Tejasvita Bhardwaj

CREDIT RISK MANAGEMENT PRACTICES: A
COMPARATIVE STUDY OF STATE BANK OF INDIA

AND PUNJAB NATIONAL BANK
Research Project Report
Submitted to the Punjab Agricultural University

in partial fulfillment of the requirements
for the degree of
MASTER OF BUSINESS ADMINISTRATION

in
FINANCIAL MANAGEMENT
(Minor Subject: Economics)
By
Tejasvita Bhardwaj
(L-2011-BS-31-MBA)
School of Business Studies

College of Basic Sciences and Humanities
© PUNJAB AGRICULTURAL UNIVERSITY
LUDHIANA-141004
2013
1
CERTIFICATE I
This is to certify that the project report entitled, “Credit Risk Management
Practices: A Comparative Study of State Bank of India and Punjab National Bank”
submitted for the degree of the Master of Business Administration in the subject of
Financial Management (Minor subject: Economics) of the Punjab Agricultural University,
Ludhiana, is a bonafide research work carried out by Tejasvita Bhardwaj (L-2011-BS-31-
MBA) under my supervision and that no part of this project report has been submitted for any
other degree.
The assistance and help received during the course of investigation have been fully
acknowledged.
_________________________
(Dr. Y. P. Sachdeva)
Major Advisor
Professor
Punjab Agricultural University,
Ludhiana-141004
2
CERTIFICATE II
This is to certify that the project report entitled, “Credit Risk Management
Practices: A Comparative Study of State Bank of India and Punjab National Bank”
submitted by Tejasvita Bhardwaj (L-2011-BS-31-MBA) to Punjab Agricultural University,
Ludhiana, in partial fulfillment of the requirements for the degree of Master of Business
Administration, in the subject of Financial Management (Minor subject: Economics) has
been approved by the external examiner along with the internal examiner after an oral
examination on the same.
____________________________ _____________________________
Internal Examiner External Examiner
____________________________
(Dr. Sandeep Kapur)
Director-cum-Professor
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ACKNOWLEDGEMENT
“Things won are done; joy's soul lies in the doing”
The success of my research project report depends on the hard work of many people.
I would like to acknowledge the contribution of all those u have been in instrumental in
helping and guiding me in the course of this effort. First of all, I bow my head in gratitude to
god for his benign blessing and thank him for bestowing me strength to complete this
research project report.
It gives me immense pleasure to expresses my profound sense of gratitude to my
major advisor Dr. Y.P. Sachdeva, Professor, School of Business Studies, Punjab Agricultural
University, Ludhiana for his guidance, support, constant direction and mentoring at all
stages of this research project. His selfless and never falling interest, excellent supervision,
perpetual inspiration, extraordinary patience, constant engorgement and constructive
criticism during the course of investigation and in the preparation of this manuscript
inculcated more and more enthusiasm in me to do my best.
Sincere note of thanks is all so extended to the members of my advisory committee Dr
Mohit Gupta, Assistant Professor, School of Business Studies, Dr. Jatinder Mohan Singh,
Agricultural Economist, Department of Economics and Sociology, and Dr. Sandeep Kapur,
Director, School of Business Studies, for their cooperation and guidance and valuable
suggestion and also for reviewing this manuscript critically.
No words can suffix my feeling of gratitude to my family whose cooperative and
helpful attitude was the source inspiration during the entire period, special note to my father
Mr. Subhash Bhardwaj, my mother Mrs. Karuna Bhardwaj, my brother Arjun Bhardwaj
and special thanks to my sister Mrs. Richa Sharma for supporting me throughout my
research project. Lastly, I am thankful to my fellow mates for their concern in completion of
my research project.
Above all, I am grateful to all the respondents who took out time and helped to make
this project a reality. All may not be mentioned but no one is forgotten; so thanks to all.
Dated:
______________________
Place: Ludhiana Tejasvita Bhardwaj
4
Title of the Project Report : Credit Risk Management Practices: A Comparative
Study of State Bank of India and Punjab National Bank
Name of the Student and : Tejasvita Bhardwaj

Admission No. L-2011-BS-31-MBA
Major Subject : Financial Management
Minor Subject : Economics
Name and Designation of the : Dr. Y.P. Sachdeva,

Major Advisor Professor,
Degree to be awarded : Master of Business Administration
Year of Award of Degree : 2013
Total Pages in project Report : 52 + Annexure + Vita
Name of University : Punjab Agricultural University,

Ludhiana
ABSTRACT
The present research was conducted to study the framework and practices adopted
with regard to the Credit Risk Management by State Bank of India and Punjab National Bank
in Ludhiana. For this purpose, secondary data was collected through websites, annual reports
and journals. Also, a primary survey was conducted. A sample of 60 respondents was selected
from Ludhiana City. The results of the survey was brought out irrespective of the size of
bank. The data were analyzed with statistical tools like mean score, standard deviation, chi-
square, weighted mean and t-value. The study revealed that majority of respondents of PNB
and SBI were not much aware of the credit risk framework and the respective practices to be
followed. Also, moderate number of respondents knew about the various practices and
instruments been adopted. The results show that the authority for approval of Credit Risk
vests with ‘Board of Directors’ to the tune of 17 per cent and 100 per cent in case of SBI and
PNB, respectively. For Credit Risk Management, both the banks were found performing
several activities like industry study, periodic credit calls, periodic plant visits, developing
MIS, risk scoring and annual review of accounts.
Keywords: Risk Management, Risk, Credit risk practices, risk and performance
______________________
Signature of Major Advisor Signature of the Student
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CONTENTS
CHAPTER TOPIC PAGE

