A STUDY ON CREDIT RISK MANAGEMENT AT CANARA BANK

An internship report Submitted in partial fulfilment of the requirement for the

award of the degree of Master of Business Administration (Finance Management)
of CHRIST (Deemed to be University)

Submitted by
V Harinath Reddy
1828820

Under the Guidance and Supervision of

Dr. Anuradha R

DEPARTMENT OF MANAGEMENT STUDIES,

CHRIST (Deemed to be University),
BANGALORE - 560 029
2019
 Insert Here

INTERNSHIP COMPANY CERTIFICATE

 DECLARATION

I, V Harinath Reddy, 1828820, hereby declare that the Internship project titled “A Study on
Credit Risk Management at Canara Bank”, submitted to CHRIST (Deemed to be
University), in partial fulfilment of the requirements for the award of Degree of Master of
Business Administration (Finance Management) is a record of original project study done by
me during the academic year 2019-20 under the guidance of Dr Anuradha R Department of
Management Studies, CHRIST (Deemed to be University). It has not been previously formed
the basis for the award of any Degree, Diploma or other similar title of recognition to any
candidate of any University or Institution.

Place:
Signature
Date:
 CERTIFICATE

This is to certify that the internship project titled “A Study on Credit Risk Management at
Canara Bank”, submitted to CHRIST (Deemed to be University) in partial fulfilment of the
requirement for the award of Degree of Master of Business Administration (Finance
Management) Programme of CHRIST (Deemed to be University), and is a record of original
project study done and independent work carried out by V Harinath Reddy (1828820) under
my guidance and supervision.

This has not been previously formed the basis of the award of any degree, diploma or other
similar title of recognition.

Place: Bangalore
Date: Dr Anuradha R
Department of Management
Studies,
CHRIST (Deemed to be
University)
 CERTIFICATE

This is to certify that V Harinath Reddy, Register No. 1828820 is a bonafide student of
Master of Business Administration (Finance Management) Programme studying in CHRIST
(Deemed to be University). He has prepared and submitted a Internship project titled “A
Study on Credit Risk Management at Canara Bank”, in partial fulfilment of the
requirement for the award of Degree of Master of Business Administration (Finance
Management) Programme of CHRIST (Deemed to be University), for the Academic Year
2019 -20.

Place: Bengaluru
Date Head,
Department of Management
Studies

Examiner/s

(Name and Signature) ______________________________

Date: ___________
 Acknowledgment
I am grateful to those, without whose support and encouragement the report would
have been impossible for me to materialize the plans into actions, and actions into results. It
is only in their presence, that it has been possible for us to channelize our skills in the right
direction and materialize efforts into a work of professionalism. At this juncture, I take this
opportunity to express my heartfelt gratitude.

I would like to extend special thanks of gratitude to faculty guide Dr. Anuradha R as
well as our Program Co-Ordinator Dr. Suresha B. for their constant guidance and support
throughout the Internship. I am thankful to Head of the Department, Dr. Amalanathan. S
whose words of motivation have guided us through all the difficulties we faced while doing
this research.

I wish to express my sincere gratitude to Canara Bank for providing me an

opportunity to do my internship in their company. I would also like to express my deepest
gratitude to my supervisor Mr. DK Rao for his unwavering support and mentorship
throughout this project.

I place on record my profound thanks to the faculty of Department of Management

Studies, CHRIST (Deemed to be University), for their constant inspiration and motivation to
complete the project in time. I would also like to express my gratitude to my family and
classmates for helping me in every way towards the completion of the project.
 Table of Contents
Page No.

Chapter: 1 Introduction 9

Chapter: 2 Company and Industry profile 12

Chapter: 3 Organizational Study 23

Chapter: 4 Research study 48

Chapter: 5 Summary of findings and suggestions 50

Bibliography 54

Annexure –Weekly reports 55

LIST OF TABLES
TABLE 2.1 – MILESTONES OF CANARA BANK 1...................................................................17
Y
TABLE 2.2 – KEY FINANCIAL RATIOS 2...............................................................................22

LIST OF FIGURES
YFIG 3.1 – ORGANISATIONAL STRUCTURE.................................................................................

