ACKNOWLEDGEMENT

This seminar report has been made possible through the direct and indirect Co-

operation of various persons, who have inspired me at every step of my work. It is

a matter of pride for me to acknowledge my profound gratitude to my respected

guide who always facilitates me in gaining practical knowledge.

I am very much obliged and thankful to my esteemed Guide MR.JAGDEEP

SINGH for his valuable Cooperation and Guidance.

JASPREET KAUR

1

PREFACE

The report provides an opportunity to a student to demonstrate application of

his/her knowledge, skill and competencies required during the technical

session. Report also helps the student to devote his/her skill to analyse the

problem to suggest alternative solutions, to evaluate them and to provide

feasible recommendations on the provided data.

The report is on the topic of “VARIOUS LOAN FACILITIES PROVIDED BY

PUNJAB STATE CO-OPERATIVE BANK ”. Although I have tried my level

best to prepare this report an error free report every effort has been made to offer

the most authenticate position with accuracy.

2

OBJECTIVES OF THE PROJECT

1) To Study about Loan

2) To Study risks associated with Loan

3) Recommending ways to Reduce the Probability of Defaults & Suggesting

Strategies for same

3

COMPANY PROFILE

The Punjab State Cooperative Bank was

established on 31st August, 1949 at Shimla vide registration No. 720 has a

principle financing institution of the cooperative movement in Punjab. In 1951 its

Head Office was shifted to Jalandhar from where it moved in 1963 to its present

building at Chandigarh. In the cooperative Banking structure, the position of the

Punjab State Cooperative Bank is extremely important as the whole credit system

revolves around it. It has 18 branches and 3 extension counter in Chandigarh.

There are 19 District Central Cooperative Banks having 813 branches all over

Punjab, mostly in rural areas of the State. One new Central Cooperative Bank and

110 new bank branches have been opened during the last four years, 1997-2001.

Mission:

Promotion and sustainance of economic interest & providing easy finance, cost

effective and quality banki

PSCB:

Punjab State Cooperative Bank. Experience a whole new Era of Banking

Technology. Where banking is made easier and convenient for our customers.

The Punjab State Cooperative Bank provides you with the New Generation

banking architecture to progress in the future in an evolutionary manner. Punjab

State Cooperative Bank (PSCB) is customer centric. Therefore it is designed to

encompass all the constituents of the banking space- the management of the

bank, the employees of the bank and the customers of the bank.

4

Organization Structure

Chairman

Board of Directors

Managing Director

Additional Managing Director (Administration) Additional Managing

Director (Banking)

 

 

 

 

 

 

Deputy

Vigilan

ce

Officer

 

 

 

 

 

 

Establishmen

t Officer

 

 

 

 

 

 

Liaison

Officer

 

 

 

 

 

 

ACFA

 

 

 

Deputy

General

Manager

(System)

General

Manager

(O&A)

General

Manager

(Development

)

 

General

Managers

(Division

Officer at

Jalandhar,

Bhatinda&

Amritsar)

 Deputy

General

Managers

Deputy

General

Managers

Assistant

General

Manager

Assistant

General

Managers

Assistant

General

Managers

Assistant

General

Managers

Deputy Deputy

Managers

Deputy

Managers

5

110 new branches of Cooperative Banks have been opened during the last four

years as against 35 opened during 1992-1997. At present, 813 branches of

Cooperative Banks are working. The Branch opening policy of the Cooperative

Banks is being revamped. It is proposed to consolidate and strengthen existing

branches and open new branches only in those areas where it is economically

viable to do so.

With a view to provide uniform identity to all Central Cooperative Banks and

their branches, sign boards of all the branches, their building designs i.e. exterior

as well as interior, have been designed on the same pattern. The branches of the

bank are being renovated and designed to update and modernize their facilities.

74 branches have been shifted to new suitable places upto 31.1.2001 and 3

branches have constructed their own buildings. Telephone facility has been

provided in 623 branches.

The Punjab State Cooperative Bank has constructed a new building at Sector 34 at

a cost of Rs. 8.96 crore. This building is spread over 13 bays and has 5 storeys. It

is centrally air-conditioned. All the modern amenities have been provided in the

building. The Chief Minister, Punjab inaugurated the new building on 19.11.2000.

