Banking History: A Flashback Into Past. Banking System in Indian Context. Issues in Banking System. Introduction To Credit and Risk

A Study on Credit Risk Assessment : Understanding relationship between Credit Risk and Interest
Introduction
Banking history : A flashback into past. Banking System in Indian Context. Issues in Banking System. Introduction to credit and Risk.
Apeejay Institute of Technology-School of Management, Greater Noida
Banking History : A Flashback into past Without a sound and effective banking system in India it cannot have a healthy economy. The banking system of India should not only be hassle free but it should be able to meet new challenges posed by the technology and any other external and internal factors.
For the past three decades India's banking system has several outstanding achievements to its credit.
The most striking is its extensive reach. It is no longer confined to only metropolitans or cosmopolitans in India. In fact, Indian banking system has reached even to the remote corners of the country. This is one of the main reason of India's growth process.
The government's regular policy for Indian bank since 1969 has paid rich dividends with the nationalization of 14 major private banks of India. Not long ago, an account holder had to wait for hours at the bank counters for getting a draft or for withdrawing his own money. Today, he has a choice. Gone are days when the most efficient bank transferred money from one branch to other in two days. Now it is simple as instant messaging or dial a pizza. Money has become the order of the day.The first bank in India, though conservative, was established in 1786. From 1786 till today, the journey of Indian Banking System can be segregated into three distinct phases. They are as mentioned below:
Early phase from 1786 to 1969 of Indian Banks Nationalisation of Indian Banks and up to 1991 prior to Indian banking sector Reforms.New phase of Indian Banking System with the advent of Indian Financial & Banking Sector Reforms after 1991.To make this write-up more explanatory, I prefix the scenario as Phase I, Phase II and Phase III.
Phase I
The General Bank of India was set up in the year 1786. Next came Bank of Hindustan and Bengal Bank. The East India Company established Bank of Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843) as independent units and called it Presidency Banks. These three banks were amalgamated in 1920 and Imperial Bank of India was established which started as private shareholders banks, mostly Europeans shareholders. In 1865 Allahabad Bank was established and first time exclusively by Indians, Punjab National Bank Ltd. was set up in 1894 with headquarters at Lahore. Between 1906 and 1913, Bank of India, Central Bank of
India, Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set up. Reserve Bank of India came in 1935.
During the first phase the growth was very slow and banks also experienced periodic failures between 1913 and 1948. There were approximately 1100 banks, mostly small. To streamline the functioning and activities of commercial banks, the Government of India came up with The Banking Companies Act, 1949 which was later changed to Banking Regulation Act 1949 as per amending Act of 1965 (Act No. 23 of 1965). Reserve Bank of India was vested with extensive powers for the supervision of banking in india as the Central Banking Authority.
During those days public has lesser confidence in the banks. As an aftermath deposit mobilisation was slow. Abreast of it the savings bank facility provided by the Postal department was comparatively safer. Moreover, funds were largely given to traders.
Phase II Government took major steps in this Indian Banking Sector Reform after independence. In 1955, it nationalised Imperial Bank of India with extensive banking facilities on a large scale specially in rural and semi-urban areas. It formed State Bank of india to act as the principal agent of RBI and to handle banking transactions of the Union and State Governments all over the country.
Seven banks forming subsidiary of State Bank of India was nationalised in 1960 on 19th July, 1969, major process of nationalisation was carried out. It was the effort of the then Prime Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in the country were nationalised.
Second phase of nationalisation Indian Banking Sector Reform was carried out in 1980 with seven more banks. This step brought 80% of the banking segment in India under Government ownership. The following are the steps taken by the Government of India to Regulate Banking Institutions in the Country: 1949 : Enactment of Banking Regulation Act. 1955 :Nationalisation of State Bank of India. 1959 :Nationalisation of SBI subsidiaries. 1961 : Insurance cover extended to deposits. 1969 :Nationalisation of 14 major banks. 1971 : Creation of credit guarantee corporation.
1975 : Creation of regional rural banks. 1980 :Nationalisation of seven banks with deposits over 200 crore.
After the nationalisation of banks, the branches of the public sector bank India rose to approximately 800% in deposits and advances took a huge jump by 11,000%..Banking in the sunshine of Government ownership gave the public implicit faith and immense confidence about the sustainability of these institutions.
Phase III
This phase has introduced many more products and facilities in the banking sector in its reforms measure. In 1991, under the chairmanship of M Narasimham, a committee was set up by his name which worked for the liberalisation of banking practices.
The country is flooded with foreign banks and their ATM stations. Efforts are being put to give a satisfactory service to customers. Phone banking and net banking is introduced. The entire system became more convenient and swift. Time is given more importance than money.The financial system of India has shown a great deal of resilience. It is sheltered from any crisis triggered by any external macroeconomics shock as other East Asian Countries suffered. This is all due to a flexible exchange rate regime, the foreign reserves are high, the capital account is not yet fully convertible, and banks and their customers have limited foreign exchange exposure.
Nationalisation Of Banks In India The nationalisation of banks in India took place in 1969 by Mrs. Indira Gandhi the then prime minister. It nationalised 14 banks then. These banks were mostly owned by businessmen and even managed by them.
Central Bank of India Bank of Maharashtra Dena Bank Punjab National Bank Syndicate Bank Canara Bank
Indian Bank Indian Overseas Bank Allahabad Bank United Bank of India UCO Bank Bank of India Bank of Baroda Union Bank
Banking System in Indian Context The banking system in India is significantly different from that of other Asian nations because of the countrys unique geographic, social, and economic characteristics. India has a large population and land size, a diverse culture, and extreme disparities in income, which are marked among its regions. There are high levels of illiteracy among a large percentage of its population but, at the same time, the country has a large reservoir of managerial and technologically advanced talents. Between about 30 and 35 percent of the population resides in metro and urban cities and the rest is spread in several semi-urban and rural centers.
The countrys economic policy framework combines socialistic and capitalistic features with a heavy bias towards public sector investment. India has followed the path of growth-led exports rather than the exported growth of other Asian economies, with emphasis on self-reliance through import substitution.
These features are reflected in the structure, size, and diversity of the countrys banking and financial sector. The banking system has had to serve the goals of economic policies enunciated in successive five year development plans, particularly concerning equitable income distribution, balanced regional economic growth, and the reduction and elimination of private sector monopolies in trade and industry. In order for the banking industry to serve as an instrument of state policy, it was subjected to various nationalization schemes in different phases (1955, 1969, and 1980). As a result, banking remained internationally isolated (few Indian banks had presence abroad in international financial centers) because of preoccupations with domestic priorities, especially massive branch expansion and attracting more people to the system. Moreover, the sector has been assigned the role of providing support to
other economic sectors such as agriculture, small-scale industries, exports, and banking activities in the developedcommercial centers (i.e., metro, urban, and a limited number of semi-urban centers).The banking systems international isolation wasalso due to strict branch licensing controls on foreign banks already operating in the country as well as entry restrictions facing new foreign banks. A criterion of reciprocity is required for any Indian bank to open an office abroad.
These features have left the Indian banking sector with weaknesses and strengths. A big challenge facing Indian banks is how, under the current ownership structure, to attain operational efficiency suitable for modern financial intermediation. On the other hand, it has been relatively easy for the public sector banks to recapitalize, given the increases in nonperforming assets (NPAs), as their Government dominated ownership structure has reduced the conflicts of interest that private banks would face.
Financial Structure
The Indian financial system comprises the following institutions:
1. Commercial banks a) Public sector b) Private sector c) Foreign banks d) Cooperative institutions (i) Urban cooperative banks (ii) State cooperative banks (iii) Central cooperative banks
2. Financial institutions a) All-India financial institutions (AIFIs) b) State financial corporations (SFCs) c) State industrial development corporations d) (SIDCs)
3. Nonbanking financial companies (NBFCs)
4. Capital market intermediaries
About 92 percent of the countrys banking segment is under State control while the balance comprises private sector and foreign banks. The public sector commercial banks are divided into three categories.
State bank group (eight banks): This consists of the State Bank of India (SBI) and Associate banks of SBI. The Reserve Bank of India (RBI) owns the majority share of SBI and some Associate Banks of SBI. 1 SBI has 13 head offices governed each by a board of directors under the supervision of a central board. The boards of directors and their committees hold monthly meetings while the executive committee of each central board meets every week.
Nationalized banks (19 banks): In 1969, the Government arranged the nationalization of 14 scheduled commercial banks in order to expand the branch network, followed by six more in 1980. A merger reduced the number from 20 to 19. Nationalized banks are wholly owned by the Government, although some of them have made public issues. In contrast to the state bank group, nationalized banks are centrally governed, i.e., by their respective head offices. Thus, there is only one board for each nationalized bank and meetings are less frequent (generally, once a month).
Regional Rural Banks (RRBs): In 1975, the state bank group and nationalized banks were required to sponsor and set up RRBs in partnership with individual states to provide low-cost financing and credit facilities to the rural masses.
Reserve Bank of India : A Prominent Role

