A

SUMMER TRAINING

REPORT ON
Credit Risk Management
Conducted at PNB BANK Chandigarh
SUBMITTED TO KURUKSHETRA UNIVERSITY, KURUKSHETRA

In partial fulfilment of the Requirement for the Degree of MASTER OF BUSINESS ADMINISTRATION SESSION (2011-2012)

SUPERVISED BY : R S Thaper (Branch Manager)

SUBMITTED BY: Gaurav Aggarwal Uni. Roll No. MBA 3ed semester

KURUKSHETRA INSTITUTE OF TECHNOLOGY & MANAGEMENT

Bhor saidan, Pehowa Road-Kurukshetra 136119 (HARYANA) (Affiliated to KURUKSHETRA UNIVERSITY, KURUKSHETRA)

PREFACE

No one can understand the importance of training as a part of ongoing process to enrich knowledge and skill and levels of oneself. Management training, however has gained rapid importance only recently. Management was previously considered as an inborn talent but in todays developing world this view has been abandoned. To develop managerial capabilities and to supplement theoretical knowledge with practical experience, the management students are required to go for training in business organisations. Only practical aspects can understand us the various faces of difficulties have to encounter in the practical situations. In my project study I analysis the credit risk found in the bank. This project report has divided into six chapters. In the first chapter there is brief introduction of the credit risk. In the second chapter of industrial profile there are different aspects of life banking industry and its history . In the third chapter of the company profile, all the details of the PNB bank are described. I undertook six-week training in PNB , Chandigarh. Here, I have assign a project on the topic Credit Risk Management. This training report is the knowledge acquired during that practical training. This training report is the knowledge acquired during that practical training. This training helped me in the development of the managerial skills which will be beneficial for my academic carrier.

(GAURAV AGGARWAL)

Declaration
This is to certify that the project work done on Credit Risk Management. Submitted to KITM College, Pehowa by me in partial fulfillment of the requirement for the award of degree of Masters in Business Administration (MBA) is a bonafide work carried out by me. The original work was carried during 26 June 2011 to 18 August 2011 in Punjab National Bank ,Chandigarh.

Date:

(GAURAV AGGARWAL) MBA 3rdsem

Acknowledgemen t
Heartfelt thanks to the following people. Concentration, dedication, hard work and application are essential but not the only factor to achieve the desired goals. These must be supplemented by guidance of people to make it a success. Many people have given their previous ideas and invaluable time to enable me to complete this project report. I offer sincere thanks and deep gratitude to Mr. R S Thaper, Branch Manager for their meaningful guidance encouragement and supervision.I am indeed indebted to Mr. R S Thaper, Branch Manager for his affectionate attitude and cooperative nature which made, my work over here a memorable one. I am also grateful to Dr. P. J George, Hony. Director, KITM, who was always there to give my spirits a boost After this I would like to thanks to my project guide Mr. Rajesh Kumar for giving me lot of academic knowledge & provide me a lot of guidelines regarding this project. Then I am very thankful to Mr. Ranjeet Verma Head of MBA department for their support and also all the faculty members of our department..I also thankful to all my friends of our department for their corporation. Last but not the least; I would like to thank the Almighty God for his blessings showered on me during the project report. Without corporation of the above people I was not able to prepare such type of project.

(GAURAV AGGARWAL)

EXECUTIVE SUMMARY
Once a project opportunity is conceived and it is considered after the preliminary screening, a detailed feasibility study has to be undertaken covering marketing, technical, and financial aspects of the project. The study deal with calculations of Credit Risk, along with going through the borrowers information, general information of the proposal, past record of borrower and details of security mortgaged. Financial records of the borrower audited, provisional and projected such as Profit and loss account statements, Balance Sheet and Cash and Fund Flow Statements needed to be considered. The ratios such as current Ratio, Debt Service Coverage Ratio etc are also checked. The ultimate decision whether to grant the credit to borrower for the application or not and how to go about it , is undertaken after this study which discloses whether the borrower has good past record and information provided are true and fair. My project concerns with the Calculations of Credit Risk, in which I need to asses if the borrower should be granted credit, and what should be the recommended loan amount. This all is done after carefully evaluating the financials and securities provided by the borrower. Based on this and the project characteristics, the final terms and conditions of financial assistance are decided upon like: Moratorium Repayment period Availability period Security (like first charge, personal guarantee etc.) Interest rate All the expenses like service fee, processing fee, document fee and other expenses like inspection of site, factory, etc. are charged to the applicant and are a source of income for the lending institution.
INTRODUCTION