6

ACHIEVEMENTS

AND

AWARDS

Deposits

The deposits of Central Cooperative Banks have touched Rs.2759.80 crore as on

31.12.2000, showing an increase of Rs.326.26 crore over the last year upto this

date. The deposits of the State Coop. Bank have increased from Rs.810.00 crore

as on 31.3.2000 to Rs.844.18 croreupto 31.12.2000, showing a net increase of

Rs.34.18 crore

Advances

Agricultural advances

Short Term Agricultural advances:

During the year 2000-2001, the Punjab State Cooperative Bank has advanced

loans of Rs.1950.49 crore up to 31.12..2000 against the target of Rs.1550.00 crore

for financing agro-inputs for crop production.

Medium Term Agricultural advances:

The Central Cooperative Banks have advanced Rs.6.80 crore as Medium-term

Agricultural advances in the State upto 31.10.2000. This loan is given to farmers

for undertaking activities allied to agriculture

Loans for consumer durables to salary earners

With a view to provide credit facilities to their customers, the Cooperative Banks

introduced a scheme of loans for purchase of consumer durables. Under the

scheme, every Government/semi-Government employee is provided loan upto

Rs.50000/- repayable in 3-5 years in easy monthly installments. The loan can be

utilized for purchase of TV, Refrigerator, Scooter, Furniture etc. A significant

section of the salaried class has benefited from the scheme. More than Rs.121

crorehave been advanced under the scheme upto 28-2-2001.7

The Punjab State Cooperative Bank has been awarded First Prize for its execlent

performance for the year 1997-98 by NABARD, in All India ranking under the

best performance awards scheme.

The Fazilka Central Cooperative Bank and the Nawanshahr Central Cooperative

Bank have also been adjudged as the best central cooperative banks in India for

the years 1997-98 and 1998-99 respectively

Loan

A loan is a type of debt. Like all debt instruments, a loan entails the redistribution

of financial assets over time, between the lender and the borrower.In a loan, the

borrower initially receives or borrows an amount of money, called the principal,

from the lender, and is obligated to pay back or repay an equal amount of money

to the lender at a later time. Typically, the money is paid back in regular

installments, or partial repayments; in an annuity, each installment is the same

amount.

The loan is generally provided at a cost, referred to as interest on the debt, which

provides an incentive for the lender to engage in the loan. In a legal loan, each of

these obligations and restrictions is enforced by contract, which can also place the

borrower under additional restrictions known as loan covenants. Although this

article focuses on monetary loans, in practice any material object might be lent.

Acting as a provider of loans is one of the principal tasks for financial institutions.

For other institutions, issuing of debt contracts such as bonds is a typical source of

funding.

Loan Schemes of PSCB

8

Special Settlement Scheme-2000 - This scheme provides opportunity for the

customers who have not settled their payments for more than 5 years. This scheme

also provides opportunity to defaulters by encouraging and assisting them to clear

their dues with the bank.

Objectives

Opportunity to borrower defaulters for more than five years to clear.

Opportunity to clear Non Performing Assets (NPA)

Reduction in cost and time for recovery.

To encourage and assist genuine defaulters.

To facilitate mutually accepted reconciliation and settlement of dormant

loan accounts.

To provide Buy Back facility for decreed property.

Defaulters for short, medium and long term loans for more than five years.

Defaulters for medium term loans for purchase of assets for more than

five years.

Defaulters for consumption loan to weaker section for more than five

years.

Members/Ex-employees involved in embezzlements.

Members whose land has been purchased.

Short term loans converted into medium term loan due to natural

calamities.

9

Duration & Eligibility

Duration: The special settlement scheme is valid from 1st February to June 2001.

Eligibility: All overdue cases for more than five years in case of CCBS/PACS and

six years in case of PADBS as on 31.01.2000 even if arbitration, awards have

been obtained and execution of proceedings have been initiated.

OperationalGuidelines

Preparation and submission of list of eligible borrowers to block and

District Level Review Comities.

Eligible borrowers or legal heirs (in case of death) can apply on prescribed

form for the scheme.

