A STUDY ON

CREDIT RISK MANAGEMENTAT SYNDICATE BANK

IN PARTIAL FULFILLMENT OF THE REQUIREMENT FOR THE AWARD OF THE DEGREE

MASTER OF BUSINESS ADMINISTRATION

FROM

OSMANIA UNIVERSITY

SUBMITTED BY

DVR POST GRADUATE INSTITUTE OF MANAGEMENT STUDIES

KANDI, SANGAREDDY. 2009-2011

ACKNOWLEDGEMENT

I would like to express my gratitude to our college Principal Mr.D.SRINIVASULU or having given me the opportunity to work on this project. It is indeed a great pleasure and a matter of immense satisfaction for me to express my deep sense of gratitude and Indebtness to Ms.Subbalakshmi (Head of Department of Business Administration) and my college lecturers for the continuous support they have given me.

This project would not have been possible without efforts and guidance of a KRISHNA MURTHY of SYNDICATE BANK HYDERABAD. I take opportunity to time all those magnanimous persons who rendered their support to this project.

I would like to thank my project external guide, Ms.SUBBALAKSHMI for his expert guidance and continuous guidance which lead to successful completion of this project.

I am thankful to my friends for sharing technical expertise with me in making this project successful.

DECLARATION

I hereby declare that this project titled CREDIT & RISK MANAGEMENT with reference to SYNDICATE BANK submitted here is genuine and original work of mine.

This project report is submitted in partial fulfillment of the requirement for the award of MASTER OF BUSINESS ADMINISTRATION degree from D V R COLLEGE OF POST GRADUATE INSTITUTE OF MANAGEMENT STUDIES, KANDI, HYDERABAD, for the year 20092009.

I also declare that this is result of my own efforts and has not been submitted to any other university for any other degree of diploma.

CONTENTS NO. CHAPTER I CHAPTER II

PROFILE OF BANKING INDUSTRY INTRODUCTION DESIGN OF STUDY 1. OBJECTIVES 2. NEED & IMPORTANCE 3. METHODOLOGY 4. SCOPE 5. LIMITATIONS

PAGE

5-7 8-13

CHAPTER III

ORGANISATION PROFILE PROFILE OF KOTAK MAHINDRA BANK TAXOMONY OF PERSONAL FINANCE

14-36

CHAPTER IV

INTRODUCTION OF CREDIT & RISK

37-56

1. IMPORTANCE OF CREDIT & RISK 2. LEGAL ASPECTS OF RISK MANAGEMENT

CHAPTER V CHAPTER VI ANNEXURES

FINDINGS AND ANALYSIS CONCLUSSION AND SUGGESTIONS

57-77 78-79

80-85 85-89
4

BIBLIOGRAPHY

INTRODUCTION
INTRODUCTION Finance may be defined as the provision of money at the time it is required. Finance refers to the management of flows of money through an organization. It concerns with application of skills in the manipulation, use and control of money. Financial management refers to that part of the management activity which is concerned with the planning and controlling of firms financial resources. It deals with finding out various sources for raising funds for the firm. The sources must be suitable and economical for the needs of the business. The most appropriate use of such funds also forms a part of financial management. The main objectives of finance function are:Acquiring sufficient funds. Optimum utilization of funds. Increasing profitability. Maximizing shareholders wealth.

1 2 3 4

In the present business context, a finance manager is expected to do financial forecasting and planning .Financial manager has to plan the funds needed in the future. How these funds will be acquired and applied is an important function of a finance manager. The sources of supply of
5

funds are shares, debentures, financial institutions, commercial banks, etc. The pros and cons of various sources should be analyzed before making a final decision. The cost of acquiring funds and the returns should be compared. Capital budgeting technique is used for this purpose. The objective of maximizing profits will be achieved only when funds are efficiently used and they do not remain idle at any time. A number of mergers and consolidations take place in present competitive Industrial world. A finance manager is supposed to assist management in making valuation etc. For this purpose, he should understand various methods of valuing shares and others assets so that correct values are arrived. Cash is the best source for maintaining liquidity. It is required to purchase raw material, pay workers, meet other expenses, etc. A finance manager is required to determine the need for liquid assets and then arrange liquid assets in such a way that there is no scarcity of funds.

DESIGN OF STUDY
Kotak Mahindra Bank personal loans are the largest business in the bank. The personal loan business is doubling every year. It is the most profitable business of the bank. Personal loans contribute substantially to the overall base line of the bank. Credit department is the back bone of personal loan business. Main function of the credit is to assess the credit worthiness of an applicant and lending him appropriate amount based on such assessment and subject to the terms, conditions and limitations of the policies.
6

The term credit management has got importance from the time when there increased the pressure of competition and force of custom persuades to sell on credit. Credit is granted to facilitate the sales. Credit is appealing to those customers who cannot borrow from other sources due to many reasons. The firms investment in accounts receivable depends on how much it sells on credit and how long it takes to collect receivables. Accounts receivables constitute one of most important asset category for firm which makes the firm to manage its credit well. The term credit management can be analyzed from various aspects like: Terms of payment, Credit policy variables, Credit evaluation, Credit granting decision. Risk management is a process of managing the collection of managing the collection of liabilities with an objective of increasing the cash flows with minimum costs. It involves collecting in right time, right amount, in right terms. This process starts from identifying the amount of liabilities and to make the collection successful. This does not end with mere collection. Besides collection, the difficulties and weak areas should also be ascertained, which leads to development of an effective system for credit extension or sales and collection.

OBJECTIVES OF THE STUDY:

The main objectives of the study are: 1
2

To study the effectiveness of credit process. To study the risk process followed in Syndicate bank. To know and analyze the procedure of loan disbursement and its
7

evaluation criteria. 4 To study and analyze the factors contributing to default rate and their interrelations.
5

To suggest suitable strategies for improving credit and risk management.

NEED & IMPORTANCE OF THE STUDY:

In todays market scenario, one of the most critical areas to focus on is to protect the bank from bankruptcy. In such conditions Credit and Risk Department plays a key role in growth of banks. Any delay in realizing the receivables would adversely affect the working capital, which in turn effects the overall financial management of a firm. No firm can be successful if its over dues are not collected, monitored and managed carefully in time. Thus Risk management is important in sustaining the bank and its growth.

PERIOD OF STUDY: The data obtained from the bank (syndicate bank) for the purpose of credit period and risk time from the customers. The information of the customers from different anglesto access the credit and risk management for a period of THREE years. i.e. from 2007-2010. Credit period refers to the length of the time are allowed amount For their purchase which is generally varied from 15 to 60 days, or 15 to 90 days.
8

to pay the

RESEARCH METHODOLOGY:
To fulfill the objectives of the study both primary and secondary data are used. The primary data was collected through interviewing all the executives and officials of the KMBL Somajiguda Hyderabad. The secondary data was collected from published records, website and reports of the KMBL. Mainly the data relating to credit procedures followed by the bank and risk management was obtained through manager from bank database .The data for this purpose was obtained from bank for a period of 3 years that is from. Based on the availability of the data, the analysis was made from different angles to assess the credit and risk management of KMBL, Somajiguda Hyderabad. SCOPE OF THE STUDY: The study intended to cover the degree and extent of default by the customers of KMBL. In that direction the following has been done. 2 The genesis of the company, its organs. And the range of activities have been studied and documented such study, it was thought, would uncover the weakness brought down as legacy from its line of entrepreneurs. 3 The process involved in loan disbursement has been studied to identify the weak area, follies committed in disbursement or in
9

the design of disbursement process. The seeds of default are built in; hence the study of loan disbursement process has been attempted. 4 The profile of the defaulters including location, stage of default, gender, age etc. has been studied and documented. The components of the profile have been presumed to be linked to the default.
5

The risk process itself has the potential for some loans to be non recoverable hence to identify the probable causes, the risk process has been studied and documented. Based on the profile and the data of defaulted loans, an analysis has been made to establish the links between default and other variables like location of loan, amount of loan taken, gender, profession etc.

