A Study on Credit Risk Analysis of Indian Banking Sector

Description
To study the emergence and evolution of the corporate banking as an important division of the commercial banking and also to study the credit appraisal models supporting the increased activities of corporate lending by banks.

SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
1
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
2
RESEARCH METHODOLOGY
CORPORATE BANKING
STATEMENT OF PROBLEM:
To study the emergence and evolution of the corporate banking as an
important division of the commercial banking and also to study the credit
appraisal models supporting the increased activities of corporate lending by
banks.
In today’s global Banking arena, Corporate Bankers are facing a string of
unprecedented and sweeping challenges in the areas like Treasury
Management, Trade Finance, Risk Management, Compliance Management,
Electronic Trading and Derivatives Markets. Compounding this are the
mounting complexities from ongoing regulatory changes, decreasing
margins and fierce competition
NEED FOR STUDY:
Over the period of time, with the tremendous increase in the growth pattern
of industrial development, the need for the corporate loans have increased
more than ever. So, the increasing trend urges the banks and financial
institutions to focus on corporate banking as a separate division. So, the
researchers have preferred to study the concept of corporate banking and all
the operational aspects attached to it in the entire process.
OBJECTIVE OF THE STUDY:
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
3
To study the banking industry, as a whole with the help of various
analysis including SWOT analysis, PEST analysis and Porter’s Five Force
analysis.
To acquire basic knowledge about the corporate lending in India and
its relevance with respect to banks.
To analyze the credit risk models of both public bank and private bank
and bring out its comparative picture on the basis of various
parameters.
To study credit risk management strategies of bank.
RESEARCH DESIGN:
A research design is the arrangement of the condition for collection and
analysis of data. Actually it is the blueprint of the research project. The
research type is descriptive research. The main objective of this design is
search primary and secondary data.
The research primarily focuses on the secondary sources and first hand
information through focus group interviews.
DATA COLLECTION:
As the research type is descriptive, the method of data collection was
informal.
SOURCES:
The relevant information were collected from both primary and secondary
sources like follow up with bank managers web search, newspaper articles
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
4
TOOLS:
Focus group interviews with the managers of banks.
BENEFICIARIES:
For the banks:
It will give them the in depth review of the various aspects involved in the
corporate banking with emphasis on the credit risk management.
For the corporates:
The report shows the comparative study of the credit appraisal and
sanctioning procedure involved in the credit lending by banks as well as
financial institutions. Secondly, they will also get the relevance of the
corporate lending by the banks and its various relevant aspects.
For the management students:
The report studies the entire banking industry from various aspects using
different analytical tools. Secondly, it introduces into the world of credit
lending and its trend in India. Moreover, it also shows the operational
procedures involved in the corporate lending with emphasis on risk
modeling and credit risk management.
LIMITATIONS OF THE STUDY:
The scope of the report is mainly depends on the information extracted from
secondary sources and the information given by the managers of banks. So,
lack of the availability of the first hand information may act as a limitation to
the project report.
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
5
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
6
CHAPTER: 1
AN OVERVIEW ON BANKING INDUSTRY
In recent years, the banking industry around the world has been undergoing
a rapid transformation. In India also, the wave of deregulation of early 1990s
has created heightened competition and greater risk for banks and other
financial intermediaries. The cross-border flows and entry of new players
and products have forced banks to adjust the product-mix and undertake
rapid changes in their processes and operations to remain competitive. The
deepening of technology has facilitated better tracking and fulfillment of
commitments, multiple delivery channels for customers and faster resolution
of miscoordinations.
Unlike in the past, the banks today are market driven and market responsive.
The top concern in the mind of every bank's CEO is increasing or at least
maintaining the market share in every line of business against the backdrop
of heightened competition. With the entry of new players and multiple
channels, customers (both corporate and retail) have become more
discerning and less "loyal" to banks. This makes it imperative that banks
provide best possible products and services to ensure customer satisfaction.
To address the challenge of retention of customers, there have been active
efforts in the banking circles to switch over to customer-centric business
model. The success of such a model depends upon the approach adopted by
banks with respect to customer data management and customer relationship
management.
Over the years, Indian banks have expanded to cover a large geographic &
functional area to meet the developmental needs. They have been managing
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
7
a world of information about customers - their profiles, location, etc. They
have a close relationship with their customers and a good knowledge of their
needs, requirements and cash positions. Though this offers them a unique
advantage, they face a fundamental problem.
During the period of planned economic development, the bank products
were bought in India and not sold. What our banks, especially those in the
public sector lack are the marketing attitude. Marketing is a
customer-oriented operation. What is needed is the effort on their part to
improve their service image and exploit their large customer information
base effectively to communicate product availability. Achieving customer
focus requires leveraging existing customer information to gain a deeper
insight into the relationship a customer has with the institution, and
improving customer service-related processes so that the services are quick,
error free and convenient for the customers.
Furthermore, banks need to have very strong in-house research and market
intelligence units in order to face the future challenges of competition,
especially customer retention. Marketing is a question of demand (customers)
and supply (financial products & services, customer services through various
delivery channels). Both demand and supply have to be understood in the
context of geographic locations and competitor analysis to undertake
focused marketing (advertising) efforts. Focusing on region-specific
campaigns rather than national media campaigns would be a better strategy
for a diverse country like India.
Customer-centricity also implies increasing investment in technology.
Throughout much of the last decade, banks world-over have re-engineered
their organizations to improve efficiency and move customers to lower cost,
automated channels, such as ATMs and online banking.
As is proved by the experience, banks are now realizing that one of their
best assets for building profitable customer relationships especially in a
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
8
developing country like India is the branch-branches are in fact a key
channel for customer retention and profit growth in rural and semi-urban set
up. However, to maximize the value of this resource, our banks need to
transform their branches from transaction processing centers into
customer-centric service centers. This transformation would help them
achieve bottom line business benefits by retaining the most profitable
customers. Branches could also be used to inform and educate customers
about other, more efficient channels, to advise on and sell new financial
instruments like consumer loans, insurance products, mutual fund products,
etc.
There is a growing realization among Indian banks that it no longer pays to
have a "transaction-based" operating model. There are active efforts to
develop a relationship-oriented model of operations focusing on
customer-centric services. The biggest challenge our banks face today is to
establish customer intimacy without which all other efforts towards
operational excellence are meaningless. The banks need to ensure through
their services that the customers come back to them. This is because a major
chunk of income for most of the banks comes from existing customers,
rather than from new customers.
Customer relationship management (CRM) solutions, if implemented and
integrated correctly, can help significantly in improving customer satisfaction
levels. Data warehousing can help in providing better transaction
experiences for customers over different transaction channels. This is
because data warehousing helps bring all the transactions coming from
different channels under the same roof. Data mining helps banks analyse
and measure customer transaction patterns and behaviour. This can help a
lot in improving service levels.
It must be noted, however, that customer-centric banking also involves
many risks. The banking industry world over is being thrust into a wild new
world of privacy controversy. The banks need to set up serious governance
systems for privacy risk management. It must be remembered that customer
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
9
privacy issues threaten to compromise the use of information technology
which is at the very center of e-commerce and customer relationship
management - two areas which are crucial for banks' future.
The critical issue for banks is that they will not be able to safeguard
customer privacy completely without undermining the most exciting
innovations in banking. These innovations promise huge benefits, both for
customers and providers. But to capture them, financial services companies
and their customers will have to make some critical tradeoffs. When the
stakes are so high, nothing can be left to chance, which is why banks must
immediately begin developing comprehensive approaches to the privacy
issue.
The customer centric business models based on the applications of
information technology are sustainable only if the banks protect client
confidentiality in the process - which is the basic foundation of banking
business.
1.1 EVOLUTION OF BANKING IN INDIA
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
10
Banking in India has its origin as early as the Vedic period. It is believed that
the transition from money lending to banking must have occurred even
before Manu, the great Hindu Jurist, who has devoted a section of his work
to deposits and advances and laid down rules relating to rates of interest.
During the Mogul period, the indigenous bankers played a very important
role in lending money and financing foreign trade and commerce. During
the days of the East India Company, it was the turn of the agency houses to
carry on the banking business.
The General Bank of India was the first Joint Stock Bank to be established in
the year 1786. The others which followed were the Bank of Hindustan and
the Bengal Bank. The Bank of Hindustan is reported to have continued till
1906 while the other two failed in the meantime. In the first half of the 19
th
century the East India Company established three banks; the Bank of Bengal
in 1809, the Bank of Bombay in 1840 and the Bank of Madras in 1843. These
three banks also known as Presidency Banks were independent units and
functioned well. These three banks were amalgamated in 1920 and a new
bank, the Imperial Bank of India was established on 27
th
January 1921. With
the passing of the State Bank of India Act in 1955 the undertaking of the
Imperial Bank of India was taken over by the newly constituted State Bank of
India.
The Reserve Bank which is the Central Bank was created in 1935 by passing
Reserve Bank of India Act 1934. In the wake of the Swadeshi Movement, a
number of banks with Indian management were established in the country
namely, Punjab National Bank Ltd, Bank of India Ltd, Canara Bank Ltd, Indian
Bank Ltd, the Bank of Baroda Ltd, the Central Bank of India Ltd. On July 19,
1969, 14 major banks of the country were nationalized and in 15
th
April
1980 six more commercial private sector banks were also taken over by the
government.
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
11
The Indian banking can be broadly categorized into nationalized
(government owned), private banks and specialized banking institutions. The
Reserve Bank of India acts a centralized body monitoring any discrepancies
and shortcoming in the system. Since the nationalization of banks in 1969,
the public sector banks or the nationalized banks have acquired a place of
prominence and has since then seen tremendous progress. The need to
become highly customer focused has forced the slow-moving public sector
banks to adopt a fast track approach. The unleashing of products and
services through the net has galvanized players at all levels of the banking
and financial institutions market grid to look anew at their existing portfolio
offering.
Conservative banking practices allowed Indian banks to be insulated partially
from the Asian currency crisis. Indian banks are now quoting a higher
valuation when compared to banks in other Asian countries (viz. Hong Kong,
Singapore, Philippines etc.) that have major problems linked to huge Non
Performing Assets (NPAs) and payment defaults. Co-operative banks are
nimble footed in approach and armed with efficient branch networks focus
primarily on the ‘high revenue’ niche retail segments.
The Indian banking has finally worked up to the competitive dynamics of the
‘new’ Indian market and is addressing the relevant issues to take on the
multifarious challenges of globalization. It has come a long way from being a
sleepy business institution to a highly proactive and dynamic entity. Banks
that employ IT solutions are perceived to be ‘futuristic’ and proactive players
capable of meeting the multifarious requirements of the large customers
base. Private banks have been fast on the uptake and are reorienting their
strategies using the internet as a medium The Internet has emerged as the
new and challenging frontier of marketing with the conventional physical
world tenets being just as applicable like in any other marketing medium.
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
12
This transformation has been largely brought about by the large dose of
liberalization and economic reforms that allowed banks to explore new
business opportunities rather than generating revenues from conventional
streams (i.e. borrowing and lending).
The banking in India is highly fragmented with 30 banking units contributing
to almost 50% of deposits and 60% of advances. Indian nationalized banks
(banks owned by the government) continue to be the major lenders in the
economy due to their sheer size and penetrative networks which assures
them high deposit mobilization. The Indian banking can be broadly
categorized into nationalized, private banks and specialized banking
institutions.
The Reserve Bank of India acts as a centralized body monitoring any
discrepancies and shortcoming in the system. It is the foremost monitoring
body in the Indian financial sector. The nationalized banks (i.e.
government-owned banks) continue to dominate the Indian banking arena.
Industry estimates indicate that out of 274 commercial banks operating in
India, 223 banks are in the public sector and 51 are in the private sector.
The private sector bank grid also includes 24 foreign banks that have started
their operations here. Under the ambit of the nationalized banks come the
specialized banking institutions. These co-operatives, rural banks focus on
areas of agriculture, rural development etc., unlike commercial banks these
co-operative banks do not lend on the basis of a prime lending rate. They
also have various tax sops because of their holding pattern and lending
structure and hence have lower overheads. This enables them to give a
marginally higher percentage on savings deposits. Many of these
cooperative banks diversified into specialized areas (catering to the vast
retail audience) like car finance, housing loans, truck finance etc. in order to
keep pace with their public sector and private counterparts, the co-operative
banks too have invested heavily in information technology to offer high-end
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
13
computerized banking services to its clients.
Complementing the roles of the nationalized and private banks are the
specialized financial institutions or Non Banking Financial Institutions
(NBFCs). With their focused portfolio of products and services, these Non
Banking Financial Institutions act as an important catalyst in contributing to
the overall growth of the financial services sector. NBFCs offer loans for
working capital requirements, facilitate mergers and acquisitions, IPO
finance, etc. apart from financial consultancy services. Trends are now
changing as banks (both public and private) have now started focusing on
NBFC domains like long and medium-term finance, working cap
requirements, IPO financing etc. to meet the multifarious needs of the
business community.
1.2 STRUCTURE OF BANKING INDUSTRY:
Banking system plays an important role in a country’s economy. It promotes
growth and development of the country. Indian money market comprises
organized and the unorganized institutions. The organized and unorganized
institutions in the Indian banking system serve a source of short term credit
to agriculture, industry, trade and commerce.
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
14
In the Indian banking structure the Reserve Bank of India is the central bank.
It regulates, direct and controls the banking and financial institutions in the
country. There are three high banking institutions, namely, RBI, NABARD and
EXIM Bank. There are separate financial institutions catering to the needs of
different sectors of the economy. Development Banks, Investment Banks,
Co-operative Banks, Land Development Banks, Commercial Banks in public
and private sectors, NABARD, RRBs, EXIM Bank, etc. The indigenous bankers
and moneylenders dominate unorganized sector.
The Indian banking structure can be seen from the chart shown under:
Apex Banking Institution
RBI IDBI NABARD EXIM Bank SIDBI
NHB IRBI
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
15
Banking Institutions
Commercial Regional Rural Co- operative Land
Development Development
Banks Banks Banks
Banks Bank
Public Private Foreign PAC’s CCB’s SCB’s PLD’s
SLDB
Sector Sector exchange
Banks Bank Banks
All India State
Level Level
SBI and Nationalised
Subsidiaries Banks
IDBI
ICICI SIDBI
SFC’s SIDC
Foreign Indian Non –
Schedule
Bank Scheduled Bank Bank
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
16
The chart reveals that there are several apex banking institutions working at
the national level. RBI is the highest banking authority regulating, directing
and controlling all the banking and financial institutions in the country.
There are development banks, namely IDBI, SIDBI, ICICI at the national level
and State Financial Corporations and State Industrial Development
Corporations which have been set-up.
There are 29 public sector banks. Co-operative banks have three tier system.
At the village level there is Primary Agriculture Co-operative Society(PACs), at
the district level there is Central Co-operative Bank and at the state level
there is State Co-operative Bank. Co-operative banks provide short term and
medium loans to the agriculture sector. Land Development Banks provide
long term agriculture credit. It comprises Primary Land Development
Bank(PLDB) at ht district level and State Land Development Bank(SLDB) at the
state level. RRBs provide loans and advances to the rural poor and NABARD is
an apex body regulating, directing and controlling the financial and banking
institutions providing finance for the agriculture and rural development.
TYPES OF BANKS
Modern age is the age of specialization with the changing situation
worldwide, bank functions have also undergone a major change. Economic
conditions and financial needs of a country are different than those of other
countries throughout the world. Some financial institutions deal in accepting
deposits and making loans and advances to different sectors of the economy.
Some institution makes loans and advances for medium and short term,
while others are meant for long term advances. Some are financing industrial
sector and foreign trade while others are advancing loans to agriculture
sector.
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
17
In broader sense of the term banks may be classified into following
categories:
Central Bank
Commercial Banks
Development Banks
Investment Banks
Co-operative Banks
Foreign Exchange Banks
Savings Banks
Export-Import Bank
Specialized National Banks
Indigenous Bankers
International Financial Institutions
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
18
1.3 GROWTH OF BANKING SECTOR
(DECADE WISE)
Pre-Liberalization: The growth of the Banking Sector in the pre
liberalization period can be analyzed as under.
1971-80:
This was the decade immediately following the Nationalization of 14
commercial banks. Also the banking sector grew at the fastest pace in this
decade.
1. Assets:
The assets of the sector grew at 21.58 % CAGR
1
. They increased from
RS.82.52bn to Rs.582.33bn. This kind of growth was achieved due to
massive increase in the number of branches resulting in a spurt in deposit
mobilization.
