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CHAPTER I1THE INDIAN FINANCIAL SYSTEM:The Indian financial system of the pre-reform period, before 1991, essentially catered to the needs of planned development in a mixed-economy framework, where the Government sector had a predominant role in economic activity. Interest rates on Government securities were artificially pegged at low levels, which were unrelated to the market conditions. The system of administered interest rates was characterized by detailed prescriptions on the lending an

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CHAPTER I

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THE INDIAN FINANCIAL SYSTEM:

The Indian financial system of the pre-reform period, before 1991, essentially catered to

the needs of planned development in a mixed-economy framework, where the Government

sector had a predominant role in economic activity. Interest rates on Government

securities were artificially pegged at low levels, which were unrelated to the market

conditions. The system of administered interest rates was characterized by detailed

prescriptions on the lending and the deposit side, leading to multiplicity and complexity of

interest rates.

Consequently, by the end of the eighties, directed and concessional availability of bank

credit to certain sectors adversely affected the viability and profitability of banks. Thus, the

transactions of the Government, the Reserve Bank and the commercial banks were

governed by fiscal priorities rather than sound principles of financial management and

commercial viability. It was then recognized that this approach, which, conceptually,

sought to enhance efficiency through a co-ordinate approach, actually led to loss of

transparency, accountability and incentive to seek efficiency

NEED AND IMPORTANCE OF FINANCIAL SECTOR:

The New Economic Policy (NEP) of structural adjustments and stabilization programmed

was given a big thrust in India in June 1991.  The financial system reforms have received

special attention as a part of this policy because of the perceived interdependence.

The need for financial reforms had arisen because the financial institution and markets

were in a bad shape.  The banking sector suffered from lack of competition, low capital

base, low productivity, and high intermediation costs.  The role of technology was minimal,

and the quality of service did not receive adequate attention.  Proper risk management

system was not followed, and prudential norms were weak.  All these resulted in poor

assets quality.  Development of financial institutions operated in an over – protected

environment with most of the funding coming from assured sources.  There was little

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competition in insurance and mutual funds industries.  Financial markets were

characterized by control over pricing of financial assets, barriers to entry, and high

transactions costs.  The banks were running either at a loss or on very low profits, and,

consequently were unable to provide adequately for loan defaults, and build their capital.

There had been organizational inadequacies, the weakening of management and control

functions, the growth of restrictive practices, the erosion of work culture, and flaws in

credit management.  The strain on the performance of the banks had emanated partly

from the imposition of high Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR)

and directed credit programmers for the priority sectors – all at below market or

concessional or subsidized interest rates.  This, apart from affecting bank profitability

adversely, had resulted in the low or repressed or depressed interest rates on deposits and

in higher interest rates on loans to the larger borrowers from business and industry.

Further, the functioning of the financial system, and the credit delivery as well as recovery

process had become politicized, which damaged the quality of lending and the culture of

repaying loans.  The widespread write-offs of the loans had seriously jeopardized the

viability of banks.  As the closure of sick industrial units was discouraged by the

government, banks had to continue to finance non-viable sick units, which further

compromised their own viability.  The legal system was not of much help in recovering

loans.  There was a lack of transparency in preparing statements of accounts by banks.

In other words, the reforms had become imperative on account of the facts that despite its

impressive quantitative growth and achievements, the financial health, integrity,

autonomy, flexibility, and vibrancy in the financial sector had deteriorated over the past

many years.  The allocation of resources had become severely distorted, the portfolio

quality had deteriorated, and productivity, efficiency and profitability had been eroded in

the system.  Customer service was poor, work technology remained outdated, and

transaction costs were high.  The capital base of the system remained low, the accounting

and disclosure practices were faulty, and the administrative expenses had greatly soared. 

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The system suffered also from a lack of delegation of authority, inadequate internal

controls and poor housekeeping.

MEASURES:

For a long time, an alarming increase of sickness in the Indian financial system had

required urgent remedial measures or reforms which were introduced in 1991.

Main and sub-objectives of financial reforms introduced in 1991:

1. To develop a market-oriented, competitive, world-integrated, diversified,

autonomous, transparent financial system.

2. To increase the locative efficiency of available savings and to promote accelerated

growth of the real sector.

3. To increase or bring about the effectiveness, accountability, profitability, viability,

vibrancy, balanced growth, operational economy and flexibility, professionalism

and de-politicization in the financial sector.

4. To increase the rate of return on real investment.

5. To promote competition by creating level-playing fields and facilitating free entry

and exit for institutions and market players.

6. To ensure that the rationalization of interest rates structure occurs, that interest

rates are flexible, market-determined or market-related, and that the system offers

to its users a reasonable level of positive real interest rates.  In other words, the goal

has been to dismantle the administered system of interest rates.

7. To reduce the levels of resource pre-emotions and to improve the effectiveness of

directed credit programmers.

8. To build a financial infrastructure relating to supervision, audit, technology, and

legal matters.

9. To modernize the instruments of monetary control so as to make them more

suitable for the conduct of monetary policy in a market economy i.e. to increase the

reliance on indirect or market-incentives based instruments rather than direct or

physical instruments of monetary control.

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The key words describing reforms have been liberalization, deregulation, marketization,

privatization, and globalization, all of which convey reforms objectives in a clear manner. 

The basic premise underlying the reforms has been that the state ownership and regulation

have harmed the financial system, particularly the banks and the investors, and that such

regulation is no longer relevant and adequate.  To use the well-known academic

terminology, the objective of financial reforms has been to correct and eliminate financial

repression; and to transform a financially repressed system into a free system.

Financial sector reforms are said to be grounded in the belief that the competitive

efficiency in the real sectors of the economy cannot be realized to its full extent unless the

locative efficiency of the private sector was improved.  The main thrust of financial sector

reforms was on the creation of efficient and stable financial institutions and markets, the

removal if structural bottlenecks, introduction of new players and instruments,

introduction of free pricing of financial assets, relaxation of quantitative restrictions,

improvement in trading, clearing and settlement practices, promotion of institutional

infrastructure, refinement of market micro-structure, creation of liquidity, depth, and the

efficient price discovery process, and ensuring technological up-gradation.

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STRUCTURE OF FINANCIAL INSTITUTION IN INDIA

SBI & ASSOCIATE BANKS FOREIGN BANKS

NATIONALIZED BANKS OTHER INDIAN BANKS DIST.LD BANKS

RRBs NON-SCH.BANKS PLDBs

20 NATIONALIZED BANKS DCC Bank UCBs

PACS, CREDIT SOCIETY

PO SAVING BANKS

NATIONAL SVG CORP LIC, GIC, UTI, NABAR

EPF DICGC, ECGC, IFCI, CHITIS,

ICICI, IDBI, SIDCs. Stock Exchange

FINANCIAL INSTITUTIONS IN INDIA:

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RESERVE BANK OF INDIA

COMMERCIAL BANK CO-OPERATIVE BANK OTHER INSTITUTIONS

PUBLIC SECTOR

PRIVATE SECTOR

STATE CO-OPERATIVE BANKS

STATE LAND DEVELOPMENT MENT BANKS

GOVERNMENTPUBLIC SECTOR

PRIVATE SECTOR

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The Financial Institutions in India mainly comprises of the Central Bank which is better

known as the Reserve Bank of India, the commercial banks, the credit rating agencies, the

securities and exchange board of India, insurance companies and the specialized financial

institutions in India.

RESERVE BANK OF INDIA:

Reserve Bank of India was established in the year 1935 with a view to organize the

financial frame work and facilitate fiscal stability in India. The bank acts as the regulatory

authority with regard to the functioning of the various commercial bank and the other

financial institutions in India. The bank formulates different rates and policies for the

overall improvement of the banking sector. It issue currency notes and offers aids to the

central and institutions governments.

COMMERCIAL BANKS IN INDIA:

The commercial banks in India are categorized into foreign banks, private banks and the

public sector banks. The commercial banks indulge in varied activities such as acceptance

of deposits, acting as trustees, offering loans for the different purposes and are even

allowed to collect taxes on behalf of the institutions and central government.

CREDIT RATING AGENCIES IN INDIA:

The credit rating agencies in India were mainly formed to assess the condition of the

financial sector and to find out avenues for more improvement. The credit rating agencies

offer various services such as:

Operation Up-gradation

Training to Employees

To Scrutinize New Projects and find out the weak sections in it

Rate different sectors

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The two most important credit rating agencies in India are:

CRISIL

ICRA

CRISIL:

CRISIL the Credit Rating Information Service of India Limited, although set up in 1987

(see previous entry), started functioning in January 1988. As on 30 June 1993, CRISIL had

assigned rating for C 586 debt instruments originated by 462 companies, covering a debt

volume of Rs 32, 142 crore. The CRISIL rating symbols for Debentures are ranked into

three categories: High Investment Grades (AAA, pronounced ‘triple A’) for highest safety,

and AA (pronounced ‘double A’) for high safety; investment Grades (A for adequate

safety, and BBB for moderate safety) and Speculative Grades (B for high risk, C for

substantial risk, and D for companies in default). CRISIL may apply + or – symbols for

ratings from AA to C to reflect comparative standing within the category. Ratings for fixed

deposits have F before the rating, while short-term instruments have the ratings p-1, p-2, p-

3, p-4 and p-5 for strong safety, less strong safety, adequate safety, minimal safety, and

possibility of default, respectively. For Structured Obligations the rating symbols are the

same as for debentures, with (so) added after the letters, e.g., AAA (so)

CRISIL makes it clear that its rating relates to the particular debt instrument and is not a

rating for the company as a whole, in as much as it takes into account the specific terms of

the instruments. The rating is not a recommendation to invest or not to invest. CRISIL

ratings are confidential, unless the company chooses to make them public, but if it does,

CRISIL will monitor the rating over the life of the instrument. Any change in the rating so

affected will be made public by CRISIL.

ICRA:

ICRA Limited (formerly Investment Information and Credit Rating Agency of India

Limited) was set up in 1991 by leading financial/investment institutions, commercial banks

and financial services companies as an independent and professional Investment

Information and Credit Rating Agency.

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Today, ICRA and its subsidiaries together form the ICRA Group of Companies (Group

ICRA). ICRA is a Public Limited Company, with its shares listed on the Bombay Stock

Exchange and the National Stock Exchange.

ALIANCE WITH MOODYS INVESTOR SERVICE:

The international Credit Rating Agency Moody’s Investors Service1 is ICRA’s largest

shareholder. The participation of Moody’s is supported by a Technical Services

Agreement, which entails Moody’s providing certain high-value technical services to ICRA.

Specifically, the agreement is aimed at benefiting ICRA’s in-house research capabilities,

and providing it with access to Moody’s global research base. The agreement also envisages

Moody’s conducting regular training and business seminars for ICRA analysts on various

subjects to help them better understand and manage concepts and issues relating to the

development of the capital markets in India. Besides this formal training programmed, the

agreement provides for Moody’s advising ICRA on Rating-products strategy and the

Ratings business in general.

THE ICRA FACTOR

FACILITATING EFFICIENCY IN BUSINESS:

ICRA information products, Ratings, and solutions reflect independent, professional and

impartial opinions, which assist businesses enhance the quality of their decisions and help

issuers access a broader investor base and even lesser known companies approach the

money and capital markets.

