CHAPTER I

THE INDIAN FINANCIAL SYSTEM:

The Indian financial system of the pre-reform period, before 1991, essentially catered to the needs of planned development in a mixed-economy framework, where the Government sector had a predominant role in economic activity. Interest rates on Government securities were artificially pegged at low levels, which were unrelated to the market conditions. The system of administered interest rates was characterized by detailed prescriptions on the lending and the deposit side, leading to multiplicity and complexity of interest rates. Consequently, by the end of the eighties, directed and concessional availability of bank credit to certain sectors adversely affected the viability and profitability of banks. Thus, the transactions of the Government, the Reserve Bank and the commercial banks were governed by fiscal priorities rather than sound principles of financial management and commercial viability. It was then recognized that this approach, which, conceptually, sought to enhance efficiency through a co-ordinate approach, actually led to loss of transparency, accountability and incentive to seek efficiency

NEED AND IMPORTANCE OF FINANCIAL SECTOR:

The New Economic Policy (NEP) of structural adjustments and stabilization programmed was given a big thrust in India in June 1991. The financial system reforms have received special attention as a part of this policy because of the perceived interdependence. The need for financial reforms had arisen because the financial institution and markets were in a bad shape. The banking sector suffered from lack of competition, low capital base, low productivity, and high intermediation costs. The role of technology was minimal, and the quality of service did not receive adequate attention. Proper risk management system was not followed, and prudential norms were weak. All these resulted in poor assets quality. Development of financial institutions operated in an over protected
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environment with most of the funding coming from assured sources. There was little competition in insurance and mutual funds industries. Financial markets were

characterized by control over pricing of financial assets, barriers to entry, and high transactions costs. The banks were running either at a loss or on very low profits, and, consequently were unable to provide adequately for loan defaults, and build their capital. There had been organizational inadequacies, the weakening of management and control functions, the growth of restrictive practices, the erosion of work culture, and flaws in credit management. The strain on the performance of the banks had emanated partly from the imposition of high Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR) and directed credit programmers for the priority sectors all at below market or concessional or subsidized interest rates. This, apart from affecting bank profitability adversely, had resulted in the low or repressed or depressed interest rates on deposits and in higher interest rates on loans to the larger borrowers from business and industry. Further, the functioning of the financial system, and the credit delivery as well as recovery process had become politicized, which damaged the quality of lending and the culture of repaying loans. The widespread write-offs of the loans had seriously jeopardized the viability of banks. As the closure of sick industrial units was discouraged by the government, banks had to continue to finance non-viable sick units, which further compromised their own viability. The legal system was not of much help in recovering loans. There was a lack of transparency in preparing statements of accounts by banks. In other words, the reforms had become imperative on account of the facts that despite its impressive quantitative growth and achievements, the financial health, integrity, autonomy, flexibility, and vibrancy in the financial sector had deteriorated over the past many years. The allocation of resources had become severely distorted, the portfolio quality had deteriorated, and productivity, efficiency and profitability had been eroded in the system. Customer service was poor, work technology remained outdated, and transaction costs were high. The capital base of the system remained low, the accounting and disclosure practices were faulty, and the administrative expenses had greatly soared.

The system suffered also from a lack of delegation of authority, inadequate internal controls and poor housekeeping.

MEASURES:
For a long time, an alarming increase of sickness in the Indian financial system had required urgent remedial measures or reforms which were introduced in 1991. Main and sub-objectives of financial reforms introduced in 1991: 1. To develop a market-oriented, competitive, world-integrated, diversified, autonomous, transparent financial system. 2. To increase the locative efficiency of available savings and to promote accelerated growth of the real sector. 3. To increase or bring about the effectiveness, accountability, profitability, viability, vibrancy, balanced growth, operational economy and flexibility, professionalism and de-politicization in the financial sector. 4. To increase the rate of return on real investment. 5. To promote competition by creating level-playing fields and facilitating free entry and exit for institutions and market players. 6. To ensure that the rationalization of interest rates structure occurs, that interest rates are flexible, market-determined or market-related, and that the system offers to its users a reasonable level of positive real interest rates. In other words, the goal has been to dismantle the administered system of interest rates. 7. To reduce the levels of resource pre-emotions and to improve the effectiveness of directed credit programmers. 8. To build a financial infrastructure relating to supervision, audit, technology, and legal matters. 9. To modernize the instruments of monetary control so as to make them more suitable for the conduct of monetary policy in a market economy i.e. to increase the reliance on indirect or market-incentives based instruments rather than direct or physical instruments of monetary control.

The key words describing reforms have been liberalization, deregulation, marketization, privatization, and globalization, all of which convey reforms objectives in a clear manner. The basic premise underlying the reforms has been that the state ownership and regulation have harmed the financial system, particularly the banks and the investors, and that such regulation is no longer relevant and adequate. To use the well-known academic terminology, the objective of financial reforms has been to correct and eliminate financial repression; and to transform a financially repressed system into a free system. Financial sector reforms are said to be grounded in the belief that the competitive efficiency in the real sectors of the economy cannot be realized to its full extent unless the locative efficiency of the private sector was improved. The main thrust of financial sector reforms was on the creation of efficient and stable financial institutions and markets, the removal if structural bottlenecks, introduction of new players and instruments, introduction of free pricing of financial assets, relaxation of quantitative restrictions, improvement in trading, clearing and settlement practices, promotion of institutional infrastructure, refinement of market micro-structure, creation of liquidity, depth, and the efficient price discovery process, and ensuring technological up-gradation.

STRUCTURE OF FINANCIAL INSTITUTION IN INDIA

RESERVE BANK OF INDIA

COMMERCIAL BANK

CO-OPERATIVE BANK

OTHER INSTITUTIONS

PUBLIC SECTOR

PRIVATE SECTOR STATE COOPERATIVE BANKS STATE LAND DEVELOPME NT MENT BANKS

SBI & ASSOCIATE BANKS NATIONALIZED BANKS BANKS RRBs 20 NATIONALIZED BANKS

FOREIGN BANKS OTHER INDIAN BANKS DIST.LD

NON-SCH.BANKS

PLDBs DCC Bank UCBs PACS, CREDIT SOCIETY

GOVERNMENT PO SAVING BANKS NATIONAL SVG CORP EPF

PUBLIC SECTOR PRIVATE SECTOR LIC, GIC, UTI, NABAR DICGC, ECGC, IFCI, ICICI, IDBI, SIDCs. CHITIS, Stock Exchange

FINANCIAL INSTITUTIONS IN INDIA:

The Financial Institutions in India mainly comprises of the Central Bank which is better known as the Reserve Bank of India, the commercial banks, the credit rating agencies, the securities and exchange board of India, insurance companies and the specialized financial institutions in India.

RESERVE BANK OF INDIA:

Reserve Bank of India was established in the year 1935 with a view to organize the financial frame work and facilitate fiscal stability in India. The bank acts as the regulatory authority with regard to the functioning of the various commercial bank and the other financial institutions in India. The bank formulates different rates and policies for the overall improvement of the banking sector. It issue currency notes and offers aids to the central and institutions governments.

COMMERCIAL BANKS IN INDIA:

The commercial banks in India are categorized into foreign banks, private banks and the public sector banks. The commercial banks indulge in varied activities such as acceptance of deposits, acting as trustees, offering loans for the different purposes and are even allowed to collect taxes on behalf of the institutions and central government.

CREDIT RATING AGENCIES IN INDIA:

The credit rating agencies in India were mainly formed to assess the condition of the financial sector and to find out avenues for more improvement. The credit rating agencies offer various services such as:

Operation Up-gradation Training to Employees To Scrutinize New Projects and find out the weak sections in it Rate different sectors

The two most important credit rating agencies in India are: CRISIL ICRA

CRISIL:
CRISIL the Credit Rating Information Service of India Limited, although set up in 1987 (see previous entry), started functioning in January 1988. As on 30 June 1993, CRISIL had assigned rating for C 586 debt instruments originated by 462 companies, covering a debt volume of Rs 32, 142 crore. The CRISIL rating symbols for Debentures are ranked into three categories: High Investment Grades (AAA, pronounced triple A) for highest safety, and AA (pronounced double A) for high safety; investment Grades (A for adequate safety, and BBB for moderate safety) and Speculative Grades (B for high risk, C for substantial risk, and D for companies in default). CRISIL may apply + or symbols for ratings from AA to C to reflect comparative standing within the category. Ratings for fixed deposits have F before the rating, while short-term instruments have the ratings p-1, p-2, p3, p-4 and p-5 for strong safety, less strong safety, adequate safety, minimal safety, and possibility of default, respectively. For Structured Obligations the rating symbols are the same as for debentures, with (so) added after the letters, e.g., AAA (so) CRISIL makes it clear that its rating relates to the particular debt instrument and is not a rating for the company as a whole, in as much as it takes into account the specific terms of the instruments. The rating is not a recommendation to invest or not to invest. CRISIL ratings are confidential, unless the company chooses to make them public, but if it does, CRISIL will monitor the rating over the life of the instrument. Any change in the rating so affected will be made public by CRISIL.

ICRA:
ICRA Limited (formerly Investment Information and Credit Rating Agency of India Limited) was set up in 1991 by leading financial/investment institutions, commercial banks and financial services companies as an independent and professional Investment Information and Credit Rating Agency.
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Today, ICRA and its subsidiaries together form the ICRA Group of Companies (Group ICRA). ICRA is a Public Limited Company, with its shares listed on the Bombay Stock Exchange and the National Stock Exchange. ALIANCE WITH MOODYS INVESTOR SERVICE: The international Credit Rating Agency Moodys Investors Service1 is ICRAs largest shareholder. The participation of Moodys is supported by a Technical Services Agreement, which entails Moodys providing certain high-value technical services to ICRA. Specifically, the agreement is aimed at benefiting ICRAs in-house research capabilities, and providing it with access to Moodys global research base. The agreement also envisages Moodys conducting regular training and business seminars for ICRA analysts on various subjects to help them better understand and manage concepts and issues relating to the development of the capital markets in India. Besides this formal training programmed, the agreement provides for Moodys advising ICRA on Rating-products strategy and the Ratings business in general. THE ICRA FACTOR FACILITATING EFFICIENCY IN BUSINESS: ICRA information products, Ratings, and solutions reflect independent, professional and impartial opinions, which assist businesses enhance the quality of their decisions and help issuers access a broader investor base and even lesser known companies approach the money and capital markets.

THE RESEARCH FACTOR:

We strongly believe that the quality of analytical output is a derivative of an organizations research capabilities. We have dedicated teams for Monetary, Fiscal, Industry and Sector research, and a panel of Advisors to enhance our in-house capabilities. Our research base enables us to maintain the highest standards of quality and credibility.

COMMITTED TO THE DEVELOPMENT OF THE FINANCIAL MARKET: The focus of ICRA in the coming years will continue to be on developing innovative concepts and products in a dynamic market environment, generating and promoting wider investor awareness and interest, enhancing efficiency and transparency in the financial market, and providing a healthier environment for market participants and regulators.

