A

PROJECT REPORT
ON
MANAGING RISK
WITH SPECIAL REFERANCE TO
THE VARACHHA CO-OPERATIVE BANK LTD, SURAT
KAPODRA BRANCH
Scheduled Bank
UNDER THE GUIDANCE OF
Mr. ARVIND V. PATEL

Dr. VISHAL PATIDAR

(BRANCH MANAGER)

(PRINCIPAL)

(VCB SURAT)

(SLPTMBAMAMRELI)
SUBMITTED BY

MBA SEM-IV (FINANCE & MARKETING)

ROLL NO 2
FOR THE PARTIAL FULFILLMENT OF THE DEGREE OF
MASTER OF BUSINESS ADMINISTRATION
SUBMITTED AT
SHREE LEUVA PATELTRUST MBA MAHILA COLLEGE,
AMRELI-365 601
AFFILIATED TO
SAURASHTRA UNIVERSITY

Saurashtra University, Rajkot.

MBA Program

Certificate

This is to certify that Ms. NEHA L. BABARIYA Exam Seat Number: has satisfactorily completed his /
her project work entitled MANAGING RISK as a partial fulfillment of the requirements for Final
Training Project, during the academic Year 2008-2009.

Date :
Director
Place :

MBA Program.
Saurashtra University, Rajkot.

DECLARATION

This Project report entitled Study of Changing role of Co-operative Banks in the era of
Globalization on The Varachha Co-operative Bank Ltd. submitted to Shree Leuva Patel Trust
M.B.A. Mahila College affiliated to Saurashtra University; in Partial fulfillment for the degree of
Master of Business Administration (MBA) has been completed by me under the guidance of

Dr.

Vishal Patidar (Project guide), Shree Leuva Patel Trust M.B.A. Mahila College.
This Project report study is entirely an outcome of my own efforts and is not submitted in part or in
whole to any other University or institute for any other degree.

Date:
Place:

NEHA BABARIYA

SHREE AMRELI JILLA LEUVA PATEL CHARITABLE TRUST-SURAT

PLACE: - SMT. SHANTABEN HARIBHAI GAJERA SHAINKSHANIK SANKUL

Chakkargadh Road, Amreli 365 601

PRINCIPALS RECOMMENDATION
TO,
The Registrar,
Saurashtra University,
Rajkot.
Subject: MBA Final Training Project Report
Respected Sir,
I am recommending the Final Training Project entitled Managing Risk in Varachha Cooperative Bank Ltd prepared by

Neha L. Babariya at The Varachha Co-operative Bank

Ltd., Surat as the partial fulfillment of the University requirement for the award of MBA
degree of Saurashtra University, Rajkot.
Date: -

Thanking You,

Place: - Amreli

Yours Faithfully
Principal
(Dr. Vishal Patidar)

GUIDES CERTIFICATE

This is to certify that NEHA BABARIYA, student of MBA has carried out the project work as per
the syllabus of Saurashtra University. She has prepared this Final Training Project Study Report on
General Report under my guidance and her contribution in making this report during the academic year
2008-2009 is highly appreciated.
To the best of my knowledge, the details presented by her are original in nature and have not been
copied from any other source. This report has not been submitted earlier for the award of any Degree or
Diploma in Saurashtra University or any other University.

Guides Name and Sign

(Dr. Vishal Patidar)

ACKNOWLEDGEMENT

The project was undertaken by me, Miss NEHA BABARIYA as a part of M.B.A program while
pursuing my management studies at Shree Leuva Patel Trust M.B.A. Mahila College. This report is an
outcome of the project work duration 01/02/09 to 15/03/09 at The Varachha Co-operative Bank Ltd,
Surat.

I am immensely grateful to Mr. Arvind Patel (Branch Manager) for providing me the opportunity
to perform the project work in their Bank and also thankful for his invaluable help and guidance through
out my training.

I am thankful to Mr. A. D. Bhalani, General Manager of VC Bank for helping in preparing the
project report, which is otherwise not possible to prepare the report in this way without his invaluable
guidance.

I would also like to express my sincere thanks to staff of The Varachha co-operative Bank Ltd. for
providing me information, which is very helpful in preparing this report.

Neha Babariya

PREFACE

One must learn things by doing it.

It is a great opportunity for management students of Saurashtra University to get wide exposure to
the real corporate world as a part of academic curriculum of M.B.A. (FINANCE) and to get wide
exposure to the real corporate world during industrial project.

This project is to be a real challenge for me apart from our previous project done at different
places. I realized during training period that corporate world is drastically different than what we learn in
theories. Thus, practical exposure to the industry is valuable for the students opting for Finance.

The prospect for co-operative sector seems to be at stake due to certain scams recently happened
in this segmeny. As the overall industry is doing through the recession phase it was interesting to have
practical training at co-operative bank. The industry attracting newer players including from private
banking sector vouches for the strong potential here and scope for accommodation of more good players
is certainly there. But due to the more severe norms recommended and policy changes all banks have to
compete and also fulfill their social obligation, which The Varachha Co-operative Bank is doing in a great
manner.

I, undergoing this project, learned about the industry and role of MANAGING RISK in financial
performance of the bank.

CONTAINT

BANK CERTIFICATE

Page No.

DECLARATION
PROJECT GUIDE'S CERTIFICATE
DIRECTORS RECOMMENDATION
PRINCIPALS RECOMMONDATION
PREFACE
ACKNOWLEDGEMENT

I.

OVERVIEW OF BANKING SECTOR

1.

Introduction...1

2.

History of Banking Industry2

3.

Types of Banks..3

4.

Definition of co-operation.4

5.

Background-Historical Review5

6.

Overview of co-operative structure6

7.

Seven Principles of co-operation..7

8.

About co-operative Structure..8

9.

Role of co-operatives in Indian Economy...9

10.

Organizational structure of co-operative Banks..10

11.

Changing Scenario In Co-operative Banks..11

11.1 Introduction of Co-operative Bank in India...12
11.2 How safe funds deposited in co-operative banks?.........................15

12.

Problems of Co-operative Banks...16

13.

Problems of Co-operative Banks..17

14.

Prospects of co-operative Banks...18

II. OVERVIEW OF THE VARACHHA CO-OPERATIVE BANK

LTD
1. Brief History of VCB Bank.20
2. High Lights of VCB Bank performance.21
3. Organization Structure of VC Bank..22
4. Services and forms of VC Bank23
5. Main Fund Inflow ( Source of Fund ).24
6. Main Fund Outflow ( Funds Used )25
7. Progress Chart of VC Bank at a glance.26
8. Certificate and Awards of VC Bank...27
9. SWOT Analysis28
10. Problem Faced by VC Bank29
11. Prospects of VC Bank..30
III. RISK
MANAGEMENT
1. Introduction..32
2. Overview33
3. Concept..34
4. Meaning of Risk.35
5. Definition of Risk & Risk Management...36
6. Risk Measurement.37
7. Risk Vs Opportunities...38
8. The Basic Principles of Risk Management..39

9. Risk Management Function..40

10. Assessment of Risk.41
11. Adoption of Risk....42
12. Need of Risk Management....43
13. Role of Risk Management in Enhancing Shareholders Value...44

14. Types of Risk..45

1) Credit Risk.46
a) Default Risk......47
b) Exposure Risk..48
c) Recovery Risk..49
i.

Collateral Risk.50

ii.

Third Party Guarantee Risk...51

iii.

Legal Risk.52

d) Caused Credit Risk.53

e) Credit Risk Management Function of a Bank..54
f) Instrument of Credit Risk Management55
g) Loan Review Mechanism(LRM)56
h) Credit Risk and Investment Banking.57
2) Liquidity Risk58
a) Measurement of Liquidity Risk.59
b) The Liquidity Risk in Banks Manifest in Different
Dimensions...60
c) Management of Liquidity Risk...61
d) Liquidity Risk can be Controlled by..62
3) Interest Rate Risk.63
a) Measures to control Interest Risk..64
4) Market Risk...65
5) Operational Risk...66
a) Measurement of Operational Risk.67
b) Control Operational Risk68

6) Contingent Risk.69
a) Measures to Control the Contingent Risk.70
15. Steps in the risk management process.71
a) Establish the context....72
b) Identification73

c) Assessment74
d) Potential risk treatments.75
i.

Risk avoidance...76

ii.

Risk reduction...77

iii.

Risk retention78

iv.

Risk transfer..79

e) Create the plan.....80

f) Implementation81
g) Review and evaluation of the plan..82
16. Limitation of Risk Management...72
IV. RESERCH
METHODOLOGY
1. Title of the Problem..84
2. Objectives of the study..85
3. Scope of the study..86
4. Research Design87
5. Sample Design88
a) Types of Universe....89
b) Sample Unit..90
c) Sample Frame..91
d) Sample Size..92
e) Parameters of interest.93

6. Data collection....94
A. Types of Data95
B. Source of Data..96
C. Methods of Data...97
7. Limitations of study...98

V. .DATA ANALYSIS AND INTERPRETATION

VI. HYPOTHESES

VII. SUMMARY, FINDINGS AND SUGGESTION

VIII. ANNEXURE

IX. BIBLIOGRAPHY

OVERVIEW OF BANKING SECTOR

1. INTRODUCTION
In the economic development of a nation, banks occupy in important place. Banking institution from an
important part of the money market and are indispensable in a modern developing society. Banking is the
life blood of modern economic. It may truly be said that modern commerce is so dependent upon banking
that any cessation of banking activity, even for a day or two, would completely paralyse the economic life
of a nation. From its original narrow scope and modest purpose of taking care of other peoples money
and lending a part of it, Banking has developed to such an extent that, in countries likes England, France
and the U.S.A.
The importance of co-operative Banking institutions in India has been considered as the backbone of
rural economy. As the industrial development of the country is taking place, banking services are also
expanding and improving efficiency of co-operative bank in various channels. Due to increasing trend in
globalization and liberalization in the service industry like banking sector, co-operatives banks are
playing crucial role with their competitors. Now a days co-operative activities of Gujarat is on the top
and in whole economy, co-operative activities are such as it does not depend on any govt. assistance.

2. HISTORY OF THE BANKING SECTOR

Banking is as old as is the authentic history and the origins of modern commercial banking are traceable
in ancient times. The New Testament mentions about the activities of the money changers in the temples
of Jerusalem. In ancient Greece, around 2000B.c the famous Temples of Ephesus, Delphi and Olympia
were used as depositories for peoples surplus funds and these temples acted as the financial agents until
public confidence was destroyed by the spread of disbelief in the religion.
Traces of credit by compensation and by transfer orders are found is Assyria, Phoenician and Egypt
before the system attained full development in Greece and Rome. The books of the old Sanskrit lawgiver,
Manu are full of regulations governing credit instruments were called for, interest on loans of bankers,
users and even of the renewal of commercial papers.
In Rome, the banks were called Argentari, Mansari of collybistoe. Some of the banks carried business on
their account and others were appointed by the Government to receive the modern banks. People used to
settle their accounts with their creditors by giving a cheques or draft on the bank. If the creditor had also
an account at the same bank, the transfer of such money by a draft was known as prescriber and rescriber
and the draft was know as describer. This bank also receives without paying interest. They lent money for
a period of three to four years on the security of land.
The Bank of Venice, established in 1157, is supposed to be the most ancient bank originally; it was being
simply an office for the transfer of the public debt. History shows the existence of a Monte is given in
the Italian dictionary. As early as 1349, the business of banking was carried on the drapers of Barcelona.
There it was subject to official regulation.

During 1407, the Bank of Genoa was established. The bank of Amsterdam was established in 1609 to
meets the needs of the merchants of the city. The bank also accepted one type of certificate now days it
called modern cheques.

The beginning of English banking may correctly be attributed to London Goldmiths. They used to receive
their customers valuables and funds for safe custody and issue receipts acknowledging the same.
Banking on European lines started in India, when two British managing agency houses, namely Ferguson
and co, and Alexander and co, set up three banks. The first joint stock bank was established in 1786 in the
name of General Bank of India. Latter the Bank of Hindustan could continue only up to 1806 while the
other two banks had failed earlier. Then came the era of Presidency Banks with the sanction of the
British parliament, the Bank of Bengal was established in 1809 as the first presidency Bank. On 1st July
1935 RBI was setup. This is fact not only in the case of India but also of other countries.
Although the business of banking is old as authentic history, banking institutions have since changed in
character and content.

