Canara Bank

CANARA BANK

Executive Summary

Topic: Credit risk Management at Canara Bank

About the Canara Bank:

Founded in 1906, Canara Bank is one of the premier banks in India, with a

net work of 2578 branches across the country. The bank was the first two launch

networked ATMs in India and obtain and ISO certification. Canara bank has also

achieved the distinction of being the country’s highest net profit earner among

nationalized banks for the year march 2007.

The bank has already carved a niche in providing IT-based services such as

networked ATMs, anywhere banking, Telebanking, Remote access Terminals,

Internet and Mobile banking, Debit cards, etc. Canara bank a vision to help improve

the economic condition of the common people of India by inculcating the habit of

savings in rural areas.

As part of its vision of using technology to provide affordable banking

services to the vast rural population of India, Canara bank has extend the

performance and cost benefits of enterprises Linux to its customers. With a

modernized branch infrastructure, Canara bank hopes to serve customers in a

timely and efficient manner, reinforcing its image of being a customer savvy bank

About the topic

Credit risk is defined as the possibility of losses associated with diminution in

the credit of quality of borrowers or counter parties. In a banks portfolio, losses stem

from outright default due to inability or unwillingness of a customer or counter party

to meet commitments in relation to lending, trading, settlement and other financial

transactions.

As credit risk is one of the challenging tasks to banks I have selected this

topic for my study in order to know the various types of risk and the types of

strategies the banks use to mitigate the risk.

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CANARA BANK

OBJECTIVES OF THE STUDY:

1. To know the methods to be implemented in banks.

2. To know the various methods used by bank to mitigate credit risk.

3. To know the various types of credit risk in bank.

4. To know the executing methods used in managing credit risk.

DATA COLLECTION METHOD

Primary data: Primary data collected through the interaction with chief manager,

senior manager and bank staff.

Secondary Data: Secondary data collected from bank circulars, bank guidelines

book and internet.

Brief Findings

Current system of credit risk management

Canara Bank has a system of checks and balance in place of extension of

credit. The aspect covered under the present system is multiple credit approvals,

independt audit and risk review and risk rating system for various categories of

system and corresponding pricing mechanism. The bank maintains a diversified

portfolio of risk assets, and ensures on going control of risk considerations .All credit

exposures above RS 5 Crores are assigned risk waiting assigned by domestic credit

rating agencies recognized by RBI

The credit risk management system at the branch level has been maped out in

detail

1. Internal rating based (IRB) approach the standardized approach adopted so

far, provides incentives to banks improving their credit risk management

techniques.

2. Banks may have discretion and flexibility in defining the exposure classes,

such as corporate, project finance, etc.

3. Unless suitable modified, the adoption of the new Accord in its present format

would result in significant increase in the capital charge for banks.

LIMITATIONS

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CANARA BANK

1. The study restricted to only one branch.

2. The time constraint was a limiting factor, as more time required carrying 0 ut

study on other aspects of the topic.

3. Due to secrecy it is difficult obtain actual facts and figures of advances of

branches.

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CANARA BANK

INDUSTRIAL PROFILE

Overview:

The enhanced role of the banking sector in the Indian economy, the

increasing levels of deregulation along with the increasing level of the competition

have facilitated globalization of the Indian banking system and placed numerous

demands on banks. Operating in this demanding environment has exposed banks to

various challenges. The last decade has witnessed major changes in the financial

sector-new banks, new financial institutions, new instruments, new windows and

new opportunities- and, along with all this, new challenges. While deregulation has

opened up new vistas for banks to augment revenues, it has entailed greater

competition and consequently greater risks. Demands for new products, particularly

derivatives, has required banks to diversify their product mix and also effect rapid

changes in their processes and operations in order to remain competitive in the

globalize environment.

The benefits of globalization have been well documented and are being

increasingly recognized. Globalization of domestic banks has also been facilitated

by tremendous advancement in information and communication technology.

Globalization has thrown up lot of opportunities but accompanied by concomitant

risk. There is a growing realization that the ability of countries to conduct business

across national borders and the ability to cope with the possible downside risks

would depend, inter – alia, on the soundness of the financial system and the

strength of the individual participants. Adoptaion of appropriate prudential,

regulatory, supervisory, and technological framework on par with international best

practices enables strengthening of the domestic banking system, which would help

in fortifying it against the risks that might arise out of globalization in India

we had strengthened the banking sector to face the pressures that may arise

out of globalization by adopting the banking sector reforms in a calibrated Mann

followed the twin governing principles of non-disruptive progress and consultative

process 1.

Legal prescriptions for ownership and governance of banks in banking regulation

Act, 1949 have been supplemented regulatory prescriptions issued by RBI from time

to time.

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CANARA BANK

Outsourcing risk:

Banks are increasingly using outsourcing for achieving strategic aims lading

to either ratio nationalization of operational costs are taping specialist expertise

which is not available internally. ‘Outsourcing’ may be defined as a banks use of a

third party, including an affiliated entity within a corporate group, to perform activities

on a continuing base that would normally be undertaken by the bank itself. Typically

outsourced financial services include applications processing (loan organization,

credit card), document processing, investment management, marketing and

research, supervision of loans data processing and bank office related activities etc.

Application of advanced technology:

Technology is a key driver in the banking industry, which creates new

business modules and process, and also revolutionizes distribution channels. Banks

which have made in adequate investment in technology have consequently faced

and erosion of there market shares. The beneficiaries are those banks which have

invested in technology. Adoption of technology also enhanced the quality of risk

management systems in banks. Recognizing the benefits of modernizing their

technology infrastructure banks is taking the right initiatives. While doing so, banks

have four options to choose from: they can build a new system those selves, or buy

best of he modules, or buy a comprehensive solution, or outsource. In this context

banks need to clearly define their core competencies to be sure that they are

investing in the areas that will distinguish them from other market players, and give

them a competitive advantage.

The global challenges which banks face or not confined only to the global

banks. These aspects are also highly relevant for banks which are part of a

globalized banking system. Further, over coming these challenges by the other

banks is excepted to not only stand them in good stead during difficult times but also

augurs well for the banking system to which they belong and will also equip them to

launch themselves as a global bank.

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CANARA BANK

Company profile

Genesis

Founded as 'Canara Bank Hindu Permanent Fund' in 1906, by late Sri.

Ammembal Subba Rao. Pai, a philanthropist, this small seed blossomed into a

limited company as 'Canara Bank Ltd.' in 1910 and became Canara Bank in 1969

after nationalization.

''A good bank is not on£v the financial heart of the community, but also one

with an. obligation of helping in every possible manner to improve the economic

conditions of the common people"

- A. Subba Rao Pai.

Canara Bank Founding Principles

1. To remove Superstition and ignorance.

2. To spread education among all to sub -serve the first principle.

3. To inculcate the habit of thrift and savings.

4. To transform the financial institution not only as the financial heart of the

community but the social heart as well.

5. To assist the needy.

6. To work with sense of service and dedication.

7. To develop a concern for fellow human being and sensitivity to the

surroundings with a view to make changes/remove hardships and sufferings.

Sound founding principles, enlightened leadership, unique work culture and

remarkable adaptability to changing banking environment have enabled Canara

Bank to be a frontline banking institution of global standards.

As Canara bank founded in 1906, Canara Bank is one of the premier banks in

India, with a network of 2578 branches across the country. The bank was the first to

launch networked ATMs in India and obtain an ISO Certification. Canara Bank has

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CANARA BANK

also achieved the distinction of being the country's highest net profit earner among

nationalized banks for the year March 2007.

The bank has already carved a niche in providing IT -based services such as

Networked ATMs, Anywhere Banking, Telebanking, Remote Access Tensional,

Internet & Mobile Banking, Debit Cards, etc. Canara Bank has a vision to help

improve the economic condition of the common people of India by inculcating the

habit of savings in rural areas.

Challenges

Canara 'Bank achieved 100% computerization very early in the course of its

operational history. It deployed a number of bank automation tools such as a

customized Total Branch Automation (TBA) package called Integrated Branch

Banking Software (18BS), which was developed by its subsidiary, Can Bank

Computer Services Ltd. (CCSL). IBBS was deployed on Novell NetWare at close to

1400 medium sized branches across the country.

Canara Bank follows a detailed tendering process for new hardware

purchases, in which contracts are awarded on the basis of bids. After nearly a

decade of deploying IBBS, the bank had purchased different types of hardware from

multiple vendors. As a result, standardization on Novell NetWare became difficult,

and supporting the legacy IBBS application became a challenging task.

Moreover, IBBS was developed using Micro focus COBOL and designed to

run in a 16 bit DOS environment. With poor support for the TCP/IP protocol stack,

the NetWare servers running IBBS could not be integrated into the corporate

network easily.

Essentially, the NetWare servers functioned as branch file servers, without

any data connectivity. Regular maintenance of different versions of IBBS across

1400 branches was a painstaking effort in the absence of network support.

Patching, troubleshooting and version upgrades had to be conducted onsite.

Branches in rural and remote areas were particularly difficult to access and required

support personnel to travel frequently. Also, the availability of certified hardware on

NetWare was limited, which made adding new machines difficult.

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CANARA BANK

As Canara Bank's customer base expanded, its banking services began to

scale, creating an immediate need for Internet Banking, Anywhere Banking (banking

from any Can Bank branch across the country) and an expanded ATM network.

Novell NetWare's closed legacy environment did not allow room to accommodate

these new technologies. Canara Bank had to purchase additional machines running

Microsoft Windows to interface with these new technologies, which was extremely

inefficient from a hardware utilization standpoint. New hardware and Microsoft

Windows licenses strained budgets and made new technology projects difficult to

scale and sustain.

When additional branches were added to the bank's network, procuring new

servers that were certified to run on NetWare was difficult, as IHVs had ceased to

provide support for older versions of the as. Micro Focus had also ceased support

for the COBOL version on which the IBBS package had been developed. A

combination of all these factors made migration attractive.

Migrating the 1400 odd legacy NetWare servers posed another challenge:

Canara Bank wanted to switch platforms but not hardware. Deploying the latest as

available, without going into a hardware refresh cycle that would cost millions of

rupees was a challenging task. The bank had amassed about a dozen different

types of machines after a decade of deploying IBBS. This heterogeneous mix of

hardware that spanned across more than1,000 server 10,000destopsmadethe

project very complex. Canara Bank began to look for a platform that could deliver the

latest innovation along with complete hardware freedom.

Future plan

Moving from the legacy NetWare platform to Red Hat Enterprise Linux has

opened up significant opportunities for Canara Bank. With networking support now

available, Canara Bank is planning to deploy Red Hat Network Satellite to send

updates for both IBBS as well as the operating system to all distributed machines

across the country. Enterprise Linux has also made Remote Management and

health monitoring of remote servers possible.

With the tremendous benefit’s provided by Enterprise Linux, Canara Bank

plans to move its Anywhere Banking and Internet Banking Ii steners to the

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CANARA BANK

Enterprise Linux platform. Enterprise Linux has provided Canara Bank with the

freedom and choice to develop a scalable growth plan, which was not possible

under NetWare's closed legacy environment.

The power of Linux is not restricted by hardware limitations, as it can run on

different kinds of architectures. Canara Bank has managed to save crores of rupees

in new hardware acquisition costs, by using a lightweight customized Linux

distribution on its existing hardware

The Bank Today

Canara Bank is one of the premier banks in the country, accredited with

umpteen distinctions. The present stature of the Bank is due to its strong

fundamentals and quality customer orientations. Profit making since inception, the

Bank today ep itomizes a perfect blend of commercial and social banking.

For the year March 2007, the Bank clocked the highest net profit ( RS.1110

crore) among nationalized banks, with significant improvement in capital adequacy

ratio (13.50%) and asset quality (net NPA ratio of 0.94%).

The Bank has already carved a niche in providing IT -based services. With

100% computerization of the branches, the bank provides a wide array of services,

such as, Networked ATMs, Anywhere Banking, Telebanking, Remote Access

Terminal also Internet & Mobile Banking, Debit Card etc. The Bank was the first

among banks to launch networked ATMs and obtain ISO Certification.

Commercial consideration has, no way, diluted the Bank's role in national

priorities. Canara Bank is in fact the first bank to be conferred FICCl award for

contribution to rural development.

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CANARA BANK

CANARA BANK SERVICES

Anywhere Banking:

Anywhere Banking is a technology-based, customer-friendly service

designed to provide greater convenience to our customers. With Anywhere Banking

facility,once customer has an account with any of the select branches, Customer

can operate it

From any other designated branch across 85 cities.

FACILITIES:

Individuals I joint account holders (operated severally) maintaining Current I

58 I OD Accounts:

I. Withdrawal of cash

2. Remittance of cash

3. Transfer of funds

4. Balance enquiry

5. Issue of mini statement

6. Depositing local cheques for collection

7. Purchase of Demand draft

Firmsl Companies I Other Bodies maintaining Current I OD I OCC Accounts:

1. Transfer of funds between accounts; from one Anywhere Banking branch to

another anywhere banking branch.

2. Depositing of local cheques for collection and crediting to the respective

account at any Anywhere Banking branch.

ELIGIBILITY:

Account holders should have maintained a minimum average balance of

Rs.5,OOO/ - in SB account and Rs.I 0,000/ - In Current account in the last six

months

FEATURES:

1. Cash withdrawal upto Rs.50, OOO/ - per occasion

2. Transactions permitted on production of ident ity card issued exclusively for

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CANARA BANK

ANYWHERE BANKING facility

3. Facilities of both intra-city and inter-city transactions.

4. HOME CLEARING - on line debit of cheques drawn on our own A WB

branches within the city / clearing zone.

Tele services

Access information about your account right from your home, office or from

anywhere over telephone. A round the clock teller answering the enquiries from

anywhere presenting voice information at any time.

You can make the following enquiries/requests over telephone:

Balance in the account including clear balance. Last five transactions in the

account.

Request for cheque book. Request for pass sheet.

Change in pass word. Fax on demand.

