STUDYING RISK MANAGEMENT IN THE KAPURTHALA CENTRAL CO-OPERATIVE BANK

By- SATWINDER SINGH 7210070005 RQ2701B47

RESEARCH METHODOLOGY

The research methodology used is the Descriptive Research. Descriptive research, also known as statistical research, describes data and characteristics about the population being studied.

DATA COLLECTION
1.

2.

Primary Data- It was collected through semistructured interview, held with the Finance Manager and Senior manager in presence of the other officials of The Kapurthala central cooperative Bank Limited. Secondary Data- It was collected from the published annual reports of the central cooperative Bank and by reading various books on Credit Risk Management , and relevant Websites.

SCOPE OF THE STUDY

The main reason to select RISK MANAGEMENT as a topic is to understand the importance of the Role played by risk management department and/or practices when the bank lends money to its borrowers.

Objective of Study
Understanding risk management conceptually. Studying the various credit risk management techniques of public sector bank. Understanding the importance of the credit risk management and how useful it is to the public sector banks and how it benefits them in various ways. SECONDARY OBJECTIVE Studying the difference between retail credit management and credit risk management practiced by public sector banks.

INTRODUCTION TO RISK MANAGEMENT

Any activity involves risk, touching all spheres of life, whether it is personal or business. Any business situation involves risk. To sustain its operations, a business has to earn revenue/profit and thus has to be involved in activities whose outcome may be predictable or unpredictable. There may be an adverse outcome, affecting its revenue, profit and/or capital. However, the dictum No Risk, No Gain hold good here.

WHAT IS RISK MANAGEMENT?

The standard definition of management is that it is the process of accomplishing preset objectives; similarly, risk management aims at fulfilling the same specific objectives. the process of identification, measurement, monitoring and control of its activities becomes paramount under risk management.

DEFINING RISK

The word RISK is derived from the Italian word Risicare meaning to dare. The four letters comprising of the word RISK define its features. R = Rare (unexpected) I = Incident (outcome) S = Selection (identification) K = Knocking (measuring, monitoring, controlling)

TYPES OF RISKS
The risk profile of an organization/banks may be reviewed from the following angles: 1. Business risks: Capital risk Credit risk Market risk Liquidity risk Business strategy and environment risk Operational risk Group risk

2. Control risks: Internal Controls Organization Management (including corporate governance) Both these types of risk, however, are linked to the three basic risk categories listed below: Credit risk Market risk Organizational risk

CREDIT RISK MANAGEMENT

According to the Basel Committee, Credit Risk is most simply defined as the potential that a borrower or counter-party will fail to meet its obligations in accordance with agreed terms. The Reserve Bank of India (RBI) has defined credit risk as the probability of losses associated with diminution in the credit quality of borrowers or counter-parties. Credit risk management is sub divided as 1. Credit risk Identification 2. Credit risk Measurement 3. Credit risk Monitoring and Control 4. Credit risk Mitigation

THE CREDIT RISK MANAGEMENT PROCESS OF THE BANK

The risk management process has four components: 1. Risk Identification :-While identifying risk bank is keeping, the following points in mind: All types of risks must be identified and their likely effect in the short run is understood. The magnitude of each risk segment may vary from bank to bank. 2. Risk Measurement : Directing the efforts of the bank to mitigate the risks according to the harms of a particular risk factor to the bank. Taking appropriate initiatives in planning the banks future threat areas and line of business and capital allocation. The systems/techniques used to measure risk depend upon the nature and complexity of a risk factor.

THE CREDIT RISK MANAGEMENT PROCESS OF THE BANK (cont..)

3. RISK MONITORING :- Risk monitoring activity of the bank ensure the following: Each operating segment has clear lines of authority and responsibility. Whenever the organizations principles and policies are breached, even if they may be to its advantage, must be analyzed and reported, to the concerned authorities to aid in policy making. In the course of risk monitoring, if it appears that it is in the banks interest to modify existing policies and procedures, steps to change them should be considered.

THE CREDIT RISK MANAGEMENT PROCESS OF THE BANK(cont..)

4. RISK CONTROL :- There are appropriate mechanism to regulate or guide the operation of the risk management system in the entire bank through a set of control devices i.e there risk management committee. Assessing risk profile techniques regularly to examine how far they are effective in mitigating risk factors in the bank. Analyzing internal and external audit feedback from the risk angle and using it to activate control mechanisms.

CREDIT RISK MANGEMENT TECHNIQUES OF THE BANK

Risk taking is an integral part of management in a bank. For example, if a particular bank decides to lend only against its deposits, then its margins are bound to be very less indeed. However the bank may also not be in a position to deploy all its lendable funds, since obviously takers for loans will be very and occasional. As a result banks income will be low and its growth zero. The basic techniques of an ideal credit risk management culture are: Certain risks are not to be taken even though there is the likelihood of major gains or profit, like speculative activities.

CREDIT RISK MANGEMENT TECHNIQUES OF THE BANK(cont..)

Transactions with sizeable risk content should be transferred to professional risk institutions. For example, advances to small scale industrial units and small borrowers should be covered by the Deposit & Credit Insurance Scheme in India. Similarly, export finance should be covered by the Export Credit Guarantee Scheme, etc. The other risks should be managed by the institution with proper risk management architecture.

FORMS OF CREDIT RISK

The RBI has laid down the following forms of credit risk: Non-repayment of the principal of the loan and /or the interest on it. Contingent liabilities like letters of credit/guarantees issued by the bank on behalf of the client---- amount not deposited by the customer. In the case of treasury operations, default by the counter-parties in meeting the obligations. In the case of securities trading, settlement not taking place when its due.

COMMON CAUSES OF CREDIT RISK SITUATIONS FOR BANK

For any organization, especially one in bankingrelated activities, losses from credit risk are usually very severe and not rare. It is therefore necessary to look into the causes of credit risk. Broadly there are three sets of causes, which are as follows: CREDIT CONCENTRATION i.e. looking financial information of the person(capital base, tangible assets) CREDIT GRANTING AND/OR MONITORING PROCESS proper monitoring of lended money to customer(usage of money) CREDIT EXPOSURE IN THE MARKET AND LIQUIDITY SENSITIVITY SECTORS. Loss to banks fund due to market ups and downs

CREDIT RISK IN NON-PERFORMING ASSETS

Non-performing assets (NPAs) ---- known as nonperforming loans (NPLs) in many banks ------ are generally the outcome of ineffective or faulty credit risk management by a bank. WHY NPA IS A MATTER OF CONCERN TO BANKS? Funds remain sunk without any returns in terms of cash flows. The credit cycle of banks gets chocked up causing liquidity constraints. Recycling of funds is affected.

MANAGEMENT OF RISK AT THE KAPURTHALA CENTRAL COOPERATIVE BANK

Risk is an inherent part of The Kapurthala Central Cooperative Bank business, and effective Risk Compliance & Audit Group is critical to achieving financial soundness and profitability. With different policies and procedures in place, The Kapurthala Central Cooperative Bank identifies, assess, monitors and manages the principal risks: Credit risk Market Risk Operational risk

MANAGEMENT OF RISK AT THE KAPURTHALA CENTRAL COOPERATIVE BANK (CONT..)

Credit risk, the most significant risk faced by The Kapurthala Central Cooperative Bank, is managed by the Credit Risk Compliance & Audit Department (CRC & AD) which evaluates risk at the transaction level as well as in the portfolio context. The industry analysts of the department monitor all major sectors and evolve a sectoral outlook, which is an important input to the portfolio planning process.

MANAGEMENT OF RISK AT THE KAPURTHALA CENTRAL COOPERATIVE BANK (CONT..)

The functions of this department include: 1. Review of Credit Origination & Monitoring:- to see credit ratings of different cos. 2. Design appropriate credit processes, operating policies & procedures. 3. Portfolio monitoring:- to measure the portfolio risk. 4. Focused attention to structured financing deals:- new product approval policy and monitoring. 5. Monitor adherence to credit policies of

MANAGEMENT OF RISK AT THE KAPURTHALA CENTRAL COOPERATIVE BANK (CONT..)

CREDIT RATING BY BANK :- Bank is having a comprehensive risk scoring/rating system that serves as a single point indicator of diverse risk factors of a borrowers and for taking credit decisions in a consistent manner. A substantial degree of standardization is required in ratings across borrowers. The agency also needs to design appropriate measures for various grades of credit at an individual level or at a portfolio level. These grades may generally be any of the following forms: Alphabet: AAA, AA, BBB, etc. Number: I, II, III, IV, etc.

MANAGEMENT OF RISK AT THE KAPURTHALA CENTRAL COOPERATIVE BANK (CONT..)

CREDIT AUDIT :- Credit audit is defined as the process of examining and verifying credit records from the viewpoint of compliance with laid down policies, system procedures for the payment of credit and their monitoring. This covers the following Portfolio review: Examining the quality of credit and investment (quasi-control) portfolio and suggesting measures for improvement. Loan review: Review of the sanction process and status of post-sanction process/procedures.

MANAGEMENT OF RISK AT THE KAPURTHALA CENTRAL COOPERATIVE BANK (CONT..)

Action points for review: Verifying compliance with the banks policies and regulatory compliance with regard to sanction. Examining the adequacy of documentation. Conducting the credit risk assessment. Frequency of review: The frequency of review varies depending on the magnitude of risk (say, three months for high risk accounts, and six months for average risk accounts, one year for low-risk accounts).

ANALYSIS

Managing credit risk is of utmost importance as it helps the banks to reduce the risk of NPAs (Non Performing Assets). Any venture taken by any body today involves a certain amount of risk today. Without risk there can be no gain. As far as the banking industry goes, one of their main aims is giving loans (credit) to individuals and corporate for personal as well as personal needs. Credit risk is closely related with the business of lending. This comprises a huge percentage of their business.

(Cont)

The credit risk management function has become the centre of gravity, especially in a financially in services industry like banking. Moreover they are now using it as a tool to succeed over their competition because credit risk management practices reduce risk and improve return on capital. Further a fact that was brought out and discussed in the interviews was that in the corporate loans the banks were not very hesitant to give loans to most of the companies because the economy as a whole is doing well and thus all the sectors and industries also.

CONCLUSION

The bank although having its risk management committee to managing the various risk especially credit risk yet it has wide range of Npas which is still uncovered. Due to which its working is very much effected. As this bank mainly deals with the agriculture sector of the society and no. of the defaults are by that only. No new recruitment is there in the bank and some employees dont even know to use computer in a well advanced ways.

CONT

Bank is lacking in CBS ( centralized banking solution)system. In this they dont have any online functioning of the bank. Due to which work load on the employees is much as they have to put each and every transaction manually and also they have to keep big bundles of registers for keeping the records. Bank is mostly focusing on the credit risk only and not on the other forms of the market risk and operational risk. As bank dont have its website much useful and knowledgeable data about the credit risk was gathered from the semi-formal type personal interview with the Senior manager and Finance manager of the bank.

BENEFITS OF CREDIT RISK MANAGEMENT

The stakeholders----especially shareholders, depositors (in the case of banks) and the government---- are the beneficiaries since the economic and social costs of poor credit risk practices strengthens the confidence in the operation of the organization concerned, besides enabling systematic peer-level analysis and comparison. It is also a fact that such practices facilitate forward-looking assessment, aided by the tools of stress testing, credit VaR, etc. The end result is certainly enhanced investor confidence and returns.

RECOMMENDATIONS

Establishment of an appropriate credit risk environment/ culture. This should operate under a sound and independent credit approval process. Maintaining appropriate credit administration, measurement and monitoring processes. Ensuring adequate controls over credit risk. Awareness of the implications of other forms of risk, such as market risk and operational risk.

LIMITATIONS OF THE STUDY

Reluctance and resistance on the part of the interviewees (public sector bank ) to share information as they considered it as confidential. Visiting all public sector banks was not possible. Banks have certain rules and regulations for credit giving process.