A

Research Project Report

On

AN EVALUATION AND ANALYSIS OF THE RISK

RETURN PROFILE OF SELETED INIDAN BANK.

Submitted to the MBA Department in Partial

fulfillment of the Requirement for the degree of
Masters of Business Administration
Session 2013-2015
SUBMITTED TO:
U.P.T.U , Lucknow

SUBMITTED By :

Vaibhav Chauhan
M.B.A. IV Sem
Roll No. 1306870122

Meerut Institute of Engineering &

Technology
NH. 58 Baghpat Bypass, Road Meerut U.P.

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ACKNOWLEDGEMENT
I

am

highly

indebted

to

Ms.

Akansha

Dubey,

Faculty

of

Management, MIET, Meerut, for his invaluable time and advice given to me
from his busy schedule in completion of this project successfully.
He not only told me about various policies of Angel Broking Ltd. but
of others also, he helped me to get to the market so that I may easily collect
data and helped me peep into the working style of Angels employees.
Besides each and every member of the team, were very supportive and kind
to me during the whole training period.
I am also highly thankful to my industry guides Mr. Himanshu
Singh, Equity Advisor, Angel Broking Ltd and Mr. Ali Asad, Sales, Angel
Broking Ltd for their efforts in guiding me as and when I required their
guidance.
In the end, I am thankful to my parents; friends & teachers who directly or
indirectly helped me while preparing the report.

Executive Summary
The activities of large, internationally active financial institutions have grown increasingly
complex and diverse in recent years. This increasing complexity has necessarily been accompanied
by a process of innovation in how these institutions measure and monitor their exposure to
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different kinds of risk. One set of risk management techniques that has attracted a great deal of
attention over the past several years, both among practitioners and regulators, is "stress testing",
which can be loosely defined as the examination of the potential effects on a firms financial
condition of a set of specified changes in risk factors, corresponding to exceptional but plausible
events.
This report represents the findings of a Working Group on Macro Stress Testing established
by the Committee on the Global Financial System. The group was asked to investigate the current
use of stress testing at large financial institutions, in line with the Committees overall mandate to
improve central banks understanding of institutional developments relevant to global financial
stability. The term "macro" in the groups name indicates another element of the groups mandate,
namely to explore the possibility that aggregating financial firms stress test results might produce
information that is of use to central banks, other financial regulators, and private-sector
practitioners.
Members of the group interviewed risk managers at more than twenty large, internationally
active financial institutions, both in their home countries and as a group at a meeting hosted by the
Banque de France. From these interviews, the group gained a substantial base of knowledge on the
current "state of the art" in the design and implementation of risk management and on the role of
stress testing in risk management decisions at the corporate level.
Drawing on this knowledge, the group then considered some of the issues relating to the
aggregation of the results of risk management conducted at different financial firms. The group
concluded that, under ideal circumstances, aggregate stress tests could potentially provide useful
information in a number of areas. Aggregate risk management might be used by financial firms to
help make ex ante assessments of market liquidity risk under stress when evaluating the riskiness
of a trading strategy. Central banks and financial regulators might use them to more effectively
monitor broad patterns of risk-taking and risk-intermediation in financial markets. However, the
group also noted that it is as yet unclear whether such ideal circumstances prevail. In particular, it
is unclear whether an appropriate reporting population can be assembled, whether the stress tests
currently conducted by financial firms are compatible with one another, and whether the
information obtained would justify the reporting burden.
This report represents practices application of risk management techniques in the portfolio
section. Risk management can be integrate by fundamental and technical method which are used
for calculation of annul return and E.P.S for the portfolio .
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4 | Page

INDEX

Particular

Page

Student certificate

Certificate of faculty Guide

Declaration

Acknowledgement

Executive summary

Chapter 1

10

THEORETICAL PRESENTATION OF THE TOPIC

Chapter 2

42

ORGANIZATIONAL PROFILE OF THE COMPANY

Chapter3

60

PRESENTATION OF DATA AND ANALYSIS

Chapter4

62

FINDINGS, CONCLUSIONS AND SUGGESTIONS

Conclusion

93

Bibliography

94

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CHAPTER I

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RISK MANAGEMENT IN INDIAN BANK

Objective
WHY DO I INTEND TO TAKE UP THIS STUDY ?

1. Analyse risk factors affecting different portfolios,

2.Analyse the different portfolio preference of various income groups,
3.Select best suited portfolio for different risk appetite clients,
4.Minimize risk exposure to the present portfolio,
5.Minimize losses at the time of extreme shock,

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INTRODUCTION
Over the past fifteen years, several investors have suffered huge losses due to
extreme events.
Barings Bank failed in 1995, Long Term Capital Management collapsed In
1998, and Enron went bankrupt in 2001. Furthermore, the terrorist attacks in the
U.S. (2001), Spain (2004), and the U.K. (2005) and the most recent American
economy collapse causing slow down (2008-09) have tremendously affected Indian
financial markets.
Extreme market moves and distress condition throughout the world have
occurred since the beginning of organized market even so, 1998 was distinguished
by the number of spectacular market stresses. Many market participants should have
learned powerful lessons. But 1998 and in 2008 and shows that many of us are still
ill prepared.
Extreme incidences that makes the world economies to slow down also effect
the india stock
Market causing the fall in index from 20 to 60 percent some of the extreme
events that affect the Indian stock market.

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INTRODUCTION TO
INDIAN BANKING
SECTOR

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INTRODUCTION
Banking is the backbone of a modern economy. Health of banking industry is one of the
most important pre-conditions for sustained economic progress of any country. The world of
banking has assumed a new dimension at the dawn of the 21 st century with the advent of tech
banking, thereby lending the industry a stamp of universality. In general, banking may be classified
as retail and corporate banking. Retail banking, which is designed to meet the requirements of
individual customers and encourage their savings, includes payment of utility bills, consumer
loans, credit cards, checking account balances, ATMs, transferring funds between accounts and the
like. Corporate banking, on the other hand, caters to the needs of corporate customers like bills
discounting, opening letters of credit and managing cash.
The Indian banking scene has changed drastically with the private sector making inroads in
an area hitherto dominated by large public sector banks. Growing disinvestment is likely to impact
the banking industry as well. There is every possibility of privatization of public sector banks,
leading to greater operational autonomy.
The development of the Indian banking sector has been accompanied by the introduction of
new norms such as Income Recognition and Capital Adequacy, by the government. The latter
implies that banks can lend on the basis of their respective capital base. These norms have caused
banks to construct equity on their own, before going in for debt. Disintermediation is a real threat
for banks. Of late, banks are adopting the EVA (Economic Value Added) concept wherein revenues
are viewed in the context of the risk associated with them.
The New World order has ensured "Survival of the Fittest". New services are the order of
the day, in order to stay ahead in the rat race. Banks are now foraying into net banking, securities,
consumer finance, housing finance, treasury market, merchant banking and insurance.

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BANKING STRUCTURE
The Indian banking industry, which has Reserve Bank of India as its regulatory authority, is
a mix of the public sector, private sector, and foreign banks. The private sector banks are again
split into old banks and new banks.
SCHEDULED BANKS
Scheduled commercial banks are those that come under the purview of the Second
Schedule of Reserve Bank of India (RBI) Act, 1934. The banks that are included under this
schedule are those that satisfy the criteria laid down vide section 42 (60 of the Act). Some cooperative banks come under the category of scheduled commercial banks though not all cooperative banks.

PUBLIC SECTOR BANKS

Public sector banks are those in which the Government of India or the RBI is a majority
shareholder. These banks include the State Bank of India (SBI) and its subsidiaries, other
nationalized banks, and Regional Rural Banks (RRBs). Over 70% of the aggregate branches in
India are those of the public sector banks. Some of the leading banks in this segment include
Allahabad Bank, Canara Bank, Bank of Maharashtra, Central Bank of India, Indian Overseas
Bank, State Bank of India, State Bank of Patiala, State Bank of Bikaner and Jaipur, State Bank of
Travancore, Bank of Baroda, Bank of India, Oriental Bank of Commerce, UCO Bank, Union Bank
of India, Dena Bank and Corporation Bank.

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PRIVATE SECTOR BANKS

Private Banks are essentially comprised of Four types: the old and the new. The old private
sector banks comprise those, which were operating before Banking Nationalization Act was passed
in 1969. On account of their small size, and regional operations, these banks were not nationalized.
These banks face intense rivalry from the new private banks and the foreign banks. The banks that
are included in this segment include: Bank of Madura Ltd. (now a part of ALLAHABAD Bank),
Bharat Overseas Bank Ltd., Bank of Rajasthan, Karnataka Bank Ltd., Lord Krishna Bank Ltd., The
Catholic Syrian Bank Ltd., The Dhanalakshmi Bank Ltd., The Federal Bank Ltd., The Jammu &
Kashmir Bank Ltd., The Karur Vysya Bank Ltd., The Lakshmi Vilas Bank Ltd., The Nedungadi
Bank Ltd. and Vysya Bank. The new private sector banks were established when the Banking
Regulation Act was amended in 1993. Financial institutions promoted several of these banks. After
the initial licenses, the RBI has granted no more licenses. These banks are gearing up to face the
foreign banks by focusing on service and technology. Currently, these banks are on an expansion
spree, spreading into semi-urban areas and satellite towns. The leading banks that are included in
this segment include Bank of Punjab Ltd., Centurion Bank Ltd., Global Trust Bank Ltd., HDFC
Bank Ltd., ALLAHABAD Banking Corporation Ltd., IDBI Bank Ltd., IndusInd Bank Ltd. and
Axis Bank Ltd.
FOREIGN BANKS
The operations of foreign banks, though similar to that of other commercial Indian banks,
are mainly confined to metropolitan areas. Foray of foreign banks depends on reciprocity,
economic and political bilateral relations. An inter-departmental committee has been set up to
endorse applications for entry and expansion. Foreign banks, in the wake of the liberalization era,
are looking to expand and diversify. Some of the leading foreign banks that operate in India are

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Citibank, Standard Chartered Grindlays Bank, Hong Kong Shanghai Banking Corporation, Bank
of America, Deutsche Bank, Development Bank of Singapore and Banque National De Paris.
PUBLIC SECTOR BANKING AT A DISADVANTAGE
Functioning of Public Sector Banks (PSBs), which are yet to achieve computerization
across the board, is at a relative disadvantage when compared to the private sector, which is
offering state-of-the-art facilities such as ATMs, doorstep banking, banking on phone, and net
banking. PSBs also suffer from huge costs of labor and low levels of automation. At this rate, it
may not be long before new channels devised by private banks effectively surpass the number of
branch NeFourrks offered by the PSBs.
This apart, the problems which have assumed enormous proportion today as far as Public
Sector banks are concerned are ballooning NPA levels, declining margins, poor credit off-take,
high overheads, and lack of good quality assets. Banks are sticking to reliable borrowers for fear of
bad debts. In fact, banks largely invest in government securities, which have zero risk. With GOI
being the single largest borrower, the yields on these securities determine the interest rates.
The government aims to decrease its shareholding in PSBs to 33%, however, at the same
time it also wants to retain the controlling stake. This, it is feared, is not going to solve the
problems which PSBs are coping with now.

