A PROJECT REPORT ON

RISK ASSESSMENT THROUGH IPO OF BANK OF MAHARASHTRA.

SUBMITTED BY

MS. T.V.HARIPRIYA
MBA-II ( FINANCE+SYSTEMS)

UNDER THE GUIDANCE OF

JAYANT OKE PUMBA

ASHOK.Y.SHEDSHALE Bank of Maharashtra

IN PARTIAL FULFILLMENT OF THE

REQUIREMENTS FOR THE AWARD OF DEGREE

OF MASTERS OF BUSINESS ADMINISTRATION

DEPARTMENT OF MANAGEMENT SCIENCES UNIVERSITY OF PUNE (PUMBA) * (2005-2007) *

Department of Management Sciences (PUMBA) University of Pune

CERTIFICATE

This is to certify that the Summer Project report titled RISK ASSESSMENT THROUGH IPO OF BANK OF MAHARASHTRA. carried out at Lokmangal ,the central office of Bank of Maharashtra Pune, has been submitted by Ms. T.V.Haripriya, 2nd year MBA Finance with additional in Systems student of The Department of Management Sciences (PUMBA), University of Pune, towards the partial fulfillment of the requirement for the award of the Masters in Business Administration (MBA) and the same has been satisfactorily carried out under the guidance of JAYANT OKE during the academic year 2005 - 2007.

Jayant Oke
Internal Guide PUMBA

External
Examiner

Anil Keskar
Head of Department PUMBA

Acknowledgement

I take this opportunity to express my deep sense of gratitude and whole hearted thanks to Mr Ashok.Y.Shedshale of Bank of Maharashtra for giving me this opportunity to work as a summer trainee. I wish to express my sincere thanks to the staff of Bank of Maharashtra for their cooperation in this project. I also like to express my indebtedness to Dr. Anil Keskar, Head of the Department, PUMBA, Pune University and my internal guide Mr Jayant Oke for their constructive cooperation, keen interest in the project and encouragement throughout the work .

T.V.HARIPRIYA

Table of content

INTRODUCTION,.

01

1.1 Risk in banking business . .... 01 1.2 Profile of organization ........ 02 2.0 RESEARCH METHODOLOGY....04 2.1 Objective of the research04 2.2 Research approach 04 2.3 Data sources.. 04 2.4 Research on IPO 05 2.5 Why IPO.. .06 2.6 Basle committee. .. 08 3.0 THEORETICAL BACKGROUND 11 3.1 What is risk 11 3.2 Types of risk in banking sector............................................... 12 3.3 Risk management process.. 15 3.4 Essential components of risk management system 17 3.5 Regulatory initiatives by RBI.. 19 3.6 Types of risks21 3.6.1 Market risk.22 3.6.2 Credit Risk. 23 3.6.3 Operational risk 23 3.7 Role of management and.risk takers 24 3.8 Benefits of risk analysis and management25 4.0 Key finding ,analysis and interpretation......26 5.0 Conclusion and Recommendations 32 6.0 Bibliography 33

1.0 INTRODUCTION

1.1 RISK IN BANKING BUSINESS Banking in simple words is mobilisation of resources for deploying into assets to generate optimum returns. Naturally ,there is an element of risk in such operation that needs to be identified, measured, monitored and controlled.Assets or liabilities,both are prone to risk. This calls for a robust risk management framework in banking business. In the era of globalisation and liberalization of the economy and the resultant economic scenario in India, risk has become inherent in any commercial activity owing to integration of world economy and the increasing competition in market place. The plethora of financial products, the advancements in technology and the multi channel delivery systems in modern banking context have altered the landscape of banking and has brought the risk management issues to the forefront. The major types of risk are credit risk, interest rate risk, liquidity risk, foreign exchange risk, operational risk, regulatory risk, reputational risk, equity price risk, commodity price risk and legal risk.

1.2 ABOUT BANK OF MAHARASHTRA

The Birth Registered on 16th September 1935 with an authorized capital of Rs 10.00 lakh and commenced business on 8th Feburary 1936.

The Childhood

Known as a common man's bank since inception, its initial help to small units has given birth to many of today's industrial houses. After nationalization in 1969, the bank expanded rapidly. It now has 1292 branches all over India. The Bank has the largest network of branches by any Public sector bank in the state of Maharashtra.

