expenditure at 13.5%. Notably, the net interest income of the Bank reg
istered a 2.80% compared to 2.78% as at March 2009.
March 2009 level of 6.87%. Yield on advances decreased by 98 basis points to 9.8
1% as
Non-Interest Income 13%
crore recorded during the
Others 1%
good 20.41% growth to reach Rs. 5681 crore and Net Interest Margin (NIM) improve
d to
Oth Opera Expend Investment 21% 8%
Page 69

Capital and Reserves Net worth of the Bank, as at March 2010, stood at Rs.12949
crore compared to Rs.10040 crore as at March 2009. With the paid-up capital at R
s.410 crore, reserves and surplus increased to Rs.14262 crore. To augment the ca
pital resources, the Bank raised Rs. 600 crore through the Innovative Perpetual
Tier I Bonds during the year. (Amt. in Rs. Crore) Composition of Capital March 2
009 Basle II Risk Weighted Assets Tier I Capital CRAR (%)(Tier I) Tier II Capita
l CRAR (%)(Tier II) Total Capital CRAR (%) 125111 10023 8.01 7623 6.09 17646 14.
10 March 2010 Basle II 150623 12870 8.54 7362 4.89 20232 13.43
As at March 2010, Capital to Risk Weighted Assets Ratio (CRAR) of the Bank under
Basle II stood at 13.43%, well above the 9% regulatory benchmark. Significantly
, the Bank has attained a Tier I capital ratio of 8.54%. The medium term objecti

is to maintain the CRAR ratio above 12%. With the still undiluted 73.17% Governm
ent of India shareholding, the Bank has large headroom available under both Tier
I and Tier II options to raise capital and support business growth momentum. BU
SINESS GROWTH Business Volumes Cross Rs.4 lack Crore
Deposits Total Deposits of the Bank registered a growth of 25.6% to reach Rs. 2,
34,651 crore as at March 2010. In accordance with the strategic focus, the Bank
s core deposits recorded a growth of 32.3%, supported by 19.3% growth in savings
deposits. Unrelenting focus on augmenting of low cost resources yielded good re
sults. The Banks mega savings bank deposit campaign (Savings Utsav) resulted in a
n addition of Rs.8064 crore in savings deposits during FY10 as against Rs.6544 c
rore in FY09. The share of CASA (current and savings bank deposits) deposits in
domestic deposits stood at 29.85%. With a CASA per branch at Rs. 22.4 crore, the
Bank continues to be one of the best among the peers. Pursuing a strategy of br
oad basing deposit clientele, all the branches together added nearly 2.35 millio
n deposit accounts, taking the total tally under deposit accounts to 32.85 milli
260000 210000
Page 71

Advances (net) The Bank s advances (net) witnessed a robust 22.5% growth in 2009
-10 to reach Rs.
1,69,335 crore. In quantum terms, credit increased by over Rs.31000 crore. The B
ank stepped up credit to all productive segments of the economy like agriculture
and Micro, Small and Medium Enterprises (MSME), exposure to corporate and infra
structure segments. The number of borrowal accounts, as at March 2010, rose to 4
.49 million.
Total Business of the Bank grew by 24.3% to reach Rs. 4,03,986 crore as at March
2010 as against Rs. 3,25,112 crore during the year. as preceding Productivity,
measured by business per employee, increased to Rs.9.83 crore from Rs.7.80 crore
a year ago, continuing to be one of the best among the peers. With clientele du
ring the year.
CAGR for
several enterprise-wide initiatives and measures, the Bank added 2.54 million
450000 400000
Page 72

Retail Lending Operations

Retail lending operations of the Bank regained the growth momentum during the ye
ar. While disbursals under the retail lending stood at Rs. 8653 crore, the
outstanding advances rose to Rs. 23902 crore, accounting for about 15% of the do
mestic credit.
(Amt. in Rs. Crore)
Retail Lending Retail Lending Housing (Direct) Retail Trade Other Personal (Incl
uding Education Loan) March 2009 19798 7896 4451 7451 March 2010 23902 10116 538
3 8403 Growth (%) 20.7 28.1 20.9 12.8
O Per 3
Page 73

