Minor Research Project
UGC SSPONSORED MINOR RESEARCH PROJECT ( 2012-2014)
UGC approval No. and Date: File No. 23-2904/ 11(WRO), dated 25-01-2012
Total Grant Allocated : Rs.1, 20,000.00
1. Name and Address of the Principal Investigator: Miss Champa R. Parab, Associate Professor, Dept. of Commerce.
2. Name And Address Of The Institution: M.E.S. College of Arts & Commerce, Zuarinagar Goa- 403 706.
Title of the Project:
“Credit Risk Management in Banks: A study of selected Banks in Goa”.
Summary of Findings:
Summary of findings of analysis and discussion topic on Bank Officials, Borrower Respondents and Secondary Data are presented under following three headings.
v Bank Officials:
Ø Loan Portfolio and Diversification:
· Majority officers revealed that they offer term loans, medium loans and demand loans. 57.14% offer Retail lending. 52.38% and 71.43% Loan Portfolio consist of Letter of Credit and Bank Guarantees also.
· All Banks target salaried class for loans because of convenience and easy recovery. 76.19% and 47.62% revealed they also cater to businessman and professionals and all as they have to fulfill the requirement of all and perform its role as per RBI directions.
· The experience of each bank under study is different. Of the different types of loans, clients prefer Home Loans of SBI as a result amount of Home Loan constitute major portion of total advances. In terms of number, personal Loan constitutes major size. Loans to corporate also constitute quite large size.
· In terms of number, personal Loan constitutes major size. Loans to corporate also constitute quite large size at GUCB.
· On an average loan to SME, Retail (Personal, Housing and Cars) Mortgage and loan to Corporate constitute major portion of Bank of India’s loans portfolio.
· Industry, retail and personal loan constitute the major portion of loan portfolio of Canara Bank along with priority sector finance.
· Of all the loans of ICICI Bank, car loans constitute the major component of loan portfolio. There is more demand for personal loan as it involves less documentation.
· In HDFC bank on an average retail loan is on higher side i.e. it constitutes 80% of total Loans and Advances of the bank.
· In GSCB on an average personal loan with salary deduction and salary earner society loan constitute major portion of total advances. In GUCB on an average business loans and loans to industry constitute major portion of total advances.
Principles of Lending, Loan Policy, Review , Approval Committee :
· Bank officers follow principle of safety and security, risk diversification, profitability, liquidity and loan purpose principle. Beside these 23.81% revealed they follow other principles also.
· 90% of the bank officers opined that they have draft of Loan Policy.
· 38% review loan policy bi-annually, 33% reveal other than annually, bi-annually, quarterly and monthly, but does it as and when need arises.
· 76.19% revealed that Board of Directors review the loan policy, while 14.29% and 4.76% revealed Credit Administration Department Managers respectively.
· A Manager can approve the specific type of loan up to specific amount, accordingly has to seek approval of Credit Approval Committee. 23.81% Managers opined that loan for an amount of₹ 20 lac and above cannot be approved by them; it has to go to higher level for approval. 14.29% revealed that above₹ 50 lac approval has to be obtained. 66.67% revealed any other.
· 76.19% revealed that they have Approval Committee at Head Office Level, 33.33%, at zonal Level, 28.57% at Regional Level and 23.81% at Branch Level.
Ø Credit Risk Analysis:
· All Managers opined that proper evaluation of Credit Risk is required to avoid risk of lending to the wrong client.
· At SBI Credit Risk Analysis is carried out at all the level. Here an important role is also played by Credit Validation Committee. In Bank of India also it is carried out at branch level and administrative office level.
· At HDFC Bank, Risk unit reviews the loan policy and Risk Head approves and finally submits to the Board of Directors for approval.
· At GSCB Credit Risk Analysis depends upon the type of loan. Credit Risk Analysis for personal loan is carried out separately and for property loan analysis of property document is done by a designated officer. Evaluation panel is appointed and repaying capacity is considered.
· General Manager (Loans and Advances) carries Risk Analysis at GUCB.
Ø Credit Criteria:
· 100% survey result revealed that financial position, purpose of credit, past earnings and ability to generate cash flows and repayment capacity are the most important factors to decide credit criteria. Besides 71.43% revealed that economic and industrial factors that will impact performance, credit period is also equally important.