Note: The facility is password protected to ensure secrecy. Ask your Branch

Manager for details and enroll today itself the service 'is absolutely lice of cost

Personal Banking:

Deposits

Savings Bank Account

Current Account

Term Deposits

- Fixed Deposits

- Kamadhenu Deposits

- Recurring Deposits

- Can flexi Deposits

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CANARA BANK

- Ashraya Deposits (for Senior Citizens)

Loans & Advances

Retail Loan Products

- Home Improvement Loan

– Cancash

- Canmobile

- Can budget

- Teachers Loan

Card Services

Insurance

NRI

- NRE (Non Resident External Rupee Account)

- NRO (Non Resident Ordinary Account)

- FCNR (Foreign Currency Non Resident Accounts -Banks) - RFC Deposits

Loans & Advances

- Housing Loan

- Home Improvement

- Cancarry (Consumer Durables)

- Cancash (Shares)

- Canmobile(vehicle)

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CANARA BANK

General Facilities

-Safe Custody Services

-Safe Deposits Locker

-Nomination facility

Other Services/Facilities

-N R I Branches

-N R I Services

-Remittance Facility

-Facilities For Returning Indians

Rural Financing

-Agriculure & Rural Credit

-Kisan Credit

-Loans for setting up Agri Clinic

-Minor Irrgation Loans

-Farm Machinery Loans

-Farm Development Loans

-Vehicle Loan for Agricultureists

-Loans for Plantation Crops

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Vidyasagar (Educational Loan)

- Housing Loan

- Loans to SSIs

- Charter for SSIs

- Other Priority Sector Loans

- Government Sponsored Schemes

- Lead Bank Activities

- Agricultural Consultancy Services

Social Banking

- Rural Development Schemes

- CBJRDT Institutes

- Women Development

- Social Banking

- Community Concerns - RUDSETIs

International Banking Services

Canara Bank entered Forex arena in 1953 with the opening of its first Foreign

Exchange Department in Mumbai.

Today Canara Bank the 4th largest Bank in India catering to the cross border

trade & remittances and financing of foreign trade.

We finance exports at pre-shipment stage as well as post shipment stage,

which can be availed either in foreign currency or Indian Rupee s.

In addition we facilitate forfaiting. That is, discounting of deferred export

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CANARA BANK

receivables on 'without recourse basis' from an overseas forfaiting agency.

The Bank has been the pioneer in financing of LC based International Trade

transactions in India.

The Bank not only finance at customers option in foreign currency at pre -

shipment and post- shipment stages at LIB OR related rates but also finance the

import leg in foreign currency where imported inputs are required for exp0l1s.

The Bank has the expertise in handling project exports of goods and services.

The Bank has an excellent worldwide correspondent relationship and have

the capability to handle any export, import, remittance and related transactions

anywhere in the world and in any currency.

Non fund based transactions like adding confilmations to LC, issuing inward

and outward Bid bonds & guarantees, establishing LCs for import into India,

arranging buyer's credit at attractive terms etc. are our forte. Canara Bank has a

branch in London and hollyowned subside in Hong Kong. We have a joint venture

with SBI at Moscow under the name Commercial Bank of India LLC. We have

recently opened a Representative Office at Shanghai, People Republic of china.

They are engaged in Trade finance and have expertise on the Indian market

scenario. The Bank also manages 2 Exchange houses in the Gulf and arrangement

with 20 Exchangf Houses and 18 Banks for drawing on DD’s from Gulf Countreis on

our select branches throught out India.

The Bank has 5 forex dealing rooms located in Mumbai, New delhi, Calcutta,

Chennai and Banglore in India. We provide a whole range of services and products

like purchases and sale of 7 world currencies forward booking and other forex

hedging instrument like currency swaps.

Our 16 Foreign Deparment located in major cities in India have the requisits

expertise to guide you and inform you in any matter connected with our products

and services as well as the current forex regulation.

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Subsidiaries of Canara Bank

CAN FIN HOMES LIMITED:

Can Fin Homes Limited was established on 29.10.1987 as a Sponsored

Entity of the Banle some of the premier financial institutions such as HDFC, UTI and

NHB are the co-promoters of the Company.

Canara Bank holds 29.30% of equity in the Company.

Sri K Venkataramaiah, General Manager of the Bank IS Managing Director of

the Company.

Apart from the Managing Director, the Board of Directors is complied of top

Executives of the Bank, institutional nominees of HDFC, UTI and NHB and also

professionals in the field of accounts/finance/Banking.

The Registered Office of the Company is at No. 29, Sir M N Krishna Rao

Park Road, Basavanagudi, Bangalore 560 004.

The Company has 41 branches and 5 Representative Office spread across the

country.

Activities:

The prime objective and activity of the Company is to provide Ion g term

finance to individuals for construction or purchase of residential houses/flats

and to Companies or Corporations or Societies or Associations for the

purpose of construction or purchase of residential houses flats

Over the years, the company has added new products to their range and

value addition is done to the existing products to keep updated with the

changing market scenario and the competition, which is getting tougher with

each passing day. Personal loans to the existing borrowers, loans for

purchase of sites, insurance cover for loaners, etc., are some examples of

innovation/value addition.

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CANARA BANK

Bank's goodwill, the innate strength of the Company approach and an

unflinching business acumen have always kept the business on an envious

platform making good profits and paying rich dividends and their pragmatic

ever since incepection.

The Company also took a major step in diversification by launching three

NonHousing Finance Products namely Premises Loan for practising

professionals (Venture), Mortgages Loans (Net worth) and Loan against rent

receivables (Ncash)

CANBANK FACTORS LIMITED:

Post Sale funds crunch is proving a handicap for many industries and

business in the smooth cycling of capital. Canbank Factors Limited (CFL) was

established in 10.05.1991 to mitigate this problem of the industry and business and

ensure a smooth flow of capital in the entire cycle.

This Company is promoted by our Bank alongwith Andhra Bank and SIDB!.

The Registered office is at No. 17, Seshadri Road, Bangalore 56 0 009.

The Company is now being headed by Sri G R Seshadri as Managing

Director a senior executive in the cadre of Deputy General Manager deputed from

the Bank.

The Board of the Company consists of Chairman & Managing Director,

Executive Director and a General Manager of the Bank, apart from the Managing

Director. SIDBI and Andhra Bank have appointed their nominees. There are 3 non-

official Directors from the profession of audit/accounts/ Banking/Finance.

Has a network of 8 branches in southern and we stem part of the courtly and

proposes to add some more during the next financial year.

Activity:

•• Factoring Services.

•• To cater to the needs of the clientele, Company has always on the look out for

innovative and competitive products. Introduction {)f variants of factOling such as

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CANARA BANK

International Factoring/Export Factoring and Sub -yariants such as Invoice

Discounting backed by LCs/Hundisffripartite Agreemt'llIs are examples of their

consistent endeavour to design/redesign their products.

CRISIL has given the following RATING to the Companv:

"PH" - indicating highest safety for short term debt program alld Commercial

Papers "FAA+" - indicating higher safety for Public Deposits

"AA" - indicating higher safety for non-convertible debentures

Has developed a well designed "Management Information System" (MIS)

Prudential norms prescribed by RBI are strictly complied with.

Has developed in house "Internal Risk Evaluation System" (IRES).

Has attained Nil Net NPA position for 4 consecutive years 200 2-03, 2003-04, 2004

-05 and 2005-06.

The Company is accredited with an ISO Certificate -"DIN EN ISO 9001 :2000" by

TUV CERT Certification body of Germany.

Operations are fully computerised from Day one.

CANBANK VENTURE CAPITAL FUND LIMITED:

In our economic environment, assistance for establishment of new ventures

in the field of industry is not easily forthcoming. To assist the new ventures, our

Bank had formed a Venture Capital Fund in the year 1989. The Fund is managed by

Canbank Venture Capital Fund Ltd, a wholly owned Subsidiary of Canara Bank.

This is the only Company of its kind sponsored by a Public Sector Bank in the

country. Sri B Sudhakar Shetty, Asst General Manager of the Bank is heading the

Company as Managing Director.

Apart from the Managing Director, the Company's Board of Directors consists

of our Chairman & Managing Director, Executive Director and a General Manager of

the Banle There are two non-official Directors, each drawn from the field of industry

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CANARA BANK

and Finance. The Registered Office is at No. 14, Naveen Complex, 4th Floor, M G

Road, Bangalore 560001.

Activity:

Trustee and Manager of Canbank Venture Capital Fund.

CANBANK COMPUTER SERVICES LIMITED:

With fast increasing impetus ~n information technology and extensive use of

computers in more and more spheres, the Bank found good opportunity for

establishment of a Company which can develop softwares and provide consultancy

services to computer users. This thought ofthe Bank culminated in the

establishment ofCCSL on 13.08 .1994.

The Company is co-promoted by 2 other Public Sector Banks and 3 Private

Sector Banks. Canara Bank is holding 62.97% of the equity of the Company.

The Registered Office is situated at No. 14, Naveen Complex, 7 th Floor, M G

Road, Bangalore 560 001

B Sivaraman, Deputy General Manager of the Bank is heading the Company as

Managing Director of the Company.

Apart from the Managing Director, the Board of Directors consists of our

Chairman & Managing Director and Executive Director. There is one Director each

from Bank of Baroda, Lakshmi Vilas Bank, ING Vysya Bank Limited and Vijaya

Bank on the Board.

Activities:

CCSL designs and develops software for banks, financial institutions and

Govemment Departments, with its extensive in-house infra-structure and proven

technical expertise. All its products and Projects are well documented and user -

friendly, with on-line help, data encryption and audit features.

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CANARA BANK

CCSL offers services in the following areas:

1. Software development

2. Business Process Outsourcing

3. Training

4. Data warehousing Solution

5. Web based solution

6. Information Systems Audit

7. Consultancy Servic

GILT SUCURITIES TRADING CORPORATION LIMITED

• This is the latest of the Subsidiaries of Canara Bank so far. Established

on06.06.1996 and co-promoted by Corporation Bank and Bank of Baroda, is a

Primary Dealer Subsidiary accredited by RBI. Company is a wholly Owned

Subsidiary ofCanara Bank since September 2004.

The Registered Office is at 1-1, Kalpatharu heritage, Manekji Wadia Building,

127, M G Road, FOlt, Mumbai 400 023.

Presently, the Company is under the stewardship of Sri D G Kamath as

Managing Director who is a Deputy General Manager of the Bank on

secondment to the Company.

The Board of the Company consists of our Chairman & Man aging Director,

Executive Director, 2 General Managers of the Bank and 2 Chartered

Accountants and a former Banker.

Activity:

Primary Dealer accredited by RBI for dealing III Government of India Dated

Securities and Treasury Bills.

Strengthening Infrastructure in the Government Securities (G Sec) Market so as

to make it vibrant, liquid and broad based.

Development of Underwriting and Market Making capabilities.

Improving Secondary Market Trading System.

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CANARA BANK

With the mentioned objectives, GSTCL participates actively both III

Security and Money Market.

Reserve Bank of India, being the Regulator of Primary Dealers, sets certain

goals in tenns of Bidding Commitments and Success Ratio in the Primary

auction of G Secs and T Bills, to be accomplished by them which form the basis

for renewal of PD's licence. GSTCL has the distinction of achieving these

benchmarks consistently since inception. Underwriting of G Secs in the auction

is yet another obligation cast on PDs.

Bond yields being the function of interest rate, the Company's asset portfolio is

subject to market vagaries caused by factors like inflation, liquidity, government

borrowing programmes, coupon, maturities of papers issued and also event

baserisks. In order to manage and mitigate these risks the Company has well

defined and board approved investment policy so also Risk Management Policy.

As typical of a trader, the Company is encashing price volatility to earn profits.

Day-to-day operations are largely supported by Call and Repo Borro wings.

Thus efficient funds management holds key to improving profitability.

The Company is also into retailing G Secs to individual investorslPFsffrusts/

Charitable Institutions through 24 designated branches of the parent, Canara

Bank. and also has put in place arrangements for retailing through Stock

Exchanges.

CANBANK INVESTMENT MANAGEMENT SERVICES LIMITED

Bank had established its Mutual Fund arm "Canbank Mutual Fund" on

19.12.1987 for foraying into the Capital Market. CMF is an independent Trust

governed by a Board of Trustees,

When the RBI issued directives to form Asset Management Companies to

manage the assets of Mutual Funds and such other Trusts, Canbank Investment

Management Services Limited was established by the Bank on 02.03.1993 as a

Wholly Owned Subsidiary of the Bank,

Sri N R Rarnanujam, Deputy General Manager of the Bank is at the helm of the

Company as Managing Director. Two General Managers of the Bank is also on the

Board. There are four non-official Directors on the Board drawn from various fields

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CANARA BANK

connected to finance,

CANBANK FINANCIAL SERVICES LIMITED:

This is the first Subsidiary emerging from the stable of Canara Bank.

Established on 01.06.1987 as a Wholly Owned Subsidiary of the Bank. Cantina was

very quick to carve a niche for itself in the Merchant Banking arena as a premier

institution providing a host of financial services under one roof.

Registered Office of the Company is housed at No. 14, Naveen Complex, 6

th Floor, M G Road, Bangalore 560 001.

Sri M. S. Prabhu, Divisional Manager of the Bank is heading the Company

Executive Director. Apart from the Executive Director, the Board of Director consist

of two General Managers of the Bank and a Chartered Accountant who is ;; non -

official Nominee as Chairman.

Activities:

Activities of Canfina were curtailed post security scam of 1992. Canfina is

presently attending to matters like collection oflease rentals and realizations of

investments.

DETAILS OF SECTIONS/DIVISIONS/DEPARTMENTS COMINC UNDER EACH

FUNCTIONAL WIN G OF HEAD OFFICE

PERSON N EL WING:

I. Personnel Management Section..

2. Industrial Relations Section.

3. Human Resources and Organisation Development Section.

4. Head Office Staff Administration Section.

5. House Magazine and Library Section.

6. Official Language Section.

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CANARA BANK

7. Staff Training College.

8. Recruitment Cell.

9. SC/ST Cell.

CORPORATE CREDIT WING

1.General Credit Sanctions-I Section.

