1

SUMMER TRAINING PRO1ECT REPORT

ON
RISK MANAGEMENT IN BANKS
AT
AXIS BANK LTD.


Submitted by:
NIKHIL SINGH BHADAURIA
PGDM FS]
SESSION -2010-2012





INSTITUTE FOR INTEGRATED LEARNING IN MANAGEMENT
GRADUATE SCHOOL OF MANAGEMENT
GREATER NOIDA




2

DECLARATION


I NIKHIL SINGH BHADAURIA The students PGDM-FS oI IILM Graduate School oI
Management hereby declare that I have completed my project, titled ~Risk Management in
Banking Sector" in the Academic Year 2011-2012. The inIormation submitted herein is true
and original to the best oI my knowledge.





Signature oI Student
NikhiI Singh Bhadauria

3


Acknowledgement


~For any successful work, it owes its thanks to
many

The success oI any venture cannot be regarded as the result oI a single
Iactor. It requires a harmonious uniIication oI perseverance, inspiration
and motivation along with the appropriate guidance Irom the peers and
mentors. Working on this project was a great challenge as well as an
opportunity Ior me to prove my will.
I would like to sincerely thunk Mr,Sumeer Suenu runch
Munuger AXIS ANk giving me the wonderIul opportunity to work
under his able guidance and support throughout my training period
This project has been possible due to the support oI several wonderIul
individuals. In the end I would like to thank many unknown individuals,
with whom I interacted. All oI them with their due cooperation and
motivation made the completion oI this project successIul. I would like
to thank them all. I also take this opportunity to express my proIound
and sincere gratitude to IILM GSM Greater Noida Ior providing me
with the opportunity to become a proIessional.
Finally, I would like to thank the staII members oI AXIS BANK Ior
helping me during various stages oI training.





4

!REFACE

Practical training imbibes an integral part oI management studies. One
cannot merely depend upon the theoretical knowledge. It is to be
coupled with practical Ior it to be IruitIul. Classroom lectures make the
Iundamental concepts oI management clear. They also Iacilitate the
learning oI practical things. However class lectures must be correlated
with practical training in the company which will have a signiIicant role
to play in business management. To develop managerial and
administrative skills in Iuture managers, it is essential to enhance their
analytical skills and Ior this it is necessary that there is a combination oI
classroom learning with the experience oI real business environment.
The current study concerns with the comparative analysis oI Axis Bank
products and with respect to their main competitors HDFC BANK and
ICICI BANK. The report gives the insight about how to manage or
reduce the risk oI AXIS BANK and also throws light on the SWOT
analysis oI AXIS BANK.
I consider myselI lucky to get my summer training at AXIS BANK
LTD. I underwent 8 weeks oI training in FAIZABAD Irom 8th May
2011 to 25th June. It helped me to get a practical insight into the actual
business environment and provided me an opportunity to make my
management concepts clearer.
It is diIIicult to elaborate everything that I learnt during the training
However, I have elaborated a comprehensive picture oI details about
working in the Iollowing pages. I have accumulated the desired
inIormation through personal observations, study oI documents, and
questionnaire cum interviews.


5

TABLE OF CONTENTS

A kLIA1Ck S1UD

Certificate of Training..XVI

Declaration ....XVII

Acknowledgement..XVIII

Executive summaryXIX

CCMAN S1UD
1-Banking History
2-Structure oI Banking Sector.
3-Company history..
4-Swot Analysis oI Company ..
5- Board oI Directors
6-Milestones oI Company

C kCILC1
. Introduction
8. Risk Management Process.
9. Types oI Risk.
10. Steps Ior Controlling the Risk.

6

11. Optimizing the Risk Return Equation...................

D kLSLAkCn ML1nCDCLCG

12 need of SLudy
13 Cb[ecLlve of SLudy
14 Slgnlflcance of SLudy
13 Scope of SLudy
16 8esearch ueslgn
17 uaLa CollecLlon
18 1echnlques of Analysls
19 LlmlLaLlons of SLudy


E.OBSERVATION AND SUGGESTIONS

20. Major Findings oI Study
21 SuggesLlons

F. RECOMMANDATION

G. LIMITATIONS

H. REFERNCES


7





ecutive Summary

Banking ndustry which is basically my concern industry around which my project has to
be revolved is really a very complex
industry. And to work for this was really a complex and hectic task and few times felt
so frustrated that thought to left the project and go for any new industry and new
project. Challenges which faced while doing this project were following

Banking sector was quite similar in offering and products and because of that it
was very difficult to discriminate between our product and products of the
competitors.

Target customers and respondents were too busy persons that to get their time
and view for specific questions was very difficult.

Sensitivity of the industry was also a very frequent .Factor which was very
important to measure correctly.

Area covered for the project while doing job also was
very large and it was very difficult to correlate two
different customers/respondents views in a one.
Chapter 1

8

DB BANK LTD.
Every financial customer has his/her own need and
according to the requirements of the customer product
customization was not possible.

So above challenges some time forced me to leave the
project but any how did my project in all circumstances.
Basically in this project analyzed that what are the polices of bank and what type of
risk they faced and how they manage these risks and what are the difference between
Axis Bank Ltd. polices and other banks polices.























9








10



11





INTRODUCTION


Banking in ndia originated in the last decade of the 18
th
Century. The oldest bank in existence in
ndia is the State Bank of ndia, a government owned bank that traces its origins back to June 1806
and that is the largest commercial bank in the country. Central banking is the responsibility of the
Reserve Bank of ndia, which in 1935 formally took over these responsibilities from the mperial Bank of
ndia, relegating it to commercial banking functions. After ndia's independence in 1947 the Reserve
Bank of ndia was nationalized and given broader powers. n 1969 the government nationalized the 14
largest commercial banks, and again 6 next in 1980.


