CANARA BANK

Executive Summary
Topic: Credit risk Management at Canara Bank
About the Canara Bank: Founded in 1906, Canara Bank is one of the premier banks in India, with a net work of 2578 branches across the country. The bank was the first two launch networked ATMs in India and obtain and ISO certification. Canara bank has also achieved the distinction of being the countrys highest net profit earner among nationalized banks for the year march 2007. The bank has already carved a niche in providing IT-based services such as networked ATMs, anywhere banking, Telebanking, Remote access Terminals, Internet and Mobile banking, Debit cards, etc. Canara bank a vision to help improve the economic condition of the common people of India by inculcating the habit of savings in rural areas. As part of its vision of using technology to provide affordable banking services to the vast rural population of India, Canara bank has extend the performance and cost benefits of enterprises Linux to its customers. With a modernized branch infrastructure, Canara bank hopes to serve customers in a timely and efficient manner, reinforcing its image of being a customer savvy bank

About the topic

Credit risk is defined as the possibility of losses associated with diminution in the credit of quality of borrowers or counter parties. In a banks portfolio, losses stem from outright default due to inability or unwillingness of a customer or counter party to meet commitments in relation to lending, trading, settlement and other financial transactions. As credit risk is one of the challenging tasks to banks I have selected this topic for my study in order to know the various types of risk and the types of strategies the banks use to mitigate the risk.

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OBJECTIVES OF THE STUDY:

1. To know the methods to be implemented in banks. 2. To know the various methods used by bank to mitigate credit risk. 3. To know the various types of credit risk in bank. 4. To know the executing methods used in managing credit risk.

DATA COLLECTION METHOD

Primary data: Primary data collected through the interaction with chief manager, senior manager and bank staff. Secondary Data: Secondary data collected from bank circulars, bank guidelines book and internet. Brief Findings Current system of credit risk management Canara Bank has a system of checks and balance in place of extension of credit. The aspect covered under the present system is multiple credit approvals, independt audit and risk review and risk rating system for various categories of system and corresponding pricing mechanism. The bank maintains a diversified portfolio of risk assets, and ensures on going control of risk considerations .All credit exposures above RS 5 Crores are assigned risk waiting assigned by domestic credit rating agencies recognized by RBI The credit risk management system at the branch level has been maped out in detail 1. Internal rating based (IRB) approach the standardized approach adopted so far, provides incentives to banks improving their credit risk management techniques. 2. Banks may have discretion and flexibility in defining the exposure classes, such as corporate, project finance, etc. 3. Unless suitable modified, the adoption of the new Accord in its present format would result in significant increase in the capital charge for banks.

LIMITATIONS

CANARA BANK 1. The study restricted to only one branch. 2. The time constraint was a limiting factor, as more time required carrying 0 ut study on other aspects of the topic. 3. Due to secrecy it is difficult obtain actual facts and figures of advances of branches.

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INDUSTRIAL PROFILE Overview:

The enhanced role of the banking sector in the Indian economy, the increasing levels of deregulation along with the increasing level of the competition have facilitated globalization of the Indian banking system and placed numerous demands on banks. Operating in this demanding environment has exposed banks to various challenges. The last decade has witnessed major changes in the financial sector-new banks, new financial institutions, new instruments, new windows and new opportunities- and, along with all this, new challenges. While deregulation has opened up new vistas for banks to augment revenues, it has entailed greater competition and consequently greater risks. Demands for new products, particularly derivatives, has required banks to diversify their product mix and also effect rapid changes in their processes and operations in order to remain competitive in the globalize environment. The benefits of globalization have been well documented and are being increasingly recognized. Globalization of domestic banks has also been facilitated by tremendous advancement in information and communication technology. Globalization has thrown up lot of opportunities but accompanied by concomitant risk. There is a growing realization that the ability of countries to conduct business across national borders and the ability to cope with the possible downside risks would depend, inter alia, on the soundness of the financial system and the strength of the individual participants. Adoptaion of appropriate prudential, regulatory, supervisory, and technological framework on par with international best practices enables strengthening of the domestic banking system, which would help in fortifying it against the risks that might arise out of globalization in India we had strengthened the banking sector to face the pressures that may arise out of globalization by adopting the banking sector reforms in a calibrated Mann followed the twin governing principles of non-disruptive progress and consultative process 1. Legal prescriptions for ownership and governance of banks in banking regulation Act, 1949 have been supplemented regulatory prescriptions issued by RBI from time to time.

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Outsourcing risk:
Banks are increasingly using outsourcing for achieving strategic aims lading to either ratio nationalization of operational costs are taping specialist expertise which is not available internally. Outsourcing may be defined as a banks use of a third party, including an affiliated entity within a corporate group, to perform activities on a continuing base that would normally be undertaken by the bank itself. Typically outsourced financial services include applications processing (loan organization, credit card), document processing, investment management, marketing and research, supervision of loans data processing and bank office related activities etc.

Application of advanced technology:

Technology is a key driver in the banking industry, which creates new business modules and process, and also revolutionizes distribution channels. Banks which have made in adequate investment in technology have consequently faced and erosion of there market shares. The beneficiaries are those banks which have invested in technology. Adoption of technology also enhanced the quality of risk management systems in banks. Recognizing the benefits of modernizing their technology infrastructure banks is taking the right initiatives. While doing so, banks have four options to choose from: they can build a new system those selves, or buy best of he modules, or buy a comprehensive solution, or outsource. In this context banks need to clearly define their core competencies to be sure that they are investing in the areas that will distinguish them from other market players, and give them a competitive advantage. The global challenges which banks face or not confined only to the global banks. These aspects are also highly relevant for banks which are part of a globalized banking system. Further, over coming these challenges by the other banks is excepted to not only stand them in good stead during difficult times but also augurs well for the banking system to which they belong and will also equip them to launch themselves as a global bank.

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Company profile Genesis

Founded as 'Canara Bank Hindu Permanent Fund' in 1906, by late Sri. Ammembal Subba Rao. Pai, a philanthropist, this small seed blossomed into a limited company as 'Canara Bank Ltd.' in 1910 and became Canara Bank in 1969 after nationalization. ''A good bank is not onv the financial heart of the community, but also one with an. obligation of helping in every possible manner to improve the economic conditions of the common people" - A. Subba Rao Pai.

Canara Bank Founding Principles

1. To remove Superstition and ignorance. 2. To spread education among all to sub -serve the first principle. 3. To inculcate the habit of thrift and savings.
4.

To transform the financial institution not only as the financial heart of the community but the social heart as well.

5. To assist the needy. 6. To work with sense of service and dedication. 7. To develop a concern for fellow human being and sensitivity to the surroundings with a view to make changes/remove hardships and sufferings. Sound founding principles, enlightened leadership, unique work culture and remarkable adaptability to changing banking environment have enabled Canara Bank to be a frontline banking institution of global standards.

As Canara bank founded in 1906, Canara Bank is one of the premier banks in India, with a network of 2578 branches across the country. The bank was the first to launch networked ATMs in India and obtain an ISO Certification. Canara Bank has 6

CANARA BANK also achieved the distinction of being the country's highest net profit earner among nationalized banks for the year March 2007. The bank has already carved a niche in providing IT -based services such as Networked ATMs, Anywhere Banking, Telebanking, Remote Access Tensional, Internet & Mobile Banking, Debit Cards, etc. Canara Bank has a vision to help improve the economic condition of the common people of India by inculcating the habit of savings in rural areas.

Challenges
Canara 'Bank achieved 100% computerization very early in the course of its operational history. It deployed a number of bank automation tools such as a customized Total Branch Automation (TBA) package called Integrated Branch Banking Software (18BS), which was developed by its subsidiary, Can Bank Computer Services Ltd. (CCSL). IBBS was deployed on Novell NetWare at close to 1400 medium sized branches across the country. Canara Bank follows a detailed tendering process for new hardware purchases, in which contracts are awarded on the basis of bids. After nearly a decade of deploying IBBS, the bank had purchased different types of hardware from multiple vendors. As a result, standardization on Novell NetWare became difficult, and supporting the legacy IBBS application became a challenging task. Moreover, IBBS was developed using Micro focus COBOL and designed to run in a 16 bit DOS environment. With poor support for the TCP/IP protocol stack, the NetWare servers running IBBS could not be integrated into the corporate network easily. Essentially, the NetWare servers functioned as branch file servers, without any data connectivity. Regular maintenance of different versions of IBBS across 1400 branches was a painstaking effort in the absence of network support. Patching, troubleshooting and version upgrades had to be conducted onsite. Branches in rural and remote areas were particularly difficult to access and required support personnel to travel frequently. Also, the availability of certified hardware on NetWare was limited, which made adding new machines difficult. 7

CANARA BANK As Canara Bank's customer base expanded, its banking services began to scale, creating an immediate need for Internet Banking, Anywhere Banking (banking from any Can Bank branch across the country) and an expanded ATM network. Novell NetWare's closed legacy environment did not allow room to accommodate these new technologies. Canara Bank had to purchase additional machines running Microsoft Windows to interface with these new technologies, which was extremely inefficient from a hardware utilization standpoint. New hardware and Microsoft Windows licenses strained budgets and made new technology projects difficult to scale and sustain. When additional branches were added to the bank's network, procuring new servers that were certified to run on NetWare was difficult, as IHVs had ceased to provide support for older versions of the as. Micro Focus had also ceased support for the COBOL version on which the IBBS package had been developed. A combination of all these factors made migration attractive. Migrating the 1400 odd legacy NetWare servers posed another challenge: Canara Bank wanted to switch platforms but not hardware. Deploying the latest as available, without going into a hardware refresh cycle that would cost millions of rupees was a challenging task. The bank had amassed about a dozen different types of machines after a decade of deploying IBBS. This heterogeneous mix of hardware that spanned across more than1,000 server 10,000destopsmadethe project very complex. Canara Bank began to look for a platform that could deliver the
latest innovation along with complete hardware freedom.

Future plan
Moving from the legacy NetWare platform to Red Hat Enterprise Linux has opened up significant opportunities for Canara Bank. With networking support now available, Canara Bank is planning to deploy Red Hat Network Satellite to send updates for both IBBS as well as the operating system to all distributed machines across the country. Enterprise Linux has also made Remote Management and health monitoring of remote servers possible. With the tremendous benefits provided by Enterprise Linux, Canara Bank plans to move its Anywhere Banking and Internet Banking Ii steners to the 8

CANARA BANK Enterprise Linux platform. Enterprise Linux has provided Canara Bank with the freedom and choice to develop a scalable growth plan, which was not possible under NetWare's closed legacy environment. The power of Linux is not restricted by hardware limitations, as it can run on different kinds of architectures. Canara Bank has managed to save crores of rupees in new hardware acquisition costs, by using a lightweight customized Linux distribution on its existing hardware

The Bank Today

Canara Bank is one of the premier banks in the country, accredited with umpteen distinctions. The present stature of the Bank is due to its strong fundamentals and quality customer orientations. Profit making since inception, the Bank today ep itomizes a perfect blend of commercial and social banking. For the year March 2007, the Bank clocked the highest net profit ( RS.1110 crore) among nationalized banks, with significant improvement in capital adequacy ratio (13.50%) and asset quality (net NPA ratio of 0.94%). The Bank has already carved a niche in providing IT -based services. With 100% computerization of the branches, the bank provides a wide array of services, such as, Networked ATMs, Anywhere Banking, Telebanking, Remote Access Terminal also Internet & Mobile Banking, Debit Card etc. The Bank was the first among banks to launch networked ATMs and obtain ISO Certification. Commercial consideration has, no way, diluted the Bank's role in national priorities. Canara Bank is in fact the first bank to be conferred FICCl award for contribution to rural development.

CANARA BANK CANARA BANK SERVICES Anywhere Banking: Anywhere Banking is a technology-based, customer-friendly service designed to provide greater convenience to our customers. With Anywhere Banking facility,once customer has an account with any of the select branches, Customer can operate it From any other designated branch across 85 cities.

FACILITIES:
Individuals I joint account holders (operated severally) maintaining Current I 58 I OD Accounts: I. Withdrawal of cash 2. Remittance of cash 3. Transfer of funds 4. Balance enquiry 5. Issue of mini statement 6. Depositing local cheques for collection 7. Purchase of Demand draft Firmsl Companies I Other Bodies maintaining Current I OD I OCC Accounts: 1. Transfer of funds between accounts; from one Anywhere Banking branch to another anywhere banking branch. 2. Depositing of local cheques for collection and crediting to the respective account at any Anywhere Banking branch.

ELIGIBILITY:
Account holders should have maintained a minimum average balance of Rs.5,OOO/ - in SB account and Rs.I 0,000/ - In Current account in the last six months

FEATURES:
1. Cash withdrawal upto Rs.50, OOO/ - per occasion 2. Transactions permitted on production of ident ity card issued exclusively for 10

CANARA BANK ANYWHERE BANKING facility 3. Facilities of both intra-city and inter-city transactions. 4. HOME CLEARING - on line debit of cheques drawn on our own A WB branches within the city / clearing zone.

Tele services
Access information about your account right from your home, office or from anywhere over telephone. A round the clock teller answering the enquiries from anywhere presenting voice information at any time. You can make the following enquiries/requests over telephone: Balance in the account including clear balance. Last five transactions in the account. Request for cheque book. Request for pass sheet. Change in pass word. Fax on demand.

