INTRODUCTION Finance may be defined as the “provision of money at the time it is required”. Finance

refers to the management of flows of money through an organization. It concerns with

application of skills in the manipulation, use and control of money.

Financial management refers to that part of the management activity which is concerned with

the planning and controlling of firm’s financial resources. It deals with finding out various

sources for raising funds for the firm. The sources must be suitable and economical for the

needs of the business. The most appropriate use of such funds also forms a part of financial

management.

The main objectives of finance function are:-

1 Acquiring sufficient funds.

2 Optimum utilization of funds.

3 Increasing profitability.

4 Maximizing shareholders wealth.

In the present business context, a finance manager is expected to do financial forecasting and

planning .Financial manager has to plan the funds needed in the future. How these funds will

be acquired and applied is an important function of a finance manager. The sources of supply

of funds are shares, debentures, financial institutions, commercial banks, etc. The pros and

cons of various sources should be analyzed before making a final decision.

The cost of acquiring funds and the returns should be compared. Capital

budgeting technique is used for this purpose. The objective of maximizing profits will be

achieved only when funds are efficiently used and they do not remain idle at any time. A

number of mergers and consolidations take place in present competitive Industrial world. A

finance manager is supposed to assist management in making valuation etc. For this purpose,

he should understand various methods of valuing shares and others assets so that correct

values are arrived.

Cash is the best source for maintaining liquidity. It is required to purchase raw material, pay

workers, meet other expenses, etc. A finance manager is required to determine the need for

liquid assets and then arrange liquid assets in such a way that there is no scarcity of funds.

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DESIGN OF STUDY

Hdfc bankpersonal loans are the largest business in the bank. The personal loan business is

doubling every year. It is the most profitable business of the bank. Personal loans contribute

substantially to the overall base line of the bank.

Credit department is the back bone of personal loan business. Main function of the credit

is to assess the credit worthiness of an applicant and lending him appropriate amount based

on such assessment and subject to the terms, conditions and limitations of the policies.

The term credit management has got importance from the time when there increased the

pressure of competition and force of custom persuades to sell on credit. Credit is granted to

facilitate the sales. Credit is appealing to those customers who cannot borrow from other

sources due to many reasons. The firm’s investment in accounts receivable depends on how

much it sells on credit and how long it takes to collect receivables. Accounts receivables

constitute one of most important asset category for firm which makes the firm to manage its

credit well.

The term credit management can be analyzed from various aspects like:

Terms of payment, Credit policy variables, Credit evaluation, Credit granting decision.

Risk management is a process of managing the collection of managing the collection of

liabilities with an objective of increasing the cash flows with minimum costs. It involves

collecting in right time, right amount, in right terms.

This process starts from identifying the amount of liabilities and to make the collection

successful. This does not end with mere collection. Besides collection, the difficulties and

weak areas should also be ascertained, which leads to development of an effective system for

credit extension or sales and collection.

OBJECTIVES OF THE STUDY:

The main objectives of the study are:

1 To study the effectiveness of credit process.

2 To study the risk process followed in Hdfc bank.

3 To know and analyze the procedure of loan disbursement and its evaluation criteria.

4 To study and analyze the factors contributing to default rate and their interrelations.

5 To suggest suitable strategies for improving credit and risk management.

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NEED & IMPORTANCE OF THE STUDY:

In today’s market scenario, one of the most critical areas to focus on is to protect the bank

from bankruptcy. In such conditions Credit and Risk Department plays a key role in growth

of banks. Any delay in realizing the receivables would adversely affect the working capital,

which in turn effects the overall financial management of a firm. No firm can be successful if

it’s over dues are not collected, monitored and managed carefully in time. Thus Risk

management is important in sustaining the bank and its growth.

RESEARCH METHODOLOGY :

To fulfill the objectives of the study both primary and secondary data are used. The primary

data was collected through interviewing all the executives and officials of the HDFC

BANKHyderabad.

The secondary data was collected from published records, website and reports of the HDFC

BANK. Mainly the data relating to credit procedures followed by the bank and risk

management was obtained through manager from bank database .The data for this purpose

was obtained from bank for a period of 3 years that is from.Based on the availability of the

data, the analysis was made from different angles to assess the credit and risk management of

HDFC BANK, Hyderabad.

PERIOD OF STUDY:

The data obtained from the bank (hdfc bank)for the purpose of credit period and risk time

from the customers. The information of the customers from different anglesto access the

credit and risk management for a period of THREE years. i.e. from

Credit period refers to the length of the time are allowed to pay the amount

For their purchase which is generally varied from15 to 60 days,or 15 to 90 days.

SCOPE OF THE STUDY:

1 The study intended to cover the degree and extent of default by the customers of

HDFC BANK. In that direction the following has been done.

2 The genesis of the company, its organs. And the range of activities have been

studied and documented such study, it was thought, would uncover the weakness

brought down as legacy from its line of entrepreneurs.

3 The process involved in loan disbursement has been studied to identify the weak

area, follies committed in disbursement or in the design of disbursement process.

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The seeds of default are built in; hence the study of loan disbursement process

has been attempted.

4 The profile of the defaulters including location, stage of default, gender, age etc.

has been studied and documented. The components of the profile have been

presumed to be linked to the default.

5 The risk process itself has the potential for some loans to be non recoverable

hence to identify the probable causes, the risk process has been studied and

documented.

6 Based on the profile and the data of defaulted loans, an analysis has been made

to establish the links between default and other variables like location of loan,

amount of loan taken, gender, profession etc.

LIMITATIONS OF THE STUDY:

1 The study is limited to Hyderabad city only.

2 The study has been done according to bank point of view.

3 The study has been done without meeting the defaulters due to constraints of

time.

INTRODUCTION OF BANKING

“Bank is an institution whose Debts widely accepted in settlement of other people’s debts

to each other”.

The banking company in India defined the Band , in the companies Act.1949, as

the one “which transacts the business of banking which means the accepting for the purpose

of lending to invests of deposits of money form the public. The deposits, which repayable on

demand withdrawal by check, draft orders.

TYPES OF BANKING

Several types of banks have come in to existence performing different specialized functions

based upon the functions performed by them; banks may be classified into different types;

1) COMMERCIAL BANKS:

They are a joint stock bank which acts as different kinds of deposits from the public

and grant short term loans. There main aims Is to provide security of funds to depositors and make

profits for their share holders. As their deposits are mainly for short periods, they can not lend money

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for long periods. They mainly finance business and trade for short periods to meet their day – to – day

transactions. They may provide finance in the form of cash credits our drafts or loans. They also

provide finance by discounting bills of exchange.

2) INDUSTRIAL BANKS

These banks are also called investment banks. They provide long terms finance to

industries ranging over a few decades. They finance long term projects and developmental plans. T

hey receives long term projects deposits from the public. They may also raise funds by the issue of

shares debentures. They specialized in the undertake industrial finance the new issue of shares,

debentures and securities of new enterprises.

3) AGRICULTURE BANKS

The commercial industrial banks are not able to meet the financial requirements of

agriculture. Agriculture requires both short term and long term finance. Frames requires short term

finance to buy seeds, fertilizers, implements etc.,

4) CO-OPERATIVE BANKS:

The banks are formed to supply credit to members on ea

sy terms. They do not aim at profit in their operations. They attract depositors from the farmers and

promote thrift by offering slightly higher rates of interests than commercial banks. They provide

credit facility to needy framers and small scale industries.

5) EXCHANGE BANKS:

The specialized in financing the import and export trade of the country. They purchase bills from

exporters and sell them to importers. They provide remittance facilities and trade information to their

clients.

6) SAVEINH BANKS:

These banks collect small and scattered savings of the low and middle income group people.

These banks receive small amounts, deposits and withdrawals are restricted. Bank offer minimum

interest on these deposits.

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7) CENTRAL BANK:

The central bank controls the entire banking system in the country. It operates the currency and

credit system in the country. It acts as an agent and adviser to the government and works in the best

interests of the nation with out any profit motive in ts operations.

Historically, a bank has been a place where depositors could park money and borrowers

could borrow. The typical spread of the bank was raising money through deposits and leading it to

corporate clients. This made the relationship with the retail consumer rather passive. But with banks

recognizing the power of the country’s middle class, this relationship is becoming very active.

The commercial banking structure in India consists of:

Scheduled Banks in India

Unscheduled Banks in India

Scheduled Banks in India constitute those banks which have been included in the Second

Schedule of Reserve Bank of India (RBI) Act, 1934. RBI in turn includes only those banks in this

schedule which sof theriria laid down vide section42 (6)(a) of the act.