2.General Credit Sanctions-II Section.

3.Export Import Credit and Development Section.

4.Project Finance Department.

5.Technology Up gradation Fund Scheme Cell.

RISK MANAGEMENT WING'

1. Credit Policy Section.

2. Industrial Advisory Division.

3. Operational Risk Management Group.

4. Credit Statistics Section.

5. Credit Review And Monitoring Section.

6. Integrated Mid Office.

PRIORITY CREDIT WING

1. Priority Credit Section.

2. Agricultural Consultancy Services.

3. Small Scale Industries Division.

4. Regional Rural Banks Division.

5. Rural Development Section. 6. Social Banking Cell.

23

CANARA BANK

PLANNING AND DEVELOPMENT WING

1. Development Section.

2. Economic Research Section.

3. Management Information and Planning Section.

4. Customer Service Section.

5. Publicity and Public Relations Section.

6. Corporate Merchant Banking Division.

7. Marketing, Research & Product Development Section.

8. Corporate Cash Management Services.

RECOVERY WING.

1. Recoveries Section.

2. NP A Management Section.

3. Legal Section.

4. Sick Industries and Rehabilitation Section.

FINANCIAL AND GENERAL ADMINISTRATION WING:

a) General Administration Department -

1. Furniture and Bills Section. 2. Premises, Policy and Administration Section. 3. Technical Cell. 4. Records and Tappal Section. 5. Premises and Estate Section. 6 Printing Section. 7 Stationery Section. 8 Central Security Cell. 9 Estate Policy and Control Section.

24

CANARA BANK

b) Accounts and Taxation Department -

1. Balance Sheet and Central Accounts Section.

2. Staff Provident Fund.

3. Staff Welfare Fund.

4. Pension Fund.

5. Government Accounts Section.

6. Executor, Trustee and Taxation Section.

7. IBA Reconciliation Section.

8. DD Reconciliation Section.

9. ATM and Debit Card Reconciliation Section.

TREASURY AND INTERNATIONAL OPERATIONS WING'

1. Treasury and Investment Division.

2. Overseas Banking Division.

RETAIL BANKING AND SUBSIDIARIES WING'

a) Can card Division

b) Retail Banking Division

1. Retail Banking Division.

2. Bank assurance Section.

3. Cross Selling of Mutual Fund Products Section.

c) Subsidiaries Division

1. Subsidiaries Section.

25

CANARA BANK

Names of Subsidiaries and Associates

a) Canbank Mutual Fund Limited. b) Canbank Factors Limited. c) Canfm Homes Limited. d) Canbank Investment Management Services Limited. e) Canbank Computer Services Limited. f) Canbank Venture Capital Fund Limited. g) Gilt Securities Trading Corporation Limited. h) Canbank Financial Services Limited.

INSPECTION WING.

1. Planning Section.

2. Follow Up Section.

3. Review and Reporting Section.

4. Information Systems Audit Section.

5. Vigilance Department.

6. Staff Administration Section.

7. Organisation and Methods Section.

DEPARTMENT OF INFORMATION TECHNOLOGY- WING'

1. Planning Establishment & Training Group.

2. Administrative Software Group.

3. Service Units Software Group.

4. Branch Software Group.

5. Delivery Channel & Communication Group.

6. Procurement Group.

7. Payment System Group.

8. New Projects Group.

9. Core Banking Group.

26

CANARA BANK

CORPORATE GOVERNANC&MODEL

CODE OF CONDUCT

1. Need and objective of the Code:

Clause 49 of the Listing Agreement entered into with the Stock Exchanges,

requires, as part of Corporate Governance the listed entities to lay down a Code of

Conduct for Directors on the Board of an entity and its Senior Management. Senior

Management has been defined to include personnel who are members of its Core

Management and functional heads excluding the Board of Directors.

Accordingly the Bank has laid down this Code for its Directors on the Board

and its Core Management (individual bank will decide on the composition of core

Management).

2. Bank's belief system:

This Code of Conduct attempts to set forth the guiding principles on which

the Bank shall operate and conduct its daily business with its multitudinous

stakeholders, government and regulatory agencies, media, and anyone else with

whom it is connected. It recognizes that-the Bank is a trustee and custodian of

public money and in order to fulfils its fiduciary obligations and responsibilities, it has

to maintain and continue to enjoy the trust and confidence of public at large.

The Bank acknowledges the need to uphold the integrity of every transaction

it enters into and believes that honesty and integrity in its internal conduct would be

judged by its external behaviors. The Bank shall be committed in all its actions to

the interest of the countries in which it operates. The Bank is conscious of the

reputation it carries amongst its customers and public at large and shall endeavor to

do all it can to sustain and improve upon the same in its discharge of obligations .

The Bank shall continue to initiate policies, which are customer centric and which

promote financial prudence.

27

CANARA BANK

2 Philosophy Of The Code:

The Code envisages and expects -

a. Adherence to the highest standards of honest and ethical conduct,

including proper and ethical procedt.res in dealing with actual or apparent

conflicts of interest between personal and professional relationships.

b. Full, fair, accurate, sensible, timely and meaningful disclosures in the

periodic reports required to be filed by the Bank with government and

regulatory agencies.

c. Compliance with applicable laws, rules and regulations.

d. To address misuse or misapplication of the Bank's assets and resources.

e. The highest level of confidentiality and fair dealing within and out side the

Bank

A. General Standards of conduct .

The Bank expects all Directors and members of the Core Management to

exercise good judgment, to ensure the interests, safety and welfare of customers,

employees, and other stakeholders and to maintain a cooper ative, efficient,

positive, harmonious and productive work environment and business organization.

The Directors and members of the Core Management while discharging duties of

their office must act honestly and with due diligence. They are expected to act with

that amount of utmost care and prudence, which an ordinary person is expected to

take in his/her own business. These standards need to be applied while working in

the premises of the Bank, at offsite locations where the business is being conducted

whet her in India or abroad, at Bank-sponsored business and social events, or at

any other place where they act as representatives of the Bank.

B. Conflict of Interest

A "conflict of interest" occurs when personal interest of any member of the

Board of Directors and of the Core Management interferes or appears to interfere in

any way with the interests of the Banle Every member of the Board of Directors and

Core Management has a responsibility to the Bank, its stakeholders and to each

28

CANARA BANK

other. Although this duty does not prevent them from engaging in personal

transactions and investments, it does demand that they avoid situations where a

conflict of interest might occur or appear to occur. They are expected to perform

their duties in a way that they do not conflict with the Bank's interest such as-

Employment / Outside Employment - The members of the Core

Management are expected to devote their total attention to the business

interests of the Bank. They are prohibited from engaging in any activity that

interferes with their performance or responsibilities to the Bank or otherwise

is in conflict with or prejudicial to the bank

Business Interests - If any member of the Board of Directors and Core

Management considers investing in securities issued by the Bank's

customer, supplier or competitor, they should ensure that these investments

do not compromise their responsibilities to the Bank. Many factors including

the size and nature of the investment; their ability to influence the Bank's

decisions; their access to confidential information of the Bank, or of the other

entity, and the nature of the relationship between the Bank and the

customer, supplier or competitor should be considered in determining

whether a conflict exists. Additionally, they should disclose to the Bank any

interest that they have which may conflict with the business of the Bank.

Related Parties - As a general rule, the Directors and members of the

Core Management should avoid conducting Bank's business with a

relative or any other person or any firm, Company, Association in

which the relative or other person is associated in any significant role.

Relatives shall include:

Father

Mother (including step-mother}

spouse

Son (including step-son)

son's wife

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CANARA BANK

Father's father

Father's mother

Mother's mother

Mother's father

•• son's son

•• Son's son's wife

Son's daughter.

•• Son's Daughter's husband

Daughter's husband

•• Daughter's son

•• Daughter's son's wife

Daughter's daughter

•• Daughter's daughter's husband

•• Brother (including step-brother)

Brother's wife

•• Sister (including step-sister)

•• Sister's husband

If such a related party transaction is unavoidable, they must fully disclose the

nature of the related party transaction to the appropriate authority. Any dealings with

a related party must be conducted in such a way that no preferential treatment is

given to that party.

30

CANARA BANK

In the case of any other transaction or situation giving rise to conflicts of

interests, the appropriate authority should after due deliberations decide on its

impact.

C. Applicable Laws

The Directors of the Bank and Core Management must comply with applicable laws,

regulations, rules and regulatory orders. They should report any inadvertent non-

compliance, if detected subsequently, to the concerned authorities.

D. Disclosure Standards

The Bank shall make full, fair, accurate, timely and meaningful disclosures in the

periodic reports required to be filed with Government and Regulatory agencies. The

members of Core Management of the Bank shall initiate all actions deemed necess

ary for proper dissemination of relevant information to the Board of Directors,

Auditors and other Statutory Agencies, as may be required by applicable laws, rules

and regulations.

E. Use of Bank's Assets and Resources:

Each member of the Board of Directors and the Core Management has a duty to the

Bank to advance its legitimate interests while dealing with the Bank's assets and

resources. Members of the Board of Directors and Core Management are prohibited

from:

Using corporate propelty, information or pos ition for personal gain;

Soliciting, demanding, accepting or agreeing to accept anything of value

from any person while dealing with the Bank's assets and resources;

Acting on behalf of the Bank in any transaction in which they or any of their

relative(s) have a significant direct or indirect interest.

31

CANARA BANK

F. Confidentiality and Fair Dealings

1. Bank's Confidential Information

The Bank's confidential information is a valuable ass;.'!. It includes all trade

related information, trade secrets, confidential and p livileged information, customer

information, employee related information, strategies, administration, research in

connection with the Bank :md commercial, legal, scientific, technical data that are

either provided to or made available to each member of the Board of Directors and

the Core Management by the Bank either in paper form or electronic media to

facilitate their work or that they are able to know or obtain access by virtue of their

positil)n with the Bank. All confidential information must be used for Bank's busil1l'

purposes only.

This responsibility includes the safeguarding, securing and proper disposal of

confidential information in accordance with the Bank's policy on maintaining

and managing records. This obligation extend to confidential information of

third parties, which the Bank has right fully received under non-disclosure

agreements.

To further the Bank's business, confidential information may have to be

disclosed to potential business partners. Such disc1oslIrl: should be made

after considering its potential benefits and risks. Care should be taken to

divulge the most sensitive information, only after the said potential business

partner has signed a confidentiality agreement with the Bank.

Any publication or publicly made statement that might be perceived or

construed as attributable to the Bank, made outside t he scope of any

appropriate authority in the Bank, should include a disclaimer that the

publication or statement represents the views of the specific author and not

the bank.

-

2 Other Confidential Information ~

The Bank has many kinds of business relationships with many companies and

individuals. Sometimes, they will volunteer confidential information about their

products or business plans to induce the Bank to enter into a bus iness relationship.

At other times, the Bank may request that a third party provide confidential

32

CANARA BANK

information to permit the Bank to evaluate a potential business relationship with that

party. Therefore, special care must be taken by the Board of Directors and members

of the Core Management to handle the confidential information of others

responsibly. Such confidential information should be handled in accordance with the

agreements with such third parties.

The Bank requires that every Director and the member of Core Management,

General Managers should be fully compliant with the laws, statutes, rules and

regulations that have the objective of preventing unlawful gains of any nature

whatsoever.

Directors and the members of Core Management shall not accept any offer,

payment promise to pay, or authorization to pay any money, gift, or anything of

value from customers, suppliers, shareholders/ stakeholders, etc. that is

perceived as intended, directly or indirectly, to influence any business decision,

any act or failure to act, any commission of fraud, or opportunity for the

commission of any fraud.

1. Good corporate governance practices

Each member of the Board of Directors of the Bank should adhere to the

following 50 as to ensure compliance with good Corporate Goverment practices. (a)

Do's

Attend Board meetings regularly and participate in the deliberations and

discussions efectively.

Study the Board papers thoroughly and enquire about follow -up reports on

definite time schedule.

Involve actively in the matter of formulation of general policies

Be familiar with the broad objectives of the Bank and the policies laid down by

the Govemment and the various laws and legislations.

Ensure confidentiality of the Bank's agenda papers, notes and Minutes.

33

CANARA BANK

(b) Don'ts

Do not interfere in the day to day functioning of the bank

Do not reveal any information relating to any constituent of the Bank to anyone.

Do not display the logo / distinctive design of the Bank on their personal visiting

cards / letter heads.

Do not sponsor any proposal relating to loans, investments, buildings or sites for

Bank's premises, enlistment or empanelment of contractors, architects, auditors,

doctors, lawyers, other professionals, etc.

Do not do anything, which will interfere with and / or be subversive of

maintenance of discipline, good conduct and integrity of the staff.

Credit Risk Management in Banks

An Overviw

The financial sector especially the banking industry III most emerging

economiesincluding India is passing through a process of change. As the financial

activity has become a major economic activity in most economies, any disruption or

imbalance in its infrastructure will have significant impact on the entire economy. By

developing a sound financial system, the banking industry can bring stability within

the financial markets.

Deregulation in the financial sector had widened the products range in the

developed markets. Some of the new products introduced are LBOs, structured

transaction, credit cards, housing finance, derivatives and various off balance sheet

items. Thus new vistas have created multiple sources for banks to generate higher

profits than the traditional financial intermediation. Simultaneously they have opened

new areas of risk also. Many unknown issues that are intricately related to new

products have exposed banks to various risks across the globe and India is no

exception.

During the past decade, the Indian banking industry continued to respond to

the emerging challenges of competition, risks and uncertainties. Risks originate in

the forms of customer default, funding a gap or adverse movements of markets.

34

CANARA BANK

Measuring and quantifying risks is neither easy nor intuitive. Our regulators

have made some sincere attempts to bring prudential and supervisory norms

conforming with international bank practices with an intention to strengthen the

stability of the banking system.

