An Empirical Study on Credit Risk Management in

Private Sector Banks: A Competitive Tool

Ms. Shaveta Gupta Ms. Anu Sahi

Lecturer in Management Lecturer in Management

Apeejay Institute of Management Apeejay Institute of Management

Jalandhar (Punjab) Jalandhar (Punjab)

Mob. No. 099151-507450 Mob. No.098156-52244

e-mail:shaveta_gupta@rediffmail.com e-mail: daring_anu2003@yahoo.co.in

Ms. Meenal Sharma

MBA Student

Apeejay Institute of Management

Jalandhar
 An Empirical Study on Credit Risk Management in Private Sector Banks: A
Competitive Tool

Abstract
Change has become part and parcel of banking sector today. The rate of change which
has taken place in the last decade is more significant than the changes that have taken
place in last fifty years because of the institutionalization, liberalisation, globalisation and
automation in the banking industry. In this vulnerable scenario, mounting competition
and escalating complexities has put pressure on banking sector to perform its basic
functions with utmost care. The basic function of banking i.e. lending loans has
aggravated many problems in terms of increasing credit risk or mounting Non Performing
Assets (NPAs). In order to deal with this problem banks at the international level have
come up with certain recommendations in the form of Basel II Accord. In this backdrop,
banks need to manage their functions by practicing credit risk management to avoid and
minimize this risk which will help them to be competitive in the banking scenario. The
main objective of credit risk management is to minimize the risk and maximize bank’s
risk adjusted rate of return by assuming and maintaining credit exposure within the
acceptable parameters. Realizing the importance of managing banking business in the
competitive scenario the present study focuses on perception of private sector banking
employees about the types of various risks prevailing in banking sector and the
approaches used for credit risk management. The study revealed that credit risk is more prevalent
in banking sector as compared to market risk and the reason for this is low interest rate. The study also
brought out the fact that majority of the private sector banks were using risk rating model for credit risk
management. Basel II norms are also successfully implemented by majority of the respondent banks.
 An Empirical Study on Credit Risk Management in Private Sector Banks: A
Competitive Tool

Introduction
Banking is the backbone of a modern economy. The most important pre-conditions for
sustained economic progress of any country is healthy banking industry. At the dawn of
the 21st century, banking world has assumed new heights with the advent of tech banking,
thereby lending the industry a stamp of universality. In general, banking may be
classified as retail and corporate banking. Retail banking, which is designed to meet the
requirements of individual customers and encourage their savings, includes payment of
utility bills, consumer loans, credit cards, checking account balances, ATMs, transferring
funds between accounts and the like. Corporate banking, on the other hand, caters to the
needs of corporate customers like bills discounting, opening letters of credit and
managing cash. The Indian banking scene has changed drastically with the private sector
making inroads in an area hitherto dominated by large public sector banks. Growing
disinvestment is likely to impact the banking industry as well. There is every possibility
of privatization of public sector banks, leading to greater operational autonomy. The
Indian banking sector has shown the path of development by the introduction of new
norms by the government such as Income Recognition and Capital Adequacy. The latter
implies that banks can lend on the basis of their respective capital base. These norms
have caused banks to construct equity on their own, before going in for debt.
Disintermediation is a real threat for banks. Of late, banks are adopting the EVA
(Economic Value Added) concept wherein revenues are viewed in the context of the risk
associated with them.

Post-Liberalization Era -Thrust on Quality and Profitability

During the post liberalization era in 1990s revamping of the banking industry structure
took place, which was of extreme importance, as the health of the financial sector in
particular and the economy as a whole would be reflected by its performance, The
reforms have enhanced the opportunities and challenges for the real sector making them
operate in a borderless global market place. However, to harness the benefits of
globalization, there should be an efficient financial sector to support the structural
reforms taking place in the real economy. Hence, along with the reforms of the real
sector, the banking sector reformation was also addressed. The route causes for the
lackluster performance of banks, formed the elements of the banking sector reforms.
Some of the factors that led to the dismal performance of banks were.

 Regulated interest rate structure.

 Lack of focus on profitability.

 Lack of transparency in the bank’s balance sheet.

 Lack of competition.

 Excessive regulation on organization structure and managerial resource.

 Excessive support from government.