RANGE OF SERVICES RATING SERVICES

As an early entrant in the Credit Rating business, ICRA Limited (ICRA) is one of the most experienced Credit Rating Agencies in the country today. ICRA rates rupee denominated debt instruments issued by manufacturing companies, commercial banks, non-banking finance companies, financial institutions, public sector undertakings and municipalities, among others. ICRA also rates structured obligations and sector-specific debt obligations such as instruments issued by Power, Telecom and Infrastructure companies. The other services offered include Corporate Governance Rating, Stakeholder Value and Governance Rating, Credit Risk Rating of Debt Mutual Funds, Rating of Claims Paying Ability of Insurance Companies, Project Finance Rating, and Line of Credit Rating. ICRA, along with National Small Industries Corporation Limited (NSIC), has launched a Performance and Credit Rating Scheme for Small-Scale Enterprises in India. The service is aimed at enabling Small and Medium Enterprises (SMEs) improve their access to institutional credit, increase their competitiveness, and raise their market standing.

GRADING SERVICES
The Grading Services offered by ICRA employ pioneering concepts and methodologies, and include Grading of: Initial Public Offers (IPOs); Microfinance Institutions (MFIs); Construction Entities; Real Estate Developers and Projects; Healthcare Entities; and Maritime Training Institutes. In IPO Grading, an ICRA-assigned IPO Grade represents a relative assessment of the fundamentals of the issue graded in relation to the universe of other listed equity securities in India. In MFI Grading, the focus of ICRAs grading
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exercise is on evaluating the candidate institutions business and financial risks. The Grading of Construction Entities seeks to provide an independent opinion on the quality of performance of the entities graded. Similarly, the Grading of Real Estate Developers and Projects seeks to make property buyers aware of the risks associated with real estate projects, and with the developers ability to deliver in accordance with the terms agreed. ICRAs Healthcare Grading presents an independent opinion on the quality of care provided by healthcare entities. In the education sector, ICRA offers the innovative service of Grading of Maritime Training Institutes in India.

CONSULTING SERVICES:
ICRA Management Consulting Services Limited (IMaCS), a wholly-owned subsidiary of ICRA Limited, is a multi-line management and development consulting firm with a global operating footprint. IMaCS offers Consulting Services in Strategy, Risk Management, Regulation & Reform, Transaction Advisory, Development Consulting and Process Reengineering. IMaCS clientele includes Banks and Financial Service Companies, Corporate Entities, Institutional Investors, Governments, Regulators, and Multilateral Agencies. Besides India, IMaCS has consulting experience across 35 countries in South East Asia, Northern Asia, West Asia, Africa, Western Europe, and North America.

SECURITIES AND EXCHANGE BOARD OF INDIA:

The securities and exchange board of India, also referred to as SEBI was founded in the year 1992 in order to protect the interests of the investors and to facilitate the functioning of the market intermediaries. They supervise market conditions, register institutions and indulge in risk management.

INSURANCE COMPANIES IN INDIA:

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The insurance companies offer protection against losses. They deal in life insurance, marine insurance, and vehicle insurance and so on. The insurance companies collect the little saving of the investors and then reinvest those savings in the market. The insurance companies are collaborating with different foreign insurance companies after the liberalization process. This step has been incorporated to expand the Indian Insurance market and make it competitive.

SPECIALISED FINANCIAL INSTITUTIONS IN INDIA:

The specialized financial institutions in India are government undertakings that were set up to provide assistance to the different sectors and thereby cause overall development of the Indian economy. The significant institutions falling under this category includes:

Board for Industrial & Financial Reconstruction Export-Import Bank Of India Small Industries Development Bank of India National Housing Bank

According to the Indian Banking Company Act 1949, "A banking company means any company which transacts the business of banking. Banking means accepting for the purpose of lending of investment of deposits of money from the public, payable on demand or other wise withdrawal by cheque, draft or otherwise."

PRIMARY FUNCTIONS OF COMMERCIAL BANKS:

Commercial Banks performs various primary functions some of them are given below 1. Accepting Deposits: Commercial bank accepts various types of deposits from public especially from its clients. It includes saving account deposits, recurring account deposits, fixed deposits, etc. These deposits are payable after a certain time period. 2. Making Advances: The commercial banks provide loans and advances of various forms. It includes an over draft facility, cash credit, bill discounting, etc. They also give demand and demand and term loans to all types of clients against proper security.

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3. Credit creation: It is most significant function of the commercial banks. While sanctioning a loan to a customer, a bank does not provide cash to the borrower Instead it opens a deposit account from where the borrower can withdraw. In other words while sanctioning a loan a bank automatically creates deposits. This is known as a credit creation from commercial bank.

SECONDARY FUNCTIONS OF COMMERCIAL BANKS:

Along with the primary functions each commercial bank has to perform several secondary functions too. It includes many agency functions or general utility functions. The secondary functions of commercial banks can be divided into agency functions and utility functions. I. AGENCY FUNCTIONS: Various agency functions of commercial banks are 1. To collect and clear cheque, dividends and interest warrant. 2. To make payment of rent, insurance premium, etc. 3. To deal in foreign exchange transactions. 4. To purchase and sell securities. 5. To act as trustee, attorney, correspondent and executor. 6. To accept tax proceeds and tax returns. II. GENERAL UTILITY FUNCTIONS: The general utility functions of the commercial banks include 1. To provide safety locker facility to customers. 2. To provide money transfer facility. 3. To issue travelers cheque. 4. To act as referees.

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5. To accept various bills for payment e.g. phone bills, gas bills, water bills, etc. 6. To provide merchant banking facility. 7. To provide various cards such as credit cards, debit cards, Smart cards, etc. The Co-operative banks in India started functioning almost 100 years ago. The Cooperative bank is an important constituent of the Indian Financial System, judging by the role assigned to co-operative, the expectations the co-operative is supposed to fulfill, their number, and the number of offices the cooperative bank operate. Though the co operative movement originated in the West, but the importance of such banks have assumed in India is rarely paralleled anywhere else in the world. The cooperative banks in India play an important role even today in rural financing. The businesses of cooperative bank in the urban areas also has increased phenomenally in recent years due to the sharp increase in the number of primary co-operative banks. Co-operative Banks in India are registered under the Co-operative Societies Act. The Co-operative bank is also regulated by the RBI. They are governed by the Banking Regulations Act 1949 and Banking Laws (Co-operative Societies) Act 1965.

CO-OPERATIVE BANKING:
Co-operative banking is retail and commercial banking organized on a co-operative basis. Co-operative banking institutions take deposits and lend money in most parts of the world. Co-operative banking (for the purposes of this article), includes retail banking, as carried out by credit unions, mutual savings and loan associations, building societies and cooperatives, as well as commercial banking services provided by mutual organizations (such as cooperative federations) to cooperative businesses.

CO-OPERATIVE BANKS IN INDIA FINANCE RURAL AREAS UNDER:

Farming
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Cattle Milk Hatchery Personal finance

CO-OPERATIVE BANKS IN INDIA FINANCE URBAN AREAS UNDER:

Self-employment Industries Small scale units Home finance Consumer finance Personal finance

Some facts about Co-operative banks in India:

Some co-operative banks in India are more forward than many of the state and private sector banks.

According to NAFCUB the total deposits & landings of Co-operative Banks in India is much more than Old Private Sector Banks & also the New Private Sector Banks.

This exponential growth of Co-operative Banks in India is attributed mainly to their much better local reach, personal interaction with customers, and their ability to catch the nerve of the local clientele.

Co-operative banks are often created by persons belonging to the same local or professional community or sharing a common interest. Co-operative banks generally provide their members with a wide range of banking and financial services (loans,
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deposits, banking accounts). In India co-operative banks are regulated with the RBI and governed by Banking Regulations Act 1949 and Co-operative Societies Act, 1965.

HISTORY:
The Bank was formed in 1872 in the city of Manchester in UK. The Co-operative banks in India have a history of almost 100 years. The Co-operative banks are an important constituent of the Indian Financial System. Co operative Banks in India are registered under the Co-operative Societies Act. The cooperative bank is also regulated by the RBI. They are governed by the Banking Regulations Act 1949 and Banking Laws (Co-operative Societies) Act, 1965. These banks were conceived as substitutes for money lenders.

ESTABLISHMENTS: Co-operative bank performs all the main banking functions of deposit mobilization, supply of credit and provision of remittance facilities. Co-operative Banks belong to the money market as well as to the capital market. Co-operative Banks provide limited banking products and are functionally specialists in agriculture related products. However, co-operative banks now provide housing loans also. UCBs provide working capital loans and term loan as well

FEATURES: 1. Customer-owned entities 2. Democratic member control 3. Profit allocation

FUNCTIONS:Co-operative Banks are organized and managed on the principal of co-operation, self-help, and mutual help. They work on the basis of no profit no loss. Profit maximization is not their goal . Co-operative bank do banking business mainly in the agriculture and rural sector. However, UCBs, SCBs, and CCBs operate in semi urban, urban, and metropolitan also. The State Co-operative Banks (SCBs), Central Co- operative Banks (CCBs) and Urban Co16

operative Banks (UCBs) can normally extend housing loans up to Rs 1lakh to an individual. The scheduled UCBs, however, can lend up to Rs 3 lakh for housing purposes. The UCBs can provide advances against shares and debentures.

RBI GUIDELINES FOR CO-OPERATIVE BANK TO CREDIT

MASTER CIRCULAR ON MICRO CREDIT

1. MICRO CREDIT

Micro Credit has been defined as the provision of thrift, credit and other financial services and products of very small amount to the poor in rural, semi-urban and urban areas for enabling them to raise their income levels and improve their living standards. Micro Credit Institutions are those, which provide these facilities.

2. THE SELF HELP GROUP (SHG)- BANK LINKAGE PROGRAMME

Despite the vast expansion of the formal credit system in the country, the dependence of the rural poor on moneylenders continues in many areas, especially for meeting emergent requirements. Such dependence is pronounced in the case of marginal farmers, landless laborers, and petty traders and rural artisans belonging to socially and economically backward classes and tribes whose propensity to save is limited or too small to be mopped up by the banks. For various reasons, credit to these sections of the population has not been institutionalized. The studies conducted by NABARD, APRACA and ILO on the informal groups promoted by non governmental organizations (NGOs) brought out that Self-Help Savings and Credit Groups have the potential to bring together the formal banking structure and the rural poor for mutual benefit and that their working has been encouraging.

The NABARD accordingly launched a pilot project for the purpose and supported it by way of refinance. It also provided technical support and guidance to the agencies participating in the programmed. The following criteria would broadly be adopted by NABARD for selecting SHGs:
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a) The Group should be in existence for at least six months. b) The Group should have actively promoted the savings habit. c) Groups could be formal (registered) or informal (unregistered). d) Membership of the group could be between 10 to 20 persons.

The advances given by the banks to the groups were treated as advances to "weaker sections" under the priority sector. While the norms relating to margin, security as also scales of finance and unit cost would broadly guide the banks for lending to the SHGs, deviations there from could be made by banks, where deemed necessary. These relaxations in margin, security norms, etc. were only in respect of SHGs to be financed under the pilot project.

NABARD, vide its circular letter No.NB.DPD.FS.4631/92-A/91-92, dated 26 February, 1992, issued detailed operational guidelines to banks for implementation of the project. Quick studies conducted by NABARD in a few states to assess the impact of the linkage project brought out encouraging and positive features like increase in loan volume of the SHGS, definite shift in the loaning pattern of the members from non-income generating activities to production activities, nearly 100% recovery performance, significant reduction in the transaction costs for both the banks and the borrowers, etc., besides leading to gradual increase in the income level of the SHG members. Another significant feature observed in the linkage project was that about 85% of the groups linked with the banks are formed exclusively by women.

