Uti Bank

UTI Bank, Hubli
EXECUTIVE SUMMARY
For the project I have taken the topic; An Analytical Study of UTI Bank and
its Risk Management with Reference to Credit Policy at Hubli branch. The project
firstly concentrates on organization study which will reveal the bank’s departments,
their functions, their responsibility, and how much decision power is assigned to each
department, how they work and achieve their objectives.
The major area of the project is; Risk Management-with reference to Credit
Activities. Credit lending is one of the functions of every bank, while lending credit to
the clients or customer, banks are do not lend blindly. They are trying to measure the
risk involved in that lending activity, which will minimizes the risk and earn them
more profit on their capital.
Here the bank measures the risk by -Credit Rating using five Parameters for
getting main Parameter weightage and what are the sub parameter considered and
how these will calculate by using two case analysis.
BLDEA’s ASP College of Commerce. MBA Program, Bijapur. 1

UTI Bank, Hubli
AIMS AND OBJECTIVES
 To Study the credit risk involved in the lending and souring of fund
 To gain an insight into the credit risk management activities of the bank
 To assess the effectiveness of these risk management activities
 To know credit policy adapting bank
 To gain corporate exposure
 To get exposed to all the departments of the Bank
Location of the study: UTI bank Hubli branch
Duration of the Study: 60 days.

UTI Bank, Hubli
METHODOLOGY
The methodology is the plan, structure and strategy of the investigation
process that sets out to obtain answer to the study. The methodology followed for the
collecting information are using two sources of data namely
Primary Data
The method which was adopted to collect the information is ‘Personal
Interview’ method. Personal interview and discussion was made with branch manager
and other personnel in the organization for this purpose. There was one formal
questionnaire used in this study to know the department’s functions and co-ordination.
The other primary data collected are
o Data regarding the Credit risk and also the concerned information.
o Organization Structure
o Product and service details.
Secondary Data
The various sources that were used for the collection of secondary data are
o Various Text books were used to understand the concepts of portfolio
management.
o Websites – Various sites like www. sharekhan.com
www.indiainfoline.com
www.utibank.com
UTI Bank, Hubli
o Newspapers such as Economic Times, Financial Express.
o Magazines such as Business World, Business Today, Investors Guide,
Capital Market.
INTRODUCTION TO UTI BANK
UTI Bank was the first of the new private banks to have begun operations in
1994, after the Government of India allowed new private banks to be established. The
Bank was promoted jointly by the Administrator of the specified undertaking of the
Unit Trust of India (UTI - I), Life Insurance Corporation of India (LIC) and General
Insurance Corporation Ltd. and its associates viz. National Insurance Company Ltd.,
The New India Assurance Company, The Oriental Insurance Corporation and United
Insurance Company Ltd. The Bank today is capitalized to the extent of Rs. 278.69
Crores with the public holding (other than promoters) at 72.28 %.
The Bank's Registered Office is at Ahmedabad and its Central Office is
located at Mumbai. Presently the Bank has a very wide network of more than 450
branch offices and Extension Counters. The Bank has a network of over 1891 ATMs
providing 24hrs a day banking convenience to its customers. This is one of the largest
ATM networks in the country. The Bank has strengths in both retail and corporate
banking and is committed to adopting the best industry practices internationally in
order to achieve excellence.

UTI Bank, Hubli
Promoters
UTI Bank Ltd. has been promoted by the largest and the best Financial Institution of
the country, UTI. The Bank was set up with a capital of Rs. 110crore, with UTI
contributing Rs. 100crore, LIC - Rs. 7.5crore and GIC and its four subsidiaries
contributing Rs. 1.5crore each.
BOARD OF DIRECTORS
The Bank has 12 members on the Board. Dr. P. J. Nayak is the Chairman and
Managing Director of the Bank.
The members of the Board are:
Dr. P. J. Nayak Chairman & Managing Director

Shri Surendra Singh Director
Shri N.C. Singhal Director
Shri A.T. Pannir Selvam Director
Shri J.R. Varma Director
Dr. R. H. Patil Director
Smt. Rama Bijapurkar Director
Shri R B L Vaish Director
Shri S. Chatterjee Executive Director (Whole Time
Director)
Shri S B Mathur Director
Shri M V Subbiah Director
Shri Ramesh Ramanathan Director
Mission
 Customer Service and Product Innovation tuned to diverse needs of individual
and corporate clientele.
 Continuous technology up gradation while maintaining human values.
 Progressive globalization and achieving international standards.

UTI Bank, Hubli
 Efficiency and effectiveness built on ethical practices.
Core Values
 Customer Satisfaction through
o Providing quality service effectively and efficiently
o Smile, it enhances customers ‘face value" is a service quality stressed
on
o Periodic Customer Service Audits
 Maximization of Stakeholder value
 Success through Teamwork, Integrity and People.
Bankers' Fair Practice Code
About this code
1.1 This is a voluntary Code, which sets standards of fair banking practices for
member banks of Indian Banks' Association to follow when they are dealing with
individual customers. It provides valuable guidance to customer for their day-to-
day operations. The Code applies to:
-current, savings and all other deposit accounts
-pension, PPF accounts etc. operated as agents of RBI/Government
-collection and remittance services offered by the banks
-loans and overdrafts
-foreign-exchange services

UTI Bank, Hubli
-card products
-third party products offered through our network.
1.2 As a voluntary Code, it promotes competition and encourages market forces to
achieve higher operating standards for the benefit of customers.
Unless it says otherwise, all parts of this Code apply to all the products and services,
whether they are provided by branches across the counter, over the phone, by post,
through interactive electronic devices, on the internet or by any other method.
Commitments outlined in this Code are applicable under normal operating
environment. In the event of force majored, they may not be able to fulfill the
commitments under this Code.
KEY COMMITMENTS
Bank’s key commitments to customers
Bank promise to customers that;
a) Act fairly and reasonably in all their dealings with customers by:
-meeting the commitments and standards in this Code, for the products and services
they offer, and in the procedures and practices our staff follow
-making sure their products and services meet relevant laws and regulations
-Bank’s dealings with customer will rest on ethical principles of integrity and
transparency.
b) Help customers to understand how their financial products and services work by:
-giving them information about in plain Hindi and/or English and/or the local
UTI Bank, Hubli
language
-explaining their financial implications and
-helping them choose the one that meets their needs.
c) Deal quickly and sympathetically with things that go wrong by:
-correcting mistakes quickly
-handling their complaints quickly
-telling them how to take their complaint forward if they are still not satisfied and
-reversing any bank charges that we apply due to our mistake.
INFORMATION
Helping customers to choose products and services, which meet customer needs:
3.1 Before a person become a customer, bank will:
-give clear information explaining the key features of the services and products with
respect to
information on any type of account facility which bank offer and may suit customer
needs
- To convey people what information bank need from people to prove their identity
and address and to comply with legal and regulatory requirements, and
-request for additional information about customer and their family to build a
database but such information can be furnished by customer only if they wish and
bank will not compel them to give this information for opening their account.

UTI Bank, Hubli
3.2 Bank will tell to customer if they offer products and services in more than one
way [for example, through ATMs on the internet, over the phone, in branches and so
on] and convey to its customer how to find out more about them.
3.3 Once customer has chosen an account or service, bank will tell them how it works.
3.4 When customer opens a single account or a joint account, bank will give them
information on their rights and responsibilities.
3.5 Bank recommend to its customer avail nomination facility offered on all deposit
accounts, articles in safe custody and safe deposit vaults.
3.6 Bank will guide to its customer how it will deal with deposits and other assets
held by bank in the name of a deceased person in the absence of nomination
INTEREST RATES
Saving Account Deposit Interest Rate - 3.5%
Rates Effective from: Wednesday, May 24, 2006
PERIOD INTEREST RATES ON DOMESTIC DEPOSITS