After review block level, Default Review Comities (BLRC) recommends

to District Level Default Review Committee (DLRC)

After hearing the applicant DLRC recommends the case.

DLRC recommends to Provisional Authority (RA) and copy to applicant.

BLRC would meet on every 1st and 3rd Tuesday whereas DLRC would

meet on 2nd and 4th Monday.

RA after considering the recommendations of DLRC and facts, pass

specific order of settlement amount and amount to be written off.

RA should seek a proof of payment of settlement amount before passing

final order.

CCB/PSCB would debit the difference amount as per RA's order without

further sanctions from RCS and also liquidate outstanding amount from

records.

The above procedure shall be followed for buy back facility of land

purchased by the PACS/CCBS/PADBS, no relief of interest to the farmers

under buy back facility.

The above procedure shall be followed for embezzlement cases even after

taking legal measures for cases older than six years.

10

Relief

DLRC, on merits, decide about the charging of simple interest from date of

account turned bad, provided that:

Amount reclaimed shall not be less than the principal amount plus 100%

there of.

Amount received is principal amount plus 50% where the borrower has no

asset or source of income.

In case of buy back facility, the original owner shall pay the total

outstanding amount.

Any other action initiated earlier under IPC shall continue unabated, also

the proceedings under the scheme shall not be prejudiced to on longing

legal proceedings.

The amount of net loss to PACs/CCBs/PADBs shall be charged to reserve

for Bad Doubtful Debts available with CCBs PADBs. There are no such

reserves with PACs.

Revolving Cash Credit

In 1998, the cooperative banks launched a new scheme of revolving cash credit

for the farmers. The scheme envisages to provide Cash credit limit to the farmers

against the mortgage of their land for all credit requirements of the farmers. It

aims at freeing them from the clutches of traditional money lenders. A cash credit

limit of Rs.1,50,000/- is sanctioned to farmers having 5 acres of land and Rs.3 lacs

for those having 10 acres of land.  So far Rs.655.00 croreshave been sanctioned

under the scheme. The scheme has been evaluated by experts from the department

of economics and sociology, PAU, Ludhiana

Key Observations

The recovery under the scheme has been excellent and more than 70% of

the credit availed under the scheme has been spent for productive

purposes, whereas remaining was provided for consumption and other

purposes.

11

Nabard should has no hesitation in providing refinance facility for the

scheme.

The scheme has so far covered medium and large farmers and it should be

extended to cover small and marginal farmers as well.

The rate of interest on credit facility under the scheme should be reduced

LOAN ACCOUNT TRANSACTIONS

PROCEDURES FOR AVAILING LOAN

The appraisal officer attends to the queries of a prospective borrower. Various

details. E.g., eligibility at alare discussed during this meeting.

Collect the application form, which is generally available at the reception counter.

After collecting the form the processing fees, which is about 1% of the loan

amount is received. The fees arenon-refundable. Generally the applicant is asked

to pay the fees only if the chances of theloan getting sanctioned are really good as

per the Officer's analysis. But PSCB do not charge any such fees.

The date of the personal interview is fixed up as per mutual convenience. The

appraisal Officer conducts the interview.

The Appraisal Officer prepares the file and discusses the case with the Branch

Manager. The Branch Manager should substantiate recommendations of the

Appraisal Officer. The file is then recommended for sanctioning by the competent

authority.

The competent authority concerned sanctions the loan proposal. In case there

aresome queries, the same have to answer by the Appraisal Officer to the

satisfactionof the sanctioning authority.12

If approved, you collect the Loan Offer letter. You fill Property Details form and

Acceptance Note and sign the same. This signifies your acceptance of the

proposal. Then, you are required to collect the disbursement within a month of the

acceptance of the offer letter.

The file is then transferred to the Legal department. You submit the legal

documents to the Legal Officer. The Loan Agreement and the other documents are

signed. The Legal Officer then prepares the Legal report after studying the legal

documents in depth.

The Disbursement Memo is prepared and is signed by the Appraisal, Legal and

countersigned by the Branch Manager.

The PEMI cheque of the amount disbursed is collected before releasing the

disbursement amount cheque. PEMI is the interest charged on the amount already

disbursed by the company.

