Credit Risk Management With Reference of State Bank of India

CREDIT RISK MANAGEMENT WITH REFERENCE OF STATE BANK OF INDIA
CREDIT RISK
MANAGEMENT WITH
REFERENCE OF STATE
BANK OF INDIA
CHAPTER I
INTRODUCTION AND RESEARCH
DESIGN
P.B.V.M PANDURTITHA 1
1.1 Introduction:
1.2 Objectives of the study
1.3 Hypothesis of the study
1.4 Significance of the Study
1.5 Statement of the Problem
1.6 Scope of the study
1.7 Methods of Data collection
1.8. Methods of Data Analysis
1.9 Limitations
1.10 Conclusion
1.1.INTRODUCTION:-
Definition-
Credit risk management is the practice of mitigating losses by understanding the adequacy of
a bank's capital and loan loss reserves at any given time – a process that has long been a
challenge for financial institutions.
Banks are regarded as the blood of the nation’s economy without them one cannot imagine
economy moving. Therefore banks should be operated very efficiently Advance is heart and
recovery is oxygen for the bank and to survive it is necessary to give advances and recover
the amount at the appropriate time. Through credit risk management we have tried to learn the
various aspects related to credit appraisal and credit policy of SBM. Credit Risk Management
covers all the areas right from the beginning like inquiry till the loan is paid up.
We are preparing comprehensive report on “Credit Risk Management at State Bank of State
Bank of India”.
The basic idea of project is to augment our knowledge about the industry in its totality and
appreciate the use of an integrated loom. This makes us more conscious about Industry and its
pose and makes us capable of analyzing Industry’s position in the competitive market. This
may also enhance our logical abilities. There are various aspects, which have been studied in
detail in the project and have been added to this project report.Though credit management, a
very vast topic, we have tried to incorporate to the best of our capacity from all possible
aspects in this project.
Concept-
Credit risk refers to the probability of loss due to a borrower’s failure to make payments on
any type of debt. Credit risk management is the practice of mitigating losses by understanding
the adequacy of a bank’s capital and loan loss reserves at any given time – a process that has
long been a challenge for financial institutions. The global financial crisis – and the credit
crunch that followed – put credit risk management into the regulatory spotlight. As a result,
regulators began to demand more transparency. They wanted to know that a bank has
thorough knowledge of customers and their associated credit risk. And new Basel III
regulations will create an even bigger regulatory burden for banks. To comply with the more
stringent regulatory requirements and absorb the higher capital costs for credit risk, many
banks are overhauling their approaches to credit risk. But banks who view this as strictly a
compliance exercise are being short-sighted. Better credit risk management also presents an
opportunity to greatly improve overall performance and secure a competition.
Meaning-
Credit risk is the possibility of a loss resulting from a borrower's failure to repay a loan or
meet contractual obligations. Traditionally, it refers to the risk that a lender may not receive
the owed principal and interest, which results in an interruption of cash flows and increased
costs for collection. Excess cash flows may be written to provide additional cover for credit
risk. When a lender faces heightened credit risk, it can be mitigated via a higher coupon rate,
which provides for greater cash flows.
Although it's impossible to know exactly who will default on obligations, properly assessing
and managing credit risk can lessen the severity of a loss. Interest payments from the
borrower or issuer of a debt obligation are a lender's or investor's reward for assuming credit
risk.
RISK MANAGEMENT STRUCTURE-
Nature-
2.1 A major issue in establishing an appropriate risk management organisation structure is

choosing between a centralised and decentralised structure. The global trend is towards
centralising risk management with integrated treasury management function to benefit from
information on aggregate exposure, natural netting of exposures, economies of scale and
easier reporting to top management. The primary responsibility of understanding the risks run
by the bank and ensuring that the risks are appropriately managed should clearly be vested
with the
Board of Directors. The Board should set risk limits by assessing the bank’s risk and risk-
bearing capacity. At organisational level, overall risk management should be assigned to an
independent Risk Management Committee or Executive Committee of the top Executives that
reports directly to the Board of Directors. The purpose of this top level committee is to
empower one group with full responsibility of evaluating overall risks faced by the bank and
determining the level of risks which will be in the best interest of the bank. At the same time,
the Committee should hold the line management more accountable for the risks under their
control, and the performance of the bank in that area. The functions Risk Management
Committee should essentially be to identify, monitor and measure the risk profile of the bank.
The Committee should also develop policies and procedures, verify the models that are used
for pricing complex products, review the risk models as development takes place in the
markets and also identify new risks. The risk policies should clearly spell out the quantitative
prudential limits on various segments of banks’ operations. Internationally, the trend is
towards assigning risk limits in terms of portfolio standards or Credit at Risk (credit risk) and
Earnings at Risk and Value at Risk (market risk). The Committee should design stress
scenarios to measure the impact of unusual market conditions and monitor variance between
the actual volatility of portfolio value and that predicted by the risk measures. The Committee
should also monitor compliance of various risk parameters by operating Departments.
2.2 A prerequisite for establishment of an effective risk management system is the existence
of a robust MIS, consistent in quality. The existing MIS, however, requires substantial
upgradation and strengthening of the data collection machinery to ensure the integrity and
reliability of data.
2.3 The risk management is a complex function and it requires specialised skills and
expertise.Banks have been moving towards the use of sophisticated models for measuring and
managing risks. Large banks and those operating in international markets should develop
internal risk management models to be able to compete effectively with their competitors. As
the domestic market integrates with the international markets, the banks should have
necessary expertise and skill in managing various types of risks in a scientific manner. At a
more sophisticated level, the core staff at Head Offices should be trained in risk modelling
and analytical tools. It should, therefore, be the endeavour of all banks to upgrade the skills of
staff. 2.4 Given the diversity of balance sheet profile, it is difficult to adopt a uniform
framework for management of risks in India. The design of risk management functions should
be bank specific, dictated by the size, complexity of functions, the level of technical expertise
and the quality of MIS. The proposed guidelines only provide broad parameters and each
bank may evolve their own systems compatible to their risk management architecture and
expertise.
2.5 Internationally, a committee approach to risk management is being adopted. While the
Asset - Liability Management Committee (ALCO) deal with different types of market risk,
the Credit Policy Committee (CPC) oversees the credit /counterparty risk and country risk.
Thus, market and credit risks are managed in a parallel two-track approach in banks. Banks
could also set-up a single Committee for integrated management of credit and market risks.
Generally, the policies and procedures for market risk are articulated in the ALM policies and
credit risk is addressed in Loan Policies and Procedures.
2.6 Currently, while market variables are held constant for quantifying credit risk, credit
variables are held constant in estimating market risk. The economic crises in some of the
countries have revealed a strong correlation between unhedged market risk and credit risk.
Forex exposures, assumed by corporates who have no natural hedges, will increase the credit
risk which banks run vis-à-vis their counterparties. The volatility in the prices of collateral
also significantly affects the quality of the loan book. Thus, there is a need for integration of
the activities of both the ALCO and the CPC and consultation process should be established
to evaluate the impact of market and credit risks on the financial strength of banks. Banks
may also consider integrating market risk elements into their credit risk assessment process.
Scope of Credit Risk -
It can be understood from the above that credit risk arises from a whole lot of banking
activities apart from traditional lending activity such as trading in different markets
investment of funds, provision of portfolio management services, providing different type of
guarantees and opening of letters of credit in favour of customers etc. For example, even
though guarantee is viewed as a non-fund based product, the moment a guarantee is given, the
bank is exposed to the possibility of the non- funded commitment turning into a funded
position when the guarantee is invoked by the entity in whose favour the guarantee was
issued by the bank. This means that credit risk runs across different functions performed by a
bank and has to be viewed as such credit.
State Bank of India (SBI) came into existence by an act of Parliament as successor to the
Imperial Bank of India. Today, State Bank of India (SBI) has spread its arms around the
world and has a network of branches spanning all time zones. SBI's International Banking
Group delivers the full range of cross-border finance solutions through its four wings-the
Domestic division, the Foreign Offices division, the Foreign Department and the International
Services division.
Credit risk refers to the probability of loss due to a borrower’s failure to make payments on
any type of debt. Credit risk management is the practice of mitigating losses by understanding
the adequacy of a bank’s capital and loan loss reserves at any given time – a process that has
long been a challenge for financial institutions. The global financial crisis – and the credit
crunch that followed – put credit risk management into the regulatory spotlight. As a result,
regulators began to demand more transparency. They wanted to know that a bank has
thorough knowledge of customers and their associated credit risk. And new Basel III
regulations will create an even bigger regulatory burden for banks. To comply with the more
stringent regulatory requirements and absorb the higher capital costs for credit risk, many
banks are overhauling their approaches to credit risk. But banks who view this as strictly a
compliance exercise are being short-sighted. Better credit risk management also presents an
opportunity to greatly improve overall performance and secure a competitive advantage.
Challenges to Successful Credit Risk Management
Inefficient data management. An inability to access the right data when it’s needed causes
problematic delays.
No group wide risk modelling framework. Without it, banks can’t generate complex,
meaningful risk measures and get a big picture of groupwide risk.
Constant rework. Analysts can’t change model parameters easily, which results in too much
duplication of effort and negatively affects a bank’s efficiency ratio.
Insufficient risk tools. Without a robust risk solution, banks can’t identify portfolio
concentrations or re-grade portfolios often enough to effectively manage risk.
Cumbersome reporting.Manual, spreadsheet-based reporting processes overburden analysts

and IT.
Best Practices in Credit Risk Management
The first step in effective credit risk management is to gain a complete understanding of a
bank’s overall credit risk by viewing risk at the individual, customer and portfolio levels.
While banks strive for an integrated understanding of their risk profiles, much information is
often scattered among business units. Without a thorough risk assessment, banks have no way
of knowing if capital reserves accurately reflect risks or if loan loss reserves adequately cover
potential short-term credit losses. Vulnerable banks are targets for close scrutiny by regulators
and investors, as well as debilitating losses. The key to reducing loan losses – and ensuring
that capital reserves appropriately reflect the risk profile – is to implement an integrated,
quantitative credit risk solution. This solution should get banks up and running quickly with
simple portfolio measures. It should also accommodate a path to more sophisticated credit
risk management measures as needs evolve. The solution should include:
Better model management that spans the entire modeling life cycle.
Real-time scoring and limits monitoring.
Robust stress-testing capabilities.
Data visualization capabilities and business intelligence tools that get important
information into the hands of those who need it, when they need it.
Principles for the Management of Credit Risk - consultative document
1. While financial institutions have faced difficulties over the years for a multitude of
reasons, the major cause of serious banking problems continues to be directly related to lax
credit standards for borrowers and counterparties, poor portfolio risk management, or a lack
of attention to changes in economic or other circumstances that can lead to a deterioration in
the credit standing of a bank's counterparties. This experience is common in both G-10 and
nonG- 10 countries.
2. Credit risk is most simply defined as the potential that a bank borrower or
counterparty will fail to meet its obligations in accordance with agreed terms. The goal of
credit risk management
is to maximise a bank's risk-adjusted rate of return by maintaining credit risk exposure within
acceptable parameters. Banks need to manage the credit risk inherent in the entire portfolio as
well as the risk in individual credits or transactions. Banks should also consider the
relationships between credit risk and other risks. The effective management of credit risk is a
critical component of a comprehensive approach to risk management and essential to the
longterm success of any banking organisation.
3. For most banks, loans are the largest and most obvious source of credit risk; however,
other sources of credit risk exist throughout the activities of a bank, including in the banking
book and in the trading book, and both on and off the balance sheet. Banks are increasingly
facing credit risk (or counterparty risk) in various financial instruments other than
loans, including acceptances, interbank transactions, trade financing, foreign exchange
transactions, financial futures, swaps, bonds, equities, options, and in the extension of
commitments and guarantees, and the settlement of transactions.
4. Since exposure to credit risk continues to be the leading source of problems in banks
world-wide, banks and their supervisors should be able to draw useful lessons from past
experiences .Banks should now have a keen awareness of the need to identify, measure,
monitor and control credit risk as well as to determine that they hold adequate capital against
these risks and that they are adequately compensated for risks incurred. The Basel Committee
is issuing this document in order to encourage banking supervisors globally to promote sound
practices for managing credit risk. Although the principles contained in this paper are most
clearly applicable to the business of lending, they should be applied to all activities where
credit risk is present.
1.2- Objectives of the study-
1.To study the concept of credit risk management in banks.
2.To know the impact of consumer's satisfaction of credit risk management in banks.
3.To study the profitability and financial risk programmes.
4.To give proper suggestion for following study.
1.3 Hypothesis of the study-
Research Hypothesis The researcher expected with better credit risk management with
high return on asset (ROA) and lower non-performing asset (NPA).With the help of data
the study was established and tested the following hypothesis:
1 (H1): credit risk management had an effect on the bank performance.

