de-Risk

Business Strategy
for
Corporate Banking
 de-Risk
Wholesale Banking Revenues in India

35
32
31

30

25
% Contribution

20 19
Series1
15 Series2
15
13 13 13
12 12 12
11

10 9

5 4 4

0
NIM from Local Foreign Exchange Trade finance Cash Management Project Finance Foreign Currency Investm ent
credits and Rates Credits Banking

Contribution from
 de-Risk
Wholesale banking Revenue Growth CAGR %

30

25
25

22

20 19 19
18

15 CAGR %

10
10

0
NIM from Local Foreign Exchange Trade finance Cash Management Project Finance Foreign Currency Investm ent Banking
credits and Rates Credits
 Organisation Structure
de-Risk

CEO

Head
Head Treasury Corporate Banking CRO

Analyst

Zonal/Regional Heads Product Heads

Location Head
Location Head RMs

RMs
 de-Risk

Regulatory
Environment

Weakness
Strength
strength

Business
Buyer’s

Own
Strategy

Competition
 de-Risk

Regulatory Framework

Asset Acquisition Strategy

Product Strategy

Market Segmentation Strategy

Pricing Strategy

Performance Management Strategy

Corporate Goals
 de-Risk

Regulatory Framework
Dilemma for Monetary Authority
de-Risk

Stable Exchange Rate

Price Stability Economic Growth

 de-Risk
RBI On-site Rating of Banks on CAMELS

In the on-site examination process, RBI rates banks on CAMELS

model based on the:

Capital Adequacy, Final Rating

Made known
Asset quality,
Only to the
Management, Concerned
Earnings appraisal, BANK
Liquidity and
Systems and controls ABCD
A composite rating is arrived at after rating each of the individual
components under CAMELS. Ratings are updated only once in a year.

RBI conducts frequent off-site data monitoring to review the CAMELS

rating assigned to each bank (Prompt Corrective Action).
 Regulatory Framework - Macro de-Risk

 Cash Reserve ratio : 4.75%

 Statutory Reserve ratio : 24%

 Repo & Reverse Repo Rate : 8% and 7%

 Liquidity Adjustment Facilities at : 9%

 Bank rate : 9%
 Regulatory Framework - Micro de-Risk

 Prudential limits
 Company- 15% of capital funds & 40% for the
group
 Can be increased to 20% & 45% respectively with
approval of the Board.
 To be declared in Notes on Account of Bank’s B/S
 Additional exposure of 5% for company and 10%
for group only for “Infrastructure” lending
 Exceptions- a) Food Credit b) Rehabilitation of
sick units c) Loan against own deposits d)
Guarantee by GOI.
 Exposure to capital market
 Max 40% of networth of the bank as in last
audited b/s Direct exposure < 20%
 de-Risk
Statutory declaration made by SBI
 Regulatory Framework - Micro.. de-Risk

 No bank should hold shares in any

Company whether as pledgee, mortgagee
or absolute owner exceeding 30% of paid-
up share capital of the company or 30% of
own paid up Capital & Reserves
whichever is less
 Loan against CD not permitted
 Regulatory Framework - Micro.. de-Risk

 Bank should have Sectoral exposure limit

 Banks are expected to identify and monitor
large exposures within prudential limits – such
exposures being referred to as ‘Substantial
Exposure’.
 Bank should have separate policy to finance
Real Estate
 Bill discounting only for Customers & with
recourse to drawer
 No loans against Gold bullion
 Loan against Bank Guarantee
 Guaranteeing bank should have Funded
exposure of at least 10% of the exposure
guaranteed
 Exception- Rehabilitation of Sick units
 de-Risk
Substantial Exposure

Extract from a credit policy statement of a bank

Substantial Exposure
de-Risk
 Regulatory Framework - Micro.. de-Risk

 Activities of NBFC not eligible for bank finance

 Bills discounted other than two wheeler & three
wheelers, Inter Corporate Deposits
 IPO Funding etc
 Finance promoters equity
 Only for existing company in Infrastructure
 Max-50%,Max tenor 7 years
 Should not be in RBI’s defaulters list
 Only companies with satisfactory Net worth
 Part of capital market exposure
 Compliance of Sec 19(2) of BR Act
 Clear take out
 Scheme to be approved by Board
 de-Risk

Corporate Goal
Build and maintain a high quality,
well diversified credit portfolio,
giving an improving risk-adjusted yield.
de-Risk
 Broad Business Strategy de-Risk

Work on revenue target rather than balance sheet

size.
Build synergy with treasury and retail business while
retaining ownership of corporate relationships.
Use fund transfer pricing effectively to concentrate on
credit risk management.
Relationship Managers and Product Managers are
the twin pillars for building sustainable profitable
relationships.
Use RAROC for performance management and
capital optimisation.
 de-Risk

Asset Acquisition Strategy

 Asset acquisition strategy de-Risk
Business by choice for a target portfolio rating.