LIMITATIONS OF THE STUDY: 1 2 3 The study is limited to Hyderabad city only. The study has been done according to bank point of view. The study has been done without meeting the defaulters due to constraints of time.

10

COMPANY PROFILE THE PROFILE OF BANKING INDUSTRY

Financial institutions today face enormous challenges as they defend their place in market; ordinarily they are simple business oriented or commercial concerns. They need to discover innovative ways to take on these challenges by making critical strategic insights and emerging industry best practices, which strengthen approaches to fluctuating interest rates and uncertain investment yields to produce increased profitability and reduce earning volatility. A study of financial institutions in India can appropriately begin with a brief discussion of the regulatory framework of the country carried out by RESERVE BANK OF INDIA. Financial regulation is necessary to generate, maintain and promote confidence, trust and faith of people for its smooth functioning. Financial markets involve intermediaries or agencies, where RBI ensures investors protection, discloser to trustees, easy access, timely and adequate information to interested parties. RESERVE BANK OF INDIA as the central bank of the country is the center of the Indian financial and monitory system. It is the oldest among the central banks in the developing countries; it started functioning from April 1st 1935.
11

In framing various policies all the banks require to maintain close and continuous collaboration with RBI and Government. The preamble of RBI states that Reserve bank is expedient to regulate the issue of bank notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage. To elaborate the above statement, functions of RBI helps us to understand the clear workings of financial system in INDIA. Role and Functions of RBI: Note issuing authority

Government banker Bankers bank Exchange control authority Security authority Above functions of RBI are discussed as under. NOTE ISSUING AUTHORITY: The issue of currency note is one of the basic functions of RBI; the responsibility of the bank is not only to put currency into or withdraw it from circulation but also to exchange notes and coins of one denomination into those of other denomination as demanded by public. The bank issues notes against the security of gold coins and gold bullion,
12

foreign security, rupee coins Government of India security, and bills of exchange and promissory notes as are eligible for purchase by the bank. At present bank issues notes in denominations of Rs. 10, 20, 50, 100, 500, and 1000. GOVERNMENT BANKER: The RBI is the banker to the Central and State Governments. It provides all the banking services such as accepting of deposits, withdrawal of funds by cheques, making payment as well as receipts and collection of payments on behalf of the Governments. As a banker to the Government, the bank can make ways and means advances to both Central and State Governments. Type of advances provided are normal or clean advances, secured advances and special advances. BANKERS BANK: RBI called as Bankers Bank because of its special relationship with commercial and co-operative banks and the major part of its business is with these kinds of banks. It controls the volume of reserves and determines the deposits or credits creating ability of banks. RBI is also said to be bank of last resort or the lender of last resort. EXCHANGE CONTROL AUTHORITY: RBI has to maintain the stability of the external value of the rupee. As far as external sector is concerned, the task of RBI has (a) administer foreign exchange control, (b) chose exchange rate system and fix the rate of rupee, (c) manage exchange reserves, (d) to interact with
13

monetary authorities such as IMF, World Bank and Asian Development Banks. The RBI administers the exchange controls in terms of FOREIGN EXCHANGE MANAGEMENT ACT (FEMA), 1973. SECURING AUTHORITY: The RBI has vast powers to supervise and control commercial and co-operative banks with a view to developing adequate and sound banking system in the country. It has following authorities (a) issue license to new banks (b) issue license to setting up bank branches (c) to prescribe minimum requirement for paid up capital and reserves, transfer to reserve funds, maintain cash reserves and control liquid assets (d) inspects working of banks in India as well as in abroad, checks branch expansion, mobilization of deposits investment, credit portfolio management, credit upraise system, profit planning etc (e) to conduct investigations into complaints, irregularities and frauds in respect of banks (f) to control methods of operations, appointments, reappointments, terminations of Chairmen and Chief Executive Officers of any private sector banks (g) to approve or force amalgamation.

14

INDIAN BANKS PROFILE: RESERVE BANK OF INDIA (RBI)

NATIONAL BANK OF AGRICULTURAL AND RURAL DEVELOPMENT (NABARD)

STATE CO-OPERATIVE OPERATIVE BANKS (SCBs) (UCBs)

STATE LAND DEVELOPMENT

URBAN COBANKS

CENTRAL CO-OPERATIVE BANKS (CCBs)

PRIMARY AGRICULTURAL CREDIT SOCIETIES (PACSs)

15

1.1 INDIAN BANK PROFILE Total state co-operative banks (SCBs) till date are 28 banks. Total primary agricultural credit societies under various CCBs are 2950. TECHNOLOGY IN BANKING INDUSTRY: The advent of the internet and the popularity of personal computers presented both an opportunity and a challenge for the banking industry; hence online banking provides numerous benefits to businesses and end-users. In order to bypass the time-consuming, paper-based aspects of traditional banking, online banking helps in using powerful computer networks to automate a number of daily transactions and to manage finance more quickly and efficiently. With the comfort of a mouse click online banking provides the comfort of managing the finance by pay bills, transfer funds, file Government remittances and have investment and loan facilities. Online banking sites generally execute and confirm transactions quicker than ATM, providing convenience of 24 hours a day and seven days week accessibility. E-Banking has revolutionized the whole concept of Banking; it has become a necessary weapon changing the banking industry worldwide.
16

 The customer should be taken into confidence as far as security is concerned; banks should extensively propagate the detailed security plan adopted to arrest frauds through E-Banking. Banks have come to realize survival in the new E-Economy depends on delivering their banking services on the internet while continuing to support their traditional infrastructure providing good security and customer satisfaction will survive. Standard for secure electronic transactions (SET) on internet helps in security measures, digital authentication and verification of online identity in all E-Banking transactions, which increase consumer confidence. LATEST AMMENDMENTS OF RBI. The RBI has cautioned against potential risk in the short and medium term on three key factors (1) Growth rates flattening out in some key industries, (2) higher oil prices and (3) continuing infrastructure constraints. The RBIs latest industrial outlook survey shows the current financial health of corporate India increased by 2.6 %.

Demand for bank credit has been largely driven by agricultural, industry and housing sector. Growth rate increased by 31.5 % compared to 24.9 % the preceding year.

17

 The Reserve Bank Of India has signaled its policy of inclusion i.e., account with nil or minimum balance requirement as well as charges that would make such accounts accessible to vast sections of the population. The RBI has granted general permission to banks to issue debit cards in tie up with non-bank entities. The quality of assets of Indian banks is now increasingly converging towards international benchmarks. The report on trends of banks in India by RBI. Capital Adequacy Ratio (CAR) of banks, the most accepted measure of the soundness has improved to 12.5 % which are higher, the better. The RBI issued guidelines on credit cards operations of banks to issue and ensures that there is on delay in dispatching bills. Unsolicited loans or other credit facilities should not be offered. In the major development for the banking sector, the Government recently threw open the Asset Reconstruction companies (ARCs) to Foreign Direct Investment (FDI), permitting 49 % in the equity capital of ARCs. NATIONAL BANK FOR AGRICULTURAL AND RURAL DEVELOPMENT (NABARD)

18

 NABARD was established on 12th July 1982 as a central or apex institution for financing agricultural and rural sector. The Government and the RBI subscribe NABARD paid-up capital of rupees 100 crores equally. NABARD is a co-coordinating agency, in respect of agricultural and rural development activities or policies of the Central and State Government, Planning Commission and other Institutions. NABARD has set up Co-operative Development Fund (CDF) to improve management systems and skills in co-operative banks. NABARD supports rural credit system by way of refinancing for short-term, production, marketing, medium-term and short-term loans relating to State Co-operative Banks (SCBs) and Regional Rural Banks (RRBs) NABARD oversees the entire rural credit system and to that extent, it has taken over a part of the job of the RBI. NABARD provides term loans and investment credits, which are technically feasible and financially viable on farm and non-farm sectors through SCBs and RRBs. NABARD undertakes inspection of co-operative Banks and RRBs without prejudice to the powers of the RBI. NABARD provides loans to State Government to enable them to contribute them to the share capital of SCBs and RRBs. NABARD has established Research and Development (R&D) fund to provide insights into the problems of agriculture and rural development through in-depth studies and applied research with innovative experiments.

