(1.

1) INDUSTRY PROFILE
Non-Banking Financial Companies (NBFCs) are fast emerging as an important
segment of the Indian Financial System. It is a heterogeneous group of institutions
(other than commercial and co-operative banks) performing financial intermediation
in a variety of ways, like accepting deposits, making loans and advances, leasing, hire
purchase etc. They raise funds from the public and then lend them to ultimate
spenders. They advance loans to the various wholesale and retail traders, small-scale
industries and self-employed persons. Thus, they have broadened and diversified the
range of products and services offered by the financial sector.
Gradually, they are being recognized as complementary to the banking sector due to
customer- oriented services, simplified procedures and attractive rates of return on
deposits, flexibility and timeliness in meeting the credit needs of the specified sectors.
The working and operation of NBFC are regulated by the Reserve Bank of India
within the Reserve Bank of India Act of 1934.
As per the RBI, a non-banking financial company is defined as:

A financial institution which is a company.

A non-banking institution which is a company and which has as its principle

business the receiving of deposits, under any scheme of arrangement or in any
other manner or lending in any manner.

Such other non-banking institution or class of such institutions, as the bank

may, with the previous approval of the Central Government and by
notification in the Official Gazette specify.

THE TYPES OF NBFCs REGISTERED WITH THE RBI ARE:

Equipment Leasing Company: - is any financial institution whose principle

business is that of leasing equipments or financing of such an activity.

Hire-Purchase Company: - is any financial intermediary whose principle

business relates to hire-purchase transaction or financing of such transactions.

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Loan Company: - means any financial institution whose principle business is

that of providing finance, whether by making loans or advances or otherwise
for any activity other than its own (excluding any equipment leasing or hirepurchase finance activity).

Investment Company:-is any financial intermediary whose principle business

is that of buying and selling of securities.
Now these NBFCs have been re-classified into three categories:

Asset Finance Companies: - These are financial institutions whose

principle business is of financing of physical assets such as
automobiles, tractors, construction equipments, material handling
equipments and other machines.

Investment Companies:- They are generally involved in the business

of shares, stocks, bonds, debentures issued by the government or local
authority that are marketable in nature.

Loan Companies: - They are loan giving companies which operate in

the business of providing loans. They can be housing loans, gold loans,
etc.

NBFCs are different from banks in the following ways:

NBFCs cannot accept demand deposits (Demand Deposits are funds deposited
in an institution that are payable immediately on demand, e.g.-savings deposit,
current account, etc.)

A NBFC cannot issue cheques to their customers and is not a part of their
payment and settlement system.

Deposit Insurance facility of Deposit Insurance Credit Guarantee Corporation

is not available to NBFCs customers.

They cannot offer interest rates higher than the ceiling rates prescribed by the
RBI from time to time (Currently the ceiling rate is 12.5%)

They cannot offer gifts, incentives or any other additional benefit to its
depositors.

They should have minimum investment grade credit rating from the credit
rating agencies.

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Non-Banking Financial Companies (NBFCs) are fast emerging as an important

segment of the Indian Financial System. It is a heterogeneous group of institutions
(other than commercial and co-operative banks) performing financial intermediation
in a variety of ways, like accepting deposits, making loans and advances, leasing, hire
purchase etc. They raise funds from the public and then lend them to ultimate
spenders. They advance loans to the various wholesale and retail traders, small-scale
industries and self-employed persons. Thus, they have broadened and diversified the
range of products and services offered by the financial sector.
Gradually, they are being recognized as complementary to the banking sector due to
customer-oriented services, simplified procedures and attractive rates of return on
deposits, flexibility and timeliness in meeting the credit needs of the specified sectors.
The working and operation of NBFC are regulated by the Reserve Bank of India
within the Reserve Bank of India Act of 1934.
As per the RBI, a non-banking financial company is defined as:

A financial institution which is a company.

A non-banking institution which is a company and which has as its principle

business the receiving of deposits, under any scheme of arrangement or in any
other manner or lending in any manner.

Such other non-banking institution or class of such institutions, as the bank

may, with the previous approval of the Central Government and by
notification in the Official Gazette specify.

(1.2) COMPANY OVERVIEW

Shriram Group is a financial servicesconglomerate founded on April 5, 1974 by R.
Thyagarajan, AVS Raja and T. Jayaraman. They have their headquarters in Chennai,
Tamil Nadu, India. The group had its beginning in chit funds business and later on
entered the lending business in a big way through Shriram Transport Finance
(Commercial Vehicle Finance) and Shriram City Union Finance (Consumer and
MSME Finance). R. Thyagarajan was awarded Padma Bhushan award in 2013 for
empowering financial inclusion in India.

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The journey of Shriram has seen them making several financial innovations while
standing at the very edge of Organized Finance. The Banks and other Financial
Institutions were guided by the Economists Vision, the small truck owner who
always fell on their blind side, was given a miss.
With a track record of almost 35 years, STFC is now among the leading organized
finance provider for the commercial vehicle segment with a focus to provide various
credit facilities to Small Road Transport Operators (SRTOs).
STFC, being a pioneer in pre-owned CV segment, has institutionalized its expertise in
loan origination, valuation and collection. Over the years, STFC has created an
ecosystem of empowerment by expanding its products and services to encompass
similar asset classes (pre-owned and new commercial and passenger vehicles, tractors,
3 wheelers, multi-utility vehicles, etc.) and ancillary services (Finance for working
capital, engine replacement, bill discounting, credit cards and tyre loans as holistic
financing support).
For employees at Shriram, credit-worthiness of the Small Truck Owner has always
been an article of faith. This faith has guided their journey from its pioneering days in
financing Small Truck Owners to the present day leadership. Today they are not only
the leader in Truck Finance; but are also India's largest Asset Based Non-Banking
Finance Company.
STFCs pan-India presence through its widespread network of branches has helped in
its overall growth over the years. As on March 2014,it has 654 branch offices and 629
rural centres and tie up with over 500 private financiers across the country. As on
March, 2014 STFCs employee strength was 18122, including more than 11,209
product executives and credit executives who are colloquially referred to as our field
force.
STFC has demonstrated consistent growth in its business and profitability. Today,
STFC has approximately 20-25% market-share in pre-owned commercial vehicles
and approximately 7-8% market share in new commercial vehicles with more than
9,50,000 customers.

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(1.2.1) PERFORMANCE OF STFC (in crores)

PARTICULARS

31.03.12

31.03.13

31.03.14

ASSET

41922.41

52,000

56,520

UNDER

MANAGEMENT
MARKETSHARE

22-25%

22-25%

22-25%

6-7%

6-7%

6-7%

A)PRE
OWNED
B)NEW
TRUCKS
CREDITRATING

Stable

NET PROFIT

1257.45

1360.62

1264.21

DIVIDEND

62%

65 %

70 %

NET NPA

0.40%

0.77 %

0.83%

16178

18122

TOTAL

NO

OF 15467

Stable

High Safety

EMPLOYEES
Table-1.1
Here we can see that Asset under management is increasing Asset Under management
is the value of documents on which company has hypothecation. As NBFCs are not
allowed to take deposit as a debt so it is the only assets with the company. So an
increasing trend shows that company is in a good state. Market share is remained
same. Credit Rating of the company is also improved which is again is good for the
company. But net profit is decreasing which is because finance charges are increasing.
Dividend given to per share to the share holder is increasing which will further boost
the shareholders faith and their investment motive. Though the NPA is still under the
percentage fixed by the RBI, but it is increasing which shows company should take a
corrective measure while providing loans. Increase in number of employees depict
that outreach of the company is increasing year by year.

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CREDIT RATING:-The credit rating enjoyed by the Company as on March 31,

2013 is as follows.
CREDIT

RATING

PROVIDED

BY

DIFFERENT

CREDIT

RATING

INSTITUTIONS
Credit Rating Agency

Instruments

Ratings

CARE

Non-Convertible

CARE AA+

Debentures
CARE

Subordinate Debt

CARE AA+

CRISIL

Fixed Deposit

CRISIL AA+/Stable

CRISIL

Subordinate Debt

CRISIL AA/Stable

CRISIL

Non-Convertible

CRISIL AA+/Stable

Debentures-Public
CRISIL

Short-Term Debt

CRISIL A1+

CRISIL

Bank Loan Long Term and CRISIL AA+/Stable

Short Term

ICRA

Fixed Deposit

MAA+

with

Stable

outlook
Table-1.2

(1.2.2) WORK DONE BY STFC AT HEAD OFFICE LEVEL

INTERNAL AUDIT
When paid up capital > 5 crore then have to form audit committee. IDEA software is
used in STFC for data analysis for internal auditing. External auditing is done by CA
firms hired time to time. Main types of auditing done in STFC areOperational audit- covers only operational activities ex inquire about loans
documents, how customers are being sourced and how they are retained etc.
Concurrent audit - this type of audit is done throughout the year. Very common in
banks.
Surprised audit- As the name suggests itself these audits are done without informing
the concerned branch. Main aim is to know the real condition of the bank on the spot.
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Because many times concerned branch is tried to manipulate the data related to audit
so that they can get good rank in auditing.
Stock audit- In this type of auditing closing and opining stock is evaluated. This is
related to inventory management.
After doing internal audit risk is basically measured. Risk is categorized in 6 types
depending upon the amount get defaulted at branch level.
Insignificant risk- no cash mismatch only entry is done wrongly.
Major risk- when default of 51 lakh-1 crore
Minor risk- up to 10 lakh
Moderate risk- 11-50 lakh
Catastrophic risk- of more than 1 crore.

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(1.2.3) BRANCH STRUCTURE

Fig-1.1
ABREVIATIONS:

BTL-Branch Team Leader

CRE-Customer Relationship Executive

CSE-Customer Service Executive

PE-Product Executive

WORKING OF STFC AT BRANCH LEVEL

Process of lending in brief
Two URLs are available in STFC. UNO and WEST REPORT. Lending process is
divided into three stages stage I, stage II, stage III.
STAGE I- In this stage two main functions are vehicle deduping and and customer
deduping. Firstly we do vehicle deduping. We go to UNO and give their unique
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numbers related to vehicle like its chessis number, engine number, registration
number etc. It is done to know whether vehicle is already financed from the company
or not. If after filling any number UNO generates data related to it that means vehicle
is already being financed by the company and so loan will not be processed if all
things related to previous loan are cleared but if all EMI and ODCs are clear it is
being preceded. After it we go for customer deduping also called deduping. In it again
we give unique numbers related to the customer likes customer ID, customer name
etc. Through it we searched about customer whether he/she is already taken loan from
company or not and also searched is he/she acts as a guarantor. If customer is old then
we check his track record that is as a guarantor or as a borrower what was his
repayment tendency. That is we checked his credit worthiness. If customer is new
then company generate new customer ID. After that check all details related to the
vehicle and using oracle try to decide the amount of loan should be given on the
vehicle.
STAGE II - This stage is related to the documentation. Verify whether documents
like tax invoice, RC, quotation, receipt of margin money, particular and insurance etc
is available or not. Then company do Telly Verification to cross check the borrower.
STAGE III -Here we fixed EMI. That is amount of EMI and also scheme through
which EMI Is provided. Fes decides which type and pattern should be applied so that
IRR will be maintained and customer should also be comfortable in repaying it.

INSURANCE
IRDA (INSRANCE REGULATORY DEPATMENT AND AUTHORITY) is in India
to look over insurance cases. Two types of insurance are available in India First Party
Insurance and Second Party Insurance. According to Motor Vehicle ACT 1988 Third
party insurance is mandatory. It is also called incomprehensive insurance. It insured
the third party only thats why called so. Borrower or the owner of the vehicle is
considered as the first party, insurance company is considered as the second party and
the anything that adversely get affected by any type accident by this vehicle is
considered as the third party. In first party insurance both the owner and the thing
which is hitted by the vehicle are insured. That is why it is also called comprehensive
insurance policy. If we talk about STFC here comprehensive policy is mandatory for

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the vehicle but in some cases Third party insurance is also taken like (i) if customer
wants to do settlement (ii) if financing amount is of less than 1 lac. Before giving
insurance we check following things-:
(i) Vehicle number is right or not
(ii) Name of the owner on the RC.
(iii) HPN is on the insurance or not
(iv) Also match chessis and engine number from the RC.
(v) Check validity of the policy.

DEPOSITS
As we know STFC is a deposit taking non banking financial company.
Deposit taking NBFC like our company has to be rated by rating agencies
such as CRISIL, CAMEL, CARE, FRIPL, FITCH, Standard & Poor, Moodys
etc. This rating has to be done every year.
The best rated NBFC can get a maximum rating of AAA in respect of
deposits.
Even AAA rating NBFCs can accept deposit only to the maximum extent of 4
times of their Net Owned Funds. If the grading comes down like AA or A, the
quantum of accepting public deposit will also get reduced to 3 times, 2 times
respectively of NOF.
Out of the deposit amount, 15% must be invested in government approved
securities (such as RBI Bond, IDBI Bond, ICICI Bond, Central & State
Government Bonds etc).
The minimum period of deposit is 1 year and the maximum period is 5 years.