2. Deposits:
The deposits grew from Rs.64.79bn to Rs.439.87bn. at a CAGR 21.11 %. The
growth was higher in later part of the decade. This growth rate would have
been higher had the current accounts grown at a rate higher than 18 %. This
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
19
indicates people’s preference for using bank as place to keep their savings.
The bank was not used as a place to keep money to be used for transaction
motive. This is further clarified by the poor ratio of average current deposits
to total deposits at 23.45 %.
3. Advances:
The advances grew at 19.26 % CAGR from Rs.46.85bn to Rs.272.67bn. Also
the growth was higher in the later part of the decade. Thus the advances
grew at a pace slower than the deposits due to decreasing credit deposit
ratio, which reduced from 72.30 % in 1970 to 61.99 % in 1980.
4. Net worth:
The Net worth increased from Rs.1.16bn to Rs.5.33bn at a CAGR of 16.48 %.
The Capital of the banks remained flat throughout the decade growing at
just 8.54 % and also the growth came in the later part of the decade. The
capital increased form Rs.470.2mn to Rs.1.07bn.
However, the Reserves grew at a healthy pace of 20 % CAGR from Rs.690mn
to Rs.4.27bn. Thus the banks in this decade did not raise capital and funded
their growth from internal accruals. This resulted in a wide gap between
Reserves and Capital indicating the banks’ hunger for Capital.
1981-90:
1. Assets:
The growth of the sector was significantly subdued since the last decade.
The assets grew at just 16.30 % CAGR compared to 21.58 % in the previous
decade. The total assets increased from Rs.582.33bn to Rs.2636.93bn.
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
20
2. Deposits:
Deposits increased from Rs.439.86bn to Rs.1820.46bn at a CAGR of 15.26 %.
The current accounts remained the usual laggards in terms of growth
growing at just 12.67 % CAGR. The term and saving deposits grew at a
slightly faster pace of 16.17 % and 15.5 % CAGR.
3. Advances:
Advances grew at a CAGR of 16.79 % from Rs.272.67bn to Rs.1287.85bn.
This is due to the fact that the banks have stepped up their credit-deposit
ratio from 62 % to 70.74 %. This indicates higher investment than saving in
the economy.
4. Net worth:
The Net worth increased from Rs.5.33bn to Rs.47.1bn. Thus the net worth
grew at a whopping 24.33 % CAGR.
The capital hungry banks went on capital raising spree in the latter half of
the decade. Thus the capital grew at a CAGR of 34.53 %. In absolute terms,
the capital soared from Rs.1.06bn at the beginning of the decade to
Rs.20.73bn at the end of the decade.
The Reserves however grew at more or less constant pace of 19.97 % CAGR
throughout the decade.
At the end of the decade the Capital had kept pace with the Reserves and the
gap between them had significantly narrowed down.
Post-Liberalization: The growth of this sector after 1991 can be
represented as under.
1991-2000:
1. Assets:
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
21
The rate of the sector further slowed down during this decade. The assets
grew at a CAGR of 15.24 % from Rs.2636.93bn to Rs.11103.68bn. The
growth rate however, was greater in the later part of the decade indicating
future prospects of increase in growth.
2. Deposits:
The deposits grew from Rs.1820.47bn to Rs.9003.06bn at a CAGR of
16.69 %. There was a spurt in the last 3-4 years of the decade indicating
improving trend. In this decade however, the savings accounts were the
laggards in terms of growth at 13.34 % CAGR. The term deposits grew at
18.38 % and current deposits grew at 15.23 %. This reversal of trend in
growth rates shows that the people are increasingly using banks to deposit
money to be used for transaction motive.
3. Advances:
The advances increased from Rs.1287.85bn to Rs.4434.69bn at a CAGR of
12.46 %. The lower growth in advances is due to the decline in credit-deposit
ratio from 70.74 % in 1990 to 49.26 %. This shows there was a marked
decline in investment in this decade with savings exceeding investment.
4. Net worth:
The Net worth grew at a feverish pace of 36.60 % CAGR, the highest in last
three decades. This was mainly because the RBI opened the Banking sector
to Private sector. As many as 9 New Private Sector Banks started their
operations in this period. They brought a lot of capital in the period 1993-95.
However in the later half of the decade, capital growth was virtually nil.
The Reserves grew at 37.54 % CAGR from Rs.26.36bn Rs.438.34bn. However,
contrary to Capital the Reserves recorded exceptional growth in the later half
of the decade due to improving profits of private as well as public sector
banks. However the gap between reserves and capital is once again widening.
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
22
1.4 FUTURE LANDSCAPE OF INDIAN BANKING
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
23
Liberalization and de-regulation process started in 1991-92 has made a sea
change in the banking system. From a totally regulated environment, we
have gradually moved into a market driven competitive system. Our move
towards global benchmarks has been, by and large, calibrated and regulator
driven. The pace of changes gained momentum in the last few years.
Globalization would gain greater speed in the coming years particularly on
account of expected opening up of financial services under WTO. Four trends
change the banking industry world over, viz. 1) Consolidation of players
through mergers and acquisitions, 2) Globalisation of operations, 3)
Development of new technology and 4) Universalisation of banking. With
technology acting as a catalyst, we expect to see great changes in the
banking scene in the coming years. The Committee has attempted to
visualize the financial world 5-10 years from now. The picture that emerged
is somewhat as discussed below. It entails emergence of an integrated and
diversified financial system. The move towards universal banking has already
begun. This will gather further momentum bringing non-banking financial
institutions also, into an integrated financial system.
The traditional banking functions would give way to a system geared to meet
all the financial needs of the customer. We could see emergence of highly
varied financial products, which are tailored to meet specific needs of the
customers in the retail as well as corporate segments. The advent of new
technologies could see the emergence of new financial players doing
financial intermediation. For example, we could see utility service providers
offering say, bill payment services or supermarkets or retailers doing basic
lending operations. The conventional definition of banking might undergo
changes.
The competitive environment in the banking sector is likely to result in
individual players working out differentiated strategies based on their
strengths and market niches. For example, some players might emerge as
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
24
specialists in mortgage products, credit cards etc. whereas some could
choose to concentrate on particular segments of business system, while
outsourcing all other functions. Some other banks may concentrate on SME
segments or high net worth individuals by providing specially tailored
services beyond traditional banking offerings to satisfy the needs of
customers they understand better than a more generalist competitor.
International trade is an area where India’s presence is expected to show
appreciable increase. With the growth in IT sector and other IT Enabled
Services, there is tremendous potential for business opportunities. Keeping
in view the GDP growth forecast under India Vision 2020, Indian exports can
be expected to grow at a sustainable rate of 15% per annum in the period
ending with 2010. This again will offer enormous scope to Banks in India to
increase their forex business and international presence. Globalization
would provide opportunities for Indian corporate entities to expand their
business in other countries. Banks in India wanting to increase their
international presence could naturally be expected to follow these corporates
and other trade flows in and out of India.
Retail lending will receive greater focus. Banks would compete with one
another to provide full range of financial services to this segment. Banks
would use multiple delivery channels to suit the requirements and tastes of
customers. While some customers might value relationship banking
(conventional branch banking), others might prefer convenience banking
(e-banking).
One of the concerns is quality of bank lending. Most significant challenge
before banks is the maintenance of rigorous credit standards, especially in
an environment of increased competition for new and existing clients.
Experience has shown us that the worst loans are often made in the best of
times. Compensation through trading gains is not going to support the
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
25
banks forever. Large-scale efforts are needed to upgrade skills in credit risk
measuring, controlling and monitoring as also revamp operating procedures.
Credit evaluation may have to shift from cash flow based analysis to
“borrower account behaviour”, so that the state of readiness of Indian banks
for Basle II regime improves. Corporate lending is already undergoing
changes. The emphasis in future would be towards more of fee based
services rather than lending operations. Banks will compete with each other
to provide value added services to their customers.
Structure and ownership pattern would undergo changes. There would be
greater presence of international players in the Indian financial system.
Similarly, some of the Indian banks would become global players.
Government is taking steps to reduce its holdings in Public sector banks to
33%. However the indications are that their PSB character may still be
retained.
Mergers and acquisitions would gather momentum as managements will
strive to meet the expectations of stakeholders. This could see the
emergence of 4-5 world class Indian Banks. As Banks seek niche areas, we
could see emergence of some national banks of global scale and a number
of regional players.
Corporate governance in banks and financial institutions would assume
greater importance in the coming years and this will be reflected in the
composition of the Boards of Banks.
Concept of social lending would undergo a change. Rather than being seen
as directed lending such lending would be business driven. With SME sector
expected to play a greater role in the economy, Banks will give greater
overall focus in this area. Changes could be expected in the delivery
channels used for lending to small borrowers and agriculturalists and
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
26
unorganized sectors (micro credit). Use of intermediaries or franchise agents
could emerge as means to reduce transaction costs.
Technology as an enabler is separately discussed in the report. It would not
be out of place, however, to state that most of the changes in the landscape
of financial sector discussed above would be technology driven. In the
ultimate analysis, successful institutions will be those which continue to
leverage the advancements in technology in re-engineering processes and
delivery modes and offering state-of-the-art products and services
providing complete financial solutions for different types of customers.
Human Resources Development would be another key factor defining the
characteristics of a successful banking institution. Employing and retaining
skilled workers and specialists, re-training the existing workforce and
promoting a culture of continuous learning would be a challenge for the
banking institutions.
1.5 BANKING INDUSTRY REFORMS AND VISION 2010
“A vision is not a project report or a plan target. It is an articulation of
the desired end results in broader terms” - A.P.J.Abdul Kalam
Vision is of an integrated banking and finance system catering to all financial
intermediation requirements of customers. Strong market players will strive
to uncover markets and provide all services, combining innovation, quality,
personal touch and flexibility in delivery. The growing expectations of the
customers are the catalyst for our vision. The customer would continue to be
the centre-point of our business strategy. In short, you lose touch with the
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
27
customer, and you lose everything.
It is expected that the Indian banking and finance system will be globally
competitive. For this the market players will have to be financially strong and
operationally efficient. Capital would be a key factor in building a successful
institution. The banking and finance system will improve competitiveness
through a process of consolidation, either through mergers and acquisitions
through strategic alliances.
Technology would be the key to the competitiveness of banking and finance
system. Indian players will keep pace with global leaders in the use of
banking technology. In such a scenario, on-line accessibility will be available
to the customers from any part of the globe; ‘Anywhere’ and ‘Anytime’
banking will be realized truly and fully. At the same time ‘brick and mortar’
banking will co-exist with ‘on-line’ banking to cater to the specific needs of
different customers.
Indian Banking system has played a crucial role in the socio-economic
development of the country. The system is expected to continue to be
sensitive to the growth and development needs of all the segments of the
society. The banking system that will evolve will be transparent in its
dealings and adopt global best practices in accounting and disclosures
driven by the motto of value enhancement for all stakeholders.
Financial Sector Reforms set in motion in 1991 have greatly changed the face
of Indian Banking. The banking industry has moved gradually from a
regulated environment to a deregulated market economy. The market
developments kindled by liberalization and globalization have resulted in
changes in the intermediation role of banks. The pace of transformation has
been more significant in recent times with technology acting as a catalyst.
While the banking system has done fairly well in adjusting to the new market
dynamics, greater challenges lie ahead. Financial sector would be opened up
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
28
for greater international competition under WTO. Banks will have to gear up
to meet stringent prudential capital adequacy norms under Basel II. In
addition to WTO and Basel II, the Free Trade Agreements (FTAs) such as with
Singapore, may have an impact on the shape of the banking industry. Banks
will also have to cope with challenges posed by technological innovations in
banking. Banks need to prepare for the changes. In this context the need for
drawing up a Road Map to the future assumes relevance. The idea of setting
up a Committee to prepare a Vision for the Indian Banking industry came up
in IBA, in this background.
Managing Committee of Indian Banks’ Association constituted a Committee
under the Chairmanship of Shri S C Gupta, Chairman & Managing Director,
Indian Overseas Bank to prepare a Vision Report for the Indian Banking
Industry. The composition of the Committee is given at the end of the report.
The Committee held its first meeting on 23
rd
June 2003 at Mumbai. Prior to
the meeting the members were requested to give their thoughts on the
future landscape of the banking industry. A discussion paper based on the
responses received from members was circulated along with a questionnaire
eliciting views of members on some of the specific issues concerning
anticipated changes in the banking environment. In the meeting, which
served as a brainstorming session, members gave their Vision of the future.
A second meeting of the Committee was held at Chennai on 7
th
August 2003
to have further discussions on the common views, which emerged in the first
meeting, and also to examine fresh areas to be covered in the study.
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
29
The Vision Statement prepared by the Committee is based on common
thinking that crystallized at the meetings. In the Chennai meeting it was
decided to form a smaller group from among the members to draft the
report of the Committee. The group met thrice to finalize the draft report.
The report was adopted in the final meeting of the Committee held at
Mumbai.
When we talk about the future, it is necessary to have a time horizon in
mind. The Committee felt, it would be rather difficult to visualize the
landscape of banking industry say, 20 years hence due to the dynamic
environment. While Government of India brought out India Vision 2020,
the Committee is of the view that the pace of changes taking place in the
banking industry and in the field of Information Technology would render
any attempt to visualize the banking scenario in 2020, inconceivable.
The entire financial services sector may undergo a dramatic
transformation. It was, therefore, felt that we should set our goals for the
near future say, for 5-10 years hence and appropriately call this exercise
“Banking Industry – Vision 2010”. The three main aspects focused in
the banking vision includes product innovation, process re-engineering
and technology.
PRODUCT INNOVATION AND PROCESS RE-ENGINEERING
With increased competition in the banking Industry, the net interest
margin of banks has come down over the last one decade. Liberalization
with Globalization will see the spreads narrowing further to 1-1.5% as in
the case of banks operating in developed countries. Banks will look for
fee-based income to fill the gap in interest income. Product innovations
and process re-engineering will be the order of the day. The changes will
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
30
be motivated by the desire to meet the customer requirements and to
reduce the cost and improve the efficiency of service. All banks will
therefore go for rejuvenating their costing and pricing to segregate
profitable and non-profitable business. Service charges will be decided
taking into account the costing and what the traffic can bear. From the
earlier revenue = cost + profit equation i.e., customers are charged to
cover the costs incurred and the profits expected, most banks have
already moved into the profit =revenue - cost equation. This has been
reflected in the fact that with cost of services staying nearly equal across
banks, the banks with better cost control are able to achieve higher
profits whereas the banks with high overheads due to under-utilisation of
resources, un-remunerative branch network etc., either incurred losses or
made profits not commensurate with the capital employed. The new
paradigm in the coming years will be cost = revenue - profit.
As banks strive to provide value added services to customers, the market
will see the emergence of strong investment and merchant banking
entities. Product innovation and creating brand equity for specialized
products will decide the market share and volumes. New products on the
liabilities side such as forex linked deposits, investment-linked deposits,
etc. are likely to be introduced, as investors with varied risk profiles will
look for better yields. There will be more and more of tie-ups between
banks, corporate clients and their retail outlets to share a common
platform to shore up revenue through increased volumes.
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
31
Banks will increasingly act as risk managers to corporate and other
entities by offering a variety of risk management products like options,
swaps and other aspects of financial management in a multi currency
scenario. Banks will play an active role in the development of derivative
products and will offer a variety of hedge products to the corporate
sector and other investors. For example, Derivatives in emerging futures
market for commodities would be an area offering opportunities for
banks. As the integration of markets takes place internationally,
sophistication in trading and specialized exchanges for commodities will
expand. As these changes take place, banking will play a major role in
providing financial support to such exchanges, facilitating settlement
systems and enabling wider participation.
Bancassurance is catching up and Banks / Financial Institutions have
started entering insurance business. From mere offering of insurance
products through network of bank branches, the business is likely to
expand through self-designed insurance products after necessary
legislative changes. This could lead to a spurt in fee-based income of
the banks.
Similarly, Banks will look analytically into various processes and practices
as these exist today and may make appropriate changes therein to cut
costs and delays. Outsourcing and adoption of BPOs will become more
and more relevant, especially when Banks go in for larger volumes of
retail business. However, by increasing outsourcing of operations
through service providers, banks are making themselves vulnerable to
problems faced by these providers. Banks should therefore outsource
only those functions that are not strategic to banks’ business. For
instance, in the wake of implementation of 90 days’ delinquency norms
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
32
for classification of assets, some banks may think of engaging external
agencies for recovery of their dues and in NPA management.
Banks will take on competition in the front end and seek co-operation in
the back end, as in the case of networking of ATMs. This type of
co-opetition will become the order of the day as Banks seek to enlarge
their customer base and at the same time to realize cost reduction and
greater efficiency.
TECHNOLOGY IN BANKING
Technology will bring fundamental shift in the functioning of banks. It
would not only help them bring improvements in their internal
functioning but also enable them to provide better customer service.
