1. SAAB MARFIN MBACREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 1

2. SAAB MARFIN MBA RESEARCH METHODOLOGYCORPORATE BANKINGSTATEMENT OF PROBLEM:To study the emergence and evolution of the corporate banking as animportant division of the commercial banking and also to study the creditappraisal models supporting the increased activities of corporate lending bybanks.In todays global Banking arena, Corporate Bankers are facing a string ofunprecedented and sweeping challenges in the areas like TreasuryManagement, Trade Finance, Risk Management, Compliance Management,Electronic Trading and Derivatives Markets. Compounding this are themounting complexities from ongoing regulatory changes, decreasingmargins and fierce competitionNEED FOR STUDY:Over the period of time, with the tremendous increase in the growth patternof industrial development, the need for the corporate loans have increasedmore than ever. So, the increasing trend urges the banks and financialinstitutions to focus on corporate banking as a separate division. So, theresearchers have preferred to study the concept of corporate banking and allthe operational aspects attached to it in the entire process.OBJECTIVE OF THE STUDY:CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 2 3. SAAB MARFIN MBATo study the banking industry, as a whole with the help of variousanalysis including SWOT analysis, PEST analysis and Porters Five Forceanalysis.To acquire basic knowledge about the corporate lending in India andits relevance with respect to banks.To analyze the credit risk models of both public bank and private bankand bring out its comparative picture on the basis of variousparameters.To study credit risk management strategies of bank.RESEARCH DESIGN:A research design is the arrangement of the condition for collection andanalysis of data. Actually it is the blueprint of the research project. Theresearch type is descriptive research. The main objective of this design issearch primary and secondary data.The research primarily focuses on the secondary sources and first handinformation through focus group interviews.DATA COLLECTION:As the research type is descriptive, the method of data collection wasinformal.SOURCES:The relevant information were collected from both primary and secondarysources like follow up with bank managers web search, newspaper articlesCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 3 4. SAAB MARFIN MBATOOLS:Focus group interviews with the managers of banks.BENEFICIARIES:For the banks:It will give them the in depth review of the various aspects involved in thecorporate banking with emphasis on the credit risk management.For the corporates:The report shows the comparative study of the credit appraisal andsanctioning procedure involved in the credit lending by banks as well asfinancial institutions. Secondly, they will also get the relevance of thecorporate lending by the banks and its various relevant aspects.For the management students:The report studies the entire banking industry from various aspects usingdifferent analytical tools. Secondly, it introduces into the world of creditlending and its trend in India. Moreover, it also shows the operationalprocedures involved in the corporate lending with emphasis on riskmodeling and credit risk management.LIMITATIONS OF THE STUDY:The scope of the report is mainly depends on the information extracted fromsecondary sources and the information given by the managers of banks. So,lack of the availability of the first hand information may act as a limitation tothe project report.CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 4 5. SAAB MARFIN MBACREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 5 6. SAAB MARFIN MBA CHAPTER: 1AN OVERVIEW ON BANKING INDUSTRYIn recent years, the banking industry around the world has been undergoinga rapid transformation. In India also, the wave of deregulation of early 1990shas created heightened competition and greater risk for banks and otherfinancial intermediaries. The cross-border flows and entry of new playersand products have forced banks to adjust the product-mix and undertakerapid changes in their processes and operations to remain competitive. Thedeepening of technology has facilitated better tracking and fulfillment ofcommitments, multiple delivery channels for customers and faster resolutionof miscoordinations.Unlike in the past, the banks today are market driven and market responsive.The top concern in the mind of every banks CEO is increasing or at leastmaintaining the market share in every line of business against the backdropof heightened competition. With the entry of new players and multiplechannels, customers (both corporate and retail) have become morediscerning and less "loyal" to banks. This makes it imperative that banksprovide best possible products and services to ensure customer satisfaction.To address the challenge of retention of customers, there have been activeefforts in the banking circles to switch over to customer-centric businessmodel. The success of such a model depends upon the approach adopted bybanks with respect to customer data management and customer relationshipmanagement.Over the years, Indian banks have expanded to cover a large geographic &functional area to meet the developmental needs. They have been managingCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 6 7. SAAB MARFIN MBAa world of information about customers - their profiles, location, etc. Theyhave a close relationship with their customers and a good knowledge of theirneeds, requirements and cash positions. Though this offers them a uniqueadvantage, they face a fundamental problem.During the period of planned economic development, the bank productswere bought in India and not sold. What our banks, especially those in thepublicsector lackarethe marketingattitude.Marketingis acustomer-oriented operation. What is needed is the effort on their part toimprove their service image and exploit their large customer informationbase effectively to communicate product availability. Achieving customerfocus requires leveraging existing customer information to gain a deeperinsight into the relationship a customer has with the institution, andimproving customer service-related processes so that the services are quick,error free and convenient for the customers.Furthermore, banks need to have very strong in-house research and marketintelligence units in order to face the future challenges of competition,especially customer retention. Marketing is a question of demand (customers)and supply (financial products & services, customer services through variousdelivery channels). Both demand and supply have to be understood in thecontext of geographic locations and competitor analysis to undertakefocusedmarketing(advertising)efforts. Focusing on region-specificcampaigns rather than national media campaigns would be a better strategyfor a diverse country like India.Customer-centricity also implies increasing investment in technology.Throughout much of the last decade, banks world-over have re-engineeredtheir organizations to improve efficiency and move customers to lower cost,automatedchannels, such asATMsand onlinebanking.As is proved by the experience, banks are now realizing that one of theirbest assets for building profitable customer relationships especially in aCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 7 8. SAAB MARFIN MBAdeveloping country like India is the branch-branches are in fact a keychannel for customer retention and profit growth in rural and semi-urban setup. However, to maximize the value of this resource, our banks need totransform theirbranches fromtransaction processing centersintocustomer-centric service centers. This transformation would help themachieve bottom line business benefits by retaining the most profitablecustomers. Branches could also be used to inform and educate customersabout other, more efficient channels, to advise on and sell new financialinstruments like consumer loans, insurance products, mutual fund products,etc.There is a growing realization among Indian banks that it no longer pays tohave a "transaction-based" operating model. There are active efforts todevelop arelationship-oriented model of operations focusingoncustomer-centric services. The biggest challenge our banks face today is toestablish customer intimacy without which all other efforts towardsoperational excellence are meaningless. The banks need to ensure throughtheir services that the customers come back to them. This is because a majorchunk of income for most of the banks comes from existing customers,ratherthanfromnew customers.Customer relationship management (CRM) solutions, if implemented andintegrated correctly, can help significantly in improving customer satisfactionlevels. Data warehousingcanhelp in providing better transactionexperiences for customers over different transaction channels. This isbecause data warehousing helps bring all the transactions coming fromdifferent channels under the same roof. Data mining helps banks analyseand measure customer transaction patterns and behaviour. This can help alotin improvingservicelevels.It must be noted, however, that customer-centric banking also involvesmany risks. The banking industry world over is being thrust into a wild newworld of privacy controversy. The banks need to set up serious governancesystems for privacy risk management. It must be remembered that customerCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 8 9. SAAB MARFIN MBAprivacy issues threaten to compromise the use of information technologywhich is at the very center of e-commerce and customer relationshipmanagement - two areas which are crucial for banks future.The critical issue for banks is that they will not be able to safeguardcustomer privacy completely without undermining the most excitinginnovations in banking. These innovations promise huge benefits, both forcustomers and providers. But to capture them, financial services companiesand their customers will have to make some critical tradeoffs. When thestakes are so high, nothing can be left to chance, which is why banks mustimmediately begin developing comprehensive approaches to the privacyissue.The customer centric business models based on the applications ofinformation technology are sustainable only if the banks protect clientconfidentiality in the process - which is the basic foundation of bankingbusiness.1.1 EVOLUTION OF BANKING IN INDIACREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 9 10. SAAB MARFIN MBABanking in India has its origin as early as the Vedic period. It is believed thatthe transition from money lending to banking must have occurred evenbefore Manu, the great Hindu Jurist, who has devoted a section of his workto deposits and advances and laid down rules relating to rates of interest.During the Mogul period, the indigenous bankers played a very importantrole in lending money and financing foreign trade and commerce. Duringthe days of the East India Company, it was the turn of the agency houses tocarry on the banking business.The General Bank of India was the first Joint Stock