2 (H0): credit risk management had no effect on the bank performance.
1.4 Significance of the study-
This study aims to provide a basis for guidance for the commercial banks of Balochistan to
adopt long-term performance-improving risk management strategies (Campbell, 2007). The
model for the study shows the impact of risk management strategies, including hedging,
diversification, the capital adequacy ratio and corporate governance. The research will also
examine the impact of each risk management strategy individually in order to understand the
importance of each strategy. To the best of authors’ knowledge, there is no study on credit
risk management on Balochistan using the described parameters. The findings of this study
are intended to contribute positively to society by demonstrating that the banks of Balochistan
can develop effective strategies to improve their CRM. Additionally, policy makers can
identify and generate appropriate policies to govern bank behaviour in order to minimize risk.
The project helps in understanding the clear meaning of credit Risk Management In State
Bank Of India. It explains about the credit risk scoring and Rating of the Bank. And also
Study of comparative study of Credit Policy with that of its competitor helps in understanding
the fair credit policy of the Bank and Credit Recovery management of the Banks and also its
key competitors.
1.5 Statement of the problem-
The problem of the study is to understand the impact of credit risk management for workers
in the indian banking sector, by helping administrators to predict the extent of variation in
profits when managing bank credit risks, considering profits as an important base for decision
makers inside and outside commercial banking facilities, and since bank credit is one of the
most dangerous Functions of commercial banks on which the strength of assets and the health
of their financial position depends.
In order to face the failures that occurred in the economic markets, which were revealed by
the global financial crisis, the Basel III Committee has presented a set of basic reforms within
the international legislative frameworks, these reforms that would strengthen the level of
banking commitment, detailed prudential measures, and the necessary instructions, which In
turn, it will increase the flexibility of banking institutions in times of financial and economic
crises .Accordingly, the problem of the study is summarized about the extent to which there is
an impact of credit risk management on the Indian banking banking sector.
1.6 Scope of the study-
Establishing appropriate credit risk environment.
Operating under sound credit granting process.
Maintaining an appropriate credit administration, measurement & Monitoring Ensuring
adequate control over credit risk.
Banks should have a credit risk strategy which in our case is communicated throughout the
organization through credit policy.
Two fundamental approaches to credit risk management:-
9.The internally oriented approach centres on estimating both the expected cost and volatility
of future credit losses based on the firm’s best assessment. Future credit losses on a given
loan are the product of the probability that the borrower will default and the portion of the
amount lent which will be lost in the event of default. The portion which will be lost in the
event of default is dependent not just on the borrower but on the type of loan (eg., some bonds
have greater rights of seniority than others in the event of default and will receive payment
before the more junior bonds).
To the extent that losses are predictable, expected losses should be factored into product
prices and covered as a normal and recurring cost of doing business. i.e., they should be direct
charges to the loan valuation. Volatility of loss rates around expected levels must be covered
through risk-adjusted returns. So total charge for credit losses on a single loan can be
represented by ([expected probability of default] * [expected percentage loss in event of
default]) + risk adjustment * the volatility of ([probability of default * percentage loss in the
event of default]).
Financial institutions are just beginning to realize the benefits of credit risk management
models. These models are designed to help the risk manager to project risk, ensure
profitability, and reveal new business opportunities. The model surveys the current state of
the art in credit risk management. It provides the tools to understand and evaluate alternative
approaches to modelling. This also describes what a credit risk management model should do,
and it analyses some of the popular models. 10
The success of credit risk management models depends on sound design, intelligent
implementation, and responsible application of the model. While there has been significant
progress in credit risk management models, the industry must continue to advance the state of
the art. So far the most successful models have been custom designed to solve the specific
problems of particular institutions. A credit risk management model tells the credit risk
manager how to allocate scarce credit risk capital to various businesses so as to optimize the
risk and return characteristics of the firm. It is important or understand that optimize does not
mean minimize risk otherwise every firm would simply invest its capital in risk less assets. A
credit risk management model works by comparing the risk and return characteristics between
individual assets or businesses. One function is to quantify the diversification of risks. Being
well-diversified means that the firms have no concentrations of risk to say, one geographical
location or one counterparty.
1.7 Methods of data collection-
To fullfill the information about credit risk management in banks, the researcher had used
secondary data collection method:-
Secondary data is the data that has already been collected through primary sources and made
readily available for researchers to use for their own research. It is a type of data that has
already been collected in the past.
A researcher may have collected the data for a particular project, then made it available to be
used by another researcher. The data may also have been collected for general use with no
specific research purpose like in the case of the national census.
Data classified as secondary for particular research may be said to be primary for another
research. This is the case when data is being reused, making it primary data for the first
research and secondary data for the second research it is being used for.
Secondary data- secondary data was also useful to collect the information , the magzines
about the banking system in India,internet,text books , annual reports these secondary data
collection methods had been used to collect the information.
Sampling-
Sampling method used for the project report is the state bank of india.
The sampling method used for collecting data is convenient sampling , the information
selected by researcher conveniently with references and observations. State bank of India was
an example or reference for that ,the branches of this bank observed by researcher and
provide information about credit risk management .
1.8 Methods of data analysis-
The data had been analyzed, using SPSS, by calculating descriptive statistics like
percentages, mean score, standard deviation in large and small banks. One-way
analysis of variance (ANOVA) was conducted to examine the significance of differences
between perceptions of credit managers in large and small banks for each survey item
and F and p values obtained at 0.05 level of significance. The results show that on 15
out of 32 variables tested, the differences between the means of large and small banks
are highly significant (significance is less than or equal to 0.05) or the responses of credit
managers on various CRM problems and obstacles are statistically different. That means
there is a significant difference in perception of credit managers towards CRM
practices/problems of large and small public sector banks in the following areas:
1. The bank has a well-designed credit risk policy and strategy (Q 1): The mean score
for large banks is 4.60(S.D 0.568), and for small banks 4.47(S.D 0.579). F value 4.875
(df 1, 335) at p= 0.028 (Table 1) As such, credit managers in small banks do not
perceive credit policy of their banks as well-designed as in large banks. 2. The
postsanction loan monitoring in the bank is as strong as the loan approval process (Q 7):
The mean score for large banks, 4.05 (S.D 0.975) is higher than for small banks (3.67
with S.D 1.191). F value 10.617 (df 1,335) at p=0.001 (Table 1). Large banks’ risk
managers are more satisfied with their banks’ two fundamental CRM processes, loan
approval and is a significant difference in mean .
: Reduction in processing effort per loan application. F value 6.119 (df 1, 335) at p=0.014.
Regular rating reviews. F value 8.839 (df 1,335) at p=0.003. Reduction in subjectivity in
credit ratings. F value 3.994 (df 1,335) at p=0.046. Internal audits. F value 4.093 (df 336) at
p=0.044. Independence of loan review mechanism. F value 9.857 (df 1,335) at p=0.002. n
all the above five areas, mean scores for small PSBs are less than the large banks. In other
words, the small banks’ risk managers are feeling the need for improvement in these areas,
which are generally the source of various substantive and procedural errors in design and
execution of CRM systems and procedures (Oesterreichische, 2004). It may be concluded that
there are many critical CRM practices where there are significant differences in large and
small Indian public sector banks which require the attention of banks’ top management,
especially of small banks,
mitigate credit risk.
1.9 LIMITATIONS OF STUDY-
There are quite a few things that have to be taken into account when dealing with credits. A
common misconception is the fact that there are downsides only for the debtor. In fact, credits
pose certain amounts of risk to the creditors as well, and that’s why credit risk management is
particularly essential. It’s worth nothing that CLB Solutions is a company that’s capable of
providing actionable and valuable advice when it comes to risk management as well as other
types of financial and accounting services. With this in mind, the term risk in this particular
situation represents the chance of incurring financial or non-financial damage as a result of
the inability of the debtor to make a payment for the credit under any circumstances. So, let’s
take a look at the disadvantages that stem from failing to implement proper credit risk
management strategies.
1. This study is only restricted to State Bank of India only.
2. The result of the study may not be applicable to any other banks.
3. Since the part of the study is based on their perceptions, the findings may change over
theyears in keeping with changes in environmental factor.
4. The present study does not ascertain the views from the borrowers who are not
directlyconcerned with management of non-performing assets.
5. The time constraint was a limiting factor, as more in depth analysis could not be carried.
.6. Some of the information is of confidential in nature that could not be divulged for
thestudy.
7. Employees were not co operative.
CONCLUSION:
The project undertaken has helped a lot in gaining knowledge of the “Credit Policy andCredit
Risk Management” in Nationalized Bank with special reference to State Bank Of India. Cre
dit Policy and Credit Risk Policy of the Bank has become very vital in thesmoot h operation
of the banking activities. Credit Policy of the Bank provide s theframework to determine (a)
whether or not to extend credit to a customer an d (b) howmuch credit to extend. The Project
work has certainly enriched the knowledge abo ut theeffective management of “Credit
Policy” and “Credit Risk Management” in banking sector.
“Credit Policy” and “Credit Risk Management” is a vast subject and it is verydifficult to cove
r all the aspects within a short period. However, every effort has been made to cover most of t
he important aspects, which have a direct bearing onimproving the financial performance of
Banking Industry
To sum up, it would not be out of way to mention here that the State Bank Of Indi a has given
special inputs on “Credit Policy” and “Credit Risk Management”.In pursuance of the instructi
ons and guidelines issued by the Reserve Bank of India, the State bank Of India is granting
and expan ding credit to all sectors.
The concerted efforts put in by the Management and Staff of State Bank Of Indiahas helped
the Bank in achie ving remarkable progress in almost all the important parameters. The Bank
is marching ahead in the d irection of achieving the Number-1 position in the Banking Indus
CHAPTER II
THEROTICAL BACKGROUND
2.1 Background of the project topic
2.2 key elements
2.3 concept
2.4Advantages
2.5 Disadvantages
2.6 Conclusion
2.1 Background Of Project Topic:
Credit risk is defined as the potential that a bank borrower or counterparty will fail to meet its
obligations in accordance with agreed terms, or in other words it is defined as the risk that a
firm’s customer and the parties to which it has lent money will fail to make promised
payments is known as credit risk The exposure to the credit risks large in case of financial
institutions, such commercial banks when firms borrow money they in turn expose lenders to
credit risk, the risk that the firm will default on its promised payments. As a consequence,
borrowing exposes the firm owners to the risk that firm will be unable to pay its debt and thus
be forced to bankruptcy CREDIT:
The word ‘credit’ comes from the Latin word ‘cruder’, meaning ‘trust’. When sellers transfer
his wealth to a buyer who has agreed to pay later, there is a clear implication of trust that the
payment will be made at the agreed date. The credit period and the amount of credit depend
upon the degree of trust. Credit is an essential marketing tool. It bears a cost, the cost of the
seller having to borrow until the customers payment arrives. Ideally, that cost is the price but,
as most customers pay later than agreed, the extra unplanned cost erodes the planned net
profit.
RISK:
Risk is defined as uncertain resulting in adverse out come, adverse in relation to planned
objective or expectation. It is very difficult o find a risk free investment. An important input
to risk management is risk assessment. Many public bodies such as advisory committees
concerned with risk management.
There are mainly three types of risk, they are follows:-
•Market risk
•Credit Risk
•Operational risk
Risk analysis and allocation is central to the design of any project finance, risk
management is of paramount concern. Thus quantifying risk along with profit projections is
usually the first step in gauging the feasibility of the project. once risk have been identified
they can be allocated to participants and appropriate mechanisms put in place.
MARKET RISK:
Market risk is the risk of adverse deviation of the mark to market value of the trading
portfolio, due to market movement, during the period required to liquidate the transactions.
OPERTIONAL RISK:
Operational risk is one area of risk that is faced by all organization s. More complex the
organization more exposed it would be operational risk. This risk arises due to deviation from
normal and planned functioning of the system procedures, technology and human failure of
omission and commission. Result of deviation from normal functioning is reflected in the
revenue of the organization, either by the way of additional expenses or byway of loss of
opportunity.
CREDIT RISK:
Credit risk is defined as the potential that a bank borrower or counterparty will fail to
meet its obligations in accordance with agreed terms, or in other words it is defined as the risk
that a firm’s customer and the parties to which it has lent money will fail to make promised
payments is known as credit risk.
MARKET RISK:
Market risk is the risk of adverse deviation of the mark to market value of the trading
portfolio, due to market movement, during the period required to liquidate the transactions.
OPERTIONAL RISK:
Operational risk is one area of risk that is faced by all organization s. More complex
the organization more exposed it would be operational risk. This risk arises due to deviation
from normal and planned functioning of the system procedures, technology and human failure
of omission and commission. Result of deviation from normal functioning is reflected in the
revenue of the organization, either by the way of additional expenses or byway of loss of
opportunity.
CREDIT RISK:
Credit risk is defined as the potential that a bank borrower or counterparty will fail to
meet its obligations in accordance with agreed terms, or in other words it is defined as the risk
that a firm’s customer and the parties to which it has lent money will fail to make promised
payments is known as credit risk.
Credit Risk Management in State Bank Of India The exposure to the credit risks large
in case of financial institutions, such commercial banks when firms borrow money they in turn
expose lenders to credit risk, the risk that the firm will default on its promised payments. As a
consequence, borrowing exposes the firm owners to the risk that firm will be unable to pay its
debt and thus be forced to bankruptcy.
Banks as intermediaries between ‘savers’ and ‘investors’ accept deposits from public
and lend them to entrepreneurs to earn profits. Once the money is lent, the borrowers are
supposed to return that lent money and the interest thereon. Thus, every credit decision
implies that the borrower’s financial position will remain steady and improve throughout.
This however, need not necessarily be true always as the projected cash flows are always
impacted by market variables like interest rate hikes and accompanying liquidity strains,
increased competition, business cycles, economic and fiscal policies of Government and
International bodies like bank for international settlement. Hence, repayments are not always
certain. There is ample scope for a borrower to default from his commitments resulting in
credit risk to a bank. Credit risk is the potential loss that a bank may be subjected to because
of inability of a counter party (borrower) to meet its (his) obligations. It is defined by the
losses in case of default of a borrower or in the event of a deterioration of the borrower’s
credit quality the assets of a bank whether a loan or investment carries credit risk. It simply
define as the potential that a bank. Borrower or counter party will fail to meet its obligations
in accordance with agreed terms.
Credit risk is defined by the Reserve Bank of India as the possibility of losses associated with
diminution in the credit quality of borrowers or counterparties. It involves inability or
unwillingness of a customer to meet commitments in relation to lending, trading, hedging,