ARLY HISTORY



Banking in ndia originated in the last decades of the 18th century. The first banks were The
General Bank of ndia which started in1786, and The Bank of Hindustan, both of which are
now defunct. The oldest bank in existence in ndia is the State Bank of ndia, which originated in
Calcutta in JUNE 1806, which almost immediately became the Bank of Bengal. This was one of the
three presidency bank, the other two being the Bank of Bombay and the Bank of Madras, all
three of which were established under charters from the British East ndia Company. For many years
the Presidency banks acted as quasi-central banks, as did their successors. The three banks merged in
1925 to form the mperial Bank of ndia, which upon ndia's independence, became the State
Bank of ndia. ndian merchants in Calcutta established the Union Bank in 1839, but it failed in1848 as
a consequence of the economic crisis of 1848-49. The Allahabad Bank, established in 1865 and still
functioning today, is the oldest Joint Stock bank in ndia. t was not the first though. That honors belongs
to the Bank of Upper ndia, which was established in 1863, and which survived until 1913, when it failed,
with some of its assets and liabilities being transferred to the Alliance Bank of Shimla Foreign banks
too started to arrive, particularly in Calcutta, in the 1860s. The Comptoire d'Escompte de Paris
opened a branch in Calcutta in 1860, And another in Bombay in 1862; branches in Madras and
Pondicherry, then a French colony, followed. HSBC established itself in Bengal in 1869. Calcutta was
the most active trading port in ndia, mainly due to the trade of the British Empire, and so became a

12

banking centre. The first entirely ndian joint stock bank was the Oudh Commercial Bank, established in
1881 in Faizabad. t failed in 1958. The next was the Punjab National Bank, established in Lahore in
1895, which has survived to the present and is now one of the largest banks in ndia. Around the turn of
the 20th Century, the ndian economy was passing through a relative period of stability. Around five
decades had elapsed since the ndian Mutiny, and the social, industrial and other infrastructure had
improved. ndians had established small banks, most of which served particular ethnic and religious
communities.









NATIONALISATION

The next significant milestone in ndian Banking happened in the late 1960s when the ndira Gandhi
government nationalized, on 19th July, 1969, 14 major commercial ndian banks, followed by
nationalization of 6 more commercial ndian banks in 1980. The stated reason for the nationalization was
more control of credit delivery. After this, until the 1990s, the nationalized banks grew at a leisurely pace
of around
4%- also called as the Hindu growth of the ndian economy.
To understand the ndian banking sector more easily a diagram is shown regarding the name of the
bank, its numbers shown in the bracket and also the category of bank under which it falls.






13




STRUCTURE OF THE ORGANISED
BANKING SECTOR IN INDIA


14






BACKGROUND

Axis Bank was the first of the new private banks to have begun operations in 1994, after the
Government of ndia allowed new private banks to be established. The Bank was promoted jointly by the
Administrator of the specified undertaking of the Unit Trust of ndia (UT - ), Life nsurance Corporation of
ndia (LC) and General nsurance Corporation of ndia (GC) and other four PSU insurance companies,
i.e. National nsurance Company Ltd., The New ndia Assurance Company Ltd. The Oriental nsurance
Company Ltd. and United ndia nsurance Company Ltd. The Bank today is capitalized to the extent of
Rs. 359.44 crores with the public holding (other than promoters) at 57.74%. The Bank's Registered
Office is at Ahmadabad and its Central Office is located at Mumbai. The Bank has a very wide
network of more than 838 branches and Extension Counters (as on 31st May 2009). The Bank has a
network of over 3674ATMs (as on 31stMay 2009) providing 24 hrs a day banking convenience to its
customers. This is one of the largest ATM networks in the country. The Bank has strengths in both retail
and corporate banking and is committed to adopting the best industry practices internationally in order to
achieve excellence.



15









MISSION AND VALUS


Mission of Ais Bank


Customer Service and Product nnovation tuned to diverse needs of individual and corporate
clientele.
Continuous technology up gradation while maintaining human values.
Progressive globalization and achieving international standards.
Efficiency and effectiveness built on ethical practices.





16

Core VaIues of Ais Bank


Customer Satisfaction through

Providing quality service effectively and efficiently
"Smile, it enhances your face value" is a service quality stressed on
Periodic Customer Service Audits

Maximization of Stakeholder value

Success through Teamwork, ntegrity and People.


!romoters

Axis Bank Ltd. has been promoted by the largest and the best Financial nstitution of the country, UT.
The Bank was set up with a capital of Rs. 115 crores, with UT contributing Rs. 100 crores, LC - Rs. 7.5
crores and GC and its four subsidiaries contributing Rs. 1.5 crores each.


















17

TH COM!ANY AND ITS
!RODUCT LIN


Axis Bank Limited (Axis Bank) offers a broad range of retail & corporate banking products and services
in ndia. The bank was earlier known as UT Bank Limited. The company offers several products
including accounts, deposits, cards, credits, advisory services, treasury, mutual funds, cash
management, international banking and transaction services. The bank operates 827 branches and
extension counters, as on 31 March 2009. Axis Bank has operations in 29 States and 3 Union Territories
in ndia. The bank has a network of 3595 ATM machines. Axis Bank is the third largest ATM network
provider in ndia. t also has branches in China, Hong Kong, Singapore and UAE. The bank is
headquartered at Mumbai in ndia. The company reported revenues of (Rupee) NR 108,291.13 million
during the fiscal year ended March 2009, an increase of 54.59% over 2008. The operating profit of the
company was NR 36,801.90 million during the fiscal year 2009, an increase of 42.35% over 2008. The
net profit of the company was NR 18,129.3 2million during the fiscal year 2009, an increase of 71.17%
over 2008. Axis bank offers banking and financial services in ndia. The company's services and Brands
include the following:

Services:
Personal Banking
Accounts
Deposits
Loans
Cards
nvestments
nsurance
Payments

Other Services:
Corporate Banking:
Accounts
Credit
Capital Market
Treasury
Cash Management Services
Govt. Business



18

NRI services:

Accounts
Deposits
Remittances



COM!TTORS OF AXIS
BANK

Central bank of ndia

Corporation bank

HDFC bank limited

CC bank limited

State bank of ndia

Union bank of ndia

Bank of Baroda









19






Ranking as per Customer Services






20














21

SWOT ANALYSIS




22

Strengths

O Competitive and proIitable banking Iranchise
O High level oI services
O Knowledge oI Indian Market
O S:pported by vario:s promoters
Servicesupdated by latest technology

Weakness

O Competitiveness oI cost oI services
O Market capitalization is low
O !ositioning
O &TI Ira:d
O C:stomer service