3. TYPES OF BANKS
1) Regional Rural banks
2) Nationalized bank

3) State bank group

4) Co-operative banks
5) Private banks
6) Foreign banks

1) Reserve Bank of India

The Hilton-young commission, appointed in 1926 has recommended the necessity of centrally
empowered institution to have effective control over currency and financial transaction in the country.
Accordingly, the government had over currency and financial transaction in the country. Accordingly, the
government had then passed Reserve Bank of India Act, 1934 and established the Reserve Bank of India
with effect from 1st April 1935. The principle aim behind this was to organize proper control over the
currency management in the interest of country and to maintain financial stability. With this, the RBI
mainly looks after the following important functions.

To keep effective control over creation of credit and currency supply

To control the banking transaction of central and state government

To act as central administered authority of all other banks in the country

To organize control over foreign currency transaction

To assist for improvement in financial aspects of the country.

a) Regional Rural Banks (RRB)

Regional Rural Banks are added in Indian banking since October 1975. The government of India in term
of the provision of the regional rural banks act 1976 has established these banks. The distinctive feature
of regional rural bank is that it is a separate body corporate with the commercial bank, which has

sponsored the proposal to establish it. The central government, while establishing a regional rural bank at
the request of a commercial bank, shall specify the local limits within which it shall operate. The regional
rural bank may establish its branches or agencies at any place within the notified area. State bank of
Saurastra sponsors regional rural banks in Saurastra.

2) Nationalized Banks
The banking sector came across with 14 major banks in India were nationalised on 19 July 1969. The
cent per cent ownership of the banks are held by Government of India.

3) State Bank Group

The state bank of India was established under the State Bank of India Act, 1955, the subsidiary banks
under the state bank of India (subsidiary banks) act 1959. The reserve bank of India owns the state bank
of India, to a large extent, and rest of the part is some private ownership in the share capital of state bank
of India. The subsidiary banks are associated with State Bank of India..

4) Co-Operative Banks
a) State co-operative Bank:
State Co-operative bank means the principal co-operative society in the state. The primary objective of
which is the financing Other Co-operative societies in the state.

b) Central/District co-operative Banks

A Central/District Co-operative bank means the principal co-operative society in a district. The primary
objective of which is the financing of other co-operative societies in that particular district.
c) Primary/Urban Co-operative Banks

Primary objective of principal business of which the transaction is of banking business and paid up share
capital and reserve of which are not less than rupees 1,00,000 and bye-laws of which do not permit
admission of any other co-operative society as a member.

5) Private Banks
a) New Private Banks
These banks lead the market of Indian banking business in very short period, because of its variety of
services and approach to handle customer, also because of long working hours and speedy services.
These banks are also registered under the company act 1956.

6) Foreign Bank
Foreign bank means multi-countries bank. In case of India foreign banks are such banks which open its
branches office in India and their head office is outside of India.

4. DEFINITION OF CO-OPERATION
"A Co-operative is an autonomous association of persons united

voluntarily

to meet their common economic, social and cultural needs and aspiration through a jointly owned and
democratically controlled enter price."

H.CALVERT DEFINE COOPERATION

As from organization, where in persons voluntarily associate together as human beings, on a basis of
equality for the promotion of the economic interest of themselves3

ACCORDING TO C.R.FAY, 1904.

A co-operative society is an association for the purpose of joint trading, originating among the weak,
and conducted always an unselfish spirit on such terms that all who are prepared to assume the duties of
membership may share in its rewards in proportion to the degree in which the make use of their
association.4

MR.HERRICH M.T., 1933 DEFINES

Co-operation is the act of persons, voluntarily united for utilizing reciprocally their mutual management
to their own forces, resources, or both under their common profit or loss.

5. BACKGROUND-HISTORICAL REVIEW
Introduction:
Co-operation was introduced in India in the early years of the 20th century as a means in of the helping
the poor agriculturists to improve their economic conditions. It followed in the wake of agrarian distress.
Starting as a movement for providing credit to agriculturalists, co-operation has over past sixty years,
extended itself to other types of activity. It has become part of national planning. It is recognized that cooperation should progressively become the principal basis of organization in many branches of economic
life.

Co-operative Banks in India:

BANKS in India can be broadly classified under two heads commercial banks and co-operative banks.
While commercial banks (nationalized banks, state bank group, private sector banks, foreign banks and

regional banks) account for an overwhelming share of the banking business, co-operative banks also play
an important role in mobilizing countrys financial performance.

Co-operative Banks came into existence with the enactment of the Co-operative Credit Societies Act of
1904, which provided for the formation of co-operative credit societies. Subsequently, in 1912, a new act
was passed which provided for the establishment of co-operative central banks. Co-operative credit
institutions play a pivotal role in the financial system of the economy in terms of their reach, volume of
operations, and the purpose they serve. The co-operative banks are also regulated by the RBI. They are
governed by the Banking Regulations Act 1949 and Banking Laws (Co-operative Societies) Act, 1965.

Co-operative bank fill in the gaps of banking need of small and medium income groups not adequately
met through by the public and private sector banks. The co-operative banking system supplements the
efforts of the commercial banks in mobilizing saving and meeting the credit needs of the local
population.

Initially set up to supplant indigenous of rural credit, particularly money lenders, today they mostly serve
the needs of agriculture and allied activities, rural based industries and to a lesser extent, trade and
industry in urban centers.
The Co-operative credit sector in India comprises rural co-operative credit institutions and urban cooperative banks. The rural co-operative credit institutions comprise of institutions such as state cooperative banks, District central co-operative banks, and primary agricultural credit societies, which
specialize in short-term credit, and institutions such as state co-operative agriculture and rural
development banks and primary co-operative agriculture and rural development banks, which specialize
in long-term credit.

Cooperative banks in India finance rural areas under:

Farming

Cattle

Milk

Hatchery

Personal finance

Cooperative banks in India finance urban areas under:

Self-employment

Industries

Small scale units

Home finance

Consumer finance

Personal finance

6. OVERVIEW OF CO-OPERATIVE STRUCTURE:

The co-operative credit institutions, which were primarily established to combat the problems of usury
and indebtedness of the customer to lenders, have emerged, over the years, as a prime institutional
agency for dispensation of credit for agricultural and rural development. The wide network of the co-

operative credit structure provides access to vast majority of the rural population. The share of cooperatives in the flow of total agricultural credit has also considerably increased. However the
performance of the co-operative bank credit institutions in terms of viability has not improved despite
more than three decades of development initiation including rehabilitation programmers of RBI,
NABARD & State Government.
The Co-operative credit structure in Gujarat has made a significant progress after the formation of the
State in 1960. There are 18 DCC and about 7500 primary Agricultural Credit societies (PACS) working
in rural area to provide production credit to the customers.
The phenomenal growth of rural credit in Gujarat has been witnessed particularly after 1960. The threetier credit structure has been strengthened at the apex level. The credit structure for meeting the short
term and medium term credit needs of cultivations in Gujarat consists of.
1. State Co-operative Bank at the apex level.
2. Central Co-operative Banks at the district level &
3. Primary Agriculture Credit Societies at the grass roots converting a single/group of villagers
at the base level.

7. SEVEN PRINCIPALS OF CO-OPERATIVE BANK

1) Voluntary Association or Open Membership

The resolution of the congress point out, Membership of a co-operative society should be
voluntary and available without artificial restriction or any social, political, racial or religious
discrimination, to all persons who can make use of its services and are willing the accept
responsibilities of membership.

2) Democratic control
The resolution of the congress point out, Co-operative societies is democratic organizations.
Their affair should be administration by persons elected or appointed in a manner agreed by the
members and accountable to them. Members of primary societies should enjoy equal rights of
voting (one member, one vote) and participation in decision affecting their societies in other
than primary societies the administration should be conducted on a democratic basis in a good
old form. The formulation of the principle of democratic management of co-operative bodies
has several implications.

3) Members Economic Participation

Members contribute equitably to and democratically control the capital of their co-operatives.
At least a part of that capital usually the co-operatives. Members usually receive limited
compensation, if any, on capital subscribed a condition of membership. Members allocate
surpluses for any or all of the following purpose developing their co-operative possibly by
setting up reserves a part of which would be indivisible benefiting members in portion their
transactions with the co-operative and supporting other activities approved by the membership.

4) Autonomy and Independence

Co-operative is independent self help organizations controlled by their members. If they enter
into agreements with other organizations including governments, or raise capital from a
external sources, they do so on terms that ensure democratic control by their members and
maintain their co-operative autonomy.

5) Co-operative Education, Training and Information

All co-operative societies should make provision for the education of their member, officers,
and of the general public, in the principles and techniques of co-operation, both economical and
democratic, so that they can contribute effectively to the development of their co-operatives.
They inform the general public particularly young people and opinion leaders about the natural
and benefits of co-operation.

6) Mutuality or Co-operation among Co-operatives

All co-operative organization in order to best serve the interest s of their member and their
communities should actively cooperate in every practical way with other co-operatives at local,
national and international levels. It noted that the process of concentration, and common action,
to reduce costs and expand business is gathering momentum in other forms of organization.

7) Concern of Community
Co-operatives work for the sustainable development of their communitys through policies
approved by their members.

8. ABOUT CO-OPERATIVE STRUCTURE

Before freedom the farmers were economically exploited by zamindars and the situation was
that the rich become richer and poor become poorer. With the inspiration of various revolutions

in America, Russia & Europe there arose a revolution and first co-operative society was formed
in 1889 at Baroda by the name ANYONYA SAHKARI MANDLI LTD .
Various co-operative acts were passed to enable the working of co-operative to become smooth.
The first co-operative act was passed by the British Govt. 1904, as the second act was passed in
1912.
The Gujarat State Co-operative Bank Ltd (GSCB) was established in the year of 1960, as an
apex bank for the co-operative credit structure in Gujarat for meeting short term and medium
term credit need of the farmers in Gujarat. This structure consists of:

Gujarat State Co-operative Bank Ltd. (GSCB) at the apex level

District Central Co-operative Banks (DCCB) at district level and

Primary Agricultural Societies (PACS) at the grass-root level

99 ROLE OF CO-OPERATIVES IN INDIAN ECONOMY

The co-operative movement in India, particularly co-operatives banking is one of the

biggest sectors in economy which played an important role in national agriculture
production and income generation by way of more than 60% share in agriculture credit
disbursement.
With the advent of liberalization and globalization policy of Government of India, it has
become necessary to make co-operative more competitive and market oriented. The old
vision of co-operatives as merely government sponsored institutions or as individual driven
organization would have to give way to a new vision of co-operatives where in the cooperative become competitive business units to play an active and effective role in
economic welfare of its members. This calls for creation and development of new type of
co-operatives institutions and re-engineering and re-innovation of existing co-operatives to
meet the challenges of new economic scenario.
The highly liberalized market economy, co-operatives also protective umbrella to the
marginalized individuals. Co-operatives also provide protection to the victims of the make
forces. Self help groups and co-operatives are important organizational forms that serve the
causes of the Survival of the weakest. They are closer to the organizational innovation of a
neo-trusteeship concept where in the concerns for the consumers also find an expression.