In the very First chapter of my project named Introduction To Credit Risk Management I explain about the terminology of risk. In very beginning of the first chapter I explain the meaning of risk. After this I mention what the term credit risk comprises. And after explain the above, there are some conceptual understanding of the credit risk management is explained. After these concepts I just explain the various types of credit risk generally found in the financial organization. Thereafter I give the brief overview on the basic principles of credit risk. After principals there is explanation of risk management process. At the ending of this chapter I give the brief overview on credit risk management framework.
INDUSTRIAL PROFILE

In second chapter named Industrial profile, at the first page I give all the details regarding history of the banking industry and thereafter various phases in the development of the banking structure are mentioned and at last of this chapter I explain different aspects related with nationalization of banks in India. In the nationalization of the banks I mentioned various banks at that was become nationalized. At that time the financial system of India has shown a great deal of resilience. It is sheltered from any crisis triggered by any external macroeconomics shock as other East Asian Countries suffered. This is all due to a flexible exchange rate regime, the foreign reserves are high, the capital account is not yet fully convertible, and banks and their customers have limited foreign exchange exposure.

COMPANY PROFILE

In the third chapter named Company Profile, I started with the history of the Punjab national bank and after its introduction I just explain about history of the Punjab national bank. In the history I explain its founders, first office in Lahore. After this there I explain about the various branches and schemes of Punjab national bank. Also I explain the different product range of PNB. In the ending of this chapter I mentioned challenges of bank and its strategies for future.

RESEARCH METHODOLOGY

In my fourth chapter named Research Methodology in which I explain about my whole research design within which I collect the concerned data. Also I mentioned here main objectives of the study. After objectives research design is mentioned .Thereafter sampling technique used in data collection is explained.
DATA ANALYSIS AND INTERPRETATION

In fifth chapter named Data Analysis and Interpretation I give the graphical presentation to my analyzed data in the forms of bars and tables. On the first page of this chapter I give a brief introduction of the Data Analysis and Interpretation. Data is represented in such a form so that the result can be easily interpreted. In the Data Analysis and Interpretation various graphs, bars, tables are used for the effectiveness of the study.
FINDING, SUGGESTIONS AND CONCLUSION

In the last chapter of this project named Findings, Suggestions and conclusion, I give the brief summary on my finding and put some suggestions for organizational officials & at last I give conclusion of my whole training programmers

Contents
PARTICULARS..Page No. PREFACE DECLARATION CERTIFICATE ACKNOWLEGEMENT EXECUTIVE SUMMARY......i-iii CHAPTER-1 CREDIT RISK MANAGEMEN...1-22 1.1 Introduction...1-2 1.2 Definition of Credit Risk..3 1.3 Techniques of Credit Risk............3 1.4 Important elements...............4 1.5 Components of Credit Risk...4-5 1.6 Principles of Risk Management5-6 1.7 Risk Management Process6-9 1.8 Importance of Risk Management9-11 1.9 Risk Profile of An Organisation11-14 1.10 Framework..14-22 CHAPTER-2 INTRODUCTION OF INDUSTRY23-27 2.1 History of Banking Industry...........23 2.2 Phases in Development of Banking Sector...24-25 2.3 Nationalisation of Banks...26-27 CHAPTER-3 INTRODUCTION OF COMPANY29-40 3.1 PNB Bank...29 3.2 History of PNB Bank....29-31 3.3 Founders.31 3.4 First office of PNB31-33 3.5 PNB online33-34 3.6 PNB branches.34 3.7 PNB housing loan.34-35 3.8 Subsidiary of PNB..35 3.9 Joint Venture of PNB.35 3.10 Vision...36

3.11 Mission.36 3.12 Awards and Achievements..36 3.13 List of Board of Directors ......36-37 3.14 SWOT Analysis..37-38 3.15 PNB Schemes..38-39 3.16 Product Range of PNB.39 3.17 Challenges39 3.18 Strategies for Future39-40 CHAPTER -4 RESEARCH METHODOLOGY...41-43 4.1 Introduction41 4.2 Statement of the Problem...41 4.3 Objective of the study.41 4.4 Research Design.41 4.5 Sampling technique....41 4.6 Sampling method...42 4.7 Sampling unit.42 4.8 Sample size.42 4.9 Scope of the study..42 4.10 Collection of data.... 42 4.11Method of data collection....42-43 4.12 Tools of Data Analysis.43 4.13 Limitations of the Study...43 CHAPTER-5 DATA ANALYSIS AND INTERPRETATION.44-53 5.1 Analysis and interpretation of Data..44-53 CHAPTER-6 MAIN FINDINGS AND SUGGESTIONS..54-56 6.1 Main findings of the study..54 6.2 Suggestions for further study.55 6.3 Conclusion..56 BIBLIOGRAPHY ANNEXURE