(1.2.4) SERVICES PROVIDED BY STFC

a. LENDING

MAIN PRODUCTS: -Shriram has divided its vehicle segments on the basis
of certain criteria and conditions in five segments. They are as follows:

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Segments of STFC

Fig-1.2:
Let us now develop a brief understanding into each of this segment:

Small Commercial Vehicles (SCV):- As per RTO this vertical comprises of

vehicles with a Gross Vehicle Weight of less than 3.5 tonnes but as per
Shriram this vertical comprises of all vehicles upto 4 wheelers.
EXAMPLE: - Bajaj Delivery Van, Maruti Omni Cargo (used only for
transporting goods), Tata Ace.

Light Commercial Vehicles (LCV):-As per RTO this vertical comprises of

vehicles having Gross Vehicle Weight of greater than 3.5 tonnes and less than
7.5 tonnes but if Shriram is taken into consideration this vertical consists of all
6 wheelers.
EXAMPLE:-Tata SFC 407, Swaraj Mazda Premium Truck, Ashok Leyland
Cargo.

Heavy Goods Vehicle and Construction Vehicle:- As per RTO this segment
consists of vehicles and machinery used for construction with a Gross Vehicle
Weight of greater than 16 tonnes and if we take Shriram into picture then this
segment consists of all vehicles above 6 wheelers and all machinery.

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EXAMPLE: - Tata Turbo Truck, Ashok Leyland 3116, Ashok Leyland 2216,
JCB 3DX.

Farm Vehicles and Farm Equipments: -This segment consists of tractors

and farm equipments, like, harvesters, all tractor variants.
EXAMPLE:-Mahindra Tractors, Punjab Tractors, L&T all tractor variants,
Escorts harvester.

Passenger Vehicles: -This vertical comprises of vehicles used for transporting

passengers, that is, from 3 wheelers upto buses, like, Swaraj Bus, School bus.
EXAMPLE: - Atul Passenger Auto, Eicher School Bus, Mahindra Maxi Cab,
Swaraj School Bus.

Hence, all vehicles that come for financing under Shriram Transport Finance
Company ltd are classified under these segments. Thus, providing loans on
Commercial vehicles is considered to be the main product of Shriram Transport
Finance Company Ltd.

OTHER PRODUCTS:-They are also known as Working Capital loans. They

are value added services provided by STFC to its existing customers.

Eligibility Criteria for Working Capital loans.

Existing customers

Completed Six month of agreement period.

Out of 6 instalments 4 must have been paid.

The various kinds of Working Capital Loans are mentioned below:-

a) TYRE LOAN:

Based on the Dealer quote, STFC at its discretion extend the loan. ( with or
without margin money)

Loan amount from Rs. 4000 to Rs. 80,000

Repayment period- 4 months to 12 months

Documentations charges as per norms.

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b) POWER LOAN:- Purpose of loan:

For vehicle repairs

For fuel requirements, Driver/Cleaner wages, tollgate expenses.

Loan amount 75% of the estimated requirements.

c) ENGINE EXCHANGE LOAN:

TATA Motors is offering reconditioned engines in exchange of used

engines.

75% of estimated requirement.

Documentation Charges: Rs. 250/-

Service Charges: 2 % of the loan amount or Rs. 1000/- whichever is

higher

d) PERSONAL LOAN:-To fulfil the personal needs of Borrower like

Medical expenses

Educational expenses for children

SLIC premium payment

Vehicle- premium payment

Maximum loan amount up to one lakh.

e) JEWEL LOAN-(Gold Loan) - Also known as asset backed personal

loan.

Only for STFC customers.

Gold Jewels only. (Gold coins, Bars, Biscuits not allowed)

Loan cannot be against jewel with very low gold weight e.g. - gross weight
of 200 grams and net pure weight of 20 grams only. Any collateral item
which has iron or copper as major weight contributing should not be
funded.

Valuation of gold based on Branch Gold Appraisers Report

Market value of gold- as per UNO (Net pure wet*UNO gold rate)

Disbursal Mode-Total payment will go first to the customer account

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1.

Minimum 55% of loan Amount OR entire loan amount to be deposited in the

parent loan account. (Cash inflow through Cheque of the loan amount
deposited to the account of customer.)

2. Maximum 45 % of loan amount disbursed for personal needs

3. Interest rate- Same as parent loan agreement.
4. Only EMI scheme
Tenure:

EMI- up to 36 months or expiry of Parent loan whichever is earlier.

Approval Authority- Branch Manager.

Processing Fee- Min Appraiser Fee.

KYC Documents- Not required.

Release of Gold Pledged- The collateral to be released on repayment of the

entire loan amount or 50% of the Loan Amount with BM/CM approval.

f) CREDIT CARD:

Co- Branded Credit card ( SHRIRAM-AXIS)

Loan amount must be more than One Lac.

Age must be below 60 years.

Over- all credit limit- Rs. 15,000/-

Cash withdrawal limit- Rs. 5000/-

Interest charged @ 2.95 per month from the date of withdrawal &
compounded monthly.

Interest Free Period 20 to 50 days.

Billing Date is 13th to 12th of next month.

Validity of card is 3 years. However Card is to be surrendered, if the

loan is closed early.
Benefits.

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Personal accident cover: Rs. 3,00,000/-

Lost card liability: Rs. 15,000/-

g) CHALLAN DISCOUNTING:

It is a facility to get money in advance against money receivable in the

future.

Commission charges are 3% of the discounted amount of Challan.

Cash disbursal limit below Rs. 20,000.

b. DEPOSITS: - Apart from providing loans on new and pre-owned

commercial vehicles and other working capital loans, Shriram Transport
Finance Company also accepts deposits. The kinds of deposits and the
procedure of making deposits are as follows:-

Kinds of Deposits:i.

Non-cumulative Deposits:-It is a deposit where the interest is being paid at

Monthly / Quarterly intervals. Fixed deposits are accepted in multiples of
Rs.1000/- subject to a minimum amount of Rs.10000/- per deposit account.

ii.

Cumulative Deposits:-Cumulative Deposits are accepted in multiples of

Rs.1,000/- subject to a minimum amount of Rs.5,000/- per deposit account.

Application Procedure
For resident individuals, the list of documents required is:
Fresh application form
A/c payee cheque / Demand Draft / Pay order favouring Shriram Transport Finance
Company Ltd.
To comply with? Know your customer? Guidelines for NBFCs prescribed by the
Reserve Bank of India, first applicant should provide a copy of any one of the
following documents (which contains the photograph of the concerned first depositor)
for identification and proof of residential address.

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Passport

PAN card

Voter's Identity Card

Driving license

Bank passbook with photo

In case the address mentioned in the above document differs from the current address
mentioned in the application form then a copy of any one of the following documents
should be furnished as proof of residential address.

Telephone bill

Bank account statement

Letter from any recognized public authority

Electricity Bill

Ration Card

Letter from Employee

Interest Payment Modes:

Post Dated interest warrants sent direct to depositors

Direct to the depositor with bank details

Through RBI Electronic Clearance Service (ECS)

DD

THE CSR ACTIVITIES OF THE COMPANY INCLUDE:1. Providing education to the backward and weaker sections of the society.
2. Empowerment of Common Man and women
3. Providing Vocational Training for income generation and enhancing
employability of marginalized/ unprivileged people of the society.
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4. Undertaking projects for protection of environment such as tree plantation,

water conservation, etc.
5. Nutrition, Health care and Sanitation Programs.

(1.2.5) SWOT ANALYSIS OF STFC:STRENGTHS:

The pioneer in commercial vehicle financing sector.

Knowledge-driven and relationship-based business model.

Pan-India presence with 539 branch offices.

A well-defined and scalable organization structure based on product, territory

and process knowledge.

Strong financial track record driven by fast growth in AUM with low NonPerforming Asset.

Experienced and stable management team.

Strong relationship with public, private as well as foreign banks, institutions

and investors.

More than 9.5 lakhs customers all over India.

WEAKNESSES:

The Companys business and its growth are directly linked to the GDP growth
of the country.

OPPORTUNITIES:

Growth in the Commercial Vehicle market.

Strong demand for Construction Equipment.

Strong demand for Passenger Commercial Vehicles.

Strong demand for pre-owned tractors.

Loans for working capital requirement of Commercial Vehicle users.

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Partnerships with private financers will enable the company to enhance its
reach without significant investments in building infrastructure.

THREAT:

Regulatory changes in the NBFC and ancillary sectors

(1.3) MANAGERIAL PROBLEM

Risk is the measure issue for any company, especially if we talked about Non-banking
financial companies it form an integral part of the Indian financial system. The history
of the NBFC Industry in India is a story of under-regulation followed by overregulation. Policy makers have swung from one extreme position to another in their
attempt to set controls and then restrain them so that they do not curb the growth of
the industry. Most of this NBFCs are operating with high risk of lending and more
often NBFCs lend credit to Small and Medium size enterprises, which are
categorized as high risk class of Assets. To assess such high risk assets we need to
have a comprehensive model. In STFC basically individual borrowers risk is
measured in qualitative basis.

(1.3.1) NEED OF THE STUDY

A Risk Assessment Model (RAM) is necessary to avoid the limitations associated
with a simplistic and broad classification of applicants into a "good" or "bad"
category. Ideally, credit and marketing functions should be separated. But, in the case
of Centurion Bank Limited, the marketing and credit functions are clubbed and are
performed by the marketing manager. If the manager detaches himself from the
organization, it will be difficult for the concern to carry on from there. The risk of
biased approach towards customers also poses a great threat. So, by systematizing the
whole process, we are not only evening out the process but also removing the element
of bias and subjectivity. The bank currently uses an evaluation sheet giving equal
weights to all parameters under consideration. Different parameters deserve different
degrees of importance. These raise the need for development of a Risk assessment
model to complement the evaluation sheet. The development of such a framework
will standardize the judgment in the credit selection procedures. The RAM will
Page | 18

deploy a number as a primary summary indicator of risks associated with a credit

exposure. Risk management encompasses identification, measurement, monitoring
and control of the credit risk exposures. Such a rating framework is the basic module
for developing a risk management system.

(1.3.2) KEY OUTPUT OF RAM

I.

Defining the pricing bands-- The grade on the rating scale is expected to
define the pricing and related terms and conditions for the accepted credit
exposures. It is possible to define broad pricing bands and directly link the
band with the grade on the rating scale. Higher the risk, higher could be the
price charged.

II.

Limits on exposure-- The amount sanctioned would depend on the creditscore on the RAM. These limits could be linked to specific parameters like, a
certain percentage of the total debt required by the borrower. This would help
in a larger dispersion of risk amongst lenders and limit risk concentration in
moderate credit-quality projects.

III.

Tenure of loans-- The rating scale could also be used for deciding on the
tenure of the proposed assistance. A longer term could be offered to safe
customers.

IV.

Monitoring the exposures-- Banks may also use the rating scale to keep a
close track of deteriorating credit quality and decide on the remedial
measures. For instance, the frequency of surveillance on category 4 exposures
could be kept at quarterly intervals, while those on category 2 loans could be
half-yearly.

Macaulay (1988) conducted a survey in the United States and found credit risk
management is best practice in bank and above 90% of the bank in country have
adopted the best practice. Inadequate credit policies are still the main source of
serious problem in the banking industry as result effective credit risk management has
gained an increased focus in recent years. The main role of an effective credit risk
management policy must be to maximize a banks risk adjusted rate of return by
Page | 19

maintaining credit exposure within acceptable limits. Moreover, banks need to

manage credit risk in the entire portfolio as well as the risk in individual credits
transactions.
So I tried to applied IRCSIT approved model on samples of Bhiwani Branch so that I
can proposed it as a new model for STFC which will add value to it. This Risk
Assessment Model for NBFCs is based on both qualitative and quantitative aspects
of the client.
Quantitative aspect: Quantitative aspect refers to managing the credit risk by using
the quantitative tools and techniques such as ratio analysis, and reaching a concrete
number for every loan which would indicate the magnitude of risk and expected
returns, on a case by case basis.
Qualitative aspect: Qualitative aspect is taking a holistic view by a bank at its overall
portfolio, deciding the lending limits to a sector, setting up the broad policies and
procedures, and so on. Both quantitative and qualitative aspects need to be taken into
consideration while computing the risk levels. In the case of corporate clients, postmortem of the balance sheet is one of the main instruments. Ratio analysis helps us
determine whether the loans have to be extended. But, past performance is not an
ideal indicator of the future performance. This raises the necessity to consider other
qualitative parameters such as technological status, reputation, repayment track with
others and so on.
The Model basically contains 4 risks Liquidity Risk, Operational Risk, Credit
Risk, Market Risk.

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(1.4) LAY OUT OF THE REPORT

Report is divided into 5 chapters. Chapter-1 is already being described in previous
pages. Chapter -1 was basically introduction part that contains COMPANY
PROFIELE, MANAGERIAL PROBLEM, and its third and last section is LAY OUT
OF THE REPORT. This part describes what this projects contain and briefly why
particular part is relevant for the project.
Chapter -2 contains Review Of Literature. This part describes all works done in the
area of the project. My topic is TO PROPOSE IACSIT APPROVED RISK
ASSESSMENT MODEL FOR STFC. So my Literature Review firstly described
Risk. What other persons think about risk and how it is categorized. It also defines
Risk Assessment and describes all theories related to it. Second part of the chapter
describes all work done by the Indians in Risk Assessment Area. Third part of the
chapter describes all work done by the International Researcher in this area.
Chapter -3 contains Research Methodology. This part is further is divided into 6 main
parts- Research Design, Sample Size, Sampling Procedure, Sources of Data and Time
Frame.
Chapter -4 Analysis of Data is done in this chapter.
Chapter -5 Contains Conclusion and Recommendation.

