CREDIT RISK MANAGEMENT
Silpa Cherian
Chapter 1. Introduction
1.1 Background of the studyBanks in general face 3 types of
risks: Credit risk, market risk, operating risk. y Credit risk is
risk due to uncertainty in a counterparty's (also called an
obligor's or credit's) ability to meet its obligations. y
Investments are risky because of the change in their prices. This
volatility in the value of a bank's investment is known as the
market risk, as it is driven by the market. y Several events that
are neither due to default by third party nor because of the
variation of the market may arise. These events are called
operational risks and can be attributed to internal systems,
processes, people and external factors.y
1.2 Background of the topicCredit risk is defined as when the
borrower or counterparty fails to meet its obligations in
accordance with agreed terms. y Aim of CRM: to maximize a bank's
risk-adjusted rate of return by maintaining credit risk exposure
within acceptable parameters. y The effective management of credit
risk is essential to the long-term success of any banking
organization.y
1.3 Nature of studyy
A descriptive study is conducted to study the Credit Risk
Management of Federal Bank Ltd., Aluva.
1.4 Objectivesy y
y y y y
Primary Objectives: To study the credit risk management
operations (assessment & procedures) in Federal Bank Ltd. To
study different kinds of risks existing in Federal bank ltd.
Secondary Objectives: To study the effect on risk management in
capital adequacy ratio of Federal Bank. To identify the effect of
Basel II norms regarding risk management in banks. To study the
impact of asset quality on credit risk management of the bank. To
analyze actual credit exposure of the bank.
Chapter 2. Industry/ Company profile
1.1 Industry ProfileThe financial services sector contributes
19% India's GDP in FY 10. y Second-largest component after trade,
hotels, transport and communication.y
History Of Banking in Indiay y y y y y y y y y y y y
Journey of Indian Banking system can be segregated into 3
distinct phases: PHASE I: 1786- The General Bank of India, Bank of
Hindustan, Bengal Bank 1809- East India Company established Bank of
Bengal 1840- Bank of Bombay 1843- Bank of Madras 1865- Allahabad
Bank 1894- Punjab National Bank Ltd. 1906-1913- Bank of India,
Central bank of India, Bank of Baroda, Canara Bank, Indian Bank,
Bank of Mysore 1920- Imperial Bank of India 1935- RBI Growth was
slow & experienced periodic failures b/w 1913- 1948.
Approximately 1,100 banks, mostly small.
History of banking in IndiaThe Banking Companies Act, 1949 y
Banking Regulation Act, 1949yy
PHASE II:
y y y y y y
Nationalization of Indian banks & up to 1991 prior to Indian
Banking sector reforms. 1955- Nationalized Imperial Bank of India
1960- 7 subsidiaries of SBI nationalized 19th July, 1969- 14 banks
nationalized 1980- 7 banks nationalized (80% of banking segment
Gov. owned) Nationalization lead to increase in deposits &
advances.
History of banking in Indiay y y y y y y y y y
PHASE III: New phase of Indian Banking system with advent of
Indian Financial & Banking Sector Reforms after 1991.
Introduced many products & facilities in banking sector. 1991-
Narasimham Committee was setup New phase brought in many changes:
Foreign banks ATM stations Customer service Phone banking Net
banking
Current Scenario in Banking Scenarioy y y y y y y y
IT based Core Banking solutions BPR implementation 88 scheduled
commercial banks 28 public sector banks 29 private banks 31 foreign
banks 65,000 branches 21,000 ATMs
2.2 Company Profiley y y y y y y
1931- Incorporated as Travancore Federal Bank Ltd. Founder- K.P.
Hormis 1945-Renamed as The Federal Bank Ltd. Annual turnover- Rs.