Chapter-1 Introduction to credit Risk management

1.1 Introduction
As in the today scenario, globalization is increasing day by day. Thus it is necessary to know about the risk of the organization sector, banking sector etc. A main concept of choosing this project is to familiarize with the different techniques of the risk management and how it is managed. Risk management evolved from a strictly banking activity. The four letters comprising the RISK define its features. R Rare (unexpected) I Incident (outcome) S Selection (identification) K Knocking (measuring, monitoring, controlling) Risk, therefore needs to be looked at from four fundamental aspects: IDENTIFICATION MEASUREMENT MONITORING CONTROL(including risk audit) Credit risk is the risk of loss due to a debtor's non-payment of a loan or other line of credit (either the principal or interest (coupon) or both). The default events include a delay in repayments, restructuring of borrower repayments, and bankruptcy. Credit analysis is the method by which one calculates the creditworthiness of a business or organization. The audited financial statements of a large company might be analyzed when it issues or has issued bonds. Or, a bank may analyze the financial statements of a small business before making or renewing a commercial loan. The term refers to either case, whether the business is large or small. The standard definition of

management is that it is the process of accomplishing preset objectives; similarly, risk management aims at fulfilling the same specific objectives.

Credit analysis involves a wide variety of financial analysis techniques, including ratio and trend analysis as well as the creation of projections and a detailed analysis of cash flows. Credit analysis also includes an examination of collateral and other sources of repayment as well as credit history and management ability.

Figure 1.1 Risk Management Cycle

Lending has always been the primary function of banking, and accurately assessing a borrowers creditworthiness has always been the only method of lending successfully. The method of analysis required varies from borrower to borrower. It also varies function of the type of lending being considered. For example, the banking risks in financing the building of a hotel or rail project, of providing lending secured by assets or a large overdraft for a retail customer would vary considerably. For the financing of the project, you would look to the funds generated by future cash flows to repay the loan, for asset secured lending, you would look at the assets, and for an overdraft facility, you would look at the way the account has been run over the past few years. In this book on credit risk management, we will be looking specifically at the appropriate methods of analysis for lending to companies, a subject more often known as corporate credit.

1.2 What is Credit Risk?

Credit risk is defined as the possibility of losses associated with diminution in the credit quality of borrowers or counter parties. In banks/financial institutions portfolio, losses stem from ought default due to inability or unwillingness of a customer or counter party 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 risk emanates from banks dealing with an individual, corporate, bank financial institution or a sovereign. Credit risk may take the following forms. In the case of direct lending: principal and /or interest amount may not be repaid; In the case of guarantees or letters of credit: funds may not be forthcoming from the constituents upon crystallization of the liability. In the case of treasury operations: the payment or series of payments due from the counter parties under the respective contracts may not be forthcoming or ceases; In the case of securities trading businesses: funds/securities settlement may not be effected, In the case of cross-border exposure ceases or restrictions may be imposed by the sovereign.

1.3 Credit Risk Management Techniques

Techniques are methods to accomplish a desired aim. In credit risk modeling, the aim is essentially to compute the probability of default of an asset/loan. Broadly, the following range is available to an organization going in for a credit risk model: Economics technique: statistical models such as linear probability and logic model, linear discriminate model, RARUC model, etc. Neural networks: computer-based systems using economic techniques on an alternative implementation basis.

1.4 Important elements of credit risk

Whether it is in business or otherwise (like schools/colleges etc), risk management is not e new phenomenon. This has been there over the ages in ages in some from or the other, though its various forms were not called market risk, credit risk or operational risk as they are today. But the importance of risk management has grown in recent times

Figure 1.2 1.5 Components of Credit Risk:

Credit Risk arises from potential changes in the Credit Quality of a borrower or portfolio. It has two components at portfolio level (i) Concentration Risk and (ii) Systematic Risk. The two components of Transaction Risk are Default Grade Risk. The diagram for the same is given here under:

Credit Risk Portfolio Risk Concentration Risk Systematic Risk Default Risk Borrower Level Risk Downgrade Risk

Portfolio

Risk:

This

arises

due

to

adverse

credit

distribution;

credit

concentration/investment concentration etc. this risk also includes concentration risk and systematic risk.

Borrower Level Risk: It may be defined as the possibility that a borrower or

counterparty will fail to meet its obligations in accordance with agreed terms.