As on 30th June, 1999, there were 300 scheduled banks in India having a total network of

64,918 branches. The scheduled commercial banks in India comprises of State bank of India and its

associates (8), nationalized banks (19), foreign banks (45), private sector banks (32), co-operative

banks and regional rural banks.

“Scheduled banks in India” means the State Bank of India constituted under the State Bank

of India Act,1955(23 of 1955), a subsidiary bank as defined in the State Bank of India (Subsidiary

Banks) Act, 1959 (38 of 1959), a corresponding new bank constituted under section 3 of the Banking

Companies(Acquisition and Transfer of Undertakings) Act, 1970 (5 of1970), 223.18lakhs the

main sources of the funds were long-term deposits were

“Under section 3 of the banking companies (acquisition and transfer of undertakings) act,

1980 (40 of 1980), or any other bank being a bank included in the second schedule to the reserve bank

of India act, 1934 (2 of 1934), but does not include of a co-operative bank”.

“Non-schedule bank in India” means a banking company as in clause (c) of section 5 of the

banking regulation act, 1949 (10 of 1949). Which is not a schedule bank”

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The following are the schedule public sector banks in India:

● State bank of India

● State bank of banker and Jaipur

● State bank of Hyderabad

● State bank of Indore

● State bank of Mysore

● State bank of Patiala

● State bank of Saurashtra

● State bank of Travancore

● Andhra bank

● Allahabad bank

● Bank of Baroda

● Bank of India

● Bank of Maharashtra

● Canara bank

● Central bank

● Central bank of India

● Corporation bank

● Dean Bank

● Indian overseas bank

● Indian Bank

● Oriental Bank of Commerce

● Punjab National Bank

● Punjab State and Sind Bank

● Syndicate Bank of India

● Unit Bank of India

● UCO Bank

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The Following are the scheduled private sector Banks in India:

● Vysya Bank Ltd

● UTI Bank Ltd

● Indusind Bank Ltd

● ICICI Banking Corporation Bank Ltd

● Global trust Bank Ltd

● HDFC Bank Ltd

● Bank of Punjab Ltd

● IDBI Bank Ltd

Top11 large Banks in INDIA:

1 1 HDFC

2 7 HSBC

3 3 ANB Amro

4 6 Corporation bank

5 15 Andhra bank

6 2 City bank NA

7 21 Punjab national Bank

8 9 Standard charted

9 13 UTI Bank

10 12 Vysya bank

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COMPANY PROFILE

The Housing Development Finance Corporation Limited (HDFC) was amongst the first to receive an

'in principle' approval from the Reserve Bank of India (RBI) to set up a bank in the private sector, as

part of the RBI's liberalisation of the Indian Banking Industry in 1994. The bank was incorporated in

August 1994 in the name of 'HDFC Bank Limited', with its registered office in Mumbai, India. HDFC

Bank commenced operations as a Scheduled Commercial Bank in January 1995.

HDFC is India's premier housing finance company and enjoys an impeccable track record in India as

well as in international markets. Since its inception in 1977, the Corporation has maintained a

consistent and healthy growth in its operations to remain the market leader in mortgages. Its

outstanding loan portfolio covers well over a million dwelling units. HDFC has developed significant

expertise in retail mortgage loans to different market segments and also has a large corporate client

base for its housing related credit facilities. With its experience in the financial markets, a strong

market reputation, large shareholder base and unique consumer franchise, HDFC was ideally

positioned to promote a bank in the Indian environment.

HDFC Bank's mission is to be a World-Class Indian Bank. The objective is to build sound customer

franchises across distinct businesses so as to be the preferred provider of banking services for target

retail and wholesale customer segments, and to achieve healthy growth in profitability, consistent

with the bank's risk appetite. The bank is committed to maintain the highest level of ethical

standards, professional integrity, corporate governance and regulatory compliance. HDFC Bank's

business philosophy is based on four core values - Operational Excellence, Customer Focus, Product

Leadership and People.

Capital Structure

As on 31st December, 2009 the authorized share capital of the Bank is Rs. 550 crore. The paid-up

capital as on said date is Rs. 455,23,65,640/- (45,52,36,564 equity shares of Rs. 10/- each). The HDFC

Group holds 23.87 % of the Bank's equity and about 16.94 % of the equity is held by the ADS

Depository (in respect of the bank's American Depository Shares (ADS) Issue). 27.46 % of the equity

is held by Foreign Institutional Investors (FIIs) and the Bank has about 4,58,683 shareholders.he

shares are listed on the Bombay Stock Exchange Limited and The National Stock Exchange of India

Limited. The Bank's American Depository Shares (ADS) are listed on the New York Stock Exchange

(NYSE) under the symbol 'HDB' and the Bank's Global Depository Receipts (GDRs) are listed on

Luxembourg Stock Exchange under ISIN No US40415F2002.

9

HDFC Bank is headquartered in Mumbai. The Bank at present has an enviable network of 1,725

branches spread in 771 cities across India. All branches are linked on an online real-time basis.

Customers in over 500 locations are also serviced through Telephone Banking. The Bank's expansion

plans take into account the need to have a presence in all major industrial and commercial centres

where its corporate customers are located as well as the need to build a strong retail customer base

for both deposits and loan products. Being a clearing/settlement bank to various leading stock

exchanges, the Bank has branches in the centres where the NSE/BSE have a strong and active

member base.

The Bank also has 4,000 networked ATMs across these cities. Moreover, HDFC Bank's ATM network

can be accessed by all domestic and international Visa/MasterCard, Visa Electron/Maestro,

Plus/Cirrus and American Express Credit/Charge cardholders.Mr. Jagdish Capoor took over as the

bank's Chairman in July 2001. Prior to this, Mr. Capoor was a Deputy Governor of the Reserve Bank

of India.

The Managing Director, Mr. Aditya Puri, has been a professional banker for over 25 years, and

before joining HDFC Bank in 1994 was heading Citibank's operations in Malaysia.

The Bank's Board of Directors is composed of eminent individuals with a wealth of experience in

public policy, administration, industry and commercial banking. Senior executives representing HDFC

are also on the Board.

Senior banking professionals with substantial experience in India and abroad head various

businesses and functions and report to the Managing Director. Given the professional expertise of

the management team and the overall focus on recruiting and retaining the best talent in the

industry, the bank believes that its people are a significant competitive strength.

HDFC Bank operates in a highly automated environment in terms of information technology and

communication systems. All the bank's branches have online connectivity, which enables the bank to

offer speedy funds transfer facilities to its customers. Multi-branch access is also provided to retail

customers through the branch network and Automated Teller Machines (ATMs).

The Bank has made substantial efforts and investments in acquiring the best technology available

internationally, to build the infrastructure for a world class bank. The Bank's business is supported by

scalable and robust systems which ensure that our clients always get the finest services we offer.

The Bank has prioritised its engagement in technology and the internet as one of its key goals and 10

has already made significant progress in web-enabling its core businesses. In each of its businesses,

the Bank has succeeded in leveraging its market position, expertise and technology to create a

competitive advantage and build market share.

HDFC Bank offers a wide range of commercial and transactional banking services and treasury

products to wholesale and retail customers. The bank has three key business segments:

Wholesale Banking Services

The Bank's target market ranges from large, blue-chip manufacturing companies in the Indian

corporate to small & mid-sized corporates and agri-based businesses. For these customers, the

Bank provides a wide range of commercial and transactional banking services, including

working capital finance, trade services, transactional services, cash management, etc. The

bank is also a leading provider of structured solutions, which combine cash management

services with vendor and distributor finance for facilitating superior supply chain management

for its corporate customers. Based on its superior product delivery / service levels and strong

customer orientation, the Bank has made significant inroads into the banking consortia of a

number of leading Indian corporates including multinationals, companies from the domestic

business houses and prime public sector companies. It is recognised as a leading provider of

cash management and transactional banking solutions to corporate customers, mutual funds,

stock exchange members and banks.

Retail Banking Services

The objective of the Retail Bank is to provide its target market customers a full range of

financial products and banking services, giving the customer a one-stop window for all his/her

banking requirements. The products are backed by world-class service and delivered to

customers through the growing branch network, as well as through alternative delivery

channels like ATMs, Phone Banking, NetBanking and Mobile Banking.

The HDFC Bank Preferred program for high net worth individuals, the HDFC Bank Plus and the

Investment Advisory Services programs have been designed keeping in mind needs of

customers who seek distinct financial solutions, information and advice on various investment

avenues. The Bank also has a wide array of retail loan products including Auto Loans, Loans

against marketable securities, Personal Loans and Loans for Two-wheelers. It is also a leading

provider of Depository Participant (DP) services for retail customers, providing customers the

11

facility to hold their investments in electronic form.