999

ORGANIZATIONAL STRUCTURE OF CO-OPERATIVE BANKS

The co-operative banks have been established under the co-operative societies Acts of
different states. Hence the state governments control the administration aspects and Reserve
Bank of India regulates these banks in the banking concept.
The co-operative banks have a three tier set up. The state co-operative bank is the apex
institution in a state, while central District co-operative bank function at district level and
primary credit societies work at the village level. Co-operative banks function with in a
given area. Their operations are restricted to a particular state in a case of a state apex bank,
a particular district in case of a district co-operative bank and to a local area in case of a
society. It proceeds on the principles of co-operation.
ORGANIZATIONAL STRUCTURE
OF CO-OPERATIVE BANKS

STAT
E COOPER
ATIV
E
BAN
KS

DISTRICT
CENTRAL COOPERATIVE
BANKS

PRIMARY COOPERATIVE
BANKS

STATE CO-OPERATIVE BANKS

The state co-operative banks, now 28 in number, from the apex of the co-operative credit structure in
each state. The state co-operative bank is not only interested in helping the co-operative credit movement
but also on promoting other co-operative ventures. The short-term credit advanced by these societies had
more than doubled while medium-term loan increased three fold in the last three years. In the sphere of
on-credit activities such as the marketing of a agricultural produce, the reorganized and trained staff and
inadequate support from extension agencies of the state Governments. The progress the state co-operative
Banks in India at 1999-2000.
STATE CO-OPERATIVE BANKS IN INDIA
Sr. no
1
2
3
4
5
6
7
8
9

Particular
Number of Banks
Number of Branches
Membership (total)
Total share capital
Borrowings (total)
Deposits
Reserves
Working capital
Number of Employees
Number of Female

Number of Male
Source:-NCUI Publication

DISTRICT CENTRAL CO-OPERATIVE BANKS

1999-2000
(Rs. In Million)
29
826
1,49,203
22,645
1,08,997
2,79,453.4
31,479.8
4,51,172.7
1,891
14,289

The central co-operative banks are federations of primary credit societies in a specified area usually
located at the district head quarters or some prominent town of the district. These banks have three
sources of funds, their own share capital and reserves, deposits from the public and loans from the state
co-operative banks. The District Banks provide the financial needs of the primary agricultural credit
society urban co-operative banks and other non agricultural societies, etc. Their branches spread over
taluk and village levels of the state. Most of the District co-operative Banks are equipped with computers,
Fax, Internet, etc. The progress of District central co-operative Banks in India at 1999-2000.
DISTRICT CO-OPERATIVE BANKS IN INDIA
Sr. no
1
2
3
4
5

Particulars

1999-2000
(Rs. In Million
367
13,029
18,01,765
26,425
1,40,217

No. of Banks
No. of offices including
Total Membership
Total share capital
Total Borrowings
From government

0.66%

From commercial Bank

1.52%

From SCB/ (NABARD)

Total Deposits

92.3%

Deposits of co-operatives
7
Total loan Advanced
8
Cost of salary
9
Total Number of Employees
Source:-NCUI Publication

PRIMARY CO-OPERATIVE BANKS

4,91,306
37.03%
4,43,565
71.4%
99,893

A co-operative bank and urban co-operative banks are working at the primary level. Primary co-operative
Banks can be started with ten or more persons, normally belonging to a village. The members have
unlimited liability, that is each member is fully responsible for the entire loss of the society, in the event
of failure. Loans are given for short periods, normally for the harvest season, for carrying on agricultural
operations, and the rate of interest is fixed. In Gujarat there were 316 urban co-operative Banks with 405
branches and 24.52 lacs members in 1997.

PRIMARY CO-OPERATIVES BANKS

Sr. no.

Particulars

1
Village covered
2
Total Membership
3
Total share capital
4
Total Reserves
5
Total Deposits
6
Total loan Advanced
Source:-NCUI Publication

999

1999-2000
(Rs. In Million)
100%
100.56
1,071
20,845.2
72,049.7
87.68%

CHANGING SCENARIO IN CO-OPERATIVE BANKS

Introduction of Co-operative Bank in India

BANKS in India can be broadly classified under two heads commercial banks and co-operative banks.
While commercial banks (nationalized banks, state bank group, private sector banks, foreign banks and
regional banks) account for an overwhelming share of the banking business, co-operative banks also play
an important role in mobilizing countrys financial performance.
Co-operative Banks came into existence with the enactment of the Co-operative Credit Societies Act of
1904, which provided for the formation of co-operative credit societies. Subsequently, in 1912, a new act
was passed which provided for the establishment of co-operative central banks. Co-operative credit
institutions play a pivotal role in the financial system of the economy in term of their reach, volume of
operations, and the purpose they serve.
Initially set up to supplant indigenous of rural credit, particularly money lenders, today they mostly serve
the needs of agriculture and allied activities, rural based industries and to a lesser extent, to trade and
industry in urban centers.
The Co-operative credit sector in India comprises rural co-operative credit institutions and urban cooperative banks. The rural co-operative credit institutions comprise of institutions such as state cooperative banks, District central co-operative banks, and primary agriculture credit societies, which
specialize in short-term credit, and institution such as state co-operative agriculture and rural
development banks and primary co-operative agriculture, which specialize in long-term credit.

Organizational Structure of the Co-operative Credit Institutions in India

Co-operative Credit Institutions

Rural Co-operative

Urban Co-operative Banks

Credit Institutions

Scheduled
Short-term structure

Co-operative
Long-term Bank
Structure

NonScheduled
Co-operative
Banks

State

District

Primary

Co-

central

Agriculture

co-

credit

State

primary

societies

Co-operative

Co-operative

Agriculture

Agriculture

and Rural

and Rural

Operative
Banks

operative

Development

Development

Co-operative banks in India provide finance Rural areas under

Farming

Cattle

Milk

Hatchery

Personal Finance

Co-operative banks in India Provide finance Urban areas under

Self-employment

Industries

Small scale units

Home finance

Consumer finance

Personal finance

2. How safe Funds Deposited In Co-operative Banks?

Depositor money is safe to the extent of insurance provided by the Deposit Insurance and Credit
Guarantee Corporation an arm of RBI. At present deposits in an account up to Rs. 1,00,000 are
insured.
Barring Government securities, any investment carries a risk however, since over 70 per cent of the
banking business own by government bank, which have, so far, never been allowed to fail, depositors
see them as risk free.
The health of bank is revealed by the financial ratios such as Capital adequacy Ratio which is the
banks own funds to that of investments made by the bank. The other crucial ratio is the level of nonperforming assets i.e. the ratio of Bad loans to total assets.
Besides this ratio, it is also useful to look at the nature of exposure that a bank has. If the bank has a
lot of exposure to one particular sector the changes of a problem arising is more.

12.

PROBLEMS OF CO-OPERATIVE BANKS

 Recovery Problem
Its easy to provide money but its very tough to get it back at time, which are playing vital role in the
recovery procedure Because of the above reasons if any members are not paying back, then cooperative bank has to pass through many legal steps for recovery purpose which are very difficult and
time consuming. It is not easy to remain and also maintain number one position in recovery against
many unfavorable affected factors.

Technical Development
The success of a financial market lies in its reach to a greater number of individuals and providing
them instant and satisfactory services. These objectives depend seriously on the developments of bank
technology, which is a proven fact. A large number of Indian co-operative banks still need to device any
benefit out of any such changes.

Problem Regarding Law

Co-operative bank has to follow rules and regulations of the relative state.. Sometimes this also affects
implementation and execution of proper policies. More government interference is also there. Apart
from this, lengthy court procedure also they have to follow.

Communication Gap
In most of co-operative bank is not fully computerized in all branches. So, communication gap between
societies, branches and head office playing vital role in increasing problem of co-operative bank.

Decreasing Interest Rate

Co-operative banks are also facing problem of decreasing interest rate. As co-operative banks are
making investment in other banks as deposit but interest rate is decreasing. So comparatively they are
getting very less return. In 1998 average rate on investment was 13.36% which come down to 13.17%
in 1999 and to 12.38% in the year 2000.

Poor and Decline Customer Service

An important side of the growth of co-operative banking has been a sharp decline in the customer
service. The service to the customer is becoming more and more impersonal, indifferent and inefficient.

Lack of Professional Management

In co-operative banks mostly Board of Directors are not professional enough. So it creates hierarchy of
problems and also there are not enough tasks for the fund management. Apart from this, promotion is
also given on the basis of selection plus seniority.

Different Co-operative Acts

Different Co-operative Acts are there in different states. This must be revised to a model co-operative
Act at national level. On that all states can understand and execute in same manner.

13. PROBLEMS OF CO-OPERATIVE STRUCTURE

Co-operative Banks mainly focuses on co-operation. Co-operation, an economic miracle of the

nineteenth century, is not a mere slogan in the present era. It is one of the potent instruments to
resolve the socio-economic problems of mankind by mutual and co-operative effort. Even the roots of
co-operative banks have widely spread there are some problems which faced by most of the cooperative banks. There problems adversely affect the financial health of these co-operative banks and
hamper its development at some extant. Few of these are.
Problem of imbalances in the co-operative credit structure
Absence of proper recovery environment
Poor management due to various constraints
Absence of professional approach
Absence of appropriate lending policies and effective supervision
Absence of democratic managements in the co-operative credit institutions
Government interference and and Govt. officials in the Board
Politicization of credit
Absence of national co-operative policy
Non co-operation among co-operatives
Interest rate structure
Mounting overdue due to poor loan recovery
Profitability and viability of the co-operative banks
Imposition of several seasonality disciplines by NABARD
Natural calamities like drought, flood, storms, riots and misleading propaganda
Governments debt relief scheme is being adversely affecting to the recovery procedure.

14.

PROSPECTS OF CO-OPERATIVE BANKS

At present co-operative banks have already achieved tremendous progress in many areas. Then also
there are prospects for co-operatives are there. These are as under:

1. ATM Services
Because of technological changes, co-operative banks also have to cope-up with it. In Surat UTI,
SBS, BOB, ICICI etc. are providing ATM services.

2. Currency Chest
In currency chest bank can put their surplus money for management. So co-operative banks can step
further in this field.

3. Village Adoption
Co-operative banks can adopt any village/villages & then fulfill all types of their demand related to
advances. At present Bhuj Mercantile Co-operative Bank Ltd. has already adopted villages.

4. Mobile Banking
At present The Bhuj Mercantile Co-operative Bank Ltd. is providing services of banking through
mobile phone.

5. Internet Banking
In this type of banking services, services are provided through internet. Here transactions are
transferred through internet.
So. In future for co-operative banks have large scope for progress and development is the in above
mentioned fields.

OVERVIEW OF THE VARACHHA CO-OPERATIVE BANK

1. BRIEF HISTORY OF THE VARACHHA CO-OPERATIVE BANK

The people in Saurashtra, located in western part of Gujarat, are always depending upon the rainfed cultivation. As a search for income generation in an alternate way for their survival, they have chosen
Surat city, where there is a good scope for trade in Diamond and Textile sector. Well off people have
entered into the trading sector and the others on labour front. In a phased manner, the population of the
people, involved in diamond trade, belonging to Saurashtra increased to a sizeable extent in Surat and in
particular in the area of Varachha. It was become obvious for a necessity of a Bank for their own people;
the efforts were taken by a well known philanthropist, story writer and columnist in local dailies, Mr. P.
B. Dhakecha, founder chairman of our Bank. As such, The Varachha Cooperative Bank Ltd., came into
existence on 16th October 1995 and Inauguration ceremony was done on the hands of Shree Swami
Sacchidanand. Some of its directors are belonging to diamond trade, who are official site holders of
getting rough block diamonds from foreign countries. At the end of the first financial year the number of
shareholders was 4484, Share Capital 57.44 lacs, Deposits Rs.2.70 crores, Advance Rs.2.07 crores and
profit stood at 4.77 lacs.
Bank has gradually developed the Banking activities and at the end of 5th year, with a network of 5
branches, the share capital and reserves raised to more than 8 crores and the deposits have crossed 100
crore mark, which is a rare phenomenon in Cooperative Banking Sector in all over India and the number
of depositors have increased 58222. The Bank has been awarded with First Prize for the best performance
among all Cooperative banks in Surat District during the FY.2000 - 01. At present the share capital and
reserves raised to nearly 40 crores. The deposit is Rs.160.70 crores Advances 78.21 crores. Total 7
branches and 130 staff members. In spite of run in a cooperative sector in the year 2001, due to
Madhavpura episode, the Bank has not only survived but also developed the base without any difficulty
due to confidence reposed upon by the public with our Bank.