settlement and other financial transactions.
Alternatively, losses result from reduction in portfolio value arising from actual or perceived
deterioration in credit quality. Credit risk emanates from a bank’s dealing with an individual,
corporate, bank, financial institution. In view of above mentioned developments the financial
market is now more vulnerable and risky than in the past. Banks in the process of financial
Intermediation are facing various kinds of financial and non financial risk viz. credit risk,
liquidity risk, operational risk etc. These risks are highly interdependent. However, Indian
banks particularly Public Sector Banks have little idea about what is risk, when and where it
occurs, how to measure it and how risk can be repelled or avoided. Thus, the most critical
task before bank management is to put in place sound participation and framework of risk
management and control. The Reserve Bank of India has issued comprehensive guidelines to
banks asking to put in place proper risk management structure to improve the ability to
identify, measure, monitor and control the overall level of risk undertaken. Public Sector
banks should assess their risk properly, maintain NPAs and Capital Adequacy Ratio within
limit fixed by the RBI and Basel Accord. Taking above facts into consideration the present
study aims to make a systematic study on risk management in Indian Public Sector banks.
For any lender the importance of credit risk measurement (CRM) is paramount. It is the basis
for which a lender can calculate the likelihood of a borrower defaulting on a loan or meet
other contractual obligations. More broadly, credit risk management attempts to measure the
probability that a lender will not receive the owed principal and accrued interest, which if
allowed to happen, will lead to a loss and increase costs for collecting the debt owed.
In simple terms, credit risks are calculated based on a borrower’s ability to repay the amount
lent to them. Before a bank or an alternative lender issues a consumer loan they will assess
the credit risk of the individual on what is more commonly known as the five
C’s: credit history, capacity to repay, capital, and finally the overall loan’s conditions and
collateral.
For other debt instruments, such as bonds, investors will also assess risk, often by reviewing
its credit rating. Ratings agencies like Moody’s and Standard & Poor use various CRM
techniques to evaluate the credit risk of investing in thousands of corporate and state-backed
bonds on a continual basis. Ratings agencies use a relatively simple method for conveying the
credit worthiness of a bond, with investors looking for a safe investment likely to lean
towards purchasing AAA-rated bonds which carry a low default risk. Meanwhile, investors
that have a strong appetite for risk, may look at lower rated bonds, more commonly referred
to as junk bonds, which carry a significantly higher chance of default in exchange for higher
yields than higher rated, investment grade debt.
CONTRIBUTORS OF CREDIT RISK:
•Corporate assets
•Retail assets
•Non-SLR portfolio
•May result from trading and banking book
•Inter bank transactions
•Derivatives
•Settlement, etc
2.2 KEY ELEMENTS OF CREDIT RISK MANAGEMENT:
•Establishing appropriate credit risk environment
•Operating under sound credit granting process
•Maintaining an appropriate credit administration, measurement & Monitoring
•Ensuring adequate control over credit risk
•Banks should have a credit risk strategy which in our case is communicated throughout the
organization through credit policy
Banking in India has its origin as carry 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 the 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 East India
Company, it was to turn of the agency houses top 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 19th 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 and were independent units and functioned well.
These three banks were amalgamated in 1920 and The Imperial Bank of India was established
on the 27th Jan 1921, with the passing of the SBI Act in1955, the undertaking of The Imperial
Bank of India was taken over by the newly constituted SBI. The Reserve Bank which is the
Central Bank was created in 1935 by passing of RBI Act 1934, in the wake of 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 19th 1969, 14 Major Banks of
the country were nationalized and in 15th April 1980 six more commercial private sector
banks were also taken over by the government. The Indian Banking industry, which is
governed by the Banking Regulation Act of India 1949, can be broadly classified into two
major categories, on-scheduled banks and scheduled banks. Scheduled Banks comprise
commercial banks and the co-operative banks.
Credit Risk Management in State Bank Of India The first phase of financial reforms resulted
in the nationalization of 14 major banks in1969 and resulted in a shift from class banking to
mass banking. This in turn resulted in the significant growth in the geographical coverage of
banks. Every bank had to earmark a min percentage of their loan portfolio to sectors
identified as “priority sectors” the manufacturing sector also grew during the 1970’s in
protected environments and the banking sector was a critical source. The next wave of
reforms saw the nationalization of 6more commercial banks in 1980 since then the number of
scheduled commercial banks increased four- fold and the number of bank branches increased
to eight fold. After the second phase of financial sector reforms and liberalization of the
sector in the early nineties. The PSB’s found it extremely difficult to complete with the new
private sector banks and the foreign banks. The new private sector first made their appearance
after the guidelines permitting them were issued in January 1993.
Two fundamental approaches to credit risk management:-
The internally oriented approach centers on estimating both the expected cost and volatility of
future credit losses based on the firm’s best assessment.-Future credit losses on a given loan
are the product of the probability that the borrower will default and the portion of the amount
lent which will be lost in the event of default. The portion which will be lost in the event of
default is dependent not just on the borrower but on the type of loan (e.g., some bonds have
greater rights of seniority than others in the event of default and will receive payment before
the more junior bonds).-To the extent that losses are predictable, expected losses should be
factored into product prices and covered as a normal and recurring cost of doing business. i.e.
They should be direct charges to the loan valuation. Volatility of loss rates around expected
levels must be covered through riskadjusted returns.-So total charge for credit losses on a
single loan can be represented by ([expected probability of default] * [expected percentage
loss in event of default]) + risk adjustment * the volatility of ([probability of default *
percentage loss in the event of default]).Financial institutions are just beginning to realize the
benefits of credit risk management models. These models are designed to help the risk
manager to project risk, ensure profitability, and reveal new business opportunities. The
model surveys the current state of the art in credit risk management. It provides the tools to
understand and evaluate alternative approaches to modeling.
This also describes what a credit risk management model should do, and it analyses some of
the popular models. The success of credit risk management models depends on sound design,
intelligent implementation, and responsible application of the model. While there has Credit
Risk Management in State Bank Of India been significant progress in credit risk management
models, the industry must continue to advance the state of the art. So far the most successful
models have been custom designed to solve the specific problems of particular institutions. A
credit risk management model tells the credit risk manager how to allocate scarce credit risk
capital to various businesses so as to optimize the risk and return characteristics of the firm. It
is important or understand that optimize does not mean minimize risk otherwise every firm
would simply invest its capital in risk less assets. A credit risk management model works by
comparing the risk and return characteristics between individual assets or businesses. One
function is to quantify the diversification of risks. Being well-diversified means that the firms
has no concentrations of risk to say, one geographical location or one counterparty.
Credit rating -
Steps to follow to minimize different type of risks:-
Definition:-
Credit rating is the process of assigning a letter rating to borrower indicating that
creditworthiness of the borrower. Rating is assigned based on the ability of the borrower
(company). To repay the debt and his willingness to do so. The higher rating of company the
lower the probability of its default.
Use in decision making:-
Credit rating helps the bank in making several key decisions regarding credit
including1.whether to lend to a particular borrower or not; what price to charge? 2.what are
the product to be offered to the borrower and for what tenure?3.at what level should
sanctioning be done, it should however be noted that credit rating is one of inputs used in
credit decisions. There are various factors (adequacy of borrowers, cash flow, collateral
provided, and relationship with the borrower) Probability of the borrowers default based on
past data.
2.3 Main features of the rating tool-
Comprehensive coverage of parameters
bjective and objective parameters
Credit Risk Management in State Bank Of India Internal credit ratings are the summary
indicators of risk for the bank’s individual credit exposures. It plays a crucial role in credit
risk management architecture of any bank and forms the cornerstone of approval process.
Based on the guidelines provided by Boston Consultancy Group (BCG), SBI adopted credit
rating tool. The rating tool for SME borrower assigns the following Weight ages to each one
of the four main categories i.e.
Past performance of the industry its future outlook and macro economic factors.
2.4 Advantages
Some of the advantages are given below:
A good credit risk management scheme improves the capacity to foresee which helps in the
evaluation of the potential risk in every transaction.
The banks use the credit risks model to examine the degree of lending which can be financed
to prospected or new borrowers.
Credit risk management is used as an alternative to traditional techniques for pricing options.
2.5 Disadvantages
Some of the disadvantages are given below:
Risk management can be a very expensive liaison.
Although there are some quantitative techniques to evaluate credit risk. But such decisions are
not accurate as it’s not possible to assess risk completely.
Generally, lenders apply one rigid model to all mitigation approach, which is wrong.
Difficulty of measuring credit risk:-
Measuring credit risk on a portfolio basis is difficult. Banks and financial institutions
traditionally measure credit exposures by obligor and industry. They have only recently
attempted to define risk quantitatively in a portfolio context e.g., a value-at-risk (VaR)
framework. Although banks and financial institutions have begun to develop internally, or
purchase, systems that measure VaR for credit, bank managements do not yet have
confidence in the risk measures the systems produce. In particular, measured risk levels
depend heavily on underlying assumptions and risk managers often do not have great
confidence in those parameters. Since credit derivatives exist principally to allow for the
effective transfer of credit risk, the difficulty in measuring credit risk and the absence of
confidence in the result of risk measurement have appropriately made banks cautious Credit
Risk Management in State Bank Of India Measurement difficulties explain why banks and
financial institutions have not, until very recently, tried to implement measures to calculate
Value-at-Risk (VaR) for credit. The VaR concept, used extensively for market risk, has
become so well accepted that banks and financial institutions supervisors allow such
measures to determine capital requirements for trading portfolios. The models created to
measure credit risk are new, and have yet to face the test of an economic downturn. Results of
different credit risk models, using the same data, can widely. Until banks have greater
confidence in parameter inputs used to measure the credit risk in their portfolios. They will,
and should, exercise caution in using credit derivatives to manage risk on a portfolio basis.
Such models can only complement, but not replace, the sound judgment of seasoned credit
risk managers.
Credit Risk:-
The most obvious risk derivatives participants’ face is credit risk. Credit risk is the risk to
earnings or capital of an obligor’s failure to meet the terms of any contract the bank or
otherwise to perform as agreed. For both purchasers and sellers of protection, credit
derivatives should be fully incorporated within credit risk management process. Bank
management should integrate credit derivatives activity in their credit underwriting and
administration policies, and their exposure measurement, limit setting, and risk
rating/classification processes. They should also consider credit derivatives activity in their
assessment of the adequacy of the allowance for loan and lease losses (ALLL) and their
evaluation of concentrations of credit. There a number of credit risks for both sellers and
buyers of credit protection, each of which raises separate risk management issues. For banks
and financial institutions selling credit protection the primary source of credit is the reference
asset or entity.
Credit Risk:
Banks as intermediaries between ‘savers’ and ‘investors’ accept deposits from public and lend
them to entrepreneurs to earn profits. Once the money is lent, the borrowers are supposed to
return that lent money and the interest thereon. Thus, every credit decision implies that the
borrower’s financial position will remain steady and improve throughout.
This however, need not necessarily be true always as the projected cash flows are always
impacted by market variables like interest rate hikes and accompanying liquidity strains,
increased competition, business cycles, economic and fiscal policies of Government and
International bodies like bank for international settlement. Hence, repayments are not always
certain. There is ample scope for a borrower to default from his commitments resulting in
credit risk to a bank.
Credit risk is the potential loss that a bank may be subjected to because of inability of a
counter party (borrower) to meet its (his) obligations. It is defined by the losses in case of
default of a borrower or in the event of a deterioration of the borrower’s credit quality the
assets of a bank whether a loan or investment carries credit risk. It simply define as the
potential that a bank. Borrower or counter party will fail to meet its obligations in accordance
with agreed terms. Credit risk is defined by the Reserve Bank of India as the possibility of
losses associated with diminution in the credit quality of borrowers or counterparties. It
involves inability or unwillingness of a customer to meet commitments in relation to lending,
trading, hedging, settlement and other financial transactions.
Alternatively, losses result from reduction in portfolio value arising from actual or perceived
deterioration in credit quality. Credit risk emanates from a bank’s dealing with an individual,
corporate, bank, financial institution. In view of above mentioned developments the financial
market is now more vulnerable and risky than in the past. Banks in the process of financial
Intermediation are facing various kinds of financial and non financial risk viz. credit risk,
liquidity risk, operational risk etc. These risks are highly interdependent. However, Indian
banks particularly Public Sector Banks have little idea about what is risk, when and where it
occurs, how to measure it and how risk can be repelled or avoided. Thus, the most critical
task before bank management is to put in place sound participation and framework of risk
management and control. The Reserve Bank of India has issued comprehensive guidelines to
banks asking to put in place proper risk management structure to improve the ability to
identify, measure, monitor and control the overall level of risk undertaken. Public Sector
banks should assess their risk properly, maintain NPAs and Capital Adequacy Ratio within
limit fixed by the RBI and Basel Accord. Taking above facts into consideration the present
study aims to make a systematic study on risk management in Indian Public Sector banks.
Credit Risk Management in State Bank Of India
Managing credit risk:-
For banks and financial institutions selling credit protection through a credit derivative,
management should complete a financial analysis of both reference obligor(s) and the
counterparty (in both default swaps and TRSs), establish separate credit limits for each, and
assign appropriate risk rating. The analysis of the reference obligor should include the same
level of scrutiny that a traditional commercial borrower would receive. Documentation in the
credit file should support the purpose of the transaction and credit worthiness of the reference
obligor. Documentation should be sufficient to support the reference obligor. Documentation
should be sufficient to support the reference obligor’s risk rating. It is especially important for
banks and financial institutions to use rigorous due diligence procedure in originating credit
exposure via credit derivative. Banks and financial institutions should not allow the ease with
which they can originate credit Exposure in the capital markets via derivatives to lead to lax
underwriting standards, or to assume exposures indirectly that they would not originate
directly. For banks and financial institutions purchasing credit protection through a credit
derivative, management should review the creditworthiness of the counterparty, establish
accredit limit, and assign a risk rating. The credit analysis of the counterparty should be
consistent with that conducted for other borrowers or trading counterparties.
Management should continue to monitor the credit quality of the underlying credits hedged.
Although the credit derivatives may provide default protection, in many instances the bank
will retain the underlying credits after settlement or maturity of the credit derivatives. In the
event the credit quality deteriorates, as legal owner of the asset, management must take
actions necessary to improve the credit. Banks and financial institutions should measure
credit exposures arising from credit derivatives transactions and aggregate with other credit
exposures to reference entities and Credit Risk Management in State Bank Of India
counterparties. These transactions can create highly customized exposures and the level of
risk/protection can vary significantly between transactions. Measurement should document
and support their exposures measurement methodology and underlying assumptions. The cost
of protection, however, should reflect the probability of benefiting from this basis risk. More
generally, unless all the terms of the credit derivatives match those of the underlying
exposure, some basis risk will exist, creating an exposure for the terms and conditions of
protection agreements to ensure that the contract provides the protection desired, and that the
hedger has identified sources of basis risk.
A portfolio approach to credit risk management:-
Since the 1980s, Banks and financial institutions have successfully applied modern portfolio
theory (MPT) to market risk. Many banks and financial institutions are now using earnings at
risk (Ear) and Value at Risk (VaR) models to manage their interest rate and market RISK
EXPOSURES. Unfortunately, however, even through credit risk remains the largest risk
facing most banks and financial institutions, the application of MPT to credit risk has lagged.
The slow development toward a portfolio approach for credit risk results for the following
factors:The traditional view of loans as hold-to-maturity assets.-The absence of tools enabling
the efficient transfer of credit risk to investors while continuing to maintain bank customer
relationships.-The lack of effective methodologies to measure portfolio credit risk.Data
problems Banks and financial institutions recognize how credit concentrations can adversely
impact financial performance. As a result, a number of sophisticated institutions are actively
pursuing quantitative approaches to credit risk measurement. While date problems remain an
obstacle, these industry practitioners are making significant progress toward developing
Credit Risk Management in State Bank Of India tools that measure credit risk in a portfolio
context. They are also using credit derivatives to transfer risk efficiently while preserving
customer relationships. The combination of these two developments has precipitated vastly
accelerated progress in managing credit risk in a portfolio context over the past several years.
Asset – by – asset approach:-
Traditionally, banks have taken an asset – by – asset approach to credit risk management.
While each bank’s method varies, in general this approach involves periodically evaluating
the credit quality of loans and other credit exposures. Applying a accredit risk rating and
aggregating the results of this analysis to identify a portfolio’s expected losses. The
foundation of thee asset-by-asst approach is a sound loan review and internal credit risk rating
system. A loan review and credit risk rating system enables management to identify changes
in individual credits, or portfolio trends, in a timely manner. Based on the results of its
problem loan identification, loan review and credit risk rating system management can make
necessary modifications to portfolio strategies or increase the supervision of credits in a
timely manner.
Banks and financial institutions must determine the appropriate level of the allowances for
loan and losses (ALLL) on a quarterly basis. On large problem credits, they assess ranges of
expected losses based on their evaluation of a number of factors, such as economic conditions
and collateral. On smaller problem credits and on ‘pass’ credits, banks commonly assess the
default probability from historical migration analysis. Combining the results of the evaluation
of individual large problem credits and historical migration analysis, banks estimate expected
losses for the portfolio and determine provisions requirements for the ALLL.Default
probabilities do not, however indicate loss severity:
i.e., how much the bank will lose if a credit defaults. A credit may default, yet expose a bank
to a minimal loss risk if the loan is well secured. On the other hand, a default might result in a
complete loss.
India Therefore, banks and financial institutions currently use historical migration matrices
with information on recovery rates in default situations to assess the expected potential in
their portfolios.
Portfolio approach:-
While the asset-by-asset approach is a critical component to managing credit risk, it does not
provide a complete view of portfolio credit risk where the term ‘risk’ refers to the possibility
that losses exceed expected losses. Therefore, to again greater insights into credit risk, banks
increasingly look to complement the asset-by-asset approach with the quantitative portfolio
review using a credit model. While banks extending credit face a high probability of a small
gain (payment of interest and return of principal), they face a very low probability of large
losses. Depending, upon risk tolerance, investor may consider a credit portfolio with a larger
variance less risky than one with a smaller variance if the small variance portfolio has some
probability of an unacceptably large loss. One weakness with the asset-by-asset approaches
that it has difficulty and measuring concentration risk. Concentration risk refers to additional
portfolio risk resulting from increased exposure to a borrower or to a group of correlated
borrowers. for example the high correlation between energy and real estate prices precipitated
a large number of failures of banks that had credit concentrations in those sectors in the mid
1980s.Two important assumptions of portfolio credit risk models are:1.the holding period of
planning horizon over which losses are predicted2.How credit losses will be reported by the
model. Models generally report either a default or market value distribution.
Credit Risk Management in State Bank Of India The objective of credit risk modeling is to
identify exposures that create an unacceptable risk/reward profile. Such as might arise from
credit concentration. Credit risk management seeks to reduce the unsystematic risk of a
portfolio by diversifying risks. As banks and financial institutions gain greater confidence in
their portfolio modeling capabilities. It is likely that credit derivatives will become a more
significant vehicle in to manage portfolio credit risk. While some banks currently use credit
derivatives to hedge undesired exposures much of that actively involves a desire to reduce
capital requirements.
APPRAISAL OF THE FIRMS POSITION ON BASIS OF FOLLOWING OTHER