Bank to be established inthe year 1786. The others which followed were the Bank of Hindustan andthe Bengal Bank. The Bank of Hindustan is reported to have continued till1906 while the other two failed in the meantime. In the first half of the 19thcentury the East India Company established three banks; the Bank of Bengalin 1809, the Bank of Bombay in 1840 and the Bank of Madras in 1843. Thesethree banks also known as Presidency Banks were independent units andfunctioned well. These three banks were amalgamated in 1920 and a newbank, the Imperial Bank of India was established on 27th January 1921. Withthe passing of the State Bank of India Act in 1955 the undertaking of theImperial Bank of India was taken over by the newly constituted State Bank ofIndia.The Reserve Bank which is the Central Bank was created in 1935 by passingReserve Bank of India Act 1934. In the wake of the Swadeshi Movement, anumber of banks with Indian management were established in the countrynamely, Punjab National Bank Ltd, Bank of India Ltd, Canara Bank Ltd, IndianBank Ltd, the Bank of Baroda Ltd, the Central Bank of India Ltd. On July 19,1969, 14 major banks of the country were nationalized and in 15th April1980 six more commercial private sector banks were also taken over by thegovernment.CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 10 11. SAAB MARFIN MBAThe Indian banking can be broadly categorized into nationalized(government owned), private banks and specialized banking institutions. TheReserve Bank of India acts a centralized body monitoring any discrepanciesand shortcoming in the system. Since the nationalization of banks in 1969,the public sector banks or the nationalized banks have acquired a place ofprominence and has since then seen tremendous progress. The need tobecome highly customer focused has forced the slow-moving public sectorbanks to adopt a fast track approach. The unleashing of products andservices through the net has galvanized players at all levels of the bankingand financial institutions market grid to look anew at their existing portfoliooffering.Conservative banking practices allowed Indian banks to be insulated partiallyfrom the Asian currency crisis. Indian banks are now quoting a highervaluation when compared to banks in other Asian countries (viz. Hong Kong,Singapore, Philippines etc.) that have major problems linked to huge NonPerforming Assets (NPAs) and payment defaults. Co-operative banks arenimble footed in approach and armed with efficient branch networks focusprimarily on the high revenue niche retail segments.The Indian banking has finally worked up to the competitive dynamics of thenew Indian market and is addressing the relevant issues to take on themultifarious challenges of globalization. It has come a long way from being asleepy business institution to a highly proactive and dynamic entity. Banksthat employ IT solutions are perceived to be futuristic and proactive playerscapable of meeting the multifarious requirements of the large customersbase. Private banks have been fast on the uptake and are reorienting theirstrategies using the internet as a medium The Internet has emerged as thenew and challenging frontier of marketing with the conventional physicalworld tenets being just as applicable like in any other marketing medium.CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 11 12. SAAB MARFIN MBAThis transformation has been largely brought about by the large dose ofliberalization and economic reforms that allowed banks to explore newbusiness opportunities rather than generating revenues from conventionalstreams (i.e. borrowing and lending).The banking in India is highly fragmented with 30 banking units contributingto almost 50% of deposits and 60% of advances. Indian nationalized banks(banks owned by the government) continue to be the major lenders in theeconomy due to their sheer size and penetrative networks which assuresthem high deposit mobilization. The Indian banking can be broadlycategorized into nationalized, private banks and specialized bankinginstitutions.The Reserve Bank of India acts as a centralized body monitoring anydiscrepancies and shortcoming in the system. It is the foremost monitoringbody inthe Indian financial sector.The nationalized banks (i.e.government-owned banks) continue to dominate the Indian banking arena.Industry estimates indicate that out of 274 commercial banks operating inIndia, 223 banks are in the public sector and 51 are in the private sector.The private sector bank grid also includes 24 foreign banks that have startedtheir operations here. Under the ambit of the nationalized banks come thespecialized banking institutions. These co-operatives, rural banks focus onareas of agriculture, rural development etc., unlike commercial banks theseco-operative banks do not lend on the basis of a prime lending rate. Theyalso have various tax sops because of their holding pattern and lendingstructure and hence have lower overheads.This enables them to give amarginally higher percentage on savings deposits. Many of thesecooperative banks diversified into specialized areas (catering to the vastretail audience) like car finance, housing loans, truck finance etc. in order tokeep pace with their public sector and private counterparts, the co-operativebanks too have invested heavily in information technology to offer high-endCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 12 13. SAAB MARFIN MBAcomputerized banking services to its clients.Complementing the roles of the nationalized and private banks are thespecialized financial institutions or Non Banking Financial Institutions(NBFCs). With their focused portfolio of products and services, these NonBanking Financial Institutions act as an important catalyst in contributing tothe overall growth of the financial services sector.NBFCs offer loans forworking capital requirements, facilitate mergers and acquisitions, IPOfinance, etc. apart from financial consultancy services.Trends are nowchanging as banks (both public and private) have now started focusing onNBFC domainslike long and medium-termfinance, working caprequirements, IPO financing etc. to meet the multifarious needs of thebusiness community.1.2 STRUCTURE OF BANKING INDUSTRY:Banking system plays an important role in a countrys economy. It promotesgrowth and development of the country. Indian money market comprisesorganized and the unorganized institutions. The organized and unorganizedinstitutions in the Indian banking system serve a source of short term creditto agriculture, industry, trade and commerce.CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 13 14. SAAB MARFIN MBAIn the Indian banking structure the Reserve Bank of India is the central bank.It regulates, direct and controls the banking and financial institutions in thecountry. There are three high banking institutions, namely, RBI, NABARD andEXIM Bank. There are separate financial institutions catering to the needs ofdifferent sectors of the economy. Development Banks, Investment Banks,Co-operative Banks, Land Development Banks, Commercial Banks in publicand private sectors, NABARD, RRBs, EXIM Bank, etc. The indigenous bankersand moneylenders dominate unorganized sector.The Indian banking structure can be seen from the chart shown under: Apex Banking InstitutionRBIIDBINABARD EXIM BankSIDBINHB IRBICREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 14 15. SAAB MARFIN MBA Banking Institutions CommercialRegional RuralCo- operative Land Development Development BanksBanks Banks Banks Bank PublicPrivate ForeignPACsCCBs SCBsPLDs SLDB SectorSectorexchange Banks BankBanks All India State Level LevelSBI andNationalisedSubsidiaries Banks IDBIICICI SIDBISFCsSIDCForeignIndian Non ScheduleBank Scheduled Bank Bank CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 15 16. SAAB MARFIN MBAThe chart reveals that there are several apex banking institutions working atthe national level. RBI is the highest banking authority regulating, directingand controlling all the banking and financial institutions in the country.There are development banks, namely IDBI, SIDBI, ICICI at the national leveland State Financial Corporations and State Industrial DevelopmentCorporations which have been set-up.There are 29 public sector banks. Co-operative banks have three tier system.At the village level there is Primary Agriculture Co-operative Society(PACs), atthe district level there is Central Co-operative Bank and at the state levelthere is State Co-operative Bank. Co-operative banks provide short term andmedium loans to the agriculture sector. Land Development Banks providelong term agriculture credit. It comprises Primary Land DevelopmentBank(PLDB) at ht district level and State Land Development Bank(SLDB) at thestate level. RRBs provide loans and advances to the rural poor and NABARD isan apex body regulating, directing and controlling the financial and bankinginstitutions providing finance for the agriculture and rural development.TYPES OF BANKSModern age is the age of specialization with the changing situationworldwide, bank functions have also undergone a major change. Economicconditions and financial needs of a country are different than those of othercountries throughout the world. Some financial institutions deal in acceptingdeposits and making loans and advances to different sectors of the economy.Some institution makes loans and advances for medium and short term,while others are meant for long term advances. Some are financing industrialsector and foreign trade while others are advancing loans to agriculturesector.CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 16 17. SAAB MARFIN MBAIn broader sense of the term banks may be classified into followingcategories:Central BankCommercial BanksDevelopment BanksInvestment BanksCo-operative BanksForeign Exchange BanksSavings BanksExport-Import BankSpecialized National BanksIndigenous BankersInternational Financial InstitutionsCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 17 18. SAAB MARFIN MBA1.3 GROWTH OF BANKING SECTOR(DECADE WISE)Pre-Liberalization: The growth of the Banking Sector in the preliberalization period can be analyzed as under.1971-80:This was the decade immediately following the Nationalization of 14commercial banks. Also the banking sector grew at the fastest pace in thisdecade. 1. Assets:The assets of the sector grew at 21.58 % CAGR 1 . They increased fromRS.82.52bn to Rs.582.33bn. This kind of growth was achieved due tomassive increase in the number of branches resulting in a spurt in depositmobilization. 2. Deposits:The deposits grew from Rs.64.79bn to Rs.439.87bn. at a CAGR 21.11 %. Thegrowth was higher in later part of the decade. This growth rate would havebeen higher had the current accounts grown at a rate higher than 18 %. ThisCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 18 19. SAAB MARFIN MBAindicates peoples preference for using bank as place to keep their savings.The bank was not used as a place to keep money to be used for transactionmotive. This is further clarified by the poor ratio of average current depositsto total deposits at 23.45 %. 