Technology will break all boundaries and encourage cross border banking
business. Banks would have to undertake extensive Business Process
Re-Engineering and tackle issues like a) how best to deliver products and
services to customers b) designing an appropriate organizational model
to fully capture the benefits of technology and business process changes
brought about. c) how to exploit technology for deriving economies of
scale and how to create cost efficiencies, and d) how to create a customer
- centric operation model.
Entry of ATMs has changed the profile of front offices in bank branches.
Customers no longer need to visit branches for their day to day banking
transactions like cash deposits, withdrawals, cheque collection, balance
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
33
enquiry etc. E-banking and Internet banking have opened new avenues in
“convenience banking”. Internet banking has also led to reduction in
transaction costs for banks to about a tenth of branch banking.
Technology solutions would make flow of information much faster, more
accurate and enable quicker analysis of data received. This would make
the decision making process faster and more efficient. For the Banks, this
would also enable development of appraisal and monitoring tools which
would make credit management much more effective. The result would
be a definite reduction in transaction costs, the benefits of which would
be shared between banks and customers.
While application of technology would help banks reduce their operating
costs in the long run, the initial investments would be sizeable. With
greater use of technology solutions, we expect IT spending of Indian
banking system to go up significantly.
One area where the banking system can reduce the investment costs in
technology applications is by sharing of facilities. We are already seeing
banks coming together to share ATM Networks. Similarly, in the coming
years, we expect to see banks and FIs coming together to share facilities
in the area of payment and settlement, back office processing, data
warehousing, etc. While dealing with technology, banks will have to deal
with attendant operational risks. This would be a critical area the Bank
management will have to deal with in future.
Payment and Settlement system is the backbone of any financial market
place.
The present Payment and Settlement systems such as Structured Financial
Messaging System (SFMS), Centralised Funds Management System (CFMS),
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
34
Centralized Funds Transfer System (CFTS) and Real Time Gross
Settlement System (RTGS) will undergo further fine-tuning to meet
international standards. Needless to add, necessary security checks and
controls will have to be in place. In this regard, Institutions such as
IDRBT will have a greater role to play.
CHAPTER: 2
STRATEGIC ANALYSIS OF BANKING INDUSTRY
2.1 PORTER’S FIVE FORCE ANALYSIS:
Prof. Michael Porter’s competitive forces Model applies to each and every
company as well as industry. This model with regards to the Banking
Industry is presented below:
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
35
Rivalry among existing firms
With the process of liberalization, competition among the existing banks
has increased. Each bank is coming up with new products to attract the
customers and tailor made loans are provided. The quality of services
provided by banks has improved drastically.
(2)
Potential Entrants
is high as
Development
Financial
Institutions as well
as Private and
foreign banks
have entered in a
big way.(1)
Rivalry among
Existing Firms
has increased with
liberalization. New
products and
improved
customer services
is the focus.
(4)
Bargaining Power
of Buyers is high
as corporate can
raise funds easily
due to high
competition.
(5)
Organizing Power
of the Supplier is
high. With new
financial
instruments they
are asking higher
return on
investment.
(3)
Threat from
Substitute is high
due to
competition from
NBFCs & Insurance
companies as they
offer a higher rate
of interest than
banks.
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
36
Potential Entrants
Previously the Development Financial Institutions mainly provided project
finance and development activities. But they have now entered into retail
banking which has resulted into stiff competition among the existing
players
Threats from Substitutes
Banks face threats from Non-Banking Financial Companies. NBFCs offer a
higher rate of interest.
Bargaining Power of Buyers
Corporates can raise their funds through primary market or by issue of
GDRs, FCCBs. As a result they have a higher bargaining power. Even in
the case of personal finance, the buyers have a higher bargaining power.
This is mainly because of competition.
Bargaining power of Suppliers
With the advent of new financial instruments providing a higher rate of
returns to the investors, the investments in deposits is not growing in a
phased manner. The suppliers demand a higher return for the
investments.
Overall Analysis
The key issue is that how can banks leverage their strengths to have a
better future. Since the availability of funds is more and deployment of
funds is less, banks should evolve new products and services to the
customers. There should be rational thinking in sanctioning loans, which
will bring down the NPAs. As there is expected revival in the Indian
economy banks have a major role to play. Funding corporate at a low cost
of capital is a major requisite.
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
37
2.2 SWOT ANALYSIS:
The banking sector is often taken as a proxy for the economy as a whole.
The performance of bank should therefore, reflect “Trends in the Indian
Economy”. Due to the reforms in the financial sector, banking industry
has changed drastically with the opportunities to the work with, new
accounting standards new entrants and information technology. The
deregulation of the interest rate, participation of banks in project
financing has changed in the environment of banks.
The performance of banking industry is done through SWOT Analysis. It
mainly helps to know the Strengths and Weakness of the industry and to
improve will be known through converting the opportunities into
strengths. It also helps for the competitive environment among the banks.
STRENGTHS
1. Greater securities of Funds
Compared to other investment options banks since its inception has been
a better avenue in terms of securities. Due to satisfactory implementation
of RBI’s prudential norms banks have won public confidence over several
years.
2. Banking network
After nationalization, banks have expanded their branches in the country,
which has helped banks build large networks in the rural and urban areas.
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
38
Private banks allowed to operate but they mainly concentrate in
metropolis.
3. Large Customer Base
This is mainly attributed to the large network of the banking system.
Depositors in rural areas prefer banks because of the failure of the NBFCs
.
4. Low Cost of Capital
Corporate prefers borrowing money from banks because of low cost of
capital. Middle income people who want money for personal financing
can look to banks as they offer at very low rates of interests. Consumer
credit forms the major source of financing by banks
WEAKNESSES
1. Basel Committee
The banks need to comply with the norms of Basel committee but before
that it is challenge for banks to implement the Basel committee standard,
which are of international standard.
2. Powerful Unions
Nationalization of Banks had a positive outcome in helping the Indian
Economy as a whole. But this has also proved detrimental in the form of
strong unions, which have a major influence in decision making. They are
against automation.
3. Priority Sector Lending
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
39
To uplift the society, priority sector lending was brought in during
nationalization. This is good for the economy but banks have failed to
manage the asset quality and their intensions were more towards
fulfilling government norms. As a result lending was done for
non-productive purposes.
4. High Non-Performing Assets
Non-Performing Assets (NPAs) have become a matter of concern in the
banking industry. This is because of change in the Accounting Standards
(Prudential Norms). Net NPAs increased to large extent of the total
advances, which has to be reduced to meet the international standards.
OPPORTUNITIES
1. Universal Banking
Banks have moved along the value chain to provide their customers more
products and services. For example: - SBI is into SBI home finance, SBI
Capital Markets, SBI Bonds etc.
2. Differential Interest Rates
As RBI control over bank reduces, they will have greater flexibility to fix
their own interest rates which depends on the profitability of the banks.
3. High Household Savings
Household savings have been increasing drastically. Investment in
financial assets has also increased. Banks should use this opportunity for
raising funds.
4. Overseas Markets
Banks should tap the overseas market, as the cost of capital is very low.
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
40
5. Internet Banking
The advances in information technology have made banking easier.
Business transactions can effectively carried out through internet banking.
THREATS
1. NBFCs, Capital Markets and Mutual funds
There is a huge investment of household savings. The investments in
NBFCs deposits, Capital Market Instruments and Mutual Funds are
increasing. Normally these instruments offer better returns to investors.
2. Change in the Government Policy
The change in the government policy has proved to be a threat to the
banking sector.
3. Inflation
The interest rates go down with a fall in inflation. Thus, the investors will
shift his investments to other profitable sectors.
4. Recession
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
41
Due to the recession in the business cycle the economy functions poorly
and this has proved to be a threat to the banking sector. The market
oriented economy and globalization has resulted into competition for
market share. The spread in the banking sector is very narrow. To meet
the competition the banks have to grow at a faster rate and reduce the
overheads. They can introduce new products and develop the existing
services.
2.3. PEST ANALYSIS
POLITICAL/ LEGAL ENVIROMENT
Government and RBI policies affect the banking sector. Sometimes
looking into the political advantage of a particular party, the Government
declares some measures to their benefits like waiver of short-term
agricultural loans, to attract the farmer’s votes. By doing so the profits of
the bank get affected. Various banks in the cooperative sector are open
and run by the politicians. They exploit these banks for their benefits.
Sometimes the government appoints various chairmen of the banks.
Various policies are framed by the RBI looking at the present situation of
the country for better control over the banks
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
42
ECONOMICAL ENVIROMENT
Banking is as old as authentic history and the modern commercial
banking are traceable to ancient times. In India, banking has existed in
one form or the other from time to time. The present era in banking may
be taken to have commenced with establishment of bank of Bengal in
1809 under the government charter and with government participation in
share capital. Allahabad bank was started in the year 1865 and Punjab
national bank in 1895, and thus, others followed
Every year RBI declares its 6 monthly policy and accordingly the
various measures and rates are implemented which has an impact on the
banking sector. Also the Union budget affects the banking sector to
boost the economy by giving certain concessions or facilities. If in the
Budget savings are encouraged, then more deposits will be attracted
towards the banks and in turn they can lend more money to the
agricultural sector and industrial sector, therefore, booming the economy.
If the FDI limits are relaxed, then more FDI are brought in India through
banking channels.
SOCIAL ENVIROMENT
Before nationalization of the banks, their control was in the hands
of the private parties and only big business houses and the effluent
sections of the society were getting benefits of banking in India. In 1969
government nationalized 14 banks. To adopt the social development in
the banking sector it was necessary for speedy economic progress,
consistent with social justice, in democratic political system, which is free
from domination of law, and in which opportunities are open to all.
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
43
Accordingly, keeping in mind both the national and social objectives,
bankers were given direction to help economically weaker section of the
society and also provide need-based finance to all the sectors of the
economy with flexible and liberal attitude. Now the banks provide various
types of loans to farmers, working women, professionals, and traders.
They also provide education loan to the students and housing loans,
consumer loans, etc.
Banks having big clients or big companies have to provide services
like personalized banking to their clients because these customers do not
believe in running about and waiting in queues for getting their work
done. The bankers also have to provide these customers with special
provisions and at times with benefits like food and parties. But the banks
do not mind incurring these costs because of the kind of business these
clients bring for the bank.
Banks have changed the culture of human life in India and have
made life much easier for the people.
TECHNOLOGICAL ENVIROMENT
Technology plays a very important role in bank’s internal control
mechanisms as well as services offered by them. It has in fact given new
dimensions to the banks as well as services that they cater to and the
banks are enthusiastically adopting new technological innovations for
devising new products and services.
The latest developments in terms of technology in computer and
telecommunication have encouraged the bankers to change the concept
of branch banking to anywhere banking. The use of ATM and Internet
banking has allowed ‘anytime, anywhere banking’ facilities. Automatic
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
44
voice recorders now answer simple queries, currency accounting
machines makes the job easier and self-service counters are now
encouraged. Credit card facility has encouraged an era of cashless society.
Today MasterCard and Visa card are the two most popular cards used
world over. The banks have now started issuing smartcards or debit cards
to be used for making payments. These are also called as electronic
purse. Some of the banks have also started home banking through
telecommunication facilities and computer technology by using terminals
installed at customers home and they can make the balance inquiry, get
the statement of accounts, give instructions for fund transfers, etc.
Through ECS we can receive the dividends and interest directly to our
account avoiding the delay or chance of loosing the post.
Today banks are also using SMS and Internet as major tool of
promotions and giving great utility to its customers. For example SMS
functions through simple text messages sent from your mobile. The
messages are then recognized by the bank to provide you with the
required information.
All these technological changes have forced the bankers to adopt
customer-based approach instead of product-based approach.
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
45
CHAPTER: 3
CORPORATE BANKING: AN OVERVIEW
3.1 INTRODUCTION:
According to American author and humorist Mark Twain: ”A banker is a
fellow who lends his umbrella when the sun is shining and wants it back
the minute it begins to rain.”
Many troubled businesses seeding credit in recent years might agree with
Mr. Twain. Indeed securing the large amounts of credit that many
businesses require can be a complicated and challenging task loan
requests. Moreover, business loans, often called commercial and
industrial loans, rank among the most important assets that commercial
banks and their closest competitors hold.
Corporate finance is an area of finance dealing with financial decisions
business enterprises make and the tools and analysis used to make these
decisions. The primary goal of corporate finance is to maximize
corporate value
[1]
while managing the firm's financial risks. Although it is
in principle different from managerial finance which studies the financial
decisions of all firms, rather than corporations alone, the main concepts
in the study of corporate finance are applicable to the financial problems
of all kinds of firms.
The discipline can be divided into long-term and short-term decisions
and techniques. Capital investment decisions are long-term choices
about which projects receive investment, whether to finance that
investment with equity or debt, and when or whether to pay dividends to
shareholders. On the other hand, the short term decisions can be
grouped under the heading "Working capital management". This subject
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
46
deals with the short-term balance of current assets and current liabilities;
the focus here is on managing cash, inventories, and short-term
borrowing and lending (such as the terms on credit extended to
customers).
The terms corporate finance and corporate financier are also associated
with investment banking. The typical role of an investment bank is to
evaluate the company's financial needs and raise the appropriate type of
capital that best fits those needs.
Corporate banking is a part of commercial banking but the part that
average depositor with deposits account never sees. It is a division of
commercial banking which extends the financial support to the corporate
for helping them achieve their organizational goals and objectives. While
banks hold money and mortgages, lend money, extend or open up a line
of credit for the average depositors, it is business that needs major
financial services to build plant, erect buildings, make structural
improvements on old ones and start new business ventures. This is one
of the most competitive, risky and financially lucrative areas of doing
business in today’s world.
Commercial loans were the earliest form of lending banks did in their
move than 2000 year old history. Later in the 20
th
century finance
companies, insurance firms, and thrift institutions entered the business
lending field. Today loan officers skilled in evaluating the credit of
businesses are usually among the most experienced and highest paid
people in the financial services field, along with security underwriters.
As a part of commercial banking, corporate banking is focused on
analyzing and assessing the risk of the business, establishing the
creditworthiness of the business and trying to predict the likelihood of
success or failure of business endeavour. These are the professionals
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
47
who help decide what business initiatives will be taken and when,
whether or not to expand the existing businesses, help develop new
markets so that new clients can be found and help develop new products
for e-commerce, the internet and the international markets.
Corporate Banking represents the wide range of banking and financial
services provided to domestic and international operations of large local
corporate and local operations of multinationals corporations. Services
include access to commercial banking products, including working capital
facilities such as domestic and international trade operations and funding,
channel financing, and overdrafts, as well as domestic and international
payments, INR term loans (including external commercial borrowings in
foreign currency), letters of guarantee etc.
The Investment Banking and Markets division of various bank brings
together the advisory and financing, equity securities, asset management,
treasury and capital markets, and private equity activities to complete the
CIBM structure and provide a complete range of financial products to our
clients. Increasingly, ECA financing is being considered by customers and
we work closely with our project export finance teams, both onshore and
offshore, to provide structured solutions.
The Corporate Bank in India was ranked 2nd overall in the 2004
Greenwich Survey.
This portfolio is largely spread within 9 sector teams divided as under :
Consumer Brands
Industrials
Energy and Utilities
Telecommunications
Automotive
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
48
Healthcare
Transport and Logistics
Metals and Mining
Media
3.2 STRUCTURE OF CREDIT LENDING (CORPORATE) IN
INDIA:
Banks, finance companies, and competing business lenders grant many
different types of commercial loans. Among the most widely used forms
of business credit are the following:
SHORT-TERM BUSINESS LOANS:
Self-liquidating inventory loans
Working capital loans
Interim construction financing
Security dealer financing
Retailer and equipment financing
Asset-based loans (accounts receivable financing, factoring, and
inventory financing)
Syndicated loans
LONG-TERM BUSINESS LOANS:
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
49
Term loans to support the purchase of equipment, rolling stock,
and structures
Revolving credit financing
Project loans
Loans to support acquisitions of others business firms
SHORT-TERM LOANS TO BUSINESS FIRMS:
Self-Liquidating Inventory Loans
Historically, commercial banks have been the leaders in extending short
term credit to businesses. These loans were used to finance the purchase
of inventory, raw materials or finished goods to sell. In this case the term
of the loan begins when cash in needed to purchase inventory and ends
when cash is available in the firm’s account to write the lender a check
for the balance of its loan.
Working Capital Loans
Working capital loans provide businesses with short run credit, lasting
from few days to about one year. Working capital loans are most often
used to fund the purchase of inventories in order to put goods on shelves
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
50
or to purchase raw materials; thus, they come closest to the traditional
self-liquidating loan described previously.