PARAMETERS
1. Managerial Competence
2. Technical Feasibility
3. Commercial viability
4. Financial Viability
Managerial Competence:
Technical Feasibility
Credit Risk Management in State Bank Of India
Commercial Viability
Financial Viability:
financial position of the borrower in coming years.
Credit investigation report-
Branch prepares Credit investigation report in order to avoid consequence in later stage Credit
investigation report should be a part of credit proposal. Bank has to submit the duly
completed credit investigation reports after conducting a detailed credit investigation as per
guidelines.
Some of the guidelines in this regards as follow: Credit Risk Management in State Bank
Of India
based only on merits of flagships concerns of
the group, then such support should also be compiled in respect of subject flagship in concern
besides the applicant company.
should
ensure participation of rating officer in compilation of this report.
limit of above 25 Lakhs and or non fund based of above Rs. 50 Lakhs.
kept informed that the compilation of this report is one of the

requirements in the connection with the processing for consideration of the proposal.
the
financial institution to the party and terms and conditions of the sanction should studied in
detail.
the observations/lapses in
the following terms of sanction.
re schedule of loans etc terms and
conditions should be highlighted.
by the
bank. To get the present condition of the party.
excess
drawings, return of cheques etc).
present / other bankers and enquiries should be made with a elicit information on conduct of
account etc.
. Risk Management Structure
2.1 A major issue in establishing an appropriate risk management organisation structure is