NO.
NO.
I. INTRODUCTION 1-10
II. REVIEW OF LITERATURE 11-17
III. RESEARCH METHODOLOGY 18-21
IV. RESULTS AND DISCUSSION 22-44
V. SUMMARY 45-49
REFERENCES 50-52
ANNEXURE i-iv
VITA
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CHAPTER-I
INTRODUCTION
It is difficult to imagine another sector of the economy where as many risks are
managed jointly as in banking. By its very nature, banking is an attempt to manage multiple
and seemingly opposing needs. While risk-managing banks do have less risk and more profit
than banks engaged in similar activities that do not manage credit risk via the loan sales
market, the risk managing banks do not have lower risk than other banks unconditionally.
This chapter contains information about credit risk, its types, various techniques required etc.
All these are covered under the following heads:
1.1 Origin
1.2 Types of risks
1.3 Instruments and Tools
1.4 Credit Risk Menu
1.5 How are these are managed?
1.6 Need for the present Study
1.1 ORIGIN
The etymology of the word “Risk” can be traced to the Latin word “Rescum”
meaning Risk at Sea or that which cuts. Risk is associated with uncertainty and reflected by
way of charge on the fundamental/ basic i.e. in the case of business it is the Capital, which is
the cushion that protects the liability holders of an institution. These risks are inter-dependent
and events affecting one area of risk can have ramifications and penetrations for a range of
other categories of risks.
The foremost thing is to understand the risks run by the bank and to ensure that the
risks are properly confronted. Effectively controlled and rightly managed. Each transaction
that the bank undertakes changes the risk profile of the bank. The extent of calculations that
need to be performed to understand the impact of each such risk on the transactions of the
bank makes it nearly impossible to continuously update the risk calculations. Hence,
providing real time risk information is one of the key challenges of risk management exercise.
Thus, Credit risk emanates from a bank’s dealings with an individual, corporate, bank,
financial institution or a sovereign.
Commonly also referred to as default risk, Credit risk events include bankruptcy,
failure to pay, loan restructuring, loan moratorium, accelerated loan payments. For banks,
credit risk typically resides in the assets in its banking book.
The past decade has seen dramatic losses in the banking industry. Firms that had
been performing well suddenly announced large losses due to credit exposures that turned
sour, interest rate positions taken, or derivative exposures that may or may not have been
1
assumed to hedge balance sheet risk. In response to this, commercial banks have almost
universally embarked upon an upgrading of their risk management and control systems.
Risks and uncertainties form an integral part of banking which by nature entails
taking risks. Business grows mainly by taking risk. Greater the risk, higher the profit and
hence the business unit must strike a tradeoff between the two. The essential functions of
risk management are to identify measure and more importantly monitor the profile of the
bank. While Non-Performing Assets are the legacy of the past in the present, Risk
Management system is the pro-active action in the present for the future.
Risk management is a constant challenge to all financial institutions. Banks need to
consistently develop and improve their operational and technical practices. Credit Risk
Management is assuming greater importance in the current environment. With the
implementation of the Basel Accord, banks are increasingly moving towards quantitative risk
evaluation of their loan portfolios. The areas of market risk have long been under the
quantitative risk management scrutiny but credit risk has gradually emerged as an area for the
quantitative risk management. This area has a unique set of challenges and opportunities for
the quantitative risk managers.
1.2 TYPES OF RISKS
Risk is intrinsic to banking and it is as old as banking itself. Credit risk is most
simply defined as the potential that a bank’s borrower or counterparty may fail to meet its
obligations in accordance with agreed terms. It is the possibility of losses associated with
diminution in the credit quality of borrowers or counterparties. In a bank’s portfolio, losses
stem from outright default due to inability or unwillingness of a customer or a counterparty to
meet commitments in relation to lending, trading, settlement and other financial transactions.
Alternatively, losses result from reduction in portfolio arising from actual or perceived
deterioration in credit quality.
Managing risk is nothing but managing the change before the risk manages. When
we use the term “Risk”, we all mean financial risk or uncertainty of financial loss. If we
consider risk in terms of probability of occurrence frequently, we measure risk on a scale,
with certainty of occurrence at one end and certainty of non-occurrence at the other end. Risk
is the greatest where the probability of occurrence or non-occurrence is equal. As per the
Reserve Bank of India guidelines issued in October 1999, there are three major types of risks
encountered by the banks and these are Credit Risk, Market Risk & Operational Risk.
As observed by RBI, Credit Risk is the major component of risk management system
and this should receive special attention of the Top Management of a bank. Credit risk is the
important dimension of various risks inherent in a credit proposal, as it involves default of the
principal itself. Credit risk may arise due to internal -meaning faulty appraisal, inadequate
monitoring, unwillingness on the part of borrower to honor commitments despite being
2
capable or external factors such as government policies, industry related changes.
For most banks, loans are the largest and the most obvious source of credit risk;
however, other sources of credit risk exist throughout the activities of a bank, including in the
banking book and in the trading book, and both on and off balance sheet. Banks increasingly
face credit risk (or counterparty risk) in various financial instruments other than loans,
including acceptances, inter-bank transactions, trade financing, foreign exchange
transactions, financial futures, swaps, bonds, equities, options and in guarantees and
settlement of transactions.
For the sector as a whole, however the risks can be broken into six generic types:
systematic or market risk, credit risk, counterparty risk, liquidity risk, operational risk, and
legal risks. The banking industry has long viewed the problem of risk management as the
need to control their risk exposure, viz, credit, interest rate, foreign exchange and liquidity
risk. While they recognize counterparty and legal risks, they view them as less central to their
concerns, where counterparty risk is significant, it is evaluated using standard credit risk
procedures, and often within the credit department itself. Likewise, most bankers would view
legal risks as arising from their credit decisions or, more likely, proper process not employed
in financial contracting. Thus, risk is considered as standardized, measurable and
manageable.
The five “C’s” of Credit includes Capital, Capacity, Conditions, Collateral, and
Character. Conventional credit risk arises through the possibility of default on a debt, an
investment, or even an invoice. When a financial obligation is not fully discharged, a loss
results. The amount of the loss may be the full amount that is owed, or a portion thereof.
The goal of credit risk management is to maximize a bank’s risk-adjusted rate of
return by maintaining credit risk exposure within acceptable parameters. Banks need to
manage the credit risk inherent in the entire portfolio, as well as, the risk in the individual
credits or transactions. Banks should have a keen awareness of the need to identify measure,
monitor and control credit risk, as well as, to determine that they hold adequate capital
against these risks and they are adequately compensated for risks incurred.
Credit risk consists of primarily two components, viz. Quantity of risk, which is
nothing but the outstanding loan balance as on the date of default and the Quality of risk,
which is the severity of loss defined by Probability of Default as reduced by the recoveries
that could be made in the event of default. Thus, credit risk is a combined outcome of Default
Risk and Exposure Risk. The elements of Credit Risk are Portfolio risk comprising
Concentration Risk as well as Intrinsic Risk and Transaction Risk comprising migration/down
gradation risk as well as Default Risk. At the transaction level, credit ratings are useful
measures of evaluating credit risk that is prevalent across the entire organization where
treasury and credit functions are handled. Measurement of credit risk is crucial if the banks
3
have to appropriately price their loan products, set suitable limits on amount of credit to be
extended as well as the loss exposure it accepts from any particular counter party.
Portfolio analysis help in identifying concentration of credit risk, default/migration
statistics, recovery data, etc. Off-balance sheet exposures such as foreign exchange forward
contracts, swaps, options etc are classified into three broad categories such as Full Risk,
Medium Risk and Low Risk and then translated into risk weighted assets through a
conversion factor and summed up. Thus the management of credit risk includes: (a)
measurement through credit rating/scoring, (b) quantification through estimate of expected
loan losses, (c) Pricing on a scientific basis and (d) Controlling through effective Loan
Review Mechanism and Portfolio Management.
1.3 INSTRUMENTS AND TOOLS
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 20 per cent for
individual borrower entity, 45 per cent for a group with additional 5 per cent/10 per cent
for infrastructure projects, subject to approval of the Board of Directors, 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 per cent to 800 per
cent of the Capital Funds of the bank (i.e. 6 to 8 times).
b) Review/Renewal: Multi-tier Credit Approving Authority, constitution wise delegation of
powers, sanctioning authority’s higher delegation of powers for better-rated customers,
discriminatory time schedule for review / renewal, Hurdle rates and Bench marks for
fresh exposures and periodicity for renewal based on risk rating, etc
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, to be graduated to quarterly so as to capture risk without delay.
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. Portfolio management shall cover bank-wide exposures on account of lending,
investment, other financial services activities spread over a wide spectrum of region,
industry, size of operation, technology adoption, etc.
f) Credit Audit/Loan Review Mechanism: This should be done independent of credit
4
operations, covering review of sanction process, compliance status, review of risk rating,
pick up of warning signals and recommendation for corrective action with the objective of
improving credit quality. 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.
Keeping in view the seriousness of credit risk and need to manage the same
appropriately, RBI issued guidelines on Credit Risk Management on October 12, 2002. These
guidelines focused that the banks should give credit risk prime attention and should put in
place a loan policy to be cleared by their boards that covers the methodology for
measurement, monitoring and control of credit risk. Basel Committee has proposed
Standardized Approaches, Foundation Internal Rating Based Approach and Advanced
Internal Rating Based Approach for credit risk capital charge calculations.
1.4 CREDIT RISK MENU
In particular, one of the aims of the recently proposed revisions to the 1988 Basel
Capital Accord is to create incentives for banks to engage in more active and sophisticated
risk management by offering a range of risk-based capital adequacy rules. The proposal states
that “For credit risk, this range (of capital adequacy rules) begins with the standardized
approach and extends to the “foundation” and “advanced” internal-ratings based (IRB)
approaches. This evolutionary approach will motivate banks to continuously improve their
risk management and measurement capabilities so as to avail themselves of the more risk
sensitive methodologies and thus more accurate capital requirements” (Bank for International
Settlements, 2001). Thus, Basel Committee has proposed the following approaches:
1) Standardized Approach: The bank allocates a risk weight to each assets as well as off
balance sheet items and produces a sum of Risk Weighted Asset values (RW of 100%
may entail capital charge of 8% and RW of 20% may entail capital charge of 1.6%). The
risk weights are to be refined by reference to a rating provided by an external credit
assessment institution that meets certain strict standards.
2) Foundation Internal Rating Based Approach: Under this, bank rates the borrower and
results are translated into estimates of a potential future loss amount which forms the
basis of minimum capital requirement.
3) Advanced Internal Rating Based Approach: In Advanced IRB approach, the range of
risk weights will be well diverse Market Risk Menu:
1) Standardized Approach
2) Internal Models Approach
Risk management underscores the fact that the survival of an organization depends
heavily on its capabilities to anticipate and prepare for the change rather than just waiting for
the change and react to it. The objective of risk management is not to prohibit or prevent risk
5
taking activity, but to ensure that the risks are consciously taken with full knowledge, clear
purpose and understanding so that it can be measured and mitigated. It also prevents an
institution from suffering unacceptable loss causing an institution to fail or materially damage
its competitive position.
Functions of risk management should actually be bank specific dictated by the size
and quality of balance sheet, complexity of functions, technical/ professional manpower and
the status of MIS in place in that bank. There may not be one-size fits-all risk management
module for all the banks to be made applicable uniformly. Balancing risk and return is not an
easy task as risk is subjective and not quantifiable whereas return is objective and measurable.
If there exist a way of converting the subjectivity of the risk into a number then the balancing
exercise would be meaningful and much easier.
The effectiveness of risk measurement in banks depends on efficient Management
Information System, computerization and net working of the branch activities. The main
sources of credit risk include, limited institutional capacity, inappropriate credit policies,
volatile interest rates, poor management, inappropriate laws, low capital and liquidity levels,
directed lending, massive licensing of banks, poor loan underwriting, reckless lending, poor
credit assessment., no non-executive directors, poor loan underwriting, laxity in credit
assessment, poor lending practices, government interference and inadequate supervision by
the central bank.
To minimize these risks, it is necessary for the financial system to have a well-
capitalized banks, service to a wide range of customers, sharing of information about
borrowers, stabilization of interest rates, reduction in non-performing loans, increased bank
deposits and increased credit extended to borrowers. The key principles in credit risk
management are; firstly, establishment of a clear structure, allocation of responsibility and
accountability, processes have to be prioritized and disciplined, responsibilities should be
clearly communicated and accountability assigned thereto.
In general, the strategies employed include transferring the risk to another party,
avoiding the risk, reducing the negative effect of the risk, and accepting some or all of the
consequences of a particular risk. Traditional risk management focuses on risks stemming
from physical or legal causes (e.g. natural disasters or fires, accidents, death, and lawsuits).
Banks need to manage the credit risk inherent in the entire portfolio as well as the risk in
individual credits or transactions. Banks should also consider the relationships between credit
risk and other risks.
Basel-I played a significant role in strengthening the financial system. It provided
capital charge for credit risk only. It put strong and weak borrower at par and did not provide
for difference between regulatory risk and bank’s actual risk. This led to the evolution of
Basel-II capital accord, which considers estimation of minimum capital requirements for
6
credit, market and operational risk. In Basel-II, credit risk has been elaborately defined and
risk weights have been scientifically determined for strong and weak borrowers.
The new Basel Capital Accord, also known as “Basel II”, is an update of “The 1988
Accord”, which was adopted by more than 100 countries worldwide. The new Basel II
regulations put forward by the Basel Committee on Banking Supervision are aimed at
improving the safety and soundness of the financial system by aligning capital adequacy
assessment more closely with the underlying risks in the banking industry, providing a
thorough supervisory review process, and enhancing market discipline.
The Basel Committee encourages banking supervisors globally to promote sound
practices for managing credit risk. The principles should be applicable to all activities where
credit risk is present. The sound practices specifically addresses the following areas:
(i) Establishing an appropriate credit risk environment;
(ii) Operating under a sound credit granting process;
(iii) maintaining an appropriate credit administration, measurement and monitoring process;
and
(iv) ensuring adequate controls over credit risk.
Although specific credit risk management practices may differ among banks
depending upon the nature and complexity of their credit activities, a comprehensive credit
risk management program will address these four areas. These practices should also be
applied in conjunction with sound practices related to the assessment of asset quality, the
adequacy of provisions and reserves.
1.5 HOW ARE THESE RISKS MANAGED?
According to standard economic theory, managers of value maximizing firms ought
to maximize expected profit without regard to the variability around its expected value.
However, there is now a growing literature on the reasons for active risk management
including the work of Stulz (1984), Smith, Smithson and Wolford (1990), and Froot,
Sharfstein and Stein (1993). In fact, the review of risk management reported in Santomero
(1995) lists dozens of contributions to the area and at least four distinct rationales offered for
active risk management. These include managerial self-interest, the non linearity of the tax
structure, the costs of financial distress and the existence of capital market imperfections.
Since exposure to credit risk continues to be the leading source of problems in banks
world-wide, banks and their supervisors should be able to draw useful lessons from past
experiences. Banks should now have a keen awareness of the need to identify, measure,
monitor and control credit risk as well as to determine that they hold adequate capital against
these risks and that they are adequately compensated for risks incurred.
After reviewing the procedures employed by leading firms, an approach emerges
from an examination of large-scale risk management systems. The management of the
7
banking firm relies on a sequence of steps to implement a risk management system. These can
be seen as containing the following four parts:
(i) Standards and reports,
(ii) Position limits or rules,
(iii) Investment guidelines or strategies,
(iv) Incentive contracts and compensation
The risks associated with the provision of banking services differ by the type of
service rendered.
Managing credit risk
Credit Risk is managed considering following points in view:
• Limits and safeguards – policy, process and procedures.
• Credit approval authorities and transaction approval process.
• Aggregating exposure limits by customer, sector and correlated credits.
• Credit mitigation techniques: collateral; termination clauses, re-set clauses, cash
settlement, netting agreements.
• Documentation: covenant packages, ISDA and CSA and other collateral agreements.
• Portfolio techniques
• Portfolio management objectives: balancing the risk appetite and diversification to
maximize risk adjusted returns.
• Diversification, granularity and correlation concepts.
• Techniques to spread risk: syndication, sub-participation, whole loan sales, credit
derivatives, securitization.
Another source of credit risk arises from financial contracts, including derivatives.
Derivatives are contractual agreements between two parties (counterparties), and they include
swaps, forwards, futures, and options. The value of these contracts is derived from the value
of an underlying asset, such as an exchange rate, index, interest rate, or commodity price.
Derivatives and other financial transactions create a particular challenge for credit risk
management. The credit risk that results from derivatives and other financial transactions
includes pre-settlement risk and settlement risk. Pre-settlement risk arises from the fact that
once a contract has been entered into, if the counterparty defaults or otherwise does not fulfill
its obligations, it might be necessary to enter into a replacement contract at far less favorable
prices.
The size of the loss depends upon the direction and extent of market price movements
since the original contract was transacted. The need to replace an existing contract, and the
potential cost associated with it, is also known as replacement risk. Conclusion Risk is an
opportunity as well as a threat and has different meanings for different users.
8
Basel II intended to improve safety and soundness of the financial system by placing
increased emphasis on bank's own internal control and risk management process and models.
The supervisory review and market discipline. Indeed, to enable the calculation of capital
requirements under the new accord, banks need to implement a comprehensive risk
management framework.
Banks stand ready to provide liquidity on demand to depositors through the checking
account and to extend credit as well as liquidity to their borrowers through lines of credit.
Because of these fundamental roles, banks have always been concerned with both solvency
and liquidity. Traditionally, banks held capital as a buffer against insolvency, and they held
liquid assets – cash and securities – to guard against unexpected withdrawals by depositors or
draw downs by borrowers.
Banking institutions should institute a setup that supervises overall risk management
at the bank. Such a setup could be in form of a risk manager, committee or department
depending on the size and complexity of the institution. Ideally, overall risk management
function should be independent from those who take or accept risk on behalf of the
institution. Where individuals responsible for overall risk management function are involved
in day to day operations, then sufficient checks and balances should be established to ensure
that risk management is not compromised. Overall risk management function provides an
oversight of the management of risks inherent in the institution’s activities. The function is
tasked to:
• identify current and emerging risks;
• develop risk assessment and measurement systems;
• establish policies, practices and other control mechanisms to manage risks;
• develop risk tolerance limits for Senior Management and Board approval;
• monitor positions against approved risk tolerance limits; and
• Report results of risk monitoring to Senior Management and the Board.
However, it must not be construed that risk management is only restricted to
individual responsible for overall risk management function. Business lines are equally
responsible for the risks they are taking.
Thus, investment decisions are more complicated. Companies are not in general as
well diversified as investors, and survival is an important and legitimate objective. Both
financial and investment decisions should be taken so that possibility of financial distress is
low. This is because financial distress leads to bankruptcy costs, which arises from the nature
of bankruptcy process and almost invariably leads to a reduction in shareholder value over
and above the reduction that took place as a result of adverse events.
9
1.6 NEED FOR THE PRESENT STUDY
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.
Credit Risk is the potential that a bank borrower/counter party fails to meet the
obligations on agreed terms. There is always a scope for the borrower to default from
commitments for one or the other reason resulting in crystallization of credit risk to the bank.
These losses could take the form of outright default or alternatively, losses from changes in
portfolio value arising from actual or perceived deterioration in credit quality that is short of
default.
The need arose to understand the various practices followed by State Bank of India
and Punjab National Bank, to study the framework adopted by these two banks and to
determine what are the most important components the banks consider for the credit risk
management practices and the significant impact of their practices.
Thus, the present study aims at achieving following objectives:
I. To examine Credit Risk Management framework of State Bank of India and Punjab
National Bank.
II. To study and compare the Risk Management practices of State Bank of India and
Punjab National Bank.
10
CHAPTER-II
REVIEW OF LITERATURE
Various studies have been conducted on credit risk management practices. In this
chapter, an attempt has been made to present a brief review of some selected studies so as to
provide a glimpse of work done in this area and identify the research gaps, if any. These
studies have been placed in chronological order so that a proper prospective may be
developed for pursuing the present project.
Diaz (1994) found out that the financial institutions have faced difficulties over the
years for a multitude of reasons, the major cause of serious banking problems continues to be
directly related to lax credit standards for borrowers and counterparties, poor portfolio risk
management, or lack of attention to changes in economic or other circumstances that can lead
to a deterioration in the credit standing of a bank’s counterparties. The traditional role of a
bank was lending and loans make up the bulk of their assets. In unstable economic
environments, interest rates charged by banks are fast overtaken by inflation and borrowers
find it difficult to repay loans as real incomes fall, insider loans increase and over
concentration in certain portfolios increases giving a rise to credit risk.
Gorton et al (1995) scrutinised that research has viewed loan sales as a response to
regulatory costs as a source of nonlocal bank capital to support local investments as a function
of funding costs and risks and possibly as a way to diversify.
Rajagopal (1996) made an attempt to overview the bank’s risk management and
suggested a model for pricing the products based on credit risk assessment of the borrowers.
He concluded that good risk management is good banking, which ultimately leads to
profitable survival of the institution. It was inferred that a proper approach to risk
identification, measurement and control safeguarded the interests of banking institution in
long run.
Demsetz et al (1997) showed that larger BHCs manage to hold less capital and are
able to pursue higher-risk activities, particularly C&I lending. It was found that large banks
following mergers tend to decrease their capital and increase their lending. There also
appeared an evidence that off-balance sheet activities in general and loan sales in particular
help banking firms lower their capital levels to avoid regulatory taxes and improve their risk
tolerance.
Houston et al (1997) reported that lending at banks owned by multi-bank bank
holding companies (BHCs) was less subject to changes in cash flow and capital. The major
emphasize was on the link between the internal capital markets and bank lending.
Froot and Stein (1998) found that credit risk management through active loan
purchase and sales activity affects banks’ investments in risky loans. Banks that purchase and
11
sell loans hold more risky loans (Credit Risk and Loss loans and commercial real estate loans)
as a percentage of the balance sheet than other banks. Again, these results were especially
striking because banks that managed their credit risk (by buying and selling loans) held more
risky loans than banks that merely sell loans (but don’t buy them) or banks that merely buy
loans (but don’t sell them).
Hughes and Mester (1998) used the level of financial capital as a risk signal that bank
managers used for controlling output quality. It was expressed as loan portfolio quality
through the ratio of non-performing loans (NPL) to total loans, which may be considered an
endogenous measure of risk. This risk variable captured the quality of monitoring over loan
portfolios. There also existed a stream of literature that introduces risk in non-parametric bank
efficiency analysis. In this case, risk took the form of undesirable outputs, and for financial
institutions it was typically proxied through NPL. This variable illustrated credit risk, which
was crucial for the long-run bank activity.
Treacy and Carey (1998) examined the credit risk rating mechanism at US Banks.
The paper highlighted the architecture of Bank Internal Rating System and Operating Design
of rating system and made a comparison of bank system relative to the rating agency system.
They concluded that banks internal rating system helps in managing credit risk, profitability
analysis and product pricing.
Allayannis et al (1999) examined the use of foreign currency derivatives in a sample
of large U.S. non- financial firms and report that there was a positive relation between firm
value and the use of foreign currency derivatives. Their evidence suggested that hedging
raises firm value.
Demirguc et al (1999) examined the overwhelming concern on bank credit risk
management is two-fold. First, the Newtonian reaction against bank losses, a realization that
after the losses have occurred that the losses were unbearable. Secondly, development in the
field of financing commercial paper, securitization, and other non-bank competition have
pushed banks to find viable loan borrowers. This had seen large and stable companies shifting
to open market sources of finance like bond market. Organizing and managing the lending
function in a highly professional manner and doing so pro-actively could minimize whatever
the degree of risk assumed losses. Banks increasingly tapped sophisticated measuring
techniques in approaching risk management issues.
Duffee and Zhou (1999) modelled the effects on banks due to the introduction of a
market for credit derivatives; particularly, credit-default swaps. Their paper examined that a
bank used swaps to temporarily transfer credit risks of their loans to others, reducing the
likelihood that defaulting loans triggered the bank’s financial distress. They concluded that
the introduction of a credit derivatives market was not desirable because it caused other
markets for loan risk-sharing to break down.
12
Jayaratne et al (1999) found that shifts in deposit supply affects lending most at
small, unaffiliated banks that do not have access to large internal capital markets. Bank size
also seemed to allow banks to operate with less capital and, at the same time, engage in more
lending.
Minton and Schrand (1999) used a sample of non-financial firms in 37 industries and
found that cash flow volatility lead to internal cash flow shortfalls, which in turn lead to
higher costs of capital and forgone investments. Firms were able to minimize cash flow
volatility seem to be able to invest more.
Coyle (2000) defined credit risk as losses from the refusal or inability of credit
customers to pay what is owed in full and on time. The main sources of credit risk include,
limited institutional capacity, inappropriate credit policies, volatile interest rates, poor
management, inappropriate laws, low capital and liquidity levels, directed lending, massive
licensing of banks, poor loan underwriting, reckless lending, poor credit assessment, no non-
executive directors, poor loan underwriting, laxity in credit assessment, poor lending
practices, government interference and inadequate supervision by the central bank. To
minimize these risks, it was necessary for the financial system to have well-capitalized banks,
service to a wide range of customers, sharing of information about borrowers, stabilization of
interest rates, reduction in non-performing loans, increased bank deposits and increased credit
extended to borrowers. Loan defaults and nonperforming loans need to be reduced.
Dahiya et al (2000) tested whether loan sales announcements provided a negative
signal about the prospects of the borrower whose loan is sold by a bank. They also examined
in a small sample (19 institutions), the characteristics of loan sellers. They found that stock
prices fall at the announcement of a 6 loan sale and that many of the firms whose loans have
been sold subsequently go bankrupt. This evidence provided further support for the idea that
banks held private information about their borrowers that makes loan sales difficult due to
adverse selection.
Ferguson (2001) analyzed the models and judgments related to credit risk
management. The author concluded that proper risk modelling provides a formal systematic
and disciplined way for firms to measure changes in the riskiness of their portfolio and helped
them in designing proper strategic framework for managing changes in their risk.
Bagchi (2003) examined the credit risk management in banks, risk identification, risk
measurement, risk monitoring, risk control and risk audit as a basic consideration for credit
risk management and concluded that proper credit risk architecture, policies and framework
of credit risk management, credit rating system, monitoring and control contributes in the
success of credit risk management system.
Muninarayanappa and Nirmala (2004) outlined the concept of credit risk management
in banks. They highlighted the objectives and factors that determine the direction of bank’s
13
policies on credit risk management. The challenges related to internal and external factors in
credit risk management were also highlighted. They concluded that success of credit risk
management required maintenance of proper credit risk environment, credit strategy and
policies. Thus the ultimate aim should be to protect and improve the loan quality.
Rahman et al (2004) observed that financial security was an important and crucial
component to the banking sector due to the economic repercussions that failure of a large
bank had on the financial system as a whole. Banking in modern economies was all about risk
management. Unsound risk management practices governing bank lending played a central
role in episodes of financial turmoil.
Rajeev (2004) outlined the concept of Basel II-issues and constraints. The study
discussed the major risk elements and various approaches in respect of broad risk areas. The
study concluded that in order to qualify for use of the standardized or advanced measurement
approaches (AMA), a bank must satisfy its supervisors that the minimum qualifying general
and specific standards are attained and maintained.
Kuosmanen (2005) addressed the issue to accurately define tools for monitoring
bank performance that integrate endogenous risk (i.e. credit risk) in the efficiency analyses.
As a baseline the specification of the models- desirable and undesirable outputs when
assuming variable returns to scale was used. This was further adapted to define the real
banking technology. Particularly, undesirable outputs, NPL, were strictly linked only to that
dimension of the output set that refers to credit (i.e. loan portfolio). The rest of outputs, such
as investment portfolio or service fees, did not have a link with NPL.
Louberge and Schlesinger (2005) aimed to propose a new method for credit risk
allocation among economic agents. Their paper considered a pool of bank loans subject to
credit risk and developed a method for decomposing the credit risk into idiosyncratic and
systematic components. The paper showed how financial contracts might be redesigned to
allow for banks to manage the idiosyncratic component for their own account, while allowing
systematic component to be retained, passed off to capital market or shared with borrower.
Nitsure (2005) stated that Indian baking sector needed to look at Basel II Norms as
opportunities to keep its own house in order. It was a necessary framework to improve the
stability and resilience of our rapidly evolving banking industry, currently at a critical phase
in its expansion. However, it was unfortunate that the current Basel proposals do not
explicitly incorporated the mutual benefits of international diversification for advanced as
well as developing countries.
Bandyopadhyay (2006) aimed at developing an early warning signal model for
predicting corporate default in emerging market economy like India. He also presented the
method for directly estimating probability of default using financial and non-financial
variable. For predicting corporate bond, default multiple discriminant analysis was used and
14
logistic regressions model was employed for estimating Probability of Default (PD). The
author concluded that by using ‘Z’ score model, banks and investors in emerging markets like
India could get early warning signals about the firm’s solvency status and reassess the
magnitude of default premium they require on low grade securities. The PD estimated from
logistic analysis would help banks to estimate credit risk capital and set corporate pricing on a
risk adjusted return basis. This model has high classification power of sample and high
prediction power in terms of its ability to detect bad firm in sample.
Chander (2006) examined the Capital Adequacy Ratio of Indian banks and presented
the position of Indian banks related to Capital Adequacy Ratio as per Basel accord. It was
concluded that banks had to raise additional capital to meet the Capital Adequacy Ratio as per
Basel II requirements.
Nachane et al (2006) investigated the relationship between changes in risk and capital
in Indian banking sector with reference to Public Sector Banks. The study identified key
variables impinging upon the Capital Adequacy of banks and examined evidence for a shift in
bank portfolio towards greater riskiness after the introduction of Capital Adequacy Norms.
The study also attempted to draw implications of new Capital Adequacy Framework proposed
by the Basel Committee on Banking Supervision (BCBS) for the Indian financial system and
evaluated the alternative regulatory arrangement as complements to the Capital Adequacy
Ratio.
Das and Ghosh (2007) found out that banks generally face various risks such as credit
risk, market risk, operational risk, liquidity risk etc. Of all the type of risks, credit risk is the
most important one hence it underpined the very existence of the banking system Since credit
risk is all about loans and their defaults, and loan transactions account for more than 50 per
cent of all banking activities, credit risk must be carefully monitored by the banking sector.
The implementation of Basel II Accord was likely to lead to a sharper focus on the risk
measurement and risk management at the institutional level. The Basel Committee, through
its various publications, provided useful guidelines on managing the various facets of risk.
Gambhire (2007) described the concept of Basel II Norms and the method to
calculate credit risk, operational risk and market risk. The study also focused on the
challenges and benefits of application of Basel II Norms in Indian banking system.
Ozturk and Aktan (2007) defined risk management as the process by which managers
satisfied their risk taking needs by identifying key risks, obtaining consistent, understandable,
operational risk measures, choosing which risks to reduce and which to increase and by what
means, and establishing procedures to monitor the resulting risk position. In other words, risk
management was the process of assessing operational dangers of a particular position,
measuring its magnitude, and mitigating such exposures in order not to deter the institutional
goals of the banking firm.
15
Raghavan (2008) outlined the concept of Basel II Norms for Indian banks. The study
explained the three pillar approaches of Basel II Norms, implication of Basel II in the banking
sector, challenges for the banks on implementation of Basel II Norms. The study concluded
that Basel II principles be viewed more from the angle of fine tuning one’s risk management
capabilities through constant mind searching rather than as regulatory guidelines to be
compiled with.
Laeven and Levine (2009) scrutinized the relations between corporate governance
mechanisms and performance. Nonetheless, similarly to the case of the link between risk and
performance, focus was on the role of corporate governance on bank performance.
Radhakrishana and Bhatia (2009) highlighted the implication on adoption of Basel II
Norms for Indian banks. The study described the need of Basel II Norms for Indian banks. It
was concluded that adoption of Basel II Norms will pose challenges for and also offered
opportunities to Indian banking sector.
Fethi and Pasiouras (2010) analysed bank efficiency from multiple angles. Among
these, a largely preferred approach relied on non-parametric efficiency frontier techniques.
These methods, best known as Data Envelopment Analysis (DEA) was more suitable when
multiple inputs were employed to obtain multiple outputs. Even if parametric models allowed
for stochastic errors, they have strong assumptions on functional distributions (which was not
needed in non-parametric contexts) and did not allowed for multiple objectives to be pursued
or desirable and undesirable outputs to be jointly produced. The flexible nature of DEA was
especially appealing for applications based on diverse management and accounting
frameworks.
Banerjee (2011) outlined the introduction to the commercial banking in Indian
scenario and further tried to locate risk management areas in banking sector. The study also
highlighted increasing role of Cost and Management Accountants (CMAs) in commercial
banks in India to contribute towards risk management functions to increase its efficiency and
growth.
Barros et al (2012) analysed the impact of risk on performance and on occasions,
attempted to introduce risk measures in performance assessments. Thus, there remained a
need to unify these approaches by using risk factors as an integrating part of performance
analyses. This implied that risk has endogenous components. Therefore, it was necessary to
develop monitoring tools to thoroughly examine the relations between risk and performance.
Moreover, new assessments be accurate enough to simultaneously accommodate the multiple
bank outputs, reflected the true technology, and spoke the language of management and
accounting communities. Thus, various characteristics had been devised to monitor this
approach for bank performance analysis. First, a multidimensional efficiency measure was
defined to include desirable and undesirable outputs, the latter of which represent credit risk.
16
Second, accounting performance ratios complemented the efficiency interpretations to attain
more traditional management viewpoints. Third, the impact of risk variables on all
performance measures was shown. Finally, the effect of executive turnover on future
performance was evaluated.
The review of above literature shows that many studies have been conducted for
credit risk management. But practices are not much followed. Various models have been
developed to a large extent, but bank employees are not much aware of these models. Thus,
the study has been conducted to bridge the gap, to make the public aware of the practices and
activities to be followed and to further the study already been conducted.
17
CHAPTER-III
RESEARCH METHODOLOGY
It is imperative to decide upon and document a research methodology well in advance