19

BANK PROFILE:
ANDHRA PRADESH STATE CO-OPERATIVE BANK

Andhra Pradesh state co-operative bank (SYNDICATE) offers all types of banking service through its 26 banking offices including Head Office, 22 Branches, 2 Extension counters situated in the twin cities and having branches at Tirupathi and Vijayawada. The Bank actively guides the District Co-operative Bank (DCCBs) to withstand the stiff competition encountered by them; greater emphasis was laid on the financial discipline at all levels in the cooperative credit structure. The Bank has continued its efforts to provide increased financial assistance to the farming community through the DCCBs and PACs by bridging the gap between the assistance from NABARD and the credit requirements at the grass root level with its own resources. The Government of Andhra basing on the recommendations of the Expert Committee restructured the PACs bringing down their number from 4464 to 2746 in the State ensuring on PACs at Mandal level. Elections are conducted to all three-tiers of the PACs after restructuring. Democratically elected managements are in position at the PACs, DCCBs and SYNDICATE levels. The Government of Andhra Pradesh has accepted and decided to implement the revival package offered by the Government of India and accordingly 20

entered into a memorandum of understanding with the Government of India and NABARD.

21

BOARD OF MANAGEMENT /COMMITTEE OF

ANDHRA PRADESH STATE CO-OPERATIVE BANK

2.1 TABLE

S. No.

Names

Representation

1.

G.Sudheer, I.A.S Principal Secretary to Govt (coop. marketing)Dept.

Chairman

2.

Dr.C.Uma Malleshwar Rao,I.A.S CC & RCS

Member

3.

R.Ramakrishnaiah, I.A.S CC & RCS

Member

4.

P.Ramana Reddy CC & RCS

Member

5.

T.S.Appa Rao,I.A.S Principal secretary to Govt. (Finance & R &D) Dept.

Member

22

6.

J.R.Sarangal C.G.M. NABARD

Member

7.

V.Krishna Rao. C.G.M.NABARD

Member

8.

M.Veerabhadraiah, I.A.S Managing Director SYNDICATE

Member

23

PERFORMANCE HIGHLIGHTS DURING2008-2009:

State level best performance award for kharif 2007 lendings instituted by government of A.P., was awarded to the bank.

Own funds of the bank increased from Rs.1315.90 crores to Rs.1387.48 crores.

Borrowings of the bank increased from Rs.3123.52 crores to Rs. 4074.73 crores.

Disbursements under investment credit impressively increased from Rs.189.93 crores to Rs.367.87 crores during the year under report registering an increase by 51.63 %.

The net profit during2008-2009 is Rs.5.70 crores compared to Rs.4.84 crores of the previous year.

Investments portfolio of SYNDICATE has recorded an increase of 23.03% during the year and stood at Rs. 785.82 crores.

The deposits of crores.

SYNDICATE as on 31.3.2006 stood at Rs.1697.15

The deposits of

DCCBs stood at Rs. 2417.30 crores as on 31.3.2006,

registering decrease due to the prevailing adverse environment for cooperative banks. 24

The bank has been providing financial assistance to DCCBs and PACS for strengthening their infrastructural facilities. During the year 2007-06, SYNDICATE released an amount of Rs.4.14 lakhs to three DCCBs out of its development fund.

Disbursements under short term crop loans increased from Rs. 2317.15 crores to Rs. 2981.73 crores during the year under report registering an increase by 28.68%.

290

farmers

clubs

(VVV

clubs)

were

established

upto

as

on

31.3.2006.These clubs are functioning as dissemination centers for credit and related activities.

The SYNDICATE training institute has conducted 578 programs, imparting training to 18,106 participants under NABARD assistance scheme from the year 2004-2007to2008-2009.

Under retail banking, gold loans increased to Rs. 69.12 crores during the year 2007-06 as compared to Rs. 48.36 crores in previous year.

Loans amounting to Rs. 802.29 crores were rescheduled covering Rs. 7.29 crores liquidity support received from NABARD.

32,55,651 farmer member of PACS were covered under the cooperative kisan credit card scheme upto 31.3.2006.

25

The financial assistance by the bank for working capital limits to cooperative sugar factories increased to Rs. 287.00 crores.

26

VISION OF THE SYNDICATE

To prepare development action plan at the apex level, DCCB level and at PACS level and organize implementation.

To cover all agricultural member of PACS under cooperative kisan credit card scheme to achieve 100 % coverage and also to provide timely and adequate credit support both short term and long term investments.

To improve the lending to the small and marginal farmers as also SC and ST agriculturists.

To provide more advances through Rythu Mirta Groups (RMGs) To formulate and adopt appropriate strategy for improved loan recoveries and to reduce Non Performing Asstes (NPAs).

To ensure writing books of accounts and also ensure regular audit at all levels. To ensure uniform accounts, Ledger maintenance at PACs level and DCCB level. To provide ATM services at various important places in twin cities. To provide anywhere banking services and Teller banking services. To convert extension counters into full ledged branches.

27

To raise deposits upto Rs. 2040 crores. To computerize the operations of DCCBs and their branches. To provide basic training and also periodical refresher courses to staff members at all level. To reduce cost of management.

28

Introduction of credit and risk Management

Introduction of credit and risk management CREDIT MANAGEMENT The term credit management has got importance from the time when there increased the pressure of competition and force of custom persuades to sell on credit. Credit is granted to facilitate the sales. Credit is appealing to those customers who cannot borrow from other sources due to many reasons. The firms investment in accounts receivable depends on how much it sells on credit and how long it takes to collect receivables. Accounts receivables constitute one of most important asset category for firm which makes the firm to manage its credit well. The term credit management can be analyzed from various aspects like: 1 2 3 4 Terms of payment. Credit policy variables. Credit evaluation. Credit granting decision.

i) Terms of payment vary widely in practice. The most accepted one in which arrangement is made wherein the trade cycle is financed partly by seller, partly by buyer and partly by some financial intermediary. When goods are sold on cash terms the payment is received either in advance or on delivery. Credit sales are generally on open account. Consignment and bill of exchange come under credit.

29

ii) Credit policy variables have the dimensions like credit standards, credit period, cash discount and collection effort. A firm has wide range of choice in respect of granting credit. At one end of spectrum, it may decide not to grant credit to any customer, however strong his credit rating may be. At the other end, it may decide to grant credit to all customers irrespective of their credit rating. Between these two extremes lie several possibilities, often the more practical ones. Credit period refers to the length of the time customers are allowed to pay for their purchases which is generally varied from 15 days to 60 days. Lengthening the credit period pushes sales up by inducing existing customers to purchase more and attracting additional customers. This is accompanied by a larger investment in debtors and a higher incidence of bad debts loss. Cash discounts are generally given by the firms to induce customers to make prompt payments. The percentage discount and the percentage discount and the period during which it is available are reflected in the credit terms. Liberalizing the cash discount may mean that the discount percentage is increased and the discount period are lengthen which enhance the sales, reduce the average collection period and increase the cost of discount. The collection programme of the firm aims at timely collection of receivables. A rigorous collection programme tends to decrease sales, shorten the average collection period, reduce bad debt percentage, and increase the collection expense and vice versa in case of lax collection programme.
30

31

iii) Credit evaluation is an important element of credit management which helps in establishing credit limits. This includes two types of errors like: Type I error: risk. Type II error: risk. Both the errors are costly. Type I error leads to loss of profit on sales to good customers who are denied credit. Type II error results in bad debt losses on credit sales made to risky customers. Proper credit evaluation can mitigate the occurrence of such type of errors. Three broad approaches used for credit evaluation are 1 2 3 Traditional credit analysis. Sequential credit analysis. Discriminant analysis. A bad customer is misclassified as a good credit A good customer is misclassified as a poor credit

The traditional credit analysis calls for assessing a prospective customer in terms of the five Cs of credit. Character of customer that is his willingness to honor his obligation. 2 Capacity of the customer to meet credit obligations from the operating cash flows. 3 Financial reserves in the form of capital of the customer. If customer has difficulty in meeting his credit obligations from operating cash flows then focus to his capital.
32

Collateral security offered by customer in the form of pledged assets is considered. Fifth C is general ECONOMIC CONDITIONS that affect the customer.

