My Project of Vijaya Bank

8/12/2019 My Project of Vijaya Bank

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A Report on

CREDIT RISK ASSESSMENT

At

Thesis submitted to Visvesvaraya Technological University (VTU) in partial fulfillment for

the award of the Degree

Master of Business Administration

Submitted by

Mr.Mahadeva Swamy.M

USN: 1RX12MBA01

Under the Guidance of

Internal Guide External Guide

Dr.Tamizharasi M Jagan Mohan

Asst. Professor Dy Gen Manager

RNSIT Vijaya bank

Bangalore Bangalore

R N S Institute of Technology

Bangalore 560098

June 2014

Certificate from the Organization.


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A PROJECT ON CERDIT RISK MANAGEMENT

RNS Institute of Technology Page 2

Certificate from the Guide.

This is to certify that the thesis/dissertation/project report titled Credit Risk Assessmemt at

Vijaya Bank, submitted by Mr.Mahadeva Swamy.M to Visvesvaraya Technological

University (VTU), for the award of degree of MBA is a record of bonafide research work

carried out by him under my guidance and supervision. This has not been previously formed

the basis for the award of any Degree, Diploma. Associateship, Fellowship or other similar

title to the candidate.

Place: Bangalore

Date:

Dr.Tamizharasi

Project Guide


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Declaration

I hereby declare that titled the thesis/dissertation/project report Credit Risk Management at

Vijaya Bank has been written by me during my study period under the guidance of

Prof.Tamizharasi, Dept of MBA.

I further declare that the thesis is the result of my own effort and has not been

submitted earlier to any other university for the award of any degree, diploma, associateship,

fellowship or other similar title.

Place: Bangalore

Date: Mahadeva Swamy.M

MBA IV Semester


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Acknowledgement

I have a great pleasure in expressing my deep sense of gratitude to Mr. ASDF for giving me

an opportunity to do a research project in his esteemed organization.

I express my profound respect and sincere thanks to Prof. Tamizharasi for her

invaluable guidance and scholarly advice through out the period of this study.

My special thanks to the Principal for his supportive role, advice and valuable

suggestions which helped me in successful completion of this project.

I wish to record my heartfelt thanks to al my faculty members in the department for

their encouragement in accomplishing this research work.

Last but no way least; my thanks are due to all those who have helped me directly and

indirectly in completion of this project.

Place:

Date: Candidates

Name


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Table of contents

Page No.

Executive summary 8

Chapter 1: Introduction 9

Chapter 2: Industry & Company Profile 16-46

Chapter 3: Theoretical Background of the study 50-63

Chapter 4: Data analysis & interpretation 64-96

Chapter 5: Summary of findings, suggestions & conclusions 97-99

Bibliography 100

Annexure 101-103


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LIST OF TABLES AND GRAPHS

Sl.

No.

Titles Page

No.

1. Board of Directors 28

2. Financial Statement of Vijaya Bank 47-49

3. Credit Risk Management Framework 55

4. Mapping Process 60

5.Risk weight Mapping of the Short Term Ratings of the domestic rating

agencies: 62

6. Table internal ceiling of risk rating 65

7. Score Sheet for ACB Electricals Limited 67

8 Graphical Representation on Business Risk (ACB Electricals) 69

9. Graphical Representation on Financial Risk(ACB Electricals) 70

10. Graphical Representation on Management Risk(ACB Electricals) 72

11. Score Sheet for PQR Energy Limited 76-77

12. Graphical Representation on Business Risk (PQR Limited) 77

13. Graphical Representation on Completion Risk (PQR Limited) 78

14. Graphical Representation on Execution Risk (PQR Limited) 79

15. Graphical Representation on Financial Risk (PQR Limited) 81

Score Sheet for JKL Power Limited 84


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16. Graphical Representation on Business Risk (JKL Power Limited) 86

17. Graphical Representation on Completion Risk (JKL Power Limited) 88

18. Graphical Representation on Execution Risk (JKL Power Limited) 89

19. Graphical Representation on Financial Risk (JKL Power Limited) 91

20. Altman Z Score 95

21. Annexure 101-103


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EXECUTIVE SUMMARY

This project is done on Credit Risk Management practices in Vijaya Bank

In the fast growing world, banks are facing many types of risks among which Credit

Risk stands at the top of the list. Hence, the topic is Credit Risk Management. One bank was

chosen to understand the practices followed by them in depth which would apply to other

banks in general.

Vijaya Bank is one of the Public Sector Banks and is supposed to be in line with RBI

guidelines. This helped in understanding the credit risk management practices followed by a

bank in a better way.

The process of Credit Risk Management is Identification, Measurement, Monitoring

& Control. The bank follows these steps very clearly and has a sound Credit Risk

Management system installed. Is has also installed a software for risk rating which was

provided by CRISIL which is in turn in lines with RBI guidelines.

The bank Net Profit has seen a growth of 234% & the total business is up by 16%.

The banks deposits are up by 13% & the gross advances are up by 19%. The credit risk

exposure is increased to 80064.90 as of Sep 30, 2011.

The credit risk of the bank has decreased over the past 5 years. They have installed an

integrated risk management system in line with BASEL II norms and RBI guidelines.

They follow strict hedging policies to reduce credit risk of the banks. They take

financial collaterals and guarantees to hedge their credit risk.

Hence, all the policies and strategies have led to a sound credit risk management system.


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INTRODUCTION

Brief Background of the research topic:-

Risk management in Indian Banks is relatively a new practice, but has already shown

to increase efficiency in governing of these banks as such procedures tend to increase the

corporate governance of financial institutions. In times of volatility & fluctuations in the

market, financial institutions prove themselves by withstanding the market variations &

achieve sustainability in terms of growth & have a stable share value. Hence, an essential

component of Risk Management framework would be needed to mitigate all risks & rewards

of all products & services offered by the bank. Thus the need for an efficient Risk

Management framework is paramount in order to factor internal & external risks.

The financial sector in various economies like that of India is undergoing a monumental

change factoring into account world events such as the banking crisis across the globe. The

2007 recession in USA has highlighted the need for banks to incorporate the concept of Risk

Management into their regular procedures. Ten various aspects is increasing global

competition to Indian Banks by Foreign Banks, increasing deregulation, introduction of

innovative products & financial instruments as well as innovation in delivery channels have

highlighted the need for Indian Banks to be prepared in terms of Risk Management.

Indian Banks have been making great advancements in terms of technology, quality as well

as stability such that they have started to expand & diversify at a rapid rate. However, such

expansion brings these banks into the context of risk especially at the onset of increasing

Globalization & Liberalization. In Banks and other financial institutions, risk plays a major

role in the earnings of the banks. Higher the risk, higher the return, hence, it is essential to

maintain a parity between risk & return. Hence, management of financial risk

incorporating a set of systematic & professional methods especially those defined by the

Basel II becomes essential requirement of the banks. The more risk averse the bank is, the

safer is their capital base.


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Importance of Credit Risk Management:-

The Credit Risk Management is the very important area the banking sector & there

are wide prospects of growth & other financial institutions also face the problems which are

financial in nature.

Also banking professional have to maintain a balance between the risks & rewards.

For a large customer base banks need to have a variety of loan products. If bank lowers the

interest rates for the loan it offers, it suffers.

In terms of equity banks must have substantial amount of capital on its reserve, but

not too much that it misses the investment revenue, and not too littler that it leads itself to

financial instability and to the risk of regulatory compliance.

Credit Risk Management is the risk assessment that comes in an 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. And such decision must be made by balancing between

risks and returns.

Giving loans is a risky affair for banks sometimes and certain risks may also come

when banks offer securities and other forms of investments. The risk of losses that results in

default of payment by the debtors is kind of a risk that must be expected. A bank to keep

substantial amount of capital to protect its solvency and to maintain its economic stability.