(%)
DEPOSITS Interest Rate on Int Rate 15-50 Lakhs Interest Rates for
Deposits Below Rs Senior citizen
UTI Bank, Hubli
15 lakhs
7 days to 14 0 3.75 0
days
15 days to 4.5 4.75 4.5
45days
46 days to 5.25 5.5 5.25
less 3
months
3 months to 5.5 5.75 5.5
less than 4
months
4 months to 5.5 5.75 5.5
less than 6
months
6 months to 6.25 6.4 7.25
less than 9
months
9 months to 6.25 6.4 7.25

less than 1
year
1 year to 6.5 6.75 7.5
less than 2
years
3 Years to 7 7 8
less than 5
years
2 years to 6.75 6.75 7.75
less than 3
years
5-10 years 7 7 8
DEPARTMENTS OF THE BANK
1. Operation Department:
It is the department which is taking care of daily banking activities for smooth
running of organization. The operation department has been delegated with average
decision authority for their routine work by management. It full co-operation with
UTI Bank, Hubli
other department and also it is necessary for other department for smooth running.
The department has been apprised by the management with different criteria, like by
customer satisfaction, by branch performance. As it is a operation department, so it
will contribute to all department in achieving their planned targets.
Functions:
a) DD Drafting.
b) Out-station cheques realization.
c) Attending customer’s queries.
d) ATN office in charge.
e) Handling day to day transactions.
f) Cash and clearance.
g) Handling govt. business.
h) RTGS (Real Time Gross Settlement System).
2. Marketing Department:
It is the department, which will take care of organization expansion by way
of achieving targeted goals. Means in this department it mainly concentrate on selling
security, acquiring more number of deposits, accounts etc. The marketing department
has been given decision power 50-90%by the management to achieve their target and,
make it success. For achieving of this success department is supporting and co-
operate with this department. Hence the marketing department performance is
appraised with technique like, by customer satisfaction, by branch performance, by
self appraisal, by giving targets. Therefore to achieve this target marketing department
has its own plan and strategies like,

UTI Bank, Hubli
-By obtaining new customers.
-By generating new business through existed customers.
Functions:
a) Achieving branch targets.
b) Coordinating with sales executives.
c) Customer service.
d) Opening of new account (building of new relation).
3. Credit Department:
This department mainly concentrates on lending activities to its
customers and client. For smoothing of its activities it has further sub department.
This department provides different loan like personal loan, housing loan, education
loan, agriculture loan etc. While providing loan it evaluate the capability, back ground
of client and analyze the risk involved in recollecting the same. To operate its activity
it has given maximum decision power by management which will help to run
organization successfully. As it is credit department it involves more risk and
uncertainty towards its client and customers, so that the contribution to other
department for achieving targets usually less. And it has also its future plans for
achieving its goals.
Functions:
a) Examining the proposals.
b) Documentations.
c) Disbursements of loans.

UTI Bank, Hubli
d) Recovering the loan.
e) Credit appraisal.
4. Cash Department:
In this department it evaluates the daily requirements of cash, based on this
it is going to maintain liquidity. If the bank is having heavy cash liquidity, this
department will keep all cash in to higher authority bank. The department has been
given 50-80% of decision power by management to do their routine activities. It has
given more contribution to other departments in achieving their goals in terms of co-
operation. As it is cash department there are no any future plans. But as per present
scenario of market it is going to act.
Functions:
a) Handling daily cash transaction.
b) Balancing cash figure at the end of day.
c) Maintaining cash level of the bank.
d) Maintaining liquidity.
5. Clearing Department:
It is department which is taking care of customer work regarding
receiving out station cheques and DDs. The department is given average decision
power by the management. Regarding co-operation it is contributing to other
department as much as possible. as it is clearing department it had no any future plans
but it is ready to accept all positive changes towards improvement.

UTI Bank, Hubli
Functions:
a) Clearance of out stations cheques.
b) Clearance of locals cheques
c) CBSS (software name used for giving information to the current
account holders).
6. Customer Relationship Department:
This department handles the customers’ queries, complaints, and problems,
regarding their transactions, debit card, bank balance etc. with cheerful smile they
give all information which is required for customers. And also this department
conducts some cultural activities for their customers and make feel them; they are
member of that organization. Customers also have been invited for bank’s annual day
functions.
Bank’s Services:
UTI bank is providing two different types of services they are as follows
1. Basic services
2. Special services
I. Basic services: These services include

UTI Bank, Hubli
a) Saving account
b) Term deposit
c) Recurring deposits
d) Demat account
e) ATM’s
f) En cash - 24
g) Special savings account
h) Residence and foreign currency account
i) Easy access through channels
j) I connect
k) Corporate I connect
l) 24 - hrs Tele banking
a) Saving account:
UTI bank has providing saving account services for healthy growth and easy
access to the customers the features of savings account are as follows;
 Interest paid on quarterly basis
 International debit card ,tele-banking and iCONNECTTM internet
banking
 Multi-city ‘AT Par’cheque book for all savings account holders.
 Free any where banking facility
 Auto sweep facility to transfer excess balances into high interest
earning term deposits

UTI Bank, Hubli
Its network over 350 offices and over 1500 ATM’s ensure that customer money can be
ived through remittances .thus enabling you to hedge against risk.
b) Term Deposit:
UTI bank offers range of options like reinvestment monthly income and
quarterly income schemes. Ranging in duration from 15 days to 10 years that enable
you to put your savings to work in a manner of your choice
c) Encash-24:
UTI bank ENCASH-24 is a dynamic two in one account that combines the
liquidity of a saving account with the high return of a fixed deposit .amount above
RS-10,000 in multiple of RS – 10,000 are automatically swept into fixed deposits in
case customer need to withdraw funds in access of RS- 10,000 fixed deposits will be
broken in multiple of RS – 5,000 on first in last out basis thereby ensuring liquidity of
your funds as well as higher return.
d) Recurring deposits:
The UTI bank recurring deposits is an attractive options for people looking to
save fixed sums of money on monthly basis with interest rates identical to fixed
deposits, these deposits can be opened for a minimum of 120 months .and all this is
with out nay TDS deductions.
e) Demat account:
The UTI demat account offering customer a safe and convenient way to manage
share portfolio with a range of facilities such as demat of securities, pledge of
securities and freezing and de freezing of securities lying in the account.

UTI Bank, Hubli
Easy Access through Bank Channels
Customers UTI Bank Account is accessible through a number of channels. A
fast growing network of over 1500 ATMs back up an ever increasing national-wide
network of 318 offices. And to top it all, customers can also bank over the phone or
through the internet
ATMs.
Bank’s network of over 1500 ATMs ensures that customers are never too
far from bank. The ATM enable customers to withdraw and deposit cash and cheques,
check your balance, and print mini statement, transfer funds between customers own
accounts, pay customer utility bills and even refill customers prepaid mobile card. All
ATMs accept any Master card /Visa Cards.
iConnect:
With the UTI Bank iConnect internet banking facility bank is just click away.
From the comfort of customer desktop they can check their account status including
customers Demat holdings, transfer funds, make all payment, place online request for
new cheque book, review term deposits, etc.
In addition, iConnect enables customers to conduct online trading, mutual
fund purchase and online shopping. Customers also can make payment to services
such as insurance, electricity, telephone and mobile service across the country.
Corporate iConnect:
To suit the fast-paced and dynamic needs of corporate customers, UTI Bank
offers corporate iConnect. Apart from all above mentioned features of iConnect and it
also offers multiple user ids to allow a number of users to access the facility at the
UTI Bank, Hubli
same time, separate of entry and authorization of transaction online to ensure
complete safety for online updating of bulk of transactions such of staff salaries.
24-Hrs. Tele-Banking:
With UTI Bank’s Tele-banking service, customers can access their
account from their telephone anytime they want. And unlike most banks, UTI Bank’s
Tele-banking service allows customers to access their accounts from any city across
the country with the same T-PIN. All they need to know is the local tele-banking
number of that city. This is currently available to customers at more than 100 branches
spanning 39 cities.
II. Special Service
a) At par cheque facility:
By offering the multi-city, at par cheque facility free to all savings
account holders, UTI Bank has created history in Indian banking. Now all cheques,
whether local or outstation, would be given the same treatment as a local cheque at
any center where UTI Bank has a branch. So customer will no longer have to incur
any cost or delays associated with outstation cheque collections nor would you have
to go to about producing a Demand draft to avoid the same. This facility also enables
customers to operate their account even if they relocate to another city, where UTI
Bank has branch, without having to shift customer account.
b) International Debit Card:
With customers savings account customer will get the UTI Bank
International Debit Card. This card will give customer access to their savings account
at all UTI Bank ATMs across the country as well as at all ATMs across the world that
UTI Bank, Hubli
are VISA-enabled, allowing them to withdraw up to Rs. 40,000 per day. It also saves
their expenses of a credit card because it enables them to make payments at all VISA
enabled Merchant Establishment that have electronic swipe terminals.
The UTI Bank International Debit Card comes with the added security of
photo-signature card plus comprehensive insurance cover like zero cost card liability,
purchase protection up to Rs. 50,000 and personal accident insurance cover up to Rs.2
lacs.
c) Priority banking:
The bank priority service offers a host of banking, investment lifestyle privileges
which will enrich customers banking experience. As a priority Banking customer,
Customers will have a dedicated relationship manager catering to all customers’
banking needs. These include special privileges such as free pick up and drop of
cheques and cash, monthly account statements, priority banking credit card with value
added features and lots more. Customer could also avail banks complimentary
advisory services, to help customers with all their investment needs and decisions.
Priority banking customer also enjoy a host of lifestyle privileges such as
invitations to exclusive film screenings, art exhibitions and a variety of shopping,
dining and travel privileges and discounts.
d) Travel currency card:
When customers travel abroad, whether on business or for leisure, the UTI bank
travel currency card ensures customers an easy secure way to make payments.

