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STUDYING RISK
MANAGEMENT
IN THE KAPURTHALA
CENTRAL CO-OPERATIVE BANKBy- SATWINDER SINGH
7210070005
RQ2701B47
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RESEARCH METHODOLOGY
The research methodology used is theDescriptive Research.
Descriptive research, also known as statistical
research, describes data and characteristicsabout the population being studied.
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DATA COLLECTION
1. Primary Data- It was collected through semi-structured interview, held with the FinanceManager and Senior manager in presence of
the other officials of The Kapurthala centralcooperative Bank Limited.
2. Secondary Data- It was collected from thepublished annual reports of the central
cooperative Bank and by reading variousbooks on Credit Risk Management , andrelevant Websites.
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SCOPE OF THE STUDY
The main reason to select RISKMANAGEMENT as a topic is to understandthe importance of the Role played by risk
management department and/or practiceswhen the bank lends money to its borrowers.
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Objective of Study
Understanding risk management conceptually.
Studying the various credit risk managementtechniques of public sector bank.
Understanding the importance of the credit riskmanagement and how useful it is to the publicsector banks and how it benefits them invarious ways.
SECONDARY OBJECTIVE Studying the difference between retail credit
management and credit risk managementpracticed by public sector banks.
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INTRODUCTION TO RISK
MANAGEMENT Any activity involves risk, touching all spheres oflife, whether it is personal or business. Anybusiness situation involves risk. To sustain its
operations, a business has to earnrevenue/profit and thus has to be involved inactivities whose outcome may be predictable orunpredictable. There may be an adverse
outcome, affecting its revenue, profit and/orcapital. However, the dictum No Risk, No Gainhold good here.
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WHAT IS RISK MANAGEMENT?
The standard definition of management isthat it is the process of accomplishingpreset objectives; similarly, risk
management aims at fulfilling the samespecific objectives. the process ofidentification, measurement,
monitoring and control of its activitiesbecomes paramount under riskmanagement.
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DEFINING RISK
The word RISK is derived from the Italian wordRisicare meaning to dare.
The four letters comprising of the word RISK
define its features.
R = Rare (unexpected)
I = Incident (outcome)
S = Selection (identification) K = Knocking (measuring, monitoring,
controlling)
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TYPES OF RISKS
The risk profile of an organization/banks may bereviewed from the following angles:
1. Business risks:Capital riskCredit riskMarket riskLiquidity risk
Business strategy and environment riskOperational riskGroup risk
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2. Control risks:
Internal Controls
Organization
Management (including corporategovernance)
Both these types of risk, however, are linked
to the three basic risk categories listedbelow:
Credit risk
Market risk
Organizational risk
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CREDIT RISK MANAGEMENT
According to the Basel Committee, Credit Risk ismost simply defined as the potential that aborrower or counter-party will fail to meet itsobligations in accordance with agreed terms.
The Reserve Bank of India (RBI) has definedcredit risk as the probability of losses associatedwith diminution in the credit quality of borrowers orcounter-parties. Credit risk management is subdivided as
1. Credit risk Identification 2. Credit risk Measurement
3. Credit risk Monitoring and Control
4. Credit risk Mitigation
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THE CREDIT RISK MANAGEMENTPROCESS OF THE BANK
The risk management process has four components:
1. Risk Identification :-While identifying risk bank iskeeping, the following points in mind:
All types of risks must be identified and their likely effect
in the short run is understood. The magnitude of each risk segment may vary from
bank to bank.
2. Risk Measurement :-
Directing the efforts of the bank to mitigate the risks
according to the harms of a particular risk factor to thebank.
Taking appropriate initiatives in planning the banksfuture threat areas and line of business and capitalallocation. The systems/techniques used to measure
risk depend upon the nature and complexity of a riskfactor.
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MANAGEMENT PROCESS OF
THE BANK (cont..)3.RISK MONITORING :- Risk monitoring activity ofthe bank ensure the following:
Each operating segment has clear lines ofauthority and responsibility.
Whenever the organizations principles andpolicies are breached, even if they may be to itsadvantage, must be analyzed and reported, to theconcerned authorities to aid in policy making.
In the course of risk monitoring, if it appears that itis in the banks interest to modify existing policiesand procedures, steps to change them should beconsidered.
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THE CREDIT RISK MANAGEMENTPROCESS OF THE BANK(cont..)