75,000 crores. Wide network 600 branches is almost all important
cities with more than 375 branches in Kerala. 30% deposits by NRIs
CRISIL rating as P1+
Growth of Federal Bank Ltd.Branches No. of units by 2002 No. of
units by 2003 No. of units by 2004 No. of units by 2005 No. of
units by 2006 No. of units by 2007 No. of units by 2008 No. of
units by 2009 No. of units by 2010 412 420 440 456 472 536 600 669
737 ATM 36 119 204 255 320 391 517 690 775
900 800 700 600 500 400 300 200 100 0 No. of No. of No. of No.
of No. of No. of No. of No. of No. of units units units units units
units units units units by by by by by by by by by 2002 2003 2004
2005 2006 2007 2008 2009 2010 Branches ATM
y
y
y y y
VISION: Develop into a stronger and more efficient and
profitable financial institution with a growing share of the
market, providing an expanding range of products and services to a
growing clientele within and outside the country, adopting best
industry practices and employing contemporary technology, and be
counted among the top private banks in the country. MISSION: Devote
balanced attention to the interest and expectations of
stakeholders, and in particular: share holders, customers &
employees. Pursue excellence in various facets of banking. Adopt
best industry practises. MOTTO: Your perfect banking partner.
Organization Structure
BOARD OF DIRECTORS
MANAGING DIRECTOR & CEO
EXECUTIVE DIRECTORS
BUSINESS DEPARTMENTS WITH BUSINESS RESPONSIBILITIES WHOLESALE
BANKING
SUPPORT DEPARTMENTS Information Technology Dept Operations
Dept
CONTROL DEPARTMENT Inspection & Audit Dept Vigilance
Dept
AUTHORITIES WITH BUSINESS RESPONSIBILITIES Regional Heads
Large Corporate Dept Treasury Dept PERSONAL BANKING Retail
Business Dept NRI Service Dept BUSINESS BANKING SME & Agri
Business Dept Asset Recovery Dept
Human Resources Dept Legal Dept Finance & Accounts Dept
Corporate Service Dept Corporate Planning Dept
Integrated Risk Mgt DeptSecretarial Dept CEO s Secretariat
Integrated Risk Management Department
Functions:y y y
y y y
Overall management of risks faced by the bank. Meeting risk
management guidelines of the RBI. Presenting quarterly progress to
the board on implementation of RM guidelines of RBI & reporting
such progress reports to RBI on quarterly or other prescribed
intervals. Implementing suitable framework for mitigating
operational risks. Risk aggregation & capital allocation.
Initiating all other functions related to risk management.
Hierarchy of IRMDEXECUTIVE DIRECTOR
RISK MANAGEMENT COMMITTEE
CREDIT RISK MGT DIVISION (HEADED BY THE CHIEF MANAGER)
MARKET RISK MGT DIVISION (HEADED BY THE SENIOR MANAGER)
OPERATIONS RISK MGT DIVISION (HEADED BY THE SENIOR MANAGER)
CREDIT RISK MANAGEMENT COMMITTEE
MARKET RISK MANAGEMENT COMMITTEE
OPERATIONS RISK MANAGEMENT COMMITTEE
Chapter 3. Review Of Literature
y y
Objectives of Risk Management (www.helplinelaw.com)
There are two main areas of focus for risk management: y
Internal x To measure management that the business is aware of and
in control of current and future business prospects. x To safeguard
business assets and reputation of business x To help in improving
banks operating performance and shareholder value x To support the
achievement of strategic goals. Externaly y
To ensure fulfillment with regulatory requirements To deliver
competitive advantage
y
To reassure stakeholders and internal groups that the business
is actively managing risk. Benefits of Risk Management
(www.federalbank.co.in) Increased Risk awareness Prioritization of
Business risks Fewer unexpected and unwelcome surprise A better
focus internally Reduced losses through process improvement
developed by bank Providing a better basis for making key strategic
decisions
y
Chapter 4. Methodology
4.1 Data CollectionData collection from secondary sources y
Annual Reports y Company Records y Data published on websites y
Journals y Websites y Manual book of Bank y Brochures y RBI
website
4.2 Sample Selection Method Choicey
Data of past 6 years (2004-2010) have been used for
calculations.