The Bank took several measures during the year to expand retail credit, includin
g special packages for housing and auto loans. Under Canara Mobile loan, the Ban
k sanctioned 24,000 accounts, amounting to Rs. 803 crore. To facilitate speedy d
isposal of proposals and credit flow, a total of 25 Centralized Processing Units
(CPU)/ Retail Assets Hubs (RAH) for housing and personal loans were functioning
at major centres across the country.
Business performance of overseas branches as on 31.03.2010
Overseas Branch London (GBP Mn) Hong Kong (USD Mn) Shanghai
Deposits 992.69 61.85
Net Profit 0.3 2.48
Profit 771.08 8.88 363.25 5.50 In first year of operation
The Bank has already obtained approval from the RBI to open 10 branches/offices
in Johannesburg, Frankfurt, Muscat, Manama, QFC-Qatar, New York, Sao Paulo, DarerSalam, Tokyo and Sharjah, out of the 20 international financial centres identi
fied for global expansion in the medium term. The Bank s international operation
s are supported by a wide network of 395 correspondent banks, spread across 80 c
ountries. The Bank has rupee drawing arrangements with 22 exchange houses and 18
banks in the Middle East for channelising the remittances of expatriates. The B
ank has been managing two exchange houses viz., Al Razouki International Exchang
e Company, Dubai and Eastern Exchange Est., Qatar, under secondment and manageme
nt agreement respectively. The Bank, during the year, expanded its arrangement u
nder Remit Money , a web based product by extending to 17 Exchange Companies/Ba
nks and 4 branches abroad.
Page 74

FINANCIAL SOUNDNEES CAPITAL The Bank s paid-up capital stood at Rs410 crore with
1.08 lack shareholders. Capital to Risk Weighted Assets Ratio worked out to 1 3
.50% vis--vis the 9% benchmark. During FY07, the Bank raised lower/upper Tier II
capital worth Rs. 1975 crore from the domestic market and US$250 million oversea
s by way of a medium term note programmed. The Bank s Capital Roadmap duly facto
rs in the likely scenario in advances movement and expected regulatory changes.
The overarching objective has been to maintain CRAR above 12% so as to support t
he buoyancy in credit deployment. RESERVES AND OWNED FUNDS Reserves increased to
Rs.9944 crore, additional accrual during the year being Rs.3222 crore. Owned fu
nds stood at Rs.8111 crore as compared to Rs.7132 crore at the end of the previo
us year. PROFITS AND PROFITABILITY Gross profit for the year 2006-07 stood at Rs
.2912 crore, while net profit was of the order of Rs. 1421 crore. HETs INSTITUTE

Return on Average Assets (RoAA), worked out to 0.98%, despite a 25% growth in to
tal assets. Net Interest Income was up 12.43%to Rs.4027 crore.
SHAREHOLDERS VALUE A dividend of 70%, amounting to Rs.287 crore, is proposed by
the Board of Directors of the Bank, as against 66% (Rs.270.60 crore) paid last y
ear, subject to the approval of shareholders. Bank s performance under earnings
is reflected in a consistent uptrend in Book Value and Earnings Per Share. While
book value increased to Rs.197. 83 as at March 2007 compared to Rs. 171 .19 rec
orded for last financial, Earnings per Share further rose from Rs.32.76 to Rs.34
.65 for the year ended March 2007
Priority Sector Advances As one of the leading players in the domestic banking i
ndustry, the Bank continues to accord importance to varied goals under national
priorities. The remarkable performance during 2009-10 has further reinforced the
Banks commitment to the large and growing productive segments of the economy, in
cluding agriculture, small enterprises, education, micro-credit, weaker sections
, SC/STs and minorities. The Bank has achieved stipulated mandatory targets unde
r Total Priority, Total Agriculture and Weaker Sections Advances with comfortabl
e margin. Priority Sector Advances of the Bank as at March 2010 increased by Rs.
10547 crore to reach Rs.59310 crore, recording a y-o-y growth of 21.6% covering
38 lakh borrowers. Priority Sector Advances formed 43.92% of the Banks Adjusted N
et Bank Credit (ANBC), well above the 40% stipulated norm. HETs INSTITUTE OF MANA