4. RISK CONTROL :- There are appropriatemechanism to regulate or guide the operation ofthe risk management system in the entire bank
through a set of control devices i.e there riskmanagement committee.
Assessing risk profile techniques regularly toexamine how far they are effective in mitigating
risk factors in the bank. Analyzing internal and external audit feedback
from the risk angle and using it to activate controlmechanisms.
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CREDIT RISK MANGEMENTTECHNIQUES OF THE BANK
Risk taking is an integral part of management in abank. For example, if a particular bank decides to lendonly against its deposits, then its margins are boundto be very less indeed. However the bank may also
not be in a position to deploy all its lendable funds,since obviously takers for loans will be very andoccasional. As a result banks income will be low andits growth zero.
The basic techniques of an ideal credit riskmanagement culture are:
Certain risks are not to be taken even though there isthe likelihood of major gains or profit, like speculativeactivities.
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CREDIT RISK MANGEMENTTECHNIQUES OF THE BANK(cont..)
Transactions with sizeable risk content shouldbe transferred to professional risk institutions.For example, advances to small scale
industrial units and small borrowers should becovered by the Deposit & Credit InsuranceScheme in India. Similarly, export financeshould be covered by the Export Credit
Guarantee Scheme, etc.
The other risks should be managed by theinstitution with proper risk management
architecture.
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FORMS OF CREDIT RISK
The RBI has laid down the following forms of credit
risk:
Non-repayment of the principal of the loan and /or theinterest on it.
Contingent liabilities like letters of credit/guaranteesissued by the bank on behalf of the client---- amount notdeposited by the customer.
In the case of treasury operations, default by thecounter-parties in meeting the obligations.
In the case of securities trading, settlement not takingplace when its due.
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COMMON CAUSES OF CREDITRISK SITUATIONS FOR BANK
For any organization, especially one in banking-related activities, losses from credit risk are usuallyvery severe and not rare. It is therefore necessary tolook into the causes of credit risk. Broadly there arethree sets of causes, which are as follows:
CREDIT CONCENTRATION i.e. looking financialinformation of the person(capital base, tangibleassets)
CREDIT GRANTING AND/OR MONITORING
PROCESS proper monitoring of lended money tocustomer(usage of money)
CREDIT EXPOSURE IN THE MARKET ANDLIQUIDITY SENSITIVITY SECTORS. Loss to banksfund due to market ups and downs
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CREDIT RISK INNON-PERFORMING ASSETS
Non-performing assets (NPAs) ---- known as non-performing loans (NPLs) in many banks ------ aregenerally the outcome of ineffective or faulty creditrisk management by a bank.
WHY NPA IS A MATTER OF CONCERN TOBANKS?
Funds remain sunk without any returns in terms ofcash flows.
The credit cycle of banks gets chocked upcausing liquidity constraints.
Recycling of funds is affected.
MANAGEMENT OF RISK AT THE
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MANAGEMENT OF RISK AT THEKAPURTHALA CENTRAL COOPERATIVEBANK
Risk is an inherent part of The KapurthalaCentral Cooperative Bank business, andeffective Risk Compliance & Audit Group iscritical to achieving financial soundness andprofitability. With different policies andprocedures in place, The Kapurthala CentralCooperative Bank identifies, assess, monitorsand manages the principal risks:
Credit risk
Market Risk
Operational risk
MANAGEMENT OF RISK AT THE
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MANAGEMENT OF RISK AT THEKAPURTHALA CENTRAL COOPERATIVEBANK (CONT..)
Credit risk, the most significant risk faced byThe Kapurthala Central Cooperative Bank, ismanaged by the Credit Risk Compliance &
Audit Department (CRC & AD) whichevaluates risk at the transaction level as wellas in the portfolio context. The industryanalysts of the department monitor all major
sectors and evolve a sectoral outlook, which isan important input to the portfolio planningprocess.
MANAGEMENT OF RISK AT THE
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MANAGEMENT OF RISK AT THEKAPURTHALA CENTRAL COOPERATIVEBANK (CONT..)
The functions of this department include:
1. Review of Credit Origination &Monitoring:- to see credit ratings of different
cos.2. Design appropriate credit processes,
operating policies & procedures.
3. Portfolio monitoring:- to measure the
portfolio risk.4. Focused attention to structured financing
deals:- new product approval policy andmonitoring.