Frequently, the working capital loan is designed to cover seasonal peaks
in the business customer’s production levels and credit needs. Normally,
working capital loans are secured by accounts receivable or by pledges of
inventory and carry a floating interest rate on the amounts actually
borrowed against the approved credit line. A commitment fee is charged
on the unused portion of the credit line and sometimes on the entire
amount of funds made available.
Interim Construction Financing
A popular form of secured short term lending is the interim construction
loan, used to support the construction of homes, apartments, office
buildings, shopping centers, and other permanent structures. The finance
is used while the construction is going on but once the construction
phase is over, this short term loan usually is paid off with a longer term
mortgage loan issued by another lender, such as insurance company of
pension fund. Recently, some commercial banks have issued
‘minipermanent’ loans, providing funding for construction and the early
operation of a project for as long as five to seven years.
Retailer and Equipment Financing
Banks support installment purchases of automobiles, appliances,
furniture, business equipment, and other durable goods by financing the
receivables that dealers selling these goods take on when they write
installment contracts to cover customer purchases. In turn, these
contracts are reviewed by banks and other lending institutions with whom
the dealers have established credit relationships. If they meet acceptable
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
51
credit standards, the contracts are purchased by lenders at an interest
rate that varies with the risk level of each borrower, the quality of
collateral pledged, and the term of each loan.
Asset-Based Financing
An increasing portion of short-term lending by banks and other lenders
in recent years has consisted of asset based loans, credit secured by the
shorter term assets of a firm that are expected to roll over into cash in
the future. Key business assets used for many of these loans are accounts
receivables and inventories of raw materials or finished goods. The lender
commits funs against a specific percentage of the book value of
outstanding credit accounts or against inventory.
In most loans collateralized by accounts receivable and inventory, the
borrowing firm retains title to the assets pledged, but sometimes title is
passed to the lender, which then assumes the risk that some of those
assets will not pay out as expected. The most common example of this
arrangement is factoring, where the bank actually takes on the
responsibility of collecting the accounts receivable of one of its business
customers. It typically assesses a higher discount rate and lends a smaller
fraction of the book value of the customer’s accounts receivable because
the lender incurs both additional expense and additional risk with a
factored loan.
Syndicated Loan
A type of large corporate loan that is increasingly used today is the
syndicated loan. This is typically a loan or loan package extended to a
corporation by a group of banks and other institutional lenders. These
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
52
loans may be “drawn” by the borrowing company, with the funds used to
support business operations or commercial expansion, or “undrawn”,
serving as lines of credit to back a security issue or other venture. Banks
engage in syndicated loans both to spread the heavy risk exposures of
these large loans, often involving hundreds of lakhs or crore of rupees in
credit for each loan, and to earn fee income.
LONG-TERM LOANS TO BUSINESS FIRMS:
Term Business Loans
Term loans are designed to fund long and medium term business
investments, such as the purchase of equipment or the construction of
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
53
physical facilities, covering a period longer than one year. Usually the
borrowing firm applies for a lump sum loan based on the budgeted cost
of its proposed project and then pledges to repay the loan in a series of
installments.
Term loans normally are secured by fixed assets e.g. Plant and Equipment
owned by the borrower and may carry either a fixed or a floating interest
rate. That rate is normally higher than on shorter term business loans
due to the lender’s greater risk exposure from such loans.
Revolving Credit Financing
A revolving credit line allows a business customer to borrow up to a pre
specified limit, repay all or a portion of the borrowing, and re borrows as
necessary until the credit line matures. One of the most flexible of all the
forms of business loans, revolving credit is often granted without specific
collateral to secure the loan and may be short term or caver a period as
long as three, four, or five years. This form of business financing is
particularly popular when the customer is highly uncertain about the
timing of future cash flows or about the exact magnitude of the future
borrowings needs.
Loan commitments are usually of two types namely,
1. Formal Loan Commitment, and
2. Confirmed Credit Line.
Formal Loan Commitment is a contractual promise to lend to a customer
up to a maximum amount of money at a set interest rate or rate markup
over the prevailing base loan rate. Whereas, Confirmed Credit Line is a
looser form of loan commitment where the banks indicate its approval of
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
54
customer’s request for credit in an emergency, though the prices of such
a credit line may not be set in advance and the customer may have little
intention to draw upon the credit line.
Long-Term Project Loans
The most risky of all business loans are project loans, credit to finance
the construction of fixed assets designed to generate a flow of revenue in
future periods. Prominent examples include oil refineries, pipelines,
mines, power plants and harbor facilities. Project loans are usually
granted to several companies jointly sponsoring a large project.
Project loans may be granted on a recourse basis, in which the lender can
recover funds from the sponsoring companies if the project does not pay
out as planned. At the other end, loan may be extended on a non
recourse basis, in which no sponsor guarantees; the project stands or
falls on its own merits. Many such loans require that the project‘s
sponsors pledge enough of their own capital to see the project through
to completion.
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
55
Term Loan / Deferred Payment Guarantees
In case of term loans and deferred payment guarantees, the
project report is obtained from the customer, who may have
been compiled in-house or by a firm or consultants/ merchant
bankers.
Term loan is provided to support capital expenditures for
setting up new ventures as also for expansion, renovation etc.
The technical feasibility and economic viability is vetted by the
Bank and wherever it is felt necessary.
Banks normally expects at least 20% contribution of Promoter’s
contribution. But the promoter contribution may vary largely in
mega projects. Therefore, there cannot be a definitive
benchmark.
The sanctioning authority will have the necessary discretion to
permit deviations.
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
56
3.3 EMERGENCE OF CORPORATE BANKING IN INDIA
The bank lending has expanded in a number of emerging market
economies, especially in Asia and Latin America, in recent years. Bank
credit to the private sector, in real terms, was rising at a high rate.
Several factors have contributed to the significant rise in bank lending in
emerging economies such as strong growth, excess liquidity in banking
systems reflecting easier global and domestic monetary conditions, and
substantial bank restructuring. The recent surge in bank lending has
been associated with important changes on the asset side of banksí
balance sheet. First, credit to the business sector - historically the most
important component of banksí assets – has been weak, while the share
of the household sector has increased sharply in several countries.
Second, banksí investments in Government securities increased sharply
until 2004-05. As a result, commercial banks continue to hold a very
large part of their domestic assets in the form of Government securities -
a process that seems to have begun in the mid-1990s.
There has been a sharp pick up in bank credit in India in recent years.
The rate of growth in bank credit which touched a low of 14.4 per cent in
2002-03, accelerated to more than 30.0 per cent in 2004-05, the rate
which was maintained in 2005-06. The upturn in the growth rate of bank
credit can be attributed to several factors. One, macroeconomic
performance of the economy turned robust with GDP growth rates
hovering between 7.5 per cent and 8.5 per cent during the last few years.
Two, the hardening of sovereign yields from the second half of 2003-04
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
57
forced banks to readjust their assets portfolio by shifting from
investments to advances. While the share of gross advances in total
assets of commercial banks grew from 45.0 per cent to 54.7 per cent that
of investments declined from 41.6 per cent to 32.1 per cent in the last
few years.
However, the credit growth has been broad-based making banks less
vulnerable to credit concentration risk. The declining trend of priority
sector loans in 2001-02 in the credit book of banks was due to
prudential write offs and compromise settlements of a large number of
small accounts which was reversed from 2002-03 on the strength of a
spurt in the housing loan portfolio of banks. Even though credit to
industry and other sectors have also picked up, their share in total loans
has declined marginally. Retail loans, which witnessed a growth of over
40.0 per cent in 2004-05 and again in 2005-06, have been the prime
driver of the credit growth in recent years. Retail loans as a percentage of
gross advances increased from 22.0 per cent in March 2004 to 25.5 per
cent in March 2006. The cyclical uptrend in the economy along with the
concomitant recovery in the business climate brings with it improved
abilities of the debtors to service loans, thereby greatly improving banks
asset quality. Despite the sharp rise in credit growth in recent years, not
only the proportional levels of gross non-performing loans (NPLs) have
declined, but the absolute levels of gross NPLs declined significantly.
Several factors have contributed to the marked improvement in the Indian
banksí asset quality. One, banks have gradually improved their risk
management practices and introduced more vigorous systems and
scoring models for identifying credit risks. Two, a favourable
macroeconomic environment in recent years has also meant that many
entities and units of traditionally problematic industries are now
performing better. Three, diversification of credit base with increased
focus on retail loans, which generally have low delinquency rates, has
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
58
also contributed to the more favourable credit risk profile. Four, several
institutional measures have been put in place to recover the NPAs. These
include Debt Recovery Tribunals (DRTs), Lok Adalats (peopleís courts),
Asset Reconstruction Companies (ARCs) and corporate debt restructuring
mechanism (CDRM). In particular, the Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest (SARFAESI) Act,
2002 for enforcement of security interest without intervention of the
courts has provided more negotiating power to the banks for resolving
bad debts.
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
59
Sectoral Deployment of Gross Bank Credit
During 2008-09 total deployment of gross bank credit increased to
Rs.1.87,515 crores from Rs.1,69.536 crores in 2008-07
Non-food bank credit increased sharply during 2005-06. The credit
growth was broad based. Credit to services (including personal loans and
other services) increased by 52.8 per cent in 2005-06, accounting for
58.3 per cent of incremental non-food gross bank credit (NFGBC).
Personal loans increased sharply in recent years mainly on account of
housing loans. Real estate loans more than doubled. Other personal loans
such as credit card outstanding and education loans also recorded sharp
increases of 59.3 per cent and 96.5 per cent, respectively.
Priority Sector Advances
Credit to the priority sector decreased to 34.1 per cent in the previous
year against 39.5 in 2008. In terms of revised guidelines on lending to
priority sector , broad category of advances under priority sector include
agriculture, micro and small enterprises, retail trade, micro-credit,
education and housing.
The agriculture and housing sectors were the major beneficiaries, which
together accounted for more than two-third of incremental priority sector
lending. Credit to small scale industries also accelerate. Several
favourable policy initiatives undertaken by the Central Government and
the Reserve Bank including, inter alia, the policy package for stepping up
of credit to small and medium enterprises (SMEs) announced on August
10, 2005, have had a positive impact. At the individual bank-level, all the
nationalised banks, and all but two of the State Bank group (State Bank of
India and State Bank of Patiala) were able to meet the priority sector
target of 40 per cent of NBC. However, only ten PSBs (Allahabad Bank,
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
60
Andhra Bank, Bank of India, Indian Bank, Indian Overseas Bank, Punjab
National Bank, Syndicate Bank, State Bank of Bikaner and Jaipur, State
Bank of Indore and State Bank of Saurashtra) were able to achieve the
subtargets for agriculture, while the sub-target for weaker sections was
met by eight PSBs (Allahabad Bank, Andhra Bank, Bank of India, Indian
Bank, Indian Overseas Bank, Punjab National Bank, Syndicate Bank and
State Bank of Patiala).
Lending to the priority sector by foreign banks constituted 34.6 per cent
of net bank credit as on the last reporting Friday of March 2006, which
was well above the stipulated target of 32 per cent. The share of export
credit in total netbank credit at 19.4 per cent was significantly above the
prescribed sub-target of 12.0 per cent. Foreign banks, however, fell a
little short of the sub-target of 10.0 per cent in respect of lending to SSIs.
Special Agricultural Credit Plans
The Reserve Bank had advised public sector banks to prepare Special
Agricultural Credit Plans (SACP) on an annual basis in 1994. The SACP
mechanism for private sector banks was made applicable from 2005-06,
as recommended by the Advisory Committee on Flow of Credit to
Agriculture and Related Activities from the Banking System
(Chairmanrof. V.S. Vyas) and announced in the Mid-term Review of
Annual Policy for 2004-05. Public sector banks were advised to make
efforts to increase their disbursements to small and marginal farmers to
40.0 per cent of their direct advances under SACP by March 2007. The
disbursement to agriculture under SACP by public sector banks
aggregated Rs.94,278 crore during 2005-06, which was much above the
target of Rs.85,024 crore and the disbursement of Rs.65,218 crore
during 2004-05. The disbursement by private sector banks during
2005-06 at Rs.31,119 crore was above the target of Rs.24,222 crore.
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
61
3.21 Public sector banks were advised to earmark 5.0 per cent of their
net bank credit to women. At end-March 2006, aggregate credit to
women by public sector banks stood at 5.37 per cent of their net bank
credit with 22 banks achieving the target. A consortium of select public
sector banks was formed, with the State Bank of India as the leader of the
consortium, to provide credit to the Khadi and Village Industries
Commission (KVIC). These loans are provided at 1.5 per cent below the
average prime lending rates of five major banks in the consortium. An
amount of Rs.322 crore was outstanding at end-July 2006 out of Rs.738
crore disbursed by the consortium under the scheme.
Micro-finance
The Reserve Bank has been making consistent efforts to strengthen credit
delivery, improve customer service and encourage banks to provide
banking services to all segments of the population. Despite considerable
expansion of the banking system in India, large segments of the country’
s population do not have access to banking services.
Expanding the outreach of banking services has, therefore, been a major
thrust area of the policy of the Government of India and the Reserve Bank
in recent years.
The self-help group (SHG)-bank linkage programme has emerged as the
major micro-finance programme in the country and is being
implemented by commercial banks, RRBs and co-operative banks. As on
March 31, 2008 3.6 million SHGs had outstanding bank loans of
Rs.17,000 crore, an increase of 25 per cent over March 31, 2007 in
respect of number of SHGs credit linked. During 2007-08, banks
financed 1.2 million SHGs for Rs.8,849 crore. As at end-March 2008,
SHGs had 5 million savings accounts with banks for Rs.3,785 crore.
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
62
Retail Credit
Continuing the strong growth in recent years, retail advances increased
by 40.9 per cent to Rs.3,75,739 crore in 2007-08, which was significantly
higher than the overall credit growth of 31.0 per cent. As a result, their
share in total loans and advances increased during the year. Auto loans
experienced the highest growth, followed by credit card receivables,
other personal loans (comprising loans mainly to professionals and for
educational purposes) and housing finance. Loans for consumer durables
increased by 17.3 per cent as against the decline of 39.1 per cent in the
previous year.
Major steps earlier taken by the Reserve Bank of India were somewhat
more oriented towards price stability and the related monitory
instruments like the bank rate, reverse repo rate, repo rate and CRR were
adjusted to rein in the price instability. Naturally, the priority was
inflation control for overall growth of the economy and we must
congratulate the RBI for a wonderful job done. The inflation today is at a
moderate level and in line with a developed economy.With these steps
taken by RBI, the latest scenario is that the non-food credit growth got
moderated, agricultural and service sector credit went up but the retail
credit growth actually took a beating due to northbound interest rates.
Such positive impact on inflation helped the economy for price stability
and we feel what is important for India now is to ensure that there is
sufficient focus on growth of the economy along with price stability.
Lending to the Sensitive Sectors
Lending by SCBs to the sensitive sectors (capital market, real estate and
commodities) increased sharply during 2005-06 mainly on account of a
sharp increase in exposure to the real estate market. Total exposure of
SCBs to the sensitive sectors consituted 18.9 per cent of aggregate bank
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
63
loans and advances (comprising 17.2 per cent to real estate, 1.5 per cent
to the capital market and 0.3 per cent to the commodities sector). During
2008-2009 total lending to sensitive sector increased by 19.1 percent in
capital market.
Among bank groups, new private sector banks had the highest exposure
to the sensitive sectors (measured as percentage to total loans and
advances of banks) mainly due to the increase in exposure to the real
estate market, followed by foreign banks, old private sector banks and
public sector banks.
MEASURES BY SIDBI
SIDBI has developed a Credit Appraisal & Rating Tool (CART) as well as a
Risk Assessment Model (RAM) and a comprehensive rating model for risk
assessment of proposals for SMEs. The banks may consider to take
advantage of these models as appropriate and reduce their transaction
costs.
.
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
64
Public Sector Banks are advised to follow a transparent rating system
with cost of credit being linked to the credit rating of the enterprise.
SIDBI in association with Credit Information Bureau (India) Ltd. (CIBIL)
expedited setting up a credit rating agency.
SIDBI in association with Indian Banks’ Association (IBA) would collect
and pool common data on risk in each identified cluster and develop an
IT-enabled application, appraisal and monitoring system for small
(including tiny) enterprises. This would help reduce transaction cost as
well as improve credit flow to small (including tiny) enterprises in the
clusters.
The National Small Industries Corporation has introduced a Credit Rating
Scheme for encouraging SSI units to get themselves credit rated by
reputed credit rating agencies. Public Sector Banks will be advised to
consider these ratings appropriately and as per availability, and structure
their rates suitably.