RBI is the banker to bankswhether commercial, cooperative, or rural. The relationship is established once the name of a bank is included in the Second Schedule to the Reserve Bank of India Act, 1934. Such bank, called a scheduled bank, is entitled to facilities of refinance from RBI, subject to fulfillment of the following conditions laid down in Section 42(6) of the Act, as follows:
It must have paid-up capital and reserves of an aggregate value of not less than an amount specified from time to time
It must satisfy RBI that its affairs are not being conducted in a manner detrimental to the interests of its depositors.
The classification of commercial banks into scheduled and nonscheduled categories that was introduced at the time of establishment of RBI in 1935 has been extended during the last two or three decades to include state cooperative banks, primary urban cooperative banks, and RRBs. RBI is authorized to exclude the name of any bank from the Second Schedule if the bank, having been given suitable opportunity to increase the value of paid-up capital and improve deficiencies, goes into liquidation or ceases to carry on banking activities.
A system of local area banks announced by the Government in power until 1997 has not yet taken root. RBI has given in principle clearance to five applicants. Specialized development financial institutions (DFIs) were established to resolve market failures in developing economies and shortage of long-term investments. The first DFI to be established was the Industrial Finance Corporation of India (IFCI) in 1948, and was followed by SFCs at state level set up under a special statute. In 1955, Industrial Credit and Investment Corporation of India (ICICI) was set up in the private sector with foreign equity participation. This was followed in 1964 by Industrial Development Bank of India (IDBI) set up as a subsidiary of RBI. The same year saw the founding of the first mutual fund in the country, the Unit Trust of India (UTI).
A wide variety of financial institutions (FIs) has been established. Examples include the National Bank for Agriculture and Rural Development (NABARD), Export Import Bank of India (Exim Bank), National Housing Bank (NHB), and Small Industries Development Bank of India (SIDBI), which serve as apex banks in their specified areas of responsibility and concern. The three institutions that dominate the term-lending market in providing financial assistance to the corporate sector are IDBI, IFCI, and ICICI. The Government owns insurance companies, including Life Insurance Corporation of India (LIC) and General Insurance Corporation (GIC). Subsidiaries of GIC also provide substantial equity and loan assistance to the industrial sector, while UTI, though a mutual fund, conducts similar operations. RBI also set up in April 1988 the Discount and Finance House of India Ltd.
(DFHI) in partnership with SBI and other banks to deal with money market instruments and to provide liquidity to money markets by creating a secondary market for each instrument. Major shares of DFHI are held by SBI.
Liberalization of economic policy since 1991 has highlighted the urgent need to improve infrastructure in order to provide services of international standards. Infrastructure is woefully inadequate for the efficient handling of the foreign trade sector, power generation, communication, etc. For meeting specialized financing needs, the Infrastructure Development Finance Company Ltd. (IDFC) was set up in 1997. To nurture growth of private capital flows, IDFC will seek to unbundle and mitigate the risks that investors face in infrastructure and to create an efficient financial structure at institutional and project levels. IDFC will work on commercial orientation, innovations in financial products, rationalizing the legal and regular framework, creation of a long-term debt market, and best global practices on governance and risk management in infrastructure projects. NBFCs undertake a wide spectrum of activities ranging from hire purchase and leasing to pure investments.
More than 10,000 reporting NBFCs (out of more than 40,000 NBFCs operating) had deposits of Rs1,539 billion in 1995/96. RBI initially limited their powers, aiming to moderate deposit mobilization in order to provide depositors with indirect protection. It regulated the NBFCs under the provisions of Chapter IIIB of the RBI Act of 1963, which were confined solely to deposit acceptance activities of NBFCs and did not cover their functional diversity and expanding intermediation. This rendered the regulatory framework inadequate to control NBFCs. The RBI Working Group on Financial Companies recommended vesting RBI with more powers for more effective regulation of NBFCs. A system of registration was introduced in April 1993 for NBFCs with net owned funds (NOF) of Rs5 million or above.
Magnitude and Complexity of the Banking Sector
The magnitude and complexity of the Indian banking sector can be understood better by looking at some basic banking data.
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In terms of growth, the number of commercial bank branches rose eightfold from 8,262 in June 1969 (at the time of nationalization of 14 banks) to 64,239 in June 1998. The average population per bank branch dropped from 64,000 in June 1969 to 15,000 in June 1997, although in many of the rural centers (such as in hill districts of the North), this ratio was only 6,000 people per branch. This was achieved through the establishment of 46,675 branches in rural and semi-urban areas, accounting for 73.5 percent of the network of branches. As of March 1998, deposits of the banking system stood at Rs6,013.48 billion and net bank credit at Rs3,218.13 billion.
The number of deposit accounts stood at 380 million and the number of borrowing accounts at 58.10 million. The regional balance observed since nationalization, and stagnation in branch expansion in the post-reform period. There has been a net decline in the number of rural branches and a marginal rise in the number of semi-urban branches. In an effort to increase the flow of funds through cooperative banks, the resources of the main refinancing agency, NABARD, were boosted substantially through deposits under the Rural Infrastructure Development Fund placed by commercial banks, as well as through the improvement of NABARDs capital base and increase in the general line of credit by RBI. The functioning of cooperative banking institutions did not show much improvement during 1996/97 and 1997/98. With deposits and credit indicating general deceleration, the overdue position of these institutions remained more or less stagnant.
However, cooperative banks emulated the changing structure and practices of the commercial banking sector in revamping their internal systems, ensuring in the process timely completion of audit and upgrading of their financial architecture. In various regions, there is a differing pattern of cooperative banking, determined according to the strength of the cooperative movement. Some cooperatives such as those in the dairy and sugar sectors are as big as corporate entities. In fact, dairy cooperatives compete with multinational corporations such as Nestl. There is also a category in the cooperative
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sector called primary (urban) cooperative banks (PCBs).As of March 1998, there are 1,416 reporting PCBs catering primarily to the needs of lower- and middle income groups. These are mainly commercial in character and located mostly in urban areas. Some have become a competitive force with notably big branch network and high growths recorded. As of 1998, PCBs have deposits of Rs384.72 billion and advances of Rs264.55 billion
The advances of PCBs fall in the majority of categories of priority sectors prescribed for PSBs and their recovery performance is better than that of PSBs.
The cooperative banks also perform basic functions of banking but differ from commercial banks in the following respects:
Commercial banks are joint-stock companies under the Companies Act of 1956, or public sector banks under a separate Act of the Parliament.
Cooperative banks were established under the Cooperative Societies Acts of different states;
Cooperative banks have a three-tier setup, with state cooperative bank at the apex, central/district cooperative banks at district level, and primary cooperative societies at rural level.
Only some of the sections of the Banking Regulation Act of 1949 (fully applicable to commercial banks), are applicable to cooperative banks, resulting in only partial control by RBI of cooperative banks.
Cooperative banks function on the principle of cooperation and not entirely on commercial parameters
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Issues in the Banking Sector

The Nonperforming Asset Problem
about Rs457 billion in 1998 .By 1997/98 banks had managed to recover Rs250 billion and provisioned for Rs181.39 billion. But since new sets of loans go bad every year, the absolute figures could be increasing. About 70 percent of gross NPAs are locked up in hard-core doubtful, and loss assets, accumulated over years. Most of these are backed by securities, and, therefore, recoverable. But these are pending either in courts or with the Board for Industrial and Financial Reconstruction (BIFR).
NPAs in Indian banks as a percentage of total assets is quite low. The NPA problem of banking institutions in India is exaggerated by deriving NPA figures based on percentage against risk assets instead of total earning assets. The Indian banking system also makes full provisions and not net of collaterals as practiced in other countries. Narasimham Committee (II) noted the danger of opaque balance sheets and inefficient auditing systems resulting in an underrating of NPAs. Nevertheless, there is a general feeling that the NPA problem is manageable. Considerable attention is being devoted to this problem by RBI, individual banks, and shareholders (Government and private).
With the increasing focus internationally on NPAs during the 1990s affecting the risk-taking behavior of banks, governments and central banks have typically reacted to the problem differently depending on the politico-economic system under which the banks operate. In some countries such as Japan, banks have been encouraged to write off bad loans with retained earnings or new capital or both. This ensures that the cost of resolving the NPA problem is borne by the banks themselves. However, this policy is not suitable for countries such as India where the banks neither have adequate reserves nor the ability to raise new capital. In some countries, the banks are State owned so the final responsibility of resolving the problem lies with the respective national government. In these cases, the governments concerned have been forced to securitize the debt through debt underwriting and recapitalization of the banks. For instance, in Hungary, guarantees were
The NPAs of public sector banks were recorded at
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established for all or part of the bad loans with the banking system, while in Poland, loans have been consolidated with the help of long-term restructuring bonds.
Most of these countries have emphasized efforts to recover the bad loans from the borrowers, usually in conjunction with one or both the measures mentioned above. If direct sale of the assets of defaulting firms was deemed nonviable, banks were encouraged to coerce these firms to restructure. The former Czechoslovakia and Poland, for example, consolidated all NPAs into one or more hospital banks, which were then vested with the responsibility to recover the bad loans. In Poland, this centralization of the recovery process was supplemented by regulations that authorized the loan recovery agency to force the defaulting industrial units to either restructure or face liquidation. Other countries such as Bulgaria created hospital banks and legalized swap of debt for equity that gave banks stakes in the defaulting firms, and hence provided them with the incentive and the power to restructure the enterprises.
In India, conversion of loans into equity is an option that should be seriously considered instead of attempting recovery solely through either or both legal means and an asset reconstruction company (ARC). Unlike NPAs, the substitute asset of equity will be an intangible investment ready for sale to potential buyers. The DFIs have a formal conversion clause for debt to be exchanged for equity that ought to be exercised not only if it is an NPA but also if the equity is appreciating. This clause has not been so far much exercised.
MAIN CAUSES OF NONPERFORMING ASSETS
One of the main causes of NPAs in the banking sector is the directed loans system under which commercial banks are required to supply a prescribed percentage of their credit (40 percent) to priority sectors. The credit supply of PSBs to the priority sectors has increased gradually to a little more than 40 percent of total advances as of March 1998. Loans to weaker sections of society under state subsidy schemes have led borrowers to expect that like a nonrefundable state subsidy, bank loans need not be repaid.
Directed loans supplied to the micro sector are problematic of recoveries especially when some of its units become sick or weak. Nearly 7 percent of PSBs net advances was directed to these units.Clearly, these units are one of the most significant sources of NPAs, rather than bank mismanagement on the
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scale that has been seen in Japan and some Southeast Asian countries. The weakness of the banking sector revealed by the accumulated NPAs stems more from the fact that Indian banks have to serve social functions of supporting economically weak sectors with loans at subsidized rates.
The Narasimham Report (II) recommended that the directed credit component should be reduced from 40 to 10 percent. As the directed credit component of the priority sectors arises from loan schemes requiring Government approval of beneficiaries, banks selection standards with regard to eligible borrowers are being interfered with. The nexus of subsidies should be eliminated from bank loan schemes. Targets or prescribed percentages of credit allocation toward the priority sectors should not be confused with directed credit.
Government subsidy schemes were intended originally to prompt bankers to lend to weaker sectors. But as the directed credit component became partly politicized and bureaucratized, the realization has grown that priority sector bank credit should operate with the required degree of risk management.
However, the dangers of the priority credit system to sound banking should not be exaggerated. The shackles of directed lending have been removed and replaced by tests of commercial viability. Economic activities classified under priority sector have undergone a metamorphosis and upgrade since 1969 when banks were first nationalized and assigned the role of financing the sector. The expansion of the definition of the priority sector, upgrade in the value limit to determine small-scale industry (SSI) status, and provision for indirect lending through placement of funds with NABARD and SIDBI have lightened the performance load of banks. Thus, priority sector financing is no longer a drag on banks. But in the long term, Indian banks should be freed from subsidized lending.
The scope in India for branch expansion in rural and semi-urban areas is vast and also necessary. Increasingly, NBFCs operating at such places are coming under regulatory pressure and are likely toabandon their intermediation role. Banks will have to move in to fill the void and these branches will find priority sector financing as the main business available especially in rural/semi-urban centers. Operational restructuring of banks should ensure that NPAs in the priority sectors are reduced, but not priority sector lending. This will remain a priority for the survival of banks. Any decisions about insulating Indian banks from priority sector financing should not be reached until full-scale research is undertaken, taking into account several sources including records of credit guarantee schemes.
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RBI NORMS
RBI is considering changes in asset classification, income recognition, and provisioning norms in line with recommendations of the Basle Committee on Banking Supervision that were made public in October 1998. It remains to be seen if RBI will give banks and FIs discretion in the classifications of assets, partially replacing the prevailing rigid norms and redefining provisioning norms taking into account collateral.
According to current practice, banks and FIs are required to make 10 percent provisioning on substandard assets and 20 percent on doubtful assets, even if the assets are backed by collateral.The Basle Committee on Banking Supervision circulated a consultative paper entitled Sound Practices for Loan Accounting, Credit Risk Disclosure, and Related Matters, complementing the Basel core principles in the fields of accounting, and disclosure for banks lending business and related credit risk.
RBI has already taken steps to implement the Basel core principles, which broadly deal with risk management, prudential regulations relating to capital adequacy, and various internal control requirements. Banks and FIs have been insisting that existing asset classification rules are rigid leaving no scope for discretion, while the Basle Committee has said that recognition and measurement of impairment of a loan cannot be based only on specific rules. The committee has also indicated that banks should identify and recognize impairment in a loan when the chances of recovery are dim. It also stated that the focus of assessment of each loan asset should be based on the ability of the borrower to repay the loan. The value of any underlying collateral factors also plays a major role in this assessment.
Another major difference between the Basle Committee recommendations and the existing asset classification norms in India relates to restructured loans. According to the Basle Committee norms, a restructured troubled loan would not automatically be classified as an impaired loan. In India, however, any restructuring automatically classifies the assets as impaired. Banks and institutions are required to classify the restructured loans as substandard for two years and are prohibited from booking interest during this period. The relaxation in asset classification norms will mean little in the Indian context.In developed financial systems, it is beneficial to have flexibility in determining weights for NPAs.However, liberal measures should be introduced only when all local players employ greater transparency in the
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asset classification process. It is necessary to first ensure that companies and borrowers follow norms of disclosure and transparency. Much needs to be done in this respect by the Institute of Chartered Accountants of India.The condition of Indian banks under the present norms has improved, contributing to a better culture of recovery. The borrowers must respond with better performance.
RATING OF BANKS
RBI has subjected banks to ratings under capital adequacy, asset quality, compliance, and system (CACS); and capital adequacy, asset quality, management, earnings, liquidity, and systems (CAMELS) models for differentiating supervisory priorities. When reforms were first introduced under recommendation of the Narasimham committee (I), the 27 (then 28) PSBs were placed under A, B, and C categories; i.e., sound banks, banks with potential weakness, and sick banks, respectively. Accordingly, recapitalization and restructuring were carried out for B and C categories.
For individual ratings by international rating agencies, a bank is assessed as if it were entirely independent and could not rely on external support. The ratings are designed to assess a banks exposure to risks, appetite for risks, and management of risks. Any adverse or inferior rating is an indication that it may run into difficulties such that it would require support. Such credit rating announcements ignore the public sensitivity to which the banking system is constantly exposed. The public expects banks to try to anticipate changes, recognize opportunities, deal with and manage risks to limit losses, and create wealth through lending. While the best banks may always play a super-safe role by confining operations to choice centers and business segments, banks in India are expected to operate on a high-risk plane. As such, the Government should support banks even during stages when they are nudged to offer equity to the public.
Introduction to credit & Risk Volatility of global markets, technological advancements, innovative new financial products and changing regulatory environments have made risk management a critical task for financial institutions today as they simultaneously mitigate and create risks.
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It has, therefore, become increasingly important to identify, measure, monitor and manage a financial institutions exposure to product-market and capital-market risks. In capital-market a firm transacts with owners and lenders and is exposed to interest rate, liquidity, currency, settlement and basis risks. In the product market it transacts with clients and suppliers. This may result in credit, strategic, regulatory, operating, commodity, human resources, legal and product risks.
Risk is simply uncertainty. It is not only the incidence of adverse outcomes but unforeseen favorable outcomes are also a form of risk. Foregoing opportunities is as significant as actual losses. Risk can be avoided by not undertaking transaction (s) that carries risk. It can be reduced through actions that lower the severity of loss. It can be retained by accepting the loss when it occurs. It can be transferred by causing another party to accept the risk. All risks that are not avoided or transferred are retained by default.
The business of financial institutions, as intermediaries, is essentially the business of bearing risk for a price. Without accepting risk there is little reason for their existence. However, any risk that compromises the survival of the firm cannot be adequately compensated. Equilibrium between risk and return must be maintained. Recognizing both the potential value of opportunity and the potential impact of adverse effects is of immense importance. It requires forward planning approach, identifying uncertainties, anticipating potential outcomes and making risk management an integral and vital part of strategic management.
Financial institution functions within legal and regulatory constraints that limit then risk management alternatives.
Risk management involves identification, measurement, monitoring and controlling risks ensuring that,
i.
The individuals who take or manage risks clearly understand it
ii.
The organizations risk exposure is within the limits established by its Board of Directors (BOD).
iii.
Risk taking decisions are in line with the business strategy and objectives set by BOD
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iv.
The expected payoffs compensate for the risk taken
v. vi.
Risk taking decisions are explicit and clear Sufficient capital as a buffer is available to justify the level of risk exposure.
The acceptance and management of financial risk is inherent to the business of banking and banks roles as financial intermediaries. Risk management as commonly perceived does not mean minimizing risk; rather the goal of risk management is to optimize the risk-reward trade-off. Not withstanding the fact that banks are in the business of taking risk, it should be recognized that an institution need not engage in business in a manner that unnecessarily imposes risk upon it: nor should it absorb risk that can be transferred to others.
In every financial institution, risk management activities broadly take place simultaneously at the following different hierarchy levels
Strategic Level:
This encompasses risk management functions performed by senior management and BOD.
Macro Level:
This encompasses risk management within a business area or across business lines. Generally the risk management activities performed by middle management of units devoted to risk reviews fall into this category.
Micro Level:
This involves on-the-line risk management where risks are actually created. This covers the risk management activities performed by individuals who take risk on the organizations behalf such as front office and loan origination functions.
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There are four major types of risk, which any financial institution has to face, they are:
i. ii. iii. iv.
Credit Risk Market Risk Liquidity Risk Operational Risk