choosing between a centralised and decentralised structure. The global trend is towards
centralising risk management with integrated treasury management function to benefit from
information on aggregate exposure, natural netting of exposures, economies of scale and
easier reporting to top management. The primary responsibility of understanding the risks run
by the bank and ensuring that the risks are appropriately managed should clearly be vested
with the
Board of Directors. The Board should set risk limits by assessing the bank’s risk and
riskbearing capacity. At organisational level, overall risk management should be assigned to
an independent Risk Management Committee or Executive Committee of the top Executives
that
reports directly to the Board of Directors. The purpose of this top level committee is to
empower one group with full responsibility of evaluating overall risks faced by the bank and
determining the level of risks which will be in the best interest of the bank. At the same time,
the Committee should hold the line management more accountable for the risks under their
control, and the performance of the bank in that area. The functions of Risk Management
Committee should essentially be to identify, monitor and measure the risk profile of the bank.
The Committee should also develop policies and procedures, verify the models that are used
for pricing complex products, review the risk models as development takes place in the
markets and also identify new risks. The risk policies should clearly spell out the quantitative
prudential limits
on various segments of banks’ operations. Internationally, the trend is towards assigning risk
limits in term of portfolio standards or Credit at Risk (credit risk) and Earnings at Risk and
Value at Risk(market risk). The Committee should design stress scenarios to measure the
impact of unusual risk.
presentative. They
should be interviewed and compilation of opinion should be done.
Enquiries should made regarding the quality of product, payment terms, and period overdue
which should be mentioned clearly in the report.
The most obvious risk derivatives participants’ face is credit risk. Credit risk is the risk to
earnings or capital of an obligor’s failure to meet the terms of any contract the bank or
otherwise to perform as agreed. For both purchasers and sellers of protection, credit
derivatives should be fully incorporated within credit risk management process. Bank
management should integrate credit derivatives activity in their credit underwriting and
administration policies, and their exposure measurement, limit setting, and risk
rating/classification processes. They should also consider credit derivatives activity in their
assessment of the adequacy of the allowance for loan and lease losses (ALLL) and their
evaluation of concentrations of credit. There a number of credit risks for both sellers and
buyers of credit protection, each of which raises separate risk management issues. For banks
and financial institutions selling credit protection the primary source of credit is the reference
asset or entity.
Managing credit risk: For banks and financial institutions selling credit protection through a
credit derivative, management should complete a financial analysis of both reference
obligor(s) and the counterparty (in both default swaps and TRSs), establish separate credit
limits for each, and assign appropriate risk rating. The analysis of the reference obligor should
include the same level of scrutiny that a traditional commercial borrower would receive.
Documentation in the credit file should support the purpose of the transaction and credit
worthiness of the reference obligor. Documentation should be sufficient to support the
reference obligor. Documentation should be sufficient to support the reference obligor’s risk
rating. It is especially important for banks and financial institutions to use rigorous due
diligence procedure in originating credit exposure via credit derivative. Banks and financial
institutions should not allow the ease with which they can originate credit exposure in the
capital markets via derivatives to lead to lax underwriting standards, or to assume exposures
indirectly that they would not originate directly.
For banks and financial institutions purchasing credit protection through a credit derivative,
management should review the creditworthiness of the counterparty, establish a credit limit,
and assign a risk rating. The credit analysis of the counterparty should be consistent with that
conducted for other borrowers or trading counterparties. Management should continue to
monitor the credit quality of the underlying credits hedged. Although the credit derivatives
may provide default protection, in many instances the bank will retain the underlying credits
after settlement or maturity of the credit derivatives. In the event the credit quality
deteriorates, as legal owner of the asset, management must take actions necessary to improve
the credit.
Banks and financial institutions should measure credit exposures arising from credit
derivatives transactions and aggregate with other credit exposures to reference entities and
counterparties. These transactions can create highly customized exposures and the level of
risk/protection can vary significantly between transactions. Measurement should document
and support their exposures measurement methodology and underlying assumptions
While financial institutions have faced difficulties over the years for a multitude of reasons,
the major cause of serious banking problems continues to be directly related to lax credit
standards for borrowers and counterparties, poor portfolio risk management, or a lackof
attention to changes in economic or other circumstances that can lead to a deterioration in the
credit standing of a bank’s counterparties. This experience is common in both G-10 and
nonG-10 countries.
2. Credit risk is most simply defined as the potential that a bank borrower or
counterparty will fail to meet its obligations in accordance with agreed terms. The goal of
credit risk management is to maximise a bank’s risk-adjusted rate of return by maintaining
credit risk exposure within acceptable parameters. Banks need to manage the credit risk
inherent in the entire portfolio as well as the risk in individual credits or transactions. Banks
should also consider the relationships between credit risk and other risks. The effective
management of credit risk is a critical component of a comprehensive approach to risk
management and essential to the long-term success of any banking organisation.
3. For most banks, loans are the largest and most obvious source of credit risk; however,
other sources of credit risk exist throughout the activities of a bank, including in the banking
book and in the trading book, and both on and off the balance sheet. Banks are increasingly
facing credit risk (or counterparty risk) in various financial instruments other than loans,
including acceptances, interbank transactions, trade financing, foreign exchange transactions,
financial futures, swaps, bonds, equities, options, and in the extension of commitments and
guarantees, and the settlement of transactions.
4. Since exposure to credit risk continues to be the leading source of problems in banks
world-wide, banks and their supervisors should be able to draw useful lessons from past
experiences. Banks should now have a keen awareness of the need to identify, measure,
monitor and control credit risk as well as to determine that they hold adequate capital against
these risks and that they are adequately compensated for risks incurred. The Basel Committee
is issuing this document in order to encourage banking supervisors globally to promote sound
practices for managing credit risk. Although the principles contained in this paper are most
important.
Each bank should develop a credit risk strategy or plan that establishes the objectives guiding
the bank’s credit-granting activities and adopt the necessary policies and procedures for
conducting such activities. The credit risk strategy, as well as significant credit risk policies,
should be approved and periodically (at least annually) reviewed by the board of directors.The
board needs to recognise that the strategy and policies must cover the many activities of the
bank in which credit exposure is a significant risk.
10. The strategy should include a statement of the bank’s willingness to grant credit based
on exposure type (for example, commercial, consumer, real estate), economic sector,
geographical location, currency, maturity and anticipated profitability. This might also
include the identification of target markets and the overall characteristics that the bank
would want to achieve in its credit portfolio (including levels of diversification and
concentration tolerances).
11. The credit risk strategy should give recognition to the goals of credit quality, earnings
and growth. Every bank, regardless of size, is in business to be profitable and,
consequently, must determine the acceptable risk/reward trade-off for its activities,
factoring in the cost of capital. A bank’s board of directors should approve the bank’s
strategy for selecting risks and maximizing profits. The board should periodically
review the financial results of the bank and, based on these results, determine if
changes need to be made to the strategy. The board must also determine that the
bank’s capital level is adequate for the risks assumed throughout the entire
organization.
12. The credit risk strategy of any bank should provide continuity in approach.
Therefore, the strategy will need to take into account the cyclical aspects of any economy and
the resulting shifts in the composition and quality of the overall credit portfolio. Although the
strategy should be periodically assessed and amended, it should be viable in the long-run and
through various economic cycles.
13. The credit risk strategy and policies should be effectively communicated throughout
the banking organisation. All relevant personnel should clearly understand the bank’s
approach to granting and managing credit and should be held accountable for
complying with established policies and procedures.
14. The board should ensure that senior management is fully capable of managing the
credit activities conducted by the bank and that such activities are done within the risk
strategy, policies and tolerances approved by the board. The board should also
regularly (i.e. at least annually), either within the credit risk strategy or within a
statement of credit policy, approve the bank’s overall credit granting criteria
(including general terms and conditions).
2.2 Conclusion:-
The given information is to explain the concept with proper examples ,the background of the company
or bank .why the topic has been selected ,how its impact on the banking industry .How it works these
types of points has been covered in the above information. The theoretical background refers to the
theory which is explained to know the concept.
CHAPTER NO. 3
PROFILE OF COMPANY
3.1 Introduction.
3.2 Profile of the state bank of India
3.3 Conclusion
SBI is entering into many

new businesses with strategic
tie ups – Pension Funds,
General
Insurance, Custodial Services,

Private Equity, Mobile
Banking, Point of Sale
Merchant Acquisition,
Advisory Services, organized
items and so on – every one of
these activities having a
massive potential for
development.SBI is moving
forward with forefront
innovation and imaginative
new saving money models, to
strengthen its presence and
widen its client base. The
bouquet of services provided
by SBI includes Personal
Banking, International,
Banking,
Agriculture / Rural and

Corporate Banking, SME, Government Business and Domestic Treasury. SBI is a universally
acknowledged regional banking giant and has 20% market share in deposits and loans among
Indian commercial banks.
As on 31.03.2015 revenue earned by SBI was Rs. 2.573 trillion and Net Income was Rs.
175.2 billion. By the end of December 2013, SBI had assets worth US$388 billion and 17,000
branches, including 190 foreign offices, making it the largest banking and financial services
company in India by assets.SBI has acquired local banks as part of rescue efforts. Bank of
Bihar was acquired in 1969 along with its 28 branches. Krishna ram Baldeo Bank was
acquired in 1975 and the Bank of Cochin in Kerala was acquired in 1985 along with its 120
branches. SBI share is listed in NSE stock market by the symbol of SBIN
Study the company management, company profile, ownership, Board of Directors and
Organization Structure of SBI
COMPANY PROFILE OF SBI, NSE, INDIA
Date of Incorporation 31-Dec-1955
Date of Listing 03-Nov-1994
Management
Name Designation
Rajnish Kumar Chairman
Sanjiv Malhotra Director
Basant Seth Director
Bhaskar Pramanik Director
Rajiv Kumar Director
Pravin Hari Kutumbe Director
Rajnish Kumar Managing Director
State Bank of India (SBI) a Fortune 500 company, is an Indian Multinational, Public Sector
Banking and Financial services statutory body headquartered in Mumbai. The rich heritage
and legacy of over 200 years, accredits SBI as the most trusted Bank by Indians through
generations.
SBI, the largest Indian Bank with 1/4th market share, serves over 45 crore customers through
its vast network of over 22,000 branches, 62617 ATMs/ADWMs, 71,968 BC outlets, with an
undeterred focus on innovation, and customer centricity, which stems from the core values of
the Bank - Service, Transparency, Ethics, Politeness and Sustainability.
The Bank has successfully diversified businesses through its various subsidiaries i.e SBI
General Insurance, SBI Life Insurance, SBI Mutual Fund, SBI Card, etc. It has spread its
presence globally and operates across time zones through 229 offices in 31 foreign countries.
Growing with times, SBI continues to redefine banking in India, as it aims to offer
responsible and sustainable Banking solutions.
SBI provides a range of banking products through its network of branches in India and
overseas, including products aimed at non-resident Indians (NRIs). SBI has 16 regional hubs
and 57 zonal offices that are located at important cities throughout India. Domestic
Samriddhi Bhavan, Kolkata
SBI has over 24000 branches in India.[18] In the financial year 2012–13, its revenue was
₹2.005 trillion (US$27 billion), out of which domestic operations contributed to 95.35% of
revenue. Similarly, domestic operations contributed to 88.37% of total profits for the same
financial year.[18]
Under the Pradhan Mantri Jan Dhan Yojana of financial inclusion launched by Government in
August 2014, SBI held 11,300 camps and opened over 3 million accounts by September,
which included 2.1 million accounts in rural areas and 1.57 million accounts in urban areas.
[19]
State Bank of India (SBI), state-owned commercial bank and financial services company,
nationalized by the Indian government in 1955. SBI maintains thousands of branches
throughout India and offices in dozens of countries throughout the world. The bank’s
headquarters are in Mumbai.
The oldest commercial bank in India, SBI originated in 1806 as the Bank of Calcutta. Three
years later the bank was issued a royal charter and renamed the Bank of Bengal. Along with
the Bank of Bombay (founded 1840) and the Bank of Madras (founded 1843), it was one of
three so-called presidency banks, each of which was jointly owned by the provincial
government and private subscribers. In 1921 the presidency banks were merged to form the
Imperial Bank of India (IBI), which then became the largest commercial enterprise in the
country. In 1955 the government of India and the country’s central bank, the Reserve Bank of
India (founded 1935), assumed joint ownership of IBI, which was renamed the State Bank of
India. Four years later, by the State Bank of India (Subsidiary Banks) Act, banks earlier
operated by individual princely states became subsidiaries of SBI. The Reserve Bank’s share
of SBI was transferred to the government in 2007. Since nationalization, SBI has served the
needs of Indian economic development through rural-development initiatives and microcredit
programs and by financing major agricultural and industrial projects and raising loans for the
government.
SBI is governed by a board of directors headed by a chairman. The chairman and directors of
the bank are appointed by the government.
Formerly Imperial bank of India
Type Public sector undertaking
Traded as • BSE: 500112