ROADMAP BY RBI
The Reserve Bank of India (RBI) has worked out the roadmap for the
Indian banks to graduate from the simpler approaches of the Basel II
framework to more advanced ones.
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
65
Basel II is the second among Basel Accords, which are primarily,
recommendations on banking laws and regulations issued by the Basel
committee on banking supervision.
It sets up rigorous risk and capital management requirements aimed at
ensuring that a bank holds capital reserves appropriate to the risk it
exposes itself to through its lending and investment practices.
Since March 2008, foreign banks operating in India and Indian banks
having presence outside the country have migrated to simpler
approaches under Basel II framework. Other commercial banks are
required to migrate to these norms by March 31, 2009.
These include standardised approach for credit risk which arising from
default by borrowers, basic indicator approach for operational risk
(arising from day to operations of the banks such robbery or power
failure) and standardised duration approach for market risk (arising from
fluctuations in interest rate and share prices) which affects the
investment and market portfolio of the banks.
In the framework, the RBI had earlier specified the date by which banks
may file application for approvals and the the likely date by which
approvals can be obtained from the central bank.
While banks have the discretion to adopt the advanced approaches, they
need to seek prior approval.
Under market risk, banks may apply to RBI for graduating to more
advanced method of internal models approach (IMA) by April 1, 2010 and
then, RBI may approve it by March 31, 2011. IMA sets out a framework
for applying capital charges to the market risks (both on balance sheet
and off-balance sheet) incurred by banks by an internal model. The
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
66
current standardised duration approach specifies a specific average
duration of the banks at large, which the banks follow and make it a basis
for applying capital charges to only open positions.
Similarly, for operational risk, banks may graduate to standardised
approach by April 1, 2010 and RBI can approve the plan by September 30,
2010. After that, they can graduate to advanced measurement approach
for operational risk by April 1, 2011 and get RBI approval by March 31,
2013.
While advanced measurement approach (AMA) sets the framework for
banks to develop their own empirical model to quantify required capital
for operational risk, it can be used after they get regulatory clearances.
Under the standardised approach, a bank's activities are divided into
eight business lines: corporate finance, trading and sales, retail banking,
commercial banking , payment and settlement, agency services, asset
management and retail brokerage. Within each business line, gross
income is a broad indicator for the scale of business operations and so,
the scale of operational risk exposure within each of these business lines.
The capital charge for each business line is calculated by multiplying
gross income by a factor .
Currently, banks are using the basic indicator approach as per which they
must hold capital for operational risk equal to the average over the
previous three years of a fixed percentage of positive annual gross
income.
For credit risk, banks can use internal ratings-based approach which
allows them to develop their own model to estimate the probability of
default for individual clients or groups of clients. Currently, banks use
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
67
standardised approach where they are required to use ratings from
external credit rating agencies to quantify the required capital for credit
risk.
CHAPTER: 4
CRM STRATEGIES FOR CORPORATE BANKING
4.1 RAROC
Risk-Adjusted Return on Capital –– RAROC–– is a measure of the
expected return on
Economic Capital over the life of an investment. This prospective measure
of risk-adjusted profitability allows for apples-to-apples comparison of
activities across risk types of business.
RAROC helps senior management maximize shareholder value by
addressing strategic business questions such as:
How much capital is needed to support the company’s
enterprise-wide risks?
Is the company over or under capitalized?
Are individual business units creating or destroying shareholder
value?
What opportunities for growth or diversification exist within the
company?
How should the economics of the business be managed within
regulatory and rating agency capital constraints?
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
68
What is an optimal strategy for reinsurance?
RAROC allows for both relative comparisons between business units and
absolute comparisons to shareholders’ minimum required return on risk,
or hurdle rate. A business line is value-neutral if its RAROC is equal to
the hurdle rate. It creates value if its RAROC is higher than the hurdle rate
and destroys value if it is lower.
COMPUTATION
RAROC is computed by dividing risk-adjusted net income by the total
amount of economic capital assigned based on the risk calculation.
RAROC allocates a capital charge to a transaction or a line of business at
an amount equal to the maximum expected loss (at a 99% confidence
level) over one year on an after-tax basis. The higher the volatility of the
returns, the more capital is allocated. The higher capital allocation means
that the transaction has to generate cash flows large enough to offset the
volatility of returns, which results from the credit risk, market risk, and
other risks taken. The RAROC process estimates the asset value that may
prevail in the worst-case scenario and then equates the capital cushion to
be provided for the potential loss.
RAROC is an improvement over the traditional approach in that it allows
one to compare two businesses with different risk (volatility of returns)
profiles. A transaction may give a higher return but at a higher risk. Using
a hurdle rate (expected rate of return), a lender can also use the RAROC
principle to set the target pricing on a relationship or a transaction.
Although not all assets have market price distribution, RAROC is a first
step toward examining an institution's entire balance sheet on a
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
69
mark-to-market basis - if only to understand the risk-return trade-offs
that have been made.
What is RAROC ?
4.2 RATING BASED METHODS:
Banksshouldhaveacomprehensive riskscoring/ratingsystemthat servesasasingle point
indicator of diverse risk factors of a counterparty and for taking credit decisions in a
consistent manner. To facilitate this, a substantial degree of standardization is required in
ratings across borrowers. The risk ratingsystemshouldbe designedto reveal the overall risk
of lending, critical input for setting pricing and non-price terms of loans as also present
meaningful information for review and management of loan portfolio. The risk rating, in
short, should reflect the underlying credit risk of the loan book. The rating exercise should
alsofacilitate the credit grantingauthorities some comfort inits knowledge of loanquality at
any moment of time.
The risk ratingsystemshouldbe drawnupina structuredmanner, incorporating, i nter
ali a, financial analysis, projections and sensitivity, industrial and management risks. The
banks may use any number of financial ratios and operational parameters and collaterals as
alsoqualitativeaspectsof management andindustry characteristicsthat have bearingsonthe
creditworthinessof borrowers. Bankscanalsoweighthe ratiosonthe basisof theyearsto
Revenues
-Expenses
-Expected Losses
+ Return on
economic capital
+ transfer values
/ prices
Capital required
for
•Credit Risk
•Market Risk
Risk Adjusted
Return
Risk Adjusted
Capital or
Economic Capital
RAROC
What is RAROC?
The concept of RAROC (Risk adjusted Return on Capital) is at the
heart of Integrated Risk Management.
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
70
whichthey represent for givingimportancetonear termdevelopments. Withinthe rating
framework, bankscanalsoprescribecertainlevel of standardsor critical parameters, beyond
which no proposals should be entertained. Banks may also consider separate rating
framework for large corporate /small borrowers, traders, etc. that exhibit varyingnature and
degree of risk. Forex exposures assumed by corporates who have no natural hedges have
significantly altered the risk profile of banks. Banks should, therefore, factor the unhedged
market risk exposures of borrowersalsointhe ratingframework. The overall score for risk is
tobe placedona numerical scale rangingbetween1-6, 1-8, etc. onthe basisof credit quality.
For each numerical category, a quantitative definition of the borrower, the loan’s underlying
quality, andananalytic representation of the underlyingfinancials of the borrower shouldbe
presented. Further, as a prudent risk management policy, each bank should prescribe the
minimum rating below which no exposures would be undertaken. Any flexibility in the
minimum standards and conditions for relaxation and authority therefore should be clearly
articulatedintheLoanPolicy.
Thecredit riskassessment exerciseshouldbe repeatedbiannually (or evenat shorter
intervals for low quality customers) and should be delinked invariably from the regular
renewal exercise. The updating of the credit ratings should be undertaken normally at
quarterly intervals or at least at half-yearly intervals, in order to gauge the quality of the
portfolio at periodic intervals. Variations in the ratings of borrowers over time indicate
changesincredit quality andexpectedloanlossesfromthe credit portfolio. Thus, if the rating
systemis to be meaningful, the credit quality reports shouldsignal changes in expectedloan
losses. In order to ensure the consistency andaccuracy of internal ratings, the responsibility
for setting or confirming such ratings should vest with the Loan Review function and
examined by an independent Loan Review Group. The banks should undertake
comprehensive study on migration (upward – lower to higher and downward – higher to
lower) of borrowersinthe ratingstoaddaccuracy inexpectedloanlosscalculations.
Value At Risk
The VaR method is employed to assess potential loss that could crystalise on trading
position or portfolio due to variations in market interest rates and prices, using a given
confidence level, usually 95% to 99%, within a defined period of time. The VaR method
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
71
should incorporate the market factors against which the market value of the trading position
is exposed. The top management should put in place bank-wide VaR exposure limits to the
trading portfolio (including forex andgold positions, derivative products, etc.) which is then
disaggregatedacrossdifferent desksanddepartments. Thelossmakingtolerance level should
also be stipulated to ensure that potential impact on earnings is managed within acceptable
limits. The potential loss in Present Value Basis Points should be matched by the Middle
Office on a daily basis vis-à-vis the prudential limits set by the Board. The advantage of
using VaR is that it is comparable across products, desks and Departments and it can be
validated through ‘back testing’. However, VaR models require the use of extensive
historical data to estimate future volatility. VaR model also may not give good results in
extreme volatile conditions or outlier events and stress test has to be employed to
complement VaR. The stress tests provide management a view on the potential impact of
large size market movements andalso attempt to estimate the size of potential losses due to
stress events, which occur in the ’ tai l s’ of the loss distribution. Banks may also undertake
scenario analysis with specific possible stress situations (recently experienced in some
countries) by linking hypothetical, simultaneous and related changes in multiple risk factors
present in the tradingportfolioto determine the impact of moves on the rest of the portfolio.
VaR modelscouldalsobemodifiedtoreflect liquidity riskdifferencesobservedacrossassets
over time. International banks are now estimatingLiquidity adjustedValue at Risk (LaVaR)
by assuming variable time horizons based on position size and relative turnover. In an
environment where VaR is difficult toestimate for lack of data, non-statistical concepts such
asstoplossandgross/net positionscanbe used.
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
72
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
73
4.3 INSPECTION METHODOLGY
The supervision of commercial banks and financial institutions is vested
in the Reserve Bank in terms of the provisions of the Banking Regulation
Act, 1949 and the Reserve Bank of India Act, 1934. This task is carried
out by the Department of Banking Supervision (DBS) under the guidance
of the BFS. The basic objective of supervision of banks is to assess the
solvency, liquidity and operational health of banks. The onsite inspection
of banks referred to as Annual Financial Inspection (AFI) is conducted
annually (except in the case of State Bank of India in which case it is
done once in two
years). For this purpose, the unit of inspection is the Head Office (HO) of
the bank. A team of Inspecting Officers from the Reserve Bank led by the
Principal Inspecting Officer (PIO) visits the bank and conducts the
inspection based on the internationally adopted CAMEL (Capital Adequacy,
Asset Quality, Management, Earnings, Liquidity) model, modified as
CAMELS (S for Systems and Control) to suit the needs of the Indian
banking system. The focus of the AFI in recent years has been on
supervisory issues relating to securitisation, business continuity plan,
disclosure requirements and compliance with other existing guidelines. In
order to have an overall perspective, units of the bank throughout the
country are also taken up for inspection either by the same team
inspecting the HO or by additional teams from the Regional Offices (RO)
of the Reserve Bank. These units could be treasury operations, specialised
branches and controlling offices in general, where there may be concerns
relating mainly to frauds, NPAs and exposure to sensitive sectors. Major
findings of these other unit inspections are
incorporated in the Report. The timeframe for carrying out the inspection
of the corporate HO of the bank is two to three months. The inspection
report is generally finalised
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
74
within four months. On completion of the inspection, the RO of the
Reserve Bank,
under whose jurisdiction the HO of the bank is situated, issues the
inspection report to the bank for perusal, corrective action and
compliance. Further, a detailed discussion on the findings of the
inspection and the road ahead is conducted by the Reserve Bank with the
CEO/CMD and other senior functionaries of the bank and a monitorable
action plan is decided and/or supervisory action is taken, wherever
warranted. The findings recorded in the inspection report along with the
responses of the CEO/CMD of the bank are placed before the BFS. Based
on the findings of the inspection and other inputs, a supervisory rating is
assigned to the bank. Efforts are afoot to move to a risk based
supervision (RBS)
approach, which envisages the monitoring of banks by allocating
supervisory resources and focusing supervisory attention depending on
the risk profile of each institution.
The process involves continuous monitoring and evaluation of the
appropriateness of the risk management system in the supervised
institution in relation to its business strategy
and exposures, with a view to assessing its riskiness.
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
75
4.4 RISK MANAGEMENT IN BANKS
Risk is inherent in any commercial activity and banking is no exception to
this rule. Rising global competition, increasing deregulation,
introduction of innovative products and delivery channels have pushed
risk management to the forefront of today’s financial landscape. Ability
to gauge the risks and take appropriate position will be the key to
success. It can be said that risk takers will survive, effective risk
managers will prosper and risk averse are likely to perish. In the
regulated banking environment, banks had to primarily deal with credit
or default risk. As we move into a perfect market economy, we have to
deal with a whole range of market related risks like exchange risks,
interest rate risk, etc. Operational risk, which had always existed in the
system, would become more pronounced in the coming days as we have
technology as a new factor in today’s banking. Traditional risk
management techniques become obsolete with the growth of derivatives
and off-balance sheet operations, coupled with diversifications. The
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
76
expansion in E-banking will lead to continuous vigilance and revisions of
regulations.
Building up a proper risk management structure would be crucial for the
banks in the future. Banks would find the need to develop technology
based risk management tools. The complex mathematical models
programmed into risk engines would provide the foundation of limit
management, risk analysis, computation of risk-adjusted return on
capital and active management of banks’ risk portfolio. Measurement of
risk exposure is essential for implementing hedging strategies.
Under Basel II accord, capital allocation will be based on the risk inherent
in the asset. The implementation of Basel II accord will also strengthen
the regulatory review process and, with passage of time, the review
process will be more and more sophisticated. Besides regulatory
requirements, capital allocation would also be determined by the market
forces. External users of financial information will demand better inputs
to make investment decisions. More detailed and more frequent
reporting of risk positions to banks’ shareholders will be the order of the
day. There will be an increase in the growth of consulting services such
as data providers, risk advisory bureaus and risk reviewers. These
reviews will be intended to provide comfort to the bank managements
and regulators as to the soundness of internal risk management systems.
Risk management functions will be fully centralized and independent
from the business profit centres. The risk management process will be
fully integrated into the business process. Risk return will be assessed
for new business opportunities and incorporated into the designs of the
new products. All risks – credit, market and operational and so on will be
combined, reported and managed on an integrated basis. The demand
for Risk Adjusted Returns on Capital (RAROC) based performance
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
77
measures will increase. RAROC will be used to drive pricing, performance
measurement, portfolio management and capital management.
Risk management has to trickle down from the Corporate Office to
branches or operating units. As the audit and supervision shifts to a risk
based approach rather than transaction orientation, the risk awareness
levels of line functionaries also will have to increase. Technology related
risks will be another area where the operating staff will have to be more
vigilant in the coming days.
Banks will also have to deal with issues relating to Reputational Risk as
they will need to maintain a high degree of public confidence for raising
capital and other resources. Risks to reputation could arise on account of
operational lapses, opaqueness in operations and shortcomings in
services. Systems and internal controls would be crucial to ensure that
this risk is managed well.
The legal environment is likely to be more complex in the years to come.
Innovative financial products implemented on computers, new risk
management software, user interfaces etc., may become patentable. For
some banks, this could offer the potential for realizing commercial gains
through licensing.
Advances in risk management (risk measurement) will lead to
transformation in capital and balance sheet management. Dynamic
economic capital management will be a powerful competitive weapon.
The challenge will be to put all these capabilities together to create,
sustain and maximise shareholders’ wealth. The bank of the future has
to be a total-risk-enabled enterprise, which addresses the concerns of
various stakeholders’ effectively.
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
78
Risk management is an area the banks can gain by cooperation and
sharing of experience among themselves. Common facilities could be
considered for development of risk measurement and mitigation tools
and also for training of staff at various levels. Needless to add, with the
establishment of best risk management systems and implementation of
prudential norms of accounting and asset classification, the quality of
assets in commercial banks will improve on the one hand and at the same
time, there will be adequate cover through provisioning for impaired
loans. As a result, the NPA levels are expected to come down
significantly.
CHAPTER: 5
AN OVERVIEW OF PUNJAB NATIONAL BANK LTD
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
79
5.1 PNB PROFILE
With over 38 million satisfied customers and 4668 offices, PNB has
continued to retain its leadership position among the nationalized
banks. The bank enjoys strong fundamentals, large franchise value
and good brand image. Besides being ranked as one of India's top
service brands, PNB has remained fully committed to its guiding
principles of sound and prudent banking. Apart from offering
banking products, the bank has also entered the credit card & debit
card business; bullion business; life and non-life insurance
business; Gold coins & asset management business, etc.