With a view to studying the functioning of SHGs and NGOs for expanding their activities and deepening their role in the rural sector, in November 1994, RBI constituted a Working Group comprising eminent NGO functionaries,

academicians, consultants and bankers under the Chairmanship of Shri S.K. Kalia, the then Managing Director, NABARD. As a follow up of the recommendations of the Working Group, banks were advised in April 1996 as under :

a) SHG Lending as Normal Lending Activity The SHGs linkage programmed would be treated as a normal business activity of banks. Accordingly, the banks were advised that they may consider lending to SHGs as part of their mainstream credit operations both at policy and implementation
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level. They may include SHG linkage in their corporate strategy/plan, training curriculum of their officers and staff and implement it as a regular business activity and monitor and review it periodically.

b) Separate Segment under priority sector In order to enable the banks to report their SHG lending without difficulty, it was decided that the banks should report their lending to SHGs and/or to NGOs for onlending to SHGs/members of SHGs/discrete individuals or small groups which are in the process of forming into SHGs under the new segment, viz. 'Advances to SHGs' irrespective of the purposes for which the members of SHGs have been disbursed loans. Lending to SHGs should be included by the banks as part of their lending to the weaker sections.

The Government of India has enacted the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 on June 16, 2006 which was notified on October 2, 2006. With the enactment of MSMED Act 2006, the paradigm shift that has taken place is the inclusion of the services sector in the definition of Micro, Small & Medium enterprises, apart from extending the scope to medium enterprises. The MSMED Act, 2006 has modified the definition of micro, small and medium enterprises engaged in manufacturing or production and providing or rendering of services. The Reserve Bank has notified the changes to all scheduled commercial banks. Further, the definition, as per the Act, has been adopted for purposes of bank credit vides RBI circular ref. RPCD.PLNFS. BC.No.63/ 06.02.31/ 2006-07 dated April 4, 2007.

FINANCIAL INSTRUMENTS IN INDIA:

Several financial instruments are available in the Indian money market. These are government securities, or G-sec, preference shares, commercial papers, equity shares, certificate of deposits, call money market and industrial securities. These are discussed below.

Government Securities: In India, mainly the institutional investors buy the government
securities. The government, both State and Central, and the government authorities, for
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example, state electricity boards, municipalities etc issue it. Commercial banks are the biggest investors who buy the G-sacs. The government collects money through the G-sacs to finance its several new infrastructure development projects or to meet its present needs. The government itself issues the risk of default for G-sec, for it.

Preference Shares: These carry a fixed dividend rate and a special right to dividends
over the private equity holders. Currently, all the preference shares in the Indian market are `redeemable & risqu, that is, they have a fixed period of maturity. Therefore, sometimes they are termed as `hybrid variety

Commercial Papers (CP): These are issued mainly by the corporate businessmen to
fund their working capital needs. Commercial Papers are issued generally for short-term maturities. Commercial papers are not secure and subject to market risks, so those corporate bodies that have a good credit history will only be able to use this financial instrument.

Equity Shares: It is a "high return risk" instrument. Equity shares don't have any fixed
return rate and thereby, no period of maturity.

Certificate of Deposits (CD): These are very similar to the Commercial papers. But the
CDs are issued mainly by the commercial banks.

Call Money Market: The loans made in the call money market are mainly short term in
nature. Call money market mainly deals with the interbank markets. Those banks that are suffering from a short-term cash deficit borrow cap from the call money market. The interest rate varies with the market rate and depends upon the banking system.

Industrial Securities: Normally the big corporate bodies are used to issue this to fulfill
their long-term requirements regarding working capital. The debentures, equity shares fall under this category.

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CREDIT RISK MANAGEMENT:

Credit risk is an investor's risk of loss arising from a borrower who does not make payments as promised. Such an event is called a default. Another term for credit risk is default risk. Credit risk refers to the likelihood a potential borrower will default on his or her financial obligations with a lending institution. Credit risk management is the lending institution's primary line of defense to protect itself against customers who fail to meet the terms of the loans or other credit that was extended to them. Credit risk management is an important aspect of a bank's success and ensures a lending institution will not take on more risk than it can handle. Investor losses include lost principal and interest, decreased cash flow, and increased collection costs, which arise in a number of circumstances:

A consumer does not make a payment due on a mortgage loan, credit card, line of credit, or other loan

A business does not make a payment due on a mortgage, credit card, line of credit, or other loan

A business or consumer does not pay a trade invoice when due A business does not pay an employee's earned wages when due A business or government bond issuer does not make a payment on a coupon or principal payment when due

An insolvent insurance company does not pay a policy obligation An insolvent bank won't return funds to a depositor A government grants bankruptcy protection to an insolvent consumer or business Bank risk management: Deals with the handling of different types of risks faced by the

banks, for example, market risk, credit risk, liquidity risk, legal risk, operational risk and reputational risk

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In course of banks lending involves a number of risks. In addition to the risks related to creditworthiness of the counterparty, the banks are also exposed to interest rate, forex and country risks.

Unlike market risks, where the measurement, monitoring, control etc. are to a great extent centralized. Credit risks management is a decentralized function or activity. This is to say that credit risk taking activity is spread across the length and breadth of the network of branches, as lending is a decentralized function. Proper a sufficient care has to be taken for appropriate management of credit risk.

Credit risk or default risk involves inability or unwillingness of a customer or counterparty to meet commitments in relation to lending, trading, hedging, settlement and other financial transactions. The objective of credit risk management is to minimize the risk and maximize banks risk adjusted rate of risk and maximize banks risk adjusted rate of return by assuming and maintaining credit exposure within the acceptable parameters.

The Credit Risk is generally made up of transaction risk or default risk and portfolio risk. The portfolio risk in turn comprises intrinsic and concentration risk. The credit risk of a banks portfolio depends on both external and internal factors. The external factors are the state of the economy, rates and interest rates, trade restrictions, economic sanctions, wide swings in commodity/equity prices, foreign exchange rates and interest rates, trade restrictions, economic sanctions, Government policies, etc. The internal factors are deficiencies in loan policies/administration, absence of prudential credit concentration limits,

inadequately defined lending limits for Loan Officers/Credit Committees, deficiencies in appraisal of borrowers financial position, excessive dependence on collaterals and inadequate risk pricing, absence of loan review mechanism and post sanction surveillance, etc. Another variant of credit risk is counterparty risk. The counterparty risk arises from non-performance of the trading partners. The non-performance may arise from counterpartys refusal/inability to perform due to adverse price movements or from external constraints that were not anticipated by the principal. The counterparty risk is

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generally viewed as a transient financial risk associated with trading rather than standard credit risk. The management of credit risk should receive the top managements attention and the process should encompass:

TYPES OF CREDIT RISK MANAGEMENT:

Risks can be classified in different ways according to their sources. As this classification is more for the sake of convenience, there may be certain amount of overlap. The risks associated with the provision of banking services differ by the service rendered. For the sector as whole, however the risk can be broken into six generic types: a) Systematic or market risk b) Reputational Risk c) Credit risk d) Counter party risk e) Liquidity risk f) Operational risk g) Legal risks.

SYSTEMATIC RISK:
Systematic risk is the risk or asset value change associated with systematic factors. It is sometimes referred to as market risk, which is in fact a somewhat imprecise term. By its can be hedged, but cannot be diversified completely away. In fact, systematic risk can be thought of as undiversifiable risk. All investors assume this type of risk, whenever assets owned or claims issued can change in value as a result of broad economic factors. As such, systematic risk comes in many forms. For the banking sectors however, two are of greatest concern, namely variations in the general level of interest rates and the relative value of currencies. Because of the banks dependence on these systematic factors, most try to estimate the impact of these particular systematic risks on performance, attempt to hedge against them
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and thus limit the sensitivity to variations in undiversifiable factors. Accordingly, most will track interest rate risk closely. They measure and manage the firms vulnerability to interest rate variation, even though they cannot do so perfectly. At the same time, international banks with large currency positions closely monitor their foreign exchange risk and try to manage, as well as limit, their exposure to it. In a similar fashion, some institutions with significant investments in one commodity such as oil, through their lending activity or geographical franchise, concern themselves with commodity price risk. Others with high single-industry concentrations may monitor specific industry concentration risk as well as the forces that affect the fortunes of the industry involved.

MARKET RISK:
Market risk has been taken off the front burner of senior management risk agendas. The extreme volatility in the market is calming down and respondents are breathing a collective sigh of relief. But the contagion impact the extent of the crisis and speed with which it swept through the industry is very much on everyones minds. Banks are working to hone their tools and processes to better predict their firms sensitivity to shocks and volatility in the market. They are supplementing traditional VAR measures with stress testing and scenario analysis some investment banks are even conducting daily and weekly tests on their trading books. They are also closely monitoring the size, concentration and liquidity of positions, and applying good business judgment to the results of the quantitative models. Several executives reported that they are focusing on the correlation between market risk and credit risk and are merging the two functions under the control of one senior executive. Market risk doesnt kill institutions. Its generally either credit risk or liquidity risk that brings you down.

REPUTATIONAL RISK:
An erosion of trust .Not surprisingly, effective management of reputational risk has become increasingly important, and respondents are brutally aware of the erosion of trust and

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confidence in the industry. Stakeholders, including shareholders, counterparties, customers, current employees and potential recruits, gauge their interactions with the company based on their individual Perceptions of the companys soundness, reliability and performance an important factor in maintaining a strong institutional brand. Many executives discussed the intensity of the political, public and media scrutiny, and its extremely negative impact on everyone in the industry including the people and organizations that managed prudently. One executive noted sadly, You dont go to a dinner party and tell people you work in a bank anymore.

CREDIT RISK:
Credit risk arises from non-performance by a borrower. It may arise from either an inability or an unwillingness to perform in the pre-committed contracted manner. This can affect the lender holding the loan contract, as well as other lenders to the creditor. Therefore, the financial condition of the borrower as well as the current value of any underlying collateral is or considerable to its bank. The real risk from credit is the deviation of portfolio performance from its expected value. Accordingly, credit risk is diversifiable, but difficult to eliminate completely. This is because a portion of the default risk may; In addition, the idiosyncratic nature of some portion of these losses remains a problem for creditors in spite of the beneficial effect of diversification on total uncertainty. This is particularly true for banks that lend in local markets and ones that take on highly illiquid assets. In such cases, the credit risk is not easily transferred, and accurate estimates of loss are difficult to obtain.

COUNTER PARTY RISK:

Counter party risk comes from non-performance of a trading partner. The nonperformance may arise from a counterparts refusal to perform due to an adverse price

25

movement caused by systematic factors, or from some other political or legal constraint that was not anticipated by the principals. Diversification is the major tool for controlling nonsystematic counter party risk. This risk is like credit risk, but it is generally viewed as a more transient financial risk associated with trading than standard creditor default risk. In addition, a counter partys failure to settle a trade can arise from other factors beyond a credit problem.