• LSE: SBID
• BSE SENSEX Constituent
• NSE NIFTY 50 CONSTITUTENT
ISIN INE062A01020
Industry Banking, financial services
Operating income ₹78,898 crore

(US$10 billion)
(2021)
Net income ₹22,405 crore

(US$3.0 billion)
(2021)
Total assets ₹4,845,619

crore (US$640
billion) (2021)
Total equity ₹274,669

crore (US$36
billion) (2021)
Number 245,642 (March

of 2021)
employees
Parent
Government of
India
Subsidiari • SBI Life

es Insuranc e Ltd
• S BI
Cards
and
Payment
Services
Ltd
• S BI
Gener
Conclusion:-
Any reference chosen for the project report including bank ,company ,or intermediaries has a profile
, its establishment ,its branches, number of employees those points has been covered in profile of the
study. This study shows the profile of state bank of India which is natinalized bank works in all over
the India.
CHAPTER IV
DATA ANALYSIS AND INTERPRETATION
4.1 Introduction
4.2 Demographic analysis
4.3 statistical analysis
4.4 competitors details
4.5 Loans lending details
4.6 Objectives
4.7 Hypothesis
4.8 Conclusion
The success of credit risk management models depends on sound design, intelligent
implementation, and responsible application of the model. While there has been significant
progress in credit risk management models, the industry must continue to advance the state of
the art. So far the most successful models have been custom designed to solve the specific
problems of particular institutions. A credit risk management model tells the credit risk
manager how to allocate scarce credit risk capital to various businesses so as to optimize the
risk and return characteristics of the firm. It is important or understand that optimize does not
mean minimize risk otherwise every firm would simply invest its capital in risk less assets. A
credit risk management model works by comparing the risk and return characteristics between
individual assets or businesses. One function is to quantify the diversification of risks. Being
well-diversified means that the firms have no concentrations of risk to say, one geographical
location or one counterparty.
4.1 Concept of credit risk-
Credit risk is the risk of loss that may occur from the failure of any party to abide by the terms
and conditions of any financial contract, principally, the failure to make required payments on
loans due to an entity.
As a financial intermediary, the project finance division of a bank is exposed to risks that are
particular to its lending and trading businesses and the environment within which it operates.
The major goal of project finance in risk management is to ensure that it understands,
measures, and monitors the various risks that arise and that the organization adheres strictly
to the policies and procedures established to address these risks. Firms have a structured
credit approval process which includes a well-established procedure for comprehensive credit
appraisal.
Banking operations come with the factor of risk; it’s inevitable. In the simplest way possible,
risk is an uncertainty of a situation or event that may happen in the future and for banks, it’s
the uncertainty of an outcome of business investments. The various types of banking risks
may be classified as Strategic risk, Compliance risk, Credit risk, Cyber Security risk,
Liquidity risk, Market risk, Operational risk, etc. Out of these Credit Risk represents the most
important type of risk for commercial banks.
Credit risk
is understood simply as the risk a bank takes while lending out money to borrowers. They
might default and fail to repay the dues in time and these results in losses to the bank. Loan
portfolio management is very important but most times a bank can’t fully assess if it will
retrieve the money back because even if the borrowers have been paying their dues on time,
the economy might show shift and change the way things have always been. So, what do
banks do then? They need to manage their credit risks.
The goal of credit risk management in banks is to maintain credit risk exposure within proper
and acceptable parameters. It is the practice of mitigating losses by understanding the
adequacy of a bank’s capital and loan loss reserves at any given time. For this, banks not only
need to manage the entire portfolio but also individual credits.
Risk Aggregation and Capital Allocation
13.1 Most of internally active banks have developed internal processes and techniques to
assess and evaluate their own capital needs in the light of their risk profiles and business
plans. Such
banks take into account both qualitative and quantitative factors to assess economic capital.
The
Basle Committee now recognises that capital adequacy in relation to economic risk is a
necessary condition for the long-term soundness of banks. Thus, in addition to complying
with the established minimum regulatory capital requirements, banks should critically assess
their internal capital adequacy and future capital needs on the basis of risks assumed by
individual. lines of business, product, etc. As a part of the process for evaluating internal
capital adequacy,
a bank should be able to identify and evaluate its risks across all its activities to determine
whether its capital levels are appropriate.
13.2 Thus, at the bank’s Head Office level, aggregate risk exposure should receive increased
scrutiny. To do so, however, it requires the summation of the different types of risks. Banks,
across the world, use different ways to estimate the aggregate risk exposures. The most
commonly used approach is the Risk Adjusted Return on Capital (RAROC). The RAROC is
designed to allow all the business streams of a financial institution to be evaluated on an equal
footing. Each type of risks is measured to determine both the expected and unexpected losses
using VaR or worst-case type analytical model. Key to RAROC is the matching of revenues,
costs and risks on transaction or portfolio basis over a defined time period. This begins with a
clear differentiation between expected and unexpected losses. Expected losses are covered by
reserves and provisions and unexpected losses require capital allocation which is determined
on the principles of confidence levels, time horizon, diversification and correlation. In this
approach, risk is measured in terms of variability of income. Under this framework, the
frequency distribution of return, wherever possible is estimated and the Standard Deviation
(SD) of this distribution is also estimated. Capital is thereafter allocated to activities as a
function of this risk or volatility measure. Then, the risky position is required to carry an
expected rate of return on allocated capital, which compensates the bank for the associated
incremental risk. By dimensioning all risks in terms of loss distribution and allocating capital
by the volatility of the new activity, risk is aggregated and priced.
13.3 The second approach is similar to the RAROC, but depends less on capital allocation and
more on cash flows or variability in earnings. This is referred to as EaR, when employed to
analyse interest rate risk. Under this analytical framework also frequency distribution of
returns for any one type of risk can be estimated from historical data. Extreme outcome can
be estimated from the tail of the distribution. Either a worst case scenario could be used or
Standard Deviation 1/2/2.69 could also be considered. Accordingly, each bank can restrict the
maximum potential loss to certain percentage of past/current income or market value.
Thereafter, rather than moving from volatility of value through capital, this approach goes
directly to current earnings implications from a risky position. This approach, however, is
based on cash flows and ignores the value changes in assets and liabilities due to changes in
market interest rates. It also depends upon a subjectively specified range of the risky
environments to drive the worst case scenario.
13.4 Given the level of extant risk management practices, most of Indian banks may not be in
a
position to adopt RAROC framework and allocate capital to various businesses units on the
basis of risk. However, at least, banks operating in international markets should develop, by
March 31, 2001, suitable methodologies for estimating economic capital.
PROPOSED RISK WEIGHT TABLE
Credit AAA to A+ to BBB+ BB+ Below Unrated

Assessment AA- A- to BBB- To B- B-
0% 20% 50% 100% 150% 100%

Sovereign(Govt.&
Central Bank)
Claims on Banks
Option 1 20% 50% 100% 100% 150% 100%
Option 2a 20% 50% 50% 100% 150% 50%
Option 2b 20% 20% 20% 50% 150% 20%
20%
Corporate
Option 1 = Risk Weight based on risk weight of the country
CREDIT POLICY:
Bank’s investments in accounts receivable depends on: (a) the volume of credit sales, and (b)
the collection period. There is one way in which the financial manager can affect the volume
of credit sales and collection period and consequently, investment in accounts receivables.
That is through the changes in credit policy. The term credit policy is used to refer to the
combination of three decision variables: (1) credit standards, (2) credit terms, and (3)
collection efforts, on which the financial manager has influence.
Credit Standards:
Credit Standards are criteria to decide the types of customers to whom goods could be sold on
credit. If a firm has more slow-paying customers, its investment in accounts receivable will
increase. The firm will also be exposed to higher risk of default.
Credit Terms:
Credit Terms specify duration of credit and terms of payment by customers. Investment in
accounts receivables will be high if customers are allowed extended time period for making
payments.
Collection Efforts:
Collection efforts determine the actual collection period. The lower the collection period, the
lower the investment in accounts receivable and higher the collection period, the higher the
investment in accounts receivable.
OBJECTIVES OF CREDIT POLICY:
 A balanced growth of the credit portfolio which does not compromise safety.
 Adoption of a forward-looking and market responsive approach for moving into

profitable new areas of lending whish emerges, within the pre-determined exposure
ceilings.
 Sound risk management practices to identify measure, monitor and control credit
risks.
 Maximize interest yields from the credit portfolio through a judicious management of
varying spreads for loan assets based upon their size, credit rating and tenure
 Ensure due compliance of various regulatory norms, including CAR, Income

Recognition and Asset Classification.
 Accomplish balanced deployment of credit across various sectors and geographical

regions.
 Achieve growth of credit to priority sectors / sub sectors and continue to surpass the
targets stipulated by Reserve Bank of India.
 Use pricing as a tool of competitive advantage ensuring however that earnings are
protected.
 Develop and maintain enhanced competencies in credit management at all levels

through a combination of training initiatives and dissemination of best practices.
IN STATE BANK OF INDIA – PARK TOWN BRANCH CHENNAI
CREDIT RATING:
In State Bank of India Park town Branch has subscribed to www.cibiilratings.com. Credit
Information Bureau (India) Limited is India’s first Credit Information Company (CIC)
founded in August 2000. CIBIL collects and maintains records of an individual’s payments
pertaining to loans and credit cards. These records are submitted to CIBIL by member banks
and credit institutions, on a monthly basis.
This information is then used to create Credit Information Reports (CIR) and credit scores
which are provided to credit institutions in order to help evaluate and approve loan
applications. CIBIL was created to play a critical role in India’s financial system, helping loan
providers manage their business and helping consumers secure credit quicker and on better
terms.unique repository providing information on almost 14,000 companies rated by CRISIL
and it has a user-friendly query interface which enables user to search and filter companies
based on a host of financial and non-financial parameters.
CIBIL Transunion Score
The CIBIL Transunion Score is a predictive scoring model that uses the credit information
available at CIBIL. The score is a number between 300 and 900 which is calculated at the
time a credit report is accessed and is representative of an individual’s credit behavior. The
higher the numerical value of the score, lower the risk profile of the individual. Each score
can be translated to the odds of at least one trade line for that individual becoming 91 + days
delinquent.
For individuals who are not present on the CIBIL database, or if they have less than 6 months
of history, the score will take values of -1 and 0.
CIBIL Transunion Score Version 2.0, the second edition of the credit score from CIBIL and
Transunion, is a better and stronger predictor of risk helping SBI makes superior decisions.
The new version also returns a score for consumers with less than 6 months credit history,
thereby helping SBI makes more objective credit decisions for a large number of SBI
borrowers.
Almost 75% of the consumers would receive a score of 50 points lower compared to the
previous version of the score**. This does not mean that the customer’s credit performance
has deteriorated. It just means that with the CIBIL Transunion Score Version 2.0 SBI score
cut off can now be lower sanctioning new credit.
A quick glance on what the new score would be vis a vis the current score with the same
probability of default.
EXISTING NEW
CIBIL Transunion Score CIBIL Transunion Score (V 2.0)
851-900 841-900
801-850 698-840
751-800 662-697
701-750 619-661
651-700 567-618
601-650 521-566
551-600 515-520
300-550 300-514
0 1-5
Impact on score cut offs:
In most cases the new score would return a lower value than its earlier version for a given
consumer**. SBI score cut off for sanctioning new credit could therefore be lower when
using version 2.0 of the score.
Additional score range of 1-5:
A new score range of 1-5 has been introduced (in addition to the range of 300-900) only for
customers with less than 6 months credit history – higher the score, lower the risk associated
with the consumer.
CIBIL TransUnion Score Version 2.0 introduces a new score range for customers with
limited credit history.
SBI customers who earlier obtained a score of ‘0’ on account of having less than 6 months of
credit history will now get a new score range ranking them 1 to 5.
Factors Influence the score
4.1 IN SBI PARK TOWN BRANCH LAST 3 YEARS LOAN DETAILS:-
Particulars Amount outstanding Amount outstanding Amount outstanding