1.6 Principles of risk Management

The International Organization for Standardization identifies the following principles of risk management Risk management should: Create value Be an integral part of organizational processes Be part of decision making Explicitly address uncertainty Be systematic and structured Be based on the best available information Be tailored Take into account human factors Be transparent and inclusive Be dynamic, iterative and responsive to change Risk management can therefore be considered the identification, assessment, and prioritization of risks followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events or to maximize the realization of opportunities. Risks can come from uncertainty in financial markets, project failures, legal liabilities, credit risk, accidents, natural causes and disasters as well as deliberate attacks from an adversary. Several risk management standards have been developed including the Project Management Institute, the National Institute of Science and Technology, actuarial societies, and ISO standards. Methods, definitions and goals vary widely according to whether the risk management method is in the context of project management, security, engineering, industrial processes, financial portfolios, actuarial assessments, or public health and safety.

The strategies to manage risk include transferring the risk to another party, avoiding the risk, reducing the negative effect of the risk, and accepting some or all of the consequences of a particular risk.

1.7 Risk Management Process

The word process connotes a continuing activity or function towards a particular result. The process is in fact the last of the four wings in the entire risk management edifice-the other three being organizational structure, principles and policies. In effect it is the vehicle to implement an organizations risk principles and policies, aided by organizational structure, with the sole objective of creating and maintaining a healthy risk across the organization.

1. Risk Identification
In order to achieve a common understanding of the characteristics of each risk segment at all levels in an organization, it is necessary to spell out the danger signals. This helps decision-makers to get the best from various activity points of the Organization, allowing them to take calculated risks and not be risk averse. While identification risks, the following points have to be kept in mind.

All types of risk (existing and potential) must be identified and their likely effect in the short-run be understood, like for example a rise in interest rates on bank borrowing in the next six months/one year.

The magnitude of each risk segment may vary from organization to organization. In financial service industries like banks, delayed payment by counter-parties create settlement risk. Its effects may be more severe for them when compared to utility service providers like power companies that have a wide consumer base and one default may not a major credit risk hazard. This being so, dominant risk activities must be separated from the identification process.

The geographical area covered by an organization may determine the coverage of its content. A bank that international operations may experience different intensity of credit, market and operational risks in various

countries when compared with a pure domestic bank. Also, even with in a bank, risks will vary in its domestic operations and its overseas arms.

One clear way of identifying risk in an organization is to scan both balance sheet items and off-balance sheet items and find the risk elements. For operational risk issues of lapses arising out of people, process, system & procedure may facilitate identification of risk contents.

2. Risk Measurement
Measurement means weighing the contents and/or value, intensity, magnitude of any object against a yardstick. In risk measurement it is necessary to establish clear ways of evaluating various risk categories in an organization, without which identification of risk would not serve any purpose. Using quantitative techniques in a qualitative framework will facilitate the following objectives.

Findings out and understanding the exact degree of risk elements in each category in the operational environment. Directing the efforts of the organization to mitigate the risks according to the vulnerability of a particular risk factor. Taking appropriate initiatives in planning the organizations future thrust areas and line of business and capital allocation.

The system/techniques used to measure risk depend on the nature and complexity of a risk factor. While a very simple qualitative assessment may be sufficient in some cases, sophisticated methodology/statistical models may be necessary in other for a quantitative value. In bank lending activity, a simple one-page credit rating system along with simple financial analysis may be sufficient for a relatively low credit limit (say up to Rs. 50,000). But for higher credit limits, detailed qualitative and quantitative analysis with sophisticated credit models may be required because the size of the credit limit would indicate the size of default risk and its ultimate effect on the institution. Value at Risk (VAR), Credit Value at Risk (C-VAR), Duration and Stress Testing are all contemporary higher-order statistical tools for the qualitative analysis of credit risk, market risk and operative risk areas. in a model should be realistic after ample scrutiny and analysis.

3. Risk Monitoring
Keeping close track of risk identification measurement activities in the light of the risk, principles and policies is a core function in a risk management system. For the success of the system, it is essential that the operating wings perform their activities within the board contours of the organizations risk perception. Risk monitoring activity should thus ensure that:

Each operating segment has clear lines of authority and responsibility. Whenever the organizations principles and policies are breachedeven if they may be to its advantagesthey should be analyzed and the appropriate authorities to aid in policy-making.

In the course of risk monitoring, if it appears that it is in the organizations interests to modify existing policies and procedures, steps to change them should be considered.

There is an action plan to deal with major threat areas facing the organization in the future. The activities of both the business and reporting wings are monitored, striking a balance at all points in time. Tracking of risk migration is both upward and downward.

4. Risk Control There must be an appropriate mechanism to regulate or guide operation of the risk management system in the entire organization through a set of control devices. These can be achieved through a host of management process.

Assessing risk profile techniques regularly to examine how far they are

effective in mitigating risk factors in the organization.

Analyzing internal and external audit feedback from the risk angle and

using it to activate control mechanisms. Segregating risk areas of major concern from other relatively

insignificant areas and exercising more control over them. For example, in banks, lending against its own deposits does not pose a significant risk compared to advances against shares. In a pharmaceutical unit, quality control is riskier than credit risk.