Y
 CHAPTER -1

INTRODUCTION

Credit risk management:

The Banking sector has an important role for the economic development of the
country. The Banking sector has the capacity to change the idle financial resources into
capital of the entities which are used for creating goods and services which creates value. The
foundation to a sound economy is based on its banking sector.

The main function of a bank is to accept various types of deposits and to provide
loans to the people required. The borrower who had taken the loan uses it for different
purposes like for doing business etc. In business, there are lots of risks involved and these
will affect the revenue and profitability of the firm. The affect on profitability of the borrower
will affect the recovery of loan amount by the bank which increases the NPAs for the bank
which is risk to banks. The risk for the borrower is an indirect risk to the bank.

Definition of Risk:

The International Organization for Standardization ISO 310000 Risk Management defines
Risk as “effect of uncertainty on objectives” and the effect may be positive or negative
deviation from the expected.

The banks can take the risk but it must take consciously. If something goes wrong
banks may collapse which affect many people who are customers of the bank and also the
economy in which it is doing its activities. In the same way for the banks the risk is directly
proportional to its return. The more the risk a bank takes , it can expect more return in the
form of high interests.

Risks faced by banking industry:

1. Liquidity Risk
2. Interest Rate Risk
3. Market Risk
 4. Credit Risk or Default Risk
5. Operational Risk

Credit Risk

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. Credit risk is
faced by lending institutions like banks, investors in debt instruments of corporate houses and
by parties involved in contractual agreements like forward contracts.

RBI definition of credit risk

 Possibility of losses associated with decline in the credit quality of borrowers or

counterparties.
 Default due to inability or unwillingness of a customer or counterparty to meet
commitments in relation to lending, trading, settlement and other financial
transactions.
 Loss from reduction in portfolio value (actual or perceived).
 Possibility that a borrowers may not meet their obligation in terms of the loan agreed
terms and conditions.
 Probability of loss from a credit transaction.

Risk Management

The International Organization for Standardization (ISO 310000) Risk Management

defines Risk management as coordinated set of activities and methods that is used to direct an
organization and to control the many risks that can affect its ability to achieve objectives.

The term risk management also refers to the programme that is used to manage risk.
This programme includes risk management principles, a risk management framework, and a
risk management process.

Credit Risk Management

The goal of credit risk management is to maximise a bank risk-adjusted rate of return
by maintaining credit risk exposure within acceptable parameters. CRM is a series of
activities which ensures that advances given will be back with minimum losses or no loss.
CRM reduces the possibility of non-payment of the borrowed amount. CRM activities are
Credit Appraisal, Credit Monitoring and Credit Review.

In terms of RBI Guidelines "Credit Risk is defined as the possibility of losses

associated with diminution in the credit quality of borrowers or counterparties. In a bank
portfolio, losses stem from outright default due to inability or unwillingness of a customer or
counterparty to meet commitments in relation to lending, trading, settlement and other
financial transactions. Alternatively, losses result from reduction in portfolio value arising
from actual or perceived deterioration in credit quality."

Objective of credit risk management

The factors and objectives that shape up the bank policies towards credit risk management
are:

 To make available sufficient liquidity to meet loan ailments, interest, operational and
other costs and losses;
 To maximize profits; and
 To support broad national policy objectives of liquidity, interest rate stability,
financial stability and above all, allocation of scarce financial resources efficiently to
foster economic growth.
 CHAPTER 2

COMPANY AND INDUSTRY PROFILE

The increase in business the necessity of borrowing capital and providing credit to
customers increased and also the risks from external and internal environment also increased
which resulted increase in credit defaults. Credit risk is the inability of the borrower or
creditor to pay the principal or interest or both. The concept of credit risk management started
to mitigate the credit default risk by the companies and the banks.