to carry out the research in a most effective and systematic way. This chapter describes the
research methodology adopted to serve the objectives of the study in a planned manner. The
methodology used to meet the requirement of data and analysis has been discussed in this
chapter. The limitations of the study are also described briefly so that the findings of the
present study can be understood in their proper perspective. This chapter consists of following
sections:
3.1 Conceptual Framework
3.2 Population and Sample Selection
3.3 Collection of data
3.4 Analysis of data
3.5 Limitations of the study
These sections have been discussed below.
3.1 Conceptual Framework
The present study aims to examine the credit risk practices adopted by State Bank of
India and Punjab National Bank. To achieve the objectives of this study, sampling techniques
has been resorted to and accordingly the data was collected through field survey using
structured questionnaire facilitating face-to-face interviews with bank’s officials and other
persons connected with risk management operations. The genesis of the different questions
incorporated in this questionnaire was to bring out and analyze the credit risk management
practices adopted by the banks. Also perception of respondents of different residential banks
has been observed. For analysis purpose, mean score, standard deviation, t-value and chi-
square has been computed.
3.2 Population and sample selection
The population of the study comprised of respondents from the various branches of
State Bank of India and Punjab National Bank. The geographical coverage is confined to
Ludhiana branches only. The sample include 60 randomly selected officers. 30 from State
Bank of India and 30 from Punjab National Bank. The data were collected based on
convenience sampling method and willingness of respondents to share the information.
3.3 Collection of Data
To meet the objectives of the study, primary data were collected through a pre-
designed, structured and non-disguised questionnaire. Before designing the questionnaire, a
desk research was conducted to study the literature available on the subject. Various studies
were reviewed to have a thorough understanding about various parameters to be included in
18
the questionnaire and accordingly a self-administered and structured questionnaire (as given
in the Appendix) was designed to collect information from the respondents.
Questions were specifically designed to get in-depth information about the profile of
the respondents, awareness level of the respondents regarding credit risk management, the
practices followed for managing the risk, its components, impacts of developing the credit
risk management practices and the instruments or techniques followed for credit risk
management.
Respondents were asked both open ended and close ended questions. Also scale
based questions were asked. In order to measure the importance attached by the responding
banks to risk management aspects, the response was obtained on seven-point scale ranging
from 1 to 7 and on a nine-point scale ranging from 1 to 9. Here 1 means the lowest
importance and 7 or 9 means the highest importance given to an item.
The questionnaire was pre-tested and suitable modifications were incorporated before
the final selection of the text of the questionnaire. Before filling the questionnaire, main
objectives were explained to the respondents.
3.4 Analysis of Data
In sync with the mentioned objectives, the study intends to test the following null
hypotheses that there is no difference between credit risk management practices of State Bank
of India and Punjab National Bank.
The data collected through the questionnaire were converted to a table. The data were
then grouped into tables and then analyzed using various statistical tools like Mean score,
Standard deviation, weighted mean, percentage, t-test and chi-square.
To study the framework, secondary data were drawn from the annual reports, journals
and websites. For comparing the credit risk management practices followed by State Bank of
India and Punjab National Bank, various questions regarding credit risk management
practices were asked.
Mean score was calculated for those questions, where respondents were asked to
provide their responses on a 7-point scale. The respondents were asked to indicate the level of
importance towards the level of risk being faced, the activities and instruments/techniques
they prefer the most, the importance of factors and aspects, the most important components
and improvements for credit risk management framework, practices and pricing.
The weights were given as follows:
7- Extremely important
6- Very important
5- Moderately important
4- Neutral
3- Important
19
2- Least important
1- Not at all important
Weighted Mean Score was calculated using the formula:
Mean Score = (Σ Wi * Fn)/ n
Where,
i = 1 to 7
Wi = Weight attached
Fn = associated frequency
n = number of respondents
If the mean score was more than midpoint of scale i.e. 3, it was concluded that respondents by
and large tend to agree with the statement.
Chi-square test was applied to test the significance of observed association between
rows and columns of contingency tables. Chi-square was calculated using the formula:
χ2 = [(O-E)2 / E]
Where,
O = Observed frequencies
E = Expected frequencies
and,
E = nr*nc/ n
nr = total number in the row
nc = total number in the column
n = sample size
If the calculated value of chi-square is less than the table value, then the null hypothesis may
be accepted.
Standard deviation was applied to test the deviations from the arithmetic mean and
to use this value in computation of t-test. Standard deviation was calculated using the
formula:
Σ( X − X ) 2
SD =
n
Σx 2
=
n
Where,
X = individual observations
x = X-X
n = number of observations
T-test was applied to test the null hypothesis that the sample has been drawn from the
20
normal population. T-value is computed using the following formula:
X −µ
t=
S/ n
Where,
X = mean of the sample
u = population mean
s = sample estimate of standard deviation
If, on comparing, the calculated value of t is greater than the table value, the null hypothesis is
rejected. Otherwise, it may be accepted at the level of significance adopted, indicating that
there is a significant difference among the rows and columns. The data analyzed was executed
with the help of SPSS software package.
3.5 Limitations of the study
Following are the limitations of this study:
1. Due to time and resource constraint, respondents of only Ludhiana City were considered
for survey. A large sample from different cities may be included in further studies.
2. As face to face interviews were conducted, many of respondents were not much aware of
the terms used in the questionnaire.
3. The information provided by respondents may not be fully accurate due to unavoidable
biases.
4. Relationship between government supplier and willingness to be aware of credit risk
management practices may be studied in detail.
21
CHAPTER-IV
RESULTS AND DISCUSSION
This chapter presents the analysis of primary data collected from the respondents as
well as the secondary data collected. The study was conducted to understand and analyze the
Credit Risk Management Framework and Practices adopted by State bank of India and Punjab
National Bank. This Chapter has been divided into three sections. The first section reveals the
demographic profile of the respondents. The second section highlights the credit risk
framework of State Bank of India and Punjab National Bank. The third section reveals the
comparison of risk management practices of State Bank of India and Punjab National Bank.
4.1 Profile of Respondents
The profile of respondents with regard to demographics like gender, age, qualification
and marital status has been discussed in this section.
TABLE 1: Distribution of respondents on the basis of demographic parameters
(Number)
CATEGORY/BANKS SBI PNB
GENDER OF RESPONDENTS
Male 20 26
(66.67) (86.67)
Female 10 4
(33.33) (13.33)
Chi-square Value 4.57
AGE OF RESPONDENTS
19-30 8 4
(26.70) (13.33)
31-45 20 21
(66.7) (70.00)
45-58 20 5
(6.70) (16.67)
Chi-square 0.63
QUALIFICATION OF RESPONDENTS
College Graduate 0 3
(0.00) (10.00)
Post Graduate 30 24
(100.0) (80.00)
Others 0 3
(0.00) (10.00)
MARITAL STATUS
Married 30 25
(100.00) (86.67)
Unmarried 0 5
(0.00) (16.67)
Figures in parentheses are %ages of total no. of respondents