THE RESEARCH FACTOR:

We strongly believe that the quality of analytical output is a derivative of an organization’s

research capabilities. We have dedicated teams for Monetary, Fiscal, Industry and Sector

research, and a panel of Advisors to enhance our in-house capabilities. Our research base

enables us to maintain the highest standards of quality and credibility.

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COMMITTED TO THE DEVELOPMENT OF THE FINANCIAL MARKET:

The focus of ICRA in the coming years will continue to be on developing innovative

concepts and products in a dynamic market environment, generating and promoting wider

investor awareness and interest, enhancing efficiency and transparency in the financial

market, and providing a healthier environment for market participants and regulators.

RANGE OF SERVICES

RATING SERVICES

As an early entrant in the Credit Rating business, ICRA Limited (ICRA) is one of the most

experienced Credit Rating Agencies in the country today. ICRA rates rupee denominated

debt instruments issued by manufacturing companies, commercial banks, non-banking

finance companies, financial institutions, public sector undertakings and municipalities,

among others. ICRA also rates structured obligations and sector-specific debt obligations

such as instruments issued by Power, Telecom and Infrastructure companies. The other

services offered include Corporate Governance Rating, Stakeholder Value and Governance

Rating, Credit Risk Rating of Debt Mutual Funds, Rating of Claims Paying Ability of

Insurance Companies, Project Finance Rating, and Line of Credit Rating. ICRA, along

with National Small Industries Corporation Limited (NSIC), has launched a Performance

and Credit Rating Scheme for Small-Scale Enterprises in India. The service is aimed at

enabling Small and Medium Enterprises (SMEs) improve their access to institutional

credit, increase their competitiveness, and raise their market standing.

GRADING SERVICES

The Grading Services offered by ICRA employ pioneering concepts and methodologies,

and include Grading of: Initial Public Offers (IPOs); Microfinance Institutions (MFIs);

Construction Entities; Real Estate Developers and Projects; Healthcare Entities; and

Maritime Training Institutes. In IPO Grading, an ICRA-assigned IPO Grade represents a

relative assessment of the “fundamentals” of the issue graded in relation to the universe of

other listed equity securities in India. In MFI Grading, the focus of ICRA’s grading

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exercise is on evaluating the candidate institution’s business and financial risks. The

Grading of Construction Entities seeks to provide an independent opinion on the quality of

performance of the entities graded. Similarly, the Grading of Real Estate Developers and

Projects seeks to make property buyers aware of the risks associated with real estate

projects, and with the developers’ ability to deliver in accordance with the terms agreed.

ICRA’s Healthcare Grading presents an independent opinion on the quality of care

provided by healthcare entities. In the education sector, ICRA offers the innovative service

of Grading of Maritime Training Institutes in India.

CONSULTING SERVICES:

ICRA Management Consulting Services Limited (IMaCS), a wholly-owned subsidiary of

ICRA Limited, is a multi-line management and development consulting firm with a global

operating footprint. IMaCS offers Consulting Services in Strategy, Risk Management,

Regulation & Reform, Transaction Advisory, Development Consulting and Process Re-

engineering. IMaCS’ clientele includes Banks and Financial Service Companies, Corporate

Entities, Institutional Investors, Governments, Regulators, and Multilateral Agencies.

Besides India, IMaCS has consulting experience across 35 countries in South East Asia,

Northern Asia, West Asia, Africa, Western Europe, and North America.

SECURITIES AND EXCHANGE BOARD OF INDIA:

The securities and exchange board of India, also referred to as SEBI was founded in the

year 1992 in order to protect the interests of the investors and to facilitate the functioning

of the market intermediaries. They supervise market conditions, register institutions and

indulge in risk management.

INSURANCE COMPANIES IN INDIA:

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The insurance companies offer protection against losses. They deal in life insurance,

marine insurance, and vehicle insurance and so on. The insurance companies collect the

little saving of the investors and then reinvest those savings in the market. The insurance

companies are collaborating with different foreign insurance companies after the

liberalization process. This step has been incorporated to expand the Indian Insurance

market and make it competitive.

SPECIALISED FINANCIAL INSTITUTIONS IN INDIA:

The specialized financial institutions in India are government undertakings that were set

up to provide assistance to the different sectors and thereby cause overall development of

the Indian economy. The significant institutions falling under this category includes:

Board for Industrial & Financial Reconstruction

Export-Import Bank Of India

Small Industries Development Bank of India

National Housing Bank

According to the Indian Banking Company Act 1949, "A banking company means any

company which transacts the business of banking. Banking means accepting for the

purpose of lending of investment of deposits of money from the public, payable on demand

or other wise withdrawal by cheque, draft or otherwise."

PRIMARY FUNCTIONS OF COMMERCIAL BANKS:

Commercial Banks performs various primary functions some of them are given below

1. Accepting Deposits: Commercial bank accepts various types of deposits from public

especially from its clients. It includes saving account deposits, recurring account deposits,

fixed deposits, etc. These deposits are payable after a certain time period.

2. Making Advances: The commercial banks provide loans and advances of various forms.

It includes an over draft facility, cash credit, bill discounting, etc. They also give demand

and demand and term loans to all types of clients against proper security.

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3. Credit creation: It is most significant function of the commercial banks. While

sanctioning a loan to a customer, a bank does not provide cash to the borrower Instead it

opens a deposit account from where the borrower can withdraw. In other words while

sanctioning a loan a bank automatically creates deposits. This is known as a credit

creation from commercial bank.

SECONDARY FUNCTIONS OF COMMERCIAL BANKS:

Along with the primary functions each commercial bank has to perform several secondary

functions too. It includes many agency functions or general utility functions. The secondary

functions of commercial banks can be divided into agency functions and utility functions.

I. AGENCY FUNCTIONS :

Various agency functions of commercial banks are

1. To collect and clear cheque, dividends and interest warrant.

2. To make payment of rent, insurance premium, etc.

3. To deal in foreign exchange transactions.

4. To purchase and sell securities.

5. To act as trustee, attorney, correspondent and executor.

6. To accept tax proceeds and tax returns.

II. GENERAL UTILITY FUNCTIONS:

The general utility functions of the commercial banks include

1. To provide safety locker facility to customers.

2. To provide money transfer facility.

3. To issue traveler’s cheque.

4. To act as referees.

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5. To accept various bills for payment e.g. phone bills, gas bills, water bills, etc.

6. To provide merchant banking facility.

7. To provide various cards such as credit cards, debit cards, Smart cards, etc.

The Co-operative banks in India started functioning almost 100 years ago. The

Cooperative bank is an important constituent of the Indian Financial System, judging by

the role assigned to co-operative, the expectations the co-operative is supposed to fulfill,

their number, and the number of offices the cooperative bank operate. Though the co

operative movement originated in the West, but the importance of such banks have

assumed in India is rarely paralleled anywhere else in the world. The cooperative banks in

India play an important role even today in rural financing. The businesses of cooperative

bank in the urban areas also has increased phenomenally in recent years due to the sharp

increase in the number of primary co-operative banks.

Co-operative Banks in India are registered under the Co-operative Societies Act. The

Co-operative bank is also regulated by the RBI. They are governed by the Banking

Regulations Act 1949 and Banking Laws (Co-operative Societies) Act 1965.

CO-OPERATIVE BANKING:

Co-operative banking is retail and commercial banking organized on a co-operative basis.

Co-operative banking institutions take deposits and lend money in most parts of the world.

Co-operative banking (for the purposes of this article), includes retail banking, as carried

out by credit unions, mutual savings and loan associations, building societies and co-

operatives, as well as commercial banking services provided by mutual organizations (such

as cooperative federations) to cooperative businesses.

CO-OPERATIVE BANKS IN INDIA FINANCE RURAL AREAS UNDER :

Farming

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Cattle

Milk

Hatchery

Personal finance

CO-OPERATIVE BANKS IN INDIA FINANCE URBAN AREAS UNDER:

Self-employment

Industries

Small scale units

Home finance

Consumer finance

Personal finance

Some facts about Co-operative banks in India:

Some co-operative banks in India are more forward than many of the state and

private sector banks.

According to NAFCUB the total deposits & landings of Co-operative Banks in India

is much more than Old Private Sector Banks & also the New Private Sector Banks.

This exponential growth of Co-operative Banks in India is attributed mainly to their

much better local reach, personal interaction with customers, and their ability to

catch the nerve of the local clientele.

Co-operative banks are often created by persons belonging to the same local or

professional community or sharing a common interest. Co-operative banks generally

provide their members with a wide range of banking and financial services (loans,

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deposits, banking accounts…). In India co-operative banks are regulated with the RBI

and governed by Banking Regulations Act 1949 and Co-operative Societies Act, 1965.

HISTORY:

The Bank was formed in 1872 in the city of Manchester in UK. The Co-operative banks in

India have a history of almost 100 years. The Co-operative banks are an important

constituent of the Indian Financial System. Co operative Banks in India are registered

under the Co-operative Societies Act. The cooperative bank is also regulated by the RBI.

They are governed by the Banking Regulations Act 1949 and Banking Laws (Co-operative

Societies) Act, 1965. These banks were conceived as substitutes for money lenders.

ESTABLISHMENTS:-

Co-operative bank performs all the main banking functions of deposit mobilization,

supply of credit and provision of remittance facilities.

Co-operative Banks belong to the money market as well as to the capital market.

Co-operative Banks provide limited banking products and are functionally

specialists in agriculture related products. However, co-operative banks now

provide housing loans also.

UCBs provide working capital loans and term loan as well

FEATURES:-

1. Customer-owned entities 2. Democratic member control  3. Profit allocation 

FUNCTIONS:-

Co-operative Banks are organized and managed on the principal of co-operation, self-help,

and mutual help. They work on the basis of “no profit no loss”. Profit maximization is not

their goal .

Co-operative bank do banking business mainly in the agriculture and rural sector.

However, UCBs, SCBs, and CCBs operate in semi urban, urban, and metropolitan also.

The State Co-operative Banks (SCBs), Central Co- operative Banks (CCBs) and Urban Co-

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operative Banks (UCBs) can normally extend housing loans up to Rs 1lakh to an

individual. The scheduled UCBs, however, can lend up to Rs 3 lakh for housing purposes.

The UCBs can provide advances against shares and debentures.

RBI GUIDELINES FOR CO-OPERATIVE BANK TO CREDIT

MASTER CIRCULAR ON MICRO CREDIT

1. MICRO CREDIT

Micro Credit has been defined as the provision of thrift, credit and other financial

services and products of very small amount to the poor in rural, semi-urban and

urban areas for enabling them to raise their income levels and improve their living

standards. Micro Credit Institutions are those, which provide these facilities.

2. THE SELF HELP GROUP (SHG)- BANK LINKAGE PROGRAMME

Despite the vast expansion of the formal credit system in the country, the

dependence of the rural poor on moneylenders continues in many areas, especially

for meeting emergent requirements. Such dependence is pronounced in the case of

marginal farmers, landless laborers, and petty traders and rural artisans belonging

to socially and economically backward classes and tribes whose propensity to save is

limited or too small to be mopped up by the banks. For various reasons, credit to

these sections of the population has not been institutionalized. The studies

conducted by NABARD, APRACA and ILO on the informal groups promoted by

non governmental organizations (NGOs) brought out that Self-Help Savings and

Credit Groups have the potential to bring together the formal banking structure

and the rural poor for mutual benefit and that their working has been encouraging.