Credit Risk Credit risk arises from the potential that an obligor is either unwilling to perform on an obligation or its ability to perform such obligation is impaired resulting in economic loss to the bank.
Historically, credit risk has been the risk causing major losses to banks operating in india. The Board of Directors is responsible for formulating a well-defined credit policy. The senior management needs to develop policies, systems and procedures and establish an organizational structure to measure, monitor and control credit risk, which should also be duly approved by the board. The bank should also put in place a well-designed credit risk management setup commensurate with the size and complexity of their credit portfolio. The loan origination function is of key importance, which necessitates the need for proper analysis of the borrowers creditworthiness and financial health. This aspect is reinforced by the credit administration function that not only ensures that activities conform to a banks policies and procedures, but also maintains credit files, loan documents and monitors compliance of loan covenants. The banks are encouraged to assign internal credit ratings to individual credit exposures. The architecture of such a rating system may vary among banks. The loan portfolio should be monitored regularly and a report prepared at periodic intervals both for the aggregates as well as sectoral and individual loan levels. Finally, banks are required to formulate a strategy/action plan to deal with problem loans.
Market Risk
This is the risk that the value of the on and off-balance sheet positions of a financial institution will be adversely affected by movements in market rates or prices such as interest rates, foreign exchange rates, equity prices, credit spreads and / or commodity prices resulting in a loss to earnings and capital. Notwithstanding the fact that the board and senior management should develop the banks strategy
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and transform those strategies by establishing policies and procedures for market risk management, a robust risk management framework is an important element to manage market risk. Such a framework includes an organizational setup commensurate with the size and nature of business, and system and procedures for measurement, monitoring and mitigating/controlling market risks. Ideally, the hierarchical structure includes an ALCO (Asset Liability Committee) headed by the CEO of the bank, which may provide updates of Board of Directors Sub-committee on Risk Management. Further, banks should establish a mid office between front office and bank office functions. This unit should manage risks relating to treasury operations and report directly to senior management. There is a vast array of methodologies to measure market risk, ranging from static gap analysis to sophisticated risk models. Banks may adopt various techniques to measure market risk, as they deem fit. Finally, the banks should ensure that they have adequate control mechanisms and appropriate setup such as periodic risk reviews / audits etc to monitor market risk.
Liquidity Risk Liquidity risk is the potential for loss to an institution arising from either its inability to meet its obligation or to fund increases in assets as they fall due without incurring unacceptable cost or losses. As the impact of such risk could be catastrophic, the senior management needs to establish a mechanism to identify, measure and mitigate/control liquidity risk. The senior management should also establish an effective organization structure to continuously monitor the banks liquidity. Generally, the Banks BOD constitutes a committee of senior management known as ALCO to undertake the function. Key elements of a sound liquidity management process include an effective Management Information System, risk limits and development of a contingency funding plan.
Operational Risk Operational risk is the risk of loss resulting from inadequate or failed internal processes, systems and people or from external events. Besides establishing a tolerance, level for operational risk, the BOD needs to ensure that the senior management has put in place adequate systems, procedures and controls for all significant areas of operations. Further, the management of the bank should effectively communicate laid down procedures / guidelines down the line and put in place a reasonable set up to implement the same.
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Research Design
Objectives. Need and Importance. Methodology. Scope Limitation.
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OBJECTIVES :
To understand various credit facilities of a bank. To evaluate different banks credit policy. To understand credit appraisal process. To understand the relationship between risk and interest rate. To understand customers banking taste and preference with respect to credit facilities.
NEED & IMPORTANCE
In todays market scenario, one of the most critical areas to focus on is to protect the bank from bankruptcy. In such conditions Credit and Risk Department plays a key role in growth of banks. Any delay in realizing the receivables would adversely affect the working capital, which in turn effects the overall financial management of a firm. No firm can be successful if its over dues are not collected, monitored and managed carefully in time. Thus Risk management is important in sustaining the bank and its growth.
METHODOLOGY
To fulfill the objectives of the study both primary and secondary data are used. The primary data was collected through interviewing Relationship managers of various leading banks in the Guwahati, Assam area. We have taken into consideration 16 different nationalized and private banks which are actively involved in catering the credit needs of the people of this area. We have approached the banks with a prepared questionnaire and tried to obtain their respective banks criteria in approving credit facilities to their customers.
We have also approached various businesses and individuals to know their taste and preferences of lending money from banks.
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The secondary data was collected from published records, website and reports of the RBI. In this report, I have used various data and excerpts to understand the credit terminologies from different websites dealing with financial information.
SCOPE
The study covers Indian banking history and its transformation till date. The study intended to cover credit appraisal process. The process involved in loan disbursement has been studied to identify the weak area, follies committed in disbursement or in the design of disbursement process. The seeds of default are built in; hence the study of loan disbursement process has been attempted.
It has been tried to understand the different aspects such as age and professions of the customers which are taken into consideration to grant them loans. The study focuses on the Negative profile in granting loan facilities. The study covers the different Reports of committee, and other tool such as CIBIL in judging the repayment capability of the credit pleading customer. It has been tried to portray the preference of banks of the customers in terms credit facilities. Based on the data collected from various banks , I have tried to analyse and summaries the policy of different banks such as the age limit , the percentage of amount sanctioned against the mortgage value or any negative profile which they least prefer in granting credit limits.
LIMITATIONS The study is limited to Guwahati city only. The study covers only 16 Banks. Some of the loan products were unavailable at this area.
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Literature Review
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Literature Review
The Majority of financial institutions and banks losses stem from outright default due to inability of customers to meet obligations in relation to lending,trading,settlement and other financial transaction .Alternatively, banks also face losses as a result of a fall in financial value of their assets due to actual or perceived deterioration in asset credit quality during recession or crisis. Inaddition , bank losses can
sometimes be due to the unethical behavior of its staff which had happened from time to time as in Lesson at barings and recently,Kerviel at societeGeneralmoreover , the recent sub-prime mortgage crisis has caused huge losses for banks in U.S. and European and they have to seek capital injection from Middle Ease, China and signapore investors. The world financial market has evolved with instruments that bank and financial institution have lost track of their real identity causing chaos in the Industry. It is essential that banks manages these risks so as to reduce losses and ensure continued existence in the longer term. One major riskthat needs to be effectively managed and investigated is credit risk. Bankfailures, acquisitions and consolidation have encouraged surviving banks to take a closer look at how to structure operations, build loan portfolios and improve asset quality.
Credit and interest rate risks are among the most important risks faced by financial institutions. It is well known that the two risks are economically related, and understanding their relationship is important to many applications in finance. For example, the values of callable corporate bonds of fixed coupons depend on both the interest rate dynamics and the issuers credit qualities. Alternatively, financial institutions balance sheets include both credit and interest rate-sensitive instruments. If interest rates (or credit quality) change unexpectedly, the resulting impact on credit quality (or interest rates) will help determine how the assets and liabilities line up, consequently determining the institutions financial health. Thus, the relationship between credit and interest rate risks plays an important role in both pricing instruments whose values are sensitive to both risks, as well as in managing an institutions balance sheet.
Despite its importance, the exact nature of the relationship between credit and interest rate risk is not quite clear. For example, consider the relationship between default and interest rate. If the economy is in recession and the default rate is high, interest rates are often relatively low through the traditional central bank monetary policy of lowering rates in the hope of stimulating the economy. When the
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economy improves, the central bank tends to raise rates. Given that government rates often form the basis of the cost of capital faced by the companies, when the interest rates increase, a firm must generate a higher rate of return on its assets to stay in business. If the cost of capital is higher than the rate of return for a particular company, that firm will run into financial insolvency or bankruptcy. In other words, the central bank is raising rates in an effort to slow the economy. Therefore, we may conjecture that the relationship between default risk and interest rates is sensitive to some measure of where the economy is in the business cycle and/or other macroeconomic factors. Moreover, comovements between interest rates and default risk may exhibit different behavior whether analyzed contemporaneously or in a causal or predictive setting.
The importance of credit risk management for banking is tremendous. Banks and other financialinstitutions are often faced with risks that are mostly of financial nature. These institutions mustbalance risks as well as returns. For a bank to have a large consumer base, it must offer loanproducts that are reasonable enough. However, if the interest rates in loan products are too low,the bank will suffer from losses. In terms of equity, a bank must have substantial amount ofcapital on its reserve, but not too much that it misses the investment revenue, and not too littlethat it leads itself to financial instability and to the risk of regulatory non-compliance.
Credit risk management, in finance terms, refers to the process of risk assessment that comes inan investment. Risk often comes in investing and in the allocation of capital. The risks must be assessed so as to derive a sound investment decision. Likewise, the assessment of risk is also crucial in coming up with the position to balance risks and returns. Banks are constantly faced with risks. There are certain risks in the process of granting loans to certain clients. There can be more risks involved if the loan is extended to unworthy debtors.
Certain risks may also come when banks offer securities and other forms of investments. The risk of losses that result in the default of payment of the debtors is a kind of risk that must be expected. Because of the exposure of banks to many risks, it is only reasonable for a bank tokeep substantial amount of capital to protect its solvency and to maintain its economic stability. The second Basel Accords provides statements of its rules regarding the regulation of the banks capital allocation in connection with the level of risks the bank is exposed to. The greater the bank is exposed to risks, the greater the amount of capital must be when it comes to its reserves, so as to maintain its solvency and
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stability. To determine the risks that come with lending and investment practices, banks must assess the risks. Credit risk management must play its role then to help banks be in compliance with Basel II Accord and other regulatory bodies.
To manage and assess the risks faced by banks, it is important to make certain estimates, conduct monitoring, and perform reviews of the performance of the bank. However, because banks areinto lending and investing practices, it is relevant to make reviews on loans and to scrutinize and analyze portfolios. Loan reviews and portfolio analysis are crucial then in determining the credit and investment risks.
The complexity and emergence of various securities and derivatives is a factor banks must beactive in managing the risks. The credit risk management system used by many banks today hascomplexity; however, it can help in the assessment of risks by analyzing the credits and determining the probability of defaults and risks of losses.
Credit risk management for banking is a very useful system, especially if the risks are in line with the survival of banks in the business world.
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Inter-Relationship Between Credit And Risk
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Risk is a fact of business life. Taking and managing risk is part of what organizations must do tocreate profits and shareholder value. But the corporate scenario of recent years suggests thatmany organizations neither manage risk well nor fully understand the risks they are taking.
Risk, in very broad terms can be defined as the chance that some event will have a positive or negative effect on something of value. In financial contexts, it is defined as the chance that the returns on an investment will be different from what were expected. This includes the possibility of losing some or all of the original investment.
Hedging usually involves taking positions in assets that are negatively correlated, so that if the value of one asset goes down, the value of another asset would go up, thereby keeping the net losses of the firm at the minimum. To take a hedge position, it is necessary that the firm estimates the risk it is exposed to.
The importance of the assessment (and then the management) of risk also arises from the relationbetween the risks undertaken by a firm and the returns it gets. The reason is that the investorsexpect to be compensated for the additional risk that they bear. The necessity to measure risk becomes more important because firms need to know their stand; about how much risk they are bearing for what amount of returns. Sometimes, it is not only the firm and its owners and employees who are affected but the common people are also effected if a firm goes bankrupt due to the extreme risk positions it takes too much risk, like in cases of banks becoming bankrupt due to low quality lending. But there would be very low returns without being exposed to any risk. Therefore there is a needto strike a middle path to find the maximum amount of risk that can be taken without having afear of bankruptcy. Credit Risk is the risk that a firm (or any party) will not recover the payment due to it, because the borrower will default. Though this risk exists for almost all businesses (as there is a risk that they might not receive their receivables), the risk is huge for financial institutions and banks, which are in the business of lending.Risk is the potential impact (positive or negative) on an asset due to some present or futureoccurrence. In financial terms, risk is the probability that an assets value will reduce or diminish,
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creating problems for the firm owning the asset. The asset could be the cash flows of the firm, the fixed assets of the firm, or the positions that the firm takes in various financial instruments.
Measurement of risk comprises the quantification of the risk that the firm expects it will face,and the firm is therefore in a position to take decisions that mitigate (in financial terms hedge)the risk.Credit Risk is the first kind of risk identified, it is the risk that a firm will not be able to collectthe loans it lent. As can be expected, credit risk is the most predominant form of risk for banks and financial institutions.
The assessment of credit risk has been one of the major necessities for compliance with the Basel I norms (which were set out for all international banks). Basel I gave the minimum capital that banks required to maintain so that the probability of the bank defaulting is minimal. This minimum capital that is required to be maintained is determined by using the credit exposures of the bank.
Basel II developed this context of assessing and minimizing credit risk further by assigning weights to the various credit exposures of the bank. The net capital that is required to be maintained is then determined. The benefit is that the capital requirements according to Basel II are usually much lesser than under Basel I, therefore banks have more free cash flows that canbe used for the further expansion of their business. The banks determine the risk-weight that has to be assigned to each asset according to the Basel guidelines. One method is based on the credit ratings of the borrowers (called the standardized Approach); a borrower firm that has a high credit rating is given a low weight and vice versa. Another way is to use the Internal Ratings Based Approach (IRB Approach), where the bank calculates the credit risk inherent in its exposures. The estimation of the probability of default(PD) is a very crucial part of the IRB approach. The Probability of Default, along with measures like Expected Loss and Loss Given Default are used to find the final credit exposure of the bank, and therefore assess the adequate capital requirements of the bank.
Because there are many types of counterpartiesfrom individuals to sovereign governments, and many different types of obligationsfrom auto loans to derivatives transactionscredit risk takes many forms. Credit Quality of an obligation, refers to counterpartys ability to perform on an obligation. This encompasses both the obligation's default probability and anticipated recovery rate. The term Credit Analysis is used to describe any process for assessing the credit quality of counter party. Credit Analysis
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is often done based on the balance sheets and the financial statements of the firms. Credit risk modeling is a concept that broadly encompasses any algorithm-based methods of assessing credit risk.
For loans to individuals or small businesses, credit quality is typically assessed through a process of Credit Scoring. Prior to extending credit, a bank or other lender will obtain information aboutthe party requesting a loan. In the case of a bank issuing credit cards, this might include the party's annual income, existing debts, whether they rent or own a home, etc. A standard formula is applied to the information to produce a number, which is called a Credit Score. Based upon the credit score, the lending institution will decide whether or not to extend credit. The process is formulaic and highly standardized.
There are many ways that credit risk can be managed or mitigated. The first line of defense is the use of credit scoring or credit analysis to avoid extending credit to parties that entail excessive credit risk. Credit risk limits are widely used. These generally specify the maximum exposure afirm is willing to take to counterparty. Industry limits or country limits may also be established to limit the sum credit exposure a firm is willing to take to counterparties in a particular industry or country finally; firms can hold capital against outstanding credit exposures.
For most banks, loans are the largest and most obvious source of credit risk; however, othersources of credit risk exist throughout the activities of a bank, including in the banking book andin the trading book, and both on and off the balance sheet. Banks are increasingly facing credit risk (or counterparty risk) in various financial instruments other than loans, including acceptances, inter-bank transactions, trade financing, foreign exchange transactions, financial futures, swaps, bonds, equities, options, and in the extension of commitments and guarantees, and the settlement of transactions.
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.
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Credit Types and its Underwriting Process
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Credit Types : Credit can be broadly classified into two categories namely; Fund based and Non fund based. The difference between fund-based and non-fund based credit assistance lies mainly in the cash outflow. While the former involves all immediate cash outflow, the latter may or may not involve cash outflow from a banker. In other words, a fund based credit facility to a borrower would result in depletion of actual liquidity of a banker immediately whereas grant of non-fund based credit facilities to a borrower may or may not affect the bankers liquidity.
Fund Based In fund based functions, the bank make deployment of their funds either by grantingadvances or by making investments for meeting gaps in funds requirements of their customers/ borrowers.
Fund-based functions of a bank may be classified into two parts: Granting of Loans and Advances Making Investments in shares/ debentures/ bonds.
Fund based functions can be further divided into:
I. LOANS AND ADVANCES Commercial Loans Segment
A. Working Capital 1. Cash Credit 2. Overdraft 3. Bills Finance 4. Bills Purchase 5. Bills Discounting.
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B. Tem Loans 1. Capital Expenditure 2. Equipment Finance 3. Project Finance
Personal Loans Segment

