ArshiaNoorie-0375-Credit MGMT at Amanath Co-Operative Bank

CREDIT MANAGEMENT & INTERNAL RATING SYSTEM
FOR SMALL SCALE INDUSTRY AT AMANATH

CO-OPERATIVE BANK
A DISSERTATION
Submitted in partial Fulfillment of the requirements for

MBA Degree of
BANGALORE UNIVERSITY
Submitted By
ARSHIA NOORIE.N
Register Number:
03XQCM6010
Under the Guidance of:
Mr. Mansoor Dr.N.S.Malavalli

Human Resource Manager Principal
Amanath co-operative Bank
M. P. Birla Institute of Management

Associate Bharatiya Vidya Bhavan
Bangalore-560001
2003 - 2005
AMANATH CO-OPERATIVE BANK
STUDENT DECLARATION
I hereby declare that this DISSERTATION entitled “Credit

Management & Internal Rating System to Small Scale industries” at
Amanath co-operative Bank, Bangalore has been undertaken and
completed by me under the valuable guidance of Mr. MANSOOR, Human
Resource Manager and Dr N.S. Malavalli, Principal in partial fulfillment
of Master of Business Administration (2003-2005) program and it is my
original work and not submitted for the award of any other degree, diploma,
fellowship or other similar title or prizes.
The findings in the study are based on the data collected by me and
have not formed the basis for the award of any other university
Bangalore ARSHIA NOORIE.N

Date Reg No: 03XQCM6010
M P Birla Institute Of Management 2

ACKNOWLEDGEMENT
I am sincerely thankful to Dr. Nagesh Malavalli, Principal M.P.Birla

Institute of Management, Bangalore for granting me the permission to do
the internship project.
I am extremely great full to Mr. Gaffer Haji Latif Director, for his
constant support and encouragement throughout this project study.
I would also like to thank Mr.Mansoor, for his valuable role in

making this project study a learning experience.
I would like to express my sincere thanks to Miss Amina Ali Shaikh

junior assistant HRD, Amanath co-operative bank Ltd, who has spent
valuable time in giving the necessary guidance throughout the projects
works.
I would like to express my profound gratitude to all the staff of

Amanath co-operative Bank those who have helped me directly or
indirectly in the course of this study.
Last but not the least I would like to express my profound gratitude to
my family and friends who have indirectly encouraged me in completing this
study.
BANGALORE Arshia Noorie.N

DATE:

CERTIFICATE BY THE GUIDE
This is to certify that the project titled “Credit Management & Internal
Rating System to Small Scale Industries” at Amanath co-operative Bank.
Bangalore is completed under my guidance and supervision. It is submitted
in partial fulfilment of the requirement for the degree of MASTER OF
BUSINESS ADMINISTRATION to Bangalore University by
Ms.ARSHIA NOORIE.N and this has not forwarded a basis for the award
of any degree, diploma or fellowship by any other Institute or University.
Place: Bangalore
Date: (Dr. Nagesh Malavalli)

Chapter No. Particulars
Chapter 1
Executive Summary
Introduction:
About co-operative Bank
Structure of co-operative bank
Chapter 2 Problem statement

Objective of the study
Scope of the study
Chapter 3
Bank Profile
Future Plans of The Bank
Product Profile
Chapter 4 Research Methodology

Research technique
Propose of the study
Tools of the study
Sampling technique
Data collection
Limitation of the study

Chapter 5
Review of literature
Chapter 6 Credit Management

Funds for lending
Credit Planning
Credit Panning
Credit Policy
Credit Standards
Credit Analysis
Rating system
Chapter 7 Internal system
External system
Credit rating system
Credit rating model
Chapter 8
Justification & Significance
Chapter 9
Data Analysis & Interpretation
Chapter 10 Findings
Suggestions
Conclusions
Bibliography

SL.NO TABLE DESCRIPTION
1.1 Distribution of UCB'S at end of march 2005

1.2 Distribution of UCB'S Deposits size- wise as
on 31st march 2005
2.1 Financial position of Bank
2.2 Rate of Interest on Term Deposit
2.3 Rate of Interest on NRE
2.4 Growth of Fixed Deposit, Saving Deposit,
Current Deposit
3.1 Borrowings from other bank
3.2 Total Credit and Deposit
3.3 Credit Deposit Ratio
4.1 Gross NPA'S and UCB'S
4.2 Status of NPA
4.3 Status of Gross NPA and Net NPA
5.1 Growth Rate of Individual Advances
6.1 Credit Rating Model
7.1 Analysis of Net Sales
7.2 Analysis of Capacity Utilization
7.3 Analysis of DEBT- EQUITY
7.4 Analysis of Current Ratio
7.5 Analysis of Net Profit
7.6 Analysis of Interest Coverage Ratio

Graph Description
1.1 Deposit
1.2 Loans and Advances
2.1 Credit Deposit ratio

Gross NPA of urban co-operative
3.1
Banks
3.2 Status of NPA

4.1 Total growth of Advances
4.1 Credit Rating Model
5.2 net sales
5.3 capacity utilization
5.4 current ratio
5.5 net profit
5.6 interest coverage ratio
7.3 debit equity
7.4 current ratio
7.5 net profit
7.6 interest coverage ratio

EXECUTIVE SUMMARY

Executive summary
Today bank are also a business entity like any other business, but their risk
are highly leveraged, as borrowing money from depositors runs their entire
business. The deposit collected from customers are not the bank’s own
property .If a bank conducts its business with out exercising the required
detrimental to the interest and stability of the entire financial sector and can
adversely affect the economics health of the country.
Indian banker today has innumerable challenges: worrying level of Non-

performing Assets, stricter prudential norms and diversified risks. They
should maintain adequacy of capital and reserve of the bank in relation to
loans related risks, the quality of assets and consequent guidelines for
provisioning of assets of bad and doubtful quality and recognition of income
that the assets generated so as to give the true and correct picture of the
profitability of the banks.
In order to avoid default risk the bank should manage the credit risk by
developing the rating model .the study is based on analysis of financial
statements of small scale industry and then developing a rating model to
avoid the default risk of the borrowers. The analysis is based on previous
financial reports of small scale industry .the analysis consider the credit risk
associated with the lending of loans to the small scale industry .the rating
model consist of rating of various factors such as the debt equity ratio,
current ratio, net sales increase in profit, demand analysis capacity
utilization & various other factors. The rating model is developed by
considering the credit policy of Amanath co-operative bank.

INTRODUCTION

INTRODUCTION TO CO-OPERATIVE BANKING
The beginning of co-operative banking in India dates back to 1904.

The Institutional source of credit for agriculture and related activities was
very inadequate at that time. The money lenders would provide some credit
at very high rates of interest. The co-operative banks were expected to
substitute such unorganized money market agencies and provide short and
long term credit at reasonable rates of interest. It was expected that they
would co-ordinate the activities of unorganized and organized segments of
Indian money market.
Subsequent to the adoption of economic planning in 1951, co-operative
banks were expected to play a crucial role in achieving agricultural and rural
development. Before the nationalization of commercial banks the co-
operative banks were the only substitute for money lenders and other
informal sector lenders. But after nationalization and creation of Regional
Rural Banks and NABARD their relative share declined.
Co-operative Banks in India, (with their network; spread over remote
rural areas and a large number of smaller towns), have historically played a
major role in mobilization of domestic savings for economic development
of the country. They have provided the farmers and non-farm entrepreneurs
with the needed credit support. These institutions have also contributed
significantly to private capital formation in agriculture and accelerated the
pace of distribution of farm inputs NABARD 2002).

Co-operative banks are promoted to meet the banking requirements of

consumers. They are established not only in the urban areas but also in the
rural areas. In rural areas these banks supply finance to agriculture, while in
the urban areas they are started to provide finance to buy consumer goods.
They provided short and medium term loans. They provide loans at a lower
rate comparatively. They are formed on the co-operative society principles
and as such are more service oriented than profit oriented.
Definition and meaning of co-operative banks:
In the words of HENRY WOLFF “co-operative banking is an agency which is

in a position to deal with the small means on his own terms accepting the
security he has and without drawing ion the protection of the rich.
DEVINE defines “a mutual society formed composed and governed by

working people themselves for encouraging regular saving and generating
miniature loans on easy terms of interest and repayments”.
On the analysis of above definitions, one can say that co-operative banks is
a co-operative organization where persons Voluntarily associate together as
human being on the basis of equality for the Promotion of economic interest of
themselves engaged in the banking functions of acceptance of deposits and
lending the credit. In short, co-operative bank is an institution, which performs
the banking functions of accepting deposits and borrowing of funds and lending
of credit.

FEATURES OF CO-OPERATIVE BANKS
1. They are organized and managed on the principle of co-operation self-

help and mutual help. They function with the rule of “one member one
vote”.
2. Co-operative banks perform all the main banking function of deposit

mobilization, supply of credit and provision for remittance facilities.
3. Co-operative banks are perhaps the first government supported agency in

India.
4. Co-operative banks belong to the money market as well as the capital

markets.
5. Co-operative banks accept current, saving, fixed and other types of time
deposits from individuals and institutions including banks.
6. Co-operative banks do banking business mainly in the agricultural and

rural sector.
7. Some co-operative banks are schedule co-operative banks while others

are non-schedule co-operative banks.