Against this background, the financial sector reforms were initiated to bring about a
paradigm shift in the banking industry, by addressing the factors for its dismal
performance. In this context, the recommendations made by a high level committee on
financial sector, chaired by M. Narsimham, laid the foundation for the banking sector
reforms. These reforms tried to enhance the viability and efficiency of the banking sector.
The Narsimham Committee suggested that there should be functional autonomy,
flexibility in operations, dilution of banking strict regulations, reduction in reserve
requirements and adequate financial infrastructure in terms of supervision, audit and
technology. The committee further advocated introduction of prudential forms,
transparency in operations and improvement in productivity, liberalizing the regulatory
framework, along with keeping them in time with international standards. The emphasis
shifted to efficient and prudential banking linked to better customer care and customer
services.
Current Scenario

Presently banking in India is considered as fairly mature in terms of supply, product

range and reach. Even in terms of quality of assets and capital adequacy, Indian banks are
considered to have clean, strong and transparent balance sheets-as compared to other
banks in comparable economies in its region with the single exception that reach in rural
India still remains a challenge for the private sector and foreign banks. With the growth
in the Indian economy, banking industry is likely to grow with the increasing demand of
services like retail banking, mortgages and investment services.

PARADIGM OF RISKS FACED BY BANKING INDUSTRY

As like any other industry banking industry is also prone to various risks the most
important one are as follows:

Market Risk
The risk associated with the possibility of loss to bank caused by the changes in the
market variables. It is the risk that the value of on-/off-balance sheet positions will be
adversely affected by movements in equity and interest rate markets, currency exchange
rates and commodity prices. Market risk is the risk to the bank’s earnings and capital due
to changes in the market level of interest rates or prices of securities, foreign exchange
and equities, as well as the volatilities, of those prices. Market risk management provides
a comprehensive and dynamic frame work for measuring, monitoring and managing
liquidity, interest rate, foreign exchange and equity as well as commodity price risk of a
bank that needs to be closely integrated with the bank’s business strategy

Operational Risk
The risk associated with the organizational structure and set up is categorized as
operational risk. It is one area of risk that is faced by all organizations. Higher the
complexity higher the operational risk. This risk arises due to deviation from normal and
planned functioning of the system procedures, technology and human failure of
omission and commission. Result of deviation from normal functioning is reflected in
the revenue of the organization, either by the way of additional expenses or by way of
loss of opportunity.

Credit Risk
The risk arising due to failure on the part of counter party/ borrower to meet the
obligations on agreed terms is known as credit risk. There is always scope for the
borrower to default from his commitments for one or the other reason resulting in
crystallization of credit risk to the bank. These losses could take the form outright default
or alternatively, losses from changes in portfolio value arising from actual or perceived
deterioration in credit quality that is short of default. Credit risk is inherent to the
business of lending funds to the operations linked closely to market risk variables. Thus
credit risk is a combined outcome of Default Risk and Exposure Risk.

FACTORS DETERMINING CREDIT RISK

Credit risk consists of primarily two components, a) Quantity of risk, which is nothing but
the outstanding loan balance as on the date of default and b) Quality of risk, i.e the
severity of loss defined by both probability of default as reduced by the recoveries that
could be made in the event of default. Apart from this credit risk of a bank's portfolio
depends on both external and internal factors.

External factors: Internal Factors:

• Economic Factors • Deficient loan policy/administration

• Industry Related Factors • Inefficient Pricing mechanism

• Ineffective monitoring etc.

While the bank can influence and control the internal factors to improve quality of its
credit portfolio, the risk due to external factors can be minimised by proper
diversification across industries and by initiating necessary changes in the loan portfolio
in anticipation of adverse developments. Development of effective risk assessment and
monitoring systems will help in improving the quality of credit decisions thereby
reducing loan losses on an on going basis and thus gradually improving the quality of
loan portfolio.