1. Consumer Loans Advance against Shares 2. Housing Loans 3. Education Loans. Etc.
II. INVESTMENTS
1. Capital Market Instruments. 2. Debt Market Instruments.
Cash Credit Facility

Cash Credit is also known as Working Capital. Cash Credit is a facility to withdraw the amount from the business account even though the account may not have enough credit balance. The limit of the amount that can be withdrawn is sanctioned by the bank based on the business cycle of the client and the working capital gap and the drawing power of the client. This drawing power is determined, based on the stock and book debts statements submitted by the borrower at monthly intervals against the security by hypothecating of stock of commodities and/ or book debts.
The excess withdrawal of cash is made generally on demand from the customer and the customer has to pay interest on the excess amount he/she has withdrawn. The Cash Credit facility is quite useful to those businesses where cash payment like wages, transportation, cash purchases are to be made and the receivables are not realized in time.
Appraisal Process
The following are the sequence of steps taken by the banks on receipt of completed application forms.
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1. Application form is accepted and acknowledged. 2. Personal interview /discussions is held with the customers by the banks officials. 3. Bank's Field Investigation team visits the business place/work place of the applicant. (All the documents submitted are verified by the bank with the originals so as to ensure the authenticity of the same.) 4. Bank verifies the track record of the applicant with the common information sharing bureau (CIBIL). 5. In case of fresh projects the bank analyses the back ground of the applicant/firm/company and the Technical feasibility/financial viability of the project based on various parameters and also the existing market conditions. 6. Depending on the size of the project the file is put up for sanction to the appropriate level of authority. SANCTION AND DISBURSEMENT : 1. On approval/sanction, the sanction letter, is issued specifying the terms and conditions for the disbursement of the loan. The acceptance to the terms of sanction is taken From the Applicant. 2. The processing charges as specified by the bank have to be paid to proceed further with the disbursement procedure. 3. The documentation procedure takes place viz. Legal opinion of various property documents and also the valuation reports.(Original Documents to title of the immovable assets are to be submitted) 4. All the necessary documents as specified by the legal dept., according to the terms of sanction of the loan of the bank are executed. Disbursement of the loan takes place after the Legal Dept. Certifies the Correctness of execution documents.
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Overdraft Facility
Over Draft Against Stock :
Traders and manufacturers prefer availing the Overdraft facility against the stock. The value of the stock of goods is assessed by the bank or lending institute and against the same overdraft limit is sanctioned. The amount is gradually settled against the amount of sale of the stock. The value of stock is assessed by physical verification and from the purchase invoices and is ensured that it is fully paid for.
Over Draft Against Receivables : Any kind of authenticated receivables like Bills Receivable, Rent Receivables can be pledged as security for the overdraft is known as Overdraft against Receivables.The proceeds of all such receivables are routed through the overdraft account and immediately settled against the overdrawn amount. However drawings can be allowed against fresh receivables. Thus the amount of receivables remains as a continuing security for all drawings. The bank or lending institute ensures that no other loan or obligation is availed by the customer pledging the same receivables. The amount of receivables and the time required to honor or materialize the receivables are the key factors to determine the limit of overdraft.
Over Draft Against Property : To Avail Overdraft against Property you have to mortgage your Property with the bank or lending institute to get Overdraft against Property facility. The value of the property generally appreciates hence they are preferred as securities. On defaulting on the settlement of overdrawn amount the bank or lending institute may sell the property to recover the overdrawn amount with interest thereon and balance, if any, is returned to the customer.
Over Draft Against Car : Car is also a security accepted by the bank or the lending institute to provide overdraft facility. In this case the amount of overdraft is determined from the purchase invoice and if the car is purchased in resale, the value of car is determined by the approved valuer appointed by the bank or lending institute
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to determine the limit of overdraft. The car or vehicles depreciate by value and hence the loan amount is determined by keeping a margin as decided by the bank.
Over Draft Against Gold : Gold can be immediately converted into cash and has always increasing value. This makes the gold one of the most preferred security to obtain the overdraft facility. Banks or lending institutes assess the cost of gold offered by the customer as security and determine the limit of overdraft. Once the gold is assessed by the bank or lending institute the overdraft the sanctioning process can be completed quickly.
Over Draft Against Pledge of Securities : A customer pledges a collateral security for example shares, mutual fund units, bonds or any fixed asset to the bank or lending institute to obtain overdraft facility. The bank can sell or liquidate these pledged securities to cover up the overdrawn amount and the interest thereon if a customer fails to settle the obligation.
Pledge of security is a very important aspect for obtaining the Overdraft Facility and determines the extent to which the amount can be overdrawn by the client.
Over Draft Against Insurance Policy : Insurance Policy by Public or Private Insurers is another type of pledged security against which Overdraft facility can be obtained. The bank or lending institute determines the actual amount of premium paid on the insurance policy and the amount on maturity to set the Overdraft limit. In case of the death of customer the overdrawn amount is recovered from the claim settlement on the policy from the Insurance Company. Over Draft Appraisal Process The following are the sequence of steps taken by the banks on receipt of completed applicationforms. 1. Application form is accepted and acknowledged. 2. Personal interview /discussions is held with the customers by the banks officials.
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3. Bank's Field Investigation team visits the business place/work place of the applicant. (All the documents submitted are verified by the bank with the originals so as to ensure the authenticity of the same.) 4. Bank verifies the track record of the applicant with the common information sharing bureau (CIBIL). 5. In case of fresh projects the bank analyses the back ground of the applicant/firm/company and the Technical feasibility/financial viability of the project based on various parameters and also the existing market conditions. 6. Depending on the size of the project the file is put up for sanction to the appropriate level of authority. SANCTION AND DISBURSEMENT : 1. On approval/sanction, the sanction letter, is issued specifying the terms and conditions for the disbursement of the loan. The acceptance to the terms of sanction is taken From the Applicant. 2. The processing charges as specified by the bank have to be paid to proceed further with the disbursement procedure. 3. The documentation procedure takes place viz.Legal opinion of various property documents and also the valuation reports.(Original Documents to title of the immovable assets are to be submitted) 4. All the necessary documents as specified by the legal dept., according to the terms of sanction of the loan of the bank are executed. Disbursement of the loan takes place after the Legal Dept. Certifies the Correctness of execution documents.
Bills Purchase
When the bank negotiates bill payable on demand when clean or documentary, the facility is known as Bills purchase. The face value of the bill is immediately paid to the holder of the bill. After purchasing the bill the bank becomes the holder in due course and value and acquires all rights of ownership over the instrument.
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Bills Discounting
When the bank credits value of the bill (less discount) which is payable on a future date after acceptance
by the drawee it is said to be bill discount . It should be remembered that demand bill is purchased and time bill is discounted
Term Loan
Term Loan is a loan borrowed for fixed amount over the fixed period of repayment and floating rate of interest. The borrower is offered a predefined schedule of repayment by the lending institution comprising of principal amount and interest thereon. Term Loan is secured by a collateral security. Term Loan facilitates the borrower to raise a stipulated amount one time and plan the business expenditure or investment or purchases on his or her own. Term Loan is normally preferred by small and medium scale businesses to meet the needs of working capital or to buy assets or infrastructure which is required to run the business on day to day basis. It may include purchase of machinery or buying an office or workshop premises The maturity period or term is between 1 10 years.
The term Loan can be availed to :
Purchase of Fixed Assets :
The term loan can be used to purchase fixed assets like premises, plant & machinery etc. The usage or performance of assets increases the business performance and hence the profit and makes the repayment of the loan easier. Even the term loan is settled the assets procured continue the productivity as asset life span is certainly longer than the term loan span. If a premises is purchased then the value of premises is always appreciated and in that case the business leverages higher value of premises which further can be used to raise funds for business expansion or diversification.
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Switching of Higher Interest Loans :
Many a times business owners opt to raise business loans at higher rate of interest. Such loans are processes and sanctioned faster but result in heavy burden interest. This interest payment becomes a fixed monthly expenses and starts leaking the profit. To arrest the growing rate of interest and penalties the higher interest loan can be switched to lower rate of interest loans or term loans. This way a borrower reduces the growing burden of interest on business loan and can save a considerable amount of money. It also benefits in maintaining the credit rating as the borrower closes one loan liability and opens another in form of term loan with lower rate of interest and easier repayment conditions.
Mortgage Term Loan :
A Term Loan can be availed by mortgaging a kind of security like home, office premises etc. This type of loan is borrowed for longer period of time that is 10, 15 or 20 years. The repayment of the principal amount and interest may be fixed in nature or it may vary over the course of repayment. The borrower may avail the revised rate of interest later and may be benefited by saving in interest.
Term Loan Appraisal Process 1. Personal interview /discussions is held with the customers by the banks officials. 2. Bank's Field Investigation team visits the business place/work place of the applicant. (All the documents submitted are Verified by the bank with the originals so as to ensure the authenticity of the same.) 3. Bank verifies the track record of the applicant with the common information sharing bureau (CIBIL). 4. In case of fresh projects the bank analyses the back ground of the applicant/firm/company and the Technical feasibility/financial viability of the project based on various parameters and also the existing market conditions. 5. Depending on the size of the project the file is put up for sanction to the appropriate level of authority.
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SANCTION AND DISBURSEMENT : 1. On approval/sanction, the sanction letter, is issued specifying the terms and conditions for the disbursement of the loan. The acceptance to the terms of sanction is taken From the Applicant. 2. The processing charges as specified by the bank have to be paid to proceed further with the disbursement procedure. 3. The documentation procedure takes place viz.Legal opinion of various property documents and also the valuation reports.(Original Documents to title of the immovable assets are to be submitted) 4. All the necessary documents as specified by the legal dept., according to the terms of sanction of the loan of the bank are executed.
Packing Credit Limit