8. Co-operative banks also required to comply with requirement of statutory

liquidity ratio (SLR) and cash reserve ratio (CRR) liquidity requirements
as other scheduled and non-scheduled banks.
STRUCTURE OF CO-OPERATIVE BANKING IN INDIA
RBI
NABARD
SLDBs
SCBS UCBs
(PCBs)
CLDBs
CCBs
PACs
PLDBs
Branches
of SLDBs

The co-operative banking is federal in character with three tie linkages

between state, district and village level institutions. At the state level, we
have development banks (SLDBs) at the district level, the central co-
operative banks (CCBs) or the District Central co-operative banks (CLDBs),
then at the village level, the primary agricultural credit societies (PACs), and
the primary land development banks (PLDB’s and the branches of SLDBs).
The lower tiers are the members and the shareholders of the immediate
higher ties. Besides, there are Urban Co-operative banks (UCBs) or the
primary co-operative banks (PCBs) which are outside this federal structure.
Though federal in its nature the system is integrated vertically on the basis of
Functional responsibilities of various components of the system. The SCBs,
CCBs, & PACs form the short term and medium term credit structure and it
is the same in all states. The LDBs at various levels make the long term
credit structure which is not uniform in all states.
The state level co-operative banks are said to be the apex institutions
in their federal Structure. However, the apex institutions from the point of
view of promotion, supply of resources and supervision are controlled by the
government. NABARD and National Co-operative bank of India, SCBs and
SLDBs are in the immediate position between the institution just mentioned
on the one hand and the co-operative banks on the other.
The SCBs co-ordinate and regulate the working of CCBs. They act ad
custodians of surplus funds of the CCBs and supplement them by attracting
deposits and by obtaining loans from the RBI. The CCBs mobilize resources
in districts to finance their members and they also chanalise funds from the
SCB to primary credit societies.

The PACs at the village level form the base of the co-operative banking.
Although they are expected to be multi purpose societies, they mostly deal in
credit. Unlike the short and medium term credit structure, the arrangements
for the provision of long term are not uniform in all the states however a
majority states have a federal set up for this purpose also. These states have
SLDBs at the state level affiliated to primary land development banks at the
district and taluk levels. In other states the operational units below the
SLDBs are the branches of SLDBs .The SLDBs obtain funds by issuing
ordinary debentures and special development debentures. The PDBs obtain
funds mainly from SLDBs. The LDBs do not accept deposits and therefore,
they are not banks in strict sense. They give long term loans.
The UCBs are like commercial banks in their operations. The banking
commission had opined that the UCBs have not been uniformly and clearly
defined in all states.
The UCBs are normally restricted under their by-laws and confines
their business to metropolitan, urban and semi urban centers. More than one
UCB may function in the same town area. They cater mainly to the needs of
the small borrowers and owners of small scale units, retail traders,
professional and salaried class. The RBI is licensing authority for new banks
and new branches of the existing banks.
The number of UCBs increased to 2105 including 179 banks under
liquidation at the end of June 2004 compared with 1106 in 1966 the year in
which UCB were brought under the purview of Banking Regulation Act,
1949. The state wise distribution of branches shows that around 80% of
UCBs are concentrated in 5 states viz, Maharastra, Gujarat, Karnataka,
Andhra Pradesh, Tamilnadu. Only nine UCBs had a deposit size f more than

Rs 1000 crore while more of the UCBs (about 60%) had a deposit size of
less than 25 crore which is shown in the following tables.
TABLE 1.1
DISTRIBUTION OF UCBS: AT THE END – MARCH 2005
Name of the bank No of banks No of branches

Andhra Pradesh 133 299
Gujarat 5 5
Jammu & Kashmir 328 1.091
Karnataka 4 17
Kerala 300 1.052
Madhya Pradesh 63 344
Maharastra &Goa 81 108
New Delhi 639 4.333
Orissa 16 60
Punjab, Haryana,HP 13 50
Rajasthan 17 48
Tamil nadu 42 161
Pondicherry 134 180
UP&Uttaranchal 80 306
West Bengal 52 86
North Eastern states 19 26
Total 1926 8166

TABLE 1.2
DISTRIBUTION OF UCB DEPOSIT SIZE-WISE

AS ON 31 MARCH 2005
DEPOSIT SIZE NO OF BANKS

Less than Rs 10
544
crore
Rs 10-25 crore 401
Rs 25-50 crore 225
Rs 50-100 crore 177
Rs 100-250crore 127
Rs 250-500 crore 38
Rs 500-1000 crore 18
Above Rs 1000
9
crore
(SOURCE: REPORT ON TREND AND PROGRESS OF BANKING IN

INDIA)

PROBLEM STATEMENT
To study credit management process and to manage the credit risks of

the bank in order to reduce the growing default risk problem and to develop
the rating model for small scale industry. Hence this project is an attempt
which considers the factors while lending loan to small scale industry, and
rating those parameters to manage the credit risk.
OBJECTIVE OF STUDY
¾
To study the credit risk associated while lending loans to small scale
industry.
¾
To study the bank credit policy while lending to small scale industry
¾
To study the causes for increase in the NPA
¾
To study the parameters consider while lending the loans to small
scale industry.
¾
To study the objectives of Credit Management.
¾
To study the manner in which funds are raised by the bank.
Scope of the Study

Credit risk management is very important in every bank in order to
manage the default risk. The bank should develop an appropriate rating
system.
The scope of the study is limited to the credit policy of amanath bank, while
lending to small scale industries.

BANK PROFILE

Amanath Co-operative Bank Ltd had begun with just 3000 members,
now boasts of nearly 39,000 members. The 15 branches in the state
service the depositors and account holders, who exceed 2.54 lakhs in
number. Many more branches are scheduled to open shortly with the aim
of extending the area of operation in the state.
Amanath Co-operative Bank Ltd. offers ATM facility at its branches at

Brigade Road, Gangenahalli, N.R. Road, Shivajinagar, R.V. Road,
Mangalore and Gulbarga. The Bank has stepped into the new millennium
incorporating the latest development in banking and Information
Technology with a resolve to make banking with Amanath a pleasure.
The microcosm of its objective is "MASS BANKING" right from its

inception. Hence, the major thrust of the bank has been to inculcate the
banking habits among middle and lower strata of the society, mostly in
hitherto unbanked / underbanked areas. Keeping this objective in view,
Amanath Bank opened branches in such areas, which are predominantly
resided by middle/lower income groups, and the areas concentrated by
minorities and backward classes to whom commercial banks are not
easily accessible.
The bank has, therefore adopted selective policy in the opening of

branches by identifying the centre where there is a good potential for
inculcating the habit of saving amongst the people and at the same time,
providing much needed finance to these people, not only to meet their
domestic needs but also for developing their businesses, and in the
process helping them become self-sufficient. Keeping this objective in

view, Bank has introduced a scheme called 'MICRO-CREDIT'for the
benefit of poorest among poor by involving SHGs and NGOs who are
working for the economic upliftment of the poor.
The bank has 443 employees on its roll, including 82 Officers. Human
resources being the most important asset of the bank, all out efforts are made
to enhance the motivational level and efficiency of the employees. In-house
capabilities for imparting adequate training to the employees continued to be
a major strength of the bank. Training is being provided to make them more
competitive and customer oriented.
The Bank has bagged the "Best Urban Co-operative Bank" award for the
second successive year from the Karnataka State Co-operative Federation
and Karnataka State urban Banks Federation.
The Reserve Bank of India conferred the "Scheduled Status" on Amanath

Bank effective from 29th January 2000 and has included the name of the
bank in the second schedule to the Reserve Bank of India act, 1934.
Amanath Bank is the first urban Co-operative bank in Karnataka to be
awarded this prestigious status. The conferment of "Scheduled Status" will
enable it to render more service to the members, clientele and the society.
The past achievements are the source of inspiration for future progress and
prosperity.
The bank has also excelled in the field of sports by winning both the "Inter-

Bank Cricket Tournament" organized by the Canara Bank and the "Inter
Co-operative Banks Cricket Tournament" in 2000.
FUTURE PROSECTUS AND PLANS OF THE BANK:

Extension of area of Operation of the Bank to the entire State of
Karnataka

Opening of branches at all district headquarters and minorities
concentrated centers.

Installation of ATMs for better customer service.

Introduction of more value-added services such as Home Banking,
Tele Banking such as Home Banking, Tele Banking
Service, Networking Services and E-banking

Expansion of credit for Medium Scale Industries

Foreign Exchange business.

Opening of "Ladies Branches" in minorities concentrated residential
areas.

Innovative schemes for financing priority sector/weaker section.

Opening of currency chest and small coin depot.

Launching of Mobile Banking.