Bank have introduced the system of quick delivery of vehicle loans, with minimum papers and
documents, without any hidden charges. Other advances of our Bank have been spread over on the
following categories:

Vehicle Loan

Loan against gold ornaments

Loan on personal guarantees (Surety Loan)

Retail trade business

Professional and Self employed

Loan against Banks own deposits/NSC

Cash credit hypothecation on stocks on trade

Technology Up gradation Finance (TUF) loan with subsidy

Besides the banking activity, the Bank has entered into the insurance business arrangement with IFFCOTOKIO. They are also having tie-up arrangements with insurance companies on referral basis, as per RBI
guidelines. We have covered with accident insurance cover for the shareholders, depositors and
borrowers of the Bank and we have received settlement to the tune of Rs.1 crore from the insurance
companies. The data pertaining to our Bank is being sent to Reserve Bank of India, banking regulator of
the country, through e-Mail under offsite surveillance system (OSS).

Bank has been fully computerized banking system, right from inception and present programme, front
end Visual Basic and the back end (database) Oracle 10G Platform. We are having the staff members,
most of them belonging to younger generation, with energetic and enthusiastic approach in Customer
Service. The staff attendance is being controlled under Biometric device system. CCTV system is being
installed to monitor the alertness of the entire banking activity, fitted with cameras at the vital points.
Bank has introduced Mobile Banking and Any Branch Banking (ABB) in the year 2007. Bank's future
plan is the introduction of on and off site ATMs and Core Banking System.

Other vital factors of our Bank are as follows:

One of the leading cooperative Banks in South Gujarat

Audit grade, continuously at A, from the beginning

Any Branch Banking (ABB)

CCTV system is being installed to monitor the alertness of the entire banking activity, fitted with
cameras at the vital points.

Bank has started E-payment facility for the customers of the Bank for the purpose of payment of
Income-Tax.

Personalized Cheque Book is being issued to all the customers of the Bank. - RTGS/NEFT facility
is also available.

Mobile Banking system to customers for getting various details about their accounts like Current
Balance, Cheque Return Status, FD Rates, Loan Rates, Various Loan Schemes etc. by way of
SMS.

Display/provision of VAT machine in Banking hall, for customers approach

Strong working capital, Deposit base and our investment assets are profit oriented

Net NPA continuously at zero percent

No default in CRR/SLR

Concurrent audit system

Implementation of Know Your Customer (KYC) policy

Teller system for payment up to Rs.20000 in CA and Rs.10000 in SB

Franking of adhesive stamp duty arranged by Revenue Dept. of Gujarat State.

Besides banking, the Bank has done a little for some noble social cause, by conducting blood donation
camps. The bright wards of the shareholders are being given with educational scholarship for their future
study.

With steady growth and strength, Bank is moving towards higher status in the Banking arena and as well
as in Cooperative Sector.

2. Organization Structure

In The Varachha Co-operative Bank organization structure given above figure.

Board Directors
Chairman

Founder Chairman & M.D.

Vice Chairman

Shri Bhavanbhai

Shri P.B.Dhakecha

Shri Bhupendrabhai

Navapara

Ribadia

Chairman Loan Committee

Chairman Staff Committee

Director

Dr. Lavjibhai Nakrani

Shri Prabhudas T. Patel

Shri Kanjibhai R
Bhalala

Director

Director

Director

Shri Kanjibhai Vadariya

Shri Vallabhbhai Savani

Shri Jivrajbhai K Patel

Director

Director

Director

Shri Kanubhai Savaliya

Shri Babubhai Mangukiya Shri Manjibhai M Patel

Manager
General Manager

Admin Manager

EDP Manager

Mr. A. D. Bhalani

Credit Manager

Mr. P. D. Kelawala

Recovery Manager

Mr. T. P. Vora

Mr. B. C. Sorathiya

Mr. S. M. Chhaniyara

Branch Manager

Mr. H. V. Patel

3. SERVICES & FORMS

Share Capital and no. of members
According to last year the total amount of share capital was 431 lacks as on 31.03.2007, and the same has
been increased to 462 lacks on 31-03-2008 and the total number of members stood at 10717 as on
31.03.2007 and as on 31.03.2008 Bank has 11569 members.

Reserve and other Funds

At the end of 31-03-07 total Reserves and other funds was 36.34 crores. During the year there is an
increase of 2.73 crores and as at the year of 31-03-08 the total Reserves and other funds is Rs.39.07
crores.

Savings
In the present time of liberalization & globalization in banking sectors in facing highly competitive due
to large network and sufficient fund, and attractive scheme of private & nationalized banks they are
making lots of profit from the loans of crores of Rs.
Due to this situation the Co-operative banks small network, limited fund and small business of city &
villages, limited loans which decided by NABARD, of which profit made that also 30% taxable
according to this budget announced. During this struggle this bank has increased there saving in Crores
with in last ten years.

Investment Of Funds
Under guidance of RBI & NABARD and the governing rules viz: the bank should invest certain amount
in Central Govt., State Govt. or registered trust securities which is being discussed in detail later.

Loans
Under guide of government of India for the purpose of agricultural development the bank has decide to
dabble there loans within three years for this purpose under (KCC) Kisan Credit Card the bank have ass
loan of Rs. 73.26 crore and NABARD have support of RS. 80.23 Crore.

Medium Term Agriculture Loan

As per the requirement of farmer which needs like, irrigation, S.R.T.O cattle land purchase the bank.

 Annual Credit Plan

As per the guiding of reserve bank of India the target for loan in district of Rs. 200 Cr. Just the Varachha
co-operative bank target was Rs. 380 cr. Which was almost higher than half?

Housing Loan
For the construction or purchase a house for residence or business during the year bank have pass loan.

Loan Again Gold Jewellary

For the emergency need of money for the people of rural or urban this bank is provide loan up to 100000.

Loan Against N.S.C. / K.V.P.

For the loan against post office, national saving certificate kisan vikas patra, insurance policy, this bank
private emergency loan in all the branch in the year 2007-08 for this purpose this bank have provide 200
lacks loan to 162 members.

THE ABOVE FACTS ARE TOTALLY WRONG (Page 48)

Saving Deposits

First customers open their account they get the application form and fill that form of saving deposit.
Customers write the name, address, profession, phone no. , Annual income, Birth date, No. of family
members and name of nominee which are joint in form. Most important thing is the signature of
customer and account no. of customer.
Saving accounts code no is 0502 card. In Saving accounts depositor can withdraw up to 2, 00,000 lacs.
The customer want to withdraw more than 2, 00,000, he has to provide PAN CARD particulars. Bank's
officer verifies the signature of customer and authorises for making payment.

Right of withdraw the money in savings account type are:

Self, it means the customer comes in person to withdraw

Joint, means signatures of all account holders to be obtained in that account.

Either or survivor, means any one of the customer can withdraw

Former, it means if one holder is alive second holder is not having any right of that account.

Current Deposits

Current Account is a one type of Demand Deposit there is no limit for number of transaction or the
amount of withdrawals. In this type of account, if the customer's balance is not adequate, bank may give
them over draft to some extent..
Most of these type of accounts are opened by the traders for their daily transaction. In this type of
account, the account holder is required to maintain certain minimum balances,.
In the Current Account bank gives Cheque Book, they dont give Pass Book. Instead, bank gives
Account statement to their customer.
In this type of account, the customer can collect the Cheques drawn on the other banks and can also
collect the cheque of third party also.
In the Current Account the PAN CARD is very much important.
Current Account Code No. is 0503. When the customer want to open current account they
fill up the form of 0503 and after that the bank gives them their account no.
When customer want to close their account that time bank get the pass book and cheque book and
after the verification of Account opening form, Specimen Signature Bank permits to close.

Recurring Deposits

 Term Deposits
Demand Draft Facility
Demand drafts and Multi City. Cheques of HDFC, AXIS Bank, and ICICI bank.
Out station cheque collection facility
Building Loan
Machinery Loan and Vehicle Loan
Personal Loan
- Maximum limit of personal loan is 100000/ Loan against FDR/NSC/KVP/LIP
Cash credit & Overdraft Facility
Loan on Gold
Loan for Business
Loan on non farming property
Loan on kisan vikas patra
Loan on fixed deposit

4. MAIN FUND INFLOW (SOURCES OF FUNDS)

Owned deposit

Deposit

Borrowing

Others

1) Owned Deposit
The owned funds consisting of paid capital of the bank, reserve fund and other reserves.

2) Deposits
It is sum of current deposits, fixed deposits, saving deposit, special saving deposits,
inoperative deposit, etc. it is the main cash inflow for any institution.

3) Borrowings
The borrowed funds consisting of borrowing from SBI, SDCCB & GSCB.

4) Others
Increase in current liabilities, reduction in debtors, fund from operation like net income,
depreciation, and reserve, less payment to creditors, reduction in advances, reduction in
inventories, reduction in cash, sold marketable securities etc.

5. MAIN FUND OUTFLOW (FUNDS USED)

CRR (cash reserve ratio)

SLR (statutory liquidity ratio) in RBI approved securities

Loanable fund

Other

CRR (Cash Reserve Ratio) With RBI Of India

The capacity of credit creation of bank is depending upon their cash flow received to
restrict this credit creation, the reserve bank of India has directed their term in cash of
scheduled banks and sec.18 of banking regulation act are required to maintain the cash
reserve ratio @4.75% and non-scheduled bank @3% to 6% of their demand and time
liability amount separately. The scheduled bank are required to deposit the cash reserve
ratio amount with RBI while the non-scheduled banks are required to maintain separate
account for this. The RBI is also empowered to raise the cash reserve ratio up to 15% only
in respect of scheduled banks. It is maintained and reported to RBI every fortnight. Time
liability is related with time like, fixed deposit Demand liability is related with the
demand like, current deposit, savings deposit, inoperative deposit, and matured fixed
deposits.

SLR (Statutory Liquidity Ratio)

The cash flow for regular banking transaction mainly depends upon deposit received in the
bank. The RBI puts some restriction on utilization of these amounts. The scheduled and
non-scheduled banks are required to deposit 25% amount of their demand and time
liability amount in the security are converted into cash and therefore they are termed as
liquid asset and 25% amount termed as liquid ratio. The RBI is empowered to raise
this liquidity ratio from 25% to 40%. It is maintained and reported to RBI every fortnight.

 Loanable Fund
Credit deposit ratio is not more then 70%. Loanable funds means amount of money,
applicable for lending. There main factors are own fund, deposit, and borrowing. Advance
can never be more then loanable fund. So a total of;
75% of own funds
70% of deposits
100%of borrowings

Other
Purchase of fixed assets, purchase of marketable, addition to advances, addition to
inventories, payment to creditors, payment of dividend, etc.

6. PROGRESS CHART OF THE VARACHHA CO-OPERATIVE

BANK AT A GLANCE
(Rs. In crores)
Particulars

2001-

2002-

2003-

2004-

2005-

2006-

2007-

No. of share

2002
7342

2003
8148

2004
8348

2005
9170

2006
9569

2007
10717

2008
11569

holder
Share capital
Reserve &

3.11
--

3.44
--

3.64
25.10

3.95
29.41

4.04
32.36

4.31
36.34

4.63
39.17

surplus
Total deposit
Total Loan
Net Profit
Working

123.04
67.32
4.70
146.41

129.79
67.25
4.73
159.35

139.19
61.64
5.67
175.50

136.27
64.55
3.24
175.07

158.24
59.67
2.38
197.49

162.97
73.26
1.51
208.38

168.27
80.23
2.81
221.15

Capital
No. of

66109

75435

86549

91495

93348

95783

99907

holder
No. of Loan

5727

5055

4391

4017

5153

6534

8999

Taker
Audit Class
Dividend

A
15%

A
15%

A
15%

A
12%

A
12%

A
12%

A
12%

Account

 Financial Performances of the bank in tabulate format are as follows:99 Share Capital

Year
Share

2002
3.11

2003
3.44

2004
3.64

2005
3.95

2006
4.04

Capital

Share Capital

2007
4.31

2008
4.63

99 Total Deposits:Year
Total

2002
123.04

2003
129.79

2004
139.19

2005
136.27

deposits
(Rs.in crore)

Total Deposits

2006
158.24

2007
162.97

2008
168.27

99 Total Loan
Year
Total Loan

2002
67.32

2003
67.25

2004
61.64

2005
64.55

2006
59.67

(Rs.in crore)

Total Loan

2007
73.26

2008
80.23

99 Net Profit:-

Year
Net Profit

2002
4.70

2003
4.73

2004
5.67

(Rs. In crore)

Net Profit

2005
3.24

2006
2.38

2007
1.51

2008
2.81

99 Working Capital:Year
Working

2002
146.41

2003
159.35

2004
175.50

2005
175.07

2006
197.49

Capital

Working Capital

2007
208.38

2008
221.15

 Performance of Kapodra Branch in Tabulate Format:1.