HDFC Bank was the first bank in India to launch an International Debit Card in association with

VISA (VISA Electron) and issues the Mastercard Maestro debit card as well. The Bank launched

its credit card business in late 2001. By March 2009, the bank had a total card base (debit and

credit cards) of over 13 million. The Bank is also one of the leading players in the “merchant

acquiring” business with over 70,000 Point-of-sale (POS) terminals for debit / credit cards

acceptance at merchant establishments. The Bank is well positioned as a leader in various net

based B2C opportunities including a wide range of internet banking services for Fixed Deposits,

Loans, Bill Payments, etc.

Treasury

Within this business, the bank has three main product areas - Foreign Exchange and

Derivatives, Local Currency Money Market & Debt Securities, and Equities. With the

liberalisation of the financial markets in India, corporates need more sophisticated risk

management information, advice and product structures. These and fine pricing on various

treasury products are provided through the bank's Treasury team. To comply with statutory

reserve requirements, the bank is required to hold 25% of its deposits in government

securities. The Treasury business is responsible for managing the returns and market risk on

this investment portfolio.

Credit Rating

The Bank has its deposit programs rated by two rating agencies - Credit Analysis & Research Limited

(CARE) and Fitch Ratings India Private Limited. The Bank's Fixed Deposit programme has been rated

'CARE AAA (FD)' [Triple A] by CARE, which represents instruments considered to be "of the best

quality, carrying negligible investment risk". CARE has also rated the bank's Certificate of Deposit

(CD) programme "PR 1+" which represents "superior capacity for repayment of short term

promissory obligations". Fitch Ratings India Pvt. Ltd. (100% subsidiary of Fitch Inc.) has assigned the

"AAA ( ind )" rating to the Bank's deposit programme, with the outlook on the rating as "stable". This

rating indicates "highest credit quality" where "protection factors are very high"

The Bank also has its long term unsecured, subordinated (Tier II) Bonds rated by CARE and Fitch

Ratings India Private Limited and its Tier I perpetual Bonds and Upper Tier II Bonds rated by CARE

and CRISIL Ltd. CARE has assigned the rating of "CARE AAA" for the subordinated Tier II Bonds while

Fitch Ratings India Pvt. Ltd. has assigned the rating "AAA (ind)" with the outlook on the rating as

12

"stable". CARE has also assigned "CARE AAA [Triple A]" for the Banks Perpetual bond and Upper Tier

II bond issues. CRISIL has assigned the rating "AAA / Stable" for the Bank's Perpetual Debt

programme and Upper Tier II Bond issue. In each of the cases referred to above, the ratings awarded

were the highest assigned by the rating agency for those instruments.

Corporate Governance Rating

The bank was one of the first four companies, which subjected itself to a Corporate Governance and

Value Creation (GVC) rating by the rating agency, The Credit Rating Information Services of India

Limited (CRISIL). The rating provides an independent assessment of an entity's current performance

and an expectation on its "balanced value creation and corporate governance practices" in future.

The bank has been assigned a 'CRISIL GVC Level 1' rating which indicates that the bank's capability

with respect to wealth creation for all its stakeholders while adopting sound corporate governance

practices is the highest.

On May 23, 2008, the amalgamation of Centurion Bank of Punjab with HDFC Bank was formally

approved by Reserve Bank of India to complete the statutory and regulatory approval process. As

per the scheme of amalgamation, shareholders of CBoP received 1 share of HDFC Bank for every 29

shares of CBoP.

The merged entity will have a strong deposit base of around Rs. 1,22,000 crore and net advances of

around Rs. 89,000 crore. The balance sheet size of the combined entity would be over Rs. 1,63,000

crore. The amalgamation added significant value to HDFC Bank in terms of increased branch

network, geographic reach, and customer base, and a bigger pool of skilled manpower.

In a milestone transaction in the Indian banking industry, Times Bank Limited (another new private

sector bank promoted by Bennett, Coleman & Co. / Times Group) was merged with HDFC Bank Ltd.,

effective February 26, 2000. This was the first merger of two private banks in the New Generation

Private Sector Banks. As per the scheme of amalgamation approved by the shareholders of both

banks and the Reserve Bank of India, shareholders of Times Bank received 1 share of HDFC Bank for

every 5.75 shares of Times Bank.

HDFC Bank Ltd. (BSE: 500180, NYSE: HDB) is a commercial bank of India, incorporated in August

1994, after the Reserve Bank of India allowed establishing private sector banks. The Bank was

13

promoted by the Housing Development Finance Corporation, a premier housing finance company

(set up in 1977) of India. HDFC Bank has 1,412 branches and over 3,295 ATMs, in 528 cities in India,

and all branches of the bank are linked on an online real-time basis. As of September 30, 2008 the

bank had total assets of INR 1006.82 billion. For the fiscal year 2008-09, the bank has reported net

profit of Rs.2,244.9 crore, up 41% from the previous fiscal. Total annual earnings of the bank

increased by 58% reaching at Rs.19,622.8 crore in 2008-09.

Business Focus

HDFC Bank deals with three key business segments - WholesaleBanking Services, Retail Banking

Services, Treasury. It has entered the bankingconsortia of over 50 corporates for providing working

capital finance, tradeservices, corporate finance and merchant banking. It is also

providingsophisticated product structures in areasof foreign exchange and derivatives, money

markets and debt trading and equityresearch.

Wholesale Banking Services

The Bank's target m inroads into the banking consortia of a number of leading Indian corporates

including multinationals, companies from the domestic business houses and prime public sector

companies. It is recognised as a leading provider of cash management and transactional banking

solutions to corporate customers, mutual funds, stock exchange members and banks.

Retail Banking Services

The objective of the Retail Bank is to provide its target market customers a full range of financial

products and banking services, giving the customer a one-stop window for all his/her banking

requirements. The products are backed by world-class service and delivered to customers through

the growing branch network, as well as through alternative delivery channels like ATMs, Phone

Banking, NetBanking and Mobile Banking.

HDFC Bank was the first bank in India to launch an International Debit Card in association with VISA

(VISA Electron) and issues the Mastercard Maestro debit card as well. The Bank launched its credit

card business in late 2001. By March 2009, the bank had a total card base (debit and credit cards) of

over 13 million. The Bank is also one of the leading players in the “merchant acquiring” business with

over 70,000 Point-of-sale (POS) terminals for debit / credit cards acceptance at merchant

14

establishments. The Bank is well positioned as a leader in various net based B2C opportunities

including a wide range of internet banking services for Fixed Deposits, Loans, Bill Payments, etc.

Treasury

Within this business, the bank has three main product areas - Foreign Exchange and Derivatives,

Local Currency Money Market & Debt Securities, and Equities. These services are provided through

the bank's Treasury team. To comply with statutory reserve requirements, the bank is required to

hold 25% of its deposits in government securities. The Treasury business is responsible for managing

the returns and market risk on this investment portfolio.

Distribution Network

HDFC Bank is headquartered in Mumbai. The Bank has an network of 1,725 branches spread in 771

cities across India. All branches are linked on an online real-time basis. Customers in over 500

locations are also serviced through Telephone Banking. The Bank has a presence in all major

industrial and commercial centres across the country. Being a clearing/settlement bank to various

leading stock exchanges, the Bank has branches in the centres where the NSE/BSE have a strong and

active member base.

The Bank also has 3,898 networked ATMs across these cities. Moreover, HDFC Bank's ATM network

can be accessed by all domestic and international Visa/MasterCard, Visa Electron/Maestro,

Plus/Cirrus and American Express Credit/Charge cardholders.

Housing Development Finance Corporation Limited or HDFC (BSE: 500010), founded 1977

by Ravi Maurya and Hasmukhbhai Parekh, is an Indian NBFC, focusing on home mortgages.

HDFC's distribution network spans 243 outlets that include 49 offices of HDFC's distribution

company, HDFC Sales Private Limited. In addition, HDFC covers over 90 locations through its

outreach programmes. HDFC's marketing efforts continue to be concentrated on developing

a stronger distribution network. Home loans are also Sharcket through HDFC Sales, HDFC

Bank Limited and other third party Direct Selling Agents (DSA).