The main activity under CRM is Credit Rating. Credit Rating is a practice of rating
the borrowers or creditors on their capacity to repay the principal and interest amounts. Even
the investors who want to invest in any company capital will look after the credit rating given
to the company by various credit rating agencies.

CRISIL, ICRA Limited, CARE Limited, Brickwork Ratings, SMERA are some the
credit rating agencies which give credit rating to various companies based different criteria.
Investors now-a-days do fundamental analysis before investing and credit rating of the
company is one of the quantitative measurement for evaluating a company.

Framework for Credit Risk Management

 Policy framework
- strategy and policy
- organization structure
- operations / systems support
 Credit risk rating framework
 Credit risk limits
 Credit risk modeling
 Credit risk pricing
 Risk mitigation
 Loan review mechanism
 Credit audit Policy Framework
Credit risk management committee

Integration of credit risk management committee with market risk management

committee, operations risk management committee and asset liability management committee
will give an effective credit risk management committee.

Credit Risk Management In Banks

Credit risk management is a process, rather a comprehensive system. The process

begins with identifying the target markets and proceeds through a series of stages to loan
repayment. Different types of risk management techniques need to be employed at each stage
of the credit process. Every activity in credit risk management is undertaken with the ultimate
aim of protecting and improving the loan quality, which is critical to the health of banks. A
healthy loan portfolio, in turn, leads to maximization of profits and shareholders wealth.

Credit Risk Management is a management of risk, equivocality and error. As

information about markets and knowledge about possible outcomes increases, risk
management provides solution for controlling risk. That is why, banking as well as other
institutions develops control systems to reduce errors, information systems to reduce
uncertainty, incentive system to manage agency problems in risk reward framework.

Initially, the Indian banks have used risk control systems that kept pace with legal
environment and Indian accounting standards. But with the growing pace of deregulation and
associated changes in the customer behaviour, banks are exposed to mark-to-market
accounting. Therefore, the challenge of Indian banks is to establish a coherent framework for
measuring and managing risk consistent with corporate goals and responsive to the
developments in the market. As the market is dynamic, banks should maintain vigil on the
convergence of regulatory frameworks in the country, changes in the clients business
practices.

Role of RBI in Risk Management:

The Reserve Bank of India has been using CAMELS rating to evaluate the financial
soundness of the Banks. The CAMELS Model consists of six components namely Capital
Adequacy, Asset Quality, Management, Earnings Quality, Liquidity and Sensitivity to
Market risk.
 In India, the focus of the statutory regulation of commercial banks by RBI until the
early 1990s was mainly on licensing, administration of minimum capital requirements,
pricing of services including administration of interest rates on deposits as well as credit,
reserves and liquid asset requirements.

Finally, it was in the year 1999 that RBI recognised the need of an appropriate risk
management and issued guidelines to banks regarding assets liability management,
management of credit, market and operational risks.

Principles of Credit Risk Management

 Board of directors of a bank has to take responsibility for approving and periodically
reviewing credit risk strategy.
 Senior management has to take the responsibility to implement the credit risk
strategy.
 Bank has to identify and manage credit risk of all banking products and activities.

Credit Risk Management as per RBI

 Measurement of risk through credit scoring.

 Quantifying risk through estimating loan losses.
 Risk pricing – Prime lending rate which also accounts for risk.
 Risk control through effective Loan Review Mechanism and Portfolio Management.

Functions of CRM Department

Credit Rating
A credit rating is a quantified evaluation of the creditworthiness of a borrower in standard
phrases or with respect to a specific debt or economic duty. A credit score not only
determines whether or not a borrower can be accepted for a loan or debt problem however
also determines the hobby charge at which the mortgage will want to be repaid.