Banks in general face the following risk:

Liquidity Foreign Exchange

Credit Market

Intrestrate Operational

The industry has undergone drastic changes in the last three decades.

Horizontal expansion of the financial markets, deregulation across the globe in

financial markets and stiff competition have led the banks to multiply their activities.

Increased activities in the industry have exposed the banks to more uncertainties

and more risks.

Risk Management in Banks is broadly divided into six sections:

Funds Management is a major activity of the banks. Liquidity management is

an integral part of funds management. Banks mobilize the deposits and deploy

funds in advances and investments. Banks also float funds through various

subsidiary services extended to their clients.

There will be always a time gap between the availability of resources and

their deployment. Hence banks will often swing between excess liquidity and

liquidity crunch in their funds position. Liquidity management essentially deals with

efficient handling of inflows and outflows of funds. Section -I discusses the liquidity

management in banks in India and across the globe.

Cash Management is a subset of the entire funds management. The lead

time is reduced in collection of cheques and other instruments by the banks, if they

introduce efficient cashmanagement services. From the bank's point of view it

increases the fee based income. Cash management services are one innovative

product introduced by the banks in the recent times. Section-II discusses the cash

management techniques adopted by banks and corporate clients.

35

CANARA BANK

Credit risk is as old as money. When the default rate increases in the portfolio

of the bank< it may lead to its total collapse. To circumvent the credit risk, the system

tries to design innovative products. Section-III discusses the credit risk management

in banks.

The Basle committee defines the operational risk as "the risk of direct or

indirect loss resulting from inadequate or failed internal processes, people and

systems or from external events". This defination excludes operational: risk but

includes legal risk. Such operational risks can be broadly classified into four

categories as information technology risk, human resource risk, loss to assets risk

and .'relationship risk. Quantification of operational risk is a major challenge to

the .risk management group of the bank: Section IV attempts to elucidate few issues

involved in the operational risk management.

One of the core activities of the regulators is proper of the system. The Basle

committee had set certain guidelines for the bank s. The Reserve Bank of India had

set up an advisory committee under the chainn:Ulship of M S Verma and the

committee had submitted its report in May 2001. The committee recommended

corporate governance, internal controls, risk management, loan accounting

transparency and disclosures, financial conglomerates and cross border banking

supervision. The supervisor should provide a safety net to the financial system.

Section -V discusses the important issues of any risk management technique.

Section-VI consists of two case studies. It briefly discusses the risk

management technique's to be adopted by banks. Derivatives are the hedging

instruments which help minimize the risks. But a 300 year old investment bank

collapsed because of its exposure to derivatives. The Barings' collapse is a classic

example of failure of supervision and incidence of human urresoce risk.

In the global scenario, the increased credit risk arises due to two reasons.

Banks have been forced to lend to riskier clients because well-rated corporates

have moved away from banks as they have access to low cost funds through

disinter mediation. The other reason is the lurking fear of global recession.

Recession in the economy could lead to low industrial output which may lead to

defaults by the industry under recession culminating into credit risk. Hence, the

markets are in search of new credit risk management models. Credit derivatives

36

CANARA BANK

which were a new innovation in the market stood the real test in 1997 during the

Asian financial crisis. Several European and US banks which were exposed to high

risk areas in Korea, Philippines and Thailand were able to save themselves from

losses as they could hedge themselves with credit derivatives. The papers "Credit

Risk Management - Models and Judgments" and "Use of Credit Derivati ves"

discuss the critical operational issues in managing credit risk through credit

derivatives.

In the recent times, we have witnessed runs on the banks - mainly the Urban

Cooperative Banks like Madhavpura Coop Bank in Gujarat/Mumbai, Charminar

Bank, a scheduled bank in Hyderabad and many others.

When the banks give the signals of distress, the depositors panic and run for

their money. As per the existing rules, Deposit Insurance and Credit Guarantee

Corporation of India (DICGC) guarantees the depositors' money up to one lakh

rupees subject to certain conditions. Till now, the banks used to pay the insurance

premium for the deposits they hold to get insurance coverage from DICGC. Now the

committee set up by the RBI under the Chairmanship of J Capoor sug gested that

the risk premium is to be paid which is sensitive to the probability of the bank in

question going bankrupt. The paper "What Makes Banks Fragile",tries to compute

the volatility of banks' assets and deposit insurance premium with an illustrati on

and presents a view point of fixing higher deposit insurance premium if reserve

requirements are to be phased out.

37

CANARA BANK

Credit Risk Management at Canara Bank

Introduction

Credit risk is defined as the possibility of losses associated with diminution in

the credit quality of borrowers or counter parties. In a bank's portfolio, losses stem

from outright default due to inability or unwillingness of a customer or counter party

to meet commitments in relation to lending, trading, settlement and other financial

transactions. Alternatively, losses result from reduction in portfolio value arising from

actual or perceived deterioration in credit quality. Credit risk emanates from a bank's

dealings with an individual, corporate, bank, financial institution or a so vereign.

Credit risk takes in the following forms:

1. In the case of direct lending: principal/and or interest amount not be repaid;

2. In the case of guarantees or letters of credit: funds not forthcoming from the

constituents upon crystallization 0 f the liability.

3. In the case of treasury operations: the payment or series of payments due from

the counter parties under the respective contracts may not be forthcoming or

ceases;

4. In the case of securities trading businesses: funds/ securities settlement may not

be effected.

Credit Risk Management

In this backdrop, it is imperative that Canara bank has credit risk

management system, which is sensitive and responsive to these factors. The

effective management of credit risk is a critical component of comprehensive risk

management and ie essential for the long-term success of Canara banking

organisation. Credit risk managemnt encompasses identification, measurement,

monitoring and control of the credit risk sources.

38

CANARA BANK

Building Blocks of Credit Risk Management at Canara Bank'

In a bank, an effective credit risk management framework would ,'omprise of the

following distinct building blocks:

Policy and Strategy

Organisational Structure

Operations/ Systems

Policy and Strategy

The Board of Directors shall be responsible for approving and periodic a II y

reviewing the credit risk strategy and significant credit risk policies.

Credit Risk Policy

1. Bank has credit risk policy document approved by the Board. The document

include risk identification, risk measurement, risk grading/ aggregation

techniques, reporting and risk controlV mitigation techniques, documentation,

legal issues and management of problem loans.

2. Credit risk policies defined target markets, risk acceptance criteria, credit

approval authority, credit origination! maintenance procedures and guidelines for

portfolio management.

3. The credit risk policies approved by the Board communicated to

branches/controlling offices. All dealing officials should clearly understand the

barne's approach for credit sanction and are held accountable for complying with

established policies and procedures.

4. Senior management of a Canara bank shall be responsible for implementing the

credit risk policy approved by the Board.

39

CANARA BANK

Credit Risk Strategy

1. Each branch of Canara bank should develop, with the approval of its Board, its

own credit risk strategy or plan that establishes the objectives guiding the

Canara bank's credit-granting activities and adopt necessary policies/

procedures for conducting such activities. This strategy should spell out clearly

the organisation's credit appetite and the acceptable level of risk -reward trade-

off for its activities.

2. The strategy would, therefore, include a statement of the Canara bank's

willingness to grant loans bas ed on the type of economic activity, geographical

location, currency, market, maturity and anticipated profitability. This would

necessarily translate into the identification of target markets and business

sectors, preferred levels of diversification and concentration, the cost of capital in

granting credit and the cost of bad debts.

Credit risk Management Committee (CRMC]

Each Canara bank may, depending on the size of the organization or loan!

investment book, constitute a high level Credit Risk Management Committee

(CRMC). The Committee should be headed by the Chairman and should comprise

of heads of Credit Department, Treasury, Credit Risk Management Department

(CRMD) and the Chief Economist.

The functions of the Credit Risk Management Committee should be as under:

1. Responsible for the implementation of the credit risk policy/ strategy approved by the

Board.

2. Monitor credit risk on a Canara bank wide basis and ensure compliance with limits

approved by the Board.

3. Recommend to the Board, for its approval, clear policies on standards for presentation

of credit proposals, financial covenants, rating standards and benchmarks,

4. Decide delegation of credit approving powers, prudential limits on large credit

exposures, standards for loan collateral, portfolio management, loan review

mechanism, risk concentrations, risk monitoring and evaluation, pricing of loans,

provisioning, regulatory/legal compliance, etc.

40

CANARA BANK

Concurrently, Canara bank set up Credit Risk Management Department (CRIVID),

independent of the Credit Administration Department.

The CRMD does the followings:

1. Measure, control and manage credit risk on a Canara bank -wide basis within

the limits set by the Board/ CRMC

2. Enforce compliance with the risk parameters and prudential limits set by t.he

Board! CRMC.

3. Lay down riskassesment system develop loan/ investment portfolio. identify

problems, correct deficiencies and undertake loan review/audit. Large

Canara banks could consider separate set up for loan review/audit.

4. Accountable for protecting the quality of the entire loan! investment portfolio.

The Department undetakes portfolio evaluations and makes comprehensive

studies on the environment to test the resilience of the loan portfolio.

Operations I Systems

Canara banks have an appropriate credit administration, crrdit risk

maisurement and monitoring processes.

The credit administration process typically involved the following

1. Relationship management phase i.e. business development.

2. Transaction management phase covers risk assessment, loan pricing, structuring the

facilities, internal approvals, documentation, loan administration, on going monitoring

and risk measurement.

3. Portfolio management phase entails monitoring of the portfolio at a macro level and the

management of problem loans.

4. On the basis of the broad management framework stated above, the Canara banks has

following credit risk measurement and monitoring procedures:

5. Canara banks established proactive credit risk management practices like annual / half

yearly industry studies and individual obligor reviews (recently stablished) periodic credit

calls that are documented, periodic visits of plant and business site, and at least

quarterly management reviews of troubled exposures/weak credits

41

CANARA BANK

Canara bank has system of checks and balances in place for

extension of credit viz.:

1. Separation of credit risk management from credit sanction

2. Multiple credit approvers making financial sanction subject to approvals at

various stages viz. credit ratings, risk approvals, credit approval grid, etc.

3. An independent audit and risk review function.

4. The level of authority required to approve credit will increase as amounts and

transaction risks increase and as risk ratings worsen.

5. Every obligor and facility must be assigned a risk rating.

6. Mechanism to price facilities depending on the risk grading of the customer, and

to attribute accurately the associated risk weightings to the facilities.

7. Banks ensure that there are consistent standards for the origination,

documentation and maintenance for extensions of credit

8. Banks has a consistent approach towards early problem recognition, the

classification of problem exposures, and remedial action.

9. Banks maintain a diversified portfolio of risk assets; have a system to conduct

regular analysis of the portfolio and to ensure ongoing control of risk

concentrations.

10. Credit risk limits include, obligor limits and concentration limits by industry or

geography. The Boards should authorize efficient and effective credit approval

processes for operating within the approvall imits.

11. Bank has systems and procedures for monitoring financial performance of

customers and for controlling outstanding within limits.

12. A conservative policy for provisioning in respect of non -performing advances

adopted adopted.

13. Bank has an experience, judgment and commitment to technical development.

14. Banks should have a clear, well-documented scheme of delegation of powers for

credit sanction.

42

CANARA BANK

Credit Risk Rating [CRR]

Canara bank concern with following risk while rating them:

1. Financial risk

2. Industry risk

3. Business risk

4. Market risk

Credit Rating System at Canara Bank:

All credit exposures above Rs.5 crores taken on private and public

companies classified as corporate

The risk weight to be assigned in respect of corporates depends on rating

assign ed by RBI recognized domestic credit rating agencies.

Canara bank furnishing below the risk weights that to be applied to corporates

based on the external ratings.

Rating of AAA AA A BBB &Below Unreted

Domestic

Agencies

Risk Weight 20% 50% 100% 150% 100%

Canara bank implemented or considered ratings given by ICRA and CRISIL for

industries.

Treatment of Credit risk at bank.

The unsecured portion of NPA accounts net of specific provisions is also to

be subject to risk weighting mechanism; unsecured portion means the NP A amount

obtained after deducting the eligible and guarantee amounts.

43

CANARA BANK

The risk weights for NPA accounts are as follows:

Other than residential mortgage loans

When specific provisions are < 20% of NPA risk weights amount 150%

When specific provisions are at least 20% ofNPA risk weight is 100%

When specific provisions are at least 50% ofNPA risk weight amounts to 50%

Fully Covered by Plant and Machinery and Land and Building

When specific provision reaches at least 15% ofNPA risk weight amount 100%

Residential Mortgage loans

Generally risk weight applicable is 100%

If specific provisions are at least 20% ofNPA risk weights amount to 75%

An Illustration

Credit Risk assessment at branch level (Traffic Island Branch)

Major Segments Scores Scores

assessed Level of Risk

I

allotted

(1) Assessment area-

I Credit

I Low • Credit- Growth 10 05

Trend

• Credit- Quality 20 08 I Low

• Non-Fund based I Medium

exposure 05 03

~ Adequacy of

portfolio 05 02 Low

Total 40 18 Low

44

CANARA BANK

Branch Authorities (Authority to sanction loans to Corporate)

Branch Office:

Braches allowed trasanction loan from I to 75 lakhs for respective sectors.

Regional Office:

If loan amount is more than 75 lakhs then that proposal goes to regional office,

Regional office has authority to sanction from 75 lakhs to 3 crores for industries.

Circle Office:

Circle office has authority of sanctioning loan from 3 crores and above.

Factors considered for sanction loans:

1) Individual Capacity.

2) Securities

3) Additional securities

4) Prompt repayment of L02.

5) Deposits in Banks

Individual Capacity:

Bank considers individual capacity h) repayment of loan with term or agreed

term with bank and also considers his transaction with bank if any.

Securities:

Bank considers securities of borrowers while lending money to him. Ex:

Shares cel1ificate, Insurance policies

45

CANARA BANK

Additional Securities:

Banks consider or accept additional securities like land, home and other

securities while sanctioning new loan to customers when customers has existing

loan in bank.