Note: The facility is password protected to ensure secrecy. Ask your Branch Manager for details and enroll today itself the service 'is absolutely lice of cost

Personal Banking: Deposits

Savings Bank Account Current Account

Term Deposits - Fixed Deposits - Kamadhenu Deposits - Recurring Deposits - Can flexi Deposits 11

CANARA BANK - Ashraya Deposits (for Senior Citizens)

Loans & Advances

Retail Loan Products - Home Improvement Loan Cancash - Canmobile - Can budget - Teachers Loan Card Services Insurance NRI - NRE (Non Resident External Rupee Account) - NRO (Non Resident Ordinary Account) - FCNR (Foreign Currency Non Resident Accounts -Banks) - RFC Deposits Loans & Advances - Housing Loan - Home Improvement - Cancarry (Consumer Durables) - Cancash (Shares) - Canmobile(vehicle)

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General Facilities
-Safe Custody Services -Safe Deposits Locker -Nomination facility Other Services/Facilities -N R I Branches -N R I Services -Remittance Facility -Facilities For Returning Indians Rural Financing -Agriculure & Rural Credit -Kisan Credit -Loans for setting up Agri Clinic -Minor Irrgation Loans -Farm Machinery Loans -Farm Development Loans -Vehicle Loan for Agricultureists -Loans for Plantation Crops

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Vidyasagar (Educational Loan)

- Housing Loan - Loans to SSIs - Charter for SSIs - Other Priority Sector Loans - Government Sponsored Schemes - Lead Bank Activities - Agricultural Consultancy Services

Social Banking
- Rural Development Schemes - CBJRDT Institutes - Women Development - Social Banking - Community Concerns - RUDSETIs

International Banking Services

Canara Bank entered Forex arena in 1953 with the opening of its first Foreign Exchange Department in Mumbai. Today Canara Bank the 4th largest Bank in India catering to the cross border trade & remittances and financing of foreign trade. We finance exports at pre-shipment stage as well as post shipment stage, which can be availed either in foreign currency or Indian Rupee s. In addition we facilitate forfaiting. That is, discounting of deferred export 14

CANARA BANK receivables on 'without recourse basis' from an overseas forfaiting agency. The Bank has been the pioneer in financing of LC based International Trade transactions in India. The Bank not only finance at customers option in foreign currency at pre -shipment and post- shipment stages at LIB OR related rates but also finance the import leg in foreign currency where imported inputs are required for exp0l1s. The Bank has the expertise in handling project exports of goods and services. The Bank has an excellent worldwide correspondent relationship and have the capability to handle any export, import, remittance and related transactions anywhere in the world and in any currency. Non fund based transactions like adding confilmations to LC, issuing inward and outward Bid bonds & guarantees, establishing LCs for import into India, arranging buyer's credit at attractive terms etc. are our forte. Canara Bank has a branch in London and hollyowned subside in Hong Kong. We have a joint venture with SBI at Moscow under the name Commercial Bank of India LLC. We have recently opened a Representative Office at Shanghai, People Republic of china. They are engaged in Trade finance and have expertise on the Indian market scenario. The Bank also manages 2 Exchange houses in the Gulf and arrangement with 20 Exchangf Houses and 18 Banks for drawing on DDs from Gulf Countreis on our select branches throught out India. The Bank has 5 forex dealing rooms located in Mumbai, New delhi, Calcutta, Chennai and Banglore in India. We provide a whole range of services and products like purchases and sale of 7 world currencies forward booking and other forex hedging instrument like currency swaps. Our 16 Foreign Deparment located in major cities in India have the requisits expertise to guide you and inform you in any matter connected with our products and services as well as the current forex regulation.

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Subsidiaries of Canara Bank

CAN FIN HOMES LIMITED: Can Fin Homes Limited was established on 29.10.1987 as a Sponsored Entity of the Banle some of the premier financial institutions such as HDFC, UTI and NHB are the co-promoters of the Company. Canara Bank holds 29.30% of equity in the Company. Sri K Venkataramaiah, General Manager of the Bank IS Managing Director of the Company. Apart from the Managing Director, the Board of Directors is complied of top Executives of the Bank, institutional nominees of HDFC, UTI and NHB and also professionals in the field of accounts/finance/Banking. The Registered Office of the Company is at No. 29, Sir M N Krishna Rao Park Road, Basavanagudi, Bangalore 560 004. The Company has 41 branches and 5 Representative Office spread across the country.

Activities:

The prime objective and activity of the Company is to provide Ion g term finance to individuals for construction or purchase of residential houses/flats and to Companies or Corporations or Societies or Associations for the purpose of construction or purchase of residential houses flats

Over the years, the company has added new products to their range and value addition is done to the existing products to keep updated with the changing market scenario and the competition, which is getting tougher with each passing day. Personal loans to the existing borrowers, loans for purchase of sites, insurance cover for loaners, etc., are some examples of innovation/value addition.

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Bank's goodwill, the innate strength of the Company approach and an unflinching business acumen have always kept the business on an envious platform making good profits and paying rich dividends and their pragmatic ever since incepection.

The Company also took a major step in diversification by launching three NonHousing Finance Products namely Premises Loan for practising professionals (Venture), Mortgages Loans (Net worth) and Loan against rent receivables (Ncash) CANBANK FACTORS LIMITED: Post Sale funds crunch is proving a handicap for many industries and business in the smooth cycling of capital. Canbank Factors Limited (CFL) was established in 10.05.1991 to mitigate this problem of the industry and business and ensure a smooth flow of capital in the entire cycle. This Company is promoted by our Bank alongwith Andhra Bank and SIDB!. The Registered office is at No. 17, Seshadri Road, Bangalore 56 0 009. The Company is now being headed by Sri G R Seshadri as Managing Director a senior executive in the cadre of Deputy General Manager deputed from the Bank. The Board of the Company consists of Chairman & Managing Director, Executive Director and a General Manager of the Bank, apart from the Managing Director. SIDBI and Andhra Bank have appointed their nominees. There are 3 nonofficial Directors from the profession of audit/accounts/ Banking/Finance. Has a network of 8 branches in southern and we stem part of the courtly and proposes to add some more during the next financial year. Activity: Factoring Services. To cater to the needs of the clientele, Company has always on the look out for innovative and competitive products. Introduction {)f variants of factOling such as International Factoring/Export Factoring and Sub -yariants such as Invoice 17

CANARA BANK Discounting backed by LCs/Hundisffripartite Agreemt'llIs are examples of their consistent endeavour to design/redesign their products.

CRISIL has given the following RATING to the Companv:

"PH" - indicating highest safety for short term debt program alld Commercial Papers "FAA+" - indicating higher safety for Public Deposits "AA" - indicating higher safety for non-convertible debentures Has developed a well designed "Management Information System" (MIS) Prudential norms prescribed by RBI are strictly complied with. Has developed in house "Internal Risk Evaluation System" (IRES). Has attained Nil Net NPA position for 4 consecutive years 200 2-03, 2003-04, 2004 -05 and 2005-06. The Company is accredited with an ISO Certificate -"DIN EN ISO 9001 :2000" by TUV CERT Certification body of Germany. Operations are fully computerised from Day one. CANBANK VENTURE CAPITAL FUND LIMITED: In our economic environment, assistance for establishment of new ventures in the field of industry is not easily forthcoming. To assist the new ventures, our Bank had formed a Venture Capital Fund in the year 1989. The Fund is managed by Canbank Venture Capital Fund Ltd, a wholly owned Subsidiary of Canara Bank. This is the only Company of its kind sponsored by a Public Sector Bank in the country. Sri B Sudhakar Shetty, Asst General Manager of the Bank is heading the Company as Managing Director. Apart from the Managing Director, the Company's Board of Directors consists of our Chairman & Managing Director, Executive Director and a General Manager of the Banle There are two non-official Directors, each drawn from the field of industry and Finance. The Registered Office is at No. 14, Naveen Complex, 4th Floor, M G 18

CANARA BANK Road, Bangalore 560001. Activity: Trustee and Manager of Canbank Venture Capital Fund. CANBANK COMPUTER SERVICES LIMITED: With fast increasing impetus ~n information technology and extensive use of computers in more and more spheres, the Bank found good opportunity for establishment of a Company which can develop softwares and provide consultancy services to computer users. This thought ofthe Bank culminated in the establishment ofCCSL on 13.08 .1994. The Company is co-promoted by 2 other Public Sector Banks and 3 Private Sector Banks. Canara Bank is holding 62.97% of the equity of the Company. The Registered Office is situated at No. 14, Naveen Complex, 7 th Floor, M G Road, Bangalore 560 001 B Sivaraman, Deputy General Manager of the Bank is heading the Company as Managing Director of the Company. Apart from the Managing Director, the Board of Directors consists of our Chairman & Managing Director and Executive Director. There is one Director each from Bank of Baroda, Lakshmi Vilas Bank, ING Vysya Bank Limited and Vijaya Bank on the Board. Activities: CCSL designs and develops software for banks, financial institutions and Govemment Departments, with its extensive in-house infra-structure and proven technical expertise. All its products and Projects are well documented and user -friendly, with on-line help, data encryption and audit features.

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CCSL offers services in the following areas:

1 Software development . 2. Business Process Outsourcing 3. Training 4. Data warehousing Solution 5. Web based solution 6. Information Systems Audit 7. Consultancy Servic

GILT SUCURITIES TRADING CORPORATION LIMITED

This is the latest of the Subsidiaries of Canara Bank so far. Established on06.06.1996 and co-promoted by Corporation Bank and Bank of Baroda, is a Primary Dealer Subsidiary accredited by RBI. Company is a wholly Owned Subsidiary ofCanara Bank since September 2004. The Registered Office is at 1-1, Kalpatharu heritage, Manekji Wadia Building, 127, M G Road, FOlt, Mumbai 400 023. Presently, the Company is under the stewardship of Sri D G Kamath as Managing Director who is a Deputy General Manager of the Bank on secondment to the Company. The Board of the Company consists of our Chairman & Man aging Director, Executive Director, 2 General Managers of the Bank and 2 Chartered Accountants and a former Banker. Activity:

Primary Dealer accredited by RBI for dealing III Government of India Dated Securities and Treasury Bills. Strengthening Infrastructure in the Government Securities (G Sec) Market so as to make it vibrant, liquid and broad based. Development of Underwriting and Market Making capabilities. Improving Secondary Market Trading System.

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CANARA BANK With the mentioned objectives, GSTCL participates actively both III

Security and Money Market. Reserve Bank of India, being the Regulator of Primary Dealers, sets certain goals in tenns of Bidding Commitments and Success Ratio in the Primary auction of G Secs and T Bills, to be accomplished by them which form the basis for renewal of PD's licence. GSTCL has the distinction of achieving these benchmarks consistently since inception. Underwriting of G Secs in the auction is yet another obligation cast on PDs.

Bond yields being the function of interest rate, the Company's asset portfolio is subject to market vagaries caused by factors like inflation, liquidity, government borrowing programmes, coupon, maturities of papers issued and also event baserisks. In order to manage and mitigate these risks the Company has well defined and board approved investment policy so also Risk Management Policy.

As typical of a trader, the Company is encashing price volatility to earn profits. Day-to-day operations are largely supported by Call and Repo Borro wings. Thus efficient funds management holds key to improving profitability.

The Company is also into retailing G Secs to individual investorslPFsffrusts/ Charitable Institutions through 24 designated branches of the parent, Canara Bank. and also has put in place arrangements for retailing through Stock Exchanges.

CANBANK INVESTMENT MANAGEMENT SERVICES LIMITED Bank had established its Mutual Fund arm "Canbank Mutual Fund" on 19.12.1987 for foraying into the Capital Market. CMF is an independent Trust governed by a Board of Trustees, When the RBI issued directives to form Asset Management Companies to manage the assets of Mutual Funds and such other Trusts, Canbank Investment Management Services Limited was established by the Bank on 02.03.1993 as a Wholly Owned Subsidiary of the Bank, Sri N R Rarnanujam, Deputy General Manager of the Bank is at the helm of the Company as Managing Director. Two General Managers of the Bank is also on the Board. There are four non-official Directors on the Board drawn from various fields 21

CANARA BANK connected to finance, CANBANK FINANCIAL SERVICES LIMITED: This is the first Subsidiary emerging from the stable of Canara Bank. Established on 01.06.1987 as a Wholly Owned Subsidiary of the Bank. Cantina was very quick to carve a niche for itself in the Merchant Banking arena as a premier institution providing a host of financial services under one roof. Registered Office of the Company is housed at No. 14, Naveen Complex, 6 th Floor, M G Road, Bangalore 560 001. Sri M. S. Prabhu, Divisional Manager of the Bank is heading the Company Executive Director. Apart from the Executive Director, the Board of Director consist of two General Managers of the Bank and a Chartered Accountant who is ;; non -official Nominee as Chairman. Activities: Activities of Canfina were curtailed post security scam of 1992. Canfina is presently attending to matters like collection oflease rentals and realizations of investments. DETAILS OF SECTIONS/DIVISIONS/DEPARTMENTS COMINC UNDER EACH FUNCTIONAL WIN G OF HEAD OFFICE PERSON N EL WING: I. Personnel Management Section.. 2. Industrial Relations Section. 3. Human Resources and Organisation Development Section. 4. Head Office Staff Administration Section. 5. House Magazine and Library Section. 6. Official Language Section. 22

CANARA BANK 7. Staff Training College. 8. Recruitment Cell. 9. SC/ST Cell.