Opport:nities

O Large retail and corporate market
O Wide scope in the r:ral market
O Competitive banking services
O Foreign Markets




23

Threats

O stablished Governments Banks
O stablished and growing MNC Banks
O Advent and growth oI Ioreign Banks
O InIlation and rising lending rate



















24



BOARDS OF DIRECTORS
Director
Name


Designation



Adarsh Kishore Chairman
Shikha Sharma
Managing Director & ChieI Executive
OIIicer
S K Chakrabarti Deputy Managing Director
V R Kaundinya Director
R N Bhattacharyya Director
S K Roongta Director
J R Varma Director
K N Prithviraj Director
M V Subbiah Director

25



















Prasad R Menon Director
R B L Vaish Director
R H Patil Director
Rama Bijapurkar Director
S B Mathur Director
P J Oza Company Secretary

26



MiIestones



Mar-08 Axis Bank launches Platinum Credit Card, India's Iirst EMV chip b
Dec-07 Axis Bank gets AAA National Long-Term Rating Irom Fitch Ratin
Sept-07 Axis Bank ties up with Banque Privee Edmond de Rothschild Europ
Management
July-07 &TI Bank re-brands itselI as Axis Bank
July-07 &TI Bank successIully raises &SD 1050 million
July-07 &TI Bank ties up with Tata Motors Ltd. Ior Car Loans
June-07 &TI Bank's expansion into Asia supported by FRS
May-07 &TI Bank launches 'Spice Rewards' on the bankcards - India's Iirst-
supported rewards program
April-07 &TI Bank opens a Financial Services Category I Branch in the DIFC
Mar-07 &TI Bank ties up with Hyundai Motor India Ltd. Ior Car Loans
Mar-07 &TI Bank ties up with IIFCL to provide Iinance Ior inIrastructural p
Mar-07 &TI Bank launches Car Loans in association with Maruti &dyog Lt
Mar-07 &TI Bank opens a Full License Bank Branch in Hong Kong
Feb-07 Finance Minister Shri P. Chidambaram Launches Shriram - &TI Ba
Card Exclusively For Small Road Transport Operators (SRTOS)
Feb-07 &TI Bank announces the launch oI its Meal Card
Feb-07 &TI Bank announces the launch oI its GiIt Card
Feb-07 LIC Premium payment now through &TI Bank Branches
Jan-07 &TI bank opens Priority Banking branch in Mumbai and Kolkata
Nov-06 &TI Bank opens Priority Banking Lounge in Pune
Sep-06 &TI Bank launches operations oI &BL Sales, its Sales Subsidiary -
oIIice in Bangalore
Aug-06 &TI Bank announces the launch oI its Credit Card Business
Aug-06 &TI Bank becomes the Iirst Indian Bank to successIully issue Forei
Capital in the International Market
Aug-06 &TI Bank Business Gold Debit Card MasterCard Launched - Desig

27

spending by SMEs and selI employed proIessionals
Aug-06 &TI Bank announces the scheme oI issuance oI "Senior Citizen ID Card" in asso
with Dignity Foundation
Aug-06 &TI Bank rolls out its 2000th ATM
July-06 &TI Bank opens Representative OIIice in Shanghai
May-06 &TI Bank and LIC join hands to launch an Annuity Card Ior group pensioners o
May-06 &TI Bank ties up with Geojit Financial Services to oIIer Online Trading service
customers
Apr-06 &TI Bank opens its Iirst international branch in Singapore
Jan-06 &TI Bank and &TI Mutual Fund to launch a new service Ior sale and redemption
Iund schemes through the Bank's ATMs across the country
Dec-05 &TI Bank wins International Financing Review (IFR) Asia 'India Bond House' a
the year 2005
Oct-05 &TI Bank extends banking services to the rural milk producers in Anand and Kh
districts in Gujarat
July-05 &TI Bank and Visa International launch Mobile ReIill Iacility - Anytime, Anyw
Paid Mobile ReIill Ior all Visa Cardholders in India
May-05 &TI Bank and Bajaj Allianz join hands to distribute general insurance products
Apr-05 &TI Bank launches Smart Privilege - a special bank account designed Ior wome
Mar-05 MTNL ties up with &TI Bank Ior payment oI telephone bills through the Bank's
network
Mar-05 &TI Bank gets listed on the London Stock Exchange, raises &S$ 239.30 million
Global
Mar-05 Depositary Receipts (GDRs)
Feb-05 &TI Bank appointed by Government oI Karnataka as the sole banker Ior the Ban
(B1) project
Feb-05 &TI Bank launches a powerIul version oI Kisan Credit Card
Jan-05 &TI Bank ties up with Remit2India to launch the Remittance Card
Mar-04 &TI Bank enables premium payment oI LIC policies through its ATMs.
Feb-04 Bilateral arrangement between State Bank oI India (and its 7 associate member b
&TI Bank. comes into Iorce with the commencement oI operations (as on 3rd Fe
oI the combined network oI over 4000 ATMs
Feb-04 &TI Bank (by pursuing a proactive strategy oI Iorging bilateral agreements and b
progressive player in the multi-lateral consortiums Ior shared ATM network) oII
customers access to over 7000 ATMs across the country - the largest to be oIIere
bank in India so Iar.
Dec-03 Bank inaugurated its ATM at Thegu near the Nathula Pass in Sikkim. This ATM
highest altitude in India.
Sep-03 The Bank's ATMs across the country crosses the thousand mark