Separation of relationship management from

credit decision making.

Use policy filters for building portfolio quality

Find novel ways of doing business while

adhering to regulatory prescriptions.

Faster credit decisions by reducing exceptions.

Get desired share of customer wallet.

AAA AA+ AA A BBB BB+ BB B CC C Total
2% 5% 13% 61% 6% 2% 1% 4% 5% 100% de-Risk

1% 9% 73% 16% 100%

4% 42% 23% 19% 3% 7% 2% 100%

23% 37% 8% 26% 4% 100%

80% 10% 7% 100%

4% 8% 73% 6% 7% 2% 0% 100%
4% 56% 31% 6% 100%

9% 1% 9% 68% 11% 1% 0% 1% 0% 100%

1% 18% 63% 10% 1% 3% 4% 100%

1% 67% 14% 12% 7% 100%

9% 1% 73% 16% 100%

19% 81% 100%
90% 100%

1% 12% 34% 42% 5% 3% 2% 1% 100%

100%

2% 37% 60% 2% 100%

15% 1% 19% 46% 14% 2% 1% 0% 2% 100%

1% 15% 65% 11% 2% 0% 1% 5% 100%
81% 18% 100%

100
7% 1% 16% 56% 13% 3% 1% 0% 1% 2% %
 Industry Correlations de-Risk

Low

Fertiliser, Steel, Auto

Anc, Paper, Const, Petroleum, Cement &
Pesticides, Chemical, Software Telecom & Media
Tyres & Power

Negative
Correlations among the industries derived using preceding three years
daily industry index data sourced from CMIE.
 Banking Arrangement : Preference de-Risk

Consortium Multiple Outside Consortium

arrangement banking & Multiple banking
arrangement
Secured Secured Normally unsecured
Regular flow of No regular No flow of
information flow of information
Difficult to exit information Easy to exit
Low elbow room Relatively Suitable for
Obligation to
easier to exit relatively weaker
participate in rehab. Suitable for companies when
package mid level of industry is doing well
Suitable in case of
companies Cyclical Industries
strong companies
 de-Risk

Product Strategy
 Risk Profiles of Corporate Liability Products
de-Risk

Corp. Liability Operational Reputation

Products Credit Risk Market Risk Risk Risk Legal Risk

Anywhere banking Nil Nil Fair Moderate Nominal

EFT/RTGS Nil Nil Fair Moderate Nominal

CMS Moderate Nil Fair Nominal Nominal

At Par payments
(DW/IW) Moderate Nil Fair Nominal Nominal

Cash Pick-Up and

Deposit Nil Nil High Nominal Nominal

Net-banking Nil Nil Moderate Nominal Nominal

Credit Collections Nominal Nil Moderate Nominal Nominal

Scale Nominal Moderate Fair High Very High

Cost competitiveness in assets comes from efficiency

in selling liability products.
 Risk Profiles of Corporate Asset Products
de-Risk

Corporate Asset Operational Reputation

Products Credit Risk Market Risk Risk Risk Legal Risk
Project Loans Very High High Nil Fair Fair

Asset / equipment Loans Fair Moderate Nil Moderate Fair

Equipment Lease Fair Fair Nil Moderate Fair
WC Term Loan Fair Moderate Nil Moderate Fair
WC Cash Credit Fair Moderate Nominal Moderate Fair
WC Bill Purchase Fair Moderate Nominal Moderate Fair
WC Factoring Fair Moderate Nominal Moderate Fair

WC Receivable Purchase Fair Moderate Nominal Moderate Fair

WC Purchase Bill
Discounting High Moderate Fair Moderate Fair

Letter of Credit Fair nil fair fair Fair

Guarantees Fair nil fair fair Fair
L/c Discounting Nominal Nil Fair Nil Moderate
Export Negotiations Nominal Nil Fair Nil Moderate
Restructured Credit
facilities Very High High Nominal Fair Fair

Scale Nominal Moderate Fair High Very High

 Risk Profiles of Treasury Products
de-Risk
Operational Reputation
Treasury Products Credit Risk Market Risk Risk Risk Legal Risk