CORPORATE CREDIT WING 1.General Credit Sanctions-I Section.

2.General Credit Sanctions-II Section. 3.Export Import Credit and Development Section. 4.Project Finance Department. 5.Technology Up gradation Fund Scheme Cell. RISK MANAGEMENT WING' 1. Credit Policy Section. 2. Industrial Advisory Division. 3. Operational Risk Management Group. 4. Credit Statistics Section. 5. Credit Review And Monitoring Section. 6. Integrated Mid Office. PRIORITY CREDIT WING 1. Priority Credit Section. 2. Agricultural Consultancy Services. 3. Small Scale Industries Division. 4. Regional Rural Banks Division. 5. Rural Development Section. 6. Social Banking Cell.

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PLANNING AND DEVELOPMENT WING 1. Development Section. 2. Economic Research Section. 3. Management Information and Planning Section. 4. Customer Service Section. 5. Publicity and Public Relations Section. 6. Corporate Merchant Banking Division. 7. Marketing, Research & Product Development Section. 8. Corporate Cash Management Services. RECOVERY WING. 1. Recoveries Section. 2. NP A Management Section. 3. Legal Section. 4. Sick Industries and Rehabilitation Section. FINANCIAL AND GENERAL ADMINISTRATION WING: a) General Administration Department 1. 2. 3. 4. 5. 6 7 8 9 Furniture and Bills Section. Premises, Policy and Administration Section. Technical Cell. Records and Tappal Section. Premises and Estate Section. Printing Section. Stationery Section. Central Security Cell. Estate Policy and Control Section.

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b) Accounts and Taxation Department 1. 2. 3. 4. 5. 6. 7. 8. 9. Balance Sheet and Central Accounts Section. Staff Provident Fund. Staff Welfare Fund. Pension Fund. Government Accounts Section. Executor, Trustee and Taxation Section. IBA Reconciliation Section. DD Reconciliation Section. ATM and Debit Card Reconciliation Section.

TREASURY AND INTERNATIONAL OPERATIONS WING' 1. Treasury and Investment Division. 2. Overseas Banking Division. RETAIL BANKING AND SUBSIDIARIES WING' a) Can card Division b) Retail Banking Division 1. 2. 3. Retail Banking Division. Bank assurance Section. Cross Selling of Mutual Fund Products Section.

c) Subsidiaries Division 1. Subsidiaries Section.

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Names of Subsidiaries and Associates a) Canbank Mutual Fund Limited. b) Canbank Factors Limited. c) Canfm Homes Limited. d) Canbank Investment Management Services Limited. e) Canbank Computer Services Limited. f) Canbank Venture Capital Fund Limited. g) Gilt Securities Trading Corporation Limited. h) Canbank Financial Services Limited.

INSPECTION WING. 1. 2. 3. 4. 5. 6. 7. Planning Section. Follow Up Section. Review and Reporting Section. Information Systems Audit Section. Vigilance Department. Staff Administration Section. Organisation and Methods Section.

DEPARTMENT OF INFORMATION TECHNOLOGY- WING' 1. 2. 3. 4. 5. 6. 7. 8. 9. Planning Establishment & Training Group. Administrative Software Group. Service Units Software Group. Branch Software Group. Delivery Channel & Communication Group. Procurement Group. Payment System Group. New Projects Group. Core Banking Group.

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CORPORATE GOVERNANC&MODEL CODE OF CONDUCT

1. Need and objective of the Code: Clause 49 of the Listing Agreement entered into with the Stock Exchanges, requires, as part of Corporate Governance the listed entities to lay down a Code of Conduct for Directors on the Board of an entity and its Senior Management. Senior Management has been defined to include personnel who are members of its Core Management and functional heads excluding the Board of Directors. Accordingly the Bank has laid down this Code for its Directors on the Board and its Core Management (individual bank will decide on the composition of core Management). 2. Bank's belief system: This Code of Conduct attempts to set forth the guiding principles on which the Bank shall operate and conduct its daily business with its multitudinous stakeholders, government and regulatory agencies, media, and anyone else with whom it is connected. It recognizes that-the Bank is a trustee and custodian of public money and in order to fulfils its fiduciary obligations and responsibilities, it has to maintain and continue to enjoy the trust and confidence of public at large. The Bank acknowledges the need to uphold the integrity of every transaction it enters into and believes that honesty and integrity in its internal conduct would be judged by its external behaviors. The Bank shall be committed in all its actions to the interest of the countries in which it operates. The Bank is conscious of the reputation it carries amongst its customers and public at large and shall endeavor to do all it can to sustain and improve upon the same in its discharge of obligations . The Bank shall continue to initiate policies, which are customer centric and which promote financial prudence.

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2 Philosophy Of The Code: The Code envisages and expects a. Adherence to the highest standards of honest and ethical conduct, including proper and ethical procedt.res in dealing with actual or apparent conflicts of interest between personal and professional relationships.
b.

Full, fair, accurate, sensible, timely and meaningful disclosures in the periodic reports required to be filed by the Bank with government and regulatory agencies.

c. Compliance with applicable laws, rules and regulations. d. To address misuse or misapplication of the Bank's assets and resources. e. The highest level of confidentiality and fair dealing within and out side the Bank A. General Standards of conduct . The Bank expects all Directors and members of the Core Management to exercise good judgment, to ensure the interests, safety and welfare of customers, employees, and other stakeholders and to maintain a cooper ative, efficient, positive, harmonious and productive work environment and business organization. The Directors and members of the Core Management while discharging duties of their office must act honestly and with due diligence. They are expected to act with that amount of utmost care and prudence, which an ordinary person is expected to take in his/her own business. These standards need to be applied while working in the premises of the Bank, at offsite locations where the business is being conducted whet her in India or abroad, at Bank-sponsored business and social events, or at any other place where they act as representatives of the Bank. B. Conflict of Interest A "conflict of interest" occurs when personal interest of any member of the Board of Directors and of the Core Management interferes or appears to interfere in any way with the interests of the Banle Every member of the Board of Directors and Core Management has a responsibility to the Bank, its stakeholders and to each 28

CANARA BANK other. Although this duty does not prevent them from engaging in personal transactions and investments, it does demand that they avoid situations where a conflict of interest might occur or appear to occur. They are expected to perform their duties in a way that they do not conflict with the Bank's interest such asEmployment / Outside Employment - The members of the Core

Management are expected to devote their total attention to the business interests of the Bank. They are prohibited from engaging in any activity that interferes with their performance or responsibilities to the Bank or otherwise is in conflict with or prejudicial to the bank Business Interests - If any member of the Board of Directors and Core

Management considers investing in securities issued by the Bank's customer, supplier or competitor, they should ensure that these investments do not compromise their responsibilities to the Bank. Many factors including the size and nature of the investment; their ability to influence the Bank's decisions; their access to confidential information of the Bank, or of the other entity, and the nature of the relationship between the Bank and the customer, supplier or competitor should be considered in determining whether a conflict exists. Additionally, they should disclose to the Bank any interest that they have which may conflict with the business of the Bank. Related Parties - As a general rule, the Directors and members of the Core Management should avoid conducting Bank's business with a relative or any other person or any firm, Company, Association in which the relative or other person is associated in any significant role. Relatives shall include: Father Mother (including step-mother} spouse Son (including step-son) son's wife 29

CANARA BANK Father's father Father's mother Mother's mother Mother's father son's son Son's son's wife Son's daughter. Son's Daughter's husband Daughter's husband Daughter's son Daughter's son's wife Daughter's daughter Daughter's daughter's husband Brother (including step-brother) Brother's wife Sister (including step-sister) Sister's husband If such a related party transaction is unavoidable, they must fully disclose the nature of the related party transaction to the appropriate authority. Any dealings with a related party must be conducted in such a way that no preferential treatment is given to that party.

30

CANARA BANK

In the case of any other transaction or situation giving rise to conflicts of interests, the appropriate authority should after due deliberations decide on its impact. C. Applicable Laws The Directors of the Bank and Core Management must comply with applicable laws, regulations, rules and regulatory orders. They should report any inadvertent noncompliance, if detected subsequently, to the concerned authorities. D. Disclosure Standards The Bank shall make full, fair, accurate, timely and meaningful disclosures in the periodic reports required to be filed with Government and Regulatory agencies. The members of Core Management of the Bank shall initiate all actions deemed necess ary for proper dissemination of relevant information to the Board of Directors, Auditors and other Statutory Agencies, as may be required by applicable laws, rules and regulations. E. Use of Bank's Assets and Resources: Each member of the Board of Directors and the Core Management has a duty to the Bank to advance its legitimate interests while dealing with the Bank's assets and resources. Members of the Board of Directors and Core Management are prohibited from: Using corporate propelty, information or pos ition for personal gain; Soliciting, demanding, accepting or agreeing to accept anything of value from any person while dealing with the Bank's assets and resources; Acting on behalf of the Bank in any transaction in which they or any of their relative(s) have a significant direct or indirect interest.

31

CANARA BANK

F. Confidentiality and Fair Dealings 1. B k's C n en an o fid tial In rm n fo atio The Bank's confidential information is a valuable ass;.'!. It includes all trade related information, trade secrets, confidential and p livileged information, customer information, employee related information, strategies, administration, research in connection with the Bank :md commercial, legal, scientific, technical data that are either provided to or made available to each member of the Board of Directors and the Core Management by the Bank either in paper form or electronic media to facilitate their work or that they are able to know or obtain access by virtue of their positil)n with the Bank. All confidential information must be used for Bank's busil1l' purposes only.

This responsibility includes the safeguarding, securing and proper disposal of confidential information in accordance with the Bank's policy on maintaining and managing records. This obligation extend to confidential information of third parties, which the Bank has right fully received under non-disclosure

agreements. To further the Bank's business, confidential information may have to be disclosed to potential business partners. Such disc1oslIrl: should be made after considering its potential benefits and risks. Care should be taken to divulge the most sensitive information, only after the said potential business partner has signed a confidentiality agreement with the Bank.

Any publication or publicly made statement that might be perceived or construed as attributable to the Bank, made outside t he scope of any appropriate authority in the Bank, should include a disclaimer that the publication or statement represents the views of the specific author and not the bank.

2 Other Confidential Information ~ The Bank has many kinds of business relationships with many companies and individuals. Sometimes, they will volunteer confidential information about their products or business plans to induce the Bank to enter into a bus iness relationship. 32

CANARA BANK At other times, the Bank may request that a third party provide confidential information to permit the Bank to evaluate a potential business relationship with that party. Therefore, special care must be taken by the Board of Directors and members of the Core Management to handle the confidential information of others responsibly. Such confidential information should be handled in accordance with the agreements with such third parties. The Bank requires that every Director and the member of Core Management, General Managers should be fully compliant with the laws, statutes, rules and regulations that have the objective of preventing unlawful gains of any nature whatsoever.

Directors and the members of Core Management shall not accept any offer, payment promise to pay, or authorization to pay any money, gift, or anything of value from customers, suppliers, shareholders/ stakeholders, etc. that is perceived as intended, directly or indirectly, to influence any business decision, any act or failure to act, any commission of fraud, or opportunity for the commission of any fraud.

1.

Good corporate governance practices Each member of the Board of Directors of the Bank should adhere to the

following 50 as to ensure compliance with good Corporate Goverment practices. (a) Do's

Attend Board meetings regularly and participate in the deliberations and discussions efectively. Study the Board papers thoroughly and enquire about follow -up reports on definite time schedule. Involve actively in the matter of formulation of general policies Be familiar with the broad objectives of the Bank and the policies laid down by the Govemment and the various laws and legislations. Ensure confidentiality of the Bank's agenda papers, notes and Minutes.

33

CANARA BANK

(b) Don'ts Do not interfere in the day to day functioning of the bank Do not reveal any information relating to any constituent of the Bank to anyone. Do not display the logo / distinctive design of the Bank on their personal visiting cards / letter heads. Do not sponsor any proposal relating to loans, investments, buildings or sites for Bank's premises, enlistment or empanelment of contractors, architects, auditors, doctors, lawyers, other professionals, etc. Do not do anything, which will interfere with and / or be subversive of maintenance of discipline, good conduct and integrity of the staff.

Credit Risk Management in Banks

An Overviw The financial sector especially the banking industry III most emerging economiesincluding India is passing through a process of change. As the financial activity has become a major economic activity in most economies, any disruption or imbalance in its infrastructure will have significant impact on the entire economy. By developing a sound financial system, the banking industry can bring stability within the financial markets. Deregulation in the financial sector had widened the products range in the developed markets. Some of the new products introduced are LBOs, structured transaction, credit cards, housing finance, derivatives and various off balance sheet items. Thus new vistas have created multiple sources for banks to generate higher profits than the traditional financial intermediation. Simultaneously they have opened new areas of risk also. Many unknown issues that are intricately related to new products have exposed banks to various risks across the globe and India is no exception. During the past decade, the Indian banking industry continued to respond to the emerging challenges of competition, risks and uncertainties. Risks originate in the forms of customer default, funding a gap or adverse movements of markets. 34

CANARA BANK Measuring and quantifying risks is neither easy nor intuitive. Our regulators have made some sincere attempts to bring prudential and supervisory norms conforming with international bank practices with an intention to strengthen the stability of the banking system. Banks in general face the following

risk:

Liquidity F oreign E xchange C redit M arket Intrestrate Operational The industry has undergone drastic changes in the last three decades.