28

Sep-03 Bank launches the Travel Currency Card.
Aug-03 The Bank's Debit Card crosses the one million mark.
Aug-03 Total Advances cross Rs 7,000 Crore.
May-03 Bank declares a net proIit oI Rs 192.18 crores Ior FY03, a growth oI 43 over t
year
Mar-03 Bank signs Agreement with Employees Provident Fund Organization (EPFO) Io
disbursement oI Pension
Mar-03 Bank crosses the 800 ATM mark
Mar-03 The Bank issues 3,83,62,834 Iully paid up equity shares totaling to Rs. 164.00 cr
through a
Mar-03 PreIerential oIIer to LiIe Insurance Corporation oI India (now constituting 13.54
Mar-03 the Bank's expanded equity), Citicorp Banking Corporation, Bahrain (holding 3.
ChrysCapital I,
Mar-03 LLC, Mauritius (holding 3.84) and Karur Vysya Bank Ltd.(constituting 1.00
Bank also
Mar-03 Increases the authorized share capital oI the Bank Irom Rs. 230 crores to Rs. 300
Feb-03 Bank, in a pioneering move, launches the AT PAR Cheque Iacility, Iree oI cost,
Savings Bank customers.
Feb-03 Bank wins mandate to set up 14 ATMs at the Western Railway stations along the
division.
Oct-02 Bank launches Corporate I Connect? - the Internet Banking Iacility Ior Corporat
Aug-02 Bank signs Mo& with BSNL regarding bill collection services across the country
both online and oIIline channels.
Apr-02 Bank opens its 500th ATM
Mar-02 Deposits Cross Rs.12, 000 Crore
Jan-02 The Bank's 100th branch opens at Tuticorin,Tamilnadu
Jan-02 The Bank opens an ATM at the Gol Dak-Khana, i.e. the New Delhi GPO, makin
Iirst instance oI a commercial bank setting up an ATM at any post-oIIice in the c
Dec-01 Total Advances cross Rs 5,000 Crore
Nov-01 The deposit base Ior the Bank crosses Rs. 10,000 Crore
Sep-01 Private placement oI 26 stake in the Bank to CDC Capital Partners. &TI holdin
to 44.88
Aug-01 Bank signs Mo& with India Post Ior introducing value added Iinancial products
services to customers oI both organizations, including setting up oI &TI Bank A
post oIIices.
July-01 Bank ties up with Govt. oI Andhra Pradesh Ior collection oI commercial tax
Dec-00 Bank opens its 200th ATM. It becomes the 2nd largest ATM network in the cou
position held even today.
Oct-00 Bank becomes Iully networked

29

July-00 E-commerce initiatives announced
July-00 Financial Advisory Services oIIered beginning with marketing oI &S 64
Apr-00 &TI Bank calls oII its proposed merger with Global Trust Bank and surges ahead
own.
Apr-00 Bank launches its Internet banking module, iConnect Retail loans introduced Ior
time by the Bank
Mar-00 ProIits cross Rs 50 crore mark Ior the Iirst time.
Feb-00 Bank adopts Finacle soItware Irom InIosys Ior core banking
Jan-00 Dr.P.J Nayak takes over as Chairman and Managing Director Irom Shri Supriya
Sep-99 Cash management services (CMS) launched, Co branded credit card launched
Mar-99 Deposits cross Rs.3000 crores
Sep-98 &TI Bank goes public with a Rs. 71 crore public issue; Issue over-subscribed 1.2
over 1 lakh retail investors. &TI holding reduces to 60.85
Jun-96 Crosses Rs.1000 crore deposit mark
Mar-95 Completes Iirst proIitable year in operation
Apr-94 First branch oI &TI Bank inaugurated at Ahmedabad by Dr. Manmohan Singh, H
Finance Minister, Government oI India.
Dec-93 &TI Bank comes into being
Dec-93 Registered oIIice at Ahmedabad; Head oIIice at Mumbai





















30

INTRODUCTION OF
PRO1ECT

The Iinancial sector especially the banking industry in most emerging economies
Including India is passing through a process oI change .As the Iinancial activity
has become a major economic activity in most economies, any disruption or
imbalance in its inIrastructure will have signiIicant impact on the entire economy.
By developing a sound Iinancial system the banking industry can bring stability
within Iinancial markets.
Deregulation in the Iinancial sector had widened the product range in the
developed market. Some oI the new products introduced are LBOs, credit cards,
housing Iinance, derivatives and various oII balance sheet items. Thus new vistas
have created multiple sources Ior banks to generate higher proIits than the
traditional Iinancial intermediation. Simultaneously they have opened new areas oI
risks also. During the past decade, the Indian banking industry continued to
respond to the emerging challenges oI competition, risks and uncertainties. Risks
originate in the Iorms oI customer deIault, Iunding a gap or adverse movements oI
markets. Measuring and quantiIying risks in neither easy nor intuitive. Our
regulators have made some sincere attempts to bring prudential and supervisory
norms conIorming to international bank practices with an intention to strengthen
the stability oI the banking system.






31





. Source: jumex 1 0leuxon, 7
eunlng of Rlxk unJ Rlxk unugement
The etymology oI the word Risk` is traced to the Latin word Rescum` meaning Risk at sea or
that which cuts. Risk is an unplanned event with Iinancial consequences resulting in loss or
reduced earnings. It stems Irom uncertainty or unpredictability oI the Iuture. ThereIore, a risky
proposition is one with potential proIit or a looming loss.
Risk is the potentiality oI both expected and unexpected events which have an adverse impact on
bank capital or earnings. In one oI the publications Price Waterhouse Cooper has interpreted the
word risk in two distinct senses


32

The Risk Management Process


The basic process steps are Iollowing:
1- Establish the context
2- IdentiIy the risk
3- Analyze the risk
4- Evaluate the risk
5- Treat the risk
Risk` is dynamic and subject to constant change, so the process includes continuing:
Monitoring and review and communication and consultation

Risk is deIined as anything which poses a threat to an organization. Risk management is the
process oI dealing with these threats.


Understanding Risk and Risk Management
To deal with risk, risk management must plan Ior the risk, assess the risk, come up with options
Ior handling risk, and analyze risks in order to determine the ways in which they may change. In
addition to this, risk management must be capable oI successIully documenting the complete risk
management system.
To understand the usage oI risk management, one thing that you must always keep in mind is
that there are diIIerent types oI risks. There are Iinancial risks, process risks, intangible risks,
time risks, human risks, legal risks, and physical risks. Financial risk is the loss oI Iunding or key
resources. Process risk involves risky business processes that could lead to project Iailure.
Intangible risks are oIten associated with any damage that is done to the reputation oI the brand
oI the organization. Time risks are risks which oIten involve things connected to time, such as
delays or opportunity costs which are missed.