Total Working Capital

Year

2002

2003

2004

2005

2006

2007

2008

Working 9.15

12.71

13.40

16.18

18.88

23.61

27.83

Capital

Total Working Capital

2. Total Net Profit

Year
Net

2002
2003
2004
2005
2006
2007
2008
12,16,374 49,14,814 80,00,833 1,22,63,434 1,23,13,342 1,08,32,416 1,39,90,862

Profit

Total Net Profit

(Rs. In Lacks)

7. CERTIFICATES & AWARDS

Surat Jilla Sahkari Sangh
Best Co-op. Bank in Surat Dist. for the year 2000-2001 : Shield from Surat Jilla Sahkari Sangh

Surat Jilla Sahkari Sangh:

Shield Award received by Shree P. B. Dhakecha (Founder Chairman)

Rashtriya Viakas Ratan Gold Award:

Rashtriya Vikas Ratan Gold Award from International Integration & Growth Society, New Delhi

Rashtriya Vikas Ratan Gold Award:

Photograph : Rashtriya Vikas Ratan Gold Award Received by Shri P. B. Dhakecha (Founder
Chairman)from I.I.G.S., New Delhi

He South Guj. Co-op. Bank's Association Ltd., Surat

Award received from The South Guj. Co-op. Bank's Association Ltd., Surat for the year 2007-08

8. SWOT ANALYSIS
1) STRENGTHS

Good infrastructure

Last 14 Years bank is obtaining audit class A.

Receive 5 times BEST PERFORMANCE AWARD

2) WEAKNESSES

Problem regarding law

Lack of professional management

Decreasing interest rate

Communication gap

Different co-operative act

3) OPPORTUNITIES

Increasing interest rate on secured loan

Strong deposit

Non-banking business increasing

Maximum use of computerization

4) THREATS

Government investment decrease in prices

Risk on investment

Transaction risk

Only profit in some period

9. PROBLEM FACED BY THE VARACHHA CO-OPERATIVE BANK

This is step ahead in diversified and dynamic co-operative movement in comparison to other
in the state as well as in the nation. The Varachha Co-Operative Bank has made tremendous
progress in every span of banking. This bank has also achieved no. 1 position in the field of
recovery. Even though this bank has achieved good position, facing problem which adversely
affecting the financial health of this bank. These problems are:

1) Recovery Problem
Its easy to provide money but its very tough to get it back in time. Increasing ratio of
wilful defaulters, short rainfall, drought, scarcity etc are playing vital role in the recovery
procedure. Because of the above reasons if any member is not paying back, then bank has
to pass through many legal steps for recovery purpose which are very difficult and time
consuming. It is not easy to remain and also maintain number one position in recovery
against many unfavorable affected factors.

2) Problems Regarding Law

This bank has to follow rules and regulations of the relating acts and laws. Sometimes this
also affects implementation and execution of proper policies. More government
interference is also there. Apart from this, lengthy court cases procedure also they have to
follow.

3) Decreasing Interest Rate

This bank is also facing problem of decreasing interest rate. As this bank is making
investment in other banks as deposit but interest rate is decreasing . So comparatively they
are getting very less return. In 1998 average interest rate on investment was 13.3%, which
come down to 13.17% in 1999 and to 12.83% in the year 2000.

4) Different Co-operative Acts

Different co-operative Acts are there in different state. This must be revised to a model cooperative Act at national level. That all states can understand and execute in same manner.

5) Natural Calamities
In Surat year 2007 the very high rainfall, scarcity etc. These natural calamities create
further problems.

6) Decrease in liquidity
Members of society will not able to clear their advances of previous year. So they cannot
take advances for next year.

7) Wilfull Defaulters
Wilfull defaulters are those who are even capable to play but willful not want to play.
Now-a-day number of wilfull defaulters is going to increase, so bank has to face strict
steps against these defaulters.

8) Audit Problem

Government audit is not done in time. So problem of arrears in audit is created.

9) Lack Of Professional management

Board of director is not professional enough. So this creates hierarchy of problem & also
there is not enough task force for the fund management. Apart from this promotion is also
given on the basis of selection plus seniority.

10.

PROSPECTS OF

VCB BANK
Inter Linking
Inter linking of H.O. to branches to societies can be done. But for this, core banking solution to all
branches and societies is must.

Inter Connectivity
This is related to any where banking.

Agricultural Technical Workshop

Here, technology guidance related to agriculture is provided. So, farmers can come to know easily about
the best & latest technology, which fit to them.

Collection Of Electricity
Before some years Varachha bank was providing services in GEB bills collection.

 Provide Locker Facilities

In Varachha Bank, where branchs own building is there, locker facility is being provided. In this bank, in
total 3 branches locker facilities are there.

RISK MANAGEMENT SYSTEM

INTRODUCTION
Risk Management is an economic operation for a banks assets, liabilities and earnings. Its objective is
to minimize uncertainties and contingencies in cash flows from the impact of fortuitous losses arising
in the course of the banks operations. It seeks to achieve financial stability through conscious decisions
on risk retention and risk transfers. In the matter of risk transfers the decisions involve commercial
contracts where in risks are transferred contractually to vendors, contractors and suppliers or even
customers. The residual risks are considered for transfer to insurer. Hence, Risk Management is an
assessment of perceived risks for assets, liabilities and operations and a pursuit to keep them
manageable.

What is risk?
Risk is virtually anything that threatens or limits the ability of a community or nonprofit organization to
achieve its mission.
It can be unexpected and unpredictable events such as destruction of a building, the wiping of all your
computer files, loss of funds through theft or an injury to a member or visitor who trips on a slippery
floor and decides to sue. Any of these or a million other things can happen, and if they do they have the
potential to damage your organization, cost you money, or in a worst case scenario, cause your
organization to close.

What is risk management?

Risk management is a process of thinking systematically about all possible risks, problems or disasters
before they happen and setting up procedures that will avoid the risk, or minimise its impact, or cope
with its impact. It is basically setting up a process where you can identify the risk and set up a strategy to
control or deal with it.
It is also about making a realistic evaluation of the true level of risk. The chance of a tidal wave taking
out your annual beach picnic is fairly slim. The chance of your group's bus being involved in a road
accident is a bit more pressing.
Risk management begins with three basic questions:
1. What can go wrong?
2. What will we do to prevent it?
3. What will we do if it happens?

2. Overview
The financial sector especially the banking industry in most emerging economics including India is
passing through a process of change. As the financial activity has become a major economic activity in
most economies, any disruption or imbalance in its infrastructure will have significant impact on the
entire economy. By developing a sound financial system, the banking industry can bring stability within
the financial markets.
During the past decade, in India, banking industry continued to respond to the emerging challenges of
competition, risks and uncertainties. Risks originate in the forms of customer default, funding a gap or
adverse movements of markets. Measuring and quantifying risks is neither easy nor intuitive, our
regulators have made some sincere attempts to bring prudential and supervisory norms conforming with
international bank practices with an intention to strengthen the stability of the banking system.
Banks in general face the following risks:

Liquidity Foreign Exchange

Credit Market

Interest rate Operational

3. Concept
The only thing certain in these changing times is uncertainty and a risk is basically linked to such
uncertainties. Although the future and risk cannot be predicted 100%, still precaution is always better
than cure. Risk is omnipresent and all pervasive in any walk of life.
The word risk is derived from risicare which means run into danger.
Risk management is the process of measuring, or assessing risk and then developing strategies to manage
the risk.

4. Meaning of risk
Road crash statistics by themselves don't necessarily tell us who is most at risk on the road since they
don't take into account the amount of driving, walking, riding, etc. By merely considering the total
number of crashes that drivers have, it could be concluded that drivers less than 15 years old are very safe
on the road because there are very few crashes involving them. In fact, this is really a result of there
being only a small number of this age group actually driving as it is illegal for them to be doing so.

In the following section, we make use of information about the amount of travel being done by various
groups in order to see who is at greater or lesser risk given the amount of travel they do. Risk can be
expressed as road crashes or injuries occurring per km travelled or per hour of travel, or even per road
crossed in the case of pedestrians.
The above graph shows how the risks for drivers per km driven have fallen considerably over the eight
years (1989/90 to 1997/98) - particularly for young and old drivers.

5. DEFINITION OF RISK & RISK MANAGEMENT

It is the chance that an investments actual return will be different than expected. This includes the
possibility of losing some or all of the original investment. It is usually measured by calculating the
standard deviation of the historical returns or average returns of a specific investment. Risk in finance,
as defined by Ron Dembo, is a general method to assets risk as an expected after-the-fact level of regret.
Such methods have been successful in limiting interest rate risk in financial markets. Financial markets
are considered to be a providing ground for general methods of risk assessment. A fundamental idea in
finance is the relationship between risk and return. The greater the amount of risk that an investor is
willing to take, the greater the potential return. The reason for this is that investors need to be
compensated for asking additional risk.

Risk Management
It is the process of identifying, analyzing and evaluating the risk and selecting the best possible methods
for handling it. There is no standard approach for Risk Management. However, there are some common
elements of successful risk management efforts:
Recognition of the risk is the responsibility of a programmed management.
The Risk Management process includes planning for risk management, continuously identifying and
analyzing programmed events, assessing the likelihood of their occurrence and consequences,
incorporating handling actions to control risk events and monitoring a programmers progress towards
meeting programme goals.

6. RISK MEASUREMENT
In the words of William Shockley measure is a comparison to a standard. The process of measurement
involves estimating the ratio of the magnitude of a quantity to the magnitude of a unit of the same type
(length, time, mass, etc). A measurement is the result of such a process, expressed as the estimated as the
product of a real number and a unit, where the real number is the estimated ratio. It is true that only
quantifiable and identifiable risks are managed in terms of providing hedge cover or insurance. It is
pertinent that enterprises identify its key risks and the volume of exposure, before it could decide on the

type of hedging and its timings, to optimize risk-return payoff. Range, standard Deviation, Coefficient of
Variation and other Econometric tools are used for the measurement of risk.

7. RISKS V/S OPPORTUNITIES

An event is any future activity that is going to have an impact on the business. The negative impact
represents risks. Risk is a possibility that an event will occur and adversely affect the achievement of
objectives. Risk require managements assessment and response.
Events with a positive impact represent opportunities. Is the possibility that an event will occur and
positively affect the achievement of the organizations objectives and creation of value? Such events are
channeled back to the managements objective setting process.

8. THE BASIC PRINCIPLES OF RISK MANAGEMENT

Risk Management covers all risk information systems, reporting and subsequent actions. The basic
principles of risk management are:
i.

The management rules should not constrain the risk taking process too much being too prudent slows
down the decision-making process and limits the volume of business.

ii.

There should be a separation of the risk-takers from the risk controllers. The risk takers have expense
of additional risks. The risk-taker therefore cannot be the risk controller.

iii.

There should be incentives to disclose risks when they rather than to encourage managers to hide
them.

9. RISK MANAGEMENT FUNCTION

The broad parameters of risk management function should encompass the following.
1. Organizational structure;
2. Comprehensive risk measurement approach;
3. Risk Management policies approved by the Board which should be consistence with the broader
business strategies, financial strength, management expertise and overall willingness to assure risk;
4. Guidelines and other parameters should be available that will govern risk taking process. Detailed
structure or prudential limits for risk taking should also be there;
5. Strong MIS for reporting, monitoring and controlling risks;
6. Well laid out procedures, effective control and comprehensive risk reporting framework;
7. Separate risk management framework independent of operational Departments and with clear
delineation of levels of responsibility for management of risk; and
8. Periodical review and evaluation of risk management system.