A credit rating or score can be assigned to any entity that seeks to borrow money — an
individual, organization, country or provincial authority, or sovereign government.
Individuals credit score is rated on a numeric scale based on the FICO calculation, bonds
issued through companies and governments are rated by using credit score companies on a
letter-based system.
 Credit scoring models of banks and lending institutions use stock prices (if available),
financial performance and sector specific data, and macroeconomic forecasts to predict the
credit rating.

Credit Monitoring
The main objective of Credit Monitoring is to focus on review of the conduct of the
account, compliance to terms and conditions, irregularities observed and steps taken/to be
taken to rectify to protect the interest of the entity.

Credit Review
After Credit Rating the loans will be sanctioned and the loans which are sanctioned based
on the credit scores should be reviewed by the respective reviewing authorities.

Objectives of the review are:

i) Assessment of quality of the loan provided

ii) Precaution taken to safeguard the interest of the bank
iii) Adherence to internal policies, procedures.

Mid Term Review

Mid-term Review is the review of the accounts with a focus on conduct of the account,
compliance to various terms and conditions and completion of pending matters if any, and
steps taken to address the deficiencies noticed/observed.

NPAs

NPAs is one of the tool of credit risk management. Loans become non-performing
when borrowers fall in arrears in the repayment of principal or interest payment or both. The
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest
Act, 2002 was passed by Parliament, which is an important step towards elimination or
reduction of NPAs.

Financial Institutions find out which are the NPAs and try to treat them differently. If
the financial institutions are able to manage their NPAs, it shows how effective their CRM
works. The above discussed are the activities of the CRM that the financial institutions do.

COMPANY PROFILE
Headquartered in Bangalore, Canara Bank India is the 5th biggest bank in India. It is one of
the most admired banking and financial services providers in India.
Canara Bank is one of the most prominent commercial banks of India. The bank was
established in the year 1906 at Mangalore, Karnataka by a well-known personality Mr.
Ammembal Subba Rao Pai. Initially, it was founded with the name Canara Bank Hindu
Permanent Fund, but later on the name was changed to Canara Bank Limited.

Canara Bank has undergone various phases in its growth path over 106 years of its existence.
The Canara Bank, established in 1906, could open its first branch only in the year 1933, i.e.
after 28 years, but after that it started steadily spreading its wings by establishing new
branches across the country and could cross 100 numbers in 1961.

Canara Bank has a strong pan India presence with 6,204 branches and 9,395 ATMs, catering
to all segments of an ever-growing clientele accounts base of 8.27 crore. Across the borders,
the Bank has 8 branches, one each at London, Leicester, Hong Kong, Shanghai, Manama,
Johannesburg, New York and DIFC (Dubai) & a Representative Office at Sharjah, UAE. The
subsidiaries of the Bank include Canbank Financial Services Ltd, Canbank Venture Capital
Fund Ltd, Canbank Factors Ltd, Canara Robecco Asset Management Company Ltd, Canbank
Computer Services Ltd, Canara Bank Securities Ltd and Canara HSBC Oriental Bank of
Commerce Life Insurance Company Ltd.

Founding Principles

1. To remove Superstition and ignorance.

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

3. To inculcate the habit of thrift and savings.

4. To transform the financial institution not only as the financial heart of the community but
the social heart as well.

5. To assist the needy.

6. To work with sense of service and dedication.

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

Vision

To emerge as a ‘Preferred Bank’ by pursuing global benchmarks in profitability, operational

efficiency, asset quality, risk management and expanding the global reach.

Mission

To provide quality banking services with good customer care, create value for all
stakeholders and continue as a responsive corporate social citizen.