Table Value of chi-square is 3.84, d.f. =1 at 5 per cent level of significance
22
Table 1 shows that in SBI, majority (67%) of respondents were males and remaining
(33%) were females. Whereas in PNB, 87 per cent of respondents consisted of males and 13
per cent of respondents were females. Findings reveal that majority of respondents in both the
banks- SBI and PNB fall under the category of 31-45 i.e. 67 per cent and 70 per cent
respectively. The study also presents that all the respondents were post graduate in SBI and 80
per cent post graduates were found in PNB. All the respondents are found married in SBI and
87 per cent respondents are married in PNB and remaining 17 per cent respondents are
unmarried.
The table reveals that as observed chi-square value is less than the table value in case
of age and marital status, so it indicates that there was no significant difference between age-
marital status of the respondents and the willingness to provide the information.
4.2 Credit Risk Management Framework of State Bank of India and Punjab
National Bank
This section deals with the credit risk management framework of State Bank of India
and Punjab National Bank.
4.2.1 Credit Risk Management Framework of State Bank of India
State Bank of India (SBI) is a multinational banking and financial services company
based in India. It is a government-owned corporation with its headquarters in Mumbai,
Maharashtra. As of December 2012, it had assets of US$501 billion and 15,003 branches,
including 157 foreign offices, making it the largest banking and financial services company in
India by assets. The Bank provides banking services to the customer. In addition to the
banking services, the Bank through their subsidiaries, provides a range of financial services:
• life insurance
• merchant banking
• mutual funds
• credit card
• factoring
• security trading
• pension fund management and
• primary dealership in the money market.
The Corporate/ Wholesale Banking segment comprises the lending activities of
Corporate Accounts Group, Mid Corporate Accounts Group and Stressed Assets Management
Group. The Retail Banking segment consists of branches in National Banking Group, which
primarily includes personal banking activities, including lending activities to corporate
customers having banking relations with branches in the National Banking Group. The Bank
operates in four business segments, namely Treasury, Corporate/ Wholesale Banking, Retail
Banking and Other Banking Business. The Treasury segment includes the investment
23
portfolio and trading in foreign exchange contracts and derivative contracts. SBI provides a
range of banking products through their vast network of branches in India and overseas,
including products aimed at NRIs. The Group, with over 16,000 branches, has the largest
banking branch network in India. The bank has 156 overseas offices spread over 32 countries.
They have branches of the parent in Colombo, Dhaka, Frankfurt, Hong Kong, Johannesburg,
London and environs, Los Angeles, Male in the Maldives, Muscat, New York, Osaka,
Sydney, and Tokyo.
Risk Management Structure
An independent Risk Governance Structure is in place for Integrated Risk
Management covering Enterprise, Credit, Market, Operational and Group Risks. This
framework visualizes empowerment of Business Units at the operating level, with technology
being the key driver, enabling identification and management of risk at the place of
origination.
Basel Implementation
In accordance with RBI guidelines, the Bank has migrated to the Basel II framework,
with the Standardized Approach for Credit Risk and Basic Indicator approach for Operational
Risk w.e.f. March 31, 2008, having already implemented the Standardized Measurement
Method for Market Risk w.e.f. March 31, 2006.
RBI has issued Guidelines on Implementation of Basel III Capital Regulations in
India on 2nd May, 2012. These Guidelines will become effective from January 1,2013. Bank is
in the process of putting in place appropriate mechanism to comply with these guidelines.
Credit Risk Management (CRM)
In addition to implementing the Standardized Approach, well defined credit risk
practices such as use of Credit Risk Assessment (CRA) Models, Industry Exposure Norms,
Counterparty Exposure Limits, Substantial Exposure Norms, Macro Economic Stress Tests
etc., have also been put in place to improve credit risk management.
The Bank has now set in process a project to migrate to Internal Rating Based(IRB)
Approach. Models for estimation of Probability of Default (PD), Loss Given Default
(LGD),and Exposure At Default (EAD) are being developed. Credit risk data mart is being set
up. Retail scoring and behavioural scoring models are being implemented.
Other risks also includes the following:
Enterprise Risk Management
It comprises of three pillars I Risks viz Internal Rating Based (IRB) approach for
Credit Risk, Internal Model Approach for Market Risk and Advanced Measurement Approach
for Operational Risk. The Bank has in place the Internal Capital Adequacy Assessment
Process (ICAAP) Document as required by Pillar II of New Capital Adequacy Framework
under Basel II as prescribed by RBI. .
24
Market Risk Management (MRM)
In accordance with RBI guidelines, Market Risk Management is governed by the
Board approved policies covering Investment, Trading, Foreign Exchange, Derivatives, Value
at Risk & Stress Testing which stipulate limits for various products and risk types in the
portfolio.
Operational Risk Management(ORM)
The main objectives of the Bank’s ORM are to continuously review systems and
control mechanisms, create awareness of operational risk throughout the Bank, assign risk
ownership, alignment of risk management activities with business strategy and ensuring
compliance with regulatory requirements.
Group Risk Management (GRM)
A Group Risk Management policy is in place which applies to all Associate Banks,
Banking and Non-banking Subsidiaries and Joint Ventures of the State Bank Group under the
jurisdiction of specified regulators and complying with the relevant Accounting Standards,
where SBI has investment in equity shares of 30 per cent and more with control over
management of the entity.
INTERNAL CONTROLS
The Bank has in-built internal control systems with well-defined responsibilities at
each level and conducts internal audit through its Inspection & Management Audit
Department. Audit Committee of the Board (ACB) exercises supervision and control over the
functioning of the department. The inspection system plays an important and critical role in
identification, control and management of risks by using international best practices in the
internal audit function which is regarded as one of the most important components of
Corporate Governance. The Bank carries out mainly two streams of audits – Risk Focussed
Internal Audit (RFIA) and Management Audit covering different facets of Internal Audit
requirement. All accounting units of the Bank like branches, Business Process Reengineering
(BPR) entities, major critical corporate centre departments like Foreign Account Office,
Treasury operations, Central Accounts Office etc., are subjected to RFIA. Management Audit
covers administrative offices and examines policies and procedures besides quality of
execution thereof.
Besides the above, the department conducts Credit Audit, Concurrent Audit,
Information Systems Audit, Home Office Audit (audit of foreign offices) and Expenditure
Audit. Risk Focussed Internal Audit (RFIA) helps in appropriately capturing all types of risks
residing in operating units.
4.2.2 Credit Risk Management Framework of Punjab National Bank