Horizontal expansion of the financial markets, deregulation across the globe in financial markets and stiff competition have led the banks to multiply their activities. Increased activities in the industry have exposed the banks to more uncertainties and more risks. Risk Management in Banks is broadly divided into six sections: Funds Management is a major activity of the banks. Liquidity management is an integral part of funds management. Banks mobilize the deposits and deploy funds in advances and investments. Banks also float funds through various subsidiary services extended to their clients. There will be always a time gap between the availability of resources and their deployment. Hence banks will often swing between excess liquidity and liquidity crunch in their funds position. Liquidity management essentially deals with efficient handling of inflows and outflows of funds. Section -I discusses the liquidity management in banks in India and across the globe. Cash Management is a subset of the entire funds management. The lead time is reduced in collection of cheques and other instruments by the banks, if they introduce efficient cashmanagement services. From the bank's point of view it increases the fee based income. Cash management services are one innovative product introduced by the banks in the recent times. Section-II discusses the cash management techniques adopted by banks and corporate clients. 35

CANARA BANK Credit risk is as old as money. When the default rate increases in the portfolio of the bank< it may lead to its total collapse. To circumvent the c re d it risk, the system tries to design innovative products. Section-III discusses the credit risk management in banks. The Basle committee defines the operational risk as "the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events". This defination excludes operational: risk but includes legal risk. Such operational risks can be broadly classified into four categories as information technology risk, human resource risk, loss to assets risk and .'relationship risk. Quantification of operational risk is a major challenge to the .risk management group of the bank: Section IV attempts to elucidate few issues involved in the operational risk management. One of the core activities of the regulators is proper of the system. The Basle committee had set certain guidelines for the bank s. The Reserve Bank of India had set up an advisory committee under the chainn:Ulship of M S Verma and the committee had submitted its report in May 2001. The committee recommended corporate governance, internal controls, risk management, loan accounting transparency and disclosures, financial conglomerates and cross border banking supervision. The supervisor should provide a safety net to the financial system. Section -V discusses the important issues of any risk management technique. Section-VI consists of two case studies. It briefly discusses the risk management technique's to be adopted by banks. Derivatives are the hedging instruments which help minimize the risks. But a 300 year old investment bank collapsed because of its exposure to derivatives. The Barings' collapse is a classic example of failure of supervision and incidence of human urresoce risk. In the global scenario, the increased credit risk arises due to two reasons. Banks have been forced to lend to riskier clients because well-rated corporates have moved away from banks as they have access to low cost funds through disinter mediation. The other reason is the lurking fear of global recession. Recession in the economy could lead to low industrial output which may lead to defaults by the industry under recession culminating into credit risk. Hence, the markets are in search of new credit risk management models. Credit derivatives 36

CANARA BANK which were a new innovation in the market stood the real test in 1997 during the Asian financial crisis. Several European and US banks which were exposed to high risk areas in Korea, Philippines and Thailand were able to save themselves from losses as they could hedge themselves with credit derivatives. The papers "Credit Risk Management - Models and Judgments" and "Use of Credit Derivati ves" discuss the critical operational issues in managing credit risk through credit derivatives. In the recent times, we have witnessed runs on the banks - mainly the Urban Cooperative Banks like Madhavpura Coop Bank in Gujarat/Mumbai, Charminar Bank, a scheduled bank in Hyderabad and many others. When the banks give the signals of distress, the depositors panic and run for their money. As per the existing rules, Deposit Insurance and Credit Guarantee Corporation of India (DICGC) guarantees the depositors' money up to one lakh rupees subject to certain conditions. Till now, the banks used to pay the insurance premium for the deposits they hold to get insurance coverage from DICGC. Now the committee set up by the RBI under the Chairmanship of J Capoor sug gested that the risk premium is to be paid which is sensitive to the probability of the bank in question going bankrupt. The paper "What Makes Banks Fragile",tries to compute the volatility of banks' assets and deposit insurance premium with an illustrati on and presents a view point of fixing higher deposit insurance premium if reserve requirements are to be phased out.

37

CANARA BANK

Credit Risk Management at Canara

Introduction

Bank

Credit risk is defined as the possibility of losses associated with diminution in the credit quality of borrowers or counter parties. In a bank's portfolio, losses stem from outright default due to inability or unwillingness of a customer or counter party to meet commitments in relation to lending, trading, settlement and other financial transactions. Alternatively, losses result from reduction in portfolio value arising from actual or perceived deterioration in credit quality. Credit risk emanates from a bank's dealings with an individual, corporate, bank, financial institution or a so vereign. Credit risk takes in the following forms: 1. In the case of direct lending: principal/and or interest amount not be repaid; 2. In the case of guarantees or letters of credit: funds not forthcoming from the constituents upon crystallization 0 f the liability. 3. In the case of treasury operations: the payment or series of payments due from the counter parties under the respective contracts may not be forthcoming or ceases; 4. In the case of securities trading businesses: funds/ securities settlement may not be effected. Credit Risk Management In this backdrop, it is imperative that Canara bank has credit risk management system, which is sensitive and responsive to these factors. The effective management of credit risk is a critical component of comprehensive risk management and ie essential for the long-term success of Canara banking organisation. Credit risk managemnt encompasses identification, measurement, monitoring and control of the credit risk sources.

38

CANARA BANK

Building Blocks of Credit Risk Management at Canara Bank' In a bank, an effective credit risk management framework would ,'omprise of the following distinct building blocks: Policy and Strategy Organisational Structure Operations/ Systems

Policy and Strategy The Board of Directors shall be responsible for approving and periodic a II y reviewing the credit risk strategy and significant credit risk policies. Credit Risk Policy 1. Bank has credit risk policy document approved by the Board. The document include risk identification, risk measurement, risk grading/ aggregation techniques, reporting and risk controlV mitigation techniques, documentation, legal issues and management of problem loans. 2. Credit risk policies defined target markets, risk acceptance criteria, credit approval authority, credit origination! maintenance procedures and guidelines for portfolio management. 3. The credit risk policies approved by the Board communicated to

branches/controlling offices. All dealing officials should clearly understand the barne's approach for credit sanction and are held accountable for complying with established policies and procedures. 4. Senior management of a Canara bank shall be responsible for implementing the credit risk policy approved by the Board.

39

CANARA BANK

Credit Risk Strategy 1. Each branch of Canara bank should develop, with the approval of its Board, its own credit risk strategy or plan that establishes the objectives guiding the Canara bank's credit-granting activities and adopt necessary policies/ procedures for conducting such activities. This strategy should spell out clearly the organisation's credit appetite and the acceptable level of risk -reward tradeoff for its activities. 2. The strategy would, therefore, include a statement of the Canara bank's willingness to grant loans bas ed on the type of economic activity, geographical location, currency, market, maturity and anticipated profitability. This would necessarily translate into the identification of target markets and business sectors, preferred levels of diversification and concentration, the cost of capital in granting credit and the cost of bad debts.

Credit risk Management Committee (CRMC]

Each Canara bank may, depending on the size of the organization or loan! investment book, constitute a high level Credit Risk Management Committee (CRMC). The Committee should be headed by the Chairman and should comprise of heads of Credit Department, Treasury, Credit Risk Management Department (CRMD) and the Chief Economist. The functions of the Credit Risk Management Committee should be as under:
1. 2. Responsible for the implementation of the credit risk policy/ strategy approved by the Board. Monitor credit risk on a Canara bank wide basis and ensure compliance with limits approved by the Board. 3. Recommend to the Board, for its approval, clear policies on standards for presentation of credit proposals, financial covenants, rating standards and benchmarks,
4.

Decide delegation of credit approving powers, prudential limits on large credit exposures, standards for loan collateral, portfolio management, loan review mechanism, risk concentrations, risk monitoring and evaluation, pricing of loans, provisioning, regulatory/legal compliance, etc.

40

CANARA BANK

Concurrently, Canara bank set up Credit Risk Management Department (CRIVID), independent of the Credit Administration Department.

The CRMD does the followings :

1. Measure, control and manage credit risk on a Canara bank -wide basis within the limits set by the Board/ CRMC
2.

Enforce compliance with the risk parameters and prudential limits set by t.he Board! CRMC. Lay down riskassesment system develop loan/ investment portfolio. identify problems, correct deficiencies and undertake loan review/audit. Large Canara banks could consider separate set up for loan review/audit.

3.

4. Accountable for protecting the quality of the entire loan! investment portfolio. The Department undetakes portfolio evaluations and makes comprehensive studies on the environment to test the resilience of the loan portfolio. Operations I Systems Canara banks have an appropriate credit administration, crrdit risk maisurement and monitoring processes. The credit administration process typically involved the following
1.
2.

Relationship management phase i.e. business development. Transaction management phase covers risk assessment, loan pricing, structuring the facilities, internal approvals, documentation, loan administration, on going monitoring and risk measurement.

3.

Portfolio management phase entails monitoring of the portfolio at a macro level and the management of problem loans.

4. On the basis of the broad management framework stated above, the Canara banks has following credit risk measurement and monitoring procedures:
5. Canara banks established proactive credit risk management practices like annual / half

yearly industry studies and individual obligor reviews (recently stablished) periodic credit calls that are documented, periodic visits of plant and business site, and at least quarterly management reviews of troubled exposures/weak credits

41

CANARA BANK

Canara bank has system of checks and balances in place for extension of 1. 2. 3. 4. 5. 6. credit viz.:

Separation of credit risk management from credit sanction Multiple credit approvers making financial sanction subject to approvals at various stages viz. credit ratings, risk approvals, credit approval grid, etc. An independent audit and risk review function. The level of authority required to approve credit will increase as amounts and transaction risks increase and as risk ratings worsen. Every obligor and facility must be assigned a risk rating. Mechanism to price facilities depending on the risk grading of the customer, and to attribute accurately the associated risk weightings to the facilities. ensure that there are consistent standards for the origination, documentation

7. Banks

and maintenance for extensions of credit 8. 9. Banks has a consistent approach towards early problem recognition, the classification of problem exposures, and remedial action. Banks maintain a diversified portfolio of risk assets; have a system to conduct regular analysis of the portfolio and to ensure ongoing control of risk concentrations. 10. Credit risk limits include, obligor limits and concentration limits by industry or geography. The Boards should authorize efficient and effective credit approval processes for operating within the approvall imits. 11. Bank has systems and procedures for monitoring financial performance of customers and for controlling outstanding within limits. 12.
13.

A conservative policy for provisioning in respect of non -performing advances adopted adopted. Bank has an experience, judgment and commitment to technical development. Banks should have a clear, well-documented scheme of delegation of powers for credit sanction.

14.

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CANARA BANK

Credit Risk Rating [CRR]

Canara bank concern with following risk while rating them: 1. 2. 3. 4. Financial risk Industry risk Business risk Market risk

Credit Rating System at Canara Bank: All credit exposures above Rs.5 crores taken on private and public companies classified as corporate The risk weight to be assigned in respect of corporates depends on rating assign ed by RBI recognized domestic credit rating agencies. Canara bank furnishing below the risk weights that to be applied to corporates based on the external ratings. Rating of AAA AA A BBB &Below Unreted

Domestic Agencies Risk Weight 20% 50% 100% 150% 100%

Canara bank implemented or considered ratings given by ICRA and CRISIL for industries.

Treatment of Credit risk at bank.

The unsecured portion of NPA accounts net of specific provisions is also to be subject to risk weighting mechanism; unsecured portion means the NP A amount obtained after deducting the eligible and guarantee amounts. The risk weights for NPA accounts are as follows: 43

CANARA BANK Other than residential mortgage loans When specific provisions are < 20% of NPA risk weights amount 150% When specific provisions are at least 20% ofNPA risk weight is 100% When specific provisions are at least 50% ofNPA risk weight amounts to 50% Fully Covered by Plant and Machinery and Land and Building When specific provision reaches at least 15% ofNPA risk weight amount 100% Residential Mortgage loans Generally risk weight applicable is 100% If specific provisions are at least 20% ofNPA risk weights amount to 75%

An Illustration
Credit Risk assessment at branch level (Traffic Island Branch) Scores Major Segments Scores Level of Risk assessed allotted (1) Assessment areaCredit ~ Credit- Growth Trend Credit- Quality Non-Fund based exposure Adequacy of portfolio Total 10 20 05 05 40 05 08 03 02 18 I Low I Low I Medium Low Low

Branch Authorities (Authority to sanction loans to Corporate)

Branch Office:

44

CANARA BANK Braches allowed trasanction loan from I to 75 lakhs for respective sectors. Regional Office: If loan amount is more than 75 lakhs then that proposal goes to regional office, Regional office has authority to sanction from 75 lakhs to 3 crores for industries. Circle Office: Circle office has authority of sanctioning loan from 3 crores and above.

Factors considered for sanction loans:

1) 2) 3) 4) 5) Individual Capacity. Securities Additional securities Prompt repayment of L02. Deposits in Banks

Individual Capacity: Bank considers individual capacity h) repayment of loan with term or agreed term with bank and also considers his transaction with bank if any. Securities: Bank considers securities of borrowers while lending money to him. Ex: Shares cel1ificate, Insurance policies

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CANARA BANK

Additional Securities: Banks consider or accept additional securities like land, home and other securities while sanctioning new loan to customers when customers has existing loan in bank. Prompt repayment of Loan: Existing transaction or previous transact ion consider while grant new loan to customers/ Clients. His prompt repayment of loan consider for new loans. Bank Deposits Bank deposits with bank or any other banks consider as security for loans. Existing Credit Risk Management at Canara Bank

Follow up clients/Customers. Recovery systems. Review of loan. Additional securities Providing additional loans to make repayment of existing loans. Loan Review Mechanism. Low and High credit risk ratings. Low interest rate for high credit rating companies High interest rate for low credit rating companies Single/group borrower limits Authorities to branches Authorities to Committees.