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PRIVATE SECTOR BLOOMS

Corporate governance and self-regulation are the ground rules for the private sector.
Government interference is not preferred. While some private banks such as ALLAHABAD Bank,
Axis Bank and IDBI Bank have financial institutions Banking them, others are opting for foreign
partnerships for technology and monetary resources.
Private Banks have emerged relatively strong, with about 60% growth reported in net
profits in the year ended March 2000. With a net profit of Rs.120 crores (+46%), HDFC was the
clear leader. IDBI Bank, however took the cake by doubling its net profit, which reached Rs.60.99
crores in March 2000.The jump in profits can mainly be attributed to non-traditional sectors such
as commission, exchange, brokerage, and profit on sale of investments.
RBI POLICIES
The RBI does not interfere in determining the prime lending rates for commercial banks.
The onus is on banks to do so. RBI regulates interest rates on savings accounts, export credit, and
credit for small and tiny sectors. The rates fixed by RBI are quite low at 7%, 5%, and 4%
respectively for Bank Rate, Repo Rate, and savings account rate. Fixing rates on bank credit is the
discretion of the banks. Though banks are allowed to offer variable interest rates on longer-term
deposit rates, they continue to offer fixed deposit rates.
Current account transaction norms eased
Norms on current account transactions were eased, in line with the Foreign Exchange
Management Act (FEMA). The Basic Travel Quota (BTQ) has been raised from US$3,000 to
US$5,000, without the need for central banks approval. Capital account restrictions related to
dealing in assets with residents and non-residents have also been relaxed.
RBI to launch liquidity adjustment facility

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The Reserve Bank of India (RBI) is launching its new liquidity adjustment facility (LAF),
effective June 5. The first phase would see the withdrawal of additional collateralised lending
facilities, and Tier-II refinance to banks. The 5% fixed rate Repo will also be withdrawn. The
facilities of collateralised lending and Tier-I refinance facilities will continue.
The Central government has granted approval to banks during the current financial year to make a
foray into forward trading in gold by including gold on the list of commodities eligible for hedging
under the Forward Contract (Regulation) Act, 1952.
MEASURES ADOPTED BY RBI
Measures to increase liquidity and decrease the cost of funds to banks

Bank rate cut by 1% from 8% to 7%

CRR cut by 0.5%, from 8% to 7.5%

Repo rate cut by 1%, from 6% to 5%

Savings deposit rate for scheduled commercial banks cut from 4.5% to 4.0%

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A landmark ". COM" ventures in India between ICICI BANK and SIFY for online distribution of
retail banking products and services.
In a major development in the Internet world, ICICI Bank, the banking subsidiary of ICICI Ltd.
(NYSE: IC and IC.D) and Satyam Infoway Ltd. (NASDAQ: SIFY) announced the setting up of a
new ".COM" company for on-line distribution of retail banking products and services on the
Internet. This landmark agreement marks the coming together of India's first Internet Banking
provider, ICICI Bank, and India's largest private ISP and mega-Portal, Satyam Infoway, to create a
unique partnership between a major Bank and a mega-Portal. The marriage between banking and
portals is expected to be a win-win potent combination, which is expected to result in improved
customer orientation, lower distribution cost, long-term customer relationships with ease of
banking wherever and whenever the customer wants it and enhanced profitability. The range of
retail banking products to be distributed through the portal would include savings accounts, current
accounts, fixed deposits, bill payments and other retail banking products that ICICI Bank may
offer through this on-line channel.
The surge in demand for e-commerce related services stems from the rapid growth in Internet
penetration in the country and a fundamental change in the business paradigm. The two companies
would therefore also explore several opportunities to complement each other's strengths to
capitalise on the opportunities in e-commerce. This would include providing a platform for trade
facilitation and payments over the Internet using innovative banking products of ICICI Bank. SIFY
has a buyer to seller ordering/selling website, SeekandSource.com, which is on-line except for the
payments that are still physical. ICICI Bank has developed an Internet based 'business to business'
payment module for purchasers and sellers to effect payments online. A synergistic offering of
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these two products would be made so that such customers/users can complete the entire transaction
and payments online.
The two companies would expect to co-operate wherever feasible to extend the reach and channels
for distribution of financial products from ICICI Bank and Internet products from SIFY. ICICI
Bank, as a part of its "Click and Brick" strategic focus would set up ATMs at the Satyam Access
Points and Cyber Cafes, thereby increasing its reach across the country. It would also offer Satyam
Internet terminals at its branches, enabling visitors to surf the Internet, thereby attracting new
customers to its branches.
The two companies shall examine further business opportunities, which would effectively
synergise the financial services strength of ICICI Bank and its Affiliates and the technological
expertise of Satyam Infoway and its Affiliates. ICICI Bank and Satyam Infoway through this
partnership will play a strategic role in providing revolutionary e-commerce solutions in India.
The memorandum of understanding was signed today between Mr. H.N Sinor, Managing Director
& CEO of ICICI Bank and Mr. R. Ramraj, Managing Director of Satyam Info way.
ICICI is a diversified financial services company offering a wide range of products and services to
corporate and retail customers in India. ICICI Bank, a subsidiary company has been the pioneer of
Internet banking in India. ICICI Bank has been gearing itself for the opportunities that would be
created from the e-Commerce revolution.
Satyam Info way Ltd. is the leading integrated Internet and E-commerce Company operating in
India. SatyamOnline, the most comprehensive portal site of Indian origin is one of the key
offerings from SIFY in the business to consumer segment. Recently it entered into an agreement to
acquire IndiaWorld Communications Private Limited, which would result in the integration of

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IndiaWorld's popular websites like samachar.com, khel.com and khoj.com with SIFY's portals. The
combined portal would be the largest India related Internet portal.

1. Key Business Objectives

Organizations are facing tremendous competition word-wide. There is pressure on the
organisations to improve their profitability and efficiency for their survival and growth. The
customers expectations about the product and services are increasing and they do not hesitate to
change their brand loyalty or the loyalty towards the organisations with whom they have been
dealing for a long time. The deregularisation, liberalization and globalisation process have given
freedom to the organisations in terms of selecting and producing the products and services,
selecting the market segment and targeting a customer group at the same time they have to meet
more rigid and regulatory requirements to satisfy the regulators that the deregulation or
liberalization does not work against the interest of the customers and the society. The organisations
also have to safeguard their resources to protect the interest of shareholders.
The changing environment particularly that of competition, customer expectations and emerging
technology have influenced the banks word-wide. Thus, the key business objectives of a bank are
to manage increasing competition by improving their product and services, improving efficiency
and productivity by restructuring their systems and work procedures and improving employees
productivity, ensuring compliance with the regulatory requirements and safeguarding the assets.
All these issues can be addressed by implementation of the right type of technology for the right

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purpose. The technology-based solutions have put the banks in a competitive advantage, improved
the efficiency of the operations and provided excellent customer service. The technology has
helped the organisations to take strategic decisions based on the on-line data rather than based on
the past experience and intuitive decisions. The computer assisted audit techniques have helped the
banks to ensure safeguarding of resources and to ensure that the banks are operating efficiently and
effectively. The extensive use of technology has also brought down the transaction cost and the
rental cost of the premises. Thus, the computerisation of banks operations had tremendous impact
on their future prospects. The central bank of any country though operate in a monopoly situation
but has to demonstrate as a role model its efficiency and effectiveness to guide and supervise the
whole banking system.

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2. Changes in IT Scenario:
The banks have undergone changes as far as the implementation of IT is concerned. They have
moved from manual systems to batch processing systems, batch processing systems to on-line
systems and now striving for real time systems. They have moved from centralized computing to
decentralized computing in which each business unit can now take care of its computing
requirement. The focus of use of computers has moved from back office to front office where most
of the computerized operations are providing customer interface in order to improve customer
service. Thus, the computerisation has refocused the predominance of its applications from
business orientation to customer orientation.
The computer operations which were mainly on stand alone environment about a decade back have
taken the advantage of data communication and networking technology to share the data and
computer resources and provide anywhere and anytime services. The online systems make the data
and information available to the decision maker at the press of a button. The MIS, which was
predominantly used for performance reporting, is now being extensively used for decision-making.
The IT supported tools like Decision Support Systems (DSS), Expert Systems, Data Warehousing
and Data Mining, etc play an important role in designing an Executive Information System (EIS).

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3. IT Enablers
a. Developments in H/W Technology:
During last decade there has been tremendous improvements in hardware technology in
terms of storage capacity and processing speed. The processing speed is getting almost
doubled every year and there is no constraint in terms of storage space. Todays
microprocessors have more speed, processing power and storage capacity than a five years
old mainframe. The networked environment and the client server architect have provided
almost an unlimited processing power to microprocessor- based systems. The only
limitation is the availability of bandwidth for wide area networks (WANs). The cost of
hardware has drastically come down to make it affordable to organisations and individuals.
The spread of Kiosks has facilitated the accessibility of computers and Internet to common
people. Invent of smart card technology has come out with many uses in banking and
payment systems. The individuals need not carry the cash. The plastic cards with microchip
can store the details of transactions and the balance amount to serve as an electronic purse.
b. Developments in Software Technology:
More than the developments in the hardware technology there have been developments in
software technology. Newer and newer software systems are implemented to facilitate the
users. The software systems are becoming more and more user friendly and interactive to
provide on-line help and validation facilities. The Graphic User Interface (GUI)
environment facilitated the users to use the systems by clicking the appropriate icons to
perform various common functions without bothering about the syntax of commands. The
software packages are now supporting multimedia i.e. text, audio, video and graphics. The
software systems have also been developed to support presentations, desktop printing, 3D
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graphics, animations, etc. Software has also been developed to support any human
activities to improve the efficiency, productivity, housekeeping and customer service.
Special packages have been developed for facilitation the auditors. The Computer Assisted
Audit Tools/ Techniques (CAATs) have made the job of auditors easy and more effective.
c. Developments in Communication Technology:
The synergy between computer and communication technology has really changed the
banking scenario. It has facilitated the banks to reach to the customers without their
physical presence. The technologies available for LAN, WAN, Intranet, Internet and
Groupware have improved the efficiency of the banks. Banks are able to provide better and
innovative services to customers using these technologies. The satellite based
communication systems provide high reliability and scalability. This technology is highly
suitable for remote locations. The fibre optic technology has also improved the reliability,
quality and speed of communication besides providing considerably higher bandwidth for
the data transfer.
4. Issues in Computer Technology
The major problem the IT users are facing today relates to fast obsolescence in Hardware
Technology. The obsolescence is fast because newer and newer software systems with more
capabilities are developed which require higher processing speed and storage. The other concern of
the user of the technology particularly of the banks is the data security and the disaster
management as the data in the computerised systems represents financial transactions.
Inadequately secured systems may lead to frauds and other computer related crimes. To provide
uninterrupted services to its customers, the banks are also concerned with the proper maintenance
of hardware and software systems. The adequate and trained manpower is generally not available

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at different business locations. It is also a very strategic issue for a bank whether to develop and
maintain the systems in-house or to outsource them. There are always some relative advantages
and disadvantages for outsourcing the systems depending upon the circumstances.
5. Issues in Communication Technology:
There are varieties of communication media available for networking and data communication.
The selection of suitable communication media in terms of its reliability, cost and durability is an
important decision. The selection of appropriate topology and the communication protocols are
also important considerations for the banks. Another major issue the banks are facing is to ensure
network security. The physical security is not considered adequate and effective in a networked
environment particularly in a wide area network. There is also shortage of communication
infrastructure in developing countries and the infrastructure is costly. There are not many choices
as the infrastructure is generally provided by the government agencies and there are always some
regulatory hassles. There is also shortage of bandwidth to support data, voice and image. The
reliability of the infrastructure is also one of the major issues when it is required to provide
services like banking anytime and anywhere.

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6. Impact on Staff:
There are number of issues related to the staff while implementing and using IT in banks. These
relate to availability of trained personnel to exploit the benefits of technology, continuous up
gradation of their skills, retention of trained manpower in the organisation and utilization of staff
rendered surplus due to implementation of technology.
7. The Future Trends:
Animation software, fusion of computer and communication technology, image processing and
video conferencing all will aid and present simulated environment for various business activities
including banking. Emergence of electronic commerce, electronic and Internet banking, electronic
payment systems and use of e-cash will bring our drastic changes in the banking activities.

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BANKING SYSTEM IN NEW MILLENIUM:

INTRODUCTION: Economic growth and development of a country depends on the health of its financial sector that
includes banking sector. Banking sector provides a very vital input wiz. Finance to all other
commercial and scientific fields thus; it should be always one step ahead of all the other fields. In
addition it provides mobiliasation of savings. It also plays an important role in capital formation of
the country.

The 1991 new economic policy adopted by the government of India is based on the three features
LPG VIZ. Liberalization, Privatization, Globalization. It created a huge improvement in the
economy of our country. Thanks to our present Prime Minister and the then Finance Minister,
Dr. MANMOHAN SINGH who is rightly called as Father of Economic Reforms. Broadly
speaking reforms in the financial sector are aimed at making Indian banks conform to the
international prudential standards and also making the financial system more competitive. The
administrate structure of interest rates has been dismantled, with freedom given to banks to fix the
rates of interest on deposits on loans. New private sector banks have been licensed.

In the words of Mr. RANGARAJAN, earlier governor of the RBI, the year 1993-94 in a way
marks a turning point in the financial history of India, in the banking system. He always gave
much more importance to improve the technology. Computerization in many commercial banks is
an account of his president efforts, in this direction.

Dr.BIMALJALAN, the former governor of the RBI was equally conscious of the need to improve
the banking sector financially and immediately. After assuming the office of the governor, of the
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RBI, he has accorded priority towards the implementation of some important recommendations of
the Narasimham Committee Report.

In order to visualize the reforms, it is necessary to trace its development in a historical prospective.