Packing credit is a loan/ cash credit facility sanctioned to an exporter in the Pre-Shipment stage. This loan facilitates the exporter to purchase raw materials at competitive rates and manufacture or produce goods according to the requirement of the buyer and organize to have it packed for onward export.. The lending institutions seek a Letter of Credit opened in favor of the exporter from the overseas buyer along with the irrevocable (cannot be canceled once drawn) Purchase Order favouring the exporter. Packing Credit facility will cover all the working capital needs of the exporter including raw materials, wages, packing costs and all pre-shipment costs. Packing credit is available for generally a period of 90 days and the exporter has to pay lowerrate of interest compared to traditional Overdraft or Cash Credit facility. Exporters use this facility so they can bid the most competitive price for export thus gaining more business opportunities for export.
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Personal Loan Segment
Personal Loan
Personal Loan is an unsecured loan for personal use which doesnt require any security or collateral and
can be availed for any purpose, be it a wedding expenditure, a holiday or purchasing consumer durables, the personal loan is very handy & caters to all your needs. The amount of loan can be ranged from Rs. 50,000 Rs. 20 lakh & the tenure for repaying the loan varies from 1 to 5 years.
Characteristics :
Loan without security :
A Personal Loan is not a secured loan (bank doesnt ask for any security or collateral) as against a Secured Loan where one is required to pledge a house or other security to acquire a loan.
Simple Documentation
A Personal Loan can be accessed with minimal paperwork or documentation & doesnt take much time to procure as against a Secured Loan.
No specification about the end use of the loan amount
One dont have to required to disclose the end use of the money borrowed, Banks are concerned about the fact that whether the borrower is able to pay back the loan with interest before the due date or not and they confirm this by checking the income, employment or business & other factors of the borrower.
Big Loan amount
Personal Loan is a means to fulfill bigger loan requirement, you can take a loan ranging from Rs. 50,000 to Rs. 20 lakh.
Tenure
Tenure is the time frame for the personal loan payments to be paid back to the bank; it ranges from 1 year to 5 years.
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Personal Loan : Process These are following steps taken by banks during process of loan.

Application form is login. Personal Discussion is done by bank officer with customer. Bank's Field Investigation (All documents are Verify by bank which given with application form)
Bank cheques CIBIL report. Sanction Letter. Signing of agreements and submitting post-dated cheques. Disbursement.
Home Loan
Home Loan is a Secured Loan offered against the security of a house/property which is funded by the banks loan, the property could be a personal property or a commercial one. The Home Loan is a loan taken by a borrower from the bank issued against the property/security intended to be bought on the part by the borrower giving the banker a conditional ownership over the property i.e. if the borrower is failed to pay back the loan, the banker can retrieve the lent money by selling theproperty.
Types of Home Loan
There are different types of home loans available in the market to cater borrowers different needs.
Home Purchase Loan : This is the basic type of a home loan which has the purpose of purchasing a new house. Home Improvement Loan : This type of home loan is for the renovation or repair of the home which is already bought. Home Extension Loan : This type of loan serves the purpose when the borrower wants to extend or expand an existing home, like adding an extra room etc. Home Conversion Loan :
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It is that loan wherein the borrower has already taken a home loan to finance his current home, but now wants to move to another home. The Conversion Home Loan helps the borrower to transfer the existing loan to the new home which requires extra funds, so the new loan pays the previous loan & fulfills the money required fornew home. Bridge Loan : This type of loan helps finance the new home of the borrower when he wants to sell the existing home, this is normally a short term loan to the borrower & helps during the interim period when he wants to sell the old home & want to buy a new one, It is given till the time a buyer is found for the old home.
Home Construction Loan : This type of loan taken when the borrower wants to construct a new home.
Land Purchase Loan : It is that loan which is taken to purchase a land for construction & investment purposes. Home Loan Appraisal Process In India there are many Banks Lender who provide Home Loan / Housing Loan. Process of this bank / lender is same.