TABLE 2.1
Financial Position of Bank
PARTICULARS POSITION AS ON
30.6.1990 31.3.1995 31.3.1999 31.3.2000 31.03.2001 31.03.2002 31.03.2003
Paid-up Capital 82 125 209 247 428.09 531.80 526
Reserves 179 784 1617 2017 3047.50 3917.00 2427
Deposits 2715 6500 20044 29293 41313.35 48895.70 43965
Advances 1895 4064 10578 14663 23631.61 30833.77 29707
Working 3300 8160 23372 33335 47505.28 56185.84 50561
Capital
Profits 65 191 506 607 712.74 425.94 247
TABLE 2.2
RATE OF INTEREST ON TERM DEPOSITS
RATE OF INTEREST
PERIOD
Up to Rs. 15 lakhs Over Rs. 15 Lakhs
Senior Senior
Citizens Citizens
31 days - 90 days 5.25% 5.75% 5.75% 6.25%
91 days - 180 days 6.00% 6.50% 6.50% 7.00%
181 days to 1 year 6.25% 6.75% 6.75% 7.25%
Above 1 year up to 6.50% 7.00% 7.00% 7.50%
2 years
Above 2 years up to 6.75% 7.25% 7.25% 7.75%
3 years
Above 3 years 7.00% 7.50% 7.00% 7.50%

TABLE 2.3
RATE OF INTEREST ON NRE DEPOSITS
Above 1 year up to 2
4.00%
years
Above 2 years up to 3
4.70%
years
NOTE: S.B & NRE S.B @ 3.50%

PRODUCT PROFILE

Amanath co-operative Bank offers various Deposit Schemes to suite
different customer profile of the society. Check here of such schemes and
click more info for more detailed information of respective schemes.
Fixed Deposit Cumulative Deposit

Savings Bank Accounts
Accounts Accounts
Khushal Deposit
Rozan Bachath Deposits Current Accounts
Accounts
Flexi Deposits NRI Accounts
FIXED DEPOSIT ACCOUNTS

This scheme will enable the depositor to fund his liquid cash for period of
time enabling him to get attractive income. An individual, by a guardian on
behalf of the Minor, Partnership Associations, Trusts, Associations,
Societies and Corporate bodies, can open this account.
KHUSHAL DEPOSIT ACCOUNTS

This is an interesting scheme, which facilitates reinvesting the interest
earned over a period of time and also ensures the liquidity. Interest is
compounded and calculated on quarterly basis and added to original deposit.
Individuals, by a guardian on behalf of the Minor, can open this account
Trusts, Associations, Societies and companies for a maximum period of ten
years.
CUMULATIVE DEPOSIT ACCOUNTS
This scheme ideally suits monthly savings may be in small accounts but
resulting in big accumulation of funds over the period of time. An
individual, by a guardian on behalf of the Minor, can open this account

Trusts, Associations, Societies and companies for a maximum period of ten
years.
ROZAN BACHATH DEPOSITS
This scheme is aimed at savings on a daily basis from small amount such as
Re. 1/-, which is collected at the doorstep of depositor. An individual, firm
and partnership to have a savings generated from daily income subject to
maximum Rs.1000/- a day can open this account.
SAVINGS BANK ACCOUNTS
Savings Bank Accounts provides the scope for saving of money at attractive
terms even with small amounts with a convenience of withdrawing at your
pleasure. This account can be opened by an individual, jointly with another
individual, by a guardian on behalf of the Minor, Trusts, Associations and
Societies.
CURRENT ACCOUNTS
The Current Accounts are opened to meet needs of the business community
involving large transactions of business nature. An individual, a firm,
Partnership Associations, Trusts, Societies and Companies, can open this
Account. This account can be opened by an individual, jointly with another

individual, by a guardian on behalf of the Minor, Trusts, Associations and
Societies.
FLEXI DEPOSITS
This scheme will enable the depositor / Investor to fund his liquid cash for
period of time enabling him to get attractive income and also investment for
a secured future. This account can be opened by an individual, jointly with
another individual, by a guardian on behalf of the Minor, Non-resident
individuals, Associations, Trusts and Corporate bodies.
Graph 1.1
DEPOSITS

Graph 1.2
LOANS /ADVANCES
LOANS AND ADVANCES OFFERED BY THE BANK

TABLE 2.4
Business Loans To traders, workshop, hotels

and other business Ventures.
Industrial Loans To start small scale and medium
scale Industries.
Vehicle Loans 75% loan against the cost of
vehicle (two, three and four
wheeler) with repayment span as
per repayment capacity.

Personal Loans For petty trade, education,

housing, marriage and other
ceremonial purposes.
Housing Loans For construction /acquisition of

homes Repairs, renovation etc
Consumer Loans For purchase of household articles

like T.V, Fridge, Furniture,
computer etc
Professional Loans For Doctors, Engineers and

Chartered Accountants etc to set
up their offices
For Graduates, Post graduates and

Educational Loans professional Courses

RESEARCH METHODOLOGY

Research Technique
The research method adopted is analytical research .The study required

analysis of financial statements, ratio analysis, debt coverage ratio interest
coverage ratio, and turn over of the company, efficiency & capacity
utilization of the company.
Purpose of the Study
The main purpose of this work is

o To study the parameters required while granting the loan to small
scale industry which will help to minimize the NPA problem of the
bank, and to find out as well as suggest the remedial measures.
o To understand the factors which influence in the rise of credit risk
o To understand the importance of credit risk management with the
practical orientation.
o The bank can consider these suggestions to decrease the default risk
problem. There by developing a rating system for the small scale
industry.
Tools of the Study

The tools used conducting research study is through analysis of
financial statements and personal interviews. The interview is framed with
both open ended and close-ended questions.

Sampling Technique:
The sample technique used in this project is of the convent sampling where
the sample are selected as per the convince, for which the entire financial
data was available to analyses all the financial statement.
STATISTICAL ANALYSIS
In the analysis statistical tools like simple percentages and ratios are
extensively used.
Data Collection Technique:
Primary data: Interview with employee of amanath co-operative bank in

particular to the credit management department.
Secondary data: The banks previous records for lending to small scale
industries. The financial report of small scale industries
Limitations of the Study
The research project is aimed at analysing the credit risk, and analysis
financial statement of small scale industry’s and develops a credit rating
system at Amanath co-operative Bank.
There are several shortcomings, which are listed below:

1) The study is confined to only, Amanath co-operative Bank Bangalore
and therefore the results and conclusions of study may not be
applicable to other banks.
2) The study size is confined to 10 financial reports of small scale
industry due to time constraint so an extensive research could not be
undertaken.
3) Analysis is done on the assumptions that financial data obtained is
accurate.
4) The study is limited only to ACBL.
5) The study is limited to information provided by the bank.
6) In depth study was not done.

REVIEW OF LITERATURE
Credit Risk and NPAs
Quite often credit risk management (CRM) is confused with managing non-
performing assets (NPAs). However there is an appreciable difference
between the two. NPAs are a result of past action whose effects are realized
in the present i.e. they represent credit risk that has already materialized and
default has already taken place.
On the other hand managing credit risk is a much more forward-looking

approach and is mainly concerned with managing the quality of credit
portfolio before default takes place. In other words, an attempt is made to
avoid possible default by properly managing credit risk.
Considering the current global recession and unreliable information in

financial statements, there is high credit risk in the banking and lending
business.
To create a defense against such uncertainty, bankers are expected to

develop an effective internal credit risk models for the purpose of credit risk
management.
Credit risk is most simply defined as the potential that a bank borrower or
counterparty will fail to meet its obligations in accordance with agreed
terms. 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 individual credits or transactions. Banks
should also consider the relationships between credit risk and other risks.
The effective management of credit risk is a critical component of a
comprehensive approach to risk management and essential to the long-term
success of any banking organization.
For most banks, loans are the largest and 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. Banks are
increasingly facing credit risk (or counterparty risk) in various advances.
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
The sound practices set out in this document specifically address the
following areas:
¾
Establishing an appropriate credit risk environment;
¾Operating under a sound credit granting process;
¾Maintaining an appropriate credit administration, measurement and
monitoring process;
¾
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,
A further particular instance of credit risk relates to the process of settling

financial transactions. If one side of a transaction is settled but the other
fails, a loss may be incurred that is equal to the principal amount of the
transaction. Even if one party is simply late in settling, then the other party
may incur a loss relating to missed investment opportunities.
Settlement risk (i.e. the risk that the completion or settlement of a financial
transaction will fail to take place as expected) thus includes elements of
liquidity, market, operational and reputation risk as well as credit risk. The
level of risk is determined by the particular arrangements for settlement.
Factors in such arrangements that have a bearing on credit risk.

CREDIT MANAGEMENT

CREDIT MANAGEMENT
“Credit allows the customer to buy now pay later”. So also credit
constitutes the major business activity of the banks i.e. lending loan and
advances. Of all the functions of modern banking, with or without security is
by far the most important function .Advances comprise a very large portion
of total bank assets and forms to backbone of very bank structure. The
strength of the bank is thus primarily judged by the soundness of its
advances. A wise and prudent policy in regard to advances is considered an
important factor inspiring confidence in the depositors and the prospective
customer of a bank.
Advances not play an important role in gross earnings of banks,
but also promote the economic development of the country. All type of
business activity including trade, industry and agriculture depend on bank
finance in one form or other. Banks by canalizing accumulated savings of
the nation into productive uses help both depositors and borrowers. Bank
assists in creating more avenues of employment and thus helps in raising the
standard of living of the people.
Creditability of a bank is one of the most important criteria in
establishing the credit-worthiness of a bank. Loans and advances constitute
lending. Loans form the major business activity of a bank and they need to
be liquid and easily realizable as the bank is obligated to repay the
depositors as and when they are due for payment. Major part of the bank’s
income is earned from interest on the advances .So there is a need for the
proper management of loans and advances.