3. Advances:The advances grew at 19.26 % CAGR from Rs.46.85bn to Rs.272.67bn. Alsothe growth was higher in the later part of the decade. Thus the advancesgrew at a pace slower than the deposits due to decreasing credit depositratio, which reduced from 72.30 % in 1970 to 61.99 % in 1980. 4. Net worth:The Net worth increased from Rs.1.16bn to Rs.5.33bn at a CAGR of 16.48 %.The Capital of the banks remained flat throughout the decade growing atjust 8.54 % and also the growth came in the later part of the decade. Thecapital increased form Rs.470.2mn to Rs.1.07bn.However, the Reserves grew at a healthy pace of 20 % CAGR from Rs.690mnto Rs.4.27bn. Thus the banks in this decade did not raise capital and fundedtheir growth from internal accruals. This resulted in a wide gap betweenReserves and Capital indicating the banks hunger for Capital.1981-90: 1. Assets:The growth of the sector was significantly subdued since the last decade.The assets grew at just 16.30 % CAGR compared to 21.58 % in the previousdecade. The total assets increased from Rs.582.33bn to Rs.2636.93bn.CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 19 20. SAAB MARFIN MBA 2. Deposits:Deposits increased from Rs.439.86bn to Rs.1820.46bn at a CAGR of 15.26 %.The current accounts remained the usual laggards in terms of growthgrowing at just 12.67 % CAGR. The term and saving deposits grew at aslightly faster pace of 16.17 % and 15.5 % CAGR. 3. Advances:Advances grew at a CAGR of 16.79 % from Rs.272.67bn to Rs.1287.85bn.This is due to the fact that the banks have stepped up their credit-depositratio from 62 % to 70.74 %. This indicates higher investment than saving inthe economy. 4. Net worth:The Net worth increased from Rs.5.33bn to Rs.47.1bn. Thus the net worthgrew at a whopping 24.33 % CAGR.The capital hungry banks went on capital raising spree in the latter half ofthe decade. Thus the capital grew at a CAGR of 34.53 %. In absolute terms,the capital soared from Rs.1.06bn at the beginning of the decade toRs.20.73bn at the end of the decade.The Reserves however grew at more or less constant pace of 19.97 % CAGRthroughout the decade.At the end of the decade the Capital had kept pace with the Reserves and thegap between them had significantly narrowed down.Post-Liberalization: The growth of this sector after 1991 can berepresented as under.1991-2000: 1. Assets: CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 20 21. SAAB MARFIN MBAThe rate of the sector further slowed down during this decade. The assetsgrew at a CAGR of 15.24 % from Rs.2636.93bn to Rs.11103.68bn. Thegrowth rate however, was greater in the later part of the decade indicatingfuture prospects of increase in growth. 2. Deposits:The deposits grew from Rs.1820.47bn to Rs.9003.06bn at a CAGR of16.69 %. There was a spurt in the last 3-4 years of the decade indicatingimproving trend. In this decade however, the savings accounts were thelaggards in terms of growth at 13.34 % CAGR. The term deposits grew at18.38 % and current deposits grew at 15.23 %. This reversal of trend ingrowth rates shows that the people are increasingly using banks to depositmoney to be used for transaction motive. 3. Advances:The advances increased from Rs.1287.85bn to Rs.4434.69bn at a CAGR of12.46 %. The lower growth in advances is due to the decline in credit-depositratio from 70.74 % in 1990 to 49.26 %. This shows there was a markeddecline in investment in this decade with savings exceeding investment. 4. Net worth:The Net worth grew at a feverish pace of 36.60 % CAGR, the highest in lastthree decades. This was mainly because the RBI opened the Banking sectorto Private sector. As many as 9 New Private Sector Banks started theiroperations in this period. They brought a lot of capital in the period 1993-95.However in the later half of the decade, capital growth was virtually nil.The Reserves grew at 37.54 % CAGR from Rs.26.36bn Rs.438.34bn. However,contrary to Capital the Reserves recorded exceptional growth in the later halfof the decade due to improving profits of private as well as public sectorbanks. However the gap between reserves and capital is once again widening.CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 21 22. SAAB MARFIN MBA1.4 FUTURE LANDSCAPE OF INDIAN BANKINGCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 22 23. SAAB MARFIN MBALiberalization and de-regulation process started in 1991-92 has made a seachange in the banking system. From a totally regulated environment, wehave gradually moved into a market driven competitive system. Our movetowards global benchmarks has been, by and large, calibrated and regulatordriven. The pace of changes gained momentum in the last few years.Globalization would gain greater speed in the coming years particularly onaccount of expected opening up of financial services under WTO. Four trendschange the banking industry world over, viz. 1) Consolidation of playersthrough mergers and acquisitions, 2) Globalisation of operations, 3)Development of new technology and 4) Universalisation of banking. Withtechnology acting as a catalyst, we expect to see great changes in thebanking scene in the coming years. The Committee has attempted tovisualize the financial world 5-10 years from now. The picture that emergedis somewhat as discussed below. It entails emergence of an integrated anddiversified financial system. The move towards universal banking has alreadybegun. This will gather further momentum bringing non-banking financialinstitutions also, into an integrated financial system.The traditional banking functions would give way to a system geared to meetall the financial needs of the customer. We could see emergence of highlyvaried financial products, which are tailored to meet specific needs of thecustomers in the retail as well as corporate segments. The advent of newtechnologies could see the emergence of new financial players doingfinancial intermediation. For example, we could see utility service providersoffering say, bill payment services or supermarkets or retailers doing basiclending operations. The conventional definition of banking might undergochanges.The competitive environment in the banking sector is likely to result inindividual players working out differentiated strategies based on theirstrengths and market niches. For example, some players might emerge asCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 23 24. SAAB MARFIN MBAspecialists in mortgage products, credit cards etc. whereas some couldchoose to concentrate on particular segments of business system, whileoutsourcing all other functions. Some other banks may concentrate on SMEsegments or high net worth individuals by providing specially tailoredservices beyond traditional banking offerings to satisfy the needs ofcustomers they understand better than a more generalist competitor.International trade is an area where Indias presence is expected to showappreciable increase.With the growth in IT sector and other IT EnabledServices, there is tremendous potential for business opportunities. Keepingin view the GDP growth forecast under India Vision 2020, Indian exports canbe expected to grow at a sustainable rate of 15% per annum in the periodending with 2010. This again will offer enormous scope to Banks in India toincrease their forex business and international presence.Globalizationwould provide opportunities for Indian corporate entities to expand theirbusiness in other countries. Banks in India wanting to increase theirinternational presence could naturally be expected to follow these corporatesand other trade flows in and out of India.Retail lending will receive greater focus. Banks would compete with oneanother to provide full range of financial services to this segment. Bankswould use multiple delivery channels to suit the requirements and tastes ofcustomers. While some customers might value relationship banking(conventional branch banking), others might prefer convenience banking(e-banking).One of the concerns is quality of bank lending. Most significant challengebefore banks is the maintenance of rigorous credit standards, especially inan environment of increased competition for new and existing clients.Experience has shown us that the worst loans are often made in the best oftimes. Compensation through trading gains is not going to support theCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 24 25. SAAB MARFIN MBAbanks forever. Large-scale efforts are needed to upgrade skills in credit riskmeasuring, controlling and monitoring as also revamp operating procedures.Credit evaluation may have to shift from cash flow based analysis toborrower account behaviour, so that the state of readiness of Indian banksfor Basle II regime improves. Corporate lending is already undergoingchanges. The emphasis in future would be towards more of fee basedservices rather than lending operations. Banks will compete with each otherto provide value added services to their customers.Structure and ownership pattern would undergo changes. There would begreater presence of international players in the Indian financial system.Similarly, some of the Indian banks would become global players.Government is taking steps to reduce its holdings in Public sector banks to33%. However the indications are that their PSB character may still beretained.Mergers and acquisitions would gather momentum as managements willstrive to meet the expectations of stakeholders. This could see theemergence of 4-5 world class Indian Banks. As Banks seek niche areas, wecould see emergence of some national banks of global scale and a numberof regional players.Corporate governance in banks and financial institutions would assumegreater importance in the coming years and this will be reflected in thecomposition of the Boards of Banks.Concept of social lending would undergo a change. Rather than being seenas directed lending such lending would be business driven. With SME sectorexpected to play a greater role in the economy, Banks will give greateroverall focus in this area. Changes could be expected in the deliverychannels used for lending to small borrowers and agriculturalists andCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 25 26. SAAB MARFIN MBAunorganized sectors (micro credit). Use of intermediaries or franchise agentscould emerge as means to reduce transaction costs.Technology as an enabler is separately discussed in the report. It would notbe out of place, however, to state that most of the changes in the landscapeof financial sector discussed above would be technology driven. In theultimate analysis, successful institutions will be those which continue toleverage the advancements in technology in re-engineering processes anddelivery modes and offeringstate-of-the-art products and servicesproviding complete financial solutions for different types of customers.Human Resources Development would be another key factor defining thecharacteristics of a successful banking institution. Employing and retainingskilled workers and specialists, re-training the existing workforce andpromoting a culture of continuous learning would be a challenge for thebanking institutions.1.5 BANKING INDUSTRY