Application form is login. Personal Discussion is done by bank officer with customer. Bank's Field Investigation (All documents are Verify by bank which given with application form). Bank cheques CIBIL report. Sanction Letter. Signing of agreements and submitting post-dated cheques. Disbursement. Loan Against property
This are following steps taken by banks during process of loan.
Application form is login
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Personal Discussion is done by bank officer with customer Bank's Field Investigation (All documents are Verifif by bank which given withapplication form) Bank cheques CIBIL report Sanction Letter Signing of agreements and submitting post-dated cheques Disbursement
Educational Loan
Money borrowed to finance education or school related expenses. Payments are often deferred while in school and for a six-month grace period after graduation. A student loan is a type of loan geared towards students to help them pay for their educational expenses like tuition fees, books, room and board etc. Usually student loans have lower interest rates than other loans, examples being Perkins Loan, Stafford Loan and such. Students are generally not required to start paying back such loans until they have graduated and have completed their education. In United States student loans can be sponsored either by the federal government or by private institutions/individuals.
Many a times other forms of financial aid such as scholarships, fellowships and work-study programs fail to cover a students needs. In such cases student loans can be extremely valuable. However, before accepting a student loan one must be fully aware of at least the basics attributes of student loans.
Characteristics
Service Provider : Banks, both public and private sector banks provide education loan.
Available For : Education loan is generally taken for child student between ages of 16 to 26 years. The age consideration does vary from bank to bank. Education loan can also be taken for self, spouse, own children and for child for whom one is the legal guardian. For minor child student the
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loan eligibility of the parent is considered. For major student loaneligibility of either child student or parent or both can be considered
Recognized Institute :
The institute, to which the child student is applying for, should be a recognized institute for providing the education loan.
Period of Repayment :
Option of wavier in EMI payment in the 1st and 2nd year of the loan. So EMI payment can be started from 3rd year onwards. Maximum repayment period allowed is generally 8 years, starting from the 3rd year of the loan
Guarantor :
Bank need a guarantor for education loan amount of between Rs 4 lakh to Rs 7.5 lakh. The guarantor should have annual income equal to or more than the loan amount. Or the net work of the guarantor should be equal to or more than the loan amount. This guarantor is contacted, when the applicant fails to re-pay
Collateral :
Bank need collateral for education loan amount of more than Rs 7.5 lakh. The value of the collateral should be of suitable value. Collateral can be gold, home, property, bond, NSC, fixed deposit, endowment policy, etc
Guarantor or Collateral Waive-Off:
Bank waive off the guarantor or collateral requirement for the education loan, if the bank have a tie-up with the institute
Tax Exemption:
Education loan provides tax benefit
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Non Fund Based
It is generally perceived that the non-fund based business is very remunerative to bank and the borrowers. Thebanks, besides getting handsome commission or fee and some other service charges, also get the low costdeposits in the shape of margin and ancillary business. The funds of the borrower are not blocked in theadvances to be given to the suppliers or beneficiaries and this keeps his liquidity
position comfortable,production smooth and costs low.The borrowers need such facilities not only for purchases of current assets or financing there of or take benefitof certain services with the help of nonfund based facilities. They also need the facilities for acquisition offixed assets including their financing .
These are called non-fund based financing (or quasi-credit facilities) because, at the time of opening of the letter of credit or bank guarantee, no amount, as such, becomes immediately payable. But, these facilities do involvesome financial commitment on the part of the bank in as much as the bank is required to pay the amount of thebill (drawn under the L/C, and in meticulous compliance of all the terms and conditions stipulated therein), inthe event of the applicant (borrower) refusing or being unable to honor the bill on presentation, at the materialtime.
The bank, however, is within its rights to proceed legally against the applicant (borrower) on the basis of theletter of request (counter guarantee and indemnity) executed by the applicant, at the time of the issuance of theLetter of Credit, on a duly stamped paper.Similarly, no amount becomes payable by the bank at the time of execution of the B/G, but as per theundertaking (commitment) given by the bank, under the B/G issued, the bank will have to make the payment ofthe amount, covered under the B/G by the beneficiary concerned. The bank may make the required payment bydebit to the applicants account, even if sufficient balance may not be available therein. The amount sooverdrawn may have to be deposited by the applicant, in the due course, failing which the bank may prefer tofile a civil suit against the applicant to cover the amount, on the basis of the counter-guarantee executed by theapplicant on the stamped paper, at the time of the issuance of the Bank Guarantee.
Thus, it is for the aforesaid reasons that the L/C and B/G are referred to as Non-Fund Based working capitalfinancing. And, accordingly, one should notharbour any misconception that L/Cs and B/Gsdonot involve anyfinancial commitments and risk. These facilities (L/C and B/G) are also referred to as Quasi(or Semi) CreditFacilities for the same reasons.
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And, as these facilities also involve financial risks, the amount, and the terms and conditions of the L/C andB/G, are also determined by the banks, on the basis of all the precautions taken, as is done at the time ofgranting Fund Based credit facilities (like stock cash credit), whereby the borrower gets the right to withdrawthe amount immediately after sanction of the limit, of course, within the over-all credit limit sanctioned and theDrawing Power (DP) available at the material time. Accordingly, the limits for L/C and B/G were also beingstipulated well within the MPBF (Maximum Permissible Bank Finance). But now, the limits of the L/C and B/Gare sanctioned separately and are independent of the ABF (Assessed Bank Finance
Non Fund Based Facilities Includes :
Funds remittance/ Transfer Facilities Establishmentof LC/BG Agency Function Merchant Banking Function
Establishment of Letter of Credit :
A letter of credit is a promise to pay. Banks issue letters of credit as a way to ensure sellers that they will get paid as long as they do what they've agreed to do. Letters of credit are common in international trade because the bank acts as an uninterested party between buyer and seller. For example, importers and exporters might use letters of credit to protect themselves. In addition, communication can be difficult across thousands of miles and different time zones. A letter of credit spells out the details so that everybody's on the same page. The bank will only issue a letter of credit if they know the buyer will pay. Some buyers have to deposit (or already have) enough money to cover the letter of credit, and some customers use a line of credit with the bank. Sellers must trust that the bank issuing the letter of credit is legitimate.
A seller only gets paid after performing specific actions that the buyer and seller agree to. For example, the seller may have to deliver merchandise to a shipyard in order to satisfy requirements for the letter of credit. Once the merchandise is delivered, the seller receives documentation proving
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that he made delivery. The letter of credit now must be paid even if something happens to the merchandise. If a crane falls on the merchandise or the ship sinks, it's not the seller's problem.
To pay on a letter of credit, banks simply review documents proving that a seller performed his required actions. They do not worry about the quality of goods or other items that may be important to the buyer and seller.
Types Of Letters Of Credit
Revocable letter of credit Just like the name says the LC can be revoked by the Issuing Bank without the agreement of the beneficiary.
Irrevocable letter of credit Can not be cancelled or amended without all the parties agreement.
Standby letter of credit Guarantee of payment. If the beneficiary does not get paid from its customer it can then demand payment from the Bank by forwarding the copy of the invoice that was not paid and supporting documentation.
Revolving letter of credit It is established when there are regular shipments of the same commodity between supplier and customer. Eliminates the need to issue an LC for each individual transaction.
Bank Guarantee
Unlike the Letter of Credit, the Bank Guarantee is comfort to the buyer or seller for recovering the losses or damages, if the CLIENT, on whose behalf the guarantee is issued, fails to complete or conform to the terms of agreement. By issuing this guarantee, the issuing bank is assuring payment of the certain
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amount of money (as specified in the bank guarantee) to the beneficiary in case of non-performance of a certain contract according to the terms andconditions contained in the same. A bank guarantee might be revoked by the seller (beneficiary) when the buyer fails to pay the seller for the goods supplied. In such a situation, the bank pays the beneficiary to the extent of the amount of Bank Guarantee. Similarly, on the other side if the Seller fails to deliver the goods or complete the terms of agreement, the bank guarantee may be cancelled by the buyer.
This instrument or method is often used in Selling, Buying or Service Providing contracts across countries and / or where both the parties have no established business relationships. Bank Guarantee is non fund based limit. Bank Guarantee Appraisal Process The following are the sequence of steps taken by the banks on receipt of completed applicationforms. 1. Application form is accepted and acknowledged. 2. Personal interview /discussions is held with the customers by the banks officials. 3. Bank's Field Investigation team visits the business place/work place of the applicant. (All the documents submitted are verified by the bank with the originals so as to ensure the authenticity of the same.) 4. Bank verifies the track record of the applicant with the common information sharing bureau (CIBIL). 5. In case of fresh projects the bank analyses the back ground of the applicant/firm/company and the Technical feasibility/financial viability of the project based on various parameters and also the existing market conditions. 6. Depending on the size of the project the file is put up for sanction to the appropriate level of authority. SANCTION AND DISBURSEMENT : 1. On approval/sanction, the sanction letter, is issued specifying the terms and conditions for the disbursement of the loan. The acceptance to the terms of sanction is taken From the Applicant. 2. The processing charges as specified by the bank have to be paid to proceed further with the disbursement procedure.
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3. The documentation procedure takes place viz.Legal opinion of various property documents and also the valuation reports.(Original Documents to title of the immovable assets are to be submitted) 4. All the necessary documents as specified by the legal dept., according to the terms of sanction of the loan of the bank are executed. Disbursement of the loan takes place after the Legal Dept. Certifies the Correctness of execution documents
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Data Analysis & Findings
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We have taken into consideration 16 banks both public and private sector bank in the Guwahati area for our study. These banks were selected randomly on the basis of accessibility. Some other banks were also taken into consideration ,but they refused to give us details regarding our study , as they hesitated inorder to comply with their banks internal policies. However we managed to collect the following banks data, some the banks were not dealing with some of the products which created a restraint in the way of analyzing the data.
We have prepared a two set of questionnaire mostly consisting of open ended questions having two different heading such as Installment loan and Working capital loan. We have further classified installment loan in our questionnaire as personal loan , Home loan, Vehicle Loan and Educational Loan. Available Loan Products
Sl. #
Name of the Bank Cash Credit Working Capital Loan Bank Over Guarantee Draft Home Loan Installment Loan Vehicle Educational Loan Loan
1 2 3 4 5 6 7 8 9 10
Allahabad Bank Axis Bank Bank of Baroda Canara Bank Dena Bank Family Credit HDFC Bank ICICI Bank Indusind Bank ING Vyasya Bank
Findings and Reports
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11 12 13 14 15 16
Karnataka Bank Punjab National Bank SBI Uco Bank Union Bank of India United Bank of India
Questionnaire Working Capital Loan

Factors behind Working Capital Loan 01 Financial Analysis :The bank analyses the financials of the customer which includes balance sheet and proft and loss account of the customers business .Generally last three years financials are taken into consideration. Then the bank tries to get a clear picture of his income during his past years and his ability to continue with that business and its prospects in near future. 02 Banking Analysis :Bank review the customers bank statement , checks regular payment of installment, banking conducts, how he routes his money through banks and also looks into number ofcheque bounces into his account and tries to justify his financials. 03 Reference Check :Bank checks the customers stand in the market, his reputation and also looks into his debtors who owes him money and list of creditors. And makes sure that the customer has more debtors comparatively than creditors. 04 Field Investigation : After reference check next is field investigation, here the bank tries to establish the checks and approachability.
05 CIBIL of the customer :CIBIL acronyms for Credit Information Bureau of India Limited. It is a understanding between member banks to share credit information regarding any customer. CIBIL holds all the credit information of the customer irrespective of banks, it records all the
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credit history of the customer , any of the member bank can demand a CIBIL report regarding any customer to see if there is any default in loan repayment, or payment discrepancy regarding credit card and personal loan with other banks. CIBIL is one of the prominent factors which helps the bank in taking decision in sanctioning the loan. If the customer has a adverse CIBIL and poor CIBIL rating then no banks would prefer him to grant credit.
loan dues. Such people are black listed by the RBI, and also theres strict instruction to the commercial banks that they should abruptly avoid offering credit facilities to such black listed customer .
07 Collateral Examination : Collateral examination refers to the checking of the collateral which is extended by the customer along with the primary security. Collateral examination is also a necessary procedure in terms of home loan , Loan against property, educational loan and overdraft. Bank need to verify the value of the collateral ,if it is immovable property then legal reports to establish the authencity of ownership of the customers and valuation report which needs to be prepared by a banks appointed valuer who would examine the property and would prepare a report stating the exact value of the land is required. If it is original property then vetting of the original property papers by a consultant is necessary.
Question 01 : Number of Years into the Business.
Interpretation : Number of years in the business implies the stand of the business in the market.Their consistency of income and sound stability record.
Working Capital Loan : Minimum number of years into the business Criteria
Sl. Name of the Bank 0-2 Yrs 2-3 Yrs 3-4 Yrs 4-5 Yrs Not Specific
1 Allahabad Bank
06 RBI Check : RBI publishes defaulters list of those who has made default in the payment of
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Karnataka Bank Punjab National Bank SBI Uco Bank Union Bank of India United Bank of India
Minimum number of years into the business

0-2 Years 7%
Not Specific 25%
4-5 Years 6% 2-3 Years 56% 3-4 Years 6%
Interpretation : It is seen from the above pie chart that 56 % of the banks prefers at least 2-3 minimum number of years into the business, this minimum number of years into the business resembles the continuing profitability nature of the business because the banks are at more ease to provide loan to the businesses which has at least some experience and also we can see the 25 % as not specific which means that the minimum number of years changes depending
2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Axis Bank Bank of Baroda Canara Bank Dena Bank Family Credit HDFC Bank ICICI Bank Indusind Bank ING Vyasya Bank
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upon the business or the reputation of the owner, 7 % of the banks extends loans to the newly developed businesses so that to promote entrepreneurship. Criteria 02: Minimum turnover of the applicant required
Interpretation :Minimum turnover signifies the sales figure of the business.The bank needs financial reports related to the sales turnover for the last three years inorder to determine the fate of the business in future. Banks gives much priority to profit making units rather than loss making. Banks are at ease to handover money to any business which has a sound financial. The more is the turnover, the less is the risk of NPA. So every bank has fixed their minimum turnover criteria in order to qualify for working capital loan.
Table 3 : Minimum Turnover of the applicant Sl. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Name of the Bank
Allahabad Bank Axis Bank Bank of Baroda Canara Bank Dena Bank Family Credit HDFC Bank ICICI Bank Indusind Bank ING Vyasya Bank Karnataka Bank Punjab National Bank SBI Uco Bank Union Bank of India United Bank of India
Minimum Turnover Amount (In Lakhs) NA 40 10 NA NA 200 100 100 100 NA NA 2 NA 25 5
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Minimum Turnover Criteria
50-100 Lakhs 20% Above 100 lacs 7%
Interpretation :From the above data it is seen that 40 % of the banks retaliated this question as case specific based. If the other criteria are satisfactory then this criteria can be overlooked. However main banks which hesitated to answer this questionnaire were the public nationalized banks. Public banks have guidelines from the government to support and nurture new growing units. As the new units may not have any past financials so these criteria is overlooked by them. However there are a percentage of 20 % which demands that minimum turnover should be between 50-100 lakhs. These banks credit policy is rigid and strong, taking less chance for any defaulters in future, they want to make sure that their money can be recovered easily. These factor also acts as a ROI determiners. Higher would be the turnover less chance of risk and lower interest rate. Lower would be the turnover, Higher chance of NPA and higher interest rates.
Criteria 03 :Minimum percentage of collateral coverage Interpretation : Minimum collateral coverage mean the minimum value of collateral that is required against the value of loan sanctioned. Collateral is required so that in future ,if the applicant defaults in the repayment of the loan , then the collateral can be confiscated in order
Not Specific 40%
Below 50 Lakhs 33%
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to realize the loan amount . Different banks have different coverage limitation. Collateral plays a important role in minimizing the credit risk because , more the value of the collateral, the lesser will be the the credit risk involved, the lesser will be the collateral , the more will be the credit risk. Collateral can be in terms of Immovable properties ,Liquid collateral such as LIC, NSE etc. Collateral can be also corporate guarantee or any guarantee by the promoters.
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Not Specific 100 50 100 40 NA 100 100 100 50 100 Not Specific 25 75 100 40
Sl.
Name of the Bank
Minimum collateral Coverage (In %)
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Minimum Collateral Coverage