The Adult

The bank has fine tuned its services to cater to the needs of the common man and incorporated the latest technology in banking offering a variety of services.

Philosophy Technology with personal touch.

Emblem The Deepmal

With its many lights rising to greater heights.

The Pillar

Our institution- Symbolising strength.

The Diyas

Our Branches- Symbolising service.

The 3 M's

Symbolising

Mobilisation of Money Modernisation of Methods and Motivation of Staff. Aims

The bank wishes to cater to all types of needs of the entire family, in the whole country. Its dream is "One Family, One Bank, Maharashtra Bank".

The Autonomy

The Bank attained autonomous status in 1998. It helps in giving more and more services with simplified procedures without intervention of Government. Our Social Aspect The bank excels in Social Banking, overlooking the profit aspect; it has a good share of Priority sector lending

2.0 RESEARCH METHODOLOGY

2.1 Objective of the research a) To know the types of risks involved in Banking sector .
b) To study the risk management policy of the Bank of Maharashtra. c) To find out how the bank assess and evaluate risk . d) To compare Bank of Maharashtras performance with its peers.

2.2 Research Approach In this project the data was mainly collected through secondary sources i.e data from SEBI guidelines, banks internal data, journals, periodicals etc. 2.3 Data sources

Primary data: For this type of data it was requisite to have a one-on-one interrogative conversation with various representatives wherein information of their existing schemes was obtained

Secondary data: i) ii) iii) Various books and relevent guidelines which are issued by SEBI. Existing information available at Bank of Maharashtra. Websites as detailed in bibliography .

2.4 Research on IPOs

The Initial Public Offering (IPO) is particularly significant in that it usually marks the transition between a start-up company and a successful venture. The prospectus issued by a company planning to go public is designed to provide potential investors with relevant information about the company as well as supplementary details about the investment opportunity. For the purposes of this research, the key section of an IPO prospectus is the listing and description of Risk Factors are taken into consideration. A company issuing an IPO prospectus is required by SEBI regulations and laws to delineate all known risks that the company faces or will potentially face. When a company issues an IPO, attorneys and underwriter agents conduct an intensive review of the company to determine all relevant risks. The Risk Factors section serves to protect the company and issuing underwriters from liability in the event that the company fails after the stock is issued. Since the parties involved in the issue can be held legally liable if it fails to list any known risk, or any risk for which it can be shown that the company should have known, there is a strong incentive to be as accurate and complete as possible. For these reasons, the information on risk factors contained in a prospectus should be more reliable and comprehensive than collected by standard approaches such as surveys and interviews. could be

2.5 WHY IPO?

One of the most important determinants of the success of a business is the nature of the risks it confronts. Firms deal with risks of varying importance and understanding the relative significance of these risks is crucial for developing effective strategies to deal with them .The key driver in managing all business lines are enhancing risk adjusted expected return. This is the common factor for all business lines. But management practices vary across business lines and subgroups and activities within each business lines as profitability of various business line/activities differ and so does the risk factors associated with them. To model how firms perceive and subsequently deal with risk, organizational researchers must identify the risks found in an organizational field. To do so, identification and categorization of these risks requires both quantitative and qualitative information.In this project the focus is at the stage in which companies make the transition from being a private company to being a public company, that is, when a firm issues its initial public offering (IPO).

We adopt this focus for several reasons:

Firms at the IPO stage have generally been operating long enough that they have had a chance to experience the types of risks faced by even much older companies.

Firms at this transition point are young enough that they are still operating in highly uncertain environments. Firms at this stage are typically in a period of rapid growth.

Third, these firms are going through a highly institutionalized process, which makes it feasible to study them systematically.

Firms going public have a unique source of data. A prospectus prepared for an initial public offering has a wealth of data, and there is a strong legal incentive to make it as complete and accurate as possible.

2.6 BASLE COMMITTEE:

One of the core activities of the regulators is proper supervision of the system. The Basle committee had set certain guidelines for the bank supervisors. The Reserve Bank of India had set up an advisory committee under the chairmanship of M S Verma and the committee had submitted its report in May 2001. The committee recommended corporate governance, internal controls, risk management, loan accounting transparency and disclosures, financial conglomerates and cross border banking supervision. The supervisor should provide a safety net to the financial system. It is a committee of banking supervisory authorities, which has established by the Central bank Governors of the group of Ten countries in 1975. It consists of senior representatives of bank supervisory authorities and central banks from: Belgium, Canada, France, Italy, Japan, Luxembourg, Netherlands, Switzerland, Sweden, UK and USA. It usually meets at the Bank for International settlements in Basle, where its permanent secretariat is located.