CREDIT RISK MANAGEMENT

Credit Risk Management has always been on the radar of the top management of any
company, but its relevance has been felt more aggressively by financial institutions in the
current business scenario – beset by increasing competition and that great doom– the sub
prime lending crisis. In this age of advancing and complex risk transfer mechanisms, it
may make sense to step back and take a look into the very basics of credit risk
management. By understanding the overall lifecycle of a typical credit risk management
process, we can identify the key priority areas and challenges in the credit risk arena and
how a solution can be designed to tackle this. The objective of credit risk management is
to minimize the risk and maximize bank’s risk adjusted rate of return by assuming and
maintaining credit exposure within the acceptable parameters

Life Cycle of Credit Risk Management Process

Credit risk is the largest and most elementary risk faced by banks. It essentially focuses
on determining likelihood of default or credit deterioration and how costly it will turn out
to be if it does occur. And this is true for consumer lending (retail) or corporate lending
(commercial) as well as counterparty credit risk in capital markets. Although dependent
on organizations requirements and profile, a credit risk management lifecycle typically
involves the following processes.
 Fig: 1.1: Credit Risk Management Life Cycle

Source: http://en.wikipedia.org/wiki/ credit _risk

TOOLS OF CREDIT RISK MANAGEMENT

The instruments and tools, through which credit risk Management is carried out, are
detailed below:

a) Exposure Ceilings: Prudential Limit is linked to Capital Funds – say 15% for
individual borrower entity, 40% for a group with additional 10% for infra- structure
projects undertaken by the group, Threshold limit is fixed at a level lower than
Prudential Exposure; Substantial Exposure, which is the sum total of the exposures
beyond threshold limit should not exceed 600% to 800% of the Capital Funds of the
bank (i.e. six to eight times).
b) Review/Renewal: Multi-tier Credit Approving Authority, constitution wise delegation
of powers, Higher delegated powers for better-rated customers; dis- criminatory time
schedule for review/renewal, Hurdle rates and Bench marks for fresh exposures and
periodicity for renewal based on risk rating, etc are formulated.
c) Risk Rating Model: Set up comprehensive risk scoring system on a six to nine point
scale. Clearly define rating thresholds and review the ratings periodically preferably at
half yearly intervals. Rating migration is to be mapped to estimate the expected loss.
d) Risk Based Scientific Pricing: Link loan pricing to expected loss. High-risk category
borrowers are to be priced high. Build historical data on default losses. Allocate capital to
absorb the unexpected loss. Adopt the RAROC framework.
e) Portfolio Management: The need for credit portfolio management emanates from the
necessity to optimize the benefits associated with diversification and to reduce the
potential adverse impact of concentration of exposures to a particular borrower, sector or
industry. Stipulate quantitative ceiling on aggregate exposure on specific rating
categories, distribution of borrowers in various industry, business group and conduct
rapid portfolio reviews. The existing frame- work of tracking the non-performing loans
around the balance sheet date does not signal the quality of the entire loan book. There
should be a proper & regular on-going system for identification of credit weaknesses
well in advance. Initiate steps to preserve the desired portfolio quality and integrate
portfolio reviews with credit decision-making process.
f) Loan Review Mechanism: This should be done independent of credit operations.
It is also referred as Credit Audit covering review of sanction process, compliance status,
review of risk rating, pick up of warning signals and recommendation of corrective action
with the objective of improving credit quality. It should target all loans above certain cut-
off limit ensuring that at least 30% to 40% of the portfolio is subjected to LRM in a year
so as to ensure that all major credit risks embedded in the balance sheet have been
tracked. This is done to bring about qualitative improvement in credit administration.
Identify loans with credit weakness. Determine adequacy of loan loss provisions. Ensure
adherence to lending policies and procedures. The focus of the credit audit needs to be
broadened from account level to overall portfolio level. Regular, proper & prompt
reporting to Top Management should be ensured. Credit Audit is conducted on site, i.e. at
the branch that has appraised the advance and where the main operative limits are made
available. However, it is not required to visit borrowers’ factory/office premises.

APPROACHES TO CREDIT RISK MANAGEMENT (BASEL II)

Basel II has pronounced the following three approaches for better administrating credit
risk management among banks:
• Standardized approach
 • Foundation internal rating based approach
• Advanced internal rating based approach

Standardised Approach : The term standardized approach (or standardised approach)

refers to a set of credit risk measurement techniques proposed under Basel II capital
adequacy rules for banking institutions.Under this approach the banks are required to use
ratings from external credit rating agencies to quantify required capital for credit risk. In
many countries this is the only approach the regulators are planning to approve in the
initial phase of Basel II Implementation. Risk weights are assigned in slabs of 0%, 20%,
50%, 100% & 150% on the basis of rating assigned by ECAIs. For example -- Claims on
Sovereigns (or Central Bank) – 0% to 150% risk weight on the basis of country risk
scores and at national discretion, a lower risk weight may be applied.