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(2.1) DEFINITION OF RISK

When doing business, constantly decisions, where the outcomes cannot be foreseen
with certainty due to incomplete information, have to be made (Stroeder, 2008,
p.135). This uncertainty connected with every kind of business activity is risks.
Although this term is of central importance, there does not exist an overall definition
of the meaning of risk (Wesel, 2010, p.280).
As a first step for the definition, similar terms, which are often used exchangeable in
every days speech, need to be distinguished, namely: uncertainty, danger and risk.
Uncertainty is used when the outcomes of future events are uncertain and the different
states cannot be connected with probabilities of occurrence (Stroeder, 2008, p.136)
The term danger in general stands for unplanned and unpredictable outcomes having a
negative impact on something. Like those two terms, risk summarizes events that are
uncertain regarding their outcome. The difference is that in the case of risk, the
outcomes can be connected with a probability of occurrence (Stroeder, 2008, p.136).
Furthermore, risk can be split into two categories. On the one hand there are pure
risks or systematic risks, which cannot be influenced by the manager and are
independent of business decisions. On the other hand there are unsystematic risks,
which are the result of managerial decision-making and can either have a negative or
a positive outcome (Stroeder, 2008, p.140; Retzlaff, 2007, p.11).
However there are differences in the definitions of risk. First of all some include also
possible positive outcomes of a risk, also referred to as upside risks or chances. Other
only define the possible occurrence of negative outcomes, or downside risks, as risks
because they are more in the focus of the management (Dhanini et al., 2007, p.74).
The inclusion or exclusion of chances is not the only difference in the common
definitions. They range from (negative) deviations of planned outcomes, over danger
of making wrong decisions to danger of losses due to information lacks (e.g. Nassauer
& Pausenberger, 2000, p.264; Hermann, 1996, pp.7-11). When focusing on the
common features of the definitions, risk is the possibility of deviation from a planned
outcome or goal. This implies that all business is connected with risks resulting from
the fact that future states of the world and outcomes of decisions can only be
predicted. As business activities are uncertain regarding their outcome and this
Page | 22

uncertainty implies risks to the profit of the firm, a company needs to manage its risk
exposure (Retzlaff, 2007, p.9).

(2.2) RISK CATEGORIES

In general risks can occur everywhere within the company or its business
environment. Operational risks, financial risks and organizational and management
risks are internal risks as they have their source within the firm (Henschel, 2008, p.8).
External risks occur in the business environment of the company and can be
economical, technological, political, legal or cultural changes (Scheve, 2005, p.26).
Economic risks apply to all companies, as they include the influence of
macroeconomic variables on the company, its input factors and demand for the
firms products (Triantis, 2000, p.558). As this category covers risks, which depend
on changes in financial markets, it is also often referred to as external financial or
market risks. The main risk factors in this category are changes in interest rates,
exchange rates and commodity prices (Triantis, 2000, p.559; Eckbo, 2008, p.542).
However financial risks can also occur independent of the development of
international markets. Also the way of financing, liquidity and equity consumption
due to losses can become risks to the company. All three risks are internal financial
business risks (Hermann, 1996, p.153).

(2.2.1) EXTERNAL FINANCIAL RISK

Financial risks
Financial risk management has received increased attention over the past years
(Glaum, 2000, p.373). The reason for this is that financial risks, though they are not a
core competency of non-financial firms, also influence their business operations to a
large extend (Triantis, 2000, p.559). Financial risks can be of different forms. On the
one hand there are external financial risks depending on changes on financial markets.
On the other hand there are internal financial risks, where the company itself is the
source of the risks (Eichhorn, 2004, p.43).
External financial risks are based on the risk factors of exchange and interest rates as
well as commodity prices (Schnborn, 2010, p.3).

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Exchange rate risk- Exchange risk occurs when a company is involved in

international business and the cash in or outflows are in a foreign exchange rate. As
this rate is not fixed and cannot be fully anticipated a possible change in a foreign
exchange rate leads to the risk of changes in the amount of a payable / receivable and
by that a change in the amount of money the company has to pay / will receive. This
risk is measured by the concept of transaction exposure (Glaum, 2000, p.375;
Armeanu & Blu, 2007, p.65). Furthermore economic exposure can be included in the
evaluation of exchange rate risk. This includes changes in the quantity of future sales
due to changes in the exchange rate and therefore relative competitiveness of the
company (Nassauer & Pausenberger, 2000, p.271). However, the prediction of this
sensitivity is difficult and hardly measurable and thus the company cannot manage
this risk actively. Most firms therefore concentrate on transaction exposure and by
that on the price change and not the quantity change caused by the exchange rate
volatility (Smithson, Smith & Wilford, 1995, p.6).
Interest rate risk- Interest rate risk is based on changes in interest rates and can be
observed in different forms. The first form refers to changes in interest rates in
connection with variable loans and short-term financing. A rise in the interest rate
leads to higher interest payments for the variable rate loan and more expensive
follow-up financing. This decreases the companys earnings and can in worst case it is
lead to financial distress. Second, the vice versa case refers to cash positions of the
company with a variable interest rate. A fall in this rate leads to a loss in earnings.
Thirdly, also fixed rate debt contracts can be a risk for the company. In times of
declining interest rates those contracts cause higher payments then a variable loan
would do and are disadvantageous for the company. However, these costs are
opportunity costs and not real costs to the company (Dhanini et al., 2007, p. 74).
Therefore it can be summarized that the more corporate debt and especially short-term
and variable rate debt a company has, the more vulnerable it is to changes in the
interest rate (Dhanini et al., 2007, p.71
Commodity price risk- A risk on the procurement market is the price volatility of
commodities. This can become a significant risk for the company if the commodities
are relatively important inputs with regard to price and/ or quantity (Stroeder, 2008,
p.219).

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(2.2.2) INTERNAL FINANCIAL RISK

Financing risk- Firm financing can become a risk for the company due to different
reasons. The choice between fixed rate and floating rate debt, the duration of the debt
and the overall amount of debt financing are possible sources of risks, which already
have been assessed in the paragraph about interest rate risk. The firm wants to be
flexible and at the same time lower the costs for financing (Brner, 2006, p.298).
The duration of loans is important in connection with the assets, which are financed
with the loan. Here, often a mismatch between the durations can be observed. Longterm assets are then financed with short-term and adjustable rate loans, leading to a
shortfall in cash flows in times of rising interest rates. This fact again can lead to a
worse ranking of the company and worse conditions to get future loans. Furthermore
difficulties regarding follow-up financing over the rest of the lifetime of the asset can
occur. Vice versa long-term financing of short-term assets might lead to access
financing when the asset is no longer existent. This causes unnecessary interest
payments for the company (Vickery, 2006, p.447).
Finally, a high amount of debt financing can become a risk to the company. In case
the return decreases and is lower than the demanded interest rate, the company is not
able to pay the interest without making a loss in that year. This consumes part of the
equity and might lead to an even more dramatic situation in the next period
(Hermann, 1996, p.156).
Solvency risk- The partly or whole consumption of equity is another financial risk of
a company when the company is not able to earn a profit for the year. However this is
the result of other risks, which influence the business. Reasons can be a decrease in
sales or an increase in costs for example the financing of the firm and high interest
rates, which lead to a deviation from the plan and a loss. The result is a partly or
whole consumption of equity in the period and loss of solvency (Hermann, 1996,
p.154).
Liquidity risk- As well as consumption of equity, liquidity risk is mainly the result
of other risks, which cause a deviation of the planned outcome and might lead to
lower cash inflows or higher cash outflows. Liquidity measures the ability of the firm
to cover its expenses and therefore it also shows whether the company is able to cope
Page | 25

with some losses due to risk occurrence (Smithson, Smith & Wilford, 1995, p.121). A
lack of financial funds can cause problems in the ability of the firm to pay its bills on
time and by that lead to additional costs (Brner, 2006, p.298). On the one hand costs
occur for arrears fees. On the other hand the rating of the company can be lower and
therefore future financing leads to higher interest payments (Eichhorn, 2004, p.44).
Due to that the financing risk becomes more urgent and can lead to higher liquidity
and solvency risks.
As external and internal financial risks can have a huge impact on the company and
its business continuity, a management of these risks is essential also for non-financial
companies.

(2.3) RISK ASSESSMENT- a part of RISK MANAGMENT

The term management can be derived from the Latin word manus (= hand) and means
handling. In a business context management is the organisation, administration and
leadership of a company (Duden online, 2011). Risk management is therefore the
organisation, administration and leading of risks in the company.
The roots of risk management can be found in the insurance sector in the 1960s
(Form, 2005, p.109). The acquisition of insurance makes it possible to secure business
against systematic risks. Over time the understanding of risk management was
extended and now also includes the management of unsystematic risk (Stroeder, 2008,
p.142).
The inclusion of managing unsystematic risks is in contrast with the theory of
Modigliani and Miller. They proposed in their paper from 1958 that in a perfect
market financial decisions will not influence the firm value. According to them,
companies therefore do not need to manage their risks or hedge to protect against
possible losses caused by unsystematic risks (Dhanini et al., 2007, p. 73; Oosterhof,
2001, p.2). The market does not price such actions. The only thing that is priced is the
systematic risk of the companies (Miller & Modigliani, 1958, p.296). This is based on
the assumption that each investor modifies his portfolio according to his risk
preference by diversification. Therefore risk does not need to be managed by the
company (Berk, 2009, p.283). Nevertheless management uses risk management to
decrease the volatility in earnings (Dhanini et al., 2007, p. 73).
Page | 26

This is because of market frictions that are absent in the Modigliani-Miller world,
which means that corporate risk management can only be relevant if markets are
imperfect. (Oosterhof, 2001, p.2)
In real business environment there are market imperfections, which are absent in the
Modigliani-Miller assumptions. Corporate risk management can therefore add
additional value to the shareholders although the financial theory of Modigliani Miller
says it is obsolete (Oosterhof, 2001, p.2). One aspect is that in reality not all investors
are likely to have the opportunity to diversify their portfolios. Moreover, under the
perfect market assumptions taxes and transaction costs are neglected. These factors
are however part of reality and might make risk management reasonable (Berk, 2009,
p.384). Furthermore there are costs related to defaulting, like direct costs of
bankruptcy or financial distress (Triantis, 2000, p.560). In the long run, which is the
perspective of the theory, gains and losses due to volatility might even out. However
this might be different in a short-term point of view, which is important to the
company. In the short run, losses might lead to financial distress and cause costs to
the company, which can be avoided by risk management (Dhanini et al., 2007, p.73).
Another aspect are indirect costs associated with difficulties of entering contracts
under high risk of defaulting, which can also be avoided or at least reduced (Triantis,
2000, p.560). The indirect costs of entering contracts refer to stakeholders of the
company that are neglected in the theory of Modigliani and Miller. Suppliers,
employees and banks, might suffer from the occurrence of a risk (Berk, 2009, p.384).
Due to that, stakeholders might demand a premium for entering a business
relationship with the company (Triantis, 2000, p.560). The premium paid to banks is
even more present, since Basel II is in force. The aim of the act is to increase the
stability in the banking sector. One way to achieve this is that banks are obliged to
have a risk sensitive amount of equity for each loan outstanding. The higher the risk
of the debtor the more equity is required from the banks to support the loan. Risky
loans cause higher costs to the bank. Therefore interest rates for loans include a risk
premium, which depends on the default risk of the borrower (Schnborn, 2010, p.13).
Although Basel II does not explicitly demand the implementation of a risk
management system, when rating a company the bank will check the existing
management instruments and also the risk assessment (Henschel, 2008, p.4). The
existence of a risk management can improve the rating of a company and increase the
Page | 27

likelihood of access to new capital and decrease the interest rates for credit financing
(Jonen & Simgen-Weber, 2008, p.102).
Therefore risk management can be of value not only to the investors of a company but
also to its other stakeholders (Berk, 2009, p.384). Its overall aim is to secure
business continuity and support the achievement of the companys goals by
preventing dangerous situations in an efficient way (Hermann, 1996, p.38; Retzlaff,
2007, p.14). However, it is not the goal to offset each single risk the company is
confronted with, as risk is essential to business activity and risk elimination also
decreases chances (Liekweg & Weber, 2000, p.280).

(2.4) PROCESS OF RISK MANAGEMENT

The different tasks of risk management are structured in a process of chronological
phases (Form, 2005, p.121). Although different researchers define the phases
similarly, the definitions to be found in the literature differ in the way the tasks are
ordered into the phases. Furthermore the wording differs also, although the tasks to be
done in the process stay the same (Hermann, 1996, p.40).
First of all a company needs to understand the sources of risk it is exposed to, to be
able to manage those (Triantis, 2000, p.571). Therefore the process of risk
management starts with the identification of risks. This is followed by the analysis
and evaluation of risks (Form, 2005, p.122). After that, in the risk assessment, the
best ways to handle the identified risks and how this handling can be included into
daily business are evaluated (Triantis, 2000, p.571). The final step of the process is
the risk monitoring, which becomes part of the daily business until the process is
started again from the beginning (Form, 2005, p.122). Risk assessment According to
the risk willingness, measures to handle the risk will be chosen in the third phase
(Wesel, 2010, p.300; Hartman Schenkel, 2003, p.42). Those measures range from risk
avoidance or prevention, over risk reduction, to transfer of risks and finally
acceptance of the risk (Henschel, 2008, p.7).