For sake of simplicity, only three Cs are considered i.e. character, capacity and capital. The judgment of customer on these dimensions the credit manager considers both quantitative and qualitative measures. Sequential credit analysis is most efficient method than traditional one. In this analysis, investigation is carried further if the benefit of such analysis outweighs it cost. To illustrate, consider three stages of credit analysis: review of the past payment record, detailed internal analysis and credit investigation by an external agency. The credit analyst proceeds from stage one to stage two only if there is no past payment history and hence a detailed internal credit analysis is warranted. Likewise, the credit analyst goes from one stage two to stage three only if internal credit analysis suggests that the customer poses a medium risk and hence there is a need for external analysis. Numerical credit scoring is an improvement over traditional ones in which more systematic numerical are assigned to evaluate the customer unlike judgmental decisions made on basis of five Cs in traditional ones. In this the credit manager identifies the factors relevant for credit evaluation. Then weights are assigned to these factors and customers are rated based on these factors using suitable rating scale usually 5 point or 7 point rating scale. Factor score is derived by multiplying factor weight with factor rate for each factor. Customer rating index is derived
33

by adding the entire factor score based on which customers are classified. Numerical credit scoring is ad hoc in nature as it is based on weights which are subjective in nature. The technique of discriminant analysis is employed to construct better risk index. This method considers the financial ratios of the customers as the basic determinants of their creditworthiness. The analysis is made based on these financial ratios which are considered to be essential for creditworthiness of customer. Risk classification is another method in which customers are classified into various risk categories for credit investigation process. iv) Credit granting decision is important because once the

creditworthiness of a customer has been assessed the credit manager has to decide whether the credit should be offered or not. It is generally done based on the decision tree. The expected profit for the action refuse credit is 0. If the expected profit for the course of action offer credit is positive, it is desirable to extend credit, otherwise not. The repeat order is accepted only if the customer does not default on the first order. Once the customer pays on the first order, the probability that he would default on the second order is less than the probability of his defaulting on the first order.

RISK MANAGEMENT Once the credit is being granted to the customer the credit manager has to find out the ways for timely collection of the credit given.
34

Traditionally two methods have been commonly suggested like Days sales outstanding and ageing schedule. Though these methods are popularly used they have serious limitations as they are based on an aggregation of sales and receivables. To overcome the limitations of traditional methods Collection matrix approach is used.

35

The days sales outstanding (DSO) at a given time t may be defined as the ratio of accounts receivable outstanding at that time to average daily sales figure during the preceding 30 days, 60 days, 90 days, or some other relevant period. The ageing schedule (AS) classifies outstanding accounts receivables at a given point of time into different age brackets. The actual AS of the firm is compared with some standard AS to determine whether accounts receivable are in control. A problem is indicated if the actual AS shows a greater proportion of receivables, compared with the standard as, in the higher age groups. Collection matrix is improvement over the traditional methods of risk managements. In order to study correctly the changes in the payment behavior of customer, it is helpful to look at the pattern of collections associated with credit sales. From the collection, pattern one can judge whether the collection is improving, stable, or deteriorating. A secondary benefit of such an analysis is that it provides a historical record of collection percentages that can be useful in projecting monthly receipts for each budgeting period. FUNCTIONS OF EACH DEPARTMENT The four main departments involved in loan process of KMBL are : 1) MARKETING 2) CREDIT 3) OPERATIONS 4) RISK
36

ORGANISATIONAL CHART OF MARKETING DEPARTMENT:

REGIONAL MARKETING HEAD

LOCATION MARKETING HEAD

LOCAITON MARKETING HEAD

LOCAITON MARKETING HEAD

RELATIONSHIP MANAGER

RELATIONSHIP MANAGER

DIRECT SELLING AGENT

DIRECT SELLING TEAM

FLEET ON STREET

FLEET ON STREET

Regional Marketing Head (RMH) (heading entire region) Location Marketing Head (LMH) (heading entire location) Relationship Manager (RM) (for maintaining relationships with DSA and DST) DSA/DST Direct Selling Agent (external) / Direct sales Team (internal) Fleet On Street (FOS) (for sourcing the case, making cold calls, collecting relevant documents etc.)
37

Marketing department in personal finance is responsible for sourcing of business. This department works through network of DSA/DST and RM. RMs are responsible for managing relationships with DSA and DST. The sales department is divided in to two units under the guidance of RM that is A) DSA (DIRECT SELLING AGENT) B) DST (DIRECT SELLING TEAM) DSA is an outside party who is interested in sourcing prospective loan candidates into the bank. The bank studies the capacity of the party bringing applicants per month and gives certain targets and if the DSA agent reaches that target then the bank provides commission to the DSA agent. The bank does not involve in any activities of DSA directly. The DSA agent has to maintain the telecallers and executives at his own expenses. The second category is DST which is called K-DIRECT in Kotak Mahindra Bank under whom telecallers, team leaders and executives work. All the office expenses and salaries are paid to them by Kotak Mahindra Bank their salaries are more compared to DSA. The persons working under DST directly comes under the Kotak Mahindra Bank. Relationship Manager is in charge of the functions of K-DIRECT team.

38

ORGANISATIONAL CHART OF CREDIT DEPARTMENT:

NATIONAL CREDIT HEAD

REGIONAL CREDIT HEAD

REGIONAL CREDIT HEAD

LOCATION CREDIT HEAD

LOCATIN CREDIT HEAD

CREDIT MANAGER

CREDIT MANAGER

CENTRA PROCESSING AGENCY

NCH - National Credit Head RCH Regional Credit Head LCH Location Credit Head CM Credit Manager (With in location) CPA Central Processing Agency
39

After sourcing the files (loan applicants) in to the bank the second and crucial step is being played by credit department. Here the sourced files are examined thoroughly whether the required documents are furnished or not. The hierarchical level is followed in this department. It is from top to bottom starting from National Credit Head to Central Processing Agency. Also at few places there are ACH (Area Credit Head). They occupy an intermediary position between RCH and LCH. While the Marketing department is responsible for sourcing, the Credit department is responsible for buying the business. OPERATIONS DEPARTMENT: After the completion of the process of sanctioning loan amount to the customer, the file goes to operations department where they have to look after the entire operation of disbursement. The operation department will issue the cheque to the party. In this department all the PDCs (Post Dated Cheques) and any other original important documents are placed in the head office in Mumbai where all the documents are preserved in a private security locker NUCLEUS which is fire proof and the bank pays for the storage of files. In Nucleus all the respective PDCs of respective month on mentioned dates comes directly to the bank. The Kotak Mahindra Bank has its clearing department with nationalized bank where it accepts all the
40

PDCs and disburse them to respective banks if it is cleared then it mentions the cleared members data and uncleared cheque data through soft copy that day evening to the operation department. The next day morning the operation department will get the hard copy and they come to know clearly the reasons for cheque bounce cases. Then the telecaller will follow up the customers and intimate them about the cheque bounces and reasons for that and intimates them about the penal charges and depending on the reply of the customer they further proceed. All the data is maintained in the system.