The reserve Bank of India, which is the Central Bank was created in 1935, by passing
25
Reserve Bank of India Act 1934.In the wake of the Swadeshi Movement, a number of banks
with Indian Management were established in the country. Punjab National Bank (PNB) is one
of them. Punjab National Bank was registered on May 19, 1894 under the Indian Companies
Act with its office in Anarkali Bazaar, Lahore. The bank is the second largest government-
owned Commercial bank in India with about 4500 branches across 764 cities.PNB serves
over 37 million customers. PNB has a banking subsidiary in the UK, as well as branches in
Hong Kong and Kabul. The Government of India nationalized PNB and 13 other major
commercial banks on July 19, 1969. PNB aims to provide excellent professional services and
improve its position as a leader in financial and related services. Products and services offered
by PNB includes-
• Corporate Banking
• Personal Banking
• Industrial Finance
• Agricultural Finance
• Financing of Trade
• International Banking
• Home Loan
• Auto Loan
• ATM/Debit Card
• Deposit Interest Rate
• Credit Interest Rate
• Other Services: Locker's Facility, Interest Banking, EFT & Clearing Services etc.
Credit Risk Management Committee (CRMC) headed by CMD is the top-level
functional committee for credit risk. The committee considers and takes the decisions
necessary to manage and control credit risk within overall quantitative prudential limits set up
by the Board. The committee is entrusted with the job of approval of policies on standards for
presentation of credit approval, fine tuning required in various models based on feedbacks or
change in market scenario, approval of any other action necessary to comply with
requirements set forth in Credit Risk Management Policy/RBI guidelines.
Bank has developed comprehensive risk rating system that serves as a single point
indicator of diverse risk factors of counterparty and for taking credit decision in a consistent
manner. The risk rating system is drawn up in a structured manner, incorporating different
factors such as borrower's specific characteristics, industry specific characteristics etc. As an
integral part of the risk management system, bank has put in place a well defined Loan
Review Policy (LRM), which helps to bring about qualitative improvements in credit
administration.
26
In order to provide a robust risk management structure, the Credit Management and
Risk policy of the bank aims to provide a basic framework for implementation of sound credit
risk management system in the bank. It deals with various areas of credit risk, goals to be
achieved, current practices and future strategies.
Though the bank has implemented the Standardized Approach of credit risk, yet the
bank shall continue its journey towards adopting Internal Rating Based Approaches. As such
Credit policy deals with short-term implementation as well as long term approach to credit
risk management. The policy of the bank embodies in itself the areas of risk identification,
risk measurement, risk grading techniques, reporting and risk control systems/mitigation
techniques, documentation practice and the system for management of problem loans.
Credit Approval Authority, prudential exposure limits, industry exposure limits,
credit risk rating system, risk based pricing and loan review mechanisms are the tools used by
the bank for credit risk management. At the macro-level, policy document is an embodiment
of the Bank's approach to understand, measure and manage the credit risk and aims at
ensuring sustained growth of healthy loan portfolio while dispensing the credit and managing
the risk.
Bank has approved the following 4 domestic credit rating agencies accredited by RBI
for mapping its exposure with domestic borrowers under standardized approach of credit risk:
• CRISIL
• CARE
• FITCH India
• ICRA
Bank has also approved the following 3 international credit rating agencies accredited
by RBI in respect of exposure with overseas borrowers:
• Standard and Poor
• Moody's
• FITCH
These agencies are being used for rating (Long Term & Short Term) of fund based/
non fund based facilities provided by the bank to the borrowers. The bank uses solicited rating
from the chosen credit rating agencies.
Bank has put in place Board approved "Credit Risk Mitigation and Collateral
Management Policy" which deals with policies and processes for various collaterals including
financial collaterals and netting of on and off balance sheet exposure. However, bank is not
making use of the on-balance sheet netting in its capital calculation process. The collaterals
used by bank as risk mitigants (for capital calculation under standardized approach) comprise
of the financial collaterals (i.e. bank deposits, govt./postal securities, life policies, gold
27
jewellery, units of mutual funds etc).
Guarantees, which are direct, explicit, irrevocable and unconditional, are taken into
consideration by bank for calculating capital requirement. Majority of financial collaterals
held by the bank are by way of own deposits and government securities, which do not have
any issue in realization. As such, there is no risk concentration on account of nature of
collaterals.
4.3 Comparison of Risk Management Practices of State Bank of India and Punjab
National Bank
This section presents the study of various practices adopted by SBI and PNB and the
comparison made between the two banks. Respondents were asked to give their response on
rating basis to the respective parameters.
4.3.1 Level of Risk Being Faced on Transactions
The respondents were asked to indicate the level of credit risk being faced by them
on various transactions. Table 2 shows the distribution below.
TABLE 2: Level of Credit Risk on various Transactions of selected banks
(Number)
Transactions DIRECT L/C CROSS BORDER
Ratings/ LENDING EXPOSURE
Banks SBI PNB SBI PNB SBI PNB
No Risk 0 3 0 6 0 0
(0.00) (10.00) (0.00) (20.00) (0.00) (0.00)
Very Low 8 6 12 3 3 0
Risk (26.7) (20.00) (40.00) (10.00) (10.00) (0.00)
Low Risk 9 11 3 8 3 2
(30.00) (36.67) (10.00) (26.67) (10.00) (6.67)
Risk 2 9 8 10 0 2
(6.70) (30.00) (26.70) (33.33) (0.00) (6.67)
Neutral 6 1 7 3 9 8
(20.00) (3.33) (23.30) (10.00) (30.00) (26.67)
High Risk 5 0 0 0 15 11
(16.70) (0.00) (0.00) (0.00) (50.00) (36.67)
Very High 0 0 0 0 0 7
Risk (0.00) (0.00) (0.00) (0.00) (0.00) (23.33)
Mean 2.70 1.97 2.33 2.03 4.80 4.63
Standard 1.49 1.03 1.24 1.30 1.75 1.13
Deviation
t-value 2.21 0.92 0.45
Table t- value is 6.31, d.f.=1 at 5 per cent significance level
28
Thus, table 2 shows that SBI employees faces high risk (50%) from cross border
exposure, very low risk (40%) from letter of credit or guarantees and low risk (30%) from
direct lending. The study also revealed that respondents of PNB found high risk (37%) from
cross border exposure, low risk (37%) from direct lending and very low risk (10%) from letter
of credit.
Also t-value is less than the table value, it indicates that there was no significant
difference between the level of risk and the transactions involved. And, mean value of direct
lending and letter of credit of both the banks is less than 3, indicating that respondents do not
agree to these statements, but in case of Cross border exposure, mean score is greater than 3,
implying that the respondents by and large agree to the statement.
4.3.2 Responsibility of approval of credit risk policy
The respondents were asked to indicate the authority responsible for credit risk
policy. The distribution is in table 3.
TABLE 3: Responsibility of approval of credit risk policy in both the banks
(Average)
Authority for credit risk SBI PNB
policy/ Banks
Board of Directors 0.17 1.00
Senior Management 0.30 0.00
Credit Policy Committee 0.47 0.00
Others 0.07 0.00
Total 30 30
(100.0) (100.0)
Chi-square value 24.63
Table 3 shows that in SBI, majority of respondents replied that the Credit Policy
Committee (47%) was responsible for approval of their credit risk policy. In PNB, all the
respondents considered Board of Directors to be responsible for the approval of Credit Risk
Policy. The above analysis shows that the authority for credit risk policy depends on the
ownership pattern of the banks. This is confirmed by the chi-square test which was applied to
test the null hypothesis that the authority for effecting credit risk policy is independent of
ownership pattern this hypothesis is accepted at 5 per cent level of significance.
4.3.3 Instruments/ Techniques for Credit Risk Management
The respondents were asked to indicate the technique or instrument they prefer most
for managing credit risk. The table of distribution is shown below in Table 4.
29
TABLE 4: Instruments of credit risk management in both banks
(Number)
SBI
Techniques/ Credit Prudentia Risk RAROC Portfolio Loan
Rating Approval l Limits Rating or Risk Mgt Review
Authority Pricing Policy
1 (High) 0 1 12 4 2 6
(0.00) (3.30) (40.00) (13.30) (6.70) (20.00)
2 1 28 3 4 6
(3.33) (93.30) 11 (10.00) (13.30) (20.00)
3 4 0 7 2 1 8
(13.33) (0.00) (23.30) (6.70) (3.30) (26.70)
4 0 1 0 12 9 4
(0.00) (3.30) 0.00) (40.00) (30.00) (13.30)
5 5 0 0 9 13 4
(16.7) (0.00) (0.00) (30.00) (43.30) (13.30)
6 (Low) 20 0 0 0 1 2
(66.7) (0.00) (0.00) (0.00) (3.30) (6.70)
Total 30 30 30 30 30 30
(100.00) (100.00) (100.00) (100.00) (100.00) (100.00)
Weighted
Mean 1.70 4.97 5.17 3.37 3.00 4.00
PNB
1 (High) 8 2 20 0 0 0
(26.70) (6.67) (66.67) (0.00) (0.000 (0.00)
2 11 5 7 0 7 0
(36.67) (16.67) (23.33) (0.00) (23.33) (0.00)
3 5 5 2 0 13 5
(16.67) (16.67) (6.67) (0.00) (43.33) (16.67)
4 2 17 1 0 10 0
(6.67) (56.67) (3.33) (0.00) (33.33) (0.00)
5 4 1 0 14 0 12
(13.33) (3.33) (0.00) (46.67) (0.00) (40.00)
6 (Low) 0 0 0 16 0 13
(0.00) (0.00) (0.00) (53.33) (0.00) (43.33)
Total 30 30 30 30 30 30
(100.00) (100.00) (100.00) (100.00) (100.00) (100.00)
Weighted
Mean 4.57 3.67 5.53 1.47 3.90 1.90
t-value
7.81 3.53 0.98 5.17 2.45 5.71
30
It was examined that SBI respondents prudential limits (93.30%) to be the most
preferred technique for credit risk management. Also it is seen that respondents of PNB found
risk rating (67%) the most preferred instrument for credit risk management.
Table 4 also shows that weighted mean of instruments like credit approval authority
(4.57), prudential limits (3.67), risk rating (5.53) and portfolio management (3.90) is greater
than 3, indicating that these instruments are given more preference for credit risk
management. And only t-value of credit approval authority is greater than the table value
indicating that there was no significant difference between this technique and respondent's
most important preference. Risk rating is given highest weightage.
4.3.4 Credit Limit for approval from Credit Approval Committee
The respondents were asked to reveal the credit limit for approval from credit
approval committee. The results are shown in Table 5 below.
TABLE 5: Approval for Credit Limit from committee of Selected Banks
(Average)
Credit Limit/ Banks SBI PNB
Below 50 Lac 0.00 0.00
50 Lac-1 Cr 0.00 0.00
1 Cr- 4 Cr 0.33 0.00
Above 4 Cr 0.67 1.00
Total 30 30
(100.00) (100.00)
Chi-square 3.72
Table 5 reveals that the SBI Credit Approval Committee grants 67 per cent credit limit
above Rs. 4 crore and 33 per cent between 1 crore to 4 crore. PNB respondents said that 100
per cent credit limit is above 4 crore for seeking approval from Credit Approval Committee. It
is observed from the table that chi-square value is slightly less than the table, indicating there
was no significant difference between credit limit of above 4 crore and the approval from the
credit approval committee.
4.3.5 Activities for Credit risk Management
Respondents were asked to rank the activities in order of the importance for the
credit risk management. The results are as below in Table 6.
Table 6 shows that 37 per cent of SBI respondents preferred Credit Risk Rating/
Scoring to be most important activity and 57 per cent respondents indicated Periodic Credit
Calls to be least important. 21 per cent of respondents of PNB revealed that Credit Risk
Rating/ Scoring to be most preferred activity and 83 per cent consider periodic calls to be
least important. The table also shows weighted mean of greater than value of 3, indicating
more weightage is given to these activities.
31
TABLE 6: Activities performed for Credit Risk Management
(Number)
SBI
Activities/ Industries Credit Visits Develop Credit Annual
Rating Studies/ Calls MIS Risk Review
Profile Rating
1 5 0 1 5 11 8
(16.70) (0.00) (3.30) (16.70) (36.70) (26.70)
2 8 1 0 11 6 4
(26.70) (3.30) (0.00) (36.70) (20.00) (13.30)
3 3 2 10 1 9 5
(10.00) (6.70) (33.30) (3.30) (30.00) (16.70)
4 1 7 8 7 3 4
(3.30) (23.30) (26.70) (23.30) (10.00) (13.30)
5 12 3 8 6 1 0
(40.00) (10.00) (26.70) (20.00) (3.33) (0.00)
6 1 17 3 0 0 9
(3.30) (56.70) (10.00) (0.00) (0.00) (30.00)
Total 30 30 30 30 30 30
(100.00) (100.00) (100.00) (100.00) (100.00) (100.00)
Weighted 3.67 2.90 2.97 4.07 4.77 3.63
Mean
PNB
1 5 0 0 4 21 0
(16.67) (0.00) (0.00) (13.33) (70.00) (0.00)
2 6 0 20 0 4 0
(20.00) (0.00) (66.67) (0.00) (13.33) (0.00)
3 8 0 0 5 5 12
(26.67) (0.00) (0.00) (16.67) (16.67) (40.00)
4 11 0 0 1 0 18
(36.67) (0.00) (0.00) (3.33) (0.00) (60.00)
5 0 25 3 2 0 0
(0.00) (83.33) (10.00) (6.67) (0.00) (0.00)
6 0 5 7 18 0 0
(0.00) (16.67) (23.33) (60.000 (0.00 (0.00)
Total 30 30 30 30 30 30
(100.00) (100.00) (100.00) (100.00) (100.00) (100.00)
Weighted 4.17 1.83 3.77 2.30 5.53 3.40
Mean
t-value 1.37 2.91 2.18 4.81 2.07 0.63
Also as calculated t-value is less than the table value, it is observed that there was
significance difference among the preferences for activities of credit risk management.
4.3.6 Frequency of Credit Risk Assessment
Respondents were asked to indicate the interval at which credit risk is assessed in
the banks. Response is as below in table 7.
32
TABLE 7: Frequency of Credit Risk Assessment
(Average)
Frequency/ Banks SBI PNB
Monthly 0.00 0.00
Quarterly 0.00 0.00
Bi-Annually 0.10 0.00
Annually 0.90 1.00
Total 30 30
(100.00) (100.00)
The above table 7 shows 90 per cent SBI employees indicated that the credit risk
assessment is repeated annually and 10 per cent employees indicated that the credit risk
assessment is repeated semi- annually. In PNB, 100 per cent employees indicated that the
credit risk assessment is repeated annually.
4.3.7 Preparation of Credit Quality Reports
Respondents were asked if your banks prepare credit quality reports for signaling
loan loss in any portfolio. The response was as below in table 8.
TABLE 8: Preparation of Credit Quality Reports
(Number)
Purpose/ Banks SBI PNB
Yes 14 30
(46.70) (100.00)
No 16 0
(53.30) (0.00)
Total 30 30
(100.00) (100.00)
Chi-square 24.63
Table 8 shows 100 per cent PNB employees prepare credit quality reports for
signaling loan loss in any portfolio. IN SBI, 47 per cent employees indicated that they prepare
credit quality reports for signaling loan loss and 53 per cent employees revealed that they do
not prepare such reports for signaling loan loss in any portfolio. The table also provides the
chi-square value, which is far greater than the table value, revealing that the null hypothesis is
rejected that the banks prepare credit quality reports for signaling loan loss in the portfolio.
4.3.8 Importance of Factors for pricing Credit Risk
The respondents were asked to indicate the importance of factors for considering
pricing of credit risk. Table 9 shows the results.
33
TABLE 9: Bank Wise Response to factors considered for pricing Credit Risk
(Number)
SBI
Factors/ Portfolio Collateral Market Perceived Future Industry Strategic