REFORMS AND VISION 2010A vision is not a project report or a plan target. It is an articulation ofthe desired end results in broader terms - A.P.J.Abdul KalamVision is of an integrated banking and finance system catering to all financialintermediation requirements of customers. Strong market players will striveto uncover markets and provide all services, combining innovation, quality,personal touch and flexibility in delivery. The growing expectations of thecustomers are the catalyst for our vision. The customer would continue to bethe centre-point of our business strategy. In short, you lose touch with theCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 26 27. SAAB MARFIN MBAcustomer, and you lose everything.It is expected that the Indian banking and finance system will be globallycompetitive. For this the market players will have to be financially strong andoperationally efficient. Capital would be a key factor in building a successfulinstitution. The banking and finance system will improve competitivenessthrough a process of consolidation, either through mergers and acquisitionsthrough strategic alliances.Technology would be the key to the competitiveness of banking and financesystem. Indian players will keep pace with global leaders in the use ofbanking technology. In such a scenario, on-line accessibility will be availableto the customers from any part of the globe; Anywhere and Anytimebanking will be realized truly and fully. At the same time brick and mortarbanking will co-exist with on-line banking to cater to the specific needs ofdifferent customers.Indian Banking system has played a crucial role in the socio-economicdevelopment of the country. The system is expected to continue to besensitive to the growth and development needs of all the segments of thesociety. The banking system that will evolve will be transparent in itsdealings and adopt global best practices in accounting and disclosuresdriven by the motto of value enhancement for all stakeholders.Financial Sector Reforms set in motion in 1991 have greatly changed the faceof Indian Banking. The banking industry has moved gradually from aregulated environment to a deregulated market economy.The marketdevelopments kindled by liberalization and globalization have resulted inchanges in the intermediation role of banks. The pace of transformation hasbeen more significant in recent times with technology acting as a catalyst.While the banking system has done fairly well in adjusting to the new marketdynamics, greater challenges lie ahead. Financial sector would be opened upCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 27 28. SAAB MARFIN MBAfor greater international competition under WTO. Banks will have to gear upto meet stringent prudential capital adequacy norms under Basel II. Inaddition to WTO and Basel II, the Free Trade Agreements (FTAs) such as withSingapore, may have an impact on the shape of the banking industry. Bankswill also have to cope with challenges posed by technological innovations inbanking. Banks need to prepare for the changes. In this context the need fordrawing up a Road Map to the future assumes relevance. The idea of settingup a Committee to prepare a Vision for the Indian Banking industry came upin IBA, in this background.Managing Committee of Indian Banks Association constituted a Committeeunder the Chairmanship of Shri S C Gupta, Chairman & Managing Director,Indian Overseas Bank to prepare a Vision Report for the Indian BankingIndustry. The composition of the Committee is given at the end of the report.The Committee held its first meeting on 23rd June 2003 at Mumbai. Prior tothe meeting the members were requested to give their thoughts on thefuture landscape of the banking industry. A discussion paper based on theresponses received from members was circulated along with a questionnaireeliciting views of members on some of the specific issues concerninganticipated changes in the banking environment.In the meeting, whichserved as a brainstorming session, members gave their Vision of the future.A second meeting of the Committee was held at Chennai on 7th August 2003to have further discussions on the common views, which emerged in the firstmeeting, and also to examine fresh areas to be covered in the study.CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 28 29. SAAB MARFIN MBAThe Vision Statement prepared by the Committee is based on commonthinking that crystallized at the meetings. In the Chennai meeting it wasdecided to form a smaller group from among the members to draft thereport of the Committee. The group met thrice to finalize the draft report.The report was adopted in the final meeting of the Committee held atMumbai.When we talk about the future, it is necessary to have a time horizon inmind. The Committee felt, it would be rather difficult to visualize thelandscape of banking industry say, 20 years hence due to the dynamicenvironment. While Government of India brought out India Vision 2020,the Committee is of the view that the pace of changes taking place in thebanking industry and in the field of Information Technology would renderany attempt to visualize the banking scenario in 2020, inconceivable.The entire financial services sector may undergo a dramatictransformation. It was, therefore, felt that we should set our goals for thenear future say, for 5-10 years hence and appropriately call this exerciseBanking Industry Vision 2010. The three main aspects focused inthe banking vision includes product innovation, process re-engineeringand technology.PRODUCT INNOVATION AND PROCESS RE-ENGINEERINGWith increased competition in the banking Industry, the net interestmargin of banks has come down over the last one decade. Liberalizationwith Globalization will see the spreads narrowing further to 1-1.5% as inthe case of banks operating in developed countries. Banks will look forfee-based income to fill the gap in interest income. Product innovationsand process re-engineering will be the order of the day. The changes willCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE29 30. SAAB MARFIN MBAbe motivated by the desire to meet the customer requirements and toreduce the cost and improve the efficiency of service. All banks willtherefore go for rejuvenating their costing and pricing to segregateprofitable and non-profitable business. Service charges will be decidedtaking into account the costing and what the traffic can bear. From theearlier revenue = cost + profit equation i.e., customers are charged tocover the costs incurred and the profits expected, most banks havealready moved into the profit =revenue - cost equation. This has beenreflected in the fact that with cost of services staying nearly equal acrossbanks, the banks with better cost control are able to achieve higherprofits whereas the banks with high overheads due to under-utilisation ofresources, un-remunerative branch network etc., either incurred losses ormade profits not commensurate with the capital employed. The newparadigm in the coming years will be cost = revenue - profit.As banks strive to provide value added services to customers, the marketwill see the emergence of strong investment and merchant bankingentities. Product innovation and creating brand equity for specializedproducts will decide the market share and volumes. New products on theliabilities side such as forex linked deposits, investment-linked deposits,etc. are likely to be introduced, as investors with varied risk profiles willlook for better yields. There will be more and more of tie-ups betweenbanks, corporate clients and their retail outlets to share a commonplatform to shore up revenue through increased volumes.CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 30 31. SAAB MARFIN MBABanks will increasingly act as risk managers to corporate and otherentities by offering a variety of risk management products like options,swaps and other aspects of financial management in a multi currencyscenario. Banks will play an active role in the development of derivativeproducts and will offer a variety of hedge products to the corporatesector and other investors. For example, Derivatives in emerging futuresmarket for commodities would be an area offering opportunities forbanks. As the integration of markets takes place internationally,sophistication in trading and specialized exchanges for commodities willexpand. As these changes take place, banking will play a major role inproviding financial support to such exchanges, facilitating settlementsystems and enabling wider participation.Bancassurance is catching up and Banks / Financial Institutions havestarted entering insurance business.From mere offering of insuranceproducts through network of bank branches, the business is likely toexpand through self-designed insurance products after necessarylegislative changes. This could lead to a spurt in fee-based income ofthe banks.Similarly, Banks will look analytically into various processes and practicesas these exist today and may make appropriate changes therein to cutcosts and delays. Outsourcing and adoption of BPOs will become moreand more relevant, especially when Banks go in for larger volumes ofretail business. However, by increasing outsourcing of operationsthrough service providers, banks are making themselves vulnerable toproblems faced by these providers.Banks should therefore outsourceonly those functions that are not strategic to banks business. Forinstance, in the wake of implementation of 90 days delinquency normsCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE31 32. SAAB MARFIN MBAfor classification of assets, some banks may think of engaging externalagencies for recovery of their dues and in NPA management.Banks will take on competition in the front end and seek co-operation inthe back end, as in the case of networking of ATMs.This type ofco-opetition will become the order of the day as Banks seek to enlargetheir customer base and at the same time to realize cost reduction andgreater efficiency.TECHNOLOGY IN BANKINGTechnology will bring fundamental shift in the functioning of banks. Itwould not only help them bring improvements in their internalfunctioning but also enable them to provide better customer service.Technology will break all boundaries and encourage cross border bankingbusiness. Banks would have to undertake extensive Business ProcessRe-Engineering and tackle issues like a) how best to deliver products andservices to customers b) designing an appropriate organizational modelto fully capture the benefits of technology and business process changesbrought about. c) how to exploit technology for deriving economies ofscale and how to create cost efficiencies, and d) how to create a customer- centric operation model.Entry of ATMs has changed the profile of front offices in bank branches.Customers no longer need to visit branches for their day to day bankingtransactions like cash deposits, withdrawals, cheque collection, balanceCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE32 33. SAAB MARFIN MBAenquiry etc. E-banking and Internet banking have opened new avenues inconvenience banking.Internet