15

INTRODUCTION OF CREDIT AND RISK MANAGEMENT

Introduction of credit and risk management

CREDIT MANAGEMENT

The term credit management has got importance from the time when there increased the

pressure of competition and force of custom persuades to sell on credit. Credit is granted to

facilitate the sales. Credit is appealing to those customers who cannot borrow from other

sources due to many reasons. The firm’s investment in accounts receivable depends on how

much it sells on credit and how long it takes to collect receivables. Accounts receivables

constitute one of most important asset category for firm which makes the firm to manage its

credit well.

The term credit management can be analyzed from various aspects like:

1 Terms of payment.

2 Credit policy variables.

3 Credit evaluation.

4 Credit granting decision.

i) Terms of payment vary widely in practice. The most accepted one in which arrangement is

made wherein the trade cycle is financed partly by seller, partly by buyer and partly by some

financial intermediary. When goods are sold on cash terms the payment is received either in

advance or on delivery. Credit sales are generally on open account. Consignment and bill of

exchange come under credit.

ii) Credit policy variables have the dimensions like credit standards, credit period, cash

discount and collection effort. A firm has wide range of choice in respect of granting credit.

At one end of spectrum, it may decide not to grant credit to any customer, however strong his

credit rating may be. At the other end, it may decide to grant credit to all customers

irrespective of their credit rating. Between these two extremes lie several possibilities, often

the more practical ones.

Credit period refers to the length of the time customers are allowed to pay for their purchases

which is generally varied from 15 days to 60 days. Lengthening the credit period pushes sales

up by inducing existing customers to purchase more and attracting additional customers. This

is accompanied by a larger investment in debtors and a higher incidence of bad debts loss.

Cash discounts are generally given by the firms to induce customers to make prompt

payments. The percentage discount and the percentage discount and the period during which

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it is available are reflected in the credit terms. Liberalizing the cash discount may mean that

the discount percentage is increased and the discount period are lengthen which enhance the

sales, reduce the average collection period and increase the cost of discount.

The collection programme of the firm aims at timely collection of receivables. A rigorous

collection programme tends to decrease sales, shorten the average collection period, reduce

bad debt percentage, and increase the collection expense and vice versa in case of lax

collection programme.

iii) Credit evaluation is an important element of credit management which helps in

establishing credit limits. This includes two types of errors like:

Type I error A good customer is misclassified as a poor credit risk.

Type II error A bad customer is misclassified as a good credit risk.

Both the errors are costly. Type I error leads to loss of profit on sales to good customers who

are denied credit. Type II error results in bad debt losses on credit sales made to risky

customers. Proper credit evaluation can mitigate the occurrence of such type of errors.

Three broad approaches used for credit evaluation are

1 Traditional credit analysis.

2 Sequential credit analysis.

3 Discriminant analysis.

The traditional credit analysis calls for assessing a prospective customer in terms of the

“five C’s of credit”.

1 Character of customer that is his willingness to honor his obligation.

2 Capacity of the customer to meet credit obligations from the operating cash flows.

3 Financial reserves in the form of capital of the customer. If customer has difficulty in

meeting his credit obligations from operating cash flows then focus to his capital.

4 Collateral security offered by customer in the form of pledged assets is considered.

5 Fifth C is general ECONOMIC CONDITIONS that affect the customer.

For sake of simplicity, only three C’s are considered i.e. character, capacity and capital. The

judgment of customer on these dimensions the credit manager considers both quantitative and

qualitative measures.

Sequential credit analysis is most efficient method than traditional one. In this analysis,

investigation is carried further if the benefit of such analysis outweighs it cost. To illustrate,

17

consider three stages of credit analysis: review of the past payment record, detailed internal

analysis and credit investigation by an external agency. The credit analyst proceeds from

stage one to stage two only if there is no past payment history and hence a detailed internal

credit analysis is warranted. Likewise, the credit analyst goes from one stage two to stage

three only if internal credit analysis suggests that the customer poses a medium risk and

hence there is a need for external analysis.

Numerical credit scoring is an improvement over traditional ones in which more systematic

numerical are assigned to evaluate the customer unlike judgmental decisions made on basis

of five C’s in traditional ones. In this the credit manager identifies the factors relevant for

credit evaluation. Then weights are assigned to these factors and customers are rated based on

these factors using suitable rating scale usually 5 point or 7 point rating scale. Factor score is

derived by multiplying factor weight with factor rate for each factor. Customer rating index is

derived by adding the entire factor score based on which customers are classified.

Numerical credit scoring is ad hoc in nature as it is based on weights which are subjective in

nature. The technique of discriminant analysis is employed to construct better risk index. This

method considers the financial ratios of the customers as the basic determinants of their

creditworthiness. The analysis is made based on these financial ratios which are considered to

be essential for creditworthiness of customer.

Risk classification is another method in which customers are classified into various risk

categories for credit investigation process.

iv) Credit granting decision is important because once the creditworthiness of a customer

has been assessed the credit manager has to decide whether the credit should be offered or

not. It is generally done based on the decision tree. The expected profit for the action ‘refuse

credit’ is 0. If the expected profit for the course of action ‘offer credit’ is positive, it is

desirable to extend credit, otherwise not. The repeat order is accepted only if the customer

does not default on the first order. Once the customer pays on the first order, the probability

that he would default on the second order is less than the probability of his defaulting on the

first order.

RISK MANAGEMENT Once the credit is being granted to the customer the credit manager has to find out the ways

for timely collection of the credit given. Traditionally two methods have been commonly

suggested like Days sales outstanding and ageing schedule. Though these methods are

18

popularly used they have serious limitations as they are based on an aggregation of sales and

receivables. To overcome the limitations of traditional methods Collection matrix approach is

used.

The days sales outstanding (DSO) at a given time t may be defined as the ratio of accounts

receivable outstanding at that time to average daily sales figure during the preceding 30 days,

60 days, 90 days, or some other relevant period.

The ageing schedule (AS) classifies outstanding accounts receivables at a given point of time

into different age brackets. The actual AS of the firm is compared with some standard AS to

determine whether accounts receivable are in control. A problem is indicated if the actual AS

shows a greater proportion of receivables, compared with the standard as, in the higher age

groups.

Collection matrix is improvement over the traditional methods of risk managements. In order

to study correctly the changes in the payment behavior of customer, it is helpful to look at the

pattern of collections associated with credit sales. From the collection, pattern one can judge

whether the collection is improving, stable, or deteriorating. A secondary benefit of such an

analysis is that it provides a historical record of collection percentages that can be useful in

projecting monthly receipts for each budgeting period.

FUNCTIONS OF EACH DEPARTMENT

The four main departments involved in loan process of HDFC BANKare :

1) MARKETING

2) CREDIT

3) OPERATIONS

4) RISK

19

ORGANISATIONAL CHART OF MARKETING DEPARTMENT:

LOCATION

MARKETING HEAD

LOCAITON MARKETING HEAD

Regional Marketing Head (RMH) (heading entire region)

Location Marketing Head (LMH) (heading entire location)

Relationship Manager (RM) (for maintaining relationships with DSA and DST)

DSA/DST – Direct Selling Agent (external) / Direct sales Team (internal) Fleet On Street

(FOS) (for sourcing the case, making cold calls, collecting relevant documents etc.)

Marketing department in personal finance is responsible for sourcing of business. This

department works through network of DSA/DST and RM.

RMs are responsible for managing relationships with DSA and DST. The sales department is

divided in to two units under the guidance of RM that is

A) DSA (DIRECT SELLING AGENT)

B) DST (DIRECT SELLING TEAM)

20

REGIONAL MARKETING HEAD

LOCAITON

MARKETING HEAD

RELATIONSHIP MANAGER RELATIONSHIP MANAGER

DIRECT SELLING AGENT DIRECT SELLING TEAM

FLEET ON FLEET ON STREET

DSA is an outside party who is interested in sourcing prospective loan candidates into the

bank. The bank studies the capacity of the party bringing applicants per month and gives

certain targets and if the DSA agent reaches that target then the bank provides commission to

the DSA agent. The bank does not involve in any activities of DSA directly. The DSA agent

has to maintain the telecallers and executives at his own expenses.

The second category is DST which is called K-DIRECT in Hdfc bankunder whom

telecallers, team leaders and executives work. All the office expenses and salaries are paid to

them by Hdfc banktheir salaries are more compared to DSA. The persons working under

DST directly comes under the Kotak Mahindra Bank. Relationship Manager is in charge of

the functions of K-DIRECT team.