10.

ASSESSMENT OF RISK

The risk assessment process should, inter-alia, include the following:

i. Identification of inherent business risks in various activities undertaken by the bank.

ii. Risk measurement in terms of both the uncertainty and its potential adverse impact on profitability.
iii. Evaluation of the effectiveness of the control systems for monitoring the inherent risks of the business
activities (Control risk)
iv. Drawing up a risk-matrix for taking into account both factors viz., inherent business risks and control
risks.

Risk Assessment Methodology

The risk assessment methodology should be based upon the following parameters:
i

Previous internal audit reports and compliance.

ii

Proposed changes in load policy or change in focus.

iii

Significant change in management / key personnel.

iv

Latest inspection report of NABARD.

Reports of external auditors.

vi

Sectoral trends and other environmental factors.

vii

Volume of business and risk prone credit.

viii

Substantial performance variations from the budgeted levels.

11.

ADOPTION OF RISK-FOCUSED INTERNAL AUDIT

To achieve the above objectives, banks will have to gradually move towards risk-based internal audit
which will, in addition to selective transaction testing, include an evaluation of risk management systems
and control procedures prevailing in various areas of banks operations. This would mean that greater
emphasis is placed on the internal auditors role in mitigating risks. While focusing on effective risk

management and controls, in addition to appropriate transaction testing, the internal audit would not only
offer suggestions for mitigating current risks but also anticipate areas of potential risks and play an
important role in protecting the bank from various risks.

12.

NEED FOR RISK MANAGEMENT

A certain amount of risk taking is inevitable for any organization to achieve its objectives. Effective
managing projects and improving operational performance. An effective risk management brings about:
i

Increased certainty and fewer surprises;

ii

Better service delivery;

iii

More effective management of change;

iv

More efficient use of resources;

Better management at all levels through improved decision making;

vi

Reduced waste and better value for money;

vii

Management of contingent and maintenance activities.

Thus, the essence of enterprise risk management is the recognition that risks affect the performance of the
company. An integrated risk management approach will yield a different and much valuable result than
the sum if a series of silo-based approaches.

13.

ROLE OF RISK MANAGEMENT IN ENHANCING

SHAREHOLDERS VALUE
Traditionally risk management was considered a way to balance the trade off between risks and rewards.
Enterprise Risk Management now takes a broader view and positions a company to enhance shareholder
value as it builds investor confidence. Firms that make good risk decisions will be rewarded with
improved market value.
Traditionally, functional, divisional or department barriers guided the approach to managing risks. In a
multi product corporation, independent business units addressed the business risks associated with their
overall strategy and profitability. Such as those related to products, pricing and relationship management.
For example, the marketing executives were responsible for Collection of overdue debt and handling of
bad debts. The quality department had to bother about the defectives and so on. Such a strategy did not
provide the strategic management term with a consolidated report displaying the total risk the
enterprise is subject to.
As a strategy for optimizing risk management, Enterprise Risk Management achieves this objective by
providing systematic co-operative evaluation and control of risk. It is an organization wide process and
approach to identifying and alleviating problems related to risk . by giving companies an objective basis
for allocating resources and reducing expenditures, Enterprise Risk Management can improve capital

efficiencies. This results in enhanced shareholder value through a more through balance of risk and
resources.

14.

TYPES OF FINANCIAL RISKS

Risks are usually defined by the adverse impact on profitability of several distinct sources of uncertainty.
Risks can be broadly grouped in two categories, (i) banking or financial risk and (ii) operational risks.
Financial risk management is the practice of creating economic value in a firm by using financial
instruments to manage exposure to risk. As a specialization of risk management, financial risk
management focuses on when and how to hedge using financial instruments to manage costly exposures
to risk.
The principal banking risks are:
Credit Risk
Liquidity Risk
Interest Rate Risk
Marketing Risk
Foreign Exchange Risk
Solvency Risk

(1).

CREDIT RISK

Credit risk paramount in terms of the importance of potential losses. Credit risk is defined by the losses in
the event of default of the borrowers or in the event of a deterioration of the borrowers credit worthiness.
This simple definition, however, hides several underlying risks. Thus, the amount at risk (the outstanding
balance as on the date of default), differs from the loss in the event of default because of the potential
recoveries. These depend on credit risk mitigators (factors) such as collateral, third-party guarantees and

the possibility of negotiating with the borrower. Default is an uncertain event and potential recoveries
from default cannot be predicted in advance.
Hence, credit risk can be divided on to three risks: -

i.

Default Risk
There are several possible definitions of default:
a) Missing a payment obligation when a scheduled payment has not been made for a minimum period
say, three months after the due date.
b) Breaking a covenant such as a financial ratio subject to upper or lower trends. This is a technical
default that usually triggers negotiations. All technical default that usually triggers negotiations. All
technical defaults do not necessarily endanger a borrowers survival.
c) An economic default occurs when the economic value of assets goes below the value of outstanding
debts.

ii.

Exposure Risk
This is generated by the uncertainty prevailing with the future amounts at risk. For all credit limits for
which there is a repayment schedule, the exposure risk can be considered as small or negligible.
However, in case of overdrafts and cash credits, where that bank is committed to lending money up to

some maximum amount, the amount at risk varies at the initiative of the client. Recoveries in the event of
default are not predictable, in these types of credit facilities.

iii.

Recovery Risk
Recovery risk has three components:

a) Collateral Risk:
Credit Risk is minimized if the collateral can be easily taken over and sold at some significant value.
Thus, use of collateral to mitigate credit risk transforms the credit risk into a recovery risk, plus an asset
value risk. Thus collateral risk is zero only with cash.
b) Third Party Guarantee Risk:
Third party guarantee turns the credit risk on the borrower into a credit risk on the guarantor. This is not a
simple transfer of risk. Since there is a possibility that both the borrower and the guarantor default at the
same time.
c) Legal Risk:
Thus refers to the risk of bank not being legally able to sell the collateral or enforce the guarantee.

1. Causes of credit risk:

The credit risk for a banks portfolio depends on two sets of factors external and internal. The external
factors are the state of economy, natural calamities, and nationwide disturbances. Governments
policy, down-turn in business cycles, sector / industry recession, etc. The banks can, however,
mitigate the adverse effects of these factors on their performance through safe and sound lending
policies and careful attitude towards risk taking (diversified credit portfolio, careful credit analysis,
loan consortium, etc.). Defective loan policy high ratio of loan to total assets, loan mix , tax
procedures and unsound prevention strategies and inexperienced credit officers are some of the
internal factors influencing credit risk. Further, certain customer related aspects like quality of
information (reliability factor), stability of cash flow, real net worth, collaterals, etc. can also
contribute to credit risk.

2. Credit Risk Management Function of a Bank:

According to the Basel committees core principles, the following factors have a bearing on the credit
risk management function of a bank:

i.

Credit-Grading Standards And Credit Monitoring Process:

The maintenance of prudent written lending policies, loan approval and administration procedures,
and appropriate loan documentation are essential to a banks management of the lending function.
Lending and investment activities should based on prudent underwriting standards that are approved
by the banks Board of Directors and clearly communicated to the banks officers and staff dealing
with credit functions.
Banks must also have a well-developed process for ongoing monitoring of credit relationships,
including the financial condition of borrowers. A key element of any management information system
should be a data base that provides essential details on the condition of the loan portfolio, including
internal loan grading and asset classifications.

ii.

Assessment Of Asset Quality And Adequacy Of Loan Loss (NPA) Provisions

And Reserves:
The board of Directors must ensure that prudential limits are fixed to restrict banks exposures to
single borrowers or groups of related borrowers. Also, the bank should have a management
information system that will enable management to identify concentrations of credit in the type of
borrowers or few sectors / activities.

The supervisory authority (like NABARD) sets prudential limits to restrict banks exposures to single
borrowers, groups of related borrowers and other significant risk concentrations through CMA
Guidelines. These limits are usually expressed in terms of a percentage of bank may extend to a
private sector borrower or a group of closely related borrowers without specific approval (from
NABARD). The Board should, therefore, monitor the banks handling of concentrations of risk and
may require that the Credit Department report to them any such exposures exceeding a specified limit
or exposures to large borrowers.

iii.

Connected Lending:
The banks lending policy must be able to prevent abuses arising from connected and related party
lending. This will require ensuring that such lending is conducted only on an arms-length bases and
that amount the amount of credit extended is closely monitored. These controls are most easily
implemented by requiring that the terms and conditions of such credits not be more favorable than
credit extended to non-related borrowers under similar circumstances and by by imposing strict
limits on such lending. Transactions with related parties that pose special risks to the bank should be
subject to the specific approval of the banks Board of Directors or prohibited altogether. Such an

approach to view the borrowing units on a consolidated basis can help to reduce problems arising
from connected lending.

3. Instruments of Credit Risk Management:

The credit risk management process may encompass a whole lot of management techniques. They
are:
i.

Appointment of Credit Approval Authority

ii.

Fixation of Prudential limits

iii.

Risk Rating for a borrower / activity

iv.

Risk Pricing

v.

Risk Monitoring

vi.

Portfolio composition management

vii.

Risk classification and provisioning policies

viii.

Controlling risk through effective Loan Review Mechanism

4. Loan Review Mechanism (LRM):

LRM is an effective tool for constantly evaluating the quality of credit portfolio and to bring about
qualitative improvements in credit administration. Banks should, therefore, put in place proper Loan
Review Mechanism for large value accounts with responsibilities assigned in various areas such as,
evaluating the effectiveness of loan administration, maintaining the integrity of credit grading process,
assessing the loan loss provision, portfolio quality, etc. The complexity and scope of LRM normally vary
based on banks size, type of operations and management practices. The major objectives of LRM could
be:

To identify promptly loan which develop credit weaknesses and initiate timely corrective action;

To evaluate portfolio quality and isolate potential problem areas;

To prove information for determining adequacy of loan loss (NPA) provision;

To assess the adequacy of and adherence to, loan policies and procedures, and to monitor compliance
with relevant laws and regulations and RBI/NABARD/RCS/Sponsor Banks guidelines.

To provide top management with information credit administration, including credit sanction process,
risk evaluation and post-sanction follow-up.

5. Credit Risk and Investment Banking:

Significant magnitude of credit risk, in addition to market/interest rate/liquidity risks is inherent
investment banking. The proposals for investments should, therefore, be subjected to the same degree of
credit risk analysis, as any loan proposals. The proposals should be subjected to detail appraisal and
rating framework that factors in financial and non-financial parameters of issuers, sensitivity to external
developments, etc. The banks should exercise due caution, particularly in investment proposals, which
are not rated and should ensure comprehensive risk evaluation. The rating migration of the issuers and
the consequent diminution in the portfolio quality should also be tracked at periodic intervals.

(2). LIQUIDITY RISK

Liquidity risk is risk is considered a major risk. It is often default in different ways. Liquidity is the safety
cushion provided by the portfolio of liquid assets or the banks ability to raise funds at a normal cost.
Extreme no-liquidity results in bankruptcy. Hence, liquidity risk is a fatal risk. However, such extreme
conditions are often the outcome of other risks.
Another common meaning of liquidity risk is that short-term assets values are not sufficient to match
short-term liabilities or unexpected outflows. From this standpoint, liquidity is the safety cushion which
helps banks to gain time under difficult condition.
Finally, liquidity risk also means having difficulties in raising funds. Liquidity risk relates then to the
ability of the types of factors: the market liquidity which varies over time and the liquidity of the bank.
Both interact to determine the condition of funding.