Ø Risk Reward Ratio:
· 86% of the Officers that their bank maximizes returns for a given level of Credit Risk and maximize returns for a given level of Credit Risk. Credit Risk is for pricing.
· There is no specific risk reward ratio but the applicable rate of interest is high for high risk amount as rated by CRISIL. Thus the risk reward ratio depends upon the level of risk. Risk reward is decided by the risk unit and depends upon tolerance level.
Ø Credit Risk and Risk Awareness Culture:
· All the Managers revealed that Right Risk Awareness Culture Prevails in the banks, without which success of banks will come in danger and profitability, will be affected.
· The results revealed that the banks are involved in Proper and continuous Training of Credit Risk Management Staff and CRM at Banks under study have Risk Conscious Top Cadre, Proper Two Way Communication and Detail Credit Policy and Standards and strict adherence.
· 4.29% of the Managers revealed that their credit risk exposure is from retail loan products which include Home Loans, Auto Loans, consumer loans, and Educational Loan. 6.19% opined that credit risk exposure is more in personal loan, 5.24% opined that it is in financing to Corporate and others. Credit risk exposure is also involved in financing under Govt. schemes and also priority sector lending.
· As opined by the Bank Managers risk involved in direct lending ranges in the given scale point of 2 to 7. The credit risk exposure is more in direct lending followed by Guarantees and Letter of Credit and Cross Border Exposure.
· Survey result shows major causes of Credit Risk are economic instability in the state, economic conditions in the area of operation of the borrower, failures in business, willful default, labour unrest, Government Regulation, contingences, changes in government policies, uncertain monsoon resulting in default in agricultural loan, reasons attributable to the borrowers themselves etc.
· 95% of the Managers opined that they carry evaluation of loan at portfolio level.
Ø Relative Risk contributed to Credit Risk or Vice Versa:
· Various risks to which the banks are exposed to are interrelated, collectively exhaustive but mutually exclusive. 80.95% Managers opined that Market risk has resulted into Credit risk. 42.86% opined that it is the systemic risk and Liquidity Risk and 47.62% opined it is the Concentration Risk to particular industry and related activities. 33.3% opined that it is the Interest Rate Risk.
Ø Collateral and Other Security:
· 95% of the survey results shows that banks ask for additional security depending upon the type of loan and as demanded by the Loan Policy.
· The result shows that all the Banks under study take recourse to the security in case of default.
· If the realized value of security is less than the loan ,the banks under study publishes photo & notices in newspaper, seize the intangible assets, give compromise offers, legally proceeds against the borrower, have discussion on One Time Settlements, restructuring, provides additional time and last option is to write it off as a bad loan.
Ø Reasons for NPA ,Classification and Recovery of NPA:
· The result revealed NPAs Accounts in all the Banks under the study in all the sectors and in all type of loans but level of NPA differs from bank to bank.
· NPA which is an impaired asset is classified into Standard Assets asset, Sub Standard Assets, Doubtful Assets and Loss Assets as per RBI Guidelines.
· Factors and causes of NPAs include mining loss and loss due to interrelated activities.
· Changes in Government policies (Mining ban) is also the cause of NPAs as business activities have stopped and assets financed are idle.
· Other reasons include non-following of proper system of procedures at the time of sanctioning of loan, financial position of the borrower, increasing inflation rates, high standard of living resulting in failure to pay EMI on time, industry problems, market risk, willful default, fraud cases, job loss and business loss, advances under Government sponsored programmes etc.
· Measures taken to correct NPAs include converting Loan into liquid loan e.g. Gold loans, restructuring, telephone call, Persuasion of the defaulter, Contacting the party, issue of notices, Legal action, Filing of suit, carrying out Compromises, Seizure of securities, initializing Securitization Act, attachment of sureties property, auctioning the property, approaching Lok Adalats and Credit Guarantee Corporation Of India for Micro and Small Enterprises to obtain claim against the losses etc.
· The 90% result revealed that after taking necessary above mentioned measures overdue were recovered.
Ø Loan Loss Provision:
· All the banks under study make loan loss provision as required by RBI.
Ø CRM Framework ,Basel II, Prudential Limit and CAR:
· 86% of the Bank Officer opined that their Bank’s Credit Risk Management Framework is in place from the date of RBI Guidelines.