Consequent to the final disbursement of the EMI starts which amortizes the

interest and adjust the principle for the tenure allotted.

The documents mortgaged are released on closure of loan.

13

DIFFERENT TYPES OF LOAN PROVIDED BY PUNJAB

STATE CO-OP BANK

There are 5 types of loan provided by PSCB: -

1) CONSUMER LOAN (UNSECURED LOAN)

2) CAR LOAN (SECURED LOAN)

3) PERSONAL LOAN (UNSECURED LOAN

4) EDUCATION LOAN (SECURED LOAN)

5) HOUSE BUILDING LOAN (SECURED LOAN)

UNSECURED LOAN: -

An unsecured bank loan is a type of financing that is granted to a borrower

without collateral. Collateral can be in the form of real estate, an automobile,

jewelry or anything that the lender qualifies as security. An unsecured bank loan is

often approved for a smaller amount compared to secured loans because the risk

of default is higher on financial agreements that do not have collateral associated

with them. They may have higher interest and fees associated with them because

the lender is taking a risk since there is no way to guarantee the loan. The credit

requirements may vary depending upon the lender. Different types of unsecured

loans include a line of credit tied to one's checking account, personal loans,

payday loans, and emergency cash advances.

Unsecured Loansalso called, also called signature loans or personal loans.An

unsecured loan means the lender relies on your promise to pay it back. They're

taking a bigger risk than with a secured loan, so interest rates for unsecured loans

tend to be higher.

14

What Does Collateral Mean?

Properties or assets that are offered to secure a loan or other credit. Collateral

becomes subject to seizure on default. In lending agreements, collateral is a

borrower's pledge of specific property to a lender, to secure repayment of a loan.

The collateral serves as protection for a lender against a borrower's default- that is,

any borrower failing to pay the principal and interest under the terms of a loan

obligation. If a borrower does default on a loan (due to insolvency or other event),

that borrower forfeits (gives up) the property pledged as collateral - and the lender

then becomes the owner of the collateral.

Secured loan:-

Secured loans are those loans that are protected by an asset or collateral of some

sort. The item purchased, such as a home or a car, can be used as collateral, and a

lien can be placed on such purchases. The finance company or bank will hold the

deed or title until the loan has been paid in full, including interest and all

applicable fees. Other items such as stocks, bonds, or personal property can be put

up to secure a loan as well. Secured loans are usually the best way to obtain large

amounts of money quickly. A lender is not likely to loan a large amount without

more than your word that the money will be repaid. Putting your home or other

property on the line is a fairly safe guarantee that you will do everything in your

power to repay the loan.

Demand loan

Demand loans are short term loans [1] that are atypical in that they do not have

fixed dates for repayment and carry a floating interest rate which varies according

to the prime rate. They can be "called" for repayment by the lending institution at

any time. Demand loans may be unsecured or secured.

15

Subsidized loan

A subsidized loan is a loan on which the interest is reduced by an explicit or

hidden subsidy. In the context of college loans in the United States, it refers to a

loan on which no interest is accrued while a student remains enrolled in education.[2] Otherwise, it may refer to a loan on which an artificially low rate of interest (or

none at all) is charged to the borrower.

An unsubsidized loan is a loan that gains interest at a market rate from the date of

disbursement

CONSUMER LOAN (UNSECURED LOAN)

The Rate of Interest charged is :

For Gents – 14 %

For Ladies – 13.5 %

Any Individual with a monthly income of minimum Rs.5000/- can avail

consumer loan.

New consumer durable such as Refrigerator, Television, Air conditioner,

Micro- oven, Cooking Range, Washing Machine, Music System,

Furniture, Personal Computer, etc. can be financed by PSCB.

The total amount of loan is 80% of the cost of consumer durable, subject

to maximum of Rs.1 lac. However, the minimum amount of loan shall be

Rs.I0000/-.

Amount of loan together with Interest shall be repayable maximum in 60

equal monthly installments.

Interest is charged on reducing balances.

Formalities which are to be completed for availing the facilityPerforma

Invoice of consumer durable(s) to be purchased.