Since its humble beginning in 1895 with the distinction of being
the first Indian bank to have been started with Indian capital, PNB
has achieved significant growth in business which at the end of
March 2009 amounted to Rs 3,64,463 crore. Today, with assets of
more than Rs 2,46,900 crore, PNB is ranked as the 3rd largest bank
in the country (after SBI and ICICI Bank) and has the 2nd largest
network of branches (4668 including 238 extension counters and 3
overseas offices).During the FY 2008-09, with 39% share of low
cost deposits, the bank achieved a net profit of Rs 3,091 crore,
maintaining its number ONE position amongst nationalized banks.
Bank has a strong capital base with capital adequacy ratio as per
Basel II at 14.03% with Tier I and Tier II capital ratio at 8.98% and
5.05% respectively as on March’09. As on March’09, the Bank has
the Gross and Net NPA ratio of only 1.77% and 0.17% respectively.
During the FY 2008-09, its’ ratio of priority sector credit to
adjusted net bank credit at 41.53% & agriculture credit to adjusted
net bank credit at 19.72% was also higher than the respective
national goals of 40% & 18%.
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
80
PNB has always looked at technology as a key facilitator to provide
better customer service and ensured that its ‘IT strategy’ follows
the ‘Business strategy’ so as to arrive at “Best Fit”. The bank has
made rapid strides in this direction. Alongwith the achievement of
100% branch computerization, one of the major achievements of
the Bank is covering all the branches of the Bank under Core
Banking Solution (CBS), thus covering 100% of it’s business and
providing ‘Anytime Anywhere’ banking facility to all customers
including customers of more than 2000 rural branches. The bank
has also been offering Internet banking services to the customers
of CBS branches like booking of tickets, payment of bills of utilities,
purchase of airline tickets etc.Towards developing a cost effective
alternative channels of delivery, the bank with more than 2150
ATMs has the largest ATM network amongst Nationalised Banks.
With the help of advanced technology, the Bank has been a
frontrunner in the industry so far as the initiatives for Financial
Inclusion is concerned. With it’s policy of inclusive growth in the
Indo-Gangetic belt, the Bank’s mission is “Banking for Unbanked”.
The Bank has launched a drive for biometric smart card based
technology enabled Financial Inclusion with the help of Business
Correspondents/Business Facilitators (BC/BF) so as to reach out to
the last mile customer. The BC/BF will address the outreach issue
while technology will provide cost effective and transparent
services. The Bank has started several innovative initiatives for
marginal groups like rickshaw pullers, vegetable vendors, diary
farmers, construction workers, etc. The Bank has already achieved
100% financial inclusion in 21,408 villages.
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
81
Backed by strong domestic performance, the bank is planning to
realize its global aspirations. In order to increase its international
presence, the Bank continues its selective foray in international
markets with presence in Hongkong, Dubai, Kazakhstan, UK,
Shanghai, Singapore, Kabul and Norway. A second branch in
Hongkong at Kowloon was opened in the first week of April’09.
Bank is also in the process of establishing its presence in China,
Bhutan, DIFC Dubai, Canada and Singapore. The bank also has a
joint venture with Everest Bank Ltd. (EBL), Nepal. Under the long
term vision, Bank proposes to start its operation in Fiji Island,
Australia and Indonesia. Bank continues with its goal to become a
household brand with global expertise.
Amongst Top 1000 Banks in the World, ‘The Banker’ listed PNB at
250th place. Further, PNB is at the 1166th position among 48
Indian firms making it to a list of the world’s biggest companies
compiled by the US magazine ‘Forbes’.
New Delhi, Jan 5: The Delhi-based Punjab National Bank (PNB) has
received the necessary approvals for patenting its rating model --
PNB Trac -- for its entire category of lending. The loans with
exposure of above Rs 20 lakh have been rated individually, while
loans with exposure under Rs 20 lakh have been rated
segment-wise on portfolio basis as per the terms of Basel II accord.
This means that the bank would be able to do credit ratings on its
own for its lendings.
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
82
In terms of rating, PNB already has data for default rates for the last
five years. "The results of the exercise are extremely satisfactory,"
BM Mittal, chief general manager, PNB, said, when contacted.
The default rates and migration matrix are comparable to that of
leading credit international rating agencies such as Standard &
Poor's, Moody's, Fitch and with international benchmarks. The
default rates are also within the limits given in Basel-II. Mittal
added that the bank is fully equipped to implement the stringent
norms. "Though the deadline for the Basel II norms implementation
has been extended by Reserve Bank of India, PNB is ready to come
up with the parallel run," he added.
Financial Performance:
Punjab National Bank continues to maintain its frontline position in the
Indian banking industry. In particular, the bank has retained its NUMBER
ONE position among the nationalized banks in terms of number of
branches, Deposit, Advances, total Business, operating and net profit in
the year 2008-09. The impressive operational and financial performance
has been brought about by Bank’s focus on customer based business
with thrust on SME, Agriculture, more inclusive approach to banking;
better asset liability management; improved margin management, thrust
on recovery and increased efficiency in core operations of the Bank.
The performance highlights of the bank in terms of business and profit
are shown below:
*Respective figure for the corresponding financial year
Parameters Mar'07 Mar'08 Mar'09 CAGR
Operating Profit* 3617 4006 5744 26.02
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
83
Net Profit* 1540 2049 3091 41.67
Deposit 139860 166457 209760 22.47
Advance 96597 119502 154703 26.55
Total Business 236456 285959 364463 24.15
(Rs.Crores)
ORGANIZATIONAL STRUCTURE OF
PUNJAB NATIONAL BANK
Head Office
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
84
Circle
Offices
(58)
Branches
(4267)
5.2 CORPORATE BANKING AT PNB
PNB has introduced a new scheme for property owners having their
property situated in Metro/Urban/ Semi Urban/rural centres and who
have let out such properties.
Eligibility
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
85
Property Owners having their properties situated in metro, urban,
semi-urban and rural areas who have leased out such properties to the
following:
(i) Public Sector Undertakings / Govt. / Semi / State Govt. &
reputed corporates, Banks, Financial Institutions,
Insurance Companies and Multinational Companies.
(ii) Reputed private schools/colleges (approved by/affiliated
to State Board/University/ AICTE/ any other govt. body).
(iii) Reputed private hospitals/ nursing homes.
Nature & Extent of loan
Remaining period of the lease Quantum of Loan
(Maximum upto
following %age of the
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
86
future lease rentals
receivable for
unexpired period of lease)
Upto 3 years 80
Beyond 3 years & upto 5 years 70
Beyond 5 years & Upto 7 years 65
Beyond 7 years & Upto 10 years 55
*Branches while financing under the scheme should ensure that the TDS,
wherever applicable have been taken into account.
Security
Assignment of lease rentals.
Equitable mortgage of the leased property or any other immovable
property:-
In case of loans having repayment period upto 5 years, the amount
of loan should not exceed the value of the property mortgaged.
In case of loans having repayment period beyond 5 years, the
amount of loan should not exceed 75% of the value of the property
mortgaged.
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
87
In case of Company - Personal Guarantee of promoter directors.
Rate of interest
Repayment
Maximum 120 monthly installments or remaining period of lease
whichever is less.
Processing Fee
0.70% of the loan amount + Service Tax & Education Cess
Documentation Charges
Rs.270/- upto Rs.2 Lac + Service Tax & Education Cess
Rs.450/- over Rs.2 Lac + Service Tax & Education Cess
Exim Finance
Services offered to Exporters
Pre-shipment finance in foreign currency and Indian rupees
Post-shipment finance in foreign currency and Indian rupees
Handling export bills on collection basis
Outward remittances for purposes as permitted under Exchange
Control guidelines
Inward remittances including advance payments
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
88
Quoting of competitive rates for transactions
Maintenance of Exchange Earners Foreign Currency (EEFC) accounts
Assistance in obtaining credit reports on overseas parties
Forfeiting for medium term export receivables
Services offered to Importers
Establishment of Import Letters of Credit covering import into India
and handling of bills under Letter of Credit
Handling of import bills on collection basis
Remittance of advance payment against imports
Offering utilisation of PCFC ( pre-shipment credit in foreign
currency) for imports
Credit reports on overseas suppliers
Exchange Earners Foreign Currency (EEFC) Deposits Scheme
The Exchange Earners Foreign Currency (EEFC) Deposits Scheme was
started by RBI in the year 1992 with the introduction of Liberalised
Exchange Rate Management System. Under this scheme, the recipient of
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
89
inward remittances, exporters and other eligible bodies are allowed to
keep a portion of their inward remittances / export proceeds in foreign
currency with the banks in India which can later be utilised for
permissible purposes.
PNB sets up connectivity with the Customs Deptt. for the benefit of
exporters/importers:
To provide efficient service to our importer/exporter clients, PNB has set
up connectivity with the Customs Department to facilitate payment of
custom duty and receipt of duty draw back by the importer/exporter
clients through the electronic media. Under this system of Electronic Data
Interchange (EDI), Custom Authorities process the shipping bills and also
effect on line payment of duty draw back for exporters. Further, they
undertake processing of Bill of Entry and deposit of custom duty for
imports. This is a pilot project in the country successfully implemented at
Indira Gandhi International Airport, Custom House branch of PNB. This
has now been replicated at PNB's extension counters at Inland Container
Depot, Tughlakabad, Delhi and Patpar Ganj, Delhi.
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
90
LOANS TO MANUFACTURING INDUSTRIES
To set up SSI units, for purchase of fixed assets and meeting
working capital needs.
PURPOSE
For acquisition of fixed assets (plant, machinery, land,
building, tools, etc.).
For working capital requirements within the ceiling
limits of Rs 3 lakh / Rs 5 lakh as the case may be.
ELIGIBILITY FOR FINANCING SSI
Technically qualified entrepreneurs and / or those having
adequate technical practical experience in a particular field of
technology.
MARGIN
For Term Loan
(i) Upto Rs 2 lakh Nil
(ii) Above Rs 2 lakh Upto Rs 3 lakh 10%
(iii) Above Rs 3 lakh Upto Rs 4 lakh 15%
(iv) Above Rs 4 lakh Upto Rs 5 lakh 20%
AMOUNT OF LOAN
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
91
Maximum Rs 3 lakh in case of individuals and Rs 5 lakh in
case of partnership firms or joint stock companies. (In case of
ancillary unit or industry with joint financing of SF / Bank
higher assistance of Rs 5 lakh for individual and Rs 10 lakh for
groups).
REPAYMENT
5 to 7 years for term loan including moratorium period.
COLLATERAL SECURITY
No collateral security for loans upto Rs 5 lakh. For loans in
excess of Rs 5 lakh and upto Rs 25 lakh no collateral security
required, if the unit is having good track record & financial
position. In other cases collateral security or third party
guarantee is asked only in cases where primary security is
inadequate or for other valid reasons and not as a matter of
routine.
LOCATION OF PROJECT
Preferably the unit should be set up in an industrial estate
where there is provision for suitable accommodation with the
requisite facilities such as water, power, transport and
communication. Project set up in industrial areas, zones or
sites specifically declared as undeveloped by the State
Government, concerned agencies / departments will be
considered.
The required accommodation should, as far as possible, be
acquired on rental or hire-purchase basis. This will ensure
that the investment in fixed assets is made for purchase of the
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
92
required machinery and equipment, thereby enabling the
entrepreneurs to make the best use of our financial
assistance.
CHAPTER: 6
AN OVERVIEW OF ICICI BANK LTD
6.1 ICICI PROFILE
ICICI Bank is India's second-largest bank with total assets of about Rs. 1
trillion and a network of about 540 branches and offices and over 1,000
ATMs. ICICI Bank offers a wide range of banking products and financial
services to corporate and retail customers through a variety of delivery
channels and through its specialized subsidiaries and affiliates in the
areas of investment banking, life and non-Banking , venture capital, asset
management and information technology. ICICI Bank's equity shares are
listed in India on stock exchanges at Chennai, Muzaffarnagar, Kolkata
and Vadodara, the Stock Exchange, Mumbai and the National Stock
Exchange of India Limited and its American Depositary Receipts (ADRs)
are listed on the New York Stock Exchange (NYSE).
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
93
ICICI Bank was originally promoted in 1994 by ICICI Limited, an Indian
financial institution, and was its wholly owned subsidiary. ICICI's
shareholding in ICICI Bank was reduced to 46% through a public offering
of shares in India in fiscal 1998, an equity offering in the form of ADRs
listed on the NYSE in fiscal 2000, ICICI Bank's acquisition of Bank of
Madura Limited in an all-stock amalgamation in fiscal 2001, and
secondary market sales by ICICI to institutional investors in fiscal 2001
and fiscal 2002. ICICI was formed in 1955 at the initiative of the World
Bank, the Government of India and representatives of Indian industry. The
principal objective was to create a development financial institution for
providing medium-term and long-term project financing to Indian
businesses. In the 1990s, ICICI transformed its business from a
development financial institution offering only project finance to a
diversified financial services group offering a wide variety of products
and services, both directly and through a number of subsidiaries and
affiliates like ICICI Bank. In 1999, ICICI become the first Indian company
and the first bank or financial institution from non-Japan Asia to be listed
on the NYSE.
After consideration of various corporate structuring alternatives in the
context of the emerging competitive scenario in the Indian banking
industry, and the move towards universal banking, the managements of
ICICI and ICICI Bank formed the view that the merger of ICICI with ICICI
Bank would be the optimal strategic alternative for both entities, and
would create the optimal legal structure for the ICICI group's universal
banking strategy. The merger would enhance value for ICICI shareholders
through the merged entity's access to low-cost deposits, greater
opportunities for earning fee-based income and the ability to participate
in the payments system and provide transaction-banking services. The
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
94
merger would enhance value for ICICI Bank shareholders through a large
capital base and scale of operations, seamless access to ICICI's strong
corporate relationships built up over five decades, entry into new
business segments, higher market share in various business segments,
particularly fee-based services, and access to the vast talent pool of ICICI
and its subsidiaries. In October 2001, the Boards of Directors of ICICI and
ICICI Bank approved the merger of ICICI and two of its wholly owned retail
finances subsidiaries, ICICI Personal Financial Services Limited and ICICI
Capital Services Limited, with ICICI Bank. The merger was approved by
shareholders of ICICI and ICICI Bank in January 2002, by the High Court
of Gujarat at Ahmedabad in March 2002, and by the High Court of
Judicature at Mumbai and the Reserve Bank of India in April 2002.
Consequent to the merger, the ICICI group's financing and banking
operations, both wholesale and retail, have been integrated in a single
entity.
6.2 CORPORATE BANKING AT ICICI BANK
Escrow Account
At ICICI Bank, we extend the trust you have in us by providing you with
escrow services for safe custody of assets or for revenue streams. These
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
95
services are customised to meet your needs. Some of the escrow services
offered are in relation to the following:
Project financing
Debt repayments
Sale purchase transactions
Mergers and acquisitions
Features
Specialised and dedicated services
Risk reduction in new relationships
Security towards contingencies
Mandatory in certain transactions
Benefits
Simplified documentation
Customised transaction structure
Online tracking of your escrow account
Fixed Deposit
Corporates can invest their surplus funds in fixed deposits for a wide
range of tenures. The minimum deposit amount is Rs.10,000. Other
features of the account are:
Funding through a debit to the operative account/cheque for clearing
While interest is compounded quarterly, payment of interest is quarterly,
monthly or on maturity
Interest payouts can be through credit to your account or through
banker's cheque
Benefits
Wide range of tenures
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
96
Choice of investment plans
Partial withdrawal permitted
Availability of auto-renewal facility
Structured Finance
In the Structured Finance space, our approach is totally client-centric. We
believe that every problem is unique and therefore we endeavour to
develop and offer the widest range of solutions tailored to address
specific requirements of each client. Services offered are:
Structured finance for Corporate clients
The Structured Finance Group aims to enable its corporate clients access
funds through cost efficient structures. The group's strength lies in its
experience and expertise in providing tailor-made solutions after
understanding the client's requirements.
To deliver these customized structures, it leverages on ICICI Bank's global
presence, industry expertise, large underwriting capability and
comprehensive product suite. Strong capabilities in end-to-end solutions
and timely execution have enabled ICICI Bank to become one of the
leading arrangers and underwriters of structured finance transactions.