4.3 Tools Used For Data Collectiony y y y y y
Capital Adequacy Ratio Asset Quality ENPA Correlation Bar
diagram Pie-chart
4.4 Limitations of the studyy
Lack of reliability. Study conducted on present conditions.
Couldnt meet all relevant personnel. Time constraint Limited
data
y
y
y
y
Chapter 5. Data Analysis & Presentation
5.1 Analysis of Data CAPITAL ADEQUACY RATIO
CAPITAL ADEQUACY RATIO Capital Adequacy Ratio = Capital Risk
Weighted AssetsyYear 2004-05 2005-06 2006-07 2007-08 2008-09
2009-10 CRAR 11.27 13.75 13.43 22.46 20.14 21.23
The CRAR has rose to 21.23 in 2009-10 which was 11.27 in
200920042004-05. Thus, showing efficient management of credit risk
as per Basel norms.
CAPITAL ADEQUACY RATIOCRAR25 20 15 10 5 0 2004-05 2005-06
2006-07 2007-08 2008-09 2009-10 CRAR
Capital Adequacy Ratio comparison with Kerala based BanksBank
South Gramin Bank Dhanalakshmi Bank Catholic Syrian Bank South
Indian Bank Federal Bank 9.77 9.58 11.08 22.46 9.21 9.56 13.80
20.14 Malabar 2007 08 9.10 2008 09 9.19
Among Kerala based banks, Federal bank has the best CRAR of
20.14 compared to least CRAR at South Malabar Gramin bank.
Capital Adequacy Ratio comparison with Kerala based Banks25
20
15 2007 08 2008 09
10
5
0 South Malabar Dhanalakshmi Catholic Syrian South Indian Gramin
Bank Bank Bank Bank Federal Bank
Total Advances to Total AssetsYear 2004-05 2005-06 2006-07
2007-08 2008-09 2009-10 Advances (Rs.) 8823 11736 14899 18904 22392
26950 Assets (Rs.) 16820 20642 25089 32506 38850 43605 Ratio .52
.56 .59 .58 .57 .62
The ratio is showing an increasing trend at 0.62 in 2009-10
which implies proper balancing of advances & assets.
Total Advance to Total AssetsRatio0.64 0.62 0.6 0.58 0.56 0.54
0.52 0.5 0.48 0.46 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
Ratio
Total Investment to AssetsYear Investment (Rs.) 2004-05 2005-06
2006-07 2007-08 2008-09 2009-10 5799 6272 7032 10026 12118 12982
Assets (Rs.) 16820 20642 25089 32506 38850 43605 .34 .30 .28 .30
.31 .30 Ratio
The ratio is constant at 0.30 during 2009-10 and shows good
maintenance of investments & assets.
Total Investment to Total AssetsRatio0.4 0.35 0.3 0.25 0.2 0.15
0.1 0.05 0 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
Ratio
ASSET QUALITY
Net NPAs to Total AssetsYear Net NPA (Rs.) Total Assets (Rs.)
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 194.51 111.60 65.05
43.20 68.12 128.79 16820 20642 25089 32506 38850 43605 1.15 % .54 %
.26 % .13 % .18 % .29% Percentage
The percentage of Net NPA to Total assets has increased to 0.29%
during 2009-10. This indicates an unsound asset quality.
Net NPA to Total AssetsPercentage1.40% 1.20% 1.00% 0.80% 0.60%
0.40% 0.20% 0.00% 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
Percentage
Net NPAs to Total AdvancesYear Net NPA (Rs.) 2004-05 2005-06
2006-07 2007-08 2008-09 2009-10 194.51 111.60 65.05 43.20 68.12
128.79 Advances (Rs.) 8823 11736 14899 18904 22392 26950 2.2 % .96
% .43 % .23 % .30 % .48% Percentage
During 2009-10 the percentage rose to 0.48% showing an
increasing trend due to poor management. Recession also plays a
role in this increase from 2008.