5. Monitor adherence to credit policies of
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MANAGEMENT OF RISK AT THE KAPURTHALACENTRAL COOPERATIVE BANK (CONT..)
CREDIT RATING BY BANK :- Bank is having acomprehensive risk scoring/rating system thatserves as a single point indicator of diverse riskfactors of a borrowers and for taking credit
decisions in a consistent manner. A substantialdegree of standardization is required in ratingsacross borrowers. The agency also needs todesign appropriate measures for various gradesof credit at an individual level or at a portfolio
level. These grades may generally be any of thefollowing forms:
Alphabet: AAA, AA, BBB, etc.
Number: I, II, III, IV, etc.
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MANAGEMENT OF RISK AT THE KAPURTHALACENTRAL COOPERATIVE BANK (CONT..)
CREDIT AUDIT :- Credit audit is defined asthe process of examining and verifying creditrecords from the viewpoint of compliance withlaid down policies, system procedures for thepayment of credit and their monitoring. Thiscovers the following
Portfolio review: Examining the quality of credit
and investment (quasi-control) portfolio andsuggesting measures for improvement.
Loan review: Review of the sanction processand status of post-sanction
process/procedures.
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MANAGEMENT OF RISK AT THE KAPURTHALA
CENTRAL COOPERATIVE BANK (CONT..)
Action points for review:
Verifying compliance with the banks policies andregulatory compliance with regard to sanction.
Examining the adequacy of documentation. Conducting the credit risk assessment.
Frequency of review:
The frequency of review varies depending on the
magnitude of risk (say, three months for high riskaccounts, and six months for average riskaccounts, one year for low-risk accounts).
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ANALYSIS
Managing credit risk is of utmost importanceas it helps the banks to reduce the risk ofNPAs (Non Performing Assets). Any venturetaken by any body today involves a certainamount of risk today. Without risk there can beno gain. As far as the banking industry goes,one of their main aims is giving loans (credit)to individuals and corporate for personal aswell as personal needs. Credit risk is closelyrelated with the business of lending. Thiscomprises a huge percentage of theirbusiness.
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(Cont)
The credit risk management function has becomethe centre of gravity, especially in a financially inservices industry like banking. Moreover they arenow using it as a tool to succeed over their
competition because credit risk managementpractices reduce risk and improve return oncapital.
Further a fact that was brought out and discussed
in the interviews was that in the corporate loansthe banks were not very hesitant to give loans tomost of the companies because the economy as awhole is doing well and thus all the sectors and
industries also.
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CONCLUSION
The bank although having its risk managementcommittee to managing the various riskespecially credit risk yet it has wide range ofNpas which is still uncovered. Due to which itsworking is very much effected. As this bankmainly deals with the agriculture sector of thesociety and no. of the defaults are by that only.
No new recruitment is there in the bank andsome employees dont even know to usecomputer in a well advanced ways.
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CONT
Bank is lacking in CBS ( centralized bankingsolution)system. In this they dont have any onlinefunctioning of the bank. Due to which work loadon the employees is much as they have to put
each and every transaction manually and alsothey have to keep big bundles of registers forkeeping the records.
Bank is mostly focusing on the credit risk only andnot on the other forms of the market risk and
operational risk. As bank dont have its website much useful and
knowledgeable data about the credit risk wasgathered from the semi-formal type personalinterview with the Senior manager and Financemanager of the bank.
S O C S
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BENEFITS OF CREDIT RISKMANAGEMENT
The stakeholders----especially shareholders,depositors (in the case of banks) and thegovernment---- are the beneficiaries since the
economic and social costs of poor credit riskpractices strengthens the confidence in theoperation of the organization concerned, besidesenabling systematic peer-level analysis and
comparison. It is also a fact that such practicesfacilitate forward-looking assessment, aided bythe tools of stress testing, credit VaR, etc. The endresult is certainly enhanced investor confidence
and returns.
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RECOMMENDATIONS
Establishment of an appropriate credit riskenvironment/ culture. This should operateunder a sound and independent credit
approval process. Maintaining appropriate credit administration,
measurement and monitoring processes.
Ensuring adequate controls over credit risk. Awareness of the implications of other forms of
risk, such as market risk and operational risk.
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LIMITATIONS OF THE STUDY
Reluctance and resistance on the part of theinterviewees (public sector bank ) to shareinformation as they considered it as
confidential. Visiting all public sector banks was not
possible.
Banks have certain rules and regulations forcredit giving process.
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