The greater the banks are exposed to risks; greater should be the amount of capital

needed so as to maintain its solvency and stability.

Credit Risk Management must play its role to help the banks to be in compliance with

Basel II Accord and other regulatory bodies.

For assessing the risks, banks should plan certain estimates, conduct monitoring, and

perform reviews of performance of the banks. They should also loan review and portfolio

analysis in order to determine the risks involved.


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Banks must be active in managing the risks in various securities and derivatives. Still

progress has to be made for analyzing the credits and determining the probability of defaults

and risks of losses.

PRESENT SITUATION:

Indian Banking sector has proved to be very stringent during the times of economic

crisis in India and has ensured the economy has not suffered due to global crisis as a result.

How well the bank has been able to handle the credit default from their customers end and

how the banks have been able to post decent profit figures at the year end.

OBJECTIVES:

To study the credit risk faced by the Vijaya Bank To analyze the process of Credit Risk Management in Vijaya Bank To assess the credit risk of selected projects of Vijaya Bank

SCOPE OF THE STUDY:

It is limited to the boundary of Bangalore City (Head Office)

METHODOLOGY:

Type of Research: Descriptive Research- This is a descriptive research explaining what

Vijaya Bank does with respect to Credit Risk Management.

DATA COLLECTION:

Primary Data: Primary Data has been collected through personal interview by direct contact

method.

Personal interview and discussion was made with manager and other personnel in the bank

for the purpose.

Secondary Data: This part of the data is collected through internet.


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LITERATURE REVIEW:

R.S.Raghavan. (2003) - Author here talks about meaning of risks and the need for risk

management initially. Different types of risks and losses as defined by the RBI guidelines are

explained in detail. It also measures each type of risks by using VaR (Value at Risk) or worst

case type analytical model to determine both expected and unexpected losses. It also talks

about minimum capital requirement as per RBI guidelines.

Credit Risk and the tools for the management of the Credit Risk are also explained in detail.

It is also said that credit risk is measured through probability of default (POD), loss given

default (LGD) also through credit quality over time

Ms. Asha Singh (2013)- Here the researcher talks about various guidelines laid down by the

RBI and also talks about various mitigation techniques. It says risk in inherent part of banks

business and effective risk management is very essential for any banks financial soundness. It

says credit risk primarily composed of two risks i.e. quantity of the risks, which is nothing

but the outstanding loan balance as on the date of default and quality of the risk i.e. the

severity of the loss defined by both probability of default as reduced by the recoveries that

could be made in the event of default. Thus the credit risk is the combined outcome of

Default Risk and Exposure Risk.

Somana Devi Thiagarajan, A.Ramachandran (2011)- In this article the study was carried

out to measure the credit risk component of the Indian Scheduled Commercial Banking

Sector by using the data of 10 years 2001-2010. It illustrates how credit risk ratios can be

used to measure the credit risk in the banking sector. The results of the study indicate a

consistent increase in the total loans to total assets ratio and the total loans to total deposits

ratios for both public and private sector during the period of study. There was a gradual

decrease in the ratio of non performing loans to total loans for both public and private sector

banks from 2001-2008 but there was a gradual increase from 2009-2010 and that was

significantly higher for private sector banks than for public sector banks.

Brigitte Gidbillion-Campus and Christophe J. Godlewskil (2005)- This research is about

the two types of information bank has. One is hard information, which is present in balance


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sheet and produced with credit scoring, and is quantifiable and verifiable. Second is soft

information, which is produced in bank relationship and is qualitative, non verifiable but

manipulable. The results of the research show that the soft information allows the banker to

decrease the capital allocation for VaR coverage. So that banker should be given sufficient

incentive to not change the soft information as it is crucial input to risk management.

Prof. Dr. Srinivas Gumparthi (2012) - The need to reduce banks Non Performing Assets

(NPA) level to match the competitors forms the primary reason/backbone for the

development of the model. Also, the appropriate weights in the current system triggered the

need for the development of the same. The model was constructed using two step method.

Risks were assessed using a comprehensive score card. Discriminant analysis was used to

classify the objects/records in to two or more groups based on the knowledge of some

variables related to them. The analysis was used for the classification of assets in to

performing and non performing assets based on the factors identified from the risk scorecard.

Carl Felsenfeld (2005) - outlined the patterns of international Banking regulation and the sources of

governing law. He reviewed the present practices and evolving changes in the field of control systems

and regulatory environment. The book dealt a wide area of regulatory aspects of Banking in the

United States, regulation of international Banking, international Bank services and international

monetary exchange. The work attempted in depth analysis of all aspects of Bank Regulation and

Supervision.

Money Laundering has been of serious concern worldwide. Its risk has wide ramifications.

Money Laundering has lead to the fall of Banks like BCCI in the past. In this context the

book on Anti-Money Laundering: International Practice and Policies by John Broome

Published by Sweet and Maxwell (August 2005) reviews the developments in the area of

Money Laundering. The author explains with reference to case studies the possible effects of

Money Laundering. The book gives a comprehensive account of the existing rules and

practices and suggests several improvements to make the control systems and oversight more

failsafe.

Daniele Nouy (2006) - elaborates the Basel Core Principles for effective Banking Supervision, its

innovativeness, content and the challenges of quality implementation. Core Principles are a set of

supervisory guidelines aimed at providing a general framework for effective Banking supervision inall countries. They are innovative in the way that they were developed by a mixed drafting group and


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they were comprehensive in coverage, providing a checklist of the principal features of a well

designed supervisory system.

The core Principles specify preconditions for effective banking supervision characteristics of

an effective supervisory body, need for credit risk management and elaborates on Principle

22 dealing with supervisory powers. Dearth of skilled human resources, poor financial

strength of supervisor and consequent inability to retain talented staff, inadequate autonomy

and the need for greater understanding of modern risk management techniques are identified

as the main difficulties in quality implementation. The critical elements of infrastructure,

legal framework that supports sound banking supervision and a credit culture that supports

lending practices are the essence of a strong banking system. Widespread failures have

occurred during a period of increased vulnerability that can be traced back to some regimechange induced by policy or by external conditions

Jacques de Larosiere (2006) - Former Managing Director of the International Monetary

Fund(31) discusses the implications of the new Prudential Framework. He explains at length

how the new Regulatory code could have some dangerous side effects. The increased capital

requirements as decided by the Basel Committee on Banking Supervision in September 2010

will affect the amount of own funds would affect the profitability of the Banks. The

consequences of such increased capital requirements would incentivise the Banks to transfer

certain operations that are heavily taxed in terms of capital requirements to shadow Banking

to avoid the scope of regulation. The risks of such a practice might affect the financial

stability. While the Central Banking authorities might contemplate registration and

supervision of such shadow banking entities like the hedge funds and other pools, such a

course might be more cumbersome than expected. The new regulation would result in the

Banks to reduce activities with rather poor margins. For example they may reduce exposure

to small and medium enterprises or increase credit costs or concentrate on more profitable but

higher risk activities. He is also critical of the proposal of Basel to introduce an absolute

leverage ratio that might push Banks to concentrate their assets in riskier operations. The

author feels that the banking model which favours financial stability and economic growth

might become the victim of the new prudential framework, and force Banks to search for

assets with maximum returns despite the attendant risks.


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Crouhy, Gala, Marick 2008 - have summarized the core principles of Enterprise wide Risk

Management. As per the authors Risk Management culture should percolate from the Board

Level to the lowest level employee. Firms will be required to make significant investment

necessary to comply with the latest best practices in the new generation of Risk Regulation

and Management.. Generally firms did not institute a truly integrated set of Risk measures,

methodologies or Risk Management Architecture. The ensuing decades will usher in a new

set of Risk Management tools encompassing all the activities of a Corporation. The integrated

Risk Management infrastructure would cover areas like Corporate Compliance, Corporate

Governance, Capital Management etc. Areas like business risk, reputation risk and strategic

risk also will be incorporated in the overall Risk Architecture more formally. As always it

will be the Banks and the Financial Services firms which will lead the way in this

evolutionary process. The compliance requirements of Basel II and III accords will also

oblige Banks and Financial institutions to put in place robust Risk Management

methodologies.