LIQUIDITY RISK:
Liquidity risk can best be described as the risk of a funding crisis. While some would include the need to plan for growth and unexpected expansion of credit, the risk here is seen more correctly as the potential for a funding crisis. Such a situation would inevitably be associated with an unexpected event, such as a large charge off, loss or confidence, or a crisis of national proportion such as a currency crisis. In any case, risk management here centers on liquidity facilities and portfolio structure. Recognizing risk leads the bank to recognize liquidity itself as an asset, and portfolio design in the face of illiquidity concerns as a challenge.

OPERATIONAL RISK:
Is associated with the problems of accurately processing, settling, and taking or making delivery on trades in exchange for cash. It also arises in record keeping, processing system failures and compliance with various regulations. As such, individual operating problems are small probability events for well run organizations but they an expose a firm to outcomes that may be quite costly. Operational risk: assessing the nuts and bolts Attention to operational risk is on the rise, especially in the Americas. Almost half of the executives interviewed voted it atop priority, making it managements second greatest concern. Financial institutions have, of course, managed operational risks for years and understand the need to maintain tight controls and low error rates. However, the heightened scrutiny from both regulatory bodies and governments, the new operational risk management framework and measurements required under Basel II, and the sheer difficulty of navigating todays
26

Environment has all intensified the focus on operations. Banks are examining the nuts and bolts of the business evaluating, defining and quantifying the people, systems and process risks embedded throughout the enterprise. Initiatives include: standardizing

documentation of processes and controls; improving data gathering, quality and timeliness; developing methodologies and metrics to quantify risks; and conducting scenario analysis by risk type. Several companies have created a new management position focused exclusively on operational Risk oversight, and many are developing risk awareness and training programs for all units and functions.Operational risk is the cause du jour with regulators.

LEGAL RISKS:
Are endemic in financial contracting and are separate from the legal ramifications of credit, counter party and operational risks. New statutes, tax legislations, court opinions and can put formerly well-established transactions into contention even when al parties have previously performed adequately and are fully able to perform in the future. For example, environmental regulations have radically affected real estate values for older properties and imposed serious risks to lending institutions in this area. A second type of legal risk arises from the activities of an institutions management or employees. Fraud, violations of regulations or laws, and other actions can lead to catastrophic loss, as recent examples in the thrift industry have demonstrated. All financial institutions face all these risks to some extent. Non-principal of agency activity involves operational risk primarily. Since institutions in this case do not own the underlying assets in which they trade, systematic, credit and counter party risk accrues directly to the asset holder. If the latter experiences a financial loss, however, legal recourse against an agent is often attempted. Therefore, institutions engaged in only agency transactions bear some legal risk, if only indirectly.

MEASUREMENT OF RISK THROUGH CREDIT RATING/SCORING:

(a) Quantifying the risk through estimating expected loan losses i.e. the amount of loan losses that bank would experience over a chosen time horizon (through tracking portfolio
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behavior over 5 or more years) and unexpected loss (through standard deviation of losses or the difference between expected loan losses and some selected target credit loss quantile); (b) Risk pricing on a scientific basis; and (c) Controlling the risk through effective Loan Review Mechanism and portfolio management. The credit risk management process should be articulated in the banks Loan Policy, duly approved by the Board. Each bank should constitute a high level Credit Policy Committee, also called Credit Risk Management Committee or Credit Control Committee etc. to deal with issues relating to credit policy and procedures and to analyze manage and control credit risk on a bank wide basis. The Committee should be headed by the Chairman/CEO/ED, and should comprise heads of Credit Department, Treasury, Credit Risk Management Department (CRMD) and the Chief Economist. The Committee should, inter alia, formulate clear policies on standards for presentation of credit proposals, financial covenants, rating standards and benchmarks, delegation of credit approving powers, prudential limits on large credit exposures, asset concentrations, standards for loan collateral, portfolio management, loan review mechanism, risk concentrations, risk monitoring and evaluation, pricing of loans, provisioning, regulatory/legal compliance, etc. Concurrently, each bank should also set up Credit Risk Management Department (CRMD), independent of the Credit Administration Department. The CRMD should enforce and monitor compliance of the risk parameters and prudential limits set by the CPC. The CRMD should also lay down risk assessment systems, monitor quality of loan portfolio, identify problems and correct deficiencies, develop MIS and undertake loan review/audit.

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Large banks may consider separate set up for loan review/audit. The CRMD should also be made accountable for protecting the quality of the entire loan portfolio. The Department should undertake portfolio evaluations and conduct comprehensive studies on the environment to test the resilience of the loan portfolio. Credit Risk may be defined as the risk of default on the part of the borrower. The lender always faces the risk of the counter party not repaying the loan or not making the due payment in time. This uncertainty of repayment by the borrower is also known as default risk.

Some of the commonly used methods to measure credit risk are:

1. Ratio of non performing advances to total advances; 2. Ratio of loan losses to bad debt reserves; 3. Ratio of loan losses to capital and reserves; 4. Ratio of loan loss provisions to impaired credit; 5. Ratio of bad debt provision to total income; etc. Managing credit risk has been a problem for the banks for centuries. As had been observed by John Medlin, 1985 issue of US banker.sBalancing the risk equation is one of the most difficult aspects of banking. If you lend too liberally, you get into trouble. If you dont lend liberally you get criticized. Over the tears, bankers have developed various methods for containing credit risk. The credit policy of the banks generally prescribes the criteria on which the bank extends credit and, inter alia, provides for standard.

CREDIT RISK MEASUREMENT IN BANK:

MEASUREMENT OF CREDIT RISK CONSISTS OF: A) Measurement of risk through credit rating / scoring

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B) Quantifying the risk through estimating expected loan losses, that is, the amount of loan losses that bank would experience over a chosen time horizon and unexpected loan losses that is the amount by which actual losses exceed the expected losses. Controlling Credit Risk through Loan Review Mechanism Loan review mechanism is an effective tool for constantly evaluating the quality of loan book and brings about qualitative improvements in credit administration. Loan review mechanism is used for large value accounts with responsibility assigned in various areas such as, evaluating effectiveness of loan administration, maintaining the integrity of credit grading process, assessing the portfolio quality, etc.

The main objective of loan review mechanism is:

To identify promptly loans, which develop credit weaknesses and initiate timely corrective action To evaluate portfolio quality and isolate potential problems areas To provide information for determining adequacy of loan losses 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 effective loan review mechanism. Credit grading involves assessment of credit quality assessment of credit quality, identification of problem loans, and assignment of risk rating. A proper credit grading system should support evaluating the portfolio quality and establishing a loan loss provision. Given the importance and subject nature of credit ratings awarded by credit administration department should be subjected to review by loan review officers who are independent of loan administration.

LOAN REVIEW POLICY SHOULD ADDRESS THE FOLLOWING ISSUES:

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QUALIFICATION OF 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 to 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 of Committee of board. 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 values of loans should be undertaken usually within three month 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. Although it is desirable to subject all loans above a cut off to Loan Review Mechanism, at least 30-40% of the portfolio should be subjected to Loan Review Mechanism in a year to provide reasonable assurance that all the major credit risks embedded in the balance sheet have been tracked.

DEPTH OF REVIEW:
Approval process Accuracy and time lines of credit rating assigned by loan officers. Adherence to internal policies and procedure and applicable laws/ regulation. Compliance with loan covenants Post-sanction follow up Sufficiency of loan documentation Portfolio quality. Recommendation for improving portfolio quality.

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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 bank should also evolve suitable framework for reporting and evaluating the quality of credit decision taken by various functional groups. The quality of credit decision should be evaluated within a reasonable time say 3-6 month, through a well defined Loan Review Mechanism.

REVIEW OF SMALL VALUE RETAIL LOAN ACCOUNTS:

Usually such assets are subjected to review on exception basis. Segments which show below average default performance are taken up for review and for putting in place remedial actions. Other segments are subjected to review on sample basis based on a predefined plan.

PRINCIPLES FOR THE MANAGEMENT OF CREDIT RISK:

1. While financial institutions have faced difficulties over the years for a multitude of reasons, the major cause of serious banking problems continues to be directly related to lax credit standards for borrowers and counterparties, poor portfolio risk management, or a lack of attention to changes in economic or other circumstances that can lead to a deterioration in the credit standing of a bank's counterparties. This experience is common in both G-10 and non-G-10 countries. 2. Credit risk is most simply defined as the potential that a bank borrower or counterparty will fail to meet its obligations in accordance with agreed terms. The goal of credit risk management is to maximize a bank's risk-adjusted rate of return by maintaining credit risk exposure within acceptable parameters. Banks need to manage the credit risk inherent in the entire portfolio as well as the risk in individual credits or transactions. Banks should also consider the relationships between credit risk and other risks. The effective management of credit risk is a critical component of a comprehensive approach to risk management and essential to the long-term success of any banking organization.

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3. For most banks, loans are the largest and most obvious source of credit risk; however, other sources of credit risk exist throughout the activities of a bank, including in the banking book and in the trading book, and both on and off the balance sheet. Banks are increasingly facing credit risk (or counterparty risk) in various financial instruments other than loans, including acceptances, interbank transactions, trade financing, foreign exchange transactions, financial futures, swaps, bonds, equities, options, and in the extension of commitments and guarantees, and the settlement of transactions. 4. Since exposure to credit risk continues to be the leading source of problems in banks world-wide, banks and their supervisors should be able to draw useful lessons from past experiences. Banks should now have a keen awareness of the need to identify, measure, monitor and control credit risk as well as to determine that they hold adequate capital against these risks and that they are adequately compensated for risks incurred. The Basel Committee is issuing this document in order to encourage banking supervisors globally to promote sound practices for managing credit risk. Although the principles contained in this paper are most clearly applicable to the business of lending, they should be applied to all activities where credit risk is present. 5. The sound practices set out in this document specifically address the following areas: (I) establishing an appropriate credit risk environment; (ii) operating under a sound creditgranting process; (iii) maintaining an appropriate credit administration, measurement and monitoring process; and (IV) ensuring adequate controls over credit risk. Although specific credit risk management practices may differ among banks depending upon the nature and complexity of their credit activities, a comprehensive credit risk management program will address these four areas. These practices should also be applied in conjunction with sound practices related to the assessment of asset quality, the adequacy of provisions and reserves, and the disclosure of credit risk, all of which have been addressed in other recent Basel Committee documents. 6. While the exact approach chosen by individual supervisors will depend on a host of factors, including their on-site and off-site supervisory techniques and the degree to which external auditors are also used in the supervisory function, all members of the Basel
33

Committee agree that the principles set out in this paper should be used in evaluating a bank's credit risk management system. Supervisory expectations for the credit risk management approach used by individual banks should be commensurate with the scope and sophistication of the bank's activities. For smaller or less sophisticated banks, supervisors need to determine that the credit risk management approach used is sufficient for their activities and that they have instilled sufficient risk-return discipline in their credit risk management processes. 7. the Committee stipulates in Sections II through VI of the paper, principles for banking supervisory authorities to apply in assessing bank's credit risk management systems. In addition, the appendix provides an overview of credit problems commonly seen by supervisors. 8. A further particular instance of credit risk relates to the process of settling financial transactions. If one side of a transaction is settled but the other fails, a loss may be incurred that is equal to the principal amount of the transaction. Even if one party is simply late in settling, then the other party may incur a loss relating to missed investment opportunities. Settlement risk (i.e. the risk that the completion or settlement of a financial transaction will fail to take place as expected) thus includes elements of liquidity, market, operational and reputational risk as well as credit risk. The level of risk is determined by the particular arrangements for settlement. Factors in such arrangements that have a bearing on credit risk include: the timing of the exchange of value; payment/settlement finality; and the role of intermediaries and clearing houses.