Investment in Corporate
Bonds Fair Very High Nil Nil Nil
Investments in T Bills Nil Nominal Nil Nil Nil

Investment in SLR Bonds Nil High Nil Nil Nil

Investment in Mutual
Funds Moderate High Nil Nil Nil
Investment in Equities Fair Very High Nil Nil Nil

Purchase and sale of

foreign Exchange Nil Nominal Moderate Nil Nil
Forwards Moderate Nominal Moderate Nil Nil
Options - vanila Moderate Fair Moderate Nil Nil
Options - Exotic Fair High Fair Moderate Moderate
Swaps Fair Fair Fair Moderate Moderate
Swaptions Fair High Fair Moderate Moderate
Quantos High High Fair Moderate Moderate

Leaveraged Products Very High Very High Fair Moderate Fair

Scale Nominal Moderate Fair High Very High

 de-Risk

Market Segmentation Strategy

 MNCs Large domestic SMEs
de-Risk
companies
Markets Multiple Large domestic One of the many
served geographies and presence and some players in
nations having international domestic market
varied political, operations through and some
economic and legal JVs, active in presence in
framework exports export market.
Ownership Mostly located Belonging to Indian Mostly family
abroad business owned with some
houses/groups public holding.
Manageme Professional, mostly Combination of Family owned,
nt controlled by expat. family and generally first or
CEOs. Most critical professional second
decisions taken by management, critical generation
foreign parent. Good decisions controlled entrepreneurs.
corp. governance by family. Fair corp. Corp.
practices governance Governance in
practices nascent stage.
 MNCs Large domestic SMEs
companies de-Risk

Skill sets Skilled managers Skilled professional Family

with special managers support management has
knowledge, clear family controllers. some support of
policy regime and Policies are fairly professional
strict adherence to comprehensive and managers. Policy
policies adherence fair. regime is not too
clear or
comprehensive.
Financial Comprehensive and Fairly Meet regulatory
disclosures largely dependable comprehensive and requirements but
dependable one needs to go
beyond these.
Internal Comprehensive Good internal Internal controls
control and controls and audit controls and well are in developing
audits processes in place known auditors in stage and
most cases auditors are not
well known
 MNCs Large domestic SMEs
companies de-Risk

Bargaining Hard bargainers and Hard bargainers and Bankers have a fair
strength price and quality price conscious. Some bargaining position.
conscious leeway on quality Very price conscious.
possible
Products Want a complete suit of Want a complete suit of Need mostly financial
needed financial transaction financial transaction products. Gingerly
related and risk and related and risk and trying to use risk
balance sheet balance sheet management
management products management products products.

Relationship Foreign banks Demanding on RMs Strong relationship

Management operating in India have give fair weight to values. Will change
an advantage. Banking relationship but are banks only if really
relationships decided liable to change banks. pissed off with a bank
by parent company Are looking for foreign otherwise add new
based on global view. bankers for support banks and continue
Indian banks tend to abroad and for exotic old relationships at
get local business as product offering lower levels.
second banker.
 de-Risk

High High Competitive Position Low

Hold & Grow Penetrate Improve or

Withdraw
Account Attractiveness

Defend Selective Standardise

Strongly Servicing d Marketing

Maintenance Minimum Withdraw

of Profitable maintenance
services
Low

Account Strategy
 de-Risk

Planning Corporate Account Strategy

Basic account screening

Prospecting
Needs identification
Account strategy Assessment
Action plan development
Call plan development
Consolidation Plans
 de-Risk

Pricing Strategy
 de-Risk

?
Mechanics of Transfer Price
de-Risk
Net TF Paid
Busine Revenue to
ss Interest Cost to to Rupee retail/Co Cost to
Liabilities raised done Paid bank business revenue rporate treasury

Floating deposits 15 0.00% 0.00 3.00% 0.45 3.00% 0.45

Savings deposits 20 3.50% 0.70 1.00% 0.20 4.50% 0.90
Term deposits
<1year 40 5.00% 2.00 0.50% 0.20 5.50% 2.20
Term depsoits >1 &
<3 years 20 6.50% 1.30 0.60% 0.12 7.10% 1.42
Term deposits >3
years 5 7.00% 0.35 1.10% 0.06 8.10% 0.41

Total 100 4.35 1.03 5.38

Weighted interest
cost for bank 4.35%
Mechanics of Transfer Price
TP Net de-Risk
Price Charged revenue Revenue Revenue
Busines charged Income to to for for
Asset created done to client to Bank Business business business treasury