ORGANISATIONAL CHART OF CREDIT DEPARTMENT:

21

NATIONAL CREDIT HEAD

REGIONAL CREDIT HEADREGIONAL CREDIT HEAD

LOCATION CREDIT HEAD LOCATIN CREDIT HEAD

CREDIT MANAGER

CREDIT MANAGER

CENTRA PROCESSING AGENCY

NCH - National Credit Head

RCH – Regional Credit Head

LCH – Location Credit Head

CM – Credit Manager ( With in location)

CPA – Central Processing Agency

After sourcing the files (loan applicants) in to the bank the second and crucial step is being

played by credit department. Here the sourced files are examined thoroughly whether the

required documents are furnished or not.

The hierarchical level is followed in this department. It is from top to bottom starting from

National Credit Head to Central Processing Agency. Also at few places there are ACH (Area

Credit Head). They occupy an intermediary position between RCH and LCH. While the

Marketing department is responsible for sourcing, the Credit department is responsible for

buying the business.

OPERATIONS DEPARTMENT :

After the completion of the process of sanctioning loan amount to the customer, the file goes

to operations department where they have to look after the entire operation of disbursement.

The operation department will issue the cheque to the party. In this department all the PDC’s

(Post Dated Cheques) and any other original important documents are placed in the head

office in Mumbai where all the documents are preserved in a private security locker

“NUCLEUS” which is fire proof and the bank pays for the storage of files.

In Nucleus all the respective PDC’s of respective month on mentioned dates comes directly

to the bank. The Hdfc bankhas its clearing department with nationalized bank where it

accepts all the PDC’s and disburse them to respective banks if it is cleared then it mentions

the cleared member’s data and uncleared cheque data through soft copy that day evening to

the operation department. The next day morning the operation department will get the hard

copy and they come to know clearly the reasons for cheque bounce cases.

Then the telecaller will follow up the customers and intimate them about the cheque bounces

and reasons for that and intimates them about the penal charges and depending on the reply of

the customer they further proceed. All the data is maintained in the system.

22

ORGANISATIONAL CHART OF RISK DEPERTMENT :

NATIONAL HEAD

In personal finance business whatever is sourced by the marketing department and bought by

the credit has great tenacity to go bad or non performing or delayed due to combined effect of

various variables like fraud, negligence, intentional, etc.

The inherent nature of personal loan arise the need of having separate risk department(RD)

to focus on timely collection and risk of loan agreements. There is primarily on collecting the

money which was funded by combined efforts of marketing and credit.

RD is responsible for controlling the losses by having a strong network of collection agents

and thus keeping the delinquency level under control

PROCESS FLOW CHART (FILE MOVEMENT SYSTEM) 23

REGIONAL RISK HEAD

STATE RISK HEAD

LOCAL RISK HEAD

BKT-1 PORTFOLIO

MANAGERBKT-2 PORTFOLIO

MANAGER

BKT-3 PORTFOLIO

MANAGER

TEAM LEADER TEAM LEADER TEAM LEADER

EXECUTIVES

EXECUTIVESEXECUTIVES

TELECALLER TELLE CALLERTELECALLER

FILE TO BE LOGGED IN

CREDIT DOES ANALYSIS

Credit Risk Management: Policy Framework

Risk is inherent in all aspects of a commercial operation and covers areas such as customer

services, reputation, technology, security, human resources, market price, funding, legal,

regulatory, fraud and strategy. However, for banks and financial institutions, credit risk is the

24

FILE INVESTIGATION WILL BE SHOT ON THE CASE

CASE IN SACTIONED OR REJECTED

IF SACTIONED , DISBURSEMENT AGREEMENT TO BE

SIGNED AND PDC’S TO BE COLLECTED

DISBURSEMENT TO BE LOGGED IN

CHEQUE TO BE DELIVERED TO THE CUSTOMER

STOP

most important factor to be managed. Credit risk is defined as the possibility that a borrower

or counterparty will fail to meet its obligations in accordance with agreed terms. Credit risk,

therefore, arises from the banks' dealings with or lending to a corporate, individual, another

bank, financial institution or a country. Credit risk may take various forms, such as:

in the case of direct lending, that funds will not be repaid;

in the case of guarantees or letters of credit, that funds will not be forthcoming from

the customer upon crystallization of the liability under the contract; in the case of

treasury products, that the payment or series of payments due from the counterparty

under the respective contracts is not forthcoming or ceases;

in the case of securities trading businesses, that settlement will not be effected;

in the case of cross-border exposure, that the availability and free transfer of currency

is restricted or ceases.

The more diversified a banking group is, the more intricate systems it would need, to protect

itself from a wide variety of risks. These include the routine operational risks applicable to

any commercial concern, the business risks to its commercial borrowers, the economic and

political risks associated with the countries in which it operates, and the commercial and the

reputational risks concomitant with a failure to comply with the increasingly stringent

legislation and regulations surrounding financial services business in many territories.

Comprehensive risk identification and assessment are therefore very essential to establishing

the health of any counterparty.

Credit risk management enables banks to identify, assess, manage proactively, and optimise

their credit risk at an individual level or at an entity level or at the level of a country. Given

the fast changing, dynamic world scenario experiencing the pressures of globalisation,

liberalization, consolidation and disintermediation, it is important that banks have a robust

credit risk management policies and procedures which is sensitive and responsive to these

changes.

Strategy and Policy

25

It is essential that each bank develops its own credit risk strategy or enunciates a plan that

defines the objectives for the credit-granting function. This strategy should spell out clearly

the organisation’s credit appetite and the acceptable level of risk - reward trade-off at both the

macro and the micro levels.

The strategy would therefore, include a statement of the bank’s willingness to grant loans

based on the type of economic activity, geographical location, currency, market, maturity and

anticipated profitability. This would necessarily translate into the identification of target

markets and business sectors, preferred levels of diversification and concentration, the cost of

capital in granting credit and the cost of bad debts.

A common feature of most successful banks is to establish an independent group responsible

for credit risk management. This will ensure that decisions are made with sufficient emphasis

on asset quality and will deploy specialised skills effectively.

In some organisations, the credit risk management team is responsible for the management

of problem accounts, and for credit operations as well. The responsibilities of this team are

the formulation of credit policies, procedures and controls extending to all of its credit risks

arising from corporate banking, treasury, credit cards, personal banking, trade finance,

securities processing, payment and settlement systems, etc.

This team should also have an overview of the loan portfolio trends and concentration risks

across the bank and for individual lines of businesses, should provide input to the Asset -

Liability Management Committee of the bank, and conduct industry and sectoral studies.

Inputs should be provided for the strategic and annual operating plans. In addition, this team

should review credit related processes and operating procedures periodically.

The credit risk strategy and policies should be effectively communicated throughout the

organisation. All lending officers should clearly understand the bank's approach to granting

credit and should be held accountable for complying with the policies and procedures.

Keeping in view the foregoing, each bank may, depending on the size of the organization or

loan book, constitute a high level Credit Policy Committee also called Credit Risk

Management Committee or Credit Control Committee, etc. to deal with issues relating to

26

credit policy and procedures and to analyse, manage and control credit risk on a bank wide

basis. The Committee should be headed by the Chairman/CEO/ED, and should comprise

heads of Credit Department, Treasury, Credit Risk Management Department (CRMD) and

the Chief Economist. The Committee should, inter alia, formulate clear policies on standards

for presentation of credit proposals, financial covenants, rating standards and benchmarks,

delegation of credit approving powers, prudential limits on large credit exposures, asset

concentrations, standards for loan collateral, portfolio management, loan review mechanism,

risk concentrations, risk monitoring and evaluation, pricing of loans, provisioning,

regulatory/legal compliance, etc. Concurrently, each bank may also set up Credit Risk

Management Department (CRMD), independent of the Credit Administration Department.

The CRMD should enforce and monitor compliance of the risk parameters and prudential

limits set by the CPC. The CRMD should also lay down risk assessment systems, monitor

quality of loan portfolio, identify problems and correct deficiencies, develop MIS and

undertake loan review/audit. Large banks may consider separate set up for loan review/audit.

The CRMD should also be made accountable for protecting the quality of the entire loan

portfolio. The Department should undertake portfolio evaluations and conduct comprehensive

studies on the environment to test the

RISK MANAGEMENT

MEANING OF RISK

Risk management is a process of managing the collection of managing the collection of

liabilities with an objective of increasing the cash flows with minimum costs. It involves

collecting in right time, right amount, in right terms.This process starts from identifying the

amount of liabilities and to make the collection successful. This does not end with mere

collection. Besides collection, the difficulties and weak areas should also be ascertained,

which leads to development of an effective system for credit extension or sales and

collection.

Risk management is an area of tremendous challenge. Risk management is used to minimize

bad debts through active account delinquency management. As the companies strive to

increase their cash flows and improve customer relationships, the risk partner is more

important than any other.