The NABARD accordingly launched a pilot project for the purpose and supported it

by way of refinance. It also provided technical support and guidance to the agencies

participating in the programmed. The following criteria would broadly be adopted

by NABARD for selecting SHGs:

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a) The Group should be in existence for at least six months.

b) The Group should have actively promoted the savings habit.

c) Groups could be formal (registered) or informal (unregistered).

d) Membership of the group could be between 10 to 20 persons.

The advances given by the banks to the groups were treated as advances to "weaker

sections" under the priority sector. While the norms relating to margin, security as

also scales of finance and unit cost would broadly guide the banks for lending to the

SHGs, deviations there from could be made by banks, where deemed necessary.

These relaxations in margin, security norms, etc. were only in respect of SHGs to be

financed under the pilot project.

NABARD, vide its circular letter No.NB.DPD.FS.4631/92-A/91-92, dated 26

February, 1992, issued detailed operational guidelines to banks for implementation

of the project. Quick studies conducted by NABARD in a few states to assess the

impact of the linkage project brought out encouraging and positive features like

increase in loan volume of the SHGS, definite shift in the loaning pattern of the

members from non-income generating activities to production activities, nearly

100% recovery performance, significant reduction in the transaction costs for both

the banks and the borrowers, etc., besides leading to gradual increase in the income

level of the SHG members. Another significant feature observed in the linkage

project was that about 85% of the groups linked with the banks are formed

exclusively by women.

With a view to studying the functioning of SHGs and NGOs for expanding their

activities and deepening their role in the rural sector, in November 1994, RBI

constituted a Working Group comprising eminent NGO functionaries,

academicians, consultants and bankers under the Chairmanship of Shri S.K. Kalia,

the then Managing Director, NABARD. As a follow up of the recommendations of

the Working Group, banks were advised in April 1996 as under :

a) SHG Lending as Normal Lending Activity

The SHGs linkage programmed would be treated as a normal business activity of

banks. Accordingly, the banks were advised that they may consider lending to SHGs

as part of their mainstream credit operations both at policy and implementation

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level. They may include SHG linkage in their corporate strategy/plan, training

curriculum of their officers and staff and implement it as a regular business activity

and monitor and review it periodically.

b) Separate Segment under priority sector

In order to enable the banks to report their SHG lending without difficulty, it was

decided that the banks should report their lending to SHGs and/or to NGOs for on-

lending to SHGs/members of SHGs/discrete individuals or small groups which are

in the process of forming into SHGs under the new segment, viz. 'Advances to

SHGs' irrespective of the purposes for which the members of SHGs have been

disbursed loans. Lending to SHGs should be included by the banks as part of their

lending to the weaker sections.

The Government of India has enacted the Micro, Small and Medium Enterprises

Development (MSMED) Act, 2006 on June 16, 2006 which was notified on October

2, 2006. With the enactment of MSMED Act 2006, the paradigm shift that has taken

place is the inclusion of the services sector in the definition of Micro, Small &

Medium enterprises, apart from extending the scope to medium enterprises. The

MSMED Act, 2006 has modified the definition of micro, small and medium

enterprises engaged in manufacturing or production and providing or rendering of

services. The Reserve Bank has notified the changes to all scheduled commercial

banks. Further, the definition, as per the Act, has been adopted for purposes of

bank credit vides RBI circular ref. RPCD.PLNFS. BC.No.63/ 06.02.31/ 2006-07 dated

April 4, 2007.

FINANCIAL INSTRUMENTS IN INDIA:

Several financial instruments are available in the Indian money market. These are

government securities, or G-sec, preference shares, commercial papers, equity shares,

certificate of deposits, call money market and industrial securities. These are discussed

below.

Government Securities: In India, mainly the institutional investors buy the government

securities. The government, both State and Central, and the government authorities, for

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example, state electricity boards, municipalities etc issue it. Commercial banks are the

biggest investors who buy the G-sacs. The government collects money through the G-sacs

to finance its several new infrastructure development projects or to meet its present needs.

The government itself issues the risk of default for G-sec, for it.

Preference Shares: These carry a fixed dividend rate and a special right to dividends

over the private equity holders. Currently, all the preference shares in the Indian market

are `redeemable & risqué, that is, they have a fixed period of maturity. Therefore,

sometimes they are termed as `hybrid variety’ –

Commercial Papers (CP ) : These are issued mainly by the corporate businessmen to

fund their working capital needs. Commercial Papers are issued generally for short-term

maturities. Commercial papers are not secure and subject to market risks, so those

corporate bodies that have a good credit history will only be able to use this financial

instrument.

Equity Shares: It is a "high return risk" instrument. Equity shares don't have any fixed

return rate and thereby, no period of maturity.

Certificate of Deposits (CD): These are very similar to the Commercial papers. But the

CDs are issued mainly by the commercial banks.

Call Money Market : The loans made in the call money market are mainly short term in

nature. Call money market mainly deals with the interbank markets. Those banks that are

suffering from a short-term cash deficit borrow cap from the call money market. The

interest rate varies with the market rate and depends upon the banking system.

Industrial Securities: Normally the big corporate bodies are used to issue this to fulfill

their long-term requirements regarding working capital. The • debentures, • equity shares

fall under this category.

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CREDIT RISK MANAGEMENT:

Credit risk is an investor's risk of loss arising from a borrower who does not make

payments as promised. Such an event is called a default. Another term for credit risk is

default risk.

Credit risk refers to the likelihood a potential borrower will default on his or her financial

obligations with a lending institution. Credit risk management is the lending institution's

primary line of defense to protect itself against customers who fail to meet the terms of the

loans or other credit that was extended to them. Credit risk management is an important

aspect of a bank's success and ensures a lending institution will not take on more risk than

it can handle.

Investor losses include lost principal and interest, decreased cash flow, and increased

collection costs, which arise in a number of circumstances:

A consumer does not make a payment due on a mortgage loan, credit card, line of

credit, or other loan

A business does not make a payment due on a mortgage, credit card, line of credit,

or other loan

A business or consumer does not pay a trade invoice when due

A business does not pay an employee's earned wages when due

A business or government bond issuer does not make a payment on a coupon or

principal payment when due

An insolvent insurance company does not pay a policy obligation

An insolvent bank won't return funds to a depositor

A government grants bankruptcy protection to an insolvent consumer or business

Bank risk management: Deals with the handling of different types of risks faced by the

banks, for example, market risk, credit risk, liquidity risk, legal risk, operational risk

and reputational risk

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In course of banks lending involves a number of risks. In addition to the risks

related to creditworthiness of the counterparty, the banks are also exposed to

interest rate, forex and country risks.

Unlike market risks, where the measurement, monitoring, control etc. are to a great

extent centralized. Credit risks management is a decentralized function or activity.

This is to say that credit risk taking activity is spread across the length and breadth

of the network of branches, as lending is a decentralized function. Proper a

sufficient care has to be taken for appropriate management of credit risk.

Credit risk or default risk involves inability or unwillingness of a customer or

counterparty to meet commitments in relation to lending, trading, hedging,

settlement and other financial transactions. The objective of credit risk management

is to minimize the risk and maximize banks risk adjusted rate of risk and maximize

banks risk adjusted rate of return by assuming and maintaining credit exposure

within the acceptable parameters.

The Credit Risk is generally made up of transaction risk or default risk and

portfolio risk. The portfolio risk in turn comprises intrinsic and concentration risk.

The credit risk of a banks portfolio depends on both external and internal factors.

The external factors are the state of the economy, rates and interest rates, trade

restrictions, economic sanctions, wide swings in commodity/equity prices, foreign

exchange rates and interest rates, trade restrictions, economic sanctions,

Government policies, etc. The internal factors are deficiencies in loan

policies/administration, absence of prudential credit concentration limits,

inadequately defined lending limits for Loan Officers/Credit Committees,

deficiencies in appraisal of borrowers financial position, excessive dependence on

collaterals and inadequate risk pricing, absence of loan review mechanism and post

sanction surveillance, etc.

Another variant of credit risk is counterparty risk. The counterparty risk arises from

non-performance of the trading partners. The non-performance may arise from

counterparty’s refusal/inability to perform due to adverse price movements or from

external constraints that were not anticipated by the principal. The counterparty risk is

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generally viewed as a transient financial risk associated with trading rather than standard

credit risk.

The management of credit risk should receive the top management’s attention and the

process should encompass:

TYPES OF CREDIT RISK MANAGEMENT:

Risks can be classified in different ways according to their sources. As this classification is

more for the sake of convenience, there may be certain amount of overlap. The risks

associated with the provision of banking services differ by the service rendered. For the

sector as whole, however the risk can be broken into six generic types:

a) Systematic or market risk

b) Reputational Risk

c) Credit risk

d) Counter party risk

e) Liquidity risk

f) Operational risk

g) Legal risks.

SYSTEMATIC RISK:

Systematic risk is the risk or asset value change associated with systematic factors. It is

sometimes referred to as market risk, which is in fact a somewhat imprecise term. By its

can be hedged, but cannot be diversified completely away. In fact, systematic risk can be

thought of as undiversifiable risk. All investors assume this type of risk, whenever assets

owned or claims issued can change in value as a result of broad economic factors. As such,

systematic risk comes in many forms. For the banking sectors however, two are of greatest

concern, namely variations in the general level of interest rates and the relative value of

currencies.

Because of the bank’s dependence on these systematic factors, most try to estimate the

impact of these particular systematic risks on performance, attempt to hedge against them

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and thus limit the sensitivity to variations in undiversifiable factors. Accordingly, most will

track interest rate risk closely. They measure and manage the firm’s vulnerability to

interest rate variation, even though they cannot do so perfectly. At the same time,

international banks with large currency positions closely monitor their foreign exchange

risk and try to manage, as well as limit, their exposure to it.

In a similar fashion, some institutions with significant investments in one commodity such

as oil, through their lending activity or geographical franchise, concern themselves with

commodity price risk. Others with high single-industry concentrations may monitor

specific industry concentration risk as well as the forces that affect the fortunes of the

industry involved.

MARKET RISK:

Market risk has been taken off the front burner of senior management risk agendas. The

extreme volatility in the market is calming down and respondents are breathing a collective

sigh of relief. But the contagion impact the extent of the crisis and speed with which it

swept through the industry is very much on everyone’s minds. Banks are working to hone

their tools and processes to better predict their firm’s sensitivity to shocks and volatility in

the market. They are supplementing traditional VAR measures with stress testing and

scenario analysis some investment banks are even conducting daily and weekly tests on

their trading books. They are also closely monitoring the size, concentration and liquidity

of positions, and applying good business judgment to the results of the quantitative models.

Several executives reported that they are focusing on the correlation between market risk

and credit risk and are merging the two functions under the control of one senior executive.

“Market risk doesn’t kill institutions. It’s generally either credit risk or liquidity risk that

brings you down.”

REPUTATIONAL RISK:

An erosion of trust .Not surprisingly, effective management of reputational risk has become

increasingly important, and respondents are brutally aware of the erosion of trust and

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confidence in the industry. Stakeholders, including shareholders, counterparties,

customers, current employees and potential recruits, gauge their interactions with the

company based on their individual

Perceptions of the company’s soundness, reliability and performance an important factor

in maintaining a strong institutional brand. Many executives discussed the intensity of the

political, public and media scrutiny, and its extremely negative impact on everyone in the

industry — including the people and organizations that managed prudently. One executive

noted sadly, “You don’t go to a dinner party and tell people you work in a bank anymore.”