Net NPAs to Total AdvancesPercentage2.50%
2.00%
1.50% Percentage 1.00%
0.50%
0.00% 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
ENPA
EXPOSURE TO CREDIT RISKy
The bank can quantify the credit risk on the basis of the level
of NPAs. The following expression quantifies the credit risk of the
bank.
ENPA = (EBT/TA) / (NPAs/ TA) ENPA- Earning per Non Performing
Assets NPA Non Performning Assets TA - Total Assets EBT Earnings
before tax
Credit risk ratio of Federal BankYear EBT (Rs.) 2004-05 2005-06
2006-07 2007-08 2008-09 2009-10 90.0859 225.2057 292.7328 368.0538
500.4936 464.5451 TA (Rs.) 16820 20642 25089 32506 38850 43676 NPA
(Rs.) 194.51 111.60 65.05 43.20 68.12 128.79 0.46 2.02 4.5 8.6 7.4
3.7 ENPA
The ENPA during 2009-10 has come down to 3.7
Earning per Non Performing AssetsENPA10 9 8 7 6 5 4 3 2 1 0
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 ENPA
CORRELATION
Correlation between Deposits and AdvancesYear 2004-05 2005-06
2006-07 2007-08 2008-09 2009-10 Deposits (Rs.) 15192 17878 21584
25913 32,198 36,058 Advances (Rs.) 8823 11736 14899 18905 22392
26,950
The deposits has increased over the years thus leading to an
increase in the advances.
Correlation between Deposits & Advances40000 35000 30000
25000 20000 15000 10000 5000 0 2004-05 2005-06 2006-07 2007-08
2008-09 2009-10 Deposits Advances
Correlation between Deposits and Net ProfitDeposits Year 2004-05
2005-06 2006-07 2007-08 2008-09 2009-10 (Rs.) 15192 17878 21584
25913 32198 36058 Net Profit (Rs.) 90.01 225.20 292.73 368.05
472.01 502.29
Increase in deposits have also lead to an increase in the Net
profit during 2009-10.
Correlation Between deposits and Net profit40000 35000 30000
25000 20000 15000 10000 5000 0 2004-05 2005-06 2006-07 2007-08
2008-092009-10 Deposits Net Profit
Correlation between Advances and Net ProfitYear Advances (Rs.)
8823 11736 14899 18905 22392 26950 Net Profit (Rs.) 90.01 225.20
292.73 368.05 472.01 502.29
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
The The Net profit has increased to 502.29 in 2009-10 while it
was 2009only 90.01 in 2004-05. 2004-
Correlation between Advances and Net Profit30000 25000 20000
15000 10000 5000 0 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
Advances Net Profit
Analysis of Deposit Mix
Analysis of Deposit MixYear Demand Deposits (Rs.) 861 938 1216
1464 1442 1831 Savings Deposits (Rs.) 2864 3534 4229 5036 6445 7611
Term Deposits (Rs.) 11467 13406 16138 19412 24210 26615 Total
Deposits (Rs.) 15192 17878 21583 25912 32097 36057
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
40000 35000 30000 25000 20000 15000 10000 5000 0 2004-05 2005-06
2006-07 2007-08 2008-09 2009-10 Demand Deposits Savings Deposits
Term Deposits Total Deposits
Percentage of Demand Deposits to Total DepositYear 2004-05
2005-06 2006-07 2007-08 2008-09 2009-10 Demand Deposits (Rs.) 861
938 1216 1464 1442 1831 Total Deposits (Rs.) 15192 17878 21583
25912 32097 36057 % to Total Deposits 5.66 5.24 5.63 5.64 4.49
5.07
The proportion was 5.66% in 2004-05 & is 5.07% in 2009-10.
20042009-
Percentage of Demand Deposits to Total Deposit% to Total
Deposits6
5
4
3 % to Total Deposits 2
1
0 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
Percentage of Savings Deposits to Total DepositsYear Savings
Deposits(Rs.) 2864 3534 4229 5036 6445 7611 Total Deposits(Rs.)