Putting in place a well drawn-out risk-focused audit system to provide

inputs on restraint for operating personnel so that they do not take needless risks for short-term interests.

Risk control mechanism provides top management the opportunity to

review Staff Skilling (training) aspects in the organization. It is evident, therefore, that the risk management process through all its four wingsidentification, measurement, monitoring and controlfacilitate an organizations sustainability and growth. The importance of each wing depends on the nature of organizations activity, size and objective. But it still remains a fact that the importance of the entire process is paramount.

1.8 Importance of Risk Management

Whether it is in business or otherwise (like schools/colleges etc), risk management is not e new phenomenon. This has been there over the ages in ages in some from or the other, though its various forms were not called market risk, credit risk or operational risk as they are today. But the importance of risk management has grown in recent times. The international Regulatory authority, the Bank for International Settlement at Basel, Switzerland, has been working on a well-structured risk management system. The concern over risk management arose from the following developments:

In February 1995, the Barings Bank episode shook the markets and

brought about the downfall of the oldest merchant bank in the UK. Inadequate regulation and the poor systems and practices of the bank were responsible for the disaster. All components of risk management market risk, credit and operational risk-were thrown overboard.

Shortly thereafter, in July 1997, there was the Asian financial crisis,

brought about again by the poor risk management systems in banks/financial institutions coupled with perfunctory supervision by the regulatory authorities. Such practices could have severely damaged the monetary systems of the various countries involved and had international ramifications.

By analyzing these two incidents, we can come to the following

conclusions: Risks do increase over time in a business, especially in a globalized

environment. A mere quantitative approach to risk perceptionarising out of trading

volumes, earnings levels etc.does not reveal the inherent drawbacks in an organization/system.

Increasing competition, the removal of barriers to entry to new business

units by many countries, higher order expectations by shareholders lead to assumption of risks without adequate support and safeguards.

Business is tempted to bring in new types products, spreading to

uncharted areas for short-term gains. The traditional focus of business has been transaction-oriented. This

has often proved disastrous. There is a need for them to take a risk perception approach enterprise wide for the long-term sustainability of operations.

The technological revolution, while introducing countless benefits, has

also created many new risks for an organizationlike technology fraud, loss due to wrong monitoring of technology etc.which can be tackled only through a compact risk management system.

The external operating environment in the 21st century is noticeably

different. It is not possible to manage tomorrows events with yesterdays systems and procedures and todays human skill sets. Hence risk management has to address such issues on a continuing basis and install safeguards from time to time with the tool of risk management.

Forward-looking assessment by an organization in operational matters is

best aided by a properly articulated risk management system. Stakeholders in business are now demanding that their long-term interest

be protected in a changing environment. They expect the organization to install appropriates systems to handle a worst-case situation. Here lies the task of a risk management systemproviding returns and enjoying their confidence.

The three-pillar principle of the Basel Committee (capital adequacy,

supervisory process and market discipline) can be served if an organization has in place a risk management system.

Risk management is thus a functional necessity and adds to the strength

and efficiency of an organization on an ongoing basis.

1.9 Risk profile of an organization A. Business risks a) Capital risk b) Credit risk
c) Market risk

B. Control risks
a) Internal controls b) Organization c) Management

A. Business Risks
By definition, business risks includes all risk factors, whether it affects a business directly (loss affecting capital etc.) or indirectly (continued loss affecting business strategy). Business risk can be divided into the followings: a) Capital risk: The size of the owners stakes (like capital) in the organization determines the strength of its operation. The composition of its capitalTier-I (paid-up capital + reserves) and Tiers-II (bonds, hybrid instruments etc.) depends on its resource mobilization capacity. If an organization can access capital from only limited sources like directors (their friends and relatives) rather than from the public, then this may act as a constraint on capital. In contemporary financial management, capital has a number of components. These include:

According capital: funds belonging to the promoters/owners. Regulatory capital: the minimum amount of capital necessary to take

care of asset value as per regulatory requirements. Economic capital: the amount of funds set aside to absorb any violent

unexpected loss. According to the Basel Committee, capital base is one of the three pillars of risk assessment (the other two being supervisory role and market discipline). b) Credit risk: While we will discuss comprehensively on this category of risk in subsequent chapters, it may be sufficient at this stage to indicate its components:

Credit growth in the organization and composition of the credit folio in

terms of sectors centers and size of borrowing activities so as to assess the extent of credit concentration.