MEANING OF CREDIT MANAGEMENT
CREDIT MANAGEMENT can be defined as management of loans and
advances in Banks.
In other words credit management means successfully managing the credit

by paying the debt obligations on time for the amount required.
FUNDS FOR LENDING
If we examine the Balance sheet of a bank, we would observe that the

main
Sources of funds available for lending and investment are as follows:

Deposits of all types – fixed, current, saving and recurring

Borrowings from other banks mostly from RBI

Undistributed profit

Paid-up-capital

General reserves and other resources

Re-finance loans from the IDBI and NABARD
FORMS OF BANK LENDING
Banks offers different kinds of borrowing facilities to customers for

various purposes according to security, maturity, method of payment which
is highlighted below:
LOANS: A loan account represents one way of lending money to a

customer. In case of loan, the banker advances a lump sum for a certain

period at an agreed rate of Interest. The entire amount is paid either in cash
or by credit to his current account, which he can draw at any time. The
interest is charged for the full amount sanctioned whether he draws the
money from his account or not. To this extent, loan account loan account
borrowing is more costly than overdraft.
OVERDRAFT: Overdraft is an arrangement between a banker and his

customer by which the latter is allowed to withdraw over and above his
credit balance in the current account up to an agreed limit. This is only a
temporary arrangement usually granted against securities which may be
personal or tangible.
CASH CREDIT: A cash credit is an arrangement by which the customer is

allowed to borrow money up to a certain limit. The customer need not draw
the sanctioned amount at once but draw the amount as and when required
and can save the interest by reducing the debit balance whenever he is in a
position to do so. They are granted against personal security.
BILLS DISCOUNTED: Bills, maturing with in 90 days are discounted by

banks for approved parties. It constitutes a clean advance against two or
more signatures of independent parties, one that of endorser and the other
that of the drawer. Banks rely on credit-worthiness, standing and means of
the endorser.
BILLS PURCHASED: Bills, clean or documentary are sometimes

purchased from approved customers in whose favor regular limits are
sanctioned. In case of documentary bill, the drafts are accompanied by

documents of title to goods such as railway receipts or bill of lading. Before
granting a limit the bankers satisfy himself as to the credit-worthiness of the
drawer. Sometimes banks verify the financial standing of the drawers of the
bills particularly when the amounts are large.
TERM LOANS: Since sometimes, bankers have started lending large

amounts for fairly long periods to industries and agriculture on the security
of fixed asset term loan basis. Such loans are re-payable by installment over
a number of years ranging from 3 to 10 years and some times more. Banks
extended term loans for acquiring fixed assets by their customers. Banks
normally ask for project to understand the cost of project, source of finance,
fund/cash flow estimates for the period.
CREDIT PLANNING
Credit planning has emerged as a major instrument for planned

allocation of credit among the various sectors and projects that have been
considered necessary for the allocation of scarce resources in accordance
with planned priorities.
The basic objective of credit planning is to guide investment and output
along the lines postulated in the development planning by RBI .The macro
level national credit plan is linked with micro level credit budgets of banks.
For the implementation of national level credit plan formulated at the

macro level , it becomes necessary to disaggregate in terms of its various
components like deposit mobilization , credit expansion , priority sector

lending so that individual banks should know how exactly each bank fits
into the national credit plan .
In-fact credit planning is a two way process:
¾
Individual bank’s credit plan should feed the process of credit plan
formulated at national level.
¾
Once the national plan is finalized individual banks should implement
it in terms of its various components.
Based on their experience and judgment banks formulate their own credit
plan in the prescribed preformed. The implementation of the credit plan
is largely the responsibility of individual banks for the realistic estimation
of available resources for lending mainly in the form of mobilization of
deposits. While preparing the credit plan and making credit allocation, a
bank has to consider all the quantitative and qualitative aspects as
summarized below:
1. The resources available for deployment have to be gauged from expected

mobilization of deposits, the charge on such deposit accretion by way of
Cash reserves, statutory requirement and net funds availability.
2. Funds required to meet the statutory obligations deducting the liquid
assets from the total estimated demand and time liabilities we can find
out the funds for lending
3. In estimating the total credit, funds are allocated for sectoral employment
and the balance should be embarked for different segments of borrowers
like industry, trade and commerce.

4. Each branch of bank will then prepare the annual credit plan for
deployment Credit in each of the villages in its own service area.
5. The annual credit plan should reflect both the needs and potentialities of
the Area on the basis of the intimate knowledge gained by the branch
manager through the survey.
6. The branch manager will take a note of the lending programmer, PLDB’s
while finalizing their own credit plans.
7. A list of borrowers is to be obtained to avoid double financing and
emphasis has to be on agriculture and allied activities.
8. The annual credit plans prepared by all the branches in a block together
with the lending programmes of co-operatives and the primary sector
activities Proposed to be financed are to be consolidated into block credit
plan.
9. While financing the credit proposals, in case of any minor shortfalls, the
RBI can be approached for stand-by and discretionary refinance limits.
CREDIT POLICY
According to the preamble of RBI Act of 1934, the main functions

of RBI are to regulate the issue of bank notes and keeping of reserves
with a view to secure monetary stability and generally to operate the
currency and credit systems of the country to its advantage . Credit policy
can be looked upon as a short term policy instrument to make
connections in the economy as it progresses.
It is customary for the Reserve bank to announce the credit policy
for the first half of the fiscal year. The credit policy indicates the current
economic scenario while at the same time indicates the areas where credit

policy initiatives are required. It also specifies the various policy
measures to be indicated by the reserve bank over the next six months.
The credit policy measures may include some or all of the following
measures depending upon the prevailing situations:

Reserve Bank’s expectations of deposit growth and to achieve the
targeted growth rate.

Measures to control liquidity in the banking system which may
include CRR, SLR and curtailment of refinance facilities.

Changes in bank deposit and lending interest rate and their effect
on savings and deposit mobilization, priority sector lending,
investment and bank profitability.

Measures to promote agricultural growth and rural development.

Changes in re-financing and bills re-discounting facilities.
So, also individual banks must also prepare their own credit policy in
conformation with the guidelines issued by RBI. A bank’s credit policy is of
a. Tight or Restrictive
b. Liberal or Non restrictive
CREDIT STANDARDS
If credit standards are relaxed it means more credit will be extended

while if standards are tightened less credit will be extended. The written
policy states the type of loans the bank considers desirable. Desirable loans
routinely include the granting of short term loans to business customers in

the trade area to the extent that resources and opportunities permit. The
type of loans to be avoided should be mentioned. It should indicate both
desirable and unacceptable types of collateral.
It should further indicate circumstances in which unsecured lending is
prohibited. The loan policy should establish lending limits for all loan
officers and loan committees.
CREDIT ANALYSIS AND CREDIT INVESTIGATION
Besides establishing credit standards a bank should develop

procedure for evaluating credit applicants. The basic aspects of credit
policies are credit analysis and credit investigation.
CREDIT ANALYSIS is the process of assessing the risk of lending

to a business or an individual. The so called credit risk must be evaluated
against the benefits the bank expects to derive from making a loan. Credit
risk is primarily related to the quality of the bank’s loan portfolio and the
bank’s delivery mechanism. a banks risk exposure is determined by its
portfolio of its assets, liabilities and capital. Credit risk is the risk that the
counter party will to perform on an obligation to the bank Credit risk
constitutes the critical portfolio which has to be managed well by the
banks.
Credit risk assessment has both quantitative and qualitative

dimensions, the qualitative dimension of risk are generally more difficult
to assess. The two basic steps involved in this process are:

1. Obtaining Credit information
2. Analysis of credit information
OBTAINING CREDIT INFORMATION:
The first step in credit analysis is obtaining credit information which

forms a basis to evaluate the credit worthiness of a customer. The sources of
information may be:
a. Internal b. External
INTERNAL:
Banks usually require their customers to fill various forms and
documents giving details of its financial operations .They are also require to
furnish trade references with which banks can have contacts to judge the
credit worthiness of the customer. Another source of credit information is
derived from the records of the banks contemplating on the extension of
credit .It is likely that a particular customer may have enjoyed credit facility
in the past , in that case the bank would have information on the behavior of
the customer in terms of the historical payment pattern. But this type of
information may not be sufficient and may therefore have to be
supplemented by information from other sources.
EXTERNAL:
The second source of information is external. The availability of
Information from this source to assess the credit worthiness of customers
depends on the development of institutional facilities and industry practices.
In India the external sources of information is not developed as much as

industrially developed countries of the world. Depending upon the
availability the following sources may be employed:
(i) Financial Statements
(ii) Bank Reference
(iii) Trade Reference
(iv) Credit Bureau Report
ANALYSIS OF CREDIT INFORMATION

Once the credit information has been collected from different sources it
should be analyzed to determine the credit worthiness of the applicant.
Although these are not established procedure to analyze the information the
firm should cover two aspects:
1 Quantitative
2. Qualitative
QUANTITAVE: The assessment of the quantitative aspect is based on the

factual information available from the financial statements the past record of
the firm. The first step involved in this type of assessment is to prepare
ageing schedule of the accounts payable of the applicant as well as calculate
average age of the accounts payable. The exercise will give an insight into
the past records of the customer.
Another step involved in analyzing the credit information is through
ratio analysis of the liquidity, profitability and debt capacity of the applicant.
These ratios should be compared with the industry average. More over trend
analysis over a period of time would reveal the financial strength of the
customers.

QUALITATIVE:
The quantitative assessment should be supplemented by a qualitative

interpretation of the applicant’s credit worthiness .The su bjective judgment
cover aspects relating to the quality management. Here the reference from
other suppliers, bank reference and specialist bureau report would form the
basis for the conclusion to be drawn. In the ultimate analysis the decision
whether to grant credit to the applicant and what amount to extend will
depend upon the subjective interpretation of his credit standing.
After obtaining and analyzing the credit information the firm will get
an idea about the type of the customer, whether new or existing, the
customer’s business line, background and related trade risk and these data
should be promptly gathered.
It finally helps to classify the customer into several credit categories:
9
Completely reliable customer
9
Highly reliable customer
9
Slightly reliable customer
9
Doubtful customer
Unnecessary delay in responding to the customer request can prove to

be detrimental and should be informed about the decision taken by the bank
whether he will be granted credit or not.