(Amt. in Rs. Crore) Priority Advances Agriculture Micro & Sector As on 31st Marc
h 2009 2010 20144 16316 48763 25051 24180 59310 Growth Amount Percentage 4907 78
64 10547 24.36 48.20 21.63
Enterprises Total Priority Sector
With a focus on credit delivery to agriculture, the Banks advances under agricult
ure rose by Rs. 4907crore to reach Rs. 25051 crore, covering 29 lakh farmers. Ag
riculture credit as a proportion of ANBC rose to 18.55%, surpassing the mandator
y targeted level of 18%. Advances to agriculture (direct) reached a level of Rs.
19069 crore, with a 23% y-o-y growth and accounting for 14.12% of ANBC. Under K
isan Credit Card Scheme, the Bank issued 3.02 lakh cards during the year with cr
edit coverage of Rs.2432 crore. As at March 2010, the cumulative number of Kisan
Credit Cards reached 30 lakhs, involving credit coverage of Rs.14507 crore. Ove
r the years, the Bank has supported lakhs of to In promising students
pursue higher education in India and abroad. doing so, the Bank has built up a s
izable education loan portfolio and the has been among sustaining position premi
nationalized banks in India.
3500 3000
The Bank s advances under Education Loan Scheme
recorded a growth of 25.9% to reach Rs.2896 crore. The bank has financed more th
an priority sectors, such as, retail traders, housing and micro credit. HETs INST
1.71 lakh students as at March 2010. The Bank also extended financial assistance
to other
Educat No. of S
Page 77

During the year, the Bank actively participated in various Government Sponsored
Schemes, such as, PMRY, SGSY, SJSRY, SLRS and DRI. As at 31st March 2010, the ou
tstanding advances under these schemes aggregated to Rs.556 crore, involving 1.4
0 lakh beneficiaries.
Performance under Various Government Sponsored Schemes
Name of the Scheme PMRY SGSY SJSRY SLRS DRI Total
No. of Accounts 61980 16071 33734 1164 27188 140137
Amt. in Rs. Crore 295.81 50.11 158.48 2.50 49.50 556.40
In support of the underprivileged sections of the society, the Banks advances to
SC/ST beneficiaries reached Rs.3905 crore as at March 2010. Advances to SC/ST re
ached a level of 6.58% of total priority sector advances and total accounts unde
r SC/ST advances were 17% of total priority sector accounts.

Advances to weaker sections aggregated to Rs.14631 crore, with 25 lakh borrowers

. Advances to weaker sections formed 10.83% of ANBC against the norm of 10%.

As at March 2010, advances by the Bank to minority communities aggregated to Rs.

9348 crore and crossed the stipulated target of 15% of total priority by reachi
ng 15.76%.
During the year, the Bank has formed 44890 Self-Help Groups (SHGs), taking the c
umulative number of SHGs formed to 3.20 lakhs as at March 2010. With 50,701 SHGs
credit linked during the year, the cumulative tally under credit linking reache
d 2.75 lakhs since inception. The total exposure of the Bank under SHG finance r
ose to Rs. 926 crore, spreading over 97,498 SHGs. HETs INSTITUTE OF MANAGEMENT ST

Advances Medium
reached Rs.31074 crore, with a y-o-y mandatory y-o-y growth of 20%. The Bank has
growth of over 30%, far above the
accounts with an exposure of over Rs. 948 crore as at March 2010 under Credit Gu
arantee for Micro and Small Enterprises (CGMSE). Considering the importance of M
SME sector in the national economy, the Bank has developed specific loan product
s to meet the diverse requirements of entrepreneurs in this particular segment.
Cluster based lending is adopted to cater to the units in industrial clusters. A
rea/ cluster specific loan products have been introduced to meet specific requir
ements. To enable the MSME sector to face the challenges of economic slowdown, t
he Bank acted swiftly and rolled out a Special Package to provide relief to MSME
s during December 2008. The special package continued during the year 2009-10 al
so. The comprehensive package includes, among other facilities, additional/adhoc
working capital, extended tenability for receivables, concession in interest an
d debt restructuring. MSME Care Centers were established across the country to r
esolve the grievances of MSMEs.
35000 30000 25000
During the year, the Bank has launched "SME SULABH", a new business model for sp
eedy credit delivery to MSME Sector. The SME Sulabhs are independent centralized
loan processing centres aimed at fast processing/quick delivery of credit to MSM
Es. They are equipped with specialized marketing, credit appraisal and monitorin
g teams. 15 SME Sulabhs have been established at Agra, Ahmedabad, Bangalore, Cha