33

k|sk Management Structure
Establishing an appropriate risk management organization structure is choosing between a
centralized and decentralized structure. The global trend is towards centralizing risk management
with integrated treasury management Iunction to beneIit Irom inIormation on aggregate
exposure, natural netting oI exposures, economies oI scale and easier reporting to top
management. The primary responsibility is oI understanding the risks run by the bank and
ensuring that the risks are appropriately managed and vested with the Board oI Directors. The
Board sets risk limits by assessing the bank`s risk and risk-bearing capacity. At organizational
level, overall risk management is assigned to an independent Risk Management Committee or
Executive Committee oI the top executives that reports directly to the Board oI Directors. The
purpose oI this top level committee is to empower one group with Iull responsibility oI
evaluating overall risk Iaced by the bank and determining the level oI risk which will be in the
best interest oI the bank. At the same time the committee holds the line management more
accountable Ior the risks under their control and the perIormance oI the bank in that area. The
risk management is a complex Iunction and it requires specialized skills and expertise. Large
banks and those operating in international markets have developed internal risk management
models to be able to compete eIIectively with their competitors. At a more sophisticated level,
the core staII at Head OIIices is trained in risk modeling and analytical tools.
Internationally, a committee approach to risk management is being adopted. While the Asset-
Liability Management Committee (ALCO) deal with diIIerent types oI market risk, the Credit
Policy Committee (CPC) oversees the credit/counter party risk and country risk. Thus, market
and credit risks are managed in a parallel two-track approach in banks. Generally, the policies
and procedures Ior market risk are articulated in the ALM policies and credit risk is addressed in
Loan Policies and Procedures.
Risk Management : Components
The process oI risk management has three identiIiable steps viz. Risk identiIication, Risk
measurement, and Risk control.
Risk Identification
Risk identiIication means deIining each oI risks associated with a transaction or a type oI bank
product or service. There are various types oI risk which bank Iace such as credit risk, liquidity
risk, interest rate risk, operational risk, legal risk etc.
Risk Measurement
The second step in risk management process is the risk measurement or risk assessment. Risk
assessment is the insemination oI the size probability and timing oI a potential loss under various
scenarios. This is the most diIIicult step in the risk management process and the methods, degree
oI sophistication and costs vary greatly. The potential loss is generally deIined in terms oI
Frequency` and Severity`.

34

Risk Control
After iJentificotion onJ ossessment of risk foctors, tbe next step involveJ is risk control. Tbe
mojor olternotives ovoiloble in risk control ore:
1) Avoid the exposure
2) Reduce the impact by reducing Irequency oI severity
3) Avoid concentration in risky areas
4) TransIer the risk to another party
5) Employ risk management instruments to cover the risks
Steps for implementing Risk Management in Banks
1) Establishing a risk management long term vision and strategy
Risk management implementation strategy is established depending on bank vision,
Focus, positioning and resource commitments.
2) Risk Identification
The second step is identiIication oI risks, which is carried out to assess the current level oI risk
management processes, structure, technology and analytical sophistication at the bank. Typically
banks distinguish the Iollowing risk categories:
- Credit risk
- Market risk
- Operational risk
3) Construction of risk management index and Sub indices
Bank roll out a customized benchmark index based on its vision and risk management strategy.
Then it develops a score Ior the current level oI bank risk practices that already exists. For
example assuming that the current risks management score is 30 out oI 100. For the gap in score
oI 70 roadmap is developed Ior achieving the milestones.
) Defining Roadmap
Based on the target risk management strategy/gap analysis bank develops unique work plans
with quantiIiable beneIits Ior achieving sustainable competitive advantage.
a. Risk Based Supervision requirements
b. Base II compliance
c. &sing risk strategy in the decision making process
opitol ollocotion
Provisioning

35

Pricing oI products
Streamlining procedures and reducing operating costs
By rolling out the action steps in phases the bank measure the progress oI the
implementation.
) Establish Risk measures and early warning indicators
Depending on the lines oI business as reIlected in bank balance sheet and business plans, the
relative importance oI market, credit and operational risk in each line oI activity is determined
The process workIlow organization, risk control and mitigation procedures Ior each activity line
is to be provided.
) Executing the key requirements:
At an operational level checklist oI key success Iactors and quantitative benchmark is generated.
Models to be applied are tested and validated on a prototype basis. Moreover, evaluation scores
on the benchmark levels speciIied helps to build up a risk process implementation score.
) Integrate Risks Management/Strategy into bank internal decision making process
The objective is to integrate risk management into business decision making process which
evolves risk culture through awareness and training, development oI integrated risk reports and
success measures and alignment oI risk and business strategies.
Types of Risks
Credit Risks: Credit Risk is deIined by the losses in to event oI deIault oI borrower to repay
his obligations or in event oI deterioration oI the borrower`s credit quality.
Regulatory Risks: It is the risk in which Iirm`s earnings value and cash Ilows is inIluenced
adversely by unanticipated changes in regulation such as legal requirements and accounting
rules.
Strategic (Business) Risks: It is the risk in which entire lines oI business is succumb to
competition or obsolescence as strategic risks occurs when a bank is not ready or unable to
compete in a newly developing line oI business.
Human Risks: It is risk, which is concurrent with the risk oI inadequate loss oI key
personnel or misplaced motivation among management personnel.
Legal Risks: It is the risk that makes transaction proves to be unenIorceable in law or has
been inadequately documented.
Operational Risks: It is the risk oI loss resulting Irom Iailed or inadequate systems, people

36

and processes or Irom external events.
Market Risks: Market Risk is the risk to the bank`s earnings and capital due to changes in
the market level oI interest rates or prices oI securities, Ioreign exchange equities as well as
volatilities oI prices.
Liquidity Risks : Liquidity Risk consists oI :
Market liquidity risks : arises when a Iirm is unable to conclude a large transaction in a
particular instrument anything near the current market prices.
Funding liquidity risks: is deIined as inability to obtain Iunds to meet cash Ilow obligations.
Interest Rate Risk: It is the potential negative impact on the Net Interest Income and reIers
to vulnerability oI an institution`s Iinancial; condition to the movement in interest rates.
NII Gap * Change in Interest Rate
Forex Risks: It is the risk that a bank suIIers loss due to adverse exchange rate movement
during a period in which it has an open position either spot or Iorwards both in same Ioreign
currency.
Country Risks: This is the risk that arises due to cross-border transactions owing to
economic liberalization and globalization as it is the possibility that a country is unable to
service or repay debts to Ioreign lenders in time.
Hence, risk management Iocus on the identiIication oI potential unanticipated events and on their
possible impact on the Iinancial perIormance oI the Iirm and at the limit on its survival. Risk
Management in its current Iorm is diIIerent Irom what the banks used to practice earlier. Risk
environment has changed and according to the draIt Basel II norms the Iocus is more on the
entire risk return equation.