The committee has stipulated in the five sections, the following eleven principles for banking supervisory authorities to apply in assessing bank's management of interest rate risk.

Principle-1 Board of Directors, should approve strategies and policies with respect to interest rate, risk

management and ensure that senior management takes the steps necessary to monitor and control these risks.

Principle-2 Senior management must ensure that appropriate policies/procedures/ resources are available.

Principle-3 Banks should clearly define the individuals/committees responsible for managing interest rate risks. Larger/complex Banks should have independent unit for administration/design of Banks interest rates/risk measurement, monitoring and control functions.

Principle-4 Banks interest rate, risk policies and procedures be clearly defined and consistent with nature and complexity of their activities. Policies should be applied on the consolidated basis.

Principle-5 New products/activities to be introduced subject to adequate procedures and controls. Principle-6 Assumptions underlying the system should be clearly understood by risk managers and Bank management. Principle-7 Banks must establish and enforce operating limits and other practices that maintain exposures within levels consistent with their internal policies.

Principle-8 Banks should measure their vulnerability to loss under stressful market conditions including the breakdown of key assumptions and consider their results at the time of review of policies.

Principle-9 Banks must have adequate information systems for measuring, monitoring, controlling and reporting interest rate exposures.

Principle-10 Banks must have an adequate system of internal controls i.e. regular independent reviews and evaluations.

Principle-11 Supervisory authorities should obtain from banks sufficient and timely information.

Basel II Encompasses enterprise risk

Minimum Capital Requirement

8% of

Risk-weighted Exposures

Market Risk
Risk of losses in on and off balance sheet positions arising from movements in market prices

Credit Risk
Potential that a bank borrower or counterparty will fail to meet its obligations in accordance with agreed terms

Operational Risk
Risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or external events

No Change

Major Changes

New element added

PILLAR 2 PILLAR 1 Minimum Capital Requirements Supervisory Review

Balance the flexibility and freedom given to banks

PILLAR 3 Risk Weights Definition of Capital Operational Risk Market Discipline Market Risk

Credit Risk

Standardized Internal Ratings Asset Approach Based Approach Securitization

Basic Indicator Approach

Standardized Approach

Advanced Measurement Approach

Foundation Approach

Advanced Approach

Standardized Approach

Internal Ratings Based Approach

Alternate Standardized Approach

3.0 THEORETICAL BACKGROUND

3.1 WHAT IS RISK? Risks are uncertainties resulting in adverse outcome ,adverse in relation to planned objective or expectations. Financial risks are uncertainties resulting in adverse variation of profitability or outright losses.

The financial sector especially the banking industry in most emerging economies including India is passing through a process of change. As the financial activity has become a major economic activity in most economies, any disruption or imbalance in its infrastructure will have significant impact on the entire economy. By developing a sound financial system, the banking industry can bring stability within the financial markets.

Deregulation in the financial sector had widened the products range in the developed markets. Some of the new products introduced are structured transaction, credit cards, housing finance, derivatives and various off balance sheet items. Thus new vistas have created multiple sources for banks to generate higher profits than the traditional financial intermediation. Simultaneously they have opened new areas of risk also. Many unknown issues that are intricately related to new products have exposed banks to various risks across the globe and India is no exception.

During the past decade, the Indian banking industry continued to respond to the emerging challenges of competition, risks and uncertainties. Risks originate in the forms of customer default, funding a gap or adverse movements of markets. Measuring and quantifying risks is neither easy nor intuitive. The regulators have made some sincere attempts to bring prudential and supervisory norms conforming with international bank practices with an intention to strengthen the stability of the banking system.

3.2 TYPES OF RISKS IN BANKING

Banks in general face the following risks: Operational risk Market risk o Liquidity o Foreign Exchange o Interest rate o Commodity price risk o Equity price risk Credit Market Transaction Portfolio

The industry has undergone drastic changes in the last three decades. Horizontal expansion of the financial markets, deregulation across the globe in financial markets and stiff competition have led the banks to multiply their activities. Increased activities in the industry have exposed the banks to more uncertainties and more risks.