· The result reveals that Credit Risk Management of all Banks under study aims at the following:
· Minimizing Bad Loans
· Pricing of Credit Risk adequately.
· Maximizing Benefits from potential credit opportunities
· Adhering to Credit Policies.
· Maintaining Reliable Database.
· Maintaining historical default database to conduct back testing of the credit quality of the portfolio.
· On-going Supervision and Follow up of credit Risk bearing Portfolio.
· 16% result showed investment in CRM Systems, such as methods, technology, resources, processes, and training of officers and 13% made investment in all.
· All the banks under study comply with Basel II and RBI requirements as far as disclosure under RBI Guidelines are concerned.
· All the Managers are aware about the Concept of Credit Risk, Causes of Credit Risk, Credit Risk Management, and Existence of Credit Risk in Loan Portfolio.
· 86 % opined their awareness about best way of managing Credit Risk and 95% revealed their awareness about how to measure Credit Risk in loan portfolio.
· 90% reported that they have Credit Approving Authority at Head Office Level.
· 86% opined that they have Internal Credit Risk Rating Models and 62% make use of Derivative products as Risk Hedging Tools.
· The 81% of the survey result shows that SRFAESI Act is very much effective in their banks and resulted in giving better results.
· All the Managers opined that all aspects of prudential limits are very important and accordingly placed on the scale by assigning highest score of 7.
· The 86% survey result showed that banks prepare Credit Quality Report.
· 66.67%, 23.81% and 9.52% use Standard Approach, Advanced Internal/Rating Based Approach and Foundation Internal Rating Based Approach respectively to measure the capital requirement.
· 86% revealed that CAR is maintained by the banks.
· The CAR ratio of the banks under study is more than as per guidelines issued by the RBI.
· 86% survey result revealed existence of Scientific Credit Risk Management System which enables to lower slippage to bad loans.
· 95% survey result reveals that there exists effective Risk Management architecture to ensure adequate Internal Management Processes and have documented Risk Management policies comprehensively covering Credit, Market and Operational Risk.
· 95% Officers opined that all policies are framed and decided at Head Office/ National Level, suggestions and feedback can go from branch to the Head Office.
· The factors such as Inadequate Capital Adequacy, Weak Corporate Governance, Low Quality of Assets, Insufficient Liquidity ,Weak Economic Growth , Lack of Credit Diversification , Ignoring Market Risk, Absence of Serious Financial Analysis of Customer and Risk Premium on Risky Loans , a Corruption of Credit Officers, Profitability at the expense of Safety and Granting high credit ceiling exceeding customer capacity of Repayment will pose serious problem in the effectiveness of CRM, as revealed by majority of the respondents.
· Results revealed that the training of Credit Officers, overall bank Strategy on CRM, mitigating methods for alleviating default, adoption of Basel norms, granting incentives to the best Credit Officer, systematic report on credit risk, and exchange of information with other banks and Credit Bureau will all make CRM system strong and effective helping in avoiding slippage to Non-Performing and loss assets.
8.1.2 Borrower Respondents:
Ø Descriptive Analysis:
· The study result reveals that there is too much demand for and concentration in housing, personal and vehicle loan.
· Only 13.3%, in GSCB, 16.67% in Bank of India and 20% in Canara Bank have availed Gold Loan.
· Majority of the respondents from all the banks have availed loan ranging from ₹1- 5 lac and ₹ 5 -10 lac. The banks under study have not sanctioned more loans to an individual borrower respondent as a result amount of risk exposure is certainly less.
· Majority of the borrowers have availed loan in the year 2000 or thereafter and completed formalities of loan procedure as per new guidelines.
· Majority of Borrowers have gone for more number of monthly installments though the amount of loan was small. This indicates less pressure on monthly income and accordingly regular and timely payment of EMI and few chances of default and less credit exposure.
· Many contributing factors which made respondents to opt and approach the bank are low rate of interest, less paper work, easy access, convenient location, friendly nature of employees. Most of the respondents revealed that there is more than one reason.