Future Of Banking Sector:

Public sector banks have enjoyed almost a monopoly situation till the Liberalization wave begin in
1991. Recently, Union Bank of India and Bank of India have amalgamated with each other and the
other news is that subsidiaries are merging with SBI to form a single merged bank. This will
reduce the administrative expenses. The banks can share the common infrastructure, management
etc. it may even happen that one senior manager may look after two or more branches in the city.
But in the present intensified process of liberalization and globalization a lot of challenges will
have to be meet by the banking sector for its survival and growth wiz.

1. Increase in competition with a growth of private banks the hitherto protected public sector
banks will have to shake off their lethargy to survive in the new liberalized banking sector.

Private sector banks are in a position to offer better customer service on account of being
hi-tech. From a sellers market, we have moved to a buyers market. It is a great challenge to
keep meeting the ever-growing requirements of non-aware, enlightened and demanding
customers. They have better alternative to meet the demands.

2. Innovative banking process of disinter mediation has begun in the Indian financial sector.
The user of finance, the corporate sector especially, is gradually depending less and less on
banks and financial institutions. They prefer to mobilize funds directly from the market.
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This has an adverse effect on the banks income and profitability. Banks now have to
constantly lookout for the new ways of earning income
3. Non-performing assets (NPAs) is a one of the serious challenges of banking system is
facing. A high level of NPAs adversely affects the profitability of our banks. In future, bank
should adopt intensive techniques to reduce the NPAs.

4. Technological changes in a hi-tech IT era customers, expect quick and efficient service.
The paper-based payment system is gradually changing into electronic payment system.
With the growth of computer network in India, some banks have also introduces Internet
Banking, Customers, who are linked to computers, find it very convenient.

Opportunities:
Let us have a look, at the opportunities that a banking

sector has in future.

1. Growing banking business, a steady increase in personal income of people an incoming of

MNCs has increases the demand for bank loans to buy consumer durables. Demand for
housing loan has also increased.
2. Financial supper market banks have entered the area of financing and other services like
depository, underwriting, gilt trading and even brokering. Commercial banks are now
operating as a financial supper markets.
3. Insurance business-now insurance sector is open to the private sector as well. It is easer for
banks with a wide network to capture the widely speared-out market for insurance
business.

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4. Cash-less system-growth of credit card business in India is another possibility for

commercial banks to exploit. It is possible to increase market share of credit card business
on account of the increase in middle and higher middle-class population.

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Constraints:
The constraints that need to be removed to make our banking sector progressive are:

1. To remove inflexibility like lack of users friendly front and environment for bank officials;
2. Use of a very technical and proprietary back and software, which cannot be customized
easily.
3. Users in banks as we know are not IT professionals and though they are trained in various
aspects, it really makes impractical for them to covers themselves suddenly to new
upcoming systems.

Concluding Remarks:

We feel that first of all, innovation is required in banks to render better and efficient customer
services. Electronic banking enables new products and services to be geared for specific
customers. We have variety of customers today and the need of each customer is different and
varied. Looking to other economies like France and United States our banking system has also
adopted credit cards, debit cards, electronic checks, smart cards, e-cash or cyber cash, automated
teller machines, which are being extensively practiced in these countries.

Internet banking is in vogue nowadays. It is the one of the latest example of IT in banking sector.
We can perform all the banking operations, just on the click of a button by sitting at our homes.

Finally, watchword is share information; money and resources (human, physical, and
technological) to improve our banking sector, for better tomorrow.

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BANKING SCENE: INDIA

Mid Term Appraisal of the 10th Plan Targets
The Mid Term Appraisal of The 10th Plan conducted by the National Development Council (NDC)
noted that in some areas of the economy is doing well and these gains need to be consolidated, but
there are also important weaknesses, which if not corrected could undermine even the performance
of the economy and problems of the economy are assumed as follows:
GDP growth has averaged 6.5% in the first three years, which is below the 10th plan target of 8.1%.
Positive factor include:
A) Improvement in private corporate sector investments,
B) Positive international perceptions on India
C) Tolerant inflation level
D) Comfortable external payment position with substantial inflow from abroad lending to
comfortable foreign exchange position.
Industrial sector also showed signs of improvement. The ultimate aim should be to consolidate
the gains in these developments and to overcome the weaknesses in the economy. Key
weaknesses are identified as follows:
1. Aggregate Growth

Though the plan fixed a target of 8.1%, it is difficulty to achieve the target and the likely
growth rate expected to below 7% during the plan period. An important reason for the lower
growth is that investment did not increase in line with available investible resources.

2.

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Agricultural Growth:

Agriculture Growth is very poor over the last two decades. Agriculture Growth has decelerated
sharply from 3.2% to 1.9% between 1980-81 and 1995-96. There is a need to revamp the entire
strategy ad more action is called for to improve the performance in agriculture sector.

3.

Infrastructure Problems:

Inadequate infrastructures in both rural and urban areas are a major factor constraining on
Indias growth. The quality of infrastructure impacts on our ability to compete globally and
also to attract Foreign Direct Investment.

4.

International Development:

Owing to high oil prices, our import outgo is quite high. Since we have ample foreign
exchange reserves at the moment, the impacts of the oil prices are not passed on to the users.
But if the oil prices remain high, its impact need to be passed on to the consumer, which will
lead to inflation or fiscal deficit in the country. Another cause of concern is that the downturn
in the world economy, which will affect our export growth considerably. It s estimated that
every 1 percentage point reduction in our export growth rate will reduce the growth rate of
GDP by 0.2% points.

5.

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Social Developments:

Our social indicators are not only lower then the levels in East Asian countries, but they are
lower even in comparison with the levels achieved by these countries twenty-five years ago.
The social indicators are also show wide disparity in the gender gaps, large rural and urban
differences and wide variation across states.

6.

Employment:

This is another area of grave concern. Studies based on data collected from organized and
unorganized sectors state that while employment may be increasing in the unorganized sector
in response to growth, there is actually a contraction in employment in the organized sector,
which is the preferred sector for employment by new entrants to the labour force.

7.

Inequality and Poverty:

Though the poverty has declined the decline was less then targeted. The moderate
improvement in education ad health indicators implies that access to more productive
employment remains limited, especially in backward regions and amongst disadvantaged
groups.

8.

Balance Regional Development:

Regional imbalance in the development of different states presents a picture, which requires a
focused attention. Some states were able to reap the benefits of the economic reforms, but
some others were not able to do so. Even district backwardness in a well performing state also
presents a grim picture.

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9.

Resources in the Public Sector:

The availability of resources in the public sector to meet targeted levels of plan expenditure is
an area, which deserves attention. Neither the center nor the state have been able to mobelize
the resources needed to keep outlays in line with 10 th plan projections and this has led to
significant under funding in many sectors. The consolidated public debt of the Center and
States taken together is about 80% of the GDP, which is among the highest in emerging market
economies.

The scope and time for correcting these deficiencies during the 10th plan period is very limited.
The Mid Term Appraisal suggests various corrective measures could be considered for
formulating the 11th Five Year Plan targets and policies.

10.

Declaration of Dividend:

The RBI has decided to grant general permission to banks to declare dividends, provided they
comply with the following conditions:

i.

Eligibility Criteria

1. Only those banks, which comply with the following minimum prudential requirements, would
be eligible to declare dividends without the Reserve Banks prior approval:

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a)

Capital to risk-weighted assets ratio (CRAR) of at least 9% for preceding

two completed years and the accounting year for which it proposes to declare dividends

b)

Net Non-performing Assets (NPAs) of less then 7%.

c)

In case any bank does not meet the above CRAR norm, but is having a
CRAR of at least 9% for the accounting year for which it proposes to declare dividend. It
would be eligible to declare dividend provided, its net NPA ratio is less then 5%.

2. The bank should comply with the provisions of section 15 and 17 of the Banking Regulations
Act, 1949.

3. The bank should comply with the Reserve Banks prevailing regulations/guidelines, including
creating adequate provisions for impairment of assets and staff retirement benefits, transfer of
profits to statutory reserves, etc.

4. The proposed dividend should be payable out of the current years profit.

5. The Reserve Bank of India should not have placed any explicit restrictions on the bank for
declaration of dividends.

Regarding the quantum of dividend, the RBI made the following stipulations.

Banks, which fulfill the eligibility criteria, may declare and pay dividends, provided-

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a) The divined payout ratio does not exceed 40 per cent. (Divined pay out ratio should be
calculated as a percentage of dividend payable in a year (excluding dividend tax) to net
profit during the year.
b) In case the profit for relevant period includes any extraordinary profits/income, the payout
ratio should be computed after excluding such extraordinary items for reckoning
compliance with the prudential pay out ratio.
c) The financial statements pertaining to the financial year to which the dividend is declared,
should be free of any qualification by the statuary auditors, which have an adverse bearing
on the profit during that year. In case of any qualification to that effect, the net profit should
be suitably adjusted while computing the dividend pay out ratio.

The reserve bank will not entertain any application for a higher dividend payout ratio than the
one for which the banks qualify.
Door-Step Banking:

The reserve bank has advised all scheduled commercial banks to formulate a
scheme for providing services at the premises of a customer within the framework
section 23 of the banking regulation Act, 1949.
According, the banks have to formulate the scheme with the approval of their respective bank
boards and send the same for RBI approval. In the instruments, etc., from the premises of central
and state governments departments.
Indias Trade Deficit:
Indias exports recorded an increase of 19.5 percent during the first quarter of the current fiscal.
Imports on the other hand recorded a shaper growth of 38 per cent during the same period. As a
result, the deficit doubled to $ 11.4 billon in the first quarter of 2005-06 compared to $ 5.9 billion
35 | P a g e

PERFORMANCE HIGHLIGHTS OF PUBLIC SECTOR BANKS IN 2004-05

In this note we analyse the performance of public sector banks (except Punjab and sind bank) on
important parameters such as total assets, Deposits, Investments, Advance, Non-performing Assets
(Gross and net), Interest Income, other Income, Total Income, Interest Expenditure, Operating
Expenditure, Total Expenditure, Operating profit, provisions and Contingencies and Net profit and
important ratios like credit-Deposit ratio, Investment-Deposit Ratio, spared to Total Assets,
Operating expenses to Total Expenses, Return on Assets, Capital Adequacy Ratio, NPA ratio and
productivity ratios. Significant features of the operations of banks on each of the above-mentioned
parameters are given below:

Total Assets
As on 31st March 2005, total assets of the public sector banks increased to Rs.17 58,207 crores
from Rs. 14,71,428 crores of the previous financial years recording a growth of 19.5% during 2005
as against 14.4% of the previous year. Higher growth in total assets is due largely to inclusion of
total assets of IDBI Ltd. In 2005.Excluding IDBI Ltd., the growth in total assets was marginally
lower at 14.0 per cent during 2004-05. 10 banks recorded higher growth than the group average.
Oriental bank of commerce tops list with a growth of 31.9 per cent, closely followed by the
Allahabad bank (30.1per cent) and state bank of Indore (29.5 per cent). Bank of Maharashtra
recorded lowest growth in assets with 2.1 per cent during 2004-05.

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DepositsTotal deposits mobilized by the public sector banks increased from Rs. 12,26,838 crores as on 31 st
march, 2004 to Rs. 14,21,672 crores as on 31 st march, 2005. Deposits showed a subdued growth
during 2004-05. Total Deposits recorded a growth of 15.9 per cent during 2004-05,which is higher
than 13.7 per cent of the previous year. Excluding IDBI Ltd., the total growth was only 14.6 per
cent during 2004-05. 15 banks recorded higher growth than the group average. Oriental bank of
commerce recorded the highest growth of 34.1 per cent, closely followed by state bank of indore
with 32.5 per cent during 2004-05.SBI and Associate as a group recorded a growth of 16.8 per cent
as compared to nationalized banks group with a growth of 13.5 per cent during 2004-05.

Investments
Banks investments showed a lower growth of 8.5 per cent during 2004-05 as against the growth of
14.7 per cent during 2003-04. In absolute terms, the total investments increased from 6,25,678
crores as at march 31st 2004 to Rs. 6,78,637 crores as on 31st march, 2005.Excluding IDBI Ltd., the
growth in investment was only 4.5 per cent during 2004-05. Seven banks recorded a higher growth
than the group average. Allahabad bank recorded the highest growth in investments with 22.1 per
cent, closely followed by Punjab National Bank with 20.3 per cent during 2004-05. Nationalized
Banks as a group showed a growth of 4.0 per cent during 2004-05, which is much lower than the
previous years growth of 17.3 per cent during 2003-04. SBI group as a whole recorded a growth
of 5.2 per cent during 2004-05 as against 10.9 per cent recorded in the previous year.