IMPOTENCE OFCREDIT RISK MANAGEMENT IN BANKING:

Credit risk management is a very important area for the banking sector and there are wide prospects of growth and other financial institutions also face problems which are financial in nature. Also, banking professionals have to maintain a balance between the risks and the returns. For a large customer base banks need to have a variety of loan products. If bank lowers the interest rates for the loans it offers, it will suffer
34

In terms of equity, a bank must have substantial amount of capital on its reserve, but not too much that it misses the investment revenue, and not too little that it leads itself to financial instability and to the risk of regulatory non-compliance. Credit risk management is risk assessment that comes in an investment. Risk often comes in investing and in the allocation of capital. The risks must be assessed so as to derive a sound investment decision. And decisions should be made by balancing the risks and returns. Giving loans is a risky affair for bank sometimes and certain risks may also come when banks offer securities and other forms of investments. The risk of losses that result in the default of payment of the debtors is a kind of risk that must be expected. A bank to keep substantial amount of capital to protect its solvency and to maintain its economic stability. The greater the bank is exposed to risks, the greater the amount of capital must be when it comes to its reserves, so as to maintain its solvency and stability. Credit risk management must play its role then to help banks be in compliance with Basel II Accord and other regulatory bodies. For assessing the risk, banks should plan certain estimates, conduct monitoring, and perform reviews of the performance of the bank. They should also do Loan reviews and portfolio analysis in order to determine risk involved. Banks must be active in managing the risks in various securities and derivatives. Still progress has to be made for analyzing the credits and determining the probability of defaults and risks of losses. So credit risk management becomes a very important tool for the survival of banks.

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CHAPTER II

36

TITLE: A Study on Credit Risk Management in Karnataka State Co-operative APEX Bank. INTRODUCTION:
Credit Risk Management is defined as the potential of a bank borrower or counterparty will fail to meet his obligation in accordance with agreed terms, or in other words it is defined as the risk that the firms customer and the parties to which it has lend money will fail to make promised payment is known as credit risk management. Credit risk is an investor's risk of loss arising from a borrower who does not make payments as promised. Such an event is called a default. Another term for credit risk is default risk. Credit risk refers to the likelihood a potential borrower will default on his or her financial obligations with a lending institution. Credit risk management is the lending institution's primary line of defense to protect itself against customers who fail to meet the terms of the loans or other credit that was extended to them. Credit risk management is an important aspect of a bank's success and ensures a lending institution will not take on more risk than it can handle.

STATEMENT OF THE PROBLEM:

Credit risk arises because of the possibility that promised cash flows on financial claims held by financial institution in the form of loans and bonds will not be paid in full. If the principal were paid in full on maturity and interest payment were made at promised dates then Financial Institution will not face any credit risk. But if a borrower does not repay both the principal and interest at the expected time Financial Institution may be at risk. In recent years, lending banks have devoted its attention in measuring credit risk and have made important gains both by employing innovative and sophisticated risk modeling techniques and also strengthening their more traditional practices. Therefore, a study is

37

undertaken in order to understand the credit risk management in scheduled bank with reference to The Karnataka State Co-operative Apex Bank Ltd.

OBJECTIVES OF THE STUDY:

To understand the specific types of credit risk and credit management policies. To study how credit risk is measured in Apex bank. To identify the tools and methods adopted by financial institution to minimize the risk level. To study the trend of assets and liabilities of Apex Bank. To offer summary and findings and recommendation.

SCOPE OF THE STUDY:

The Study covers operational jurisdiction of Apex Bank recognizing the fact and dealings which will benefit lending institutions and the economies in which they operate. It also focuses on credit risk management practices of the bank. The study is concentrated to make differentiate between the recovery system of scheduled bank and with others bank.

RESEARCH METHODOLOGY OF THE STUDY:

An analytical study is undertaken on credit risk management. The study required data to be collected from mainly secondary sources. The study is based on survey method. The data has been collected from the various reports available with the bank and the same as been taken for the study. However the required primary data has to collect from the managers through an interview schedule.

SAMPLING TECHNIQUE:
Sampling is the process of inferring something about large group of elements by studying only a part of it. Sample is the portion of population which is examined with a view to estimate the characteristic of the population. Reference to this, Simple Random sampling technique is used.

SOURCES OF DATA
PRIMARY DATA
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In case of primary data, the data are collected through interviewing managers and trend analysis. SECONDARY DATA In case secondary data, the data are collected from financial reports, Annual general reports, financial records of the bank, internet, bank websites, magazines.

SAMPLE SIZE:
Based on the objective of the study sample sizes of 50 respondents have been chosen and this size represents the population.

TOOLS FOR DATA COLLECTION:

Trend analysis. Trend percentage analysis

PLAN OF THE ANALYSIS:

The data will be collected from the INCOME STATEMENT OR PROFIT AND LOSS ACCOUNT AND BALANCE SHEET of the bank. The collected data will be tabulated, Graph, Diagram, Charts are proposed to be used.

LIMITATION OF THE STUDY: Analysis in the study will be depending on the information supplied by the bank The study is confined to only one Branch Due to limited time, in-depth study could not be made. Assuming that the information given by the respondent is not bias. The information available is limited, as it is confidential.

CHAPTER SCHEMES

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INTRODUCTION

II

RESEARCH DESIGN

III

COMPANY PROFILE

IV

ANALYSIS AND INTERPRETATION OF DATA

SUMMARY OF CONCLUSION

FINDINGS,

SUGGESTIONS

&

VI

ANNEXURE BIBLIOGRAPHY

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CHAPTER III

41

BACKGROUND AND INCEPTION OF THE COMPANY:

The Karnataka State Co-Operative Apex Bank Limited has been playing a very significant role in the dispensation of production, credit to the farmers. It is to the credit of Karnataka, that the first co-operative credit institution in the entire country was established way back in the year 1904 in a village called Kanaginahal now at Gadag district. Primary Agricultural Credit Society (PACS) at the village level federated later to District Central Co-Operative Banks (DCCBs) at the district level. These DCC banks federated themselves at the state level to form Apex Bank. The Karnataka State Co-Operative Bank was established in the year 1915 and the late Varadaraja Iyengar has been its founder president. It made a humble beginning with a working capital of Rs. 1.80 lakhs comprising of Rs. 1.26 lakhs as deposits. Over 90 years, the institution has grown by leaps and bounds and today its working capital is Rs. 4718.28 crores with deposit level of Rs. 2264.14 crores and fund of Rs. 265.91 crores. The bank has earned Rs. 13.35 crores. Apex bank is a pioneer in agriculture finance and activities. Apex bank is ranked as one of the premier state co-operative banks in the country. The main objectives of the bank are to serve the farmers in the state by providing short term and long agricultural loans, general banking business and function as a leader of the co-operative banks in the state.

NATURE OF BUSINESS:
The business carried by the bank is generally related with providing short term and long term agricultural loans. It also accepts deposits from the public. Apex bank also provides loans to processing, marketing and consumer co-operatives as well as sugar factories in Karnataka and working capital loans to state level and national level institutions. CORPORATE MOTTO: To fulfill your dream we are changing Our fundamental is Strong.

VISION, MISSION AND QUALITY POICY:

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VISION:
As a state co-operative bank, Apex bank shall be a dominant financial institution in the state, leading the state to economic prosperity. They shall be the model of an effective, protective, dynamic and financial sound organization, respectively to state goals and aspiration. They shall maintain highly trained and motivated professionals committed to the highest standards of ethics and excellence. They shall contribute to building progressive and standard of co-operative societies in the service of farmers and rural mass.

MISSION:
Ensuring the best quality of life and success of their farmers, agricultural co-operative societies, district central co-operative banks, clients and employees who are the reasons for their being.

For their Farmers:

They shall continue to improve their socio-economic status through timely financial and technical support.

For their Clients:

They shall deliver innovative and advanced products and services in productive and effective manner to meet their local demands.

For their PACS and DCC banks:

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They shall ensure mutual co-operation and compliment action to achieve optimum gains in an environment of confidence and trust.

For their Employees:

They shall ensure a work atmosphere of mutual respect and team work team work within a system of recognition and regards. They shall continue to provide appropriate training and value enhancement to ensure the highest degree of professionalism and integrity. They shall hold their organization composed of highly competent people driven by superior technology.

For the People of Karnataka:

They commit their unvarying loyalty and dedicated service in the pursuit of state farmers interest.

Quality Objectives:
To serve as a state co-operative bank and as a balancing center in the state of Karnataka for registered co-operative societies. To raise funds by way of deposits, loans, grants donations, subscription, subsidies etc for financing the members by way of loans, cash credits, overdrafts and advances. To develop, assist and co-ordinate the member DCCBs and other co-operative societies and secure financial assistance for them. To arrange/hold periodical co-operative conferences of the DCCBs and other members of the bank and to take action for the growth and development of the co-operative credit movement.

SERVICE PROFILE OF THE BANK:

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The Karnataka State Co-Operative Apex Bank Limited provides following services to the societies: Financing of short term loans Financing of medium term loans Financing of Kisan credit card scheme/loan Credit facilities to self help groups. Advancing medium term loans economic development and providing cash loans Advancing workshop capital loans Collection of cheques and drafts Loans through various schemes Personal banking

Services provided by the bank in detail:

Financing of short term loans: Financing of short term loans for seasonal agricultural operations and for marketing of crops. These loans are repayable within one year.

Financing of medium term loans:

These loans are sanctioned for agricultural purpose and non-agricultural purpose

Financing of Kisan credit card schemes/loan:

Kisan credit card aims at providing timely and adequate credit support to farmers for their cultivation including investment credit needs in a flexible and cost effective manner. All DCC banks in the state have implemented the kisan credit scheme.

Credit facilities to self help groups:

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All the DCCBs have taken keen interest in the formation of self help groups in coordination with PACS. Self help groups mobilize their savings and avail credit facilities from DCCBs and PACS.

Advancing medium term loans with economic development:

These loans are advanced for the agricultural infrastructures such as lift irrigation, diary, poultry, plantation, gobar gas etc that constitutes schematic lending.

Providing cash credit loans:

Providing cash credit loans to processing marketing and consumer co-operatives as well as sugar factories in Karnataka and also term loans to sugar factories under consortium agreement.

Advancing working capital loans:

Advancing working capital loans to state level co-operatives like MARKFRED, KCCF and to the national level co-operatives like IFFCO and KRIBHCO. The bank provide similar facilities to public sector undertakings like Karnataka Silk Marketing Board, Karnataka Handloom Development Corporation, Karnataka Small Scale Industries Development Corporations, Food Corporations of India directly and also through consortium arrangements through commercial banks.

Collection of Cheques and Drafts:

The bank extends finance to the non-farm sector and to the development of cottage industries, small scale industries and rural artisan weavers. It is a scheduled bank in all aspects including remittance of funds, demand drafts, mail transfers, collection of cheques and drafts.