41

ORGANISATIONAL CHART OF RISK DEPARTMENT: NATIONAL HEAD

REGIONAL RISK HEAD

STATE RISK HEAD LOCAL BKT-1 PORTFOLIO MANAGER RISK HEAD BKT-3 PORTFOLIO

BKT-2 PORTFOLIO MANAGER

MANAGER

TEAM LEADER

TEAM LEADER

TEAM LEADER

EXECUTIVES EXECUTIVES TELECALLER EXECUTIVES TELECALLER TELLE CALLER

In personal finance business whatever is sourced by the marketing department and bought by the credit has great tenacity to go bad or non performing or delayed due to combined effect of various variables like fraud, negligence, intentional, etc. The inherent nature of personal loan arise the need of having separate
42

risk department(RD)

to focus on timely collection and risk of loan

agreements. There is primarily on collecting the money which was funded by combined efforts of marketing and credit. RD is responsible for controlling the losses by having a strong network of collection agents and control. PROCESS FLOW CHART (FILE MOVEMENT SYSTEM) FILE TO BE LOGGED IN FILE INVESTIGATION WILL BE SHOT ON THE CASE thus keeping the delinquency level under

CREDIT DOES ANALYSIS

CASE IN SACTIONED OR REJECTED

43

IF SANCTIONED,DISBURSEMENT AGREEMENT TO BE SIGNED AND PDCS TO BE COLLECTED

DISBURSEMENT TO BE LOGGED IN

CHEQUE TO BE DELIVERED TO THE CUSTOMER

STOP Credit Risk Management: Policy Framework Risk is inherent in all aspects of a commercial operation and covers areas such as customer services, reputation, technology, security, human resources, market price, funding, legal, regulatory, fraud and strategy. However, for banks and financial institutions, credit risk is the most important factor to be managed. Credit risk is defined as the possibility that a borrower or counterparty will fail to meet its obligations in accordance with agreed terms. Credit risk, therefore, arises from the banks' dealings with or lending to a corporate, individual, another bank, financial institution or a country. Credit risk may take various forms, such as:

in the case of direct lending, that funds will not be repaid;

44

in the case of guarantees or letters of credit, that funds will not be forthcoming from the customer upon crystallization of the liability under the contract;

in the case of treasury products, that the payment or series of payments due from the counterparty under the respective contracts is not forthcoming or ceases;

in the case of securities trading businesses, that settlement will not be effected;

in the case of cross-border exposure, that the availability and free transfer of currency is restricted or ceases.

The more diversified a banking group is, the more intricate systems it would need, to protect itself from a wide variety of risks. These include the routine operational risks applicable to any commercial concern, the business risks to its commercial borrowers, the economic and political risks associated with the countries in which it operates, and the commercial and the reputational risks concomitant with a failure to comply with the increasingly stringent legislation and regulations surrounding financial services business in many territories. Comprehensive risk identification and assessment are therefore very essential to establishing the health of any counterparty. Credit risk management enables banks to identify, assess, manage proactively, and optimise their credit risk at an individual level or at an entity level or at the level of a country. Given the fast changing, dynamic world scenario experiencing the pressures of globalisation, liberalization, consolidation and disintermediation, it is important that
45

banks have a robust credit risk management policies and procedures which is sensitive and responsive to these changes. Strategy and Policy It is essential that each bank develops its own credit risk strategy or enunciates a plan that defines the objectives for the credit-granting function. This strategy should spell out clearly the organisations credit appetite and the acceptable level of risk - reward trade-off at both the macro and the micro levels. The strategy would therefore, include a statement of the banks willingness to grant loans based on the type of economic activity, geographical location, currency, market, maturity and anticipated 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. A common feature of most successful banks is to establish an independent group responsible for credit risk management. This will ensure that decisions are made with sufficient emphasis on asset quality and will deploy specialised skills effectively. In some organisations, the credit risk management team is responsible for the management of problem accounts, and for credit operations as well. The responsibilities of this team are the formulation of credit policies, procedures and controls extending to all of its credit risks arising from corporate banking, treasury, credit cards, personal banking,

46

trade finance, securities processing, payment and settlement systems, etc. This team should also have an overview of the loan portfolio trends and concentration risks across the bank and for individual lines of businesses, should provide input to the Asset - Liability Management Committee of the bank, and conduct industry and sectoral studies. Inputs should be provided for the strategic and annual operating plans. In addition, this team should review credit related processes and operating procedures periodically. The credit risk strategy and policies should be effectively communicated throughout the organisation. All lending officers should clearly understand the bank's approach to granting credit and should be held accountable for complying with the policies and procedures. Keeping in view the foregoing, each bank may, depending on the size of the organization or loan book, constitute a high level Credit Policy Committee also called Credit Risk Management Committee or Credit Control Committee, etc. to deal with issues relating to credit policy and procedures and to analyse, manage and control credit risk on a bank wide basis. The Committee should be headed by the Chairman/CEO/ED, and should comprise heads of Credit Department, Treasury, Credit Risk Management Department (CRMD) and the Chief Economist. The Committee should, inter alia, formulate clear policies on standards for presentation of credit proposals, financial covenants, rating standards and benchmarks, delegation of credit approving powers, prudential limits on large credit exposures, asset concentrations, standards for loan collateral, portfolio management, loan review mechanism, risk
47

concentrations, may also set

risk up

monitoring Credit Risk

and

evaluation,

pricing

of

loans,

provisioning, regulatory/legal compliance, etc. Concurrently, each bank Management Department (CRMD), independent of the Credit Administration Department. The CRMD should enforce and monitor compliance of the risk parameters and prudential limits set by the CPC. The CRMD should also lay down risk assessment systems, monitor quality of loan portfolio, identify problems and correct deficiencies, develop MIS and undertake loan review/audit. Large banks may consider separate set up for loan review/audit. The CRMD should also be made accountable for protecting the quality of the entire loan portfolio. The Department should undertake portfolio evaluations and conduct comprehensive studies on the environment to test the

48

RISK MANAGEMENT MEANING OF RISK Risk management is a process of managing the collection of managing the collection of liabilities with an objective of increasing the cash flows with minimum costs. It involves collecting in right time, right amount, in right terms.This process starts from identifying the amount of liabilities and to make the collection successful. This does not end with mere collection. Besides collection, the difficulties and weak areas should also be ascertained, which leads to development of an effective system for credit extension or sales and collection. Risk management is an area of tremendous challenge. Risk management is used to minimize bad debts through active account delinquency management. As the companies strive to increase their cash flows and improve customer relationships, the risk partner is more important than any other.

IMPORTANCE OF RISK In todays market scenario, one of the most critical areas to focus on is to protect the bank from bankruptcy. In such conditions Risk department plays a key role in the growth of banks. Any delay in realizing the receivables would adversely effect the working capital, which in turn effects the overall financial management of the firm. No firm can be successful if its overdue are not collected, monitored and managed carefully in time. Thus risk management is important in
49

sustaining the bank and its growth.

RISK DEPARTMENT IN KMBL When all the doors are closed to collect the EMI from the customer then it comes to risk department. In Syndicate bank the most importance is given to risk department. The risk department in KMBL follows bucket wise policies which starts from BUCKET 1. The cheques of the customers which got bounced will come to the risk department where they pressurizes the customer and gets the EMI including penal and cheque bounce charges from customer. The first six months of the customer is very important for the risk department which is called INFANT DELIQUENCY where the risk department estimates whether the customer is going to be defaulter in future. The risk department is very strong in KMBL where they follow the bucket system. The bucket system depends on Days past dues. For every 30 days the bucket system shifts from one bucket to other depending on pending EMI amount. PROCESS FLOW INSERT If the bank is unable to collect atleast one EMI from the customer from past continuous 3 months then they book the case as non performance
50

assets. They claim the future calculated amount as loss so to avoid this type of loss to the bank. They take lot of care to collect the EMIs within the three months with out fail to reduce the increase in the default ratio through bucket wise. The loss is calculated using the following formula: Future outstanding = EMI * lost amount + EMI * future turn amount. To control the defaulters ratio they started the necessary steps from the starting of the collection department. The flow of power is as shown in the flow chart from top level to bottom level. When the case comes to bucket 1 lot of pressure is made by portfolio manager to stop the case not to extend to bucket 2. The bucket portfolio manager plays a prominent role in risk department and he is paid more pay and perks. In similar way in bucket 2 the portfolio manager plays a prominent role to reduce the case not to extend to bucket 3. When the case enters bucket 3 and portfolio manager is unable to collect at least one EMI then the case is booked as non performance asset which is a loss to the bank.

