DISSERTATION REPORT DISSERTATION TITLE PRESENTATION CREDIT RISK MANAGEMENT IN BANKS

7th May,2008

FACULTY GUIDE:Ms. Kiran Mittal FacultyFinance

Presented By:Nitin Dhawan MBA(G), 2008

INTRODUCTION
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Significance of Credit Risk Management Basel II implementation Credit Analysis 5Cs of Credit Analysis Credit Scoring

REVIEW OF EXISTING LITERATUR

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First Generation Structural form Models Second generation Structural Form Models Reduced form models CREDIT VALUE-at- RISK MODELS

OBJECTIVES OF STUDY
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To study the credit analysis procedure at banks Analyze the shortcomings of the credit risk management process followed Analyze the various statistical technique available to make a credit decision Provide for a comprehensive credit risk management process to manage credit risk

Data collection:

RESEARCH METHODOLOGY

Primary Sources- through questionnaires Secondary sources- through existing literature

x x x x

Research design- Exploratory in nature Sample Size- 14 banks Period of study Plan of analysis Factor Analysis and graphical
tools
Kaiser-Meyer-Olkin Measure of Sampling Adequacy Bartlett's Test of Sphericity Eigenvalue Principal Component Analysis

C E R YD F E R KM N G M N G ID L E L A L E IN D IS A A E E T U E IN S

DATA ANALYSIS & RESULTS

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1 2

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y c n u q e r F

0 YS E

C E R YD F E R KM N G M N G ID L E L A L E IN D IS A A E E T U E IN S

e 14 FIs surveyed has clearly defined risk management guid

Relative importance of risk management policy on various elements

Kaiser-Meyer-Olkin Measure of Sampling Adequacy - .716 Bartlett's Test of Sphericity Significance- .009

Initial Eigenvalue first three component has 84% of variability

Risk management Philosophy

BASEL ACCORD- ADOPTION RATE

IMPORTANCE OF FACTORS THAT AFFECT CREDIT RISK

Kaiser-Meyer-Olkin Measure of Sampling Adequacy - .513 Bartlett's Test of Sphericity - .001 Initial Eigenvalue cumulative %- 86.77 of three factors Factors being :-- absence of prudential credit limit; inadequately define lending limits; deficiency in loan policies

Cmu ate om l is ni E nms ntos c o i ac n o c i Dfc ni s l ap e i c i on i e en oc s l i i e as nef r dna bec o uet p i l r dlm cei i i t t I aeut l dfn nd qa y e e e i d ni gm l d l is e ni t Dfc ni s ap e i c i pr i e en a i a f or wr fn s l br o e i a o s ni l oi i n c ps o a t ec si eeedn xes dpne v c oc la r l eno t a l e s I ii l na t 10 . 0 0 10 . 0 0 10 . 0 0 10 . 0 0 10 . 0 0 10 . 0 0 E r co x at n t i .9 79 .0 91 .6 92 .2 92 .4 73 .7 89

E r co M hdPni aCm nnAa s . x at n e o: r c l o p et nl i t i t i p o ys

RELATIVE IMPORTANCE OF FACTORS CONSIDERED FOR PRICING CREDIT RISK

Initial Eigenvalue cumulative % for first 3 variables- 76% Thus three important factors that are considered:- Portfolio quality, market forces and future business potential

Capital and Capacity are the top two Cs that are considered by the bankers
Com unalities m character collateral capital capacity conditions Initial 1.000 1.000 1.000 1.000 1.000 Extraction .751 .413 .893 .939 .535

Extraction Method: Principal Component Analysis.

Initial Eigenvalue cumulative %- 70% for the two

In 64% of banks, credit policy committee look after the risk management policies, 29%- Board of Directors and rest by senior management 85% of the banks reviews the account annually and studies the industry. 80% of the bank visit the site periodically and developed the MIS. If we look at the collected data, we come to know that banks face the high degree of credit risk in Direct Lending in comparison of Guarantees or Letter of credit and Cross Border Exposure. Direct lending - .956 Guarantee- .881 Cross border Exposure- .902

CREDIT RISK MODELS AND SOFTWARES USED

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Canara Bank- RAM JP Morgan- Credit Metrics Andhra Bank- In-house SIDBI- In-house developed by I-flex OBC- NIBM Deutsche- Dbrat IDBI- Anderson model & I RAM model American Express- IMS-CAS DCB- CRISIL RAM ICICI- FRACTAL

RECOMMENDATIONS
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Use of proper credit analysis process Preparation of Credit scorecards Efficient use of Asset Liability Management Model Following of proper Loan Review Mechanism

LIMITATIONS
The research work faced following limitations:x x

Sample size limitation: - The research undertaken is limited to few banks due to time constraint. Another limitation that accrues is related to data collection. Bank officials didnt want to speak on the policies and practices. The unwillingness on the part of the banks officials resulted in limited information. The advanced models or the discriminant analysis is a complex process and involves complicated calculations which could not widely covered in the paper. The models are studied and found internationally which may not be as applicable in the Indian Markets. The information is dependent on the efficiency of the markets.

CONCLUSION
Indian Banking Industry adopting the new norms NPA down from 8.8% (2003) to 2.5%(2007) as a result of the efforts towards CRM
Source:- Times of India,30th Nov 2007

Investment is being done for effective credit risk management Nationalized Banks still lagging behind Still the precision is lacking Most of the lending till date is based on the traditional methods of 5Cs