Internal Rating Based Approach: Under the IRB approach, a bank estimates each
borrower’s creditworthiness and the results are translated into estimates of a potential
future loss amount, which forms the basis of minimum capital requirement and the
treatment of each exposure class (i.e. corporate, bank, sovereign, retail & equity
exposure) is based on three main elements namely: -
 Risk components
 Risk weight functions
 Minimum requirements
The underlying concepts and approaches prescribed in IRB have been developed based
on credit risk measurement techniques being used by sophisticated banks for ascertaining
their capital requirements. The Capital required is derived from an estimate of potential
losses for a credit portfolio over one year time horizon with 99.9% confidence level. It
implies that there is only one chance in 1000 that the losses will be larger than the
regulatory capital.

REVIEW OF LITERATURE
Edward (1998) discussed in his study that dynamic change in the interest and concern
with credit risk management despite historically low default rates and losses in the loan
and corporate bond markets. The reasons are that lending institutions are increasingly
comfortable with transacting their assets in counterparty arrangements whereby credit
risk exposed is shifted. This motivation has helped to stimulate the congruence of several
important ingredients for the sophisticated treatment of corporate credit evaluation and
management including stand-alone valuation techniques, portfolio management
approaches, comprehensive and reliable relevant data bases and the growth in credit
derivative and other types of credit insurance structures.
Robson (2001) discussed in his study that recent developments and future needs in
modeling credit risk in the retail portfolio and their recent regulatory implications, against
the implications of the new framework proposed by the Basel Committee on Banking
Supervision. It introduces four related papers arising from a conference held at the Bank
of England in November 2000, before outlining the history of the requirements and the
determination of the minimum capital required by banks to cover credit risk on their
assets.
Prasad (2002) discussed that competition in the Indian banking sector has increased since
the inception of the financial sector reforms in 1992. Using annual data on scheduled
commercial banks for the period 1996–2004, the article evaluates the validity of this
proposition in the Indian context. The empirical evidence reveals that Indian banks earn
revenues as if under monopolistic competition
Patrick (2003) discussed in his study that advanced economies has exposed deficiencies
in risk management and prudential regulation approaches that rely too heavily on
mechanical, albeit sophisticated, risk management models. These have aggravated private
and economic losses. While fiscal costs were at first limited, it remains to be seen to what
extent the taxpayer will be protected. Policymakers and bankers need to recognise the
limitations of rules-based regulation and restore a more discretionary and holistic
approach to risk management.
Brigitte (2005) investigated the impact of the information's type on credit risk
management in a principal agent framework with moral hazard with hidden information.
He explored the existence of an incentive of the credit officer to manipulate the signal
based on soft information that he produces. Therefore, we propose to implement an
adequate incentive salary package which enables this manipulation. The comparison of
the results from the two frameworks (information hard versus combination of hard and
soft information) using simulations confirms that soft information gives an advantage to
the banker but requires particular organizational modifications within the bank, as it
allows to reduce capital allocation for VaR coverage.
Rajesh (2005) discussed in his study that the banking industry in India is undergoing a
transformation since the beginning of liberalization. Interest rates have declined
considerably but there is evidence of under-lending by the banks. The "social" objectives
of banking measured in terms of rural credit are, expectedly, taking a back seat. The
performance of the banks has improved slightly over time with the public sector banks
doing the worst among all banks. The banking sector as a whole and particularly the
public sector banks still suffer from considerable NPAs, but the situation has improved
over time. New legal developments like the SARFAESI Act provide new options to
banks in their struggle against NPAs. The adoption of Basel-II norms however implies
new challenges for Indian banks as well as regulators. Over time, the Indian banking
industry has become more competitive and less concentrated. The new private sector