37
























OPTIMIZING THE RISK RET&RN EQ&ATION

DEGREE OF RISK

P
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o
f
i
t
s


L
o
s
s
e
s


38


Moreover, banks now a day`s seek services oI Global Consultants like KPMG,
PricewaterhouseCoopers (PwC), Tata Consultancy Services (TCS), Boston Consulting Group
(BCG), The Credit Rating and Investment Services oI India Ltd. (Crisil), I Flex Solutions and
InIosys Technologies who have vast experience in risk modeling as these players identiIy the gap
in the system and help the banks in devising a risk return model.
RBI Cuidelines on Risk Management
RBI has issued guidelines Irom time to time, which are being implemented by banks through
various committees. So Iar RBI has issued guidelines in respect oI Iollowing:
A & L Management Systems in Banks Feb., 1999
Risk Management Systems October, 1999
Risk Based Supervision August, 2007
Risk Focused Internal Audit Dec., 2008
Credit and Market risk Management Jan., 2009
RBI suggests that
(a) Banks must equip themselves with an ability to identiIy, to measure, to monitor and to
control the various risks with New Capital Adequacy provisions in due course.
(b) For integrated management oI risk there must be single risk management committee.
(c) For managing credit risk, portIolio approach must be adopted.
(d) Appropriate credit risk modeling in the Iuture must be adopted.
(e) For measurement oI market risk banks are advised to develop expertise in internal
models
(I) RAROC (Risk Adjusted Return on Capital) Iramework is to be adopted by banks
operating in international markets.
(g) Banks should upgrade credit risk management system to optimize use oI capital.
(h) Banks are advised by RBI to initiate action in Iive speciIic areas to prepare themselves
Ior risk based supervision. One oI the Iive speciIic areas is eIIective Risk Management
Architecture to ensure adequate internal risk management practices.
(i) The limits to sensitive sectors like advances against equity shares, real estates which are
subject to a high degree oI asset price volatility as well as to speciIic industries which are
subject to Irequent business cycles should be restricted. Similarly, high-risk industries as
perceived by the bank should be placed under lower portIolio limit.

39

RESEARCH
METHODOLOGY




40


Need of the Study
The need oI the study arises because oI Iollowing Iactors: -
Increasing liberalization, deregulation and internationalization oI banking sector in India.
External pressures on senior management to increase proIit and decrease costs.
Necessity oI the banks to respond to the array oI new and more complex risks caused by:
- Rapidly increasing pace oI change in technology
- Globalization
- Mergers and acquisitions
- Downsizing
- Regulatory changes
The need Iorever increasing Ilexible Iinancing.
Increasing competition in the banking sector in India.
Growing sophistication in banking operations, derivative trading securities underwriting, on-
line electronic banking, payment oI services have made risk management extremely critical
and indispensable.
In iIc rcvicw of iIc liicraiurc ii's found iIai risl managcmcni
is an aiicmi io idcniify, io mcasurc, io moniior and io
managc unccriainiy. Howcvcr, noi mucI Ias lccn donc on iIc
raciical imlcmcniaiion of iIis iccIniquc as asscssing and
managing risls siill rcmains a cIallcnging iasl for lanls,
wIicI raiscs iIc issuc of Iow io idcniify iIc oiimal siraicgics
io curiail iIcsc risls. Hcncc, iIc nccd of iIc siudy ariscs so
as io siudy iIc formulaiion and imlcmcniaiion of risl
managcmcni in various lanls.
Objectives of the Study
The Iollowing objectives have been Iixing Ior making thus study:
. To know need Ior risk management.
. To know vaiious types of iisks faceu by banks.
. To analyze diIIerent types oI risk such as
- Credit Risk
- Market risk, which includes Liquidity risk and Interest rate risk
- Operational risk

41

. To know the guidelines set up by RBI Ior banks.
. To know how to measure and monitor various risks.
. To know about Basel II Accord and Risk Based Supervision Requirements.
. To study about the Risk Management approach adopted by six banks, this includes banks in
both public as well as private sector.
. To know newer methodologies to quantiIy risk in light oI newer businesses and challenges.
Significance of the Study
Good risk management is good banking. And good banking is essential Ior proIitable survival oI
institution. It brings stability in earnings and increases eIIiciency in operations.
The present study proposes to: -
Enhance shareholders value with
Value creation
Value preservation
Capital optimization
Enhance capital allocation.
Improvement oI portIolio identiIication and action plans.
An understanding oI key business processes.
Integration oI risk management within corporate governance Iramework.
Improved InIormation Security.
Corporate Reputation.
Instill conIidence in the market place.
Alleviate regulatory constraints and distortions thereoI.
In real world risk management creates value. Hence, it is an essential part oI a Iinancial
institution as it involves stakeholder`s interest among others.
$.450 41 tb0 $tudy
Risk is intrinsic to banking business as the major risks conIronting banks are credit risk, interest
rate risk, liquidity risk and operational risk. Irrespective oI the nature oI the risk the best way Ior
banks to protect themselves is to identiIy risk, accurately measure, price it and maintain
appropriate levels oI reserves and capital. II Indian banks are to compete globally then they have
to institute sound and robust risk management practices, which will improve eIIiciency oI banks.
The scope oI this study involves analyzing and measuring major risks i.e credit risk, liquidity
risk, interest rate risk and operational risk oI six banks (public and private sector). The present