banking has also led to reduction intransaction costs for banks to about a tenth of branch banking.Technology solutions would make flow of information much faster, moreaccurate and enable quicker analysis of data received. This would makethe decision making process faster and more efficient. For the Banks, thiswould also enable development of appraisal and monitoring tools whichwould make credit management much more effective. The result wouldbe a definite reduction in transaction costs, the benefits of which wouldbe shared between banks and customers.While application of technology would help banks reduce their operatingcosts in the long run, the initial investments would be sizeable. Withgreater use of technology solutions, we expect IT spending of Indianbanking system to go up significantly.One area where the banking system can reduce the investment costs intechnology applications is by sharing of facilities. We are already seeingbanks coming together to share ATM Networks. Similarly, in the comingyears, we expect to see banks and FIs coming together to share facilitiesin the area of payment and settlement, back office processing, datawarehousing, etc. While dealing with technology, banks will have to dealwith attendant operational risks. This would be a critical area the Bankmanagement will have to deal with in future.Payment and Settlement system is the backbone of any financial marketplace.The present Payment and Settlement systems such as Structured FinancialMessaging System (SFMS), Centralised Funds Management System (CFMS),CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE33 34. SAAB MARFIN MBACentralized Funds TransferSystem (CFTS)and Real Time GrossSettlement System (RTGS) will undergo further fine-tuning to meetinternational standards. Needless to add, necessary security checks andcontrols will have to be in place.In this regard, Institutions such asIDRBT will have a greater role to play. CHAPTER: 2STRATEGIC ANALYSIS OF BANKING INDUSTRY2.1 PORTERS FIVE FORCE ANALYSIS:Prof. Michael Porters competitive forces Model applies to each and everycompany as well as industry. This model with regards to the BankingIndustry is presented below:CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE34 35. SAAB MARFIN MBA(2) Potential Entrants ishighas Development Financial Institutions as well asPrivate and foreign banks have entered in a(5)big way.(1)(4)Organizing Power Rivalryamong Bargaining Powerof the Supplier is ExistingFirmsof Buyers is highhigh. With new has increased with as corporate canfinancialliberalization. Newraise funds easilyinstruments they productsanddue to highare asking higherimproved competition.return oncustomer servicesinvestment.is the focus.(3) Threat from Substitute is high due to competition from NBFCs & Insurance companies as they offer a higher rate of interest than banks.Rivalry among existing firmsWith the process of liberalization, competition among the existing bankshas increased. Each bank is coming up with new products to attract thecustomers and tailor made loans are provided. The quality of servicesprovided by banks has improved drastically.CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE35 36. SAAB MARFIN MBAPotential EntrantsPreviously the Development Financial Institutions mainly provided projectfinance and development activities. But they have now entered into retailbanking which has resulted into stiff competition among the existingplayersThreats from SubstitutesBanks face threats from Non-Banking Financial Companies. NBFCs offer ahigher rate of interest.Bargaining Power of BuyersCorporates can raise their funds through primary market or by issue ofGDRs, FCCBs. As a result they have a higher bargaining power. Even inthe case of personal finance, the buyers have a higher bargaining power.This is mainly because of competition.Bargaining power of SuppliersWith the advent of new financial instruments providing a higher rate ofreturns to the investors, the investments in deposits is not growing in aphased manner. The suppliers demand a higher return for theinvestments.Overall AnalysisThe key issue is that how can banks leverage their strengths to have abetter future. Since the availability of funds is more and deployment offunds is less, banks should evolve new products and services to thecustomers. There should be rational thinking in sanctioning loans, whichwill bring down the NPAs. As there is expected revival in the Indianeconomy banks have a major role to play. Funding corporate at a low costof capital is a major requisite.CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 36 37. SAAB MARFIN MBA2.2 SWOT ANALYSIS:The banking sector is often taken as a proxy for the economy as a whole.The performance of bank should therefore, reflect Trends in the IndianEconomy. Due to the reforms in the financial sector, banking industryhas changed drastically with the opportunities to the work with, newaccounting standards new entrants and information technology. Thederegulation of the interest rate, participation of banks in projectfinancing has changed in the environment of banks.The performance of banking industry is done through SWOT Analysis. Itmainly helps to know the Strengths and Weakness of the industry and toimprove will be known through converting the opportunities intostrengths. It also helps for the competitive environment among the banks.STRENGTHS 1. Greater securities of FundsCompared to other investment options banks since its inception has beena better avenue in terms of securities. Due to satisfactory implementationof RBIs prudential norms banks have won public confidence over severalyears. 2. Banking networkAfter nationalization, banks have expanded their branches in the country,which has helped banks build large networks in the rural and urban areas.CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE37 38. SAAB MARFIN MBAPrivate banks allowed to operate but they mainly concentrate inmetropolis.3. Large Customer BaseThis is mainly attributed to the large network of the banking system.Depositors in rural areas prefer banks because of the failure of the NBFCs.4. Low Cost of CapitalCorporate prefers borrowing money from banks because of low cost ofcapital. Middle income people who want money for personal financingcan look to banks as they offer at very low rates of interests. Consumercredit forms the major source of financing by banksWEAKNESSES1. Basel CommitteeThe banks need to comply with the norms of Basel committee but beforethat it is challenge for banks to implement the Basel committee standard,which are of international standard.2. Powerful UnionsNationalization of Banks had a positive outcome in helping the IndianEconomy as a whole. But this has also proved detrimental in the form ofstrong unions, which have a major influence in decision making. They areagainst automation.3. Priority Sector LendingCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE38 39. SAAB MARFIN MBATo uplift the society, priority sector lending was brought in duringnationalization. This is good for the economy but banks have failed tomanage the asset quality and their intensions were more towardsfulfilling government norms. As a result lending was done fornon-productive purposes.4. High Non-Performing AssetsNon-Performing Assets (NPAs) have become a matter of concern in thebanking industry. This is because of change in the Accounting Standards(Prudential Norms). Net NPAs increased to large extent of the totaladvances, which has to be reduced to meet the international standards.OPPORTUNITIES 1. Universal BankingBanks have moved along the value chain to provide their customers moreproducts and services. For example: - SBI is into SBI home finance, SBICapital Markets, SBI Bonds etc. 2. Differential Interest RatesAs RBI control over bank reduces, they will have greater flexibility to fixtheir own interest rates which depends on the profitability of the banks. 3. High Household SavingsHousehold savings have been increasing drastically. Investment infinancial assets has also increased. Banks should use this opportunity forraising funds. 4. Overseas MarketsBanks should tap the overseas market, as the cost of capital is very low.CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 39 40. SAAB MARFIN MBA 5. Internet BankingThe advances in information technology have made banking easier.Business transactions can effectively carried out through internet banking.THREATS 1. NBFCs, Capital Markets and Mutual fundsThere is a huge investment of household savings. The investments inNBFCs deposits, Capital Market Instruments and Mutual Funds areincreasing. Normally these instruments offer better returns to investors. 2. Change in the Government PolicyThe change in the government policy has proved to be a threat to thebanking sector. 3. InflationThe interest rates go down with a fall in inflation. Thus, the investors willshift his investments to other profitable sectors. 4. RecessionCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 40 41. SAAB MARFIN MBADue to the recession in the business cycle the economy functions poorlyand this has proved to be a threat to the banking sector. The marketoriented economy and globalization has resulted into competition formarket share. The spread in the banking sector is very narrow. To meetthe competition the banks have to grow at a faster rate and reduce theoverheads. They can introduce new products and develop the existingservices.2.3. PEST ANALYSISPOLITICAL/ LEGAL ENVIROMENTGovernment and RBI policies affect the banking sector. Sometimeslooking into the political advantage of a particular party, the Governmentdeclares some measures to their benefits like waiver of short-termagricultural loans, to attract the farmers votes. By doing so the profits ofthe bank get affected. Various banks in the cooperative sector are openand run by the politicians. They exploit these banks for their benefits.Sometimes the government appoints various chairmen of the banks.Various policies are framed by the RBI looking at the present situation ofthe country for better control over the banksCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 41 42. SAAB MARFIN MBAECONOMICAL ENVIROMENTBanking is as old as authentic history and the modern commercialbanking are traceable to ancient times. In India, banking has existed inone form or the other from time to time. The present era in banking maybe taken to have commenced with establishment of bank of Bengal in1809 under the government charter and with government participation inshare capital. Allahabad bank was started in the year 1865 and Punjabnational bank in 1895, and thus, others followedEvery year RBI declares its 6 monthly policy and accordingly thevarious measures and rates are implemented which has an impact on thebanking sector. Also the Union budget affects the banking sector toboost the economy by giving certain concessions or facilities. If in theBudget savings are encouraged, then more deposits will be attractedtowards the banks and in turn they can lend more money to theagricultural sector and industrial sector, therefore, booming the economy.If the FDI limits