Prompt repayment of Loan:

Existing transaction or previous transact ion consider while grant new loan to

customers/ Clients. His prompt repayment of loan consider for new loans.

Bank Deposits

Bank deposits with bank or any other banks consider as security for loans.

Existing Credit Risk Management at Canara Bank

Follow up clients/Customers.

Recovery systems.

Review of loan.

Additional securities

Providing additional loans to make repayment of existing loans.

Loan Review Mechanism.

Low and High credit risk ratings.

Low interest rate for high credit rating companies

High interest rate for low credit rating companies

Single/group borrower limits

Authorities to branches • Authorities to Committees.

Following Up customers/Clients:

Bank remind borrowers to repay loan and interest according to term and

condition which he has agreed while taking loan from banks, and also ensure that

ifhe fails to pay the loanwhat is next step of banks.

46

CANARA BANK

Recovery Systems:

Bank directly collect dues from customers. They have separate department, which

look

\after all matters related to recovery of loan.

Review of loan:

If the amount not recovered within specified term mentioned as per the policy of

bank, bank goes for review of loan if required.

Additional Securities:

Additional securities will be taken from the customer in two situations:

1) If existing loan extended by the bank.

2) When additional loan is given to the customer in addition to existing loan.

Low and High credit risk ratings.

Interest rate is depend on credit worthy ness of the company, if the credit

worthy ness of the company is high he will be charged low interest, opposite is the

case for low credit worthiness

Following Securities as eligible for treatment as Credit risk mitigates:

1) Bank Deposits 2) Gold Jewellery ( Benchmarked to 99.99 purity) 3) State Govt securities 4) Central Govt securities 5) National Saving Certificates, Vikas Patras and Kisan Vikas Patras 6) Life Insurance Policies 7) Equities ( Including convertible bonds) 8) Mutual fund securities9) Land and Building 10) Plant and Machinery

47

CANARA BANK

Guarantors Types

• State Government

• Central Government

• Public Sector Entities

• Banks

• Primary Dealers Corporate

Substitution approach

In this approach risk weight of the guarantor replace the lisk weight of the

borrower provided it result in application of a lower risk weight, thus only guarantee

issued by entities with a lower risk weight provides credit risk mitigation effect in the

form of lower capital charges.

Proportional Cover

This method is taken note of is that the risk mitigation effect will be available

to the extent of protection provided b Guarantor and the remaining unprotected

portion carry the risk weight applicable to borrower.

Thus in order to avail capital relief it is necessary that the following details on

guarantors are captured:

Name of the Guarantor

Extent of Guarantee cover available

Customer type of the guarantor

Type of Exposures

48

CANARA BANK

SNo Exposure Credit Factors(%)

1

Direct Credit 100%

2

Certain transaction

related 50%

contingent items (eg:

Perfomance Bonds, bid

bonds, Warranties etc) ---

3

Short term self liquidating 20%

trade related

contingencies

4

Sale and repurchase 100%

agreement and asset

sales

with recourse where the

credit risk remain with

banks

5

Shares and securities 100%

6

Note issuance facilities

and 50%

revolving underlying I

facilities

7

Original maturity up to

one 20%

I

year I

R B I GUIDLINES

49

CANARA BANK

R B I Guidelines on Credit risk Management- Credit Risk models

A credit risk model seeks to determine, directly or indirectly, the answer to the

following question: Given our past experience and our assumptions about the future,

w hat is the present value of a given loan or fixed income security? A credit risk

model would also seek to determine the ( quantifiable) risk that the promised cash

flows will not be forthcoming. The techniques for measuring credit risk that have

evolved over the last twenty years are prompted by these questions and dynamic

changes in the loan market. The increasing importance of credit risk modelling

should be seen as the consequence of the following three factors:

1. Banks are becoming increasingly quantitative in their treatment of credit risk.

2. New markets are emerging in credit derivatives and the marketability of

existing loans is increasing through securitisation/ loan sales market."

3. Regulators are concerned to improve the current system of bank capital

requirements especially as it relates to credit risk.

Importance of Credit Risk Models

Credit Risk Models have assumed importance because they provide the decision

maker with insight or knowledge that would not otherwise be readily available or that

could be marshalled at prohibitive cost. In a marketplace where margins are fast

disappearing and the pressure to lower pricing is unrelenting, models give their

users a competitive edge. The credit risk models are intended to aid banks in

quantifying, aggregating and managing risk across geographical and product lines.

The outputs of these models also play increasingly important roles in banks' risk

management and performance measurement processes, customer profitability

analysis, risk -based pricing, active portfolio management and capital structure

decisions. Credit risk modeling may result in better internal risk management and

may have the potential to be used in the supervisory oversight of banking

organisations.

50

CANARA BANK

Techniques for Measuring Credit Risk

In the measurement of credit risk, models may be classified along three different

dimensions:

1. The techniques employed,

2. The domain of applications in the credit process and

3. The products to which they are applied.

Techniques:

The following are the more commonly used techniques:

1. Econometric Techniques such as linear and multiple discriminate analysis,

Multiple regression, logic analysis and probability of default, etc.

2. Neural networks are computer-based systems that use the same data

employed in the econometric techniques but arrive at the decision model using

alternative implementations of a trial and error method.

3 Timisation models are mathematical programming techniques that discover

the optimum weights for borrower and loan attributes that minimize lender error and

maximise profits.

3. Rule-based or expert are characterised by a set of decision rules, a knowledge

base consisting of data such as industry financial ratios, and a structured inquiry

process to be used by the analyst in obtaining the data on a particular borrower.

4. Hybrid Systems In these systems simulation are driven in part by a direct

causal relationship, the parameters of which are determined through estimation

techniques.

51

CANARA BANK

Domain of application:

These models are used in a variety of domains:

Credit approval

Models are used on a stand alone basis or in conjunction with a judgemental

override system for approving credit in the consumer lending business. The use of

such models has expanded to include small business lending. They are generally

not used in approving large corporate loans, but they may be one of the inputs to a

decision.

Credit rating determination:

Quantitative models are used in deriving 'shadow bond rating' for unrated

securities and commercial loans. These ratings in turn influence portfolio limits and

other lending limits used by the institution. In some instances, the credit rating

predicted by the model is used within an institution to challenge the rating assigned

by the traditional credit analysis process.

Credit risk models may be used to suggest the risk premier that should be

charged in view of the probability of loss and the size of the loss given default. Using

a mark -to-market model, an institution may evaluate the costs and benefits of

holding a financial asset. Unexpected losses implied by a credit model may be used

to set the capital charge in pricing.

Instruments of Credit Risk Management

Credit Risk Management encompasses a host of management techniques,

which help the banks in mitigating the adverse impacts of credit risk.

1. Credit Approving Authority

Each bank should have a carefully formulated scheme of delegation of

powers. The banks should also evolve multi-tier credit approving system where the

loan proposals are approved by an 'Approval Grid' or a 'Committee'. The credit

facilities above a specified limit may be approved by the 'Grid' or 'Committee',

52

CANARA BANK

comprising at least 3 or 4 officers and invariably one officer should represent the

CRMD, who has no volume and profit targets. Banks can also consider credit

approving committees at various operating levels i.e. large branches (where

considered necessary), Regional Offices, Zonal Offices, Head Offices, etc. Banks

could consider delegating powers for sanction of higher limits to the 'Approval Grid'

or the 'Committee' for better rated / quality customers. The spirit of the credit

approving system may be that no credit proposals should be approved or

recommended to higher authorities, if majority members of the 'Approval Grid' or

'Committee' do not agree on the creditworthiness of the borrower. In case of

disagreement, the specific views of the dissenting member/s should be recorded.

The banks should also evolve suitable framework for reporting and evaluating

the quality of credit decisions taken by various functional groups. The quality of

credit decisions should be evaluated within a reasonable time, say 3 - 6 months,

through a well-defined Loan Review Mechanism.

2. Prudential Limits

In order to limit the magnitude of credit risk, prudential limits should be laid

down on various aspects of credit:

a) Stipulate benchmark current/debt equity and profitability ratios, debt service

coverage ratio or other ratios, with flexibility for deviations. The conditions

subject to which deviations are permitted and the authority therefore should

also be clearly spelt out in the Loan Policy;

b) Single/group borrower limits, which may be lower than the limits prescribed by

Reserve Bank to provide a filtering mechanism;

c) Substantial exposure limit i.e. sum total of exposures assumed in respect of

those single bond avers enjoying credit facilities in excess of a threshold limit,

say 10% or 15% of capital funds. The substantial exposure limit may be fixed at

600% or 800% of capital funds, depending upon the degree of concentration

risk the bank is exposed.

53

CANARA BANK

d) maximum exposure limits to industry, sector, etc. should be set up. There must

also be systems in place to evaluate the exposures at reasonable intervals and

the limits should be adjusted especially when a pm1icular sector or industry

faces slowdown or other sector/industry specific problems. The exposure limits

to sensitive sectors, such as, advances against equity shares, real estate, etc.,

which are subject to a high degree of asset price volatility and to specific

industries, which are subject to frequent business cycles, may necessarily be

restricted. Similarly, high-risk industries, as perceived by the bank, sholud also

be placed under lower portfolio limit. Any excess exposure should be fully

backed by adequate collaterals or strategic considerations.

e) Banks may consider maturity profile of the loan book, keeping in view the

market risks inherent in the balance sheet, risk evaluation capability, liquidity,

etc.

3 Risk Rating

Banks should have a comprehensive risk scoring / rating system that serves

as a single point indicator of diverse risk factors of a counterparty and for taking

credit decisions in a consistent manner. To facilitate this, a substantial degree of

standardisation is required in ratings across borrowers. The risk rating system

should be designed to reveal the overall risk of lending, critical input for setting

pricing and non -price terms of loans as also present meaningful information for

review and management of loan portfolio. The risk rating, in short, should reflect the

underlying credit risk of the loan book. The rating exercise should also facilitate the

credit granting authorities some comfort in its knowledge of loan quality at any

moment of time.

4 Risk Pricing

Risk-return pricing is a fundamental tenet of risk management. In a risk -

return setting,borrowers with weak financial position and hence placed in high credit

risk category should be priced high.

Banks should evolve scientific systems to price the credit risk, which should

have a bearing on the expected probability of default. The pricing of loans normally

54

CANARA BANK

should be linked to risk rating or credit quality. The probability of default could be

derived from the pastbehaviour of the loan portfolio, which is the function of loan

loss provision/charge offs for the last five years or so.

Banks should build historical database on the portfolio quality and

provisioning / charge off to equip themselves to price the risk. But value of collateral,

market forces, perceived value of accounts, future business potential,

portfolio/industry exposure and strategic reasons may also play important role in

pricing. Flexibility should also be made for revising the price (risk premia) due to

changes in rating / value of collaterals over time. Large sized banks across the

world have already put in place Risk Adjusted Return on Capital (RAROC)

framework for pricing of loans, which calls for data on portfolio behavior

And allocation of capital commensurate with credit risk inherent in loan

proposals. Under RAROC framework, lender begins by charging an interest mark -

up to cover the expected loss - expected default rate of the rating category of the

borrower. The lender then allocates enough capital to the prospective loan to cover

some amount of unexpected loss- variability of default rates. Generally, international

banks allocate enough capital so that the expected loan loss reserve or provision

plus allocated capital covers 99% of the loan loss outcomes.

Portfolio Management

The existing framework of tracking the Non Performing Loans around the

balance sheet date does not signal the quality of the entire Loan Book. Banks

should evolve proper systems for identification of credit weaknesses well in

advance. Most of international banks have adopted various portfolio management

techniques for gauging asset quality. The CRMD, set up at Head Office should be

assigned the responsibility of periodic monitoring of the portfolio.

The portfolio quality could be evaluated by tracking the migration (upward or

downward) of borrowers from one rating scale to another. This process would be

meaningful only if the borrower-wise ratings are updated at quarterly / half-yearly

intervals. Data on movements within grading categories provide a useful insight into

the nature and composition of loan book.

55

CANARA BANK

The banks could also consider the following measures to maintain the portfolio

1) Evaluate the rating-view distribution of borrowers In vanous industry, business

segments,

2) Exposure to one industry/sector should be evaluated on the basis of overall rating

distribution of borrowers in the sector/group. In this context, banks should weigh

the pros and cons of specialisation and concentration by industry group. In cases

where port folio exposure to a single industry is badly performing, the banks may

increase the quality standards for that specific industry;

6. Loan Review Mechanism (LRM)

LRM is an effective tool for constantly evaluating the quality of loan book and

to bring about qualitative improvements in credit administration. Banks should,

therefore, put in place proper Loan Review Mechanism for large value accounts with

responsibilities assigned in various areas such as, evaluating the effectiveness of

loan administration, maintaining the integrity of credit grading process, assessing

the loan loss provision, portfolio quality, etc. The complexity and scope of LRM

normally vary based on banks' size, type of operations and management practices.

It may be independent of the C RMD or even separate Department in large banks.

The main objectives of LRM could be:

To identify promptly loans which develop credit weaknesses and initiate

timely corrective action;

To evaluate portfolio quality an~ isolate potential problem areas;

To provide information for determining adequacy of loan loss provision;

To assess the adequacy of and adherence to, loan policies and

procedures, and to monitor Compliance with relevant laws and regulations.

To provide top management with information on credit administration,

including credit Sanction process, risk evaluation and post-sanction follow-

up.

Accurate and timely credit grading is one of the basic components of an

56

CANARA BANK

effective LRM. Credit grading involves assessment of credit quality, identification of

problem loans, and assignment of risk ratings. A proper Credit Grading System

should support evaluating the p0l1folio quality and establishing loan loss provisions.

Given the importance and subjective nature of credit rating, the credit ratings

awarded by Credit Administration Department should be subjected to review by

Loan Re view Officers who are independent of loan administration.

The Risk Management Group of the Basle Committee on Banking Supervision

has released a consultative paper on Principles for the Management of Credit Risk.

The Paper deals with various aspects relating to credit risk management. The Paper

is enclosed for information of banks.