Ranking Quality Value Forces Value Potential Exposure Reasons
4 0 0 0 6 2 3 6
(0.00) (0.00) (0.00) (20.00) (6.70) (10.00) (20.00)
5 0 3 16 4 10 5 12
(0.00) (10.00) (53.30) (13.30) (33.30) (16.70) (40.00)
6 7 10 7 15 12 10 8
(23.30) (33.30) (23.30) (50.00) (40.00) (33.30) (26.70)
7 (High) 23 17 7 5 6 12 4
(76.70) (56.70) (23.30) (16.70) (20.00) (40.00) (13.30)
Total 30 30 30 30 30 30 30
(100.00) (100.00) (100.00) (100.00) (100.00) (100.00) (100.00)
Mean 6.77 6.47 5.70 5.63 5.73 6.03 5.33
Standard 0.43 0.68 0.84 1.00 0.87 1.00 0.96

Deviation
PNB
1 (Low) 1 4 0 1 0 0 1
(3.30) (13.33) (0.00) (3.33) (0.00) (0.00) (3.33)
2 0 0 0 2 0 0 0
(0.00) (0.00) (0.00) (6.67) (0.00) (0.00) (0.00)
3 1 0 0 0 0 0 0
(3.30) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00)
4 1 1 5 4 0 1 0
(3.30) (3.33) (16.67) (13.33) (0.00) (3.33) (0.00)
5 0 10 0 2 2 11 2
(0.00) (33.33) (0.00) (6.67) (6.67) (36.67) (6.67)
6 10 8 10 12 19 7 24
(33.33) (26.67) (33.33) (40.00) (63.33) (23.33) (80.00)
7 (High) 17 7 15 9 9 11 3
(56.67) (23.33) (50.00) (30.00) (30.00) (36.67) (10.00)
Total 30 30 30 30 30 30 30
(100.00) (100.00) (100.00) (100.00) (100.00) (100.00) (100.00)
Mean 6.23 5.17 6.17 5.53 6.23 5.93 5.87
Standard 1.36 1.86 1.09 1.63 0.57 0.94 1.01

Deviation
t-value 2.07 3.60 1.87 0.29 2.63 0.40 3.88
In case of SBI, employees gave no response to First three factors
The study from table 9 shows that 77 per cent SBI respondents rated Portfolio Quality
of highest importance and 57 per cent respondents rated Collateral Value to next to highest
importance. PNB respondents indicated Future Business Potential (63%) of highest
importance and Strategic Reasons (57%) to be of next to highest importance factor. The table
34
shows that the mean score is greater than 3, indicating that respondents to a great extent agree
to the instruments according to importance.
Calculated t-value is less than the table value showing that there is significant
difference between the factors considered for pricing credit risk and the respondent's view of
both the banks.
4.3.9 Frequency and Responsibility of Loan Review Policy
The employees were enquired about the frequencies and responsible authority for
review of loan policy in the banks. The table 10 reveals the results.
TABLE 10: Frequencies and responsibilities of review of loan policy of both banks
(Number)
Interval and SBI PNB
Authority/Banks
Frequency of loan policy
Monthly 0 0
(0.00) (0.00)
Quarterly 4 0
(13.33) (0.00)
Bi-Annually 7 0
(23.33) (0.00)
Annually 19 30
(63.33) (100.00)
Responsibilities of loan policy
Board of Director 12 30
(40.00)
Credit Department 4 0
(13.33) (0.00)
Loan Officer 8 0
(26.67) (0.00)
Others 6 0
(20.00) (0.00)
Table 10 clearly indicates that 63 per cent employees answered that loan policy reviews
annually and 40 per cent employees held the Board of Directors responsible for loan review
policy in SBI. Also, in PNB, 100 per cent employees were of the view that loan policy is
reviewed annually and that Board of Directors were held responsible for the review of loan
policy. Calculated chi-square value in the table is greater than the table value, indicating that
there was significant association between the frequency-responsible authority and the review
of loan policy.
4.3.10 Frequency for Exposure of Off-balance sheet exposure
Respondents were asked to indicate the interval for defining exposure for Off-
balance sheet exposure. The distribution is in table 11.
35
TABLE 11: Frequency of defining exposure for managing Off-Balance sheet exposure
(Number)
Frequency/ banks SBI PNB
Always 1 16
(3.30) (53.33)
Often 24 14
(80.00) (46.67)
Sometimes 0 0
(0.00) (0.00)
Rarely 0 0
(0.00) (0.00)
Never 5 0
(16.70) (0.00)
Total 30 30
(100.00) (100.00)
t-value 4.29
Thus, table 11 shows that 80 per cent SBI employees revealed that exposure for
managing off-balance sheet is defined often in the banks and 53 per cent PNB employees
indicated that off-balance sheet exposure is always defined. As calculated t-value is less than
the table value, null hypothesis is rejected that there was difference between the interval and
in defining exposure for the off-balance sheet exposure.
4.3.11 Importance of Aspects for evaluating Bank-wise Exposure
The employees were asked to indicate the importance of aspects for evaluating
bank-wise exposure. The respondents response is summed up in the table below.
It is observed from the table 12 that 100 per cent response of SBI employees gives
highest importance to the study of financial performance, 67 per cent response goes next
highest importance to management quality and least importance is given to past experience.
Also it is seen from the table that PNB employees considered study of Financial Performance
and Internal Matrix for studying counter party or country risk to be of high importance i.e. 77
per cent and past experience to be of least importance i.e. 3.33 per cent employees. Also as
mean score in both the banks is greater than 3, it is implied that respondents agree to the
important aspects in evaluating inter-bank exposures. Rankings like 1, 2, 3 was given zero per
cent in SBI.
36
TABLE 12: Bank Wise Importance assigned to aspects in evaluating inter-bank
exposures (Number)
SBI
Aspects/ Financial Operating Management Past Bank Internal
Rankings Performance Efficiency Quality Experience Rating Matrix
4 0 0 0 0 0 3
(0.00) (0.00) (0.00) (0.00) (0.00) (10)
5 0 1 0 1 14 17
(0.00) (3.33) (0.00) (3.33) (46.67) (56.67)
6 0 13 10 11 11 3
(0.00) (43.33) (33.33) (36.67) (36.67) (10.00)
7 30 16 20 18 5 7
(100.00) (53.33) (66.67) (60.00) (16.67) (23.33)
Mean 7.00 6.50 6.67 6.57 5.70 5.47
Standard
Deviation 0.00 0.57 0.48 0.57 0.75 0.97
PNB
1 0 1 0 0 0 1
(0.00) (3.33) (0.00) (0.00) (0.00) (3.33)
4 0 0 0 0 0 5
(0.00) (0.00) (0.00) (0.00) (0.00) (16.67)
5 0 1 5 1 1 0
(0.00) (3.33) (16.67) (3.33) (3.33) (0.00)
6 7 17 11 13 9 1
(23.33) (56.67) (36.67) (43.33) (30.00) (3.33)
7 23 11 14 16 20 23
(76.67) (36.67) (46.67) (53.33) (66.67) (76.67)
Mean 6.77 6.17 6.30 6.50 6.63 6.27
Standard
Deviation 0.43 1.12 0.75 0.57 0.56 1.51
t-value 2.93 1.44 2.28 0.48 5.44 2.44
T-value in table 12 is less than the table value which means that there is significant
difference between the importance given to the aspects and the opinion of respondents of both
the banks.
4.3.12 Use of Derivatives to manage Credit Risk in the banks
A derivative is a contract whose value is derived from the value of another asset,
known as the underlying asset. Eg a share, a stock market index, an interest rate, a commodity
or a currency. Respondents were asked to reveal if derivatives were used in the banks and if
derivatives are used, which derivatives their banks uses. Their response is shown below in
table 13.
37
TABLE 13: Derivatives use by selected banks to manage credit risk
(Numbers)
Response/Banks SBI PNB
Forwards 17 4
(56.67) (13.33)
Futures 0 0
(0.00) (0.00)
Options 0 0
(0.00) (0.00)
Warrants 0 0
(0.00) (0.00)
Swap 0 26
(0.00) (86.67)
Swaptions 0 0
(0.00) (0.00)
All 5 0
(16.67) (0.00)
Use Derivatives 22 30
(73.33) (100.0)
Don't Use derivatives 8 0
(26.67) (0.00)
Total 30 30
(100.0) (100.0)
Table 13 shows that 73 per cent SBI employees responded that their bank uses the
derivatives and 17 per cent of them said that their bank uses all types of derivatives, whereas
57 per cent said their banks uses only forwards derivatives. And all PNB employees
responded that their bank uses derivatives and 87 per cent voted for swap derivatives.
And, chi-square value is greater than the table value, that points out that the null
hypothesis is rejected that there was significant difference between the banks and the use of
the derivatives.
4.3.13 Approach for measuring Capital Requirement for Credit Risk
The employees were asked to appropriate the most preferred approach for measuring
capital requirement for credit risk. The response was as defined in the table below.
Table 14 indicates that PNB employees preferred Standard Approach the most
important for measuring capital requirements for credit risk. Many employees also responded
that Advanced IRR Approach will be applicable from 2014. The table also shows that 63 per
cent SBI employees preferred Standard Approach the most for measuring capital
requirements.
38
TABLE 14: Approaches for capital requirements of Selected banks
(Number)
APPROACHES/ BANKS SBI PNB
Standard Approach 19 30
( 63.33) (100.00)
Fountain IRR Approach 0 0
(0.00) (0.00)
Advanced IRR Approach 10 0
(33.33) (0.00)
Others 1 0
(3.33) (0.00)
Total 30 30
(100.0) (100.0)
Also, chi-square value is far more than the table value, indicating that there was
significant difference between the banks and the approaches to be selected.
4.3.14 Impact of Components in formulating Risk Management Internal Regulation
Respondents were asked to rank (from high to low) according to the importance of
the impact of components in formulating the risk management the risk management internal
regulation. The results are explained in table 15 below.
TABLE 15: Impact of components in formulating risk management internal regulation
(Number)
Components/Banks SBI Weighted PNB Weighted t-value
Mean Mean
Factors and Tools 18 7.90 13 7.60 1.67
(60.00) (43.33)
Risk Definition 16 5.90 13 8.23 6.31
(53.33) (43.33)
Limit Structure 16 3.20 16 4.57 3.68
(53.33) (53.33)
Stress Testing 16 3.30 16 2.57 1.98
(53.33) (53.33)
Templates 14 4.57 14 1.93 6.58
(46.67) (46.67)
Roles and 0 5.40 0 4.73 2.52
Responsibilities (0.00) (0.00)
Methods 0 6.53 0 5.77 3.21
(0.00) (0.00)
Verification Procedures 0 3.93 0 4.50 1.87
(0.00) (0.00)
Risk Monitoring and 0 5.37 0 4.97 4.09
Control (0.00) (0.00)
Table 15 reveals that 60 per cent employees ranked Risk Factors and Identification
Tools to be of highest impact in formulating risk management internal regulation in SBI. And
39
it is also observed from the table that limit structure and stress testing procedure are given
highest weight age in formulating risk management internal regulation in PNB.
Weighted mean in the table shows that SBI gives highest weightage to risk factors and
identification tools and; risk measuring methodology and models, whereas PNB gives high
weightage to risk definition and; risk factors and identification tools.
Also t-value for risk definition and templates is same as the table value indicating that
neither components are significant nor insignificant in formulating risk management internal
regulation.
4.3.15 Impact of Developing Bank Risk Management Practices
Respondents of banks were asked to give rating to the most important parameter in
developing bank risk management practices. The results are as below in table 16 and
weighted mean and t-value is shown in table 17.
TABLE 16: Impact Of developing Bank risk Management Practices Of both banks
Banks/ SBI PNB
Particulars
Impact Per cent Impact Percent
High Requirements 40.00 Capital Allocation 46.67
Medium Financial Loss 30.00 Bank's Earnings 36.67
Low Risk Based Price 53.33 Risk Based Price 53.33
TABLE 17: weighted mean and t-value of SBI and PNB

Weighted Mean t-value
Parameters/ Banks SBI PNB
Mandatory Requirements 4.30 3.57 1.76
International Credit Rating 4.30 3.93 0.98
Meeting IFRS Standards 3.53 2.70 2.11
Capital Allocation 4.43 6.27 3.68
Control over Efficient Financial 4.87 4.97 0.12
Losses
Volatility on Bank's Earnings 3.90 4.17 0.85
Assigning Risk Based Price 2.67 2.40 0.59
Table 16 summarizes that SBI respondents give high importance to meeting
mandatory Requirements from Regulatory Authorities, 30 per cent importance to making
control over efficient Financial Losses and least importance to assigning risk based price to
bank's product. The table also shows that PNB respondents give highest importance to Capital
40
Allocation and least importance to assigning risk based price to the bank's product.
Table 17 shows that as all parameters (except assigning risk based price) have value
greater than 3, this indicates that these parameters are given moderate weightage almost
equally. It also shows that there is difference between the parameters and the opinion of
respondents of both the banks like capital allocation is given more weightage in PNB than in
SBI and mandatory requirements is given more weightage in SBI than in PNB.
4.3.16 Improvement in Credit Risk Management Function
The employees were asked to rank the most important parameter as high for
indicating the improvement in credit risk management function. The response is summed up
in the following table 18 and weighted mean and t-values are shown in table 19.
TABLE 18 : Improvements to be considered in both the Banks
Particulars/ Banks SBI PNB