MIBOR linked loans 5 5.50% 0.275 4.50% 1.00% 0.05 0.225

Bills 60 to 90 days 5 8.00% 0.4 5.50% 2.50% 0.13 0.275
Cash credits and
Over drafts 29 12.00% 3.48 8.00% 4.00% 1.16 2.32
Short term Loans 10 10.50% 1.05 7.50% 3.00% 0.30 0.75
medium term loans 5 11.00% 0.55 9.00% 2.00% 0.10 0.45
Housing loans 15 9% 1.35 7% 2.00% 0.30 1.05
Cash on hand 7 0 0
SLR Investments 24 7% 1.68 1.68
100 8.785 2.04 6.75

Weignted Interest Treasury

Earned By bank 8.79% Cost 5.38
ALM 1.38
NIM for the Bank 4.44% profit
 de-Risk

Revenue For Bank

Treasury profit 1.38
from ALM

Business profit Liabilities 1.03

Business profit Assets 2.04

Total Bank NIM 4.44

de-Risk
 de-Risk
Pricing Liabilities

Investment opportunities
Administrative overheads
Transaction processing cost
Risk premium – probable (expected) loss to be included in pricing to
cover market and operational risk
Capital cost

Price Taker or Price Leader?

 de-Risk
Pricing Assets
Risk Unbundling for better pricing
Cost Elements
Cost of funds
Administrative overheads
Transaction processing cost
Risk premium – probable (expected) loss to be included in pricing to
cover credit, market and operational risk
Capital cost

Price Taker or Price Leader?

 de-Risk

Elements of Asset Pricing Percent

1 Cost of funds based on transfer price 6.50
Required loan loss provision based on
2 credit rating 1.20
3 Direct expenses 0.40
4 Indirect expenses 0.50
5 Overhead costs 0.50
6 Total costs before equity chargeSum(1..6) 9.10

7 Economic capital based on Credit rating 10%

8 ROE expected 15%
9 Effective tax rate 30%
10 Capital charge 2.14
11 Price to be charged to customer (6+10) 11.24
 de-Risk

Performance Management
 Relationship Manager the Kingpin de-Risk

Good at analysing financial statements

Good at analysing Industries and Key players
Look for business opportunities
Sound judgment on promoters and finance managers
Good at valet sizing clients
Good negotiator
Conservative banker
Annexure

Revenue Budget for For R M

Relationship Manager the Kingpin de-Risk

Product-wise business
plan for CB clients
Other
Tot C/A I
L Tot F n
o l c
a
F o o
n e a m Frn
Client Tot WC s e t TOTAL Taxes e k CMS Total

PQR Textiles
Volume 2950 1000 500 500 666.00

Income 29.75 38 57.6 25 150.3 0.54 12 162.84

Petro CO
4878.0
Volume 0 0 0 1900 0

Income 0 0 5 95 100 3.94 2 105.94

GSPL
Volume 0 1500 0 0

Income 0 22.5 0 0 22.5 22.50

SA Steel
Volume 3500 0 1000 200.00

Income 47.5 0 20.1 67.6 0.16 2 69.76

Total Revenue 77.25 60.5 82.7 120 340.4 4.64 0 0 16 361.04
 Credit Process
de-Risk
Business Sourced at Branches

CB responsible for sourcing the business

Credit Assessment done by Risk independently

Credit Decision taken Jointly by Business and Risk

by Consensus.
Credit Administration/Remedial Management is
handled separately

Periodic Review / Renewal / Exit

 Credit Administration de-Risk

 Independent Function- Separate from Business

 Documentation and security creation
 Preparation and dissemination of periodic
management reports to Credit committee
 Regulatory MIS
 Events of Default tracking and reporting to
Corporate Office
 Audit compliance and timely disposal of reports
de-Risk
de-Risk
 de-Risk

Total Rs. 1,19,971 Crores

de-Risk
Remedial Management de-Risk

Early warning signals

Better immediately than later

Need to take decision away from relationship

manager

Loan Review Mechanism

Remedial management Group

 Exit with least pain ? de-Risk

• Early decision

• Sale of securities without court intervention

• Restructuring and patiently waiting for recovery

• Sale of asset to Asset Reconstruction

Specialists

• Criminal suit in case of willful default, fraud or

misrepresentation

• Civil suit for recovery through “Debt Recovery

Tribunal”

• Civil suit through normal legal process.