· 30% in both cooperative banks revealed that purpose of taking loan was for purchase of house. Maximum borrowed from SBI to purchase home, followed by purchase of Vehicle. Study result of Canara Bank shows that 33.3%, 26.7% and 23.3% availed for purchase of vehicle, house repair and other reasons respectively. Bank of India 30%and 26.7% revealed that the purpose was purchase of house and vehicle respectively and 13.3% attributed it to business. Survey result of ICICI bank revealed that 26.7% availed for business purpose, 23.3% for purchase of house and vehicle and 13.3% attributed to some other reason. The survey result of HDFC Bank reveals that 33.33% availed loan for house and 23.3% for business.
· 26.7% result of SBI shows that house and flat was mortgaged.
· Majority revealed that almost all the banks under study advise the clients to go for property insurance or life or both but only 20% and 26.7% were advised for insurance Bank of India and ICICI bank only.
· 16.67% respondents revealed that time taken for approval of loan by GUCB bank was 1 to 4 days, 13.3% revealed 7days and 15 days and 10% revealed 14 days. 36.7% revealed 1 day 10% revealed 15 days in the case of GSCB.
· 23.3%, 20% and 13.3% respondents revealed that HDFC has taken 4, 2 and 15 days respectively. On the contrary 23.3%, 20% and 13.3% revealed that SBI took 1, 2, 7 and 15 days respectively. Thus there is similarity between the SBI and HDFC.
· 30%, 20% and 13.3% respondents availing loan from Canara bank revealed that it takes 2, 7 to 15 days’ time to approve. Survey result also reveal that at Bank of India 20%, 16.7%, 13.3% and 10% opined 2, 1, 15, and 3 days respectively, whereas at ICICI Bank 30%,20% and 10% revealed that 1, 2and 6 and 3 days respectively.
· Majority revealed that unless all documentation formalities and procedures are completed no bank will approve the loan. But borrowers prefer to avail loan facilities of private banks like HDFC and ICICI because of door step services.
· 80%, 90%, 66.67%, 96.75%, 80%, 93.3% and 100% respondents of GUCB, GSCB, HDFC, SBI, Canara, BOI and ICICI opined that entire loan applied was approved by the bank.
· The study revealed that full amount was not approved where loan criteria were not met. This indicates a precautionary step against credit risk exposure.
· 63%,23%, and 10% respondents of the GUCB have assessed loan sanctioning procedures as simple and less time consuming, as per RBI guidelines and set Loan Policy and practices of the bank and lengthy respectively.
· While assessing another co-operative bank i.e. GSCB 60%, 23.3% and 10% respondents also revealed the same. At HDFC bank 46.7% and 43.4% assessed it as simple and less time consuming and as per RBI Guidelines and set Rules of the Bank.
· Assessment of SBI revealed that 60% and 33.3%% revealed it as simple and less time consuming and as per RBI guidelines. At Canara Bank and Bank of India the result revealed that it is categorized into three which also includes lengthy too.66.6% and 30% at ICICI bank revealed that loan sanctioning procedures are as per RBI guidelines and simple and less time consuming too.
· 90% results of both the cooperative banks and SBI and BOI shows that they completed all documentation under KYC as required by the bank. 96.7% revealed that they completed formalities of KYC of Canara Bank and ICICI Bank. The survey reveals 100% result for HDFC Bank for KYC requirements.
· The survey result reveals that 56.7%, 50%, 73%, 56.7%, 66.7%, 70% and 90% at GUCB, GSCB, HDFC, SBI, Canara Bank, BOI and ICICI Bank respectively received awareness guidance and advisory services on Loan Guidelines and Procedures.
· The survey reveals that all the banks under study provide guidance on loan utilization. But majority of the respondents (86.7%) of ICICI Bank revealed that they received guidance on loan utilization. Less number of respondents of other banks revealed that their bank does the same.
· 93.3% respondents of ICICI Bank revealed that they were advised on regular and timely payment of EMI and the consequences of irregular payment. Lowest number of respondents i.e. 53.3%and 43.3%of both the co-operative banks were educated. Awareness and education with regard to payment of regular installment is not effective as compared to private and public banks under study.
· 46.7%, 63.3% 56.7% 60%, 66.7%, 56.7% and 86.7% respondents of GUSCB, GSCB, HDFC, SBI, Canara, BOI, and ICICI respectively opined that they maintained contact with the Bank Officials and are the frequent visitors at the Bank. This is a healthy practice in timely recovery of all installments.