Hannan and Hanweck (2007) - felt that the insolvency for Banks becomes true when

current losses exhaust capital completely. It also occurs when the return on assets (ROA) is

less than the negative capital-asset ratio. The probability of insolvency is explained in termsof an equation p, 1/ (2(Z2). The help of Z-statistics is commonly employed by Academicians

in computing probabilities.

LIMITATIONS OF THE STUDY:

It is limited to only Vijaya Bank It is based on only limited availability documents Since the data regarding the Credit Risk Management is highly confidential, primary data

availability was very limited.

It also limited only to data availed through research papers and internet.

INDUSTRY OVERVIEW


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Modern Banking in Indian can be traced back to the establishment of Bank of Bengal

Jan 02, 1809, the first joint stock bank sponsored by Government of Bengal and Government

of the Royal Charter of British India Government. It was followed by the establishment of

Bank of Bombay April 15, 1840 and the Bank of Madras, July 1, 1843. These three banks,

known as the presidency banks, marked the beginning of the limited liability and the joint

stock banking in India and were also vested with right of note issue.

In 1921, the three presidency banks were merged to form the Imperial Bank of India

which had multiple roles and responsibilities and that functioned as commercial banks, a

banker to the government and a bankers bank.Following the establishment of Reserve Bank

of India (RBI) in 1935, the central banking responsibilities that the Imperial Bank of India

was carrying out came to an end, leading it to become more of a commercial bank. At the

time of independence of India, the capital and reserves of the Imperial Bank stood at Rs. 118

Million, deposits at Rs. 2751 million and advances at 723 million and a network of 172

branches and 200 sub offices spread all over the country.

In 1951, in the backdrop of central planning and the need to extend bank credit to therural areas, the government constituted All India Rural Survey Committee, which

recommended the creation of a state sponsored institution that will extend banking services to

the rural areas. Following this, by an act of parliament passed in May 1955, State Bank of

India was established in July 1955. In 1959, State Bank of India took over the eight former

state-associated banks as its subsidiaries. To further accelerate the flow of credit flow to the

rural areas and the vital sections of the economy such as agriculture, small scale industries,

etc., that are of national importance, social control over the banks was announced in 1967 and

a National Credit Council was setup in 1968 to asses the demand for credit by these sectors

and determine resource allocations. The decade of 1960s also witnessed significant

consolidations in Indian Banking Industry with more than 500 banks functioning in 1950s

reduced to 89 by 1969.

For the Indian Banking Industry, July 19, 1969, as a landmark day, on which

nationalization of 14 major banks were announced that each had a minimum of Rs.500

Million and above of aggregate deposits. In 1980, eight more banks were nationalized. In


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1976, the Regional Rural Banks Act came into being, that allowed opening of

specialized regional rural banks to exclusively cater to the credit requirements in the rural

areas. These banks were setup jointly by the Central Government, Commercial Banks and the

respective local governments of the states in which these are located.

The period following the Nationalization was characterized by rapid rise in the banks

business and helped in increasing national savings. Savings rate in the country leapfrogged

from 10-12% in the two decades of 1950-70 to about 25% post nationalization period.

Aggregate deposits which registered annual growth in the range of 10%-12% in the 1960s to

about 19% in the 1970s and 1980s. Branch Network expanded significantly leading to

increasing in the banking coverage.

Indian Banking, which experienced rapid growth following the nationalization, began

to face pressures on asset quality by the 1980s. Simultaneously, the banking world

everywhere was gearing up towards new prudential norms and operational standards

pertaining to capital adequacy, accounting and risk management, transparency and disclosure

etc. In the early 1990s, India embarked on an ambitious economic reforms programme in

which banking sector reforms formed a major part. The committee on a financial system1991, more popularly known as the Narasimham Committee prepared the blueprint of the

reforms. A few of the major aspects of the reform included:

a. Moving towards international norms in income recognition and other relatedaspects of accounting

b. Liberalization of entry and exit norms leading to the establishment of several Newprivate sector banks and entry of number of new foreign banks,

c. Freeing of deposits and lending rates (except the savings deposit rates),d. Allowing public sector banks access to public equity markets for raising capital

and diluting the government stake

e. Greater transparency and disclosure standards in financial reporting,f. Suitable adoption of BASEL Accord on capital adequacyg. Introduction of technology in banking operation etc.

The reforms lead to major changes in the approaches of the banks towards aspects

such as competition, profitably and productivity and the need and the scope for


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harmonization of global operational standards and adoption of best practices. Greater focus

was given to deriving efficiency by improvement performance and rationalization of

resources and greater reliance on technology including promoting in a big way

computerization of banking operations and introduction of electronic banking.

The reforms lead to significant changes in the strength and sustainability of Indian

Banking. In addition to significant growth in the business, Indian banks experienced sharp

growth in the profitability, greater emphasis on prudential norms with higher provisioning

levels, reduction in the non performing assets and surge in capital adequacy. All bank groups

witnessed sharp growth in the performance and profitability. Indian Banking industry is

preparing for smooth transition towards more intense competition arising from further

liberalization of banking sector that was envisaged in the year 2009 as a part of the adherence

to liberalization of the financial services industry.

HISTORY OF BANKING IN INDIA


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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 Nationalization 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 and BankingSector Reforms after 1991.

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 bank, mostly European shareholders.

In 1865, Allahabad bank was established and first time exclusively by Indians, Punjab

National Bank Limited 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 setup. Reserve Bank of India came in 1935.

During the first phase the growth was very slow and the banks also experienced

periodic failures between 1913 and 1948. There was 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 the amending Act of 1965 (Act No.23 of 1965). Reserve Bank ofIndia was vested with extensive powers for the supervision of Banking in India as the Central

Banking Authority.

During those days public had lesser confidence in the banks. As an aftermath deposit

mobilization was slow. Abreast of it savings bank facility was provided by the Postal

department was comparatively safer. Moreover, funds were largely given to traders.

Phase II:


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Government took major steps in this Indian Banking Sector Reforms after

independence. In 1955, it nationalized Imperial bank of India with extensive banking

facilities on a large scale especially 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 Government all over the country.

Seven Banks forming subsidiary of State Bank of India was nationalized in 1960. On

July 19th, 1969, major process of nationalization was carried out. It was the effort of then

Prime Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in the country were

nationalized.

Second phase of nationalization of Indian Banking Sector Reforms 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 Act1955: Nationalization of State Bank of India

1959: Nationalization of SBI Subsidiaries

1961: Insurance cover extended to deposits

1969: Nationalization of 14 major banks

1971: Creation of Credit Guarantee Corporation

1975: Creation of Regional Rural Banks

1980: Nationalization of seven banks with deposits over 200 crore.

After the nationalization of banks, branches of public sector banks in India rose to

approximately 800% in deposits and advances took a huge jump by 11000%.

Phase III:


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This phase has introduced many 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 liberalization of banking practices.

The country was flooded with foreign banks and their ATM stations. Efforts are being

put to give a satisfactory service to its customers. Phone Banking and Net banking was

introduced. The entire banking 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 macro economics shock as other Asian Countries

suffered. This is all due to a flexible change 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.

STRUCTURE OF INDIAN BANKING


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The Indian Banking Industry has Reserve Bank of India as a regulatory authority. This is a

combination of both Public Sector banks, Private Sector Banks, Co-operative Banks and

Foreign Banks. The Private Sector Banks are again split into old banks and new banks.