Chennai, Coimbatore, Delhi, Hubli, Hyderabad, Kolkata, Lucknow, Madurai, Mumbai,

Pune and Trivandrum. The Bank has embarked upon reaching out to large section o
f MSMEs at major centres in the country through this model. The contributions of
the Sulabhs in the growth of MSME credit of the Bank during 2009-10 has been su
bstantial resulting in Bank achieving the MSME targets for the year.
Rural Development The Bank, through its Canara Bank Centenary Rural Development
Trust, has established exclusive training institutes to promote entrepreneurship
development among rural youth and encourage them taking up self-employment acti
vities. During the year, 9 new training institutes were opened at Aligarh and Et
ah districts in Uttar Pradesh, Sheikhpura district in Bihar, Calicut and Palakka
d districts in Kerala, Nilgiris, Erode, Theni and Dindigul in Tamil Nadu enhanci
ng the number of such training institutes to 26. These institutes have so far tr
ained 94935 unemployed youth, comprising 60% women with an impressive settlement
rate of 70%. The Trust is also supporting the activities of Society for Educati
onal and Economic Development (SEED), a voluntary organization based in Sriperam
badur, Tamil Nadu, working for the welfare of the socially marginalized children
. The Bank has co-sponsored 23 Rural Development and Self Employment Training In
stitutes (RUDSETIs) engaged in training of rural youth for taking up self-employ
ment programmes. 23 RUDSETIs have trained more than 2,38,000 unemployed youth, w
ith a settlement rate of 70%. The Bank is also co-sponsoring Deshpande-RUDSETI a
t Haliyal in Karnataka and Andhra Pradesh Bankers Institute of Rural Development
(APBIRED) at Hyderabad in Andhra Pradesh. These two institutes are also engaged
in promoting entrepreneurship development among rural unemployed youth.
Page 80

The new campus for Canara Bank Institute for Artisans, Karaikudi was inaugurated
by Hon ble Union Home Minister, Shri P Chidambaram, during the year. Canara Ban
k s Rural Clinic Service Scheme provides basic health care services in remote ar
eas lacking basic medical infrastructure facilities. Under the Scheme, the Bank
encourages doctors to set up clinics in identified rural areas. As at March 2010
, the total number of such clinics rose to 518. The Bank under Jalayoga , a sch
eme to provide safe drinking water, has so far implemented 35 projects in its le
ad districts.
The Bank donated a hi-tech, custom built, solar powered Mobile Sales Van to as
sist women entrepreneurs, SHGs and artisans to market their products. Visits by
Parliamentary Committees The third Sub-Committee of Parliamentary Committee on O
fficial Languages had inspected our Khajuraho, Ghaziabad, Raipur Branches and CO
Mysore and lauded the efforts put in by the Bank in the field of Official Langu
age implementation.
Page 81

Branch Network
Expanded Pan India Presence
The year was significant for the Bank in expanding domestic operations across th
e country. Befitting its 104th year of existence, the Bank on its Founders Day i.
e., 19th November, 2009, opened 104 branches across the country, inaugurated by
Honble Finance Minister Shri Pranab Mukherjee. The Bank opened 314 branches durin
g the year, taking the total tally under the branch network to 3046 branches. Co
mposition of domestic branch network No. of Branches 31.03.200 31.03.2010 Catego
ry Metropolitan Urban Semi-urban Rural Total Branches 9 629 674 691 735 2729 727
744 793 779 3043
Page 82

The Bank has 118 specialized branches catering to the specific financial needs o
f different clientele categories.
Categories of Specialized Branches 1. SMEs 2. Overseas 3. Agri-Finance 4. Micro
Finance Branches 5. Savings 6. NRIs 7. Asset Recovery Management 8. Prime Corpor
ate 9. Industrial Finance 10. Stock Exchange 11. Capital Market 12. Mahila Banki
ng 13. Consumer Finance 14. Housing Finance 15. Branch for Physically Challenged
31.03.2010 37 17 10 9 7 7 7 7 5 3 3 3 1 1 1 118
Page 83

GOALS FOR 2007-08

Bank targets a global business level of Rs.2, 90, 000 crore for 2007-08, with a
growth rate of over 20%, comprising Rs. I,70,000 crore under deposits and Rs.I,2
0,000 crore under advances. Advances growth will be significantly driven by agri
culture, SME, infrastructure and other productive segments, including services s

Towards faster implementation of Core Banking Solution (CBS), the Bank targets t
o cover all the branches under CBS by March 2008. The Bank has taken up a major
brand building exercise and comprehensive review of its business strategies cove
ring products, processes, people and its organization structure.