CREDIT RISK:

Credit risk arises from non-performance by a borrower. It may arise from either an

inability or an unwillingness to perform in the pre-committed contracted manner. This can

affect the lender holding the loan contract, as well as other lenders to the creditor.

Therefore, the financial condition of the borrower as well as the current value of any

underlying collateral is or considerable to its bank. The real risk from credit is the

deviation of portfolio performance from its expected value. Accordingly, credit risk is

diversifiable, but difficult to eliminate completely. This is because a portion of the default

risk may; In addition, the idiosyncratic nature of some portion of these losses remains a

problem for creditors in spite of the beneficial effect of diversification on total uncertainty.

This is particularly true for banks that lend in local markets and ones that take on highly

illiquid assets. In such cases, the credit risk is not easily transferred, and accurate estimates

of loss are difficult to obtain.

COUNTER PARTY RISK:

Counter party risk comes from non-performance of a trading partner. The non-

performance may arise from a counterpart’s refusal to perform due to an adverse price

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movement caused by systematic factors, or from some other political or legal constraint

that was not anticipated by the principals. Diversification is the major tool for controlling

nonsystematic counter party risk.

This risk is like credit risk, but it is generally viewed as a more transient financial risk

associated with trading than standard creditor default risk. In addition, a counter party’s

failure to settle a trade can arise from other factors beyond a credit problem.

LIQUIDITY RISK:

Liquidity risk can best be described as the risk of a funding crisis. While some would

include the need to plan for growth and unexpected expansion of credit, the risk here is

seen more correctly as the potential for a funding crisis. Such a situation would inevitably

be associated with an unexpected event, such as a large charge off, loss or confidence, or a

crisis of national proportion such as a currency crisis. In any case, risk management here

centers on liquidity facilities and portfolio structure. Recognizing risk leads the bank to

recognize liquidity itself as an asset, and portfolio design in the face of illiquidity concerns

as a challenge.

OPERATIONAL RISK:

Is associated with the problems of accurately processing, settling, and taking or making

delivery on trades in exchange for cash. It also arises in record keeping, processing system

failures and compliance with various regulations. As such, individual operating problems

are small probability events for well run organizations but they an expose a firm to

outcomes that may be quite costly. Operational risk: assessing the nuts and bolts

Attention to operational risk is on the rise, especially in the Americas. Almost half of the

executives interviewed voted it atop priority, making it management’s second greatest

concern. Financial institutions have, of course, managed operational risks for years and

understand the need to maintain tight controls and low error rates. However, the

heightened scrutiny from both regulatory bodies and governments, the new operational

risk management framework and measurements required under Basel II, and the sheer

difficulty of navigating today’s

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Environment has all intensified the focus on operations. Banks are examining the nuts and

bolts of the business evaluating, defining and quantifying the people, systems and process

risks embedded throughout the enterprise. Initiatives include: standardizing

documentation of processes and controls; improving data gathering, quality and timeliness;

developing methodologies and metrics to quantify risks; and conducting scenario analysis

by risk type. Several companies have created a new management position focused

exclusively on operational Risk oversight, and many are developing risk awareness and

training programs for all units and functions.“Operational risk is the ‘cause du jour’ with

regulators.

LEGAL RISKS:

Are endemic in financial contracting and are separate from the legal ramifications of

credit, counter party and operational risks. New statutes, tax legislations, court opinions

and can put formerly well-established transactions into contention even when al parties

have previously performed adequately and are fully able to perform in the future. For

example, environmental regulations have radically affected real estate values for older

properties and imposed serious risks to lending institutions in this area. A second type of

legal risk arises from the activities of an institution’s management or employees. Fraud,

violations of regulations or laws, and other actions can lead to catastrophic loss, as recent

examples in the thrift industry have demonstrated.

All financial institutions face all these risks to some extent. Non-principal of agency activity

involves operational risk primarily. Since institutions in this case do not own the

underlying assets in which they trade, systematic, credit and counter party risk accrues

directly to the asset holder. If the latter experiences a financial loss, however, legal recourse

against an agent is often attempted. Therefore, institutions engaged in only agency

transactions bear some legal risk, if only indirectly.

MEASUREMENT OF RISK THROUGH CREDIT RATING/SCORING:

(a)  Quantifying the risk through estimating expected loan losses i.e. the amount of loan

losses that bank would experience over a chosen time horizon (through tracking portfolio

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behavior over 5 or more years) and unexpected loss (through standard deviation of losses

or the difference between expected loan losses and some selected target credit loss

quantile);

(b) Risk pricing on a scientific basis; and

(c)  Controlling the risk through effective Loan Review Mechanism and portfolio

management.

The credit risk management process should be articulated in the bank’s Loan Policy, duly

approved by the Board. Each bank should constitute a high level Credit Policy Committee,

also called Credit Risk Management Committee or Credit Control Committee etc. to deal

with issues relating to credit policy and procedures and to analyze 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 should 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.

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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 resilience of the loan portfolio.

Credit Risk may be defined as the risk of default on the part of the borrower. The lender

always faces the risk of the counter party not repaying the loan or not making the due

payment in time. This uncertainty of repayment by the borrower is also known as default

risk.

Some of the commonly used methods to measure credit risk are:

1. Ratio of non performing advances to total advances;

2. Ratio of loan losses to bad debt reserves;

3. Ratio of loan losses to capital and reserves;

4. Ratio of loan loss provisions to impaired credit;

5. Ratio of bad debt provision to total income; etc.

Managing credit risk has been a problem for the banks for centuries. As had been observed

by John Medlin, 1985 issue of US banker.s“Balancing the risk equation is one of the most

difficult aspects of banking. If you lend too liberally, you get into trouble. If you don’t lend

liberally you get criticized”.

Over the tears, bankers have developed various methods for containing credit risk. The

credit policy of the banks generally prescribes the criteria on which the bank extends credit

and, inter alia, provides for standard.

CREDIT RISK MEASUREMENT IN BANK:

MEASUREMENT OF CREDIT RISK CONSISTS OF:

A) Measurement of risk through credit rating / scoring

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B) Quantifying the risk through estimating expected loan losses, that is, the amount of loan

losses that bank would experience over a chosen time horizon and unexpected loan losses

that is the amount by which actual losses exceed the expected losses.

Controlling Credit Risk through Loan Review Mechanism

Loan review mechanism is an effective tool for constantly evaluating the quality of loan

book and brings about qualitative improvements in credit administration. Loan review

mechanism is used for large value accounts with responsibility assigned in various areas

such as, evaluating effectiveness of loan administration, maintaining the integrity of credit

grading process, assessing the portfolio quality, etc.

The main objective of loan review mechanism is:

To identify promptly loans, which develop credit weaknesses and initiate timely

corrective action

To evaluate portfolio quality and isolate potential problems areas

To provide information for determining adequacy of loan losses provision

To assess the adequacy of and adherence to, loan policies and procedures, and to

monitor compliance with relevant laws and regulations

To provide top management with information on credit administration, including

credit sanction process, risk evaluation and post sanction follow up

Accurate and timely credit grading is one of the basic components of an effective loan

review mechanism. Credit grading involves assessment of credit quality assessment of

credit quality, identification of problem loans, and assignment of risk rating. A proper

credit grading system should support evaluating the portfolio quality and establishing a

loan loss provision. Given the importance and subject nature of credit ratings awarded by

credit administration department should be subjected to review by loan review officers

who are independent of loan administration.

LOAN REVIEW POLICY SHOULD ADDRESS THE FOLLOWING

ISSUES:

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QUALIFICATION OF INDEPENDENCE:

The Loan Review Officers should have sound knowledge in credit appraisal, lending

practices and loan policies of the bank. They should also be well versed to the relevant

laws/ regulations that affect lending activities. The independence of Loan Review Officers

should be ensured and the findings of the reviews should also be reported directly to the

Board of Committee of board.

Frequency and scope of Reviews:

The Loan Reviews are designed to provide feedback on effectiveness of credit sanction and

to identify incipient Deterioration in portfolio quality. Reviews of high values of loans

should be undertaken usually within three month of sanction/renewal or more frequently

when factors indicate a potential for deterioration in the credit quality. The scope of the

review should cover all loans above a cut off limit. In addition, banks should also target

other accounts that present elevated risk characteristics. Although it is desirable to subject

all loans above a cut off to Loan Review Mechanism, at least 30-40% of the portfolio should

be subjected to Loan Review Mechanism in a year to provide reasonable assurance that all

the major credit risks embedded in the balance sheet have been tracked.

DEPTH OF REVIEW:

Approval process

Accuracy and time lines of credit rating assigned by loan officers.

Adherence to internal policies and procedure and applicable laws/ regulation.

Compliance with loan covenants

Post-sanction follow up

Sufficiency of loan documentation

Portfolio quality. Recommendation for improving portfolio quality.

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The findings of reviews should be discussed with line managers and the corrective actions

should be elicited for all deficiencies. Deficiencies that remain unresolved should be

reported to top management.

The bank should also evolve suitable framework for reporting and evaluating the quality of

credit decision taken by various functional groups. The quality of credit decision should be

evaluated within a reasonable time say 3-6 month, through a well defined Loan Review

Mechanism.

REVIEW OF SMALL VALUE RETAIL LOAN ACCOUNTS:

Usually such assets are subjected to review on exception basis. Segments which show below

average default performance are taken up for review and for putting in place remedial

actions. Other segments are subjected to review on sample basis based on a predefined

plan.

PRINCIPLES FOR THE MANAGEMENT OF CREDIT RISK:

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 non-G-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 maximize 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 organization.

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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.

5. The sound practices set out in this document specifically address the following areas: (I)

establishing an appropriate credit risk environment; (ii) operating under a sound credit-

granting process; (iii) maintaining an appropriate credit administration, measurement and

monitoring process; and (IV) ensuring adequate controls over credit risk. Although specific

credit risk management practices may differ among banks depending upon the nature and

complexity of their credit activities, a comprehensive credit risk management program will

address these four areas. These practices should also be applied in conjunction with sound

practices related to the assessment of asset quality, the adequacy of provisions and

reserves, and the disclosure of credit risk, all of which have been addressed in other recent

Basel Committee documents.

6. While the exact approach chosen by individual supervisors will depend on a host of

factors, including their on-site and off-site supervisory techniques and the degree to which

external auditors are also used in the supervisory function, all members of the Basel

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Committee agree that the principles set out in this paper should be used in evaluating a

bank's credit risk management system. Supervisory expectations for the credit risk

management approach used by individual banks should be commensurate with the scope

and sophistication of the bank's activities. For smaller or less sophisticated banks,

supervisors need to determine that the credit risk management approach used is sufficient

for their activities and that they have instilled sufficient risk-return discipline in their

credit risk management processes.

7. the Committee stipulates in Sections II through VI of the paper, principles for banking

supervisory authorities to apply in assessing bank's credit risk management systems. In

addition, the appendix provides an overview of credit problems commonly seen by

supervisors.

8. A further particular instance of credit risk relates to the process of settling financial

transactions. If one side of a transaction is settled but the other fails, a loss may be incurred

that is equal to the principal amount of the transaction. Even if one party is simply late in

settling, then the other party may incur a loss relating to missed investment opportunities.