6. Qualification and Independence

The Loan Review Officers should have sound knowledge in credit appraisal,

lending practices and loan policies of the bank they should also be well versed in

the relevant laws/regulations that affect lending activities. The independence of

Loan Review Officers should be ensured and the findings of the reviews should also

be reported directly to the Board or Committee of the Board.

7. Frequency and Scope of Reviews

The Loan Reviews are designed to provide feedback on effectiveness of

credit sanction and to identify incipient deterioration in portfolio quality. Reviews of

high value loans should be undertaken usually within three months of sanction

/renewal or more frequently when factors indicate a potential for deterioration in the

credit quality. The scope of the review should cover all loans above a cut -off limit. In

addition, banks should also target other accounts that present elevated risk

characteristics. At least 30-40% of the portfolio should be subjected to LRM in a

year to provide reasonable assurance that all the major credit risks embedded in the

balance sheet have been tracked.

57

CANARA BANK

Depth of Reviews

The loan reviews should focus on:

Approval process;

Accuracy and timeliness of credit ratings assigned by loan officers;

Adherence to internal policies and procedures, and applicable laws /

regulations;

Compliance with loan convents;

Post-sanction follow-up;

Sufficiency of loan documentation;

Portfolio quality; and

Recommendations for improving portfolio quality

The findings of Reviews should be discussed with line Managers and the

corrective actions should be elicited for all deficiencies. Deficiencies that remain

unresolved should be reported to top management.

The Risk Management Group of the Basle Committee on Banking Supervision

has released a consultative paper on Principles for the Management of Credit Risk.

The Paper deals with various aspects relating to credit risk management. The Paper

is enclosed for information of banks.

Early warning:

Credit models are used to flag potential problems in the portfolio to facilitate early

corrective action.

Common credit language:

Credit models may be used to select assets from a pool to construct a portfolio

acceptable to investors at the time of asset securitisation or to achieve the minimum

credit quality needed to obtain the desired credit rating. Underwriters may use such

models for due diligence on the portfolio (such as a collateralized pool of

commercial loans).

58

CANARA BANK

Collection strategies:

Credit models may be used in deciding on the best collection or workout

strategy to pursue. If, for example, a credit model indicates that a borrower is

experiencing short term liquidity problems rather than a decline in credit

fundamentals, then an appropriate workout may be devised.

Credit Risk Models: Approaches

The literature on quantitative risk modeling has two different approaches to

credit risk measurement. The first approach is the development of statistical models

through analysis of historical data. This approach was frequently used in the last two

decades. The second type of modelling approach tries to capture distribution of the

firm's asset -value over a period of time.

The statistical approach tries to rate the firms on a discrete or continuous

scale. The linear model introduced by Altman (1967), also known as the Z -score

Model, separates defaulting firms from non-defaulting ones on the basis of certa in

financial ratios. Altman, Hartzell, and Peck (1995,1996) have modified the original Z

-score model to develop a model specific to emerging markets. This model is known

as the Emerging Market Scoring (EMS) model.

The second type of modelling approach tries to capture distribution of the

financial assetvalue over a period of time. This model is based on the expected

default frequency (EDF) model. It calculates the asset value of a film from the

market value of its equity using an option pricing based approach that recognizes

equity as a call option on the underlying asset of the firm. It tries to estimate the

asset value path of the firm over a time horizon. The default risk is the probability of

the estimated asset value falling below a prespecified default point. This model is

based conceptually on Merton's (1974) contingen hasork and has been working

very well for estimating default risk in a liquid market.

Closely related to credit risk models are portfolio risk models. In the last three

years, important advances have been made in modelling credit risk in lending

portfolios. The new models are designed to quantify credit risk on a portfolio basis,

and thus are applied at the time of diversification as well as portfolio based·pricing.

59

CANARA BANK

These models estimate the loss distribution associated with the P0l1folio and

identify the risky components by assessing the risk contribution of each member in

the portfolio.

Banks may adopt any model depending on their size, complexity, risk bearing

capacity and risk appetite, etc. However, the credit risk models followed by banks

should, at theleast, achieve the following:

1. Result in differentiating the degree of credit risk in different credit exposures

of a bank. The system could provide for transaction -based or borrower-

based rating or both. It is recommended that all exposures are to be rated.

Restricting risk measurement to only large sized exposures may fail to

capture the p0l1folio risk in entirety for variety of reasons. For instance, a

large sized exposure for a short time may be less risky than a small sized

exposure for a long time.

2. Identify concentration in the portfolios

3. Identify problem credits before they become NPAs

4. Identify adequacy/ inadequacy of loan provisions

5. Help in pricing of credit

6. Recognise variations in macro-economic factors and a possible impact under

alternative scenarios

7. Determine the impact on profitability of transactions and relationship.

60

CANARA BANK

FINANCIAL PERFORMA BANK 2006/07NCE OF CANARA

FY07 yet again reaffirmed Canara Bank's pre-eminent position, among Indian

banking majors, both under business volumes and earnings. Having led the Indian

PSBs under aggregate business, the Bank's unstinted drive to break new frontiers in

customer orientation and commitment to enhanced value for stakeholders were

richly rewarded during 2006-07. The overarching objectives of the Bank's varied

pursuits during FY07 have been to emerge as a Global Financial Conglomerate

adheringto best practices as its performance hallmark.

PERFORMANCE AT A GLANCE: 2006-07

• Business touched Rs.240887 Crore, up 23%

• Aggregate Deposits at Rs. 142381 Crore, up 22%.

• Advances (Net) moved up to Rs.98506 Crore, up 24%.

• Gross Profit at Rs.2912 Crore, up 14%.

• Net Profit at Rs.1421 Crore.

• Return on Average Assets at 0.98%

• Gross NPA ratio down at 1.51 %, Net NPA ratio at 0.94%.

• Capital to Risk Weighted Assets Ratio of 13.50%.

• Priority Sector Advances up 22% to Rs.37844 Crore.

• Agricultural Disbursals reached Rs.9404 Crore, up 30%.

• SME advances up 23% to Rs.14245 Crore

• Foreign Business Turnover up 32% to Rs. 130083 Crore.

Branches 2578

Of Which CBS 330

Clientele (Million) 29.35

ATMs 1132

Earnings per Share (Rs.) 34.65

Book Value (Rs.) 196.83

Dividend (%) 70

Business per Employee (Rs. in Cr) 5.49

61

CANARA BANK

PERFORMANCE HIGHLIGHTS AND WORKING RESULTS: 2006-07

  2004-05 2005-06 2006-07

Number of Branches 2513 2532 2578

Paid up Capital 410 410 410

Results 5699 6722 9944

Aggregate Deposits 96796 116803 142381

Growth (%) 12.1 20.67 21.9

Non resident Deposits 12476 12894 13606

Foreign Business Turnover 84517 98665 130083

Advance(Net) 60421 79426 98506

Growth (%) 24.74 31.45 24.02

Retail Advances 11277 14552 17485

Growth (%) 40.24 29.04 20.16

Priority Sector Advances 24777 30937 37844

Growth (%) 26.55 24.86 22.33

Agriculture Outstanding 8782 12032 15525

Growth (%) 34.18 37.01 29

Agriculture Disbursal 5401 7211 9404

Small & medium Enterprises 10295 11619 14245

Growth (%) 16.53 7.56 22.6

Advance under DIR Schemes 69 49 44

Advance to SC/ST Clients 1043 1332 1659

Self help group(No) 73439 115470 150278

Export credit 6183 7136 7896

Clientele(In million) 26.28 27.69 29.35

Total no of Staff 47389 46893 46359

Total income 9116 10027 12815

Total Expenditure 6531 7477 9903

Operating profit 2585 2550 2912

Net profit 1110 1343 1421

Key performance ratios (%)  

Capital adequacy ratio 12.78 11.22 13.5

EPS (Rs) 27.06 32.76 34.65

Book value (Rs) 146.15 171.19 197.83

62

CANARA BANK

Business per employee(Rs

Crore) 3.51 4.42 5.49

Profit per employee(Rs lakhs) 2.48 3.02 3.24

Return on average assets 1.07 1.13 0.98

Net NPA ratio 1.88 1.12 0.94

Credit deposit ratio 62.42 68 69.18

priority credit to net bank credit 43.11 41.39 40.21

FINANCIAL SOUNDNEES

CAPITAL

The Bank's paid-up capital stood at Rs410 crore with 1.08 lakh

shareholders. Capital to Risk Weighted Assets Ratio worked out to 1 3.50% vis-a.-

vis the 9% benchmark.

During FY07, the Bank raised lower/upper Tier II capital worth Rs. 1975 crore

from the domestic market and US$250 million overseas by way of a medium term

note programme.

The Bank's Capital Roadmap duly factors in the likely scenario in advances

movement and expected regulatory changes. The overarching objective has been to

maintain CRAR above 12% so as to support the buoyancy in credit deployment.

RESERVES AND OWNED FUNDS

Reserves increased to Rs.9944 crore, additional accrual during the year

being Rs.3222 crore. Owned funds stood at Rs.8111 crore as compared to Rs.7132

crore at the end of the previous year.

PROFITS AND PROFITABILITY

Gross prafit for the year 2006-07 stood at Rs.2912 crore, while net prafit was

of the order of Rs. 1421 crore.

63

CANARA BANK

Return on Average Assets (RoAA), worked out to 0.98%, despite a 25%

growth in total assets. Net Interest Income was up 12.43%to Rs.4027 crore.

SHAREHOLDERS'VALUE

A dividend of 70%, amounting to Rs.287 crore, is praposed by the Board of

Directors of the Bank, as against 66% (Rs.270.60 crore) paid last year, subject to

the approval of shareholders. Bank's performance under earnings is reflected in a

consistent uptrend in Book Value and Earnings Per Share. While book value

increased to

Rs. 197. 83 as at March 2007 compared to Rs. 171 .19 recorded for last

financial, Earnings Per Share further rose from Rs.32.76 to Rs.34.65 for the year

ended March 2007

64

CANARA BANK

65

CANARA BANK

BUSINESS

(Rs. in Crore)

DEPOSITS

Global

deposits of

the Bank

moved up to

Rs.142381

crore from

Rs. I 16803

crore a year

ago,

signifying a

22% growth,

covering

25.53 million

accouont

2004-05 2005-06 2006-07

ADVANCES

Global advances (net) aggregated to Rs.98506 crore, up from Rs.79426 crore a

year ago, exhibiting a growth of 24%. Number of borrowal accounts stood at 3.82

million. The Bank's credit to deposit ratio improved from 68% to 69.18% between

March 2006 and March 2007. 75% ofthe incremental credit during the year was

deployed in productive sectors like agriculture, SME, industries, infrastructure and

services sectors. While overall credit growth has been 24%, growth in credit to

productive sectors worked out to over 33%, out of which growth in agriculture and

industries worked out to 29% and 36%

66

CANARA BANK

PRODUCTIVITY

Business per Employee moved up from RsAA2 crore to Rs.5A9 crore, while Profit

Per Employee stood at Rs.3 .24Iakh.

67

CANARA BANK

PRIORITY SECTOR OPERATIONS

Advances to priority sectors moved up to Rs.37844 crore, recording a growth of

22.33%, accounting for 40.21 % of net credit vis-à-vis the 40% norm. Under priority

sector advances, agricultural credit aggregated to Rs.15521 crore, signifying a

robust 29% y-o-y growth. Agricultural disbursements touched Rs.9404 crore in

2006-07 as against the level of Rs4103 crore during 2003-04, registering more than

doubling of agricultural credit in three years. Similarly outstanding agricultural

advances increased from a level of Rs. 6545 crore as at March 2004 to Rs. 15521

crore as at March 2007, signifying a 137% growth. During the year, the Bank

financed 3.26 lakh new farmers. Besides, the number of Kisan Credit Cards

(cumulative) reached a level of21 lakh.

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CANARA BANK

The bank, has, formed 1.5 laks self Help Group [SHGs] in which 1.2 laks were credit

linked.

Advanced to SME sector moved uf to Rs.14245 crore, recording a y-o-y

growth of 23% as against the target of 20% set for the year.

Canara bank has been playing a lead role in furtherance of the financial

inclusion movement in the country. In addition to various schemes for hitherto

excluded segments, the bank has extended its Total Financial campaign to 1639

villages across the country. Two of the Banks lead district, namely, placed and

Davanagere in Karnataka, have already acquired the distinction of 100% financially

included.

Can saral, a no-frills scheme, aimed at enhancing the coveraged under total

financial inclusion has garnered around 3.5 laks accounts. The bank has launched a

programmed to achieve total financial inclusion in 23 lead districts a campaign to

create one million no-frill accounts during 2007-08

RETAIL LENDING

Disbursal made under retail lending during FY07 amounted to Rs.7447 crore, taking

the outstanding retail loans to Rs.17485 crore, recording a y-o-y growth of 20%

Retail advances to the housing segment clocked a 17.43% growth to reach

Rs6575 crore. Advanced to retails trade and other personal segment stood at Rs

3584 crore. And 7326 crore respectively. Bank has been prudent in its rey\tail

exposer. Retail portfolio as a proportion of net credit was also brought down to

17.84%, which is in tune with the policy focus on rebalancing of credit

portfolio.Direct housing ioan formed 37.6% of retail portfolio, out of which 81% were

under the priority ambit, reflating the banks continued concern for the common man.

In the sphere of education loan, cumulative assistance by the bank was of

the order of Rs.1252 crore, covering 92579 students taking up higher studies. With

31.37% growth in education loan, Canara Bank is placed first among natiolized

banks in funding higher education.

69

CANARA BANK

TREASURY

Aggregate investments of the Bank, as at March 2007, were of the order of

Rs.45226 crore. Duration of the investment portfolio has been brought down

considerably as a conscious management decision in view of interest rate volatility

and rising trend in interest rate. The advantage of having higher volumes under the

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CANARA BANK

'Available for Sale' duly reflects that the stated value of the portfolio is truly

realizable.