UTI Bank, Hubli
Accepted at over 840,000 VISA/Plus ATMs and 13 million VISA Electron
establishments worldwide, it allows them travel light and shop to their heart’s
content.Besides,it gives customer flexible options on the utilized balance on their
card. And to make it even more convenient for them, the travel currency card is
available at all UTI Bank branches and full fledged money changers (FFMC).
e) Financial Advisory Services.
It is bank’s endeavor to offer customers’ complete personal finance solutions.
Through its’ financial Advisory Services bank understand customer investment
requirements and design tailor made financial solutions for them.
Beyond merely advising customers, Bank will also help the customers to invest
in a variety of instruments including.
 Mutual funds.
 RBI Bonds.
 Bonds of financial institutions.
 Capital Gain Tax Saving Bonds
 UTI Bank Fixed deposits.
Insurance Bank also keeps customers on the latest in financial
markets through daily and weekly market roundups and quarterly newsletters.
f) NRI Service:

UTI Bank, Hubli
In UTI Bank, realize that for NRI, the banking needs are special. And in
keeping with this philosophy, and offer valued NRI customers a plethora of services
customized to their needs, such as
 The entire bouquet of NRI Deposit Products & Services.
 International Debit Card with Accident Insurance cover
 Free Internet Banking facility
 Portfolio Investment scheme for capital market
transactions.
 Correspondent Banking/Remittance arrangements in all major
currencies.
h) Cash Management Service:
Through bank cash management service, bank brings to customers’ a wide array
of collection and payment services for improved liquidity through faster access to
their funds and total control on their fund movements through customized MIS
reports. Banks cash management service solutions include
 Collection services that offer local cheques collection (LCC) at more than
100 locations and upcountry cheques collection (UCC) for more than 800
locations.
 Payment/disbursement service, whereby one can issue cheques payable ‘at
par’ at 90 locations in the country, issue warrants payable “at par” for

UTI Bank, Hubli
dividend/interest payments at more than 500 locations and avail of
electronic clearing service (ECS).
i) Power Loans:
UTI bank power loans bring everything with customer reach. With products like
personal loans, Educational loans Home loans and vehicle loans.
With UTI Bank, everyday banking becomes an absolutely hassle free
experience for customers’. Because bank use the latest technologies to constantly
innovate on bank services and products.
SWOT ANALYSIS OF BANK

UTI Bank, Hubli
Strength Weakness
 UTI Bank has been in the
 Tedious procedures have to be
banking industry since 1994. It
followed before advancing loans
has successfully completed 12
causing inconvenience to
years in the Banking industry.
customers.
 The bank has a sound network i.e
Anywhere Banking facility in
450 Branches and 1891ATM's at
strategic locations in India.
 UTI Bank stands one among the
top ten banks in India and is
ranked 1st in growth in business
 The bank is having well
experienced, trained, most
dedicated and committed staff.
 In has a strong customer base.
Opportunities
Threat
 Global aspirations of Indian
 Bank is facing competition from
consumers and growing
its other Private Sector Banks
integration with NRIs.
and even the foreign Banks
 The bank can optimize the growth
 Changing economic policies of
opportunities arising out of retail
Government will have serious
banking and small and medium
impact on interest rates and
enterprises (SMEs).
reserve ratio maintained with
 Further expansion of ATMs
RBI
networks and possible
arrangements of sharing networks
of other banks by issuing mutual
funds and insurance
THEORETICAL BACKGROUND OF RISK MANAGEMENT
What is Risk?

UTI Bank, Hubli
Risk is defined as uncertainties resulting in adverse outcome, adverse in
relation to planned objective or expectation. It is very difficult to find a risk free
investment. An important input to risk management is risk assessment. Many public
bodies such as advisory committees concerned with risk management.
Types of Financial Risk
Market Risk:
Market risk is the risk of adverse deviation of the mark to market value of the
trading portfolio, due to market movement, during the period required to liquidate the
transactions.
Operational Risk:
Operational Risk is one area of risk that is faced by all organizations. More
complex the organization more exposed it would be operational risk. This risk arises
due to deviation from normal and planned functioning of system procedures,
technology and human failure of omission and commission. Result of deviation from
normal functioning is reflected in the revenues of the organization, either by way of
additional expenses or by way of loss of opportunity.

UTI Bank, Hubli
Credit Risk:
The risk that a firm’s customers and the parties to which it has lent
money will fail to make promised payments is known as credit risk. Most firms face
some credit risks for account receivables. The exposure to credit risk is particularly
large for financial institutions, such commercial banks when firms borrow money;
they in turn expose lenders to credit risk, the risk that the firm will default on its
promised payments. As a consequence, borrowing exposes the firm’s owners to the
risk that firm will be unable to pay its debts and thus be forced to bankruptcy.
Frame work of Credit Risk Management
Credit risk management involved to finding answer to for four questions. They
are
1. What are the risks?
2. Which, when, and how much risk is to accept that result in improving
bottom line.
3. How can we monitor and control credit risk?
4. Can we reduce the risk?
Risk Identification:

UTI Bank, Hubli
Credit Risk
Portfolio Risk Transactional Risk
Concentration Systematic Default Down

Risk Risk Risk grade/spread Risk
I. Portfolio Risk:
a) Systematic Risk:
If a portfolio is fully diversified i.e. diversified across geographies,
industries, borrowers, marketers etc equitably than the portfolio risk is reduced to
minimum level.
b) Concentrated Risk:
If the portfolio is not diversified that is to say that it has higher weight in
respect of borrower or geography or industry etc.
II. Transactional Risk:
a) Default Risk:
Default risk is driven by the potential failure of a borrower to make
promised payments, either partly or wholly.
b) Credit Down grade /spread Risk:
If a borrower doesn’t default, there is still risk due to worsening in credit
quality. This result in the possible widening of the credit spread.
Risk Measurement:
UTI Bank, Hubli
Measures of credit risk management consist of;
a) credit rating/scoring
b) Rating migration
a) Credit Rating:
Credit rating of an account is done with primary objective to determine whether
the account, after the expiry of a given period, would remain a performing asset i.e. it
will continue to meet its obligation to its creditors, including bank and would not be in
default. In other words, credit rating exercise seeks to predict whether the borrower
would have the capability to honour its financial commitment in future to the rest of
the world.
There is no mathematical/econometrical/empirical model to predict the future
capability of a borrower to meet its financial obligation accurately. Nevertheless
lenders in financial market, all over the world, rely on some model, which seeks to
predict the future capability of a borrower to meet its financial obligations.
A borrower even though he is rated C, may not default after a given period of
say one year, whereas, another borrower rated A may default at the end of given
period. This type of apparently paradoxical situation does arise and that too
infrequently. However if 100 C rated borrowers are tracked over a period of say one
year and say 10 borrowers default in meting their financial obligations, as against that,
100 A rated borrower, if tracked over the same period, only one borrower may default
in meeting his financial obligations. So, lenders in financial market rate accounts to
determine the class to which a borrower belongs. And based on the past record of

UTI Bank, Hubli
default of the borrower belonging to the same class, they have a fair estimate of
possible number of defaults among the borrower belonging to the said class.
Credit Rating Model:
A credit rating model essentially differentiates borrowers based on degree of
stability in terms of top line and bottom line revenues generation. This is because
where uncertainty in revenue generation in a business is more, chances of failing in
keeping financial commitment to the rest of the world is also more. Where revenue
generation is stable over a given period, uncertainty or risk associated is zero.
Ex: cash generation from an investment in govt. security is absolutely stable and
hence risk associated with such investment is also non-existent. this would also mean
that an A rated borrower would have more stable revenue generation than of B rated
borrower and an A++ rated borrower’s revenue generation would more stable than
that of A rated borrower.
b) Rating Migration:
Rating migration is the changes in the rating of a borrower over a period of
time when rated on the same standard or model.
Ex: a borrower M/s XYZ ltd is rated as B+ based on the position as on 31-3-02 The
same company is again rated as on 31-3 03 based on its position as on the date, its
rating, based on the same model, say comes to B. then we say that the rating of the
account has migrated from B+ to B over one year period.
As in case of rating of borrower, rating migration of single account also doesn’t
convey much. It becomes useful when migration of a large number of accounts of
similar rating is observed. Say we have 100 A rated borrowers as on 31 st March 2002.