51

LEGAL ASPECTS OF RISK When the file comes to bucket 3 there after making all pressures if they could not get the amount they further proceed legally to collect the money. The three main sections used to proceed legally are: 1 2 3 Section 138 Where any cheque drawn by a person on account maintained by him with the banker for payment of any amount of money to another person from out of that account for the discharge, in a whole or in part, of any debt or any liability, his return by bank unpaid, either because of the amount of money outstanding to the credit of that account by an agreement made with the bank. Such person shall be deemed to have committed an offence and shall without prejudice to any other provisions of this act can be punished with imprisonment for a term which may extend to one year or with a fine which may extend to twice the amount of cheque or with the both. Now the court has the power to order twoyear imprisonment for cheque bounces under section 138 N.I. a POST DATED CHEQUES A cheque post-dated remains bills of exchange till the date written on it and with effect from the said date shown on the face of it; it becomes a cheque under the act. Post dated cheque deemed to have been drawn on the date it bears provision of section 138 (a) held.
52

Section 138 (NEGOTIABLE INSTRUMENTS ACT) Section 156 Section 9

ELECTRONIC CLEARENCE SERVICE Electronic clearance service contains six cheques among that four cheques contain the EMI amount and one with full loan amount and another with cleared amount each cheque is signed by the loan according to RBI rules. STANDARD INSTRUCTIONS This type of instruction are produced when the loanee working in the same bank and taking loan amount. SUMMONS The chief ministerial officer of the court shall ordinarily sign summons issued to witness. 1: These are the witness summons. 2: Accused summons to be signed by magistrates: Magistrates shall themselves sign summons to accused persons. The copy of the complaint may be sent with summons or warrant issued to the accused under sub-Section (i) of section 204 of the code. Place of hearing to be stated: Every summons and every order of adjournment shall state the place in which the course to which it relates will be heard. Warrant bearing sign manual of the judge or the magistrate: All warrants should receive the sign of them from whose court they are issued. SECTION 156 This case is claimed against the customer as cheating or forgery case where the customer might have given some fake documents to get a loan which might have mislead the bank.
53

Whoever by deceiving any person fraudulently or dishonestly include the persons. So deceive to deliver property to any person or to consent that any person shall retain any property intentionally include person so deceived to do or omit to do anything which he would not do or omit if he were not so deceived, and which after omission cause or lively cause damage or harm to that person in body, mind, reputation and property is said to cheat Example 1. A by putting a counterfoil mark on an article intentionally deceives into a belief that this articles were made by celebrity manufacturer, and thus dishonestly induces Z to buy and pay for the articles A cheats. 2. A by pleading as diamonds articles which he knows are not diamonds intentionally deceives Z if he thereby dishonestly includes Z to land money, A cheats. i) ii) Dibas sarkar vs. State 1989 Cr. LJ MOC 30 Cal. Kakumukkala Krishnamurthy vs. State of AP AIR 1956 Sec.333 Section 9 This case is claimed against the customer as a property attachment where the bank attacks the property of the customer. This section is very rarely used.

54

ANALYSIS and FINDINGS:

ANALYSIS and FINDINGS The information or data of credit and risk management reference to Syndicate bank. Finding for last years of description for risk mode. NON PERFORMANCE ASSETS table shows the performance assets of the KMBL. MONTHS April 09 May 09 June 09 July 09 Aug 09 Sep 09 Oct 09 Nov09 Dec 09 Jan 10 Feb 10 Mar 10 Total TARGET (In lakhs) 1.56 1.62 1.77 1.92 2.11 2.34 2.58 2.83 3.10 3.37 3.68 4.01 30.89 ACHIEVEMENTS (In lakhs) 0.41 1.2 1.3 0.56 1.72 2.13 0.60 0.61 0.00 1.9 1.98 0.32 12.73 data of the non

55

NON PERFORMANCE ASSETS-IN LAKHS

1) TARGETS: This is the amount given to book as loss for the risk

department in every month of non performance of asset.

2) ACHIEVEMENTS: This is the amount booked as loss to risk

department achieved in every month.

56

PENAL CHARGES COLLECTED Finding for last years of description for risk mode. MONTHS TARGET (In lakhs) Apr 07 May 07 June 07 July 07 Aug 07 Sep 07 Oct 07 Nov 07 Dec 07 Jan 08 Feb 08 Mar 08 Total 0.26 0.29 0.32 0.36 0.40 0.43 0.47 0.52 0.56 0.61 0.65 0.70 5.57 ACHIEVEMENTS (In lakhs) 0.19 0.32 0.52 0.30 0.83 0.32 0.66 0.77 0.65 0.59 0.81 1.29 7.25

57

PENAL AMOUNT

1. TARGETS: This is the target penal amount given for risk

department to collect.
2. ACHIEVEMENTS: This is the penal amount collected by risk

department every month.

Months April 2008

Target (lakhs) 0.71

Achievements (lakhs) 0.67

58

MONTH

May2008 June 2008 July 2008 August 2008 September 2008 October 2008 November 2008 December 2008

0.74 0.77 0.80 0.82 0.87 0.90 0.91 0.93

0.53 0.80 0.74 1.21 1.22 0.93 0.75 0.95

PENAL AMOUNT

1. TARGETS: This is the target penal amount given for risk

department to collect.
2. ACHIEVEMENTS: This is the penal amount collected by risk

department every month. Details of self clients of KMBL SEP RSENP SURR SAL SENP TOTAL

59

DEFAULTERS (%)

57

20

37

34

155

DEFAULTERS AMNOUNT

134043 409509

110438 412913 1298755 2365656

DEFAULTERS PERCENTAGE DEFAULTERS (%) CLIENTS

1: SELF EMPLOYED PROFESSIONAL. (SEP) 2: RETAIL SELF EMPLOYED NON PROFESSIONAL.(RSENP) 3: SURROGATIVES. (SURR) 4:SALARIED (SAL) 5: SELF EMPLOYED NON PROFESSIONAL. (SENP) TOTAL

7 57 20 37 34 155

60

DE A L R P CE TA E F U TE S ER N G

2% 2

5 % 3% 6

SE P RS N E P SU R R SA L

2% 4

1% 3

SE P N

Analysis of defaulters (%) 1: SEP = 7/155 * 100 = 5% 36% 13% 24%

2: RSENP = 57/155 * 100 = 3: SURR = 20/155 * 100 4: SAL =37/155 * 100 5: SENP =34/155 *100 = =

= 22%

61

DEFAULTERS AMOUNT PERCENTAGE Defaulters Amount

1: SELF EMPLOYED PROFESSIONAL. 2: RETAIL SELF EMPLOYED NON PROFESSIONAL. 3: SURROGATIVES. 4: SALARIED. 5: SELF EMPLOYEDN ON PROFESSIONAL.