27

IMPORTANCE OF RISK

In today’s market scenario, one of the most critical areas to focus on is to protect the bank

from bankruptcy. In such conditions Risk department plays a key role in the growth of banks.

Any delay in realizing the receivables would adversely effect the working capital, which in

turn effects the overall financial management of the firm.

No firm can be successful if its overdue are not collected, monitored and managed carefully

in time. Thus risk management is important in sustaining the bank and its growth.

RISK DEPARTMENT IN HDFC BANK

When all the doors are closed to collect the EMI from the customer then it comes to risk

department. In Hdfc bankthe most importance is given to risk department. The risk

department in HDFC BANKfollows bucket wise policies which starts from BUCKET 1.

The cheques of the customers which got bounced will come to the risk department where

they pressurizes the customer and gets the EMI including penal and cheque bounce charges

from customer.

The first six months of the customer is very important for the risk department which is called

“INFANT DELIQUENCY” where the risk department estimates whether the customer is

going to be defaulter in future.

The risk department is very strong in HDFC BANKwhere they follow the bucket system. The

bucket system depends on “Days past dues”. For every 30 days the bucket system shifts from

one bucket to other depending on pending EMI amount.

PROCESS FLOW

INSERT

If the bank is unable to collect atleast one EMI from the customer from past continuous 3

months then they book the case as non performance assets.

They claim the future calculated amount as loss so to avoid this type of loss to the bank. They

take lot of care to collect the EMI’s within the three months with out fail to reduce the

increase in the default ratio through bucket wise.

The loss is calculated using the following formula:28

Future outstanding = EMI * lost amount + EMI * future turn amount.

To control the defaulters’ ratio they started the necessary steps from the starting of the

collection department. The flow of power is as shown in the flow chart from top level to

bottom level.

When the case comes to bucket 1 lot of pressure is made by portfolio manager to stop the

case not to extend to bucket 2. The bucket portfolio manager plays a prominent role in risk

department and he is paid more pay and perks. In similar way in bucket 2 the portfolio

manager plays a prominent role to reduce the case not to extend to bucket 3. When the case

enters bucket 3 and portfolio manager is unable to collect at least one EMI then the case is

booked as non performance asset which is a loss to the bank.

LEGAL ASPECTS OF RISK

When the file comes to bucket 3 there after making all pressures if they could not get the

amount they further proceed legally to collect the money.

The three main sections used to proceed legally are:

1 Section 138 (NEGOTIABLE INSTRUMENTS ACT)

2 Section 156

3 Section 9

Section 138

Where any cheque drawn by a person on account maintained by him with the banker for

payment of any amount of money to another person from out of that account for the

discharge, in a whole or in part, of any debt or any liability, his return by bank unpaid, either

because of the amount of money outstanding to the credit of that account by an agreement

made with the bank. Such person shall be deemed to have committed an offence and shall

without prejudice to any other provisions of this act can be punished with imprisonment for a

term which may extend to one year or with a fine which may extend to twice the amount of

cheque or with the both. Now the court has the power to order two-year imprisonment for

cheque bounces under section 138 N.I. a

POST DATED CHEQUES

A cheque post-dated remains bills of exchange till the date written on it and with effect from

the said date shown on the face of it; it becomes a “cheque” under the act.29

Post dated cheque deemed to have been drawn on the date it bears – provision of section 138

(a) held.

ELECTRONIC CLEARENCE SERVICE

Electronic clearance service contains six cheques among that four cheques contain the EMI

amount and one with full loan amount and another with cleared amount each cheque is signed

by the loan according to RBI rules.

STANDARD INSTRUCTIONS

This type of instruction are produced when the loanee working in the same bank and taking

loan amount.

SUMMONS

The chief ministerial officer of the court shall ordinarily sign summons issued to witness.

1: These are the witness summons.

2: Accused summons to be signed by magistrates:

Magistrates shall themselves sign summons to accused persons. The copy of the complaint

may be sent with summons or warrant issued to the accused under sub-Section (i) of section

204 of the code.

Place of hearing to be stated:

Every summons and every order of adjournment shall state the place in which the course to

which it relates will be heard.

Warrant bearing sign manual of the judge or the magistrate:

All warrants should receive the sign of them from whose court they are issued.

SECTION 156

This case is claimed against the customer as cheating or forgery case where the customer

might have given some fake documents to get a loan which might have mislead the bank.

Whoever by deceiving any person fraudulently or dishonestly include the persons. So deceive

to deliver property to any person or to consent that any person shall retain any property

intentionally include person so deceived to do or omit to do anything which he would not do

or omit if he were not so deceived, and which after omission cause or lively cause damage or

harm to that person in body, mind, reputation and property is said to “cheat “

Example

30

1. A by putting a counterfoil mark on an article intentionally deceives into a belief that

this articles were made by celebrity manufacturer, and thus dishonestly induces Z to

buy and pay for the articles ‘A cheats’.

2. A by pleading as diamonds articles which he knows are not diamonds intentionally

deceives Z if he thereby dishonestly includes Z to land money, ‘A cheats’.

i) Dibas sarkar vs. State 1989 Cr. LJ MOC 30 Cal.

ii) Kakumukkala Krishnamurthy vs. State of AP AIR 1956 Sec.333

Section 9

This case is claimed against the customer as a property attachment where the bank attacks the

property of the customer. This section is very rarely used.

ANALYSIS AND FINDINGS

ANALYSIS AND FINDINGS

The information or data of credit and risk management reference to

hdfc bank.

Finding for last years of description for risk mode .

NON PERFORMANCE ASSETS

table shows the data of the non performance assets of the HDFC BANK.

MONTHS

TARGET

(In lacks)

ACHIEVEMENTS

(In lacks)

April 10 1.56 0.41

May 10 1.62 1.2

June 10 1.77 1.3

July 10 1.92 0.56

Aug 10 2.11 1.72

Sep 10 2.34 2.13

Oct 10 2.58 0.60

Nov10 2.83 0.61

31

Dec 10 3.10 0.00

Jan11 3.37 1.9

Feb11 3.68 1.98

Mar11 4.01 0.32

30.89 12.73

NON PERFORMANCE ASSETS-IN LAKHS

1) TARGETS : This is the amount given to book as loss for the risk department in

every month of non performance of asset.

2) ACHIEVEMENTS : This is the amount booked as loss to risk department

achieved in every month.

PENAL CHARGES COLLECTED

Finding for last years of description for risk mode .

MONTHS TARGET ACHIEVEMENTS

32

(In lacks) (In lacks)

Apl 10 0.26 0.19

May 10 0.29 0.32

June 10 0.32 0.52

July 10 0.36 0.30

Aug 10 0.40 0.83

Sep 10 0.43 0.32

Oct 10 0.47 0.66

Nov 10 0.52 0.77

Dec 10 0.56 0.65

Jan11 0.61 0.59

Feb11 0.65 0.81

Mar11 0.70 1.29

5.57

7.25

33

PENAL AMOUNT

1. TARGETS: This is the target penal amount given for risk department to collect.

2. ACHIEVEMENTS: This is the penal amount collected by risk department every

month.

Months Target (lakhs) Achievements (lakhs)

April 2010 0.71 0.67

May2010 0.74 0.53

June2010 0.77 0.80

July 2010 0.80 0.74

August 2010 0.82 1.21

September 2010 0.87 1.22

October 2010 0.90 0.93

34

MONTH WISE

November 2010 0.91 0.75

December 2010 0.93 0.95

PENAL AMOUNT

1. TARGETS: This is the target penal amount given for risk department to collect.

2. ACHIEVEMENTS: This is the penal amount collected by risk department every

month.