FOLLOW-UP SUPERVISION AND CONTROL OF BANK CREDIT
No doubt, credit disbursals are made by banks after careful evaluation

and appraisal of loan proposals to determine their ‘bank ability’ on the basis
of principles of bank of the lending banker is to follow-up and supervise the
use of bank credit to verify First, whether the assumptions on which lending
decision was taken continue to hold good both in regard to business
operations and environment and second whether the end use is according to
the purpose for which it was given.
When money has been lent, the bank can reduce the risk of not getting
repaid by checking up on how the money has been used and what the
customer is doing about repayment. Any diversion of funds and deviation by
the borrowers from terms and conditions stipulated by banks has to be
noticed and timely action has to be taken. As such, the banker has to be
cautious and guard against any misuse of credit facilities. Loans -made
successfully should be repaid according to their terms and conditions.
It has been said that a bank “never” makes a bad loan – a loan goes
bad after it has been made. So it is very necessary to take necessary
precaution before accepting the proposal for credit and at the same time it is
also necessary to supervise and control after loan is disbursed to the
customer.
ADVANCES
There are 2 types of Advances given. They are:-
• Secured Advances

• Unsecured Advances
Secured Advances
The advances are granted against security of some property. Security
may be in the form of Hypothecation, Pledge or Mortgage.
The loans are sanctioned against the following securities:-
Unsecured advances
These advances are granted against personal security which includes
the following:-
Surety loans: These loans are sanctioned to only regular members of
the bank against the personal security of one or more members. The period
of loan shall be 12-25 months for the purpose of trade, commerce and for
productive purposes such as poultry, farming, bee keeping and dairy farming
etc and up to 48 months for other purposes such as housing, education,
consumption, ceremonial purposes etc repayable monthly installments
together with interest.
Clean Overdraft/overdraft/cash credit
It is granted only to the regular members of the bank who is engaged in

bonafide trade, commerce and industry. It may be granted for such periods
as fixed by the board of directors in each case but not exceeding one year in
any case
TABLE 2.4
Growth of Fixed Deposit , Saving Deposit and Current Deposits

(In Percentage)
Saving Bank Current
YEAR Fixed Deposits
Deposits Deposits
2002 148.42 118.45 131.70
2003 118.15 125.27 98.63
2004 86.09 98.37 108.37
2005 73.90 107.24 122.05
Inference: From the table it is observed that the percentage growth of total Fixed
Deposits was148.42% during the year 20002-2003 which reduced to 73.90 percent by the
year 2004-2005.The percentage growth of total Saving Bank Deposit was 118.45%
during the year 2002-2003 which reduced to 107.24% by the year 2004-2005.The
percentage growth of Current deposit was 131.70% during the year 20001-2002 which
reduced to 122.05% by the year 2004-2005. Overall the growth rate of all types of
deposits is reducing over the years.
Table 3.1BORROWINGS FROM OTHER BANKS
YEAR NABARD KCAB KMDC
2000 --- 8.6 ---
2001 --- --- ---
2002 715.47 479.36 ---
2003 608 --- 6.25
2004 386.91 --- ---
TOTAL 1710.38 487.96 6.25

Inference: From the above table it is observed that the main source of funds
for the bank is the borrowings from NABARD.The second main source is
Karnataka State Co-operative Apex Bank Ltd (KCAB).
Credit- Deposit Ratio
Credit Deposit ratio is a measure of utilization of resources (deposits) by

banks and has a direct bearing on the size of the loan portfolio. It has
implications for the profitability of the banks. It is one of the most widely
used banking indicators for analyzing the role of banks in promoting
productive sectors and contributing to economic growth. CD ratio assumes
greater significance as an aggressive measure for gauging the effectiveness
of credit delivery system. Higher CD ratio implies for greater credit
orientation of banks.
The deployment of credit and time path of CD ratio in general is
influenced by structural transformation of the economy, the role of credit
culture and lending policy of banks have a considerable impact on the size of
the ratio.
Table3.2
Total Credit and Deposits
(Rs in lakh)
YEAR CREDIT DEPOSIT
2002 23631.61 41313.34
2003 30833.77 48895.70
2004 29707.79 43965.84
2005 22291.40 35390.97

Inference: From the above table it is observed that total credit advanced was
Rs.23631.61 lakh against total deposit of Rs.41313.34 lakh during the year
2002 which reduced to Rs.22291.40 lakh against total deposit of
Rs.35390.97 lakh by the year 2005.
GRAPH 2.1
CREDIT DEPOSIT RATIO
Credit Deposit Ratio
50000
40000
30000
Amount
20000 Credit
10000
0 Deposit
2002 2003 2004 2005
Financial years
Table no-3.3
Credit Deposit ratio
Year In Percentage
2001 50.05
2002 57.20
2003 63.06
2004 67.57
2005 62.98

Inference: From the table it is observed that the credit deposit ratio was
50.05% during the year 2002 which increased to 62.98% by the year 2005.
RATING SYSTEM

Unlike agency rating, which use public scales, internal ratings use, propriety
scales that vary across banks. Both types of rating serve as the foundation
for the internal rating based (IRB) approach of the new accord and should
play a role for differentiating credit risk of loans.
External ratings are those of debt issues, not of issuers. The ratings assigned
to senior unsecured debt are close to issuer rating since the debt default only
if the issuer does. Subordinate debt might default without a default of senior
debt. The secured debt benefits from various guarantees, acting as a shield
between the debts risk and the pure issuers credit risk. The ratings of issues
of facilities capture the severity of losses, which is combination of default
probability and expected recovery.
Rating schemes use various criteria, from qualitative factors such as

strengths and weakness of firms, up to financials of corporate borrowers.
Internal rating system should use a rating scheme isolating the various
ingredients of credit risk, default probability and recovery rates. This implies
distinguishing the intrinsic rating of barrower, the role of a supporting entity
if any the recoveries resulting from the guarantees attached to each facility.
To move back and forth from internal ratings to default probabilities, as the
IRB approach of regulatory requires, a mapping between external ratings
and internals ratings. This mapping remains conventional.
The last section explains how to move from internal ratings to default
probabilities, one of the major credit risk drivers in risk models.

EXTERNAL RATING:
The main or global, rating agencies are Moody’s, standard and Poor’s (S&P)
and Fitch. Ratings are assessments of the credit standing of a debt issue,
materialized by coded letters (Such as AAA, AA, etc) that serve essentially
the needs of investors to have a third party view on the credit risk of dent. In
additions, ratings rank risk rather than value risk.
This is a major distinction between ratings and default probabilities, the later
being a quantification of the default likelihood of a debt issuer.
Rating agencies rate public issues rather than issuers. The same issuers
usually have several debt issues rather than issuers not all of them having the
same risk. They all share the risk that the issuer defaults. However, issues
differ by seniority levels and guarantees. Senior unsecured ratings are very
close to issuer rating because they benefits from first priority repayments in
the event of default. Hence the likelihood of less is similar to the default
likelihood of the issuer. Secured debts have collateral attached so that, in the
event of default of the issuer, they benefit from the higher recoveries.
Subordinate debts are subject to claims from more senior lenders and have a
higher risk. Therefore, the credit risk varies across debt issues of the same
issuer, even though they all share the same default risk, which is specific to
the issuer because senior unsecured debt is first to be repaid and does not
benefit from any collateral other than the credit standing of the issuer, it is
possible to consider senior unsecured debt rating as issuer’s rating.

Ratings depend on the fundamental analysis under a long view. Agencies
tend to rate ‘through the cycle’ based on the long -term view of ‘strength and
weaknesses, opportunities and threat’ (SWOT) of firms. Hence, ratings do

not change frequently under normal conditions because short-term
deviations due to current conditions are not relevant as long as they do not
alter durably the credit standing of an obligor. However, agencies
continuously review their ratings on a periodical basis or under occurrence
of contingent events that affect the credit standing of an issuer.
An example of such an event is a merger or an acquisition, which changes
significantly the risk profile of corporate borrower. Rating agencies also
provide short-term rating and signal ratings under review to investor.
External ratings apply to various debt issues from: corporate firms; banks
and financial institution; sovereign borrowers (country risk); multilateral
development banks. Ratings also apply to currencies, including local
currency and foreign currency held locally and subject to transfer risk, the
risk of being unable to transfer cash out of the country. By contrast an
issuer’s rating characteristics the credit standing of an issuer and should
correlate with its default probability.
Rating from agencies exits only for issues of large listed companies. This
creates a bias when assigning default frequencies based on historical default
statistics because the sample of counter parties rated by agencies is usually
not representative of the banks, portfolios. For bank corporate loans or
market counter parties, external agency ratings are usually not available
because borrowers are medium or small businesses.

Banks need to relay their own internal rating scheme to differentiate the risk
of their exposures to these counter parties.
In general, a typical rating scales uses such general quantifications of credit
risk as ‘highest’, ‘high grade’, ‘some risk’ or vulnerable’,’ highly
vulnerable’. The quantifications of various le vels do not make fully explicit
the criteria used for rating, although all agencies provide methodology notes.
This makes sense given that there are a wide variety of criteria influencing
the credit standing of borrower.
INTERNAL RATING SYSTEM:
Internal rating system is public and is customized to each bank’s need. There
is a strong tendency towards harmonization due to the new regulations
putting the rating system in a central position for evaluation capital
requirements. Since capital requirements affect pricing, the banking industry
needs common benchmarks. Banks have exposure to all sorts of counter
parties and across industries and countries. Therefore, all banks also need
ratings for various types of entities; corporate firms; banks; country rating.
Like external ratings, internal ratings are grades assigned to borrowers or
facilities for ranking their risk relative to each other. Unlike external ratings,
the counter parties of the banks are usually non-rated entities, Such as small
or medium size businesses. Internal rating isolates the borrowers risk from
the facility risk, which depends on how secured it is. Internal ratings result
from a review of both borrowers and facility characteristics.