Loans through various schemes: Such as:

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Vehicle loans Housing loans Mortgage loans Installment loans Jewel loans Other loans

Personal Banking:
Apex bank provides the following deposit schemes to the customers:

Fixed Deposits:
In this account, the customer deposits money period up to 10 years.

Current deposits:
In this type, the individuals or businessmen operate. This account is kept open for the entire day. The customer can make any number of deposits and withdrawals in a day during business hours.

Saving Bank Deposits:

In this deposit, the low income class groups and marginal customer deposits the money.

AREA OF OPERATION:
Apex bank works in the regional level only. It does not work in national level. The area of operation covers the entire Bangalore. It has 31 branches in Bangalore and head quarter is situated in Chamarajpet. The branch offices of bank are adequately delegated with power
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of sanction of disbursements. If the loans are to be provided up to 10 lakhs it is handled by concerned branch offices but if it is more than 10 lakhs then it is handled by concerned branch offices but if it is more than 10 lakhs then it is handled by main branch.

BRANCHES AT BANGALORE:
Head office Branch- Chamarajpet. Ashoka Pillar. Banashankari. Basaveshwara nagar. Girinagar. Gokula. Gandhinagar. Agra- HSR Layout. Indiranagar. Jayanagar Market Complex. Jayanagar 9th Block. J.P nagar. Kalpatharu Super Bazaar. Koramangala. Kengeri Satellite Town. Lakkasandra. Magadi Road. ssGanganagar.
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Padmanabha nagar. Public Utility Building. Rajajinagar. R.P.C Layout. Vijayanagar. Vidhana Soudha. Legislators Home. M.S Building. Mahalakshmipuram. Vyalikaval. Chandra Layout. Vivekananda College (Ext. counter). R.T Nagar.

OWNERSHIP PATTERN:
Apex bank is state co-operative bank established by the state government in the year 1915 under the organization of Primary Agricultural Co-Operative Credit Societies (PACS) in villages and Urban Co-Operative Banks in towns and cities offer passing the co-operative credit societies at 1904 to meet mainly short and medium term financial needs of farmers.

INFRASTUCTRUCTURAL FACILITIES:
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Consultant effectively conceptualizes the vision of the corporate head office floated by the Directors of the Board. The built up area of UTHUNGA has been 67,820 Sq. ft. the civil cost has come to Rs. 888 per sq. ft. and interiors all inclusive worked out at Rs. 357 per sq. ft. They believe that their members are always behind them not only to encourage but also to guide them in case they go wrong. They are grateful to them. Similarly they are grateful to the Government of The new administrative building at a cost of around Rs. 800 lakhs completed in 2002 provides additional impetus to a new work culture and new mindset of all. The gigantic building with granite gladded faade having circular and rectangular columns suggesting strengths and stability reflects the character of the organization. This four storied block caters mainly to the administrative requirement of the bank along with the hi-tech banking hall on the ground floor. The architects M/s.Zechariah Karnataka, RBI, NABARD and all other sister Co-Operative in the state for what they are today.

ACHIEVEMENTS/AWARDS:
1) Bank is able to lend 75% of the farmers in the state and it covers all sugar factories in Karnataka. 2) Apex bank is habituated to get awards at National levels year after year. Similarly NABARD has been giving best performance award and even PACS have not have logged behind in getting National recognition. All DCC banks and merely 80% of PACS have proved themselves to be financially viable.

WORK FLOW MODEL

APEX BANK

DCC BANKS

PRIMARY COOPERATIVE BANKS

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FARMERS

WORK FLOW METHOD:

The bank has both administrative office as well as 31 Branches in the Bangalore City to carry its banking business. The Branch is headed by the Manager and assisted by other staff members in front office and the attenders to do day to day office work. The main function of those staff is to provide customer service by achieve the targets set by the management as a measure of Business Development Plan. The Branch Managers are acting on the purview of their financial powers and delegation of duties entrusted by HO. The other staff is given job charts and accounting manuals to discharge their duties. Periodical rotation of duties is being effected among the Branch staff. The Branch Manager recommends the loan application to HO for sanction, if the proposal exceeds his financial power. The main function of the Branches are to collect deposits from the customers, lending non-agriculture and commercial loans, collection of cheques and to expand nonbanking business to achieve viability of the Branch. Whereas in case of Corporate Office, all agricultural, non-agricultural and sugar sector advances are being sanctioned and the operative accounts are maintained. The loan proposal is being processed by the section case workers. The same will have to be passed on to several higher levels Officer for processing for the approval. If the project requires special permission, the same proposal will be placed before the Board of Directors for approval. The Bank Bye Laws describe the functioning and working style of the Bank which is approved by the Registrar of Co-operative Societies in Karnataka.

FUTURE GROWTH AND PROSPECTUS:

51

The Honorable Union Minister for finance has already announced and introduced and instructed all the banks in the country for building the agriculture credit in 3 years. The Co-operatives too, in the state have to increase the agriculture credit to farmers by 30% during the years 2006-07. The state government in its budget proposals also announces to issue agricultural loans at 4% interest. The Apex bank will endeavor to further increase in the agriculture loans from 1258.20 crores of total agricultural loans portfolio in the year 2005-06 to 1450.00 crores to the end of 31st march 2007. Accordingly a target has been set to mobilize additional resources to the extent of Rs.166.05 crores through the bank branches. NABARD also inform apex bank and District Central Co-operative banks to take appropriate action to mobilize additional resources to utilize such funds to increase the seasonal agricultural operations.

OPPORTUNITIES:
Bank is entering into modern banking through having license for RTGS (Real Time Grass Settlement), ATM, Net Banking and other Advance Banking System. Bank is having opportunities to open new Banking services in the state, all ready proposed 15 new branches in the city. Bank has introduced 14 new loan products and 4 insurance bi products to capture potential market. Bank has liberalized their loan policy as per nationalized bank in respect of housing segment, gold loans, mortgage loans, and other non secured loan sector. Doubling of credit and reaching to the BPL (Below Poverty Line) farmers, help the bank strengthen and expand its business towards rural and short term credit re finance.

THREATS:
Bank has to complete with nationalized, commercial, private sector, and foreign banks. Bank has to develop infrastructure facilities to attract new customers as well as to retain existing customer in the track.

52

 Delay in operating newly proposed branches may lead to scarifying the market opportunities to other banks that are well equipped with better products. Lack of training and knowledge about banking development may lead to financial loss due to operational risk. The bank is already facing threat of non recovery of agricultural loans from section 11, non complain blanks like Kolar and KCC Bank, Dharward due to poor recovery and high level of NPA,s.

STRENGTHS:
The bank has is having long history, completed 95 years having well capital based. The rate of interest charged on loan and offered for deposits is very attractive and the same is being nominated on quarterly basis and as when required. The bank is having well-trained man power. The bank is having no lapses and maintenance of Cash Reserve Ratio (CRR) and Statutory Lending Ratio (SLR) complaining Bank Regulation Act-1949. In respect of statutory requirement, capital adequacy, net worth, prudential norms. The organization is having well qualified and technical board of directors along with state government and NABARD nominees. The organization is having good network base of District Central Co-Operative Banks and Primary Agricultural Co-Operative Society in Karnataka as compared to other state in India. The bank is able to bear any adverse situation like drought, non-recovery loan waiver and failure of crops on the districts. Banks has come up with several packages to DCC banks could not comply with Section (11) of BR- Act- 1949.

WEAKNESSES:
Bank has to take immediate steps to computerization of all its transactions, banking networking with Core Banking System (CBS) facility and ATMs to attract more business.
53

 The bank is purely dependent on agricultural sector. The bank is having slow process of filling up of staff vacancies of both in new requirements and promotions. The bank is not giving permission to have NRIs accounts, mutual funds, gold business, foreign exchange. The bank is highly dependent on other State Co-operative Banks (SCB) and DCC banks to issue and collect Demand Drafts (DDs) under All India Mutual Arrangement Scheme.

54

CHAPTER IV

55

Table 1
Table showing the Share Capital of Karnataka State Co operative Apex Bank Ltd., during the year 2005-10

YEAR PARTICULAR 200506 SHARE CAPITAL 37.73 TREND PERCENTAGE 100 INCREASE/DECREASE 1
Analysis:

YEAR 200607 42.39 112.35 12.35

YEAR 200708 65.67 174.05 61.7

YEAR 200809 81.11 214.97 40.92

YEAR 200910 81.24 215.31 0.34

From the above data it is analyzed the Share Capital of the bank was 100% in the year 2005-06 and it is continuously increased by 112.35%, 174.05%, 214.97%, 215.31%,during the year 2006-07,2007-08, 2008-09 and 2009-10 respectively.

56

Chart-1
Chart showing the Share Capital of Karnataka State Co operative Apex Bank Ltd, during the year 2005-10

SHARE CAPITAL
250

200

150

SHARE CAPITAL
TREND PERCENTAGE 100 INCREASE/DECREASE

50

0 2005-06 2006-07 2007-08 2008-09 2009-10 YEAR YEAR YEAR YEAR YEAR

Interpretation: From the above analysis it is inferred the Share Capital of bank increased year after year.

57

Table 2
Table showing the Owned Funds of Karnataka State Co operative Apex Bank Ltd., during the year 2005-10

PARTICULAR

YEAR YEAR 200506 200607 262.96 108.50 8.5

YEAR YEAR YEAR 200708 307.41 126.84 18.34 200809 346.60 143.01 16.17 200910 363.84 150.12 7.11

OWNED FUNDS

242.35

TREND PERCENTAGE 100 INCREASE/DECREASE 1

Analysis:
From the above data it is analyzed that the Owned Funds of the bank was 100% in the year 2005-06 and it is increased by 108.50%, 126.84%, 143.01%, and 150.12% in the year 200607, 2007-08, 2008-09, and 2009-10 respectively.

58

Chart-2
Chart showing the Owned Funds of Karnataka State Co operative Apex Bank Ltd., during the year 2005-10

OWNED FUNDS
400

350

300

250 OWNED FUNDS 200 TREND PERCENTAGE 150 INCREASE/DECREA SE

100

50

0 2005-06 2006-07 2007-08 2008-09 2009-10 YEAR YEAR YEAR YEAR YEAR

Interpretation:
From the above analysis it is inferred that the Owned Funds of the bank increased year after year.

59

Table 3
Table showing the Working Capital of Karnataka State Co operative Apex Bank Ltd., during the year 2005-10

PARTICULAR

YEAR 200506

YEAR

YEAR

YEAR

YEAR

2006-07 2007-08 2008-09 2009-10

WORKING CAPITAL TREND PERCENTAGE INCREASE/DECREASE

3754.35 4332.69 100 1 115.40 15.4

5022.34 133.77 18.37

6436.16 171.43 37.66

6699.11 178.43 7

Analysis: From the above data it is analyzed that the Working Capital of the bank 100% in the year 2005-06 and it is continuously increased by 115.40%, 133.77%, 171.43%and 178.43% during the year 2006-07, 2007-08, 2008-09, 2009-10 respectively

60

Chart-3
Chart showing the Working Capital of Karnataka State Co operative Apex Bank Ltd., during the year 2005-10

WORKING CAPITAL
7000 6000 5000 4000 3000 WORKING CAPITAL TREND PERCENTAGE INCREASE/DECREASE

2000
1000 0

2005-06

2006-07

2007-08

2008-09

YEAR YEAR YEAR YEAR YEAR

Interpretation:
From the above analysis it is inferred that the Working Capital of the bank increased year after year.