Following Up customers/Clients:
Bank remind borrowers to repay loan and interest according to term and condition which he has agreed while taking loan from banks, and also ensure that ifhe fails to pay the loanwhat is next step of banks.

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CANARA BANK

Recovery Systems:
Bank directly collect dues from customers. They have separate department, which look \after all matters related to recovery of loan. Review of loan: If the amount not recovered within specified term mentioned as per the policy of bank, bank goes for review of loan if required.

Additional Securities:
Additional securities will be taken from the customer in two situations: 1) If existing loan extended by the bank. 2) When additional loan is given to the customer in addition to existing loan. Low and High credit risk ratings. Interest rate is depend on credit worthy ness of the company, if the credit worthy ness of the company is high he will be charged low interest, opposite is the case for low credit worthiness Following Securities as eligible for treatment as Credit risk mitigates: 1) Bank Deposits 2) Gold Jewellery ( Benchmarked to 99.99 purity) 3) State Govt securities 4) Central Govt securities 5) National Saving Certificates, Vikas Patras and Kisan Vikas Patras 6) Life Insurance Policies 7) Equities ( Including convertible bonds) 8) Mutual fund securities 9) Land and Building 10) Plant and Machinery

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CANARA BANK

Guarantors Types State Government Central Government Public Sector Entities Banks Primary Dealers Corporate

Substitution approach
In this approach risk weight of the guarantor replace the lisk weight of the borrower provided it result in application of a lower risk weight, thus only guarantee issued by entities with a lower risk weight provides credit risk mitigation effect in the form of lower capital charges. Proportional Cover This method is taken note of is that the risk mitigation effect will be available to the extent of protection provided b Guarantor and the remaining unprotected portion carry the risk weight applicable to borrower.

Thus in order to avail capital relief it is necessary that the following details on guarantors are captured: Name of the Guarantor Extent of Guarantee cover available Customer type of the guarantor

Type of Exposures 48

CANARA BANK SNo 1 2 Exposure Direct Credit Certain transaction Credit Factors(%) 100% 50%

related contingent items (eg: Perfomance Bonds, bid bonds, Warranties etc) 3

---

Short term self liquidating 20% trade contingencies related

Sale and repurchase agreement and asset

100%

sales with recourse where the credit risk remain with banks 5 6 Shares and securities Note issuance facilities and revolving underlying facilities Original maturity up to one year 100% 50% I I I

20%

R B I GUIDLINES
R B I Guidelines on Credit risk Management- Credit Risk models A credit risk model seeks to determine, directly or indirectly, the answer to the following question: Given our past experience and our assumptions about the future, w hat is the present value of a given loan or fixed income security? A credit risk model would also seek to determine the ( quantifiable) risk that the promised cash flows will not be forthcoming. The techniques for measuring credit risk that 49

CANARA BANK have evolved over the last twenty years are prompted by these questions and dynamic changes in the loan market. The increasing importance of credit risk modelling should be seen as the consequence of the following three factors: 1. Banks are becoming increasingly quantitative in their treatment of credit risk.
2.

New markets are emerging in credit derivatives and the marketability of existing loans is increasing through securitisation/ loan sales market."

3. Regulators are concerned to improve the current system of bank capital requirements especially as it relates to credit risk. Importance of Credit Risk Models Credit Risk Models have assumed importance because they provide the decision maker with insight or knowledge that would not otherwise be readily available or that could be marshalled at prohibitive cost. In a marketplace where margins are fast disappearing and the pressure to lower pricing is unrelenting, models give their users a competitive edge. The credit risk models are intended to aid banks in quantifying, aggregating and managing risk across geographical and product lines. The outputs of these models also play increasingly important roles in banks' risk management and performance measurement processes, customer profitability analysis, risk -based pricing, active portfolio management and capital structure decisions. Credit risk modeling may result in better internal risk management and may have the potential to be used in the supervisory oversight of banking organisations.

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CANARA BANK

Techniques for Measuring Credit Risk

In the measurement of credit risk, models may be classified along three different dimensions: 1. 2. 3. The techniques employed, The domain of applications in the credit process and The products to which they are applied.

Techniques: The following are the more commonly used techniques:

1.

Econometric Techniques such as linear and multiple discriminate analysis,

Multiple regression, logic analysis and probability of default, etc.

2.

Neural networks are computer-based systems that use the same data employed in the econometric techniques but arrive at the decision model using alternative implementations of a trial and error method.

3 Timisation models are mathematical programming techniques that discover the optimum weights for borrower and loan attributes that minimize lender error and maximise profits.
3.

Rule-based or expert are characterised by a set of decision rules, a knowledge base consisting of data such as industry financial ratios, and a structured inquiry process to be used by the analyst in obtaining the data on a particular borrower.

4.

Hybrid Systems In these systems simulation are driven in part by a direct causal relationship, the parameters of which are determined through estimation techniques.

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CANARA BANK

Domain of application: These models are used in a variety of domains: Credit approval Models are used on a stand alone basis or in conjunction with a judgemental override system for approving credit in the consumer lending business. The use of such models has expanded to include small business lending. They are generally not used in approving large corporate loans, but they may be one of the inputs to a decision. Credit rating determination: Quantitative models are used in deriving 'shadow bond rating' for unrated securities and commercial loans. These ratings in turn influence portfolio limits and other lending limits used by the institution. In some instances, the credit rating predicted by the model is used within an institution to challenge the rating assigned by the traditional credit analysis process. Credit risk models may be used to suggest the risk premier that should be charged in view of the probability of loss and the size of the loss given default. Using a mark -to-market model, an institution may evaluate the costs and benefits of holding a financial asset. Unexpected losses implied by a credit model may be used to set the capital charge in pricing. Instruments of Credit Risk Management Credit Risk Management encompasses a host of management techniques, which help the banks in mitigating the adverse impacts of credit risk. 1. Credit Approving Authority Each bank should have a carefully formulated scheme of delegation of powers. The banks should also evolve multi-tier credit approving system where the loan proposals are approved by an 'Approval Grid' or a 'Committee'. The credit facilities above a specified limit may be approved by the 'Grid' or 'Committee', 52

CANARA BANK comprising at least 3 or 4 officers and invariably one officer should represent the CRMD, who has no volume and profit targets. Banks can also consider credit approving committees at various operating levels i.e. large branches (where considered necessary), Regional Offices, Zonal Offices, Head Offices, etc. Banks could consider delegating powers for sanction of higher limits to the 'Approval Grid' or the 'Committee' for better rated / quality customers. The spirit of the credit approving system may be that no credit proposals should be approved or recommended to higher authorities, if majority members of the 'Approval Grid' or 'Committee' do not agree on the creditworthiness of the borrower. In case of disagreement, the specific views of the dissenting member/s should be recorded. The banks should also evolve suitable framework for reporting and evaluating the quality of credit decisions taken by various functional groups. The quality of credit decisions should be evaluated within a reasonable time, say 3 - 6 months, through a well-defined Loan Review Mechanism. 2. Prudential Limits In order to limit the magnitude of credit risk, prudential limits should be laid down on various aspects of credit: a) Stipulate benchmark current/debt equity and profitability ratios, debt service coverage ratio or other ratios, with flexibility for deviations. The conditions subject to which deviations are permitted and the authority therefore should also be clearly spelt out in the Loan Policy; b) Single/group borrower limits, which may be lower than the limits prescribed by Reserve Bank to provide a filtering mechanism; c) Substantial exposure limit i.e. sum total of exposures assumed in respect of those single bond avers enjoying credit facilities in excess of a threshold limit, say 10% or 15% of capital funds. The substantial exposure limit may be fixed at 600% or 800% of capital funds, depending upon the degree of concentration risk the bank is exposed.

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CANARA BANK

d) maximum exposure limits to industry, sector, etc. should be set up. There must also be systems in place to evaluate the exposures at reasonable intervals and the limits should be adjusted especially when a pm1icular sector or industry faces slowdown or other sector/industry specific problems. The exposure limits to sensitive sectors, such as, advances against equity shares, real estate, etc., which are subject to a high degree of asset price volatility and to specific industries, which are subject to frequent business cycles, may necessarily be restricted. Similarly, high-risk industries, as perceived by the bank, sholud also be placed under lower portfolio limit. Any excess exposure should be fully backed by adequate collaterals or strategic considerations. e) Banks may consider maturity profile of the loan book, keeping in view the market risks inherent in the balance sheet, risk evaluation capability, liquidity, etc. 3 Risk Rating Banks should have a comprehensive risk scoring / rating system that serves as a single point indicator of diverse risk factors of a counterparty and for taking credit decisions in a consistent manner. To facilitate this, a substantial degree of standardisation is required in ratings across borrowers. The risk rating system should be designed to reveal the overall risk of lending, critical input for setting pricing and non -price terms of loans as also present meaningful information for review and management of loan portfolio. The risk rating, in short, should reflect the underlying credit risk of the loan book. The rating exercise should also facilitate the credit granting authorities some comfort in its knowledge of loan quality at any moment of time. 4 Risk Pricing Risk-return pricing is a fundamental tenet of risk management. In a risk -return setting,borrowers with weak financial position and hence placed in high credit risk category should be priced high. Banks should evolve scientific systems to price the credit risk, which should have a bearing on the expected probability of default. The pricing of loans normally 54

CANARA BANK should be linked to risk rating or credit quality. The probability of default could be derived from the pastbehaviour of the loan portfolio, which is the function of loan loss provision/charge offs for the last five years or so. Banks should build historical database on the portfolio quality and provisioning / charge off to equip themselves to price the risk. But value of collateral, market forces, perceived value of accounts, future business potential, portfolio/industry exposure and strategic reasons may also play important role in pricing. Flexibility should also be made for revising the price (risk premia) due to changes in rating / value of collaterals over time. Large sized banks across the world have already put in place Risk Adjusted Return on Capital (RAROC) framework for pricing of loans, which calls for data on portfolio behavior And allocation of capital commensurate with credit risk inherent in loan proposals. Under RAROC framework, lender begins by charging an interest mark -up to cover the expected loss - expected default rate of the rating category of the borrower. The lender then allocates enough capital to the prospective loan to cover some amount of unexpected loss- variability of default rates. Generally, international banks allocate enough capital so that the expected loan loss reserve or provision plus allocated capital covers 99% of the loan loss outcomes. Portfolio Management The existing framework of tracking the Non Performing Loans around the balance sheet date does not signal the quality of the entire Loan Book. Banks should evolve proper systems for identification of credit weaknesses well in advance. Most of international banks have adopted various portfolio management techniques for gauging asset quality. The CRMD, set up at Head Office should be assigned the responsibility of periodic monitoring of the portfolio. The portfolio quality could be evaluated by tracking the migration (upward or downward) of borrowers from one rating scale to another. This process would be meaningful only if the borrower-wise ratings are updated at quarterly / half-yearly intervals. Data on movements within grading categories provide a useful insight into the nature and composition of loan book.

55

CANARA BANK The banks could also consider the following measures to maintain the portfolio 1) Evaluate the rating-view distribution of borrowers In vanous industry, business segments, 2) Exposure to one industry/sector should be evaluated on the basis of overall rating distribution of borrowers in the sector/group. In this context, banks should weigh the pros and cons of specialisation and concentration by industry group. In cases where port folio exposure to a single industry is badly performing, the banks may increase the quality standards for that specific industry;

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

To identify promptly loans which develop credit weaknesses and initiate timely corrective action; To evaluate portfolio quality an~ isolate potential problem areas; To provide information for determining adequacy of loan loss provision; To assess the adequacy of and adherence to, loan policies and procedures, and to monitor Compliance with relevant laws and regulations. To provide top management with information on credit administration, including credit Sanction process, risk evaluation and post-sanction followup.

Accurate and timely credit grading is one of the basic components of an 56

CANARA BANK effective LRM. Credit grading involves assessment of credit quality, identification of problem loans, and assignment of risk ratings. A proper Credit Grading System should support evaluating the p0l1folio quality and establishing loan loss provisions. Given the importance and subjective nature of credit rating, the credit ratings awarded by Credit Administration Department should be subjected to review by Loan Re view Officers who are independent of loan administration. The Risk Management Group of the Basle Committee on Banking Supervision has released a consultative paper on Principles for the Management of Credit Risk. The Paper deals with various aspects relating to credit risk management. The Paper is enclosed for information of banks. 6. Qualification and Independence The Loan Review Officers should have sound knowledge in credit appraisal, lending practices and loan policies of the bank they should also be well versed in the relevant laws/regulations that affect lending activities. The independence of Loan Review Officers should be ensured and the findings of the reviews should also be reported directly to the Board or Committee of the Board. 7. Frequency and Scope of Reviews The Loan Reviews are designed to provide feedback on effectiveness of credit sanction and to identify incipient deterioration in portfolio quality. Reviews of high value loans should be undertaken usually within three months of sanction /renewal or more frequently when factors indicate a potential for deterioration in the credit quality. The scope of the review should cover all loans above a cut -off limit. In addition, banks should also target other accounts that present elevated risk characteristics. At least 30-40% of the portfolio should be subjected to LRM in a year to provide reasonable assurance that all the major credit risks embedded in the balance sheet have been tracked.

