Introduction:

State Bank of Mysore was established in the year 1913 as Bank of Mysore Ltd. under the patronage of the erstwhile Govt. of Mysore, at the instance of the banking committee headed by the great Engineer-Statesman, Late Dr. Sir M.Visvesvaraya.Subsequently, in March 1960,the Bank became an Associate of State Bank of India.State Bank of India holds 92.33% of shares. The Bank's shares are listed in Bangalore, Chennai and Mumbai stock exchanges. The Bank has a widespread network of 707 branches(as on 31.03.2011) and 22 extension counters spread all over India which includes 6 Small and Medium Enterprises Branches, 4 Industrial Finance branches, 3 Corporate Accounts Branches, 6 specialised Personal Banking Branches, 10 Agricultural Development Branches, 3 Government Business branches, 1 Asset Recovery Branch and 8 Service Branches, offering wide range of services to the customers.

Credit risk management

Our prima facie objective for taking up this project is to acquire knowledge of banking sector and to take a practical exposure and expertise of credit risk management. The Credit Risk Management is a holistic exercise which starts from the time a prospective borrower walks into the branch and culminates in credit delivery and monitoring with the objective of ensuring and maintaining the quality of lending and managing credit risk. The process of Credit Appraisal is multidimensional and includes- Management Appraisal, Technical Appraisal, Commercial Appraisal, and Financial Appraisal.

History & Background Of The Bank Established in October 1913 under the aegis of the Government of Mysore on the recommendation of the Banking Committee headed by Sir M. Visvesvaraya, the great engineering statesman. It became the subsidiary of State Bank of India in March 1960 under the SBI (Subsidiary Banks) Act, 1959. State Bank of India holds 92.33% of shares and the rest is held by private shareholders/other institutions. The bank s shares are listed in Bangalore, Chennai and Mumbai Stock Exchanges. The bank is playing a very proactive and dynamic role in the economic development of Karnataka state. It has pioneered in financing of coffee and silk industries and has taken early lead in financing agriculture and small scale industries in the state even before nationalisation of banks. It enjoys an excellent brand equity in the state and is well known for the excellent quality of its customer service. The bank has followed prudent banking policies and has the

enviable record of earning uninterrupted profits and declaring dividends since inception without any break. The bank has stood up to the challenges of financial sector reforms in this decade. Our bank has been awarded with the first prize in state level for best performance under SHG bank linkage programme for the year 2002-2003.

New Basle II Capital Adequacy Framework

The New Basel Capital Accord, often referred to as the Basel II Accord or simply Basel II, was approved by the Basel Committee on Banking Supervision of Bank for International Settlements in June 2004 and suggests that banks and supervisors implement it by beginning 2007, providing a transition time of 30 months. It is estimated that the Accord would be implemented in over 100 countries, including India. Basel II takes a three-pillar approach to regulatory capital measurement and capital standards - Pillar 1 (minimum capital requirements); Pillar 2 (supervisory oversight); and Pillar 3 (market discipline and disclosures). Pillar 1 spells out the capital requirement of a bank in relation to the credit risk in its portfolio, which is a significant change from the one size fits all approach of Basel I. Pillar 1 allows flexibility to banks and supervisors to choose from among the Standardised Approach, Internal Ratings Based Approach, and Securitisation Framework methods to calculate the capital requirement for credit risk exposures. Besides, Pillar 1 sets out the allocation of capital for operational risk and market risk in the trading books of banks. Pillar 2 provides a tool to supervisors to keep checks on the adequacy of capitalisation levels of banks and also distinguish among banks on

the basis of their risk management systems and profile of capital. Pillar 2 allows discretion to supervisors to (a) link capital to the risk profile of a bank; (b) take appropriate remedial measures if required; and (c) ask banks to maintain capital at a level higher than the regulatory minimum. Pillar 3 provides a framework for the improvement of banks disclosure standards for financial reporting, risk management, asset quality, regulatory sanctions, and the like. The pillar also indicates the remedial measures that regulators can take to keep a check on erring banks and maintain the integrity of the banking system. Further, Pillar 3 allows banks to maintain confidentiality over certain information, disclosure of which could impact competitiveness or breach legal contracts. Basel II Accord Pillar 1 Specifies new standards for minimum capital requirements, along with the methodology for assigning risk weights on the basis of credit risk and market risk; Also specifies capital requirement for operational risk. Pillar 2 Enlarges the role of banking supervisors and gives them power to them to review the banks risk management systems. Pillar 3 Defines the standards and requirements for higher disclosure by banks on capital adequacy, asset quality and other risk management processes Credit risk

redit risk is an investor's risk of loss arising from a borrower who does not make payments as promised. Such an event is called a default. Another term for credit risk is default risk.