banks have been the most efficient though the recent collapse of Global Trust bank has
raised issues about efficiency and regulatory effectiveness.
Godlewski (2006) discussed in his study that regulatory and institutional environment is
not without effect on a bank's risk taking and therefore on a bank's default. In this article,
we investigate regulatory and institutional determinants of credit risk taking and bank's
default probability in emerging market economies. Using a two-step logit model applied
to a database of banks from emerging economies, we confirm the role of the institutional
and regulatory environment as a source of excess credit risk, which increases a bank's
default risk. In particular, the rule of law appears to be a crucial element of an efficient
regulatory environment, which may reduce excessive risk taking incentives.
Honohan (2008) discussed in his study that 2007-8 banking crisis in the advanced
economies has exposed deficiencies in risk management and prudential regulation
approaches that rely too heavily on mechanical, albeit sophisticated, risk management
models. These have aggravated private and economic losses. While fiscal costs were at
first limited, it remains to be seen to what extent the taxpayer will be protected.
Policymakers and bankers need to recognise the limitations of rules-based regulation and
restore a more discretionary and holistic approach to risk management.
Simone(2008) in his study analysed the impact of ICT on the value creation system of
loans and its respective business models and focuses on credit risk management of
commercial banks. Whereas ICT impact on loan origination has been studied already in
earlier papers there are no in-depth studies available mainly focused at credit risk
management, which reaches beyond mere origination. After presenting a general analysis
about ICT impact on value creation in the financial industry, this paper provides a state-
of-the-art analysis of e-business tools for credit risk management emphasizing their value
proposition with respect to credit risk management. The analysis is based on the
hypothesis that only by innovative e-business solutions traditional loan business can
convert into active credit risk management. As a result the research comes up with three
categories of tools which are valuation platforms, rating tools, and trading platforms. It
can be shown that ICT leads to the deconstruction of the traditional loan business model.
Verma (2009) discussed in his study that Credit risk emanates from a bank's dealings
with an individual, corporate, bank, financial institution or a sovereign. The present paper
is designed to study the implementation of the Credit Risk Management Framework by
Commercial Banks in India. To achieve the above mentioned objective a primary survey
was conducted. The results show that the authority for approval of Credit Risk vests with
'Board of Directors' in case of 94.4% and 62.5% of the public sector and private sector
banks, respectively. This authority in the remaining banks, however, is with the 'Credit
Policy Committee'. For Credit Risk Management, most of the banks (if not all) are found
performing several activities like industry study, periodic credit calls, periodic plant
visits, developing MIS, risk scoring and annual review of accounts. However, the banks
in India are abstaining from the use of derivatives products as risk hedging tool. The
survey has brought out that irrespective of sector and size of bank, Credit Risk
Management framework in India is on the right track and it is fully based on the RBI's
guidelines issued in this regard.
NEED AND OBJECTIVES OF THE STUDY
The perusal of the literature revealed that there have been many researches focusing on
various aspects of credit risk management. Majority of the studies have paid attention on
activities undertaken by banks like industry study, periodic credit calls, periodic plant
visits, developing MIS, risk scoring and annual review of accounts, interest rates and that
too among public sector banks. But none of the study has focused on perceptual aspect of
banking employees regarding credit risk management in private sector banks. So the
present study tries to answer the question that how banks are actually perceiving the
credit risk management practices with following precise objectives:
 To know about the different types of risks involved in the banks and their impact
on the profitability.
 To know about credit risk management in private sector banks in India
 To know about the different tools and approaches used for credit risk
management in private sector banks.
 To know about the accuracy of tools of credit risk management used by private
sector banks in India

