A Project Report

On

Analysis Of Credit Risk

Submitted to : Submitted by :
Dr.Bibhu Sahoo Abhishek Shukla 20100103
Nitin Kumar 20100116
Prakhar Nigam 20100117
Rajiv Kumar 20100118
Saptarshi Roy 20100122
 ACKNOWLEDGMENT

I would like to take this opportunity to extend my heartfelt gratitude to

all those who have made this project a possibility and have guided me at
every stage of this project.

I owe enormous intellectual debt to Mr. Bibhu Sahu Project Guide who
has augmented my knowledge in the field of Finance and for lacing his
confidence in us. Giving me this opportunity and for his valuable
contribution to the project.
 INTRODUCTION
Banking industry has revolutionized the transaction and financial
services system worldwide. Banking Industry services is nothing but the
access of most of the banking related services (Such as verification of
accounts details, going with the transactions etc.) In today’s world,
progress of online services is available to all the customers of the
concerned bank and can accessed at any point of time and from
anywhere provided the place is equipped with the internet facility. Now-
a-almost all the banks all over the world, especially the multinational
ones, provide their customers with online banking facilities.
The Indian Banking Industry can be categorized into-

a) Non Scheduled Banks

b) Scheduled Banks

Scheduled Banks constitute banks and co-operative banks. There are

about 67,000 branches of scheduled banks spread across India. During
the first phase of financial reforms, there was a nationalization of 14
major banks in 1969. This crucial step led to a shift from Class banking
to Mass Banking. Since.
As far as the present scenario is concerned the banking industry is in a
transition phase. The public Sector Banks (PSBs), which are the
foundation of the Indian system account for more than 78 percent of the
total banking industry assets. Unfortunately they are burdened with the
excessive Non-Performing Assets (NPAs) massive manpower & lack of
Modern Technology.
On the other hand the Private Sector Banks in India are witnessing
immense progress. They are leaders in Intent banking, mobile banking,
phone Banking ATMs. On the other hand Public Sector Banks are still
facing the problem of unhappy employees. There has been a decrease of
20 percent in the employee strength of the private sector in the wake of
the Voluntary Retirement Schemes (VRS). As far as foreign banks are
concerned they are likely to succeed in Indian.
Indus land bank was the first private bank to set up in India. IDBI, ING
Vyasa Banks, SBI Commercial and International Bank Ltd. Karur Vysya
Bank Ltd. Bank of Rajasthan etc.

About Standard Chartered Bank

Standard Chartered has a long and proud history in South Asia, In
1858 in established its first branch opening in Kolkata- then the most
important commercial city in India and the center of the jute and indigo
trades. It have gone on to become the largest international bank in India
in terms of branch network and profits.

Today its number many of the emerging Indian multinationals amongst

our clients and are expanding our strategic and advisory capabilities to
keep pace with their financial needs and understanding of the evolving
needs of our clients.
This is backed by our strong capabilities across all product segments
with a particular regional emphasis on convertible bonds and commodity
derivatives, as well as project and asset backed finance, and cross-border
M&A business.

Standard Chartered have 83 branches in India and 17 in New Delhi

were we assign our project, it has a presence in Bangladesh, Nepal and
Sri Lanka.

Overview of Standard Chartered Bank

Standard Chartered Bank has deep roots and a long heritage in

international banking. Have an extensive history in some of the world’s
most dynamic and fast-growing markets, such as Asia and the Middle
East. No one has a better understanding of the wealth management needs
of clients across these markets.

Standard Chartered—a financial services giant—has top credit ratings

and a 150 year history in banking with a long term commitment and
financial investment in the Private Bank. The Standard Chartered
Private Bank offers a full ranges of customized wealth management
products and services, including those offered by our award - wining
commercial bank. In use a broad architecture approach to investment
management to bring you some of the world’s leading money managers
and financial products.
Products & Services

In Standard Chartered Private Bank, Clients will receive individual

attention from Private Banker who works with Investment, Fiduciary,
Credit and Treasury specialists in the Local markets to create a carefully
chosen portfolio of products and services designed to meet you wealth
management needs.

Standard Chartered Indian Offers expertise and services in the following

areas:

 Trade Finance
 Commodity trade finance
 Cash management
 Custody
 Foreign exchange
 Debt capital markets
 Corporate finance
 Supply chain finance

A. Fiduciary Services

It offer extensive estate planning and fiduciary services to give you

greater control over you wealth, whatever you personal, family and
business circumstances or the political situation

In your home country. With Trust Company locations in both the

Cayman Islands (Grand Gayman) and Guernsey (Channel Islands), we
make the following services available to you to ensure a smooth transfer
of assets from one generation to another :

 Full Trust
 Express Trust
 Registered Office Facility
 Private Investment Company

B. Insurance

Insurance can provide continuity in your business, liquidity at a critical

moment and maximum choices for you heirs. Our Fiduciary Specialists
can provide an introduction to a licensed broker who is qualified to
evaluate your needs and recommend a strategy.

C. Credit Facilities

Our secured loans can provide you with short-term liquidity without
disrupting your long-term investments. They allow you to leverage your
assets in one jurisdiction for use in another or your personal assets for
use in you business. Pre-approved loan margins are in place for a wide
range of assets.

D. Collateralised Trading Program

24-hour self-directed trading of an extensive array of foreign exchange,

interest rate, bond and equity products are available with around-the-
clock service from major Trading Centres in Sigapore, London and
Hong Kong.
Operations :

Personal Banking , Private Banking, SME Banking ,Wholesale Banking

 Accounts
 Credit Cards
 Debit & Prepaid Cards
 Loans & Mortgages
 NRI Banking

STANDARD CHARTERED BANK IN INDIA :

Standard Chartered Bank in India is the largest International Bank

Group in India. The combined Balance Sheet (as at 31 st March, 2007) of
SCB Indian is Rs 293 billion (USD 6 billion)

And is having a combined customer base 2.4 million in retail banking

and over 1550 corporate customers.

The Key Business of Standard Chartered Bank in India include

consumer banking-Primarily Credit Cards, Mortgages, Personal loans
and wealth Management and wholesale Banking, where the bank
specializes in the provision of cash Management, trade, finance, treasury
and custody services.
Standard chartered India was the first to issue first global credit card in
India, the first to issue photo card, the picture Card and was the first
Credit card issuer to be awarded by the ISO 8002 certification.

Basel II- A Move to meet global standards

In India, the RBI has implemented the Basel II norms. Basel II is the
second of the Basel Accords, which are recommendations on banking
laws and regulations issued by the Basel Committee on Banking
Supervision.

The purpose of Basel II, which was initially published in June 2004, is
to create an international standard that banking regulators can use when
creating regulations about how much capital banks need to put aside to
guard against the types of financial and operational risks banks face.
Advocates of Basel II believe that such an international standard can
help project the international financial system from the types of
problems that might arise should a manor bank or a series of banks
collapse. In practice, Basel II attempts to accomplish this by setting up
rigorous risk and capital management requirements designed to ensure
that a bank holds capital reserves appropriate to the risk the bank
exposes itself to through its lending and investment practices. Generally
speaking, these rules mean that the greater risk to which the bank is
exposed, the greater the amount of capital the bank needs to hold to
safeguard its solvency and overall economic.

Basel II uses a “three pillars” concept-(1) minimum capital

requirements (addressing risk), (2) supervisory review and (3) market
discipline-to promote greater stability in the financial system.

The first pillar

The first pillar deals with maintenance of regulatory capital calculated

for three major components of risk that a bank faces : credit risk,
operational risk and market risk. Other risks are not considered fully
quantifiable at this stage.

The second pillar

The second pillar deals with the regulatory response to the first pillar,
giving regulators much improved “tools” over those available to them
under Basel I . it also provides a framework for dealing with all the
other risks a bank may face, such as systemic risk, pension risk
concentration risk, strategic risk, reputation risk, liquidity risk and legal
risk, which the accord combines under the title of residual risk.

The third Pillar

The third pillar greatly increases the disclosures that the bank must
make. This is designed to allow the market to have a better picture of
the overall risk position of the bank and to allow the counter parties of
the bank to price and deal appropriately.

Advantages of Basel II in India.

The plausible advantages that would have in store for India would be
both banking as well as non-banking.

 Banking Opportunities

With second highest growth rate in the world and huge scientific and
general work force, India is now well recognized as one of the fast
emerging nations in the world. A sound and evolved banking system
should thus be a prime requirement to support the hectic and enhanced
levels of domestic and international economic activities in the country.
Though India is credited with a strong banking system, still some better
risk practices by Indian banks are required. A majority of Indian banks
are either at nascent or at a very low level of competence in Credit,
Market and Operational risk measurement and management system.
They are lagging behind in use of modem risk methodologies and tools
in comparison to their western counterparts. Economic reforms, higher
market dynamics and large-scale globalization demand a robust risk
management system in the Indian banks . as suggested by the recent
Global Trust bank fiasco the current level of risk based supervision and
market disclosures are also not very satisfactory in the Indian banking
system. Basel II gives an opportunity and a framework for improvement
to the Indian banks. A Basel II compliant banking system will further
enhance the image of India in the League of Nations. The country rating
of Indian will wurely improve, and consequently facilitate a higher
capital inflow in the country. This will tremendously help India to move
on the higher growth trajectory in the coming decades.

 Non-Banking Opportunities

The major advantage of Basel II to India is going to be in the area of

services. Predominantly, It and manpower. The banks all over the
world will have to make huge investments in order to be the Basel II
compliant. These investments will be mainly in the areas of information
technology system (Software tools Database management, Business
Intelligence, Hardware), training etc. to create risk infrastructure to
address the three compliance pillars of the Basel II. Here is the
opportunity for consultancy and IT companies in India and abroad.
Indian IT companies with an established reputation of system
implementations and service support can and must use this opportunity
to enhance their business from the financial services domain. IT/ITES
industry in banking and financial services sector can enhance the present
level of revenue from both on and off site services related to Basel II
compliance. Some of the Indian IT majors like Flexm, Infosys and
wipro are believed to be, in the advanced stage of preparation in terms
of product and services, to embark upon the business opportunities
provided by Basel II
 CREDIT RISK MANAGEMENT
Credit Risk is simply defined as the risk of non payment due to a loan
in time. The service include payment of interest and other charges &
repayment of principal account by installment or otherwise. If these are
not paid as & when due credit risk is involved because the bank loses
not only the cost of funds to carry this for a further purpose but also the
profit that would have been earned on simultaneous investment of this
amount. A default therefore reduces the present value of the loan &
consequently the value of the bank’s business. According to prudential
norms, a loan assets becomes a sub-standard asset where there is a two-
quarter on interest & installment payment. A substandard asset
immediately entails provisioning for losses. The bank is not entitled to
book profit for unpaid interest.

The technical capacity for business to service its loan is estimated by

its debt coverage ratio or priority obligation ratio.

RATING METHODOLOGY :

The Rating Methodology involves an analysis of industry risk, the

issuers business financial & Management risk. A rating is assigned
after assessing all the factors that could affect the credit worthiness of
the entity. Typically industry risk assessment sets the stage for
analyzing more specific company risks factor & establishing the
priority of these factors in the overall evaluation. For instance, if the
industry is highly competitive, careful assessment of the issuer’s market
position is stressed. If the company has large capital requirement, the
current information provided by the issuers or facts from reliable
sources.

The main elements for rating methodology for banks/Fls are :-

1 Business Risk

2 Industry Risk

3 Financial Risk

4 Management Risk
1. Business Risk
This is defined as the inability of the business or project to service its
debt in time. This inability emerge from income generation capacity of
the business, which is affected by the nature of the business or the
product it sells, the external economic or market environment & the
internal manufacturing organization & product mix of an enterprise . if
all these variables are in a steady state, the business suffers from no
risk. But if any one of them is not in steady , the business will suffer
from volatility.

2. Industry Risk
It consist of nature & basis competition, key success factors, demand
& supply position, structure of industry, cyclical/seasonal factors,
government polices & so on. A lender should always keep in mind
that it is the financially week companies that become insolvent during
the cyclically induced decline of the industry. The incidence of solvency
is also high at the bottom of the boom phase & recovery phase from a
recession, because in the former case, labour cost & interest continue to
remain or become high against a fall in sale & in latter case, & interest
continue to remain or become high against a fall in sale & in latter case,
the firms are unable to support a rising demand of their product due to
erosion of capital base during recession. It is important therefore, to
capture cyclical trend in an Industry to evaluate borrowing risk.
3. Financial Risk
After evaluating the issuer’s competitive position & operating
environment, the analyst proceeds to analyse the financial strength of the
issuer. Financial risk is analysed largely through quantitative means,
particularly by using financial ratios. While the past financial
performance of the issuer is important, emphasis is placed on the ability
of the issuer to maintain /improve its future financial performance.

As ratings rely on audited data, the analysis of the audited financial

results begins with a review of accounting quality. The purpose is to
determine whether ratios & statistics derived from financial statements
can be used to accurately measure a company’s performance& its
position. Relative to both its peer group & large universe of companies.

4. Management Risk
A proper assessment of debt protection levels requires an evaluation of
the management philosophies & its strategies. The analyst compares the
company’s business strategies & financial plans to provide insights into
a management’s abilities with respect to forecasting & implementing of
plans.
TYPES OF BORROWER

There are several types of borrowers, but I have taken only three types
of borrowers for my study. These are :-

 Traders
 Contractor
 SME

Traders

A trader is a person who buys or sells goods. He did not manufacture

goods. He purchases goods from manufacture & sells to retailers. He can
be a person who is dealing in import or export.

Contractor

A person who undertakes to work on contract basis is a contractor. Ex. A

person undertake a contract to prepare a road on certain time period.

SME

The Term ‘ enterprise’ has been defined under section 2 (e) so as to

mean any industrial undertaking or a business concern or any other
establishment, by whatever name called, engaged in production or
manufacture of goods, in any manner pertaining to any industry
specified in the first schedule to the industries (development &
regulation) Act, 1951 or engaged in providing of rendering of any
service of services’.
For the purpose of the Act, any class or classes of enterprises may be
classified as micro, small or medium enterprises by a notification issued
in this behalf.

The Classification of enterprises as micro, small & medium as envisaged

under section 7 (1) & notified vide Min. of SSI Notification No. S.O.
1642 (E) Dt. 29-9-2006 is depicted in the following chart.
 ANALYSIS & INTERPRETATION
Average Risk of Borrower

We can analysis that traders are having maximum Industry Risk i.e. 7.12
as compared to Contractor & SME where it is 6.43 & 6.98 because
structure of industry, cyclical factors, government policies etc. are
uncertain & unpredictable, so traders have no control over it as
compared to contractor & SME who have little control. Because of this
industry Risk, Repayment can be affected.

SME are having maximum Business Risk as compared to Trader &

Contractor because SMEs are dealing in small & medium Business, they
at the same time, are having Risk both from other SMEs & large
Enterprises dealing in same business. And they are small they do not
have large amount of funds to fulfill there losses, if they fails. This will
affect their repayment capacity. They are also having maximum
management Risk because what most of the traders do, they said they
are dealing in export (they have all documents proving this) while they
are dealing in domestic business only. So if trader is lying that they are
in export business while they are not, they might not able to repay the
loan.
Contractors are having more Financial Risk because they work on
contract basis, they don’t have huge pool of resources, they buy the
resources at the same time they receive the contract. So if they fail to
fulfill the contract on time & the party cancels the contract, they might
be not in a position to repay the loan.
Type of Risk Type of Borrower

Trader Contractor SME

Business Risk 6.21 5.85 6.83

Financial Risk 5.17 5.56 4.78

Industry Risk 7.12 6.43 6.98

Management Risk 7.02 6.66 6.66

Total 25.52 24.5 25.25

Total Average Risk 6.38 6.12 6.31

Average Risk of Borrower

30
25 Type of Risk
20 Business Risk
Type of Risks 15 Financial Risk
10 Industry Risk

5 Managment Risk
Total
0
Traders Contractors SME Total Average Risk

Type of Borrower
 Composition of Average Risk of Trader
Financial Risk
Management
20%
Risk
28%

Management Risk
Business Risk
Industry Risk
Financial Risk
Industry Risk
28%
Business Risk
24%
Average Risk of contractor

As far as average risk if Trader is concerned, they are having more

management & industry risk i.e. 28% each because of structure of
industry, cyclical factors, government policies etc. which are uncertain
& unpredictable, and Trader have least control over it. Traders are
having maximum control on their financial position, that is why they are
having least financial risk. They are also having control over business
position which is greater than management & industry risk by lesser than
financial risk.

Composition of Average Risk of Contrator

Financial Risk Management
23% Risk
27%

Management Risk
Business Risk
Industry Risk
Financial Risk
Industry Risk
26% Business Risk
24%
Average Risk of SME

SMEs are also having maximum industry risk because industry in

uncertain, on one has control over it. After industry, SMEs are having
maximum business risk because they are having competition from both
small enterprises & large enterprises. Then comes to management risk,
their percentage is also high. As they are small enterprises, they don’t
have effectively coordinated management. They are also having less
financial risk.

Composition of Average Risk of SME

Business Risk
Management Risk
25%
27%

Business Risk
Financial Risk
Industry Risk
Management Risk
Financial Risk
19%

Industry Risk
29%