42

study evaluates key perIormance indicators oI various banks in terms oI credit deposit ratio, net
interest margin, spread, overhead eIIiciency, Gap analysis and maturity ladder. While putting the
risk management in place banks oIten Iind it diIIicult to collect reliable data. The challenge is
mainly in the area oI operational risk where there is dearth oI reliable historic data and not a
great deal oI clarity on the measurement oI such risk.
,t, C40.tI43
The present study is based on both primary and secondary sources. (Desk Research)
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Questionnaire` has been prepared and sent to selected six banks to ascertain their degree oI
readiness Ior risk management on various parameters and inIormation is collected through in
depth personal interview oI senior oIIicers and employees oI six banks.
$0.43d,7y $4u7.08
InIormation has also been obtained through desk research such as
(a) Annual reports oI the banks
(b) Indian Bank Association Bulletin
(c) RBI Bulletin
(d) Report on trends and progress oI banking in India
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The sample comprises oI six banks both in public as well as private sector. The banks are
selected on the basis oI their net proIit during the year. Following banks are included in the
sample size (Business India; August 2010) which are shown in sequence Irom high proIit banks
to low proIit banks.
State Bank oI India
ICICI Bank
Central Bank oI India
HDFC Bank
Oriental Bank oI Commerce
IDBI Bank
The study is divided into Iollowing chapters.
1. Introduction
2. Literature Review
3. Research Methodology

43

4. Bank ProIiles
5. Credit Risk Management
6. Market Risk Management
7. Operational Risk Management
8. Basel II Compliance and Risk Based Supervision Requirements
9. Analysis oI Survey Responses
10. Observations and Suggestions
Research Design
A research design is the arrangement oI conditions Ior collection and analysis oI data in a
manner that aims to combine relevance to the research purpose with economy in procedure. In
Iact, the research design is the conceptual structure within which research is conducted. It
constitutes the Iramework Ior the collection, measurement and analysis oI data. It provides the
empirical and logical basis Ior getting knowledge and drawing conclusions.
The research design in the study is oI exploratory research. Various methods are utilized in order
to gain the inIormation and to interpret it in most rational and objective manner.
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The Iollowing techniques have been applied Ior analysis: -
Ratio Analysis
To vu!uut tl `uuu`u! oud`t`ou, omuu uud o`tu|`!`ty |uuk:
u`: tu`u yud:t`k: .Tl o!!o~`u_ vu`ou: uouut`u_ too!: luv
|u u:d.
O Core Deposits/Total Assets
Where Core Deposits 20 oI Demand Deposits 80 oI Savings Deposits
O olutlle Ilubllltlex,1otul Axxetx
Where Volatile liabilities Demand Term deposits oI other banks
O Short term Assets/Total Assets
Where short term assets Cash & Bank Balance Receivable Bills Receivable short
term /demand advances
O Credit Deposit Ratio: Higher deposit ratio indicates poor liquidity position oI a bank & vice

44

versa. The ratio is calculated as Iollows:
Loans and Advances/Total Deposits
O Cost of Funds: Total Interest Expense/Interest bearing liabilities where interest bearing
liabilities Deposits Borrowings
O Net Interest Margin : Net Interest Income/Earning Assets where Net Interest Income
Total Interest Income Total Interest Expenses
orninq Assets = All lnterest eorninq ossets {Totol Assets - osb Bolonces - IixeJ Assets -
0tber Asset)

The impact oI volatility on the short-term proIits is measured by Net Interest Margin.
O Spread Yield Cost oI Iunds
Where yield Total Interest earned/ Earning Assets
O Return on Average Assets (ROA) This ratio is relationship between the net proIit (aIter
tax and interest) and the total assets oI the bank. It is calculated as Iollows:
Net profit ofter tox - lnterest ,Totol ossets
O Return on Equity (ROE) Shareholders are the real owner oI the organization, so they are
more interested in proIitability and perIormance oI an organization. This is calculated as
Iollows:
Net proIit aIter interest, tax and PreIerence dividend /Equity Shareholders Funds.
O Capital Adequacy Ratio
This ratio strengthens the capital base oI bank. The paid up capital reserves oI bank Iorm an
adequate percentage oI assets oI banks, their investments, loans and advances. All these
items are assigned weights according to prescribed risks and the ratio so computed is known
as capital adequacy ratio.
O ;07b0,d E11I.I03.y iIis is calculaicd as follows.
Non-Inicrcsi Incomc/Non Inicrcsi Ecnsc

O Profit Margin This is calculated as Iollows:
Net Income/Total Revenue
O Burden/Spread

45

Where Burden is the Net Non Interest Income and Spread is the Net
Interest Expense
Gap Analysis
Maturity Ladder
Analysis of survey responses on various parameters



OBSERVATIONS AND
SUGGESTIONS

The present chapter is divided into two sections. First part consists oI major observations oI
study and second part comprises oI its suggestions. Observations initiate Iurther reIinements in
the existing structure while suggestions provide better guidelines in the eIIicient working oI the
organization.
Hence, based on the responses to the questionnaire and the personal meetings with senior risk
proIessionals in banks a Iew major Iindings oI study are:


46

There is much greater awareness across the banking sector about the need Ior risk
management and the various categories oI risk which banks are exposed to. A separate credit
risk department distinct Irom credit Iunction has been set up in all the surveyed banks. This
implies substantial progress Irom three years ago when risk management was new concept
Ior all except the most advanced and sophisticated banks.
Degree oI readiness Ior integrated risk management among banks diIIers widely. As there are
banks which have several years risk data and sophisticated risk models, there are also other
banks, which have started the process oI systematic capturing oI risk data. Degree oI
readiness also diIIers with regard to the risk elements covered.
While putting the risk management in place banks surveyed oIten Iind it diIIicult to collect
reliable data. The challenge is mainly in the area oI operational risk where there is dearth oI
reliable historic data and not a great deal oI clarity on the measurement oI risk.
Risk Management System is not in line with organization goals and objective.
Risk management is review and control exercise which requires independent Iunctioning in
maintaining reporting lines distinct Irom operating managers oI corresponding departments
but it`s not there within banks. Hence, proper organizational structure is an essential
component oI risk management eIIort. Implementing the necessary structure is the key task
Ior all the banks surveyed.
With increased awareness there has come about a need to ensure harmony oI understanding
and direction across banks. Absence oI standardized deIinition and measurement divergences
lead delays in installing and integrating the components oI an integrated risk management
system.
Regulatory and legal issues are not taken into account while setting up oI risk management
system.
Methodologies Ior measuring and assessing market risk and credit risks are inconsistent
throughout the banking sector.
Quarterly progress reports are not made in order to keep the track record Ior the progress oI
bank.
Moreover each bank going Ior risk management implementation is Iaced with question oI
whether to outsource and iI so how much and to whom. Selection processes Ior vendors are