DATABASE AND METHODOLOGY

The paper focused on various aspects of credit risk management practices among private
sector banks in Punjab. The survey was carried out through non disguised structured
questionnaire having open ended, close ended, dichotomous and likert scale based
questions. The questionnaire was filled by total of fifty employees of private sector
banks. The present study had been analysed by using various statistical tools like
weighted average score and summated score.
Description of the Sample
The sample for the current study demonstrated the following demographics concerning
the age, gender, qualification and designation of the bank employees responded to the
survey.
 Table 1: Demographic Profile of Respondents

Demographics Number of Respondents Percentage of Respondents

Age
18-30 yrs 35 70%
31-40 yrs 13 26%
41-50 yrs 2 4%
Above 50 yrs 0 0%
Total 50 100%
Gender
Male 35 70%
Female 15 30%
Total 50 100%
Qualification
Post Graduate 35 70%
Graduate 15 30%
Higher Secondary 00 0%
Others 00 0%
Total 50 100
Designation
Branch Manager 23 46%
Assistant Manager 2 4%
Regional Manager 0 0%
Others 25 50%
Total 50 100%

ANALYSIS AND INTERPRETATION

The analysis and interpretation revolves around the awareness about banking risks, the
dominant risk factors, tools used to manage the risks, its effectiveness and the assistance
of BASEL II norms. The entire discussion on these very aspects is as follows:

Awareness about Different Types of Risks

--------------
Table 2
--------------
Table 5.1 depicted that 34% of the respondents were aware about each type of risk stated
above. This showed that majority of bank employees were aware about different types of
risks except for the market risk.
 Most Prevalent Risk in Banking Sector
--------------
Table 3
--------------

The table showed that majority of the respondents rank credit risk as most prevalent by
ranking it 1. So it can be analysed that credit risk was most prevailed in the banking
sector and market risk was least prevailed in the banking sector

Reasons for Excessive Credit Risk in Private Banks

--------------
Table 4
--------------
The idea behind the question was to extract the reasons for excessive credit risk in private
banks and majority of the respondents rank low rate of interest as 1 and financial crisis as
4. So it can be interpreted that major reason for excessive credit risk in private banks was
low rate of interest.

Effect on Profitability due to Credit Risk

--------------
Table 5
--------------
The results depicted that majority of the respondents (58%) revelaed that credit risk put
impact on the profitability of the banks that can vary between 4-6%. Some respondents
said that it had greater impact on profitability.

Tool of Credit Risk Management used in Various Private Banks

--------------
Table 6
--------------
The purpose of framing this question was to find the tools used for credit risk
management and majority of the respondents (64%) were observed to be using risk rating
model for credit risk management followed by risk based scientific pricing.

Approach Followed for Credit Risk Management

--------------
Table 7
--------------
The table showed the various approaches followed for credit risk management. Majority
of the respondents (58%) responded that they were using foundation internal rating based
approach followed by advanced internal rating based approach.

Accuracy of Tools used for Credit Risk Management in Various Private Banks
--------------
Table 8
--------------
In order to know about the accuracy of tools used by banks for credit risk management,
the question has been framed. Majority of the respondents ( 52%) said these tools were
accurate up to 50-74% followed by (46%) who said accuracy of these tools are 75-99%
and none of the respondent consider these tools to be accurate below 50% .

Awareness regarding BASEL Committee Recommendations for Risk Management

--------------
Table 9
--------------
The question was about the awareness about the BASEL committee recommendations
and the survey revealed that all respondents (100%) were aware about these
recommendations.
 Rate of Implementation of BASEL Committee Recommendations
--------------
Table 10
--------------

The results depicted that all the bankers (100%) were implementing the BASEL
committee recommendations for risk management.

Type of Recommendation Implemented by Respondent Banks

--------------
Table 11
--------------
This question was about the type of recommendation being implemented by the different
banks and majority of the respondents (60%) said that they were using the
recommendation relating to market discipline.

Accuracy of BASEL Committee Recommendations

--------------
Table 12
--------------
Majority of the respondents (56%) of the total respondents said that BASEL committee
recommendations were accurate between 50-74% followed by 42% of the respondents
who believed that these recommendations were accurate between 75-99%.

Conclusion
The banking scenario has changed drastically. Credit Policy and Credit Risk Policy of the
Bank has become very vital in the smooth operation of the banking activities. The
changes which have taken place in the last ten years are more than the changes took place
in last fifty years because of the institutionalization, liberalisation, globalisation and
automation in the banking industry. The objective of credit risk management is to
minimize the risk and maximize bank’s risk adjusted rate of return by assuming and
maintaining credit exposure within the acceptable parameters. The research was
conducted to know about the types of various risks prevailed in banking sector and the
various approaches used for credit risk management.
On the basis of findings it was concluded that credit risk is most prevalent in the banking
sector and the main reason for excessive credit risk in private banks was low rate of
interest. It was also deduced that credit risk put impact on bank‘s profitability, the credit
rating tools were accurate upto 74% and all the banks were implementing the BASEL
committee recommendations.