INTERNATIONAL OPERATIONS

During the year, the second overseas branch of the Bank was inaugurated by

Shri P Chidambaram, Hon'ble Finance Ministeroflndia, at Hong Kong.

Foreign business turnover of the Bank, as at March 2007, aggregated to

Rs.130083 crore, recording a robust y-o-y growth of32%. Turnover under exports,

imports and remittances were ofthe orderofRs.49307 crore, Rs.3 1705 crore and

Rs.49071 crore respectively.

Outstanding advances to the export sector stood at Rs.7896 crore as against

Rs.7136 crore at the end of the previous year.

ASSET QUALITY AND RISK MANAGEMENT)

ASSET QUALITY

(In Percent)

Bank's

gross NPA level

stood at Rs. 1493

71

CANARA BANK

crore, with gross NPA ratio down from 2.25% to 1.51 %. Net NPA level stood at

Rs.927 crore, with net NPA ratio further coming down to 0.94% from 1.12% a year

ago. The Bank could effect a cash recovery ofRs.1 025 crore in NPAaccounts

during the year as against Rs.972 crore during the previous year

RISK MANAGEMENT

The Bank has initiated implementation of parallel run of new capital adequacy

framework under Basel II during the year and is fully geared for a smooth switchover

within the RBI prescribed time schedule, The Bank's Board has been driving the

policy initiatives and putting appropriate strategies in place for effectively managing

the Credit, Market and Operational risks, Top Executive Risk Committees, headed

by the Chairman & Managing Director, are in place to effectively address all issues

related to the management and mitigation of various business/control risks.

CORPORATE SOCIAL RESPONSIBILITIES) RURAL DEVELOPMENT

Rural Development and Self-Employment Training Institutes (RUDSETls) co-

sponsored by the Bank have been engaged in providing training to rural youths to

pursue various self-employment activities. RUDSETls, numbering 20 across India,

have so far trained I .87lakh unemployed youth, with a settlement rate of 67%. The

Bank, under Canara Bank Centenary Rural Development Trust, has promoted 14

self-employment training institutes. These institutes have so far trained 56520 rural

youth, with an impressive settlement rate of72%. The Trust is also extending

support to Society for the Educational and Economic Development (SEED), a

voluntary organization workingforthe welfare of socially marginalized children.

The Bank's 'Rural Clinic Services' scheme has assisted doctors in opening

21 additional clinics during 2006-07, taking the total of such clinics to 493 across

India. Under 'Jalayoga', a scheme for facilitating availability of safe drinking water in

rural areas, the Bank has completed 35 projects so far. Tapping the spirit of

voluntarism among its employees, the Bank, under the Rural Service Volunteer

Scheme, has assisted 500 villages, benefiting over 2 lakh families since its inception

in 1985.

As a responsible corporate social citizen, the Bank has donated hi-tech and

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CANARA BANK

solar powered 'Mobile Sales Van' to assist women entrepreneurs, SHGs and

artisans in their entrepreneurial ventures.

ANCILLARY SERVICES)

BANCASSURANCE AND CROSS-SELLING MF PRODUCTS

The Bank, under tie-up arrangement with M/s AVIVA Life Insurance

Company India Pvt Ltd, collected premium amounting to Rs3 18 crore (sum

assured) during the year. It has also tied-up with M/s United India Insurance

Company Limited for undertaking Non-Life Insurance business.

Under cross-selling of Mutual Fund products of can bank Mutual Fund and

HDFC Mutual Fund, the Bank mobilized assume ofRs.945 crore.

Bank has since tied up with global majors for creating Joint Ventures in

Insurance and Asset Management.

MERCHANT BANKING OPERATIONS

During 2006-07, the Bank handled 16 assignments as Lead Manager/Co-

Book Running Lead Manager/Co-Manager & Advisor, covering 5 Public Issues, 9

Private Placement Issues, one Rights Issue and one assignment of Delisting of

Equity. The Bank handled 22 'Bankers to the Issue' assignments as Escrow

Bankers/Collecting Bankers with total float funds amounting to Rs.4360 crore.

CORPORATE CASH MANAGEMENT SERVICES (CCMS)

Aggregate turnover under Corporate Cash Management Services scherne,

for the year ended March 2007, amounted to Rs.2650 crore. The scheme provides

services, such as, local and upcountry cheque collection, bulk cheques collection

and zero balance account facility. The CCMS network presently covers 94

Operating Centers and 683 Pooling Branches.

BUSINESS SUPPORT SYSTEM) BRANCH NETWORK

As at March 2007, the Bank had 2578 branches, inclusive of its branch at

London, Hong Kong and Offshore Banking Unit at NOIDA, besides 251 Extension

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CANARA BANK

Counters. Number of branches in rural, semi-urban, urban and metro locations were

728, 656, 591 and 600 respectively. Number of specialized branches stood at I 2 I .

TECHNOLOGY INITIATIVES

Financial 2006-07 witnessed significant headway in the realm of Core

Banking Solution (CBS). As at March 2007, 330 branches of the Bank have been

covered under CBS. The Bank also significantly enhanced its tech-enabled multi-

delivery channels during the year to I 132 ATMs (458 centers), 1550 'Anywhere

Banking' branches and I 156 Internet & Mobile Banking branches. Number of

branches providing RTGS and NEFT further increased to 1506. The Bank entered

into an agreement to share ATM network with SBI and ATMs under National

Financial Switch (NFS), providing access to ATM network of 23 other Banks. In all,

customers of Canara Bank now have increased access to over 14000 ATMs across

the country. In a noteworthy initiative, as many as 125 ATMs spread across the

country were commissioned on a single day in March 2007, with Shri V Leeladhar,

Deputy Governor, Reserve Bank India, gracing the function at Bangalore. During the

year, the Bank has added more than 51akh Debit Card clientele base, taking the

total number of debit cards to 22.681akh as at March 2007.

CUSTOMER ORIENTATION

The Bank, during the year, introduced several new measures towards further

improving customer centricity and service quality to match the competitive market

conditions and customer expectations. In a noteworthy initiative, the Bank has

implemented 'Six Sigma' project for enhancing the knowledge base of its frontline

staff on products and services. Keeping track of services quality at branches has

been a hallmark of the Bank's unprecedented customer orientation. During the year,

customer survey from a sample of 25 branches each in five metros, viz., Bangalore,

Chennai, Delhi, Kolkata and Hyderabad, covering 10000 customers was conducted

by consultant of repute to further improve the level of customer service. Further, as

a member of Banking Codes and Standards Board of India (BCSBI), set up by RBI,

the Bank has brought out a booklet on "Code of Commitment to Customers" to

create awareness among the customers as well as staff about the Uniform Fair

Practice Code used as benchmark standard by all banks in India.

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CANARA BANK

HUMAN RESOURCES DEVELOPMENT / TOM

Knowledge enrichment for employees continued to be a top priority for the

Bank during FY07. Close on the heels of achieving the one lakh mark in training/re-

skilling during its centenary year, 2006-07 featured the tally moving up further to

1,09,661 covering diverse functional areas. During the year, the Bank effected a

major organizational restructuring exercise for grater business focus and

expeditious decision making, apart from moves to decentralize operational activities.

The Bank also adopted a fast track promotion policy and implemented cash

incentive scheme for high performers. Canara Bank is also the only Bank in the

country to have formed 'Club2020' a group, comprising young talent, to spearhead

strategic changes in the fast changing banking environment.

Focus on specialized expertise led to recruitment of 541 officers through

campus and direct recruitment in diverse areas like marketing, financial analysis and

risk management.

Continued focus on quality drive enhanced the number of ISO 900 I Certified

Branches and Administrative Offices to 805 and 14 respectively as at March 2007.

PRODUCT PRAFITABILITY

New product services In addition to a host of existing products and services,

the Bank introduced several deposit products during FY07. Can Tax Saver, a term

deposit scheme, was introduced under the Kamadhenu and fixed deposit mode with

tax benefit under Section 80C. Can Champ- an exclusive SB deposit product was

launched for aspiring children upto the age of 12 years for inculcating the habit of

savings. A term deposit scheme, namely, Canara Centenary Deposit was also

introduced during the year, offering attractive rate of interest for the depositors.

During the year, the Bank also launched a SB-Gold deposit scheme, targeting the

HNI clients.

In the sphere of new loan products, the Bank introduced 'Kisan Tatkal' for

enabling farmers to meet emergent requirements and 'Kisan Mitra' scheme for

funding tenant farmers. Grameen Vikas Vahini, vehicle for inclusive growth in rural

areas was also introduced during the year. To promote SME sector, the Bank

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CANARA BANK

launched SME Gold Card and a Term Loan Scheme for reimbursement of capital

expenditure.

SUBSIDIARIES, JOINT VENTURE AND SPONSORED INSTITUTION)

The Bank has nine subsidiaries/joint ventures/sponsored institutions providing a

wide range of services, and is, thus, poised to emerge as a major 'Financial

Conglomerate'.

Canbank Venture Capital Fund limited (CVCFL) currently manages four funds,

with fourth fund made operational since December 2005. It has so far mobilized a

corpus of Rs.60 crore from seven banks and SlOB!. Till March 2007, CVCFL has

assisted 84 ventures, involving financial assistance to the tune of Rs.74 crore.

The Company recorded a profit after tax of Rs. 20 lakh for the year 2006-07 and

distributed a dividend of 40%.

Can Fin Homes limited, a sponsored housing finance institution of Canara

Bank, sanctioned and disbur5ed a sum of RsAl7 crore and RsA53 crore

respectively during 2006-07. The Company has recorded a profit after-tax of Rs.

30 crore.

Canbank Investment Management Services limited (ClMS) acts as

investment manager for all the schemes floated by Canbank Mutual Fund. ClMS,

with combined net assets of Rs.2185 crore, is currently managing 18 schemes.

The Company posted a profit after-tax of Rs1 crore in 2006-07, with a proposed

dividend of30%.

Canbank Factors limited, the factoring subsidiary of the Bank, posted a total

turnover of Rs.3396 crore as at March 2007 and a profit after tax of Rs. 14 crore.

The Company proposed a dividend of I 5% for the year.

Canbank Computer Services limited (CCSL), the Bank's software services

related subsidiary, bagged several key contracts during the year 2006-07 and

posted a profit after tax of Rs.129.58 lakh. The Company has strengthened its

net worth base from RsA71 lakh as at March 2006 to RS.6021akh as at March

2007.

Gilt Securities Trading Corporation limited (GSTCL), a primary dealer

promoted by Canara Bank, posted a profit of Rs.l 0.60 crore despite rise in yield

rates and provision for depreciation on stock of securities held. Primary dealer

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CANARA BANK

functions of GSTCL have been taken over by Canara Bank from February 2007,

with diversification of activities into the areas of equity broking and trading.

Canbank Financial Services limited (CANFINA) confined its activities to legal

matters arising out of past transactions in securities, besides concentrating on

collection of lease rentals and realization of investments. The Company recorded

a profit after tax of Rs. 24.23 crore.

Indo-Hong Kong International Finance limited, a wholly owned overseas

subsidiary of the Bank, posted a net profit of US$ 3.52 million for the year ended

March 2007. IHIFL has since been converted into a full-fledged branch ofthe

Bank during March 2007.

Commercial Bank of India LLC, an overseas Joint Venture with SBI at Moscow,

recorded a net profit of US$I.02millionfortheyearendedMarch2007.

All the 3 Regional Rural Banks (RRBs), sponsored by the Bank, recorded

combined operating prafitofRs.86.75 croreforthe year 2006-07. Pursuing

consolidation under RRBs, 3 RRBs of the Bank in Karnataka were amalgamated

to form 'Pragati Grameen Bank' while 'Shreyas Grameen Bank' was formed out

of 3 RRBs sponsored by the Bank in Uttar Pradesh.

NEW INITIATIVES

The Bank has singed MoU to commission a Joint Venture in Life Insurance

business, in association with HSBC Holding (Asia Pacific), a global major and

domestic partner, Oriental Bank of Commerce, with a majority 5 I % share

holding.

Recognizing the potential of Asset Management business in the emerging

financial setup, Canara Bank also signed MoU with internationally reputed,

Robeco Group N.V, for starting a Joint Venture in Asset Management business

with 51 % stake.

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CANARA BANK

The domain expertise of the globally reputed partners in both the

ventures will enable the Bank to offer world class and tech-enabled sophisticated

services to its over 29 million clientele base.

After commissioning its second overseas branch at Hong Kong, initiative has

been taken to convert its Representative Office at Shanghai into a full-fledged

branch.

AWARDS/ACCOLADES )

The Bank was adjudged the 'Best Public Sector Bank' in India by the 'Financial

Express-Ernst and Young' survey for 2005-06.

Conferred with "Employer Branding Awards 2007" by India times Mindscape and

ITM Business School, for excellence in human resources.

Won the maiden award of 'Best Performing Bank' under solar water heater

finance for the year 2005-06, instituted by the Ministry of New and Renewable

Energy, Govt. of India.

Received Niryat Bandhu Gold Trophy for outstanding performance under export

finance.

Two schemes under Canbank Mutual Fund viz., CANFLOATING RATE and CAN

BALANCE-II also won the Gold Award (ICRA Mutual Funds Awards 2007) and

Best Fund Award (at the Lipper Awards India 2007) respectively.

Year 2006-07 was of special significance as the curtains were drawn on the

centenary of the Bank on June 30, 2006. The valedictory function for the

Centenary was graced, among others, by Dr. Man Mohan Singh, Hon'ble Prime

Minister of India, Shri P Chidambaram, Hon'ble Union Finance Minister and a

galaxy of dignitaries. While the Bank's century long feats were widely acclaimed

by the dignitaries, quite fitting to the occasion, the Bank crossed the coveted

Rs.2,00,000 crore mark under aggregate business at the end of June 2006.

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CANARA BANK

GOALS FOR 2007-08

Bank targets a global business level of Rs.2, 90, 000 crore for 2007-08, with a

growth rate of over 20%, comprising Rs. I ,70,000 crore under deposits and

Rs.I,20,000 crore under advances. Advances growth will be significantly driven

by agriculture, SME, infrastructure and other productive segments, including

services sector.