Investor losses include lost principal and interest, decreased cash flow, and increased collection costs, which arise in a number of circumstances:


A consumer does not make a payment due on a mortgage loan, credit card, line of credit, or other loan A business does not make a payment due on a mortgage, credit card, line of credit, or other loan A business or consumer does not pay a trade invoice when due A business does not pay an employee's earned wages when due A business or government bond issuer does not make a payment on a coupon or principal payment when due An insolvent insurance company does not pay a policy obligation An insolvent bank won't return funds to a depositor A government grants bankruptcy protection to an insolvent consumer or business

  

  

Assessing credit risk Main articles: Credit analysis and Consumer credit risk Significant resources and sophisticated programs are used to analyze and manage risk. Some companies run a credit risk department whose job is to assess the financial health of their customers, and extend credit (or not) accordingly. They may use in house programs to advise on avoiding, reducing and transferring risk. They also use third party provided intelligence. Companies like Standard & Poor's, Moody's Analytics, Fitch Ratings, and Dun and Bradstreet provide such information for a fee. Most lenders employ their own models (credit scorecards) to rank potential and existing customers according to risk, and then apply appropriate strategies. With products such as unsecured personal loans or mortgages, lenders charge a higher price for higher risk customers and vice versa. With revolving products such as credit cards and overdrafts, risk is controlled through the setting of credit limits. Some products also require security, most commonly in the form of property.

Credit scoring models also form part of the framework used by banks or lending institutions grant credit to clients. For corporate and commercial borrowers, these models generally have qualitative and quantitative sections outlining various aspects of the risk including, but not limited to, operating experience, management expertise, asset quality, and leverage and liquidity ratios, respectively. Once this information has been fully reviewed by credit officers and credit committees, the lender provides the funds subject to the terms and conditions presented within the contract (as outlined above). Credit risk has been shown to be particularly large and particularly damaging for very large investment projects, socalled megaprojects. This is because such projects are especially prone to end up in what has been called the "debt trap," i.e., a situation where due to cost overruns, schedule delays, etc. the costs of servicing debt becomes larger than the revenues available to pay interest on and bring down the debt.[1]
[edit]Sovereign

risk

Sovereign risk is the risk of a government becoming unwilling or unable to meet its loan obligations, or reneging on loans it guarantees.[2] The existence of sovereign risk means that creditors should take a two-stage decision process when deciding to lend to a firm based in a foreign country. Firstly one should consider the sovereign risk quality of the country and then consider the firm's credit quality.[3] Five macroeconomic variables that affect the probability of sovereign debt rescheduling are: [4]
   

Debt service ratio Import ratio Investment ratio Variance of export revenue

Domestic money supply growth The probability of rescheduling is an increasing function of debt service ratio, import ratio, variance of export revenue and domestic money supply growth. Frenkel, Karmann and Scholtens also argue that the likelihood of rescheduling is a decreasing function of investment ratio due to future economic productivity gains. Saunders argues that rescheduling can become more likely if the investment ratio rises as the foreign country could become less dependent on its external creditors and so be less concerned about receiving credit from these countries/investors.[5]


[edit]Counterparty

risk

Counterparty risk, otherwise known as default risk, is the risk that an organization does not pay out on a bond, credit derivative, credit insurance contract, or other trade or transaction when it is supposed to.[6] Even organizations who think that they have hedged their bets by buying credit insurance of some sort still face the risk that the insurer will be unable to pay, either due to temporary liquidity issues or longer term systemic issues.[7] Large insurers are counterparties to many transactions, and thus this is the kind of risk that prompts financial regulators to act, e.g., the bailout of insurer AIG. On the methodological side, counterparty risk can be affected by wrong way risk, namely the risk that different risk factors be correlated in the most harmful direction. Including correlation between the portfolio risk factors and the counterparty default into the methodology is not trivial, see for example Brigo and Pallavicini[8] A good introduction can be found in a paper by Michael Pykhtin and Steven Zhu.[9]

LIMITATION In view of the unforeseen changes in the financial conditions of companies,industries, geographical areas or whole countries, a system of limits for differenttypes and categories of lending have to be set. While banks could adopt creditlimits in different ways and at different levels the essential requirement is toestablish maximum amount that may be loaned to any one borrower or groupof connected borrowers and to any one industry or type of economic activity.Loans may be classified by size and limits put on large loans in terms of theirproportion to total lending. The rationale of these limits is to limit the bank exposure to losses from loans to any one borrower or to a group whose financialconditions are interrelated. A system of credit limits, restricts losses to a levelwhich does not compromise banks solvency. Lending limits have to be settaking into account bank capital and resources. Any limit on credit has to beaccompanied by a general limit on all risk assets. This would enable the bank to hold a minimum proportion of assets such as cash and government securitieswhose risk of default is zero. Methodology Raising credit standards to reject risky loans. Obtain collateral and guarantees. Ensure compliance with loan agreement. Transfer credit risk by selling standardized loans. Transfer risk of changing interest rates by hedging in financial fu-tures, options or by using swaps. Create synthetic loans through a hedge and interest rate futures toconvert a floating rate loan into a fixed rate loan. Make loans to a variety of firms whose returns are not perfectlypositively correlated