47

long drawn and implementation gets delayed on account oI time taken to Ireeze requirements
and Iine-tunes speciIications.
Banks are Iacing signiIicant challenge in rolling out IT networks. The banks on the soItware
Iront could not entail investments in databases, data warehousing and in sophisticated
statistical models as aggregation and analysis oI the vast amount oI data is needed Ior
successIul risk management system.
Procedural Audit reporting risk management is not done.
There is absence oI binding time Irame as Ior measuring and managing risk comprehensive
and credible system is not placed by the speciIied date. It`s much longer beIore suIIicient
data aggregation could be carried out Ior the introduction oI sophisticated quantitative
approaches demanding suIIicient internal measurements.
Issues relating to internal audit system, loan review system and timeliness oI internal ratings
are not observed in most oI the banks.
Training Ior supervisory cadres is not given in banks Ior understanding the critical issues
raised under Basel II.
There is a lack oI conceptual clarity in some oI the Iields oI risk management.
Banks surveyed don`t have expertise in risk modeling. That`s why they seek the services oI
global consultants like KPMG, Price house water coopers, TCS and many more. These
consultants identiIy the gaps in system and help banks in devising risk return model.
Selection processes oI vendors Ior outsourcing the soItware solution are long drawn.
The risk management soItware solutions market is almost nine percent oI the entire IT budget
oI the global Iinancial industry.
Risk management solutions have been mainly used to calculate credit risk. It`s in the area oI
operational risk that most Iirms will make Iresh investments.
In recent times much have been done in the area oI credit risk management.
Banks surveyed did not comply with Basel II norms and still Iollow rudimentary risk models.
In the current interest rate environment, banks Iind more proIitable to invest in government
securities.



48

Recommendations

Risk Management System should be in place to deal with current and potential risks.
The system needs to be developed in line with organization goals and objective.
For measuring and managing risk the comprehensive and credible system need to be placed
by a speciIied date which is much more longer beIore suIIicient data aggregation could be
carried out Ior introduction oI sophisticated quantitative approaches.
Timeliness is recommended Ior progress oI the components oI risk management.
Quarterly progress reports should be made which is an eIIective way oI keeping track oI
progress made by each bank.
Regulatory and legal issues need to be taken into account while setting up the risk
management system.
There should be an active participation oI senior management and main line Iunctional staII
in setting up oI risk management system, which will enhance the acceptability oI adopting
the risk management measures by the employees.
Procedural Audit oI all banks reporting risk management should be done.
An eIIicient asset liability management system should be there which is an adequate tool to
identiIy and mitigate market risks.
Appropriate internal controls and audit, risk based supervision, proper manpower planning,
selection training and development and eIIicient compliance oIIicer should be there in
addressing risk management issues.
Monitoring and reviewing risk management process with dynamically changing global
environment needs to be undertaken.
Selection processes oI vendors Ior outsourcing the soItware solution should not be long
drawn.
New system calls Ior skilled expertise sophisticated IT inIrastructure and a comprehensive
database.

49

Measuring and disclosing various risks requires sound MIS. A technological application in
the Iorm oI networking and data warehousing is indispensable.
Simple handbooks must be published on risk management demystiIying the subject and
making it accessible to the line managers who eventually need to implement and use it.
DeIinitions, Approaches and Methodologies oI key risk management must be arrived at and
complied.
Organization oI Seminars and workshops should be conducted Ior training oI risk
management proIessionals as its important not only in terms oI concepts and methodologies
but also to get across vital communication tools and techniques.
Banks should place more emphasis on the cash Ilow based lending rather than traditional
securities based lending.
With view to build up adequate reserves to guard against any possible reversal oI interest rate
banks should maintain a certain level oI investment Iluctuation reserve.
A Iairly robust credit rating system is needed Ior implementing the IRB model.
Retooling risk management practices with modeling techniques is the need oI the hour.
Banks should comply with Basel II norms
There is no alternative to an eIIicient risk management system covering all aspects oI risk Ior
healthy growth oI the organization. The regulators must work closely with banks to ensure that
banks take up the issue seriously.


50




Limitations of the Study

However, I have made every possible eIIort at my great extent level to show how selected
sample oI banks analyze the major risks i.e. credit, market and operational risks. But the study at
the disposal oI a researcher on this level is limited. In addition to other Iactor such as time that
plays a very important role in every Iield oI today`s liIe has also an important bearing on
research work. The main limitations oI the present study are as Iollows:
All data and inIormation collected is true to some speciIic period oI time.
The study hasn`t got the wider scope as only six banks are being considered Ior evaluating
risk management.
It was diIIicult to have group discussions with experts due to their busy schedules.











51




REFRENCES



List of Books and Articles referred

Reserve Bank oI India, Report on Trend and progress oI Banking in India (various
years).
Annual Report oI all banks (2008-09, 2009-10).
IBA Bulletin (Mar 2008, Mar 2009).
Kumar Prashant (June 2010), 'Revised Credit Risk Assessment System Gurukul, 34-
47.
,lLra k kumar ramod 1axmann'sCredlL 8lsk ,anagemenL" 2000

Mishra.A.K, Innovative Risk Management Tools Ior Indian Banks Management and
change, 2(2) 373-382 .1998.
Schonbucher. J. Philipp, 'The Mathematics oI Credit Derivatives McGraw Hill,
2007.
Carter. R.L and N.A. Doherty, Handbook oI Risk Management London, Harrop
Handbooks, 1995, Part 5.
Torp JeIIrey and Matz Leonard, 'Risk Management Ior banks-A Guide to Regulatory

52







Lists of Internet Sites
1 wwwaxlsbankcom
2 wwwrblorgln
3 wwwhdfccoln
4 wwwsldblcom
3 wwwflnanclalexpresscom