Settlement risk (i.e. the risk that the completion or settlement of a financial transaction will

fail to take place as expected) thus includes elements of liquidity, market, operational and

reputational risk as well as credit risk. The level of risk is determined by the particular

arrangements for settlement. Factors in such arrangements that have a bearing on credit

risk include: the timing of the exchange of value; payment/settlement finality; and the role

of intermediaries and clearing houses.

IMPOTENCE OFCREDIT RISK MANAGEMENT IN BANKING:

Credit risk management is a very important area for the banking sector and there are wide

prospects of growth and other financial institutions also face problems which are financial

in nature.

Also, banking professionals have to maintain a balance between the risks and the returns.

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

interest rates for the loans it offers, it will suffer

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In terms of equity, a bank must have substantial amount of capital on its reserve, but not

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

financial instability and to the risk of regulatory non-compliance.

Credit risk management is risk assessment that comes in an investment. Risk often comes

in investing and in the allocation of capital. The risks must be assessed so as to derive a

sound investment decision. And decisions should be made by balancing the risks and

returns.

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

banks offer securities and other forms of investments.

The risk of losses that result in the default of payment of the debtors is a kind of risk that

must be expected. A bank to keep substantial amount of capital to protect its solvency and

to maintain its economic stability.

The greater the bank is exposed to risks, the greater the amount of capital must be when it

comes to its reserves, so as to maintain its solvency and stability.

Credit risk management must play its role then to help banks be in compliance with Basel

II Accord and other regulatory bodies.

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

perform reviews of the performance of the bank. They should also do Loan reviews and

portfolio analysis in order to determine risk involved.

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

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

defaults and risks of losses.

So credit risk management becomes a very important tool for the survival of banks.

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CHAPTER II

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TITLE:

“A Study on Credit Risk Management in Karnataka State Co-operative

APEX Bank”.

INTRODUCTION:

Credit Risk Management is defined as the potential of a bank borrower or counterparty

will fail to meet his obligation in accordance with agreed terms, or in other words it is

defined as the risk that the firm’s customer and the parties to which it has lend money will

fail to make promised payment is known as credit risk management.

Credit risk is an investor's risk of loss arising from a borrower who does not make

payments as promised. Such an event is called a default. Another term for credit risk is

default risk.

Credit risk refers to the likelihood a potential borrower will default on his or her financial

obligations with a lending institution. Credit risk management is the lending institution's

primary line of defense to protect itself against customers who fail to meet the terms of the

loans or other credit that was extended to them. Credit risk management is an important

aspect of a bank's success and ensures a lending institution will not take on more risk than

it can handle.

STATEMENT OF THE PROBLEM:

Credit risk arises because of the possibility that promised cash flows on financial claims

held by financial institution in the form of loans and bonds will not be paid in full. If the

principal were paid in full on maturity and interest payment were made at promised dates

then Financial Institution will not face any credit risk. But if a borrower does not repay

both the principal and interest at the expected time Financial Institution may be at risk.

In recent years, lending banks have devoted its attention in measuring credit risk and have

made important gains both by employing innovative and sophisticated risk modeling

techniques and also strengthening their more traditional practices. Therefore, a study is

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undertaken in order to understand the credit risk management in scheduled bank with

reference to The Karnataka State Co-operative Apex Bank Ltd.

OBJECTIVES OF THE STUDY:

To understand the specific types of credit risk and credit management policies. To study how credit risk is measured in Apex bank. To identify the tools and methods adopted by financial institution to minimize the risk

level. To study the trend of assets and liabilities of Apex Bank. To offer summary and findings and recommendation.

SCOPE OF THE STUDY:

The Study covers operational jurisdiction of Apex Bank recognizing the fact and dealings

which will benefit lending institutions and the economies in which they operate. It also

focuses on credit risk management practices of the bank. The study is concentrated to

make differentiate between the recovery system of scheduled bank and with others bank.

RESEARCH METHODOLOGY OF THE STUDY:

An analytical study is undertaken on credit risk management. The study required data to

be collected from mainly secondary sources. The study is based on survey method. The

data has been collected from the various reports available with the bank and the same as

been taken for the study. However the required primary data has to collect from the

managers through an interview schedule.

SAMPLING TECHNIQUE:

Sampling is the process of inferring something about large group of elements by studying

only a part of it. Sample is the portion of population which is examined with a view to

estimate the characteristic of the population. Reference to this, Simple Random sampling

technique is used.

SOURCES OF DATA

PRIMARY DATA

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In case of primary data, the data are collected through interviewing managers and trend analysis.

SECONDARY DATA

In case secondary data, the data are collected from financial reports, Annual general reports, financial records of the bank, internet, bank websites, magazines.

SAMPLE SIZE:

Based on the objective of the study sample sizes of 50 respondents have been chosen and

this size represents the population.

TOOLS FOR DATA COLLECTION:

Trend analysis.

Trend percentage analysis

PLAN OF THE ANALYSIS:

The data will be collected from the INCOME STATEMENT OR PROFIT AND LOSS ACCOUNT AND BALANCE SHEET of the bank.

The collected data will be tabulated, Graph, Diagram, Charts are proposed to be used.

LIMITATION OF THE STUDY:

Analysis in the study will be depending on the information supplied by the bank

The study is confined to only one Branch

Due to limited time, in-depth study could not be made.

Assuming that the information given by the respondent is not bias.

The information available is limited, as it is confidential.

CHAPTER SCHEMES

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I INTRODUCTION

II RESEARCH DESIGN

III COMPANY PROFILE

IV ANALYSIS AND INTERPRETATION OF DATA

V SUMMARY OF FINDINGS, SUGGESTIONS & CONCLUSION

VI ANNEXURE

BIBLIOGRAPHY

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CHAPTER III

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BACKGROUND AND INCEPTION OF THE COMPANY:

The Karnataka State Co-Operative Apex Bank Limited has been playing a very significant

role in the dispensation of production, credit to the farmers. It is to the credit of

Karnataka, that the first co-operative credit institution in the entire country was

established way back in the year 1904 in a village called Kanaginahal now at Gadag

district. Primary Agricultural Credit Society (PACS) at the village level federated later to

District Central Co-Operative Banks (DCCBs) at the district level. These DCC banks

federated themselves at the state level to form Apex Bank.

The Karnataka State Co-Operative Bank was established in the year 1915 and the late

Varadaraja Iyengar has been its founder president. It made a humble beginning with a

working capital of Rs. 1.80 lakhs comprising of Rs. 1.26 lakhs as deposits. Over 90 years,

the institution has grown by leaps and bounds and today its working capital is Rs. 4718.28

crores with deposit level of Rs. 2264.14 crores and fund of Rs. 265.91 crores. The bank has

earned Rs. 13.35 crores.

Apex bank is a pioneer in agriculture finance and activities. Apex bank is ranked as one of

the premier state co-operative banks in the country. The main objectives of the bank are to

serve the farmers in the state by providing short term and long agricultural loans, general

banking business and function as a leader of the co-operative banks in the state.

NATURE OF BUSINESS:

The business carried by the bank is generally related with providing short term and long

term agricultural loans. It also accepts deposits from the public. Apex bank also provides

loans to processing, marketing and consumer co-operatives as well as sugar factories in

Karnataka and working capital loans to state level and national level institutions.

CORPORATE MOTTO:

“To fulfill your dream we are changing” “Our fundamental is Strong”.

VISION, MISSION AND QUALITY POICY:

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VISION:

As a state co-operative bank, Apex bank shall be a dominant financial institution in the

state, leading the state to economic prosperity.

They shall be the model of an effective, protective, dynamic and financial sound

organization, respectively to state goals and aspiration.

They shall maintain highly trained and motivated professionals committed to the highest

standards of ethics and excellence.

They shall contribute to building progressive and standard of co-operative societies in the

service of farmers and rural mass.

MISSION:

Ensuring the best quality of life and success of their farmers, agricultural co-operative

societies, district central co-operative banks, clients and employees who are the reasons for

their being.

For their Farmers:

They shall continue to improve their socio-economic status through timely financial and

technical support.

For their Clients:

They shall deliver innovative and advanced products and services in productive and

effective manner to meet their local demands.

For their PACS and DCC banks:

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They shall ensure mutual co-operation and compliment action to achieve optimum gains in

an environment of confidence and trust.

For their Employees:

They shall ensure a work atmosphere of mutual respect and team work team work within a

system of recognition and regards. They shall continue to provide appropriate training and

value enhancement to ensure the highest degree of professionalism and integrity. They

shall hold their organization composed of highly competent people driven by superior

technology.

For the People of Karnataka:

They commit their unvarying loyalty and dedicated service in the pursuit of state farmer’s

interest.

Quality Objectives:

To serve as a state co-operative bank and as a balancing center in the state of Karnataka

for registered co-operative societies.

To raise funds by way of deposits, loans, grants donations, subscription, subsidies etc

for financing the members by way of loans, cash credits, overdrafts and advances.

To develop, assist and co-ordinate the member DCCBs and other co-operative societies

and secure financial assistance for them.

To arrange/hold periodical co-operative conferences of the DCCBs and other members

of the bank and to take action for the growth and development of the co-operative

credit movement.

SERVICE PROFILE OF THE BANK:

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The Karnataka State Co-Operative Apex Bank Limited provides following services to the

societies:

Financing of short term loans

Financing of medium term loans

Financing of Kisan credit card scheme/loan

Credit facilities to self help groups. Advancing medium term loans economic

development and providing cash loans

Advancing workshop capital loans

Collection of cheques and drafts

Loans through various schemes

Personal banking

Services provided by the bank in detail:

Financing of short term loans:

Financing of short term loans for seasonal agricultural operations and for marketing of

crops. These loans are repayable within one year.

Financing of medium term loans:

These loans are sanctioned for agricultural purpose and non-agricultural purpose

Financing of Kisan credit card schemes/loan:

Kisan credit card aims at providing timely and adequate credit support to farmers for their

cultivation including investment credit needs in a flexible and cost effective manner. All

DCC banks in the state have implemented the kisan credit scheme.

Credit facilities to self help groups:

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All the DCCBs have taken keen interest in the formation of self help groups in co-

ordination with PACS. Self help groups mobilize their savings and avail credit facilities

from DCCBs and PACS.

Advancing medium term loans with economic development:

These loans are advanced for the agricultural infrastructures such as lift irrigation, diary,

poultry, plantation, gobar gas etc that constitutes schematic lending.

Providing cash credit loans:

Providing cash credit loans to processing marketing and consumer co-operatives as well as

sugar factories in Karnataka and also term loans to sugar factories under consortium

agreement.

Advancing working capital loans:

Advancing working capital loans to state level co-operatives like MARKFRED, KCCF and

to the national level co-operatives like IFFCO and KRIBHCO. The bank provide similar

facilities to public sector undertakings like Karnataka Silk Marketing Board, Karnataka

Handloom Development Corporation, Karnataka Small Scale Industries Development

Corporations, Food Corporations of India directly and also through consortium

arrangements through commercial banks.

Collection of Cheques and Drafts:

The bank extends finance to the non-farm sector and to the development of cottage

industries, small scale industries and rural artisan weavers. It is a scheduled bank in all

aspects including remittance of funds, demand drafts, mail transfers, collection of cheques

and drafts.

Loans through various schemes:

Such as:

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Vehicle loans

Housing loans

Mortgage loans

Installment loans

Jewel loans

Other loans

Personal Banking:

Apex bank provides the following deposit schemes to the customers:

Fixed Deposits:

In this account, the customer deposits money period up to 10 years.

Current deposits:

In this type, the individuals or businessmen operate. This account is kept open for the

entire day. The customer can make any number of deposits and withdrawals in a day

during business hours.

Saving Bank Deposits:

In this deposit, the low income class groups and marginal customer deposits the money.

AREA OF OPERATION:

Apex bank works in the regional level only. It does not work in national level. The area of

operation covers the entire Bangalore. It has 31 branches in Bangalore and head quarter is

situated in Chamarajpet. The branch offices of bank are adequately delegated with power

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of sanction of disbursements. If the loans are to be provided up to 10 lakhs it is handled by

concerned branch offices but if it is more than 10 lakhs then it is handled by concerned

branch offices but if it is more than 10 lakhs then it is handled by main branch.

BRANCHES AT BANGALORE:

Head office Branch- Chamarajpet.

Ashoka Pillar.

Banashankari.

Basaveshwara nagar.

Girinagar.

Gokula.

Gandhinagar.

Agra- HSR Layout.

Indiranagar.

Jayanagar Market Complex.

Jayanagar 9th Block.

J.P nagar.

Kalpatharu Super Bazaar.

Koramangala.

Kengeri Satellite Town.

Lakkasandra.

Magadi Road.

ssGanganagar.

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Padmanabha nagar.

Public Utility Building.

Rajajinagar.

R.P.C Layout.

Vijayanagar.

Vidhana Soudha.

Legislators’ Home.

M.S Building.

Mahalakshmipuram.

Vyalikaval.

Chandra Layout.

Vivekananda College (Ext. counter).

R.T Nagar.

OWNERSHIP PATTERN:

Apex bank is state co-operative bank established by the state government in the year 1915

under the organization of Primary Agricultural Co-Operative Credit Societies (PACS) in

villages and Urban Co-Operative Banks in towns and cities offer passing the co-operative

credit societies at 1904 to meet mainly short and medium term financial needs of farmers.

INFRASTUCTRUCTURAL FACILITIES:

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Consultant effectively conceptualizes the vision of the corporate head office floated by the

Directors of the Board. The built up area of “UTHUNGA” has been 67,820 Sq. ft. the civil

cost has come to Rs. 888 per sq. ft. and interiors all inclusive worked out at Rs. 357 per sq.

ft. They believe that their members are always behind them not only to encourage but also

to guide them in case they go wrong. They are grateful to them. Similarly they are grateful

to the Government of The new administrative building at a cost of around Rs. 800 lakhs

completed in 2002 provides additional impetus to a new work culture and new mindset of

all. The gigantic building with granite gladded façade having circular and rectangular

columns suggesting strengths and stability reflects the character of the organization. This

four storied block caters mainly to the administrative requirement of the bank along with

the hi-tech banking hall on the ground floor. The architects M/s.Zechariah Karnataka,

RBI, NABARD and all other sister Co-Operative in the state for what they are today.

ACHIEVEMENTS/AWARDS:

1) Bank is able to lend 75% of the farmers in the state and it covers all sugar factories in

Karnataka.

2) Apex bank is habituated to get awards at National levels year after year. Similarly

NABARD has been giving best performance award and even PACS have not have logged

behind in getting National recognition. All DCC banks and merely 80% of PACS have

proved themselves to be financially viable.

WORK FLOW MODEL

50

APEX BANK

DCC BANKS

PRIMARY CO-OPERATIVE

Page 51: Credit Risk Management in Karnataka State Credit Risk Management in Karnataka State

WORK FLOW METHOD:

The bank has both administrative office as well as 31 Branches in the Bangalore City to

carry its banking business. The Branch is headed by the Manager and assisted by other

staff members in front office and the attenders to do day to day office work. The main

function of those staff is to provide customer service by achieve the targets set by the

management as a measure of Business Development Plan. The Branch Managers are

acting on the purview of their financial powers and delegation of duties entrusted by HO.

The other staff is given job charts and accounting manuals to discharge their duties.

Periodical rotation of duties is being effected among the Branch staff. The Branch Manager

recommends the loan application to HO for sanction, if the proposal exceeds his financial

power. The main function of the Branches are to collect deposits from the customers,

lending non-agriculture and commercial loans, collection of cheques and to expand non-

banking business to achieve viability of the Branch.

Whereas in case of Corporate Office, all agricultural, non-agricultural and sugar sector

advances are being sanctioned and the operative accounts are maintained. The loan

proposal is being processed by the section case workers. The same will have to be passed on

to several higher levels Officer for processing for the approval. If the project requires

special permission, the same proposal will be placed before the Board of Directors for

approval. The Bank Bye Laws describe the functioning and working style of the Bank

which is approved by the Registrar of Co-operative Societies in Karnataka.

FUTURE GROWTH AND PROSPECTUS:

51

FARMERS

Page 52: Credit Risk Management in Karnataka State Credit Risk Management in Karnataka State

The Honorable Union Minister for finance has already announced and introduced and

instructed all the banks in the country for building the agriculture credit in 3 years. The

Co-operatives too, in the state have to increase the agriculture credit to farmers by 30%

during the years 2006-07. The state government in its budget proposals also announces to

issue agricultural loans at 4% interest. The Apex bank will endeavor to further increase in

the agriculture loans from 1258.20 crores of total agricultural loans portfolio in the year

2005-06 to 1450.00 crores to the end of 31st march 2007. Accordingly a target has been set

to mobilize additional resources to the extent of Rs.166.05 crores through the bank

branches. NABARD also inform apex bank and District Central Co-operative banks to

take appropriate action to mobilize additional resources to utilize such funds to increase

the seasonal agricultural operations.

OPPORTUNITIES:

Bank is entering into modern banking through having license for RTGS (Real Time

Grass Settlement), ATM, Net Banking and other Advance Banking System.

Bank is having opportunities to open new Banking services in the state, all ready

proposed 15 new branches in the city.

Bank has introduced 14 new loan products and 4 insurance bi products to capture

potential market.

Bank has liberalized their loan policy as per nationalized bank in respect of housing

segment, gold loans, mortgage loans, and other non secured loan sector.

Doubling of credit and reaching to the BPL (Below Poverty Line) farmers, help the

bank strengthen and expand its business towards rural and short term credit re

finance.

THREATS:

Bank has to complete with nationalized, commercial, private sector, and foreign

banks.

Bank has to develop infrastructure facilities to attract new customers as well as

to retain existing customer in the track.

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Delay in operating newly proposed branches may lead to scarifying the market

opportunities to other banks that are well equipped with better products.

Lack of training and knowledge about banking development may lead to

financial loss due to operational risk.

The bank is already facing threat of non recovery of agricultural loans from

section 11, non complain blanks like Kolar and KCC Bank, Dharward due to

poor recovery and high level of NPA,s.

STRENGTHS:

The bank has is having long history, completed 95 years having well capital based.

The rate of interest charged on loan and offered for deposits is very attractive and

the same is being nominated on quarterly basis and as when required.

The bank is having well-trained man power.

The bank is having no lapses and maintenance of Cash Reserve Ratio (CRR) and

Statutory Lending Ratio (SLR) complaining Bank Regulation Act-1949. In respect

of statutory requirement, capital adequacy, net worth, prudential norms.

The organization is having well qualified and technical board of directors along

with state government and NABARD nominees.

The organization is having good network base of District Central Co-Operative

Banks and Primary Agricultural Co-Operative Society in Karnataka as compared

to other state in India.

The bank is able to bear any adverse situation like drought, non-recovery loan

waiver and failure of crops on the districts. Banks has come up with several

packages to DCC banks could not comply with Section (11) of BR- Act- 1949.

WEAKNESSES:

Bank has to take immediate steps to computerization of all its transactions, banking

networking with Core Banking System (CBS) facility and ATM’s to attract more

business.

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The bank is purely dependent on agricultural sector.

The bank is having slow process of filling up of staff vacancies of both in new

requirements and promotions.

The bank is not giving permission to have NRI’s accounts, mutual funds, gold

business, foreign exchange.

The bank is highly dependent on other State Co-operative Banks (SCB) and DCC

banks to issue and collect Demand Drafts (DD’s) under All India Mutual

Arrangement Scheme.

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CHAPTER IV

55

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Table –1

Table showing the Share Capital of Karnataka State Co operative Apex Bank Ltd., during the year 2005-10

PARTICULARYEAR2005-06

YEAR2006-07

YEAR2007-08

YEAR2008-09

YEAR2009-10

SHARE CAPITAL 37.73 42.39 65.67 81.11 81.24TREND PERCENTAGE

100 112.35

174.05

214.97

215.31

INCREASE/DECREASE

1 12.35 61.7 40.92 0.34

Analysis:

From the above data it is analyzed the Share Capital of the bank was 100% in the year

2005-06 and it is continuously increased by 112.35%, 174.05%, 214.97%, 215.31%,during

the year 2006-07,2007-08, 2008-09 and 2009-10 respectively.

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Chart-1

Chart showing the Share Capital of Karnataka State Co operative Apex Bank Ltd, during the year 2005-10

2005-06 2006-07 2007-08 2008-09 2009-10YEAR YEAR YEAR YEAR YEAR

0

50

100

150

200

250

SHARE CAPITAL

SHARE CAPITALTREND PERCENTAGEINCREASE/DECREASE

Interpretation:

From the above analysis it is inferred the Share Capital of bank increased year after year.

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Table –2

Table showing the Owned Funds of Karnataka State Co operative Apex Bank Ltd., during the year 2005-10

PARTICULAR YEAR

2005-

06

YEAR

2006-

07

YEAR

2007-

08

YEAR

2008-

09

YEAR

2009-

10

OWNED FUNDS 242.35 262.96 307.41 346.60 363.84

TREND PERCENTAGE 100 108.50 126.84 143.01 150.12

INCREASE/

DECREASE

1 8.5 18.34 16.17 7.11

Analysis:

From the above data it is analyzed that the Owned Funds of the bank was 100% in the year

2005-06 and it is increased by 108.50%, 126.84%, 143.01%, and 150.12% in the year 2006-

07, 2007-08, 2008-09, and 2009-10 respectively.

58

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Chart-2

Chart showing the Owned Funds of Karnataka State Co operative Apex Bank Ltd., during the year 2005-10

2005-06 2006-07 2007-08 2008-09 2009-10YEAR YEAR YEAR YEAR YEAR

0

50

100

150

200

250

300

350

400

OWNED FUNDS

OWNED FUNDSTREND PER-CENTAGEINCREASE/DECREASE

Interpretation:

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From the above analysis it is inferred that the Owned Funds of the bank increased year after year.

Table –3

Table showing the Working Capital of Karnataka State Co operative Apex Bank Ltd., during the year 2005-10

PARTICULAR YEAR

2005-

06

YEAR

2006-07

YEAR

2007-08

YEAR

2008-09

YEAR

2009-10

WORKING CAPITAL 3754.35 4332.69 5022.34 6436.16 6699.11

TREND PERCENTAGE 100 115.40 133.77 171.43 178.43

INCREASE/DECREASE 1 15.4 18.37 37.66 7

Analysis:

From the above data it is analyzed that the Working Capital of the bank 100% in the year

2005-06 and it is continuously increased by 115.40%, 133.77%, 171.43%and 178.43%

during the year 2006-07, 2007-08, 2008-09, 2009-10 respectively

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Chart-3

Chart showing the Working Capital of Karnataka State Co operative Apex Bank Ltd., during the year 2005-10

2005-06 2006-07 2007-08 2008-09 2009-10YEAR YEAR YEAR YEAR YEAR

0

1000

2000

3000

4000

5000

6000

7000

WORKING CAPITAL

WORKING CAPITALTREND PERCENTAGEINCREASE/DECREASE

Interpretation:

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From the above analysis it is inferred that the Working Capital of the bank increased year after year.

Table –4

Table showing the Net Profit of Karnataka State Co operative Apex Bank Ltd., during the year 2005-10

PARTICULAR YEAR

2005-06

YEAR

2006-07

YEAR

2007-08

YEAR

2008-09

YEAR

2009-10

NET PROFIT 27.28 13.35 10.02 12.50 9.25

TREND PERCENTAGE 100 48.93 36.73 45.82 33.90

INCREASE/

DECREASE

1 51.07 12.2 9.09 11.92

Analysis:

From above data it is analyzed that the Net Profit of the bank 100% in the year 2005-06

and it is decreased by 48.82% in the year 2006-07 and in the year 2007-08 it has increased

45.82% in the year it has decreased to 33.90% in the year 2009-10 respectively.

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Chart-4

Chart showing the Net Profit of Karnataka State Co operative Apex Bank Ltd., during the year 2005-10

2005-06 2006-07 2007-08 2008-09 2009-10YEAR YEAR YEAR YEAR YEAR

0

20

40

60

80

100

120

NET PROFIT

NET PROFITTREND PERCENTAGEINCREASE/DECREASE

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Interpretation:

From the above analysis it is inferred that the Net Profit of the bank has decreased.

Table –5

Table showing the Deposits of Karnataka State Co operative Apex Bank Ltd., during the year 2005-10

PARTICULAR YEAR

2005-06

YEAR

2006-07

YEAR

2007-08

YEAR

2008-09

YEAR

2009-10

DEPOSITS 2264.95 2663.99 3119.32 3892.42 4479.04

TREND PERCENTAGE 100 117.61 137.72 171.85 197.75

INCREASE/DECREASE 1 17.61 20.11 34.13 25.9

Analysis:

From the above data it is analyzed that the Deposits of the bank 100% in the year 2005-06

and it is increased by 117.61%, 137.72%, 171.85%, and 197.75% in the year 2006-07, 2007-

08, 2008-09 and 2009-10 respectively.

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Chart-5

Chart showing the Deposits of Karnataka State Co operative Apex Bank Ltd., during the year 2005-10

2005-06 2006-07 2007-08 2008-09 2009-10YEAR YEAR YEAR YEAR YEAR

0

500

1000

1500

2000

2500

3000

3500

4000

4500

DEPOSITS

DEPOSITSTREND PER-CENTAGEINCREASE/DECREASE

Interpretation:

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From the above analysis it is inferred that the deposits of the bank is increased year after year.

Table –6

Table showing the Investments of Karnataka State Co operative Apex Bank Ltd., during the year 2005-10

PARTICULAR YEAR

2005-06

YEAR

2006-07

YEAR

2007-08

YEAR

2008-09

YEAR

2009-10

INVESTMENTS 1454.81 1230.35 1539.90 2696.53 3227.34

TREND PERCENTAGE 100 84.57 105.84 185.35 221.83

INCREASE/

DECREASE

1 15.43 21.27 79.51 36.48

Analysis:

From the above data it is analyzed that the investment of the bank 100% in the year 2005-

06 and it is decreased by 84.57% in the year 2006-07 it is increased by 105.84%, 185.35%,

and 221.83% in the year 2007-08, 2008-09 and 2009-10 respectively.

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Chart-6

Chart showing the Investment of Karnataka State Co operative Apex Bank Ltd., during the year 2005-10.

2005-06 2006-07 2007-08 2008-09 2009-10YEAR YEAR YEAR YEAR YEAR

0

500

1000

1500

2000

2500

3000

3500

INVESTMENT

INVESTMENTSTREND PERCENTAGEINCREASE/DECREASE

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Interpretation:

From the above analysis it is inferred that the Investment of the bank is increased year after year

Table –7

Table showing the Loan Issued of Karnataka State Co operative Apex Bank Ltd., during the year 2005-10

PARTICULAR YEAR

2005-06

YEAR

2006-07

YEAR

2007-08

YEAR

2008-09

YEAR

2009-10

LOAN ISSUED 1656.54 2229.24 2396.31 3386.09 2950.39

TREND PERCENTAGE 100 134.57 144.65 204.40 178.10

INCREASE/

DECREASE

1 34.57 10.08 59.75 26.3

Analysis:

From the above data it is analyzed that the Loan Issued of the bank is 100% in the year

2005-06 and it is increased by 134.57%, 144.65%, 204.40% during the year 2006-07, 2007-

08, 2008-09 and in 2009-10 it is decreased to 178.10% respectively.

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Chart-7

Chart showing the loan Issued of Karnataka State Co operative Apex Bank Ltd., during the year 2005-10

69

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2005-06 2006-07 2007-08 2008-09 2009-10YEAR YEAR YEAR YEAR YEAR

0

500

1000

1500

2000

2500

3000

3500

LOAN ISSUED

LOAN ISSUEDTREND PERCENTAGEINCREASE/DECREASE

Interpretation:

From the above analysis it is inferred that the Loan Issued of the bank increased in the

year 2006-07,2007-08,2008-09 and it is slight decreased in the year 2009-10.

Table –8

Table showing the Loans and Advances o/s of Karnataka State Co operative Apex Bank Ltd., during the year 2005-10

PARTICULAR YEAR YEAR YEAR YEAR YEAR

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2005-06 2006-07 2007-08 2008-09 2009-10

LOANS&ADVANCES

O/S

1785.75 2237.66 2804.84 3492.54 3146.28

TREND PERCENTAGE 100 125.30 157.06 195.57 176.81

INCREASE/

DECREASE

1 25.30 31.76 38.51 19.39

Analysis:

From the above data it is analyzed that the Loans & Advances of the bank 100% in the

year 2005-06 and it is increased by 125.30%, 157.06%, and 195.57% during the year 2006-

07, 2007-08 and 2008-09. It is decreased to 176.18% in the year 2009-10 respectively

Chart-8

Chart showing the Loans & Advances O/S of Karnataka State Co operative Apex Bank Ltd., during the year 2005-10

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2005-06 2006-07 2007-08 2008-09 2009-10YEAR YEAR YEAR YEAR YEAR

0

500

1000

1500

2000

2500

3000

3500

LOANS & ADVANCES O/S

LOANS &ADVANCES O/STREND PER-CENTAGEINCREASE/DECREASE

Interpretation:

From the above analysis it is inferred that the Loans &Advances O/S of the bank increased

in year 2006-07, 2007-08, 2008-09 and decreased in the year 2009-10.

Table –9

Table showing the Recovery in Agriculture Loan of Karnataka State Co operative Apex Bank Ltd., during the year 2005-10

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PARTICULAR YEAR

2005-06

YEAR

2006-07

YEAR

2007-08

YEAR

2008-09

YEAR

2009-10

RECOVERY IN

AGRICULTURE LOAN

50.46 91.68 94.68 96.92 100

TREND PERCENTAGE 100 181.68 187.63 192.07 198.17

INCREASE/DECREASE 1 81.68 5.95 4.44 6.1

Analysis:

From the above data it is analyzed that the Recovery in Agriculture Loan of the bank

100% in the year 2005-06 and it is increased by 181.68%,187.63%, 192.07% and 198.17%

during the year 2006-07, 2007-08, 2008-09 and 2009-10 respectively.

Chart-9

Chart showing the loan Issued of Karnataka State Co operative Apex Bank Ltd., during the year 2005-10

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2005-06 2006-07 2007-08 2008-09 2009-10YEAR YEAR YEAR YEAR YEAR

0

20

40

60

80

100

120

140

160

180

200

LOAN ISSUED

RECOVERY IN AGRICULTURE LOANTREND PERCENTAGEINCREASE/DECREASE

Interpretation:

From the above analysis it is inferred that the Recovery of Agriculture Loan of the bank

increased year after year.

Table –10

Table showing the Recovery of Non Agriculture Loan of Karnataka State Co operative Apex Bank Ltd., during the year 2005-10

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PARTICULAR YEAR

2005-06

YEAR

2006-07

YEAR

2007-08

YEAR

2008-09

YEAR

2009-10

RECOVERY IN NON

AGRICULTURE LOAN

36.55 57.72 42.69 47.81 52.76

TREND PERCENTAGE 100 157.92 116.79 130.80 144.35

INCREASE/DECREASE 1 57.92 41.13 14.01 13.55

Analysis:

From the above data it is analyzed that the Recovery in Agriculture Loan of the bank

100% in the year 2005-06 and it is increased by 157.92% in the year 2006-07 and it is

decreased in the year 2007-08 by 116.79% the trend was increased to 130.80% and

144.35% in the year 2008-09 and 2009-10 respectively.

Chart-10

Chart showing the Recovery in Non Agriculture loan of Karnataka State Co operative Apex Bank Ltd., during the year 2005-10

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2005-06 2006-07 2007-08 2008-09 2009-10YEAR YEAR YEAR YEAR YEAR

0

20

40

60

80

100

120

140

160

RECOVERY IN NON AGRICULTURE LOAN

RECOVERY IN NON AGRICULTURE LOANTREND PERCENTAGEINCREASE/DECREASE

Interpretation:

From the above analysis it is inferred that the Recovery in Agriculture Loan of the bank

increased in the year 2006-07 and it is decreased in year 2007-08. Therefore, it is increased

year after year.

Table –11

Table showing the Recovery in Overall Loan of Karnataka State Co operative Apex Bank Ltd., during the year 2005-10

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PARTICULAR YEAR

2005-06

YEAR

2006-07

YEAR

2007-08

YEAR

2008-09

YEAR

2009-10

RECOVERY IN

OVERALL LOAN

46.30 87.70 91.08 94.16 97.63

TREND PERCENTAGE 100 189.41 196.71 203.36 210.86

INCREASE/DECREASE 1 89.41 7.3 6.65 7.5

Analysis:

From the above data it is analyzed that the Recovery in Overall Loan of the bank is 100%

in the year 2005-06 and it is increased by 189.41%, 196.71%, 203.36% and 210.86% during

the year 2006-07, 2007-08, 2008-09 and 2009-10 respectively.

Chart-11

Chart showing the Recovery in Overall loan of Karnataka State Co operative Apex Bank Ltd., during the year 2005-10

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2005-06 2006-07 2007-08 2008-09 2009-10YEAR YEAR YEAR YEAR YEAR

0

50

100

150

200

250

OVERALL LOAN

RECOVERY IN OVERALL LOANTREND PERCENTAGEINCREASE/DECREASE

Interpretation:

From the above analysis it is inferred that the Recovery in Overall Loan of the bank

increased year after year.

Table –12

Table showing the Standard Assets of Karnataka State Co operative Apex Bank Ltd., during the year 2005-10

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PARTICULAR YEAR

2005-06

YEAR

2006-07

YEAR

2007-08

YEAR

2008-09

YEAR

2009-10

STANDARD ASSEST 1524.22 1995.41 2581.1 3300.53 3000.26

TREND PERCENTAGE 100 130.91 169.33 216.53 196.83

INCREASE/

DECREASE

1 30.91 38.42 47.2 19.7

Analysis:

From the above data it is analyzed that the Standard Assets of the bank is 100% in the year

2005-06 and it is increased to 130.91%, 169.33%, 216.53% in the year 2006-07, 2007-08 and

2008-09. In the year 2009-10 it is decreased to 196.83% respectively.