57

CANARA BANK

Depth of Reviews The loan reviews should focus on: Approval process; Accuracy and timeliness of credit ratings assigned by loan officers; Adherence to internal policies and procedures, and applicable laws / regulations;

Compliance with loan convents;

Post-sanction follow-up; Sufficiency of loan documentation; Portfolio quality; and Recommendations for improving portfolio quality The findings of Reviews should be discussed with line Managers and the corrective actions should be elicited for all deficiencies. Deficiencies that remain unresolved should be reported to top management. The Risk Management Group of the Basle Committee on Banking Supervision has released a consultative paper on Principles for the Management of Credit Risk. The Paper deals with various aspects relating to credit risk management. The Paper is enclosed for information of banks. Early warning: Credit models are used to flag potential problems in the portfolio to facilitate early corrective action. Common credit language: Credit models may be used to select assets from a pool to construct a portfolio acceptable to investors at the time of asset securitisation or to achieve the minimum credit quality needed to obtain the desired credit rating. Underwriters may use such models for due diligence on the portfolio (such as a collateralized pool of commercial loans).

58

CANARA BANK

Collection strategies: Credit models may be used in deciding on the best collection or workout strategy to pursue. If, for example, a credit model indicates that a borrower is experiencing short term liquidity problems rather than a decline in credit fundamentals, then an appropriate workout may be devised. Credit Risk Models: Approaches The literature on quantitative risk modeling has two different approaches to credit risk measurement. The first approach is the development of statistical models through analysis of historical data. This approach was frequently used in the last two decades. The second type of modelling approach tries to capture distribution of the firm's asset -value over a period of time. The statistical approach tries to rate the firms on a discrete or continuous scale. The linear model introduced by Altman (1967), also known as the Z -score Model, separates defaulting firms from non-defaulting ones on the basis of certa in financial ratios. Altman, Hartzell, and Peck (1995,1996) have modified the original Z -score model to develop a model specific to emerging markets. This model is known as the Emerging Market Scoring (EMS) model. The second type of modelling approach tries to capture distribution of the financial assetvalue over a period of time. This model is based on the expected default frequency (EDF) model. It calculates the asset value of a film from the market value of its equity using an option pricing based approach that recognizes equity as a call option on the underlying asset of the firm. It tries to estimate the asset value path of the firm over a time horizon. The default risk is the probability of the estimated asset value falling below a prespecified default point. This model is based conceptually on Merton's (1974) contingen hasork and has been working very well for estimating default risk in a liquid market. Closely related to credit risk models are portfolio risk models. In the last three years, important advances have been made in modelling credit risk in lending portfolios. The new models are designed to quantify credit risk on a portfolio basis, and thus are applied at the time of diversification as well as portfolio basedpricing. 59

CANARA BANK These models estimate the loss distribution associated with the P0l1folio and identify the risky components by assessing the risk contribution of each member in the portfolio. Banks may adopt any model depending on their size, complexity, risk bearing capacity and risk appetite, etc. However, the credit risk models followed by banks should, at theleast, achieve the following: 1. Result in differentiating the degree of credit risk in different credit exposures of a bank. The system could provide for transaction -based or borrowerbased rating or both. It is recommended that all exposures are to be rated. Restricting risk measurement to only large sized exposures may fail to capture the p0l1folio risk in entirety for variety of reasons. For instance, a large sized exposure for a short time may be less risky than a small sized exposure for a long time. 2. Identify concentration in the portfolios 3. Identify problem credits before they become NPAs 4. Identify adequacy/ inadequacy of loan provisions 5. Help in pricing of credit 6. Recognise variations in macro-economic factors and a possible impact under alternative scenarios
7.

Determine the impact on profitability of transactions and relationship.

60

CANARA BANK

FINANCIAL PERFORMA BANK 2006/07NCE OF CANARA

FY07 yet again reaffirmed Canara Bank's pre-eminent position, among Indian banking majors, both under business volumes and earnings. Having led the Indian PSBs under aggregate business, the Bank's unstinted drive to break new frontiers in customer orientation and commitment to enhanced value for stakeholders were richly rewarded during 2006-07. The overarching objectives of the Bank's varied pursuits during FY07 have been to emerge as a Global Financial Conglomerate adheringto best practices as its performance hallmark. PERFORMANCE AT A GLANCE: 2006-07 Business touched Rs.240887 Crore, up 23% Aggregate Deposits at Rs. 142381 Crore, up 22%. Advances (Net) moved up to Rs.98506 Crore, up 24%. Gross Profit at Rs.2912 Crore, up 14%. Net Profit at Rs.1421 Crore. Return on Average Assets at 0.98% Gross NPA ratio down at 1.51 %, Net NPA ratio at 0.94%. Capital to Risk Weighted Assets Ratio of 13.50%. Priority Sector Advances up 22% to Rs.37844 Crore. Agricultural Disbursals reached Rs.9404 Crore, up 30%. SME advances up 23% to Rs.14245 Crore Foreign Business Turnover up 32% to Rs. 130083 Crore. Branches Of Which CBS Clientele (M illion) ATMs 1132 Earnings per Share (Rs.) Book Value (Rs.) Dividend (%) 34.65 196.83 70 2578 330 29.35

Business per Em ployee (Rs. in Cr) 5.49

61

CANARA BANK PERFORMANCE HIGHLIGHTS AND WORKING RESULTS: 2006-07 2004-05 2513 410 5699 96796 12.1 12476 84517 60421 24.74 11277 40.24 24777 26.55 8782 34.18 5401 10295 16.53 69 1043 73439 6183 26.28 47389 9116 6531 2585 1110 2005-06 2532 410 6722 116803 20.67 12894 98665 79426 31.45 14552 29.04 30937 24.86 12032 37.01 7211 11619 7.56 49 1332 115470 7136 27.69 46893 10027 7477 2550 1343 11.22 32.76 171.19 4.42 3.02 1.13 1.12 68 41.39 2006-07 2578 410 9944 142381 21.9 13606 130083 98506 24.02 17485 20.16 37844 22.33 15525 29 9404 14245 22.6 44 1659 150278 7896 29.35 46359 12815 9903 2912 1421 13.5 34.65 197.83 5.49 3.24 0.98 0.94 69.18 40.21

Number of Branches Paid up Capital Results Aggregate Deposits Growth (%) Non resident Deposits Foreign Business Turnover Advance(Net) Growth (%) Retail Advances Growth (%) Priority Sector Advances Growth (%) Agriculture Outstanding Growth (%) Agriculture Disbursal Small & medium Enterprises Growth (%) Advance under DIR Schemes Advance to SC/ST Clients Self help group(No) Export credit Clientele(In million) Total no of Staff Total income Total Expenditure Operating profit Net profit Key performance ratios (%) Capital adequacy ratio 12.78 EPS (Rs) 27.06 Book value (Rs) 146.15 Business per employee(Rs Crore) Profit per employee(Rs lakhs) Return on average assets Net NPA ratio Credit deposit ratio priority credit to net bank credit FINANCIAL SOUNDNEES CAPITAL 3.51 2.48 1.07 1.88 62.42 43.11

The Bank's paid-up capital stood at Rs410

crore with 1.08 lakh 62

CANARA BANK shareholders. Capital to Risk Weighted Assets Ratio worked out to 1 3.50% vis-a.vis the 9% benchmark. During FY07, the Bank raised lower/upper Tier II capital worth Rs. 1975 crore from the domestic market and US$250 million overseas by way of a medium term note programme. The Bank's Capital Roadmap duly factors in the likely scenario in advances movement and expected regulatory changes. The overarching objective has been to maintain CRAR above 12% so as to support the buoyancy in credit deployment. RESERVES AND OWNED FUNDS Reserves increased to Rs.9944 crore, additional accrual during the year being Rs.3222 crore. Owned funds stood at Rs.8111 crore as compared to Rs.7132 crore at the end of the previous year. PROFITS AND PROFITABILITY Gross prafit for the year 2006-07 stood at Rs.2912 crore, while net prafit was of the order of Rs. 1421 crore.

63

CANARA BANK

Return on Average Assets (RoAA), worked out to 0.98%, despite a 25% growth in total assets. Net Interest Income was up 12.43%to Rs.4027 crore. SHAREHOLDERS'VALUE A dividend of 70%, amounting to Rs.287 crore, is praposed by the Board of Directors of the Bank, as against 66% (Rs.270.60 crore) paid last year, subject to the approval of shareholders. Bank's performance under earnings is reflected in a consistent uptrend in Book Value and Earnings Per Share. While book value increased to Rs. 197. 83 as at March 2007 compared to Rs. 171 .19 recorded for last financial, Earnings Per Share further rose from Rs.32.76 to Rs.34.65 for the year ended March 2007

64

CANARA BANK

( In Rs)

40

35

34.65

32.06

30

27.06

25

20

15

10

6.6 5.5 5

0
2004-05 2005-06 2006-07

65

CANARA BANK

BUSINESS (Rs. in Crore) DEPOSITS Global deposits the of Bank

moved up to Rs.142381 crore from Rs. I 16803 crore a year ago, signifying covering 25.53 million accouont 2004-05 2005-06 2006-07 a 22% growth,

ADVANCES Global advances (net) aggregated to Rs.98506 crore, up from Rs.79426 crore a year ago, exhibiting a growth of 24%. Number of borrowal accounts stood at 3.82 million. The Bank's credit to deposit ratio improved from 68% to 69.18% between March 2006 and March 2007. 75% ofthe incremental credit during the year was deployed in productive sectors like agriculture, SME, industries, infrastructure and services sectors. While overall credit growth has been 24%, growth in credit to productive sectors worked out to over 33%, out of which growth in agriculture and industries worked out to 29% and 36%

66

CANARA BANK PRODUCTIVITY Business per Employee moved up from RsAA2 crore to Rs.5A9 crore, while Profit Per Employee stood at Rs.3 .24Iakh.

67

CANARA BANK

PRIORITY SECTOR OPERATIONS Advances to priority sectors moved up to Rs.37844 crore, recording a growth of 22.33%, accounting for 40.21 % of net credit vis--vis the 40% norm. Under priority sector advances, agricultural credit aggregated to Rs.15521 crore, signifying a robust 29% y-o-y growth. Agricultural disbursements touched Rs.9404 crore in 2006-07 as against the level of Rs4103 crore during 2003-04, registering more than doubling of agricultural credit in three years. Similarly outstanding agricultural advances increased from a level of Rs. 6545 crore as at March 2004 to Rs. 15521 crore as at March 2007, signifying a 137% growth. During the year, the Bank financed 3.26 lakh new farmers. Besides, the number of Kisan Credit Cards (cumulative) reached a level of21 lakh.

68

CANARA BANK

2006-07

RS. I n C r or e

SME s , 14245

Agr i cul tur e 14245

Other P r i or i ti es 12472

69

CANARA BANK

The bank, has, formed 1.5 laks self Help Group [SHGs] in which 1.2 laks were credit linked. Advanced to SME sector moved uf to Rs.14245 crore, recording a y-o-y growth of 23% as against the target of 20% set for the year. Canara bank has been playing a lead role in furtherance of the financial inclusion movement in the country. In addition to various schemes for hitherto excluded segments, the bank has extended its Total Financial campaign to 1639 villages across the country. Two of the Banks lead district, namely, placed and Davanagere in Karnataka, have already acquired the distinction of 100% financially included. Can saral, a no-frills scheme, aimed at enhancing the coveraged under total financial inclusion has garnered around 3.5 laks accounts. The bank has launched a programmed to achieve total financial inclusion in 23 lead districts a campaign to create one million no-frill accounts during 2007-08 RETAIL LENDING Disbursal made under retail lending during FY07 amounted to Rs.7447 crore, taking the outstanding retail loans to Rs.17485 crore, recording a y-o-y growth of 20% Retail advances to the housing segment clocked a 17.43% growth to reach Rs6575 crore. Advanced to retails trade and other personal segment stood at Rs 3584 crore. And 7326 crore respectively. Bank has been prudent in its rey\tail exposer. Retail portfolio as a proportion of net credit was also brought down to 17.84%, which is in tune with the policy focus on rebalancing of credit portfolio.Direct housing ioan formed 37.6% of retail portfolio, out of which 81% were under the priority ambit, reflating the banks continued concern for the common man. In the sphere of education loan, cumulative assistance by the bank was of the order of Rs.1252 crore, covering 92579 students taking up higher studies. With 31.37% growth in education loan, Canara Bank is placed first among natiolized banks in funding higher education.