are relaxed, then more FDI are brought in India throughbanking channels.SOCIAL ENVIROMENTBefore nationalization of the banks, their control was in the handsof the private parties and only big business houses and the effluentsections of the society were getting benefits of banking in India. In 1969government nationalized 14 banks. To adopt the social development inthe banking sector it was necessary for speedy economic progress,consistent with social justice, in democratic political system, which is freefrom domination of law, and in which opportunities are open to all.CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 42 43. SAAB MARFIN MBAAccordingly, keeping in mind both the national and social objectives,bankers were given direction to help economically weaker section of thesociety and also provide need-based finance to all the sectors of theeconomy with flexible and liberal attitude. Now the banks provide varioustypes of loans to farmers, working women, professionals, and traders.They also provide education loan to the students and housing loans,consumer loans, etc.Banks having big clients or big companies have to provide serviceslike personalized banking to their clients because these customers do notbelieve in running about and waiting in queues for getting their workdone. The bankers also have to provide these customers with specialprovisions and at times with benefits like food and parties. But the banksdo not mind incurring these costs because of the kind of business theseclients bring for the bank.Banks have changed the culture of human life in India and havemade life much easier for the people.TECHNOLOGICAL ENVIROMENTTechnology plays a very important role in banks internal controlmechanisms as well as services offered by them. It has in fact given newdimensions to the banks as well as services that they cater to and thebanks are enthusiastically adopting new technological innovations fordevising new products and services.The latest developments in terms of technology in computer andtelecommunication have encouraged the bankers to change the conceptof branch banking to anywhere banking. The use of ATM and Internetbanking has allowed anytime, anywhere banking facilities. AutomaticCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE43 44. SAAB MARFIN MBAvoice recorders now answer simple queries, currency accountingmachines makes the job easier and self-service counters are nowencouraged. Credit card facility has encouraged an era of cashless society.Today MasterCard and Visa card are the two most popular cards usedworld over. The banks have now started issuing smartcards or debit cardsto be used for making payments. These are also called as electronicpurse. Some of the banks have also started home banking throughtelecommunication facilities and computer technology by using terminalsinstalled at customers home and they can make the balance inquiry, getthe statement of accounts, give instructions for fund transfers, etc.Through ECS we can receive the dividends and interest directly to ouraccount avoiding the delay or chance of loosing the post.Today banks are also using SMS and Internet as major tool ofpromotions and giving great utility to its customers. For example SMSfunctions through simple text messages sent from your mobile. Themessages are then recognized by the bank to provide you with therequired information.All these technological changes have forced the bankers to adoptcustomer-based approach instead of product-based approach.CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 44 45. SAAB MARFIN MBA CHAPTER: 3CORPORATE BANKING: AN OVERVIEW3.1 INTRODUCTION:According to American author and humorist Mark Twain: A banker is afellow who lends his umbrella when the sun is shining and wants it backthe minute it begins to rain.Many troubled businesses seeding credit in recent years might agree withMr. Twain. Indeed securing the large amounts of credit that manybusinesses require can be a complicated and challenging task loanrequests. Moreover, business loans, often called commercial andindustrial loans, rank among the most important assets that commercialbanks and their closest competitors hold.Corporate finance is an area of finance dealing with financial decisionsbusiness enterprises make and the tools and analysis used to make thesedecisions. The primary goal of corporate finance is to maximize[1]corporate value while managing the firms financial risks. Although it isin principle different from managerial finance which studies the financialdecisions of all firms, rather than corporations alone, the main conceptsin the study of corporate finance are applicable to the financial problemsof all kinds of firms.The discipline can be divided into long-term and short-term decisionsand techniques. Capital investment decisions are long-term choicesabout which projects receive investment, whether to finance thatinvestment with equity or debt, and when or whether to pay dividends toshareholders. On the other hand, the short term decisions can begrouped under the heading "Working capital management". This subjectCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 45 46. SAAB MARFIN MBAdeals with the short-term balance of current assets and current liabilities;the focus here is on managing cash, inventories, and short-termborrowing and lending (such as the terms on credit extended tocustomers).The terms corporate finance and corporate financier are also associatedwith investment banking. The typical role of an investment bank is toevaluate the companys financial needs and raise the appropriate type ofcapital that best fits those needs.Corporate banking is a part of commercial banking but the part thataverage depositor with deposits account never sees. It is a division ofcommercial banking which extends the financial support to the corporatefor helping them achieve their organizational goals and objectives. Whilebanks hold money and mortgages, lend money, extend or open up a lineof credit for the average depositors, it is business that needs majorfinancial services to build plant, erect buildings, make structuralimprovements on old ones and start new business ventures. This is oneof the most competitive, risky and financially lucrative areas of doingbusiness in todays world.Commercial loans were the earliest form of lending banks did in theirmove than 2000 year old history. Later in the 20th century financecompanies, insurance firms, and thrift institutions entered the businesslending field. Today loan officers skilled in evaluating the credit ofbusinesses are usually among the most experienced and highest paidpeople in the financial services field, along with security underwriters.As a part of commercial banking, corporate banking is focused onanalyzing and assessing the risk of the business, establishing thecreditworthiness of the business and trying to predict the likelihood ofsuccess or failure of business endeavour. These are the professionalsCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE46 47. SAAB MARFIN MBAwho help decide what business initiatives will be taken and when,whether or not to expand the existing businesses, help develop newmarkets so that new clients can be found and help develop new productsfor e-commerce, the internet and the international markets.Corporate Banking represents the wide range of banking and financialservices provided to domestic and international operations of large localcorporate and local operations of multinationals corporations. Servicesinclude access to commercial banking products, including working capitalfacilities such as domestic and international trade operations and funding,channel financing, and overdrafts, as well as domestic and internationalpayments, INR term loans (including external commercial borrowings inforeign currency), letters of guarantee etc.The Investment Banking and Markets division of various bank bringstogether the advisory and financing, equity securities, asset management,treasury and capital markets, and private equity activities to complete theCIBM structure and provide a complete range of financial products to ourclients. Increasingly, ECA financing is being considered by customers andwe work closely with our project export finance teams, both onshore andoffshore, to provide structured solutions.The Corporate Bank in India was ranked 2nd overall in the 2004Greenwich Survey.This portfolio is largely spread within 9 sector teams divided as under :Consumer BrandsIndustrialsEnergy and UtilitiesTelecommunicationsAutomotiveCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 47 48. SAAB MARFIN MBAHealthcareTransport and LogisticsMetals and MiningMedia3.2 STRUCTURE OF CREDIT LENDING (CORPORATE) ININDIA:Banks, finance companies, and competing business lenders grant manydifferent types of commercial loans. Among the most widely used formsof business credit are the following:SHORT-TERM BUSINESS LOANS:Self-liquidating inventory loansWorking capital loansInterim construction financingSecurity dealer financingRetailer and equipment financingAsset-based loans (accounts receivable financing, factoring, andinventory financing)Syndicated loansLONG-TERM BUSINESS LOANS:CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE48 49. SAAB MARFIN MBATerm loans to support the purchase of equipment, rolling stock,and structuresRevolving credit financingProject loansLoans to support acquisitions of others business firmsSHORT-TERM LOANS TO BUSINESS FIRMS:Self-Liquidating Inventory LoansHistorically, commercial banks have been the leaders in extending shortterm credit to businesses. These loans were used to finance the purchaseof inventory, raw materials or finished goods to sell. In this case the termof the loan begins when cash in needed to purchase inventory and endswhen cash is available in the firms account to write the lender a checkfor the balance of its loan.Working Capital LoansWorking capital loans provide businesses with short run credit, lastingfrom few days to about one year. Working capital loans are most oftenused to fund the purchase of inventories in order to put goods on shelvesCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE49 50. SAAB MARFIN MBAor to purchase raw materials; thus, they come closest to the traditionalself-liquidating loan described previously.Frequently, the working capital loan is designed to cover seasonal peaksin the business customers production levels and credit needs. Normally,working capital loans are secured by accounts receivable or by pledges ofinventory and carry a floating interest rate on the amounts actuallyborrowed against the approved credit line. A commitment fee is chargedon the unused portion of the credit line and sometimes on the entireamount of funds made available.Interim Construction FinancingA popular form of secured short term lending is the interim constructionloan, used to support the construction of homes, apartments, officebuildings, shopping centers, and other permanent structures. The financeis used while the construction is going on but once the constructionphase is over, this short term loan usually is paid off with a longer