Credit quality in terms of standards, sub-standard, doubtful and loss-

making assets. Extent of the provision made towards poor quality credits. Volume of off-balance-sheet exposures having a bearing on the credit

portfolio. c) Market risk: The component of this risk type is:

Composition of the investment portfolio. Quality of the investment portfolio (i.e., investment in rated and unrated

instrument). Interest rate volatility and sensibility. Where in a business the foreign exchange aspect is also vital (i.e.,

banking/export-oriented units).

B. Control Risks
In the entire risk measurement process, control of activities finds a prominent place. A control mechanism is a must for any organizations well-being. Control risks can be divided into: a) Internal control risks: Lack of a clear line of responsibility and authority. In-house lack of control may lead to house keeping and other problems, which may affect the organizations well- being.

Poor systems for monitoring and reporting suspicious transactions that have a noticeable impact on the organization. No regular surveillance of the control mechanism by the top management.

b) Organizational risk:

Vague and overlapping organizational structure with unclear legal

implications. Absence of a structured assessment mechanism to leverage external and

internal relationships. Absence of a cordial industrial relationship.

c) Management (including corporate governance) risk: Composition, cohesiveness, competence and leadership attributes of the

board of directors. The match between the board and the organizations risk philosophy and risk appetite.

Non-assessment of the effectiveness of function of senior management. Absence of a clear succession planning mechanism. Undefined responsibility and accountability. Whether it follows contemporary corporate governance practices,

especially with regard to strategy formulation and problem-solving.

1.10 Credit Risk Management-Framework

The overall framework of credit risk management in the bank would comprise of following building blocks: A. Credit Risk Management Structure B. Credit Risk Policy & Strategy C. Processes and Systems

A. CREDIT RISK MANAGEMENT STRUCTURE Under overall credit risk management framework, the bank has put in place the following structure: a) Risk Management Division (RMD): The Division is headed by GM with distinct functions related to credit risk, namely: Framing of policies, related to credit risk, development of systems & models for identifying, measuring and managing credit risks and their implementation; b) Monitoring and managing the industry risk; Integrated risk management functions.

Circle Risk Management Departments (CRMDs): Risk Management Departments functioning at Circles are called as

Circle Risk Management Departments (CRMDs). CRMDs will function under the administrative supervision of second senior most official of the Circle. The operational work will be looked after by DGM/AGM/CM of the Circle Office who is not directly involved in the process of the sanction of credit proposal. Their responsibilities include monitoring and initiating steps to improve the quality of the credit portfolio of the Circle, tracking down the health of the borrower accounts through regular risk rating, besides assisting the respective Credit Committee in addressing the issues on risk. Their role in Credit Risk Management includes the following: To ensure that risk awareness percolates down to the branch

level in the Circle. To assess the credit risk rating in all eligible accounts falling

under Circle Office powers and ensuring risk rating of all other eligible accounts falling under HO power. To make scrutiny of all loan proposals falling under the powers

of Circle and HO from the credit risk angle. To ensure that the users at the Circle Office/Branch level are

adequately trained on the methodology of rating as well as various

credit risk management processes including use of the on-line Application. To ensure that a proper inventory of the trained Raters is

maintained and regularly updated to ensure that they are utilized properly. To take steps for upgradation of the skills of risk raters through

periodical seminars/training. To undertake Portfolio, Migration & Default Rate analysis for

their respective Circle by using the reports available in PNB Trac to improve the data quality in the System. To undertake variance analysis of the ratings being vetted by

their office and ensuring that corrective measures are initiated to improve the position. To assist RMD, HO in formulating and developing banks credit

policy based on behaviour of Circles credit portfolio by giving feedback on the analysis made by them on various industries to which exposures have been made at Circle level. To furnish feedback on refinement to be made on the credit risk To conduct studies and suggest to RMD with supporting

rating tools on an on-going basis. documents, the area which shows increasing trend in risk perception viz. a particular scheme/segment/industry /credit practice in geographical area showing signals of increased risk. c) Risk Management Committee (RMC) is a Sub-Committee of Board with overall responsibility of formulating policies/procedures and managing all the risks. It adopts integrated approach in managing all the risks. d) Credit Risk Management Committee (CRMC) is a top level functional Committee headed by CMD and comprises of EDs, CGMs/GMs of Risk Management, Credit, Treasury, etc. as per the directives from RBI. Its specific responsibilities are as under:

Implementation of credit risk policy/ strategy approved by the Monitor credit risk on a bank wide basis and ensure compliance Recommend to the Board for its approval, policies on standards

board/ RMC. of limits approved by the Board/ RMC. for presentation of credit proposal, financial covenants, rating standards and benchmarks. Devise delegation of credit approving powers, prudential limits on large credit exposures, asset concentration, standards for loan collaterals, portfolio management, loan review mechanism, risk concentration, risk monitoring and evaluation, pricing of loans, provisioning, regulatory/ legal compliance, etc.