Advances
The years 2004-05 witnessed higher credit off take by the commercial banks. This was reflected in
the total disbursement made by the PSBs during 2004-05. Total advances of the banks jumped up
from Rs.6, 32,740 crores as on 31st march, 2004 to Rs.8, 48,340 crores as on 31 st march 2005

37 | P a g e

showing an impressive growth of 34.1 per cent as against the previous years growth of 15.2 per
cent. Excluding the IDBI Bank Ltd., the growth was 26.9 per cent during 2004-05. Eight bank
recorded higher growth than the group average. United Bank of India showed the maximum
growth in advances with 43.02 per cent closely followed by State bank of Indore with 41.1 per cent
and state bank of Bikaner & Jaipur with 39.7 per cent during 2004-05. Nationalized banks as a
group recorded a growth of 25.7 per cent during 2004-05 as against the previous year growth of
14.5 per cent. As for SBI group the growth was 29.1 per cent during 2004-05 as against 16.6 per
cent recorded in the previous year.

Non-performing Assets (NPA)

During 2004-05, both gross and net-performing assets showed decline in absolute terms as a
percentage of advance Inspite of the reduction in the total provisions towards non-performing
assets as a compared to the previous year. President recovery set up coupled with close monitoring
of the assets could be sighted as a reasons for reduction in non-performing assets. Gross NPA of
the public sector banks decreased from Rs.51, 537 crores as on 31 st march 2004 to Rs.47, 596
crores as on 31st march, 2005 shoeing a declined growth of (-) 7.6 per cent. Net NPA declined from
Rs. 18,860 crores as on 31 st march, 2004 to Rs. 16,983 crores as on 31 st march, 2005 recording a
declined growth of (-) 10.0 per cent. Six banks namely Bank OF India, Bank of Maharashtra, and
Oriental bank of commerce, Vijay a bank, state bank of indore and state bank of patiala recorded
higher growth in gross NPA during 2004-05 as compared to previous year. In case of net NPA nine
banks are recorded higher growth in net NPA than the previous year. SBI Group recorded higher
net NPA than the previous year.

Income

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Total income of the public sector bank recorded a growth of 3.8 per cent during 2004-05 as
compared to 7.2 per cent of previous year. Excluding IDBI Limited. The growth was only 1.4 per
cent during 2004-05.Growth in income in PSBs was due largely to higher contribution from
interest income than the fee based income. Non-interest income, which was showing a higher
growth during a last three years, has recorded a declined growth during 2004-05. This could be due
to lower treasury earnings during 2004-05. Interest income of the banks increased from Rs.
1,09,572 crores during 2003-04 to Rs. 1,19,098 crores during 2004-05. Recording a growth of 8.7
per cent as against 2.10 per cent during 2003-04. On the other hand, the other income of the banks
recorded a declined growth of (-) 15.5 per cent during 2004-05 as against the previous years
growth of 32.3 per cent. Interest, the share of fee income in the total income declined to 16.6 per
cent during 2004-05 as against 20.4 per cent of the previous year. Ten banks recorded a higher
growth in income then the group average. Allhabad banks tops the list with a growth of 11.9 per
cent, closely followed by state bank of Mysore with 11.2 per cent during 2004-05.

Expenditure: Total expenditure of the banks increased from Rs. 98,127 crores during 2003-04 to Rs. 1,04,038
crores during 2004-05 showing a growth of 6.0 per cent as against previous years lower growth of
(-) 0.6 per cent. Excluding IDBI Ltd., the growth in total expenditure was 3.0 per cent during
2004-05.Intrest expenditure recorded a higher growth of 3.5 per cent during 2004-05 as against the
previous years growth of (-) 5.9 per cent. Operating expenditure, on the other hand, recorded a
lower growth of 11.1 per cent during 2004-05 as compared to 11.9 per cent during 2003-04.
Nationalized banks and SBI Group recorded lower growth in operation expenditure during 200405. 14 banks recorded higher growth in total expenditure then the group expenditure in 2004-05.
Allahabad bank, Indian bank, State bank of Saurashtra were the only three banks, which recorded a
decline in operating expenses then the previous year.

39 | P a g e

Profit- the total operating profit if the PSBs declined from Rs. 39,536 crores during 2003-04 to Rs.
38,799 crores during 2004-05, recording a decline growth of (-) 1.9 per cent during 2004-05 as
against 33.1 per cent of the previous year. Though the total provisions made by the banks increased
from Rs. 22,928 crores during 2003-04 to Rs.23, 241 crores during 2004-05, the growth was only
marginal at 1.4 per cent during 2004-05 as against 31.6 per cent during 2004-05. Majority of the
banks have made lower provisions during 2004-05 as compared to previous year. Net profit of the
banks also declined from Rs. 16, 546 crores during 2003-04 to Rs. 15,558 crores during 2004-05
recording a declined growth of (-) 6.0 per cent of the previous year. Excluding IDBI Ltd., the
decline is even sharper at (-) 7.8 per cent during 2004-05. Ten banks recorded higher growth in net
profit than the previous year.

Capital Adequacy Ratio

All PSBs had achieved the stipulated CRAR of 9 per cent as on 31 st march, 2005. United bank of
India topped the list with a CRAR of 18.2 per cent closely followed by Corporation bank with a
CRAR of 16.2 per cent. 10 banks recorded higher CRAR during 2004-05, than the previous year.
Return on Assets
Net profit as a percentage to total assets declined marginally from 1.1 per cent during 2003-04 to
0.9 per cent during 2004-05. 14 banks have higher ROA than the group average, of which 10 banks
have ROA of more than 1 per cent. Andhra bank topped the group with an ROA of 1.59 per cent,
followed by oriental bank of commerce with 1.41 per cent.

Credit-Deposit Ratio
Credit-Deposit Ratio (C/D) Ratio of public sector banks showed considerable improvement during
2004-05. This is largely due to higher deployment of credit and lower resource mobilization during
40 | P a g e

2004-05. C/D ratio of the banks improved from 51.6 per cent during 2003-04 to 59.7 per cent
during 2004-o5. Excluding IDBI Ltd., the ratio was 57.1 per cent during 2004-05. IDBI Ltd. Tops
the list with a C/D ratio of 300.7 per cent followed by bank of India with 71.1 per cent and
corporation bank with 68.1 per cent. The lowest ratio of 44.9 per cent was recorded by central bank
of India.

Investment-Deposit Ratio
As a noted before, the investments of banks were lower during 2004-05 as compared to the
previous year. This is reflected in the investment-deposit. (I/D) ratio also during 2004-05. The I/D
ratio of the banks declined from 51.0 per cent during 2003-04 to 47.7 per cent during 2004-05.
IDBI Ltd. With a ratio of 165.9 per cent tops the grouped followed by UCO bank and united bank
of India with 56.8 per cent and Indian bank with 51.5 per cent during 2004-05. Bank of India
recorded the lowest ratio with 35.8 per cent during 2004-05.

Interest Spread
Interest spread or net interest income as a percentage of total assets declined marginally from 3.0
per cent during 2003-04 to 2.9 per cent during the financial year 2004-05. In the case of
nationalized banks, interest spread declined from 3.1 during 2003-04 to 3 per cent during 2004-05.
On the other hand, for SBI group, the interest spread ratio moved up from 2.8 per cent during
2003-04 to 3.1 per cent during 2004-05. 16 banks have the interest spread ratio of more than 3 per
cent during 2004-05.

Non-Performing Assets

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As mentioned before, both the gross and net non-performing assets showed declined in absolute
terms ad as percentage of net advance during 2004-05. For majority of the banks, this ratio is less
than 3 per cent. Dena bank has the highest ratio with 5.2 per cent during 2004-05.

Operating Expenses
Ratio of operating expenses to total expenses increased to 34.6 per cent during 2004-05 from 33.0
per cent of the previous financial year. 4 banks have a ratio of more then 40 per cent during 200405. Majority of the banks recorded a higher ratio than the previous year.

Business per Employee

Business per employee of most of the banks was higher than that of the previous year.
Highest per employee business was recorded by IDBI Ltd. With Rs. 13.5 crores. Lowest
business ratio was shown by Central Bank of India with 2.1 crores during 2004-05.
Majority of the banks recorded a business ratio of Rs.3.0 crores to Rs. 4.0 crores during
2004-05.

Profit per Employee

Majority of the banks recorded a lower profit per employee ratio than the previous year.
Highest ratio was recorded by the IDBI Ltd. With Rs. 6.85 lacs during 2004-05. This ratio
for majority of the banks ranged from Rs. 1.5 lacs to Rs. 3.0 lacs during 2004-05.

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Conclusion
Compared to 2003-04, the performance of the Public Sector Banks was not impressive during
2004-05. Resource

mobilization and investments were lower during 2004-05 as compared to

2003-04. Disbursement of credit was impressive during this year. Total income and total
expenditure of these banks were higher than the financial year 2003-04. Since growth in
expenditure were higher than the growth in income, the banks recorded deceleration in operating
and net profit during 2004-05. a significant achievement for the banks was reduction in the gross
and net non-performing assets of the bans in absolute term and also as percentage of net advances
during 2004-05. Banks were able to maintain spread at the same level as that of the previous year.
Slight deceleration in the Capital Adequacy Ratio and Return on Assets were also observed during
2004-05. Productivity ratio showed improvement than the previous year. However, profitability
ratio was lower than the previous year.

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E-BANKING

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WHAT IS E-BANKING?
Electronic banking is one of the truly widespread avatars of E-commerce the world over.
Various authors define E-Banking differently but the most definition depicting the meaning and
features of E-Banking are as follows:
1. Banking is a combination of two, Electronic technology and Banking.
2. Electronic

Banking

is

process

by

which

customer

performs

banking

Transactions electronically without visiting a brick-and-mortar institutions.

3.

E-Banking denotes

the provision of banking and related

service through

Extensive use of information technology without direct recourse to the bank by

customer.

Bank
Information
technology

Customer

NEED FOR E-BANKING

45 | P a g e

the

One has to approach the branch in person, to withdraw cash or deposit a cheque or request a
statement of accounts. In true Internet banking, any inquiry or transaction is processed online
without any reference to the branch (anywhere banking) at any time. Providing Internet banking is
increasingly becoming a "need to have" than a "nice to have" service. The net banking, thus, now
is more of a norm rather than an exception in many developed countries due to the fact that it is the
cheapest way of providing banking services.
Banks have traditionally been in the forefront of harnessing technology to improve their products,
services and efficiency. They have, over a long time, been using electronic and telecommunication
networks for delivering a wide range of value added products and services. The delivery channels
include direct dial up connections, private networks, public networks etc and the devices include
telephone, Personal Computers including the Automated Teller Machines, etc. With the popularity
of PCs, easy access to Internet and World Wide Web (WWW), Internet is increasingly used by
banks as a channel for receiving instructions and delivering their products and services to their
customers. This form of banking is generally referred to as Internet Banking, although the range of
products and services offered by different banks vary widely both in their content and
sophistication.

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EVOLUTION OF E-BANKING
The story of technology in banking started with the use of punched card machines like Accounting
Machines or Ledger Posting Machines. The use of technology, at that time, was limited to keeping
books of the bank. It further developed with the birth of online real time system and vast
improvement in telecommunications during late 1970s and 1980s.it resulted in a revolution in the
field of banking with convenience banking as a buzzword. Through Convenience banking, the
bank is carried to the doorstep of the customer.
The 1990s saw the birth of distributed computing technologies and Relational Data Base
Management System. The banking industry was simply waiting for these technologies. Now with
distribution technologies, one could configure dedicated machines called front-end machines for
customer service and risk control while communication in the batch mode without hampering the
response time on the front-end machine.
Traditional banking

Virtual or E-banking

Gunpowder

Nuclear charged

Personalized services, time

consuming, limited access

Real time transactions,

integrated platform, all time
access

Intense competition has forced banks to rethink the way they operated their business. They had to
reinvent and improve their products and services to make them more beneficial and cost effective.
Technology in the form of E-banking has made it possible to find alternate banking practices at
lower costs.
More and more people are using electronic banking products and services because large section of
the banks future customer base will be made up of computer literate customer, the banks must be
able to offer these customer products and services that allow them to do their banking by electronic
means. If they fail to do this will, simply, not survive. New products and services are emerging that
are set to change the way we look at money and the monetary system.

