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1.1 Background of the study
§ Banks in general face 3 types of risks: Credit risk, market
risk, operating risk.
§ Credit risk is risk due to uncertainty in a counterparty's
(also called an obligor's or credit's) ability to meet its
obligations.
§ Investments are risky because of the change in their prices.
This volatility in the value of a bank's investment is known
as the market risk, as it is driven by the market.
§ Several events that are neither due to default by third party
nor because of the variation of the market may arise. These
events are called operational risks and can be attributed to
internal systems, processes, people and external factors.
1.2 Background of the topic
§ (- "
§ Nationalization of Indian banks & up to 1991 prior to Indian
Banking sector reforms.
§ 1955- Nationalized Imperial Bank of India
§ 1960- 7 subsidiaries of SBI nationalized
§ 19th Duly, 1969- 14 banks nationalized
§ 1980- 7 banks nationalized (80% of banking segment ± Gov.
owned)
§ Nationalization lead to increase in deposits & advances.
History of banking in India
§ (- "
§ New phase of Indian Banking system with advent of Indian
Financial & Banking Sector Reforms after 1991.
§ Introduced many products & facilities in banking sector.
§ 1991- Narasimham Committee was setup
§ New phase brought in many changes:
§ Foreign banks
§ ATM stations
§ Customer service
§ Phone banking
§ Net banking
Y&'(
800
700
600
500
400
Branches
300 ATM
200
100
0
No. of No. of No. of No. of No. of No. of No. of No. of No. of
units units units units units units units units units
by by by by by by by by by
2002 2003 2004 2005 2006 2007 2008 2009 2010
ü *
"
§ Develop into a stronger and more efficient and profitable
financial institution with a growing share of the
market, providing an expanding range of products and services to
a growing clientele within and outside the country, adopting best
industry practices and employing contemporary technology, and
be counted among the top private banks in the country.
ü
"
§ Devote balanced attention to the interest and expectations of
stakeholders, and in particular: share holders, customers &
employees.
§ Pursue excellence in various facets of banking.
§ Adopt best industry practises.
ü "
§ h
()
& * Y
a
CEO͛s Secretariat
( !'(
Functions:
§ Overall management of risks faced by the bank.
§ Meeting risk management guidelines of the RBI.
§ Presenting quarterly progress to the board on implementation of RM
guidelines of RBI & reporting such progress reports to RBI on quarterly
or other prescribed intervals.
§ Implementing suitable framework for mitigating operational risks.
§ Risk aggregation & capital allocation.
§ Initiating all other functions related to risk management.
Hierarchy of IRMD
EXECUTIVE DIRECTOR
RISK MANAGEMENT
COMMITTEE
OPERATIONS
MARKET RISK RISK
CREDIT RISK
MANAGEMENT MANAGEMENT
MANAGEMENT
COMMITTEE COMMITTEE
COMMITTEE
Y+
Review Of Literature
§ !% !'(,====
§ There are two main areas of focus for risk management:
§
° To measure management that the business is aware of and in
control of current and future business prospects.
° To safeguard business assets and reputation of business
° To help in improving banks¶ operating performance and
shareholder value
° To support the achievement of strategic goals.
-
§ To ensure fulfillment with regulatory requirements
§ To deliver competitive advantage
§ To reassure stakeholders and internal groups that the business is actively
managing risk.
§ Lack of reliability.
§ Time constraint
§ Limited data
Y/
Data Analysis & Presentation
/
!!%
YRAR
25
20
15
YRAR
10
0
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
Y
4 !5
!&'!
&' #6678 69 #6698 6:
Among Kerala based banks, Federal bank has the best CRAR of
20.14 compared to least CRAR at South Malabar Gramin bank.
Y
4 !5
!&'!
25
20
15
2007 ± 08
10 2008 ± 09
0
South Malabar Dhanalakshmi Catholic Syrian South Indian Federal Bank
Gramin Bank Bank Bank Bank
!
!!!
3 !, !< !!!
, !<
2004-05 8823 16820 .52
0.64
0.62
0.6
0.58
0.56
0.54 Ratio
0.52
0.5
0.48
0.46
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
! !!!
0.4
0.35
0.3
0.25
0.2
Ratio
0.15
0.1
0.05
0
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
ASSET QUALIT
( =!
!!!
3
( , !<
!!! ((
, !<
2004-05 194.51 16820 1.15 %
1.20%
1.00%
0.80%
0.60% (ercentage
0.40%
0.20%
0.00%
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
( =!
!
ear Net NPA Advances Percentage
, !< , !<
2004-05 194.51 8823 2.2 %
2.00%
1.50%
(ercentage
1.00%
0.50%
0.00%
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
(
? ??