31.3.2018 31.3.2019 31.3.2020
(Rs in Crs) (Rs in Crs) (Rs in Crs)
Car Loan 17, 20, SBI (PARK 18, 40, 00,000 22,50,00,000
TOWN BRANCH)
IN THE YEAR
2018 – LOANS
00,000
Home Loan 10, 20, 00,000 11, 23, 00,000 13,86,00,000
Personal Loan 4,90,00,000 5,40,00,000 6,25,00,000
Education Loan 3,89,00,000 4,82,00,000 5,16,00,000
Others 12,20,00,000 13,50,00,000 14,20,00,000
Total 48,39,00,000 53,35,00,000 61,97,00,000
As mention in the given chart this is the study of different types of loans and advances with
the increasing amounts from year 2018 -2020.There were many changes in providing
loans ,the loans such as car loan ,home loan ,personal loan ,education loan, are involved in
credit policy.The number of investors in state bank of India has been increased year by year .
The lending service provides financial settlement to consumers. In the given chart the amount
outstanding is given to know the impact of credit risk management on lending.
3.2.4 Risk Pricing
Risk-return pricing is a fundamental tenet of risk management. In a risk-return setting,
borrowers with weak financial position and hence placed in high credit risk category should
be priced high. Thus, banks should evolve scientific systems to price the credit risk, which
should have a bearing on the expected probability of default. The pricing of loans normally
should be linked to risk rating or credit quality. The probability of default could be derived
from the past behaviour of the loan portfolio, which is the function of loan loss
provision/charge offs for the last five years or so. Banks should build historical database on
the portfolio quality and provisioning / charge off to equip themselves to price the risk. But
value of collateral, market forces, perceived value of accounts, future business potential,
portfolio/industry exposure and strategic reasons may also play important role in pricing.
Flexibility should also be made for revising the price (risk premia) due to changes in rating /
value of collaterals over time. Large sized banks across the world have already put in place
Risk Adjusted Return on Capital (RAROC) framework for pricing of loans, which calls for
data on portfolio behaviour and
allocation of capital commensurate with credit risk inherent in loan proposals. Under
RAROC
framework, lender begins by charging an interest mark-up to cover the expected loss –
expected default rate of the rating category of the borrower. The lender then allocates enough
capital to the prospective loan to cover some amount of unexpected loss- variability of default
rates.
Generally, international banks allocate enough capital so that the expected loan loss reserve or
provision plus allocated capital covers 99% of the loan loss outcomes.
There is, however, a need for comparing the prices quoted by competitors for borrowers
perched on the same rating /quality. Thus, any attempt at price-cutting for market share would
result in mispricing of risk and ‘Adverse Selection’.
LOANS
CAR LOAN
HOME LOAN
PERSONAL LOAN
EDUCATIONAL LOAN
OTHERS
SBI (PARK TOWN BRANCH) IN THE YEAR 2018– LOANS
LOANS
CAR LAON
HOME LOAN
PERSONAL LOAN
EDUCATION LOAN
OTHERS
SBI (PARK TOWN BRANCH) IN THE YEAR 2019 – LOANS .
LOANS
CAR LAON
HOME LOAN
PERSONAL LOAN
EDUCATIONAL LOAN
OTHERS
In SBI PARK TOWN BRANCH, LAST 3 YEARS CAR LOAN DETAILS:-
YEAR CAR LOAN AMOUNT
2018 17, 20, 00,000

2019 18, 40, 00,000
2020 22, 50, 00,000
The above graphs and chart shows the information about last three years car loan amount ,as
lending is the primary objective of banks ,to provide loans for the bank settlement is the main
aim of the banks.
There is a comparison between last three years about growth or decrease in income but the
amount ,or investors were increasing year by year.
IN STATE BANK OF INDIA PARK TOWN BRANCH LAST 3 YEARS HOME LOAN
DETAILS:
YEARS LOAN AMOUNT
2018 10, 20, 00,000
2019 11, 23, 00,000
2020 13, 86, 00,000
The given above are the details about home loan provided by state bank of india. If compare
to car loan amount there are more than investors who interested to invest in car loan but not in
home loan.
IN SBI PARK TOWN BRANCH PERSONAL (XPRESS CREDIT) LOAN DETAILS

LAST 3 years:-
Years LOAN AMOUNT
2018 4, 90, 00, 000
2019 5, 40, 00, 000
2020 6, 25, 00, 000
The given above is the information about personal loan provided by state bank of India. This
is the last three years loan amount which was also increasing year by year .as compare to
other loans such as home ,loans and car loans there are more investors in personal loans.
COMAPRING THEIR LOAN GROWTH OF SBI PARK TOWN BRACH FOR THE
YEARS OF 2018,19,20.
4.2 EMI CALCULATION FOR LOAN:
FORMULA TO CALCULATE EMI
Where ‘L’ is Loan Amount
‘r’ is Rate of Interest
‘n’ is Number of Years
For Example
A customer taking a loan of RS.1, 00,000 has to be repaid of 5 annual installments. The loan
carries an interest rate of 9% p.a. Calculate the loan installment.
End of Year Payment Interest Principal Balance

(1) (2) (3) (4) Outstanding
(5) * 9% (2) – (3) (5)
0 - - - 1,00,000
1 25,709 9,000 16,709 83,291

2 25,709 7,496 18,213 65,078
3 25,709 5.857 19,852 45,856
4 25,709 4,127 21,582 24,274

5 25,709 1,435 24,724 -
Suppose, if monthly installment means = 25,709/12 = 2,142.4
4.3 Non-Performing Asset
NPA is used by financial institutions that refer to loans that are in jeopardy of default. Once
the borrower has failed to make interest or principle payments for 90 days/ 3 Months the loan
is considered to be a non-performing asset. Non-performing assets are problematic for
financial institutions since they depend on interest payments for income. Troublesome
pressure from the economy can lead to a sharp increase in non-performing loans and often
results in massive write-downs.
Non-performing asset (NPA) ratio
The nonperforming asset ratio is a measure of bank’s nonperforming assets relative to the
total value of the loans that have made -- often referred to as bank loan book. To calculate this
ratio, simply divide your nonperforming assets by your total loans.
In State Bank of India Park Town Branch, the current financial year (2014-2015) the
total amount of the year is: RS.146, 76, 30, 264.11 and the NPA is: RS.1, 51, 39,320.13,
Provision of RS.52, 33,615.00
Loan and advance details:-

Particulars Amount
Advances 24,81,00,000
Housing Loan 13,86,00,000
Vehicle Loan 2,25,00,000
Education Loan 5,16,00,000
Personal Loan 6,25,00,000
Total 52,33,00,000
= 94, 43, 30,264.11
As per the calculation, the total NPA ratio of current financial year is 1.04%, so the Credit
Risk Management of State Bank of India Park Town Branch is well maintained.
4.4 COMPETITORS DETAILS
Main competitors of State Bank of India are ICICI Bank in private sector banks and Syndicate
Bank and Corporation Bank In public sector.
POSITION OF STATE BANK OF INDIA IN LENDING (PRIVATE SECTOR BANK) IN

THE YEAR 2018:
BANK LENDING IN Cr
State Bank of India 390
ICICI bank 250
HDFC 150
UTI 350
This table is to verify the position of state bank of India in lending, this is the comparison
between other competitors banks who use the credit policy to provide loans.
LENDING IN Cr
State Bank of India
ICICI bank
HDFC
UTI
POSITION OF STATE BANK OF INDIA IN LENDING (PUBLIC SECTOR BANK) IN

THE YEAR 2018:
BANK LENDING IN Cr
State Bank of India 380
Syndicate Bank 360
Canara Bank 330
Corporation Bank 350
This is the table to show the position of state bank of India in lending ,(public sector banks)
state bank of India has maintained it place because of the credit policy system used in bank ,
lending is the primary objective of any bank so state bank of India also focuses on lending
money to consumers of bank .compare to the private sector banks there is difference in
amount
.
LENDING IN Cr
State Bank of India
Syndicate Bank
Canara Bank
Corporation Bank
4.5 INTERPRETATION:
 Considering the above data we can say that year on year the amount of advances lent
by State Bank of India has increased which indicates that the bank’s business is really
commendable and the Credit Policy it has maintained is absolutely good.
 Whereas other banks do not have such good business SBI is ahead in terms of its
business when compared to both Public Sector and Private Sector banks, this implies
that SBI has incorporated sound business policies in its bank
 SBI‟s direct agriculture advances as compared to other banks is 10.5% of the Net
Bank’s Credit, which shows that Bank has not lent enough credit to direct agriculture
sector.
 In case of indirect agriculture advances, SBI is granting 3.1% of Net Banks Credit,
which is less as compared to Canara Bank, Syndicate Bank and Corporation Bank.
SBI
has to entertain indirect sectors of agriculture so that it can have more number of
borrowers for the Bank.
 SBI has advanced 13.6% of Net Banks Credit to total agriculture and 8.9% to weaker
section and 37% to priority sector, which is less as compared with other Bank.
4.6CREDIT POLICIES OF STATE BANK OF INDIA
Credit policy
:The credit policy document is a document which carefully specifies the do’s and don’ts
while sanctioning the loan proposals.
•As loan proposals differ widely from each other, there cannot be a strict methodology for
accepting or rejecting the proposals.
•Instead, guidelines can be given within the credit policy for the decision makers to
enablethem to screen out loans, which can be out rightly rejected.
YEAR LOANS ISSUED RECOVERED OUTSTANDING
2020 157033.54 91601.4 66332.09

2019 202374.46 120210.43 82164.03
2018 261641.54 163264.32 98377.22
•Loans that can be sanctioned without any reference to the top management and proposals
that require a certain amount of top-level decision-making.
•The credit policy of a bank consists of five major components.
RBI Guidelines for credit policy:
As per RBI’s guidelines at least 40% of the net bank credit should be given to the
prioritysector, of which 18% would be for Agriculture and 10% to the weaker sections ofthe
society.
•RBI, NABARD and State Level Bankers Committee (SLBC) govern the credit policy and
procedures with respect to agricultural sector.
•Depending on the segments, the policies and procedures could differ substantially.
•The introduction of Service Area Approach in 1989 prompted each bank’ branch to
prepare its own Service Area Plan based on the village profile, skills and available resources.
Such
4.7THE TABLE SHOWS ADVANCES OF PUBLIC SECTOR BANKS TOPRIORITY

SECTOR PERCENT.
4.2 THE TABLE ABOVE SHOW THE LOANS ISSUED ,RECOVERD AND
OUTSTANDING FOR THREE ANNUAL YEARS.
Syndicate Bank, Canara Bank, Corporation Bank
Private Sector Banks:
HDFC Bank, ICICI Bank, UTI Bank
Considering the above figure we can say that year on year the amount of advances lent by
State Bank of India has increased which indicates that the Interpretation:
From the figure we can say that till the year 2015 outstanding loans had increased up to 30%
but due to the improved credit policy of SBI its outstanding rate decreased to 23% in the year
2014.
NAME OF THE 2018 2019 2020
BANK
STATE BANK OF 631914.52 7567194.48 8675788.90