Not Specific 13%
Below 50 % 40%
100% 40%
50- 99% 7%
Interpretation : From the above data. It is seen that collateral has equal importance in judging the credit limit of any applicant. Thebanks feels that this is the main factor which assures them peace of mind. It has been observed that 40 % of the banks are in the opinion of 100% collateral that means that they will permit them loan only if the applicant can support the entire loan amount in terms of collateral security. This assures the banks that if in near future the applicant becomes bankrupt then there would be a option for the banks to recover their dues by confiscatingthe collateral. Moreover the percentage of collateral security is decided on the basis of the financial reports of the applicant. If the financials are of sound in nature , then the banks may offer some relaxation in terms of the collateral percentage. This may vary from 0 % to 100 %. .
Criteria 04 : Methods to calculate Working Capital Gap Table 4 : Methods to calculate Working Capital Gap
Sl. Name of the Bank Method Both Normal Turnover Method Both
1 Allahabad Bank 2 Axis Bank 3 Bank of Baroda
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SBI Uco Bank Union Bank of India United Bank of India
Method to calculate working capital gap

NA 6% MPFB 6%
Normal Turnover Method 25%
Both 63%
Interpretation: MPBF resembles the maximum permissible bank finance which has been developed by the Tandon Committee. It is a method to calculate the working capital loan requirement of the business. And Normal Turnover Method resembles simply 20% of the turnover as the working capital loan requirement. From the pie chart it is seen that 63 % of the banks uses both the methods to calculate the working capital requirement whereas 25 % of the banks prefers to use Normal Turnover method.
Criteria 05 : Range of Rate of Interest as on 20th June 2011
4 5 6 7 8 9 10 11 12 13 14 15 16
Canara Bank Dena Bank Family Credit HDFC Bank ICICI Bank Indusind Bank ING Vyasya Bank Karnataka Bank Punjab National Bank
Normal Turnover Method Normal Turnover Method NA Both Both Both Both Both Both Both MPBF Normal Turnover Method Both
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Interpretation :Rate of interest is the rate which the banks earn on the amount that has been sanctioned as a loan to the customer. The interest rate always depends on the BPLR which is fixed by the RBI and the commercial banks have to fix their own interest rate above the BPLR individually. The rate of interest is not fixed however ,it is always volatile and responds to RBIs BPLR. Higher the rate of interest , higher will be the income for the banks. The rate of interest for working capital loan many vary from banks to banks depending on the criteria that has been
discussed above. By evaluating all the stages as discussed the bank decides as how much is to be imposed as a rate of interest. The applicants involving in good business where risk of loss is less would enjoy low interest rate while applicants involving in business where risk of loss is high will suffer high interest rate.
Sl. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Name of the Bank
Range of ROI 11.50-17.50% 10-13% 11.75-16% 13.75-17.75% 13-15% NA 12.75-13% 12.75-17% 12.5-14% 12-14% 10.25-16% Not Specific 13-16% 11.13 16.25 % 12-15 % 12.25-16 %
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Negative Profile :
While granting working capital loan , the bank has to keep in view many aspects which may affect the normal repayment of the loan. So they avoid certain profiles. Any business which dont have any working capital gap such as petrol pump, Passenger transport service are not preferred for working capital loan. Moreover people with Police, advocate etc are generally avoided while granting loan.Theres a constant fear in the minds of the bank officials that in
future such professions may create restraints in the way of repayment. Any loss making units are generally avoided. Last but not the least ,applicant with adverse CIBIL report are abruptly avoided.
Installment Loans Home Loan :

Type : Highly Secured
Criteria 01 : Minimum and Maximum Age of the applicant
Sl. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Name of the Bank

Allahabad Bank Axis Bank Bank of Baroda Canara Bank Dena Bank Family Credit HDFC Bank ICICI Bank Indusind Bank ING Vyasya Bank Karnataka Bank Punjab National Bank SBI Uco Bank Union Bank of India
Minimum (In Yrs) 21 25 18 18 18 NA 21 21 NA NA 18 18 18 21 21
Maximum(In Yrs) 70 60 65 60 60 NA 70 60 NA NA 70 65 70 55 65
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16 United Bank of India
25
Minimum Age for Home Loan

NA 19%
25 Yrs Above 13%
18-20 Yrs 37%
21-24 Yrs 31%
Maximum Age for Home Loan

NA 19% 55-60 Yrs 31%
65 Yrs and above 25%
61-65 Yrs 25%
Interpretation: Minimum and maximum age limits are needed in applying for a home loan. There are many banks whose minimum and maximum age criteria differs but more or less
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remains the same, it is necessary to check the age in order to make sure that a person attaining at least the majority age as prescribed by the government of Indiain order to involve in any contract with the bank.Moreover a person becomes employable from the age 18 onwards. And the maximum age limits the person from applying loan. Generally at the age of 60, a common man retire from his service, so the bank wants to make sure that the applicant is in servicing period in order to repay the loan. But business applicants enjoy a certain relaxation in
maximum age limit as they can approach a bank until 65 (normally).
Criteria 02 :Percentage Of Loan Amount Sanctioned In Comparison To Mortgage Value Interpretation :Home loan is always granted for construction or renovation purposes. Here the plot of land on which the house is to be constructed remains as a mortgage with the bank until the loan is fully repaid. If the applicant makes any default in the course of repayment, then the bank has the right to confiscated the plot of land with prior warning to the applicant. So, while sanctioning the proposal, banks make sure that the loan amount should be lower than the value of the plot of land, only then it is possible to recover the dues fully from the applicant.
% of Value 75 % 80% 75% 50% NA NA 80% 70% NA NA 80% 75% 70% 80-85 % 80 % 60 %
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Percentage of Amount sanctioned aginst Mortgage Value

Upto 50% 6% NA 27% 51% to 75% 33% 80% and Above 7% 76% to 80 % 27%
Interpretation :From the above data, it is seen that 33 % of the banks sanctions 51-75 % of the value of the mortgaged value.Home loan involves less risk because banks has a piece of land as a mortgage, the unique quality of land is that it never depreciates in future rather it appreciates.Theres are also a 6% of banks who sanctions only upto 50% of the mortgaged value.It implies that they are playing safe rather being competitive.UCO bank which grants nearly 80-85 % of the value of the mortgage, beats all other participated banks with a interest rate of 10.5 %
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Criteria 03 : Range of Rate of Interest Interpretation: Rate of interest is the rate which the banks earn on the amount that has been sanctioned as a loan to the customer. The interest rate always depends on the BPLR which is fixed by the RBI and the commercial banks have to fix their own interest rate above the BPLR individually. The rate of interest is not fixed however ,it is always volatile and responds to RBIs
BPLR. Higher the rate of interest , higher will be the income for the banks. The rate of interest may vary from banks to banks. The banks which sanctions more amount against the mortgage value tends to attract more interest rate inorder to balance the risk. The banks which grants less loan amount against mortgage value may offer low range of rate of interest as their risk involved is very low.
Sl. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Name of the Bank

ROI 10.25-12.50% 8-11% 9.25-12 % 10-13% 12-14 NA 8-12% NA NA NA 10.25-12% 10.50 -12% 8-11% 10.5 % 10.75-11% 8.5-12%
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Range of Rate of Interest
NA 25%
Upto 10% 25%
Above 12% 13% 11-12% 37%
Interpretation :From the above data, it is seen that the 37% of the participated charges interest
rate between 11-12%. Home loan is generally regarded as low risk product because in either of the case , the banks is in win-win situation. The rate of interest remains same more or less with other banks. The rate of interest usually varies from 10-12% depending upon the loan amount applied, the tenure of repayment opted.
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Personal Loan
Type : Highly Unsecured
Personal Loan is an unsecured loan for personal use which doesnt require any security or collateral and can be availed for any purpose, be it a wedding expenditure, a holiday or
purchasing consumer durables, the personal loan is very handy & caters to all your needs. The amount of loan can be ranged from Rs. 50,000 Rs. 20 lakh & the tenure for repaying the loan varies from 1 to 5 years. The loan is granted on the basis of his/her earning capacity , on his personal gurantee to repay the loan in due coarse. Criteria 01 :Eligibile Employers :
I have surveyed 16 participated banks and found out that maximum of the banks nearly 100% of the banks gives preference to Govt.Salaried applicant and the next in priority comes any employee of a reputed private firm. Govt. employees are given much priority because their job is much stable and secured which will enable the applicant to repay the dues timely without any default.This creates a less risk for the banks to grant personal loan ,as in personal loan the security is supported by personal guarantee, so the bank wants make sure that his source and consistency of income is sound. Criteria 02 : Minimum and Maximum age for personal Loan.
Sl. 1 2 3 4 5 6 7
Name of the Bank

Allahabad Bank Axis Bank Bank of Baroda Canara Bank Dena Bank Family Credit HDFC Bank
Minimum (In Yrs) 21 25 18 18 18 NA 21
Maximum(In Yrs) 59 60 65 60 57 NA 70
70
60 NA NA NA 60 60 55 65 65
8 9 10 11 12 13 14 15 16
ICICI Bank Indusind Bank ING Vyasya Bank Karnataka Bank Punjab National Bank SBI Uco Bank Union Bank of India United Bank of India
21 NA NA NA 18 18 21 18 25
Minimum Age for Personal Loan

NA 19% 25 Yrs Above 13% 18-20 Yrs 37%
21-24 Yrs 31%
Interpretation: Minimum and maximum age limits are needed in applying for a home loan. There are many banks whose minimum and maximum age criteria differs but more or less remains the same, it is necessary to check the age in order to make sure that a person attaining at least the majority age as prescribed by the government of India in order to involve in any contract with the bank. Moreover a person becomes employable from the age 18 onwards. And the maximum age limits the person from applying loan. Generally at the age of 60, a common man retire from his service, so the bank wants to make sure that the applicant is in servicing period in order to repay the loan. But business applicants enjoy a certain relaxation in maximum age limit as they can approach a bank until 65 (normally).
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Maximum Age for Personal Loan
NA 25% 55-60 Yrs 50% 61-65 Yrs 19%

65 Yrs and above 6%
Criteria 02 : Maximum Tenure for repayment

Maximum Tenure (In Months) 60 60 60 48 36 NA 60 60 NA NA NA 60 60 48 60 60
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Maximum Tenure of Repayment
NA 25%
36-59 Months 19%
60 Months 56%
Interpretation : Maximum tenure is the period within which the applicant assures the banks that he will repay the necessary dues full and finally. Some of the banks offers choice of tenure which varies fro 3 years to 5 years. The longer will be the tenure the higher will be the interest rate, shorter will be the tenure , the lower will be the interest. From the above data it seen that maximum tenure that is allowed by the participated banks is 60 months. And theres a proportion of 19% which offers generally 36-58 months. Criteria 03: Range of Rate of Interest Interpretation :Rate of interest is the rate which the banks earn on the amount that has been sanctioned as a loan to the customer. The interest rate always depends on the BPLR which is fixed by the RBI and the commercial banks have to fix their own interest rate above the BPLR individually. The rate of interest is not fixed however ,it is always volatile and responds to RBIs BPLR. Higher the rate of interest , higher will be the income for the banks. The rate of interest may vary from banks to banks. The interest rate depends on many factors such as the amount of loan applied, the tenure of repayment opted, the type of job that he is into. As personal loan is backed by personal guarantee, so a high profile stable job employee would enjoy a low interest rate and vice versa.
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Sl. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Name of the Bank

ROI 14-15 % 9-17 % 14-16 % 12-14 % 15 % NA 13-16 % 15 % NA NA NA 11-13 % 14.75-16 % 15.25 % 16.75 % 11-14.5 %
Range of ROI
Upto 12 % 6%
NA 25% 12-14% 31%
Above 14 % 38%
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Interpretation : Since we have discussed in the above criteria that personal loan is backed by personal guarantee rather than any security or collateral.So the interest rate tends to be very high as this loan is of high risk in comparison to home loan or other loan,theres no specific security with the bank which they can confiscated in case of any non-payments of dues. From the above data it is seen that the interest rate in 38% of the participated bank is above 14%, which is quite high in comparison to other loans. Only 6% of the participated bank has lowest interest that at around 12 %.
Vehicle Loan
Type : Well Secured
Vehicle loans are generally granted inorder to purchase a new or a used vehicle, this type of loan is easy to qualify as the vehicle itself acts as a security for the bank, banks generally finance 75-80% of the vehicle value which has to be repaid later along with the interest , on the event of any non-payment , the bank has the right to confiscated the vehicle with prior notices to the applicant. Moreover the vehicle is registered with the transport authority and remains traceable and also the vehicle registration certificate remains hypothecation markedwhich prohibits the owner to sale or transfer.
Criteria 01 :Minimum and Maximum age criteria for Vehicle Loan
Interpretation : Minimum and maximum age limits are needed in applying for a home loan. There are many banks whose minimum and maximum age criteria differs but more or less remains the same, it
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is necessary to check the age in order to make sure that a person attaining at least the majority age as prescribed by the government of India in order to involve in any contract with the bank. Moreover a person becomes employable from the age 18 onwards. And the maximum age limits the person from applying loan. Generally at the age of 60, a common man retire from his service, so the bank wants to make sure that the applicant is in servicing period in order to repay the loan. But business applicants enjoy a certain relaxation in maximum age limit as they
can approach a bank until 65 (normally).