(2.5) RISK ASSESSMENT

1. Introduction- Risk assessment is an analytic techniques that are used in different
situations, depending upon the characteristic of the hazard, the existing data, and
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requirements of decision makers as explained by Haimes (2001). Risk based decision

making is a process that organizes information about the possibility for one or more
unwanted outcomes to occur into a broad, orderly structure that helps decision makers
make more informed management choices as described by Macesker (2004).

Risk AssessmentRisk assessment is used for estimating the likelihood and the outcome of risks to
human health, safety and the environment and for enlightening decisions about how to
deal with those risks. Risk assessments are tools that used for preparing a scientific
basis to reduce the risk. The tools were selected as recommended by API 14J risk
assessment method for hazard analysis because the wide applicability and success in
making decisions such as HAZOP, HAZID, FMEA, FTA, ETA, etc

2.5.1 FMEA (Failure Mode Effect and Analysis) FTA (Fault Tree
Analysis) Moss and Kurty (1983) calculate the reliability analysis of preliminary
design of Tension Leg Platform (TLP) using FMEA and FTA. All possible failures
and their impacts are identified and examined using FMEA. FTA is constructed based
on the cause/impact correlation identified in FMEA. The FTA systematically
describes all causes of undesired events leading to the failure mode.

Geum et al

(2009) used FTA to describe the customers selection to proposed Service Tree
Analysis (STA) which of service tree construction, qualitative analysis and
quantitative analysis. The weakness of this method is the subjectivity.

2.5.2. HAZOP (Hazard and Operability ) - HAZID (Hazard Identification)

Pitt (1994) applied Hazop in manufacturing for safety assessment by defining how
dangers can happen and considering their severity. Controlling the probability of
failure and severity of failure will help the safety measures cost effective. Stiff et al.
(2003) described the differences between spread mooring and turret mooring systems
using HAZID that come out into scenario categories. The quantitative risk assessment
is calculated using the structural reliability analysis between spread mooring and
turret mooring.
Approaches Authors Applications Specific Areas FMEA FTA Moss et al (1983)
Offshore Reliability Analysis of TLP FTA Geum et all (2009) Industry Service
Process Selection HAZOP Pitt (1994) Manufacturing Safety Assessment HAZID
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Structural Reliability Analysis Stiff et at l (2003) Offshore Comparative Risk

Analysis of Mooring FETI-HAZOP-FTA Roy et al (2003) Material Quantitative Risk
Assessment in Production Facility
FTA ETA
Jacinto & Silva (2009) Offshore Ship Building Industry Dianous&Fievez (2005)
Industry

Methodology

for

Risk

Assessment

Targoutzidis

(2009)

Safety

Methodological tool in the process of risk assessment HAZID - ETA Petruska et al

(2009) Offshore Mooring MODU Risk Assessments ETA Ghodrati et al (2007)
Mining Spare part selection HAZOP FTA ETA Deacon et al (2010) Offshore Risk
Analysis in Offshore Emergencies Cockshott (2005) Chemical Risk Management
Tool

2.5.3. FETI (Fire Explosion and Toxicity Index) HAZOP (Hazard and
Operability) FTA (Fault Tree Analysis) Roy et al (2003) studied the quantitative
risk assessment for storage and purification section of a titanium sponge production
facility using FETI, HAZOP and FTA. FETI and HAZOP were used to find the most
hazardous section in the entire plant which is Titanium tetra chlodride (TiCl4), FTA is
used as probabilistic analysis to describe the root cause of an events.

2.5.4. FTA (Fault Tree Analysis) and ETA (Event Tree Analysis)
known as Bow Tie Analysis- Dianous & Fievez (2005) built methodology for
risk assessment in industry using bow tie diagrams to identify the major accidents and
the barriers. To assess the number and the reliability of the safety functions risk graph
is used so that a good risk control can be reached. Jacinto & Silva (2009) applied the
bow tie method in large shipyard. Firstly, it was used to initial qualitative analysis and
secondly to calculate the semi quantitative assessment. The accident risk level and
acceptance criteria were carried out using scoring system. Targoutzidis (2009) applied
methodological tool in the process of risk assessment for incorporation of human
factors. FTA is used to define and assess pre condition and structures examination of
human factors. ETA stage only considered human error supplement which is subject
to risk taking or skill based behavior. Risk is developed from product of risk
perception and risk motivation that includes economic, social or other benefits.

Page | 30

2.5.5. HAZID (Hazard Identification) ETA (Event Tree Analysis) Petruska

et al (2009) considered quantitative risk assessment approach to evaluate the risk of
moored MODU in deepwater facilities. Identifying and defining the potential mooring
failure and the consequences using HAZID which then used to develop the event trees
of each scenario. ETA evaluates all the possible failure sequence and identification of
their respective consequence. Ghodrati et al (2007) modified the ETA to calculate the
associated risks (i.e. risk of shortage of spare parts) in estimation of the required
number of spare parts due to not considering the characteristics of system operating
environment. The result shows visualisation of risk in graphics that can facilitate
correct decision making.

2.5.6. HAZOP (Hazard and Operability) FTA (Fault Tree Analysis)

ETA (Event Tree Analysis) Deacon et al (2010) evaluated the risk of human error
during offshore emergency musters with HAZOP and bow tie analysis. HAZOP is
used to record failure modes, potential consequence and safeguards. Bow tie model
allow analyzing the human factors consequence. This method can decrease the gap
between real and perceived risk in emergency preparedness if used appropriately.
Cockshott (2005) constructed methodology for a new hazardous chemical marine
terminal using probability bow ties and expanded with rapid risk ranking (RRR). The
bow tie and RRR combination is called probability bow tie (PBT).

(2.6) THEORIES ON RISK ASSESSMENT

The fundamental difficulty in risk assessment is determining the rate of occurrence
since statistical formation is not available on all kinds of past incidents. Furthermore,
evaluating the in- severity of the con- sequences (impact) is often quite difficult for
immaterial assets. Asset valuation is another question that needs to be addressed.
Thus, best educated opinions and available statistics are the primary sources of
information. Nevertheless, risk assessment should produce such information for the
management of the organization that the primary risks are easy to understand and that
the risk management decisions may be prioritized. Thus, there have been several
theories and attempts to quantify risks. The fundamental difficulty in risk assessment
is determining the rate of occurrence since statistical in- formation is not available on
all kinds of past incidents. Furthermore, evaluating the severity of the con- sequences

Page | 31

(impact) is often quite difficult for immaterial assets. Asset valuation is another
question that needs to be addressed. Thus, best educated opinions and available
statistics are the primary sources of information. Nevertheless, risk assessment should
produce such information for the management of the organization that the primary
risks are easy to understand and that the risk management decisions may be
prioritized. Thus, there have been several theories and attempts to quantify risks.

(2.6.1) VALUE-AT-RISK MODELS- Value-at-Risk models are the primary

means through which financial institutions measure the magnitude of their exposure
to market risk. These models are designed to estimate, for a given portfolio, the
maximum amount that a bank could lose over a specific time period with a given
probability (Jorion, 1997). This way, they provide a summary measure of the risk
exposure generated by the given portfolio. Management then decides whether it feels
comfortable with this level of exposure or not and acts accordingly. Value-at-Risk
models are extensively used for reporting and limiting risk, allocating capital, and
measuring performance (Brian, 1995). Calculation of VaR depends on the method
used. It essentially involves using historical data on market prices and rates, the
current portfolio positions, and models for pricing those positions. These inputs are
then combined in various ways depending on the method used, to derive an estimation
of a particular percentile of the loss distribution, typically the 99th percentile loss.
According to the Basle Committee Proposal (1995, 1996), the computation of VaR
should be based on a set of uniform quantitative inputs, namely a horizon of 10
trading days, or two calendar weeks, a 99% level of confidence, and an observation
period based on at least a year of historical data. Three methods are commonly used
for computing VaR. This section provides a brief account of these three methods.

(2.6.2) DELTA NORMAL APPROACH- Delta-normal approach is the

simplest method to implement. However, it has several drawbacks such as nonstability of parameters used, and the assumptions of normal distributions for all risk
factors and linearity for all securities in the risk factors. This method consists of going
back in time and computing variances and correlations for all risk factors. Portfolio
risk is then computed by a combination of linear exposures to numerous factors and
by the forecast of the covariance matrix (Dunbar, 1998). For this method, positions
on risk factors, forecasts of volatility, and correlations for each risk factor are
Page | 32

required. Delta-normal approach is generally not appropriate to portfolios that hold

options or instruments with imbedded options such as mortgage-backed securities,
callable bonds, and many structured notes. This approach is relatively easier to
compute and compare. It is also easy to compute marginal contribution to VaR.. Risk
Metrics, a particular implementation of the delta-normal approach, assumes a
particular structure for the evolution of market prices and rates through time. It, then,
transforms all portfolio positions into their constituent cash flows and performs the
VaR computation on those (Dowd, 1998). This model was launched by JP Morgan in
1994 aiming at promoting the use of value-at- risk among the firm's clients. The
service comprised a technical document describing how to implement a VaR measure
and a covariance matrix for several hundred key factors updated daily on the Internet.
It is an entirely logical approach, particularly for portfolios without a lot of nonliearity, and is known to be responsible for popularizing VaR.

(2.6.3) HISTORIC OR BACK-SIMULATION APPROACH- Historic

Approach is also a relatively simple method where distributions can be non-normal,
and securities can be non-linear. Historic approach involves keeping a historical
record of preceding price changes. It is essentially a simulation technique that
assumes that whatever the realizations of those changes in prices and rates were in the
earlier period is what they can be over the forecast horizon. It takes those actual
changes, applies them to the current set of rates, and then uses those to revalue the
portfolio. The outcome is a set of portfolio revaluations corresponding to the set of
possible realizations of rates. From that distribution, the 99th percentile loss is taken
as the VaR (Dowd, 1998). However, historic approach uses only one sample path,
which may not efficiently represent future distributions. For this approach,
specification of a stochastic process for each risk factor is required. Also required are
the positions on various securities, and valuation models for all assets in the portfolio.
This method involves going back in time, and applying current weights to a timeseries of historical asset returns. This return restructures the history of a hypothetical
portfolio using the current position. Obviously, if asset returns are all normally
distributed, the VaR obtained under the historical-simulation method should be the
same as that under the delta-normal method (Dowd, 1998). This approach is easy to
compute and to understand. It allows for non-normality and non-linearity. It can also
easily be adapted to scenario analysis. However it has several draw- backs such as
Page | 33

unstable parameters and altering variances. In addition, the model may not work well
if based on small sample (Stulz, 2000).

(2.6.4) MONTE-CARLO APPROACH- Monte Carlo approach is widely

regarded as the most sophisticated VaR method. It looks easy to code Monte Carlo
analyses. However, it takes hours or even days to run those analyses, and to speed up
analyses complicated techniques such as variance reduction need to be implemented
(Dowd, 1998). In theory, Monte Carlo method makes some assumptions about the
distribution of changes in market prices and rates. Then, it collects data to estimate the
parameters of the distribution, and uses those assumptions to give successive sets of
possible future realizations of changes in those rates. For each set, the portfolio is
revalued and, as in the historic method, outcomes are ranked and the appropriate VaR
is selected. Monte-Carlo method makes it easier to cope with extreme non-linearities
as it allows for non-linear securities. It can also easily be adjusted according to the
distribution of risk factors. However it is computationally burdensome which
constitutes a problem for routine use (Dunbar, 1998).

(2.7)

LITERATURE

REVIEW

INTERNATIONAL

PERSPECTIVE
Crouhy, Gala, Marick(26) have summarised the core principles of Enterprise wide
Risk Management. As per the authors Risk Management culture should percolate
from the Board Level to the lowest level employee. Firms will be required to make
significant investment necessary to comply with the latest best practices in the new
generation of Risk Regulation and Management. Corporate Governance regulation
with the advent of Sarbanes-Oxley Act in US and several other legislations in various
countries also provide the framework for sound Risk Management structures.
Hitherto, Enterprise wide Risk Management existed only for name sake. Generally
firms did not institute a truly integrated set of Risk measures, methodologies or Risk
Management Architecture. The ensuing decades will usher in a new set of Risk
Management tools encompassing all the activities of a Corporation. The integrated
Risk Management infrastructure would cover areas like Corporate Compliance,
Corporate Governance, Capital Management etc. Areas like business risk, reputation
risk and strategic risk also will be incorporated in the overall Risk Architecture more
Page | 34

formally. As always it will be the Banks and the Financial Services firms which will
lead the way in this evolutionary process. The compliance requirements of Basel II
and III accords will also oblige Banks and Financial institutions to put in place robust
Risk Management methodologies. The authors felt that it is generally felt that Risk
Management concerns largely with activities within the firm. However, during the
next decade Governments in different countries would desire to have innovatively
drawn Risk Management system for the whole country. The authors draw reference to
the suggestions of Nobel Laureate Robert Merton who suggested that a country with
exposure to a few concentrated industries should be obliged to diversify its excessive
exposures by arranging appropriate swaps with other countries with similar problems.
Risk Management offers many other potential macro applications to improve the
management of their social security measures etc. They draw references to the spread
of Risk Management Education worldwide.
Hannan and Hanweckfelt that the insolvency for Banks become true when current
losses exhaust capital completely. It also occurs when the return on assets (ROA) is
less than the negative capital-asset ratio. The probability of insolvency is explained in
terms of an equation p, 1/(2(Z2 ). The help of Z-statistics is commonly employed by
Academicians in computing probabilities. Daniele Nouy elaborates the Basel Core
Principles for effective Banking Supervision, its innovativeness, content and the
challenges of quality implementation.