termmortgage loan issued by another lender, such as insurance company ofpension fund. Recently, some commercialbanks haveissuedminipermanent loans, providing funding for construction and the earlyoperation of a project for as long as five to seven years.Retailer and Equipment FinancingBanks support installmentpurchases of automobiles, appliances,furniture, business equipment, and other durable goods by financing thereceivables that dealers selling these goods take on when they writeinstallment contracts to cover customer purchases. In turn, thesecontracts are reviewed by banks and other lending institutions with whomthe dealers have established credit relationships. If they meet acceptableCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE50 51. SAAB MARFIN MBAcredit standards, the contracts are purchased by lenders at an interestrate that varies with the risk level of each borrower, the quality ofcollateral pledged, and the term of each loan.Asset-Based FinancingAn increasing portion of short-term lending by banks and other lendersin recent years has consisted of asset based loans, credit secured by theshorter term assets of a firm that are expected to roll over into cash inthe future. Key business assets used for many of these loans are accountsreceivables and inventories of raw materials or finished goods. The lendercommits funs against a specific percentage of the book value ofoutstanding credit accounts or against inventory.In most loans collateralized by accounts receivable and inventory, theborrowing firm retains title to the assets pledged, but sometimes title ispassed to the lender, which then assumes the risk that some of thoseassets will not pay out as expected. The most common example of thisarrangement is factoring, where the bank actually takes on theresponsibility of collecting the accounts receivable of one of its businesscustomers. It typically assesses a higher discount rate and lends a smallerfraction of the book value of the customers accounts receivable becausethe lender incurs both additional expense and additional risk with afactored loan.Syndicated LoanA type of large corporate loan that is increasingly used today is thesyndicated loan. This is typically a loan or loan package extended to acorporation by a group of banks and other institutional lenders. TheseCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 51 52. SAAB MARFIN MBAloans may be drawn by the borrowing company, with the funds used tosupport business operations or commercial expansion, or undrawn,serving as lines of credit to back a security issue or other venture. Banksengage in syndicated loans both to spread the heavy risk exposures ofthese large loans, often involving hundreds of lakhs or crore of rupees incredit for each loan, and to earn fee income.LONG-TERM LOANS TO BUSINESS FIRMS:Term Business LoansTerm loans are designed to fund long and medium term businessinvestments, such as the purchase of equipment or the construction ofCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 52 53. SAAB MARFIN MBAphysical facilities, covering a period longer than one year. Usually theborrowing firm applies for a lump sum loan based on the budgeted costof its proposed project and then pledges to repay the loan in a series ofinstallments.Term loans normally are secured by fixed assets e.g. Plant and Equipmentowned by the borrower and may carry either a fixed or a floating interestrate. That rate is normally higher than on shorter term business loansdue to the lenders greater risk exposure from such loans.Revolving Credit FinancingA revolving credit line allows a business customer to borrow up to a prespecified limit, repay all or a portion of the borrowing, and re borrows asnecessary until the credit line matures. One of the most flexible of all theforms of business loans, revolving credit is often granted without specificcollateral to secure the loan and may be short term or caver a period aslong as three, four, or five years. This form of business financing isparticularly popular when the customer is highly uncertain about thetiming of future cash flows or about the exact magnitude of the futureborrowings needs.Loan commitments are usually of two types namely, 1. Formal Loan Commitment, and 2. Confirmed Credit Line.Formal Loan Commitment is a contractual promise to lend to a customerup to a maximum amount of money at a set interest rate or rate markupover the prevailing base loan rate. Whereas, Confirmed Credit Line is alooser form of loan commitment where the banks indicate its approval ofCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE53 54. SAAB MARFIN MBAcustomers request for credit in an emergency, though the prices of sucha credit line may not be set in advance and the customer may have littleintention to draw upon the credit line.Long-Term Project LoansThe most risky of all business loans are project loans, credit to financethe construction of fixed assets designed to generate a flow of revenue infuture periods. Prominent examples include oil refineries, pipelines,mines, power plants and harbor facilities. Project loans are usuallygranted to several companies jointly sponsoring a large project.Project loans may be granted on a recourse basis, in which the lender canrecover funds from the sponsoring companies if the project does not payout as planned. At the other end, loan may be extended on a nonrecourse basis, in which no sponsor guarantees; the project stands orfalls on its own merits. Many such loans require that the projectssponsors pledge enough of their own capital to see the project throughto completion.CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE54 55. SAAB MARFIN MBATerm Loan / Deferred Payment Guarantees In case of term loans and deferred payment guarantees, the project report is obtained from the customer, who may have been compiled in-house or by a firm or consultants/ merchant bankers. Term loan is provided to support capital expenditures for setting up new ventures as also for expansion, renovation etc. The technical feasibility and economic viability is vetted by the Bank and wherever it is felt necessary. Banks normally expects at least 20% contribution of Promoters contribution. But the promoter contribution may vary largely in mega projects. Therefore, there cannot be a definitive benchmark. The sanctioning authority will have the necessary discretion to permit deviations.CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 55 56. SAAB MARFIN MBA3.3 EMERGENCE OF CORPORATE BANKING IN INDIAThe bank lending has expanded in a number of emerging marketeconomies, especially in Asia and Latin America, in recent years. Bankcredit to the private sector, in real terms, was rising at a high rate.Several factors have contributed to the significant rise in bank lending inemerging economies such as strong growth, excess liquidity in bankingsystems reflecting easier global and domestic monetary conditions, andsubstantial bank restructuring. The recent surge in bank lending hasbeen associated with important changes on the asset side of banksbalance sheet. First, credit to the business sector - historically the mostimportant component of banks assets has been weak, while the shareof the household sector has increased sharply in several countries.Second, banks investments in Government securities increased sharplyuntil 2004-05. As a result, commercial banks continue to hold a verylarge part of their domestic assets in the form of Government securities -a process that seems to have begun in the mid-1990s.There has been a sharp pick up in bank credit in India in recent years.The rate of growth in bank credit which touched a low of 14.4 per cent in2002-03, accelerated to more than 30.0 per cent in 2004-05, the ratewhich was maintained in 2005-06. The upturn in the growth rate of bankcredit can be attributed to several factors. One, macroeconomicperformance of the economy turned robust with GDP growth rateshovering between 7.5 per cent and 8.5 per cent during the last few years.Two, the hardening of sovereign yields from the second half of 2003-04CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 56 57. SAAB MARFIN MBAforced banks to readjust their assets portfolio by shifting frominvestments to advances. While the share of gross advances in totalassets of commercial banks grew from 45.0 per cent to 54.7 per cent thatof investments declined from 41.6 per cent to 32.1 per cent in the lastfew years.However, the credit growth has been broad-based making banks lessvulnerable to credit concentration risk. The declining trend of prioritysector loans in 2001-02 in the credit book of banks was due toprudential write offs and compromise settlements of a large number ofsmall accounts which was reversed from 2002-03 on the strength of aspurt in the housing loan portfolio of banks. Even though credit toindustry and other sectors have also picked up, their share in total loanshas declined marginally. Retail loans, which witnessed a growth of over40.0 per cent in 2004-05 and again in 2005-06, have been the primedriver of the credit growth in recent years. Retail loans as a percentage ofgross advances increased from 22.0 per cent in March 2004 to 25.5 percent in March 2006. The cyclical uptrend in the economy along with theconcomitant recovery in the business climate brings with it improvedabilities of the debtors to service loans, thereby greatly improving banksasset quality. Despite the sharp rise in credit growth in recent years, notonly the proportional levels of gross non-performing loans (NPLs) havedeclined, but the absolute levels of gross NPLs declined significantly.Several factors have contributed to the marked improvement in the Indianbanks asset quality. One, banks have gradually improved their riskmanagement practices and introduced more vigorous systems andscoring models for identifying credit risks. Two, a favourablemacroeconomic environment in recent years has also meant that manyentities and units of traditionally problematic industries are nowperforming better. Three, diversification of credit base with increasedfocus on retail loans, which generally have low delinquency rates, hasCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE57 58. SAAB MARFIN MBAalso contributed to the more favourable credit risk profile. Four, severalinstitutional measures have been put in place to recover the NPAs. Theseinclude Debt Recovery Tribunals (DRTs), Lok Adalats (peoples courts),Asset Reconstruction Companies (ARCs) and corporate debt restructuringmechanism (CDRM). In particular, the Securitisation and Reconstruction ofFinancial Assets and Enforcement of Security Interest (SARFAESI) Act,2002 for enforcement of security interest without intervention of thecourts has provided more negotiating power to the banks for resolvingbad debts.CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE58 59. SAAB MARFIN MBASectoral Deployment of Gross Bank CreditDuring 2008-09 total deployment of gross bank credit increased toRs.1.87,515 crores from Rs.1,69.536 crores in 2008-07Non-food bank credit increased sharply during 2005-06. The creditgrowth was broad based. Credit