70

CANARA BANK

35000

30000

25000

20000

Other P er sonal Retai l T r ade Housi ng

15000

10000

5000

0 2004-05 2005-06 2006-07

TREASURY Aggregate investments of the Bank, as at March 2007, were of the order of Rs.45226 crore. Duration of the investment portfolio has been brought down considerably as a conscious management decision in view of interest rate volatility and rising trend in interest rate. The advantage of having higher volumes under the 71

CANARA BANK 'Available for Sale' duly reflects that the stated value of the portfolio is truly realizable. INTERNATIONAL OPERATIONS During the year, the second overseas branch of the Bank was inaugurated by Shri P Chidambaram, Hon'ble Finance Ministeroflndia, at Hong Kong. Foreign business turnover of the Bank, as at March 2007, aggregated to Rs.130083 crore, recording a robust y-o-y growth of32%. Turnover under exports, imports and remittances were ofthe orderofRs.49307 crore, Rs.3 1705 crore and Rs.49071 crore respectively. Outstanding advances to the export sector stood at Rs.7896 crore as against Rs.7136 crore at the end of the previous year. ASSET QUALITY AND RISK MANAGEMENT)

(I n Per cent)

4. 5

Gr oss NP A Rati o Net NPA Rati o

3. 89

3. 5

2. 5 2. 25

1. 88

1. 51 1. 5

ASSET QUALITY
1. 12 0. 94

(In Percent) Bank's gross NPA level

0. 5

0 2004-05 2005-06 2006-07

72

CANARA BANK stood at Rs. 1493 crore, with gross NPA ratio down from 2.25% to 1.51 %. Net NPA level stood at Rs.927 crore, with net NPA ratio further coming down to 0.94% from 1.12% a year ago. The Bank could effect a cash recovery ofRs.1 025 crore in NPAaccounts during the year as against Rs.972 crore during the previous year RISK MANAGEMENT The Bank has initiated implementation of parallel run of new capital adequacy framework under Basel II during the year and is fully geared for a smooth switchover within the RBI prescribed time schedule, The Bank's Board has been driving the policy initiatives and putting appropriate strategies in place for effectively managing the Credit, Market and Operational risks, Top Executive Risk Committees, headed by the Chairman & Managing Director, are in place to effectively address all issues related to the management and mitigation of various business/control risks. CORPORATE SOCIAL RESPONSIBILITIES) RURAL DEVELOPMENT Rural Development and Self-Employment Training Institutes (RUDSETls) cosponsored by the Bank have been engaged in providing training to rural youths to pursue various self-employment activities. RUDSETls, numbering 20 across India, have so far trained I .87lakh unemployed youth, with a settlement rate of 67%. The Bank, under Canara Bank Centenary Rural Development Trust, has promoted 14 self-employment training institutes. These institutes have so far trained 56520 rural youth, with an impressive settlement rate of72%. The Trust is also extending support to Society for the Educational and Economic Development (SEED), a voluntary organization workingforthe welfare of socially marginalized children. The Bank's 'Rural Clinic Services' scheme has assisted doctors in opening 21 additional clinics during 2006-07, taking the total of such clinics to 493 across India. Under 'Jalayoga', a scheme for facilitating availability of safe drinking water in rural areas, the Bank has completed 35 projects so far. Tapping the spirit of voluntarism among its employees, the Bank, under the Rural Service Volunteer Scheme, has assisted 500 villages, benefiting over 2 lakh families since its inception in 1985. As a responsible corporate social citizen, the Bank has donated hi-tech and 73

CANARA BANK solar powered 'Mobile Sales Van' to assist women entrepreneurs, SHGs and artisans in their entrepreneurial ventures. ANCILLARY SERVICES) BANCASSURANCE AND CROSS-SELLING MF PRODUCTS The Bank, under tie-up arrangement with M/s AVIVA Life Insurance Company India Pvt Ltd, collected premium amounting to Rs3 18 crore (sum assured) during the year. It has also tied-up with M/s United India Insurance Company Limited for undertaking Non-Life Insurance business. Under cross-selling of Mutual Fund products of can bank Mutual Fund and HDFC Mutual Fund, the Bank mobilized assume ofRs.945 crore. Bank has since tied up with global majors for creating Joint Ventures in Insurance and Asset Management. MERCHANT BANKING OPERATIONS During 2006-07, the Bank handled 16 assignments as Lead Manager/CoBook Running Lead Manager/Co-Manager & Advisor, covering 5 Public Issues, 9 Private Placement Issues, one Rights Issue and one assignment of Delisting of Equity. The Bank handled 22 'Bankers to the Issue' assignments as Escrow Bankers/Collecting Bankers with total float funds amounting to Rs.4360 crore. CORPORATE CASH MANAGEMENT SERVICES (CCMS) Aggregate turnover under Corporate Cash Management Services scherne, for the year ended March 2007, amounted to Rs.2650 crore. The scheme provides services, such as, local and upcountry cheque collection, bulk cheques collection and zero balance account facility. The CCMS network presently covers 94 Operating Centers and 683 Pooling Branches. BUSINESS SUPPORT SYSTEM) BRANCH NETWORK As at March 2007, the Bank had 2578 branches, inclusive of its branch at London, Hong Kong and Offshore Banking Unit at NOIDA, besides 251 Extension 74

CANARA BANK Counters. Number of branches in rural, semi-urban, urban and metro locations were 728, 656, 591 and 600 respectively. Number of specialized branches stood at I 2 I . TECHNOLOGY INITIATIVES Financial 2006-07 witnessed significant headway in the realm of Core Banking Solution (CBS). As at March 2007, 330 branches of the Bank have been covered under CBS. The Bank also significantly enhanced its tech-enabled multidelivery channels during the year to I 132 ATMs (458 centers), 1550 'Anywhere Banking' branches and I 156 Internet & Mobile Banking branches. Number of branches providing RTGS and NEFT further increased to 1506. The Bank entered into an agreement to share ATM network with SBI and ATMs under National Financial Switch (NFS), providing access to ATM network of 23 other Banks. In all, customers of Canara Bank now have increased access to over 14000 ATMs across the country. In a noteworthy initiative, as many as 125 ATMs spread across the country were commissioned on a single day in March 2007, with Shri V Leeladhar, Deputy Governor, Reserve Bank India, gracing the function at Bangalore. During the year, the Bank has added more than 51akh Debit Card clientele base, taking the total number of debit cards to 22.681akh as at March 2007. CUSTOMER ORIENTATION The Bank, during the year, introduced several new measures towards further improving customer centricity and service quality to match the competitive market conditions and customer expectations. In a noteworthy initiative, the Bank has implemented 'Six Sigma' project for enhancing the knowledge base of its frontline staff on products and services. Keeping track of services quality at branches has been a hallmark of the Bank's unprecedented customer orientation. During the year, customer survey from a sample of 25 branches each in five metros, viz., Bangalore, Chennai, Delhi, Kolkata and Hyderabad, covering 10000 customers was conducted by consultant of repute to further improve the level of customer service. Further, as a member of Banking Codes and Standards Board of India (BCSBI), set up by RBI, the Bank has brought out a booklet on "Code of Commitment to Customers" to create awareness among the customers as well as staff about the Uniform Fair Practice Code used as benchmark standard by all banks in India. 75

CANARA BANK HUMAN RESOURCES DEVELOPMENT / TOM Knowledge enrichment for employees continued to be a top priority for the Bank during FY07. Close on the heels of achieving the one lakh mark in training/reskilling during its centenary year, 2006-07 featured the tally moving up further to 1,09,661 covering diverse functional areas. During the year, the Bank effected a major organizational restructuring exercise for grater business focus and expeditious decision making, apart from moves to decentralize operational activities. The Bank also adopted a fast track promotion policy and implemented cash incentive scheme for high performers. Canara Bank is also the only Bank in the country to have formed 'Club2020' a group, comprising young talent, to spearhead strategic changes in the fast changing banking environment. Focus on specialized expertise led to recruitment of 541 officers through campus and direct recruitment in diverse areas like marketing, financial analysis and risk management. Continued focus on quality drive enhanced the number of ISO 900 I Certified Branches and Administrative Offices to 805 and 14 respectively as at March 2007. PRODUCT PRAFITABILITY New product services In addition to a host of existing products and services, the Bank introduced several deposit products during FY07. Can Tax Saver, a term deposit scheme, was introduced under the Kamadhenu and fixed deposit mode with tax benefit under Section 80C. Can Champ- an exclusive SB deposit product was launched for aspiring children upto the age of 12 years for inculcating the habit of savings. A term deposit scheme, namely, Canara Centenary Deposit was also introduced during the year, offering attractive rate of interest for the depositors. During the year, the Bank also launched a SB-Gold deposit scheme, targeting the HNI clients. In the sphere of new loan products, the Bank introduced 'Kisan Tatkal' for enabling farmers to meet emergent requirements and 'Kisan Mitra' scheme for funding tenant farmers. Grameen Vikas Vahini, vehicle for inclusive growth in rural areas was also introduced during the year. To promote SME sector, the Bank 76

CANARA BANK launched SME Gold Card and a Term Loan Scheme for reimbursement of capital expenditure. SUBSIDIARIES, JOINT VENTURE AND SPONSORED INSTITUTION) The Bank has nine subsidiaries/joint ventures/sponsored institutions providing a wide range of services, and is, thus, poised to emerge as a major 'Financial Conglomerate'.

Canbank Venture Capital Fund limited (CVCFL) currently manages four funds, with fourth fund made operational since December 2005. It has so far mobilized a corpus of Rs.60 crore from seven banks and SlOB!. Till March 2007, CVCFL has assisted 84 ventures, involving financial assistance to the tune of Rs.74 crore. The Company recorded a profit after tax of Rs. 20 lakh for the year 200607 and distributed a dividend of 40%.

Can Fin Homes limited, a sponsored housing finance institution of Canara Bank, sanctioned and disbur5ed a sum of RsAl7 crore and RsA53 crore respectively during 2006-07. The Company has recorded a profit after-tax of Rs. 30 crore.

Canbank

Investment

Management

Services

limited

(ClMS) acts

as

investment manager for all the schemes floated by Canbank Mutual Fund. ClMS, with combined net assets of Rs.2185 crore, is currently managing 18 schemes. The Company posted a profit after-tax of Rs1 crore in 2006-07, with a proposed dividend of30%.

Canbank Factors limited, the factoring subsidiary of the Bank, posted a total turnover of Rs.3396 crore as at March 2007 and a profit after tax of Rs. 14 crore. The Company proposed a dividend of I 5% for the year.

Canbank Computer Services limited (CCSL), the Bank's software services related subsidiary, bagged several key contracts during the year 2006-07 and posted a profit after tax of Rs.129.58 lakh. The Company has strengthened its net worth base from RsA71 lakh as at March 2006 to RS.6021akh as at March 2007.

Gilt Securities Trading Corporation limited (GSTCL), a primary dealer promoted by Canara Bank, posted a profit of Rs.l 0.60 crore despite rise in yield rates and provision for depreciation on stock of securities held. Primary dealer 77

CANARA BANK functions of GSTCL have been taken over by Canara Bank from February 2007, with diversification of activities into the areas of equity broking and trading.

Canbank Financial Services limited (CANFINA) confined its activities to legal matters arising out of past transactions in securities, besides concentrating on collection of lease rentals and realization of investments. The Company recorded a profit after tax of Rs. 24.23 crore.

Indo-Hong Kong International Finance limited, a wholly owned overseas subsidiary of the Bank, posted a net profit of US$ 3.52 million for the year ended March 2007. IHIFL has since been converted into a full-fledged branch ofthe Bank during March 2007.

Commercial Bank of India LLC, an overseas Joint Venture with SBI at Moscow, recorded a net profit of US$I.02millionfortheyearendedMarch2007. All the 3 Regional Rural Banks (RRBs), sponsored by the Bank, recorded combined operating prafitofRs.86.75 croreforthe year 2006-07. Pursuing consolidation under RRBs, 3 RRBs of the Bank in Karnataka were amalgamated to form 'Pragati Grameen Bank' while 'Shreyas Grameen Bank' was formed out of 3 RRBs sponsored by the Bank in Uttar Pradesh.

NEW INITIATIVES The Bank has singed MoU to commission a Joint Venture in Life Insurance

business, in association with HSBC Holding (Asia Pacific), a global major and domestic partner, Oriental Bank of Commerce, with a majority 5 I % share holding.

Recognizing the potential of Asset Management business in the emerging financial setup, Canara Bank also signed MoU with internationally reputed, Robeco Group N.V, for starting a Joint Venture in Asset Management business with 51 % stake.

78

CANARA BANK The domain expertise of the globally reputed partners in both the

ventures will enable the Bank to offer world class and tech-enabled sophisticated services to its over 29 million clientele base. After commissioning its second overseas branch at Hong Kong, initiative has been taken to convert its Representative Office at Shanghai into a full-fledged branch. AWARDS/ACCOLADES ) The Bank was adjudged the 'Best Public Sector Bank' in India by the 'Financial Express-Ernst and Young' survey for 2005-06.

Conferred with "Employer Branding Awards 2007" by India times Mindscape and ITM Business School, for excellence in human resources.

Won the maiden award of 'Best Performing Bank' under solar water heater finance for the year 2005-06, instituted by the Ministry of New and Renewable Energy, Govt. of India.

Received Niryat Bandhu Gold Trophy for outstanding performance under export finance.

Two schemes under Canbank Mutual Fund viz., CANFLOATING RATE and CAN BALANCE-II also won the Gold Award (ICRA Mutual Funds Awards 2007) and Best Fund Award (at the Lipper Awards India 2007) respectively. Year 2006-07 was of special significance as the curtains were drawn on the centenary of the Bank on June 30, 2006. The valedictory function for the Centenary was graced, among others, by Dr. Man Mohan Singh, Hon'ble Prime Minister of India, Shri P Chidambaram, Hon'ble Union Finance Minister and a galaxy of dignitaries. While the Bank's century long feats were widely acclaimed by the dignitaries, quite fitting to the occasion, the Bank crossed the coveted Rs.2,00,000 crore mark under aggregate business at the end of June 2006.

