Project Report

(Submitted for the Degree of B.Com. (Honours in Accounting &

Finance) under the University of Calcutta)

Title of the Project

Credit Risk Management in Banks:

Opportunities & Challenges.

Name of the Candidate :-Madho Agarwal

Registration No. :-017-1121-0247-16
Name of the College :-The Bhawanipur Education Society
College
College Roll No. :-0101160414

Supervised by
Name of the supervisor Prof. Siddhartha Chattopadhay
Name of the college The Bhawanipur Education Society College

Month & Year of Submission

February, 2019
Annexure- IA

This is to certify that Madho Agarwal a student of B.Com (Honours) in

Accounting & Finance in Business of The Bhawanipur Education Society
College under the University of Calcutta has worked under my supervision and
guidance for his Project Work and prepared a Project Report with the title Credit
Risk Management in Banks : Opportunities and Challenges which he is
submitting, is his genuine and original work to the best of my knowledge.

Signature:

Place Name: Siddhartha Chattopadhay

Date:
Designation:LecturerBhawanipur
Education
Society College
 Annexure- IB

I hereby declare that the Project Work with the title (in block letters) .............................
...............................................................................................................
submitted by me for the partial fulfilment of the degree of B.Com. Honours in Accounting &
Finance / Marketing / Taxation / Computer Applications in Business under the University of
Calcutta is my original work and has not been submitted earlier to any other University
/Institution for the fulfilment of the requirement for any course of study.
I also declare that no chapter of this manuscript in whole or in part has been incorporated in
this report from any earlier work done by others or by me. However, extracts of any literature
which has been used for this report has been duly acknowledged providing details of such
literature in the references.
Signature
Name:
Address:
Registration No.
PLACE:
DATE:
I take this opportunity to express my profound gratitude and deep regards to my
guide Prof. Siddhartha Chattopadhaya
for his exemplary guidance, monitoring and constant encouragement throughout
the course of this thesis. The blessing, help and guidance given by him time to time
shall carry me a long way in the journey of life on which I am about to embark.
I also take this opportunity to express a deep sense of gratitude for his cordial
support, valuable information and guidance, which helped me in completing this
task through various stages.
I am obliged to my entire friend circle for valuable information provided by them. I
am grateful for their cooperation during the period of my assignment.
Lastly, I thank the almighty, my parents, sisters and friends for their constant
encouragement without which this assignment would not possible.
TABLE OF CONTENTS
CHAPTER NO.
TOPIC PAGE
NO.
I. INTRODUCTION
II. REVIEW OF LITERATURE
III. RESEARCH METHODOLOGY
IV. RESULTS AND DISCUSSION
V. SUMMARY
REFERENCES
CHAPTER ONE
1. 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 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
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, counterpartrisk, liquidityrisk, 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
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 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 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.
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 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. 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 drawdowns 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.

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
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.

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 nonexecutive 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.

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 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.

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.

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 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.
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.

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.

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. 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.
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 West Bengal 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 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
2- Least important
1- Not at all important
Weighted Mean Score was calculated using the formula:

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:

Where,
O = Observed frequencies
E = Expected frequencies
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:

Where,
X = individual observations
n = number of observations
T-test was applied to test the null hypothesis that the sample has been drawn
from the normal population. T-value is computed using the following formula:

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.
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.
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

TABLE 1: Distribution of respondents on the basis of demographic parameters

GENDER OF RESPONDENTS
SBI PNB

Male 20 (66.67) 26 (86.67)

Female 10 (33.33) 4 (13.33)

Chi-square 4.57
AGE OF RESPONDENTS
19-30
8 (26.70) 4 (13.33)

31-45
 20 (66.7) 21 (70.00)
45-58
20 (6.70) 5 (16.67)
Chi-square 0.63
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 .