INDIA
SYNDICATE 904063.59 1067819.20 1236201.77

BANK
CANARA BANK 1693346.30 2112682.92 2324898.18
CORPORATION 632025.62 868504.04 1004690.20

BANK
HDFC BANK 1258305.93 1599826.65 1954200.29
Interpretation-
Above figure shows that the all competitors banks in India include state bank of india has
involved credit policy .Given above is the 3 years ,annual report of the different banks who
used the credit policy and state bank of India has increased the credit policy systems for every
years. The other banks such as syndicate bank canara bank ,corporation bank and hdfc bank
who had involved credit policy were increasing their growth year by year. The different types
of loans provided by bank focuses on customers satisfaction at the time of loss credit policy
helps to recover the losses.
bank’s business is really commendable and the Credit Policy it has maintained is absolutely
good. Whereas other banks do not have such good business SBI is in terms of its business
when compared to both Public Sector and Private Sector banks, this implies that SBI has
incorporated sound business policies.
337336.49 263264.32 74072.17
6.2 Proxies of credit risk:
1. Capital Adequacy Ratio (CAR) is the minimum capital requirement of the Bank which
indicates the bank’s ability to absorb the loss. It acts like an air bag in the car.
2. Nonperforming Asset Ratio (NPA) indicates the loans that are default for the period of
more
than 90 days and the assets that are acquired as result of foreclosure.
3. Loan to Deposit Ratio (LDR) indicates the liquidity of the bank i.e., it indicates the bank’s
ability to withstand the cash withdrawal made by the customer as the loans were made out
of the deposits made by the customers.
4. Cost per Loan Ratio (CLR) indicates the cost incurred by the bank in providing one unit of
loan.
5. Provision Coverage Ratio PCR Provision coverage indicates the provision made to cover
the loss that might occur from the nonperforming assets.
6. Leverage Ratio (LR): Leverage means borrowing money and investing with the aim of
earning more profit than the money spent on borrowing. The bank provides loan to the
customer out of deposits made with the aim of earning more profit. Excessive leverage
increases the credit risk faced by the bank.
7. Problem Asset Ratio (PAR) indicates the efficiency of the bank in assessing credit risk and
to an extent recovering the debts. Lower ratio indicates better quality of advances (better
utilization of assets) and performance of the bank.
8. A substandard asset is one which has remained NPA for a period less than or equal to 12
months. In such case, the current net worth of the borrower or guarantor or the current
market value of the
security charged is not enough to ensure recovery of the dues to the banks in full.
9. Doubtful Assets are all those assets which are considered as non-performing for period of
more than 12
months. A loan classified as doubtful has all the weaknesses inherent in assets that were
classified as
substandard, with the added characteristic that the weaknesses make collection or liquidation
in full,
highly questionable and improbable, on the basis of currently known facts, conditions and
values.
10. Loss Asset is one where loss is been identified by, the bank or the internal or external
audit or the RBI inspection, but the amount has not been written off wholly.
.
Profitability ABBREVIATION OF Description Formula
THE
Variable
CAR Return on capital Net income –

dividend/debt+equity×100
NPA Capital Tier 1 capital +tier 2

adequacy capital÷riskweighted assets
ratio ×100
LDR Non performing Total loans ÷total deposits

assets ratio ×100
Credit risk CLR Loan to deposit Total operating cost ÷total

ratio amount of loan disbursed
×100
PCR Cost Per Loan Total provision ÷gross

Ratio NPA x100
LR Leverage ratio Total debt ÷total equity
×100
PAR Substandard Asset Net non performing assets
Ratio ÷total assets ×100
SAR Substandard Asset Total substandard assets

Ratio ÷gross NPA ×100
DAR Doubtful Asset Total doubtfull assets

Ratio ÷gross NPA ×100
4.2 OBJECTIVES:-
To study the concept of state bank of india-
All lenders must reduce their risk of loan loss. Credit risk management is the most difficult
potential loan loss to prevent. Borrowers with consistently poor credit reports or excellent
credit scores allow lenders to make easier approval and rejection decisions. However,
prospective borrowers with a mix of on-time payments and late payments create credit risk
management challenges for lenders.
To know the impact on consumers satisfaction of credit risk management-
The study found that there is positive and significant relationship between credit risk
management and customer satisfaction and the regression results showed that 49% of the
variability in customer satisfaction can be explained by credit risk management.
To study the profitability and financial risk programmes:-
This is the another important objective which focuses on profitability of credit policy. To
involve in financial risk programmes to reach to the goal of bank.
To give proper suggestions to the study-
This is the objective of the study to give proper suggestions ,to get the good result. This study
focuses on improvement of credit risk management in banks. Which strategies are usefull to
maintain credit risk management these type of suggestions has been given in the study.
4.3 HYPOTHESIS-
Credit risk management has an effect on bank performance(H1-
The findings reveal that credit risk management does have positive effects on profitability
of commercial banks. Between the two proxies of credit risk management, NPLR has a
significant effect on the both ROE and ROA while CAR has an insignificant effect on both
ROE and ROA.
Credit risk management has no effect on bank performance-(H0)
Improper credit risk management reduce the bank profitability, affects the quality of its
assets and increase loan losses and non-performing loan which may eventually lead to
financial distress. CBN for policy purposes should regularly assess the lending attitudes of
financial institutions.
Conclusion-:
The given above is the statistical analysis and demographic analysis of credit risk in states bank of
India. The different graphs and tables shows the growth between three annual years The result shown
as there is growth in lending in state bank of India by using credit risk .The credit risk management
involves the risk management system which helpful to reduce risk in banks.
CHAPTER V
CONCLUSION SUGGESTIONS AND
FINDINGS
5.1 Introduction
5.2 Finding
5.3 Suggestions
5.4 Conclusion
5.1 INTRODUCTION-
The study is aimed at investigating the impact of Credit risk on the profitability of the
bank. Through extensive literature review, various factors that influence Credit risk are
identified as Capital adequacy ratio (CAR), Nonperforming Asset ratio (NPA), Loan to
Deposit Ratio (LDR), Cost per Loan Ratio (CLR), Provision Coverage Ratio (PCR),
Leverage Ratio (LR), and Nonperforming Asset to Asset Ratio (NPAAR). Return on
Equity (ROE) is identified as the indicator of profitability. The secondary data is
collected from the Annual reports of the State Bank of India for twenty years (1997-
2016). The data is analysed using multiple regression. The result showed that NPAAR
alone have significant negative impact on ROE and other indicators of credit risk do not
have significant impact on ROE. But overall credit risk has significant impact on
profitability of State Bank of India. State bank of India faces credit risk due to inefficient
Credit risk management. So it is advised to improve Credit risk management practices in
State Bank of India. State Bank of India can minimise the Credit risk by reducing the
Nonperforming assets by framing strict loan policies.
5.2 FINDINGS
Project findings reveal that SBI is sanctioning less Credit to agriculture, as compared with its
key competition r’s viz., Canara Bank, Corporation Bank, Syndicate Bank
1 .Recovery of Credit
:SBI recovery of Credit during the year 2013 is 84.2% Compared to other Banks SB
I’s recovery policy is very good, hence this reduces NPA
2 .Total Advances
: As compared total advances of SBI is increased year by year. State Bank of India is granting
credit in all sectors in an Equated Monthly Installments so that anybody can borrow money
easily Project findings reveal that State Bank of India is lending more credit or sanctioning
more loans as compared to other Banks.
State bank Of India is expanding its Credit in the following focus areas:
SBI Term Deposits Recurring Deposits SBI Housing Loans sbi Car , Educational LoanSBI
Personal Loan
…etc.
In case of indirect agriculture advances, SBI is granting 3.1% of Net Banks Credit, which is
less as compared to Canara Bank, Syndicate Bank and Corporation Bank.SBI
‟ s direct agriculture advances as compared to other banks is 10.5% of the Net Bank s
Credit, which shows that Bank has not lent enough credit to direct agriculture sector. Credit
risk management process of SBI used is very effective as compared with other banks.
5.3 SUGGESTION FOR FUTURE RESEARCH:
Through extensive literature review, some ratios were identified as the indicators of credit
risk and ROC as the indicator of profitability. Except those indicators involved in this study,
there are other indicators of credit risk and profitability. It is recommended to include more
indicators of credit risk and profitability to test the relationship in future. And this study is
focused only on credit risk of State Bank of India. Except the credit risk there are other risks
faced by the bank. In future research, we recommend including other risks faced by the Bank.
This study must want the good results for the banking environment . Credit risk management should
be completely maintained in every not only national but public and private sector banks.
5.4 CONCLUSION
The general objectives of the study was to establish the impact of credit risk on profitability
of State Bank of India and specific objectives were to establish impact of Capital adequacy
ratio
(CAR), Nonperforming Asset ratio (NPA), Loan to Deposit Ratio (LDR), Cost per Loan
Ratio
(CLR), Provision Coverage Ratio (PCR), Leverage Ratio (LR) and Nonperforming Asset to
Asset Ratio (NPAAR) on Return On Equity. The result showed that NPAAR alone have
significant, negative impact on ROE and other variables do not have significant impact on
ROE. It can be concluded that overall credit risk have significant impact on the profitability
of State Bank of India. State bank of India faces credit risk due to ineffective Credit risk
management. So it is advised to improve Credit risk management practices in State Bank of
India. State Bank of India can minimize the Credit risk by reducing the Nonperforming assets
.
BIBLIOGRAPHY
BOOKS REFERED :-
1.The books related to commercial banking system.
2.The annual reports of state bank of India.
WEBSITES- https://www.scribd.com/document/487111880/Credit-Risk-Management-in-
SBI https://issuu.com/babasabpatil/docs/a_project_report_on_credit_risk_rat
http://ictactjournals.in/html/IJMS/Volume_3/V3I2/A_STUDY_ON_THE_IMPACT_OF_CRE
DIT_RISK_ON_THE_PROFITABILITY_OF_STATE_BANK_OF_INDIA_(SBI).html
https://pdfslide.net/documents/credit-risk-management-sbi.html

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CREDIT RISK MANAGEMENT WITH REFERENCE OF STATE BANK OF INDIA

1.2 Objectives of the study

1.3 Hypothesis of the study

1.4 Significance of the Study

1.5 Statement of the Problem

1.6 Scope of the study

1.7 Methods of Data collection

1.8. Methods of Data Analysis

RISK MANAGEMENT STRUCTURE-

2.1 A major issue in establishing an appropriate risk management organisation structure is

Scope of Credit Risk -

Challenges to Successful Credit Risk Management

duplication of effort and negatively affects a bank’s efficiency ratio.

Cumbersome reporting.Manual, spreadsheet-based reporting processes overburden analysts

Best Practices in Credit Risk Management

Real-time scoring and limits monitoring.

Robust stress-testing capabilities.

Principles for the Management of Credit Risk - consultative document

1.2- Objectives of the study-

1.To study the concept of credit risk management in banks.

3.To study the profitability and financial risk programmes.

4.To give proper suggestion for following study.

1.3 Hypothesis of the study-

1 (H1): credit risk management had an effect on the bank performance.

1.4 Significance of the study-

1.5 Statement of the problem-

1.6 Scope of the study-

Establishing appropriate credit risk environment.

Operating under sound credit granting process.

Maintaining an appropriate credit administration, measurement & Monitoring Ensuring

adequate control over credit risk.

Two fundamental approaches to credit risk management:-

1.7 Methods of data collection-

1.8 Methods of data analysis-

mitigate credit risk.

1.9 LIMITATIONS OF STUDY-

1. This study is only restricted to State Bank of India only.

7. Employees were not co operative.

2.1 Background of the project topic

2.2 key elements

2.1 Background Of Project Topic:

There are mainly three types of risk, they are follows:-

unwillingness of a customer to meet commitments in relation to lending, trading, hedging,

CONTRIBUTORS OF CREDIT RISK:

•May result from trading and banking book

•Inter bank transactions

2.2 KEY ELEMENTS OF CREDIT RISK MANAGEMENT:

•Establishing appropriate credit risk environment

•Operating under sound credit granting process

•Maintaining an appropriate credit administration, measurement & Monitoring

•Ensuring adequate control over credit risk

Two fundamental approaches to credit risk management:-

Steps to follow to minimize different type of risks:-

Use in decision making:-

2.3 Main features of the rating tool-

Comprehensive coverage of parameters

bjective and objective parameters

Some of the advantages are given below:

Some of the disadvantages are given below: