icici bankcredit risk management strategies for home loan
TRANSCRIPT
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Project ReportOn
Credit Risk Management Strategies For Home Loan inICICI Bank Jabalpur
Submitted To-Director-Dr. Anil Kumar Dhagat
Gyan Ganga College of Technology, Jabalpur
Project GuideDr. Anil Kumar Dhagat
Submitted By- Sohit GuptaEnrolment No. - AW/3802
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ACKNOWLEDGEMENT
Working in this Project has been a great Learning experience for me. Thisreport gives immense pleasure to express sincere and heartfelt gratitudetoward faculty guide Dr. Anil Kumar Dhagat whose valuable guidance andencouragements throughout the project inspired me to take up new tasks
and complete them successfully.
I also extend my appreciation to Mr. Ashok Tiwari and Mr. PushkarMazumdarSr. Officer HSG loan, ICICI Bank, Jabalpur branch and Mr. Piyush Vishnoi,Care Ratings Manager, Jabalpur
I would like to thank all the personalities behind the successful completionof the project. I thank my friends and colleagues for the suggestions theyprovided to me time to time.
I am also indebted to Gyan Ganga College of Technology, Jabalpur for givingme opportunity to do this project.
SOHIT GUPTA
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S.No. Particulars Page No.
01 Objective Of Project 01
02 Research Methodology 02
03 Company Profile 03-07
04 Introduction 08-09
05 Body of Thesis 10-14
06 RBI Guidelines 15-16
07 SWOT Analysis 17
08 Credit Appraisal Process 18
09 Questionnaire 19
CONTENTS
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Objective of project:
1. To study the Credit risk management policy and strategies for Home
loan used by the ICICI Bank, Jabalpur.
2. To find out how the bank assesses and evaluates credit risk of the
Home loan proposals and what improvements can be effected in the
existing system.
3. To Study the Credit Risk Rating models are developed by the ICICI
Bank.
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Research Methodology
Primary Data:
Take a formal interview of Mr. Ashok Tiwari and Mr. Pushkar Mazumdar
Sr. Officer Home loans, ICICI Bank, Jabalpur.
Take a formal interview of Mr. Piyush Vishnoi, Manager, Credit
Analysis & Research ltd., Jabalpur
Secondary Data:
Reference book: Credit Risk Management Concept & Cases
Edited by C Vijay Chandra Kumar.
www.businesscreditsuccess.com
www.creditquest.com
www.icicibank.com
www.investopedia.com
www.rbi.org
www.risk-technology.com
www.wikipedia.com
http://www.businesscreditsuccess.com/http://www.creditquest.com/http://www.icicibank.com/http://www.investopedia.com/http://www.rbi.org/http://www.risk-technology.com/http://www.wikipedia.com/http://www.businesscreditsuccess.com/http://www.creditquest.com/http://www.icicibank.com/http://www.investopedia.com/http://www.rbi.org/http://www.risk-technology.com/http://www.wikipedia.com/ -
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COMPANY PROFILE
History of ICICI Bank
ICICI Bank is India's second-largest bank. The Bank has a network of about
573 branches and extension counters and over 2,000 ATMs. ICICI Bank was
originally promoted in 1994 by ICICI Limited, an Indian financial institution,
and was its wholly-owned subsidiary.
ICICI was formed in 1955 at the initiative of the World Bank, the
Government of India and representatives of Indian industry. The objectivewas to create a development financial institution for providing medium-term
and long-term project financing to Indian businesses.
In the 1990s, ICICI transformed its business from a development financial
institution offering only project finance to a diversified financial services
group offering a wide variety of products and services, both directly and
through a number of subsidiaries and affiliates like ICICI Bank.
In 1999, ICICI become the first Indian company and the first bank or
financial institution from non-Japan Asia to be listed on the NYSE. In 2001,
ICICI bank acquired Bank of Madura Limited.
ICICI Bank set up its international banking group in fiscal 2002 to cater to
the cross border needs of clients and leverage on its domestic banking
strengths to offer products internationally. ICICI Bank currently has
subsidiaries in the United Kingdom, Canada and Russia, branches in
Singapore and Bahrain and representative offices in the United States,
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China, United Arab Emirates, Bangladesh and South Africa.
Today, ICICI Bank offers a wide range of banking products and financial
services to corporate and retail customers through a variety of delivery
channels and through its specialised subsidiaries and affiliates in the areas
of investment banking, life and non-life insurance, venture capital and asset
management.
You see, ICICI Bank is India's #2 bank (after State Bank of India ), with more
than 700 branches and 3,200 ATMs nationwide. ICICI's retail banking group
offers lending and deposit services to small businesses and individuals.
Larger businesses are served by the corporate banking group, which offersfinance services and treasury products. ICICI's rural and government
banking unit offers micro-loans and agricultural banking. Foreign operations,
as well as services related to international trade finance and expatriate
Indians, fall under the international banking group. Other ICICI offerings
include online banking, asset management, and insurance.
Management :
ICICI Bank is operating under the guidance and management of the following experts:
Ms. Chanda Kochhar,Managing Director & CEOMr. N. S. Kannan,Executive Director & CFOMr. K. Ramkumar,Executive Director
Mr. Rajiv Sabharwal,Executive Director
Board Members -Mr. K. V. Kamath, ChairmanDr. Swati PiramalMr. Homi R. KhusrokhanMr. Dileep ChoksiMr. Arvind KumarMr. M.S. RamachandranDr. Tushaar Shah
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Mr. V. Sridar
TIME LINE HISTORY OF ICICI
1955:
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1956:
1960:
1961:
1967:
1969:
1972:
1977:
1982:
1986:
:
:
The Industrial Credit and Investment Corporation of India Limited(ICICI) incorporated at the initiative of the World Bank, theGovernment of India and representatives of Indian industry, with theobjective of creating a development financial institution for providingmedium-term and long-term project financing to Indian businesses.
Mr.A.Ramaswami Mudaliar elected as the first Chairman of ICICILimited.
ICICI emerges as the major source of foreign currency loans to Indianindustry. Besides funding from the World Bank and other multi-lateralagencies, ICICI also among the first Indian companies to raise fundsfrom International markets.
ICICI declared its first Dividend at 3.5%.
ICICI building at 163, Backbay Reclamation was inaugurated.
The first West German loan of DM 5 million from Kredianstalt wasobtained by ICICI.
ICICI made its first debenture issue for Rs.6 crore, which wasoversubscribed.
First two regional offices in Calcutta and Madras were opened.
Second entity in India to set-up merchant banking services.
ICICI sponsors the formation of Housing Development FinanceCorporation.Managed its first equity public issue.
Becomes the first ever Indian borrower to raise European CurrencyUnits.ICICI commences leasing business.
ICICI first Indian Institution to receive ADB Loans. First public issue byan Indian entity in the Swiss Capital Markets.
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:
1987:
1988:
1993:
:
1994:
1996:
:
:
1997:
:
:
1998:
:
1999:
:
2000::
2001:
2002:
:
ICICI along with UTI sets up Credit Rating Information Services ofIndia Limited, (CRISIL) India's first professional credit rating agency.
ICICI promotes Shipping Credit and Investment Company of IndiaLimited. (SCICI)
The Corporation made a public issue of Swiss Franc 75 million in
Switzerland, the first public issue by any Indian equity in the SwissCapital Market.
ICICI signed a loan agreement for Sterling Pound 10 million withCommonwealth Development Corporation (CDC), the first loan byCDC for financing projects in India.
ICICI promotes TDICI - India's first venture capital company.
ICICI sets-up ICICI Securities and Finance Company Limited in jointventure with J. P. Morgan.
ICICI sets up ICICI Asset Management Company.
ICICI sets up ICICI Bank.
ICICI becomes the first company in the Indian financial sector to raiseGDR.
ICICI announces merger with SCICI.
Mr.K.V.Kamath appointed the Managing Director and CEO of ICICI Ltd
ICICI was the first intermediary to move away from single prime rateto three-tier prime rates structure and introduced yield-curve basedpricing.
The name "The Industrial Credit and Investment Corporation of IndiaLimited" was changed to "ICICI Limited".
ICICI announces takeover of ITC Classic Finance.
Introduced the new logo symbolizing a common corporate identity forthe ICICI Group.
ICICI announces takeover of Anagram Finance.
ICICI launches retail finance - car loans, house loans and loans forconsumer durables.ICICI becomes the first Indian Company to list on the NYSE throughan issue of American Depositary Shares.
ICICI Bank becomes the first commercial bank from India to list itsstock on NYSE.
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ICICI Bank announces merger with Bank of Madura.
The Boards of ICICI Ltd and ICICI Bank approved the merger of ICICIwith ICICI Bank.
Moodys' assign higher than sovereign rating to ICICI.
Merger of ICICI Limited, ICICI Capital Services Ltd and ICICI Personal
Financial Services Limited with ICICI Bank.
INTRODUCTION
THEORETICAL BACKGROUND
The concept of Credit Risk
Credit Risk is the risk of default by borrower due to inability and/orunwillingness to repay his debts in accordance with the agreed terms and
conditions.
Debt: Bonds, loans and commercial paper are all examples of debt. Forexample, a company may look to borrow $1 million so they can buy acertain piece of equipment. In this case, the debt of $1 million will need tobe paid back (with interest owing) to the creditor at a later date.
What is credit?
Credit is a very heart of the banking. Indeed the word credit was derived
from the Latin credere which, means to trust or believe. Thus, credit
means faith or confidence that is engendered between a debtor and
creditor, which may result in the transfer of value in the present, the
payment being deferred to the future. Credit is often defined from two
platform: One, credit as a potentiality ans two as an actuality. In the case of
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former is defined as The power to obtain goods or service by giving a
promise to pay money on demand or at a specified date in the future while
in the case of the latter it is defined as the present right to a future
payment
From this generic understanding , we can define bank credit as an amount
of money that has been delivered by a bank to a customer in return for the
promise of interest and capital repayment in the future. It is simply an
exchange of rights an immediate right given to a borrower to use the
money against a future right given to the bank to demand money.
CREDIT MONITORING SYSTEMS HELPS IN:
It is a very crucial activity in credit risk management. It is a function of themanager/ credit department
Understanding the financial position of the borrower.
Confirming credit in compliance with the sanction terms.
Enduring that there is no deviations in the end use of fund, and is used
for the sanctioned purposes.
Ensuring that project cash-flows are being realized by the borrower.
Ensuring that securities/collaterals are in conformity with the
sanctioned-terms and have not deteriorated.
Identifying the potential problem loan accounts well in time which in
turn would help the bank to initiate corrective measures.
There are well known Credit Rating Agencies in India are:
1. Credit Rating Information Services of India Limited(CRISIL)
2. Investment Information and Credit Rating Agency of India (ICRA)
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3. Credit Information & Research Limited (CARE)
BODY OF THESIS
OPERATIONAL REVIEW OF ICICI BANK IN 2011-12
ICICI Bank continued to serve as the focal point for marketing, distribution
and servicing of home loan products.
In addition, your company keenly looks at every step in the entire value
chain of real estate, which starts as a land transaction and culminates in an
end user moving into a property, as a business opportunity for the
Company.
Retail housing customers expect greater transparency, reliability,
professional standards and convenience in the process of searching for their
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homes. The Company has made significant gains in the business of retail
property services through the brand ICICI Home Search.
The Company also made significant progress in the commercial real estate
space and provided advisory services to corporate and developers in the
aforesaid segment. This has driven growth in fee income.
The Company has started a separate business vertical that shall focus on
sourcing ICICI HFC Fixed Deposits. The objective is to optimize cost of
resources. ICICI HFC Fixed Deposits have received the highest credit ratings
of AAA by CARE and MAAA by ICRA.
RISK MANAGEMENT SYSTEM IN ICICI BANK
Structure:
Risk Management Committee.
Asset Liabilities Management Committee
Operational Risk Management Committee
Credit Risk Management Committee
Credit Committees
Credit Audit & Review Division
Credit Policy & Risk Management Division.
Credit Risk Rating
Credit risk rating is a rating assigned to borrowers is based on an analysis of
their ability and willingness to repay the debt taken from the bank. This
rating is assigned on a scale, which generally has 6 to 8 levels. Companies
falling in the same credit risk category have similar probability of default.
Better the rating, lower is the probability of default. The probability of
default increases in an exponential manner as the credit risk rating
deteriorates.
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Uses of Credit Risk Rating
Credit risk rating is one of the important tools to decide in the following
matters:
Whether to lend to a borrower or not: The credit risk rating of a
borrower determines the appetite of the bank in determining exposure
level. A bank would be willing to lend to highly rated borrowers but would
not like exposure to borrowers with very poor credit risk rating.
Pricing: The risk premium to be charged to a borrower should be
determined by its credit risk rating. Borrowers with poor credit rating
should be priced high.
Risk Mitigants: The extent of collateral security required and the
need to step up margin requirements are linked to credit risk rating of a
borrower. The higher the risk category of a borrower, the greater should be
the value of collateral and/or the margins.
Product mix:There is need to gradually shift from the present form of
credit facility by way of Cash Credit limit to Term Lending in Working
Capital.
Level of decision-making: The delegation of loan sanction/approva
powers can be linked to the credit risk rating of a borrower. For low risk
borrowers, higher power of approval can be at the branch level to facilitate
faster sanctioning of loans thereby ensuring better customer service. For
higher risk borrowers, approval from higher levels may be considered.
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Frequency of renewal and monitoring: Renewal of facility in case
of high rated borrowers can be considered at longer intervals as compared
to low rated borrowers.
Credit risk ratings eventually help a bank to assign a probability of default
for borrower according to its risk category. This probability of default is
determined statistically from past data by observing the behavior of various
rated clients over a number of years. The expected losses from a loan can
be determined using this probability of default. This probability will then
help to determine the terms and conditions for the loans in terms of the
amount, interest rate to be charged, maturity etc.
Credit risk rating will be just one of the inputs which will be used in making
the credit decisions, besides other factors like collateral provided, period
and quality of relationship with the borrower, portfolio concentration etc.
Criteria of ICICI Bank for lending the Home loan
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As informed by Mr. Ashok Tiwari (ICICI Bank Sr. Officer, Home loans) Home
loan is divided into two parts are:
1) SAL(Salaried)
2) SEP (Self Employed Professionals)
i. Self employed professionals
ii. Self employed non-professionals
1) Salaried: Applicants whose salary is less than Rs.10000/- pm but
more than Rs.4000/- pm the bank charged 40% EMI from their salary
and applicants whose salary is above Rs.10000/- the bank charged
50% EMI from their salary.
2)Self Employed Professionals:
i. Self employed professionals This category is for Doctors,
Chartered Accountants, Architectures etc.
ii. Self employed non-professionals This category is for
businessman like Proprietors, Partnership businesses, Director ofthe company etc.
The bank give the loan for both professionals on their Loan to value
(LTV 80%) + Fixed Obligation to Income Ratio (FOIR 40%). Bank
sanctioned 120% loan of the professionals return.
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PROCESS OF THE SANCTIONING THE HOME LOAN PRAPOSAL
MIS Management Information System
FI Field Investigation
RCU Risk Containment Unit
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RBI GUIDELINES ON CREDIT RATING
Banks should have a comprehensive risk scoring/rating system that servesas a single point indicator of diverse risk factors of counter party and for
taking credit decisions in a consistent manner. To facilitate this, a
substantial degree of standardization is required in ratings across
borrowers. The risk rating system should be designed to reveal the overall
risk of lending, critical input for setting pricing and non-price terms of loans
as also present meaningful information for review and management of loan
portfolio. This risk rating, in short, should reflect the underlying credit risk
of the loan book. The rating exercise should also facilitate the credit
granting authorities some comfort in its knowledge of loan quality at any
moment of time.
The risk rating system should be drawn up in a structured manner,
incorporating, inter alia, financial analysis, projections and sensitivity,
industrial and management risks. The banks may use any number of
financial ratios and operational parameters and collaterals as also
qualitative aspects of management and industry characteristics that have
bearings on the creditworthiness of borrowers. Banks can also weigh the
ratios on the basis of the years to which they represent for giving
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importance to near term developments. Within the rating framework, banks
can also prescribe certain level of standards or critical parameters, beyond
which no proposals should be entertained. Banks may also consider
separate rating framework for large corporate/small borrowers, traders, etc.
that exhibit varying nature and degree of risk. Forex exposures assumed by
corporate who have no natural hedges have significantly altered the risk
profile of banks. Banks should, therefore, factor the unhedged market risk
exposures of borrowers also in the rating framework. The overall score for
risk is to be placed on a numerical scale ranging between 1-6, 1-8, etc. on
the basis of credit quality. For each numerical category, a quantitative
definition of the borrower, the loans underlying quality, and an analytic
representation of the underlying financials of the borrower should be
presented. Further, as a prudent risk management policy, each bank should
prescribe the minimum rating below which no exposures would be
undertaken.
Any flexibility in the minimum standards and conditions for relaxation and
authority, therefore, should be clearly articulated in the Loan Policy.
The credit risk assessment exercise should be repeated biannually (or even
at shorter intervals for low quality customers) and should be delinked
invariably from the regular renewal exercise. The updating of the credit
ratings should be undertaken normally at quarterly intervals or at least at
half-yearly intervals, in order to gauge the quality of the portfolio at periodicintervals. Variations in the ratings of borrowers over time indicate changes
in credit quality and expected loan losses from the credit portfolio. Thus, if
the rating system is to be meaningful, the credit quality reports should
signal changes in expected loan losses. In order to ensure the consistency
and accuracy of internal ratings, the responsibility for setting or confirming
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such ratings should vest with the Loan Review function and examined by an
independent Loan Review Group. The banks should undertake
comprehensive study on migration (upward lower to higher and downward
higher to lower) of borrowers in the ratings to add accuracy in expected
loan loss calculations.
SWOT Analysis
STRENGTHS WEAKNESSES
OPP
ORTUNITIES
S O Strategies
Strength: Large Capital base.
Opportunity: Market Expansion.
Strategy: Deep Penetration intoRural Market.
W O Strategies
Weakness: WorkforceResponsiveness.
Opportunity: Outsourcing of Non -Core Business.
Strategy: Outsource Customer Care& other E-Helps.
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THREAT
S
S T Strategies
Strength: Low operating costs
Threat: Increased Competitionfrom others Pvt. Banks.
Strategy: Steps to Ensure Loyaltyby old Customers.
W T Strategies
Weakness: Not Equal to InternationalStandards.
Threat: Entry of many ForeignBanks.
Strategy: Consider additionalbenefits
CREDIT APPRAISAL PROCESS
There are the main below contains which should be used when
Credit Manager appraises the file:
Applicant Name
Co-applicant Name
Educational Qualification
No. of dependents
Spouse income
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Assets
Experience
Investments
No. years lived in city
Past financial records
Stability & continuity of occupation
Saving history
Credit Manager is a complete solution for managing, reviewing andanalyzing credit applications, significantly reducing commercial applicationturnaround times while improving credit risk mitigation.
Overview of Credit Manager
Questionnaire
1) What is the Credit Risk in Home loans?
2) How can the bank manage the Credit Risk in Home loan?
3) What are the different policies used by Credit Manager to minimizing
the credit risk?
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4) How does the Credit Manager calculate the Credit risk?
5) What is the Credit appraisal process?
6) Which Credit risk rating model used by bank?