2009-10

61

Table 4 Table showing the Net Profit of Karnataka State Co operative Apex Bank Ltd., during the year 2005-10

PARTICULAR

YEAR 2005-06

YEAR 2006-07 13.35 48.93 51.07

YEAR 2007-08 10.02 36.73 12.2

YEAR 2008-09 12.50 45.82 9.09

YEAR 2009-10 9.25 33.90 11.92

NET PROFIT

27.28

TREND PERCENTAGE 100 INCREASE/DECREASE 1

Analysis:
From above data it is analyzed that the Net Profit of the bank 100% in the year 2005-06 and it is decreased by 48.82% in the year 2006-07 and in the year 2007-08 it has increased 45.82% in the year it has decreased to 33.90% in the year 2009-10 respectively.

62

Chart-4
Chart showing the Net Profit of Karnataka State Co operative Apex Bank Ltd., during the year 2005-10

NET PROFIT
120

100

80

60

NET PROFIT TREND PERCENTAGE INCREASE/DECREASE

40

20

0 2005-06 2006-07 2007-08 2008-09 2009-10 YEAR YEAR YEAR YEAR YEAR

Interpretation: From the above analysis it is inferred that the Net Profit of the bank has decreased.

63

Table 5
Table showing the Deposits of Karnataka State Co operative Apex Bank Ltd., during the year 2005-10

PARTICULAR

YEAR 2005-06

YEAR 2006-07 2663.99 117.61 17.61

YEAR 2007-08 3119.32 137.72 20.11

YEAR

YEAR

2008-09 2009-10 3892.42 4479.04 171.85 34.13 197.75 25.9

DEPOSITS

2264.95

TREND PERCENTAGE 100 INCREASE/DECREASE 1

Analysis:
From the above data it is analyzed that the Deposits of the bank 100% in the year 2005-06 and it is increased by 117.61%, 137.72%, 171.85%, and 197.75% in the year 2006-07, 200708, 2008-09 and 2009-10 respectively.

64

Chart-5
Chart showing the Deposits of Karnataka State Co operative Apex Bank Ltd., during the year 2005-10

DEPOSITS
4500 4000 3500 3000 2500

2000
1500 1000 500 0 2005-06 2006-07 2007-08 2008-09 2009-10

DEPOSITS TREND PERCENTAGE INCREASE/DECREASE

YEAR YEAR YEAR YEAR YEAR

Interpretation:
From the above analysis it is inferred that the deposits of the bank is increased year after year.

65

Table 6
Table showing the Investments of Karnataka State Co operative Apex Bank Ltd., during the year 2005-10

PARTICULAR

YEAR 2005-06

YEAR 2006-07 1230.35 84.57 15.43

YEAR

YEAR

YEAR 2009-10 3227.34 221.83 36.48

2007-08 2008-09 1539.90 2696.53 105.84 21.27 185.35 79.51

INVESTMENTS

1454.81

TREND PERCENTAGE 100 INCREASE/DECREASE 1

Analysis: From the above data it is analyzed that the investment of the bank 100% in the year 200506 and it is decreased by 84.57% in the year 2006-07 it is increased by 105.84%, 185.35%, and 221.83% in the year 2007-08, 2008-09 and 2009-10 respectively.

66

Chart-6
Chart showing the Investment of Karnataka State Co operative Apex Bank Ltd., during the year 2005-10.

INVESTMENT
3500

3000

2500

2000 INVESTMENTS 1500

TREND PERCENTAGE
INCREASE/DECREASE

1000

500

0 2005-06 2006-07 2007-08 2008-09 2009-10 YEAR YEAR YEAR YEAR YEAR Interpretation: From the above analysis it is inferred that the Investment of the bank is increased year after year

67

Table 7
Table showing the Loan Issued of Karnataka State Co operative Apex Bank Ltd., during the year 2005-10

PARTICULAR

YEAR 2005-06

YEAR 2006-07 2229.24 134.57 34.57

YEAR 2007-08 2396.31 144.65 10.08

YEAR

YEAR

2008-09 2009-10 3386.09 2950.39 204.40 59.75 178.10 26.3

LOAN ISSUED

1656.54

TREND PERCENTAGE 100 INCREASE/DECREASE 1

Analysis:
From the above data it is analyzed that the Loan Issued of the bank is 100% in the year 2005-06 and it is increased by 134.57%, 144.65%, 204.40% during the year 2006-07, 200708, 2008-09 and in 2009-10 it is decreased to 178.10% respectively.

68

Chart-7
Chart showing the loan Issued of Karnataka State Co operative Apex Bank Ltd., during the year 2005-10

LOAN ISSUED
3500

3000

2500

2000 LOAN ISSUED TREND PERCENTAGE INCREASE/DECREASE

1500

1000

500

0 2005-06 2006-07 2007-08 2008-09 2009-10 YEAR YEAR YEAR YEAR YEAR

Interpretation:
From the above analysis it is inferred that the Loan Issued of the bank increased in the year 2006-07,2007-08,2008-09 and it is slight decreased in the year 2009-10.

69

Table 8
Table showing the Loans and Advances o/s of Karnataka State Co operative Apex Bank Ltd., during the year 2005-10

PARTICULAR

YEAR 2005-06

YEAR 2006-07 2237.66

YEAR 2007-08 2804.84

YEAR 2008-09 3492.54

YEAR 2009-10 3146.28

LOANS&ADVANCES O/S

1785.75

TREND PERCENTAGE 100 INCREASE/DECREASE 1

125.30 25.30

157.06 31.76

195.57 38.51

176.81 19.39

Analysis:
From the above data it is analyzed that the Loans & Advances of the bank 100% in the year 2005-06 and it is increased by 125.30%, 157.06%, and 195.57% during the year 200607, 2007-08 and 2008-09. It is decreased to 176.18% in the year 2009-10 respectively

70

Chart-8
Chart showing the Loans & Advances O/S of Karnataka State Co operative Apex Bank Ltd., during the year 2005-10

LOANS & ADVANCES O/S

3500 3000 2500 2000 1500 1000 500 0 2005-06 2006-07 2007-08 2008-09 2009-10

LOANS &ADVANCES O/S TREND PERCENTAGE

INCREASE/DECREASE

YEAR YEAR YEAR YEAR YEAR

Interpretation:
From the above analysis it is inferred that the Loans &Advances O/S of the bank increased in year 2006-07, 2007-08, 2008-09 and decreased in the year 2009-10.

71

Table 9
Table showing the Recovery in Agriculture Loan of Karnataka State Co operative Apex Bank Ltd., during the year 2005-10

PARTICULAR

YEAR 2005-06

YEAR

YEAR

YEAR 2008-09 96.92

YEAR 2009-10 100

2006-07 2007-08 91.68 94.68

RECOVERY IN AGRICULTURE LOAN

50.46

TREND PERCENTAGE 100 INCREASE/DECREASE 1

181.68 81.68

187.63 5.95

192.07 4.44

198.17 6.1

Analysis:
From the above data it is analyzed that the Recovery in Agriculture Loan of the bank 100% in the year 2005-06 and it is increased by 181.68%,187.63%, 192.07% and 198.17% during the year 2006-07, 2007-08, 2008-09 and 2009-10 respectively.

72

Chart-9
Chart showing the loan Issued of Karnataka State Co operative Apex Bank Ltd., during the year 2005-10

LOAN ISSUED
200 180 160 140 120 100 80 INCREASE/DECREASE 60 40 20 0 2005-06 2006-07 2007-08 2008-09 2009-10 YEAR YEAR YEAR YEAR YEAR RECOVERY IN AGRICULTURE LOAN TREND PERCENTAGE

Interpretation:
From the above analysis it is inferred that the Recovery of Agriculture Loan of the bank increased year after year.

73

Table 10
Table showing the Recovery of Non Agriculture Loan of Karnataka State Co operative Apex Bank Ltd., during the year 2005-10

PARTICULAR

YEAR 2005-06

YEAR

YEAR

YEAR

YEAR 2009-10 52.76

2006-07 2007-08 2008-09 57.72 42.69 47.81

RECOVERY IN NON 36.55 AGRICULTURE LOAN TREND PERCENTAGE 100 INCREASE/DECREASE 1

157.92 57.92

116.79 41.13

130.80 14.01

144.35 13.55

Analysis:
From the above data it is analyzed that the Recovery in Agriculture Loan of the bank 100% in the year 2005-06 and it is increased by 157.92% in the year 2006-07 and it is decreased in the year 2007-08 by 116.79% the trend was increased to 130.80% and 144.35% in the year 2008-09 and 2009-10 respectively.

74

Chart-10
Chart showing the Recovery in Non Agriculture loan of Karnataka State Co operative Apex Bank Ltd., during the year 2005-10

RECOVERY IN NON AGRICULTURE LOAN

160 140 120 100 RECOVERY IN NON AGRICULTURE LOAN 80 60 40 20 0 2005-06 2006-07 2007-08 2008-09 2009-10 YEAR YEAR YEAR YEAR YEAR

TREND PERCENTAGE
INCREASE/DECREASE

Interpretation:
From the above analysis it is inferred that the Recovery in Agriculture Loan of the bank increased in the year 2006-07 and it is decreased in year 2007-08. Therefore, it is increased year after year.

75

Table 11
Table showing the Recovery in Overall Loan of Karnataka State Co operative Apex Bank Ltd., during the year 2005-10

PARTICULAR

YEAR 2005-06

YEAR 2006-07 87.70

YEAR

YEAR

YEAR 2009-10 97.63

2007-08 2008-09 91.08 94.16

RECOVERY IN OVERALL LOAN

46.30

TREND PERCENTAGE 100 INCREASE/DECREASE 1

189.41 89.41

196.71 7.3

203.36 6.65

210.86 7.5

Analysis:
From the above data it is analyzed that the Recovery in Overall Loan of the bank is 100% in the year 2005-06 and it is increased by 189.41%, 196.71%, 203.36% and 210.86% during the year 2006-07, 2007-08, 2008-09 and 2009-10 respectively.

76

Chart-11
Chart showing the Recovery in Overall loan of Karnataka State Co operative Apex Bank Ltd., during the year 2005-10

OVERALL LOAN
250

200

150

RECOVERY IN OVERALL LOAN TREND PERCENTAGE

100

INCREASE/DECREASE

50

0 2005-06 2006-07 2007-08 2008-09 2009-10 YEAR YEAR YEAR YEAR YEAR

Interpretation:
From the above analysis it is inferred that the Recovery in Overall Loan of the bank increased year after year.

77

Table 12
Table showing the Standard Assets of Karnataka State Co operative Apex Bank Ltd., during the year 2005-10

PARTICULAR

YEAR 2005-06

YEAR

YEAR

YEAR 2008-09 3300.53 216.53 47.2

YEAR 2009-10 3000.26 196.83 19.7

2006-07 2007-08 1995.41 2581.1 130.91 30.91 169.33 38.42

STANDARD ASSEST

1524.22

TREND PERCENTAGE 100 INCREASE/DECREASE 1

Analysis:
From the above data it is analyzed that the Standard Assets of the bank is 100% in the year 2005-06 and it is increased to 130.91%, 169.33%, 216.53% in the year 2006-07, 2007-08 and 2008-09. In the year 2009-10 it is decreased to 196.83% respectively.