16

Details required for availing the loan:-

Proof of residence

Proof of Income

Details of guarantor

Return copy

CARLOAN (SECURED LOAN)

The Rate of Interest charged is :

For Gents – 11 %

For Ladies – 10.5 %

Individuals and Business Concerns can avail car loan.

Finance is also available for purchase of used cars not older than 3 years.

The amount of Loan can avail from PSCB :

For individuals, loan amount shall be 25 times the Net Monthly Salary

/Income, subject to maximum of Rs•10.00 lac or 75% of the cost of the

vehicle whichever is less.

The income of the spouse can also be taken into account for determining

the amount of loan. In such cases, the spouse shall stand a guarantor.

The repayment period for loan together with interest shall be repayable

maximum in 60 equal monthly installments. However, for old car, loan

together with interest is to be repaid maximum in 60 equal monthly

installments.

Formalities which are to be completed for availing the facility : -

17

Performa Invoice of Car to be Purchased

Proof of residence

Proof of Income

Details of guarantor

Return Copy

• PERSONAL LOAN (UNSECURED LOAN)

The Rate of Interest charged is :

For Gents – 14 %

For Ladies – 13.5 %

The Repayment period for the term loan will be in equal monthly

installment within the following period :- Loan up to Rs 200000/ - 60

Months.

The maximum limit of loan is 2 lacs.

EDUCATION LOAN

The Rate of Interest charged is :

For Gents – 9 %

For Ladies – 8.5 %

Education loans are given for pursuing all types of education viz. general,

Professional, technical and vocational courses.

The costs which are financed under this scheme enables the needy students

to meet the following costs for studies in India as well as abroad:

admission fees, books & stationery, instruments required for the course,

monthly fees, examination fees, insurance premium for policy on life of

the borrowing student, caution deposit/ building fund/refundable deposit

18

supported by bills/ receipts, expenses like study tours/ project work/ thesis

etc. required to complete the course.

Following is the eligibility criteria for getting loan under the scheme:

Indian nationals, in the age group of 16-40 years.

Students who have scored pass marks in their last qualifying examination

and have secured admission in the courses mentioned above.

The parents/ guardian should have regular source of income to the extent

that they are able to repay the loan in case of need/ unforeseen

circumstances.

The amount of loan one can avail from PSCB is co-related to expenses

involved in taking up the course and the expected earnings after

qualifying, subject to a maximum of 5 lacs in India and 10 lacs in abroad

HOUSE BUILDING LOAN (SECURED LOAN) The Rate of Interest charged is :

For Gents – 10 %

For Ladies - 9.5 %

The Maximum Period for allowing loan is up to 15 years.

The documents required for availing facility are : -

Proof of residence

Proof of Income

Details of guarantor

Return Copy

Account Statement

The maximum House Building loan provided by PSCB is 20 lacs.

19

Some other types of loans

Poor Credit LoanA poor credit loan can give you the money you need without a lot of hassle. Many

people are used to getting a loan that takes a great deal of time and effort to

achieve. You can get a loan with bad credit fast and this is something that many

people do not know about.

Turning to an online resource for a loan can give you the right resources for even

the worst credit rating. When you go online to find a loan with poor credit, you

will have a great deal of lenders to choose from. This can help you to get to know

each lender and what they have to offer.

Knowing your interest rates can be very important to helping you find a loan with

an interest rate that you can afford. A poor credit loan can be very easy to obtain

and this can help you in a variety of situations where you need quick cash.

How can get a Loan even with Poor Credit ?

If you need to get a loan there are some great ways that you can do this fast. You

do not have to fill out a ton of paperwork only to get denied through a bank. Using

your own computer can provide you with access to many lenders to help you get

the loan that you need.

You can get a loan online and this will give you a way to get money without

leaving your home. You can often get this money very quickly and this may be

exactly what you need to help you with any financial obligation you have in your

life.

When you get a loan online this process can be very easy. If you have a verifiable

job and bank account you may have all of the right tools to help you get the

money you need. You can explore terms and choose the right loan for your

personal need.

