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On
Risk Management
Of
Presented to
Faculty Member
Jaipuria Institute of Management, Lucknow
On
September 13th, 2010
Submitted By:
Saitu Gupta (Roll No.119)
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PREFACE
Trend Analysis
Horizontal Analysis
Ratio Analysis
The ratio analysis of the company has been derived for 23 ratios which
help to determine the company’s performance. In the Scenario Analysis of
the company we have included the company’s industrial GDP, its Market
Share, Market Capitalization, Market Growth etc.
Acknowledgement
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With a sense of gratitude and respect, we would like to extend our
heartiest thanks to all of those who provided help and guidance to make
this project a big success. No Project is ever the outcome of single
individual’s talent or effort. This work is no exception. This project would
not have been possible without the whole hearted encouragement, support
and co-operation of our guide, friends and well-wishers. Although it is not
possible for us to name and thank them all individually, we must make
special mention of some of the personalities and acknowledge our sincere
indebtness to them.
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1. “Credit Risk”
“Credit Risk” means the possibility of loss associated with diminution in the credit
quality of borrowers or counter parties. These counter parties may include an
individual, corporate, bank, financial institution or sovereign.
In order to take informed decisions, it is necessary to identify the areas of credit risk in
each borrower as well as each industry. Risk management division HO, in
coordination with other HO divisions involved in disbursal of credit and also the risk
management departments of various circle offices, identifies the risk areas and
develops necessary tools and processes to measure and monitor the risk.
In order to measure the credit risk in bank’s portfolio, PNB has developed the
following models:
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Small Loans Above Rs.2 Up to Rs.25 cr. All Sectors except NBFC/Banks/FIs
II lakhs
And up to
Rs.50 lakhs
AND
NBFC All Non Banking Financial Companies Irrespective of limit
New Projects Above Rs.5 Cost of Project All sectors, except NBFC/ Banks/
Cr OR Above Rs.15 Cr FIs and trading up to two years of
operations.
Entrepreneur Borrower Cost of Project All sectors, except NBFC/ Banks/
New Setting up Above Rs.15 Cr FIs. However, all new trading
Business new business irrespective of limits shall
Business be rated under this model.
and
Requiring
Finance
Above
Rs.20 lakh
And up to
Rs.5 Cr
AND
Half Yearly Applicable to all listed companies as well as all accounts having
Review of Exposure from PNB of above Rs.50 Cr
Rating
Counter Party All banks and financial institutions
These models have been implemented at the field level. The bank is developing new
risk rating models besides refining existing risk rating models to assess the credit risk
in its entire credit portfolio.
2.2.2 Similarly, to evaluate risk in retail segment, credit scoring models are being
used. It is a simple tool to predict the probability that a loan applicant or existing
borrower will default. The outcome is based on personal characteristics and past
behaviour.
Such credit scoring models for all the retail lending schemes except PNB Baghban
Scheme and Loan against Gold have been developed based on scientific application
and have been put on central server under the name PNB Score. All the retail loans
will now be sanctioned based on the scores obtained by individual borrower and all
retail loan applications coming for sanction are necessarily to be scored and rejection
would be based on the score obtained. The cut off score for sanction will be based on
performance of the models, market conditions and corporate policies.
1. Conveyance Loan
2. Hosing Loan
3. Education Loan
4. Doctors’ Loan
5. Personal Loan (pensioner)
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6. Personal Loan (Others)
7. Traders’ Loan (New)
8. Traders’ Loan (Renewal)
2.2.3 The credit risk rating models have been developed with a view to provide a
standard system for assigning a credit risk rating to all the borrowers on the basis of
the overall credit risk involved in them. Inputs of the model are financial,
management, business and conduct of account, industry information. The evaluation
of a borrower is done by assessment on various objective/subjective parameters. The
model evaluate the credit risk rating of a borrower on a scale of AAA to D with AAA
indicating minimum risk and D indicating caution risk.
The credit risk rating models incorporate therein all possible risk factors, which are
important for determining the credit quality/rating of a borrower. These risks could be:
• The models provide for down gradation of the rating of a borrower by one
notch on the basis of any crucial factor coming to the notice after the date of
audited balanced sheet (on which rating is done) and which may affect the
operating efficiency/viability of the unit substantially such as:
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i. Poorer performance during current year as compared to balance
sheet figures.
ii. Absence of willingness/capability of the promoters to repay the
debt as agreed
terms and conditions
iii. Substantial impairment in the value of assets
iv. Obsolescence of the product or any major change in Govt. policies
having substantial impact on the performance of the company.
v. Effects of any major developments, which are not yet cleared,
major damage to plants/stocks, court judgement on environmental threats,
involvement of promoters/company in excise/FEMA/ criminal proceedings
against the promoters, change of management etc.
• The credit risk rating of all borrowers should be done immediately after receipt
of audited financial results of the company and should not be linked to the
regular renewal/review exercise.
• For the purpose of assigning score under “conduct of account” in respect of
borrowers, which have not been dealing with PNB earlier, the PMS score will
not be available and as such be made “NA”
• The Risk Management Division (RMD), Head Office circulates the industry
ratings to be used for all major industries, on a quarterly basis. Based on the
circular, industry ratings are updated in the software at RMD HO. The
industry, for which the RMD HO has not provided score, shall be assigned
‘Neutral’ industry rating.
Scores are assigned to each of the attributes of the different parameters based on the
risk perception. The score being assigned to most of the parameter is based on
objective criteria. The scores of the applicable/selected attributes of the parameters are
aggregated in a certain fashion depending on the scheme to arrive at the final score.