Title - Current Credit Risk Management Practices in Indian Banking Industry

Title - Current Credit Risk Management Practices in Indian Banking Industry

Table of Contents

1.    Introduction. 6

1.1.     Background of the Study. 6

1.2.     Research Objectives. 9

1.3.     Research Questions. 10

1.4. Methodology. 10

1.5. Structure of the Study. 11

2. Literature Review.. 12

2.1. Risk and Banking Risks. 13

2.1.1. Risk in general 13

2.1.2. Banking Risks. 15

2.2. Risk and Banking Risk Management 18

2.2.1. Risk management 18

2.2.2. Risk Management in Banking Firms. 21

2.3. Credit and Credit Risk. 23

2.3.1. Credit 24

2.3.2. Credit Risk. 25

2.4. Credit Risk Management 27

2.4.1. Credit Culture. 29

2.4.2. Credit Organization. 32

2.4.3. Credit Policies. 34

2.5. Evaluation of Credit Risk Management Implementation. 37

3. Research methodology. 41

3.1. Research Data. 43

3.1.1. Secondary Data. 43

3.1.2. Primary Data. 45

3.2. Data Collection Methods. 46

3.2.1. Qualitative Methods. 48

3.2.2. Quantitative Methods. 50

3.3. Validity and Reliability. 52

3.4. Limitations. 54

4. Empirical Study. 55

4.1. Overview of Indian Banking Sector & Credit Market 56

4.1.1. Indian Banking Sector 57

4.1.2. Indian Credit Market 59

4.3. Credit Risk Management at the Bank & the Transaction Office. 65

4.3.1. Overview of Risk Management at the Bank. 66

4.3.2. Regulatory Credit-Related Policies. 68

4.3.3. Credit Culture. 74

4.3.4. Internal Credit Policies. 81

4.3.6. Credit Practices and Performance. 94

4.4. Credit Risk Management Analysis. 101

4.4.1. Indian Credit Conditions. 102

4.4.2. Formal Internal Credit Regulations. 103

5. Conclusions. 110

5.1. Recommendations for the bank. 112

5.1.1. For the formal documents. 113

5.1.2. For the staffs. 114

5.1.3. For the practices. 115

5.2. Recommendations for Further Studies. 116

6. References. 118

1.      Introduction

In this beginning chapter, the readers will understand the reasons behind the choice of this research problem in the background of the study. A brief explanation of the objectives of the study as well as research questions will immediately follow. After that, an overview of the research methodology and the structure of this thesis will be discussed and conclude the chapter.

1.1.            Background of the Study

The global economic depression that knocked almost all big economies throughout the world down in the past 2 years is still kept in many people’s minds. It was triggered by the United States financial sector. One key reason for the collapse or nearly-collapse of the financial institutions is the badly-functioned subprime mortgage lending to companies/people with bad and unreliable credit.

As soon as the world begins to see the signs of a recovery period, the financial sector, this time in the Euro-zone, suffers another great distress at the serious debt crisis in Greece that poses risk to the European RBI (ECB) and many other institutions in the industry. A number of European banks have made investments in Greek government bonds and other securities and use them as collaterals to obtain loans from ECB. And now when Greece defaults, the collateral subsequently loses its value and the ECB‟s balance sheet is put at risk as it fails to recollect the loans. Greek banks are not the only ones in danger. French and German banking business are on the same boat with respectively $80 billion and $45 billion exposure to the troubled country. Recently, the Basel Committee on Bank Supervision demands a jump in both tier 1 and tier 2 capital levels as a response to the crises these days (Wall Street Journal 2010). These incidents raise a question for all financial institutions in general and banks in particular: What could they have done in order to prevent or at least lessen the bad impact of this happening? It urges the significance of a sound credit risk management in lending organizations. Credit risk is a popular type of risk that both non-financial and financial institutions must deal with. Credit risk occurs when a debtor/borrower fails to fulfill his obligations to pay back the loans to the principal/lender. In banking business, it happens when “payments can either be delayed or not made at all, which can cause cash flow problems and affect a bank’s liquidity” (Greening & Bratanovic 2009, 161). Hence, credit risk management in a bank basically involves its practices to “manage”, or in other words, to minimize the risk exposure and occurrence. For a commercial bank, lending activities form a critical part of its products and services. According to Greuning & Bratanovic (2009), “more than 70% of a bank’s balance sheet generally relates to this aspect of risk management”. Therefore, credit risk management is crucial to any bank’s success. In a country like India, the financial sector is still in the development phase and many small commercial banks have not been able to establish a firm risk management framework, particularly credit risk management, in order to prevent unfavorable events. This is dangerous when Indian banks‟ customer services are still in their infancy and banks‟ revenue depends heavily on lending activities and credit growth is central to any banking organizations‟ profit (Infotv, 2010). In addition, the control work from the reserve bank, though playing a growing role, has not been protective enough. Access to credit information and history is very limited. Some years ago, unofficial news arose that a small bank was going to file for bankruptcy due to bad credit assessment practices brought a big loss to the bank. “Smoke cannot be released without a fire”. There must have been something wrong in that bank’s credit procedures.

To read more…….

Writekraft Research & Publications LLP.

www.writekraft.com

OR Call us @ +91- 7753818181, 9838033084
or email us: writekraftuk@gmail.com