The Structured Finance Group provides an array of services to its clients
including:
Acquisition finance
Asset-backed finance
Receivables purchase
Subordinated debt
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
97
Convertibles / Hybrid instruments
Non-recourse structures
Investment opportunities in securitized debt instruments
We offer a plethora of investment opportunities in securitised debt
instruments (SDIs) involving both Pass-Through and Pay-Through
structures which:
offer a premium in yield to corporate debt instruments having
similar risk profiles
are customizable to meet both quantum and tenor requirements of
the investors
have well-diversified risk profiles
could be customized (using different levels of credit protection) to
meet the specific risk appetites of the investors
could be offered as collateral by the investors at a later date for
additional leveraging
For clients desirous of growth through the inorganic route, we can
structure solutions around sale of specific asset category(ies) as per the
clients' needs.
Further, we could also structure solutions for clients desirous of getting
involved in market making or investing at specific points in time through
structuring of appropriate Put Options.
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
98
Securitization & structured finance advisory solutions
We help structure selling or buying of asset portfolios (in whole or in
part) for clients through securitisation or otherwise, thereby effectively
limiting their exposures to future risks arising out of such asset pools.
We can even offer to buy such identified asset pools from clients if the
commercials suit the Bank's risk-return appetite.
Being involved in more than 100 securitisation transactions till date, we
can provide advice to clients for structuring securitisation transaction
efficiently. We have the distinction of structuring and placing some of the
largest securitisation transactions in the Indian market including the
solitary transaction which exceeded USD 1.00 billion in size.
Traditionally Corporate borrowing has been on the basis of strength or
weakness of balance sheet, with the credit quality of the borrower being
the single most important factor. But of late the borrowings are being
closely linked to the value of the asset or the revenue earning capability
of the asset. This could be achieved by means of appropriate structuring
wherein customized borrowing propositions could be evolved for
different business.
A few examples of such structured financing could entail evolving
solutions around dealer financing, vendor financing, transporter
financing, brand financing, Export & Packing Credit (EPC) contract
financing, investment monetisation, etc.
Leveraging on our rich experience and wide reach in the Indian debt
markets, we can provide arranging services for clients interested in
securitising their assets.
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
99
Being a SEBI registered Category - I merchant banker, we can provide
underwriting services for securitisation transactions originated by
clients.
We can also provide protection to the client from interest rate /
currency risks for their structured finance exposures through interest
rate swaps, currency swaps and associated derivatives.
We can also provide protection to the client from credit risks for their
structured finance exposures by tailoring suitable credit protection
offerings.
We can also participate in market making or investing at specific points
in time through structuring of appropriate Put Options.
Dealer financing
Dealers of large corporates can be provided finance which can be either
with a limited recourse (on a first loss basis) to the corporate or based on
the creditworthiness of the dealer and its relationship with the
manufacturer. Bill discounting / Web-based financing with/without
recourse, Cash credit / Demand loan facilities, Financing for auto dealers,
could be some of the examples in this space.
Vendor financing
Vendor financing can be structured as a direct line of credit to the
vendors specifically to be used for supplies to the company or as a
revolving line for discounting bills raised by the vendors on the company.
The former can be integrated into the Internet banking model of ICICI
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
100
Bank and a web-based vendor financing structure can be created. The
web-based structure would offer the company the convenience of
operating the credit line of the vendors for making payments through the
net immediately after accepting goods. Vendor financing programs can
be set up for specific vendors recommended by the company. Through
the widespread branch network of ICICI Bank, the program can include
vendors at multiple locations.
Transporter financing
This is a product designed to finance the truck operators who are
dedicated transport service providers to a company. The truck operators
are typically small players and hence have limited sources for raising
funds. It is likely that the vehicles used by them have been financed at a
high cost which they would indirectly be passed on to the company in the
form of increased freight rates. A financing facility could be set up for the
truck operators with some support from the corporates they serve, which
could be used for refinancing their existing vehicles or could be used for
expansion of their fleet in line with the company's growth requirements.
Brand financing
Borrowings could be structured against security of specific brand(s) or a
sale and lease back of the brand(s). Borrowers could even be financed to
fund purchase of a brand. In the first option, the brand would be
mortgaged in the name of the lender and only in the event of default of
the loan would the brand be transferred to the lender. The lender could
alternatively purchase the brand from the borrowing company and lease /
license it out to the same entity. After expiry of the lease / license period
the brand could either revert to the company or be sold to someone else.
In the second option, the loan could be given to the company exclusively
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
101
for purchasing the brand/s which would then be mortgaged in the name
of the lender.
Investment monetization
This is a product designed to cater to the requirement of the business
groups to streamline the cross-holdings within their own group
companies. A Trust could be set up to acquire the intra-group cross
holdings from the various companies in the group at current market
prices. To fund this, the Trust would issue Pass-through Certificates
(PTCs) to the lender. The take-out could be through a put option
provided by the identified holding company of the group wherein the
lender could sell the PTCs to the put option provider at a pre-determined
price on a fixed date. The deal could be secured through a pledge of
shares.
Project Finance Group
ICICI Bank Project Finance Group (PFG) has developed comprehensive
domain expertise and knowledge in the infrastructure & manufacturing
sector, having ensured timely financial closure of several big ticket
projects. PFG has unmatched capabilities of discovering, creating and
structuring project finance transactions.
Group structure
PFG is the “One Stop Shop” fulfilling the funding requirements of
Greenfield & Brownfield projects in infrastructure & manufacturing sector.
It comprises of three sub-groups as follows:
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
102
Infrastructure Finance Group (IFG): IFG caters to the funding
requirement in the infrastructure sector like Power, Telecom, Roads,
Ports, Airports, Railways and Urban infrastructure.
Manufacturing Projects group (MPG): MPG caters to the funding
requirement in the manufacturing sector like Oil & Gas, Steel,
Aluminium, Cement, Auto, and Mining
Infrastructure Equity Group (IEG): IEG is engaged in providing equity
support to projects in various established as well as upcoming
sectors.
The project finance team of ICICI Bank has developed substantial insight
in the dynamics and trends in the infrastructure sector, having assisted
the Government of India in formulating policies relating to various
segments of the infrastructure sector. The unique insight and
understanding thus derived from the exercise has not only enabled ICICI
Bank to provide optimum solutions to its clients, but has also provided
ICICI Bank with an appropriate decision support for strategic measures,
going forward.
Service offerings
PFG provide a wide range of services including the following:
Rupee term loans
Foreign currency term loans
External Commercial Borrowings
Subordinated debt and mezzanine financing
Export Credit Agency backed funding
Non fund based facilities like Letter of Credit, Bank Guarantee,
Supplier’s Credit, Buyer’s Credit etc.
Equity funding
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
103
Technology Finance
The Technology Finance Group (TFG) of ICICI Bank implements various
programmes for international agencies such as World Bank and USAID.
The programmes currently running are designed to help the industry and
institutions undertake collaborative R&D and technology development
projects. These programmes focus on the following sectors:
Biotechnology/ Healthcare
Electrical
Electronics & communication
Energy
Environment
Materials
Manufacturing/ Control technologies
Financial/ Security services
The core group handling these programmes assists projects, which
introduce new concepts, products, and processes that will have a positive
impact on the industry and help in improving competitiveness and
operational efficiencies.
The programmes being implemented are:
Technology Development and Commercialization (TDC) programme
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
104
The objective of this programme is to facilitate technology development,
commercialisation and strengthen Indo-US technology collaboration. Till
date, the Technology Finance Group has assisted 29 projects. Private
sector companies which would like to commercialize innovative concepts,
products and processes in the areas of energy, environment & healthcare
are eligible for concessional Rupee Term Loans up to a maximum of 50%
of the project cost. The repayment is structured as per project and
programme requirements.
Guidelines for Financial Assistance
The project is evaluated in terms of innovative content, likely impact on
industry and Indo-US linkages. The company is requested to submit a
project profile covering the following information:
Brief particulars of the company
Project title
Description of existing facilities
Current development activities
Proposed commercialisation project
Innovative content of the project in terms of comparison with
current methods and aim of project in quantitative terms
Major steps/ activities involved in proposed EE/ESCO/DSM project
Brief on product / processes to be developed
Brief particulars of the work already carried out
Details on Indo-US technology collaboration (if any)
Cost of project with breakup and proposed means of financing
Schedule of implementation
Business plan for commercialisation
Details on market size, demand/supply drivers, etc.
The programme is currently under renewal
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
105
The objective of this programme is to stimulate technology development
through private investment in R&D and strengthen industry & technology
institution (TI) collaboration. The companies eligible for availing these
facilities should be from the private sector undertaking R&D in
collaboration with TI.
Following are the eligible sectors
Biotechnology/ Healthcare
Electrical
Electronics & communication
Energy
Environment
Materials
Manufacturing/ Control technologies
Financial/ Security services
The facilities include concessional Rupee Term Loans of up to 50% of the
eligible project cost. The repayment is structured as per project and
programme requirements. Till date the SPREAD has assisted 120 projects.
Guidelines for Financial Assistance: To avail the facilities, the companies
are requested to submit a project profile covering the following
information:
Project title
Brief particulars of the company
Description of existing facilities
Current R&D activities
Proposed R&D project
Collaborating technology institution
Brief on product / processes to be developed
Innovative content of the project in terms of comparison with
current practice and aim of project in quantitative terms
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
106
Major steps / activities involved in proposed R&D
Break-up of activities to be taken up by the company and by the
Technology Institution
Brief particulars of the work already carried out
Cost of project with breakup and proposed means of financing
Schedule of implementation
Business plan for commercialisation
Details on market size, demand/supply drivers, etc.
The project is evaluated in terms of
Innovative content & likely impact
Contribution from the technology institution
Commercial potential.
DOCUMENTS
Please return the form along with the following documents
1. Firm/Company profile
2. List of 5 major suppliers and customers including contact person and
contact no
3. Constitution documents
4. Audited financial statements of last 3 years along with IT return and
tax audit report and schedules and notes to accounts
5. Bank statement of the last 6 months
6. IT PAN card of concern (entity) and all Promoters / Directors / Partners
7. Provisional Balance Sheet and P/L a/c of ...............-................... as
certified by proprietor / partner / director
Projected Balance Sheet and P/L a/c of ....,...........-................... as
certified by proprietor / partner / director
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
107
8. Proprietor's / Partner's/Directors personal ITR and Balance Sheet of last
1 year - CA certified/signed by individual
9. Current performance ( P/L & Balance Sheet ) from April ........................
,.... to till date
10. VAT assessment order or sales tax registration certificate or shop &
establishment or VAT return
For Limited Co.
11. Latest list of Directors
12. Form no: 32 and shareholding pattern or annual return
For Partnership
13. Registration certificate in case of partnership/application for
registration
Property papers (for loan against collaterals)
14. Title deed
15. Completion certificate & occupancy certificate
16. Tax receipts & sanction plan
Additional documents for loan against credit card securitisation
17. CA certified last 12 months credit card sales of Master & Visa only
(excluding Dinners & Amex)
If applicable
18. Loan no of ICICI Bank loans (if any)
19. Latest 1 year audited financials of sister concern (If any)
20. Agreement with principal (if any) - Applicable to distributors/sole
selling agents/franchisee etc.
21. Existing Banks sanctions letter (if applicable).
22. Any other document as required and deemed fit.
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
108
CHAPTER: 7
AN OVERVIEW OF BLISS PHARMA LTD
7.1 PHARMA INDUSTRY
The Indian pharmaceutical industry is a success story providing
employment for millions and ensuring that essential drugs at affordable
prices are available to the vast population of this sub-continent.”
Richard Gerster
The Indian Pharmaceutical Industry today is in the front rank of India’s
science-based industries with wide ranging capabilities in the complex
field of drug manufacture and technology. A highly organized sector, the
Indian Pharma Industry is estimated to be worth $ 4.5 billion, growing at
about 8 to 9 percent annually. It ranks very high in the third world, in
terms of technology, quality and range of medicines manufactured. From
simple headache pills to sophisticated antibiotics and complex cardiac
compounds, almost every type of medicine is now made indigenously.
Playing a key role in promoting and sustaining development in the vital
field of medicines, Indian Pharma Industry boasts of quality producers
and many units approved by regulatory authorities in USA and UK.
International companies associated with this sector have stimulated,
assisted and spearheaded this dynamic development in
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
109
the past 53 years and helped to put India on the pharmaceutical map of
the world.
The Indian Pharmaceutical sector is highly fragmented with more than
20,000 registered units. It has expanded drastically in the last two
decades. The leading 250 pharmaceutical companies control 70% of the
market with market leader holding nearly 7% of the market share. It is an
extremely fragmented market with severe price competition.
The pharmaceutical industry in India meets around 70% of the country's
demand for bulk drugs, drug intermediates, pharmaceutical formulations,
chemicals, tablets, capsules, orals and injectibles. There are about 250
large units and about 8000 Small Scale Units, which form the core of the
pharmaceutical industry in India (including 5 Central Public Sector Units).
These units produce the complete range of pharmaceutical formulations,
i.e., medicines ready for consumption by patients and about 350 bulk
drugs, i.e., chemicals having therapeutic value and used for production of
pharmaceutical formulations.
Following the de-licensing of the pharmaceutical industry, industrial
licensing for most of the drugs and pharmaceutical products has been
done away with. Manufacturers are free to produce any drug duly
approved by the Drug Control Authority. Technologically strong and
totally self-reliant, the pharmaceutical industry in India has low costs of
production, low R&D costs, innovative scientific manpower, strength of
national laboratories and an increasing balance of trade. The
Pharmaceutical Industry, with its rich scientific talents and research
capabilities, supported by Intellectual Property Protection regime is well
set to take on the international market.
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
110
7.2 CASE FACTS
7.2.1. COMPANY PROFILE
Bliss Gvs Pharma Limited was incorporated on 11th December, 1984 as
Public Limited Company. It is listed on Bombay and Delhi Stock Exchange.
The Manufacturing Plant is located at Palghar (approximately 90 kms
from Bombay) in an industrial area which is well developed with all
infra-structural facilities. The plant is 1.5 kms. from Palghar Railway
Station on the Western Railway. The company's most unique product is
'Today' Vaginal Contraceptive, a safe female contraceptive aimed at
furthering planned parenthood and is also an established method for
preventing conception
Bliss Gvs Pharma Limited was incorporated on 11
th
December, 1984 as
Public Limited Company. It is listed on Bombay and Delhi Stock Exchange.
The Manufacturing Plant is located at Palghar (approximately 90 kms
from Bombay) in an industrial area which is well developed with all
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
111
infra-structural facilities. The plant is 1.5 kms. from Palghar Railway
Station on the Western Railway. The company's most unique product is
'Today' Vaginal Contraceptive, a safe female contraceptive aimed at
furthering planned parenthood and is also an established method for
preventing conception.
Bliss Gvs Pharma Limited has the most modern plant to manufacture
Female Contraceptives, Soft Pessaries and Suppositories. Its most popular
product is 'Today' Vaginal Contraceptive pessaries containing Nonoxynol
9. Bliss also manufactures to U.S. specification vaginal pessaries of
Clotrimazole & Povidone Iodine in addition to Anal Suppositories for
treatment of Piles.
BLISS complies with all norms laid down by Food & Drug Administration
for manufacture of its products and maintains high International GMP
standards.
BLISS also manufactures wide range of Pessary Formulations, Suppository
Formulations, Calcium Preparation, Protein Powders, Iron Preparation,
Antibiotics, Analgesic & Antipyretics, Respiratory, Anti-inflammatory,
Dermatological Preparations, Anti-Diarrhoeal products.
7.2.2. LOCATION
It is a sophisticated automatic plant situated at Palghar (approx. 90 kms
away from Mumbai City) in an Industrial area which is well-developed
with all Infra-structural facilities. This site is around 1.5 kms away from
Palghar Railway Station on the Western Railway and is well-connected by
Road and Rail to most parts of the country, including Mumbai.
The plant aims to be as the most modern and one of its kinds in Indian
sub-continent, to manufacture suppositories. Complete overhaul and
annual maintenance has kept the plant in excellent condition and fully
operational with minimum down time. Spares and consumables are
maintained at proper levels to prevent unnecessary delays and the
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
112
company has made efforts to employ a qualified Maintenance Engineer
since production should not be hampered in any way.
7.2.3. AWARDS AND ACCOLADES
Bliss GVS Pharma receives award from Pharmexil
In recognition of commendable performance in exports of
pharmaceuticals Bliss GVS Pharma has announced that the company has
received an Award from Pharmexcil, Outstanding Export Performance
Award in the recognition of commendable performance in the exports of
pharmaceuticals in the category of Small Scale Industries for the year
2008-2009.