In pursuit of the Bank s global aspirations, 21 prominent centers have been iden
tified by the Bank for expanding its global reach. With the preliminary moves un
derway, the Bank s Representative Office at Shanghai is being converted into a f
ull fledged branch.

After creation of JVs in Insurance and Asset Management, the Bank is exploring s
imilar options in other financial services. The Bank is geared up to comply with
the revised guidelines issued under priority sector lending. Under HR, Assessme
nt Development Centre concept will be implemented to map training competence and
upgrade manpower skill. Plans are underway to introduce Internship programmed
to assist students pursuing professional course.
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Analysis of the financial statement Financial statements and reports are the too
ls which provide information of the firms financial affairs. This information is
required for financial analysis & decision making. It assesses the financial st
atus of organization which is prepared with help of accounting principle. Financ
ial statement has mainly as follow:
Balance sheet
Profit & loss account Financia
l statement is prepared on basis of generally accepted accounting principle. The
se are a. Business entity principle b. Going concern principle c. Monetary princ
iple d. Historical principle e. Realizations principle f. Accrual concept Basic
conventions under which financial statements prepared is:
consistency conservati
veness disclosure
Analyzing of financial statements helps to know the financial health of the borr
ower, which provides the detail of the liabilities and the assets of the applica
nt. It also helps to study the trends in the financial matters of the company. I
t helps to valuate the assets of the applicant company. It assists in decision m
aking process relating to the future activities.
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Profit and Loss account:Meaning:- profit and loss account is one of the essentia
l document which shows the summary of revenues, expenses and net income of the f
irm during the particular financial period. Functions of the Profit and Loss acc
ount: It gives a concise summary of the firms revenue and expenses during the part
icular period.
It measures the firms profitability.
It represents the activity of
the firm. Ratio Analysis:Ratios are classified into four parts like:1. Liquidit
y ratios 2. Activity ratios 3. leverage ratios 4. profitability ratios
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Canara Bank Balance Sheet

Mar 06 12 mths Capital and Liabilities: Total Share Capital Equity Share Capita
l Share Application Money Preference Share Capital Reserves Revaluation Reserves
Net Worth Deposits Borrowings Total Debt Other Liabilities & Provisions Total L
iabilities 410.00 410.00 0.00 0.00 6,608.86 113.38 7,132.24 116,803.23 25.82 116
,829.05 8,860.57 132,821.86 410.00 410.00 0.00 0.00 7,701.11 2,242.87 10,353.98
142,381.45 1,574.35 143,955.80 11,651.25 165,961.03 410.00 410.00 0.00 0.00 7,88
5.63 2,204.86 10,500.49 154,072.42 2,517.23 156,589.65 13,438.55 180,528.69 410.
00 410.00 0.00 0.00 9,629.61 2,168.16 12,207.77 186,892.51 7,056.61 193,949.12 1
3,488.91 219,645.80 410.00 410.00 0.00 0.00 12,129.11 2,132.68 14,671.79 234,651
.44 8,440.56 243,092.00 6,977.30 264,741.09 Mar 07 12 mths Mar 08 12 mths Mar
09 12 mths Mar 10 12 mths
Assets Cash & Balances with RBI Balance with Banks, Money at Call Advances Inves
tments Gross Block Accumulated Depreciation Net Block Capital Work In Progress O
ther Assets Total Assets Contingent Liabilities Bills for collection Book Value
(Rs) 7,914.00 4,909.56 79,425.70 36,974.18 1,718.60 1,030.13 688.47 0.00 2,909.9
5 132,821.86 47,062.37 12,260.93 171.19 9,095.19 7,278.74 98,505.69 45,225.54 4,
056.39 1,195.04 2,861.35 0.00 2,994.53 165,961.04 52,150.75 15,660.41 197.83 13,
364.79 4,513.25 107,238.04 49,811.57 4,254.33 1,337.46 2,916.87 0.00 2,684.17 18
0,528.69 95,710.87 25,299.63 202.33 10,036.79 6,622.99 138,219.40 57,776.90 4,44
0.07 1,510.61 2,929.46 0.00 4,060.26 219,645.80 136,851.39 25,757.73 244.87 15,7
19.46 3,933.75 169,334.63 69,676.95 4,480.37 1,620.99 2,859.38 0.00 3,216.92 264
,741.09 110,627.02 21,206.47 305.83
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Profit & Loss account of Canara Bank