B. CREDIT RISK POLICY & STRATEGY

In order to provide a robust risk management structure, the policy aims to provide a basic framework for implementation of sound credit risk management system in the bank. It deals with various areas of credit risk, goals to be achieved, current practices and future strategies. Though the bank has implemented the Standardized Approach of credit risk, as prescribed by Reserve Bank of India in its final guidelines on capital adequacy framework, yet the bank shall continue its journey towards adopting Internal Rating Based Approaches. As such, the credit policy deals with short-term implementation as well as long term approach to credit risk management. The policy of the bank embodies in itself the areas of risk identification, risk measurement, risk grading techniques, reporting and risk control systems /mitigation techniques, documentation practice and the system for management of problem loans. a) Capital Charge for Credit Risk Under Standardized Approach loan assets have been classified into following major categories: i) Claims on Corporate Claims on corporate include all FB and NFB exposures other than those which qualify for inclusion under sovereign, bank, regulatory retail, residential mortgage,

NPA and specified categories. The risk weight shall be in the range of 20% to 150% depending upon the ratings assigned by the external credit rating agencies as approved by the RBI/Board of the bank. These rating agencies are CRISIL, ICRA, CARE and FITCH India. The risk weights would be as under:

External rating Corresponding internal rating Risk weight

AAA AAA 20%

AA AA 30%

A A 50%

BBB BB 100%

BB & below B& below 150%

Unrated exposure

100%

ii) Claims secured by Residential Properties The lending to individuals for securing residential properties which are fully secured by mortgage of residential properties shall attract risk weight as indicated below:

Category of loan/advance Housing loans to individuals: i) Outstanding upto Rs.30 Lacs and LTV upto 75% ii) Outstanding above Rs.30 Lacs and LTV upto 75% iii) Where LTV ratio is more than 75%, irrespective of outstanding

Risk weight 50% 75% 100%

Rescheduled claims secured by residential property shall however be risk weighted with an additional risk weight of 25% under each category making it as 75%, 100% and 125% respectively. b) Credit Risk Mitigation Techniques RBI has prescribed list of eligible financial collaterals, method of valuation of these collaterals and haircut thereon etc., which would help the bank in reducing the exposure amount by permitting offset of such collaterals against the exposure. Banks use a number of techniques to mitigate the credit risk e.g. exposure may be collaterised in whole or in part by cash or securities, deposits from the same party, guarantee of a third party etc. RBI guidelines under Standardized Approach of credit risk allow a wide range of credit risk mitigants to be recognized for regulatory capital purposes provided these techniques meet the requirements of legal certainty. It may be added that while the use of CRM technique reduces or transfers credit risk, it simultaneously may increase other risks such as residual risks. The bank will ensure that all these risks are also monitored and controlled. The software system has been fine tuned for computation of RWA under credit risk as mentioned above to take care of CRM techniques prescribed by RBI in their guidelines. Under Standardized Approach, the following securities (either primary or collateral) are eligible for treatment as credit risk mitigants:

(i) Cash (as well as certificates of deposit or comparable instruments issued by the lending bank) or deposit with the bank which is incurring the counter-party exposure. (ii) Gold: Gold would include both bullion and jewellery. However, the value of the collateralized jewellery should be benchmarked to 99.99 purity. (iii) Securities issued by Central and State Governments provided no lock in period is operational and if they can be encashed with in the holding period. (v) Life insurance policies with a declared surrender value of an insurance company which is regulated by an insurance sector regulator (vi)Debt securities rated by a recognized Credit Rating Agency where these are either: (a) at least BBB- when issued by public sector entities; or (b) at least PR3/ P3/F3/A3 for short-term debt instruments. (vii) Debt securities not rated by a recognized Credit Rating Agency where these are: a) issued by a bank; and b) listed on a recognized exchange; and c) Classified as senior debt; and d) all rated issues of the same seniority by the issuing bank that are rated at least BBB- or PR3/ P3/F3/A3 by a chosen Credit Rating Agency ; and e) the bank holding the securities as collateral has no information to suggest that the issue justifies a rating below BBB- or PR3/ P3/F3/A3 (as applicable) and; f) (viii) Banks should be sufficiently confident about the market liquidity of the security. Units of Mutual funds regulated by the securities regulator of the jurisdiction of the banks operation mutual funds where: a) a price for the units is publicly quoted daily i.e., where the daily NAV is available in public domain; and b) Mutual fund is limited to investing in the instruments listed in this paragraph. (iv)Indira Vikas Patra, Kisan Vikas Patra and National Savings Certificates