Scheduled Banks in India

Scheduled Commercial Scheduled Co operative

Public Sector

Banks

Private Sector

Banks

Foreign Banks in

India

Regional Rural

Banks

Nationalized

Banks

SBI and its

Associates

Old Private Sector

Banks

New Private Sector

Banks


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The banking system in India has three tiers. They are, Scheduled Commercial Banks, the

Regional Rural Banks, which operate in the rural areas, not covered by the scheduled banks

and the Co operative and special purpose rural banks.

Public Sector Banks:

Public Sector Banks are those in which the majority stake is held by the Government

of India. Public Sector Banks together makeup the largest category in the Indian Banking

System. There are currently 27 Public Sector Banks in India. They include SBI & its six

associates banks, 19 nationalized banks. Public Sector Banks have taken a lead role in branch

expansion, particularly in the rural areas.

Regional Rural Banks:

Regional Rural Banks (RRBs) were established during 1976-1987 with a view to

develop the rural economy. Each RRB is owned jointly by the Central Government,

concerned State Government and a sponsoring Public Sector Commercial Bank. RRBs

provide credit to small farmers, artisans, small entrepreneurs and agricultural labourers.

Private Sector Banks:In these banks, majority of the capital is held by the private individuals and corporate.

Not all private sector banks were nationalized in 1969 and 1980. The private banks which

were not nationalized are collectively known as Old Private Sector Banks and include banks

such as The Jammu and Kashmir Bank., Lord Krishna Bank Ltd etc. In July 1993, as a part of

banking reform process and as a measure to induce competition in the banking sector, RBI

permitted private sector banks to enter India

Foreign Banks:

These are the banks having their Head Office in a foreign country but they operate

through branches all across the world. RBI permits these banks to operate either through

branches or through wholly owned subsidiaries. The primary activity of most of the foreign

banks has been in the corporate segment. However, some of the foreign banks also have

made consumer financing as a part of their portfolio.


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Co-operative Banks:

Co-operative banks cater to the financing need of agriculture, retail trade, small

industries and self employed businessmen in urban, semi urban and rural areas of India. A

distinctive feature of the co operative credit structure in India is its heterogeneity. The

structure differs across urban and rural areas, across state and loan maturity. Urban areas are

served by Urban Co operative Banks (UCBs), whose operations are limited to one state or

stretch across states.

RBI and National Agriculture and Rural Development Bank (NABARD) have taken

number of measures in recent years to improve financial soundness of Co operative banks.


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COMPANY PROFILE

[VIJAYA BANK, HEAD OFFICE, MG ROAD, BANGALORE]


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BACKGROUND AND INCEPTION OF THE COMPANY:

Vijaya bank was founded on 23rdOctober 1931 by Late.Shri A.B.Shetty and other

enterprising farmers in Mangalore, Karnataka. The objective of the founders was essentially

banking habit, thrift and entrepreneurship among the farming community of Dakshina

Kannada district in Karnataka. The bank became Scheduled Bank in 1958. Initially, the

banks operations were confined to Dakshina Kannada district and were later extended to

other parts in Karnataka, followed by expansion into other states.

Vijaya Bank steadily grew into a large All India bank, with nine smaller banks

merging with it during 1963-68. The credit for this merger as well as growth goes to

Late.M.Sunder Ram Shetty, who was then the Chief Executive of the Bank. The Bank was

nationalized on 15thApril 1980. At the time of nationalization, the bank had 571 branches

with a deposit base of 390.44 crores. The Bank has built a network of 1149 branches, 43

Extension Counters and 376 ATMs as at 31.12.2009, that span all 28 states and 4 union

territories in the Country.

Each branch provides efficient and effective services and significantly contributes tothe growth of the individual and the nation.

OVERVIEW:

Vijaya bank today is a PAN India Institution, serving the diverse sections of the

society. The bank has built a network of 1512 branches, 48 extension counters AND 1528

ATMs, that span all 28 states and 4 union territories in the country. The bank has the highest

number of branches in its home state Karnataka.

Vijaya Bank offers a bouquet of innovative and attractive products and services to the

customers. Vijaya Bank also incorporated the latest technology to provide best service to its

customers.

The Bank offers several technology products, such as ATMs, Cash Deposit Machines,

Debit and Credit Cards, Internet Banking, Mobile Banking, Phone Banking, Funds Transfer


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through RTGS and NEFT tec. All Branches and offices are under RTGS/NEFT. The bank

also offers RuPay cards to its customers.

The driving force behind Vjaya23 Banks every initiativehas been its 12000 strong

dedicated workforce.

MANAGEMENT:

Today living up to the ideals of the visionaries of the bank, the management includes

dedicated professionals, who bring with them a considerable amount of expertise and

experience in the banking industry.

The bank has a three tier Organization Structure:

Head Office Regional Office Branches

The head office hosts various functional departments that are instrumental in policyformulations and monitoring of the performances of the regions and branches.

The Banks 24 Regional Offices exercise immediate supervision and control over the

branches under their jurisdiction.

Directors(effective from 19-06-2012)

RBI Nominee Director

Smt. Suma Varma

Chief General Manager

Reserve bank of India.


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BOARD OF DIRECTORS:

Sl. No. Name of Directors Designation

1. Shri.V.Kannan Chairman & Managing Director

2. Shri.K.Ramadas Shenoy Executive Director

3. Shri.B.S.Rama Rao Executive Director

4. Smt.Suma Varma RBI Nominee Director

5. Shri.V.K.Chopra Govt. Nominee Director

6. Shri.P.Vaidyanathan Shareholder Director

7. Smt. Bharati Rao Shareholder Director

8. Shri. Ashok Gupta Non Official Director

9. Shri.Prakash Chandra Nalwaya Non Official Director

10. Shri.H.Harish Ballal Officer Employee Director

11. Shri.Y.Muralikrishna Workman Director


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VISION, MISSION AND QUALITY POLICY:

VISION

Bank is professionally managed with a good track record of customer loyalty and

consistent profitability. The bank has the resilience to face the new challenges successfully an

achieve the goals in vision by its management. Adopting ethical management practices, bank

reiterates its commitment to fulfill national and social priorities, present sound financial

position and above all to improve and meet the challenges posed by a customer driven

banking industry.

MISSION

The mission statement of any organization generally represents its long term goals

and strategies. Every organization must have its own mission, which describes present

business scope of the organization.

The mission statement of the Vijaya Bank is To emerge as a prime national bank

backed by modern technology meeting customers aspirations with professional banking

services and sustained growth contributing to national development.

QUALITY POLICY

The Quality Policy of the Vijaya Bank is of providing Quicker and Better service

and thereby achieving Customer Satisfaction.


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PRODUCT/ SERVICE PROFILE:

Today, personal finance is the fastest growing segment of the banks credit

deployment. Among personal banking products, loans to salaried class occupy a prominent

place. With this backdrop this loan product has been modified from time to time. The purpose

for which this loan scheme can be used are purchase household articles/consumer durables,

Childrens Education, Marriage and thread ceremony of self/dependents, medical expenses

for self/dependants, obsequies expenses, repairs to own house, and any other purpose as to

the satisfaction of the sanctioning authority. The quantum of loan provided shall be to the

maximum of 10 times of the monthly gross salary out of which, the overdraft component

shall not exceed 5 times of the gross salary. The loan has to be repaid with interest with in 5

years.

SAVINGS AND DEPOSITS:

Savings Bank

V Payroll Savings Bank Account V Genuth Savings Bank Account V Balika Savings Bank Account V Platinum Savings bank Account

Current Account

V Platinum Current Account

Term Deposits

Recurring Deposits V Genuth Unnathi Recurring Deposits Bank Account Vijayashree Units Fixed Deposits V Balika Deposit Jeevan Nidhi Deposit Capital Gain Scheme


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Vijaya Tax Savings Scheme V Cash Certificate.