7.2.4. PRODUCTS
Antimalarial
Alaxin Gvither P-Alaxin
Gsunate Lonart
Anal Suppositories
Rectol Poroxicam Parafen
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
113
Vomitin Slipizem Anomex
Prochloperazine Conlax Xtacy
Meloxicam Rectcin Glycerin
Vaginal Pessaries
Imazole Gvgyl Terconazole
Vagid Gvgyl - N Clindemycin
Povid / Gevid Blissfast /
Gynanfort
Klovinal
Micozole Blissnox /
Wellgynax
Ecozole Vagikit
General
Lofnac Comit Zinvite
Funbact-A Aceclofenac Gudapet
Gvfluc Clamoxin Gbactin
40
7.3 FINANCIAL DATA
BALANCE SHEET AS AT 31ST MARCH 2009
(Rs. In crores)
Balance sheet
Mar ' 09 Mar ' 08
Sources of funds
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
114
Owner's fund
Equity share capital 10.31 6.45
Share application money - -
Preference share capital - -
Reserves & surplus 87.2 55.43
Loan funds
Secured loans 2.41 12.23
Unsecured loans - -
Total 99.93 74.1
Uses of funds
Fixed assets
Gross block 34.53 21.3
Less : revaluation reserve - -
Less : accumulated depreciation 10.17 6.6
Net block 24.36 14.7
Capital work-in-progress 0.13 0.04
Investments - -
Net current assets
Current assets, loans &
advances
102.56 92.75
Less : current liabilities &
provisions
27.12 33.39
Total net current assets 75.44 59.37
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
115
Miscellaneous expenses not
written
- -
Total 99.93 74.1
Profit loss account
Mar ' 09 Mar ' 08
Income
Operating income 132.96 102.4
Expenses
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
116
Material consumed 69.84 44.59
Manufacturing expenses 2.43 2.09
Personnel expenses 2.64 2
Selling expenses 6.71 4.58
Adminstrative expenses 12.03 7.35
Expenses capitalised - -
Cost of sales 93.65 60.62
Operating profit 39.31 41.77
Other recurring income 0.19 0.09
Adjusted PBDIT 39.49 41.86
Financial expenses 2.26 1.38
Depreciation 3.59 2.93
Other write offs - -
Adjusted PBT 33.64 37.55
Tax charges 2.77 1.27
Adjusted PAT 30.87 36.28
Non recurring items 6.71 -1.16
Other non cash adjustments -0.03 0.98
Reported net profit 37.55 36.09
Earnigs before appropriation 73.14 39.01
Equity dividend 1.55 0.65
Preference dividend - -
Dividend tax 0.26 0.11
Retained earnings 71.33 38.25
CHAPTER: 8
Case study analysis
8.1. ICICI RATING MODEL
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
117
ICICI Bank’s corporate banking strategy is based on providing customized
financial solutions to clients, tailored to meet their specific requirements.
The corporate banking strategy focuses on careful management of credit
risk and adequate return on risk capital through risk-based pricing and
proactive portfolio management, rapid growth in fee-based services and
extensive use of technology to deliver high levels of customer satisfaction
in a cost effective manner.
Financial performance
Manufacturing Max.
Score
Co.Score
Parameter Range Score Weight
Turnover/total
income
>= 750 mn 5 4% 5 20 20
550 to 750
mn
4
400 to 550
mn
3
250 to 400
mn
2
100 to 250
mn
1
=15% 5 2% 5 10 10
12% to 15% 4
9% to 12% 3
6% to 9% 2
3% to 6% 1
=18% 5 5% 5 25 25
16% to 18% 4
13% to 16% 3
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
118
10% to 13% 2
6% to 10% 1
=5 times 5 2% 5 10 10
4 to 5 times 4
3 to 4 times 3
2 to 3 times 2
1.5 to 2 times 1
=200 mn 5 2% 5 10 10
150 to 200
mn
4
100 to 150
mn
3
50 to 100 mn 2
30 to 50 mn 1
=1.75 times 5 4% 5 20 20
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
119
1.33 to 1.75 4
1.25 to 1.33 3
1.15 to 1.25 2
1 to 1.15 1
=6% 5 2% 5 10 10
5% to 6% 4
4% to 5% 3
3% to 4% 2
2% to 3% 1
5%
of turnover)
5 5 3% 3 15 9
4 4
3 3
2 2
1 1
0 0
Length of
association with
large customers
>= 5 years 5 3% 5 15 15
3 to 5 years 4
2 to 3 years 3
1 to 2 years 2
6 months to
1 year
1
< 6 months 0
% of turnover from
large customers
30% to 50%
of turnover
5 3%
between 20%
to 30% or
50% to 60%
4 4 15 12
between 15%
to 20% or
60% to 70%
3
between
10%to 15% or
70% to 80%
2
between 5%to
10% or 80%
to 90%
1
90% 0
Total 29% 24 145 99
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
122
Parameter Range Score Weight Max
score
Cos.score
Business vintage (years) 0 – 10 3%
5 15 15
Personal networth of promoters
(Rs. in mn)
0 – 50 3%
Constitution of the entity Public limited
company
5 3%
5 15 15
Private limited
company
4
Registered
partnership firm
3
Unregistered
partnership firm/HUF
2
Sole proprietorship
concern
1
Trade reference/ Market feedback
about promoters
Excellent 5 4% 20 12
Very Good 4
Good 3 3
Above average 2
Average 1
Below average 0
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
123
Promoters /management
Promoter's financial flexibility Excellent
(deposits/investment
s >=100.0 mn)
5 3%
5 15 15
4
5 15 15
Good
(deposits/investme
nts 50.0 to 70.0
mn)
3
Above average
(deposits/investme
nts 20.0 to 50.0
mn)
2
Average
(deposits/investme
nts 10.0 to 20.0
mn)
1
Below average
(deposits/investme
nts 5.00 OR
4.0
0 &
upto
5.00
[
2
]
>2.
50
&
upt
o
4.0
0 [4]
1.00 &
upto
2.50 [6] 1.50 &
upto
2.00 [6] >2.00 [8] 8.00
Iii ROCE
35.92
% 16% [8] 8.00
Iv
Inventory & Debtors
Holding (Months) 3.13 >5 [0]
>4.0
0 &
upto
5.00
[
2
]
>3
&
upt
o 4 [4]
2 & upto
3 [6] 95%
V
ii
Discounting Factor for
scre inder (vi) above. (-) 50%
(-)
30%
(-)
20
% (-) 10% NIL
-30.0
0%
V
iii
Net score under
Financial after
discounting (v-vii) 18.00
Estimated cash profit 303.0 250 [8] 8.00
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
128
Ix
of current year to Net
Repayment
obligations of current
year
9 % % &
upto
125
%
2
]
% &
upt
o
175
%
4
]
%
A
NET SCORE OF
FINANCIALS (viii+ix)
2 BUSINESS/INDUSTRY
i Expected Sales Growth
Growth of
less than
5% or
negative
growth
during the
last 3
years
consecutiv
ely. [0]
Posit
ive
grow
th of
mini
mum
5%
duri
ng
any
one
year
out
of
past
3
year
s
and
posit
ive
grow
th of
mini
mum
5% is
expe
cted
[
2
]
Pos
itiv
e
gro
wth
of
min
imu
m
5%
for
any
2
yea
rs,
out
of
pas
t 3
yea
rs
and
exp
ect
ed
to
con
tinu
[
4
]
Positive
growth
of
minimu
m 5%
for
consecu
tively 2
years
during
past
3rd year
&
expecte
d to
continu
e
during
current
year. [6]
Positive
growth of
minimum
5% for last
3 years
continousl
y and
expected
to
continue
during
current
year.
8.0
0
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
129
to
conti
nue
duri
ng
curre
nt
year.
e
dur
ing
cur
ren
t
yea
r.
Positive growth of minimum5% is expected to continue in the current year
Ii
Availability of
inputs
Scarcity/lo
w
availability [0]
High
depe
nden
ce
on
supp
liers
/inst
abilit
y of
supp
lies
[
1
]
Eas
y
ava
ilab
ility
of
inp
uts
[
2
]
Adequa
te
availibli
ty at
competi
tive
prices [3]
Buyers'
market [4] 2.00
Iii
Production/Pro
duct Strength
Poor
Quality [0]
Qual
ity
not
main
taine
d
[
1
]
Go
od
Qu
alit
y/N
or
ms
mai
ntai
ned
[
2
]
Standar
d
Quality
& Post
Sales
Services [3]
Market
Leader [4] 2.00
Iv
Marketing
Strength
Poor
Customer
base/
marketing
network [0]
Inad
equa
te
cust
omer
base
/
mark
eting
[
1
]
Sati
sfa
cto
ry
cus
to
mer
bas
e/
[
2
]
Good
Marketi
ng
Networ
k/Growi
ng
Market [3]
Sellers'
market [4] 3.00
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
130
netw
ork
mar
keti
ng
net
wor
k
B
TOTAL SCORE
OF
BUSINESS/IND
USTRY 15.00
3 MANAGEMENT:
i
% Achievement
of Sales
vis-à-vis
estimates 92.00%
80 &
upto
90%
>90 &
upto
95% >95%
3.0
0
Sales
Achievement 132.95
Sales Target
145(40%
)
ii
Actual Profits
vis--vis
Estimated
Profits 89.00%
80 &
upto
90%
>90 &
upto
95% >95%
2.0
0
Profit
Achievement 40.26
Profit Target 45(20%)
iii
Constitution/Es
tablishment
Propriet
orship
upto 5
years
standing
/
Partners
hip upto
2 Years
standing
Propri
etorsh
ip >5
years
upto
10
years
standi
ng or
Partne
rship
upto
5
Years
standi
ng
but
>2
years
Propriet
orship
>10
years
but
upto 15
years
or
Partner
ship >5
Years
but
upto 10
standin
g or Pvt
ltd.
Co.>2
years
upto 2
Propri
etorsh
ip
>15
years
or
Partne
rship
>2
Years
and
upto
15
years
or
Pvt.ltd
.>5
years
upto
Partne
rship
>15
years
or Pvt.
Ltd.
Co.
>10
Years
or
Public
Ltd
Comp
any
>5
years
in
busin
ess
4.0
0
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
131
or Pvt
ltd.
Co. or
any
other
consti
tution
s
havin
g
upto
2
years
standi
ng
years
standin
g or
any
other
constit
utions
such as
Co-op.
Societie
s etc.
>2
years
standin
g
10
years
or
Public
Ltd
Comp
any
upto
5
years
but>2
years
standi
ng
operat
ion
iv
Integrity/Com
mitment &
Sincerity
Poor/wil
lful
defaulte
r
Margi
nally
Accep
table
Satifact
ory
Reliab
le
Beyon
d
Doubt
3.0
0
v
Track Record in
Debt
Repayment and
Statutory Dues
Irregular
for over
3
months/
statutor
y
liabilitie
s
overdue
Occasi
onally
Irregu
lar
due to
intere
st/no
statut
ory
liabilit
ies
overd
ue
No
irregula
rities
during
past 1
years/n
o
statutor
y
liabilitie
s
overdu
e
No
irregu
larity
durin
g past
3
years/
no
statut
ory
liabilit
ies
overd
ue
No
irregu
larity
durin
g past
3
years
&
capab
le of
repayi
ng on
dema
nd/no
statut
ory
liabilit
ies
overd
ue
3.0
0
C
TOTAL SCORE
OF
MANAGEMENT
15.
00
4 CONDUCT OF ACCOUNT
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
132
I
Conduct of
Accounts
Un-satisfa
ctory [0] Average
[
3
] Good
[
6
]
Very
Good [9] Excellent [12]
6.0
0
ii
Submission
and reliabilities
of Feedback
statements &
Other
Information
Delay in
submissio
n beyond
30 days of
due date/
lack of
reliability
of
data/rene
wal
overdue
beyond 90
days
Delay in
submissi
on not
exceedin
g 30 days
of due
date but
reliable
data/ren
ewal
overdue
>60 days
& upto
90 days
Occasio
nally
delayed
but
reliable
data/
renewal
overdu
e >30
days &
upto 60
days
Timely
submiss
ion/relia
ble
data/ren
ewal
overdue
upto 30
days
Prompt
submission/r
eliable
data/renewal
not overdue
6.0
0
D
TOTAL SCORE
FOR CONDUCT
OF ACCOUNT
12.
00
E
TOTAL SCORE
(A+B+C+D)
(E)
5
FOR TERM
LOAN:
i
Debt-Equity
Ratio of
Company 0.02
>3.00
or 2.00 &
upto 3.00 [2]
>1.50
& upto
2.00 [4]
1.00 &
upto
1.50 [6] 2.5
N.A
.
b) In case of
existing
companies
proposes to
avail fresh term
loan/DPG
>6
years
>5 & upto
6 years
>4 &
upto 5
years
>3 &
upto 4
years
3 years or
below 4
F TOTAL FOR TL
12.
00
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
133
G
GRAND
TOTAL SCORE
(E+F) Out of total 120 80
Adjusted
Score Out of total 100 (G*100/120) 66.67
CREDIT RISK RATING A
8.3. COMPARATIVE ANALYSIS
ICICI model is divided into five parameters viz Promoters/
management, business and market position, financial performance,
transaction history and collateral and each parameter is divided in
various sub parameters while PNB model is divided in four
Score >80 >70 & upto
85
>60 &
upto 70
>50 &
upto 60
>40 &
upto 50
>30 & upto
40
30 and
below
Grade AAA AA A BB B C D
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
134
parameters viz financials, business/industry, management, conduct
of account and each parameter is relatively divided in less number
of sub parameters compared to ICICI bank
Collateral securities are not considered by PNB whereas these
parameters are included in ICICI model. PNB bank should consider
collateral securities of a company while evaluating and rating
company as collateral securities are important to judge company’s
soundness.
Transaction history of a company is considered by ICICI in detail as
compared to PNB model. ICICI bank considers various sub
parameters under transaction history like cheque bouncing, LC
devolvement and utilization of fund based limits that are lacking in
PNB bank.
ICICI bank focuses on company’s relationship with customer in
detail as it is important to measure stability of a company and
demand of its products and services in market whereas PNB does
not consider company’s relations with customer.
Personal networth of promoters and their flexibility is considered
by ICICI bank whereas PNB bank does not consider.
ICICI model gives weightage along with score whereas in PNB
model only scores are given to each parameter. In ICICI credit
rating model separate score and weightage is given to all sub
parameters along with parameters
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
135
Bliss pharma scores 77.8 and category - B as per ICICI model
whereas it scores 66.67 and category - A as per PNB model
In case if total exposure of an individual borrower exceeds
maximum exposure according to scorecard special approval is
needed as per ICICI model whereas there is no such limit in PNB
model
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
136
CHAPTER 9
9.1 RECOMMENDATIONS TO PNB
PNB bank should consider personal net worth of promoters,
promoters financial flexibility and their payment records with other
banks, financial institutions, creditors and non financial institutions
while rating a company to evaluate efficiency of a company and its
repayment abilities.
PNB bank should conduct in depth study of a company viz it should
consider customers of a company and transaction history in detail
to judge its stability in market.
As PNB bank ignores weightage of each parameters, scores loses its
relevance. Bank should consider weightage for each parameter
along with each sub parameter.
PNB bank should include maximum exposure limit in its credit
rating model to be very specific and clear.
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
137
9.2 RECOMMENDATIONS TO COMPANY
Bliss pharma should reduce its inventory turnover ratio for effective
utilization of resources.
It should reduce debtor’s collection period for smooth running of
business cycle and working capital cycle.
Company should increase its trade reference to increase its brand
image.
The company should increase its ratio between total outstanding
liabilities and total net worth to avail more credit from banks at
easier terms. For this purpose it has to increase its networth and
reduce its outstanding liabilities.
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
138
CHAPTER 10
CONCLUSION
During my project I realized that a credit analyst must own
multi-disciplinary talents like financial, technical as well as legal
know-how about corporate lending and credit rating model for the
purpose of lending loan
A study of both private bank and public bank enhanced my
knowledge and I gained a great learning experience
During the study I learnt how the theoretical financial analysis
aspects are used in practice during the term loan finance
assessment
The credit appraisal for term loan finance system has been devised
in a systematic way. There are clear guidelines on how the credit
analyst or lending officer has to analyze a loan proposal
Credit Appraisal Model of both PNB and ICICI bank are based on
sound principles of lending
Method of lending of both banks is different.
SAAB MARFIN MBA
CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE
139
Compared to PNB model, ICICI model is complicated as ICICI
considers more aspects and in detail compared to PNB.
Both banks follow inventory and receivable norms as suggested by
RBI.
BIBLIOGRAPHY
WEB LINKS:
www.rbi.com
www.icicibank.com
www.crisil.com
www.pnb.com
www.moneycontrol.com
www.icicidirect.com
LITERATURE SURVEY
Economics times

doc_811708314.pdf