47 | P a g e

48 | P a g e

E-Banking transaction
mechanism

49 | P a g e

E-BANKING PRODUCTS
Automated Teller Machine (ATM)
These are cash dispensing machine, which are frequently seen at banks and other locations such as
shopping centers and building societies. Their main purpose is to allow customer to draw cash at
any time and to provide banking services where it would not have been viable to open another
branch e.g. on university campus.
An automated teller machine or automatic teller machine (ATM) is a computerized
telecommunications device that provides a financial institution's customers a method of financial\
transactions in a public space without the need for a human clerk or bank teller. On most modern
ATMs, the customer identifies him or herself by inserting a plastic ATM card with a magnetic
stripe or a plastic smartcard with a chip that contains his or her card number and some security
information, such as an expiration date or CVC (CVV). Security is provided by the customer
entering a personal identification number (PIN).
Using an ATM, customers can access their bank accounts in order to make cash withdrawals (or
credit card cash advances) and check their account balances. Many ATMs also allow people to
deposit cash or checks, transfer money between their bank accounts, pay bills, or purchase goods
and services.
ATMs are known by various casual terms including cash machine, hole-in-the-wall, cash point or
Bancomat (in Europe and Russia). The occasionally-used ATM Machine is an example of RAS
syndrome.
Some of the advantages of ATM to customers are:

Ability to draw cash after normal banking hours

Quicker than normal cashier service

Complete security as only the card holder knows the PIN

Does not just operate as a medium of obtaining cash.

Customer can sometimes use the services of other bank ATMs.

Telebanking or Phone Banking

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Telephone banking is relatively new Electronic Banking Product. However it is fastly becoming
one of the most popular products. Customer can perform a number of transactions from the
convenience of their own home or office; in fact from anywhere they have access to phone.
Customers can do following:

Check balances and statement information

Transfer funds from one account to another

Pay certain bills

Order statements or cheque books

Demand draft request

This facility is available with the help of Voice Response System (VRS). This

system basically, accepts only TONE dialed input. Like the ATM customer has to follow particular
process, initially account number and telephone PIN are fed for the process to start. Also the VRS
system provides the users within additional facilities such as changing existing password with the
new desired, information about new products, current interest rates etc.
Mobile Banking
Mobile banking comes in as a part of the banks initiative to offer multiple channel banking
providing convenience for its customer. A versatile multifunctional, free service that is accessible
and viewable on the monitor of mobile phone. Mobile phones are playing great role in Indian
banking- both directly and indirectly. They are being used both as banking and other channels.
Internet Banking
The advent of the Internet and the popularity of personal computers presented both an opportunity
and a challenge for the banking industry. For years, financial institutions have used powerful
computer networks to automate million of daily transactions; today, often the only paper record is
the customers receipt at the point of sale. Now that their customers are connected to the Internet
via personal computers, banks envision similar advantages by adopting those same internal
electronic processes to home use.
Banks view online banking as a powerful value added tool to attract and retain new customers
while helping to eliminate costly paper handling and teller interactions in an increasingly
competitive banking environment. In India first one to move into this area was ICICI Bank. They
started web based banking as early as august 1997.
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Moments of crisis often present unusual but fleeting

opportunities to profit from strategic repositioning.
The following is a comprehensive list of actions that should be considered:

Buy protection or insurance for risks that can be immunized.

Restructure business, client, or product mix.
Price differently to include previously unidentified risk.
Get out of the position, market, or business.
Dont change the business but systematically monitor and manage the business through

more stress
Testing, and develop contingency plans for the shocks.
Evaluate the returns over the life cycle of the business for the total economics.
Beware of the industry herd mentality and the resulting concentration of risks.
Be careful of the .greater fool. Assumption.
Prepare for liquidity and funding issues that naturally occur in stressful market
environments by increasing

Credit/counterparty lines/ limits and funding sources, and managing liability structure for
adequate short-, medium-, and long-term funding in a crisis.
In general, a capital charge is not a useful tool for dealing with the results of stress tests. One or
more of the above solutions should provide the protection more effectively.
Taken together, the above seeks to first ensure that the firm can survive the stress events
(which include the impact on capital adequacy, reported earnings, firm liquidity, credit ratings, and
customer and investor confidence). In addition, the actions aim to preserve enough resilience in
distressed market conditions and to enable the firm to take the offensive and move quickly,
because moments of crisis often present unusual but fleeting opportunities to profit from strategic
repositioning.

Risk Management

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Since the occurrence of these incidents, the importance of risk management has been
extensively recognized by banks and securities firms when deciding the amount of risk they are
willing to take.
Moreover, bank regulators now put an emphasis on risk management practices in
attempting to reduce the fragility of financial and banking system.
Setting up of risk management cell is been practiced by various banks, brokerage houses
and other financial firms. Basic objective of this department was to eliminate risk exposure to the
firm and the clients portfolio as much as possible.

In volatile financial markets, both market participants and market regulators need models
for measuring, managing and containing risks. Market participants need risk management models
to manage the risks involved in their open positions. Market regulators on the other hand must
ensure the financial integrity of the stock exchanges and the clearing houses by appropriate
margining and risk containment systems.
The successful use of risk management models is critically dependent upon estimates of
thevolatility of underlying prices. The principal difficulty is that the volatility is not constant
overtime - if it were, it could be estimated with very high accuracy by using a sufficiently long
sample of data. Thus models of time varying volatility become very important. Practitioners and
econometricians have developed a variety of different models for this purpose. Whatever intuitive
or theoretical merits any such model may have, the ultimate test of its usability is how well it holds
up against actual data. Empirical tests of risk management models in the Indian stock market are
therefore of great importance in the context of the likely introduction of index futures trading in
India.

53 | P a g e

There are several risk management models available, but the most
popular in them are :Value-at-Risk,
Stress Testing,

Value-at-Risk,
In financial risk management, Value at Risk (VaR) is a widely used measure of the risk of
loss on a specific portfolio of financial assets. For a given portfolio, probability and time horizon,
VaR is defined as a threshold value such that the probability that the mark-to-market loss on the
portfolio over the given time horizon exceeds this value (assuming normal markets and no trading
in the portfolio) is the given probability level.
For example, if a portfolio of stocks has a one-day 5% VaR of $1 million, there is a 5%
probability that the portfolio will fall in value by more than $1 million over a one day period,
assuming markets are normal and there is no trading. Informally, a loss of $1 million or more on
this portfolio is expected on 1 day in 20. A loss which exceeds the VaR threshold is termed a VaR
break.
VaR

has

five

main

uses

in finance: risk

management,

risk

measurement,

financial control, financial reporting and computing regulatory capital. VaR is sometimes used in
non-financial applications as well.

Varieties of VaR
The definition of VaR is no constructive, it specifies a property VaR must have, but not
how to compute VaR. Moreover, there is wide scope for interpretation in the definition. This has
led to two broad types of VaR, one used primarily in risk management and the other primarily for
risk measurement. The distinction is not sharp, however, and hybrid versions are typically used in
financial control, financial reporting and computing regulatory capital.
To a risk manager, VaR is a system, not a number. The system is run periodically (usually
daily) and the published number is compared to the computed price movement in opening
positions over the time horizon. There is never any subsequent adjustment to the published VaR,
and there is no distinction between VaR breaks caused by input errors (including
54 | P a g e

Information breakdowns, fraud and rogue trading), computation errors (including failure to
produce a VaR on time) and market movements.

Risk measure and Risk metric

The term VaR is used both for a risk measure and a risk metric. This sometimes leads to
confusion. Sources earlier than 1995 usually emphasize the risk measure, later sources are more
likely to emphasize the metric.
The VaR risk measure defines risk as mark-to-market loss on a fixed portfolio over a fixed
time horizon, assuming normal markets. There are many alternative risk measures in finance.
Instead of mark-to-market, which uses market prices to define loss, loss is often defined as change
in fundamental value. For example, if an institution holds a loan that declines in market price
because interest rates go up, but has no change in cash flows or credit quality, some systems do not
recognize a loss. Or we could try to incorporate the economic cost of things not measured in
daily financial statements, such as loss of market confidence or employee morale, impairment of
brand names or lawsuits.
Rather than assuming a fixed portfolio over a fixed time horizon, some risk measures
incorporate the effect of expected trading (such as a stop loss order) and consider the expected
holding period of positions. Finally, some risk measures adjust for the possible effects of abnormal
markets, rather than excluding them from the computation.
The VaR risk metric summarizes the distribution of possible losses by a quantile, a point
with a specified probability of greater losses. Common alternative metrics are standard deviation,
mean absolute deviation, expected shortfall and downside risk.

VaR risk management

Supporters of VaR-based risk management claim the first and possibly greatest benefit of
VaR is the improvement in systems and modeling it forces on an institution. In 1997, Philippe
Jorion wrote:
The greatest benefit of VAR lies in the imposition of a structured methodology for critically
thinking about risk. Institutions that go through the process of computing their VAR are forced to
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confront their exposure to financial risks and to set up a proper risk management function. Thus
the process of getting to VAR may be as important as the number itself.
Publishing a daily number, on-time and with specified statistical properties holds every part
of a trading organization to a high objective standard. Robust backup systems and default
assumptions must be implemented. Positions that are reported, modeled or priced incorrectly stand
out, as do data feeds that are inaccurate or late and systems that are too-frequently down. Anything
that affects profit and loss that is left out of other reports will show up either in inflated VaR or
excessive VaR breaks. A risk-taking institution that does not compute VaR might escape disaster,
but an institution that cannot compute VaR will not.
The second claimed benefit of VaR is that it separates risk into two regimes. Inside the VaR
limit, conventional statistical methods are reliable. Relatively short-term and specific data can be
used for analysis. Probability estimates are meaningful, because there are enough data to test them.
In a sense, there is no true risk because you have a sum of many independent observations with a
left bound on the outcome. A casino doesn't worry about whether red or black will come up on the
next roulette spin. Risk managers encourage productive risk-taking in this regime, because there is
little true cost. People tend to worry too much about these risks, because they happen frequently,
and not enough about what might happen on the worst days.
Outside the VaR limit, all bets are off. Risk should be analyzed with stress testing based on
long-term and broad market data.[14] Probability statements are no longer meaningful. Knowing the
distribution of losses beyond the VaR point is both impossible and useless. The risk manager
should concentrate instead on making sure good plans are in place to limit the loss if possible, and
to survive the loss if not.

One specific system uses three regimes.

1. Out to three times VaR are normal occurrences. You expect periodic VaR breaks. The loss
distribution typically has fat tails, and you might get more than one break in a short period
of time. Moreover, markets may be abnormal and trading may exacerbate losses, and you
may take losses not measured in daily marks such as lawsuits, loss of employee morale
and market confidence and impairment of brand names. So an institution that can't deal
with three times VaR losses as routine events probably won't survive long enough to put a
VaR system in place.
2. Three to ten times VaR is the range for stress testing. Institutions should be confident they
have examined all the foreseeable events that will cause losses in this range, and are
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prepared to survive them. These events are too rare to estimate probabilities reliably, so
risk/return calculations are useless.
3. Foreseeable events should not cause losses beyond ten times VaR. If they do they should
be hedged or insured, or the business plan should be changed to avoid them, or VaR should
be increased. It's hard to run a business if foreseeable losses are orders of magnitude larger
than very large everyday losses. It's hard to plan for these events, because they are out of
scale with daily experience. Of course there will be unforeseeable losses more than ten
times VaR, but it's pointless to anticipate them, you can't know much about them and it
results in needless worrying. Better to hope that the discipline of preparing for all
foreseeable three-to-ten times VaR losses will improve chances for surviving the
unforeseen and larger losses that inevitably occur.
"A risk manager has two jobs: make people take more risk the 99% of the time it is safe to do so,
and survive the other 1% of the time. VaR is the border."

VaR risk measurement

The VaR risk measure is a popular way to aggregate risk across an institution. Individual
business units have risk measures such as duration for a fixed income portfolio or beta for
anequity business. These cannot be combined in a meaningful way.It is also difficult to aggregate
results available at different times, such as positions marked in different time zones, or a high
frequency trading desk with a business holding relatively illiquid positions. But since every
business contributes to profit and loss in an additive fashion, and many financial businesses markto-market daily, it is natural to define firm-wide risk using the distribution of possible losses at a
fixed point in the future.
In risk measurement, VaR is usually reported alongside other risk metrics such as standard
deviation, expected shortfall and greeks (partial derivatives of portfolio value with respect to
market factors). VaR is a distribution-free metric, that is it does not depend on assumptions about
the probability distribution of future gains and losses. The probability level is chosen deep enough
in the left tail of the loss distribution to be relevant for risk decisions, but not so deep as to be
difficult to estimate with accuracy.