Significant milestones 

Table 2.1 - Milestones of Canara Bank

1st
Canara Hindu Permanent Fund Ltd. formally registered with a capital of 2000
July
shares of 50/- each, with 4 employees.
1906

1910 Canara Hindu Permanent Fund renamed as Canara Bank Limited

1969 14 major banks in the country, including Canara Bank, nationalized on July 19

1976 1000th branch inaugurated

Overseas branch at London inaugurated, Cancard (the Bank’s credit card)

1983
launched

Takeover of Lakshmi Commercial Bank Limited and Commissioning of Indo

1985
Hong Kong International Finance Limited (now a full-fledged branch)

1987 Canbank Mutual Fund & Canfin Homes launched

1989 Canbank Venture Capital Fund started

1989- Canbank Factors Limited, the factoring subsidiary launched

90

1992- Became the first Bank to articulate and adopt the directive principles of “Good
93 Banking”.

1995- Became the first Bank to be conferred with ISO 9002 certification for one of its
96 branches in Bangalore

2001- Opened a 'Mahila Banking Branch', first of its kind at Bangalore, for catering
02 exclusively to the financial requirements of women clientele.

2002-
Maiden IPO of the Bank
03

2003-
Launched Internet Banking Services
04

2004-
100% Branch computerization
05

Entered 100th Year in Banking Service. Launched Core Banking Solution in

2005-
select branches. Number One Position in Aggregate Business among
06
Nationalized Banks.

Retained Number One Position in Aggregate Business among Nationalized

2006- Banks. Signed MoUs for Commissioning Two JVs in Insurance and Asset
07 Management with international majors viz., HSBC (Asia Pacific) Holding and
Robeco Groep N.V respectively.

Launching of New Brand Identity. Incorporation of Insurance and Asset

2007-
Management JVs. Launching of 'Online Trading' portal. Launching of a ‘Call
08
Centre’. Switchover to Basel II New Capital Adequacy Framework.

2008- The Bank crossed the coveted 3 lakh crore in aggregate business. The Bank’s 3rd
09 foreign branch at Shanghai commissioned.
 The Bank’s aggregate business crossed 4 lakh crore mark.
2009-
Net profit of the Bank crossed 3000 crores. The Bank’s branch network crossed
10
the 3000 mark.

The Bank’s aggregate business crossed 5 lakh crore mark. Net profit of the Bank
crossed 4000 crores. 100% coverage under Core Banking Solution. The Bank’s
2010-
4th foreign branch at Leicester and a Representative office at Sharjah, UAE,
11
opened. The Bank raised 1993 crore under QIP. Govt. holding reduced to 67.72%
post QIP.

2011- Total number of branches reached 3600. The Bank’s 5th foreign branch at
12 Manama, Bahrain opened.

2012-
Highest Dividend of 130% paid for the year
13

1027 branches and 2786 ATMs opened during the year. Global business crossed
2013- the 7-lakh crore milestone. Switchover to Basel III New Capital Adequacy
14 Framework. Branch Network and ATMs increased to 4755 branches and 6312
ATMs.

2014-
Global Business of the Bank crossed 8 lakh crores.
15

2015-
The Bank’s 8th foreign branch at DIFC (Dubai) opened.
16

Branch network crossed 6000 milestones. 

2016-
Total number branches rose to 6083.
17
Canara Bank (Tanzania) Ltd., a foreign subsidiary, opened.

2017-
Global Business of the Bank crossed 9 lakh crores.
18

2018- Global Business of the Bank crossed 10 lakh crores, Bank issued 2 core new
 equity shares to employees under Canara Bank Employee Share Purchase scheme
19
(CanBank-ESPS).

Awards/Accolades Received during 2018-19

 Central Vigilance Commission has awarded Canara Bank with ‘Vigilance Excellence
Award-Outstanding’ under Category ‘Timely Completion of Disciplinary Proceedings’ for
the year 2018.

 Bank received first runner up award on theme Credit off-take in EASE Banking
Reform Awards 2019.
 Bank has bagged four awards from the Associated Chambers of Commerce and
Industry of India (ASSOCHAM) under Agriculture, Priority sector lending, Social Banking
and Technology.
 Bank has bagged eight Awards from Public Relations Council of India (PRCI)
including 3 Gold under Television Commercials, Advertising Corporate Campaign RADIO
and Advertising Corporate Campaign Television
 NPCI Special Award in recognition of excellent performance in NFS ATM Network,
Rupay, CTS & UPI / IMPS.
 Bank’s House magazine ‘Shreyas’ bagged Making of Developed India Award
sponsored by ET Now for best in house magazine for the year 2018.