Core Principles are a set of supervisory

guidelines aimed at providing a general framework for effective Banking supervision

in all countries. They are innovative in the way that they were developed by a mixed
drafting group and they were comprehensive in coverage, providing a checklist of the
principal features of a well designed supervisory system. The core Principles specify
preconditions for effective banking supervision characteristics of an effective
supervisory body, need for credit risk management and elaborates on Principle 22
dealing with supervisory powers.
Jacques de Larosiere, former Managing Director of the International Monetary Fund
discusses the implications of the new Prudential Framework. He explains at length
how the new Regulatory code could have some dangerous side effects. The increased
capital requirements as decided by the Basel Committee on Banking Supervision in
September 2010 will affect the amount of own funds would affect the profitability of
the Banks.
Page | 35

The consequences of such increased capital requirements would

incentivise the Banks to transfer certain operations that are heavily taxed in terms of
capital requirements to shadow Banking to avoid the scope of regulation. The risks of
such a practice might affect the financial stability.

While the Central Banking

authorities might contemplate registration and supervision of such shadow banking

entities like the hedge funds and other pools, such a course might be more
cumbersome than expected. The new regulation would result in the Banks to reduce
activities with rather poor margins. For example they may reduce exposure to small
and medium enterprises or increase credit costs or concentrate on more profitable but
higher risk activities. He is also critical of the proposal of Basel to introduce an
absolute leverage ratio that might push Banks to concentrate their assets in riskier
operations. The author feels that the banking model which favours financial stability
and economic growth might become the victim of the new prudential framework, and
force Banks to search for assets with maximum returns despite the attendant risks.
As per G. Dalai, D. Rutherberg, M. Sarnat and B. Z. Schreiber- Risk is intrinsic to
banking. However the management of risk has gained prominence in view of the
growing sophistication of banking operations, derivatives trading, securities
underwriting and corporate advisory business etc. Risks have also increased on
account of the on-line electronic banking, provision of bill presentation and payment
services etc. The major risks faced by financial institutions are of course credit risk,
interest rate risk, foreign exchange risk and liquidity risk. Credit risk management
requires that Banks develop loan assessment policies and administration of loan
portfolio, fixing prudential per borrower, per group limits etc. The tendency for
excessive dependence on collateral should also be looked into. The other weaknesses
in Credit Risk Management are inadequate risk pricing, absence of loan review
mechanism and post sanction surveillance. Interest rate risk arises due to changes in
interest rates significantly impacting the net interest income, mismatches between the
time when interest rates on asset and liability are reset etc. Management of interest
rate risk involves employing methods like Value-at-Risk (VaR), a standard approach
to assess potential loss that could crystallise on trading portfolio due to variations in
market interest rates and prices. Foreign Exchange risk is due to running open
positions. The risk of open positions of late has increased due to wide variations in
exchange risks.

The Board of Directors should law down strict intra-day and

overnight positions to ensure that the Foreign Exchange risk is under control.
Page | 36

Chief Risk Officer, Alden Toevs of Commonwealth Bank of Australia states that a
major failure of risk management highlighted by the global financial crisis was the
inability of financial institutions to view risk on a holistic basis. The global financial
crisis exposed, with chilling clarity, the dangers of thinking in silos, particularly
where risk management is concerned says the author. The malady is due to the Banks
focussing on individual risk exposures without taking into consideration the broader
picture. As per the author the root of the problem is the failure of the Banks to
consider risks on an enterprise-wide basis.

The new relevance and urgency for

implementing the Enterprise Risk Management (ERM) is due to the regulatory

insistence with a number of proposals to ensure that institutions stay focussed on the
big picture. In a way the Three Pillar Approach frame work of the Basel II Accord is
an effort to full fill this requirement. The risk weighted approaches to Credit Risk on
the basis of the asset quality, allocation of capital to Operational Risk and Market
Risks nearly capture all the risks attendant to a Banks functioning.

(2.8) LITERATURE REVIEW: INDIAN PERSPECTIVE

Rekha, Arun kumar and Koteshwar feel that the Credit Risk is the oldest and biggest
risk that Banks, by virtue of their very nature of business inherit. The pre-dominance
of credit risk is the main component in the capital allocation. As per their estimate
credit risk takes the major part of the Risk Management apparatus accounting for over
70 per cent of all Risks. As per them the Market Risk and Operational Risk are
important, but more attention needs to be paid to the Credit RISK Management in
Banks.
S. K. Bagchi, observed that in the world of finance more specifically in Banking,
Credit Risk is the most predominant risk in Banking and occupies roughly 90-95 per
cent of risk segment.
Operations Risk etc.

The remaining fraction is on account of Market Risk,

He feels that so much of concern on operational risk is

misplaced. As per him, it may be just one to two per cent of Banks risk. For this
small fraction, instituting an elaborate mechanism may be unwarranted. A well laid
out Risk Management System should give its best attention to Credit Risk and Market
Risk. In instituting the Risk Management apparatus, Banks seem to be giving equal
priority to these three Risks viz., Credit Risk, Operational Risk and Market Risk. This

Page | 37

may prove counter-productive. Securitization and Reconstruction of Financial Assets

Enactment of Security Interest Act, 2002.(SARFAESI ACT).
Govt. Of India has taken the initiative of making the legislation to help Banks to
provide better Risk Management for their asset portfolio. Risk Management of the
Loan book has been posing a challenge to the Banks and Financial Institutions which
are helpless in view of the protracted legal processes. The act enables Banks to
realise their dues without intervention of Courts and Tribunals. As a part of the Risk
Management strategies, Banks can set up Asset Management Companies (AMC) to
acquire Non Performing Assets of Banks and Financial agencies by paying the
consideration in the form of Debentures, Bonds etc.

This relieves the Bank

transferring the asset to concentrate on their loan book to secure that the quality of the
portfolio does not deteriorate. The act contains severe penalties on the debtors. The
AMC is vested with the power of issuing notices to the Borrowers calling for
repayment within 60 days. If the borrower fails to meet the commitment, the AMC
can take possession of the secured assets and appoint any Agency to manage the
secured assets. Borrowers are given the option of appealing to the Debt Tribunal, but
only after paying 75% of the amount claimed by the AMC. There are strict provisions
of penalties for offences or default by the securitisation or reconstruction company.
In case of default in registration of transactions, the company officials would be fined
upto Rs.5,000/- per day. Similarly non-compliance of the RBI directions also attract
fine up to Rs.5 lakhs and additional fine of Rs.10,000/- per day. This has proved to be
a very effective Risk Management Tool in the hands of the Banks.
Dr. Atul Mehrotra, Dean, Vishwakarma Institute of Management emphasises the
need for promotion of Corporate Governance in Banks in these uncertain and risky
times. This paper discussed at length Corporate Governance related aspects in Banks
as also touches upon the principles for enhancing Corporate Governance in Banks as
suggested by BCBS. The author felt that despite the RBIs initiatives on the
recommendations of the Consultative Group of Directors of Banks/Financial
Institutions under the Chairmanship of Dr. A.S. Ganguly, member of the Board for
Financial Supervision, there is more ground to be covered before Indian Banks are in
a position to attain good Governance Standards.

Page | 38

Mrudul Gokhaleelaborately dealt with the subject of capital adequacy in Banks. As

per her, Banks mostly give adequate focus for the credit risk aspect. There is a shift
from the qualitative risk assessment to the quantitative management of risk. In tune
with the regulatory insistence on capturing risks for the purpose of capital charge,
sophisticated risk models are being developed. These models help Banks to near
accurately quantify the potential losses arising from different risks viz., credit risk,
market risk and operations risk. This will enable the Regulator to ascertain whether
individual Bank has accurately compiled the risk profile of assets.
It was in April 1992 that the Reserve Bank of India introduced a risk asset ratio
system for all banks including foreign Banks in India as a capital adequacy measure.
As per this system, the balance sheet assets both funded and non-funded items and
other off-balance sheet exposures are assigned prescribed risk weighs. Banks were
required to maintain unimpaired minimum capital funds equivalent to the prescribed
ratio on the aggregate of the risk weighted assets. BCBS released the International
Convergence of Capital Measurement and Capital Standards: A Revised Framework
on June 26, 2004. The revised Framework consists of three-mutually reinforcing
Pillars, viz., minimum capital requirements, supervisory review of capital adequacy
and market discipline. The core of the Basel Accord is its risk sensitivity approach.
The Accord offers three distinct options for computing capital requirement for credit
risk and three other options for computing capital requirement for operational risk.
The options available for computing capital for credit risk are on the basis of
Standardised Approach, Foundation Internal Rating Based Approach and Advanced
Internal Rating Based approach. The options available for computing capital for
operational risk are Basic Indicator Approach, Standardized Approach and Advanced
Measure Approach.
The Core Principles for Effective Banking Supervision released by the BCBS in 1997
stated that the Banking supervisors must be satisfied that the Banks under their
jurisdiction have adequate policies and procedures for identifying, monitoring and
controlling country risk and transfer risk in the international lending and investment
activities and for maintaining reserves against such risks (Principle XI). The Reserve
Bank reviewed the position in India in the light of this and found that Country Risk
Management (CRM) was one area where there was an observed deficiency in the
India Banks. Hence the RBI has initiated steps to elicit the views of the Banks on the
Page | 39

basis of the Draft Guidelines and issued final Guidelines in February 2003. These
guidelines were made applicable to countries where an Indian Bank has more than 2
per cent or more of its assets. The guidelines are fairly detailed in nature with policy
and procedures. The RBI wanted the Banks to follow a rigorous CRM policy and
implement the Know Your Customer (KYC) guidelines strictly in their International
activities. RBI further defined the scope of these guidelines to include both funded
and non-funded exposures from their domestic as well as foreign branches for the
purpose of identifying, measuring, monitoring and controlling country risks.

Page | 40

CHAPTER- 3: RESEARCH METHODOLOGY

Research methodology is a way to systematically solve the research problem. The
research methodology using for find out the solution of the research problem is
analytical research methodology and some extend descriptive research methodology.

(3.1) OBJECTIVE OF THE STUDY

1) TO PROPOSE IACSIT APPROVED MODEL OF RISK ASSESSMENT FOR
STFC.
2) Secondary Objective Study of risk assessment models available in STFC deeply.
3) To study working of STFC.

(3.2) RESEARCH DESIGN

1) Nature of the Study- The study is descriptive identifying the parameters and
assigning the appropriate weights for them.

(3.3) SAMPLING DESIGN

Sampling frame- This represents the list from which the sample has been selected.
Samples are collected on random basis from the LCC of Bhiwani Branch. Two
category of sample is selected. Firstly sample from LGV segment is selected. Then
sample from passenger vehicle is being selected. Sample consists of borrowers of the
Bhiwani Branch who have taken loan from it.
Type of sample- The sampling technique used is random sampling method.
Sample size- 10 borrower of LGV segment is considered and 15 borrower of
Passenger vehicle is considered. Total sample size thus is of 28. For risk assessment
of individual borrower through STFC model all these sample is used. But only 4
samples is putted on IRCSIT approved model.

Page | 41

(3.4) DATA COLLECTION

The type of data used in assigning appropriate weights aiding the development of the
model is primary. However, the various parameters were identified using secondary
data. The instrument used for the survey is sampling.

Sources Of Data :
(a) Primary data:
Primary data required for study will be collected through direct interaction with
financial executives of the establishment. Since a good rapport has been maintained
the management has assured timely guidance and assistance and availability of
relevant information through risk analysis tools and documents. I worked on UNO,
OMNI DOCS, west report etc and filled credit sheet which is the main source of data
for customer analysis part.
(b)Secondary dataSecondary data will consist of annual reports, publications, audited financial
statement issued, day-to-day working files and budgets for different years. Which will
be obtain from their websites- stfc.co.in,
This data basically help in calculating ratios for ratio analysis part.
(c)Interview with key PersonnelData will also be collected by interviewing the key personnel of the firm. How the
balance between the risk and Profitability is maintained and how risk is diversified is
explained by them. Branch visit play a key role for it. There got opportunity to meet
with a number of product executives, branch manager, Branch team leader, and other
employee working there.

Page | 42

(3.5) TOOLS USED FOR THE RESEARCH.