to services (including personal loans andother services) increased by 52.8 per cent in 2005-06, accounting for58.3 per cent of incremental non-food gross bank credit (NFGBC).Personal loans increased sharply in recent years mainly on account ofhousing loans. Real estate loans more than doubled. Other personal loanssuch as credit card outstanding and education loans also recorded sharpincreases of 59.3 per cent and 96.5 per cent, respectively.Priority Sector AdvancesCredit to the priority sector decreased to 34.1 per cent in the previousyear against 39.5 in 2008. In terms of revised guidelines on lending topriority sector , broad category of advances under priority sector includeagriculture, micro and small enterprises, retail trade, micro-credit,education and housing.The agriculture and housing sectors were the major beneficiaries, whichtogether accounted for more than two-third of incremental priority sectorlending. Credit to small scale industries also accelerate. Severalfavourable policy initiatives undertaken by the Central Government andthe Reserve Bank including, inter alia, the policy package for stepping upof credit to small and medium enterprises (SMEs) announced on August10, 2005, have had a positive impact. At the individual bank-level, all thenationalised banks, and all but two of the State Bank group (State Bank ofIndia and State Bank of Patiala) were able to meet the priority sectortarget of 40 per cent of NBC. However, only ten PSBs (Allahabad Bank,CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 59 60. SAAB MARFIN MBAAndhra Bank, Bank of India, Indian Bank, Indian Overseas Bank, PunjabNational Bank, Syndicate Bank, State Bank of Bikaner and Jaipur, StateBank of Indore and State Bank of Saurashtra) were able to achieve thesubtargets for agriculture, while the sub-target for weaker sections wasmet by eight PSBs (Allahabad Bank, Andhra Bank, Bank of India, IndianBank, Indian Overseas Bank, Punjab National Bank, Syndicate Bank andState Bank of Patiala).Lending to the priority sector by foreign banks constituted 34.6 per centof net bank credit as on the last reporting Friday of March 2006, whichwas well above the stipulated target of 32 per cent. The share of exportcredit in total netbank credit at 19.4 per cent was significantly above theprescribed sub-target of 12.0 per cent. Foreign banks, however, fell alittle short of the sub-target of 10.0 per cent in respect of lending to SSIs.Special Agricultural Credit PlansThe Reserve Bank had advised public sector banks to prepare SpecialAgricultural Credit Plans (SACP) on an annual basis in 1994. The SACPmechanism for private sector banks was made applicable from 2005-06,as recommended by the Advisory Committee on Flow of Credit toAgriculture andRelatedActivities from theBankingSystem(Chairman:Prof. V.S. Vyas) and announced in the Mid-term Review ofAnnual Policy for 2004-05. Public sector banks were advised to makeefforts to increase their disbursements to small and marginal farmers to40.0 per cent of their direct advances under SACP by March 2007. Thedisbursement to agriculture under SACP by public sector banksaggregated Rs.94,278 crore during 2005-06, which was much above thetarget of Rs.85,024 crore and the disbursement of Rs.65,218 croreduring 2004-05. The disbursement by private sector banks during2005-06 at Rs.31,119 crore was above the target of Rs.24,222 crore.CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE60 61. SAAB MARFIN MBA3.21 Public sector banks were advised to earmark 5.0 per cent of theirnet bank credit to women. At end-March 2006, aggregate credit towomen by public sector banks stood at 5.37 per cent of their net bankcredit with 22 banks achieving the target. A consortium of select publicsector banks was formed, with the State Bank of India as the leader of theconsortium, to provide credit to the Khadi and Village IndustriesCommission (KVIC). These loans are provided at 1.5 per cent below theaverage prime lending rates of five major banks in the consortium. Anamount of Rs.322 crore was outstanding at end-July 2006 out of Rs.738crore disbursed by the consortium under the scheme.Micro-financeThe Reserve Bank has been making consistent efforts to strengthen creditdelivery, improve customer service and encourage banks to providebanking services to all segments of the population. Despite considerableexpansion of the banking system in India, large segments of the countrys population do not have access to banking services.Expanding the outreach of banking services has, therefore, been a majorthrust area of the policy of the Government of India and the Reserve Bankin recent years.The self-help group (SHG)-bank linkage programme has emerged as themajor micro-financeprogrammein the country and is beingimplemented by commercial banks, RRBs and co-operative banks. As onMarch 31, 2008 3.6 million SHGs had outstanding bank loans ofRs.17,000 crore, an increase of 25 per cent over March 31, 2007 inrespect of number of SHGs credit linked. During 2007-08, banksfinanced 1.2 million SHGs for Rs.8,849 crore. As at end-March 2008,SHGs had 5 million savings accounts with banks for Rs.3,785 crore.CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 61 62. SAAB MARFIN MBARetail CreditContinuing the strong growth in recent years, retail advances increasedby 40.9 per cent to Rs.3,75,739 crore in 2007-08, which was significantlyhigher than the overall credit growth of 31.0 per cent. As a result, theirshare in total loans and advances increased during the year. Auto loansexperienced the highest growth, followed by credit card receivables,other personal loans (comprising loans mainly to professionals and foreducational purposes) and housing finance. Loans for consumer durablesincreased by 17.3 per cent as against the decline of 39.1 per cent in theprevious year.Major steps earlier taken by the Reserve Bank of India were somewhatmore oriented towards price stability and the related monitoryinstruments like the bank rate, reverse repo rate, repo rate and CRR wereadjusted to rein in the price instability. Naturally, the priority wasinflation control for overall growth of the economy and we mustcongratulate the RBI for a wonderful job done. The inflation today is at amoderate level and in line with a developed economy.With these stepstaken by RBI, the latest scenario is that the non-food credit growth gotmoderated, agricultural and service sector credit went up but the retailcredit growth actually took a beating due to northbound interest rates.Such positive impact on inflation helped the economy for price stabilityand we feel what is important for India now is to ensure that there issufficient focus on growth of the economy along with price stability.Lending to the Sensitive SectorsLending by SCBs to the sensitive sectors (capital market, real estate andcommodities) increased sharply during 2005-06 mainly on account of asharp increase in exposure to the real estate market. Total exposure ofSCBs to the sensitive sectors consituted 18.9 per cent of aggregate bankCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE62 63. SAAB MARFIN MBAloans and advances (comprising 17.2 per cent to real estate, 1.5 per centto the capital market and 0.3 per cent to the commodities sector). During2008-2009 total lending to sensitive sector increased by 19.1 percent incapital market.Among bank groups, new private sector banks had the highest exposureto the sensitive sectors (measured as percentage to total loans andadvances of banks) mainly due to the increase in exposure to the realestate market, followed by foreign banks, old private sector banks andpublic sector banks.MEASURES BY SIDBISIDBI has developed a Credit Appraisal & Rating Tool (CART) as well as aRisk Assessment Model (RAM) and a comprehensive rating model for riskassessment of proposals for SMEs. The banks may consider to takeadvantage of these models as appropriate and reduce their transactioncosts..CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 63 64. SAAB MARFIN MBA Public Sector Banks are advised to follow a transparent rating systemwith cost of credit being linked to the credit rating of the enterprise. SIDBI in association with Credit Information Bureau (India) Ltd. (CIBIL)expedited setting up a credit rating agency. SIDBI in association with Indian Banks Association (IBA) would collectand pool common data on risk in each identified cluster and develop anIT-enabled application, appraisal and monitoring system for small(including tiny) enterprises. This would help reduce transaction cost aswell as improve credit flow to small (including tiny) enterprises in theclusters.The National Small Industries Corporation has introduced a Credit RatingScheme for encouraging SSI units to get themselves credit rated byreputed credit rating agencies. Public Sector Banks will be advised toconsider these ratings appropriately and as per availability, and structuretheir rates suitably.ROADMAP BY RBIThe Reserve Bank of India (RBI) has worked out the roadmap for theIndian banks to graduate from the simpler approaches of the Basel IIframework to more advanced ones.CREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 64 65. SAAB MARFIN MBABasel II is the second among Basel Accords, which are primarily,recommendations on banking laws and regulations issued by the Baselcommittee on banking supervision.It sets up rigorous risk and capital management requirements aimed atensuring that a bank holds capital reserves appropriate to the risk itexposes itself to through its lending and investment practices.Since March 2008, foreign banks operating in India and Indian bankshaving presence outsidethe country have migrated to simplerapproaches under Basel II framework. Other commercial banks arerequired to migrate to these norms by March 31, 2009.These include standardised approach for credit risk which arising fromdefault by borrowers, basic indicator approach for operational risk(arising from day to operations of the banks such robbery or powerfailure) and standardised duration approach for market risk (arising fromfluctuations in interest rate and share prices) which affects theinvestment and market portfolio of the banks.In the framework, the RBI had earlier specified the date by which banksmay file application for approvals and the the likely date by whichapprovals can be obtained from the central bank.While banks have the discretion to adopt the advanced approaches, theyneed to seek prior approval.Under market risk, banks may apply to RBI for graduating to moreadvanced method of internal models approach (IMA) by April 1, 2010 andthen, RBI may approve it by March 31, 2011. IMA sets out a frameworkfor applying capital charges to the market risks (both on balance sheetand off-balance sheet) incurred by banks by an internal model. TheCREDIT RISK ANALYSIS OF INDIAN BANKING SECTOR FOR MBA FINANCE 65 66. SAAB MARFIN MBAcurrent standardised duration approach specifies a specific averageduration of the banks at large, which the banks follow and make it a basisfor applying capital charges to only open positions.Similarly, for operational risk, banks may graduate to standardisedapp