Towards faster implementation of Core Banking Solution (CBS), the Bank targets

to cover all the branches under CBS by March 2008.

The Bank has taken up a major brand building exercise and comprehensive

review of its business strategies covering products, processes, people and its

organization structure.

In pursuit of the Bank's global aspirations, 21 prominent centers have been

identified by the Bank for expanding its global reach. With the preliminary moves

underway, the Bank's Representative Office at Shanghai is being converted into

a full fledged branch.

After creation of JVs in Insurance and Asset Management, the Bank is exploring

similar options in other financial services.

The Bank is geared up to comply with the revised guidelines issued under

priority sector lending.

Under HR, Assessment Development Centre concept will be implemented to

map training competence and upgrade manpower skill. Plans are underway to

introduce 'Internship' programme to assist students pursuing professional

course.

`

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CANARA BANK

Analysis of the financial statement

Financial statements and reports are the tools which provides information of the

firms financial affairs. This information is required for financial analysis & decision making.

It assesses the financial status of organization which is prepared with help of accounting

principle.

Financial statement has mainly as follow:

Balance sheet

Profit & loss account

Financial statement is prepared on basis of generally accepted accounting principle.

These are

a. Business entity principle

b. Going concern principle

c. Monetary principle

d. Historical principle

e. Realizations principle

f. Accrual concept

Basic conventions under which financial statements prepared is:

consistency

conservativeness

disclosure

Analyzing of financial statements helps to know the financial health of the borrower,

which provides the detail of the liabilities and the assets of the applicant. It also helps to

study the trends in the financial matters of the company. It helps to valuate the assets of the

applicant company. It assists in decision making process relating to the future activities.

Financial statements act as a basic document for banker, supplier, creditors etc in their

credit appraisal of the firm. Financial statement provides the reliable information about the

resources and firm’s obligation. It assists in estimating earning potential of the firm.

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CANARA BANK

Profit and Loss account:-

Meaning:- profit and loss account is one of the essential document which shows the

summary of revenues, expenses and net income of the firm during the particular financial

period.

Functions of the Profit and Loss account:-

It gives a concise summary of the firm’s revenue and expenses during the particular

period.

It measures the firm’s profitability.

It represents the activity of the firm.

Ratio Analysis:-

Ratios are classified into four parts like:-

1. Liquidity ratios

2. Activity ratios

3. leverage ratios

4. profitability ratios

Limitations of the analysis :-

There are no standard formula fixed to judge the performance. Since management

problems are so complex that they cannot be reduced to a formula

Forming of the ratio should be made with care.

due to price fluctuation it may distort the result

there are chances of making window dressing in the financial statements of the firm,

it has some limitation for

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CANARA BANK

Case analysis

XYZ COMPANY LTD (coal pallet industry)

This is a sister concern of a existing company which is in the Andhra Pradesh State,

which is running successfully from many years in that state and enjoying the great profit.

This company is a priority sector which is owned by private owned limited company.

Now they are thinking to set up new plant in the Dharwad district Karnataka State

where there is more demand for the products of the proposed company. And there are no

such company in near region..

The company is intended to produce coal palette which means the processing of the

coal which is used by the hotels and other small scale manufacturing units in near region.

After processing the used coal the final output will be able to work as the finished good

which will be having 90% of the coal power as compared to the pure coal. This can be called

as the considerable proposal because the product proposed will be acting as the cost effective

alternative for electricity and other modes of power.

To set up this proposed plant the company is need of following credit facility.

Total amount required for the project Rs. 100 lakhs

For establishment Rs. 75 lakhs

For term loan Rs. 25 lakhs

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CANARA BANK

The company proposed the branch for credit facility. Bank has collected all the

required documents and other data which is required for making the credit rating. The credit

file provides important source material for loan supervision in regard to the internal and

external audit.

Some of the contents of the credit file:-

Basic information report of the borrower

Milestone of the borrowing unit

Competitive analysis of the borrower

Credit approval memorandum

Financial statements

Copy of sanction communication

Security documentation list

Collateral valuation report

Latest ledger page supervision report

Half yearly credit reporting of borrower

Quarterly risk classification

Customer profitability

Summary inspection of the audit observation

Credit file provides information regarding status of loan account on the basis of credit

decision in past. This file helps the credit officer to monitor the accounts and provides

concise information regarding background and the current status of the account.

This file has to be investigated thoroughly by branch in order to avoid consequences in

future period. Bank has to submit duly completed credit investigation report after conducting

detailed credit investigation as the guidelines.

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CANARA BANK

Credit officer has to consider the financial statements and reports which produce

information of the firm’s financial affairs. These are prepared with help of accounting

principle. It helps in decision making.

The main financial statements are

1. balance sheet

2. profit and loss account

3. funds flow and cash flow statements

These financial statements will help the credit officer to calculate the following to ratios

to make the credit rating

1. liquidity ratio

2. activity ratio

3. leverage ratio

4. profitability ratio

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CANARA BANK

PQR PHARMA AGENCY

This company is existing since 1999, which is 7 years old running successfully which

is situated at the heart of city of the Hubli.

This company is set up by two partners who had experience in same field and after

some years i.e., in 2002 one partner retired from the business due to personal problem. Now

this company is rendered by the individual.

Pharmaceutical industry is one of the booing sector, where this company handles

more than 30 major branded pharmaceutical companies’ products. And also have a various

division products which have more demand in market.

This company wants to expand its business, which required funds up to 70 lakhs or at

least they required Rs.50 lakhs now for smooth flow of business where 20 lakhs can be

raised later.

After proposed loan from the firm bank next step is the bank has to collect required

documents related to the firm such as financial statements and considering the ratio analysis

which is made on the basis of the figures which are recorded in the financial each ratio

discloses different meaning. The loan will be granted on the adequacy of the ratio. Ratios

and IT returns were calculated by comparing 3 to 5 years and also calculated on the basis of

collected on basis transaction made with the bank in bank statement and list of creditors and

debtors. After considering all above documents bank makes verification of all these

documents it sends to the central office. Where central office investigates thoroughly the

documents. After satisfying it inform the branch and make clarification of documents if

necessary. And tells to bank to carry further things.

Which include physical investigation and direct conversation of borrower and study

the position of the borrower by collecting information from the same field or industry person

or existingcreditworthiness and repayment capacity of the borrower and also taken a legal

opinion from advocate and also consider the collateral securities.

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CANARA BANK

If satisfied above criteria next important part of the bank is to do credit rating where it is

one of the input to better credit risk management which is calculated mainly by following

parameters.

1. financial performance

2. operation in business performance

3. quality of management

4. industry outlook

5. conduct of account

Where each parameter consists of sub parameter. After considering sub parameter banks

give Weightage to sub parameters according to those importance. If high importance the

Weightage will be high. After considering the Weightage bank calculate the risk existing for

lending loan for particular company.

Banker calculates different calculations for different sector such as manufacturing,

trading and service sector.

For this case, for getting scoring of above 5parameters, first and foremost calculate sub

parameters Weightage to get average scoring of particular company’s rating.

In below calculation for using 5 financial statements for financial performance sub parameters and

operation in business.

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CANARA BANK

PQR PHARM AGENCY

Particulars 31.3.2003 31.3.2004 31.3.2005 31.3.2006 31.3.2007

  (Aud.) (Aud.) (Aud.) (Prov) (Esti)

Net sales 148.41 273.54 160.84 322.24 442.98 2.171282

PBDIT4.00 10.00 6.98 10.99 12.37 2.7475

PBDIT/Sales (%) 2.70 3.66 4.34 3.41 2.79Profit before tax 0.18 0.31 1.42 5.28 7.41Profit after tax

0.18 0.31 1.42 5.28 7.41Depreciation

0.83 0.42 0.73 0.55 0.46Cash accruals

1.01 0.73 2.15 5.83 7.87Net profit/ sales (%) 0.12 0.11 0.88 1.64 1.67Paid up capital

7.63 11.02 4.84 9.05 14.97Reserves

0.00 0.00 0.00 0.00 0.00Quasi Equity

21.96 14.32 30.16 23.93 44.86TNW

29.59 25.34 35.00 32.98 59.83TOL

54.51 36.36 41.73 42.69 127.44TOL/ (TNW+QE) 1.84 1.43 1.19 1.29 2.13TNW-QE

7.63 11.02 4.84 9.05 14.97TOL/TNW(No QE) 7.14 3.30 8.62 4.72 8.51Current Assets

80.04 57.95 67.44 71.42 183.22Current Liabilities 54.51 36.36 41.73 25.48 107.45Current ratio

1.47 1.59 1.62 2.80 1.71Credit allowed (Days) 107.03 33.47 80.29 34.11 72.82Credit availed (Days) 56.32 18.88 38.03 26.92 45.88Debtors*

43.52 25.08 35.38 30.11 88.38Purchase

173.36 251.12 237.27 311.68 461.61Creditors*

26.75 12.99 24.72 22.99 58.03Inventories

33.60 28.59 31.42 40.75 82.93Working Capital Cycle 1.92 5.10 2.41 4.55 2.59

* Note: Debtors and creditors need to be the average of last year and current year

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CANARA BANK

Ratios are based on 31.3.2006 audited financial statements.

Sales Growth 29.49

Pbdit Growth 40.06

Pbdit/Sales 3.41

Current Ratio 2.80

TOL/(TNW+QE) 1.29

Working capital Cycle 4.55

Credit allowed 34.11

Credit availed 26.92

TOL/TNW 4.72

1).Sales Growth

= {(value of sales in current year} / value of sales in year 3}(1/3)-1}]*100

= Net sales of the year 31-3-06 / net sales of year 31-3-03

= 322.24 / 148.41 = 2.17182

Sales growth = 2.17182 * (1/3) -1 * 100 = 29.49

Using this calculation we can come to know how much growth in sales is achieved as

compared to past three years’ sales. If the borrower give the estimated high sales growth we

can easily find that.

2).PBDIT Growth

=[{value of PBDIT in current year) / (value of PBDIT 3 year)} (1/3) -1}] *100

= PBDIT of year 31-3-06 / PBDIT of 31-3-2006 = 10.99 / 4.00 = 2.7475

PBDIT = 2.7475 * (1/3) *100 = 40.06

This ratio indicates improved performance of the company reflected in increasing

profitability. As comparing with third root of current year’s PBDIT to PBDIT of 3 years.

2. PBDIT / Sales

= (PBDIT / Net sales) * 100

= PBDIT of year 31-3-06 / net sales of year 31-3-06 * 100

= 322.24 / 10.99 * 100

= 3.49

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CANARA BANK

This ratio indicates the operational efficiency. if the percentage of sales is higher it indicates

the positive results.

3. current ratio

= current assets / current liability

= current assets for the year 31-3-06 / current liability for the year 31-3-06

= 71.42 / 25.48

= 2. 80

Using this ratio liquidity position of the company can be found out. Higher the ratio will be

good for meanwhile but in the long run it may affect adversely.

4. TOL / ( TNW + QE)

=Total outside liability / (Tangible net worth + quasi equity )

=42.69 / 32.98

This ratio gives the holistic representation of total outside liability in relation to tangible net

worth of the company. it will give an indicator of the capital adequacy of the country.

5. working capital cycle

=Net sales for year 31-3-2006 / Debtors for year 31-3-06 + inventories for year 31-3-06

= 322.24 / 30.11 + 40.75 = 4.55

This ratio indicates the capacity of the firm to convert the inventories into cah and it

indicates the efficiency of the sales of the firm.

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CANARA BANK

6. credit allowed ( days)

Debtors for the year 06

Net sales / 365

= 30.11

322. 24/ 365

= 34.11 days

It shows that the company is allowing 34 days for repayment of the debt amount to its

customers.

7. credit availed (days)

= Creditors for the year 06

Purchase / 365

= 22.99

311.68 / 365

= 26.92

This ratio shows that the company is getting the credit period on an average 27 days.

By considering the above two factors it comes to know that company is allowing more days

as compared to the credit period he is availing from his suppliers. This can be concluded in

two ways. In one way his suppliers not believing him, so his credit availed days is less,

other way he is getting the low interest rates from the bank and he is giving the more days

for his customers. So the credit allowed period is high as compared to credit availed period.

Comment on case

After calculating the above sub parameters banker adds these values to the credit tool he

comes to know the scoring rate of individual parameters. It helps the banker to know the

applicable interest rate and amount to be lend based on the credit rating scores

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CANARA BANK

Findings

1. The proposed standardized Basel2 to approach does not fits the needs of

smaller banking organization engaged primarily traditional banking.

2. The current nor proposed capital frameworks yet address what is perhaps the

most critical risk factor for the smaller banks - geographic and sectoral

concentrations of credit risk.

3. Internal ratting based approach provides positive incentives to banks in

improving their credit risk management techniques.

4. Banks may have discretion and flexibility in defining the exposure classes

that which corporate, project finance, etc.

5. Unless suitably modified the adoption of the new accord in its present format

would result in significant increase in the capital charge for bank.

6. Additional cost of capital will increase to the bank and bank may go for capital

market to raise the found.

7. Bank as well documented schemes delegation powers for credit sanction.

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CANARA BANK

Recommendations

1. The bank will now have to adopt the credit risk assessment system which is

an international standard specified for the banking system.

2. Due to increased sensitivity towards risk under the new norms, the risk will

come down significantly. This will lead to an increase in the regulatory

capitalization levels, which will increase the cost of capital, which may be

passed on to the customers.

3. The banks will have to exercise due care in maintaining the portfolio of risk

assets in order not to increase unduly the required regulatory capitalization

level. This may in turn in duce conservatism in the bank in taking of risky

portfolio of advances, a danger they have to guard against. It will indeed be a

delicate balancing task.

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CANARA BANK

BIBLIOGRAPHY

1 Bank circulars.

2 Internal magazines.

3 www.mis.org.

4 www.canbankindia.com.

5 www.rbi.org.in.

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