These are the most popular tools of risk assessment. They focus on measuring the risk
associated with the individual borrowers.
RATIO ANALYSIS
Debt Equity Ratio- The ratio brings out the extent to which the firm is dependent on
outsiders for its existence and indicates the proportion of the owners stake in the
business. A high ratio means that claims of creditors are greater than owners funds.
Excessive liabilities tend to cause insolvency. This is the most unfavorable situation
for a banker, as he may gain the position of just one among the many creditors of the
company.
Current Ratio - The current ratio is an index of the concerns financial stability since
it shows the extent of the working capital, which is the amount by which the current
assets exceed the current liabilities. A high current ratio indicates inadequate
employment of funds while a poor current ratio is a danger signal to the management.
It shows that business is trading beyond its resources. Current ratio of 2 is ideal.
Liquid Ratio - This ratio is also an indicator of the short-term solvency of a firm.
Ideal ratio is 1:1. A comparison of current ratio to liquid ratio indicates inventory
hold-ups. The higher the amount of liquid assets to current liabilities the greater the
assurance of current liabilities being paid off.
Interest Coverage Ratio- It tells the analysts the extent to which the firms current
earnings are able to meet current interest payments. When this ratio is high it shows
that the business would earn sufficient profits to pay the interest charges periodically.
A low interest coverage ratio may result in financial embarrassment.
Debt Service Coverage Ratio- The standard ratio is 1.5. However, if the ratio is
between 1 and 1.5, suitable spacing of the repayment period and thereby lowering the
annual repayment obligations, may raise the ratio and make the proposal financially
viable. A persistently low ratio indicates heavy repayment obligations, which the
business is at pains to meet.

Page | 43

Net Profit trend - The final profit figure arrived at after charging all the expenses of
the firm against all its income is called net profit. A banker would look at the trend of
net profit over the years. A company, which has been consistently achieving positive
growth rates, reflects a healthy industry position and the managements commitment
to the business, effective steps taken by the management to promote their sales in the
market. The company with positive growth is favored than those whose growth is
static or negative
Cash Profit trend - Cash profit represents the annual profit arrived at before charging
depreciation.
Fixed Assets Turnover Ratio-This ratio measures the sales per rupee of investment
in fixed assets or the efficiency with which fixed assets are employed. A high ratio
indicates a high degree of efficiency in asset utilization and a low ratio reflects
inefficient use of assets.
Total Assets Turnover Ratio - This takes the total view of the business as a
producing unit. It determines the produce ability of the assets of the business, which
also indicates the managerial capacity of the entrepreneur in putting the assets to best
use.
Return on Investments Return on Investments The ROI is the key factor of
profitability of a business. It matches the operating profit with the assets, which earn
this profit. Efficient utilization of assets will have a relatively high return, while a less
efficient use will have a low return. Higher profitability implies greater cushion to
debt holders.
Return on Capital Employed - ROCE is a useful metric for comparing profitability
across companies based on the amount of capital they use. A higher ROCE indicates
more efficient use of capital. ROCE should be higher than the companys capital cost;
otherwise it indicates that the company is not employing its capital effectively and is
not generating shareholder value.

Page | 44

CUSTOMER ANALYSIS
Free Assets to Total AssetsThis ratio indicates on what value of asset out of the
total asset is used as collateral for taking loans.
Revenue (/km or /hr)- Revenue per KM/HR Expected revenue generated on the
financed vehicle will form one of the criteria for assessing the viability. This will
show the banker whether the customer will be in a position to repay the loan.
Operating cost (/km or /hr)- The operating cost may be classified into fixed and
variable cost. Study under this classification helps in arriving at the optimal level of
utilization of the equipment. However, the operating cost and revenue for the vehicle
cannot be measured in isolation. The profitability of the equipment is what matters at
the end of the day.
Fleet strength- Fleet Strength Fleet strength is the number of equipments/vehicles
held by the customer and gives an idea about the size of the business. A lender
generally looks at a small business with high caution, as there are only few assets to
turn to in case the debts turn bad.
Work Orders on hand- The number of work orders that one has helps to check how
well the business is progressing. Generally, when the business has many, steady work
orders, it shows that they have constant business. However, those customers who have
unsteady number of work orders need a close watch. It also shows the trend of the
business in the market
Percentage funding to total cost - This helps us measure the level of financial
commitment of the borrower in the proposal. Lower ratio means more contribution
from the borrower and the risk on the bankers end is low. Value and liquidity of
collateral offered As a driving note collateral must not drive lending decisions. The
best security of a lender is a thriving business on which the appraisal should focus.
Whenever, the bank is forced to foreclose the collaterals, it demonstrates that the
lending decision in the first place had been unsound.
Repayment Track with Others- The repayment track of the borrower with others
determines how well they have carried out their business in the past years. A business

Page | 45

with prompt payment has less credit risks than those whose reputation is a question
mark in the market.
Timely Submission- Timely submission of information. The customers are required
to be prompt in submission of information. A delay in such submission is highly
likely to be caused because of tampering of information. This reflects to a great extent
the credibility of the customer. Thus, customers who are always regular in submitting
the information score over those who have an irregular track for submission.
Value of Collateral Offered- As a driving note collateral must not drive lending
decisions. The best security of a lender is a thriving business on which the appraisal
should focus. Whenever, the bank is forced to foreclose the collaterals, it
demonstrates that the lending decision in the first place had been unsound.
Liquidity of Collateral- The demand for collaterals as a condition for a loan is a
sufficient indication that the borrower lacks the required level of credit worthiness.
Collaterals enhance the credit worthiness of a borrower. The test of good collateral
lies in its liquidity, which, in other words means the saleability of the assets. The
higher the liquidity is, the better the collaterals.

MARKET ANALYSIS
Nature of Business - The kind of business in which the customer is in will greatly
influence the risk associated with him. It might be against the policies of the company
to advance loans to a few businesses, like in the case of CBL, advancing of loan to
cab drivers is not entertained. Thus, the preferred businesses might have been realized
from experience or observation.
Net Worth to Net Sales- The net worth of a business provides that important cushion
to withstand shocks from adverse changes in external (economic, financial and legal)
and internal environments of the business. Net worth is thus referred to as the risk
capital. When compared to the sales of the business, it shows the efficiency with
which the capital is rotated in the business.
Reputation of Promoters- The promoters are the ones who initiate a business idea
successfully. The background of the promoters gives an idea of their business
expertise and their talents. A promoter hailing from a highly reputed business family
Page | 46

is less likely to fool the public. A person hailing from a business family, whose
reputation is not established or suspect, is to be looked at with caution, as the
probability of default is high.
Technology status- Obsolescence is another problem that an industry faces. A firms
competitive position is decided based on the technological competence it possesses.
Advances in technology can dramatically alter a firms landscape. The firm is at an
advantageous position when it holds superior technology. The risk is more among the
players in the industry when the technological competence is inferior. The risk of not
keeping up with the progress of changing technology may affect the growth. Hence a
firm with a good technological background is more attractive.
Effect of Business Cycle- Almost every industry suffers from some amount of
cyclical fluctuations. At the downturn of a cycle, credits may be frozen, while in its
upswing, there may be excessive fluctuations of loan volumes. It is important for a
banker to know on which side of the cycle a borrowing unit is operating to adjust to
the credit needs of the borrower and the riskiness of his fund. A business which is
least impacted by the business cycle would be an ideal borrower. As the impact
decreases the risk also declines.
Government Policies- The pace and pattern of growth in a country depends largely
on various policies of the Government. It acts as a regulator and a mediator between
the businessmen and the public. When the government policies are friendly and
favorable towards the industry, then the growth prospects are high. Provision of
incentives such as export subsidy, cash incentives, duty drawbacks, excise relief,
credit at concession rates helps an industry grow. On the contrary, absence of such
positive policies or a very stiff taxation policy may create obstacles to the growth of
that industry.
Turnover ratio Financial Ratios that measures an assets activity and efficiency in
generating or turning over the cash.

Page | 47

(3.6) TECHNIQUES
The technique used in the analysis of the company is excel sheets, graphs and tables
of financial statement for example balance sheet, profit loss a/c, cash flow statement, ,
ratio analysis etc.

(3.7) SCOPE OF THE STUDY

The scope of this research study is as under.

Functional Scope
Functional scope of this study is to analyze risk of Bhiwani Branch. And then put it in
another model to add value to it.

Geographical Scope
I worked on 2 branches of STFC. I also worked on the Head Office.

(3.8) SIGNIFICANCE OF THE STUDY

Contribution to the knowledge
1. Through this research study the knowledge of mine regarding risk assessment, its
tools and techniques is increased.
2. The knowledge regarding Risk Management also get improved.

Contribution to the STFC

1. STFC may use the new model to further reduce its risk associated with the
borrowers and thus will improve its collection status.

Contribution to the Industry

1. If this model will work good in STFC other commercial vehicle financing
company can use it.

Page | 48

(3.9) LIMITATION OF RESEARCH

Fundamental analysis has some limitation involved in it. This limitation can be
explained as under:
Time Constrain:
Risk Assessment is a very vast topic and thus required much time but i have to
complete my research within 8 weeks. I have to spend about 5 weeks only on
collecting data. On rest two weeks only I have to analyse the data.
Branch Specific:
I got opportunity to work only on 2 branches and i got data of only 1 branch so my
research may not be able to visualize the risk of whole company. It is branch specific.
Inadequacies of Data:
While making analysis one has to often wrestle with inadequate data. While
deliberate falsification of data may be rare, subtle misrepresentation and concealment
are common. The accuracy of the model depends on the accuracy of information
provided by the customer.
Future Uncertainties:
Future changes are largely unpredictable; more so when the economic and business
environment is buffeted by frequent winds of change. In an environment characterized
by discontinuities, the past record is a poor guide to future performance.
Irrational Market Behavior: The market itself presents a major obstacle while
making analysis on account of neglect or prejudice, undervaluation may persist for
extended periods;
likewise, overvaluations arising from unsatisfied optimism and misplaced enthusiasm
may endure for unreasonable lengths of time.

Page | 49

(3.10)

TIME FRAME

Our Internship starts from 22 nd April and completed on 14th June. In this period of 54
days we learn a lot. In respect to project point of view we can divide the time in three
main parts.
(a) Theoretical Time- In initial days we got allotted branches and we have to learn
their all functions of branches. I also started connecting that work to my
project during that days only. I also tried to collect theoretical data related to
my project during this time.
(b) Data Collection Time- This was a big tacks I required risk related data and no
one in initial stage wants to share it. This also took 10-15 days
(c) Analysis of Data- This took almost 20 days.

Page | 50

ANALYSIS OF DATA
(4.1) LENDING PROCESS OF STFC
STAGE I- In this stage two main functions are vehicle deduping and and customer
deduping. Firstly we do vehicle deduping. We go to UNO and give their unique
numbers related to vehicle like its chessis number, engine number, registration
number etc. It is done to know whether vehicle is already financed from the company
or not. If after filling any number UNO generates data related to it that means vehicle
is already being financed by the company and so loan will not be processed if all
things related to previous loan is cleared but if all EMI and ODCs are clear it is being
proceeded. After it we go for customer deduping also called deduping. In it again we
give unique numbers related to the customer likes customer ID, customer name etc.
Through it we searched about customer whether he/she is already taken loan from
company or not and also searched is he/she acts as a guarantor. If customer is old then
we check his track record that is as a guarantor or as a borrower what was his
repayment tendency. That is we checked his credit worthiness. If customer is new
then company generate new customer ID. After that check all details related to the
vehicle and using oracle try to decide the amount of loan should be given on the
vehicle.
STAGE II- This stage is related to the documentation. Verify whether documents like
tax invoice, RC, quotation, receipt of margin money, particular and insurance etc is
available or not. Then company do Telly Verification to cross check the borrower.
Scan Copy of documents required are given below-

Page | 51

Documents related to borrower and vehicle:-

Insurance policy copy

Loan Type
Comprehensive
Policy
< Rs.1 Lac funding amount/Vehicles >=15
Years old

Re-Finance/Re-Agreement Cases

Accepted

Accepted

Third party
Policy

No Policy

Accepted

Accepted

Accepted
along with
commitmen
t letter for
Comprehens
ive renewal) Not Accepted

Buying - Selling Cases

Accepted
Not
Accepted

Fig-4.1

Page | 52

Not Accepted

Table showing deviation level for different loan taking condition of the borrower
(i)

Payments to Beneficiaries

Deviation Level

Transactions involving Financier, Seller (Regd.

1

Owner) and Borrower

Financier

a. Settlement Letter
Seller (Regd Owner)
a. Authorization

letter

for

payment

to

Financier and for collecting

b.
3

Termination
papers directly

Borrower
a.

Authorization

letter

from

Borrower

for

payment to Seller, Financier

b. Payment to Borrower only after TO, STFC RBH/RCH/RPH (ii)

endorsement.

Any two

Transactions involving Third party & Borrower

a. Bank A/C details of the Third party
b. Authorization letter from the Borrower for
making payment favoring Third Party
c. Payment to Borrower only after TO, STFC RBH/RCH/RPH
endorsement.

Any two

Payment to Seller ( Regd. owner) of the vehicle

(iii)

which is free of any Endorsement

a.

Authorization

letter

from

Borrower

for

payment to Seller
(iv)

Re-Finance/Re-Agreement Cases
a. Payment to Borrower only after STFC RBH/RCH/RPH
endorsement

Table-4.1

Page | 53

Any two

STAGE III-Here we fixed EMI. That is amount of EMI and also scheme through
which EMI Is provided. Fes decides which type and pattern should be applied so that
IRR will be maintained and customer should also be comfortable in repaying it. This
is also very important stage regarding the risk because of two thingsi.

Product Executives tried to collect the main part of the loan in the initial
period only so that risk will get minimized and also a higher IRR will be
maintained.

ii.

But they also have to take care of EMI/Surplus ratio of the customer, because
if customer has enough surpluses then only they will able to repay.