Typical components of internal rating system include:

¾
Borrowers risk
¾
External support from a supporting entity, typically a holding
company supporting a subsidiary.
¾
Facility risk (a facility being transaction), the equivalent to a debt
issue for public firms.
The intrinsic borrower’s risks are the risk of a corporate as a standalone

entity. The support of another entity can stonily affect the risk of the
couple ‘primarily barrower supporting entity’ facilities might benefits
from a wide spectrum of guarantees, strongly mitigating the credit risk.
Support plays a major role in enhancing intrinsic rating. The support can
be formal, for government owned companies for instance. In general,
support designates a less formal relationship linking a holding company
to its subsidiary. If the subsidiary is in the core business of the parent
company, chances are that the parent company will not let it down. To
assess support, it is necessary to assess the credit standing of the direct
borrower, that of the supporting entity and the ‘strength’ of the support.
Combining support assessment with intrinsic rating provide the
borrowers overall rating. For facilities, other factors mitigate credit risk,
mainly the seniority level and the guarantees attached to single facilities.
Hence, a well-collateralized facility might have a good rating even

though the role for banks internal system.

The risk mitigates of a facility relate directly to recovery in the event of

default. Recovery rates based on experience, type of transaction and type
of guarantee now serve as a substitute for facility ratings, sometimes
used. Chances are that these Forfeits will evolve into hard data with
historical statistics from default built up under the incentives of the
regulators.
Internal ratings of banks should ideally include:
• The intrinsic rating of the borrowers.

• In the rating of the supporting entity:
• The overall borrower rating, given intrinsic rating, the supporting
entity rating and the assessment of the support
• An assessment of the guarantees, which should be converted into a
recovery rate of loss, given default rate for capital requirement
purposes. It is desirable to differentiate recovery rates according to
the nature of guarantees.
• A rating qualifying the intensity of support of a parent company if
any.
Evidence from many banks in recent years suggests that collateral values
and recovery rates (RRs). This link between RRs and default rates has
traditionally been neglected by credit risk models, as most of them focused
on default risk and adopted static loss assumptions, treating the RR either as

a constant parameter or as a stochastic variable independent from the
probability of default (PD).
Strength and weakness competitive Intrinsic rating of borrowers.

advantages financial etc.
Third party support and credit Internal ratings of borrower

standing country risk regulations
(banks)
Guarantees: third party, collateral etc. Internal rating of facilities or

recovery date
Internal Rating System in co-operative banks base their analyses on a

company’s financial statements, turn ov er, ratios analysis, management
quality and competitive position in its industry, and seek to predict credit
performance – the servicing of debt obligations in full and on time, and
several other parameters including stress situations. This analysis is based
not only on public information, but also on private/confidential information.
Inherent in this definition of ratings is the notion that they are an ordinal
measure of risk, but not necessarily a cardinal one. Accordingly, all Credit
Rating system expresses the outcome of their assessments in the form of
symbols, such as PPP, AAA, or on a scale 20.

From an operational standpoint, the purpose of ratings is to measure credit
risk in terms of probability of default, expected losses or likelihood of timely
payments in accordance with contractual terms. Internal Rating System the
Probability of default varies with different time horizons. While agencies

have been criticized, and at times rightly so, for being vague as to the time
horizon over which they are rating, Different agencies use different concepts
of loss, although in practice the differences do not appear to affect the
ratings outcomes significantly. IRAs compare the fundamental credit
analysis on which ratings are based with market sentiment, which is
measured by quantitative indicators such as the market price of corporate
bonds and equities, price volatility, the subordinated debt price, and the
credit default swap price.
Although the recent increase in rating volatility may to some extent have
been due to an increase in economic and business uncertainty, questions
remain as to whether this uncertainty will lead the IRS to adjust the weights
they attach to different objectives – accuracy and stability – in their rating
process more actively. Assessing the performance of rating agencies with
regard to these two objectives can be done either in relation to the
methodology they use (i.e. do ratings provide an accurate and stable picture
of default risk).
Ratings provided by CRAs are a measure of the long-term fundamental

credit strength of customers, i.e. their long-term ability and willingness to
meet debt-servicing obligations. More specifically, ratings apply either to the
general creditworthiness of an obligor or to its obligations with respect to a

particular debt security (secured or unsecured, collateralized debt structures,
etc.)
RULES TO SMALL - SCALE INDUSTRIES:
MEANING TO SMALL SCALE INDUSTRIES:
The small scale unit covers any unit, engaged in Industrial Activities such
as manufacturing processing or preservation of goods, whose original
investment in plant and machinery and equipment does not exceed Rs 5
lakhs.
ADVANCES TO SMALL SCALE INDUSTRIES:
Are, considered as priority sector advance. In view its importance to the

National Economy authorities have called upon on the entire bank's for
enlarging their assistance to this sector.
Following types of credit facilities covered under small scale

Medium term Loan

Over draft

Sight letters of credits

Unsecured facilities such as clean over draft and purchase of up
country cheques.

Inland Documentary bills purchased and discounted / Advances
against bills for collection.
Before providing any credit facility, a satisfactory status report is obtained

.While compiling the report the emphasis is on technical knowledge and
experience of the proprietor / Partner / Directors in managing small scale
industrial units than on their means.

MEDIUM TERM LOAN
This facility normally is available only to a new unit for financing

purchase of plant, machinery equipment required for setting up a small scale
industrial unit. A term loan will also be considered for an existing unit
provided the loan is to be utilized for financing purchase of fixed assets
required for expansion of its capacity for production.
Before granting a medium term loan a careful scrutiny of the project and
its viability and capacity to generate sufficient surplus to enable it to meet its
obligation in due time is made. Further, we should examine the technical
feasibility of the unit with particular reference to the various items of plant
and machinery which will be purchased for !use in the factory.
Security
The security for the medium term loan will be a first charge on the
,entire fixed assets of the unit by way of mortgage by deposit of title ,deeds
and hypothecation of plant and machinery or movables.
Margin for Loan

Normally book will ask for a margin based on the cost of various items
of the fixed assets. In genuine cases, the bank will accept a reduced margin
after taking in to consideration the financial position of the promoter, his
technical knowledge and efficiency of the unit, Medium term loans are
required to be repaid within a maximum period of five to seven years in
convenient installments.
Medium term loans are required to be repaid within a maximum period

of five to seven years in convenient installments.

Disbursement of Loan
Bank will make disbursement of the medium term loan after proper
verification of the type of fixed assets acquired its values and other details
from original invoice etc., it is preferable to make direct payment to the
machinery and other supplier to the debit of the account of barrowers
account. All the above norms will equally apply where a medium term loan
is required by an existing unit for financing its expansion.
Cash Credit / Secured Overdraft facility for financing_ working_ capital

Requirement
The bank would only consider cash credit or secure overdraft facility against
the security of raw materials and finished goods on a edge basis either in
which a small portion can also be considered in serving cases under the
hypothecation of raw materials, stocks that are normally under process and
finished goods.
Where hypothecation facilities are required the bank usually insists for a
change on fixed sets to hold them as collateral security. This is being
stipulated as on additional precaution where there has no control over the
security
Small scale industries have to face stiff competition from and large
industries. It is therefore, not advisable to provide working capital facilities
which are disproportionate to the actual need of the Unit., except where,
imported items from a major portion of raw materials required, stock of raw

materials required for two months production would be considered as quite
sufficient in the case of small scale units. 'a the cost price of the raw
materials for two months, we may add one month’s wages and the normal
trade credit required to be given to the ,purchaser. Manager will then get an
idea of the actual requirements of the working capital required by the
particular until.
TABLE NO: 5.1
Growth rate of Individual Advances – Term wise (in percentage)
Short term Medium Long term

YEAR
loan term loan loan
2001 142.11 261.50 120.22
2002 100.7 97.45 383.67
2003 105.5 89.27 88.33
2004 135.36 88.33 112.13
GRAPH NO 4.1
TOTAL GROWTH OF ADVANCES
Total Grow th of Advances
500
400 short term loan
percentages
300
m edium trm loan
200
100 long term loan
0
2001 2002 2003 2004
Financial years

Credit Rating System

The credit rating system is essentially one point indicator of an
individual credit exposure and is used to identify measure and monitor the
credit risk of individual proposal. At the whole bank level, credit rating
system enables tracking the health of banks entire credit portfolio. Credit
rating models take into account various type of risks viz, financial, industry
and management associated with a borrower unit. The exercise generally
has done at the time of sanction of new borrowal account and at the time of
review/renewal of existing credit facilities. The credit rating model rates on
scale of 3 to 0.
Financial analysis:
The financial analysis considers the debt equity ratio, current ratio,
interest coverage ratio, debt coverage ratio, growth in sales, increase in
profit and positive cash flows if the standard is met then the loan is
granted. The risk each of the items is determined while granting the loan.
Market industry analysis:
This analysis consider the demand of the product if the supply is short of the
demand the this situation is said to be favorable, competitive situation is
analyzed like number of competitors, presence of big competitors in the
market is also considered, availability of input/raw material,location

advantage, technology factors, capacity utilization, and seasonality factors
are parameters which are rated in market –industry analysis.
Rating of facility:
In rating of facility the parameters which are consider are the turn over of
the small scale industry ,repayments of loans, submission of balance sheet&
profit and loss account, there commitment to term loans are rated on a scale
0-3 .
Credit rating model rating model depends on the data gathered by banks
previous records, while granting the loan to small scale industries the risk is
rated as lowest risk, satisfactory risk, and high risk. If the bank have
aggressive policy for lending then the bank lends the loans by taking high
Risk if the bank follows a defensive policy for lending then it will never lend
loans to those companies who have high risk. The bank should compare the
rating parameters for two consecutive years. If there result is favorable then
bank can make a decision of lending.
The credit rating model is developed by considering factors like whether the
company as satisfactory relationship with the bank from past 5 years
,submission of audited profit & loss statements, their repayments of loans on
time, these parameters should be consider for two consecutive years .

