Credit risk analysis of commercial banks of india

Credit risk management of commercial banks in India

By:Siva prasad sharma1NZ15MBA62

What is credit

In general credit is the trust which allows a party or a client to provide sum of money or resources or gods and services before payment that will be made in the future.

Simple financial term credit is a commercial lending of loan and advance for the financial reward.

what is risk?

Risk is the potential of gaining or loosing something of value.

Values can be gained or be loss form given action or inaction, foreseen or unforeseen.

What is credit risk? It is change in net asset value due to change in perceived ability of client

Risk comes form commercial lending

customer asks for money, loan officer make assessment towards the loan proposal

of the customer bank gives money , customer pays money back with interest and thus

everyone is happy,

When credit risk arises

Borrower’s failure to repay advance or failure to meet credit agreed terms and conditions

Expecting the future cash flow to pay the current obligation

Unwillingness to meet the commitments lending, trading and other financial transaction.

Recent example credit risk of the banks

9000 croreBye Bye India

STATE BANK OF INDIA

KINGFISHER AIRLINES LTD (PREV

VIJAY MALLYA (DR), UNITED BREWERIES (HOLDINGS) LIMITED

120139.99 ( lakh)

KOTAK MAHINDRA BANK BETA NAPHTHOL

DEEPAK K BAWEJA, SATISH D DESHPANDE, KEWAK K BAWEJA, PREMNATH PANDIT, SATYAPAL PAHWA, SURENDRA SANMUKHANI

95197.00

PUNJAB NATIONAL BANK

WINSOME DIAMONDS & JEWELLERY LTD.

JATIN MEHTA, R RAVICHANDRAN, RAMESH PARIKH, JAI KUMAR KAPOOR (IND), MADAN KHURJEKAR, DILIP TIKALE, MRS. URVASHI SAXENA

90037.06

PUNJAB NATIONAL BANK

FOREVER PRECIOUS JEWELLERY & DIAMONDS LTD.

JATIN MEHTA, PRANAV RAMESH DALAL, HARI MOHAN NAMDEV, VINOD KUMAR JAIN, BHAILAL KANTILAL PATEL, HARISH MEHTA (IND), JAIKUMAR MADANLAL KAPOOR (IND), NIMESH PATEL, MADAN KHURJEKAR

74798.36

KOTAK MAHINDRA BANK RAZA TEXTILES LIMITED V K SHRIVASTAV 69459.51 KOTAK MAHINDRA BANK RANK INDUSTRIES LIMITED. D V RAMESH, K SRINIVASA

RAO, S JAYADEV 55131.13

CENTRAL BANK OF INDIA

Winsome Diamonds & Jewellery Ltd

Ramesh I Parikh, R Ravichandran, Jatin Rajnikant Mehta Guarantor, Formerly Co Know as Suraj Diamonds&Jwell, Bombay Diamonds Company Pvt Ltd, Kohinoor Diamonds Company Pvt Ltd Gtee, Forever Diamonds Pvt Ltd Guarantor

54926.00

Recent trends state-owned banks’ gross non-performing assets (NPAs) rose 6.27% to

Rs.3.04 trillion in the September quarter from Rs.2.86 trillion in the year earlier.

The rise for the private banks has been 5.98%. Overall, gross NPAs of listed banks in the September quarter rose 6.24% to Rs.3.37 trillion from Rs.3.17 trillion in the year earlier.

Incidentally, both sets of banks, the march quarter2016 gross and net NPAs were much higher than in the preceding June quarter 2015.

Indian banking sector, where there are 43 publicly traded banks of which 27 are public sector. The analysis in report pointed to public sector banks having higher default risk than private banks, particularly since 2010.

Non performing asset as on FY 2015

Once the borrower has failed to make interest or principal payments for 90 days the loan is considered to be a non-performing asset

bad loans written off between 2004 and 2015 amount to more than Rs 2.11 lakh crore. More than half such loans (Rs 1,14,182 crore) have been waived off between 2013 and 2015.

Only two banks, State Bank of Saurashtra and State Bank of Indore, have shown zero bad debts in the past five years.

Bad loans of public-sector banks grew at a rate of 4 per cent between 2004 and 2012, in financial years 2013 to 2015, they rose at almost 60 per cent

It disclosed that bad debts have declined only four times since 2004. The last time was in 2011

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Three pillar of lending

Banks should choose client trustworthy

client should have sound income and financial health

Client should have good collateral back up.