4.2 Credit Risk Management Framework of SBI and PNB

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.
4.3 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 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.
CHAPTER-V
5.1SUMMARY
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. 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. 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 predesigned, 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' 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.
• 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 offbalance 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 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.
REFERENCES
Allayannis, George and James P Weston (1999) The Use of Foreign Currency
Derivatives andFirm Market Value. Rev Finan Stud 14:243-76.
Bagchi S K (2003) Credit risk management A panacea or conundrum? SBI Monthly
Rev. 42: 497-504.
Bandyopadhyay A (2006) Predicting Probability of Default of Indian Corporate
Bonds: Logistic and Z score Model Approaches. J Risk Fin 7: 255-72.
Banerjee A (2011) Risk management in banking sector: An overview. Mgmt Acct
46: 679-82.
Barros C, P Managi S and Matousek R (2012) The technical efficiency of the
Japanese banks: Non radial directional performance measurement with
undesirable output. Omega 40: 1-8.
Basel Committee on Banking Supervision (2004) International convergence of
capital measurement and capital standards: A revised framework. Retrieved on 1
February 2012 from http://www.bis.org/publ/bcbs107.pdf
Basel Committee on Banking Supervision (2011) Range of methodologies for risk
and performance alignment of remuneration. Retrieved on 1 February 2012 from
http://www.bis.org/publ/bcbs194.pdf
Berger A N and Young R (1997) Problem loans and cost efficiency in commercial
banks. J Banking and Fin 21: 849-70.
Coyle B (2000) Framework for Credit Risk Management. Pp. 3-10 Chartered
Institute of Bankers Publishing, UK.
Das A and Ghosh S (2007) Determinants of credit risk in Indian state owned banks:
An empirical investigation. Econ Issues 12:27-46.
Dash Parvesh Chander (2006) Capital Adequacy Ratio-Issues in India. Intl J Mgmt
Res and Rev. 2:52-54.
Dahiya, Sandeep, Manju Puri, and Anthony Saunders (2000) Bank Borrowers and
Loan Sales: New Evidence on the Uniqueness of Bank Loans Working Paper, NYU.
Retreived on July 2000 from http://hdl.handle.net/2451/26632.
Demirguc, Asili and Huzinga H (1999) Determinants of Commercial Banks Interest
Margins and Probability: Some International Evidence World Bank Econ Rev
13:379-408.
Demsetz, Rebecca S, and Philip E Strahan, (1997) Diversification, Size, and Risk at
Bank Holding Companies J Money, Credit and Banking 29:300-13.
Duffee Gregory R and Zhou Chunseng (1999) Credit derivatives in banking: Useful
tools for managing risk? UCB Working Papers. JEL: G21, D82.
Ferguson R W (2001) Credit risk management – Models and judgement. PNB
Monthly Rev. 23:23-31.
Fethi M D and Pasiouras F (2010) Assessing bank efficiency and performance with
operational research and artificial intelligence techniques: A survey. European J
Oper Res 204:189-98.
Froot Kenneth A and Jeremy C Stein (1998) Risk Management, Capital Budgeting,
and Capital Structure Policy for Financial Institutions: An Integrated Approach. J
Fin Econ 47:55-82.
Gambhir N Santosh (2007) Basel II – Are Indian Banks Going to Gain. PNB Monthly
Rev. 22:1-4.
Gil-Diaz F (1994) The Origin of Mexico’s 1994 Financial Crisis. The Cato Journal 17
Retrieved on 28 November 2008 from http://www.cato.org/pubs/journal/cj.
Ghosh, Saibal and Das Abhiman (2005) Market Discipline, Capital Adequacy and
Bank Behaviour: Theory and Indian Evidence. Econ and Political Weekly 40:1198-
1209.
Gorton, Gary B and George G Pennacchi (1995) Banks and Loan Sales, Marketing
Nonmarketable Assets. J Monetary Econ 35:389-411.
Guidance Note on Credit Risk Management. Department of Banking Operations
and Development, Reserve Bank of India. Retrieved on October 12, 2002 from
http://rbidocs.rbi.org.in/rdocs/notification/PDFs/32084.pdf.
Houston, Joel, Christopher James, and David Marcus (1997) Capital Market
Frictions and the Role of Internal Capital Markets in Banking. J Fin Econ 46:135-64.
Hughes J P and Mester L J (1998) Bank capitalization and cost: Evidence of scale
economies in risk management and signalling. Rev Econ and Stats 80: 314-25.
Jayaratne, Jith and Donald P. Morgan (1999) Capital Market Frictions and Deposit
Constraints on Banks. J Money, Credit and Banking 32:74-92.
Kunt-Demirguc and Detragiache (1997) The Determinants of Banking Crises:
Evidence from Developing and Developed Countries International Monetary Fund;
Working Paper, WP/97/106. JEL Classification: E44, G21.
Kuosmanen T (2005) Weak disposability in nonparametric productivity analysis
with undesirable outputs. American J Agri Econ 87:1077-82.
Laeven and Levine R (2009) Bank governance, regulation and risk taking. J Fin
Econ 93:259-75.
Louberge Henri and Schlesinger Hanis (2005) Coping with Credit Risk. The J Risk
Fin 6: 118-34.
Minton and Catherine Schrand (1999) The Impact of Cash Flow Volatility on
Discretionary Investment and the Costs of Debt and Equity Financing. J Finan Econ
54:423-60
Muninarayanappa and Nirmala (2004) Credit risk management in banks – Key
issues. J Acct and Fin 18: 94-98.
Nachane, Ray and Saibal (2006) Basel II and bank lending behavior: Some likely
implications for monetary policy in India. Econ and Political Weekly 41:1053-58.
Nitsure Rege Pura (2005) Basel II Norms-Emerging Market Perspective with Indian
Focus. Econ and Political Weekly 40:1162-66.
Ozturk, M and Aktan B (2007) The New Basel Capital Accord: In search of
Excellence at Bank Risk Management Rev. of Social, Econ and Bus Stud 7:151-74
Pennacchi and George G (1988) Loan Sales and the Cost of Bank Capital. The J Fin
43: 375-96.
Radhakrishanan R and Ravi B (2009) Adoption of Basal II Norms: Are Indian Banks
Ready? Indian Institute of Management, Calcutta. Retrieved on September 20,
2012 from www.indianmba.com / occasional _papers / op 206/op206.html
Rahman S, Tan L H, Hew O L and Tan Y S (2004) Identifying financial distress
indicators of selected banks in Asia. Asian Econ J 18:45–57.
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
Raghvan R S (2005) Credit as well as Credit risk Management in Banks. The
Chartered Acct 53:996-1002
Raghavan R S (2008) Basel II, the Way Forward for Banks. The Chartered Acct
56:1767-74.
Rajagopal S (1996) Bank Risk Management – A Risk Pricing Model. SBI Monthly
Rev. 35:553-67.
Treacy William F and Carey Mark S (1998) Credit Risk Rating at Large US Banks.
Federal Reserve Bulletin. 84:897-921

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 ( )
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 ( )

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 ( ) ( ) ( ) ( ) ( ) ( ) ( )
counterparty 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 ( )
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 [ ]