Chart-12

Chart showing the Standard Assets of Karnataka State Co operative Apex Bank Ltd., during the year 2005-10

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2005-06 2006-07 2007-08 2008-09 2009-10YEAR YEAR YEAR YEAR YEAR

0

500

1000

1500

2000

2500

3000

3500

STANDARD ASSETS

STANDARD ASSESTTREND PER-CENTAGEINCREASE/DECREASE

Interpretation:

From the above analysis it is inferred that the Standard Assets of the bank increased and in

the year 2009-10 it is decreased.

Table –13

Table showing the Sub-Standard Assets of Karnataka State Co operative Apex Bank Ltd., during the year 2005-10

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PARTICULAR YEAR

2005-06

YEAR

2006-07

YEAR

2007-08

YEAR

2008-09

YEAR

2009-10

SUB-STANDARD

ASSETS

169.57 151.78 104.68 64.38 38.23

TREND PERCENTAGE 100 89.50 61.73 37.96 22.57

INCREASE/DECREASE 1 10.5 27.77 23.77 15.39

Analysis:

From the above data it is analyzed that the Sub-Standard Assets of the bank 100% in the

year 2005-06 and it is decreased by 89.50%, 61.73%, 37.96% and 22.57% during the year

2006-07, 2007-08, 2008-09, and 2009-10 respectively.

Chart-13

Chart showing the Sub-Standard Assets of Karnataka State Co operative Apex Bank Ltd., during the year 2005-10

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2005-06 2006-07 2007-08 2008-09 2009-10YEAR YEAR YEAR YEAR YEAR

0

20

40

60

80

100

120

140

160

180

SUB-STANDARD ASSETS

SUB-STANDARD ASSETSTREND PERCENTAGEINCREASE/DECREASE

Interpretation:

From the above analysis it is inferred that the Sub-Standard Assets of the bank is decreased year after year.

Table –14

Table showing the Doubtful Assets of Karnataka State Co operative Apex Bank Ltd., during the year 2005-10

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PARTICULAR YEAR

2005-06

YEAR

2006-07

YEAR

2007-08

YEAR

2008-09

YEAR

2009-10

DOUBTFUL ASSETS 9.28 18.12 113.82 123.59 104.47

TREND PERCENTAGE 100 195.25 1226.50 1331.78 1125.75

INCREASE/DECREASE 1 95.25 1031.25 105.28 206.03

Analysis:

From the above data it is analyzed that the Doubtful Assets of the bank 100% in the year

2005-06 and it is increased by 195.25 in the year 2006-07. It is further increased by

1226.50%, 1331.78% in the year 2007-08 and 2008-09. The trend was decreased by

1125.75% in the year 2009-10 respectively.

Chart-14

Chart showing the Doubtful Assets of Karnataka State Co operative Apex Bank Ltd., during the year 2005-10

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2005-06 2006-07 2007-08 2008-09 2009-10YEAR YEAR YEAR YEAR YEAR

0

200

400

600

800

1000

1200

1400

DOUBTFUL ASSETS

DOUBTFUL ASSETSTREND PER-CENTAGEINCREASE/DECREASE

Interpretation:

From the above analysis it is inferred that the Doubtful Assets of the bank increased, now it

is decreased slightly in the year 2009-10.

Table –15

Table showing the Loss Assets of Karnataka State Co operative Apex Bank Ltd., during the year 2005-10

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PARTICULAR YEAR

2005-06

YEAR

2006-07

YEAR

2007-08

YEAR

2008-09

YEAR

2009-10

LOSS ASSETS 82.68 72.19 5.02 4.05 3.32

TREND PERCENTAGE 100 87.31 6.07 4.89 4.01

INCREASE/DECREASE 1 12.69 81.24 1.18 0.88

Analysis:

From the above data it is analyzed that the Loss Assets of the bank in the was 100% in the

year 2005-06 it is decreased to 87.31%, 6.07% 4.89% and 4.01% in the year 2006-07,2007-

08, 2008-09 and 2009-10 respectively.

Chart-15

Chart showing the Loss Assets of Karnataka State Co operative Apex Bank Ltd., during the year 2005-10

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2005-06 2006-07 2007-08 2008-09 2009-10YEAR YEAR YEAR YEAR YEAR

0

10

20

30

40

50

60

70

80

90

100

LOSS ASSETS

LOSS ASSETSTREND PERCENTAGEINCREASE/DECREASE

Interpretation:

From the above analysis it is inferred that the Loss Assets of the bank is decreased.

Table –16

Table showing the Total Impaired Assets of Karnataka State Co operative Apex Bank Ltd., during the year 2005-10

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PARTICULAR YEAR

2005-06

YEAR

2006-07

YEAR

2007-08

YEAR

2008-09

YEAR

2009-10

TOTAL IMPAIRED

ASSETS

261.53 242.09 223.52 192.02 146.03

TREND PERCENTAGE 100 92.56 85.46 73.42 55.83

INCREASE/DECREASE 1 7.44 7 12.04 17.59

Analysis:

From the above data it is analyzed that the Total Impaired Assets of the bank is 100% in

the year 2005-06 and it is decrease to 92.56%, 85.46%, 73.42% and 55.83% in the year

2006-07, 2007-08, 2008-09 and 2009-10 respectively.

Chart-16

Chart showing the Total Impaired Assets of Karnataka State Co operative Apex Bank Ltd., during the year 2005-10

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2005-06 2006-07 2007-08 2008-09 2009-10YEAR YEAR YEAR YEAR YEAR

0

50

100

150

200

250

300

TOTAL IMPAIRED ASSETS

TOTAL IMPAIRED ASSETSTREND PERCENTAGEINCREASE/DECREASE

Interpretation:

From the above analysis it is inferred that the Total Impaired Assets of the bank is

decreased year after year.

Table –17

Table showing the % of NPA To Loan O/S of Karnataka State Co operative Apex Bank Ltd., during the year 2005-10

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PARTICULAR YEAR

2005-06

YEAR

2006-07

YEAR

2007-08

YEAR

2008-09

YEAR

2009-10

% Of NPA TO LOAN

O/S

14.65 10.82 7.45 5.50 4.64

TREND PERCENTAGE 100 73.85 50.85 37.54 31.67

INCREASE/DECREASE 1 26.15 23 13.31 5.87

Analysis:

From the above data it is analyzed that the %Of NPA to Loan O/S of the bank 100% in the

year 2005-06 and it is decreased by 73.85%, 50.85%, 37.54% and 31.67% in the year 2006-

07, 2007-08, 2008-09 and 2009-10 respectively

Chart-17

Chart showing the %Of NPA To Loan O/S of Karnataka State Co operative Apex Bank Ltd., during the year 2005-10

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.

2005-06 2006-07 2007-08 2008-09 2009-10YEAR YEAR YEAR YEAR YEAR

0

10

20

30

40

50

60

70

80

90

100

% Of NPA TO LOAN

% Of NPA TO LOAN O/STREND PER-CENTAGEINCREASE/DECREASE

Interpretation:

From the above analysis it is inferred that the % Of NPA To Loan O/S of the bank

decreased year after year.

CHAPTER V90

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FINDINGS:

The Karnataka State Co-operative Apex Bank Ltd, is one of the leading banks having 95

years of fruitful experience in the agricultural, non agricultural and sugar advances

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portfolio management in the country, acting as a catalyst for the growth of the Indian

Economy.

From the study it is found that the share capital of the bank has increased year after

year.

The Karnataka State Co-operative Apex Bank Owned Funds has increased over the

years but there is slight increase in the year 2009-10.

The liquidity position of the bank is good, as its net working capital is increased

over the year.

There is fluctuation in profitability position of the bank. The net profit of the bank

is decreased in few years.

The Deposits of the bank has considerably increased year after year which shows

the trust level of customers over the bank...

The Karnataka State Co-operative Apex Bank ltd has given loans of all terms to

support economic activity and to make reasonable gain out of it.

The loan repayment is good in case of agriculture loans even though the farmers are

gambling with the monsoon for their livelihood, loan recovery in agriculture

increased.

As good recovery in loans reduced the credit risk of the bank, the bank recovery of

loans has increased year after year.

The Karnataka State Co-operative Apex Bank is keep increasing its investment in

the standard assets of the bank continuously and reducing in the sub-standard

assets.

The doubtful assets were increasing year after year which results in increase in the

risk and it affects the banks reputation and overall performance.

From the data of different sources it is found out that the major part of the loan and

advances are allocated to agriculture sector.

There is no risk management committee in the bank which can take care of different

risk that might occur in the bank.

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SUGGESTIONS:

The successful management of credit risk depends not only on the norms stipulated by

the regulatory authorities and the management of the bank but also on how far the

industrial finance has been extended their portfolio and present position of the new

account.

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The bank should improve the existing system to evaluate credit worthiness of the

customers at the time of providing loans.

The bank should keep vigilant eye on their levels of non agricultural loan default

in areas where market condition are uncertain.

As the major parts of loans allocations are in the areas of sugar and agriculture

sector, the bank has to initiate proper recovery system, since these crops are

seasonal is in nature.

There should be regular collection of information about borrower’s position

from outside sources as well as personal visit by the field staff.

As there is no risk management committee in the bank, the management has to

implement the committee as per NABARD circular. In to frame the risk

management policy.

Bank has to increase its long term loans and advances rather than short term in

order to increase the profitability position.

The increase in doubtful assets will increase the risk of the bank reputation and

overall performance of the bank because the bank should reduce its doubtful

assets by providing proper provision out of its profit.

Continuous maintaining of loans profile must be made in the bank.

Incentives must be fixed for the advancing the recovery targets.

Customer counseling centre must be established to reduce the NPA.

Bank should appoint a concerned authority who takes care about the regular

recovery of the credit and also maintaining the credibility of the bank.

A risk management committee should be formulated to care of different risk

that might occur in the industry.

The bank should focus on mobilizing the surplus funds in introducing different

schemes and product to different types of customers. It helps to reduce credit

risk.

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CONCLUSIONS:

The study on credit risk management at the Karnataka State Co-operative Apex Bank Ltd

has been great sources of knowledge. The bank is performing very well in every aspects of

its dealing. The working capital has increased constantly in small rate which is very

positive response of growth.

The Karnataka State Co-operative Apex Bank Ltd mobilizes and deploys its funds in a

very efficient and systematic way which provides a good scope for the growth and

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development. The bank is been following all the rules and regulation set by RBI and

NABARD.

The financial statement of the bank is been showing a good financial progress and

performance from past five years.

The best model for reducing the credit risk at the Apex Bank is to monitor regularly and

follow up the accounts and self set goals for the employees along with educating the

borrowers.

This study identified such variables and models and there practical utility at the macro

level with a view of evolving the comprehensive and sustainable model for risk

identification of variables and parameters underlying credit risk management in bank.

The further detail and redefined studies are essential to address the specific issues and

dilemmas faced by the bank in this regard.

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Bibliography

Law and Practice of Banking.

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R. Venkatraman Bank Financial Management.

Macmillan

Advanced Bank Management. Macmillan

www.karnatakaapex.com [email protected]

95th Annual Reports of Apex Bank

98