1. Measurement of Liquidity Risk

Measuring and managing liquidity needs are vital for effective operation of banks. By assuring a banks
ability to meet its liabilities as they become due, liquidity management can reduce the probability of an
adverse situation developing. Net funding requirement are determined by analyzing the banks future
cash flows based on assumption of the future behavior of assets and liabilities that are classified into
special time bucked and then calculating the cumulative net flows over the time frame for liquidity
assessment. Future cash flows are to be analyzed under what if scenarios that could occur on a day-today basis and under bank specific and general market crisis scenarios. Factors to be taken into
consideration while determining liquidity of the banks future stock of assets and liabilities include their
potential marketability, the extent to which maturing assets/liability will be renewed, the acquisition of
new assets/liability and the normal growth in assets/liability heads. Hence they need to be reviewed

frequently to determine their continuing validity, especially given the rapidity of change in financial
market.
The Liquidity Risk in Banks Manifest In Different Dimensions:

Funding Risk- need to replace (manage) net outflows due to unanticipated withdrawal/non-renewal
of deposits (wholesale and retail);

Time Risk-need to compensate for non-receipt of expected inflows of funds, i.e, performing assets
turning into non-performing assets; and

Call Risk-due to crystallization of contingent liabilities and inability to undertake profitable business
opportunities when desirable.

3. Management of Liquidity Risk

The first step towards liquidity management is to put in place an effective liquidity management policy,
which, inter alias, should spell out the funding strategies, liquidity planning under alternative scenarios,
prudential limits, liquidity reporting/reviewing, etc.

4. Liquidity Risk Can Be Controlled By:

Raising a proportion of bank funds committed to readily marketable assets (SLR)

Refinance from lender of last resort / NABARD / SIDBI / NHB.

Reliance on funds on large number of small deposits.

Drawing up of maturity profile of assets and liabilities.

It should be noted that the maturity profile can not assess / does not take into account the
following:

The ability of the bank to borrow and raise resources

Quality of assets

Contingent liabilities.

(3).

INTEREST RATE RISK

The interest rate risk is the risk of decline of earnings due to the movement of interest rates. Most of the
balance sheet items of banks generate revenues and costs which are indexed to interest rates. Since
interest rates are unstable so are earnings. Anyone who lends or borrows is subject to interest rate risks.
The lender earning a variable rate has the risk of seeing revenues reduced through a decline in interest
rates. The borrower paying a variable rate has higher costs when interest rates increase. Both positions
are risky since they generate revenues and costs indexed to market risks.
The interest rate risk when viewed from these two perspectives is known as earnings perspective and
economic value perspective, respectively. The regulatory restrictions in the past had greatly reduced
many of the risks in the banking system. Deregulation of interest rates has, however, exposed the banks
to the adverse impacts of interests rate risk. The earning of assets and the cost of liabilities are now
closely related to market interest rate volatility.

When interest rates rise, the market will fall. A bank faced with the need to sell these assets in a rising
rate market will take some losses. Rising interest rates would also depress the banks profit margin if the
structure of its assets and liabilities is such that expenses on deposits/borrowings increase more rapidly

than interest scenario, if the bank has an excess of rate sensitive assets over rate sensitive liabilities,
falling interest rate may erode the banks profit margin.

Measures To Control Interest Rate Risk:

Use of monitoring device for interest rate sensitivity.

Fixation of appropriate tolerance limits on rate sensitive gaps, especially in short term buckets, say up
to 1 year.

Stretch out maturity period of fixed rate deposits and other banks liabilities before interest rate rise.

(4). MARKET RISK

Market risk is the risk of adverse deviations of the market-to-market values of the trading portfolio
during the period required to liquidate the transaction. More precisely; it is the risk the changes in rates in
fundamental economic markets i.e. equities and Fixed interest bearing securities and other external
factors which will negatively impact on the market value on the banks investment/trading portfolio,
resulting in a loss / smaller profit, one the investments mature / are liquidated.
According to the Core Principles enumerated by the Basel committee, the banks must have in place,
systems that accurately measure, monitor and adequately control market risk.
Comprehensive circular containing instructions on investment portfolio of banks, trading in securities,
etc.

(5). OPERATIONAL RISK

Operational risks are those of the malfunctioning of the information systems, or the reporting systems
about the internal monitoring rules. In the absence of efficient tracking and reporting of risks, some
important risks can remain ignored, do not trigger any corrective action in day-to-day operations but, can
result in disastrous.
Operational Risks Appear At Two Different Levels:
The technical level i.e when the information system or the risk measures (of the bank) are deficient.
The organizational level i.e reporting and monitoring of risk and all related rules and policies.

Measurement Of Operational Risk:

There is no uniformity of approach in measurement of operational risk in the banking systems. In the
absence of any sophisticated methods, banks should evolve simple benchmarks based on an aggregate
measure of business activity such as revenue, fee income, operating costs, total assets adjusted for offbalance sheet exposures or a combination of these variables.

Control Of Operational Risk:

Banks should have well defined policies on operational risk management. The policies and procedures
should be based on common elements across business lines or risks. One of the major tools for managing
operational risk is the well-established internal control system, which includes segregation of duties, clear
management reporting lines and adequate operating procedures. Most of the operational risk events are
associated with weak links in internal control systems or laxity in complying with the existing internal
control procedures.

(6). CONTINGENT RISK

Contingent risks are not new in themselves. Banks have traditionally stood ready to provide certain type
of guarantee which involved underwriting the obligation of the third party and which created contingent
risks have become more important as banks have increased off balance sheet business in a search for fee
based income without the constraints involved with on-loaning business. New type of business creates
new type of risks.
Contingent risk which is on account of the contingent liabilities such as guarantee and other
commitments of funds arising out of committed facilities, give risk to credit risk, liquidity risk and
interest risk.
If the borrower fails to rise funds (credit risk), it may activate banks commitment. It may involve
liquidity risk as the bank can not know in advance when their obligations will materialize. The committed
banks own borrowing rate may change adversely, in between the giving of the commitment and its
exercise, thus narrowing or even eliminating the interest margin.

Measures To Control The Contingent Risk:

Proper selection of borrower.

Appropriate ceiling on off-balance sheet commitments / exposures.

Ceiling on the period for which commitment is given as longer the period, greater is the risk involved.

15.

STEPS IN THE RISK MANAGEMENT PROCESS

(a).

Establish the Context

Establishing the context involves

1. Planning the remainder of the process.
2. Mapping out the following: the scope of the exercise, the identify and objectives of stakeholders, and
basis upon which risks will be evaluated.
3. Defining a framework for the process and an agenda for identification.
4. Developing an analysis of risk involved in the process.

(b). Identification
After establishing the context, the next step in the process of managing risk is to identify potential risks.
Risks are about events that, when triggered, cause problems. Hence, risk identification can start with the
source of problems, or with the problem itself.

Source Analysis

Risk sources may be internal or external to the system that is the target of risk management. Examples of
risk sources are: stakeholders of a project, employees of a company or the weather over an airport.

Problem Analysis

Risks are related to identify threats. For example: the threat of losing money, the threat of abuse of
privacy information or the threat of accidents and casualties. The threats may exist with various entities,
most important with shareholder, customers and legislative bodies such as the government.

 Methods of Identifying Risk

The chosen method of identifying risks may depend on culture, industry practice and compliance. The
identification methods are formed by templates or the development of templates for identifying source,
problem or event. Common risk identification methods are;

Objectives-Based Risk Identification

Organizations and project teams have objectives. Any event that may endanger achieving an objective
partly or completely is identified as risk. Objective-based risk identification is at the basis of COSOs
Enterprise Risk Management-Integrated Framework.

Scenario-Based Risk Identification

In scenario analysis different scenarios are created. The scenario may be the alternative ways to achieve
an objective, or market or battle. Any event that triggers an undesired scenario alternative is identified as
risk see Future studies for methodology used by Futurists.

Taxonomy-Based Risk Identification

The taxonomy in taxonomy-based risk identification is a breakdown of possible risk sources. Based on
the taxonomy and knowledge of best practices, a questionnaire is compiled. The answers to the questions
reveal risks.

Common-Risk Checking
In several industries lists with known risks are available. Each risk in the list can be checked for
application to a particular situation.

(c). Assessment
Once risks have been identified, they must then be assessed as to their potential severity of loss and to the
probability of occurrence. These quantities can be either simple to measure, in the case of the value of a
lost building, or impossible to know for sure in the case of the probability of an unlikely event occurring.
Therefore, in the assessment process it is critical to make the best educated guesses possible in order to
properly prioritize the implementation of the risk management plan.
The fundamental difficulty in risk assessment is determining the rate of occurrence since statistical
information is not available on all kinds of past incidents. Rate of occurrence multiplied by the impact of
the event equals risk Later research has shown that financial benefits of risk management are less
dependent on the formula used but are more dependent on the frequency and how risk assessment is
performed.

(d). Potential Risk Treatments

Once risks have been identified and assessed, all techniques to manage the risk fall into one or more of
these four major categories:

(i).

Risk avoidance

Includes not performing an activity that could carry risk. An example would not be buying a property or
business in order not to take on the liability that comes with it. Another would not be flying in order
not to take the risk that the airplane was to be hijacked. Avoidance may seems the answer to all risks, but
avoiding risks also means losing out on the potential gain that accepting (retaining) the risk may have
allowed. Not entering a business to avoid the risk of loss also avoids the possibility of earning profits.

(ii).
(iii).

Risk Reduction
Involves methods that reduce the severity of the loss. Examples include sprinklers designed to put out a
fire to reduce the risk of loss by fire. This method may cause a greater loss by water damage and
therefore may not be suitable. Halon fire suppression systems may mitigate that risk, but the cost may
be prohibitive as a strategy.
Modern software development methodologies reduce risk by developing and delivering software
incrementally. Early methodologies suffered from the fact that they only delivered software in the final
phase of development; any problems encountered in earlier phases meant costly rework and often
jeopardized the whole project. By developing in iterations, software projects can limit effort wasted to a
single iteration. A current trend in software development, spearheaded by the Extreme programming
community, is to reduce the size of iterations to smallest size possible, sometimes as little as one week
is allocated to an iteration.

iii

Risk Retention

Involves accepting the loss when it occurs. True self insurance falls in this category. Risk retention is
viable strategy for small risks where the cost of insuring against the risk would be greater over time
than the total losses sustained. All risks that are not avoided or transferred are retained by default. This
includes risks that are so large or catastrophic that they either cannot be insured against or the
premiums would be infeasible. Also any amount of potential loss (risk) over the amount insured is
retained risk. This may also be acceptable if the chance of a very large loss is small or if the cost to
insure for greater coverage amounts is so great it would hinder the goals of the organization too much.

iv

Risk Transfer

Means causing another party to accept the risk, typically by contract or hedging. Insurance is one type
of risk transfer that uses contracts. Other times it may involve contract language that transfers a risk to
another party without the payment of an insurance premium. Liability among construction or other
contractors is very often transferred this way. On the other hand, taking offsetting positions in
derivatives is typically how firms use hedging to financially manage risk.
Some ways of managing risk fall into multiple categories. Risk retention tools are technically retaining
the risk for the group, but spreading it over the whole group. This is different from traditional
insurance, in that no premium is exchanged between members of the group.

(e). Credit The Plan

Decide on the combination of methods to be used for each risk. Each risk management decision should
be recorded and approved by the appropriate level of management. For example. A risk concerning the
image of the organization should have top management decision behind it whereas IT management
would have the authority to decide on computer virus risks.
The risk management plan should propose applicable and effective security controls for managing the
risks. For example, an observed high risk pf computer viruses could be mitigated by acquiring and
implementing anti-virus software. A good risk management plan should contain a schedule for control
implementation and responsible persons for those actions. The risk management concept is old but is
still not very effectively measured.

(f).

Implementation

Follow all of the planned methods for mitigating the effect of the risks. Purchase insurance policies for
risks that have been decided to be transferred to an insurer, avoid all risks that can be avoided without
sacrificing the entitys goals, reduce others, and retain the rest.

(g). Review And Evaluation Of The Plan

Initial risk management plans will never be perfect, practice, experience and actual loss results will
necessitate changes in the plan and contribute information to allow possible different decisions to be
made in dealing with the risks being faced.
Risk analysis result and management plans should be updated periodically. There are two primary
reasons for this:

To evaluate whether the previously selected security controls are still applicable and effective, and

To evaluate the possible risk level changes in the business environment. For example, information
risks are a good example of rapidly changing business environment.

16.