· 30%, 50%, 40%, 33.33%, 10% and 66.7% of the respondents of GUSCB, GSCB, HDFC, SBI, Canara, BOI and ICICI respectively revealed that Officials make inquiry about both Loan Utilization and Repayment as the first line of defense in identifying problem loans.
· 50% respondents from both the cooperative bank revealed that loan supervision is carried out by the Officials. 60% from HDFC and SBI revealed positive response too and 83.3%, 70% and 86.7% each from Canara Bank, Bank of India, and ICICI Bank respectively revealed that Loan Supervision exercise is carried out by their banks.
· As revealed by 80% only the ICICI Bank intimates well in advance about EMI payment so that necessary arrangement of either direct cash or depositing into account can be made, of the survey results.
· 96.7% respondents from GUCB, HDFC, and Canara Bank revealed that they are regular in payment of their installment. All the respondents of SBI and ICICI Bank opined that they have not delayed nor defaulted any time. 80% and 86.7% from GSCB and Bank of India have been regular in paying installment. The result of five banks under study revealed that there are defaulters those who have failed to pay EMI on time.
· 43.3% survey result revealed that the borrowers of ICICI Bank availed concession for being regular in payment of EMI, while only 6.7 %, of GUCB and SBI, 10% of HDFC, 20% of GSCB and Canara Bank, 13.3% of BOI received the same. This is an encouragement and initiation in the direction of regular payment of EMI.
· The study revealed that all the banks under study levy penalty interest for default or delay in payment of EMI as revealed by 50 %, 56.7 %, 53.3 %, 30 %, 50%, 60 % and 80 % respondent s of the banks under study.
· The survey result shows that the borrowers of ICICI Bank under study have not defaulted. On the contrary 10%, 33.3%, 20% and 3.3%, respondents of GUCB, GSCB, HDFC and BOI, SBI and Canara Bank respectively defaulted.
· The reasons for default as revealed by the survey result include failure in business resulting in illiquidity, loss of job, shortage of cash, economic conditions in the state resulted due to ban in mining, money held up with the Govt. loss on crops , transfer of salary account etc.
· The survey results of the above banks revealed that 26.7 %, 40.0 %, 20 %, 6.7%, 20 % 0 % and 66.7 % were intimated about their failure to pay installment.
· 6.7 %, 13.3 %, 10 %, 0 %, 13.3 % and 3.3 % respondents of GUCB, GSCB, HDFC, SBI, Canara, BOI and ICICI bank respectively, revealed that they have overdue on their Loan Accounts. This indicates that these banks are exposed to credit risk and there are NPAs.
· 30%, 20% and 50% survey result on credit granting procedures of GUCB revealed that it was very liberal, moderate, and stringent respectively. Similarly GSCB result shows that 23%, 60% and 16.7% categorized it as very liberal, moderate and very stringent respectively. While in the case of HDFC, SBI, Canara Bank, BOI 46.7%, 26.7%, 26.7%, 16.7%, 50%, 33.3%, 43.3%, 36.6%, 20%, 50%, 26.7%and 23.3% survey result revealed as liberal, moderate and stringent respectively. In ICICI Bank 50% revealed it as liberal and moderate.
· 16.7 %, 30 %, 40 %, 30 %, 36.7%, 30 % and 80 % respondents from the banks under study opined that they are aware about the reasons behind stringent rules and loan sanctioning procedures the borrowers have to undergo.
· Only 40 %, 43.3 %, 30 %, 50 %, 43.3 %, 40 % and 83.3 % respondents revealed their awareness about credit risk exposure of banks.
· There is low credit off take and less default in Goa, compared to other states in India as revealed by survey:
ü GUCB: 50% and13.3% opined all or some of the reasons from Questionnaire and don’t want to be the part of rigorous Procedure respectively.
ü GSCB: 50% revealed all or some of the reasons and 20% showed their preference towards family and friends than banks.
ü HDFC: 33.3% and 20% revealed that they prefer to approach family friends than banks and the mentality of Goans that taking loans is a sin and he cannot live with loan burden.
ü SBI: 26.7 % revealed all or some of the reasons and 23.3 % opined that they prefer to approach family friends than banks.
ü Canara 36.7% revealed all or some of the reasons and16.7% their unawareness of loans under Govt. Schemes.