RISKS IN BANKING BUSINESS

BUSINESS LINES Corporate finance

SUBGROUPS Merchant banking advisory services, corporate finance municipal. Sales, market making. Retail banking Private banking

ACTIVITIES Mergers and acquisitions, underwriting, research debt and equity syndications,IPO. Fixed income ,equity. Retail lending and deposits,banking services. Private lending and deposits. Payment and collection Escrow, depository receipts Execution and full service.

Trading and sales Retail banking

Payment and settlement Agency services Retail brokerage

External clients Custody Retail brokerage

The key driver in managing all business lines are enhancing risk adjusted expected return. This is the common factor for all business lines . But management practices vary across business lines and subgroups and activities within each business lines as profitability of various business line/ activities differ and so does the risk factors associated with them.

3.3 RISK MANAGEMENT PROCESS Risk management is a process by which an organization ,say a bank identifies,measures,monitors and controls its risk exposures.risk management is a continuous process and not a one time activity. Generally, Risk Management is the process of measuring, or assessing risk and then developing strategies to manage the risk. ,The manner in which a risk analysis is performed varies from project to project,but regardless of it is carried out the result is always an overview of the most important risk factors and the possible measures to control them In ideal risk management, a prioritization process is followed whereby the risks with the greatest loss and the greatest probability of occurring are handled first, and risks with lower probability of occurrence and lower loss are handled later. In general, the strategies employed include: Transferring the risk to another party Avoiding the risk Reducing the negative effect of the risk, and Accepting some or all of the consequences of a particular risk.

Enterprise Risk Management Framework

Monitoring Internal Environment

Objective Setting Event Identification Risk Assessment Risk Response Control Procedures

Information and Communication

THE ESSENTIAL COMPONENTS OF ANY RISK MANAGEMENT SYSTEM ARE

ESTABLISH THE CONTEXT:

Establishing the context includes planning the remainder of the process and mapping out the scope of the exercise, the identity and objectives of stakeholders, the basis upon which risks will be evaluated and defining a framework for the process, and agenda for identification and analysis.

(i)

Risk IdentificationThe naming and defining of each type of risk associated with a transaction or

type of product or service.After establishing the context, the next step in the process of managing risk is to identify potential risks. Risks are about events that, when triggered, will cause problems. Hence, risk identification can start with the source of problems, or with the problem itself.

Source analysis: Risk sources may be internal or external to the system that is the target of risk

management. Examples of risk sources are: stakeholders of a project, employees of a company

Problem analysis: Risks are related to identified threats. For example: the threat of losing money,

the threat of abuse of privacy information or the threat of accidents and casualties. The threats may exist with various entities, most important with shareholder, customers and legislative bodies such as the government. The chosen method of identifying risks may depend on culture, industry practice and compliance. .

RISK ASSESSMENT:
Once risks have been identified, they must then be assessed as to their potential severity of loss and to the probability of occurrence. These quantities can be either simple to measure, in the case of the value of a lost building, or impossible to know for sure in the case of the probability of an unlikely event occurring. Therefore, in the assessment process it is critical to make the best educated guesses possible in order to properly prioritize the implementation of the risk management plan. Risk assessment should produce such information for the management of the organization that the primary risks are easy to understand and that the risk management decisions may be prioritized. The most significant factor in risk management seems to be that 1.) risk assessment is performed frequently and 2.) it is done using as simple methods as possible

Risk MeasurementThe Risk Measurement is estimation of the size, probability and timing of potential loss under various scenarios

Risk ControlThe framing of policies and guidelines that define the risk limits not only at the individual level but also for particular transactions

3.5 Regulatory Initiatives taken by RBI

The regulatory initiatives taken by the Reserve Bank of India include: Ensuring that the banks have suitable risk management framework oriented towards their requirements dictated by the size and complexity of business, risk philosophy, market perceptions and the expected level of capital. The framework adopted by banks would need to be adaptable to changes in business size, market dynamics and introduction of innovative products by banks in future. Introduction of Risk Based Supervision (RBS) in 23 banks on a pilot basis. Encouraging banks to formalize their Capital Adequacy Assessment Programme (CAAP) in alignment with business plan and performance budgeting system. This, together with adoption of Risk Based Supervision would aid in factoring the Pillar II requirements under Basel II. Enhancing the area of disclosures (Pillar III), so as to have greater transparency Building capacity for ensuring the regulators ability for identifying and permitting eligible banks to adopt IRB / Advanced Measurement approaches.