LIMITATIONS FOR RISK MANAGEMENT

If risks are improperly assessed and prioritized, time can be wasted in dealing with risk of losses that are
not likely to occur. Spending too much time assessing and managing unlikely risks can divert resources
that could be used more profitably. Unlikely events do occur but if the risk is unlikely enough to occur it
may be better to simply retain the risk and deal with the result if the loss does in fact occur.
Prioritizing too highly the risk management processes could keep an organization from ever completing a
project or even getting started. This is especially true if other work is suspended until the risk
management process is considered complete.

It is also import to keep in mind the distinction between risk and uncertainty. Risk can be measured by
impacts versus probability.

RESEARCH METHODOLOGY
1. TITLE OF THE PROBLEM:
A research problem in general, refers to some difficulty which a researcher experiences in the context
of either a theoretical or practical situation and wants to obtain a solution for the same.
My Research problem is that. How The Varachha Co-operative Bank Ltd. is managing the risk.

2. OBJECTIVE OF STUDY
The main objectives of the studies are,

To explain the concept of Risk, Risk Management and Risk measurement.

To discuss the different types of risk

To analyze the techniques of risk measurement

To suggest the steps involved in the Risk Management process.

To present the summary of the study

3. SCOPE OF THE STUDY

Useful for analysis risk in any area of banking.

Effectively find the risk on particular section.

Assessment the risk in effectively manner.

Managing risk in systematic way.

Easily to treatment on risk.

4. RESEARCH DESIGN
The study is about managing Risk.

The study is carried out at VCB Ltd, Surat.

Primary as well as secondary data are required and collected there by Managers and deputy
Managers of Head Office of The VCB Ltd.

The same has been accomplished through surveys or through experiments.

As well as published or unpublished data.

SAMPLE DESIGN
STEPS IN SAMPLE DESIGN
1) Type of Universe
The universe for the study was Head Office of VCB Bank Ltd., Surat. It was an infinite study. The
Number of Risk was certain, I had a clear cut idea about the total number of risks or set of objects
to be studied.
2) Sampling Unit
A decision concerning a sampling unit was based on Management of risk. That is Research was
limited to head office of VCB.

3) Sampling Frame
It is also known as source List from which sample is to be drawn. It has been prepared by myself,
such a list was correct, reliable and appropriate one. It was a representative of the entire population.
4) Sample Size
This refers to the number of items selected from the universe to constitute a sample. It was a major
problem before me. Sample size selected is an optimum i.e. 11 samples. This optimum sample
fulfills the requirements of efficiency, representatives, reliability & Flexibility. Parameters of
interest in a research study are kept in view, while deciding the size of the sample.
5) Parameters on Interest
In determining the sample design, I considered the Questions of the specific population
parameters which are of knowing about how to manage Risk in Banking.

6. DATA COLLECTION

A. TYPES OF DATA
We know that there are mainly two sources of Data viz.
I. Primary Data &
II. Secondary Data
B. SOURCES OF DATA
So far my research is concerned then I used both the Data sources for my study on
Varachha Co-operative Bank Ltd Surat.

Primary Sources: It includes:

Observation

Personal Interview

Secondary Sources: It includes:

Brochures

Reports & publications

Books

Historical Documents

Unpublished Biographies.

C.METHODS OF DATA COLLECTION

In dealing with any real life problem it is often found that Data on hand are inadequate and hence it
becomes necessary to collect data that are appropriate.
There are several ways of collecting the appropriate Data which differ considerably in context of time
and other resources at the disposal of the researcher.
I collected the data by one or more of the following ways:

Observation Method

Interview Method

Through Questionnaires

7. LIMITATIONS OF STUDY
Geographical Location
The project was conducted in only Head Office of VCB Ltd., so, findings of the project are valid
only for Head office of VCB Ltd.

Sample Size
Due to considering time constraint the sample size was restricted, so the finding may not given a
very accurate result.

Sampling Techniques
Due to convenience I used non-probability judgment sampling technique so, sample may not
represent parameters of whole population.

DATA ANALYSIS AND INTERPRETATION

1. Bank has a Risk

Table of data
Risk
Yes
No
Total

No. of Response
10
1
11

When asked question to 11 respondents than 10 said Yes and 1 said to No Risk in Bank.
So, after analysis finding Every Bank have risk its some sort of less or more.

Chart Format Data

After the analysis find the Bank has risk and its different types of risk at the differentdifferent area of Bank.

2. Bank has Risk Management committee

Table of data for analysis

Risk
Yes
No
Total

No. of Response
8
3
11

When asked question to 11 respondents in Bank any Risk management committee or not
than 8 people said Yes and 3 said No. So, after analysis find Bank has to Risk
Management Committee for Managing Risk

Chart Format Data

After the analysis find the Bank has Risk Management committee should actively oversee
investment transaction and its role as follows.

Participate in risk strategy analysis.

Develop and refine risk tolerance.

Evaluate Material risk Exposures.

Oversee the role & Responsibilities of internal auditor.

3. Bank has Management Action against Risk

Table of data
Risk
Yes
No
Total

No. of Response
11
0
11

When asked question to 11 respondents said Yes no one said to No. So, after analysis
finding Bank has action against Risk.

Chart Format Data

After the analysis find the Bank Management has action against Risk it is as follows.

Comply with risk management policies.

Ensuring risks are managed on daily basis.

Applying effective Risk Management techniques & methodologies.

Provide unit leadership with complete & accurate reports.

4. Risk on Banks Deposit and Interest Risk

Table of data
Risk
Yes
No
Total

No. of Response
10
1
11

When asked question to 11 respondents.10 people said Yes and 1 said to No. So, Bank has
Risk on Banks Deposit and Interest Rate.

Chart Format Data

After the analysis find the Bank has risk on deposit and Interest Rate. Deposit of great
inconvenience and costing terms of money and time. It is the risk of an adverse effect of
interest Rate movements on a banks profit or Balance Sheet. Interest Rates affects a bank
in two ways by affecting the profit and by affecting the value of its assets or liabilities.

5. Risk on Banks given loan

Table of data

Risk
Yes
No
Total

No. of Response
11
0
11

When asked question to 11 respondents. 11 said Yes and no one said to No. So, Bank has
Risk on given loan.

Chart Format Data

After analysis data find Bank has risk on given loan. Administration, absence of prudential
credit concentration limits, inadequately defined lending limits for Loan officers in loan
review mechanism and post sanction surveillance, etc.(wrong conclusion)

6. Risk on Bank if invest money some where else

Table of data
Risk
Yes
No
Total

No. of Response
11
0
11

When asked question to 11 respondents. 11 said Yes and no one said No. So, Bank has
Risk on invest money somewhere else.

Chart Format Data

After analysis data find Bank has risk on investment it is significant magnitude of credit
risk in addition to market/Interest Rate/Liquidity Risk is inherent in investment banking.
The proposals for investments should therefore be subjected to the same degree of credit
risk analysis as any loan proposals.

7. Changing Country Economic

Table of data for analysis

Risk
Yes
No
Total

No. of Response
11
0
11

When asked question to 11 respondents.11 said Yes and no one said No. So, Bank has
Risk whether changing country economic.

Chart Format Data

After analysis find Bank has Risk on whether changing country economic of market. That
is affected in bank as follows.

Inflation

Availability of funds with client

Exchange rate fluctuation

Financial default of sub-contractor

8. Claim against

Table of data

Risk
Yes
No
Total

No. of Response
9
2
11

When asked question to 11 respondents. 9 said Yes and 2 said No. So, Bank has Risk on
claim against.

Chart Format Data

After analysis data find Bank has risk on claim against other or other claim against bank.
A risk involves the possibility of losses on private claims.

9. Extra charges

Table of data

Risk
Yes
No
Total

No. of Response
11
0
11

When asked question to 11 respondents. 11 said Yes and no one said to No. So, Bank has
Risk on Banks Deposit and Interest Rate.

Chart Format Data

After analysis data find Bank lay down extra charges from borrower when not paying
regularly installment. It is Banks used own recovery policies for collect money.

10.Changing Market Condition

Table of data

Risk
Yes

No. of Response
10

No
Total

1
11

When asked question to 11 respondents. 10 said Yes and 1 said No. So, Bank has
changing interest rate on loan when changing Market condition.

Chart Format Data

After analysis data find Bank has change rate of loan interest on comparing to Market
Movement.

HYPOTHESIS TESTING
Hypothesis is usually considered as the principal instrument in research. Its main function is to
suggest new experiments and observations. In fact, many experiments are carried out with the
deliberate object of tasting hypothesis. Ordinarily, when one talks about hypothesis, one simply
means a mere assumption or some supposition to be provided or disproved. But for a researcher
hypothesis is a formal question that he intends to resolve.

Null Hypotheses:
There is no significant population mean in VCB Ltd., Surat Managing Risk improperly.

Alternative Hypotheses:
There is significant population in VCB Ltd., Surat Managing Risk Properly.

ANALYSIS OF STATICAL DATA:

T-Test has been applied to judge where the computed correlation are significant or not.
H0 = Population Mean =
H1 = population Mean =
Now, describe the data by computing the means for each condition/group. While we are at it, we
might as well compute the difference scores and their squares.
T-Test has been applied to judge whether the computed correction are significant or not.

SUMMARY, FINDINGS AND SUGGESTION

SUMMARY
Risk measurement and Management is one of the important functions of the finance manager. The
changing global environment constantly affects his decisions. Co-operative Banking Business
present scenario make risky business because internal legal and rules of market. In this bank direct
effect on Credit Risk, Liquidity Risk, Interest Rate Risk and Market Risk. But bank has more credit
proportion of risk. Loan and also deposit in both activities have risk. Every co-operative Bank has
required to watchful area of credit risk. And also ready for survival in competitive market.

FINDINGS

The risks in banking are a result of many diverse activities, executed from many locations, and
by numerous people.

The volatile nature of the banks operating environment will aggravate the effect of these risks.

The credit risk of a banks depends on both external and internal factors.

How to manage Risk in Co-operative Bank.

SUGGESTION

In Bank Risk Management policy should set out its approach to and appetite for risk and its
approach to risk management.

The policy should also set out responsibilities for risk management process throughout the
organization.

Allocation of appropriate resources for training and the development of enhanced risk
awareness.

Establish risk management standard.

Develop and refine appetite/tolerance.

Evaluate material risk exposures.

Oversee the role and responsibilities of the Internal Audit.

BIBLIOGRAPHY
Books:

Pathak, Bharati V, Indian Financial System, person Education, New Delhi, 2004.

Kishore, ravi M, Financial Management, published by: Taxmann Allied Services (P.) Ltd, New

Delhi, Sixth Edition July 2005.

Kothari, C.R, Research Methodology Methods & Techniques, wishwa prakashan, New Delhi,
Second Edition-2002.

Rajkumar Adukia, Manual on Risk Management, poornima Publications, Mumbai, First

Edition August-2006.

Other Materials:

The Varachha Co-operative Bank, Annual Report 2007-2008.

Journal of Banking.

Journal of Financial Management and Analysis.

RBI Guide Line.

NABARD Guide Line.

Newspaper & Magazines

The Times of India

The Economics of Time

ANNEXURE
QUESTIONAIRE FOR RISK MANAGEMENT IN VCB BANK
Name: -

Address: Designation: -

1) Does any Risk in Banks?

Yes [ ]

No [ ]

2) Bank has any Committee to Decide Risk?

Yes [ ]

No [ ]

3) Bank Management had taken action against Risk?

Yes [ ]

No [ ]

4) Does any Risk on Banks Deposit and Interest Risk?

Yes [ ]

No [ ]

5) Does any Risk on Banks given loan?

Yes [ ]

No [ ]

6) Does any Risk on Bank whether Invest Money some where else?
Yes [ ]

No [ ]

7) Does any Risk on Bank whether changing country economic in market?

Yes [ ]

No [ ]

8) Does any Risk on Bank whether Bank claim against other party or other party claim against Bank?
Yes [ ]

No [ ]

9) Whether Borrower not given install regularly than taken any extra changes from the Borrower?
Yes [ ]

No [ ]

10) Do Changing loans interest rate as to consider happening in market?

Yes [ ]

No [ ]