§ The bank can quantify the credit risk on the basis of the
level of NPA¶s. The following expression quantifies the
credit risk of the bank.
( >,&$ <$,
( =!$ <
( ? Earning per Non Performing Assets
( 8 Non Performning Assets
? Total Assets
&8 Earnings before tax
Y!'%*
&'
3 &
(
(
, !< , !< , !<
2004-05 90.0859 16820 194.51 0.46
35000
30000
25000
20000 Deposits
Advances
15000
10000
5000
0
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
Y
5!!
(%
!!
(%
3 , !<
, !<
40000
35000
30000
25000
20000 Deposits
Net (rofit
15000
10000
5000
0
2004-05 2005-06 2006-07 2007-08 2008-092009-10
Y
5 !
(%
ear Advances
Net Profit , !<
, !<
25000
20000
15000 Advances
Net (rofit
10000
5000
0
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
Analysis of Deposit Mix
Analysis of Deposit Mix
ear Demand Savings Term Total
Deposits Deposits Deposits Deposits
, !< , !< , !< , !<
2004-05 861 2864 11467
15192
2005-06 938 3534 13406
17878
2006-07 1216 4229 16138
21583
2007-08 1464 5036 19412
25912
2008-09 1442 6445 24210
32097
2009-10 1831 7611 26615
36057
40000
35000
30000
25000
Demand Deposits
20000 Savings Deposits
Term Deposits
15000 Total Deposits
10000
5000
0
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
((%!!
!
3
!! A
!!, !< , !< !!
2004-05 861 15192 5.66
2005-06 938 17878 5.24
3
% to Total Deposits
0
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
((% (!!!
!!
ear Savings Total % to Total
Deposits, !< Deposits, !< Deposits
75.5
75
74.5
74 % to Total Deposits
73.5
73
Y-!%*
'#66
Y 0 ( Y
*2
2 Lakhs ± 50 lakhs 30
Retail loans 35
2 Lakhs ± 50 lakhs
35% 30%
50 Lakhs ± 500
lakhs
500 Lakhs and
above
20% Retail loans
15%
Y;
@Y
!!
6.1 Findings of the study
§ The CRAR has rose to 21.23 in 2009-10 which was 11.27 in 2004-
05. Thus, showing efficient management of credit risk as per Basel
norms.
§ Among Kerala based banks, Federal bank has the best CRAR of
20.14 compared to least CRAR at South Malabar Gramin bank.
§ The ratio of total advances to total assets show an increasing trend
at 0.62 in 2009-10 which implies proper balancing of advances &
assets.
§ The ratio of total investment to total assets is constant at 0.30
during 2009-10 and shows good maintenance of investments &
assets.
§ The percentage of Net NPA to Total assets has increased to 0.29%
during 2009-10. This indicates an unsound asset quality.
§ During 2009-10 the percentage of Net NPA advances rose to
0.48% showing an increasing trend due to poor management.
Recession also plays a role in this increase from 2008.
*(!%!
§ The ENPA during 2009-10 has come down to 3.7
§ The deposits has increased over the years thus leading to an
increase in the advances.
§ Increase in deposits have also lead to an increase in the Net profit
during 2009-10.
§ Increase in advances has also lead to an increase in Net profit to
502.29 in 2009-
2009-10 while it was only 90.01 in 2004-
2004-05.
§ The proportion of demand deposits to total deposit was 5.66% in
2004--05 & is 5.07% in 2009
2004 2009--10.
§ The proportion of savings deposits to total deposit was 18.9% in
2004--05 & has increased to 28.59 in 2009
2004 2009--10.
§ The proportion of term deposits to total deposit is showing a
consistent relation from 2004-
2004-05 from 75.3 to 2009-
2009-10 73.8.
§ Federal bank shows a high percentage of 35% in lending retail
loans.
6.2 Recommendations
§ Bank should establish a system that helps identify
problem loan ahead of time when there may be more
options available for remedial measures.
§ Banks should disclose to the public, information on
the level of risk and policies for risk management.
§ Bank should take measures to improve its asset
quality, so that the credit risk can be minimized.
§ The bank must put maximum effort to attract the
fixed deposits which contribute significantly towards
the enhancement of banks profitability.
§ The bank should maintain a good proportion in their
deposits and advances.
6.2 Conclusions
§ The effectiveness of credit risk management rests where the
credit quality is maintained by the bank.
§ Basel III is likely to improve the risk management systems
of banks as the banks aim for adequate capitalization to
meet the underlying credit risks and strengthen the overall
financial system of the country
§ Formerly, people were not much bothered about the
banking services but now they are comparing banks based
on the services offered.
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