Credit Rating Model
For For
SCORE
PARAMETER CRITERION previous present
A FINANACIAL RISK
Below 1 3
1 to 1.50 2
1 DEBT EQUITY RATIO 1.50 to 2.50 1
Above 2.50 0
1.50
3
&Below
1.50 to 2.50 2
2 CURRENT RATIO
2.50-4.00 1
Above 4.00 0
Above 15% 4
>12% to
3
15%
>10% to
2
3 RETURN ON CAPITAL EMPLOYED 12%
>8% to 10% 1
Less than
0
8%
4 NET SALES 100% 3

>80%
2
<100%
>60% <80% 1
BELOW
0
50%
>2.5 3
2.00 to 2.5 2
5 INTEREST COVERAGE RATIO 1.99 to 1.50 1
> 1.50 0
>2 3
>1.50 to
2
2.00
6 DEBT SERVICE RATIO
1.10 to 1.50 1
<1.10 0
>20% 3
>15% <20% 2
7 GROWTH IN SALES >10% <15% 1
<10% 0
>20% 3
>15% <20% 2
GROWTH IN NET PROFIT >10% <15% 1
8 <10% 0
SUB TOTAL
BASED ON CASH FLOW STATEMENTS
For For
1 NET CASH FROM SALES
Criteria Score previous present
>5% 3
>3% TO 5% 2

0 to 3% 1
Negative 0
Above 40% 3
25% to 40% 2
2 CASH FROM LONG TERM DEBTS
10% to 25% 1
Below 10% 0
FINANCIAL RISK
LOWEST RISK =20-25

SATISFACTORY RISK=17-20
HIGH RISK=10-15
MARKET-INDUSTRY For For

C RISK Criteria previous present
1 GOOD 2 2 2
NEUTRAL 1
Market potential/demand
UNFAVOURABLE 0
situation
Diversification among HIGH 2 2 2

different MODERATE 1
2
consumer segments LOW 0
geographical spread
Monopoly Situation 3 3 3
Favorable 2
Neutral 1
Unfavorable 0
3 Competitive situation
High 2 2 2
moderate 1
inputs/raw materials low 0
4 availability
5 location issues Favorable 2 2 2
Neutral 1

Unfavorable 0
Superior 2
Adequate 1 1 1
technology
Low 0
6
Good 3 3 3
Manufacturing Satisfactory 2
efficiency Average 1
capacity utilization Below average 0
7
Not affected by 2 2 2
cyclical fluctuations
Favorable industry 1
cycle with long
term
prospects
Cyclicality/Seasonality Susceptible to 0
8
unfavorable
changes
in the markets/
industry
cycle
sub - total
MARKET INDUSTRY RISK
LOWEST RISK =15-18

HIGH RISK=3-5
RATING OF THE
FACILITY
2
A COMPLIANCE OF SANCTION TERMS
1 Compliance of sanction
terms
terms All sanction terms compiled with and
legally enforceable 2 2
documentation held on records
documentation held on records 1
only 2nd charge not registered 0
EM not completed
Timely Submission 2
Submitted within 30 days from due
Submission of stock
date 1
statements /QPR
Belated Submission beyond 30 days 0 0
2
Submission of audited submitted within 3 months from the
closure of the account 2
Balance sheet &Profit submitted within a period of >3 months
&loss <6 months from the 1
a/c &financial data in
CMA forms closure of the account 0 0
delay >6 months
3
Repayment schedule for Upto 5 yrs 0 0
Terms Loans only >5 yrs 2 NA
4
TOP Class
no occasion of excess and return of
cheaques 3 3
satisfactory rare occasions of excess
5 &returns of cheaques 2
Operations in the account
Average occasional excesses &return
of cheaques 1
Below Average frequent excess
&return of cheaques 0
Turnover Commensurate with sales 3 3

Turnover >70% to
<90%Commensurate with sales 2
6 Operations in the account
Turnover >60% to <70% 1
Turnover<60% 0

Timely payment 3
Commitments under Irregular/ overdue unto one month
DPGL/ from due date 2
7 Term loan and payment of Irregular /overdue beyond one month
int up to 2 months 1
cash credit /overdraft,etc Delayed beyond 2 months 0
TABLE NO: 3 BUSINESS CONSIDERATIONS
Having satisfactory relationship with

the bank for >5 yrs 2 2
1 Length of Relationship
the bank b/w 1 - 5 yrs 1
the bank for L<1 yr 0
Income Value to the
(Interest, >10% 2
2 commission, exchange, >8%-10% 1
etc) <8% 0
from the account as %to
total
fund based limits
RATING OF THE FACILITY
LOWEST RISK =15-19

HIGH RISK=0-5

JUSTIFICATION & SIGNIFICANCE

NON-PERFORMING ASSETS
Non Performing Asset means an asset or account of borrower, which has
been classified by a bank or financial institution as sub-standard, doubtful or
loss asset, in accordance with the directions or guidelines relating to asset
classification issued by RBI.
An amount due under any credit facility is treated as "past due" when it has
not been paid within 30 days from the due date. Due to the improvement in
the payment and settlement systems, recovery climate, up gradation of
technology in the banking system, etc., it was decided to dispense with 'past
due' concept, with effect from March 31, 2001. Acco
rdingly, as from that
date, a Non performing asset (NPA) shell be an advance where
¾
Interest and /or installment of principal remain overdue for a period of
more than 180 days in respect of a Term Loan,
¾
Interest and/ or installment of principal remains overdue for two
harvest seasons but for a period not exceeding two half years in the
case of an advance granted for agricultural purpose, and
¾
Any amount to be received remains overdue for a period of more than
180 days in respect of other accounts.

With a view to moving towards international best practices and to ensure

greater transparency, it has been decided to adopt the '90 days overdue' norm
for identification of NPAs, form the year ending March 31, 2004.
Accordingly, with effect form March 31, 2004, a non-performing asset
(NPA) shell be a loan or an advance where;
Overdue:
Any amount due to the bank under any credit facility is 'overdue' if it is not
paid on the due date fixed by the bank
Standard Assets: Such an asset is not a non-performing asset. In other

words, it carries not more than normal risk attached to the business.
Sub-standard Assets: It is classified as non-performing asset for a period

not exceeding 18 months.
Doubtful Assets: Asset that has remained NPA for a period exceeding 18
months is a doubtful asset.
Loss Assets: Here loss is identified by the banks concerned or by internal

auditors or by external auditors or by Reserve Bank India (RBI) inspection.
In terms of RBI guidelines, as and when an asset becomes a NPA, such

advances would be first classified as a sub-standard one for a period that
should not exceed 18 months and subsequently as doubtful assets.
It should be noted that the above classification is only for the purpose of
computing the amount of provision that should be made with respect to bank

advances and certainly not for the purpose of presentation of advances in the
banks balance sheet.
There was an increase in the NPA in Amanath co-operative bank since three
years as the credit risk of the customers was not properly managed by the
bank since these reason lead to develop the credit raing system in Amanath
co-operative bank
The following table shows the position of Urban Co-operative Banks as

on 31-03-04. If we examine the position of NPAs, we can identify that it
has increased from Rs 3306 crores to Rs 13647 crores which is very high
and thus there is a great need to take corrective steps to reduce them
though not eliminate them completely.
Table 4.1
Gross NPAs of UCBs as on 31-03-05
YEAR AMOUNT(IN
CRORES)
2000 3306
2001 4535
2002 9245
2003 13706
2004 13647
Source :( IBA Bulletin Special Issue January 2004)

GRAPH NO:3.1
Gross NPAs of Urban Co-operative Banks as on 31-03-05
15000
13706 13647
13000
Rs in Crores
11000
9245
9000
7000
5000 4535
3306
3000
2001 2002 2003 2004 2005
YEAR
TABLE NO: 4.2
Table Showing Status of NPAs in the bank
% of NPAs to Total
Year
Advances
2002 8.9
2003 10.73
2004 35.95
2005 53.91
Inference: From the table it is observed that the percentage of NPAs was
8.9% during the year 2002 which increased to 53.91% during the year 2005.

Status of NPAs
100
90
80
70 53.91
60 35.95
50 Total Advances
40
30 10.73 % of NPAs to total
20 8.9
Advances
10
0
2002 2003 2004 2005
Financial years
STATUS OF GROSS AND NET NPAs

(Rs in lakh)
YEAR GROSS NPAs NET NPAs
2002 --- ---
2003 4518 3311
2004 12661.61 10681.33
2005 14010.75 12019.20
Inference: From the above table it is observed that the total gross NPAs
was Rs. 4518 during the year 2003 which increased to Rs.14010.75 during
the year 2005. The Net NPAs was Rs. 3311 lakh during the year 2003 which
increased to 12019.20 during the year 2005 from profit and loss account.