The Bank has recently launched a series of customer friendly mobile application as under:

 Canara Saathi – Canara Bank Credit Card Self Service Mobile App.
 Canara OTP – Mobile app for generating OTP for your Canara Bank Internet Banking
 BHIM Aadhaar Pay- App for accepting payments for the sale of goods/services.
 BHIM Canara Empower- Unified Payments Interface (UPI) for single platform in
accessing multiple bank accounts.
 Canara mServe- enables customer to Hotlist and Block/Unblock Cards.
 Canara GeoLocate- a mobile Application which enables a GPS based search for locating
Branch, ATMs and E Lounge of Canara Bank.
 Green PIN in ATMs, an online module to generate Debit Card PIN at the time of fresh
issuance of Card and also when the customer forgets the PIN.
 Canara Tech- support for structured resolution of queries related to tech-products.
 Canara Cart- an application basket containing all mobile based solutions. Customers can
manage all mobile apps of Canara Bank under this single application.
 Canmoney- an exclusive stock trading mobile 

Financial Performance of the Bank in FY 2017-18

Operating profit of the Bank increased to Rs.9548 crore compared to Rs.8914 crore last year.

Due to increase in provisions and contingencies on account of stressed loan book, the Bank
reported a net loss of Rs.4222 crore for 2017-18 compared to a net profit of Rs.1122 crore
during last year.

Net Interest income of the bank increased by 23.21% to `12163 Crore compared to `9872
crore generated during last year.

Income and Expenditure Analysis:

During the year, total income stood at Rs.48195 crore, comprising Rs.29096 crore interest
from loans and advances, Rs.10412 crore interest from investments, Rs.6943 crore from non-
interest income and Rs.1744 crore from other income.
Non-interest income registered a growth of 9.80% to Rs.5020 compared to Rs.4572 crore
during last year.
Total expenditure of the Bank came down by 3.45% y.o.y to Rs.38647 crore from Rs.40028
crore incurred during last year.
The net interest income, the difference between interest paid and interest earned by the Bank,
increased by 23.21% to Rs.12163 crore compared to the last years Rs.9872 crore.

Capital and Reserves:

Net worth of the Bank, as at March 2018 stood at Rs.23086 crore compared to Rs.26914
crore as at March 2017. While the total paid-up capital of the Bank stood at Rs.733 crore, the
reserves and surplus increased to Rs.34872 crore.
Capital Adequacy Ratio, under Basel III, improved to 13.22% as at March 2018 against the
regulatory requirement of 10.875%, including capital conservation buffer of 1.875%.
 Business Growth:
Deposits: Total Deposits increased to Rs.524772 crore as at March 2018 compared to
Rs.495275 crore a year ago, with a y.o.y growth of 5.96%.
Current and Saving (CASA) deposits of the Bank increased by 11.54% y-o-y to Rs.167035
crore as at March 2018.
Total business of the Bank increased to Rs.906475 crore, with a y-o-y growth of 8.26%
compared to Rs.837284 crore in the previous year.

Key Financial Ratios of the Bank

Table 2.2 - Key Financial Ratios

Key Financial Ratios (%) March 2017 March 2018

Cost of funds 5.65 5.17

Yield on funds 7.42 7.34

Cost of Deposits 6.25 5.60

Yield on Advances 8.99 8.12

Yield on Investments 7.75 7.63

Net Interest Margin 2.23 2.42

Return on Assets (ROA) 0.20 (0.75)

Return on Equity 4.15 (16.74)

Cost to income ratio 48.85 50.03

 CHAPTER 3

ORGANISATIONAL STUDY

The organization structure of Canara Bank is: