A STUDY ON THE EXPOSURE OF CREDIT RISK IN EXPORT BILLS AT PUNJAB NATIONAL BANK

Organization Study
Submitted to

MAHATMA GANDHI UNIVERSITY, KOTTAYAM

In partial fulfillment of requirement for the award of

MASTERS DEGREE IN BUSINESS ADMINISTRATION

(2009-2011) By

Subroto Chowdhury
Reg No: 10839

RAJAGIRI COLLEGE OF SOCIAL SCIENCES

RAJAGIRI P.O Kochi 683104

DECLARATION
I, Subroto Chowdhury , Ist year Master of Business Administration student of Rajagiri College of Social Sciences, Kochi, hereby declare that this project report titled A Study on the Exposure of Credit Risk in Export Bills in Punjab National Bank submitted to Mahatma Gandhi University, Kottayam in partial fulfillment of the requirement of the award of Masters Degree in Business Administration is my original work and effort and that it will not be submitted to any other University or institution for the award of any degree or diploma.

All information in this document has been obtained to use only for my academic purpose and is presented in accordance with the academic rules and ethical conduct under the guidance of Prof. Rakesh Krishnan, faculty, Rajagiri College of Social Sciences and Mr. D.Hari, Senior Manager and Mr. D.Chandranatha, Manager Forex, Punjab National Bank, K.G. Road, Bangalore

PLACE: DATE:

ACKNOWLEDGEMENT
I would like to express my gratitude to, Dr. Joseph I Injodey, Principal Rajagiri College of Social Sciences, and his team for providing me the opportunity to be a part of Rajagiri Centre for Business Studies and undertaking this project.

I offer my profound gratitude to my guide Prof. Rakesh Krishnan, faculty of Rajagiri College of Social Sciences in whole heartedly helping me in successfully completing this project. I really thank Mr. D.Hari, Senior Manager and

Mr.D.Chandranatha, Manager - Forex, Punjab National Bank for their guidance in collecting necessary information and for their support in successfully completing this project. I thank my parents, teachers, GOD and all others who have directly or indirectly assisted me in doing this project and also for the help, support, interest and valuable hints they have provided.

TABLE OF CONTENTS

Title EXECUTIVE SUMMARY 1. ORGANISATIONAL STUDY 1.1INDUSTRY PROFILE 1.2 COMPANY PROFILE HISTORY & INCORPORATION REACH PERFORMANCE ORGANISATIONAL STRUCTURE SWOT ANALYSIS VISION 2013 2. PROBLEM CENTERED STUDYOF THE ORGANISATION 2.1 TITLE OF STUDY 2.2 OBJECTIVES OF THE STUDY 2.3 RESEARCH METHODOLOGY 2.4 PROBLEM STATEMENT 2.5LIMITATIONS OF THE STUDY 2.6 BACKGROUND STUDY 3 DATA ANALYSIS & INTERPRETATION 4 FINDINGS 5 SUGGESTIONS 7 8 APPENDIX BIBLIOGRAPHY

Pg. No. 1 2 3 16 17 19 22 31 39 47 49 50 50 50 50 50 51 62 75 76 78 82

LIST OF TABLES

Table No.

Particulars FINANCIAL EXPRESS / ERNST & YOUNG SURVEY ON INDIAs BEST BANKS PERFORMANCE OF PUNJAB NATIONAL BANK AS ON 31.03.2010 CAPITAL STRUCTURE OF PNB OTHER BUSINESS PERFORMANCE PARAMETERS CREDIT RISK RATING BY PNB through PNB Trac CREDIT RISK RATING MODELS INDUSTRY-WISE CREDIT EXPOSURE LIMITS FOREIGN OUTWARD BILLS PURCHASED (FOBP)

Page No. 22

1.2.1

1.2.2 1.2.3 1.2.4 2.6.1 2.6.2 2.6.3 3.1.1 3.1.2 3.1.3 3.1.4

23 23 25 57 58 59 63 65 67 69

FOREIGN OUTWARD BILLS FOR COLLECTION FOREIGN OUTWARD BILLS NEGOTIATED UNDER LETTER OF CREDIT FOREIGN OUTWARD BILLS DISCOUNTED

LIST OF DIAGRAMS
Diagram No. 1.2.1 1.2.2 1.2.3 1.2.4 1.2.5 1.2.6 1.2.7 2.6.1 2.6.2 3.1.1 3.1.2 3.1.3 3.1.4 Particulars DOMESTIC NETWORK PERFORMANCE PROFILE RATIO PRODUCTIVITY & MANKET SHARE SUBSIDIARIES PERFORMANCE SHARE PRICES OF PNB VALUE FOR STAKEHOLDERS SHAREHOLDING PATTERN RISK MANAGEMENT DIVISION ORGANISATIONAL STRUCTURE OF RMD FOBP USANCE BILLS FOBP SIGHT BILLS FOBC SIGHT BILLS FOBC USANCE BILLS Page No. 21 24 26 27 28 29 30 61 61 64 64 65 66

3.1.5 3.1.6 3.1.7 3.1.8 3.1.9 3.1.10 3.1.11 3.1.12 3.1.13 3.1.14

FOBNLC SIGHT BILLS FOBNLC USANCE BILLS FOBD SIGHT BILLS FOBD SIGHT BILLS OUTSTANDING BILLS (07-08) OUTSTANDING BILLS (08-09) OUTSTANDING BILLS (09-10) OUTSTANDING SIGHT & USANCE BILLS (07-08) OUTSTANDING SIGHT & USANCE BILLS (08-09) OUTSTANDING SIGHT & USANCE BILLS (09-10)

68 68 70 70 71 72 72 73 74 74

Glossary
FOBP FOBC FOBNLC FOBD L/C RBI NPA Foreign Outward Bills Purchased Foreign Outward Bills for Collection Foreign Outward Bills Negotiated under Letter of Credit Foreign Outward Bills Discounted Letter of credit Reserve Bank of India Non Performing Assets

FDI TSA RMD CIBIL CRMD CRMC PBT IRB ICAAP DA DP NTP B/L EDW CRM RTGS

Foreign Direct Investment The Standardized Approach Risk Management Division Credit Information Bureau of India Credit Risk Management Division Credit Risk Management Committee Profit before Tax
Internal Ratings Based Internal Capital Adequacy Assessment Process

Documents Against Acceptance Documents Against Payment Normal Transit Period Bill of Lading Electronic Data Warehouse Credit Risk Management Real Time Gross Settlement

Executive Summary
In these five decades since independence, banking in India has evolved through four distinct phases: Foundation phase: Can be considered to cover 1950s and 1960s till the nationalisation of
banks in 1969. The focus during this period was to lay the foundation for a sound banking system in the country. As a result the phase witnessed the development of necessary legislative framework for facilitating re-organisation and consolidation of the banking system, for meeting the requirement of Indian economy.

Expansion phase: Had begun in mid-60s but gained momentum after nationalisation of
banks and continued till 1984. A determined effort was made to make banking facilities available to the masses. However this weakened the lines of supervision and affected the quality of assets of banks and pressurized their profitability and brought competitive efficiency of the system at low ebb.

Consolidation Phase: The phase started in 1985 when a series of policy initiatives were
taken by RBI which saw marked slowdown in the branch expansion. Attention was paid to improving house-keeping, customer service, credit management, staff productivity and profitability of banks. Measures were also taken to reduce the structural constraints that obstructed the growth of money market.

Reforms Phase: The macro-economic crisis faced by the country in 1991 paved the
way for extensive financial sector reforms which brought deregulation of interest rates, more competition, technological changes, prudential guidelines on asset classification and income recognition, capital adequacy, autonomy packages etc. This Project which is basically done in the area of export finance basically analyses the credit risk of export bills & finds ways & solutions with the help of credit risk mitigation techniques to minimize the credit risk of export bills . it also focuses deeply on the organisational achievements & structure of Punjab national bank. The project also highlights all the main areas of post shipment credit. The research is done after deep study of RBI & Fedai guidelines. I sincerely hope that it will be not only being useful to the organisation but also foe academic purposes.

SECTION 1
ORGANISATION STUDY

1.1

INDUSTRY PROFILE

BIRTH OF THE BANKING CONCEPT IN THE COUNTRY

Banking in India originated in the last decades of the 18th century. The first banks were The General Bank of India which started in 1786, and the Bank of Hindustan, both of which are now defunct. The oldest bank in existence in India is the State Bank of India, which originated in the Bank of Calcutta in June 1806, which almost immediately became the Bank of Bengal. This was one of the three presidency banks, the other two being the Bank of Bombay and the Bank of Madras, all three of which were established under charters from the British East India Company. For many years the Presidency banks acted as quasi-central banks, as did their successors. The three banks merged in 1921 to form the Imperial Bank of India, which, upon India's independence, became the State Bank of India. Indian merchants in Calcutta established the Union Bank in 1839, but it failed in 1848 as a consequence of the economic crisis of 1848-49. The Allahabad Bank, established in 1865 and still functioning today, is the oldest Joint Stock bank in India. It was not the first though. That honor belongs to the Bank of Upper India, which was established in 1863, and which survived until 1913, when it failed, with some of its assets and liabilities being transferred to the Alliance Bank of Shimla. When the American Civil War stopped the supply of cotton to Lancashire from the Confederate States, promoters opened banks to finance trading in Indian cotton. With large exposure to speculative ventures, most of the banks opened in India during that period failed. The depositors lost money and lost interest in keeping deposits with banks. Subsequently, banking in India remained the exclusive domain of Europeans for next several decades until the beginning of the 20th century. Foreign banks too started to arrive, particularly in Calcutta, in the 1860s. The Comptoire d'Escompte de Paris opened a branch in Calcutta in 1860, and another in Bombay in 1862; branches in Madras and Pondicherry, then a French colony, followed. HSBC established itself in Bengal in 1869. Calcutta was the most active trading port in India, mainly due to the trade of the British Empire, and so became a banking center. The first entirely Indian joint stock bank was the Oudh Commercial Bank, established in 1881 in Faizabad. It failed in 1958. The next was the Punjab National Bank, established in Lahore in 1895, which has survived to the present and is now one of the largest banks in India. The period between 1906 and 1911, saw the establishment of banks inspired by the Swadeshi movement. The Swadeshi movement inspired local businessmen and political figures to found banks of and for the Indian community. A number of banks established then have
3

survived to the present such as Bank of India, Corporation Bank, Indian Bank, Bank of Baroda, Canara Bank and Central Bank of India. The fervor of Swadeshi movement lead to establishing of many private banks in Dakshina Kannada and Udupi district which were unified earlier and known by the name South Canara ( South Kanara ) district. Four nationalized banks started in this district and also a leading private sector bank. Hence undivided Dakshina Kannada district is known as "Cradle of Indian Banking".

Post-independence
The partition of India in 1947 adversely impacted the economies of Punjab and West Bengal, paralyzing banking activities for months. India's independence marked the end of a regime of the Laissez-faire for the Indian banking. The Government of India initiated measures to play an active role in the economic life of the nation, and the Industrial Policy Resolution adopted by the government in 1948 envisaged a mixed economy. This resulted into greater involvement of the state in different segments of the economy including banking and finance. The major steps to regulate banking included:

In 1948, the Reserve Bank of India, India's central banking authority, was nationalized, and it became an institution owned by the Government of India. In 1949, the Banking Regulation Act was enacted which empowered the Reserve Bank of India (RBI) "to regulate, control, and inspect the banks in India." The Banking Regulation Act also provided that no new bank or branch of an existing bank could be opened without a license from the RBI, and no two banks could have common directors.

However, despite these provisions, control and regulations, banks in India except the State Bank of India, continued to be owned and operated by private persons. This changed with the nationalization of major banks in India on 19 July 1969.

Nationalization
By the 1960s, the Indian banking industry had become an important tool to facilitate the development of the Indian economy. At the same time, it had emerged as a large employer, and a debate had ensued about the possibility to nationalize the banking industry. Indira Gandhi, the-then Prime Minister of India expressed the intention of the GOI in the annual conference of the All India Congress Meeting in a paper entitled "Stray thoughts on Bank Nationalization." The paper was received with positive enthusiasm. Thereafter, her move was swift and sudden, and the GOI issued an ordinance and nationalized the 14 largest commercial banks with effect from the midnight of July 19, 1969. Jayaprakash Narayan, a national leader of India, described the step as a "masterstroke of political sagacity." Within two weeks of the issue of the ordinance, the Parliament passed the Banking Companies
4

(Acquisition and Transfer of Undertaking) Bill, and it received the presidential approval on 9 August 1969. A second dose of nationalization of 6 more commercial banks followed in 1980. The stated reason for the nationalization was to give the government more control of credit delivery. With the second dose of nationalization, the GOI controlled around 91% of the banking business of India. Later on, in the year 1993, the government merged New Bank of India with Punjab National Bank. It was the only merger between nationalized banks and resulted in the reduction of the number of nationalized banks from 20 to 19. After this, until the 1990s, the nationalized banks grew at a pace of around 4%, closer to the average growth rate of the Indian economy. The nationalized banks were credited by some, including Home minister P. Chidambaram, to have helped the Indian economy withstand the global financial crisis of 2007-2009.

Liberalization
In the early 1990s, the then Narsimha Rao government embarked on a policy of liberalization, licensing a small number of private banks. These came to be known as New Generation tech-savvy banks, and included Global Trust Bank (the first of such new generation banks to be set up), which later amalgamated with Oriental Bank of Commerce, Axis Bank(earlier as UTI Bank), ICICI Bank and HDFC Bank. This move, along with the rapid growth in the economy of India, revitalized the banking sector in India, which has seen rapid growth with strong contribution from all the three sectors of banks, namely, government banks, private banks and foreign banks. The next stage for the Indian banking has been setup with the proposed relaxation in the norms for Foreign Direct Investment, where all Foreign Investors in banks may be given voting rights which could exceed the present cap of 10%, at present it has gone up to 74% with some restrictions. The new policy shook the Banking sector in India completely. Bankers, till this time, were used to the 4-6-4 method (Borrow at 4%; Lend at 6%; Go home at 4) of functioning. The new wave ushered in a modern outlook and tech-savvy methods of working for traditional banks. All this led to the retail boom in India. People not just demanded more from their banks but also received more. Currently (2007), banking in India is generally fairly mature in terms of supply, product range and reach-even though reach in rural India still remains a challenge for the private sector and foreign banks. In terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong and transparent balance sheets relative to other banks in comparable economies in its region. The Reserve Bank of India is an autonomous body, with minimal pressure from the government. The stated policy of the Bank on the Indian Rupee is to manage volatility but without any fixed exchange rate-and this has mostly been true.

With the growth in the Indian economy expected to be strong for quite some time-especially in its services sector-the demand for banking services, especially retail banking, mortgages and investment services are expected to be strong. One may also expect M&As, takeovers, and asset sales. In recent years critics have charged that the non-government owned banks are too aggressive in their loan recovery efforts in connection with housing, vehicle and personal loans. There are press reports that the banks' loan recovery efforts have driven defaulting borrowers to suicide.

INDIAN BANKING SYSTEM

UNORGANISED SECTOR

ORGANISED SECTOR

INDIGENOUS BANKERS

MONEY LENDERS

RESERVE BANK OF INDIA

COMMERCIAL BANKS

COOPERATIVE BANKS

SPECIALISED BANKS

SCHEDULED BANKS

NON- SCHEDULED BANKS

STATE COOPERATIVE BANKS

PUBLIC SECTOR BANKS

PRIVATE SECTOR BANKS

FOREIGN BANKS

DISTRICT COOPERATIVE BANKS

PRIMARY COOPERATIVE BANKS & SOCIETIES

SBI & OTHER ASSOCIATES

REGIONAL RURAL BANKS

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NATIONALISED BANKS

Characteristics of the Indian Banking

India has well developed, but not best run, banking system. The banking system is:

Indigenized - that is, it is made up of mainly indigenous, local and national, banks manned by local people. Nationalized - the indigenous banks are mostly in public sector. New foreign and indigenous banks are emerging in the private sector, which is more competitive. India's banking is mixed economy. Diversified - the system has many kinds of banks, such as commercial banks (some of which are foreign banks), specialized banks, rural banks. The diversity in banking is because of the diversity in banking needs. The diversity is the necessity. The diversity is a national solution. The presence of rural banks indicates that banking in India is geographically widespread and not concentrated in big cities. The diversity leads to expansion - the country's banking system is expanding with the recurrent edition of more banks, more bank branches. The Indian banking is essentially branch banking the public sector banks have branches all over India. The branch banking system suits the country most because of the system's inherent advantages and the country's growing banking needs due to its vast geography, vast demography, and vast economy. The indigenous banking has replaced the traditional moneylenders, who have worked only to perpetuate debt and poverty in the weaker sections of the society. The nationalization of banks has served to make finance accessible, affordable and productive for the weaker sections. Unionized - the banking staff matters are handled by unions and this more or less affects customer service., Centrally administered - the country's central bank administers the banking sector of the country's economy. Canalized- the nationalized banks' resources in particular are canalized toward country's economic development. They are invested in trade development, rural development, agriculture development (called green revolution), and industrial development. The nationalization paves the way for canalization. India's mechanization of agriculture is the courtesy of the countrys nationalized banks. India's banking system is not the result but the cause of the country's economic development. Deposit- focused - the indigenous banks vie for deposits and this helps the country in capital formation for economic development acceleration and the bank manager in career development Collateral -oriented - that is, the lending is heavily collateralized, in some cases unnecessarily additionally collateralized. Bad debt ridden - the loans in public sector banks made for development purposes, particularly rural development, are mainly non-performing assets. This is because verification of end use of the loans is lacking. The political interference in poverty8

alleviation banking programs in particular has made the public sector banks poor. Poverty-alleviation banking is political banking and political banking is not prudent banking.

Computerized - the computer is ledger, teller, cashier but in urban teller banking. The rural banking is more or entirely paper-based.

CURRENT SCENARIO & BANKING REFORMS

The broad theme of banking in the present is to achieve value addition beyond conventional products and services, to extend market size and carve niches for successfully competing for higher share of business. In this endeavour, co-creation of new products and services along with other players like mutual funds, pension funds, private equity partners, credit card and consumer finance companies, capital market intermediaries like brokerages, depositories, personal finance and wealth management advisors, insurance companies, infrastructure finance companies, micro-finance self-help groups, etc. is likely to be a win-win situation for most business associates. The rising aspirations of our economy growing at an accelerated pace of over 9% are pointing to the need for new products and services on the resources raising side as well as credit and advances. This process will see the banking segment emerge stronger and vibrant in the banking-financial services-insurance (BFSI) space. Within the dominant services sector, which accounts for nearly 60% of the economy, the BFSI segment will be a growth driver for the whole economy. As far as banking sector is concerned, there are some developments and trends which are playing out as per RBI/Govt. roadmaps indicated, while dynamics of foreign banks plans/liberalization of the sector/global factors cannot be fully visualized or predicted. However, Deposits at Rs 45,00,000 crores (reckoning CAGR of around 18%), Bank Credit around Rs 32,00,000 crores and Banking Sector market capitalization at Rs.6,00,000 crores are plausible estimates of the size of Indian banking sector by 2010. It would mean an increased monetisation of the economy and financial inclusion would have brought about 80% of the population availing banking services.

THE MACRO INTER-ACTION IN BFSI SECTOR Globalisation and the expanding economy is reflected in the greater inter-action within the broad bankingfinancial servicesinsurance (BFSI) sector and with other sectors of the global economy. In the market place, this is manifested in new finance products like venture capital, top-up or mezzanine finance, private equity, variety of hybrid financial instruments, derivatives, cross-border deals, long term infrastructure finance, micro-finance, etc. New arrangements like Public-Private partnerships, build-own-operate-transfer, interest rate
9

subventions for farmers, bancassurance ; new institutions like India Infrastructure Finance Corporation, Power Finance Corporation, multi-lateral aid and finance agencies are adding variety to a bouquet of financial services. While inter-action between banks, money market, capital market, commodity futures markets, foreign exchange markets and asset markets like realty/gold have increased; The regulatory requirements, risk management guidelines and market segmentation have maintained the disparate character of these constituents of the overall financial sector. This has enabled cross-subsidization, selective interest regulation and regulatory interventions to work with significant impact. With the Doha round difficulties in WTO negotiations persisting and contentious issues of agriculture, freer services and labour markets still awaiting resolution, major changes in international trade and services are not likely in the next three years. But yes, the tilt towards Asia would become increasingly visible. And so, increased flows of foreign direct investment, foreign institutional investment inflows and remittances to India, China and other Asian countries are expected.

BANKING POLICY PERSPECTIVES AND DYNAMICS:

The Indian Banking Sector is dominated by Public Sector Banks accounting for about 70% share of business. With expansion of Private Sector Banks and Foreign Banks in India, this business share is expected to go down, but Public Sector Banks are expected to retain the dominant share of over 60%. As on March 2007, there were 82 Scheduled Commercial Banks, 96 Regional Rural Banks, 1815 Urban Co-operative Banks, 7 Development Finance Institutions, 13020 Non Banking Finance Companies, 11 Primary Dealers and numerous State Level/District/Primary Cooperative Banks. This indicates a lot of variety in institutions, business models and customers served. Govt. policies are encouraging consolidation in the financial sector by way of mergers, amalgamations and acquisitions. So, by 2010, the Banking Sector is likely to have fewer Indian Banks with increased overseas branches and more Foreign Banks. The Finance Ministry has set a tentative time schedule of 2009 for allowing Foreign Banks to acquire Indian Private Sector Banks and other liberalization. With foreign currency reserves around US$ 225 billion today and significant addition in the years to come, the Govt. is following an increasingly liberal policy on the matter of capital account convertibility. While full convertibility may not materialize (due to not meeting essential conditions laid down by Tara pore Committee), there is comfort in meeting foreign exchange requirements and Indias investment grade external rating is recognition of its strengths. The banking sector has definitely benefited in this regard. However, though the international standing of Indian banks has improved significantly, their size is no match for international banks from

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developed countries or even Chinese banks. (Please see compilations by Business Standard Banking Annual 2006 given below) Risk Management initiatives being calibrated by RBI are directing the banks towards better management of businesses and risks. Extensive use of internal and external credit ratings, bank ratings, Banking Codes and Standards Board of India promoting international best practices, score-based assessments and payment histories are all going to bring fairness, transparency and informed decision- making in the banking sector.

Current Scenario
The industry is currently in a transition phase. On the one hand, the PSBs, which are the mainstay of the Indian Banking system, are in the process of shedding their flab in terms of excessive manpower, excessive non Performing Assets (Npas) and excessive governmental equity, while on the other hand the private sector banks are consolidating themselves through mergers and acquisitions. PSBs, which currently account for more than 78 percent of total banking industry assets are saddled with NPAs (a mind-boggling Rs 830 billion in 2000), falling revenues from traditional sources, lack of modern technology and a massive workforce while the new private sector banks are forging ahead and rewriting the traditional banking business model by way of their sheer innovation and service. The PSBs are of course currently working out challenging strategies even as 20 percent of their massive employee strength has dwindled in the wake of the successful Voluntary Retirement Schemes (VRS) schemes. The private players however cannot match the PSBs great reach, great size and access to low cost deposits. Therefore one of the means for them to combat the PSBs has been through the merger and acquisition (M& A) route. Over the last two years, the industry has witnessed several such instances. For instance, Hdfc Banks merger with Times Bank ICICI Banks acquisition of ITC Classic, Anagram Finance and Bank of Madura. Centurion Bank, Indusind Bank, Bank of Punjab, Vysya Bank are said to be on the lookout. The UTI bank- Global Trust Bank merger however opened a Pandoras box and brought about the realization that all was not well in the functioning of many of the private sector banks. Private sector Banks have pioneered internet banking, phone banking, anywhere banking, and mobile banking, debit cards, Automatic Teller Machines (ATMs) and combined various other services and integrated them into the mainstream banking arena, while the PSBs are still grappling with disgruntled employees in the aftermath of successful VRS schemes. Also, following Indias commitment to the WTO agreement in respect of the services sector, foreign banks, including both new and the existing ones, have been permitted to open up to 12 branches a year with effect from 1998-99 as against the earlier stipulation of 8 branches. Talks of government diluting their equity from 51 percent to 33 percent in November 2000 have also opened up a new opportunity for the takeover of even the PSBs. The FDI rules
11

being more rationalized in Q1FY02 may also pave the way for foreign banks taking the M& A route to acquire willing Indian partners. Meanwhile the economic and corporate sector slowdown has led to an increasing number of banks focusing on the retail segment. Many of them are also entering the new vistas of Insurance. Banks with their phenomenal reach and a regular interface with the retail investor are the best placed to enter into the insurance sector. Banks in India have been allowed to provide fee-based insurance services without risk participation invest in an insurance company for providing infrastructure and services support and set up of a separate jointventure insurance company with risk participation. Foreign banks are likely to succeed in their niche markets and be the innovators in terms of technology introduction in the domestic scenario. The outlook for the private sector banks indeed looks to be more promising vis--vis other banks. While their focused operations lower but more productive employee force etc will stand them good, possible acquisitions of PSU banks will definitely give them the much needed scale of operations and access to lower cost of funds. These banks will continue to be the early technology adopters in the industry, thus increasing their efficiencies. Also, they have been amongst the first movers in the lucrative insurance segment. Already, banks such as ICICI Bank and HDFC Bank have forged alliances with Prudential Life and Standard Life respectively. This is one segment that is likely to witness a greater deal of action in the future. In the near term, the low interest rate scenario is likely to affect the spreads of majors. This is likely to result in a greater focus on better asset-liability management procedures. Consequently, only banks that strive hard to increase their share of fee-based revenues are likely to do better in the future. ANTICIPATED EVENTS Stronger measures for addressing burgeoning fiscal deficit/trade deficit in USA. This will have far reaching impact on world trade, liquidity, strength of the US dollar, and international fund flows. Major banking sector liberalization scheduled for 2009. Initiatives on pension funds/regulations by Pension Fund Development and Regulatory Authority. Policy consolidation on financial conglomerates in India it would impact major public financial institutions and Special Purpose Vehicles.

DYNAMICS AND UNCERTAINTIES Persuasive advisories from Finance Ministry, RBI for consolidation in the financial sector has not influenced mid-size banks. Hence newer measures/ directives are

12

expected. The consolidation process has to gain momentum to enable Indian banks to acquire critical size to be ready for intense competition ahead. Expansion, growth and earnings growth of Corporate India to impact the banking sector in terms of new/ additional business as also asset quality. Also, acquisitions abroad and international forays will show impact within next three years in terms of revenues, costs, profits, and management experience. Real economy issues SEZ developments, labour reforms, infrastructure deficiencies, recovery of development charges and utility costs to determine future public-private partnerships and recovery of infrastructure funding by banks etc. Inter-state taxation, new tax measures and other irritants, which impede economic growth affect financial sector indirectly by adverse impact on assets. The Agriculture Conundrum uncertainties, water management, laggard growth, funding issues, next wave technology. Fortunes of Small and Medium Enterprises, which are heavily funded by banking sector. Indian competitiveness is on test as India integrates with the world economy.

ISSUES AND CHALLENGES FOR INDIAN BANKING SECTOR In the face of competition from multinational banks and their leverage of size, international presence and skills, the Indian banking sector is bound to feel the heat. While the leading financial conglomerates like ICICI Bank, SBI, PNB, BOB, UTI, LIC, GIC, Reliance, etc are gearing up, it is going to be a stiff challenge. More so, when the Indian banking sector is vying for international business (at home and abroad), for a higher share in the fee income pie, investment banking, resources raising and higher value products and services. The growth prospects are more challenging for the dominant public sector banking segment capital adequacy issues in the context of asset growth, government ownership issues and holding restrictions, human resources issues, competition from foreign banks/NBFCs/stronger new private sector banks in all new financial products, shifting of creamy best customers to competitors etc. Challenge of serving the rural sector agriculture, small and medium enterprises, artisans, cross-subsidization Banks which move fast with cost-effective business models for financial inclusion can garner new business (an issue as well as a challenge) Making longer term resources plans and implementing them need for new deposit products, enhancing liquidity in the bond markets Developing new skills for new products and services

IMPERATIVES FOR THE PUBLIC SECTOR BANKS A marketing thrust with customer acquisition and retention orientation has to be reinforced to realize the business potential of the large branch networks.

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A makeover is required in terms of matching technology/human skills/efficiency parameters with the competition. For this, a workout involving management, workmen unions, officer unions, government is required. Compensation and way of restructuring / retraining / redeployment and infusion of new workforce are major issues awaiting resolution. Risk/return/contribution have to be synchronized into the performance and rewards matrix. Going forward, reforms addressing capital requirements, government ownership, incentives for improved performance have become an immediate requirement. Business models for different businesses have to be updated.

CHANGES IN CUSTOMER INTERFACE / OPERATIONS Technology is enabling new products and services to be offered like multi-city operations, frequent resets of interest and various combinations, multi-channel transaction facilitation, etc. This enables offer of specialized services of phone banking, seamless execution in savings-demat-settlement-borrowal accounts, biometric ATMs, mobile & net banking , etc. Technological improvements are also facilitating customer segmentation based on customer revenue contributions/business activity profiles/various need classifications. This has led to specialized service outlets like large corporate branch, mid-corporate branch, Premium (high value clientele) outlets, capital markets branch, etc. Customer Relationship Management is improving.

OPPORTUNITIES AHEAD The take-off growth opportunities in the following segments require focused marketing efforts and innovative products and services: Housing and Retail consumer loans. Infrastructure projects (airports, cargo and logistics/ urban transportation/ roads/ ports, inland waterways, power, utilities etc) One estimate is over US $300 billion over the next five years. New finance packages for increasing variety of agriculture and horticulture related inputs. Automobile sector growth. New products for small and medium enterprises.

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Indians are traditionally high savers and future planners. This factor shall ensure inflow of deposits, and need for insurance & pension products, mutual funds etc. (refer Appendix Table 11 & 12 of RBI Annual Report 2006-07 given below). The growing prosperity shall require wealth management services, private equity funds and other new services. Indigenous defence production and commercial exploitation of space are new growth opportunities. Asset reconstruction/ liquidation/ asset sell-offs. Investment banking opportunities - mergers & acquisitions, financial structuring, financing foreign acquisitions, resources raising in capital and debt markets in India and abroad, take-out financing, etc. Derivatives - interest rate swaps, currency swaps, currency futures and other varied hedging and risk management measures. The RBI Annual Report 2005-06 has acknowledged:. The emphasis on financial inclusion will also lead to enhanced need for financial intermediation. The banking system has to respond adequately to these new challenges, opportunities and risks. Innovative channels for credit delivery for serving these new rural credit needs, encompassing full supply chain financing, covering storage, warehousing, processing and transportation from farms to market will have to be found. Besides the business activities mentioned above, global best practices and efficiencies in risk management, dynamic asset-liability management, balance-sheet management involving derivatives/securitization, etc. shall unfold new vistas in banking. So, the purveyors of money will also be change-agents and growth-drivers.

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1.2 COMPANY PROFILE

Head Office: 7, Bhikhaiji Cama Place, New Delhi 110 066, India.Tel: (91 11) 2610 2303; Fax (91 11) 26108741; E-mail: fpo@pnb.co.in; Website: www.pnbindia.com
(Constituted

under the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 as Punjab National Bank on July 19, 1969. On April 13, 1987, the Head Office of the Bank was changed from 5, Sansad Marg, New Delhi 110 001 to 7, Bhikhaiji Cama Place, New Delhi 110 066).

VISION
"To be a Leading Global Bank with Pan India footprints and become a household brand in the Indo-Gangetic Plains providing entire range of financial products and services under one roof"

MISSION
"Banking for the unbanked"

Established in 1895 at Lahore, undivided India, Punjab National Bank (PNB) has the distinction of being the first Indian bank to have been started solely with Indian capital.The bank was nationalized in July 1969 along with 13 other banks. From its modest beginning, the bank has grown in size and stature to become a front-line banking institution in India at present.

Punjab National Bank (PNB), was registered on May 19, 1894 under the Indian Companies Act with its office in Anarkali Bazaar Lahore. The Bank is the second largest governmentowned commercial bank in India with about 5000 branches across 764 cities. It serves over 38 million customers. The bank has been ranked 248th biggest bank in the world by Bankers Almanac, London.

16

HISTORY & INCORPORATION

1895: PNB commenced its operations in Lahore. PNB has the distinction of being the first Indian bank to have been started solely with Indian capital that has survived to the present. PNB's founders included several leaders of the Swadeshi movement such as Dyal Singh Majithia and Lala HarKishen Lal, Lala Lalchand, Shri Kali Prosanna Roy, Shri E.C. Jessawala, Shri Prabhu Dayal, Bakshi Jaishi Ram, and Lala Dholan Dass. Lala Lajpat Rai was actively associated with the management of the Bank in its early years. 1904: PNB established branches in Karachi and Peshawar. 1940: PNB absorbed Bhagwan Dass Bank, a scheduled bank located in Delhi circle. 1947: Partition of India and Pakistan at Independence. PNB lost its premises in Lahore, but continued to operate in Pakistan. 1951: PNB acquired the 39 branches of Bharat Bank (est. 1942); Bharat Bank became Bharat Nidhi Ltd. 1960s: PNB amalgamated Indo Commercial Bank (est. 1933) in a rescue 1961: PNB acquired Universal Bank of India. 1963: The Government of Burma nationalized PNB's branch in Rangoon (Yangon). September 1965: After the Indo-Pak war the government of Pakistan seized all the offices in Pakistan of Indian banks, including PNB's head office, which may have moved to Karachi. PNB also had one or more branches in East Pakistan (Bangladesh). 1969: The Government of India (GOI) nationalized PNB and 13 other major commercial banks, on July 19, 1969. 1976 or 1978: PNB opened a branch in London. 1986: The Reserve Bank of India required PNB to transfer its London branch to State Bank of India after the branch was involved in a fraud scandal. 1986: PNB acquired Hindustan Commercial Bank (est. 1943) in a rescue. The acquisition added Hindustan's 142 branches to PNB's network. 1993: PNB acquired New Bank of India, which the GOI had nationalized in 1980. 1998: PNB set up a representative office in Almaty, Kazakhstan.

17

2003: PNB took over Nedungadi Bank, the oldest private sector bank in Kerala. At the time of the merger with PNB, Nedungadi Bank's shares had zero value, with the result that its shareholders received no payment for their shares.PNB also opened a representative office in London. 2004: PNB established a branch in Kabul, Afghanistan.PNB also opened a representative office in Shanghai.PNB established an alliance with Everest Bank in Nepal that permits migrants to transfer funds easily between India and Everest Bank's 12 branches in Nepal. 2005: PNB opened a representative office in Dubai. 2007: PNB established PNBIL - Punjab National Bank (International) - in the UK, with two offices, one in London, and one in South Hall. Since then it has opened a third branch in Leicester, and is planning a fourth in Birmingham. PNB partnered with Venture InfoTech Global (VIG) and American International Group (AIG) Consortium, to form a Joint Venture for credit card business in Bhutan. In the same year, PNB entered into a memorandum of understanding with India Infrastructure Finance Company (IFCL), to finance infrastructure projects in the country. Later in that year, the bank launched a pilot project on financial inclusion at Neemrana in Alwar district of Rajasthan as part of a plan to cover 75 million people by 2010. 2008: PNB opened a branch in Hong Kong. The Royal Monetary Authority of Bhutan approved to set up Druk PNB Bank Ltd, a joint venture bank between PNB and Bhutanese Promoters in December 2008. 2009: PNB opened a representative office in Oslo, Norway, and a second branch in Hong Kong, this in Kowloon. . Nagesh Pydah and MV Tanksale were appointed as the Directors of the bank in March 2009. Oct 2009: K R Kamath was appointed as the Chairman and Managing Director at PNB. In the same month, the bank acquired about 63.64% stake in Dana Bank, Kazakhstan. Nov 2009: PNB entered into an agreement with FIM Bank (Malta), Banca IFIS, Italy and Blend Financial Services Ltd, to set up a joint venture company for providing factoring, forfeiting and trade finance related business, in November 2009. In the same month, the bank entered into agreement to sell 81, 25,000 shares of UTI AMC at INR200 each (approximately $4.3 each)and 6,500 shares of UTI Trustee at INR11.92 per share (approximately $0.25 per share) to M/s.T Rowe Price Global Investment Services Ltd.

2010: PNB received permission to upgrade its representative office in the Dubai International Financial Centre to a branch.

18

PUNJAB NATIONAL BANK - A SAGA OF EXCELLENCE IN BANKING

With over 60 million satisfied customers and 5123 offices, PNB has continued to retain its leadership position among the nationalized banks. The bank enjoys strong fundamentals, large franchise value and good brand image. Besides being ranked as one of India's top service brands, PNB has remained fully committed to its guiding principles of sound and prudent banking. As the Bank starts 116 year, let me enumerate its performances & achievements till the year 2010. REACH
th

PNB is ranked as the 3rd largest bank in the country (after SBI and ICICI Bank. On the occasion of 116th Foundation Day on 13.4.2010, the Hon'ble Union Finance Minister, Shri Pranab Mukherjee inaugurated the 5000 branch of the Bank. The Bank declared 100% CBS in all 6 sponsored Regional Rural Banks with 1408 branches. It launched 'Project Namaskar' by commissioning 30 kiosks under Financial Inclusion. The Bank presently has 60 million customers, 5123 branches, 3663 ATMs, 10 lac internets banking users and equipped with RTGS / NEFT, on-line railway / air ticket booking, on-line tax payment, global credit card, on-line trading and mobile banking. A professionally managed bank with a successful track record of Strategic business area covering the large Indo-Gangetic belt and the metropolitan centres. It has Strong correspondent banking relationships with more than 217 international banks of the world More than 50 renowned international banks maintain their Rupee Accounts with PNB. Well equipped dealing rooms; 20 different foreign currency accounts are maintained at major centres all over the globe. Rupee drawing arrangements with M/s UAE Exchange Centre, UAE, M/s Al Fardan Exchange Co. Doha, Qatar/s Bahrain Exchange Co, Kuwait, M/s Bahrain Finance Co, Bahrain/s Thomas Cook Al Rostamani Exchange Co. Dubai,UAE, and M/s Musandam Exchange, Besides the huge network of general banking branches, the Bank is providing specialized services through Large Corporate branches, Mid-corporate branches, Trade Finance branches, SME branches, International Banking branches and full range of international banking services in association with international banking correspondents throughout the world. On-line payment of Govt. taxes (direct & indirect), bill payment services, booking of airline and rail tickets, depository services, range of investment services in association with SMC and IDBI Capital Services , credit cards, housing finance, investment in gilts/gold, international remittance facilities in association with 15 exchange companies in Gulf countries/ Singapore, etc. indicate the wide range of customer services offered.
19
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The bank provides training, advisory services and extension services through 8 Farmer Training Centres and RUDSETI, Patna to farmers, landless labour, urban and rural poor and unemployed youth. The Bank is reaching out to remote and interior areas through its sponsored Regional Rural Banks and business facilitators and correspondents. The wide-ranging customer service interface is further strengthened by 24/7 call centre on toll-free nos. 1800 180 2222/0124-2340000 along with websites at www.pnbindia.in / www.pnbindia.com.

SUBSIDIARIES PNB Housing Finance Ltd. PNB Gilts Ltd. PNB Investment services ltd PNB International Ltd., UK Druk PNB Bank Ltd. in Bhutan

JOINT VENTURES UTI Asset Management Co. P Ltd/ UTI Trustee Co. P Ltd ( Joint Ownership) Asset Care Enterprises Ltd. (joint-venture asset reconstruction company) Principal PNB Asset Management Co. PVT. Ltd Principal Trustee Co. Pvt. Ltd PNB Principal Financial Planners Pvt. Ltd PNB Principal Insurance Broking Pvt. Ltd Principal PNB Life Insurance Co. Ltd Everest Bank Ltd., Nepal (Joint Venture) M/s India Factoring & Finance Solutions Pvt. Ltd;

INTERNATIONAL OPERATIONS

Branches at (2) Hongkong & (1)Kabul, (1) Dubai Representative Office at Almaty, Dubai, Shanghai & Oslo PNB International Ltd., UK with 4 branches Everest Bank Ltd., Nepal (Joint Venture)

REGIONAL RURAL BANKS Haryana, HP,, UP, Rajasthan, Bihar and Punjab

20

FIGURE: 1.2.1
PERFORMANCE PNB has retained the leadership position amongst public sector banks, having achieved highest business volume of Rs.4.37 lac crores (Deposits Rs. 2.50 lakh crore + Advances-Rs. 1.87 lakh crore) for the year ended March 2010. The Annual Survey of Financial Express, Mumbai and Ernst & Young published in February, 2010 have also placed PNB at No. 1 in the public sector banks category. Our international rank has also improved from 250 in 2008 to 239 in 2009 amongst the Top 1000 Banks ranking released by `The Banker', London.
th th

21

The above achievements, financial performance of the Bank and the inherent strength of the Bank (strong financials, CRAR, brand, pan-India presence, etc.) have been recognized by the stock markets by raising our stock price over Rs.1000 in March 2010. PNB ranked as:

th

26 amongst Indias top 500 listed companies by ET 500. 3 amongst group of Large Bank by Business Today - KPMG Best Banks 2009 study. 5 amongst group of Large Banks by Business World-PWC Indias Best Bank 2009 survey. No. 1 in the Public Sector Banks' category by `Financial Express', Mumbai - Feb. 2010. PNB is Asia Pacifics 2nd strongest bank as per, The Asian Banker, (Singapore) PNB is ranked as 54th Biggest Emerging Market Banks, out of the list of 200 such banks, as per the Global Finance Magazine; FINANCIAL EXPRESS / ERNST & YOUNG SURVEY ON INDIAs BEST
th rd

BANKS

Name

Overall Rank 2009

Strength & Soundnes s 1 5 2 4 10 1 1 8

Growth

Profitabili ty

Efficiency

Credi t Quali ty 1.5 4 5 6 20 4 6 2

Best Public Sector Banks (27) Punjab National 1 Bank Bank of Baroda 2 Indian Bank 3 Corporation Bank 4 Bank of India 5 Best New Pvt. Sector Bank (6) HDFC Bank 1 Best Old Pvt. Sector Bank (13) Federal Bank Best Foreign Bank (12) JP Morgan Chase Bank 1 1 5 2 13 10 4 1 3 7 1 8 3 6.5 2 2 4.5 1 9 3 6 2 1 4 1 2

TABLE: 1.2.1

22

As per the survey, Amongst 27 Public Sector Banks, Punjab National Bank takes the top slot followed by Bank of Baroda, Indian Bank, Corporation Bank and Bank of India. Punjab National Bank has been ranked Number one in terms of Strength & Soundness, Profitability and Credit Quality. However, it has been ranked at 5 position in terms of growth and at 9 position in terms of efficiency.
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PERFORMANCE OF PUNJAB NATIONAL BANK AS ON 31.03.2010

TABLE: 1.2.2
Rs. crore BANKS Deposi t Mar 2010 24978 9 24140 0 22981 5 23500 0 17010 0 YOY Growth% 2009 2010 26.0 26.5 26.5 21.3 33.5 19.1 25.5 21.1 25.7 22.6 CASA % Mar 09 38.8 34.9 31.0 30.1 30.7 Mar 10 40.9 35.7 32.0 31.0 32.0 Credit Mar 2010 187030 177500 171834 169000 121000 Growth% 09 10 CD Total Rati Busine o ss Mar Mar 2010 201 0 74.9 436819 73.5 418900 74.8 401649 71.9 404000 71.1 291100

PNB BOB BOI Canara Union

29.5 20.9 34.9 23.3 25.9 20.2 28.9 22.3 30.0 25.3

CAPITAL STRUCTURE OF PNB

Subjec ts Net Profit Mar0 0 408.1 4 Mar0 1 458.23 Mar02 562.39 Mar03 842.20 Mar04 1108.69 Mar05 1410.12 Mar06 1439.31 Mar07 1540.08 Mar08 2048.76 Mar09 3090.88

Equity / Total share capital Total Debt

212.2 4 48145 .66

212.24

212.24

265.30

265.30

315.30

315.30

315.30

315.30

315.30

56804. 33

64,532. 05

76,475. 66

89,205. 46

105885. 18

126372. 10

141808. 53

171903. 79

214134. 86

TABLE: 1.2.3
23

FIGURE: 1.2.2

24

OTHER BUSINESS PERFORMANCE PARAMETERS

st Accounts As at 31 March, 2010 Savings Accounts 361.27 lacs Recurring Deposit campaign 4.23 lacs Current Accounts Over 12 lacs Retail Schemes: - PNB Vidyarthi Accounts - Total Freedom Accounts - Tax Saver FD Loans under Retail Lending Schemes Financial Inclusion No Frill accounts Financial Inclusion General Credit Cards issued

Amount (Rs.crores) 78,404 242 24,254 43.08 lacs 2.29 lacs 0.61 lacs 19,214 41.63 lacs 0.688 lacs

TABLE: 1.2.4

25

FIGURE: 1.2.3

26

FIGURE: 1.2.4

27

SHARE PRICES OF PNB

FIGURE: 1.2.5
28

FIGURE: 1.2.6

29

FIGURE: 1.2.7

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ORGANISATIONAL STRUCTURE
Bank has its Corporate Office at New Delhi and supervises 65 Circle Offices under which the branches function. The delegation of powers is decentralized upto the branch level to facilitate quick decision making.

HEAD OFFICE

CIRCLE OFFICES (65)

BRANCHES (5123)

ORGANISATIONAL HIERARCHY
Chairman & Managing Director

CMD

Sh. K. R. Kamath 31

Executive Directors
Sh. M.V.Tanksale Executive Director Sh. Nagesh Pydah Executive Director

Directors
Smt. Ravneet Kaur Govt. of India Nominee Director Sh. L.M.Fonseca Reserve Bank of India Nominee Director Sh. Gautam P. Khandelwal Part-time Non-Official Director

Sh. Vinod Kumar Mishra Part-time Non-Official Director

Sh. Mushtaq A Antulay Part-time Non-Official Director

Sh. Devinder Kumar Singla Share Holder Director

Sh. G R Sundaravadivel Share Holder Director

Sh. Tribhuwan Nath Chaturvedi Share Holder Director

Sh. Mohinder Paul Singh Workmen Employees Director

Sh. Pradeep Kumar Officer Employee Director

GENERAL MANAGERS &BOARD OF DIRECTORS Chief General Managers

R. I. S. Sidhu Ranjan Dhawan I. D. Singh

General Managers(Head office)

R. K. Gupta A. K. Gupta Sudeshna Sharma S. K. Dubey Sushma Bali K. Bhaskar Jagat Ram

K. G. Sharma
Ms Archana Bhargava

B. C. Nigam Krishnan Ramiah G. Banerjee Madanjit Singh Ajay Mishra

V. K. Khanna V. Srinivasan B. P. Sharma

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GENERAL MANAGERS(FIELD)
S. S. Bhandari S. Ranganathan S. P. Singh R. K. Ummat B.P .CHOPRA R. K. Dubey V. K.Sood Rohtash Kumar N. K. Mehta S. S. Chopra N. C. Jain V. M. Sharma

DEPUTY GENERAL MANAGER

ASSISTANT GENERAL MANAGER

CHIEF MANAGER

SENIOR MANAGER

MANAGER

OFFICER

CLERK
Deputy General Manager & Assistant General Manager are also appointed as Regional & Zonal Manager.

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ORGANIZATIONAL INITIATIVES IN 2009-10 CHANGES RESPONDING TO NEW REQUIREMENTS / BUSINESS VERTICALS:

After migration to 3-tier structure organization over a year back, it was felt necessary to create new Circles, as also enhance roles of Field General st Managers. Accordingly, with effect from 1 April, 2010, the total number of Circles has increased to 65 with certain branches / geographical reallocation and 10 Field General Managers have assumed charge in their respective command areas. SME Division at H.O. is managing the SME vertical and current accounts portfolio is also monitored in the Division. In order to provide thrust to MSME Advances, 523 Specialised MSME/SME focus branches have been identified to provide focused attention to this segment of the business. Financial Inclusion Division headed by General Manager is overseeing the Financial Inclusion initiatives. 8 Financial Inclusion Back Offices at Delhi, Chandigarh, Hyderabad, Patna, Lucknow, Jaipur, Shimla and Raipur have started functioning and many ICT based projects have been initiated. Other initiatives / Projects include Bhamashah Project in Rajasthan, Financing of Rickshaw pullers, Weavers Project, Mother Dairy Project in Bulandshahar, Financing Self Help Groups, Inclusion of Construction Workers, etc. Retail Lending Hub & Spoke arrangement has been restructured and Retail Asset Branches under the new set up have started functioning in all circles. International Banking Service Branch, New Delhi is looking after all inward foreign remittances and E-bay New Delhi is dealing with opening of accounts linked to inward foreign remittances from abroad. International Trade Finance Branch, New Delhi is a new centralized arrangement for dealing with all trade finance transactions including issue of foreign letters of credit / negotiation of export bills, etc. for all branches of the Bank.

34

 Under Branchless banking model of financial inclusion, the bank is implementing 46 projects in 17 States. Out of these, 38 are technology based financial inclusion projects while other 8 are credit driven projects. Newly established Credit Monitoring Division has taken over credit monitoring and follow up activities under Credit Follow Up Department and also taken over loan review mechanism under Credit Audit and Review Department. 20 Financial Literacy and Counselling Centres are functioning to provide guidance and assistance to customers.

CIRCLE OFFICES
AGRA AHMEDABAD ALIGARH ALWAR AMRITSAR ARRAH BANGALORE BAREILY BHARATPUR BHATINDA BHOPAL BHUBHANESHWA R BIHAR SHARIF BULAND SHAHAR BURDWAN CHANDIGARH CHANDIGARH-B DELHI DHARAMSHALA FAIZABAD FEROZEPUR GAYA GORAKHPUR GUWAHATI HAMIRPUR HARIDWAR HISSAR HOSHIARPUR HYDERABAD INDORE JAIPUR JALANDHAR JAMMU JABALPUR KANPUR KAPURTHALA KASHIPUR KOZHIKODE KOLKATA KARNAL KURUKSHETRA LUCKNOW LUDHIANA MANDI MEERUT MIDNAPORE MORADABAD MUMBAI MUZZAFARNAGAR MUZZAFARPUR NAGPUR RAIPUR RAJKOT RANCHI ROHTAK SAHARANPUR SHIMLA SRI GANGANAGAR SRINAGAR TRICHY VARANASI

35

CHENNAI DARBHANGA

JHANSI JODHPUR

PATNA PUNE

BACK OFFICES o IBD FARIDABAD ZONAL AUDIT OFFICE o ZAO FARIDABAD

DEPARTMENTS & DIVISIONS OF PUNJAB NATIONAL BANK 1)Board & Coordination division 2) Compliance Division 3)Corporate Marketing division 4)Credit Administration Division 5)Credit Audit Review 6)Credit card Division 7)Merchant Acquiring business 8)Customer care 9) Finance 10)Fraud Prevention 11)General Administration Department 12)Government business pension 13)Human Resource Department 14)International Banking Division 15)Inspection & Audit Department 16) Insurance cell 17) IT department 18) Law division 19)MARD 20)MASD 21) Financial Inclusion 22) Management information system 23) Marketing division 24)Merchant Banking 25)OSPD 26)Printing & Stationary 27)PR & Publicity 28)PSLB 29)Retail Banking Division 30)Risk Management Division 31)Security 32)Share 33)Special Management Division 34)SME 35)Training Department 36)Treasury 37)Transaction Banking Division 38) Strategic Planning & Business Process

36

PRODUCTS & SERVICES OF PUNJAB NATIONAL BANK SME & PSLB PRODUCTS 1. 2. 3. 4. Scheme For Financing Traders
PNB GRAMIN CHIKITSAK Advance Against Future Lease Rentals Scheme For Financing Professionally Qualified Medical Practitioners

MUTUAL FUND & THIRD PARTY PRODUCTS 1. Principal PNB AMC (Mutual Fund Scheme) 2. UTI AMC (Mutual Fund Scheme)
3. Depository Operations (DEMAT A/C & Online Trading 4. PNB Oriental Royal Mediclaim Policy 5. Gold Coin Business (on consignment basis) IT PRODUCTS 1. ATM / DEBIT CARD (Mobile & Biometric ATMs) 2. GLOBAL CREDIT CARD 3. WORLD TRAVEL CARD LIABILLITY A/CS 1. PNB MITRA: Savings Fund account For Financial Inclusion (no frills account) 2. PNB SMART ROAMER : Current account & Earn Interest Like FD account 3. PNB Spectrum Fixed Deposit 4. PNB Prudent Sweep (Saving account & earn interest like FD account)

37

5. PNB Total Freedom account :Salary account For Corporate Employees) 6. PNB Floating Rate Fixed Deposit Scheme 7. PNB Tax Saver Deposit Scheme 8. Senior Citizen Savings Scheme (2004) 9. PNB Vidyarthi Saving Fund account 10.PNB Growth Fixed Deposit Scheme (single deposit 1crore-5 crore) 11.PNB Bulk Fixed Deposit Scheme(single deposit above 5 crores) 12.MIBOR Linked Notice Deposit Scheme 13.PNB Flexi RD Deposit Scheme 14.Recurring Deposit Scheme 15.Capital Gains Account Scheme-1988 16.Balika Shiksha Fixed Deposit Scheme EARNING PRODUCTS 1. 2. 3. 4. 5. 6. 7. 8. 9. Advance Against Gold /Silver Jewellery/Ornaments PNB Sarthi (Conveyance Loan Scooter/Motor Cycle/Moped/Bicycle Car Loan Education Loan Personal Loan For Pensioners Housing Loan ( Public) Personal Loan For Public Mortgage Loan Against IP PNB Baghban Scheme

CUSTOMERS & CLIENTS OF PUNJAB NATIONAL BANK K.G.ROAD SATI EXPORTS LTD BAL PHARMA LTD PRAKASH ROADLINES LTD BAJAJ HOME APPLIANCES LTD KARLE INTERNATIONAL LTD

38

SWOT ANALYSIS OF THE BANK

Strength Fundamentally sound bank 57 Million strong customer base PAN INDIA Presence Well-entrenched Brand Image Dominant position in Indo-Gangetic Plain No competition A leader amongst Public Sector Banks High proportion of customer base in deposits Strong Risk Management Practices Redefined processes through technology initiatives like CBS, ATM, Internet Banking 100% CBS branches High tech platform incorporating EDW, CRM etc. Large network of branches with 76% in Rural & Semi-urban areas Strong controlling & internal audit inspection & checking Expanding overseas network- subsidiaries /jvs
39

Weaknesses Predominant presence in less developed areas leading to high operating cost Complacency (Structural & Environmental) Weak & Inconsistent MIS rendering decision making difficult Limited International presence. Low NRI business More dependence on conventional low margin business No Income from Financial Products such as Insurance, Mutual Fund, Credit Card etc. State Ownership has affected level playing field and competitive ability Less flexibility in dealing with strategic HR & operational issues Imbalance in distribution/ deployment of staff Inadequate skills for modern banking Changing environment, adoption of technological advancement, marketing of products requires change in the mindset of employees Low per employee productivity

Threats Aggressive marketing by competitor banks Expansion of peer Banks/Private Sector Banks in Indo-Gangetic belt eroding our dominance Loss of savings business to Mutual Fund/ Insurance Products which are aggressively marketed as being more remunerative Technological parity of competitor banks Aggressive strategy and innovative products, larger risk appetite of other banks Regulatory norms being more stringent Share holders demand higher returns.

Opportunities Rural India is the next growth horizon with an opportunity 3 times the size of Urban India Financial Inclusion is a clearcut opportunity with overall exposure to formal services of finance being about 20% Great opportunity for expanding business with over 60% population outside the banking service net IT Initiative creating a back bone for increasing reach. It provides an opportunity to go beyond the Brick & Mortar Bank has a visionary leadership which can transform the bank Large workforce of 58398 number of employees. Each and every employee has to believe we can do it, usher in change in our attitudes/conventional wisdom, be a learner willing to adapt to the changing banking environment

Threats have since been converted into Opportunities.

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BEST PRACTICES & NEW INITIATIVES & INNOVATIONS Best Practices:

Adoption and adherence to Code of Commitment towards Customers Adoption and adherence to Commitment towards MSE borrowers Multiple communication channels with customers - Branches, Circle Offices through Chief Host, E-mails, PNB Sparsh website, other websites, other touch points Updates on products, services, service charges, customer notifications on websites Benefit of better risk management / asset liability management practices has enabled lowest Prime Lending Rate in the industry / other competitive pricing.

Customer Orientation / Customer Conveniences:

Customer Care Centre, H.O. Regular customer interaction and feedback Customer Grievance Redressal Mechanism PNB Sparsh website Customer Access 24/7 x 365 (www.sparshpnb.net) Other Customer Services www.pnbindia.in / www.pnbindia.com (Corporate website) www.netpnb.com (Internet Banking website) www.pnbcard.in (Credit Card) https://pnb.in (Corporate E-mail) www.pnb.net.in (Depository Services) www.pnbnet.org.in (on-line education loan website) www.pnb.org.in (eprocurement website) Customer Care No. 1800 180 2222 for MTNL/BSNL Users (Toll Free) 0124-234000 Credit Card Customer Helpline 1800 180 2345 (Toll Free for MTNL/BSNL Users) 0120 4616200. Regular interaction with customers at all offices - 15 of every month Branch Customer Service Committee Monthly Meetings.
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Regulatory Compliances:
5 Social and Corporate Governance Award under the category of Best Corporate
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Social Responsibility Practice 2010 awarded by Bombay Stock Exchange; Corporate Governance: Golden Peacock Award for Excellence in Corporate Governance (2009) presented by Institute of Directors, Delhi; Gold Trophy of SCOPE Meritorious Award for Excellence in Corporate Governance 2009 by Standing Conference of Public Enterprises. RBI has recognized the banks risk management compliance and preparations for advanced measurement approach .

41

IT Supported Initiatives Transaction Banking Division Developments:

PNB ATM Network has expanded to 3544 ATMs as on 31.03.2010; ATM transactions reconciliation has been centralized, which is assisting branches and customers; Internet Banking Services: Single Window view to all accounts with Bank (quick view, statement of accounts, account details). Transfer of funds Inter-Bank and Intra Bank. Online Payments towards Railway/airlines tickets. utility bills (telephone, water, electricity etc), donations, subscriptions, insurance premiums, Mutual Funds etc., PNB Credit card dues, Online payments towards government taxes, duties, fees etc.(like Excise Service, Income, Corporate Taxes etc.). Online Share Trading. Account Administration/Account Management (setting workflow rules/limits) Trade finance. Upload /MIS/Reconciliation features E-freight for Railways

ECS/NECS :
ECS Funds transfer from one a/c to many other a/c or many a/c to one a/c. ECS (Credit) - From single a/c to many a/c e.g. Salary, Pension, Dividend, IT Refund, IPO refund etc. ECS (Debit) From many a/c to single a/c e.g. Telephone Bill, Electricity Bill, EMI of Loans, Tax Collection etc.

NECS is centralized National Electronic Clearing Services:

Mandate Capturing in the CBS which is pre-requisite for commencement of NECS (Debit) has commenced

NEFT & RTGS:

Educate & persuade customers using traditional mode of remittance .i.e. Drafts etc customers to adopt NEFT/RTGS channels. Each Urban/Metro branch of the Circle to execute at least three NEFT transactions per day and each semi Urban branch of the Circle to execute one transaction per day. Circle Head to focus on such branches not sending NEFT

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SIX TECHNOLOGY MILESTONES :

1. PNB Mobile Banking Manual SMS, Thin client GPRS, Thick Client SMS, Thick client GPRS Manual SMS (Pull SMS) can be used on each mobile phone (Facilities like view A/C balance, A/C Stmt. Request, Online mini Stmt, Self transfer of funds, online stop cheque, cheque book request, cheque status inquiry are available in Manual SMS.) Thin Client GPRS can be used on mobiles with browsing capabilities of GPRS (Additional facilities like A/C details, A/C Stmt, Bill payments, Offline request for NEFT & RTGS are available in this flavour).

2. PNB Smart Invest (ASBA) IPO / FPO retail applications supported by blocked accounts 3. PNB Xpress Remit Faster NRI remittances 4. PNB Merchant acquiring business All types of point of sales (POS) transactions acquiring merchant establishments 5. PNB World Travel Card Pre-loaded foreign currency card - $, Euro, GBP 6. PNB Prepaid Card Revised Automatic Business Continuity Plan Automatic branch level back up data in CBS and other provisions. Enhanced IT Security features Enterprise-wide Data Warehouse: Multiple source systems like CBS, Credit Card, ATM Switch, Debit Card etc are integrated Facilitates quicker access to statements since they are pre-published. More than 205 reports ( Control, Analytical , Statistical reports) published Acts as source system for point solutions like AML, CRM, Risk Solutions etc Facilitates Analytics based on data enabling informed decision making.

Indicative Analysis Top Customers in different portfolio of each branch / circle Compare growth/ performance of individual branches in circle on various parameters (including negative performance) on year on year basis Analyze above data for a subset of branches based on branch size, location, business group, district etc. Performance of branches / circles in various segments over a period of time.

43

Cash Management Services Bank had entered into tie-up with some foreign banks for offering them collection facility. Bank has started DD drawing arrangement with several Foreign and Private sector banks. This product gives benefit of both float and commission income. Training has been provided to all branches handling CMS operations and staff of IT section of concerned circle offices. To transfer the benefit of CMS operations to the branches : 100% earning is now been distributed among the collecting branch only. To pass on the benefit of float to the collecting branches in their special current account (CMS collection account) opened at the respective branches.

Recent Initiatives in The Process of Implementation:

1. Lending Automation & Processing System (LAPS)

It will facilitate the automation of whole loan processing cycle from initial to final point. Loan Origination Module It facilitates the maintaining of customer profile, taking leads from various sources and sanctioning/rejecting the loans based on the eligibility criteria, credit score etc. Loan Collection Module: This modules facilitates post sanction follow up, like automatic reminder, sending emails to defaulter in case the instalments is not paid and various other follow up activities.

2. SINGLE WINDOW CONCEPT - Focus on implementation at all branches

The guidelines for implementation of Single Window Concept were issued by HO: IAD circular letter 76/09 & 7/10 vide which following services are to be provided on all Single Window Counters in the branches All Cash Payments upto Rs 20,000/ - (to start with) All Cash Receipts up 25,000/- (to start with) Entering of all Cash / transfer / clearing transactions and passing cash/ transfer/ clearing transactions within vested powers Govt Business activities at approved branches Payment of Demand Draft upto 20,000/Updation of Passbook , issue of statement of Accounts Entry of standing instructions. Stop Payment, Customer Master Data updation, Account Master updation, Cheque Book Issue and related activities

44

Single Windows Concept Enquiry, Account closing , DD Issue, Pay Order, Remittance (NEFT / RTGS) Bills Any other work as per requirement of the branch and as per the job profile of the CTO 3. Strengthening of Circle Help Desks The knowledge gap of the staff manning the Circle Help Desks to be reduced 4. Customised SME credit rating models are under development which shall facilitate credit process in MSE segment of advances.

AWARDS & ACHIEVEMENTS OF PUNJAB NATIONAL BANK

1. "Best IT Team of the Year Award"- at the IDRBT Banking Technology awards for the year 2005-06. 2. SKOTCH Challenger Award- for Change Management for the year 2005-06. 3. Best IT User in Banking & Financial Services Industry 2004- by NASSCOM in partnership with Economic Times. 4. Golden Peacock Award- for Excellence in Corporate Governance - 2005 by Institute of Directors. 5. FICCI's Rural Development Award- for Excellence in Rural Development 2005. 6. Skotch Challenger Award for Exemplary use of Technology- for becoming a pioneer in Public Banks 2005. 7. Golden Peacock National Training - 2004 & 2005- by Institute of Directors. 8. National Award for Excellence in SSI Lending- Ranked 2nd for 4 consecutive years 2002, 2003, 2004 & 2005. 9. Banking Technology Awards 2004- Runner up in 'Best IT Team of the Year Award 2005'- Jointly Adjudged by IBA, Finacle & TFCI. 10. Money Outlook Award 2004- Runner up in 'Best Bank (public Sector) of the year Award' -2005. 11. Niryat Bandhu Gold Trophy- for excellence in export performance for consecutive years 2001, 2002 & 2003 by Federation of Indian Exporters Organization (FIEO). 12. 21st Amongst Top 500 Companies- by the leading Financial Daily The Economic Times, June 2005. 13. 9th amongst India's Top 50 Most Trusted Service Brands- A.C Nielson Survey, The Economic Times Dec 2004. 14. FICCI's Rural Development Award- Award for excellence in rural development 2005. 15. Amity Global Corporate Excellence Award- Amity Business School, Noida has conferred the Award to PNB, after an in-depth research to analyse the strengths and core competencies of the Global 500 companies and banks which have already made an indelible most admired impression on the Indian economy. 2008 & 2007 & 2005.
45

16. National Award For Excellence in lending to Tiny sector- First Prize by By Ministry of Small Scale Industries.2006. 17. Computer Associates Excellence Award- Excellence in EMS Roll Out. 2007. 18. IDRBT Banking Technology Awards- Best IT Team of the Year Award 2006,2008 19. Dun & Bradstreet Award for Priority Sector Lending including Financial Inclusion2009. 20. National Award for Excellence in Lending for Institutional Finance in Propagating KVI Programmes in NORTH ZONE- Khadi & Village Industry Commission, Ministry of Micro, Small & Medium Enterprises, Govt. of India (Interest Subsidy Eligibility Certificate Scheme) 2009. 21. National Award for Excellence in Lending for Institutional Finance in Propagating KVI Programmes in CENTRAL ZONE- Khadi & Village Industry Commission, Ministry of Micro, Small & Medium Enterprises, Govt. of India . 22. National Award for Excellence in Lending for Institutional Finance in Propagating KVI Programmes in NATIONAL LEVEL- Khadi & Village Industry Commission, Ministry of Micro, Small & Medium Enterprises, Govt. of India . 23. India Pride Award by dainik Bhaskar and Daily News analysis- Excellence in PSU 2009. 24. Indira Gandhi Rajbhasha Shield- Promoting Hindi 2009. 25. Emerson Uptime Champion Awards 2009. 26. Best Info Sphere Warehouse Solution Award by IBM 2009 (for implementation of Enterprise Wide Data Warehouse.

46

VISION 2013
Vision represents aspiration levels, more importantly, the need to develop aspiration, structure, processes, people in an integrated way for sustainable growth in the future. Even though aspirations may change, the structure, process and people need flexibility for adapting to the dynamic, even changing competitive environment .Accordingly, the honourable Board of Directors in the meeting held in Shimla in May 2008, proposed the concept of Vision 2013 and set goals which were to be achieved in the next 5 years to position the Bank as the Number One Bank in the country. In this respect Vision 2013 is far more challenging, comprehensive and road map for our Bank in the future.

PNB VISION 2013 PROJECT NAMASKAR

a) QUANTITATIVE DIMENSIONS
Deposits to increase from Rs.166457 Crores in March 2008 to Rs.582000 Crores in March 2013, at an average growth of 32%. Advances to increase from Rs.119502 Crores in March 2008 to Rs.418000 Crores in March 2013, at an average growth of 28%. Total business to increase from Rs.285959 Crores in March 2008 to Rs.1000000 Crores in March 2013, at an average growth of 28%. Operating Profit to increase from Rs.4006 Crores in March 2008 to Rs.15000 Crores in March 2013 with a CAGR of 30.2%. Net Profit to increase from Rs.2049 Crores in March 2008 to Rs.7500 Crores in March 2013, at an average growth of 30%. The Return on Assets [RoA] to increase from 1.15% in March 2008 to 1.30% in March 2013 [This ratio is comparable to the RoA of the Peer Banks and is also better than all banks ratio of 1% as on March 08]. The Return on Equity [RoE] to increase from 19% in March 2008 to 21% in March 2013. Customer base to increase from 3.7 Crores in March 2008 to 15 Crores in March 2013. Number of touch points to be 100000 by March 2013.

47

 To have a rural coverage of 100000 villages in the Indo-Gangetic Plains by March 2013.
b) QUALITATIVE

DIMENSIONS

A leader and front runner amongst nationalized banks In Financial Inclusion In all domestic operations In adopting best risk management practices In adopting global best practices in Corporate Governance & Corporate Social Responsibility In HR policies to raise skills, morale and productivity To be Global Bank Among the top 3 Indian banks with global presence in Middle East, South East Asia, China, UK, Australia, Canada, etc. Bring best global practices to effectively compete with global players in India. Become a Universal Bank provider of complete range of financial services To be the most profitable bank amongst nationalized banks by focusing on : Fee based income/off-balance sheet exposures Mid Cap segment, Retail lending, SME Advances & Agriculture Reduction in Gross NPAs Expenditure Control Low cost deposits Ensuring higher spreads (return on advances minus cost of deposits/funds) Capitalize on IT initiatives Provide more value added services Expand reach of ATMs Back Office Centralization of all CBS branches Promote internet banking Provide IT advisory services to other banks Explore options of in-organic growth Merger of Private/Public Sector Banks Enlargement of customer base and retention of existing customers. Ensure smooth transition to adopting Basel II norms ahead of schedule. Develop robust Management Information System for better decision making & policy prescription. Further entrench brand image of the Bank.
48

SECTION 2
PROBLEM CENTERED STUDY OF THE ORGANISATION

49

2.1 Title:
A study on the Exposure of Credit Risk in Export Bills at Punjab National Bank

2.2 Objectives of the study:

Understand the working of various post shipment credit instruments. To identify the key problem areas in realisation of export bills & also the risk of default faced by the bank so that one can suggest ways to minimize the risk. To study the scope of risk management department and the various activities involved

2.3 Research Methodology:

Type of Research Comparative Research aimed at identifying some of the key problem areas in the field of export bill financing Data Source & Statistical tools : This problem area has been arrived at or explored after studying the data on the export bills for the last three years using certain analytical tools , such as ratios, percentages, charts & graphs. Data collection tool was Secondary Data - Websites and companys internal data, direct observation and unstructured interviews, internal circulars , documents , books internal website,

2.4 Problem Statement:

Credit risk is the possibility of loss associated with changes in the credit quality of the borrowers or counter parties. The counter parties may include individual, small & medium enterprises, corporate, bank, financial institution, or a sovereign. In a banks portfolio, losses stem from outright default due to inability or unwillingness of a borrower or counter party to honour commitments in relation to lending, settlement and other financial transactions. Prior to default, there is no way to discriminate unambiguously between firms that will default and those that will not. At best we can only make probabilistic assessments of the likelihood of default.. Here in this project we are trying to assess the export bills credit risk and suggest the ways of mitigation of the credit risks to an extent.

2.5 Limitations of the Study:

.

Time constraint was also a prime limitation. Data about export bills of only three years was available

50

2.6 BACK GROUND STUDY EXPORT FINANCE

Export finance is a short term working capital finance allowed to an exporter. An exporter may avail financial assistance from any bank provided following two requirements are satisfied: 1) Timely availability of credit: funds should be available to the exporter at the required time. To ensure availability of funds to eligible borrowers Reserve bank has prescribed time schedule to commercial banks for speedy sanctioning of export credit limits. Further, banks are advised to achieve the target of 12% of their total net bank credit under export finance. 2) Cost of funds should be affordable: In order to compete in the international market our exporter may require credit facility at the cheapest interest rate. Since interest subsidy has been withdrawn from 1991, new products (export finance schemes) are made available to the exporters at a comparatively cheaper interest rates.

POST- SHIPMENT FINANCE

Post shipment finance is essentially an advance against receivables, which will be in the form of shipping documents. the responsibility of an Advance will be felt more in case of post shipment advances because Reserve bank will be monitoring the realisation of full proceeds of individual shipments through Advance . Some of the major exchange control regulations concerning export finance at the post shipment stage are as follows: a) Exporter should have an IEC no. and each shipment should accompany the prescribed declaration (GR/SDF/PP/SOFTEX) form in which the value of export will be declared and duly certified by the customs authority. b) Shipping documents along with relative declaration form must be submitted to an AD within 21 days from the date of shipment. If there is any genuine delay beyond the control of the exporter , AD has been delegated with powers to condone the delay and accept the shipping documents even after 21 days from date of shipment. c) The payment should be received in an approved manner within the prescribed time. For Realisation of export proceeds countries all over the world has been divided into 2 groups i.e., Asian Clearing Union (ACU) and Non ACU countries. Exports to the group of ACU countries (Myanmar, Bangladesh, Pakistan, Iran and Sri Lanka) should be realised in ACU dollars (US dollars). Other Than ACU countries, realisation of export proceeds can be in any freely convertible currencies.

DIFFERENT TYPES OF POST SHIPMENT ADVANCES

I. II. III. Export Bills Purchased / Discounted Export Bills Negotiated Advance Against Export bills sent on collection basis
51

IV. V. VI.

Advance against Exports on consignment basis. Advance Against undrawn balances Advance against Duty Drawback.

EXPORT BILLS PURCHASED / DISCOUNTED DA & DP BILLS (NON L/C BILLS)

The export bills, representing genuine international trade transactions, strictly drawn in terms of the sale contract / live firm contract /order may be discounted or purchased by the banks. Proper limit should be sanctioned to the exporter for purchase of export bills facility. Since the export is not covered under Letter of Credit, risk of non- payment may arise. The risk is more pronounced in case of documents under acceptance. In order to safe guard the interest of the bank and also the exporter, ECGC offers coverage of credit risks through their guarantees / policies at the post shipment stage. The bank will normally be covering the advance under Whole Turnover Post Shipment Guarantee Scheme. In addition to this guarantee the exporter should be advised to go for a separate buyer wise policy also. By having this additional policy, wider coverage will be available to the exporter in case of any risk. 1. EXPORT BILLS NEGOTIATED : ( Bills Drawn under Letter of Credit): When export documents, drawn under LC, are presented to the bank for negotiation, they should be scrutinized carefully with the terms and conditions of the LC. The operation of letter of credit is governed by Uniform Customs & Practices for Documentary Credits (1993 Revision) of the International Chamber of Commerce, Brochure No.500. All the documents tendered should be strict in accordance with the L/C terms. It is to be noted that the LC issuing bank undertakes to honour its commitment only if the beneficiary submits the stipulated documents conforming to LC terms. Even the slightest deviation from those terms & conditions specified in the L/C can give an excuse to the issuing bank for refusing the payment to the negotiating bank which might have already paid the beneficiary. Some of the discrepancies commonly observed are listed below: 1. Late negotiation- Submission of documents after the expiry of the L/C 2. Late shipment of goods 3. Late presentation of documents even when the L/C is current documents not submitted within the limitation period if specified in the L/C or within 21 days from date of shipment 4. Drawings in excess of L/C amount 5. Shipments made from and shipped to ports other than those stipulated in L/C. 6. Partial shipments / Trans shipments/ effected, not authorised by the L/C. 7. Bill of Lading / AWB not properly signed, not properly dated and not properly stamped. Alterations, if any, not properly authenticated. 8. Presentation of insufficient and/or incomplete set of B/L.
52

9. Presentation of claused Bill of Lading/ received for shipment Bill of lading / Short Form Bill of Lading / Charter party Bill of lading /- when not permitted in the L/C. 10. Presentation of bill of lading in which On Board notation not dated. 11. Inconsistency in the weight declared in the invoice and the weight list and other documents. 12. Presentation of documents , like invoice , packing list , weight list, insurance certificate / policy , certificate of origin , inspection certificate , Bill of Lading / AWB that , are inconsistent with each other. 13. Inadequate insurance cover 14. Presentation of insurance documents unsigned, undated, unstamped and drawn in a different currency other than the currency of the L/C. Insurance document dated after the date of shipment. 15. Description of goods including charges in the invoice not authorised by L/C. 16. Incomplete or incorrect Drafts / Bills of Exchange. 17. Insufficient number of copies of various documents as called for in the L/C. 18. Non submission of certain Documents as called for in L/C. THE above discrepancies, which are commonly found, should be considered as deviation from the terms and conditions of the L/C. and the opening / issuing bank may refuse documents even if the discrepancies are not materially significant. ADVANCES AGAINST EXPORT BILLS SENT ON COLLECTION BASIS: At Times the exporter might have fully utilised his bills limit and in certain other cases the bills drawn under L/C may have some discrepancies. In such cases the bills will be sent on collection basis. In some cases the exporter himself may request for sending the bills on collection basis anticipating the strengthening of the foreign currency. Banks may allow advance against these collection bills to an exporter. Concessive rate of interest can be charged for this advance unto the transit in the case of DP bill and the transit period plus Usance Period. In the case of Usance Bills depending on the type of drawing. Beyond this period, the interest rate will be subject to the various rates prescribed by RBI depending upon the Usance of the bill. For computing the eligible transit period (NTP), the period will commence from the date of acceptance of the export documents at the branch for collection and not from the date of advance. Before extending this facility to the exporter, branch should ensure that they have proper delegated sanctioning powers to allow such facility. In some banks sanctioning of advances against collection of bills is vested with their respective higher authorities.

53

RISK MANAGEMENT POLICY OF PNB

Risk management is the process by which a bank identifies, measures, monitors and controls its risk exposures to ensure that Risks are understood Risks are within tolerances set by the Board of Directors Decisions having inherent risks are consistent with strategic business objectives Risk taking decisions are explicit and clear The expected return compensates for the risk taken Capital allocation is consistent with risk exposures The banks performance incentives are aligned with risk tolerances. The guiding principles for evolving robust and dynamic risk management practices include: - Board of Directors and top managements responsibility - Risk evaluation/measurement - Framework for managing risk - Independent review - Integration of all risks Detailed operational guidelines, prudential exposure norms etc. are contained in respective policies such as Credit Management & Risk Policy, ALM Policy, Investment Policy and Operational Risk Management Policy etc.

Risk Management Approach:

Banks risk management approach is based on three pillars for each of the three risks i.e. Credit, Market and Operational Risk. The three pillars being: Policy and Tools Organization and Processes Skills and Capabilities The Board of Directors decides the overall risk management policies and approves the Credit Management & Risk policy, Investment policy, ALM policy, Operational Risk Management policy, Policy for internal capital adequacy assessment process (ICAAP), Credit Risk Mitigation & Collateral Management Policy and Stress Testing Policy, containing the direction and strategies for integrated management of the various risk exposures of the Bank. The time schedule for implementation of the Advanced Approaches of Basel II has been prescribed by RBI. The time schedule prescribed is for Internal Models Approach (IMA) for Market Risk, The Standardized Approach (TSA) & Advanced Measurement Approach (AMA) for Operational Risk and Internal Ratings Based (IRB) Approach for Credit Risk (Foundation- as well as Advanced IRB). Bank shall continue its journey for migration to advanced approaches.

54

CREDIT RISK
Credit risk is the possibility of loss associated with changes in the credit quality of the borrowers or counter parties. The counter parties may include individual, small & medium enterprises, corporate, bank, financial institution, or a sovereign. In a banks portfolio, losses stem from outright default due to inability or unwillingness of a borrower or counter party to honour commitments in relation to lending, settlement and other financial transactions. a credit risk may be defined as the risk that a counter party to a transaction will fail to perform according to the terms and conditions of the contract, thus causing the holder of the claim to suffer a loss. Banks all over the world are very sensitive to credit risk in various financial sectors like loans, trade financing, foreign exchange, swaps, bonds, equities, and interbank transactions.

CREDIT RISK RATING BY PNB through PNB Trac

Information Required Name of the borrower: For example: BAL Pharma Limited Constitution: Public ltd company/Private ltd company/JHF/Partnership Industry: For Example :( Pharmaceutical Bulk Drugs Activity: For Example: Manufacturing of Bulk Drugs & Formulations Credit risk rating is based on four major parameters: Parameters 1)Financial Evaluation Weight 40 FINANCIAL EVALUATION It is evaluated based upon following parameters: Growth Rate Profitability Cash Flows 2) Business & Industry Evaluation 25 3)Management Evaluation 25 4)Conduct Evaluation 10

Past Financial Absolute Comparison Solvency Liquidity Debt Coverage Return On Capital Employed
55

Profitability

Future Risk Impact Of Contingent Liability Foreign Transaction Risk Impact Of Merger / Demerger/Expansion On Key Financials Cash Flow Adequacy Impact of Financials on Future Financials

Subjective Assessment of Financials Transparency in Accounting Quality of Inventory Reliasibility of Debtors Quality of Inventory/Advances made to group other Companies

Trend Adjustment: Adjustment for Financial Trend Net Sales PBDT Operating Cash Flow/Total Debt Tangible Net worth for last 5 years

BUSINESS AND INDUSTRY EVALUATION Parameters for evaluation Operational Efficiency Evaluation Operating Leverage Net sales/Operation Assets Inventory Turnover Raw material consumed/ Net sales Credit Period Allowed

Market Position Evaluation Competitive Position: Expected sales growth, Market Dominance, Market share, Trend in Market share. Input Related Risk: Availability of Raw material and other Critical Inputs, Dependence on Imports. Production Related Risk: Capacity utilisation risk, State of technology used, patent & proprietary technology. Price Competitiveness : Economies of scale, Pricing Flexibility, Buyers Power Marketing : Long term contracts /Assured off takes, Direct Marketing Setup.

56

INDUSTRY RISK EVALUATION For Example: Pharmaceutical Bulk Drugs industry This type of Evaluation can be done through various industry research reports like ICRA reports, CRISIL reports. MANAGEMENT EVALUATION: Actual Gross Sales Targeted Sales Actual PBT Targeted PBT

Subjective Assessment of Management 1. 2. 3. 4. 5. 6. 7. Management Set Up & Corporate Governance Commitment & Sincerity Track Record In Execution of Projects Track Record in Debt Repayment Track Record in Industrial Relations Financial Strength/ Flexibility/Group Support Capital Market Perception

Conduct Of Account Evaluation 1. 2. 3. 4. Preventive Monitoring System Rating Status of account Operations in account Submission of Financial data statement

Based on these parameters the bank evaluates and comes to a final rating of the borrower Score Obtained Above 80.00 Above 77.00 upto 80.00 Above 72.00 upto 77.00 Above 70.00 upto 72.00 Above 67.00 upto 70.00 Above 62.00 upto 67.00 Above 60.00 upto 62.00 Above 57.00 upto 60.00 Above 52.00 upto 57.00 Above 50.00 upto 52.00 Above 47.50 upto 50.00 Above 42.50 upto 47.50 Above 40.00 upto 42.50 Above 30.00 upto 40.00 30.00 and Below Rating PNB AAA PNB AA+ PNB AA PNB AAPNB A+ PNB A PNB APNB BB+ PNB BB PNB BBPNB B+ PNB B PNB BPNB C PNB D Description Minimum Risk Marginal risk Marginal risk Marginal risk Modest Risk Modest Risk Modest Risk Average Risk Average Risk Average Risk Marginally Acceptable Risk Marginally Acceptable Risk Marginally Acceptable Risk High Risk Caution

TABLE: 2.6.1
57

Credit Risk Rating Models: To measure risk in individual borrowal accounts, the bank has identified various segments viz. large corporate, mid corporate, small, NBFC, New projects, Banks, Retail, etc. Borrowers in these segments reflect similarity of potential credit risk factors and as such can be rated using the single model for the segment. Parameter under these models captures potential credit risk both internal as well as external, which may affect the credit quality of a borrower. The credit risk rating awarded to a borrower is subject to review from time to time. These models have already been implemented at the field level and results of these models are regularly monitored to calibrate/ refine the models. The bank is also aggregating the credit risk in its rated portfolio and monitoring the same. Advance portfolio risk identification and measurement models shall be adopted by the bank on completing the measurement of credit risk in its entire portfolio. All existing borrowers above a thresh hold limits are also subject to a continuous preventive monitoring system. This system helps in identifying accounts developing adverse signals to initiate corrective measures. The bank also has system of identifying and monitoring weak accounts which develop incipient sickness. Experience gained through these systems is used in refining the various models. Further, it is also ensured that business unit while framing schemes of lending also identify potential new credit risk factors so as to analyze the impact of same and correspondingly provide for mitigation. The bank has developed the following models/tools:

Sr.No. 1

Credit Risk Rating Model Large Corporate

Applicability Total Limits Above Rs. Crore (OR) Sales 15 Above Rs.100 Crore, except Trading concerns

Mid Corporate

Above Rs.5 Cr and Above Rs.25 Cr up to Rs.15 and up to Rs.100 Cr. (OR) Cr. All trading concerns falling in the Large Corporate category shall also be rated under this model

Small Loans

Above Rs.50 lakh & Up to Rs.25 Cr. up to Rs.5 Cr (AND) Above Rs.2 lakh & up to Rs.50 lakhs All Non Banking Financial Companies irrespective of Limit 5 Cost of Project above Rs.15 Cr.

4 5 6

Small Loans II NBFC

New Projects Rating Above Rs. model Cr. (OR)

58

Entrepreneur Business Model

New Borrower setting up Cost of Project new business and upto Rs.15 Cr. requiring finance above Rs 20 lac upto Rs. 5 Cr (AND) However, all new trading business irrespective of limits shall be rated under this model

Half Yearly Review of i) Listed companies. Rating OR ii)Availing limits (FB+NFB) Rs.50.00 crores from our bank. above

Facility Framework

Rating Assigning rating to facility sanctioned to the borrower based on default rating and securities available

10

Credit Risk Rating All banks and Financial Institutions models for Banks/ FI

TABLE: 2.6.2

Industry-wise Credit Exposure Limits:

A. Industry / Sector

Proposed ceiling for next 12 months or till review of limits (Rs. in Crore) 6000 1000

1. 2. 3. 4. 5. Coal 6. Computer Software 7. Construction 8. Cotton Textiles 6000 6000 500 500 Cement & cement products Chemicals (Others) 6000 2000 All Engineering Automobiles Incl. Trucks, Motors

59

9. Fertilisers 10. Food Processing 11. Gems & Jewellery 12. Iron & Steel 13. Jute Textiles 14. Leather & Leather products 15. Mining 16. Other Metals & Metal Products 17. Other Textiles 18. Paper & Paper products 19. Petroleum 20. Pharmaceuticals 21. Rubber & Rubber products 22. Sugar 23. Tea 24. Tobacco & Tobacco products 25. Vegetable Oils (Incl. Vanaspati) B. Infrastructure 1. Ports 2. Power 3. Roads & Bridges 4. Telecommunication 5. Other Infrastructure 2000 500 500 3600 500 2000 10800 2000 6000 2000 1000 1000 500 10800 1000 6000 2000

6000 13300 6000 6000 8400

TABLE: 2.6.3

60

FIGURE: 2.6.1

FIGURE: 2.6.2
61

SECTION 3
DATA ANALYSIS & INTERPRETATION

62

Foreign Outward Bills Purchased (FOBP)

The following is a table showing various facts & figures about foreign outward bills purchased in Punjab National Bank K.G road Bangalore for last three years.

FOBP (Foreign outward Bills Purchased) 1-4-2007 --31-3-2008 SIGHT No of Bills Lodged Total bills for the year Total Amount Lodged (rs) No of Bills Realised Total Amount Realised (rs) No of Bills Delinked Total Amount Delinked(rs) In Delinked : No of Bills Recovered No of Bills Outstanding Total Amount Outstanding (rs) Total Bills Outstanding USANCE 1-4-2008--31-3-2009 SIGHT USANCE 1-4-2009--31-3-2010 SIGHT USANCE

16 16 12049234 5 6051494 0 0

6 6 3695699 0 0 0 0

141 152 157970077 146 159108650 1 1697760

58 64 72183150 33 49944816 3 620703

228 233

158 186

161360939 154101272 173 121513788 0 0 106 10041428 7 3682818

0 0

0 0

0 0

2 1

0 0

4 3

134550

1423512

11

28

60

73

TABLE: 3.1.1

63

FOBP USANCE BILLS

Total No Of Bills 186 106 64 61 0 33 6 28 No of Bills Realised Outstanding Bills

73

FIGURE: 3.1.1

FOBP SIGHT BILLS

Total No of Bills 233 152 161 5 146 173 11 60 5 No of Bills Realised Outstanding Bills

FIGURE: 3.1.2
INTERPRETATION: As can be seen from the above graphs & tables: The Total No of Bills (Usance & Sight) has considerably increased from 07-08 to 09-10.the increase in the ) 07 10.the bills lodged is positive, The level of outstanding bills is increasingly high in almost all the lev years in both sight & usance bills in each of the three financial years from 2007 to 2010. We sance can very well see that in year 07-08 there are 6 sight bills which were outstanding & in the 07 year 09-10 there are 73 sight bills which are outstanding, in the same way in Usance bills 11
64

bills were outstanding but in 09- it has increased to 60 bills. The prime reason for this is -10 also indicated in the same i.e. improper & incomplete realisation of bills.

Foreign Outward Bills for Collection (FOBC)

FOBC (Foreign O Outward Bills For Collection) 1-4-2007 -- 31-3 3-2008 SIGHT No of Bills Lodged Total Bills for the year Total Amount Lodged (rs) No of Bills Realised Total Amount Realised (rs) Total Bills Outstanding USANCE 1-4-2008 -- 31-3-2009 SIGHT USANCE 1-4-2009 -- 31-3-2010 2009 SIGHT USANCE

50 50 36631740 40

27 27 84859529 26

216 226 15558768 3 147 96315203 79

86 87 59539430 32 24385649 55

173 252 9285342 5 140 9505982 4 112

151 206 82571225 73 41046935 133

28105951 87417236 10 1

The following is a table showing various facts & figures about foreign outward bills for collection in Punjab National Bank K.G road Bangalore for last three years.

TABLE: 3.1.2

FOBC SIGHT BILLS

Total No of Bills 226 50 1 252 147 40 140 10 79 112 No of Bills Realised Outstanding Bills

FIGURE: 3.1.3
65

FOBC USANCE BILLS

Total No of Bills 206 133 87 27 1 26 32 1 73 55 No Of Bills Realised Outstanding Bills

FIGURE : 3.1.4

INTERPRETATION: As can be seen from the above graphs & tables: The Total No of Bills (Usance & Sight) has considerably increased from 07-08 to 09-10.the increase in the ) 07 10.the bills lodged is positive, The level of outstanding bills is increasingly high in almost all the lev years in both sight & usance bills in each of the three financial years from 2007 to 2010. We sance from can very well see that in year 07-08 there are 10 sight bills which were outstanding & in the 07 08 year 09-10 there are 112 sight bills which are outstanding, in the same way in Usance bills it 10 was only one bill which was outstanding but in 0 10 it has increased to 133 bills which are 09-10 outstanding. The prime reason for this is also indicated in the same i.e. improper & incomplete realisation of bills. Number of sight bills realised have declined from 147 (08 . (08-09) to 140(09-10), it is clearly seen that the number of bills realised in Usance bills is not enough een comparing the rise in the number of bills.

66

Foreign Outward Bills Negotiated Under Letter Of Credit (FOBNLC)

FOBNLC (Foreign Bills Negotiated under LC) 1-4-2007--31-3-2008 SIGHT No of Bills Lodged Total Bills for the year Total Amount Lodged (rs) No of Bills Realised Total Amount Realised (rs) No of Bills Delinked Total Amount Delinked(rs) In Delinked : No of Bills Recovered No of Bills Outstandin g Total Amount Outstandin g (rs) Total bills outstanding USANCE 1-4-2008--31-3-2009 SIGHT USANCE 1-4-2009-31-3-2010 SIGHT USANCE

6 6 677422 0 4 587749 3 0 0

16 16 15828616 11 11236698 3 2859450

18 20 3321063 9 17 2165425 0 0 0

10 14 8038367 14 1222680 3 0 0

19 22 88512993 22 10096610 9 0 0

23 23 1194590 3 23 1194590 3 0 0

0 0

2 1

0 0

0 0

0 0

0 0

0 2

0 2

0 3

406895 0

0 0

1423512 0

TABLE: 3.1.3
The following is a table showing various facts & figures about foreign outward bills for collection in Punjab National Bank K.G road Bangalore for last three years.

67

FOBNLC SIGHT BILLS

Total No. Of Bills 20 6 1 22 17 4 2 3 No of Bills Realised 22 Outstanding Bills

FIGURE: 3.1.5

FOBNLC USANCEBILLS
Total No of Bills 23 16 14 14 No of Bills Realised 23 Outstanding Bills

11

FIGURE: 3.1.6
INTERPRETATION: As can be seen from the above graphs & tables: The Total No of Bills (Usance & Sight) has increased from 07 07-08 to 09-10.the increase in the bills lodged is 10.the positive, The level of outstanding bills is low in almost all the years in both sight & usance el bills in each of the three financial years from 2007 to 2010. We can very well see that in year ls 07-08 there are only 2sight bills which were outstanding & in the year 09-10 there are no sight 10 sight bills which are outstanding, in the same way in Usance bills there are only 2 bills outstanding & in the year 09-10 there are no bills which are outstanding. The prime reason 10 outstanding.
68

for this is also indicated in the same i.e. proper & complete realisation of bills. Number of sight bills & usance realised have shown increasing trend.

Foreign Outward Bills Discounted ( FOBD )

FOBD (Foreign Outward Bills Discounted) 1-4-2009 -- 31-32010 SIGHT USANCE

1-4-2007 -- 31-3-2008 SIGHT No of Bills Lodged Total Bills for the year Total Amount Lodged (rs) No of Bills Realised Total Amount Realised (rs) No of Bills Delinked Total Amount Delinked(rs) In Delinked : No of Bills Recovered No of Bills Outstanding Total Amount Outstanding (rs) Total bills outstanding USANCE

1-4-2008 -- 31-3-2009 SIGHT USANCE

83 83 298188976 76 283048344 2 888271

3 3 10,68,388 2 801957 0 0

45 52 213009271 50 227906295 2 4162615

6 7 516299 7 7 542942 8 0 0

18 18 17477350 19 17986097 0 0

6 6 437932 1 0 0 0 0

1 Partial 23256 5

0 0 0 1

1 1 159310 0

0 0 0 0

0 0 0 0

0 0 0 6

The following is a table showing various facts & figures about foreign outward bills discounted in Punjab National Bank K.G road Bangalore for last three years

TABLE: 3.1.4

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FOBD SIGHT BILLS

Total No of Bills Realised 83 52 18 1 No of Bills Realised 76 50 18 5 0 0 Outstanding Bills

FIGURE: 3.1.7

FOBD USANCE BILLS

Total No of Bills 7 3 1 6 2 0 No of Bills Realised 7 Outstanding Bills 6

FIGURE: 3.1.8

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INTERPRETATION: As can be seen from the above graphs & tables: The Total No of Bills (Usance & Sight) has decreased from 07-08 to 09-10. there is a decline in the trend of number of bills. The level of outstanding bills is low in almost all the years in sight bills in el each of the three financial years from 2007 to 2010. We can very well see that in year 07 20 07-08 there are only 5 sight bills which were outstanding & in the year 09-10 there are no sight bills 10 which are outstanding, in the same way in Usance bills there is only one bill outstanding & in the year 09-10 there are 6 bills which are outstanding. The prime reason for this is also 10 outstanding. al indicated in the same i.e. proper realisation of sight bills. The status of the usance bills is . alarming as there is a declining trend in the realization of bills.

YEARWISE ANALYSIS OF VARIOUS OUTSTANDING ALYSIS EXPORT BILLS

OUTSTANDING BILLS (07-08) (07

FOBP FOBNLC FOBD FOBC

29% 45%

16% 10%

FIGURE: 3.1.9

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OUTSTANDING BILLS (08-09) (08

FOBP FOBNLC FOBD FOBC

19% 2% 0%

79%

FIGURE: 3.1.10

OUTSTANDING BILLS (09-10) (09

FOBP FOBNLC FOBD FOBC

35%

64%

0% 1%

FIGURE: 3.1.11
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INTERPRETATION: As can be seen from the above pie charts: In the year (07-08) percentage of (07 08)

bills outstanding in FOBP is highest i.e. 45% & FOBC is second highest with 29%, FOBD has a share of 16% & FOBNLC has a share of 10% respectively. In the year (08 (08-09) percentage of bills outstanding in FOBC has increased from 45% to 79%, Also we can very well see that there is a decrease in the level of outstanding in FOBP i.e. 45% to19%, of FOBNLC i.e.10%to 2% and FOBD i.e. 16% to nil. In the year (09-10) percentage of (09 10) outstanding bills in FOBC is highest with 64%, while 35% of FOBP bills are also outstanding in the year , FOBNLC is reduced to nil whereas FOBD has a share of 1% during the period.

YEAR WISE ANALYSIS OF OUTSTANDING SIGHT & USANCE EXPORT BILLS

OUTSTANDING BILLS (07-08) (07

USANCE 26%

SIGHT 74%

FIGURE: 3.1.12

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OUTSTANDING BILLS (08-09) (08

USANCE 49%

SIGHT 51%

FIGURE: 3.1.13

OUTSTANDING BILLS (09-10) (09

SIGHT 45% USANCE 55%

FIGURE: 3.1.14

INTERPRETATION: As can be seen from the above pie charts: In the year (07 (07-08) percentage of bills outstanding in sight bills is greater than usance bills i.e. 74% whereas usance has a share of 26%. In the year (08-09) percentage of bills outstanding in sight is 51% (08 09) whereas usance bills are very much closer i.e.49%. In the year (09-10) percentage of bills as (09 10) outstanding in sight is 45% whereas usance bills are greater than sight bills i.e. 55%.

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4 FINDINGS

1. There is a positive increasing trend in the total no. of bills in FOBP. Foreign Outward Bills Purchased faces a fair amount of credit risk among all other bills. FOBP also has the highest outstanding amount among all the export bills i.e. rs 39847151 (sight) and also rs 144059844 (Usance).The level of outstanding bills is in an increasing trend. This is causing a lot of concern to the bank. 2. There is an increasing trend in the total no. of bills in FOBC. Foreign Outward Bills collection faces the highest amount of credit risk as it has the highest amount of outstanding bills in comparison to all other export bills in almost all the financial years.

3. The bank has done very well in Foreign Outward Bills Negotiated under Letter of Credit. A bill which is protected with a letter of credit is usually a very safe transaction. As there is a bank of the counter party also involved and also the information about the party is available through the Exim bank too. The bank basically deals with the documents and it has to scrutinize and carefully judge the documents otherwise it has to face the consequences of the discrepancies. 4. Total No of Bills (Usance & Sight) has shown an declining trend in Foreign Outward Bills Discounted .The level of outstanding bills is low in almost all the years in sight bills in each of the three financial years from 2007 to 2010. The prime reason for this is also indicated in the same i.e. proper realisation of sight bills. The status of the usance bills is alarming as there is a declining trend in the realization of bills.

5. It can be concluded from the analysis that the sight bills have not performed well in comparison to the usance bills. There is more percentage of outstanding bills in sight bills than usance bills in the years 07-08 & 08-09. The situation have changed in the year09-10 where usance bills have more percentage of outstanding bills than sight bills.

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5 SUGGESTIONS

1. ECGC Cover
Branches should ensure that the export bills tendered by the customer are either covered under the whole Turnover Post Shipment Guarantee of ECGC or a separate policy has been obtained wherever required. The incumbent-in-charge must go through the conditions of ECGC Policy/Guarantee to ensure that Banks interest is safeguarded .In cases where specific approval of ECGC is required to cover post shipment credit under the Guarantee issued to bank, branches purchasing the documents must ensure that necessary approval from ECGC is obtained and the limit fixed by ECGC, if any, is adhered to.

2. Steps to strengthen the rating exercise:

In order to stabilize and create robust credit risk management system, bank should continuously monitor the ratings and their migration. Seminars, workshops, regular visits of senior officials and video conferences should be conducted regularly to equip the CRMD officials to monitor the migration and reduce deviation. Notes on rating migrations are placed to CRMC for information. The credit risk rating of a borrower shall become due for updating after the expiry of 12 months from the month of confirmation of rating or 18 months from the date of balance sheet on the basis of which credit risk rating was assigned, whichever is earlier.

3. Use of CIBIL data and RBI defaulters list

With the aim of taking informed credit decisions, the bank has become a member of Credit Information Bureau of India, an institution set up for creation of the database in respect of the borrowers of banks/FIs and sharing the same with its member banks. Credit Information Report (CIR) should be drawn while considering fresh/enhanced/renewal proposal. This initiative helps the bank in better credit decisions thereby resulting in lower NPAs. In cases where name of a company appears in the RBI list of defaulters and the Director(s) of such company are also Director(s) in another company seeking credit facilities from bank, such case should not normally be considered. However, sanctioning

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authority not below the level of Circle Head can take a view in this regard after conducting due diligence exercise.

4. Credit Risk Mitigation techniques

When taking collateral, banks should calculate their adjusted exposure to a counterparty for capital adequacy purposes in order to take account of the effects of that collateral. Banks are required to adjust both the amount of the exposure to the counterparty and the value of any collateral received in support of that counterparty to take account of possible future fluctuations in the value of either, occasioned by market movements. as well as of the eligible financial collaterals.

5. External Credit assessments

Bank must use the ratings of the following domestic credit rating agencies (arranged in alphabetical order) for the purposes of risk weighting their claims for capital adequacy purposes: a) Credit Analysis and Research Limited; b) CRISIL Limited; c) FITCH India; and d) ICRA Limited. Bank must also use the ratings of the following international credit rating agencies (arranged in alphabetical order) for the purposes of risk weighting their claims for capital adequacy purposes where specified: a. Fitch; b. Moodys; and c. Standard & Poors

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6. APPENDIX SAFEGUARDS SUGGESTED BY RBI IN RESPECT OF ADVANCES AGAINST BILLS 1) Branches should be circumspect in discounting bills drawn by front companies of
industrial groups.

2) Bills financing should be part of the working capital credit limit provided to the
borrower after proper appraisal of the working capital needs.

3) The standing and credit worthiness of the borrower as well as the Drawee of the bills
should be carefully looked into.

4) At the collecting branches, the bills should be promptly presented for payment on due
dates and fate should be informed to the sending branch.

5)

For the purpose of retirement of bills, the borrower should not be allowed fresh facility of bills purchase/discount. be extended to prime customers and that too, sparingly.

6) Cheque purchase facilities should not be permitted as a matter of routine but should 7) 8)
It has to be ensured that bills facilities are not disproportionate in relation to the business of the borrower, the drawees are credit worthy and are not associates and the documents are genuine. In the case of documentary bills, the railway receipts/motor transport receipts/bills of lading tendered therewith should be scrutinised carefully to verify their genuineness, the quality and quantity of merchandise covered by them, the date of issue, etc. and ensure that transport receipts are from approved carriers and not stale. At the time of discounting the accepted bills, it is to be ensured that confirmation in regard to the acceptance is obtained from drawees, especially where the bill amounts are large or where there may be reasons to suspect the genuineness of the bill or acceptance. Bills covering film prints must not be treated as Documentary bills. These should be treated as clean D/Ds and powers exercised accordingly and such facilities should be allowed only to first class parties who are considered good for unsecured advances. Bills received for collection should be sent to such of the branches or branches of scheduled bank (where bank does not have a branch) for collection as are situated nearest to the drawee's place of business/residence. In case no other bank's branch is situated at the place, the bill may be sent to drawee's bank directly after obtaining written authority from the party. While discounting Usance bills, it is to be ensured that the bills so discounted have arisen out of the actual movement of goods. For this purpose, the relative invoices as also the documents like RRs/MTRs should be verified and in respect of
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9)

10)

11)

12)

local sales, the bills should be supported by either receipted delivery orders/challans or invoices receipted by the drawees concerned.

13) 14) 15)

Purchase of clean bills covering local sale of goods where bills are not drawn on parties connected with borrower or his selling agent may be allowed as per vested loaning powers. Branches should be selective in choosing new borrowers desiring facilities against discounting or purchase of documentary bills, and have to be equally selective while discounting/purchasing bills even from existing customers. While purchasing/discounting/negotiating bills under LCs or otherwise, branches should establish genuineness of underlying transactions/documents.

SAFEGUARDS:
Safeguards to be observed by branches purchasing/discounting and receiving export bills are given hereunder: a) Discounting Branches While accepting Bills accompanied by carrier receipts for their discounting, the Branches should properly scrutinise the documents and satisfy that: 1. Bills purchased and discounted have arisen out of genuine trade transactions and are made for movement of goods. 2. Bills are not drawn on self or allied/associate concerns of the borrower unless proper sanction is held. Bills purchased/discounted are within the sanctioned limits of the party. Carrier receipt should be of a transport operator, whose name appears on the approved list of the bank and is in the Special Format as laid down by the IBA Scheme and should carry special endorsement printed in RED between two parallel lines indicating that the consignee copy of MTR is to be used for borrowing from the bank.

3. 4.

5. Register should be maintained wherein the details of all the bills received back unpaid should be recorded and in future, bills drawn on such parties may not be accepted for discounting. 6. As soon as the Bills accompanied by carrier receipts are discounted, a notice of lien under registered post should simultaneously be sent to the destination office of the transport company to enable the transporter to detect if any MTRs have been issued unauthorisedly or fraudulently by anybody. A copy of such notice of lien should also be endorsed to the Drawee branch.
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7.

At the time of discounting the accepted bills/hundies, confirmation in regard to acceptance is obtained from drawees especially where the bill amounts are large or where there are reasons to suspect the genuineness of the bill or acceptance. Names of the drawees on which the bills are drawn must be got approved from the Circle head, where so provided in the sanction. While recording entries in the DD purchased Register, it should be ensured that all relevant information is properly recorded and in the column 'From whom Purchased' the name of the company concerned as also the name of the beneficiary must invariably be indicated to help facilitating subsequent follow up and realisation of amount from the reimbursing offices.

8.

9.

10. CR on the drawees of the bills must be collected and placed on record of the Bank. 11. Usance of the bills should not be more than the period mentioned in the sanction. 12. It should be ensured that the bills are properly drawn and stamped and are payable where there are offices of the bank or other scheduled commercial bank.

CREDIT RISK MANAGEMENT

PD The Probability of Default is the likelihood that a loan will not be repayed and fall into default. This PD will be calculated for each company who have a loan. The credit history of the counterparty and nature of the investment will all be taken into account to calculate the PD figures. Many banks will use external ratings agencies such as Standard and Poors. However, banks are also encouraged to use their own Internal Rating Methods as well. The amount of funds that is lost by a bank or other financial institution when a borrower defaults on a loan. Academics suggest that there are several methods for calculating the loss given default, but the most frequently used method compares actual total losses to the total potential exposure at the time of default A total value that a bank is exposed to at the time of default. Each underlying exposure that a bank has is given an EAD value and is identified within the bank's internal system. Using the internal ratings board (IRB) approach, financial institutions will often use their own risk management default models to calculate their respective EAD systems An adjustment to the return on an investment that accounts for the element of risk. Risk-adjusted return on capital (RAROC) gives decision makers the ability to compare the
80

LGD

EAD

RAROC

returns on several different projects with varying risk levels. RAROC was popularized by Bankers Trust in the 1980s as an adjustment to simple return on capital (ROC).

For a collateralised transaction, the exposure amount after risk mitigation is calculated as follows: E* = max {0, [E x (1 + He) - C x (1 - Hc - Hfx)]} Where: E* = the exposure value after risk mitigation E = current value of the exposure for which the collateral qualifies as a risk Mitigants He = haircut appropriate to the exposure C = the current value of the collateral received Hc = haircut appropriate to the collateral Hfx = haircut appropriate for currency mismatch between the collateral and Exposure The exposure amount after risk mitigation (i.e., E*) will be multiplied by the risk weight of the counterparty to obtain the risk-weighted asset amount for the collateralised transaction. Sovereign will include Reserve Bank of India, DICGC and CGTSI, which are eligible for zero per cent risk weight. Banks may apply a zero haircut for eligible collateral where it is a National Savings Certificate, Kisan Vikas Patras, surrender value of insurance policies and banks own deposits. The standard supervisory haircut for currency risk where exposure and collateral are denominated in different currencies is eight per cent.

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6. Bibliography

Books
1. 2. 3. 4. Export Finance published by Foreign Exchange Dealers Association Of India Documentary Credits published by Foreign Exchange Dealers Association Of India Banking Ready Reckoner 2010 Published by Punjab National Bank Sundaram & Varshaney(2006), Banking Theory law & Practice ,S.Chand publishers New Delhi

Websites
1. www.rbi.org.in 2. www.fedai.org.in 3. www.pnbindia.com 4. www.allbankingsolutions.com 5. www.iccindiaonline.com 6. www.lcviews.com 7. www.coastlinesolutions.com 8. www.investopedia.com 9. www.moneycontrol.com 10. www.buzzingstocks.com 11. www.sitpro.org.uk/trade

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