Most Important Early Warning System Early Warning System
Important Credit Administration Risk Modeling
Least Important Risk Modeling Special IT
Not Important Organization Structure Credit Approval Process
Thus, table 18 examines that SBI respondents ranked Early Warning System to be of
highest importance in improving the credit risk management function and Organization
Structure to be of least importance for improvement in credit risk management function. And
table also shows that PNB respondents indicated early warning System to be of high
importance and Credit Approval Process of least importance for improving credit risk
management function.
TABLE 19: Weighted mean and t-values of SBI and PNB
Weighted Mean
Parameters SBI PNB t-value
Organizational Structure 2.17 3.47 3.18
Credit Administration 3.13 3.70 2.45
Credit Approval Process 5.50 3.90 4.21
Early Warning System 6.67 6.47 0.62
Bad Debt Management 4.40 5.53 2.16
Risk Modeling 3.50 2.63 2.78
Special IT Support 2.50 2.13 1.69
Table 19 reveals that calculated t-value is less than the table value at 5% significance
level, it means that there was significant difference between the parameters required for
improvement in credit risk management function and the respondent's opinion in both SBI
41
and PNB bank.
Weighted mean in both the banks indicates that high weightage was given to the early
warning system, more weightage was given to bad debt management in PNB than in SBI and
more weightage was given to credit approval process in SBI than that in PNB.
4.4 Discussions
This section presents a discussion of major findings revealed by the study. The first
objective of the study was to examine the credit risk framework of the State Bank of India and
Punjab National Bank. The framework includes the internal controls, the activities and
techniques adopted, the approaches followed, products and services offered and the various
approaches to credit risk.
To achieve the second objective of the study, significant comparison was made
between the opinions of respondents of State Bank of India and Punjab National Bank for
various practices adopted for credit risk management. Opinions of PNB respondents was
more stabilized than those of SBI. Results revealed that in defining the practices, level of risk
faced by the employees of SBI and PNB is high in case of cross-border exposure. SBI
employees considered that potential limits are the most preferred technique for credit risk
management. PNB employees considered risk rating as an important technique for risk
management. SBI and PNB employees preferred Credit Risk Rating or Credit Scoring the
most preferred activity for credit risk management. SBI and PNB gave highest importance to
the study of financial performance for evaluating bank wise exposures. In formulating the
internal regulation for risk management, risk factors and identification tools are important
aspects in SBI. PNB respondents held limit structure and stress test to be of more importance.
Mandatory requirements and efficient capital allocation was highly influenced factors for
developing risk management practices in SBI and PNB respectively. In making future
improvements employees of both the banks was more concerned with the early warning
system.
Employees of PNB considered Credit Approval Authority, Risk ratings and Portfolio
management more important than employees of SBI. For activities of credit risk management,
industry profile, plant visits and risk scoring are highly rated than those by employees of SBI.
In pricing credit risk, perceived value accounts and strategic reasons was equally ranked in
both the banks. Whereas value of collateral, market forces and future business potential was
rated more high by PNB employees than by those of SBI. Equal weightage was given to past
experience in evaluating bank wise exposure by respondents of both the banks. The impact of
risk definition in formulating risk management was significantly high in view of PNB
employees. SBI employees rated roles and responsibilities, risk measuring methods,
procedures, control and tool templates to be of high importance. Mandatory requirements,
international credit rating IFRS standards was the most important impact of developing bank
42
risk management practices in SBI. Lastly, equal weightage was given to early warning system
in both the banks for making future improvements for the various function of managing risks.
Where bad debt management was given second rank in PNB, it was given third ranking by
SBI. Other parameters were given low weightage by respondents of both the banks.
In a scenario where majority of profits are derived from trade in the market, one can
no longer afford to avoid measuring risk and managing its implications thereof. To the extent
the bank can take risk more consciously, anticipates adverse changes and hedges accordingly,
it becomes a source of competitive advantage, as it can offer its products at a better price than
its competitors. What can be measured can mitigation is more important than capital
allocation against inadequate risk management system. Basel proposal provides proper
starting point for forward-looking banks to start building process and systems attuned to risk
management practice. Given the data-intensive nature of risk management process, Indian
Banks have a long way to go before they comprehend and implement Basel II norms in total.
Liquidity, profitability, and solvency goals seem to cross paths and by and large
contradict one another. The extant empirical literature for non- financial firms indicates that
active risk management through both internal capital markets (e.g. scale and diversification)
and through active engagement in the external capital markets (e.g. active use of derivatives)
provide ways to manage liquidity and cash flow and achieve higher investment. In recent
years it is seen banks trade credit risks using credit derivatives, and the emergence of
sophisticated credit risk measurement systems that take account of correlations across
borrowers in different industries, countries and market segments. Regulators have decided
that such innovations ought to be encouraged and even used to help determine capital
adequacy standards. The loan sales market suggests that developments in risk management
are healthy ones that are likely to increase the availability of bank credit, but that regulators
ought not expect that these technologies will be employed to reduce risk.
Various relevant findings indicates that changes in the regulatory framework are
initially followed by inefficiency increases. Efficiency subsequently improves after what is
known as an adjustment period used by banks to adapt to the new regulations and market
conditions (Grifell-Tatjé and Lovell 1999; Park and Weber 2006; Lozano-Vivas and
Pasiouras 2010).
An objective and reliable data base has to be built up for which bank has to analyze its
own past performance data relating to loan defaults, trading losses, operational losses etc. and
come out with bench marks so as to prepare themselves for the future risk management
activities. Any risk management model is as good as the data input.
To effectively manage the credit risk in the Indian Scheduled Commercial Banking
sector (SCBs), the Reserve Bank of India has developed policies and guidelines in accordance
with the norms set out by Basel Committee on Banking Supervision (the Basel II accord).
43
Since credit risk is associated with traditional lending activities of the bank, banks can
monitor various credit risk associated ratios by using their internal data. Since the Scheduled
Commercial Banking sector is the driving engine of the Indian economy and the credit risk
associated with this sector is very significant, the RBI is keen on monitoring this sector and
develops policies and other corrective measures as necessary.
The real risk from credit is the deviation of portfolio performance from its expected
value. Accordingly, credit risk is diversifiable, but difficult to eliminate completely. This is
because a portion of the default risk may, in fact, result from the systematic risk. In addition,
the idiosyncratic nature of some portion of these losses remains a problem for creditors in
spite of the beneficial effect of diversification on total uncertainty. This is particularly true for
banks that lend in local markets and ones that take on highly illiquid assets. In such cases, the
credit risk is not easily transferred, and accurate estimates of loss are difficult to obtain.
Each bank must apply a consistent evaluation and rating scheme to all its investment
opportunities in order for credit decisions to be made in a consistent manner and for the
resultant aggregate reporting of credit risk exposure to be meaningful. To facilitate this, a
substantial degree of standardization of process and documentation is required. This has lead
to standardized ratings across borrowers and a credit portfolio report that presents meaningful
information on the overall quality of the credit portfolio.
Variations in credit quality reports over time, indicate changes in loan quality and
expected loan losses from the credit portfolio. In fact, credit quality reports should signal
changes in expected loan losses, if the rating system is meaningful.
For such type of credit quality report to be meaningful, all credits must be monitored,
and reviewed periodically. It is, in fact, standard for all credits above some dollar volume to
be reviewed on a quarterly or annual basis to ensure the accuracy of the rating associated with
the lending facility. In addition, a material change in the conditions associated either with the
borrower or the facility itself, such as a change in the value of collateral, will trigger a re-
evaluation. This process, therefore, results in a periodic but timely report card on the quality
of the credit portfolio and its change from month to month. Generally accepted accounting
principles require this monitoring. The credit portfolio is subject to fair value accounting
standards, which have been tightened by The Financial Accounting Standards Board (FASB).
44
CHAPTER-V
SUMMARY
In this chapter, a brief summary of study has been presented, so as to understand the
implications of the findings. This chapter also discusses recommendations and scope of the
study.
5.1 Summary
Indian banking sector has expanded in an exponential manner in the past decade
offering a wide range of services to rural, urban and metropolitan areas of the country . Bank
optimizes utilization of deposits by deploying funds for developmental activities and
productive purposes through credit creation process. Deposit mobilization & Credit
deployment constitute the core of banking activities and substantial portion of expenditure
and income are associated with them.
It is very much essential to conduct credit investigation before taking up a proposal for
consideration. This preliminary study should lead to valuable information on of the borrower
is well established and the return to the bank by way of interest is examined. The Credit risk
can be improved only when those who review it are knowledgeable and carry with them
requisite experience in credit portfolio. Credit Department should be expertise-oriented rather
than going by the scale and grade in the organization, as there are many who climbed the
organization ladder without being exposed to the requisite credit management.
Risk Management is a discipline at the core of every financial institution and
encompasses all the activities that affect its risk profile. It involves identification,
measurement, monitoring and controlling risks to ensure that:
a) The individuals who take or manage risks clearly understand it.
b) The organization’s Risk exposure is within the limits established by Board of
Directors.
c) Risk taking Decisions are in line with the business strategy and objectives set by
BOD.
d) The expected payoffs compensate for the risks taken
e) Risk taking decisions are explicit and clear.
f) Sufficient capital as a buffer is available to take risk
Credit Risk is intrinsic to banking and it is as old as banking itself. Credit risk is
defined as the possibility of losses associated with diminution in the credit quality of
borrowers or counterparties. In a bank’s portfolio, losses stem from outright default due to
inability or unwillingness of a customer or counterparty to meet commitments in relation to
lending, trading, settlement and other financial transactions. Alternatively, losses result from
reduction in portfolio value arising from actual or perceived deterioration in credit quality.
45
Recent banking studies analyzed the impact of risk on performance and, on occasions,
attempted to introduce risk measures in performance assessments (Hughes and Mester (1998),
Altunbas et al (2000), Park and Weber (2006), Banker et al (2010), Hsiao et al (2010) or
Barros et al. (2012). There remains, however, a need to unify these approaches by using risk
factors as an integrating part of performance analyses. This implies that risk has endogenous
components (Van Hoose 2010). Therefore, it is necessary to develop monitoring tools to
thoroughly examine the relations between risk and performance.
Off-balance sheet exposures such as foreign exchange forward contracts, swaps,
options etc are classified into three broad categories such as Full Risk, Medium Risk and Low
Risk and then translated into risk weighted assets through a conversion factor and summed
up.
Thus, it is concluded that increasingly sophisticated risk management practices in
banking are likely to improve the availability of bank credit but not to reduce bank risk.
So, there is a need to examine the framework and determine the practices of credit
risk management for reducing risk, making people aware of the various practices been
followed and modern techniques in line and educating people regarding credit risk
management practices.
So, the present study aimed to achieve the following objectives:
I. To examine Credit Risk Management framework of State Bank of India and Punjab
National Bank.
II. To study and compare the Risk Management practices of State Bank of India and
Punjab National Bank.
The population of the study comprised of respondents from State Bank of India and
Punjab National Bank. A sample of 60 respondents was selected and data were collected
depending on the willingness of respondents to share information.
To meet the objectives of the study, primary data was collected through a pre-
designed, structured and non-disguised questionnaire. Various studies were reviewed to have
a thorough understanding about various parameters to be included in questionnaire and
accordingly a self-administered and structured questionnaire was designed to collect
information from the respondents. Questions were specifically designed to get in-depth
information about the profile of respondents, awareness level of respondents towards credit
risk management framework and practices and; activities and techniques adopted for
managing credit risk. Questions relating to aspects, parameters, components and various
improvements to be made in future were also included. Both open ended as well as close
ended questions were asked. Respondents were asked multiple choices, dichotomous and
scale based questions. For scale based questions, respondents were asked to provide their
responses on a seven point and nine point scale, indicating their level of agreement, where '7'
46
and '9' showed 'extremely important', and '1' as not at all important.
5.2 Findings of the study
This section deals with findings and conclusion drawn from the study. An attempt
has been made to study the ‘Credit Risk Management Framework’ of State Bank of India and
Punjab National Bank in Ludhiana City. The survey based findings are presented below:
• The framework involves the services like life insurance, mutual funds, factoring etc
provided by SBI and services like corporate banking, home loan, industrial finance, ATM
provided by PNB.
• The risk managers are of the opinion that, the ‘cross border exposure activities cause the
maximum level of credit risk in both SBI and PNB. In order to manage and control credit
risk, both the banks have responded favorably to various activities, techniques and
instruments.
• Regarding the authority for approval of the Credit Risk Policy, it was found that in SBI,
the same is approved by Credit Policy Committee and in PNB, Board of Directors caught
the hold of approval. The authority of credit risk management is set up at ‘Head Office’
level in most of the banks. The credit sanction of the authority is obtained from for
exposures of more than Rs. 4 cr in both the banks..
• The survey indicated that 40 per cent of respondents favor risk rating as an instrument for
‘Credit Risk Management’ in PNB and 93 per cent respondents of SBI voted 'Prudential
Limits' as an important instrument for credit risk management. The other instruments
such as ‘proper credit administration in form of credit sanctions’, and ‘loan review’ are
also given very high importance by the banks.
• For management of credit risk, RBI has suggested various prudential limits like clear
definition of exposure limits and single/group borrower limits. Amongst these limits, the
former is favored more in SBI.
• The risk rating is the most important activity performed by banks for credit risk
management. For risk rating the design of MIS is considered as an important requirement
for banks now-a-days. The survey brought out that 37 per cent of SBI respondents and 70
per cent of PNB respondents perform risk rating exercise and they have started
developing MIS. In most of the banks the rating is presented in the form of ‘Alphabets’.
• Regarding frequency of the credit risk assessment exercise, it has been observed that the
bankers perform it annually. The other most important technique for credit risk
management, as suggested by SBI (77%) and PNB (57%), was ‘Portfolio Quality’. The
survey further exhibited that the ‘Future Business Potential’ is the most important factor
considered for pricing credit risk in PNB. 'Perceived value' and 'Strategic Reasons' was
ranked equally by both the banks.
47
• 100 per cent of the respondents of PNB implied the review of their loan policy is made
annually and this exercise is performed by Board of Directors. Whereas 63 per cent SBI
employees voted that loan policy is reviewed annually and this exercise is performed by
Board of Directors as responded by 40% employees.
• The survey also brought out that 80 per cent respondents of SBI have often defined their
off-balance sheet exposure. Where 53 per cent PNB employees responded that off-
balance sheet exposure was always defined.
• ‘Study of Financial performance’, ‘operating efficiency’ and ‘management quality’ are
assumed as more important aspects in SBI in comparison to PNB for evaluating interbank
exposure.
• The use of derivatives in banks for credit risk management is almost availed in PNB and
73 per cent in SBI.
• For capital charge calculation, almost 63 per cent of respondents have favored
standardized approach of credit risk in PNB and 100 per cent respondents favored in SBI.
• 'Risk Definition', 'Stress testing procedure' and 'Limit structure and setting up Procedures'
was given high weightage in PNB comparatively.
• 'SBI respondents revealed that high impact was found in parameters like ' Meeting
mandatory requirements from regulatory authorities', 'Getting International Credit Rating',
and 'Meeting IFRS or corporate Governance Standards' in SBI significantly.
• PNB employees ranked 'Early Warning System', 'Bad Debt Management', and ' Credit
administration' as most important improvements to be made in credit risk management
function than those ranked by SBI employees.
5.2.1 Conclusion
The survey has, thus, 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. While ‘risk rating’ is the most important instrument, the
others proper credit administration, prudential limits and loan review are used as very highly
important instruments of credit risk management. Most banks have their credit approving
authority at ‘Head Office Level’. Borrower limits and exposure limits are major prudential
limits for credit risk management. Risk pricing is a modern tool for pricing credit risk in
banks. However, both the banks was enthusiastic to use derivatives products as risk hedging
tools. The risk managers were of the opinion that the implementation of credit risk related
guidelines was not a problem for them, but lack of the understanding of the methodologies /
instruments was a cumbersome task for many of them. They needed to undergo some
training/education program in this regard. Hence, the concerned banks as well as RBI should
take appropriate steps to organize high training programs on risk management at some
48
institute of high credibility.
5.3 Recommendations of the study
Majority of respondents were not aware about the credit risk management practices
and framework to be followed and adopted in SBI residential branches. Therefore, steps
needed to be taken to create awareness among SBI employees about credit risk management.
SBI employees and certain PNB employees found certain terms technical to respond to. They
need to be aware of these terms by reading newspapers, through T.V etc. From 2014,
Advanced Internal Rating Based Approach will be implemented for measuring capital
charges. Thus, employees should gather various such information from the higher level to get
updated on daily basis. Also, banks should take help from other branches to collect the
information. There should be an efficient auditing of banks and securities firms with respect
to their exposure to risk and their internal controls. Besides capital requirements and other
quantitative requisites, regulators should set forth and enforce qualitative requirements for
internal controls; financial institutions (and broker-dealers) should be required to have written
risk control policies.
5.4 Scope for future research
A few areas where there is scope for further research are mentioned below:
1. Future studies may include larger samples from other cities.
2. Government support should be enhanced and adoption of more modern techniques,
practices and instruments should be adopted for further studies.
49
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52
ANNEXURE
Q1. Please indicate the level of Credit Risk being faced by your bank on the
following transactions. (On a scale of 0 to 6, where 0 = no risk; 1 = very low risk;
and 6 = very high risk)
A. Direct Lending No Risk 0 1 2 3 4 5 6 Very High