How can mitigate the credit risk

Model for credit risk practices by banks

Credit score rating : Altman’s z score model: Credit metrics model: Value at risk model:

Credit score rating

Credit rating score is a three digit number It start form keeping eyes on your very first credit

transaction And it used by lenders to determine your credit worthiness

for a mortgage, loan, or credit card analyzing by traced and tracked on the payment history,

credit utilization, cash transactions, tax issues, credit score inquires

How it rate the trustworthiness

Excellent credit: credit scores above 800 Very good credit: credit scores between 750 and 800 Good credit: credit scores between 700 and 750 Fair credit: credit scores between 650 and 700 Bad credit: credit scores between 600 and 650 Vary bad credit: credit scores below 600

Altman’s z score model

It deals with combine quantifiable financial indicators with a small number of variables in an attempt to predict whether a firm will fail

It calculated Z score Z score = A1 (working capital/ total assets) + A2 ( retained

earing/ total assets)+ A3 ( EBIT/ total assets) + V4 ( market value of equity/ book value of total liabilities) + A5 ( sales/ total assets)

A1to A5 are the model constants

Decision on the base Z score

Above Z3 – excellent Z2 to Z3 – safe Z1.8 to Z2 – doubtful performance Below 1.8 expected to become bankrupt

Value at risk model

measures the potential loss in value of a risky asset or portfolio over a defined period for a given confidence interval.

It measure probability of a loan portfolio value reducing by an estimated amount over a given time horizon.

Is risk can mitigate by past financial heath?

proactive looking continuous monitor the lending portfolio using value

at risk model. Quarterly re- analysis of income and financial health. analysis of installment payment of client. re valuation of collateral yearly basis.

Not at all because banks lend for future

Review of Literature: Various researchers have studied on the credit risk management analysis of the

commercial banks and studied reasons behind bank problems and formulates the several conclusion.

Swaranjeet Arora professor of PIMR in (march2013) reviewed the credit risk analysis in Indian commercial banks an empirical investigation about credit risk analysis system, credit worthiness and collateral requirement are the important factor of credit risk.

Choppari naresh and borala rajeshwar rao of Osmania university ( January 2015) reviewed potential source of risk including liquidity risk, credit risk, interest rate risk, market risk, foreign exchange risk and political risk and conclude bank dictates the credit risk strategy that spell out target market risk acceptance/avoidance levels, risk tolerance limits diversification and monitoring and controlling mechanism.

David H. Pyle professor of banking and finance Hass business school, university of California in (July 1997) conclude why risk management is needed and outline some of the theoretical underpinnings of contemporary bank risk management with an emphasis on market and credit risks.

Ms. Asha Singh a research scholar merwar university reviewed her journal of finance service and management research (July 2013) about component of risk, objective of risk management and RBI ( the central bank of India) expectations in risk management.

Conclusion: Commercial lending is the straight forward job. Commercial lending carry some sought of risk Analysis of the client is carefully on

Is client is trustworthy or not ?

Is client has sufficient income and sound financial health ?

Is credit back up with good collateral or not? Mostly uses model of risk mapping is credit score rating KYC model

Risk managing practices is newly but try to effectively implement by commercial bank in India.

Bibliography:Swarabjeet arora, (2013)” credit risk analysis of the indian commercial bank an empricial investigation.Diana cibulskiene, reda rubuskaite,(2012) credit risk models of commercial banks and their importance Ms.asha singh ( july 2013) credit risk management in indian commercial banks.Patil jayakar bhasker (jan 2014) credit risk management in indian banksPavid h pyle ( july 1997) bank risk management porala rajeshwar rao, (jan2015)credit risk practices of indian commercial banks Thirupati kanchu and m. manoj kumar (2013) risk management in banking sectors an empirical study.Dr.Ravi inder singh( ) explanatory variables of credit risk an study of indian banks industry.Hamid sepehrdoust and Adel berjisian (2013) credit risk management of commercial banks in Iran

Online sources and books:http://economictimes.indiatimes.com/industry/banking/financehttps://www.rbi.org.in/SCRIPTS/AnnualPublications.aspx?head=Trend%20and%20Progress%20of%20Banking%20in%20Indiahttps://www.rbi.org.in/scripts/NotificationUser.aspx?Id=85&Mode=0https://www.rbi.org.in/SCRIPTS/PublicationReportDetails.aspx?...ID

Khan, M. Y. and Jain P. K. (1993), "Financial Management Text and Problem", New Delhi: Tata McGraw- Hill Publishing Company Limited.

Flink J. B. and Donald C. (1964), "Investments: Analysis and Management", New work: McGraw- Hill Inc.

State bank of India.( 2015), credit risk assessment guidelines final