Minimum (In Yrs) 18 25 18 18 18 21 21 21 21 NA 18 18 18 21 21 25
Maximum(In Yrs) 59 60 65 57 60 70 60 58 NA 60 65 60 55 65 60
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Minimum Age for Vehicle Loan

25 Yrs Above 13% NA 6% 18-20 Yrs 44%
21-24 Yrs 37%
Maximum Age for Vehicle Loan

No Limit 6% Above 65 Yrs 6% NA 6%
61-65 Yrs 19%
55-60 Yrs 63%
Criteria 02 : Types of Vehicle for which Loan is Provided Infact all the participated banks are into vehicle finance but many of them are not into commercial vehicle finance which includes Autorikshaw, JCB Earth movers, cranes etc.So the below table shows the type of vehicles for which the loan is supported by the bank . As per IndusInd bank , they finance 60% of any two wheeler where as in the case of private four wheeler this increases to 75-80% of the value and in terms of commercial vehicle like truck , tanker etc. it finances 100%.
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Sl.
Name of the Bank
Two Wheeler
Four Wheeler
Commercial
1
Allahabad Bank

2 Axis Bank
3 Bank of Baroda
4 Canara Bank
5 Dena Bank
6 Family Credit
7 HDFC Bank
8 ICICI Bank
9 Indusind Bank
10 ING Vyasya Bank
11 Karnataka Bank
12 Punjab National Bank
13 SBI
14 Uco Bank
15 Union Bank of India
16 United Bank of India
Criteria 03 :Range of Rate of Interest

Sl. 1 2 3 4 5 Name of the Bank
Allahabad Bank Axis Bank Bank of Baroda Canara Bank Dena Bank
ROI 12-17.5 % 11-13 % 14-16 % 12-14 % 12-14 %
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Union Bank of India United Bank of India
Range of ROI
Upto 12 % 6% NA 6% Above 14 % 13%
12-14% 75%
Interpretation : Rate of interest is the rate which the banks earn on the amount that has been sanctioned as a loan to the customer. The interest rate always depends on the BPLR which is fixed by the RBI and the commercial banks have to fix their own interest rate above the BPLR individually. The rate of interest is not fixed however ,it is always volatile and responds to RBIs BPLR. Higher the rate of interest , higher will be the income for the banks. The rate of interest may vary from banks to banks.
6 7 8 9 10 11 12 13 14 15 16
Family Credit HDFC Bank ICICI Bank Indusind Bank ING Vyasya Bank Karnataka Bank Punjab National Bank SBI Uco Bank
14 % 13-16 % 13-15 % 14 % NA 12-13.5 % 12-12.5 % 10.5-14 % 11.13-13.75 % 10.5-14.75 % 11-14.5 %
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Educational Loan :
Type :Moderately Secured
Educational loan has some relaxation in comparison with other loan. In educational loan, the interest in calculate on simple interest basis till the period of study after completion of the course the method is changer from simple interest to compound interest and repayment starts
6 months after getting a job or 1 year after completion of the course whichever is earlier
Criteria 01 : Minimum and Maximum Age of the applicant : Interpretation :The minimum and maximum age criteria in this loan is totally differentfrom that of other loan. Generally theres no minimum age to apply for this loan as this loan is always backed by a major guarantor and if necessary also by collaterals. But some the banks demands it to be atleast 18 years but theres no hard and fast rule that it should be 18. As education has no age limit, so theres no maximum age limit in case of educational loan. A applicant can apply for loan unless and until he has the willingness to study.
Minimum (In Yrs) No Limit -18 18 18 -18 21 --No Limit No Limit No Limit 18 No Limit 18
Maximum(In Yrs) No Limit -No Limit No Limit No Limit -No Limit No Limit --35 No Limit No Limit No Limit No Limit No Limit
80
Minimum Age for Educational Loan
NA 25%
18 Yrs 38%
No Limit 31% 21 Yrs 6%
Maximum Age for Educational Loan

35 Yrs 6% NA 25%
No Limit 69%
Criteria 02 :Type of collateral The security and collateral clause of the all the participated banks are amost same, upto amount of Rs 4 lacs , theres no requirement for any collateral, it is merely backed by a personal guarantee by a guarantor. Any amount above 4 lacs tends to attract collateral security which can be Immovable like land, building etc. or liquid which includes NSC, LIC etc. equalizing to the value of loan applied. If the applicant has qualified for any national reputed institutes like IITs,IIMs,NITsetc then no such collateral security is necessary , a mere personal guarantee will be applicable.
81
Criteria 03 : Maximum amount for studies in india and abroad
I have found that maximum amount that is being allowed for studies in india varies from 10-15 lakhs where as in case of nationally reputed colleges like IITs,IIMs etc. the amount may maximize to 20 lakhs without any hesitation. And for studies in abroad the banks may extend
loan upto 20 lakhs.
Criteria 04 : Type of institute/Colleges :
All the participate banks offers educational loan for courses which are approved by AICTE or is under UGC. There are also some banks like UCO bank has expressed that they are willing to extend loan for any course of any colleges. Some banks also exerted that they prefers those institute which have corporate tie up with their respective banks.
Criteria 05 : Range of Rate of Interest
Interpretation : Rate of interest is the rate which the banks earn on the amount that has been sanctioned as a loan to the customer. The interest rate always depends on the BPLR which is fixed by the RBI and the commercial banks have to fix their own interest rate above the BPLR individually. The rate of interest is not fixed however ,it is always volatile and responds to RBIs BPLR. Higher the rate of interest , higher will be the income for the banks. The rate of interest may vary from banks to banks. But in the case of educational loan ,theres very less difference between interest rates of the banks. If the applicant is applying loan to study in institutes like IITs,IIMs or any other nationally reputed colleges, then the banks may waive off his interest , as the students qualifying for such colleges has a rare chance of being NPA in future.
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Sl. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Name of the Bank

ROI 11.25-13 % NA 12-14 % 10-12 % 11-12.5 % NA 13-14 % 13-15 % NA NA 13.75-14.75 % 12.5-14 % 12-13 % 13.75 % 12.75-13.75 % 11-12.25 %
Range of ROI
NA 25%
Upto 11 % 19%
Above 14 % 12%
11-14 % 44%
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Conclusion :
The management of credit risk is possible only with its measurement. Models are the tools to effectively measure the risk exposure of various financial institutions. With the correct measure
of the credit risk, its management will become effective and efficient. This work concentrates on developing an approach to measure the credit risks associated with various borrowers of a bank.
Post disbursement contact with the loanee should be maintained. This process not only builds report but also gives important clues about loanees ability to honour the payment responsibility. At the same time this also leads to good customer care.
There should be good coordination among sales department, credit department and risk department where they should go through the loanees profile and should sanction the amount through proper stringent verification when the amount is huge.
Future status of loaners business, if he is a business man, should selling if proper verification and strict scrutnisation is done with corresponding undertaking officers. Good rapport with government officers by risk department will help in recovering the targeted amounted from government employees proper branch network and good force in risk department will solve if there is any transfer of employees.
To safeguard the loan and improve the risk especially when there is a probability of mobility of a loan for example: in case of a personal loan property attachment or guaranteed of government employee is to be taken. Hence such defaulters can be reduced
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Bibliography
Market Forces April Issue, Vol. 01,No. 01,RISK MANAGEMENT FOR BANKS,A.A
Kanwar,College of Management Sciences
Asia Pacific Journal of Finance and Banking Research Vol. 2. No. 2. 2008,Operational Risk Management In Indian Banks In The Context Of Basel Ii: A Survey Of The State Of Preparedness And Challenges In Developing The Framework, UshaJanakiramani
Federation Of Indian Chambers Of Commerce & Industry, Indian Banking System: The Current State & Road Ahead - Annual Survey RBI Reports Excerpts from websites www.deal4loans.com, personallaon.org, Wikipedia etc. Excerpts from IndusInd Bank Website at www.indusindbank.com.

Banking History: A Flashback Into Past. Banking System in Indian Context. Issues in Banking System. Introduction To Credit and Risk

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A Study on Credit Risk Assessment : Understanding relationship between Credit Risk and Interest

Apeejay Institute of Technology-School of Management, Greater Noida

The Indian financial system comprises the following institutions:

3. Nonbanking financial companies (NBFCs)

4. Capital market intermediaries

Reserve Bank of India : A Prominent Role

Magnitude and Complexity of the Banking Sector

Apeejay Institute of Technology-School of Management, Greater Noida

Issues in the Banking Sector

Apeejay Institute of Technology-School of Management, Greater Noida

The NPAs of public sector banks were recorded at

MAIN CAUSES OF NONPERFORMING ASSETS

The individuals who take or manage risks clearly understand it

The expected payoffs compensate for the risk taken

i. ii. iii. iv.

Credit Risk Market Risk Liquidity Risk Operational Risk

Apeejay Institute of Technology-School of Management, Greater Noida

NEED & IMPORTANCE

Apeejay Institute of Technology-School of Management, Greater Noida

Inter-Relationship Between Credit And Risk

Apeejay Institute of Technology-School of Management, Greater Noida

Credit Types and its Underwriting Process

Apeejay Institute of Technology-School of Management, Greater Noida

Fund based functions can be further divided into:

I. LOANS AND ADVANCES Commercial Loans Segment

B. Tem Loans 1. Capital Expenditure 2. Equipment Finance 3. Project Finance

Personal Loans Segment

1. Capital Market Instruments. 2. Debt Market Instruments.

Cash Credit Facility

The term Loan can be availed to :

Purchase of Fixed Assets :

Switching of Higher Interest Loans :

Mortgage Term Loan :

Packing Credit Limit

Personal Loan Segment

Loan without security :

No specification about the end use of the loan amount

Big Loan amount

Types of Home Loan

This are following steps taken by banks during process of loan.

Application form is login

Guarantor or Collateral Waive-Off:

Education loan provides tax benefit

Non Fund Based

Non Fund Based Facilities Includes :

Establishment of Letter of Credit :

Types Of Letters Of Credit

Data Analysis & Findings

Apeejay Institute of Technology-School of Management, Greater Noida

Apeejay Institute of Technology-School of Management, Greater Noida

Findings and Reports

Questionnaire Working Capital Loan

Question 01 : Number of Years into the Business.

Apeejay Institute of Technology-School of Management, Greater Noida

Minimum number of years into the business

Not Specific 25%

4-5 Years 6% 2-3 Years 56% 3-4 Years 6%

Apeejay Institute of Technology-School of Management, Greater Noida

Minimum Turnover Amount (In Lakhs) NA 40 10 NA NA 200 100 100 100 NA NA 2 NA 25 5

Minimum Turnover Criteria

50-100 Lakhs 20% Above 100 lacs 7%

Apeejay Institute of Technology-School of Management, Greater Noida