20

Payday Loan Lenders The requirements of payday loan lenders will vary depending on which lender you

want to do business with. There are some ways that you can begin comparing each

loan that you are seeking out and this can help you to get terms you are satisfied

with. Instead of seeking out just one lender, it can be more informative to look for

several lenders to compare. When you compare you will be able to find the best

loan for your needs. You will not have to settle for any loan that you are not

completely satisfied with when you explore several lenders ahead of time.

Payday loan lenders can vary and you should always make sure that you seek out

more than one lender to make a more informed decision. This can help you to get

the money you need with terms you will be happy with now and in the future.

Small Personal Loans For Everyday Needs

If you are exploring small personal loans, you may not know where to begin

seeking out this type of loan. Going online and looking for lenders can be one of

the easiest ways to find a lender for a small loan.

When you are seeking out a small loan online you will have instant access to

many lenders. This can give you the option to compare lenders and terms to find

what is best for your needs. If you have bad credit, you can find a loan online that

does not require the use of your credit history in order to obtain.

Small personal loans can be used for a variety of reasons. Seeking out this loan

online can give you the right tools to help you find the money you need and this

process can happen very quickly. This will allow you to get the money you need

for any reason and you can go on w

ith your life much faster.

The Benefits of Quick Loans

Quick loans do exist and this can help anyone that needs some extra cash. Many

people think that their credit score will stand in the way of getting money. This is

not the case and there are loans that you can apply for without using your credit.

21

When you apply for an online loan you will want to make sure that you

understand the qualifications of this type of loan. You will want to make sure that

you have proof of employment. This is often a qualification of a quick loan. Your

bank account is something else that you may need to show proof of and this is

something you will want to be prepare for.

When you get quick loans you will not have to worry about your credit score

holding you back. Even bad credit will not prevent you from getting a loan from

the right lender.

Online LoansOnline loans can provide you with an easy way to get the money that you need.

This is often a very quick way to get money and you can get some help until you

get to your next paycheck.

When you are first thinking about getting an online loan you need to be very

proactive. You should never agree to a loan where you do not know the terms. It

will be your responsibility to learn more about this loan and then you can decide if

you want to proceed forward.

You want to also consider what you are going to use this money for. If you are

trying to pay off another loan, this is not a good idea and something you may want

to reconsider, but if you are using this to help you get by until you make more

money, this can be a great time to take advantage of online loans.

Target markets

Personal or commercial

Loans can also be subcategorized according to whether the debtor is an individual

person (consumer) or a business. Common personal loans include mortgage loans,

car loans, home equity lines of credit, credit cards, installment loans and payday

loans. The credit score of the borrower is a major component in and underwriting

and interest rates (APR) of these loans. The monthly payments of personal loans

22

can be decreased by selecting longer payment terms, but overall interest paid

increases as well. For car loans in the U.S., the average term was about 60 months

in 2009.[3]

Loans to businesses are similar to the above, but also include commercial

mortgages and corporate bonds. Underwriting is not based upon credit score but

rather credit rating.

Abuses in lending

Predatory lending is one form of abuse in the granting of loans. It usually involves

granting a loan in order to put the borrower in a position that one can gain

advantage over him or her. Where the moneylender is not authorized, they could

be considered a loan shark.

Usury is a different form of abuse, where the lender charges excessive interest. In

different time periods and cultures the acceptable interest rate has varied, from no

interest at all to unlimited interest rates. Credit card companies in some countries

have been accused by consumer organisations of lending at usurious interest rates

and making money out of frivolous "extra charges".

Abuses can also take place in the form of the customer abusing the lender by not

repaying the loan or with intent to defraud the lender.

United States taxes

Most of the basic rules governing how loans are handled for tax purposes in the

United States are codified by both Congress (the Internal Revenue Code) and the

Treasury Department (Treasury Regulations — another set of rules that interpret

the Internal Revenue Code).Yet such rules are universally accepted:

1. A loan is not gross income to the borrower. Since the borrower has the

obligation to repay the loan, the borrower has no accession to wealth.

23

2. The lender may not deduct (from own gross income) the amount of the

loan. The rationale here is that one asset (the cash) has been converted into a

different asset (a promise of repayment). Deductions are not typically available

when an outlay serves to create a new or different asset.

3. The amount paid to satisfy the loan obligation is not deductible (from own

gross income) by the borrower.