LOANS AND ADVANCES:

Retail Lending Schemes

Vijaya Home Loan Education Loan Education Loan Vocational and Training Courses Personal Loan Vehicle Loan Loans to Transport Operators V vehicle Jewel Loans Vijaya Gold Cash Credit V Reverse Mortgage Loans for Trader V Restaurant V Secured Overdraft V Rent Loan against property Loan for medical practitioners V Equip V CAHSEW VIAJAYA MANGALA

Government Sponsored Schemes

Prime Minister Rozgar Yojana Golden Jubilee Rural Housing Scheme Differential Rate of Interest Scheme Swarna Jayanti Gram Swarozgar Yojana Scheme for Liberation of Rehabilitation of Scavenger


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Special Schemes for women

Debt waiver and Relief Beneficiaries Online Retail Loans Facilities to Minority Communities Finance for Flour, Rice and Dal mills Advances to agriculture, SSI and others Non Fund based facilities Loans against securities.

NRI SERVICES:

International BankingNRI Services

NRE Accounts NRO Accounts FCNR(B) Accounts Helpline for NRIs Resident Foreign Currency Deposit Account(RFC) Remittances Facilities Remit2India

FOREX Branches

FOREX Market Information

Forex Rates

Card Rates

Treasury Services

USA Patriot Act

Wolfs berg AML Certificate

Service Charges

CARD SERVICES:

Domestic Cards


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VISA Classic Debit Card MasterCard Classic Debit Card Vijaya Platinum Card VISA Gold Credit Card

Verified by VISA Cards

Global Cards

Master Card Global Credit Card VISA Classic International Card VISA City Specific Card VISA Doctors Card VISA Nurses Card

Debit Cards

VISA Debit Cards Gift Card Rupay KC FI Guidelines

New Offers

V Care U Policy

REMIT AND COLLECT

FOREX Remittances Inland Remittances Electronic Remittances Services Inward Outward Collection Remittances

HELP DESK

Branches NRI branches ATM Centers Interest Rates Service Charges Customer Relations


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Contact us Citizen Charter Ombudsman Fair Practice Codes Model Policy Codes SSI Charter List of Documents Download Forms Mobile Banking Net Banking Aadhaar status VePass Book BCSBI Codes HO Personnel Department SC ST & OBC Cell Cash Deposit KIOSK


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AREAS OF OPERATION

State/Union Territories Number of Branches

Andaman & Nicobar 2

Andhra Pradesh 146

Arunachal Pradesh 5

Assam 18

Bihar 22

Chandigarh 6

Chhattisgarh 20

Daman and Due 1

Delhi 64

Goa 9

Gujarat 85

Haryana 26

Himachal Pradesh 7

Jammu and Kashmir 3

Jharkhand 10Karnataka 587

Kerala 108

Madhya Pradesh 42

Maharashtra 134

Manipur 5

Meghalaya 5

Mizoram 3

Nagaland 5

Orissa 12

Pondicherry 2

Punjab 36

Rajasthan 33

Sikkim 1

Tamil Nadu 109

Tripura 2


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Uttar Pradesh 115

Uttaranchal 6

West Bengal 50


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INFRASTRUCTURAL FACILITIES:

The Vijaya Bank has following infrastructural facilities;

1. CBS Branches2. ATMs3. Total Branch Mechanization(TBM)4. Video Conferencing in HO,RO, CO5. Internet Facility6. Data Warehousing and mining7. Real Time Gross Settlement(RTGS) in CBS Branches8. Foreign Exchange Business9. Treasury and Investment10.Credit and Debit Card11.Security arrangement12.Close circuit TV and Time clock facility13.Communication facility with cash van during cash remittance14.Installation of hotline with currency chest15.Strong ad safe room for currency chest16.The Access Control System at all currency chests has been further strengthened as per

RBI guidelines

17.Burglar Alarm system all branches18.Automatic fire alarm system in all CBS branches19.Fire Proof cabinet in all CBS branches

Head Office of the Vijaya Bank is located in the heart of the Garden City Bangalore, MG

Road.

The bank is one of the few banks in the country which uses Finacle Software and has 100%

implementation, which in turn helps the bank to serve its customers more efficiently.


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COMPETITORS INFORMATION:

All banks of India are the competitors for the Vijaya Bank. Following are the list of

competitors;

State Bank of India and its Associate Banks

State Bank of India State bank of Bikaner and Jaipur State Bank of Hyderabad State Bank of Indore State Bank of Mysore State Bank of Patiala State Bank of Saurashtra State Bank of Travancore

Other Public Sector Banks (Nationalized Banks)

Allahabad bank Andhra Bank Bank of Baroda Bank of India Bank of Maharashtra Canara Bank Central Bank of India Dena Bank Indian Bank Indian Overseas bank Oriental Bank of Commerce Punjab and Sind Bank Punjab National Bank Syndicate Bank UCO Bank Union Bank of India


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United Bank of India

Private Sector Banks:

HDFC Bank ICICI Bank Induslnd Bank Kotak Mahindra Bank Axis Bank (then UTI Bank) Yes Bank Karnataka Bank

Foreign banks:

ABN-AMRO Bank Abu Dhabi Commercial bank ltd. American Express bank Ltd. Barclays bank PLC BNP Paribas Citi Bank DBS Bank Ltd Deutsche bank AG HSBC Ltd Standard Chartered Bank State Bank of Mauritius

Other Institutional Competitors:

Industrial Development Bank of India (IDBI) Industrial Finance Corporation of India (IFCI) Export Import Bank of India (EXIM Bank) Industrial Reconstruction bank of India (IRBI) now (Industrial Investment Bank of

India)

National bank for Agriculture and Rural Development (NABARD) Small Industries Development Bank of India (SIDB)


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Strength

SWOT ANALYSIS:

SWOT Analysis is a strategic planning method used to evaluate the Strengths, Weakness,

Opportunities and Threats involved in a project or in a business venture.

Strengths

1. The factors that have contributed to the success of the Vijaya Bank is its workforcebecause the bank has highly educated workforce, young and energetic with in the age

group of 25-45 years, this helps the junior employees to learn from the experience of

the senior employees.

2. The Bank is professionally managed. The Bank is one of the few banks in India whichgives importance to technology in order to serve its customer better. It in one the

Banks to use Finacle Software.

3.

The Banks Strength lie in the management capabilities, focused strategy, speedydecision making.

4. There has been expansion of branches and ATMs during the last few years.5. The Banks provide good infrastructural facilities to its staff and help them to

concentrate more on their job.

6. The bank also has introduced various schemes catering to various segments in thesociety.

7. The Banks also takes pride of providing best customer service.

Opportunities

Weakness

Threats

SWOT


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Weakness

1. The weakness the bank includes that the bank has majority of the branches in thesouthern regions

2. The second weakness of the bank is that of its aging workforce3. The aging workforce may not immediately accept the change and adopt it as

compared to younger generation.

4. There are a few problems with employees union.

Opportunities

1. The growth potential or the opportunities are very huge as the bank had mainlyconcentrated on the southern region of the country in its earlier years it has the

opportunity to expand its business to other parts of the country wherein it can

increase its customer base.

2. The Bank also has introduced mobile banking, Internet Banking, besideslaunching value additions like SMS alerts & Customer Utility bill payment and

Air Ticket Booking, Movie Ticket Booking, Mobile Recharge, Corporate Fund

Transfer, Temple Donation, fees payment etc, which contributes to value added

service which can retain customers.

3. Further, Bank is also tied up for providing information related to FOREX, ImportExport and also trading.

4. Vijaya Bank is targeting the younger generation and corporate banking so thatthey will have a wide scope for getting lions share with a strategic planning.

Threats:

1. As the banks majority business comes from the south any effect to the companyhere would have an adverse effect on the performance of the bank.

2. The Bank is relatively smaller when compared to other banks like SBI. ICICIBank and few other banks.


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3. Since it is a smaller bank when compared to mightier banks like SBI, CanaraBank, the bank is always under a threat of being over taken by other banks in the

industry.