78

Chart-12
Chart showing the Standard Assets of Karnataka State Co operative Apex Bank Ltd., during the year 2005-10

STANDARD ASSETS
3500 3000 2500 2000 1500 1000 500 0 2005-06 2006-07 2007-08 2008-09 2009-10

STANDARD ASSEST
TREND PERCENTAGE INCREASE/DECREASE

YEAR YEAR YEAR YEAR YEAR

Interpretation:
From the above analysis it is inferred that the Standard Assets of the bank increased and in the year 2009-10 it is decreased.

79

Table 13
Table showing the Sub-Standard Assets of Karnataka State Co operative Apex Bank Ltd., during the year 2005-10

PARTICULAR

YEAR 2005-06

YEAR

YEAR

YEAR

YEAR

2006-07 2007-08 2008-09 2009-10 151.78 104.68 64.38 38.23

SUB-STANDARD ASSETS

169.57

TREND PERCENTAGE 100 INCREASE/DECREASE 1

89.50 10.5

61.73 27.77

37.96 23.77

22.57 15.39

Analysis:
From the above data it is analyzed that the Sub-Standard Assets of the bank 100% in the year 2005-06 and it is decreased by 89.50%, 61.73%, 37.96% and 22.57% during the year 2006-07, 2007-08, 2008-09, and 2009-10 respectively.

80

Chart-13
Chart showing the Sub-Standard Assets of Karnataka State Co operative Apex Bank Ltd., during the year 2005-10

SUB-STANDARD ASSETS
180
160 140 120 100 80 INCREASE/DECREASE 60 40 20 0 2005-06 2006-07 2007-08 2008-09 2009-10 YEAR YEAR YEAR YEAR YEAR SUB-STANDARD ASSETS TREND PERCENTAGE

Interpretation:
From the above analysis it is inferred that the Sub-Standard Assets of the bank is decreased year after year.

81

Table 14
Table showing the Doubtful Assets of Karnataka State Co operative Apex Bank Ltd., during the year 2005-10

PARTICULAR

YEAR 2005-06

YEAR

YEAR

YEAR

YEAR

2006-07 2007-08 18.12 195.25 95.25 113.82 1226.50 1031.25

2008-09 2009-10 123.59 104.47

DOUBTFUL ASSETS

9.28

TREND PERCENTAGE 100 INCREASE/DECREASE 1

1331.78 1125.75 105.28 206.03

Analysis:
From the above data it is analyzed that the Doubtful Assets of the bank 100% in the year 2005-06 and it is increased by 195.25 in the year 2006-07. It is further increased by 1226.50%, 1331.78% in the year 2007-08 and 2008-09. The trend was decreased by 1125.75% in the year 2009-10 respectively.

82

Chart-14
Chart showing the Doubtful Assets of Karnataka State Co operative Apex Bank Ltd., during the year 2005-10

DOUBTFUL ASSETS
1400 1200 1000 800 DOUBTFUL ASSETS 600 400 200 0 2005-06 2006-07 2007-08 2008-09 2009-10 TREND PERCENTAGE

INCREASE/DECREASE

YEAR YEAR YEAR YEAR YEAR

Interpretation:
From the above analysis it is inferred that the Doubtful Assets of the bank increased, now it is decreased slightly in the year 2009-10.

83

Table 15
Table showing the Loss Assets of Karnataka State Co operative Apex Bank Ltd., during the year 2005-10

PARTICULAR

YEAR 2005-06

YEAR 2006-07 72.19 87.31 12.69

YEAR

YEAR

YEAR 2009-10 3.32 4.01 0.88

2007-08 2008-09 5.02 6.07 81.24 4.05 4.89 1.18

LOSS ASSETS

82.68

TREND PERCENTAGE 100 INCREASE/DECREASE 1

Analysis:
From the above data it is analyzed that the Loss Assets of the bank in the was 100% in the year 2005-06 it is decreased to 87.31%, 6.07% 4.89% and 4.01% in the year 2006-07,200708, 2008-09 and 2009-10 respectively.

84

Chart-15
Chart showing the Loss Assets of Karnataka State Co operative Apex Bank Ltd., during the year 2005-10

LOSS ASSETS
100 90 80 70

60
50 40 30 20 10 0 2005-06 2006-07 2007-08 2008-09 2009-10 YEAR YEAR YEAR YEAR YEAR LOSS ASSETS TREND PERCENTAGE INCREASE/DECREASE

Interpretation:
From the above analysis it is inferred that the Loss Assets of the bank is decreased.

85

Table 16
Table showing the Total Impaired Assets of Karnataka State Co operative Apex Bank Ltd., during the year 2005-10

PARTICULAR

YEAR 2005-06

YEAR 2006-07 242.09

YEAR

YEAR

YEAR 2009-10 146.03

2007-08 2008-09 223.52 192.02

TOTAL IMPAIRED ASSETS

261.53

TREND PERCENTAGE 100 INCREASE/DECREASE 1

92.56 7.44

85.46 7

73.42 12.04

55.83 17.59

Analysis:
From the above data it is analyzed that the Total Impaired Assets of the bank is 100% in the year 2005-06 and it is decrease to 92.56%, 85.46%, 73.42% and 55.83% in the year 2006-07, 2007-08, 2008-09 and 2009-10 respectively.

86

Chart-16
Chart showing the Total Impaired Assets of Karnataka State Co operative Apex Bank Ltd., during the year 2005-10

TOTAL IMPAIRED ASSETS

300

250

200

TOTAL IMPAIRED ASSETS

150 TREND PERCENTAGE INCREASE/DECREASE 100

50

0 2005-06 2006-07 2007-08 2008-09 2009-10 YEAR YEAR YEAR YEAR YEAR

Interpretation:
From the above analysis it is inferred that the Total Impaired Assets of the bank is decreased year after year.

87

Table 17
Table showing the % of NPA To Loan O/S of Karnataka State Co operative Apex Bank Ltd., during the year 2005-10

PARTICULAR

YEAR 2005-06

YEAR

YEAR

YEAR

YEAR 2009-10 4.64

2006-07 2007-08 2008-09 10.82 7.45 5.50

% Of NPA TO LOAN 14.65 O/S TREND PERCENTAGE 100 INCREASE/DECREASE 1

73.85 26.15

50.85 23

37.54 13.31

31.67 5.87

Analysis:
From the above data it is analyzed that the %Of NPA to Loan O/S of the bank 100% in the year 2005-06 and it is decreased by 73.85%, 50.85%, 37.54% and 31.67% in the year 200607, 2007-08, 2008-09 and 2009-10 respectively

88

Chart-17
Chart showing the %Of NPA To Loan O/S of Karnataka State Co operative Apex Bank Ltd., during the year 2005-10

% Of NPA TO LOAN
100 90 80 70 60 % Of NPA TO LOAN O/S TREND PERCENTAGE INCREASE/DECREASE

50
40 30 20 10 0 2005-06 2006-07 2007-08 2008-09 2009-10

YEAR YEAR YEAR YEAR YEAR .

Interpretation:
From the above analysis it is inferred that the % Of NPA To Loan O/S of the bank decreased year after year.

89

CHAPTER V

90

FINDINGS:
The Karnataka State Co-operative Apex Bank Ltd, is one of the leading banks having 95 years of fruitful experience in the agricultural, non agricultural and sugar advances portfolio management in the country, acting as a catalyst for the growth of the Indian Economy. From the study it is found that the share capital of the bank has increased year after year. The Karnataka State Co-operative Apex Bank Owned Funds has increased over the years but there is slight increase in the year 2009-10. The liquidity position of the bank is good, as its net working capital is increased over the year. There is fluctuation in profitability position of the bank. The net profit of the bank is decreased in few years. The Deposits of the bank has considerably increased year after year which shows the trust level of customers over the bank... The Karnataka State Co-operative Apex Bank ltd has given loans of all terms to support economic activity and to make reasonable gain out of it. The loan repayment is good in case of agriculture loans even though the farmers are gambling with the monsoon for their livelihood, loan recovery in agriculture increased. As good recovery in loans reduced the credit risk of the bank, the bank recovery of loans has increased year after year. The Karnataka State Co-operative Apex Bank is keep increasing its investment in the standard assets of the bank continuously and reducing in the sub-standard assets. The doubtful assets were increasing year after year which results in increase in the risk and it affects the banks reputation and overall performance. From the data of different sources it is found out that the major part of the loan and advances are allocated to agriculture sector.

91

 There is no risk management committee in the bank which can take care of different risk that might occur in the bank.

92

SUGGESTIONS:
The successful management of credit risk depends not only on the norms stipulated by the regulatory authorities and the management of the bank but also on how far the industrial finance has been extended their portfolio and present position of the new account. The bank should improve the existing system to evaluate credit worthiness of the customers at the time of providing loans. The bank should keep vigilant eye on their levels of non agricultural loan default in areas where market condition are uncertain. As the major parts of loans allocations are in the areas of sugar and agriculture sector, the bank has to initiate proper recovery system, since these crops are seasonal is in nature. There should be regular collection of information about borrowers position from outside sources as well as personal visit by the field staff. As there is no risk management committee in the bank, the management has to implement the committee as per NABARD circular. In to frame the risk management policy. Bank has to increase its long term loans and advances rather than short term in order to increase the profitability position. The increase in doubtful assets will increase the risk of the bank reputation and overall performance of the bank because the bank should reduce its doubtful assets by providing proper provision out of its profit. Continuous maintaining of loans profile must be made in the bank. Incentives must be fixed for the advancing the recovery targets. Customer counseling centre must be established to reduce the NPA. Bank should appoint a concerned authority who takes care about the regular recovery of the credit and also maintaining the credibility of the bank. A risk management committee should be formulated to care of different risk that might occur in the industry.

93

 The bank should focus on mobilizing the surplus funds in introducing different schemes and product to different types of customers. It helps to reduce credit risk.

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CONCLUSIONS:
The study on credit risk management at the Karnataka State Co-operative Apex Bank Ltd has been great sources of knowledge. The bank is performing very well in every aspects of its dealing. The working capital has increased constantly in small rate which is very positive response of growth. The Karnataka State Co-operative Apex Bank Ltd mobilizes and deploys its funds in a very efficient and systematic way which provides a good scope for the growth and development. The bank is been following all the rules and regulation set by RBI and NABARD. The financial statement of the bank is been showing a good financial progress and performance from past five years. The best model for reducing the credit risk at the Apex Bank is to monitor regularly and follow up the accounts and self set goals for the employees along with educating the borrowers. This study identified such variables and models and there practical utility at the macro level with a view of evolving the comprehensive and sustainable model for risk identification of variables and parameters underlying credit risk management in bank. The further detail and redefined studies are essential to address the specific issues and dilemmas faced by the bank in this regard.

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Bibliography
Law and Practice of Banking. R. Venkatraman Bank Financial Management. Macmillan Advanced Bank Management. Macmillan www.karnatakaapex.com mis@karapex.com

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