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Risk measurement VaR is sometimes called parametric VaR. This usage can be confusing,
however, because it can be estimated either parametrically (for examples, variance-covarianceVaR
or delta-gamma VaR)

or

nonparametrically

(for

examples,

historical simulation VaR

or resampled VaR). The inverse usage makes more logical sense, because risk management VaR is
fundamentally nonparametric, but it is seldom referred to as nonparametric VaR.
VaR has been controversial since it moved from trading desks into the public eye in 1994. A
famous 1997 debate between Nassim Taleb and Philippe Jorion set out some of the major points of
contention. Taleb claimed VaR:[20]
1. Ignored 2,500 years of experience in favor of untested models built by non-traders
2. Was charlatanism because it claimed to estimate the risks of rare events, which is
impossible
3. Gave false confidence
4. Would be exploited by traders
More recently David Einhorn and Aaron Brown debated VaR in Global Association of Risk
Professionals Review[12] [21] Einhorn compared VaR to an airbag that works all the time, except
when you have a car accident. He further charged that VaR:
1. Led to excessive risk-taking and leverage at financial institutions
2. Focused on the manageable risks near the center of the distribution and ignored the tails
3. Created an incentive to take excessive but remote risks
4. Was potentially catastrophic when its use creates a false sense of security among senior
executives and watchdogs.
New York Times reporter Joe Nocera wrote an extensive piece Risk Mismanagement on
January 4, 2009 discussing the role VaR played in the Financial crisis of 2007-2008. After
interviewing risk managers (including several of the ones cited above) the article suggests that VaR
was very useful to risk experts, but nevertheless exacerbated the crisis by giving false security to
bank executives and regulators. A powerful tool for professional risk managers, VaR is portrayed
as both easy to misunderstand, and dangerous when misunderstood.

Even VaR supporters generally agree there are common abuses of VaR.
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1. Referring to VaR as a "worst-case" or "maximum tolerable" loss. In fact, you expect two or
three losses per year that exceed one-day 1% VaR.
2. Making VaR control or VaR reduction the central concern of risk management. It is far
more important to worry about what happens when losses exceed VaR.
3. Assuming plausible losses will be less than some multiple, often three, of VaR. The entire
point of VaR is that losses can be extremely large, and sometimes impossible to define,
once you get beyond the VaR point. To a risk manager, VaR is the level of losses at which
you stop trying to guess what will happen next, and start preparing for anything.
4. Reporting a VaR that has not passed a backtest. Regardless of how VaR is computed, it
should have produced the correct number of breaks (within sampling error) in the past. A
common specific violation of this is to report a VaR based on the unverified assumption
that everything follows a multivariate normal distribution

Risk management in Indian capital market

Categorisation of stocks for imposition of margins
Stock are classifed into three categories on the basis of their liquidity and impact cost.

The Stocks which have traded at least 80% of the days for the previous six months shall
constitute the Group I and Group II.

Out of the scrips identified above, the scrips having mean impact cost of less than or equal
to 1% are categorized under Group I and the scrips where the impact cost is more than 1,
are categorized under Group II.

The remaining stocks are classified into Group III.

The impact cost is calculated on the 15th of each month on a rolling basis considering the
order book snapshots of the previous six months. On the basis of the impact cost so
calculated, the scrips move from one group to another group from the 1st of the next
month.

For securities that have been listed for less than six months, the trading frequency and the
impact cost are computed using the entire trading history of the security.

Categorisation of newly listed securities

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For the first month and till the time of monthly review a newly listed security is categorised
in that Group where the market capitalization of the newly listed security exceeds or equals the
market capitalization of 80% of the securities in that particular group. Subsequently, after one
month, whenever the next monthly review is carried out, the actual trading frequency and impact
cost of the security is computed, to determine the liquidity categorization of the security.
In case any corporate action results in a change in ISIN, then the securities bearing the new
ISIN are treated as newly listed security for group categorization.

Margins
Daily margins payable by members consists of the following:

1. Value at Risk Margin

2. Extreme Loss Margin
3. Mark to Market Margin
Daily margin, comprising of the sum of VaR margin, Extreme Loss Margin and mark to market
margin is payable.
Value at Risk Margin
All securities are classified into three groups for the purpose of VaR margin

For the securities listed in Group I, scrip wise daily volatility calculated using the
exponentially weighted moving average methodology is applied to daily returns. The scrip
wise daily VaR is 3.5 times the volatility so calculated subject to a minimum of 7.5%.

For the securities listed in Group II, the VaR margin is higher of scrip VaR (3.5 sigma) or
three times the index VaR, and it is scaled up by root 3.

For the securities listed in Group III the VaR margin is equal to five times the index VaR
and scaled up by root 3.

The index VaR, for the purpose, is the higher of the daily Index VaR based on S&P CNX NIFTY or
BSE SENSEX, subject to a minimum of 5%.
NSCCL may stipulate security specific margins from time to time.
The VaR margin rate computed as mentioned above is charged on the net outstanding position
(buy value-sell value) of the respective clients on the respective securities across all open
settlements. There is no netting off of positions across different settlements. The net position at a
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client level for a member is arrived at and thereafter, it is grossed across all the clients including
proprietary position to arrive at the gross open position.
For example, in case of a member, if client A has a buy position of 1000 in a security and client
B has a sell position of 1000 in the same security, the net position of the member in the security is
taken as 2000. The buy position of client A and sell position of client B in the same security is not
netted. It is summed up to arrive at the members open position for the purpose of margin
calculation.
The VaR margin is collected on an upfront basis by adjusting against the total liquid assets of
the member at the time of trade.
The VaR margin so collected is released on completion of pay-in of the settlement.

Extreme Loss Margin

The Extreme Loss Margin for any security is higher of:
1. 5%, or
2. 1.5 times the standard deviation of daily logarithmic returns of the security price in the last
six months. This computation is done at the end of each month by taking the price data on a
rolling basis for the past six months and the resulting value is applicable for the next
month.
The Extreme Loss Margin is collected/ adjusted against the total liquid assets of the member on a
real time basis.
The Extreme Loss Margin is collected on the gross open position of the member. The gross
open position for this purpose means the gross of all net positions across all the clients of a
member including its proprietary position.
There is no netting off of positions across different settlements. The Extreme Loss Margin
collected is released on completion of pay-in of the settlement.

Mark-to-Market Margin
Mark to market loss is calculated by marking each transaction in security to the closing
price of the security at the end of trading. In case the security has not been traded on a particular
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day, the latest available closing price at NSE is considered as the closing price. In case the net
outstanding position in any security is nil, the difference between the buy and sell values shall be is
considered as notional loss for the purpose of calculating the mark to market margin payable.
The mark to market margin (MTM) is collected from the member before the start of the trading of
the next day.
The MTM margin is collected/adjusted from/against the cash/cash equivalent component of
the liquid net worth deposited with the Exchange.
The MTM margin is collected on the gross open position of the member. The gross open
position for this purpose means the gross of all net positions across all the clients of a member
including its proprietary position. For this purpose, the position of a client is netted across its
various securities and the positions of all the clients of a member are grossed.
There is no netting off of the positions and setoff against MTM profits across two rolling
settlements i.e. T day and T+1 day. However, for computation of MTM profits/losses for the day,
netting or setoff against MTM profits is permitted.

Trade for Trade segment Surveillance segment

In case of securities in Trade for Trade Surveillance segment (TFT-S segment) the upfront
margin rates (VaR Margin + Extreme Loss Margin) applicable is 100 % and each trade is marked
to market based on the closing price of that security.
The details of all margins VAR, extreme loss margin and mark to market as at end of each
day are downloaded to members in their respective Extranet directory.

Margins collection from Client

Members should have a prudent system of risk management to protect themselves from
client default. Margins are likely to be an important element of such a system. The same should be
well documented and be made accessible to the clients and the Stock Exchanges. However, the
quantum of these margins and the form and mode of collection are left to the discretion of the
members.

Margin Shortfall
In case of any shortfall in margin:
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The members shall not be permitted to trade with immediate effect.

There is a penalty for margin violation

Penalty applicable for margin violation is levied on a monthly basis based on slabs as mentioned
below:

Instances of

Penalty to be levied

Disablement
1st instance
2nd to 5th instance
of disablement

0.07% per day

0.07% per day +Rs.5000/- per instance from 2nd to 5th instance

6th to 10th instance 0.07% per day+ Rs. 20000 ( for 2nd to 5th instance) +Rs.10000/- per instance
of disablement
11th instance
onwards

from 6th to 10th instance

0.07% per day +Rs. 70,000/- (for 2nd to 10th instance) +Rs.10000/- per
instance from 11th instance onwards. Additionally, the member will be
referred to the Disciplinary Action Committee for suitable action

Instances as mentioned above shall refer to all disablements during market hours in a calendar
month. The penal charge of 0.07% per day shall is applicable on all disablements due to margin
violation anytime during the day.

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Liquid assets
Embers are required to provide liquid assets which adequately cover various margins
and Security Deposit requirements. A member may deposit liquid assets in the form of cash, bank
guarantees, fixed deposit receipts, approved securities and any other form of collateral as may be
prescribed from time to time. The total liquid assets comprise of the cash component and the non
cash component wherein the cash component shall be at least 50% of liquid assets.

1. Cash Component:
a.

Cash

b.

Bank fixed deposits (FDRs) issued by approved banks and deposited withapproved
custodians or NSCCL.

c.

Bank Guarantees (BGs) in favour of NSCCL from approved banks in the specified format.

d.

Units of money market mutual fund and Gilt funds where applicable haircut is 10%.

2. Non Cash Component:

a.

Liquid (Group I) Equity Shares in demat form, as specified by NSCCL from time to time
deposited with approved custodians.

b.

Mutual fund units other than those listed under cash component decided by NSCCL from
time to time deposited with approved custodians.

Margins for institutional deals

Nstitutional businesses i.e., transactions done by all institutional investors are
margined from T+1 day subsequent to confirmation of the transactions by the
custodians. For this purpose, institutional investors include

Foreign Institutional Investors registered with SEBI. (FII)

Mutual Funds registered with SEBI. (MF)

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Public Financial Institutions as defined under Section 4A of the Companies Act, 1956.
(DFI)

Banks, i.e., a banking company as defined under Section 5(1)(c) of the Banking
Regulations Act, 1949. (BNK)

Insurance companies registered with IRDA. (INS)

Pension Funds registered with PFRDA (PNF)

Levy of margins:

Institutional transactions are identified by the use of the participant code at the time of
order entry.

In respect of institutional transactions confirmed by the custodians the margins are levied
on the custodians.

In respect of institutional transactions rejected/not accepted by the custodians the margins

are levied on the members who have executed the transactions.

The margins are computed and levied at a client (Custodial Participant code) level in
respect of institutional transactions and collected from the custodians/members.

Retail Professional Clearing Member:

In case of transactions which are to be settled by Retail Professional Clearing Members
(PCM), all the trades with PCM code are included in the trading members positions till the same
are confirmed by the PCM. Margins are collected from respective trading members until
confirmation of trades by PCM.
On confirmation of trades by PCM, such trades are reduced from the positions of trading
member and included in the positions of PCM. The PCMs are then liable to pay margins on the
same.

Exemption upon early pay-in of securities

In cases where early pay-in of securities is made prior to the securities pay-in, such
positions for which early pay-in (EPI) of securities is made are exempt from margins. Members are
required to provide client level early pay-in file in a specified format. The EPI of securities is
allocated to clients having net deliverable position, on a random basis unless specific client details
are provided by the member/ custodian. However, member/ custodian shall ensure to pass on

65 | P a g e

appropriate early pay-in benefit of margin to the relevant clients. Additionally, member/custodian
can specify the clients to whom the early pay-in may be allocated.

Exemption upon early pay-in of funds

In cases where early pay-in of funds is made prior to the funds pay-in, such positions for
which early pay-in (EPI) of funds is made are exempt from margins based on the client details
provided by the member/ custodian in the specified format . Early pay-in of funds specified by the
member/custodians for a specific client and for a settlement is allocated against the securities in the
descending order of the net buy value of outstanding position of the client.