4. Repayment of the loan is not gross income to the lender. In effect, the

promise of repayment is converted back to cash, with no accession to wealth by

the lender.

5. Interest paid to the lender is included in the lender’s gross income. Interest

paid represents compensation for the use of the lender’s money or property and

thus represents profit or an accession to wealth to the lender. Interest income can

be attributed to lenders even if the lender doesn’t charge a minimum amount of

interest.

6. Interest paid to the lender may be deductible by the borrower. In general,

interest paid in connection with the borrower’s business activity is deductible,

while interest paid on personal loans are not deductible. The major exception here

is interest paid on a home mortgage.

24

Credit Risk Management

Credit Risk

As observed by RBI, Credit Risk is the major component of risk

management system and this should receive special attention of the Top

Management of a bank. Credit risk is the important dimension of various risks

inherent in a credit proposal, as it involves default of the principal itself. Credit

risk may arise due to internal -meaning faulty appraisal, inadequate monitoring,

unwillingness on the part of borrower to honor commitments despite being

capable or external factors such as government policies, industry related changes.

Credit risk is the risk of financial loss owing to the failure of the

counterparty to perform its contractual obligations.

Lack of diversification of credit risk has been the primary reason for many

bank failures.

Banks have a comparative advantage in making loans to entities with

whom they have an ongoing relationship.

Credit risk is more difficult to quantify than market risk.

Default probabilities are difficult to assess because of the infrequency of

defaults.

Credit risk has effectively three components:

Default risk – The risk of default by the counterparty and is measured by the

probability of default.

Credit exposure risk – The risk of fluctuations in the market value of the claim

on the counterparty.

Recovery risk – Uncertainty in the fraction of the claim recovered after default.

Thus Credit risk deals with the combined effect of market, default and recovery

risks.

25

Risks of Bank Loans

There are many risks associated with bank loans, both for the bank and for those

who receive the loans. A close analysis of risk in bank loans requires

understanding what risk means. Risk is a concept which denotes the probability of

certain outcomes--or the uncertainty of them--especially an existing negative

threat for trying to achieve a current monetary objective. Risk in bank loans can

include: credit risk, the risk that the loan won't be paid back on time or at all;

interest rate risk, the risk that the interest rates priced on bank loans will be too

low to earn the bank enough money; and liquidity risk, the risk that too many

deposits will be withdrawn too quickly, leaving the bank short on immediate cash.

Risk and Return

Much of the economy can be characterized by a trade-off between risk and return.

There are risks associated with all actions. "Risk" here means the chance that your

investment, your time, effort or money, will go wasted rather than be used

productively.

Banking Risks

When a banker makes a loan, he is taking a risk that the borrower will pay the

loan back (credit risk), and also taking the risk that the funds loaned out won't be

needed to pay out withdrawals or to take care of regular bank business, thereby

preventing bank runs (liquidity risk). Further, the banker is undertaking "interest

rate risk," which is more subtle but still present. Interest rate risk represents the

possibility that the bank has somehow priced its loan and deposit interest rates

incorrectly, be it the bank's fault or the fault of an ever-changing marketplace. If it

turns out that the loan payments aren't high enough to cover deposit costs (or, if

the bank's profit on loans is less than its losses on deposits), the bank will fail to

be profitable.

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Depositor's Risks

Depositors to banks have their own sets of risks. Most significantly, the depositor

is worried about credit risk--if the bank fails, the depositor wonders if he will be

able to get back the money he put in. However, depositors don't really have a

comparable number of risks as bankers, because safeguards are in place.

Borrower's Risks

Risks are relative to each person, so it is hardly surprising that the borrower has

his own sets of risks that he cares about. Firstly, the borrower got a loan for a

reason. The biggest risk for a borrower, then, is that something will go wrong with

the investment and he won't be able to pay back the loan.

Criminal under Indian Terminal Forum:-A person should not be declared as

criminal under ITF. If a loan is provided to such type of person, the chances of

risk will be huge as such person can make fraud at any time with the bank.

Wrong Intention:- Some persons apply loan with wrong intentions, in these cases

the chances of risk for the bank is more.