MCKENSYS 7S FRAME WORK:

Mckinsey & Companiesm7s framework provides a useful way of studying internal

working of the organization. The model was developed by Tom Peter and Robert Waterman,

consultants of Mckensys & Company. The 7s Model was first published by them in the

article Structure is not organization (1980) and in the book The Art of Japanese

Management (1981) and In search of Excellence. The Mckensy Consulting Firm

identified strategy as only one of the seven elements exhibited by the best managed

companies.

Strategy, Structure and Systems can be considered as hardware of success while

Style, Staff, Skills and Shared Values can be seen as Software.

Companies. In which these soft elements are present, are usually more successful at

the implementation of the strategy.

Structure

Strategy

Skill

Staff

Systems

Style

Shared


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The functioning of the Vijaya Bank can be better understood with help of the following 7s

The 7s are:

Structure Skill Style System Strategy Staff Shared Values

1. Structure: It prescribes the formal relationship that should exist among variouspositions and activities. It is the duty of the top management to design organization

structure for an organization. It is one of the critical tasks. The designing of the super

structure involves issues like division of organization tasks and allocation of

responsibilities between various departments. The hierarchy of superior subordinate

relationship are defined by the organization charts which are formal documents that

indicate the chain of command and the titles that have been assigned to the managers

and other personnels. Organization charts indicates the employees position in the

hierarchy and their relationship with in an organization.

The Bank has a three tier Organization Structure:

Head Office, Regional Office & Branches.

The Head Office hosts various functional departments that are instrumental in policy

formulations and monitoring of performances of the regions and branches. The

Banks 20 Regional Offices exercise immediate supervision and control over the

branches under their jurisdiction.

2. Skill: Skills refer to the fact that, employees have the4 skills needed to carry out thecompanys strategies. Skillful employees are the assets of the organization. Skills of


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the employees may be improved by giving them necessary training. The Bank

believes that skillful employees contribute to the success of the Bank.

Development if the Human Resource is an important factor for the development of

any industry. Banking is not an exception to that. It involves various aspects like

continuous training, rewards by way of promotion, appreciations etc. The Banks

HRD policy is guided by the Chinese Proverb Ifyou are planning for one year, grow

rice. If you are planning for twenty years plant trees. If you are planning for centuries,

develop men.

Vijaya Bank has designed various training programmes for different levels, which

includes product training. Forex, Treasury, Assets Management trainings and

exclusive leadership and decision making trainings for the top level.

The bank has well experienced trainers and also sometimes hires trainers from outside

firms for specific training.

Thus, Vijaya Bank provides ongoing opportunities for its employees to groom theirskill set and to upgrade with latest skills to be competent in the industry and serve its

customer better.

3. Style: It is one of the 7s that a top management can use to bring about change in theorganization. According to Mckensys Framework, becomes evident through the

patterns of action taken by the members of the top management team over a period of

time. The McKensys framework considers style as more than a style of

management.

Vijaya Bank follows a Top to down style of management. It also works in a

Participative Style. The decisions are taken by the top management concerning

matters related to an organization.

The decisions relating to department matters are taken by the departmental heads. The

Bank follows a democratic leadership style which allows the employees to take part in


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the decision making process. Employees are free to give any ideas, suggestions etc.

for the betterment of an organization. This will be taken with active consultation with

employees.

4. System: System means formal and informal procedures that govern everydayactivities. The decision making systems within the organization can range from

management institutions to structured computer systems and formal and informal

procedures that govern everyday activities of the bank.

The system of Vijaya Bank includes

Computer System

Training System &

Control System.

5. Strategy: Strategy means actions company plans in response to or anticipation ofchallenges in the external environment. The Vijaya Bank. In order to respond to the

changes, has formed the following action plan with specific reference to product,

pricing.

Action plans on products are:

Expansion of Branches and ATM network Achieve 100% mobile banking Expand the Corporate Banking Targeting child banking as they can be future prospects

Action planning on pricing are:

Provide best interest rates on deposits and attract more customers Provide home loan at a lower rate of interest.

The successful implementation of these strategies or action plans helps the banks to

gain competitive advantage over other banks.


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6. Staff: Staff means that the organization has hired able people, trained them well andassigned them to the right jobs. Staffs are human resource working in an organization.

They are responsible for carrying various activities in an organization effectively and

efficiently. Vijaya Bank has well trained, devoted and skilled staffs who work very

hard for the success of the bank. The number of people employed by the bank stands

at around 12000 employees, of which 7000 includes the clerical, sub staff and 5000

officers.

7. Shared Values: Shared Values refer to the guiding concepts, values and aspirationsthat unite an organization in some common purpose. They guide employees of any

organization towards valued behavior. Important concerns and goals that are shared

by most of the people in a group, that tend to shape group behavior, and that often

persist overtime even with changes in group membership. Shared Values originally

called as super ordinate goals; it is the guiding concepts and principles of the

organization values and aspirations, often unwritten. They are also the things that

influence a group to work together for a common goal. It acts as a guiding concept,

fundamental ideas around which a business is built. So, it must be simple, usuallystated at the abstract level, have a great meaning inside the organization even though

outsiders may not see or understand them.

Vijaya Bank goes for the following values:

Customer Satisfaction

Quick & better Service

Loyal to the Customers

Honesty


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FINANCIAL STATEMENT

Balance Sheet

Particulars 2013 2012

CAPITAL AND LIABILITIES

Total Share Capital 1,695.54 1,695.54

Equity Share Capital 495.54 495.54

Share Application Money 0.00 0.00

Preference Share Capital 1,200.00 1,200.00

Reserves 3,863.11 3,279.15

Revaluation Reserves 0.00 277.53

Net Worth 5,558.65 5,252.22

Deposits 97,017.24 83,055.51

Borrowings 6,391.82 5,418.40

Total Debt 103,409.06 88,473.91

Other Liabilities & Provisions 2,014.05 2,037.88

Total Liabilities 110,981.76 95,764.01

ASSETS

Cash & Balances with RBI 3,917.70 4,542.53

Balance with Banks, Money at Call 2,727.05 1,860.32

Advances 69,765.76 57,903.74

Investments 31,284.97 28,643.80

Gross Block 476.74 1,089.06

Accumulated Depreciation 0.00 602.11

Net Block 476.74 486.95

Capital Work In Progress 0.00 0.00

Other Assets 2,809.54 2,326.66

Total Assets 110,981.76 95,764.00

Contingent Liabilities 16,997.08 13,864.09

Bills for collection 0.00 3,630.44

Book Value (Rs) 87.96 76.17


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Profit & Loss Account


INCOME

Interest Earned 9,051.88 7,988.13

Other Income 607.00 527.90

Total Income 9,658.88 8,516.03

EXPENDITURE

Interest expended 7,173.88 6,084.59

Employee Cost 848.59 739.92

Selling and Admin Expenses 0.00 618.75

Depreciation 41.46 39.95

Miscellaneous Expenses 1,009.34 456.04

Preoperative Exp Capitalized 0.00 0.00

Operating Expenses 1,362.97 1,615.03

Provisions & Contingencies 536.42 239.63

Total Expenses 9,073.27 7,939.25

Mar '13 Mar '12

Net Profit for the Year 585.61 576.77

Extraordinary Items 0.00 4.23

Profit brought forward 934.97 911.96

Total 1,520.58 1,492.96

Preference Dividend 119.33 132.49

Equity Dividend 144.94 143.98

Corporate Dividend Tax 0.00 0.00

PER SHARE DATA (ANNUALIZED)

Earning Per Share (Rs) 9.41 8.97

Equity Dividend (%) 25.00 25.00

Book Value (Rs) 87.96 76.17

APPROPRIATIONS

Transfer to Statutory Reserves 297.32 236.54

Transfer to Other Reserves 0.00 -0.02


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Proposed Dividend/Transfer to Govt. 264.27 276.47

Balance c/f to Balance Sheet 958.99 979.97

Total 1,520.58 1,492.96

Key Ratios


Current Ratio 0.73 0.03

Quick Ratio 37.98 31.78

Face Value 10.00 10.00

Dividend Per Share 2.50 2.50

Operating Profit Per Share (Rs) 11.23 10.36


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Theoretical Framework


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Credit:

The word comes from the Latin word credere, meaning trust. When sellers transfer

is wealth to a buyer who has agreed to pay later, there is a clear implication that the payment

will be made at the agreed date. The credit period and the amount of credit depend upon the

degree of trust.