1,34,043 4,09,509 1,10,438 4,12,913 12,98,755

DEFA ULTERS A O M UNT PERCENTA E G

6%

17% 5% 17%

S EP R N SE P S R U R SL A S P EN

55%

62

Analysis of Defaulters amount (%) 1: SEP = 134043/2365656 * 100 = 6% 17% 5% 17% 55%

2: RSENP =409509/2365656 * 100 = 3: SURR = 110438/2365656 * 100 = 4: SAL = 412913/2365656 * 100 =

5: SENP =1298755/2365656 *100 =

TABLE: 1 The statement showing default on the lines of repayment period NUMBER OF DAYS DEFAULT REPAYMENT PERIOD [0 YRS 2 YRS] 30 DAYS 14 (58) 60 DAYS 2 (8) 90 DAYS 3 (13) ABOVE 90DAYS 5 (21) ROW TOTAL 24

[2 YRS - 3 YRS]

91 (76)

11 (9)

7 (6)

10 (9)

119

63

[3 YRS 4YRS]

9 (75)

1 (8)

1 (8)

1 (9)

12

COLUMN TOTAL

114 (74)

14 (9)

11 (7)

16 (10)

155

** Figures in parenthesis denote the row wise percentage. Effective risk (%) in terms of period 1) 14/24*100=58 2) 91/ 199*100=76

3)

9/12*100=75

The distribution of defaulters with respect to repayment period is visible in table 1. According to the table more number of defaulters are lying in bucket 1, 74% of the defaulters are in bucket 1 followed by 10% in above 90 days and 9% in bucket 2 and 7% in bucket 3. The same is reflected in the categories of 2-3 years and 3-4 years repayment period where as in 0-2 years repayment period 58% of defaulters are in 30 days 21% in above 90 days, 13% in 90 days and 8% in 60 days. It implies the bank has been focusing to control and reduce the number of defaulters in other than 30 days bucket further it also implies the repayment period is not a factor which influence on number of defaulters.
64

Table: 2 The statement showing default on the lines of profession NUMBER OF DAYS PROFESSION 30 DAYS TECHNICAL 26 (0.65) BUSINESS COLUMN TOTAL 75 (0.77) 101 11 10 15 137 6 7 9 97 60 AYS 5 90 DAYS 3 DEFAULT ABOVE 90DAYS 6 ROW TOTAL 40

**figures in parenthesis denote the row wise percentage. Here business category is defined as the income category based on their non-salaried and non-professional incomes where they use their business skills, RSENP, SENP comes under this category. Technical profession, these are the persons having an income either from salary or from their professional qualification. SEP, SALARIED comes under this category. NULL HYPOTHESIS: H0: There is no relationship between profession and number of defaulters P1=P2
65

ALTERNATE HYPOTHESIS: H1: There is relationship between profession and default rate. The business professions are more than the technical profession. P1<P2 (Left tailed test) Test of proportions Z=P1-P2/P (1-P) (1/n1+1/n2) Where P1=26/40=0.65 P2=75/97=0.77 P=P1+P2/n1+n2 Where n1=40 , N2=97 Therefore P=0.74 Z=0.65-0.77/ (0.74) (1-0.74) (1/40+1/97) = -1.46 The calculated value of test of proportion is -1.46 The table value of test of proportion is -1.645 at 95% confidence level. Therefore the calculated value lies in rejection rejoin, so null hypothesis is accepted Therefore there is no relationship between the profession and the number of defaulters.

66

TABLE: 3 The statement showing default on the lines of gender. NUMBER OF DAYS DEFAULT 30 SEX MALE FEMALE DAYS 95 (0.72) 20 (0.87) COLUMN TOTAL **figures in parenthesis denote the row wise percentage. NULL HYPOTHESIS: H0: There is no relationship between sex and number of defaulters P1=P2 ALTERNATE HYPOTHESIS: H1: There is relationship between sex and number of defaulters. Female are more in number than male. P1<P2 (Left tailed test) Test of proportions Z=P1-P2/P (1-P) (1/n1+1/n2)
67

60 DAYS 11 1

90 DAYS 11 1

ABOVE 90DAYS 15 1

ROW TOTAL 132 23

115

12

12

16

155

Where

P1=95/132=0.72 P2=20/23=0.87 P=P1+P2/n1+n2

Where n1=132 , N2=23 Therefore P=0.74 Z=0.72-0.87/(0.74) (1-0.74) (1/132+1/23) = -1.52 The calculated value of test of proportion is -1.52 The table value of test of proportion is -1.645 at 95% confidence level. Therefore the calculated value lies in rejection rejoin, so null hypothesis is accepted Therefore there is no relationship between the sex and the number of defaulters.

68

TABLE: 4 To find the relationship between AMOUNT OF LOAN and DAYS DEFAULT RATE. NUMBER OF DAYS DEFAULT RATES 30 AMOUNT of LOAN [RS 0 RS 1,00,000] [RS1,00,000 2,00,000] [RS 2,00,000 RS RS DAYS 54 (0.77) 32 (0.64) 22 1 2 1 26 60 DAYS 4 7 90 DAYS 6 3 ABOVE 90DAYS 6 8 ROW TOTAL 70 50

5,00,000] [RS 5,00,000 RS 2 0 0 1 3

7,00,000] [RS7,00,00010,00,000] COLUMN TOTAL 116 12 11 16 155 RS 6 0 0 0 6

*figures in parenthesis denote row wise percentage.

69

NULL HYPOTHESIS: H0: Percentage of defaulters within 30 days period do not differ significantly between the amount borrowed 0-1 lack and 1 lack-2 lack P1=P2 ALTERNATE HYPOTHESIS: H1: Percentage of defaulters within 30 days period differ significantly between the amount borrowed 0-1 lack and 1 lack-2 lack. P1>P2 (Right tailed test) Test of proportions Z=P1-P2/P (1-P) (1/n1+1/n2) Where P1=54/70=0.77 P2=32/50=0.64 P=P1+P2/n1+n2 Where n1=70 N2=50 Therefore P=0.72 Z=0.77-0.64/ (0.72) (1-0.72) (1/70+1/50) = 1.566 The calculated value of test of proportion is 1.566
70

The table value of test of proportion is 1.645 at 95% confidence level. Therefore the calculated value lies in rejection rejoin, so null hypothesis is accepted Therefore there is no relationship between the loan amount and the number of defaulters. Note: The hypothesis is tested between first two slots i.e. amount range Rs 0-1 lack and Rs 1 lack-2 lack. TABLE 5: Statement showing default on line of location.

NUMBER OF DAYS DEFAULT 30 LOCATION DAYS 60 DAYS 90 DAYS ABOVE 90DAYS ROW TOTAL

NEW HYDERABAD

41

58

SECUNDERABAD 30 RANGA REDDY DISTRICT 29

43

39

COLUMN TOTAL

100

12

12

16

140

71

**figures in parenthesis denote row wise percentage. Observed frequency (oi) NEW HYDERABAD 41 34 49 1.44 Expected frequency (ei) (oi-ei)2 (oi.-ei) 2/ei

SECUNDERABAD

30

33

0.27

RANGA REDDY DISTRICT

29 -------100 ---------

33 --------100 ----------

16

0.48 ------chisquare =2.19 -------

NULL HYPOTHESIS: H0: Categories in 30 days are equally distributed P1=P2

72

ALTERNATIVE HYPOTHESIS: H1: Categories in 30 days are not equally distributed P1=P2 Chi square value is 2.19 Critical value at 95% confidence level is 5.99. Chi square value is less than critical value so null hypothesis is accepted. Therefore location of the loanees not influence on the defaulters (in 30 days category).

73

CONCLUSION
CONCLUSION Periodically customer meet should be conducted and category wise the best customer should be appreciated and if possible rewarded by way of cash prize or in kind. This helps in creating good publicity for the bank as well as to penetrate in to market. Post disbursement contact with the loanee should be maintained. This process not only builds report but also gives important clues about loanees ability to honour the payment responsibility. At the same time this also leads to good customer care.

There should be good coordination among sales department, credit department and risk department where they should go through the loanees profile and should sanction the amount through proper stringent verification when the amount is huge.