Details of self clients of HDFC BANK

SEP RSENP SURR SAL SENP TOTAL

DEFAULTERS(%) 7 57 20 37 34 155

DEFAULTERS

AMNOUNT

134043 410510 110438 412913 1298755 2365656

35

DEFAULTERS PERCENTAGE

DEFAULTERS CLIENTS (%)

1: SELF EMPLOYED PROFESSIONAL. (SEP) 7

2: RETAIL SELF EMPLOYED NON PROFESSIONAL. (RSENP) 57

3: SURROGATIVES. (SURR) 20

4: SALARIED. (SAL) 37

5: SELF EMPLOYED NON PROFESSIONAL. (SENP) 34

TOTAL 155

DEFAULTERS PERCENTAGE

5%

36%

13%24%

22% SEP

RSENP

SURR

SAL

SENP

Analysis of defaulters (%)

36

1: SEP = 7/155 *110 = 5%

2: RSENP = 57/155 *110 = 36%

3: SURR = 20/155 *110 = 13%

4: SAL =37/155 *110 = 24%

5: SENP =34/155 *100 = 22%

DEFAULTERS AMOUNT PERCENTAGE

Defaulters Amount

1: SELF EMPLOYED PROFESSIONAL. 1,34,043

2: RETAIL SELF EMPLOYED NON PROFESSIONAL. 4,10,510

3: SURROGATIVES. 1,10,438

4: SALARIED. 4,12,913

5: SELF EMPLOYED NON PROFESSIONAL. 12,98,755

Analysis of Defaulters amount (%)

1: SEP = 134043/2365656 *110 = 6%

2: RSENP =410510/2365656 *110 = 17%

3: SURR = 110438/2365656 *110 = 5%

4: SAL = 412913/2365656 *110 = 17%

5: SENP =1298755/2365656 *100 = 55%

TABLE: 1 The statement showing default on the lines of repayment period

37

NUMBER OF DAYS DEFAULT

REPAYMENT

PERIOD

30

DAYS

60

DAYS

90

DAYS

ABOVE

90DAYS

ROW

TOTAL

[0 YRS – 2 YRS] 14

(58)

2

(8)

3

(13)

5

(21)

24

[2 YRS - 3 YRS] 91

(76)

11

(9)

7

(6)

10

(9)

119

[3 YRS – 4YRS] 9

(75)

1

(8)

1

(8)

1

(9)

12

COLUMN TOTAL 114

(74)

14

(9)

11

(7)

16

(10)

155

** figures in parenthesis denote the row wise percentage.

Effective risk (%) in terms of period

1) 14/24*100=58

2) 91/ 199*100=76

3) 9/12*100=75

The distribution of defaulters with respect to repayment period is visible in table 1.

According to the table more number of defaulters are lying in bucket 1, 74% of the defaulters

are in bucket 1 followed by11% in above 90 days and 9% in bucket 2 and 7% in bucket 3.

The same is reflected in the categories of 2-3 years and 3-4 years repayment period where as

in 0-2 years repayment period 58% of defaulters are in 30 days 21% in above 90 days, 13%

in 90 days and 8% in 60 days.

38

It implies the bank has been focusing to control and reduce the number of defaulters in other

than 30 days bucket further it also implies the repayment period is not a factor which

influence on number of defaulters.

Table: 2 The statement showing default on the lines of profession

NUMBER OF DAYS DEFAULT

PROFESSION 30

DAYS

60

AYS

90

DAYS

ABOVE

90DAYS

ROW

TOTAL

TECHNICAL 26

(0.65)

5 3 6 40

BUSINESS 75

(0.77)

6 7 9 97

COLUMN TOTAL 101 11 10 15 137

**figures in parenthesis denote the row wise percentage.

Here business category is defined as the income category based on their

non-salaried and non-professional incomes where they use their business skills, RSENP,

SENP comes under this category.

Technical profession, these are the persons having an income either from salary or from their

professional qualification. SEP, SALARIED comes under this category.

NULL HYPOTHESIS: H0:

There is no relationship between profession and number of defaulters

P1=P2

ALTERNATE HYPOTHESIS: H1:

There is relationship between profession and default rate. The business professions are more

than the technical profession.

P1<P2 (Left tailed test)

Test of proportions Z=P1-P2/√P (1-P) (1/n1+1/n2)

Where P1=26/40=0.65

P2=75/97=0.77

39

P=P1+P2/n1+n2

Where n1=40 , N2=97

Therefore P=0.74

Z=0.65-0.77/√ (0.74) (1-0.74) (1/40+1/97)

= -1.46

The calculated value of test of proportion is -1.46

The table value of test of proportion is -1.645 at 95% confidence level.

Therefore the calculated value lies in rejection rejoin, so null hypothesis is accepted

Therefore there is no relationship between the profession and the number of defaulters.

TABLE: 3 The statement showing default on the lines of gender.

NUMBER OF DAYS DEFAULT

SEX

30

DAYS

60

DAYS

90

DAYS

ABOVE

90DAYS

ROW

TOTAL

MALE 95

(0.72)

11 11 15 132

FEMALE 20

(0.87)

1 1 1 23

COLUMN

TOTAL

115 12 12 16 155

**figures in parenthesis denote the row wise percentage.

NULL HYPOTHESIS: H0:

There is no relationship between sex and number of defaulters

P1=P2

ALTERNATE HYPOTHESIS: H1:

There is relationship between sex and number of defaulters. Female are more in

number than male.

P1<P2 (Left tailed test)

Test of proportions Z=P1-P2/√P (1-P) (1/n1+1/n2)

Where P1=95/132=0.72

40

P2=20/23=0.87

P=P1+P2/n1+n2

Where n1=132 , N2=23

Therefore P=0.74

Z=0.72-0.87/√(0.74) (1-0.74) (1/132+1/23)

= -1.52

The calculated value of test of proportion is -1.52

The table value of test of proportion is -1.645 at 95% confidence level.

Therefore the calculated value lies in rejection rejoin, so null hypothesis is accepted

Therefore there is no relationship between the sex and the number of defaulters.

TABLE: 4 To find the relationship between AMOUNT OF LOAN and DAYS

DEFAULT RATE.

NUMBER OF DAYS DEFAULT RATES

AMOUNT of LOAN

30

DAYS

60

DAYS

90

DAYS

ABOVE

90DAYS

ROW

TOTAL

[RS 0 – RS 1,00,000] 54

(0.77)

4 6 6 70

[RS1,00,000 – RS 2,00,000] 32

(0.64)

7 3 8 50

[RS 2,00,000 – RS 5,00,000] 22

1

2

1

26

[RS 5,00,000 – RS 7,00,000] 2

0

0

1

3

[RS7,00,000- RS11,00,000] 6 0 0 0 6

COLUMN TOTAL 116 12 11 16 155

*figures in parenthesis denote row wise percentage.

NULL HYPOTHESIS: H0:

41

Percentage of defaulters within 30 days period do not differ significantly between the

amount borrowed 0-1 lack and 1 lack-2 lack

P1=P2

ALTERNATE HYPOTHESIS: H1:

Percentage of defaulters within 30 days period differ significantly between the amount

borrowed 0-1 lack and 1 lack-2 lack.

P1>P2 (Right tailed test)

Test of proportions Z=P1-P2/√P (1-P) (1/n1+1/n2)

Where P1=54/70=0.77

P2=32/50=0.64

P=P1+P2/n1+n2

Where n1=70

N2=50

Therefore P=0.72

Z=0.77-0.64/√ (0.72) (1-0.72) (1/70+1/50)

= 1.566

The calculated value of test of proportion is 1.566

The table value of test of proportion is 1.645 at 95% confidence level.

Therefore the calculated value lies in rejection rejoin, so null hypothesis is accepted

Therefore there is no relationship between the loan amount and the number of defaulters.

Note: The hypothesis is tested between first two slots i.e. amount range Rs 0-1 lack and Rs 1

lack-2 lack.

TABLE 5: Statement showing default on line of location.

NUMBER OF DAYS DEFAULT

LOCATION

30

DAYS

60

DAYS

90

DAYS

ABOVE

90DAYS

ROW

TOTAL

NEW

HYDERABAD

41 6 4 7 58

SECUNDERABAD 30 3 5 5 43

42

RANGA REDDY

DISTRICT 29 3 3 4 39

COLUMN TOTAL 100 12 12 16 140

**figures in parenthesis denote row wise percentage

Observed

frequency

(oi)

Expected

frequency

(ei)

(oi-ei)2 (oi.-ei) 2/ei

NEW

HYDERABAD 41

34

49

1.44

SECUNDERABAD 30

33

9 0.27

RANGA REDDY

DISTRICT

29

--------

100

---------

33

---------

110

----------

16 0.48

--------

chisquare =2.19

--------

NULL HYPOTHESIS: H0:

Categories in 30 days are equally distributed

43

P1=P2

ALTERNATIVE HYPOTHESIS: H1:

Categories in 30 days are not equally distributed

P1=P2

Chi square value is 2.19

Critical value at 95% confidence level is 5.99.

Chi square value is less than critical value so null hypothesis is accepted.

Therefore location of the loanees not influence on the defaulters (in 30 days category).

CONCLUSSION

Periodically customer meet should be conducted and category wise the best customer

44

should be appreciated and if possible rewarded by way of cash prize or in kind. This

helps in creating good publicity for the bank as well as to penetrate in to market.