Claims on banks
The claims denominated in Indian Rupees on banks operating in India will be risk weighted as under: (i) All exposures to scheduled banks, will be assigned a risk weight one category less favourable than the Sovereign. Hence all claims on these banks will be risk weighted at 20%. (ii) All exposures on other banks will be assigned a risk weight of 100%.

The claims denominated in foreign currency on banks will be risk weighted as under as per the ratings assigned by international rating agencies.

Credit Assessment of S &P Moodys Risk weight

AAA to AAAaa to Aa 20 %

A+ to AA 50 %

BBB+ to BBBBaa 50 %

BB+ to BBa to B 100 %

Below BBelow B 150 %

Unrated

50 %

However, the claims denominated in foreign currency on a bank which is funded in that currency will be risk weighted at 20%.

3.6 TYPES OF RISKS: Risk Types in Banking There are two t ypes of influnces that cause variations in returns-the external and internal influences.external influences to a firm or a company cannot be controlled.on the other hand the internal influences which can be controlled to a large degree. 1) SYSTEMATIC RISKS: In investments those forces that are uncontrollable ,external and broad in their effect are called sources of systematic risk.Economics , political and sociological changes rae sources of systematic risk. 2) UNSYSTEMATIC RISKS: It is that portion of the total risk that is unique or peculiar to a firm or an industry. The risks can be categorized as: 3.6.1 MARKET RISK This risk arises from adverse changes in market variables such as interest rates,forex rates ,equity price and commodity price. Even a small change in these variables can cause substancial changes in the income and economic value of the bank.

Market Risk takes the following forms: Liquidity Risk: Liquidity is the ability to meet commitments as and when they are due and ability to undertake new transactions when they are profitable. Liquidity risk may emanate in any of the following situations(a) Net outflow of funds arising out of withdrawals/non renewal of deposits (b) Non recovery of cash receipts from recovery of loans (c) Conversion of contingent liabilities into fund based commitment. (d) Increased an ailment of sanctioned limits Interest Rate Risk: This risk arises due to fluctuations in the interest rates. It can result in reduction in the revenues of the bank due to fluctuations in the interest rates which are dynamic and which change differently for assets and liabilities. With the deregulated era interest rates are market determined and banks have to fall in line with the market trends even though it may stifle their Net Interest margins Foreign Exchange Risk : Risk may arise on account of maintenance of positions in forex operations and it involves currency rate risk, transaction risks (profits/loss on transfer of earned profits due to time lag) and transportation risk (risks arising out of exchange restrictions) Cmmodity price risk: Commodity price risk is defined as the probability of loss associated with the dealings of a commodity .eg.agricultural products,oil.

Euity price risk : Equity price risk is the probability of loss due to changes in equity price 3.6.2 CR EDIT RISK: This is the risk of non recovery of loan or the risk of reduction in the value of asset. The

credit risk also includes the pre-payment risk resulting in loss of opportunity to the bank to earn higher interest income. Credit Risk also arises due excess exposure to a single borrower, industry or a geographical area. The element of country risk is also present which is the risk of losses being incurred due to adverse foreign exchange reserve situation or adverse political or economic situations in another country. Technology Risk: This risk is associated with computers and the communication technology which is being increasingly introduced in the banks. This entails the risk of obsolescence and the risk of losing business to better technologically Strategic Risk: This is the risk arising out of certain strategic decisions taken by the banks for sustaining themselves in the present day scenario for example decision to open a subsidiary may run the risk of losses if the subsidiary does not do good business.

3.6.3 OPERATIONAL RISK: Operational risk in bank arises due to failure of integrated systems in highly automated technology,internal control external frauds and security issues in credit risks. E-commerce, risk in outsourcing, mergers and legal or other risk arising out risk mitigation s of market and

Regulatory risk: It is the risk of loss arising out of failure to comply with regulatory or legal requirement in the relevant jurisdiction in which the bank operates.this may even lead to loss of license to operate a banking company. Reputaional risk: It is the risk of loss of reputation faced by bank on account of any act of commision or omission on part of the bank or its employees or on account of any adverse publicity in any of the print or visual media or otherwise. Legal risk: It arises when there is likelihood pf the banks legal right being adversly afevted and when the bank would not be in a position to enforce a contract against another party. 3.7 Role of Management, Risk Takers Within the Banks,

Supervisory Authorities
Managements priority will be to ensure that they comply with the regulators requirements at best cost and risk to the bank. Senior officers will need to look at the risk model frequently with a good technical understanding. Such feedback and involvement bodes well for the integration of modeling and compliance with the process of risk management in the bank. However the dilemma faced by banks in the face of mandatory compliance with the new Basel accord is the level of capital adequacy.