REFERENCES

Anonymous. Banking in India Retrieved Jan 7 2010, from,

http://en.wikipedia.org/wiki/banks in India

Anonymous. Credit risk managementRetrieved Jan 7 2010, from,

http://en.wikipedia.org/wiki/credit risk management

Anonymous. CRM in India. Retrieved Jan 7 2010, from,

http://www.dsir.gov.in/reports/ExpTech TNKL/Abs%20new/1INTRODUCTION.htm

Anonymous. Approaches to credit risk management Retrieved Jan 7 2010, from,

http://www.scribd.com/approaches to credit risk management.aspx

Brigitte(2005). The role of information's processing in bank. Oxford International

Journal, Vol. 7, No.1, pp.59

Edward (1998). Changes in the interest and concern with credit risk management. Oxford
international Journal, Vol. 5, No.1 pp.34.
Godlewski(2006). Regulatory and institutional environment of private banks. Oxford
International Journal, Vol.5, No. 7. pp.45

Honohan(2008). Banking crisis. Sage international Journal, Vol. 1, No.1. pp.81

Patrick(2003). India as advanced economy. The Icfai University Journal of Bank

Management, Vol. 8, No. 1, pp. 47

Prasad(2002). Competition in private sector banks. saze online journals, vol. 5, No. 2,
pp. 183 – 206.

Rajesh(2005). Banking industry in India. Indian school of business, Vol. 12, No. 1, pp.
67

Robson(2001). Developments and future needs of private banks. Oxford International

Journal, Vol.7, No. 3. pp.57

Simone(2008). General analysis about ICT. The Icfai Journal of banking regulations,
Vol. 13, No.1. pp.65

Verma(2009). Credit risk estimates. The Icfai University Journal of Bank Management,
Vol. 8, No. 1, pp. 47-72.

Annexure

Table 2: Awareness about Different Types of Risks

Type of Risk No. of Respondents Percentage of Respondents

Market Risk 0 0
Credit Risk 16 32
Forex Risk 1 2
 Operational Risk 16 32
All of Above 17 34
Total 50 100

Table 3: Ranking of Risk Most Prevailed in Banking Sector.

Type of Risk Summated Score Total Rank

Market Risk 4*1+12*2+8*3+26*4 154 4
Credit Risk 31*1+11*2+7*3+1*4 78 1
Operational Risk 10*1+22*2+4*3+14*4 122 2
Forex Risk 5*1+5*2+31*3+9*4 144 3

Table 4: Ranking of the Reasons for Excessive Credit Risk in Private Banks

Reasons Summated Score Total Rank

Low Rate of Interest 27*1+4*2+4*3+15*4 107 1
Excessive Lending 11*1+13*2+24*3+2*4 117 2
Financial Crisis 12*1+8*2+3*3+27*4 145 4
Mismatch of Securities & 0*1+25*2+19*3+6*4 131 3
Sanctioned Amount

Table 5: Effect of Credit Risk on Bank’s Profitability

Extent of Profitability No. of Respondents Percentage of Respondents

0-2% 3 6
2-4% 12 24
4-6% 29 58
6-10% 6 12
Total 50 100

Table 6: Tools of Credit Risk Management used by Banks

Name of Tools No. of Respondents Percentage of Respondents

Exposure Ceilings 2 4
Review/Renewal 5 10
Risk Rating Model 32 64
Risk Based Scientific Pricing 11 22
Total 50 100

Table 7: Approaches Followed for Credit Risk Management.

Approaches No. of Respondents Percentage of Respondents
Standardised Approach 4 8
Foundation Internal Rating based Approach 29 58
Advanced Internal Rating based Approach 17 34
Total 50 100

Table 8: Accuracy of Tools used for Credit Risk Management

%Age of Accuracy No. of Respondents Percentage of Respondents

Below 50% 0 0
50-74% 26 52
75-99% 23 46
100% 1 2
Total 50 100

Table 9: Awareness about the BASEL Committee Recommendations for Risk Management.

Awareness of Recommendations No. of Respondents Percentage of Respondents

Yes 50 100
No 0 0
Total 50 100

Table 10: Implementation of the BASEL Committee Recommendations for Risk Management.

Implementation of Recommendations No. of Respondents Percentage of Respondents

Yes 50 100
No 0 0
Total 50 100

Table 11: Type of Recommendation Being Implemented by Banks.

Recommendation No. of Respondents Percentage of Respondents
Capital Adequacy 5 10
Market Supervision 15 30
Market Discipline 30 60
Total 50 100

Table 12: Accuracy of BASEL Committee Recommendations

%Age of Accuracy No. of Respondents Percentage of Respondents
Below 50% 1 2
50-74% 28 56
75-99% 21 42
100% 0 0
Total 50 100