Cross Margin
Salient features of the cross margining available are as under:
1. Cross margining benefit is available across Cash and Derivatives segment
2. Cross margining benefit is available to all categories of market participants
3. For client/entities clearing through same clearing member in Cash and Derivatives
segments, the clearing member is required to intimate client details through a file
upload through Collateral Interface for Members (CIM) to avail the benefit of Cross
margining
4. For client/entities clearing through different clearing member in Cash and Derivatives
segments they are required to enter into necessary agreements for availing cross margining
benefit.
5. For the client/entities who wish to avail cross margining benefit in respect of positions in
Index Futures and Constituent Stock Futures only, the entitys clearing member in the
Derivatives segment has to provide the details of the clients and not the copies of the
agreements. The details to be provided by the clearing members in this regard are stipulated
in the Format
1. Positions eligible for cross-margin benefit
2. Entities/clients eligible for cross margining
3. Facility of maintaining two client accounts
4. Computation of cross margining benefit
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5. Provisions in respect of default

6. Additional Reports for Cross Margin
1. Positions eligible for cross-margin benefit:
Cross margining is available across Cash and F&O segment and to all categories of market
participants. The positions of clients in both the Cash and F&O segments to the extent they offset
each other are being considered for the purpose of cross margining as per the following priority
a. Index futures and constituent stock futures in F&O segment
b. Index futures and constituent stock positions in Cash segment
c. Stock futures in F&O segment and stock positions in Cash segment
i.

In order to extend the cross margin benefit as per (a) and (b) above, the basket of
constituent stock futures/ stock positions should be a complete replica of the index
futures. NSCCL specifies the number of units of the constituent stocks/ stock
futures required in the basket to be considered as a complete replica of the index on
the website of the exchange (www.nseindia.com/NSCCL/Notification) from time to
time.

ii.

The number of units are changed only in case of change in share capital of the
constituent stock due to corporate action or issue of additional share capital or
change in the constituents of the index.

iii.

The positions in F&O segment for the stock futures and index futures should be in
the same expiry month to be eligible for cross margining benefit.

iv.

The position in a security is considered only once for providing cross margining
benefit. E.g. Positions in Stock Futures of security A used to set-off against index
futures positions will not be considered again if there is an off-setting positions in
the security A in Cash segment.

v.

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Positions in option contracts are not considered for cross margining benefit.

2. Entities/clients eligible for cross margining

The clearing member has to inform NSCCL the details of client to whom cross margining
benefit is to be provided. The cross margining benefit is available only if clearing members
provide the details of clients in such manner and within such time as specified by NSCCL from
time to time.

1. Client/entity settling through same clearing member in both Cash and

F&O segment
i.

The clearing member has to ensure that the code allotted (code used while
executing client trade) to client/entity in both Cash and F&O segment is same

ii.

The clearing member must inform the details of clients to whom cross margining
benefit is to be provided through a file upload facility provided in Collateral
Interface for Members (CIM).

2. Client/entity settling through different clearing member in Cash and F&O segment
i.

In case a client settles in the Cash segment through a trading member / custodian
and clears and settles through a different clearing member in F&O segment, then
they are required to enter into necessary agreements.

ii.

In case where the client/entity settles through Custodian in Cash segment, then the
client/entity, custodian and the clearing member in F&O segment are required to
enter into a tri-partite agreement as per the format

iii.

In case where the client/entity clears and settles through a member in Cash segment,
and a different clearing member in F&O segment, then the member in Cash
segment and the clearing member in F&O segment have to enter into an agreement
as per the format. Further, the client/entity must enter into an agreement with the
member as per the format.

iv.

The clearing member in the F&O segment must intimate to NSCCL the details of
the client/entity in F&O segment along-with letter from trading member/custodian
giving details of client/entity in Cash segment who wish to avail cross margining
benefit.

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3. Facility of maintaining two client accounts

As specified by SEBI, a client may maintain two accounts with their respective members to avail
cross margin benefit only. The two accounts namely arbitrage account and a non-arbitrage account
may be used for converting partially replicated portfolio into a fully replicated portfolio by taking
opposite positions in two accounts. However, for the purpose of compliance and reporting
requirements, the positions across both accounts shall be taken together and client shall continue to
have unique client code.

4. Computation of cross margining benefit

i.

The computation of cross margining benefit is done at client level on an online real time
basis and provided to the trading member / clearing member / custodian, as the case may
be, who, in turn, shall pass on the benefit to the respective client.

ii.

For institutional investors the positions in Cash segment are considered only after
confirmation by the custodian on T+1 basis and on confirmation by the clearing member in
F&O segment.

iii.

The positions in the Cash and F&O segment are considered for cross margining only till
time the margins are levied on such positions.

iv.

While reckoning the offsetting positions in the Cash segment, positions in respect of which
margin benefit has been given on account of early pay-in of securities or funds are not
considered.

v.

The positions which are eligible for offset, are subject to spread margins. The spread
margins are 25% of the applicable upfront margins on the offsetting positions or such other
amount as specified by NSCCL from time to time.

vi.

The difference in the margins on the total portfolio and on the portfolio excluding offsetting positions considered for cross margining, less the spread margins is considered as
cross margining benefit. Example

5. Provisions in respect of default

In the event of default by a trading member / clearing member / custodian, as the case may be,
whose clients have availed cross margining benefit, NSCCL may:
i.

Hold the positions in the cross margin account till expiry in its own name.

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ii.

Liquidate the positions / collateral in either segment and use the proceeds to meet the
default obligation in the other segment.

iii.

In addition to the foregoing provisions, take such other risk containment measures or
disciplinary action as it may deem fit and appropriate in this regard.

Stress testing in risk management

Stress testing defines a scenario and uses a specific algorithm to determine the expected impact
on a portfolio's return should such a scenario occur. There are three types of scenarios:

Extreme event: hypothesize the portfolio's return given the recurrence of a historical event.
Current positions and risk exposures are combined with the historical factor returns.

Risk factor shock: shock any factor in the chosen risk model by a user-specified amount.
The factor exposures remain unchanged, while the covariance matrix is used to adjust the
factor returns based on their correlation with the shocked factor.

External factor shock: instead of a risk factor, shock any index, macro-economic series
(e.g., oil prices), or custom series (e.g., exchange rates). Using regression analysis, new
factor returns are estimated as a result of the shock.
In an exponentially weighted stress test, historical periods more like the defined scenario

receive a more significant weighting in the predicted outcome. The defined decay rate lets the
tester manipulate the relative importance of the most similar periods. In the standard stress test,
each period is equally weighted.
Instead of doing financial projection on a "best estimate" basis, a company may do stress
testing where they look at how robust a financial instrument is in certain crashes, a form ofscenario
analysis. They may test the instrument under, for example, the following stresses:

What happens if the market crashes by more than x% this year?

What happens if interest rates go up by at least y%?

What if half the instruments in the portfolio terminate their contacts in the fifth year?

What happens if oil prices rise by 200%?

This type of analysis has become increasingly widespread, and has been taken up by various

governmental bodies (such as the FSA in the UK) as a regulatory requirement on certain financial

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institutions to ensure adequate capital allocation levels to cover potential losses incurred during
extreme, but plausible, events. This emphasis on adequate, risk adjusted determination of capital

INDIAN BANK
THE PROCESS OF SELECTING a portfolio may be divided into two stages.
The first stage starts with observation and experience and ends with beliefs about the future
performances of available securities.
Thesecond stage starts with the relevant beliefs about future performances and ends with
the choice of portfolio.
This report is concerned with the second stage. We first consider the rule that the investor
does (or should) maximize discounted expected, or anticipated, returns. This rule is rejected both
as a hypothesis to explain, and as a maximum to guide investment behavior. We next consider the
rule that the investor does (or should) consider expected return a desirable thing and variance of
returnan undesirable thing. This rule has many sound points, both as amaxim for, and hypothesis
about, investment behavior. We illustrate relations between beliefs and choice of portfolio
according to the "expected returns-variance of returns" rule.One type of rule concerning choice of
portfolio is that the investor does (or should) maximize the discounted (or capitalized) value of
future returns.
.

Since the future is not known with certainty, it must be "expected" or "anticipatded7'

returns which we discount. Variations of this type of rule can be suggested. Following Hicks, we
could let "anticipated" returns include an allowance for risk.
We could let the rate at which we capitalize the returns from particular securities vary with
risk.
The hypothesis (or maxim) that the investor does (or should)maximize discounted return
must be rejected. If we ignore market imperfections the foregoing rule never implies that there is a
diversified portfolio which is preferable to all non-diversified portfolios. Diversification is both
observed and sensible; a rule of behavior which doesnot imply the superiority of diversification
must be rejected both as a maxim.There is a rule which implies both that the investor should
diversify and that he should maximize expected return. The rule states that the investor does (or
should) diversify his funds among all those securities which give maximum expected return. The
law of large numbers will insure that the actual yield of the portfolio will be almost the same as the
expected yield.5 This rule is a special case of the expected returnsvariance of returns rule (to be
71 | P a g e

presented below). It assumes that there is a portfolio which gives both maximum expected return
and minimum variance, and it commends this portfolio to the investor.This presumption, that the
law of large numbers applies to a portfolio of securities, cannot be accepted. The returns from
securities are too intercorrelated. Diversification cannot eliminate all variance.
The portfolio with maximum expected return is not necessarily the one with minimum
variance. There is a rate at which the investor can gain expected return by taking on variance, or
reduce variance by giving
Up expected return.We saw that the expected returns or anticipated returns rule is
inadequate. Let us now consider the expected returns-variance of returns (E-V) rule. It will be
necessary to first present a few elementary concepts and results . We will then show some
implications of the E-V rule. After this we will discuss its plausibility.In our presentation we try to
avoid complicated mathematical statements and proofs. As a consequence a price is paid in terms
of rigor and generality. The chief limitations from this source are (1) we do not derive our results
analytically for the n-security case; instead, we present them geometrically for the 3 and 4 security
cases;
(2)

we assume static probability beliefs. In a general presentation we must recognize that the
probability distribution of yields of the various securities is a function of time. The writer
intends to present, in the future, the general,mathematical treatment which removes these
limitations.The concepts "yield" and "risk" appear frequently in financialwritings. Usually
if the term "yield" were replaced by "expected yield" or "expected return," and "risk" by
"variance of return," little change of apparent meaning would result.

72 | P a g e

CHAPTER II

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Secondary Data Collection

For preparation of this dissertation report I have only counted on secondary

data available to me from various web sites, newspaper, article ,journal, reports, and
past record.
A part from this I have also spoken to the top official of the angel broking to
gather some internal information regarding the risk management but unfortunately
they not able to disclose all those fact which are highly classified for the company
purpose

74 | P a g e

CHAPTER IV

75 | P a g e

EXAMPLES OF EXTREME

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1987 Stock market crash:

One day moves. Dow Jones Industrial Average (DJIA) fell 23% to 1738.74, and the S
&P500 Index fell 20% to 224.84 on October 19, 1987. Contagion effects included the Nikkei
index.s 15% drop, the FTSE 100 Index.s 12% drop, and the Hang Seng Index closing for four
days and falling 33%
on October 26 .

1990 Nikkei crash, high yield tumbles.

Nikkei fell 48% to a low of 20,221.86 over the year, and the one-week historical volatility
exceeded 120% in September/October 1990. The Japan Real Estate Index tumbled 56%. In
addition, the Salomon Brothers High Yield composite fell 13% to 158.75 in October. Drexel
Burnham Lambert collapsed.

77 | P a g e

1992 European currency crisis.

The European Rate Mechanism, a prescribed set of ranges that the 12-member European
community currencies can trade between,broke down. When the monetary system started to
crumble, institutions rushed to protect their investments by selling the weaker currencies and
buying the German mark. The UK raised rates to 12% to defend the currency but eventually
suspended its participation in the European monetary system and let the pound fall. Italy devalued
the lire by 7%, Spain devalued the paseta by 5%

1994 U.S. interest rates.

U.S. Federal Funds short-term target rate was raised six times from 3.0% on January 3,
1994, to 5.5% on December 30, 1994, an increase of 83%. Following, the 12-month domestic
funds rate increased 110% to 7.75% at year-end. The DJIA fell 10% to 3593.35 on April 4, 1994.
The Salomon Treasury Index fell 5% to 446.8 on June 30, 1994, and the Salomon Corporate Bond
index fell 6% to 489.8 on June 30, 1994.

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1994 and 1995 Mexican peso crisisand Latin America crisis.