B. Guarantees or Letter of Credit 0 1 2 3 4 5 6
C. Cross Border Exposure 0 1 2 3 4 5 6
Q2. Who is responsible for approval of Credit Risk Policy in your bank? (Please tick the
appropriate )
A. Board of Directors ( )
B. Senior Management ( )
C. Credit Policy Committee ( )
D. Any other, please specify _______________________________________________
Q3. Which technique/instrument, do you prefer the most for Credit Risk Management
in your bank? (Please rank in ascending order)
A. Credit Approval Authority ( )
B. Prudential Limits ( )
C. Risk Ratings ( )
D. Risk Pricing or Risk Adjusted Return on Capital (RAROC) ( )
E. Portfolio Management ( )
F. Loan Review Policy ( )
G. Any other, please specify _______________________________________________
Q4. What is the credit limit for seeking approval from Credit Approval Committee in
your bank? (Please tick the appropriate)
A. Below 50 lacs ( )
B. 50 Lacss - 1 crore ( )
C. 1 crore - 4 crore ( )
D. Above 4 crore ( )
Q5. What activities you most prefer for Credit Risk Management? (Rank from High To
Low)
A. Industries Studies\Profiles ( )
B. Periodic Credit Calls ( )
i
53
C. Periodic Visits of Plants ( )
D. Develop MIS ( )
E. Credit Risk Rating/Risk Scoring ( )
F. Annual Review of Accounts ( )
G. Any other Modern Technique ___________________________________
Q6. At what interval the Credit Risk assessment is repeated in your bank?
A. Monthly ( )
B. Quarterly ( )
C. Bi-annually ( )
D. Annually ( )
Q7. Do you prepare ‘Credit Quality Reports’ for signaling loan loss in any portfolio?
Yes ( ) No ( )
Q8. Please indicate, the relative importance of the following factors you consider for
pricing Credit Risk (on a scale of 1 to 7, where 1 = not used, 2 = unimportant; 7 = very
important)
not used 1 2 3 4 5 6 7 V imp
A. Portfolio Quality ( ) ( ) ( ) ( ) ( ) ( ) ( )
B. Value of Collateral ( ) ( ) ( ) ( ) ( ) ( ) ( )
C. Market forces ( ) ( ) ( ) ( ) ( ) ( ) ( )
D. Perceived value of accounts ( ) ( ) ( ) ( ) ( ) ( ) ( )
E. Future business potential ( ) ( ) ( ) ( ) ( ) ( ) ( )
F. Portfolio Industry Exposure ( ) ( ) ( ) ( ) ( ) ( ) ( )
G. Strategic Reasons ( ) ( ) ( ) ( ) ( ) ( ) ( )
H. Any other, please specify ___________________________________________
Q9. At what interval the ‘Loan Policy’ is reviewed?

(A) Monthly ( ) (B) Quarterly ( ) (C) Bi-annually ( ) (D) Annually ( )
Q10. Who review the ‘Loan Policy’ in your bank? (Tick the appropriate)
A. Board of Directors ( )
B. Credit Administration Department ( )
C. Loan Review Officer ( )
D. Any other, please specify ( )
ii
54
Q11. How frequently you define exposure for managing off-balance sheet exposure?
(A) Always (B) Often (C) Sometimes (D) Rarely (E) Never
Q12. Please indicate the relative importance of the following aspects that you consider
for evaluating bank-wise exposures (on a scale of 1 to 7, where 1 = not used, 2 =
unimportant; 7 = very important)
1 2 3 4 5 6 7
A. Study of Financial Performance ( ) ( ) ( ) ( ) ( ) ( ) ( )
B. Operating Efficiency ( ) ( ) ( ) ( ) ( ) ( ) ( )
C. Management Quality ( ) ( ) ( ) ( ) ( ) ( ) ( )
D. Past Experience ( ) ( ) ( ) ( ) ( ) ( ) ( )
E. Bank rating on Credit Quality ( ) ( ) ( ) ( ) ( ) ( ) ( )
F. Internal Matrix for studying ( ) ( ) ( ) ( ) ( ) ( ) ( )
counter party or country risk
Q13. Does your bank use ‘Derivatives’ to manage Credit Risk?

Yes ( ) No ( )
Q14. If yes, Which derivatives your bank use? (Tick the appropriate one)
(A) Forwards (B) Futures (C) Options (D) Warrants (E) Swaps (F) Swaptions
Q15. Which approach you prefer the most for measuring capital requirement for Credit
Risk? (Please tick the appropriate)
A. Standardized Approach ( )
B. Foundation Internal Rating Based Approach ( )
C. Advanced Internal Rating Based Approach ( )
D. Any other ________________________________________
Q16. What is the impact of following components in formulating the risk management
internal regulation? (Rank from High to Low)
A. Risk definition ( )
B. Roles and responsibilities ( )
C. Risk factors and identification tools ( )
D. Risk measuring methodology and models ( )
E. Model verification procedures ( )
F. Limit structure and setting up procedures ( )
G. Risk monitoring and control ( )
iii
55
H. Reporting procedure and tool templates ( )
I. Stress testing procedure ( )
J. Any other, specify ____________________________________________________
Q17. What is the most important impact of developing bank risk mgt practices?
(Give ranking)
A. Meeting mandatory requirements from regulatory authorities ( )
B. Getting international credit ratings or stepping up to higher grade rate ( )
C. Meeting IFRS or corporate governance standards ( )
D. Supporting efficient capital allocation ( )
E. Making control over efficient financial losses ( )
F. Stabilizing volatility of bank's earnings ( )
G. Assigning risk based price to the bank's product ( )
H. Others (specify) __________________________________________________________
Q18. What does your bank most want to improve in credit risk management function?
(Give Rating)
A. Organizational structure ( )
B. Credit administration ( )
C. Credit approval process ( )
D. Early warning system ( )
E. Bad debt management ( )
F. Risk modeling ( )
G. Special IT support for risk management ( )
H. Others (specify) ________________________________________________________
Respondent Profile:
Name of Respondent: ________________________________________________________
Designation:________________________________________________________________
Gender: Male [ ] Female [ ]
Marital Status: Married [ ] Single [ ]
Age (in years): Below 18 [ ] 19-30 [ ] 31- 45 [ ]
46-60 [ ] 60 Above [ ]
Education Qualification: High School or less [ ] College Graduate [ ] Post-Gradation [ ]
Others_____
56
iv
VITA
Name of the Student : Tejasvita Bhardwaj

Father's Name : Mr. Subhash Bhardwaj
Mother's Name : Mrs. Karuna Bhardwaj
Nationality : Indian
Date of Birth : 10 May, 1990
Permanent Home Address : House No.-1160, Street No.-6
Krishna Nagar, Civil Lines,
Ludhiana, 141001
EDUCATIONAL QUALIFICATIONS
Bachelor Degree : B.Com
University and year of award : Panjab University, Chandigarh, 2011
% Marks : 77.33
Master's Degree : Master of Business Administration
OCPA : 7.22 (3rd Sem.)
Title of Master's Project Report : Credit Risk Management Practices:
A Comparative Study of
State Bank of India and Punjab
National Bank
57

Tejasvita Bhardwaj

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Tejasvita Bhardwaj

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CREDIT RISK MANAGEMENT PRACTICES: A

COMPARATIVE STUDY OF STATE BANK OF INDIA

Research Project Report

Submitted to the Punjab Agricultural University

MASTER OF BUSINESS ADMINISTRATION

School of Business Studies

Name of the Student and : Tejasvita Bhardwaj

Major Subject : Financial Management

Minor Subject : Economics

Name and Designation of the : Dr. Y.P. Sachdeva,

Degree to be awarded : Master of Business Administration

Year of Award of Degree : 2013

Total Pages in project Report : 52 + Annexure + Vita

Name of University : Punjab Agricultural University,

CHAPTER TOPIC PAGE

II. REVIEW OF LITERATURE 11-17

III. RESEARCH METHODOLOGY 18-21

IV. RESULTS AND DISCUSSION 22-44

It is imperative to decide upon and document a research methodology well in advance

Figures in parentheses are %ages of total no. of respondents

4.2.2 Credit Risk Management Framework of Punjab National Bank

Factors/ Portfolio Collateral Market Perceived Future Industry Strategic

Standard 0.43 0.68 0.84 1.00 0.87 1.00 0.96

Standard 1.36 1.86 1.09 1.63 0.57 0.94 1.01

High Requirements 40.00 Capital Allocation 46.67

Medium Financial Loss 30.00 Bank's Earnings 36.67

Low Risk Based Price 53.33 Risk Based Price 53.33

TABLE 17: weighted mean and t-value of SBI and PNB

Particulars/ Banks SBI PNB

Bandyopadhyay A (2006) Predicting Probability of Default of Indian Corporate Bonds:

Basel Committee on Banking Supervision (2004) International convergence of capital

Guidance Note on Credit Risk Management. Department of Banking Operations and

Kuosmanen T (2005) Weak disposability in nonparametric productivity analysis with

Rajeev R S (2004) Basel II-Issues and Constraints. IBA Bulletin 21:1-6.

Raghvan R S (2003) Risk Management In Banks. The Chartered Acct 51:841-51

A. Direct Lending No Risk 0 1 2 3 4 5 6 Very High

Q9. At what interval the ‘Loan Policy’ is reviewed?

Q13. Does your bank use ‘Derivatives’ to manage Credit Risk?

Name of the Student : Tejasvita Bhardwaj

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