Income Interest Earned Other Income Total Income Expenditure Interest expended E
mployee Cost Selling and Admin Expenses Depreciation Miscellaneous Expenses Preo
perative Exp Capitalised Operating Expenses Provisions & Contingencies Total Exp
enses 5,130.01 1,515.30 1,061.42 145.03 894.05 0.00 2,982.32 633.48 8,745.81 Mar
06 Mar 07 7,337.73 1,609.29 957.77 148.18 1,402.58 0.00 3,023.26 1,094.56 11,
455.55 10,662.94 1,661.28 1,491.09 169.97 958.76 0.00 3,666.30 614.80 14,944.04
Mar 08 12,401.25 1,877.15 1,540.27 173.64 1,481.42 0.00 3,965.24 1,107.24 17,47
3.73 Mar 09 13,071.43 2,193.70 2,164.65 155.13 1,146.44 0.00 4,903.79 756.13 18
,731.35 Mar 10 8,711.51 1,377.51 11,364.56 1,511.80 14,200.74 2,308.31 12,876.3
6 17,119.05 2,427.10 16,509.05 19,546.15 18,751.96 3,000.82 21,752.78
Net Profit for the Year Extraordionary Items Profit brought forward Total Prefer
ence Dividend Equity Dividend Corporate Dividend Tax Per share data (annualised)
Earning Per Share (Rs) Equity Dividend (%) Book Value (Rs) Appropriations Trans
fer to Statutory Reserves Transfer to Other Reserves Proposed Dividend/Transfer
to Govt Balance c/f to Balance Sheet Total
1,343.22 0.00 0.00 1,343.22 0.00 270.60 38.00 32.76 66.00 171.19 -867.12 1,901.7
4 308.60 0.00 1,343.22
1,420.81 0.00 0.00 1,420.81 0.00 287.00 48.78 34.65 70.00 197.83 362.21 722.82 3
35.78 0.00 1,420.81
1,565.01 0.00 0.00 1,565.01 0.00 328.00 56.00 38.17 80.00 202.33 802.00 379.01 3
84.00 0.00 1,565.01
2,072.42 0.00 0.00 2,072.42 0.00 328.00 55.75 50.55 80.00 244.87 1,508.64 180.03
383.75 0.00 2,072.42
3,021.43 0.00 0.00 3,021.43 0.00 410.00 70.00 73.69 100.00 305.83 1,676.35 865.0
8 480.00 0.00 3,021.43
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1. The proposed standardized Basel2 to approach does not fits the needs of small
er banking organization engaged primarily traditional banking. 2. The current no
r proposed capital frameworks yet address what is perhaps the most critical risk
factor for the smaller banks - geographic and sect oral concentrations of credi
t risk. 3. Internal ratting based approach provides positive incentives to banks
in improving their credit risk management techniques. 4. Banks may have discret
ion and flexibility in defining the exposure classes that which corporate, proje
ct finance, etc. 5. Unless suitably modified the adoption of the new accord in i
ts present format would result in significant increase in the capital charge for
bank. 6. Additional cost of capital will increase to the bank and bank may go f
or capital market to raise the found. 7. Bank as well documented schemes delegat
ion powers for credit sanction.
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1. The study restricted to only one branch. 2. The time constraint was a limitin
g factor, as more time required carrying 0 ut study on other aspects of the topi
c. 3. Due to secrecy it is difficult obtain actual facts and figures of advances
of branches.

1. The bank will now have to adopt the credit risk assessment system which is an
international standard specified for the banking system. 2. Due to increased se
nsitivity towards risk under the new norms, the risk will come down significantl
y. This will lead to an increase in the regulatory capitalization levels, which
will increase the cost of capital, which may be passed on to the customers. 3 Th
e banks will have to exercise due care in maintaining the portfolio of risk asse
in order not to increase unduly the required regulatory capitalization level. Th
is may in turn in duce conservatism in the bank in taking of risky portfolio of
advances, a danger they have to guard against. It will indeed be a delicate bala
ncing task.
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The variability of return around the expected average is thus a quantitative des
cription of risk .Moreover, this measure of risk is simply a proxy for risk beca
use other measures cud be used. The total variance is the rate of return on a st
ock around the expected average that includes both systematic and unsystematic r
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BIBLIOGRAPHY Refer By 1 2 3 4 5 Bank circulars. Internal magazines. www.mis.org.

www.canbankindia.com. www.rbi.org.in.
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