UTI Bank, Hubli
When these accounts are rated again as on 31st March 2003, i.e. after one year,
typically we may find new rating as given bellow.
Rating migration of 100 A rated Accounts
Migration between 31.3.02 and 31.2.03
Last No. of Present Rating

rating Accounts
A++ A+ A B+ B C Default
A 100 1 1 79 10 4 3 2
This migration table implies that A rated borrower would have 2% default
probability. This is based on one year data only when this observation is collated over
a number of years, we would have a fairly accurate estimation of default probability.
This migration pattern of A rated borrowers should also compare well with
standard migration pattern published by rating agencies. This means that if usually A
rated borrowers show 0.2% default probability in terms of standard migration pattern
observed, and rating migration as per the model records 2% default for A category
borrowers, then regulatory authorities, rating agencies and market will assume a
lower rating for all borrowers rated A under that model. The rating equivalent would
be considered say B+, if default probability of B+ rated borrowers happens to be 2%
in terms of standard rating models. This is known as mapping with market standards.
Credit Risk Management
Of all different types of risk that a bank is subject to credit risk can be defined
as the risk of failure on the part of the borrower to meet obligations towards the bank
UTI Bank, Hubli
in accordance with the terms and conditions that have been agreed upon. Inability and
or / unwillingness of the borrower to repay debts may be the cause of such default.
Credit Risk Management becomes even more relevance in the light of the
changes that have been brought about in the economic environment including
increasing competition and lending spreads on both side as of bank.
Banks and financial institutions are expanding their operations around the
world; they are entering new markets; and they are trading new asset types. These
changes have created new opportunities along with new risks. While banking is
always evolving, the current fast rate of change is making it a challenge to respond to
all the new opportunity. Changes in extreme banking debacles. In addition, there has
been a divergence between international and domestic regulation as well as between
regulatory capital and economic capital. More subtly, banks and financial institutions
which are responding to the changes have been rewarded with a competitive
advantage. One response is the investment in risk management. While risk
management is not new, not even in banking, the current rendition of risk
management is new.
Credit risk is traditionally the main risk of banks and financial institutions.
Banks and financial institutions are in the business of taking credit risk in exchange
for a certain return above the risk less rate. As one would expect, banks and financial
institutions deal in the greatest number of markets and types of products. Banks above
all other institutions, including corporations, insurance companies and asset managers,
face the greatest challenge in managing their credit risk. One of the credit risk
managers, tools is the credit risk management model.

UTI Bank, Hubli
Two fundamental approaches to credit risk management
 The internally oriented approach centers on estimating both the expected cost
and volatility of future credit losses based on the firm’s best assessment.
 Future credit losses on a given loan are the product of the probability that the
borrower will default and the portion of the amount lent which will be lost in
the event of default. The portion which will be lost in the event of default is
dependent not just on the borrower but on the type of loan (eg. some bonds
have greater rights of seniority than others in the event of default and will
receive payment before the more junior bonds).
To the extent that losses are predictable, expected losses should be factored
into product prices and covered as a normal and recurring cost of doing business. i.e.,
they should be direct charges to the loan valuation. Volatility of loss rates around
expected levels must be covered through risk-adjusted returns.
So total charge for credit losses on a single loan can be represented by
([expected probability of default] * [expected percentage loss in event of default]) +
risk adjustment * the volatility of ([probability of default * percentage loss in the
event of default]).
Functionality of good credit risk management model
A credit risk management model tells the credit risk manager how to allocate
scarce credit risk capital to various businesses so as to optimize the risk and return
characteristics of the firm. It is important or understand that optimize does not mean

UTI Bank, Hubli
minimize risk otherwise every firm would simply invest its capital in risk less assets.
A credit risk management model works by comparing the risk and return
characteristics between individual assets or businesses. One function is to quantify the
diversification of risks. Being well-diversified means that the firm has no
concentrations of risk to say, one geographical location or one counterparty.
TYPES OF CREDIT RISK MODELS
Asset Credit Risk Model:-
The first component is the asset risk model that contains two main
subcomponents: the credit rating model and the dynamic credit rating model. The
credit rating model calculates the credit risk ness of an asset, while the dynamic credit
rating model calculates how that riskiness may evolve overtime. The credit riskiness
may be in the form of a probability of default or in the form of a credit rating. The
credit rating may correspond to one of the international credit rating services or the
institutions.
The credit riskiness of an asset can depend upon the particular structure of the
asset. For ex: - credit riskiness of a bond depends on its seniority as well as maturity.
To accurately measure the credit risk it is essential to know both the credit
riskiness today as well how that credit riskiness may evolve overtime. The dynamic
credit rating model calculates how an asset’s credit riskiness may evolve overtime.
The way this component is implemented depends very much on the assets in the
portfolio and the length of the period for which risk is being calculated. The credit
rating is influenced by the economy that moves through the business cycle. Thus the
probability of downgrade and thus default is greater during the recession.

UTI Bank, Hubli
Credit Risk Pricing Model:-
The next major component of the model is the credit risk pricing model. This
model together with the market risk model will allow the credit risk management
model to calculate the relevant return statistics. The credit risk pricing model is
necessary because the price of the credit risk has two components. one is the credit
rating that was handled by previous component, the other is spread over the risk less
rate. The spread is the price that the market charges for a particular credit risk. This
spread can change without the underlying credit risk changing is affected by the
supply and demand.
The credit risk pricing model can be based on the econometric models or any
of the popular risk-neutral pricing models which are used for pricing credit
derivatives. Most risk-neutral pricing models are transplants of risk-neutral interest
rate pricing models and do not adequately account for the differences between credit
risk and interest rate risk.
Credit risk management models need a dynamic credit risk term structure
model. The reason being that the credit risk models need both the expected return of
each asset as well as covariance matrix of returns. Credit risk models calculate the
credit risky term structure that is the yield curve for the various credit risky assets. It
also calculates the corresponding term structure for the end of the time period as the
distribution of the term structure.
Since the credit spreads do not move independently of one another the credit
risk pricing model, like the asset credit model also has a correlation component.

UTI Bank, Hubli
Depending on the asset in the portfolio it may be possible to economies and combine
this component with previous one.
Market Risk Pricing Model:-
The market risk pricing model is analogous to the credit pricing model, except
that it is limited to assets without credit risk. This component models the change in
the market rates such as credit riskiness. To price all the credit risky assets completely
and accurately it is necessary to have both a market risk pricing model and credit risk
pricing model.
These models are best suited for products such as loans that are most sensitive
to major credit events like credit rating migration including defaults.
Exposure Model:-
This model aggregates the portfolio of assets across lines and legal entities and
any appropriate category. In particular netting across a counter party would take into
account the relevant jurisdictions and its netting news. Without fully aggregating, the
model cannot accurately take into account diversification or the lack of
diversification.
The exposure model also calculates for each asset the appropriate time period,
which roughly corresponds to the amount of the time it would take to liquidate the
asset.
The Organization Responsibility for Risk Assessment:-
The correct credit structure in any business is to have the three basic functions –
risk assessment, sales ledger and cash collection, under the control of credit manager.
Most successful companies put all credit related functions under the control of the

UTI Bank, Hubli
credit manager. The credit manager should be seen by other staff as resolving
customer problems. Risk control does not mean saying ‘no’ to poor risks, just because
the policy allows this. It means looking for ways of saying ‘yes’ i.e., a constructive
attitude and sufficient seniority to be able to make agreements with customers for, say
part deliveries, installments or special credit terms.
Credit Risk:-
The most obvious risk derivatives participants’ face is credit risk. Credit risk
is the risk to earnings or capital of an obligor’s failure to meet the terms of any
contract the bank or otherwise to perform as agreed. For both purchasers and sellers
of protection, credit derivatives should be fully incorporated within credit risk
management process. Bank management should integrate credit derivatives activity in
their credit underwriting and administration policies, and their exposure measurement,
limit setting, and risk rating/classification processes. They should also consider credit
derivatives activity in their assessment of the adequacy of the allowance for loan and
lease losses (ALLL) and their evaluation of concentrations of credit.
There a number of credit risks for both sellers and buyers of credit
protection, each of which raises separate risk management issues. For banks and
financial institutions selling credit protection the primary source of credit is the
reference asset or entity.
Difficulty of measuring credit risk:-
Measuring credit risk on a portfolio basis is difficult. Banks and financial
institutions traditionally measure credit exposures by obligor and industry. They have
only recently attempted to define risk quantitatively in a portfolio context e.g., a

UTI Bank, Hubli
value-at-risk (VaR) framework. Although banks and financial institutions have begun
to develop internally, or purchase, systems that measure VaR for credit, bank
managements do not yet have confidence in the risk measures the systems produce. In
particular, measured risk levels depend heavily on underlying assumptions and risk
managers often do not have great confidence in those parameters. Since credit
derivatives exist principally to allow for the effective transfer of credit risk, the
difficulty in measuring credit risk and the absence of confidence in the result of risk
measurement have appropriately made banks cautious about the use of banks and
financial institutions internal credit risk models for regulatory capital purposes.
Managing credit risk:-
For banks and financial institutions selling credit protection through a credit
derivative, management should complete a financial analysis of both reference
obligor(s) and the counterparty (in both default swaps and TRSs), establish separate
credit limits for each, and assign appropriate risk rating. The analysis of the reference
obligor should include the same level of scrutiny that a traditional commercial
borrower would receive. Documentation in the credit file should support the purpose
of the transaction and credit worthiness of the reference obligor. Documentation
should be sufficient to support the reference obligor. Documentation should be
sufficient to support the reference obligor’s risk rating. It is especially important for
banks and financial institutions to use rigorous due diligence procedure in originating
credit exposure via credit derivative. Banks and financial institutions should not allow
the ease with which they can originate credit exposure in the capital markets via

UTI Bank, Hubli
derivatives to lead to lax underwriting standards, or to assume exposures indirectly
that they would not originate directly.
For banks and financial institutions purchasing credit protection through a
credit derivative, management should review the creditworthiness of the counterparty,
establish a credit limit, and assign a risk rating. The credit analysis of the counterparty
should be consistent with that conducted for other borrowers or trading counterparties.
Management should continue to monitor the credit quality of the underlying credits
hedged. Although the credit derivatives may provide default protection, in many
instances the bank will retain the underlying credits after settlement or maturity of the
credit derivatives. In the event the credit quality deteriorates, as legal owner of the
asset, management must take actions necessary to improve the credit.
Banks and financial institutions should measure credit exposures arising from
credit derivatives transactions and aggregate with other credit exposures to reference
entities and counterparties.
Managing basis risk:-
The purchase of credit protection through credit derivatives may not
completely eliminate the credit risk associated with holding a loan because the
reference asset may not have the same terms and conditions as the balance sheet
exposure. This residual exposure is known as basis risk. For example, upon a default,
the reference asset might lose 25% of its value, whereas the underlying loan could
lose 30% of its value. Should the value of the loan decline more that of default swap
than it loses on the underlying loan. Bonds historically have tended to lose more
value, in default situations, those loans. Therefore, a bank hedging a loan exposure

UTI Bank, Hubli
using a bond as a reference asset could benefit from the basis risk. The cost of
protection, however, should reflect the probability of benefiting from this basis risk.
More generally, unless all the terms of the credit derivatives match those of the
underlying exposure, some basis risk will exist, creating an exposure for the terms and
conditions of protection agreements to ensure that the contract provides the protection
desired, and that the hedger has identified sources of basis risk.
Evaluating counterparty risk
A protection buyer can suffer a credit loss on a default swap only if the
underlying obligor and the protection seller simultaneously default, an event whose
probability is technically referred to as their joint probability of default.
To limit risk, credit – hedging institutions should carefully evaluate the
correlation between the underlying obligor and the protection seller. Hedgers should
seek protection seller counterparties that have the lowest possible default correlation
with the underling exposure. Low default correlations imply that if one party defaults,
only a small chance exists that the second party would also default. For example, a
bank seeking to hedge against the default of a private sector borrow in an emerging
market ordinarily would not by protection from a counterparty in that same emerging
market. Since the two companies may have a high default correlation, a default by one
would imply a strong likelihood of default by the other. In practice, some credit
hedging banks and financial institutions often fail to incorporate into the cost of the
hedge the additional risk posed by higher default correlations. The lowest nominal fee
offered by a protection seller may not represent the most effective hedge. Given
default correlation concerns. Banks and financial institutions that hedge through

UTI Bank, Hubli
counterparties that are highly correlated with the underlying exposures should do so
only with the full knowledge of the risks involved, and after giving full consideration
to valuing the correlation costs.
A portfolio approach to credit risk management:-
Since the 1980s, Banks and financial institutions have successfully applied
modern portfolio theory (MPT) to market risk. Many banks and financial institutions
are now using earnings at risk (EaR) and Value at Risk (VaR) models to manage their
interest rate and market RISK EXPOSURES. Unfortunately, however, even through
credit risk remains the largest risk facing most banks and financial institutions, the
application of MPT to credit risk has lagged.
The slow development toward a portfolio approach for credit risk results for the
following factors:
 The traditional view of loans as hold-to-maturity assets.
 The absence of tools enabling the efficient transfer of credit risk to investors
while continuing to maintain bank customer relationships.
 The lack of effective methodologies to measure portfolio credit risk.
 Data problems
Banks and financial institutions recognize how credit concentrations can
adversely impact financial performance. As a result, a number of sophisticated
institutions are actively pursuing quantitative approaches to credit risk measurement.
While date problems remain an obstacle, these industry practitioners are making
significant progress toward developing tools that measure credit risk in a portfolio
context. They are also using credit derivatives to transfer risk efficiently while

UTI Bank, Hubli
preserving customer relationships. The combination of these two developments has
precipitated vastly accelerated progress in managing credit risk in a portfolio context
over the past several years
Asset – by – asset approach:-
Traditionally, banks have taken an asset – by – asset approach to credit risk
management. While each bank’s method varies, in general this approach involves
periodically evaluating the credit quality of loans and other credit exposures.
Applying a accredit risk rating and aggregating the results of this analysis to identify a
portfolio’s expected losses.
The foundation of thee asset-by-asst approach is a sound loan review and
internal credit risk rating system. A loan review and credit risk rating system enables
management to identify changes in individual credits, or portfolio trends, in a timely
manner. Based on the results of its problem loan identification, loan review and credit
risk rating system management can make necessary modifications to portfolio
strategies or increase the supervision of credits in a timely manner.
Banks and financial institutions must determine the appropriate level of the
allowances for loan and losses (ALLL) on a quarterly basis. On large problem credits,
they assess ranges of expected losses based on their evaluation of a number of factors,
such as economic conditions and collateral. On smaller problem credits and on ‘pass’
credits, banks commonly assess the default probability from historical migration
analysis. Combining the results of the evaluation of individual large problem credits
and historical migration analysis, banks estimate expected losses for the portfolio and
determine provisions requirements for the ALLL.

UTI Bank, Hubli
Default probabilities do not, however indicate loss severity: i.e., how much
the bank will lose if a credit defaults. A credit may default, yet expose a bank to a
minimal loss risk if the loan is well secured. On the other hand, a default might result
in a complete loss. Therefore, banks and financial institutions currently use historical
migration matrices with information on recovery rates in default situations to assess
the expected potential in their portfolios
Portfolio approach:-
While the asset-by-asset approach is a critical component to managing
credit risk, it does not provide a complete view of portfolio credit risk where the term
‘risk’ refers to the possibility that losses exceed expected losses. Therefore, to again
greater insights into credit risk, banks increasingly look to complement the asset-by-
asset approach with the quantitative portfolio review using a credit model
A primary problem with the asset-by-asset approach is that it does not
identify or quantity the probability and severity of unexpected losses. Historical
migration analysis and problem loan allocations are two different methods of
measuring the same variable i.e., expected losses, the ALLL absorbs expected losses.
However, the nature of credit risk is that there is a small probability of very; large
losses.
While banks extending credit face a high probability of a small gain
(payment of interest and return of principal), they face a very low probability of large
losses. Depending, upon risk tolerance, am investor may consider a credit portfolio
with a larger variance less risky than one with a smaller variance if the small variance
portfolio has some probability of an unacceptably large loss.

UTI Bank, Hubli
Credit risk, in a statistical sense refers to deviations from expected losses,
or unexpected losses. Capital covers unexpected losses, regardless of the source;
therefore, the measurement of unexpected losses is an important concern.
One weakness with the asset-by-asset approach is that it has difficulty and
measuring concentration risk. Concentration risk refers to additional portfolio risk
resulting from increased exposure to a borrower or to a group of correlated borrowers.
for example the high correlation between energy and real estate prices precipitated a
large number of failures of banks that had credit concentrations in those sectors in the
mid 1980s.
It is important to understand what diversification can and cannot do for a
portfolio. The goal of diversification in a credit portfolio is to shorten the tail of the
loss distribution: i.e., to reduce the probability of large, unexpected, credit losses.
Diversification cannot transform a portfolio of poor quality asses, with a high level of
expected losses, into a high quality portfolio. Diversification cannot transform a
portfolio of poor quality assets, with a large level of expected losses, into a higher
quality portfolio. Diversification efforts can reduce the uncertainty of losses around
the expectation (i.e., credit risk). But it cannot change the level of expected losses,
which is a function of the quality of the constituent assets. A low quality portfolio will
have higher expected losses than a high quality portfolio. Because all credit risky,
assets have exposure to macro economic conditions, it is impossible to diversify a
portfolio completely. Diversification efforts focus on eliminating the issuer specific
‘unsystematic’ risk of the portfolio. Credit managers attempt to do this by spreading
the risk out over a large number of obligors with as small as possible.

UTI Bank, Hubli
Two important assumptions of portfolio credit risk models are:
 The holding period of planning horizon over which losses are predicted
 How credit losses will be reported by the model.
Models generally report either a default or market value distribution.
The objective of credit risk modeling is to identify exposures that create an
unacceptable risk/reward profile. Such as might arise from credit concentration.
Credit risk management seeks to reduce the unsystematic risk of a portfolio by
diversifying risks. As banks and financial institutions gain greater confidence in their
portfolio modeling capabilities. It is likely that credit derivatives will become a more
significant vehicle in to manage portfolio credit risk. While some banks currently use
credit derivatives to hedge undesired exposures much of that actively involves a
desire to reduce capital requirements.
Future of credit risk management:-
Credit risk management has two basic processes: transaction oversight and
portfolio management. Through transaction oversight, banks and financial institutions
make credit decisions on individual transactions. Transaction oversight addresses
credit analysis , deal structuring, pricing, borrower limit setting, and account
administration. Portfolio management, on the other hand, seeks to identify, measure
and controls risks. It focuses on measuring a portfolio’s expected and unexpected
losses and making the portfolio more efficient.
Credit portfolio managers actively seek to move their portfolios to the efficient
frontier. In practice, they find their portfolios lie inside the frontier. Such portfolios
are ‘inefficient’ because there is some combination of the constituent assets that either

UTI Bank, Hubli
would increase returns given risk constraints, or reduce risk given return
requirements. As banks and financial institutions increasingly manage credit on a
portfolio basis, one can expect credit portfolio to show more market like
characteristics: e.g., less direct borrower contact, fewer credit covenants and less non-
public information. The challenge for banks and financial institutions portfolio
managers will have to obtain the benefits of diversification and use of more
sophisticated risk management techniques, while preserving aspects of traditional
credit management techniques.
ANALYSIS OF THE FINANCIAL STATEMENT
Financial statements and reports are the tools which provide information of
the firm’s financial affairs. This information is required for financial analysis &

UTI Bank, Hubli
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 are:
 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.

UTI Bank, Hubli
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 firm’s obligation. It assists in estimating earning
potential of the firm.
Profit and Loss account:-
Meaning:
Profit and loss account is one of the essential documents which show 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 firm’s revenue and expenses during the
particular period.
 It measures the firm’s 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:-

UTI Bank, Hubli
 There are no standard formulas 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
Types of Methods Lending for Assessment of Working Capital:
The following methods are used for assessment of working capital limits
based on the quantum of finance to be provided and also the nature of activity.
1. Maximum Permissible Bank Finance (MPBF) System
(Tandon committee)
2. Turnover method (Nayak Comitee Recommendations)
3. Cash Budget System (Chore Committee Recommendation)
Note: After taking into consideration and examining the following factors and if
they are found satisfactory then Banks will adopt any of the above 3 methods to
compute Working Capital.
1. MPBF System:
This system is applicable for borrowers enjoying WC limits of over
Rs.2Crores & upto Rs.25Crores
Certain norms for holding of Current Assets were laid down by the Tandon
Committee for the purpose of financing Working Capital requirements of the firms by
Banks. Although banks are no longer bound by the industry-wise norms for holding of

UTI Bank, Hubli
current assets as originally prescribed by the Tandon Committee, and as subsequently
enlarged and revised by the RBI from time to time, it must be said that the Tandon
committee will go down in the history of Indiana Banking as the first attempt to
reorient the technology of bank lending in India. The methodology recommended by
it continues to govern and shape the lending operations not only of commercial banks
but also of other Financial Institutions engaged in these activities.
A study group under the Chairmanship of Mr. P.L.Tandon, the then Chairman
and MD of Punjab National Bank, was formed in July 1974 to examine in depth the
pattern and mode of financing of commercial banks and suggest changes in the
existing methods of credit appraisal and administration to ensure judicious allocation
of scarce resources of banks. The essences of the Committee’s recommendations were
to finance only a portion of the borrower’s working capital requirement and not the
whole of it. With this point of view, the committee suggested three alternatives for
working out permissible levels of bank borrowings. Of the three methods of lending,
the third method was never put into practice. The second methods of lending continue
to dominate the lending decisions of commercial banks. All the three methods are
discussed below:
Method of Computation:
All the three methods begin with computation of working capital as given
below:
Total Current Assets (A) ------
Less: Current Liabilities other than Bank Borrowings (B) ------
Working Capital Gap (C=A-B) ------
Method 1:

UTI Bank, Hubli
Under this method, 75% of this working capital gap would be financed by the
Bank, which was called Permissible Bank Finance, and the remaining 25% would
have to be financed from the long-term resources of the borrower. (25% of C).
Method 2:
In this method, the borrower would be required to finance 25% of the total
current assets (not of working capital gap) from long-term sources. (25% of A).
Method 3:
In the third method, PBF should be calculated in the same manner as in the second
method, but after deducting core current asset from the total current assets. Core
current assets were to be financed from the long-term funds of the borrower.
(According to Tandon committee, “core” current assets refer to the absolute minimum
level of raw material, process stock, finished goods and stores that are in the pipeline,
so to speak, to ensure a continuity of production).
2. Turnover Method (Nayak Committee recommendations):

Apart from the methods discussed above, there is yet another way of assessing
working capital requirements up to Rs2Crores (Rs.5Crores in case of SSI Units),
which is based on turnover normally adopted by banks in case of those borrowers
coming under small and medium units. As per the guidelines issued by RBI, such
units may be provided working capital limits by banks on the basis of a minimum
20% of their projected annual turnover for new as well as existing units. Borrowers
would be required to bring 5% of their annual turnover as margin money. In other
words, 25% of the output value should be computed as working capital requirement of
which at least 1/5th (5% of projected turnover) should be brought by the borrowers
towards margin for the working capital.
This is explained by following illustration:

UTI Bank, Hubli
Projected accepted annual Turnover Rs.20Lakhs

Working Capital requirement 25% of the above Rs.5Lakhs
Margin to be provided by the party (5%) Rs.1Lakh
Bank finance for Working Capital (20%) Rs.4Lakhs
 As the WC requirements are linked to projected turnover, banks should
satisfy themselves about the reasonableness of the projected annual turnover
of the applicant. This should be done with reference to the past performance
of the units, as reflected in the audited financial statements, the orders on
hand, installed capacity of the units, power, availability of raw materials &
other inputs & infrastructure facilities.
 In the case of new units, banks should ensure that the projections made are
realistic by analyzing the installed capacity, availability of infrastructure
facilities, marketability of the product & performance of similar units in the
industry, background of the promoter, etc., & such other factors relevant to a
particular unit.
 In cases where actual performance of the unit exceeds the projected level
accepted by the bank the assessed WC is found to be adequate, the banks
should reassess the WC needs of the units & additional limits should be
permitted in tune with the actual requirements of the unit.
 The assessment of WC credit limits should be done both as per projected
turnover basis and traditional methods based on production/processing cycle
(MPBF). The projected turnover/output value is the ‘gross sales’, which will
include excise duty also.

UTI Bank, Hubli
 At least 1/5th of the WC requirement should be brought in by the party of Net
WC (Margin). However, if the available NWC is more, the same should be
reckoned for assessing the extent of bank finance & lower limits can be
considered. In the case of traders, while bank finance could be assessed at 20
% of the projected turnover, the actual drawals should be allowed on the
basis of drawing power determined after deducting unpaid stocks.
 The minimum CR for extending any credit facilities shall not be below 1. If
the CR is below 1, the sanctioning authority may renew the limits for 1 year
that is renewal of the existing limits can be done as a one-time measure at
the time of renewal of limits. If however, the CR does not reach the level of
1 during the next renewal, proposals shall have to be referred to the next
higher authority.

UTI Bank, Hubli
3. Cash Budget System:
 The competitive banking environment calls for adopting methods of
assessments appropriate to meet the needs of borrowers.
 In the case of borrowers enjoying/requiring credit facilities of over Rs.25
crore, the same can be assessed on the basis of Cash Budget system or
MPBF system at the option of the borrowers.
 However, in the case of specific industries/seasonal activities such as
software export, construction activity, tea and sugar, normally, the system of
assessment based on the cash budget may be adopted. Further, in the case
of specific industries like tea, wherever for specific reasons, the borrower
opts to avail the Working Capital facility under MPBF system; the respective
sanctioning authority may permit the same.
Other statements
1) Cash Flow and Fund Flow Statement
2) Break Even Analysis

UTI Bank, Hubli
CREDIT RISK MANAGEMENT WITH REFERENCE TO UTI

BANK HUBLI
Definition to Credit Risk Management
Of all different types of risk that a bank is subject to credit risk can be defined
as the risk of failure on the part of the borrower to meet obligations towards the bank
in accordance with the terms and conditions that have been agreed upon. Inability and
or / unwillingness of the borrower to repay debts may be the cause of such default.
The bank aims at minimizing this risk that could arise from individual
borrower or the entire portfolio.
Credit Risk Management becomes even more relevance in the light of the
changes that have been brought about in the economic environment including
increasing competition and lending spreads on both side as of bank.
Determinants of credit risk:-
Factors determine credit risk of banks portfolio can be divided into two
1. External Factor
2. Internal Factor
1. External: - It will not control bank depend upon macro environment.
2. Internal: - These factors can be controlled by bank making internal policies
and process of the bank. Like loan policies, appraisal policies, monitoring
system etc.

UTI Bank, Hubli
Introduction of Credit Tool:-
The bank has developed tools for better credit risk management. The tools on
areas of rating of corporate (pre sanction of the loan), monitoring of loans (post
sanction).
Credit rating
Definition:-
Credit rating is the process of assigning a letter rating to borrower indicating
that creditworthiness of the borrower.
Rating is assigned based on the ability of the borrower (company). To repay
the debt and his willingness to do so. The higher rating of company the lower the
probability of its default.
Use of Credit Rating in decision making:-
Credit rating helps the bank in making several key decisions regarding credit
including
1. Whether to lend to a particular borrower or not; what price to charge?
2. What are the products to be offered to the borrower and for what tenure?
3. at what level should sanctioning be done
It should however be noted that credit rating is one of inputs used in credit
decisions.
There are various factors (adequacy of borrowers, cash flow, collateral provided,
and relationship with the borrower)
Probability of the borrowers default based on past data.

UTI Bank, Hubli
Main features of the rating tool:-
 comprehensive coverage of parameters
 extensive data requirement
 mix of subjective and objective parameters
 includes trend analysis
 13 parameters are benchmarked against other players in the segment
 captions of industry outlook
 8 grade ratings broadly mapped with external rating agencies prevail data.
Rating tool for SME:-
Internal credit ratings are the summary indicators of risk for the bank’s
individual credit exposures. It plays a crucial role in credit risk management
architecture of any bank and forms the cornerstone of approval process.
Based on the guidelines provided by Boston Consultancy Group (BCG), UTI
Bank adopted credit rating tool.
The rating tool for SME borrower assigns the following Weightage to each
one of the four main categories i.e,
i. scenario (I) without monitoring tool
S No parameters Weightage (%)

1 financial performance XXXX
2 operating performance XXXX
3 quality of management XXXX
4 industry outlook XXXX
ii. Scenario (II) with monitoring tool [conduct of account]:- the weightage would be
conveyed separately on roll out of the tool.

UTI Bank, Hubli
In the above parameters first three parameters used to know the borrower
characteristics. In fourth encapsulates the risk emanating from the environment in
which the borrower operates and depends on the past performance of the industry its
future outlook and macro economic factors.
Parameters used in SME tool:
1. Financial performance:-this parameter used for rating borrower on its
financial strength. In this using various sub parameters what risk being faced
by the company in different areas.
2. Operating performance of business: - in this there are various sub
parameters the efficiency of generation of the cash for repayment of its debt
obligation. And the primary activity goes like.
3. Quality of management: - using this parameter direct impact on the
performance of the company and also direct impact on the integrity of the
borrower especially in terms of its willingness to repay its debt.
4. Industry outlook: - in order to undertake the credit rating of any borrower.
It is important to assess the riskiness of the industry to which that borrower
belongs risk.
Risk Managements (SME):- Rating Grade
 highest safety
 high safety
 adequate safety
 moderate safety
 inadequate safety
UTI Bank, Hubli
 high risk prove
 substantial risk
 default
For above after giving rating of parameters based on that rating grade will give
Financial Performance:-
S No Sub parameters Weightage
(in %)
1 Net sales growth rate (%) xxxx
2. PBDIT Growth rate (%) xxxx
3. PBDIT /Sales (%) xxxx
4. TOL/TNW xxxx
5. Current ratio xxxx
6. Operating cash flow xxxx
7. DSCR xxxx
8. Foreign exchange ratio xxxx

9. Expected values of D/E of 50% of NFB credit xxxx
devolves
10. Reliability of Debtors xxxx
11. State of export country economy xxxx
12. Fund deputation risk xxxx
Total xxxxxx
Operating Performance of Business:-

S No Sub parameters Weightage
(%)
1. credit period allowed xxxx
2. credit period availed xxxx
3. working capital cycle xxxx
4. tax incentives xxxx
5. production related risk xxxx
6. product related risk xxxx
7. price related risk xxxx
8. client risk xxxx
9. fixed asset turnover xxxx
Total xxxxxx

UTI Bank, Hubli
Quality of Management:-
S No sub parameters Weightages
(%)
1. HR Policy / Track record of industrial unrest xxxx
2 market report of management reputation xxxx
3 history of FERA violation / ED enquiry xxxx
4 Too optimistic projections of sales and other xxxx
financials
5 technical and managerial expertise xxxx
6 capability to raise money xxxx
Total xxxxxx

UTI Bank, Hubli
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 Rs. 100 lakhs

For establishment Rs. 75 lakhs
For term loan Rs. 25 lakhs
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:-

UTI Bank, Hubli
 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.

UTI Bank, Hubli
Credit officer has to consider the financial statements and reports which
produce information of the firm’s 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
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 sectors, 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.

UTI Bank, Hubli
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 existing customer and from the other bank where the borrower is
customer of that bank regarding creditworthiness and repayment capacity of the
borrower and also taken a legal opinion from advocate and also consider the collateral
securities.
If satisfied above criteria next important part of the bank is to do credit rating
where it is one of the inputs to better credit risk management which is calculated
mainly by following parameters.

UTI Bank, Hubli
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 company’s
rating.
In below calculation for using 5 financial statements for financial performance sub
parameters and operation in business.
PQR PHARM AGENCY
Particulars 31.3.2002 31.3.2003 31.3.2004 31.3.2005 31.3.2006

UTI Bank, Hubli
(Aud.) (Aud.) (Aud.) (Prov) (Esti)

Net sales
148.41 273.54 160.84 322.24 442.98 2.171282
PBDIT
4.00 10.00 6.98 10.99 12.37 2.7475
PBDIT/Sales
(%) 2.70 3.66 4.34 3.41 2.79
Profit before
tax 0.18 0.31 1.42 5.28 7.41
Profit after tax
0.18 0.31 1.42 5.28 7.41
Depreciation
0.83 0.42 0.73 0.55 0.46
Cash accruals
1.01 0.73 2.15 5.83 7.87
Net profit/
sales (%) 0.12 0.11 0.88 1.64 1.67
Paid up capital
7.63 11.02 4.84 9.05 14.97
Reserves
0.00 0.00 0.00 0.00 0.00
Quasi Equity
21.96 14.32 30.16 23.93 44.86
TNW
29.59 25.34 35.00 32.98 59.83
TOL
54.51 36.36 41.73 42.69 127.44
TOL/
(TNW+QE) 1.84 1.43 1.19 1.29 2.13
TNW-QE
7.63 11.02 4.84 9.05 14.97
TOL/TNW(No
QE) 7.14 3.30 8.62 4.72 8.51
Current Assets
80.04 57.95 67.44 71.42 183.22
Current
Liabilities 54.51 36.36 41.73 25.48 107.45
Current ratio
1.47 1.59 1.62 2.80 1.71
Credit allowed
(Days) 107.03 33.47 80.29 34.11 72.82
Credit availed
(Days) 56.32 18.88 38.03 26.92 45.88
Debtors*
43.52 25.08 35.38 30.11 88.38
Purchase
173.36 251.12 237.27 311.68 461.61
Creditors*
26.75 12.99 24.72 22.99 58.03
Inventories
33.60 28.59 31.42 40.75 82.93
Working
Capital Cycle 1.92 5.10 2.41 4.55 2.59
* Note: Debtors and creditors need to be the average of last year and
current year
Ratios are based on

31.3.2005 audited
financial statements.
UTI Bank, Hubli
Sales Growth 29.49

Pbdit Growth 40.06
Pbdit/Sales 3.41
Current Ratio 2.80
TOL/(TNW+QE) 1.29
Working capital Cycle 4.55
Credit allowed 34.11
Credit availed 26.92
TOL/TNW 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 31-3-05 / net sales of year 31-3-02
= 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 borrowers 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 31-3-05 / PBDIT of 31-3-2005 = 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 year’s PBDIT to PBDIT of 3
years
.
3) PBDIT / Sales
= (PBDIT / Net sales) * 100
= PBDIT of year 31-3-05 / net sales of year 31-3-05 * 100
UTI Bank, Hubli
= 10.99 / 322.24 * 100

= 3.49Created on 6/21/2006 11:01 AM
This ratio indicates the operational efficiency. if the percentage of sales is higher it
indicates the positive results.
4) Current ratio
= current assets / current liability
= current assets for the year 31-3-05 / current liability for the year 31-3-05
= 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.
5) 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.
6) Working capital cycle

=Net sales for year 31-3-2006 / Debtors for year 31-3-05 + inventories for year 31-3-
05
= 322.24 / 30.11 + 40.75 = 4.55
This ratio indicates the capacity of the firm to convert the inventories into cash and it
indicates the efficiency of the sales of the firm.

UTI Bank, Hubli
7) 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.
8) 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

UTI Bank, Hubli
banker to know the applicable interest rate and amount to be lent based on the credit
rating scores.
FINDINGS
 UTI Bank is existing for past 13 years and in Hubli for past 4 years
successfully and it got more market share in various deposits and services as
compared with other private banks and even nationalized banks.
 UTI Bank is having wide network of 450 branches 1891 ATMs
 UTI Bank is growing at a rate of 53% yearly
 UTI is providing it’s customers for services like
i. Consumer banking
ii. Corporate banking
iii. NRI service
iv. Treasury
v. Retail loans
 UTI is the first bank in the banking sector which provides government
business services.
 UTI also lending the targeted 3 segments namely
i. Large corporate
ii. Agriculture business
iii. SME
 In SME sectors UT looks of after 5 parameters for credit rating for risk
management in SME sector as are

UTI Bank, Hubli
i. Financial performance
ii. Operating performance of business
iii. Quality of management
iv. Industry outlook
v. Code account
 UTI Bank adopted BCG (Boston Consultancy Group) Model for credit
rating
Conclusion:-
Though banking sector has coin to coin competition UTI bank is providing a
satisfied service to their customers and with the latest technology and software’s as
well as the new strategies, UTI is coming up with new products keeping in mind
about customers as a lay man and providing service to them , it is growing rapidly.
SME sector is one of the important sectors as if we could see before also and
now too, it is the one sector which is providing the most employment to people.
In such a liberalized environment could not give competition to MNC’s nor to
their technology when time came to the dissolution of small SME’s to keep their SME
existed for day to day life , the loan taken from bank , for expansion of their business.
For such existence, UTI bank also plays an important role and provides credit
facilities to SME. And in such thing the risk is the most to over come this through the
technology , risk rating is been done to give such credit risk rating for that UTI bank
has different parameters they are namely
 financial performance
 operating performance of business

UTI Bank, Hubli
 quality of management
 industry out look
 code of conduct
For above parameters each has so many sub parameters for each sub parameters
according to those importance weightage has given after considering these sub
parameters weightage it will put on according to respective main parameters after
considering main parameters overall rating considered finally rating will give based
final rating whether to bank lend to particular borrower and what rate of interest
charge
Finally I conclude that in this esteemed organization I got exposed to credit risk
management in SME sector
Limitation of the study
 Study is only concentrated on SME Small and Medium Enterprise..
 Constraints to get access to employees for information due to their busy
schedule.
 Time constraint to study the fundamental of Credit Risk Management, and its
nature

UTI Bank, Hubli
Bibliography
Books
 Risk Management published by financial institutions
 Risk Assessment and credit Appraisal by Mukherji
 Bank’s information and case study
Websites
 www.google.com
 www.infoline.com
 www.utibank.com

Uti Bank

Încărcat de

Informații document

Titlu original

Drepturi de autor

Formate disponibile

Partajați acest document

Partajați sau inserați document

Opțiuni de partajare

Vi se pare util acest document?

Este necorespunzător acest conținut?

Drepturi de autor:

Formate disponibile

Uti Bank

Încărcat de

Drepturi de autor:

Formate disponibile

UTI Bank, Hubli

department, how they work and achieve their objectives.

more profit on their capital.

how these will calculate by using two case analysis.

BLDEA’s ASP College of Commerce. MBA Program, Bijapur. 1

AIMS AND OBJECTIVES

 To assess the effectiveness of these risk management activities

 To know credit policy adapting bank

 To gain corporate exposure

 To get exposed to all the departments of the Bank

Location of the study: UTI bank Hubli branch

Duration of the Study: 60 days.

BLDEA’s ASP College of Commerce. MBA Program, Bijapur. 2

collecting information are using two sources of data namely

The method which was adopted to collect the information is ‘Personal

The other primary data collected are

o Product and service details.

o Various Text books were used to understand the concepts of portfolio

o Websites – Various sites like www. sharekhan.com

o Newspapers such as Economic Times, Financial Express.

o Magazines such as Business World, Business Today, Investors Guide,

INTRODUCTION TO UTI BANK

Crores with the public holding (other than promoters) at 72.28 %.

The Bank's Registered Office is at Ahmedabad and its Central Office is

banking and is committed to adopting the best industry practices internationally in

order to achieve excellence.

BLDEA’s ASP College of Commerce. MBA Program, Bijapur. 4

contributing Rs. 1.5crore each.

The members of the Board are:

Dr. P. J. Nayak Chairman & Managing Director

 Customer Service and Product Innovation tuned to diverse needs of individual

and corporate clientele.

 Continuous technology up gradation while maintaining human values.

 Progressive globalization and achieving international standards.

BLDEA’s ASP College of Commerce. MBA Program, Bijapur. 5

 Efficiency and effectiveness built on ethical practices.

 Customer Satisfaction through

o Providing quality service effectively and efficiently

o Smile, it enhances customers ‘face value" is a service quality stressed

o Periodic Customer Service Audits

 Maximization of Stakeholder value

 Success through Teamwork, Integrity and People.

Bankers' Fair Practice Code

About this code

individual customers. It provides valuable guidance to customer for their day-to-

day operations. The Code applies to:

-current, savings and all other deposit accounts

-pension, PPF accounts etc. operated as agents of RBI/Government

-collection and remittance services offered by the banks

-loans and overdrafts

BLDEA’s ASP College of Commerce. MBA Program, Bijapur. 6

-third party products offered through our network.

1.2 As a voluntary Code, it promotes competition and encourages market forces to

achieve higher operating standards for the benefit of customers.

through interactive electronic devices, on the internet or by any other method.

Commitments outlined in this Code are applicable under normal operating

commitments under this Code.

Bank’s key commitments to customers

Bank promise to customers that;

-explaining their financial implications and

-helping them choose the one that meets their needs.

c) Deal quickly and sympathetically with things that go wrong by:

-correcting mistakes quickly