The credit is an essential marketing tool. It bears the cost, the cost of the seller having

to borrow until the customers payment arrives. Ideally, that cost is the price but, as most

customers pay later than agreed, the extra unplanned cost erodes the planned net profit.

Introduction:

Risk is a potential that events, either expected or unexpected, may have an adverse

impact on the banks capital or earnings. Banks are now graduating from being financial

intermediary to risk intermediary and hence there is a need to strike a balance between the

two for achieving optimum trade off between risk and return. Greater the calculated and

informed risk undertaken, higher the likely profits, as the profits is the successful reward for

the risk undertaken in any business activity.

There are mainly there types of risks:

Market Risk Credit Risk Operational Risk

Types of Financial Risks:

Financial Risks

MarketRisk

Credit Risk

Operational


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Market Risk:

Market risk is the risk of adverse deviation of the mark to market value of the trading

portfolio, due to market environment, during the period required to liquidate the transactions.

Operational Risks:

Operational risk is one area of the risk that is faced by all the organizations. More

complex the organization, more exposed it would be to the operational risks. This risk arises

due to the deviation from normal and planned functioning of the systems, procedures,

technology and human failure of omissions and commissions. Result of deviation from

normal functioning is reflected in the revenue of the organization, either by way of additional

expenses or by way of losses of opportunity.

Credit Risk:

Credit Risk is defined as the potential that a bank borrower or a counterparty will fail

to meet its obligation in accordance with the agreed terms, or in other words, it is defined as

the risk that a firms customer and the parties to which it has lent money wi ll fail to make

promised payments is known as Credit Risk.

The exposure to the credit risk is larger in case of financial institutions, such as,

commercial banks. When firms borrow money, they in turn

expose lenders to the credit risk, the risk that a firm will default on its promised payments.

As a consequence, borrowing exposes the firm owners to the risk that a firm will be unable to

pay its debt and thus e forced to bankruptcy.

The progressive deregulation and liberalization of the Indian Financial Sector have

offered banks tremendous business opportunities. At the same time, the increased

competition has brought the exposure to various types of risks. The evolution of the new

financial instruments in the market provides not only new opportunities for earning additional

income, but also exposes the banks to new and greater risks, although some instruments allow

the banks to hedge very risks. In such a scenario, it is essential to identify various risks to


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which banks business are exposed to, and formulate a policy to identify and quantify and

mitigate these risks.

Credit Risk Management at VIJAYA BANK

Credit Risks:

Credit Risk is defined as the possibility of losses associated with diminution in the

credit quality of the borrowers or counterparties. In a banks portfolio, losses stem from the

outright default due to inability or unwillingness of a customer or a counterparty to meet

commitments in relation to lending, trading, settlement and other financial transaction.

Alternatively, losses result from reduction in portfolio value arising from actual or perceived

deterioration in credit quality. The credit risks emanates from a banks dealings with an

individual, corporate, bank, financial institution or a sovereign.

Credit Risk may take the following terms:

In case of direct lending: principal/and or interest amount may not be repaid; In case of the guarantees or the Letters of Credit: funds may not be forthcoming from

the constituents upon crystallization of the liability;

I case of treasury operations: the payment or series of payments due from thecounterparties under the respective contracts may not be forthcoming of ceases;

In the case of securities trading business: funds/securities settlement may not beeffected;

In the case of cross border exposure: the availability and free transfer of foreigncurrency funds may either cease or restrictions may be imposed by the sovereign.

Scope of the Policy:

In nutshell this policy is designed to:

Enhance the risk management capabilities to ensure orderly and healthy credit growthwith in a bank

Maintain overall asset quality Maintain Credit Risk exposure within acceptable paramaters/prudential exposures

norms prescribed in a banks lending policy.


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Mitigate the reduce the risk associated with advances/lending bysupporting/modifying/co-operating/fine-tuning the systems, procedures and controls.

Manage the asset portfolio in an orderly manner the ensures, that a bank has adequatecapital to hedge these risks.

Organizational set up:

The organizational setup for the Credit Risk Management aspects is depicted as below

Board of Directors

Risk Management Committee of the Board (RMCB)

Credit Risk Management Committees

Risk Management Department

Role of the Board and RMCB:

The Board of Directors is the ultimate authority in the bank to lay down the policies.

The board can, however, form committees to oversee the risk management process,

procedures and systems in the banks. Accordingly, the board has constituted a five member

risk management committee of the Board with chairman and Managing Director as the head

to oversee the policy and the strategy for implementation of Credit Risk Management system.

In addition to the Executive Director, three independent Directors are also its members.

The RMCB shall oversee the risk management in the bank and provide directions onCredit Risk Management Systems, conduct and review of credit risk in the bank and suggest

modifications in the role and responsibility of the Credit Risk Management Committee.

Credit Risk Management Committee:

The role of the Credit Risk Management Committee, is mainly the implementation of

the Credit Risk Management policy, comply with the directions of the Board and BMCB,

overseeing the various risk management process and systems. Besides, it shall be responsible

for laying down policy and Drawing up an MIS framework for Credit Risk Management and


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also monitor and manage the credit risk exposure of the bank. This committee would report to

the Board/RMCB.

Credit Risk Management Framework:

Credit Risk Management encompasses a host of management techniques, which help

the bank in mitigating the adverse impact of credit risk. The Credit Risk Management

Committee (CMRC) of a bank shall consist of the following members.

1. Chairman and Managing Director Chairman

2. Executive Director Member

3. General Manager-Risk Management Member

4. General Manager-Credit (O) Member

5. General Manager-Credit-R&R Member

6. General Manager-M.I.S Member

7. General Manager, Credit-Priority/Retail Member

8. General Manager, Credit-M.S.&C Member

9. Chief Vigilance Officer Invitee

10. Dy. General Manager-Risk Management Convener


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Risk Management Department:

The banks will have, at the functional level, a Risk Management Department (RMD)

headed by an Executive in Top Management Cadre. The risk analysts / risk managers,

Regional Risk Monitors / Officers covering credit, market and operational risks will report to

the head of RMD

The RMD shall be responsible for identifying and assessing Bank Wide risks through

the structured Risk Profile Template prescribed by the RBI or otherwise, and getting it vetted

by Quality Assurance Team (specifically constituted for this purpose) and reporting to RBI at

stipulated periodicity (presently on quarterly basis) the aspects pertaining to Credit Risk of

the Bank.

The department shall review and adopt risk management systems, techniques and

methodologies to identify, measure, manage and control the Credit Risk, and to review

portfolio concentrations.

Credit Risk Rating:

Risk rating reflects the underlying credit risk in the existing and or prospective

exposure. The thrust area of the credit risk management is to measure, quantify, control as

well as price the risk appropriately. Accordingly, Bank has implemented CRISIL Risk Rating

software- Risk Assessment Model (RAM) for conducting risk rating of Retail and Non Retail

Loans of the bank with exemptions for exposures fully secured by banks own deposits, gold

& jewellery and staff loans.