Post disbursement contact with the loanee should be maintained. This process not

only builds report but also gives important clues about loanee’s ability to honour the

payment responsibility. At the same time this also leads to good customer care.

There should be good coordination among sales department, credit department and

risk department where they should go through the loanee’s profile and should sanction

the amount through proper stringent verification when the amount is huge.

Future status of loanees business, if he is a business man, should be assessed.

Reserves, environment, competition, capabilities etc. should be considered before

sanctioning a loan based on past performance. Future analysis is more important for a

new customer than to an old customer. Whereas, in case of employee, the job security,

skill base, proof of past financial discipline, property owned etc. should be

considered. Simply not with numerical parameters but also with other qualitative

factors.

Government employee is also an important segment, bulk applicants can be attracted

by influencing the undertaking office or accounts officer of the concerned department

for taking letters to see that installments payments are directly deducted from their

salaries. This segment is definitely useful in boosting up the loan selling if proper

verification and strict scrutanisation is done with corresponding undertaking officers.

Good rapport with government officers by risk department will help in recovering the

targeted amounted from government employee’s proper branch network and good

force in risk department will solve if there is any transfer of employees.

To safeguard the loan and improve the risk especially when there is a probability of

mobility of a loan for example: in case of a personal loan property attachment or

guaranteed of government employee is to be taken.Hence such defaulters can be

reduced.

SUGGESTION

A loanee’s political affiliation and his past career in politics have to be investigated

before disbursing the loan amount in order to reduce the hardships involved in 45

collecting the amount.

Proper verification of documents and evaluation of stocks and assets of business

people before sanctioning such loans is essential to avoid overvaluation by the

employees. For this a technical person is to be appointed who has entire knowledge of

risk, legal aspects and technical process where thorough verification can be done.

To detect the fraud by the sales people whose intention is to usually just sourcing the

loans applications the risk department head along with sales department head should

select the cases randomly and visit the places for inspection in every month first week

where they can find the exact picture and at the same time can ascertained the scope

for fraud.

In terms of customer wise loan amount the percentage of self employed non

professionals is more and special attention should be given while disbursing the loan

amounts.

Risk management should be a proactive process and hence its role

should not be limited to the post default activity it should develop a system to track

the possible pitfalls in each sanction from the very beginning.

BIBILIOGRAPHY

R.K. Sharma Shashi K. Guptha ----- Management Accounting

P.V. Varshney ---- Companying Law and practices

S.N. Maheshwari ---- Financial Management

Web sites:

www.investopedia.com

www.wikipedia.com

Annexure

Annexure

46

Credit department is the back bone of personal loan business. Main function of the credit is

to assess the credit worthiness of an applicant and lending him appropriate amount based on

such assessment and subject to the terms, conditions and limitations of the policies.

Comprehensive credit information, which provides details pertaining to credit facilities

already availed by the borrower as well as his payment track record, has become the need of

an hour. Credit risk is defined as the possibility that a borrower or counterparty will fail to

meet its obligations in accordance with agreed terms. Credit risk, therefore, arises from the

banks' dealings with or lending to a corporate, individual, another bank, financial institution

or a country.

Credit risk management enables banks to identify, assess, manage proactively, and

optimise their credit risk at an individual level or at an entity level or at the level of a country.

Given the fast changing, dynamic world scenario experiencing the pressures of globalisation,

liberalization, consolidation and disintermediation, it is important that banks have a robust

credit risk management policies and procedures which is sensitive and responsive to these

changes.

The strategy would therefore, include a statement of the bank’s willingness to grant

loans based on the type of economic activity, geographical location, currency, market,

maturity and anticipated profitability. This would necessarily translate into the identification

of target markets and business sectors, preferred levels of diversification and concentration,

the cost of capital in granting credit and the cost of bad debts.

In some organisations, the credit risk management team is responsible for the management of

problem accounts, and for credit operations as well. The responsibilities of this team are the

formulation of credit policies, procedures and controls extending to all of its credit risks

arising from corporate banking, treasury, credit cards, personal banking, trade finance,

securities processing, payment and settlement systems, etc.

The credit risk strategy and policies should be effectively communicated throughout the

organisation. All lending officers should clearly understand the bank's approach to granting

credit and should be held accountable for complying with the policies and procedures.

To deal with issues relating to credit policy and procedures and to analyse, manage and

47

control credit risk on a bank wide basis.

Credit risk is not really manageable for very small companies (i.e., those with only one or

two customers). This makes these companies very vulnerable to defaults, or even payment

delays by their customers.

Lenders will trade off the cost/benefits of a loan according to its risks and the interest

charged. But interest rates are not the only method to compensate for risk. Protective

covenants are written into loan agreements that allow the lender A recent innovation to

protect lenders and bond holders from the danger of default are credit derivatives, most

commonly in the form of credit defaulters swap. These financial contracts allow companies to

buy protection against defaults from a third party, the protection seller. The protection seller

receives a periodic fee (the credit spread) as compensation for the risk it takes, and in return it

agrees to buy the debt should a credit event ("default") occur.

Employees of any firm also depend on the firm's ability to pay wages, and are exposed to the

credit risk of their employer

Risk management is used to minimize bad debts through active account delinquency

management in right time, right amount, in right terms.Any delay in realizing the receivables

would adversely effect the working capital, which in turn effects the overall financial

management of the firm.

CREDIT RISK IS FACED BY

Faced by lenders to consumers

Most lenders employ their own models (credit scoreboard) to rank potential and existing

customers according to risk, and then apply appropriate strategies. With products such as

unsecured personal loans or mortgages, lenders charge a higher price for higher risk

customers and vice versa. With revolving products such as credit cards and overdrafts, risk is

48

controlled through careful setting of credit limits. Some products also require security, most

commonly in the form of property.

Faced by lenders to business

Lenders will trade off the cost/benefits of a loan according to its risks and the interest

charged. But interest rates are not the only method to compensate for risk. Protective

covenants are written into loan agreements that allow the lender some controls. These

covenants may:

limit the borrower's ability to weaken his balance sheet voluntarily e.g., by buying

back shares, or paying dividends, or borrowing further.

allow for monitoring the debt by requiring audits, and monthly reports

allow the lender to decide when he can recall the loan based on specific events or

when financial ratios like debt/equity, or interest coverage deteriorate.

A recent innovation to protect lenders and bond holders from the danger of default are credit

derivatives, most commonly in the form of credit defaulters swap. These financial contracts

allow companies to buy protection against defaults from a third party, the protection seller.

The protection seller receives a periodic fee (the credit spread) as compensation for the risk it

takes, and in return it agrees to buy the debt should a credit event ("default") occur.

Faced by business

Companies carry credit risk when, for example, they do not demand up-front cash payment

for products or services.[1] By delivering the product or service first and billing the customer

later - if it's a business customer the terms may be quoted as NET-30- the company is

carrying a risk between the delivery and payment.

Significant resources and sophisticated programs are used to analyze and manage risk. Some

companies run a credit risk department whose job is to assess the financial health of their

customers, and extend credit (or not) accordingly. They may use in house programs to advise

on avoiding, reducing and transferring risk. They also use third party provided intelligence.

Companies like MOODYS and DUN BRADSTREETprovide such information for a fee.

49

For example, a distributors selling its products to a troubled retailersmay attempt to lessen

credit risk by tightening payment terms to "net 15", or by actually selling fewer products on

credit to the retailer, or even cutting off credit entirely, and demanding payment in advance.

Such strategies impact on sales volume but reduce exposure to credit risk and subsequent

payment defaults.

Credit risk is not really manageable for very small companies (i.e., those with only one or

two customers). This makes these companies very vulnerable to defaults, or even payment

delays by their customers.

The use of a collection agency is not really a tool to manage credit risk; rather, it is an

extreme measure closer to a write down in that the creditor expects a below-agreed return

after the collection agency takes its share (if it is able to get anything at all).

Faced by individuals

Consumers may also face credit risk in a direct form as depositors at banks or as

investors/lenders. They may also face credit risk when entering into standard commercial

transactions by providing a deposit to their counterparty, e.g. for a large purchase or a real

estate rental. Employees of any firm also depend on the firm's ability to pay wages, and are

exposed to the credit risk of their employer.

In some cases, governments recognize that an individual's capacity to evaluate credit risk may

be limited, and the risk may reduce economic efficiency; governments may enact various

legal measures or mechanisms with the intention of protecting consumers against some of

these risks. Bank deposits, notably, are insured in many countries (to some maximum

amount) for individuals, effectively limiting their credit risk to banks and increasing their

willingness to use the banking system.

50