Regulators minimum must be kept with a pool of risks which give the best cost/benefit trade off. Anything in addition for safety would constraint growth and limit risk taking.

To limit the adverse impact of a high level of capital adequacy, a reality check with actual market conditions or in the alternative, a stress testing to verify the potential losses in situations of high event risk must be performed to optimize capital and meet regulators requirements.

3.8 BENEFITS OF RISK ANALYSIS AND RISK MANAGEMENT: The benifts of Risk Analysis and Risk management are as follows:
Perceptions of risk can be better defined. Actions taken inside and outside the organisation can be communicated in a better manner and thus it improves credibility of plans. Risks that occur very often reations to theses situations lead to better contingency planning. Whenn ways of preventing or avoiding risks are found out ,it provides afeedback into the desiging and planning process. Responsible selection and contingency planning in a sort of feed-forward into the construction and operation of projects for mitigating the impact of risks. Project exposure to risks can be reduced and the experience provides insight, knowledge and confidence for better decision making.

4.0 KEY FINDINGS, ANALYSIS AND INTERPRETATION

NAME OF THE BANK: BANK OF MAHARASHTRA 1)ORGANISATION - MAJOR INDUSRY: Financial - SUB INDUSTRY: Commercial banks 2)STRUCTURE -SHAREHOLDING PATTERN : promoters holding : 76.77% non-promoters holding : 4.93% others : 18.30 % -GEOGRAPHICAL SPREAD AND BRANCH NETWORK: The bank operates through 1291 branch offices,31 extension counter in 22states and 2 union territories. Of this 600 branches would be covered under the Core Banking Solution by December 2007 covering 85 per cent of the business. The bank would be opening another 37 branches across the country by March 31.

Concentrated presence: BOM has around 72% of its branches located in just one state, i.e. Maharashtra. While this signifies the Bank's strong presence in the western region, this concentration is of concern as the bank is likely to miss out on growth opportunities in other regions of the country. Also, competition from private sector banks is rising, thus concentration in a single region may be harmful in the long-term 3) BUSINESS PROFILE: The groups principal activities are provide banking and other financial services to corporate and private customers. The bank offers personal banking, cash management, retail loans and other financial services. 4) KEY ISSUES OF CONCERN The net interest margin (NIM) was 2.7 per cent, below the industry average of above 3 per cent. This was due to the accounting policy for transfer of government securities from the available for sale category to the held to maturity. During the year, the bank has transferred about Rs 1,800-crore worth of securities taking advantage of the RBI's provisions allowing for such transfers once every year. The losses booked on account of this transfer was netted from interest earnings, leading to a lower NIM. If the bank had netted the amortisation amount from other income, the NIM would have been 3.3 per cent within the industry average.

5) BALANCE SHEET TRENDS : -CAPITAL -ASSETS -DEPOSITS -BORROWINGS -PROFITS : There was a sharp drop in net profit growth.the net profit was down from 177cr in 2004-05 to 51 cr in 2005-06. Bank of Maharashtra's net profit for the second quarter of the current fiscal is Rs 61.29 crore : Rs.4305200.00 : Rs.312145137.00 : Rs.269061875.00 : Rs.4883804.00

-NPAS: .Poor operational efficiencies: While NPAs has been a menace for the Indian banking sector, BOM's NPAs are a

bigger threat to its growth prospects. BOM's NPAs is much higher than those of its peers in the public sector. To reduce these levels, the Bank would have to provide for higher provisioning going forward, thus affecting its profitability. Despite being a well established bank it scores low on the operational front indicating that the bank may still be suffering from a PSU hangover