Improper use of loan:- When a person apply for a loan, care must be taken that

the loan provided to the applicant must be used in a proper way. Risk creates for

the bank when a person uses the loan in some other activities against his

requirement as sanctioned by the bank.

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WAYS & STRATEGIES FOR REDUCING RISK:-

FINANCIAL INVESTIGATION:-According to my opinion, the bank must

investigate the financial position of the applicant while sanctioning a loan. The

amount of mortgage should be such that the bank should recover the loan in case

of discrepancy occurs during the tenure of the loan.

To review the structured finance product activities, identify any violations of law

and examine ways to strengthen existing regulatory prohibitions against abusive

practices.

For example, Sanctioning loan without any financial investigation dragged the

US economy into the recession. Banking system should avoid repeat of those

events which were responsible for the US recession.

KYC- KNOW YOUR CUSTOMER:-The adoption of effective know-your-

customer (KYC) standards is an essential part of banks' risk management

practices. Banks with inadequate KYC risk management programmes may be

subject to significant risks, especially legal and reputational risk. Sound KYC

policies and procedures not only contribute to a bank's overall safety and

soundness, they also protect the integrity of the banking system by reducing the

likelihood of banks becoming vehicles for money laundering, terrorist financing

and other unlawful activities. Recent initiatives to reinforce actions against

terrorism in particular have underlined the importance of banks' ability to monitor

their customers wherever they conduct business.

FIELD INVESTIGATION:-After receipt of the application the field

investigation agency should carry out basic address, job and individual

verification regarding the applicant. It will help in reducing various types of

frauds such as :

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Fake PAN cards — the name may be genuine, but another individual’s

photograph is used.

Presenting ‘proofs’ of non-existent residences or businesses

Incorrect details — like wrong contact details, improper qualification,

salary figures and work experience.

Tie-up with insurance company:-The bank should tie-up with some good

reputed insurance company so that the chances of risk can be reduced. The banks

who have tied-up with insurance companies are operationally feasible and at the

same time the risk related to borrowers is reduced i.e. if in case the borrower

becomes defaulter then the insurance company pays the balance amount to the

concerned bank.

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SWOT ANALYSIS

STRENGTHS

Brand name of Punjab State co-op bank is established over the years.

Single window clearance - a single employee provides wide variety of

facilities to the borrower, minimizing the hassle of wastage of time.

Specialized software's are big assets.

There is no penalty for prepayment from borrowers own service.

WEAKNESSES

Top management takes large amount of time to approve high value

seeking loan borrowers.

People are not aware of wide variety of schemes offered by the company;

tend to think the company as only providing housing and consumer loans

OPPORTUNITIES

Special rates of interest are offered during exhibitions.

Special rates of interest can be introduced for employees of PSU'S &

Reputed national or multinational companies'

THREATS

The competition in market is very high due to the private players

Innovative schemes with Horne loan from other players.

The processing process is quite slow which leads to low housing finance

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Comparison of PSCB with ICICI bank and PNB bank

Attributes PSCB ICICI Bank , Punjab National Bank

Types of loans

Car loan, House

Building loan,

Consumer loan,

Personal loan,

Education loan

Home Loan, Car

loan, Personal loan,

Commercial vehicle

loan, Loan against

property, Education

loan

Personal loan, Vehicle loan,

Consumer goods loan, Education

loan, Personal loan, Loan against

property

Eligibility

Rate of Interest

Car loan-11%,

House building

loan-10%,

Consumer loan-

14%, Personal

loan-14%,

Education loan-

9%

Home loan-10.25%,

Car loan-11%,

Personal loan-16%,

Loan against

property-9.50%,

Education loan-13%

Personal loan-15.05%, Vehicle

loan-12%, Education loan-

12.25%, Home loan-9.25%, Loan

against property-13.75%

Emi Payments

Mode of Transactions

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FormalitiesLess formalities

are requiredMore Less

Flexibility

Ease in Sanction

Amount of Sanction Up to 20 lacs

Bank type Nationalized Private Nationalized

Tagline “Committed to

development”" Hum Hai Na “ “The name you can bank upon”

BIBLIOGRAPHY

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http://pbcooperatives.gov.in/PSCB.htm

www.google.com

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