DATA ANALYSIS & INTERPRETATION

TABLE NO : 7.1
Analysis of Net Sales
percentage of percentage of
Net Sales
NPA Recovery
100% 15 85
>80%
33 67
<100%
>50 < 60% 52 48
Graph 7.1
percentage of NPA
100
percentage of Recovery
80
60
40
20
0
100% >80% >50 < 60%
<100%
Inference:
This graph shows that when the small scales industries have meet 100% of
their sales then bank was able to recover loan on time of about 85% and
when the sales is below 50% there was an NPA of 52%.this indicates when
the sales increases the credit worthiness of the bower increases .

TABLE NO: 7.2
Analysis of Capacity Utilization
Capacity percentage of percentage of

Utilization NPA Recovery
>90% 12 88
75% to 90% 41 59
50% to 75% 47 53
Graph 7.2
percentage of NPA
100
percentage of Recovery
80
60
40
20
0
>90% 75% to 90% 50% to 75%
Inference:
This graph shows that when the Capacity Utilization is 90% the bank was
able to recovery loan on time of about 88% and when the capacity utilization
is below 50% there was an NPA of 47%.the capacity utilization reveal about
the turnover of the company which is a very good indicator of the paying
capacity of the borrower.

TABLE NO :7.3
Analysis of Debt Equity Ratio
Debt equity ratio
NPA Recovery
below 1 20 80
1 to 1.50 25 75
above 2.50 55 45
Graph 7.3
100
80 perc e ntage of
60 NP A
40 perc e ntage of
20 R ec ove ry
0
below 1 1 to above
1.50 2.50
Inference:
This graph shows that when the small scales industries have debt equity ratio
of 1 the bank was able to recovery loan on time of about 80% and when the
debt equity mix above 2.50 there was an NPA of 52%.this ratio is a very
good indicator of the credit worthiness of the borrower.

TABLE NO: 7.4
Analysis of Current Ratio
Current ratio
NPA Recovery
1:01 32 68
1.50 to 2.50 23 77
2.50 to 4.00 45 55
Graph 7.4
100
80 perc entage of
60 NP A
40 perc entage of
20 R ec overy
0
1:01 1.50 to 2.50 to
2.50 4.00
Inference:
This graph shows that when the current ratio of 1:1 it was not a good
indicator of credit worthiness, as the ratio keep changing and the bank was
able to recovery loan on time of only about 68%where as when the current
ratio was ranging from 1.5 to 2.5 the bank was able to recovery loan of
77%.thus the current ratio is not a good indicator of credit worthiness of the
borrower.

TABLE NO: 7.5

Analysis of Net Profit
% of
Net Profit % of NPA
Recovery
>20% 9 91
>10% to
57 43
<20%
<10% 66 34
Graph 7.5
100
80
60
40
20
0
% of NPA >20% >10% to <10%
<20%
% of Recovery
Inference:
This graph shows that when an increase in net profit was about >20% the
bank was able to recovery loan on time of about 91% and when the net profit
is below 10% there was an NPA of 66%.this indicates that when the profit
increases by 20% from the previous year the loan is paid on the time .where
as when the profit is <10% the payment is not on time.

TABLE NO: 7.6
Analysis of Interest Coverage Ratio
Interest coverage % of % of
ratio NPA Recovery
>2.5 15 85
2.00 to 2.5 28 72
<1.50 57 43
Graph 7.6
100
80
60
40
20
0
% of NPA >2.5 2.00 to 2.5 <1.50
% of Recovery
Inference:
This graph shows that when the interest coverage ratio is greater than
2.5%than then the bank was able to recovery loan on time of about 85% and
when the ratio was less than 1.50 there was an NPA of 43%.

FINDING & SUGGESTION

FINDINGS
The findings are based on the analysis of the financial statements of the
small scale industries in order to develop a credit rating model.
¾
There was NPA of about 13647 crores in the bank.
¾
The net NPA for the year 31 march 2003 was 3311 lakh and the
increased to12019.20 during the year 2005 from profit and loss
account.
¾
It is observed that the total gross NPAs were Rs. 4518 during the year
2002 which increased to Rs.14010.75 by the year 2005.
¾
There existing rating system in Amanth Co-operative bank did not
consider the rating of interest coverage ratio, and debt service ratio.
¾
The bank did not have any credit rating model to rate the small scale
industries.
¾
The bank did not manage the credit risk by getting the credit risk
information from the other bank in order to lend.
¾
The current ratio is not a very good indicator of the credit worthiness
of the borrower. Where as the debt equity ratio and the interest
coverage ratio is a very good indicator of the credit worthiness of the
borrower.

Suggestions

The board of directors should have responsibility for approving and
periodically (at least annually) reviewing the credit risk strategy and
significant credit

Risk policies of the bank. The strategy should reflect the bank’s
tolerance for risk and the level of profitability the bank expects to
achieve for incurring various credit risks.

Banks should identify and manage credit risk inherent in all products
and activities. Banks should ensure that the risks of products and
activities new to them are Subject to adequate risk management
procedures and controls before being introduced
Banks should establish overall credit limits at the level of individual

borrowers and counter parties, and groups of connected counter
parties that aggregate in comparable and meaningful manner different
types of exposures, both in the banking and trading book and on and
off the balance sheet.

Banks are encouraged to develop and utilize an internal risk rating
system in managing credit risk. The rating system should be
consistent with the nature, size and complexity of a bank’s activities.


Banks must have a system in place for early remedial action on
deteriorating credits, managing problem credits and similar workout
situations.

The bank should implement a credit rating model in order to manage
the credit risk of the borrower.

The rating should be based on financial analysis, managerial
information and the technical analysis of the small scale industries.

The bank should compare the present year and previous year analysis
of financial statements in order to verify whether there is increase in
the sales and profit before lending the loan.
Conclusion:
The project was aimed to develop credit rating model for the SSI units,
early the rating was a manual system and credit risk of the borrower was
not managed properly and hence there was an increase in NPA of the
bank .The credit rating model is designed to manage the credit risk and
minimize the NPA of the bank.

BIBLOGRAPHY


H.R.Suneja, “Management of Bank Credit” Himalaya Publishing
House

H.L Bedi and V.K Hardikar, “Practical Banking Advances”, UBS
Publishers and Distributers ltd

Vasant Desai, “Indian Banking”, Himalaya Publishing House

V.K Bhaskar Rao , “Management of NPAs in the Bank- Banking
Finance” Feb 2004

www.amanath-bank.com

ArshiaNoorie-0375-Credit MGMT at Amanath Co-Operative Bank

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CREDIT MANAGEMENT & INTERNAL RATING SYSTEM

FOR SMALL SCALE INDUSTRY AT AMANATH

Submitted in partial Fulfillment of the requirements for

Under the Guidance of:

Mr. Mansoor Dr.N.S.Malavalli

M. P. Birla Institute of Management

I hereby declare that this DISSERTATION entitled “Credit

Bangalore ARSHIA NOORIE.N

M P Birla Institute Of Management 2

I am sincerely thankful to Dr. Nagesh Malavalli, Principal M.P.Birla

I would also like to thank Mr.Mansoor, for his valuable role in

I would like to express my sincere thanks to Miss Amina Ali Shaikh

I would like to express my profound gratitude to all the staff of

BANGALORE Arshia Noorie.N

M P Birla Institute Of Management 3

CERTIFICATE BY THE GUIDE

Date: (Dr. Nagesh Malavalli)

M P Birla Institute Of Management 4

Chapter No. Particulars

Chapter 2 Problem statement

Chapter 4 Research Methodology

M P Birla Institute Of Management 5

Chapter 6 Credit Management

M P Birla Institute Of Management 6

SL.NO TABLE DESCRIPTION

1.1 Distribution of UCB'S at end of march 2005

M P Birla Institute Of Management 7

2.1 Credit Deposit ratio

3.2 Status of NPA

M P Birla Institute Of Management 8

M P Birla Institute Of Management 9

Indian banker today has innumerable challenges: worrying level of Non-

M P Birla Institute Of Management 10

M P Birla Institute Of Management 11

INTRODUCTION TO CO-OPERATIVE BANKING

The beginning of co-operative banking in India dates back to 1904.

M P Birla Institute Of Management 12

Co-operative banks are promoted to meet the banking requirements of

Definition and meaning of co-operative banks:

In the words of HENRY WOLFF “co-operative banking is an agency which is

DEVINE defines “a mutual society formed composed and governed by

M P Birla Institute Of Management 13

FEATURES OF CO-OPERATIVE BANKS

1. They are organized and managed on the principle of co-operation self-

2. Co-operative banks perform all the main banking function of deposit

3. Co-operative banks are perhaps the first government supported agency in

4. Co-operative banks belong to the money market as well as the capital

6. Co-operative banks do banking business mainly in the agricultural and

7. Some co-operative banks are schedule co-operative banks while others

M P Birla Institute Of Management 14

8. Co-operative banks also required to comply with requirement of statutory

STRUCTURE OF CO-OPERATIVE BANKING IN INDIA

M P Birla Institute Of Management 15

The co-operative banking is federal in character with three tie linkages

M P Birla Institute Of Management 16

M P Birla Institute Of Management 17

DISTRIBUTION OF UCBS: AT THE END – MARCH 2005

Name of the bank No of banks No of branches

M P Birla Institute Of Management 18

DISTRIBUTION OF UCB DEPOSIT SIZE-WISE

DEPOSIT SIZE NO OF BANKS

(SOURCE: REPORT ON TREND AND PROGRESS OF BANKING IN