ü BOI: 26.7% revealed that they prefer to approach family friends than banks, 26.7% attributed to other reasons and 20% their unawareness of loans under Govt. Schemes. 33.3 %revealed all or some of the reasons and 26.7% revealed any other reason other than in the questionnaire.
Ø Findings of Nonparametric Tests:
· The result of Kruskal Wallis Test, test statistics showed that all seven banks have followed different awareness, guidance and advisory services. Thus null hypothesis 1 is rejected.
· The results showed that all three categories’ of bank follow different practices to manage Credit Risks. Thus null hypothesis 2 is rejected.
· The result showed that banks make an attempt to lower the credit risk by supervising Loan Utilization. Thus null hypothesis 3 is rejected.
· All the banks do not intimate in advance regarding the payment of installment. Thus null hypothesis 4 is rejected.
8.1.3 Secondary Data:
Ø The overall findings of the secondary data revealed the following:
· There is tremendous growth in the banking business of the sampled banks in terms of expansion in number of branches, banking offices, amount of deposits and advances also.
· The credit deposit ratio is very low in Goa compared to other states in India. The reasons for low credit deposit ratio are more amount of domestic and NRE deposits flowing into the State. Another reason is low credit off take due to high per capita income and people are rich in ancestral property.
· The Public Sector Banks fulfill all conditions of advancing loans under priority sector and Govt. sponsored Schemes as per RBI guidelines.
· Credit off take under Govt. sponsored programme is low, people don’t come forward to avail the loans and those who applied also many applications get rejected.
· Though there is low credit delivery and CD Ratio, there are defaults and overdue on loan accounts of all the banks under study not only during ban on Mining but otherwise also. Banks are exposed to credit risk, and there are NPAs. There are non-recoveries in all the banks in all the sectors viz. Agriculture, Industries and Services and pending cases with DRO. Total recovery from all sectors was 74% for the year ending 30/06/04. On an average non recovery from Agriculture, Industries and Service sector accounts for 20% in all the Banks functioning in Goa.
· The recovery percentage under various Govt. sponsored schemes has been declined from 79% in 2009 to 57% during 2010. The advances under Govt. sponsored schemes by the public sector banks under study shows low % of recovery resulting in 16 to 20% non-recovery.
· Goan economy turned weaker during the financial year 2012 due to ban on mining activity in the state of Goa. This has resulted in tremendous rise in the Non-Performing Assets. The loss was from mining and other interrelated activities.
Testing of Hypothesis No. 7:
“Low Credit Deposit Ratio indicates no credit risk and NPAs”
ü In the light of the above discussion on low CD Ratio, and simultaneous non-recoveries, exposure to credit risks, resulting NPAs in all sectors and govt. sponsored schemes, the hypothesis “ Low Credit Deposit Ratio indicates no credit risk and NPAs” is rejected. Though the CD Ratio is low compared to all India level, the banks in Goa are exposed to credit risk resulting in NPAs.
Testing of Hypothesis No.6:
“Significant interrelated asset/liability exposures in distress in some market /sectors or area of activity doesn’t result in huge losses and credit risks”.
ü Total credit risk exposure from Co-operative Banks in Goa state as on 30/09/2012 from mining and related activities like financing to Barge, Transport operator, wheel loaders in terms of Numbers of Accounts was 1474 and in terms of outstanding amount was₹21545.43 lac, resulting in NPA.
ü Number of NPA accounts in public sector Banks operating in Goa as on date are 388 and amount outstanding is₹ 6339.43 lac.
ü NPA Position of all Banks operating in the state of Goa resulting in total 7099 NPA accounts and 91782.30 over dues.
ü The decision of the central Govt. ministry of Environment clearance of 93 mines has resulted in a complete stoppage of mining activity and export of Iron ore.
ü The Goa Barge industry employs 6,000 persons directly as Barge crew and a further 30,000 persons are indirectly employed in ancillaries like workshops, ports, jetties, trucks, services offices etc. the stoppage of the industry resulted in retrenchment of crew and other workers in ancillaries which has great impact on the financial burden and overdue of these workers.
In the light of above description the hypothesis No. 6 i. e .Significant interrelated asset/liability exposures in distress in some market /sectors or area of activity doesn’t results in huge losses and credit risks” is rejected because distress and exposure in mining sector and interrelated exposure has resulted in huge losses and credit risk