RISK ASSESSMENT MODELS (RETAIL & NON RETAIL)

The following modules are provided by CRISIL as part of their Risk Assessment

Model:

Non-Retail Exposures:

A. Simple Model for loans for Rs.2 lakhs and below (Hosted under Retail ScoringModels)


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B. Rating Model I- For exposure above Rs.2 lakhs and up to RS.1Crore for existingborrowers

C. Rating Model II For exposure above Rs.2lakhs and up to Rs. 1Crore for newborrowers.

D. In respect of loans beyond Rs. 1 Crore sector specific models are as follows:1. Large CorporateWith Projects, Without Projects, Green Field Projects2. Large Trader3. Bank4. NBFC5. SME (Manufacturing)6. SME (Traders)7. SME (Services)8. Real Estate Developers9. Brokers10.Infrastructure Projects- Port11.Infrastructure Projects- Road12.Infrastructure Projects- Telecom13.Infrastructure Projects- Power14.Infrastructure Projects- Airport15.Micro Financing Institutions16.Sovereign Ratings17.Object Finance

Retail Exposures:

Retail Models are designed in respect of following type of retail sector

1. Home loans2. Vehicle Loans3. Personal Loans4. Credit Cards5. Educational Loans6. Agriculture- Crop Loans7. Agriculture- Tractor Loans


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8. Government Sponsored Schemes9. Self Help Groups10.Behavioral Models for all the above modules.

The Bank has put in place the credit risk rating framework as detailed below

Sl

No.

Particulars Rating Model To be rated at pre

sanction level by

To be approved by

1. Retail Loans Retail Model of

CRISIL

RACPC/Branches

in the absence of

RACPC

In the CRISIL

rating software by

the authority other

than sanctioning

authority at the presanction level and

to be reviewed by

the reviewing

authority at the time

of review of

sanction

2. Non Retail Loans

above Rs. 2 lakhs

and below Rs. 1

crore

Manual Model of

bank customized by

CRISIL

Official

Processing of the

proposal at the

branches/ ROs

Authority other than

sanctioning

authority at pre

sanction level

3. Non Retail

loans of Rs. 1

crore and above and

up to Rs 7.5 Crore

CRISIL Model

(RAM)

Risk Rating Team

at RO

AGM/DGM, RMD

at pre sanction level

i.e. level 2 in

CRISIL software.

4. Non Retail Loans

above Rs.7.5 Crore

CRISIL Model

(RAM)

Risk Rating Team

at RMD, HO

DGM/GM, RMD at

pre sanction level

i.e. level 2 in

CRISIL Software

Adoption of External Credit Ratings:

External Credit Rating:

In respect of credit risk, RBI has allowed the banks to adopt standardized Approach,

in which the risk weights are allocated for the banks claims on corporate, Public Sector

Entities and Exposures on Asset Finance Companies (AFCs), NBFC-IFC (Infrastructure

Finance Companies) based on the credit ratings carried out by the recognized Credit Rating

Agencies for this purpose.


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The Bank shall adopt Standardized Approach initially to estimate the capital for credit

risk based on External Credit Assessment, and through this policy, bank has put in place a

framework containing detailed operational guidelines which should be adhered during credit

evaluation and capital calculation process under BASEL II

Eligible Credit Rating Agencies:

In line with the final guidelines of RBI on BASEL II norms, ratings assigned by an

eligible credit rating agencies is the basis for assigning the risk weight of the claim in respect

of certain category of exposures.

In accordance with the principle laid down in the revised framework, the RBI ahs

decided that banks may use the ratings of following domestic credit rating agencies for the

purposes of risk weighting their claims for capital adequacy calculations. Accordingly the

bank shall use the following rating agencies` external credit assessment for the purpose of

risk weighting our claims on Corporate, Public Sector Entities, exposures on Asset Finance

Companies (AFCs) and exposures to NBFC-IFCs (Infrastructure Finance Companies).

Domestic Exposure:

a. Credit Analysis and Research Limited (CARE);b. CRISIL Limited (CRISIL) ;c. FITCH India (FITCH) ; andd. ICRA Limited (ICRA).e. Brickworks Ratings India Pvt Limited.f. SMERA (SME Rating Agency of India Ltd)

The RBI has decided that banks may use the ratings of the following international

credit rating agencies for the purpose of risk weighting international (overseas) exposures for

capital adequacy:

Overseas Exposure

a. Fitchb. Moodys; and


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c. Standard & Poors

Mapping Process:

Revised Framework recommends the development of a mapping process to assign the

ratings used by eligible credit rating agencies to the risk weights available under the

standardized risk weighting framework. The mapping process is required to result in a risk

weight assessment consistent with that of level of credit risk. As suggested by CRISIL ltd in

its rating model validation report, the existing mapping of internal rating with that of external

rating based on predictive ability of capturing probability of default (PD) is mapped as under.

External Ratings Internal Ratings

AAA/AA+ VB1

AA/AA- VB2

AA-/A+ VB3

A/A- VB4

BBB+/BBB VB5

BBB/BBB- VB6

BB+/BB/BB- VB7

B+/B VB8

B-/C VB9

D VB10

While carrying out rating in CRISIL RAM Model, it will be the endeavor to ensure

the mapping of internal rating with the external rating. However, exception can be made

based on banks own experience with the particular borrower, industry etc and judgment of

the rating authorities.


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Long Term Ratings:

On the basis of the above factors as well as the data made available by the rating

agencies, the ratings issued by the domestic credit rating agencies have been mapped to the

appropriate risk weights applicable as per the Standardized Approach under the revised

framework.

The rating risk weight mapping furnished in the table below shall be adopted by our

bank:

Risk Weight Mapping of Long Term Ratings of the chosen domestic rating agencies:

Long Term Ratings of the chosen credit rating

agencies operating in India

Standardized Approach Risk Weights

AAA 20%

AA 30%

A 50%

BBB 100%

BB & Below 150%

Unrated * 100%

Where + or notation is attached to the rating, the corresponding main rating

category risk weight should be used. For example: A+ or A- would be considered to be in the

A rating category and assigned 50% risk weight.

If an issuer has a long term exposure with an external long term rating that warrants a

risk weight of 150%, all unrated claims on the same borrower, whether short term or long

term, shall also receive a 150 % risk weight, unless the bank uses recognized credit risk

mitigation techniques for such claims.


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Short Term Ratings:

For risk weighting purpose, short term ratings are deemed to be issue specific. They

can only be used to derive risk weights for claims arising from the rated facility. They cannot

be generalized to other short term claims. In no event can a short term rating be used to

support risk weight for an unrated long term claim. Short Term assessments may only be used

for short term claims against banks and corporate.

The unrated short term claim on the borrower will attract risk weight of at least one

level higher than the risk weight applicable to the rated short term claim on that borrower. If a

short term rated facility to borrower attracts a 20% or 50% risk weights, unrated short term

claims to the same borrower cannot attract risk weights lower than 30% or 100%

respectively.

Similarly, if an issuer has a short term exposure with an external short term rating that

warrants a risk weight of 150%, all unrated claims on the same borrower, whether long term

or short term, should also receive a 150% risk weight, unless bank has recognized Credit Risk

Mitigation techniques for such claims.

In respect of the issue4 specific short term ratings the following risk weight mapping

shall be adopted by the bank as provided in the table below.

Risk weight Mapping of the Short Term Ratings of the domestic rating agencies:

Short Term Ratings Risk

WeightsCARE CRISIL FITCH ICRA BRICKWORK SMERA

Care A1 Crisil A1 Fitch A1 Icra A1 BWR A1 SERA A1 20%




Care D Crisil D Fitch D Icra D BWR D SERA D 150%

UNRATED 100%


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The above risk weight mapping of both long term and short term ratings of the

domestic rating agencies would be4 reviewed annually by the Reserve Bank.

Credit Risk in the Investments:

As certain magnitude of the credit risk is inherent in the investment portfolio, the

proposals for the investment shall be subjected to same degree of credit risk analysis as any

loan proposal. These proposals shall be subjected to a detailed appraisal and rating

framework that factors in financial and non financial parameters.

As stipulated by the Investment Policy, the entry level ratin