Mexican peso devalued 15% to 3.975 on December 20,Lieng-Seng Wee and Judy Lee is a
principal at Capital Market Risk 1994, and the one-week historical volatility exceeded 150% in
December. From September 1994 to March 1995, the Mexican Bolsa Index dropped 49%
to1447.52, the Brazilian Bovespa Stock Index dropped 61% to 2138.28, and the Argentinian
Merval Index dropped 58% to 262.11

79 | P a g e

1997 Asian crisis.

The Thai baht had a oneday fall of 16% on July 2, 1997. The crisis spread rapidly to the
other Asian currencies. The South Korean won dropped 41% between December 4,1997, and
December 23, 1997, and the Korea Composite Index dropped 50% to 350.68. The Indonesian
rupiah fell 71% between December 1, 1997, and January 26, 1998, and one-week volatility
exceeded 200%. The Jakarta Composite Index dropped 41 % to 339.53 from September 10, 1997,
to December 15,1997. The Malaysian ringgit fell 25% in December.The Kuala Lumpur Composite
Index dropped 45% to 477.57 from September 10, 1997, to January 12, 1998

80 | P a g e

1998 Russian crisis.

The Russian ruble fell 41% from August 25, 1998, to August 27, 1998, with a one-day fall
of 29% on August 27, 1998, as Russia defaulted on its internal government debt. Russia.s RTS
stock index lost 86% for 1998. Also, Russian government bond yields increased from 333% on
August 26, 1998, to 578% on August 27, 1998 (24,290 bps).

1998 LTCM.
Long Term Capital was a major driver of the depressed equity markets in the third quarter.
The DJIA fell 12%, price volatilities exceeded 70% in August, credit spreads increased
substantially across the board.

1999 Brazil crisis.

Brazil devalued its currency by 8% on January 14, 1999, and the Bovespa stock index fell
10% to a low of 5057.19 the same day. Price volatilities on the Brazilian real exceeded 80% in
January.

81 | P a g e

Portfolio selected with implementation of Risk management

Sample 1:
Name

Percentage PE Ratio

EPS

Face

Net profit

Return

value

margin(%)

on
average
equity

Rural

11.75

12.08

14.81

10

24.31

16.02

9.28

20.02

16.93

5.58

13.13

11

34.03

12.66

10

18.16

22.62

7.92

48.66

11.51

10

25.44

8.17

9.28

165.91

10

20.8

47.76

13

31.68

29.68

10

9.82

15.48

10

8.41

29.26

10

12.64

9.39

9.87

13.14

17.16

10

23.95

11.6

12

10.28

78.48

10

15.06

27.13

7.18

17.26

61.25

10

23.89

16.89

Electrific
IVRCL Infra
& Pr
MphasiS Ltd.
Mundra Port
&
Specia
Shree
Cement
United
Spirits Ltd.
Federal Bank
Power
Finance Co
UltraTech
Cement
Engineers
India

82 | P a g e

Expected retur :

40%

Minimum investment :

>500000

Portfolio PE Ratio :

20.48

Portfolio earning per share:

43.76

Avgerage face value of portfolio:

9.2

Return average equity :

18.81

Risk management model :

VAR

Risk Exposure :

30-80%

Category :

High Risk High Return

Diversification :

7%

This portfolio is good for the income group between Rs 5-10 lac and willing to invest on
market value portfolio of greater than Rs10 lac. Risk appetite of the client is low. liquidity in type
of portfolio is high. Emphasis is given to financial institution , Computers - Software, Cement Major, Construction & Contracting - Civil. With the diversification of approx 7% at the time
of creating portfolio

83 | P a g e

Sample 2
Name

Percentage

PE

EPS

Ratio

Face
value

Net profit Return on

margin(%)

average
equity

Eicher Motors

12.06

24.75

14.34

10

5.42

8.1

Apollo Tyres

13.25

18.23

2.14

2.63

7.99

Indian Bank

12.9

4.97

28.98

10

16.25

22.03

LIC Housing Fi

11.47

9.41

62.59

10

18.37

23.79

Exide Inds.

11.25

22.97

3.55

7.55

23.35

Ashok Leyland

11.02

24.51

1.43

3.1

9.05

8.41

29.15

2.96

10

6.22

15.38

4.22

12.32

9.42

5.98

19.84

3.24

51.44

3.92

34.38

17.59

12.18

51.59

1.31

10

0.58

1.63

Ramkrishna
Forgings
Amara Raja
Batt.
IndiabullsFinSe
rvice
Escorts Ltd.

84 | P a g e

Expected return:

35%

Minimum Investment:

>600000

Portfolio PE Ratio :

24.93

Portfolio earning per share:

13.0

Avgerage face value of portfolio :

5.7

Return average equity :

10.04

Risk management model :

VAR

Risk Exposure :

40-80%

Category :

High risk High Return

Diversification

:7%

This portfolio is good for the income group between Rs 5-10 lac and willing to invest on
market value portfolio of lesser than Rs 25 lac. Risk appetite of the client is high. liquidity in type
of portfolio is low. Emphasis is given to Auto - LCVs/HCVs, Auto Ancl - Batteries, Tyres &
Tubes And Exploration, Finance - Banks - Public Secto. With the diversification of approx 7%

85 | P a g e

Sample 3
Name

Percentage

PE

EPS

Ratio

Face

Net profit

Return

value

margin(%)

on
average
equity

Indian Rly. Fin

6.72

879.22

830.31

1000

17.45

21.51

LIC Housing Fi

13.16

9.41

62.59

10

18.37

23.79

ICICI Bank

12.44

22.44

33.76

10

9.74

7.58

ONGC

8.86

14.62

75.4

10

25.93

23.87

Power Finance Co

9.59

13.14

17.16

10

23.95

11.6

SBI

7.58

11.7

143.67

10

12.03

15.74

Bank of Baroda

6.55

6.84

60.93

10

12.86

17.35

Rural Electrific

18.54

12.08

14.81

10

24.31

16.02

GlaxoSmithKlineConsu

7.35

23.57

44.78

10

11.56

24.75

Crompton Greaves

9.21

27.43

10.83

8.4

32.35

86 | P a g e

Expected return:

30%

Minimum investment:

>500000

Portfolio PE Ratio :

102.04

Portfolio earning per share:

129.42

Avgerage face value of portfolio:

108.2

Return average equity :

19.45

Risk Management model :

VAR

Risk Exposure :

40-60%

Category :

Medium risk, Medium Return

Diversification :

10%

This portfolio is good for the income group between 10-25 lac and willing to invest on
market value portfolio of lesser than10-50 lac. Risk appetite of the client is low. liquidity in type of
portfolio is high. Emphasis is given to financial institute , Computers - Software, Oil Drilling And
Exploration, Telecommunications - Service. With the diversification of approx 10%

87 | P a g e

Sample 4
Name

Percentage

PE Ratio

EPS

Face

Net profit

Return on

value

margin(%)

average
equity

Rallis India

15

Power
Finance Co

12.07

60

10

8.32

25.51

13.14

17.16

10

23.95

11.6

8.77

11.85

10

6.71

11.53

36.25

13.7

10

4.68

4.15

879.22

830.31

1000

17.45

21.51

19.61

101.73

27.54

32.67

19.68

97.07

10

14.47

24.66

5.39

59.78

35.11

38.85

10.96

IDBI Bank
Ltd.

13.47

Trent Ltd.

10.62

Indian Rly.
Fin

6.66

Infosys
Techno.

6.52

Reliance
Inds.

6.18

Nava
Bharat
Ventures

6.14

ITC Ltd.

11.64

27.81

8.65

21.18

23.85

L & T

12.81

25.14

59.44

8.54

22.81

Expected return:

24.92

Minimum investment:

>400000

88 | P a g e

Portfolio PE Ratio :

104.708

Portfolio earning per share:

125.96

Avgerage face value of portfolio:

106

Return average equity:

21.71

Risk management model :

VAR

Risk Exposure :

40-60%

Category :

Medium risk, Medium Return

Diversification:

10%

This portfolio is good for the income group between 1-5 lac and willing to invest on market
value portfolio of lesser than25 lac. Risk appetite of the client is high. liquidity in type of portfolio
is low. Emphasis is given to Finance - Term Lending Institutions, Chemicals, Computers Software Telecommunications - Service, Finance - Banks - Public Sector. With the diversification
of approx 10%

Sample 5

89 | P a g e

Name

Percentage

PE Ratio

EPS

Face

Net profit

Return on

value

margin(%)

average
equity

Indian Oil

20.87

24.74

10

2.78

16.99

Corp

13.18

SBI

11.23

11.7

143.67

10

12.03

15.74

9.3

9.41

62.59

10

18.37

23.79

8.77

11.85

10

6.71

11.53

19.68

97.07

10

14.45

24.66

27.18

52.78

10

11.35

15.32

27.95

4.89

10

30.7

12.22

13.42

64.55

10

16.29

24.61

18.56

50.57

10

13.31

17.77

29.59

80.24

10

20.71

17.37

National
Housing
IDBI Bank
Ltd.

12.56

Reliance
Inds.

9.8

HDFC
Bank

11.24

Neyveli
Lignite

9.56

ACC Ltd.

6.16

Axis Bank
Ltd.

7.42

HDFC

9.55

Expected return:

13%

Minimum investment:

>100000

Portfolio PE Ratio :

17.52

Portfolio earning per share:

59.29

90 | P a g e

Average face value of portfolio;

10

Return average equity:

18

Risk management model :

VAR

Risk Exposure :

20-40%

Category :

low risk low return

Diversification :

7%

This portfolio is good for the income group between 1-5 lacs and willing to invest on
market value portfolio of lesser than 1 lacs. Risk appetite of the client is low. liquidity in type of
portfolio is high but comparatively return is quite low. Emphasis is given to financial institute ,
Refineries, Power - Generation/Distribution, Cement Major. Wih the diversification of approx
7%

Sample 6
Name

Percentage

PE Ratio

EPS

Face

Net profit

Return on

value

margin(%)

average
equity

91 | P a g e

Reliance
Inds.
L & T

19.68

97.07

10

14.45

24.66

25.14

59.44

8.54

22.81

19.61

101.73

27.52

32.67

12.03
7.84

Infosys
Techno.

9.41

ICICI Bank

9.12

21.91

33.76

10

9.74

7.58

HDFC

9.75

29.59

80.24

10

20.71

17.37

27.18

52.78

10

11.35

15.32

20.76

20.4

23.99

30.94

23.12

27.81

8.65

21.18

23.85

11.7

143.67

10

12.03

15.74

5.29

14.62

75.4

10

25.93

23.87

HDFC
Bank

9.26

Bharti
Airtel
ITC Ltd.
SBI
ONGC

92 | P a g e

9.18

Expected return:

25%

Minimum investment:

>2000000

Portfolio PE Ratio :

102.04

Portfolio earning per share:

129.42

Avgerage face value of portfolio:

108.2

Return average equity:

19.45

Risk management model :

VAR

Risk Exposure :

5-30%

Category :

Blue chip

Diversification :

16%

This portfolio is good for the income group between 10-25 lacs and willing to invest on
market value portfolio of lesser than10-50 lacs. Risk appetite of the client is low. liquidity in type
of portfolio is high. Emphasis is given to financial institute , Computers - Software, Oil Drilling
And Exploration, Telecommunications - Service. With the diversification of approx 16%

93 | P a g e

CONCLUS ION
Focussing on downside risk as an alternative measure for risk in financial markets has
enabled us to develop a framework for INDIAN BANK that moves away from the standard
meanvariance approach. The measure for risk depends on a portfolio's potential loss function,
itself a function of portfolio VaR. Introducing VaR into the measure for risk has the benefit of
allowing the risk +return trade-o to be analysed for various associated confidence levels.
Since the riskiness of an asset increases with the choice of the confidence level associated
with the downside risk measure, risk becomes a function of the individual's risk aversion level. The
INDIAN BANK problem is still to maximise expected return, however whilst minimising the
downside risk as captured by VaR. This allows us to develop a very generalized framework for
INDIAN BANK. Indeed the use of certain parametric distributions such as the normal allows for a
market equilibrium model to be derived, with the assumption of normality enabling the model to
collapse.

94 | P a g e

B I B LI O G R APH Y
Following sources is been proved very helpful in preparation of this report
Website
www.angelbroking.com
www.in.ibtimes.com
www.rediff.com/money
www.thehindubusinessline.com
Journal
Investors journal of financial economic by ER Bawa
Journal of Portfolio Management by Bekaert, G., Erb, C., Harvey, C., Viskanta, T.,
Das, D., Uppal, R., 1999. The eect of systemic risk on international portfolio choice. Workingp
paper.
Journal of Banking & Finance 25 (2001)
Books
Financial market in india by rakesh shahni
Integrated risk management :techniques and strategies for managing corporate risk byNeil A
Doherty.
The financing of catastrophe risk by Kenneth Froot

95 | P a g e