Page | 54

(4.2) CREDIT& RISK ASSESSMENT USING STFCs

MODEL
I worked on the Passenger Vehicle segment of the Bhiwani Branch. I chose 15
Borrowers as my sample size and made credit sheet for individual borrower. I
analysed their credit sheet and statement of account and got following things-

Extract of credit sheet and statement of account

Party Name

N/U

Loan

Cost of Asset

Earning

Arrear

Amount
Surender

Used

99,000

1,50,000

45,000

Satish Kr

Used

1,10,000

2,20,000

49,500

Anil

Used

1,79,000

3,00,000

57,200

Satish

Used

3,00,000

6,80,000

54,000

-20

niranjan Singh

Used

99,500

2,00,000

35,280

-1,131

Prmanand

Used

2,00,000

3,27,134

56,000

15,547

Krishan

Used

2,50,000

3,50,000

Anil Kumar

Used

1,20,000

2,00,000

78,000

-15

bhupender

Used

1,50,000

3,00,000

50399

-66

Sunil Kumar

Used

1,37,000

2,50,000

30,000

10,542

Jagdish Singh

Used

99,500

2,00,000

47250

-1,450

Rakesh

Used

1,20,000

1,93,000

42,000

7,135

Pawan Kumar

Used

1,80,000

3,00,000

40320

-1,849

Sonu Kumar

Used

90,000

2,00,000

42,000

Raj Kapoor

USED

2,70,000

3,00,000

N.A

78,659

-25

Table-4.2
Now I will do CUSTOMER ANALYSIS using the various Credit Sheets provided by
the STFC. Customer Analysis is shown in tabular form below.

Page | 55

Free
Party
Nam
e

Earn
ing

Expense

Surpl
us

Surpl

fleet

us/E

stren

mi

gth

Asset
s to
Total

Docs
Exp

Availabl
e

Asset

Arr
ear

F
T

Remark

s
Suren
der

45,00
0

22,55
22,442

1.90

10 Y

0 Y

etr

Insurance
Satis
h kr

49,50
0

16,79
32,710

57,20
Anil

not
2.54

5 available

192
4 N

N.S

0 N

etr

17,74
39,456

1.93

2.00

0.91

10 Y

pa
ss
Satis
h

54,00
0

18,23
35,765

bo
2.30

8 Y

-20 ok

GOOD

ba
niranj
an
Singh

Insurance
35,28
0

10,21
25,070

: Not
1.73 1.00

0.98

7 scanned

- nk
1,13 det
1 ail

GOOD

PAN &
V ID:
Name &
photo
mismatch
, No
HPN on
Prma

56,00

nand

13,25
42,750

Table-4.3 Customer Analysis

Page | 56

RC &
1.30

N.A

5 Insurance

15,5
47 N

Risk

Customer analysis of rest of the customers

Sonu
Kum
ar

3.0
42,000

22,534

1.0

19,466 0

Dedupe not
0.980

5 clear.

0 N

etr

Raj
Kapo
or

N.A

N.A

N.A

N.

3.0

1 Insurance
0.95

0 not clear.

78,65 Pass
9 Book

Ri
sk

Insurance:
Not
scanned &

Krish
an

0.708

Viability

bank

sheet: Not

a/c

5 available

-25 detail

D
G

Anil
Kum
ar

2.7
78,000

58,567 19,433

Bhup
ender

FC: Not

7 1

7 available

1.6
50399

36,997 13,402

bank

a/c

-15 detail

pass

7 Y

-66 book

Etr

N(
GUR
Guaranter's

mobile

Mobile No.,

no

Sunil

Insurance

nttraca

Kum

& FC: Not

ar

30,000

0.973

available

Jagdi

FC &

sh

Insurance:

Sing
h

47250

19,992 27,258

1.7

2.0

Not
0.952

6 available

10,54 ble+FC
2 ntavl)

Ri
sk
G

bank
- a/c
1,450 detail

O
O
D

PE
Rake
sh

2.0
42,000
Page | 57

21,947 20,053

Signature:
N.A

6 Not

ris
7,135 N

available &
discrepancy
in Father's
name
Pawa

Address &

ID Proof:

Kum
ar

2.3
40320

23,236 17,084

Not
2

0.90

8 scanned.

- pass
1,849 book

Table-4.4

1. By using Table 2.1, Table 2.2a and SOA of Anil we got following thingsHe has given its first EMI (new loan). He has given his all documents except
for financial track

record. So we can say that it is a good loan.

2. By using Table 2.1, Table 2.2a and SOA of Satish kr I got following thingsHe has Parent as well as WCL, he has given Rs 7100 but it is even less than
the EMI of his Parent loan so we can categorized it as NS, but cannot say
anything as it is a new loan.

3. By using Table 2.1, Table 2.2a and SOA of Raj Kapoor I found that it was a
bad loan in initial stage as he had not given his initial EMIs till, he came in 6+
bucket, but then he gave about 78,000 and so now we can consider him safe
loan. But then he did not give his documents in proper way also. So we may
say documentation risk is attached with him.

Page | 58

Etr

Collections observations from disbursement cases:

Fig-4.2
(4.3) ANALYSIS USING IACSIT APPROVED MODEL
I APPLIED IRCSIT APPROVED MODEL ON ALL THE 15 CASES.
This Model analyses the cases using 3 toolsI.
II.
III.

Ratio Analysis
Market Analysis
Customer Analysis

Ratio Analysis and Market Analysis will be same for the all 14 cases as they are
related to the same company and so are exposed to the same market scenario.
Customer Analysis is different for each case and it defined its credit worthiness.
Firstly I will do Ratio Analysis, then Market Analysis and Lastly Customer Analysis
of the samples using this Model.

Page | 59

RATIO ANALYSIS
2014

RATIO ANALYSIS

LIQUIDITY RATIOS
CURRENT RATIO

Current Assets/Current Liabilities=

1.626

Current Assets

2,03,746

7,08,598

16,78,912

Current Liabilities

29,356

12,25,629

44,591

QUICK RATIO

Cash Near Cash Assets/Current Liabilities=

Cash and bank

Cash

&

near

cash 7,08,598

1.494

Short-term loans and advances

16,78,912

balances
Current Liabilities

29,356

12,25,629

44,591

OPERATING EFFICIENCY RATIOS

FIXED

ASSET Sales/Average Fixed Asset=

98.04

TURNOVER
Sales

7,87,812

(Assumption Of Income From Operations as

Sales)

Average Fixed Asset

TOTAL

2014

2013

10,066

6,006

ASSET Sales/Average Total Asset=

0.168

TURNOVER
Sales

7,87,812

(Assumption Of Income From Operations as

Sales)

Average Total Asset

2014

2013

49,22,570

44,45,782

4684176

SOLVENCY RATIOS
DEBT TO EQUITY Total Debt/Total Capital=

Page | 60

4.95

RATIO
Non-Current

Current Liabilities

Liabilities
Total Debt

24,97,082

15,98,166

40,95,248

Equity
Total Equity

8,27,322

RETUTRN ON CAPITAL EMPLOYED

EBIT

1,82,804

CAPITAL EMPLOYED

846653

RETURN

8,27,322
EBIT/CAPITAL EMPLOYED

0.216

ON

INVESTMENT

NET

WORTH

TO

1.050

NET SALE
NET WORTH
NET SALE
INTEREST

EBIT/INTEREST EXPENSES

0.811

NOI/TOTAL DEBT SERVICE

0.049

COVERAGE RATIO
EBIT

2,14,946

INTEREST EXPENSES 2,65,199.20

DEBT SERVICE COVERAGE RATIO
NET

OPERATING 2,01,619.11

INCOME
TOTAL

DEBT 40,95,248

SERVICE
Table-4.5
Firstly I am calculating Liquidity Risk using Ratios which is already being calculated
in the above table.
Page | 61

Table showing various parameters with their weights. Five parameters have been
identified to measure the liquidity risk. Out of the four categories of risk considered in
the model, liquidity is considered most important and has been assigned a maximum
weightage of 400 points.

Current Ratio

1.5

Liquid Ratio

2.25

Interest Coverage Ratio

2.25

Debt Service Coverage Ratio

Debt Equity Ratio

Table-4.6

Now I will assign marks to the each ratio according to the marks allotted to them by
risk assessment model.
The Risk Assessment Model

Table showing the key for assessment

Parameters

\ Best

Worst

Scores

Ratings

10 to 8

1 Debt Equity Below 1.00

8 to 6

6 to 4

4 to 2

2 to 0

1.0 0 - 1.50

1.50 - 2.00

2.00 - 3.00

Above 3.00

Ratio
2 Current Ratio

Above 2.50

2.50 -2.00

2.00 - 1.50

1.50 -1.00

Below 1.00

3 Liquid Ratio

Above 1.50

1.50-1.00

1.00-0.80

0.80 - 0.50

Below 0.50

4.00 -2.50

2.50 - 1.50

1.50-1.00

Below1.00

Interest Above 4.00

Coverage Ratio

Page | 62

5 Debt Service Above 2.50

1.5 0 - 2.50

1.50 -1.25

1.25-1.00

Below 1.00

Increasing

Constant

Inconsistent

Decreasing

Increasing

Constant

Inconsistent

Decreasing

High

Moderate

Low

3.0 0 - 3.50

2.50 - 3.00

2.00 - 2.50

Coverage Ratio

6 Net Profit - Increasing

past 2-3 years

sharply

7 Cash Profit - Increasing

past 2-3 years

sharply

8 Net Worth to Very high

Very low

Net Sales

9 Fixed Assets Above 3.50

Below 2.00

Turnover Ratio

10 Total Assets Above 2.00

2.00-1.50

1.33 - 1.50

1.00 - 1.33

Below 1.00

Turnover Ratio

11 Return on Above 12%

10 % - 12 %

8% - 10%

6% - 8%

Below 6%

High

Moderate

Low

Very low

90-95%

85-90%

Investments

12 Return on Very high

Capital
Employed

13 Free Assets 95-100%

to Total Assets

Page | 63

80-85%

75-80%

14

Revenue above

(/km or /hr)

65%

15Operatin

g Very low

cost

55-65%

45-55%

35-45%

25-35%

Low

Moderate

High

Very high

12-10

9-7

6-4

1-3

Low (0)

Very low

(/km or

/hr)

16Experience

Above 12

of
Business(yrs)

17Fleet

Very

high High (2)

strength

(more than 2)

18Resale value Very high

Moderate

(1)

High

Moderate

Low

Very low

65% - 75 %

75% - 80%

80% - 95%

Above 85%

Few & steady

Moderate

Many

Few

&unsteady

&unsteady

of Asset

19%ge

Below 65%

Funding

to

Total Cost

20Work Orders Many & steady

on hand

21Reputation

Highly reputed

Reputed

of Promoters

22Repayment
Track

with

others

Page | 64

Moderately
reputed

Very sound

Prompt

Behind
schedule

Unpaid

24Value

of Very high

High

Moderate

25Liquidity of Very high

High

Moderate

Updated

Comfortable

Collateral
Offered

Collateral

26Technology

Superior

status

27Effect

of No impact

Business Cycle

28Government

Very

less Less impact

impact

Friendly

Favourable

Comfortable

Very good

Good

Moderately

Policies

29Bank
References

30Financial

good

Very good

Good

Statements

good

31Credit

Highly

Investigation

favourable

32Own

Existing

Records

customer with good track

Existing

excellent track

Table-4.7

Page | 65

Moderately

Favourable

customers with

Neutral

Now I will assign points to each 4 ratios used for calculating Liquidity Risk. Each
ratio will get point according to their value as defined in Risk Assessment Model.

LIQUIDITY RISK OF ANIL

Parameters
LIQUIDITY RISK
1
Debt Equity Ratio
2
Current Ratio
3
Liquid Ratio
4
Interest Coverage
Ratio
5 Debt
Service
Coverage Ratio
Sub Total
Table-4.8

Weight

Remark

Score

Wtd score

8
6
9
9

1
5
8
2

8
30
72
18

64
192

IN THE SAME WAY WE CAN FORM TABLE FOR THE OPERATIONAL RISK
ALSO. But here both Ratio Analysis and Customer Analysis is used to find out the
value of each parameters used. Value of ratios is already mentioned in Table-2, for
calculating Free Asset to Total Asset, Revenue, Operating Cost, and Fleet Strength we
used Customer Analysis. I used Documents like FIR, Viability Sheet, and Application
Form of each borrower to reach to the value. Extract of these 4 documents used for
calculation is given below in tabular form for 14 customers.

Page | 66

EXTRACT OF DOCUMENTS - FIR, Viability Sheet, and Application Form of each

borrower
Free
Assets
to
Party

fleet

Total

Name

Earning Expense Surplus Surplus/Emi strength Assets

Surender

45,000

22,442

22,558

1.90

Satish

49,500

32,710

16,790

2.54

Anil

57,200

39,456

17,744

1.93

2.00

0.914

54,000

35,765

18,235

2.30

0.80

Singh

35,280

25,070

10,210

1.73

0.980

Prmanand

56,000

42,750

13,250

1.30

N.A

Satish
Kumar
niranjan

Krishan

0.708

0.973

2.00

0.952

1.00

0.980

Anil K
Kumar

78,000

58,567

19,433

2.77

bhupender 50399

36,997

13,402

1.63

Sunil
Kumar

30,000

Jagdish
Singh

47250

19,992

27,258

1.70

Rakesh

42,000

21,947

20,053

2.00

40320

23,236

17,084

2.30

42,000

22,534

19,466

3.00

Pawan
Kumar
Sonu
Kumar
Table-4.9

Page | 67

Using above table we will calculate the Operational Risk of ANIL.