15192 17878 21583 25912 32097 26615 % to Total Deposits 18.9 19.8
19.6 19.4 20.0 28.59
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
The proportion was 18.9% in 2004-05 & has 2004increased to
28.59 in 2009-10. 2009-
Percentage of Savings Deposits to Total Deposits % to Total
Deposits35 30 25 20 15 10 5 0 % to Total Deposits
Percentages of Term Deposits to Total DepositsYear Term deposit
(Rs.) 11467 13406 16138 19412 24210 26615 Total Deposits (Rs.)
15192 17878 21583 25912 32097 36057 % to Total Deposits 75.3 74.9
74.7 74.9 75.4 73.8
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
The proportion is showing a consistent relation from 20042004-05
from 75.3 to 2009-10 73.8. 2009-
Percentages of Term Deposits to Total Deposits% to Total
Deposits76 75.5 75 74.5 74 73.5 73 % to Total Deposits
Credit Exposure of Federal bank in 2010CREDIT LIMITS 2 Lakhs 50
lakhs 50 Lakhs 500 lakhs 500 Lakhs and above Retail loans
PERCENTAGE FIGURE 30 20 15 35
The bank shows a high percentage of 35% in lending retail
loans.
Credit Limits
2 Lakhs 50 lakhs 35% 30% 50 Lakhs 500 lakhs 500 Lakhs and above
Retail loans
15%
20%
Chapter 6. Summary & Conclusions
6.1 Findings of the studyy
y y
y
y y
The CRAR has rose to 21.23 in 2009-10 which was 11.27 in 200405.
Thus, showing efficient management of credit risk as per Basel
norms. Among Kerala based banks, Federal bank has the best CRAR of
20.14 compared to least CRAR at South Malabar Gramin bank. The
ratio of total advances to total assets show an increasing trend at
0.62 in 2009-10 which implies proper balancing of advances &
assets. The ratio of total investment to total assets is constant
at 0.30 during 2009-10 and shows good maintenance of investments
& assets. The percentage of Net NPA to Total assets has
increased to 0.29% during 2009-10. This indicates an unsound asset
quality. During 2009-10 the percentage of Net NPA advances rose to
0.48% showing an increasing trend due to poor management. Recession
also plays a role in this increase from 2008.
Findings of the studyy y y y y y y y
The ENPA during 2009-10 has come down to 3.7 The deposits has
increased over the years thus leading to an increase in the
advances. Increase in deposits have also lead to an increase in the
Net profit during 2009-10. Increase in advances has also lead to an
increase in Net profit to 502.29 in 2009-10 while it was only 90.01
in 2004-05. 20092004The proportion of demand deposits to total
deposit was 5.66% in 20042004-05 & is 5.07% in 2009-10. 2009The
proportion of savings deposits to total deposit was 18.9% in
20042004-05 & has increased to 28.59 in 2009-10. 2009The
proportion of term deposits to total deposit is showing a
consistent relation from 2004-05 from 75.3 to 2009-10 73.8.
20042009Federal bank shows a high percentage of 35% in lending
retail loans.
6.2 Recommendationsy
y y y
y
Bank should establish a system that helps identify problem loan
ahead of time when there may be more options available for remedial
measures. Banks should disclose to the public, information on the
level of risk and policies for risk management. Bank should take
measures to improve its asset quality, so that the credit risk can
be minimized. The bank must put maximum effort to attract the fixed
deposits which contribute significantly towards the enhancement of
banks profitability. The bank should maintain a good proportion in
their deposits and advances.
6.2 ConclusionsThe effectiveness of credit risk management rests
where the credit quality is maintained by the bank. y Basel III is
likely to improve the risk management systems of banks as the banks
aim for adequate capitalization to meet the underlying credit risks
and strengthen the overall financial system of the country y
Formerly, people were not much bothered about the banking services
but now they are comparing banks based on the services
offered.y
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