Poor reports on operations: A working group (Verma committee) was set up by the Reserve Bank (RBI) to assess weak and potentially weak banks. The committee concluded that BOM failed to comply with certain parameters, for which it was categorized under the second category of compliance. BOM has also been pulled up by the RBI for flaws in its systems, which include areas like asset classification, income recognition, provisioning and credit purposes. This reflects poorly on the image of the bank Potential for NPA reduction: A significant part of BOM's investments have a maturity period of over 5 years, thus indicating un-booked profits in its books. So the bank may be able to profit on these investments going forward (assuming that interest rates remain stable) and hence it will be able to provide aggressively for NPAs going forward 6) PEER GROUP ANALYSIS The net and gross non-performing assets (NPAs) as a percentage of advances have also come down for all commercial banks. In the public sector: Bank Dena Bank Central Bank of India, Bank of Maharashtra, Punjab & Sind Bank and Uco Bank 13 other public sector banks <1 Net NPA % 3 2-3

Only three banks net NPAs have risen during the year, that too marginally. For instance, Punjab National Banks net NPA rose from 0.20 per cent to 0.29 per cent and that of Vijaya Banks from 0.59 per cent to 0.85 per cent. In the case of State Bank of Indore, the net NPA level has almost doubled from 1 per cent to 1.83 per cent, but on a very low base. Public sector banks remained a drag with just 5.57 per cent growth in net profit Nine public sector banks reported a drop in net profits and, in some cases, the slide was very sharp. At least five of them saw a second successive drop in net profit growth in as many years. These are Andhra Bank, Bank of Maharashtra, Central Bank of India, Oriental Bank of Commerce, UCO Bank, United Bank India, Union Bank, Vijaya Bank and State Bank of Bikaner & Jaipur

Private banking segment: Bank Seven private banks Eight private banks Development Credit Bank IndusInd Bank Net NPA % <1 1-2 4.5 >2

Note : private banks average net profit rose by over 41 per cent and that of foreign banks by 54.76 per cent.

7) EXTENT OF COMPUTERISATION

The bank is also in the process of computerization of all its branches, which is likely to improve productivity further.

8) FUTURE PROSPECTS Growth initiatives: BOM has had a healthy record of business growth, especially advances over the last five years (advances have recorded a CAGR of 22% in the last five years). Its use of technology is also enabling it to offer a wider array of services to its customers. However, implementation of various initiatives typically takes time in public sector banks and hence achievement of targets may be sometime away. Bank of Maharashtra has set a target to ensure that its business crossed over Rs 1.10 lakh crore by 2010, the bank had surpassed the business landmark of Rs 50,000 crore. Of the 1.10 lakh crore business, the deposits would be around Rs 65000 crore and advances Rs 45000 crores. The low cost deposits in total deposits comprising 43 per cent reflected a strong growth performance of the bank. Various initiatives launched by the bank such as human resources development, training and technology had yielded better results with regard to overall performance of the bank. Intend bringing down our non performing asset ratio down to 1 per cent . Focus of the bank would be to raise low-cost resources. The low-cost resources comprising CASA (Current and Savings Accounts) comprised 43 per cent of the bank's working funds. Itintends to raise CASA to 45 per cent .

5.0. CONCLUSION AND RECOMMENDATIONS:

Conclusion:
Skills for internal model development, testing and maintenance is inadequate and will take considerable time to develop internally. The banks would have to resort to external help and rethink their organizational structures and training of staff to gear their institutions up for compliance

Recommendations:
Following are the recommendations that I like to suggest regarding risk management in bank. Software up gradation in the existing software that calculate credit risk rating in the bank. Bank must have adequate information systems for measuring ,monitoring,controlling and reporting liquidity risk. Bank needs some changes in existing components of credit risk regarding implementation of BASEL II in 2007. Training should provide to the risk management department personnel. Models should be changed or update by considering previous data or information. There are four primary areas of internal controls: limits for loan approval, and decision-making procedures); 2. accounting procedures (reconciliation of accounts, control lists, periodic trial balances, etc.); 3. the "four eyes" principle (segregation of various functions, cross-checking, dual control of assets, double signatures, etc.); and physical control over assets and investments. The bank should improve upon these internal controls.

1. organisational structures (definitions of duties and responsibilities, discretionary

6.0 BIBLIOGRAPHY

6.1 Books Risk based internal audit in banks by D.P.Gupta and R.K.Gupta Project risk management by D van well-stam,F Lindenaar,B van den bunt. Bank Finance by H.R. Machiraju Risk Management by S.B.Verma Risk Management in Banking by Joel Basis

6.2 Websites www.rbi.org.in www.bankofmaharashtra.org.in