OPERATIONAL RISK OF ANIL

Parameters

Weight

Remark

Score

Wtd score

4.5

18

10

10

0.5

10

2.5

10

30

OPERATIONAL
RISK
6

Net Profit past 2-3 0.5

years

Cash Profit - past 2-3 2

years

Fixed Assets Turnover 1

Ratio

Total Assets Turnover 0.5

Ratio

10

Return on Investments

11

Return

on

0.5

Capital 0.5

Employed

12

Free Assets to Total 3

Assets

13

Revenue (/km or /hr)

12

14

Operating cost (/km or 2

12

/hr)

15

Fleet Strength

32

16

Work Orders on hand

32

SUB TOTAL
Table-4.10

Page | 68

158.5

Extract of documents required for finding credit risk of the customers

Party
Name
Surender
Satish
Anil
Satish
kumar
niranjan
Singh
Prmanand

Loan
Amount
99,000
1,10,000
1,79,000

Cost of Funding to
total cost
Asset
1,50,000
0.660
2,20,000
0.500
3,00,000
0.597

FTR
Y
N
N
pass
book
bank
detail
N
bank a/c
detail
bank a/c
detail
pass
book

3,00,000 6,80,000

0.441

99,500 2,00,000
2,00,000 3,27,134

0.498
0.611

Krishan
Anil
Kumar

2,50,000 3,50,000

0.714

1,20,000 2,00,000

0.600

bhupender
Sunil
Kumar
Jagdish
Singh
Rakesh
Pawan
Kumar
Sonu
Kumar

1,50,000 3,00,000

0.500

1,37,000 2,50,000

0.548 N
bank a/c
0.498 detail
0.622 N
pass
0.600 book

Table-4.11

Page | 69

99,500 2,00,000
1,20,000 1,93,000
1,80,000 3,00,000
90,000 2,00,000

0.450 N

CREDIT RISK OF ANIL

Parameters

17.

18.

19.

20.
21.

22.

CREDIT
RISK
Resale
value
of
Asset
%Funding
to
Total
Cost.
Repayment
Track With
Others.
Timely
Submission.
Value Of
Collaterals
Offered.
Liquidity
Of
Collaterals.
Sub total

Table-4.12

Page | 70

Weight Remark Score

Wtd
score

42

54

36

10

30

4.5

38

4.5

38

238

MARKET RISK OF ANIL.

Parameters

Weight Remark Score

Wtd
score

MARKET
RISK
23. Exp in Yrs.

2.5

17.5

24. Net Worth 0.5

4.5

18

13.5

13.5

18

To Net Sale
25. Reputation

of
Promoters.
26. Technology 1.5
Status.
28. Effect

of 1.5

Business
Cycle
29. Gov.

Policies
SUB

85

TOTAL
Table-4.13
TOTAL SCORE OF ANIL
LIQUIDITY

192

RISK
OPERATIONAL 158.5
RISK
CREDIT RISK

238

MARKET RISK

85

TOTAL
Table-4.14

Page | 71

RISK ASSOCIATED WITH ANIL

QUANTITATIVE 673.5
TERM
QUALITATIVE

TOLERABLE

TERM

RISK

Table-4.15

In the same way we can get risk associated with other 14 persons:
Liquidity Risk is same for all 15 borrowers. I have to calculate Operational Risk and
Credit risk Individually for rest 14 borrowers. Out of the total 6 components of the
Market Risk only one Component differ individual wise that is Experience of the
Borrower in Transportation Sector. So market risk is also almost constant for all the
customers. But I preferred to calculate rest three risk individually for all the customers.

Page | 72

RISK ASSOCIATED WITH ALL 15 INDIVIDUAL IN BOTH QUALITATIVE AND

QUANTITATIVE FORM

CUSTOMER NAME

QULITATIVE RISK

QUANTITATIVE RISK

ASSOCIATED

ASSOCIATED

SURENDER

HIGH RISK

593

SATISH Kr

HIGH RISK

515.5

ANIL

TOLERABLE RISK

648

SATISH

TOLERABLE RISK

624.5

NIRANJAN SINGH

TOLERABLE RISK

665

PARMANAND

HIGH RISK

517.5

SONU KUMAR

TOLERABLE RISK

612.5

RAJ KAPOOR

TOLERABLE RISK

634

ROHTAS

TOLERABLE RISK

624.5

ANIL KUMAR

TOLERABLE RISK

634

BHUPENDER

TOLERABLE RISK

622

SUNIL KUMAR

HIGH RISK

537

JAGDISH SINGH

TOLERABLE RISK

680

RAKESH

HIGH RISK

538

PAWAN KUMAR

TOLERABLE RISK

680.5

Table-4.16

I did the analysis of the borrowers by both the models that is by using STFCs model and by
using IACSIT approved model. Now I will compare the two models using Confusion Matrix
and will try to correlate the two models. For comparing the models in appropriate way I took
some assumptions likeIn case of STFCs model borrowers having the dues of Rs.0-less than Rs 1000 is considered as
of low risk and borrower having dues of above Rs.1000 is considered as of high risk.

Page | 73

RISK THROUGH IACSIT APPROVED MODEL AND STFC MODEL

Name
SURENDER
SATISH Kr
ANIL
SATISH
NIRANJAN SINGH
PARMANAND
SONU KUMAR
RAJ KAPOOR
ROHTAS
ANIL KUMAR
BHUPENDER
SUNIL KUMAR
JAGDISH SINGH
RAKESH
PAWAN KUMAR

IACSIT Method
High Risk
High Risk
Tolerable Risk
Tolerable Risk
Tolerable Risk
High Risk
Tolerable Risk
Tolerable Risk
Tolerable Risk
Tolerable Risk
Tolerable Risk
High Risk
Tolerable Risk
High Risk
Tolerable Risk

STFC Method
Low Risk
Low Risk
Low Risk
Low Risk
Low Risk
High Risk
Low Risk
High Risk
Low Risk
Low Risk
Low Risk
High Risk
Low Risk
High Risk
Low Risk

Table-4.17

Confusion Matrix
IACSIT Method
STFC
Method
High Risk
Low Risk
Grand Total

High
Risk
3
2
5

Tolerable Risk
1
9
10

Grand
Total
4
11
15

Table-4.18

80
20

Page | 74

Percentage Accuracy of IACS Method vis-a-vis STFC Method

Percent of Misclassification

The confusion matrix is used to measure the accuracy of a new technique vis-a- visa old
technique. In this case the old STFC technique has classified 11 borrowers as low risk
and 4 borrowers as high risk. The new technique (IACSIT approved) has classified 5 as
high risk and 10 as low risk. Out of the total original high risk the new technique has
classified 3 as high risk and 1 as tolerable risk and out of the 11 low risk it has classified
9 as tolerable risk and 2 as low risk so if we match then a total of 9+3 = 12 respondent
have maintained their risk classification. This gives us an accuracy of 12/15 = 80%.

(5.1.1) FINDINGS RELATED TO RATIO ANALYSIS

Page | 75

1. The company had maintained its liquidity position at very high levels. The current ratio
2. was almost double of the ideal ratio, the quick ratio was also maintained at higher than
3. the ideal levels but it is the cash ratio that is at lower than the ideal levels, thus we can
4. say that the other liquidity ratios are maintained at ideal levels for the year 2011 except
5. the cash ratio. Thus, we can say that the company maintains more than sufficient amount
6. of liquid assets but the Cash in hand at cash at bank are kept at somewhat a little less than
7. sufficient amount. But, then if we move ahead in the years we can see that the overall
8. levels of current ratio have been decreasing over the years and have reached less than
the ideal current ratio that should have been maintained. In the year 2013 it was the least
but in the year 2014 it somewhat increased but even then it is less than the ideal level.
The solvency ratios of the company are not even maintained at levels which are close
to the ideal ratio levels, they are maintained at unnecessarly either high or low levels
and so the company should have a check on this ratio, the company should plan about
balancing its debt and equity positions.

9.

(5.1.2)

FINDINGS RELATED TO CUSTOMER ANALYSIS

As depicted in the Table-4.17 customers of STFCs are of low risk. So company can provide
Page | 76

loan to them. They are under manageable risk. As seen from the credit risk analysis, most

of the customers had deposited their relevant documents. Also, I found that those

customers who were not punctual in depositing their documents showed the same attitude

towards giving their EMI. Thus documents were getting very high weighted in STFC

and we can say that lending process there is basically based on DOCUMENTATION.

A separate loan book is maintained in STFC for the purpose of documentation. Registration
Certificate of the vehicle is the main document they have taken from the customers. This is
the main way how STFC minimized its risk. For any vehicle, Registration Certificate is the
main document and STFC give their Hypothecation on this RC before financing, so if any
customer will try to default STFC naturally become legal owner of the vehicle thus are
legalized to use it for its purpose. Depository Promissory note is the other risk minimizing
document. Executives their mainly relates risk through Financial Track Record of the

customers. If the previous Financial Track Record of the customer is good it is seen
that that customer will perform good. Overall customer analysis shows that customers at
STFC are creditworthy.

(5.1.3)

FINDINGS RELATED TO MARKET ANALYSIS

Market Analysis consists of factors like -:

Page | 77

Nature of Business

Net Worth to Net Sales

Reputation of Promoters

Technology status

Effect of Business Cycle

Government Policies
Nature of business is an important factor considered in STFC also for lending purpose. As
they provide loan on the commercial vehicles so they prefer drivers as the borrower. They
prefer those borrowers who have at least 3-4 years of experience. If talk about the
government policies, we can see that it is flexible for the NBFCs which is good for them.
Promoters are of good reputation. Technology status should be improved. As I was in

Karolbag Branch I can easily see that it must have to update itself with respect to the

technology. Kiosk Machine is required for the purpose of Internal Audit but it is not there ,

because of that both Auditors and Branch Employee has to suffer.

(5.1.4)

OVERALL FINDING

28 parameters to measure the risk associated with the customer were identified. Liquidity

Risk or the inability of the prospect to meet the immediate liability is considered most
Page | 78

significant of all kinds of risks. While credit or the willingness of the customer to repay

falls in line next , the operational efficiency is rated third in vitality. Statement
showing financial position rated as top quality information provider. Credit Investigation
and interview with customers are also known to provide reliable information.
Out of the 28

parameters, all the participants rated 9 of them to be most important uniformly.

They are1. Free Assets to Total Assets
2. Revenue (/km or /hr)
3. Cost (/km or /hr)
4. Nature of Business
5. Fleet strength
6. Resale value of Asset
7. %ge Funding to Total Cost
8. Work Orders on hand
9. Repayment Track With Others

(6.1) CONCLUSION RELATED TO RATIO ANALYSIS

By, looking at the ratio analysis we can say that the liquidity and profitability ratios of the
Company are quite satisfactory. But, the debt equity ratio of the company is nowhere

Page | 79

Close to the ideal debt equity ratio and so we can say that the company does not prefer
to raise funds through issue of shares but prefers taking debt instead. But, the company
is said to be doing good because even the asset under management is showing increasing
trends. So, overall the financial position of STFC can be considered to be satisfactory
as seen from its financial statements and also from the analysis done by its ratio analysis.

(6.2) CONCLUSION RELATED TO CUSTOMER ANALYSIS

Customers of STFC is considered as creditworthy as only 4 out of the 15 customers are
came in the high risk zone. That means 73% of customers have good track record and
thus make them eligible for taking the loans. STFC has 11000 Field Officers who have
to watch the loan from initial stage, which is one of the factor why STFCs loans are
secure.

(6.3) CONCLUSION RELATED TO MARKET ANALYSIS

Promoters reputation, Customers Experience in their field etc are good but then it also
Depends on the government policy which vary time to time. Like presently RBI
comes with some new policy regarding NBFCs. The Reserve Bank of India's new norms
for NBFCs may reduce the risk they pose to the financial system, but it will reduce
profitability and increase nonperforming assets of the industry.

(7.1) SUGGESTIONS

As verified in the analysis part using Confusion Matrix that IACSIT approved

Page | 80

model is 80% accurate accurate , is a scientific model and also will enable the
STFC to measure the risk both in qualitative and quantitative way.

My next suggestion is related to the Human Risk. When I was in Branch for my
training, Branch Manager of that branch started checking HELMETS used by
the Product Executives, he found that 80% of PEs used Helmets of very low cost.
These Helmets are not enough to protect them in proper way. Actually many of
PEs there are new and they dont have enough money to buy Helmets as I
observed. So I think STFC should provide helmets to their PEs free of cost, it
will be a appreciable step by STFC.

Books should be filled in proper way. As my topic was related to risk so when
I was doing training in Branch I used to analyse Loan Books, I found that some
pages are not properly filled, specially Vehicle Evaluation Sheet is filled in a very
random way. Its look like Product Executives actually not checked the part of
the vehicle but they just filled it. Then when I was working in Omni to check the
scan copy of the documents, their also these sheets were not available. I think we
should give worth to this sheet also.

(8.1) Using APA format

SSn, SrinivasGumparthi (2010). Risk Assessment Model for Assessing NBFCs

Page | 81

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