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GOALS FOR 2007-08

Bank targets a global business level of Rs.2, 90, 000 crore for 2007-08, with a growth rate of over 20%, comprising Rs. I ,70,000 crore under deposits and Rs.I,20,000 crore under advances. Advances growth will be significantly driven by agriculture, SME, infrastructure and other productive segments, including services sector.

Towards faster implementation of Core Banking Solution (CBS), the Bank targets to cover all the branches under CBS by March 2008. The Bank has taken up a major brand building exercise and comprehensive review of its business strategies covering products, processes, people and its organization structure.

In pursuit of the Bank's global aspirations, 21 prominent centers have been identified by the Bank for expanding its global reach. With the preliminary moves underway, the Bank's Representative Office at Shanghai is being converted into a full fledged branch.

After creation of JVs in Insurance and Asset Management, the Bank is exploring similar options in other financial services. The Bank is geared up to comply with the revised guidelines issued under priority sector lending. Under HR, Assessment Development Centre concept will be implemented to map training competence and upgrade manpower skill. Plans are underway to introduce 'Internship' programme to assist students pursuing professional course.

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CANARA BANK Analysis of the financial statement Financial statements and reports are the tools which provides information of the firms financial affairs. This information is required for financial analysis & decision making. It assesses the financial status of organization which is prepared with help of accounting principle. Financial statement has mainly as follow: Balance sheet Profit & loss account Financial statement is prepared on basis of generally accepted accounting principle. These are a. Business entity principle b. Going concern principle c. Monetary principle d. Historical principle e. Realizations principle f. Accrual concept Basic conventions under which financial statements prepared is: consistency conservativeness disclosure

Analyzing of financial statements helps to know the financial health of the borrower, which provides the detail of the liabilities and the assets of the applicant. It also helps to study the trends in the financial matters of the company. It helps to valuate the assets of the applicant company. It assists in decision making process relating to the future activities. Financial statements act as a basic document for banker, supplier, creditors etc in their credit appraisal of the firm. Financial statement provides the reliable information about the resources and firms obligation. It assists in estimating earning potential of the firm.

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CANARA BANK Profit and Loss account:Meaning:- profit and loss account is one of the essential document which shows the summary of revenues, expenses and net income of the firm during the particular financial period. Functions of the Profit and Loss account: It gives a concise summary of the firms revenue and expenses during the particular period. It measures the firms profitability. It represents the activity of the firm. Ratio Analysis:Ratios are classified into four parts like:1. Liquidity ratios 2. Activity ratios 3. leverage ratios 4. profitability ratios Limitations of the analysis:-

There are no standard formula fixed to judge the performance. Since management problems are so complex that they cannot be reduced to a formula Forming of the ratio should be made with care. due to price fluctuation it may distort the result there are chances of making window dressing in the financial statements of the firm, it has some limitation for

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Case analysis
XYZ COMPANY LTD (coal pallet industry) This is a sister concern of a existing company which is in the Andhra Pradesh State, which is running successfully from many years in that state and enjoying the great profit. This company is a priority sector which is owned by private owned limited company. Now they are thinking to set up new plant in the Dharwad district Karnataka State where there is more demand for the products of the proposed company. And there are no such company in near region.. The company is intended to produce coal palette which means the processing of the coal which is used by the hotels and other small scale manufacturing units in near region. After processing the used coal the final output will be able to work as the finished good which will be having 90% of the coal power as compared to the pure coal. This can be called as the considerable proposal because the product proposed will be acting as the cost effective alternative for electricity and other modes of power. To set up this proposed plant the company is need of following credit facility. Total amount required for the project For establishment For term loan Rs. 100 lakhs Rs. 75 lakhs Rs. 25 lakhs

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The company proposed the branch for credit facility. Bank has collected all the required documents and other data which is required for making the credit rating. The credit file provides important source material for loan supervision in regard to the internal and external audit. Some of the contents of the credit file: Basic information report of the borrower Milestone of the borrowing unit Competitive analysis of the borrower Credit approval memorandum Financial statements Copy of sanction communication Security documentation list Collateral valuation report Latest ledger page supervision report Half yearly credit reporting of borrower Quarterly risk classification Customer profitability Summary inspection of the audit observation Credit file provides information regarding status of loan account on the basis of credit decision in past. This file helps the credit officer to monitor the accounts and provides concise information regarding background and the current status of the account. This file has to be investigated thoroughly by branch in order to avoid consequences in future period. Bank has to submit duly completed credit investigation report after conducting detailed credit investigation as the guidelines.

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Credit officer has to consider the financial statements and reports which produce information of the firms financial affairs. These are prepared with help of accounting principle. It helps in decision making. The main financial statements are 1. balance sheet 2. profit and loss account 3. funds flow and cash flow statements These financial statements will help the credit officer to calculate the following to ratios to make the credit rating 1. liquidity ratio 2. activity ratio 3. leverage ratio 4. profitability ratio

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PQR PHARMA AGENCY This company is existing since 1999, which is 7 years old running successfully which is situated at the heart of city of the Hubli. This company is set up by two partners who had experience in same field and after some years i.e., in 2002 one partner retired from the business due to personal problem. Now this company is rendered by the individual. Pharmaceutical industry is one of the booing sector, where this company handles more than 30 major branded pharmaceutical companies products. And also have a various division products which have more demand in market. This company wants to expand its business, which required funds up to 70 lakhs or at least they required Rs.50 lakhs now for smooth flow of business where 20 lakhs can be raised later. After proposed loan from the firm bank next step is the bank has to collect required documents related to the firm such as financial statements and considering the ratio analysis which is made on the basis of the figures which are recorded in the financial each ratio discloses different meaning. The loan will be granted on the adequacy of the ratio. Ratios and IT returns were calculated by comparing 3 to 5 years and also calculated on the basis of collected on basis transaction made with the bank in bank statement and list of creditors and debtors. After considering all above documents bank makes verification of all these documents it sends to the central office. Where central office investigates thoroughly the documents. After satisfying it inform the branch and make clarification of documents if necessary. And tells to bank to carry further things. Which include physical investigation and direct conversation of borrower and study the position of the borrower by collecting information from the same field or industry person or existingcreditworthiness and repayment capacity of the borrower and also taken a legal opinion from advocate and also consider the collateral securities.

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CANARA BANK If satisfied above criteria next important part of the bank is to do credit rating where it is one of the input to better credit risk management which is calculated mainly by following parameters. 1. financial performance 2. operation in business performance 3. quality of management 4. industry outlook 5. conduct of account Where each parameter consists of sub parameter. After considering sub parameter banks give Weightage to sub parameters according to those importance. If high importance the Weightage will be high. After considering the Weightage bank calculate the risk existing for lending loan for particular company. Banker calculates different calculations for different sector such as manufacturing, trading and service sector. For this case, for getting scoring of above 5parameters, first and foremost calculate sub parameters Weightage to get average scoring of particular companys rating.

In below calculation for using 5 financial statements for financial performance sub parameters and operation in business.

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PQR PHARM AGENCY

Particulars

31.3.2003 (Aud.)

31.3.2004 (Aud.) 273.54 10.00 3.66 0.31 0.31 0.42 0.73 0.11 11.02 0.00 14.32 25.34 36.36 1.43 11.02 3.30 57.95 36.36 1.59 33.47 18.88 25.08 251.12 12.99 28.59 5.10

31.3.2005 (Aud.) 160.84 6.98 4.34 1.42 1.42 0.73 2.15 0.88 4.84 0.00 30.16 35.00 41.73 1.19 4.84 8.62 67.44 41.73 1.62 80.29 38.03 35.38 237.27 24.72 31.42 2.41

31.3.2006 (Prov) 322.24 10.99 3.41 5.28 5.28 0.55 5.83 1.64 9.05 0.00 23.93 32.98 42.69 1.29 9.05 4.72 71.42 25.48 2.80 34.11 26.92 30.11 311.68 22.99 40.75 4.55

31.3.2007 (Esti) 442.98 12.37 2.79 7.41 7.41 0.46 7.87 1.67 14.97 0.00 44.86 59.83 127.44 2.13 14.97 8.51 183.22 107.45 1.71 72.82 45.88 88.38 461.61 58.03 82.93 2.59 2.171282 2.7475

Net sales PBDIT PBDIT/Sales (%) Profit before tax Profit after tax Depreciation Cash accruals Net profit/ sales (%) Paid up capital Reserves Quasi Equity TNW TOL TOL/ (TNW+QE) TNW-QE TOL/TNW(No QE) Current Assets Current Liabilities Current ratio Credit allowed (Days) Credit availed (Days) Debtors* Purchase Creditors* Inventories Working Capital Cycle

148.41 4.00 2.70 0.18 0.18 0.83 1.01 0.12 7.63 0.00 21.96 29.59 54.51 1.84 7.63 7.14 80.04 54.51 1.47 107.03 56.32 43.52 173.36 26.75 33.60 1.92

* Note: Debtors and creditors need to be the average of last year and current year

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Ratios are based on 31.3.2006 audited financial statements. Sales Growth Pbdit Growth Pbdit/Sales Current Ratio TOL/(TNW+QE) Working capital Cycle Credit allowed Credit availed TOL/TNW 29.49 40.06 3.41 2.80 1.29 4.55 34.11 26.92 4.72

1).Sales Growth = {(value of sales in current year} / value of sales in year 3}(1/3)-1}]*100 = Net sales of the year 31-3-06 / net sales of year 31-3-03 = 322.24 / 148.41 = 2.17182 Sales growth = 2.17182 * (1/3) -1 * 100 = 29.49 Using this calculation we can come to know how much growth in sales is achieved as compared to past three years sales. If the borrower give the estimated high sales growth we can easily find that. 2).PBDIT Growth =[{value of PBDIT in current year) / (value of PBDIT 3 year)} (1/3) -1}] *100 = PBDIT of year 31-3-06 / PBDIT of 31-3-2006 = 10.99 / 4.00 = 2.7475 PBDIT = 2.7475 * (1/3) *100 = 40.06 This ratio indicates improved performance of the company reflected in increasing profitability. As comparing with third root of current years PBDIT to PBDIT of 3 years. 2. PBDIT / Sales = (PBDIT / Net sales) * 100 = PBDIT of year 31-3-06 / net sales of year 31-3-06 * 100 = 322.24 / 10.99 * 100 = 3.49 89

CANARA BANK This ratio indicates the operational efficiency. if the percentage of sales is higher it indicates the positive results. 3. current ratio = current assets / current liability = current assets for the year 31-3-06 / current liability for the year 31-3-06 = 71.42 / 25.48 = 2. 80 Using this ratio liquidity position of the company can be found out. Higher the ratio will be good for meanwhile but in the long run it may affect adversely. 4. TOL / ( TNW + QE) =Total outside liability / (Tangible net worth + quasi equity ) =42.69 / 32.98 This ratio gives the holistic representation of total outside liability in relation to tangible net worth of the company. it will give an indicator of the capital adequacy of the country. 5. working capital cycle =Net sales for year 31-3-2006 / Debtors for year 31-3-06 + inventories for year 31-3-06 = 322.24 / 30.11 + 40.75 = 4.55 This ratio indicates the capacity of the firm to convert the inventories into cah and it indicates the efficiency of the sales of the firm.

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CANARA BANK 6. credit allowed ( days) Debtors for the year 06 Net sales / 365 = 30.11 322. 24/ 365 = 34.11 days It shows that the company is allowing 34 days for repayment of the debt amount to its customers. 7. credit availed (days) = = Creditors for the year 06 Purchase / 365 22.99 311.68 / 365 = 26.92 This ratio shows that the company is getting the credit period on an average 27 days. By considering the above two factors it comes to know that company is allowing more days as compared to the credit period he is availing from his suppliers. This can be concluded in two ways. In one way his suppliers not believing him, so his credit availed days is less, other way he is getting the low interest rates from the bank and he is giving the more days for his customers. So the credit allowed period is high as compared to credit availed period. Comment on case After calculating the above sub parameters banker adds these values to the credit tool he comes to know the scoring rate of individual parameters. It helps the banker to know the applicable interest rate and amount to be lend based on the credit rating scores

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Findings
1. The proposed standardized Basel2 to approach does not fits the needs of smaller banking organization engaged primarily traditional banking. 2. The current nor proposed capital frameworks yet address what is perhaps the most critical risk factor for the smaller banks concentrations of credit risk. 3. Internal ratting based approach provides positive incentives to banks in improving their credit risk management techniques. 4. Banks may have discretion and flexibility in defining the exposure classes that which corporate, project finance, etc. 5. Unless suitably modified the adoption of the new accord in its present format would result in significant increase in the capital charge for bank. 6. Additional cost of capital will increase to the bank and bank may go for capital market to raise the found. 7. Bank as well documented schemes delegation powers for credit sanction. - geographic and sectoral

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Recommendations
1. The bank will now have to adopt the credit risk assessment system which is an international standard specified for the banking system. 2. Due to increased sensitivity towards risk under the new norms, the risk will come down significantly. This will lead to an increase in the regulatory capitalization levels, which will increase the cost of capital, which may be passed on to the customers. 3. The banks will have to exercise due care in maintaining the portfolio of risk assets in order not to increase unduly the required regulatory capitalization level. This may in turn in duce conservatism in the bank in taking of risky portfolio of advances, a danger they have to guard against. It will indeed be a delicate balancing task.

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BIBLIOGRAPHY
1 2 3 4 5 Bank circulars. Internal magazines. www.mis.org. www.canbankindia.com. www.rbi.org.in.

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