Future status of loanees business, if he is a business man, should be assessed. Reserves, environment, competition, capabilities etc. should be considered before sanctioning a loan based on past performance. Future should be analyzed as to whether the business would sustain in future, the products are going to match the future needs or not should be analyzed. Future analysis is more important for a new customer than to an old customer. Whereas, in case of employee, the job security, skill base, proof of past financial discipline, property owned etc. should be considered. Simply not with numerical parameters but also with other qualitative factors. Government employee is also an important segment, bulk

applicants can be attracted by influencing the undertaking office or

74

accounts officer of the concerned department for taking letters to see that installments payments are directly deducted from their salaries. This segment is definitely useful in boosting up the loan selling if proper verification and strict scrutanisation is done with corresponding undertaking officers. Good rapport with government officers by risk department will help in recovering the targeted amounted from government employees proper branch network and good force in risk department will solve if there is any transfer of employees.

To safeguard the loan and improve the risk especially when there is a probability of mobility of a loan for example: in case of a personal loan property attachment or guaranteed of government employee is to be taken.Hence such defaulters can be reduced.

75

SUGGESTION
SUGGESTION A loanees political affiliation and his past career in politics have to be investigated before disbursing the loan amount in order to reduce the hardships involved in collecting the amount.

Proper verification of documents and evaluation of stocks and assets of business people before sanctioning such loans is essential to avoid overvaluation by the employees. For this a technical person is to be appointed who has entire knowledge of risk, legal aspects and technical process where thorough verification can be done.

To detect the fraud by the sales people whose intention is to usually just sourcing the loans applications the risk department head along with sales department head should select the cases randomly and visit the places for inspection in every month first week where they can find the exact picture and at the same time can ascertained the scope for fraud.

In terms of customer wise loan amount the percentage of self employed non professionals is more and special attention should be given while disbursing the loan amounts. Risk management should be a proactive process and hence its role should not be limited to the post default activity it should develop a system to track the possible pitfalls in each sanction from the
76

very beginning.

Annexure
Annexure Credit department is the back bone of personal loan business. Main

function of the credit is to assess the credit worthiness of an applicant and lending him appropriate amount based on such assessment and subject to the terms, conditions and limitations of the policies. Comprehensive credit information, which provides details pertaining to credit facilities already availed by the borrower as well as his payment track record, has become the need of an hour. Credit risk is defined as the possibility that a borrower or counterparty will fail to meet its obligations in accordance with agreed terms. Credit risk, therefore, arises from the banks' dealings with or lending to a corporate, individual, another bank, financial institution or a country. Credit risk management enables banks to identify, assess, manage proactively, and optimise their credit risk at an individual level or at an entity level or at the level of a country. Given the fast changing, dynamic world scenario experiencing the pressures of globalisation, liberalization, consolidation and disintermediation, it is important that banks have a robust credit risk management policies and procedures which is sensitive and responsive to these changes. The strategy would therefore, include a statement of the banks willingness to grant loans based on the type of economic activity, geographical location, currency, market, maturity and anticipated
77

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. In some organisations, the credit risk management team is responsible for the management of problem accounts, and for credit operations as well. The responsibilities of this team are the formulation of credit policies, procedures and controls extending to all of its credit risks arising from corporate banking, treasury, credit cards, personal banking, trade finance, securities processing, payment and settlement systems, etc. The credit risk strategy and policies should be effectively communicated throughout the organisation. All lending officers should clearly understand the bank's approach to granting credit and should be held accountable for complying with the policies and procedures. To deal with issues relating to credit policy and procedures and to analyse, manage and control credit risk on a bank wide basis. Credit risk is not really manageable for very small companies (i.e., those with only one or two customers). This makes these companies very vulnerable to defaults, or even payment delays by their customers. Lenders will trade off the cost/benefits of a loan according to its risks and the interest charged. But interest rates are not the only method to compensate for risk. Protective covenants are written into loan agreements that allow the lender A recent innovation to protect lenders and bond holders from the danger of default are credit derivatives, most
78

commonly in the form of credit defaulters swap. These financial contracts allow companies to buy protection against defaults from a third party, the protection seller. The protection seller receives a periodic fee (the credit spread) as compensation for the risk it takes, and in return it agrees to buy the debt should a credit event ("default") occur. Employees of any firm also depend on the firm's ability to pay wages, and are exposed to the credit risk of their employer Risk management is used to minimize bad debts through active account delinquency management in right time, right amount, in right terms.Any delay in realizing the receivables would adversely effect the working capital, which in turn effects the overall financial management of the firm. CREDIT RISK IS FACED BY Faced by lenders to consumers Most lenders employ their own models (credit scoreboard) to rank potential and existing customers according to risk, and then apply appropriate strategies. With products such as unsecured personal loans or mortgages, lenders charge a higher price for higher risk customers and vice versa. With revolving products such as credit cards and overdrafts, risk is controlled through careful setting of credit limits. Some products also require security, most commonly in the form of property. Faced by lenders to business Lenders will trade off the cost/benefits of a loan according to its risks and the interest charged. But interest rates are not the only method to
79

compensate for risk. Protective covenants

are written into loan

agreements that allow the lender some controls. These covenants may:

limit the borrower's ability to weaken his balance sheet voluntarily e.g., by buying back shares, or paying dividends, or borrowing further. allow for monitoring the debt by requiring audits, and monthly reports allow the lender to decide when he can recall the loan based on specific events or when financial ratios like debt/equity, or interest coverage deteriorate.

A recent innovation to protect lenders and bond holders from the danger of default are credit derivatives, most commonly in the form of credit defaulters swap. These financial contracts allow companies to buy protection against defaults from a third party, the protection seller. The protection seller receives a periodic fee (the credit spread) as compensation for the risk it takes, and in return it agrees to buy the debt should a credit event ("default") occur. Faced by business Companies carry credit risk when, for example, they do not demand upfront cash payment for products or services.[1] By delivering the product or service first and billing the customer later - if it's a business customer the terms may be quoted as NET-30- the company is carrying a risk between the delivery and payment. Significant resources and sophisticated programs are used to analyze and manage risk. Some companies run a credit risk department whose
80

job is to assess the financial health of their customers, and extend credit (or not) accordingly. They may use in house programs to advise on avoiding, reducing and transferring risk. They also use third party provided intelligence. Companies like MOODYS and DUN BRADSTREETprovide such information for a fee. For example, a distributors selling its products to a troubled retailersmay attempt to lessen credit risk by tightening payment terms to "net 15", or by actually selling fewer products on credit to the retailer, or even cutting off credit entirely, and demanding payment in advance. Such strategies impact on sales volume but reduce exposure to credit risk and subsequent payment defaults. Credit risk is not really manageable for very small companies (i.e., those with only one or two customers). This makes these companies very vulnerable to defaults, or even payment delays by their customers. The use of a collection agency is not really a tool to manage credit risk; rather, it is an extreme measure closer to a write down in that the creditor expects a below-agreed return after the collection agency takes its share (if it is able to get anything at all).

81

Faced by individuals Consumers may also face credit risk in a direct form as depositors at banks or as investors/lenders. They may also face credit risk when entering into standard commercial transactions by providing a deposit to their counterparty, e.g. for a large purchase or a real estate rental. Employees of any firm also depend on the firm's ability to pay wages, and are exposed to the credit risk of their employer. In some cases, governments recognize that an individual's capacity to evaluate credit risk may be limited, and the risk may reduce economic efficiency; governments may enact various legal measures or mechanisms with the intention of protecting consumers against some of these risks. Bank deposits, notably, are insured in many countries (to some maximum amount) for individuals, effectively limiting their credit risk to banks and increasing their willingness to use the banking system.

82

BIBLIOGRAPHY

BIBLIOGRAPHY

www.kotak.com

www.wikipedia.org

www.rmahq.org

www.syndicate bank .com

www.rbi.org

83