(Equities including convertible bonds are no longer part of CRM) c) CREDIT RISK STRATEGIES The bank has been implementing various techniques, relevant structure and processes for credit risk measurement but it may take some more time to quantify the entire credit risk in banking book. Based on the results of the risk measurement models developed by the bank, the bank has prescribed various risk strategies for credit portfolio, which involve the following: i. Identification of Target Market for the bank ii. Decision on Risk Acceptance levels iii. Quantitative Exposure Ceilings i. IDENTIFICATION OF TARGET MARKET FOR BANK

An important aspect of targeted marketing is to have matching delivery channels. Bank has created proper credit delivery channels for building up of a sound credit portfolio. Bank has created specialized structure wherein relationship management concept has also been introduced. The purpose of creating specialized structure is to ensure prompt credit dispensation and improving credit risk management practices. The initiatives taken in this regard are: Large Corporate Branches Mid Corporate Branches International Banking Branches Specialized SME Branches Trade Finance Branches Signature Branches Retail Loan Hubs Specialized Agriculture Finance Branches

These initiatives help the bank in improving the effectiveness of the delivery channels for targeted marketing. However, in order to expedite decision making besides qualitative improvement in credit appraisal system, Single Point Credit Appraisal System has been introduced to achieve the following objectives:

 To ensure that marketing/delivery and the credit appraisal systems to be distinct and separate. To ensure that the branches to: i) ii) Concentrate on marketing of credit. Focus on improvement in customer service

For successful implementation of the system, Circle Heads to ensure that the revised system be implemented with proper planning and adequate staff be trained to handle appraisal of credit proposals and risk rating to ensure quality. ii. DECISION ON RISK ACCEPTANCE LEVELS: The bank has also taken various initiatives for putting in place the systems for risk acceptance, wherein informed decisions on credit sanctions are taken after taking care of the risk inherent in the borrower and returns desired by the bank. Certain policy initiatives taken are as:

Linking Loaning Powers with Risk Rating The Bank has in place a multi-tier credit approving system. In order to

enable the field functionaries for taking expeditious decisions and also to attract quality accounts, higher loaning powers have been vested with the sanctioning officials in the rank of CMs/AGMs/DGMs/Circle Heads/GMs (HO) in case of borrowers with credit risk rating of A & above. loaning powers shall be exercised. In case of AAA & AA rated borrowers, 125% and in case of A rated borrowers, 110% of their normal

Other Loaning Powers:

i) All real estate proposals above Rs.100 lac including hotel industry (excluding hotels falling under SME segment), finance against lease rentals and advances under retail lending schemes backed by mortgage of IPs shall require administrative clearance from ED/CMD. Finance to Retail Traders under SME sector for purchase of shop/show room are exempted from the pre-condition of obtaining administrative clearance from GM (Circle Office)/Field GMs /GM/CGM, CAD, HO/ED/CMD.

ii) The administrative clearance up to Rs. 100 lac shall be given by GM(CO/Field/HO). Loaning powers for sanction of proposals for Hotels including guest houses shall be exercised by Chief Managers and above within their vested loaning powers. iii) All proposals relating to Cement Industry are to be considered at Head Office level only. Linking of pricing with credit risk rating:

The pricing is linked with credit risk rating. Interest rate is charged depending upon the quality of asset. In normal course of business, better-rated accounts are priced at lower rate of interest as compared to low rated accounts. Situations may arise where the borrowers would like to know about the rationale of their rating. Borrowers may be informed about their weak areas such as Financial, Business/Industry, Management or Conduct of Account. The rating report/individual parameters in detail are not to be disclosed to them. iii. QUANTITATIVE EXPOSURE CEILINGS

Exposure shall include credit exposure (funded and non-funded credit limits) and investment exposure (including underwriting and similar commitments) as well as certain types of investments in companies. The sanctioned limits or outstanding, whichever are higher, shall be reckoned for arriving at exposure limit. Further, non-fund based exposure should also be reckoned at 100 percent of the limits or outstanding, whichever are higher. Banks have been given freedom to fix internal limits on their exposure to specific industries/sectors keeping in view their performance and risk perceived therein. In terms of

RBI guidelines, credit exposure ceiling shall not exceed 15% of the capital funds in case of individual borrowers (20% provided the additional 5% is on account of credit to infrastructure projects) and 40% of capital funds in case of group borrowers (50% provided the additional 10% is on account of credit to all infrastructure projects).

Chapter -2 Industrial Profile

2.1 History of Banking in India
Without a sound and effective banking system in India it cannot have a healthy economy. The banking system of India should not only be hassle free but it should be able to meet new challenges posed by the technology and any other external and internal factors. For the past three decades India's banking system has several outstanding achievements to its credit. The most striking is its extensive reach. It is no longer confined to only metropolitans or cosmopolitans in India. In fact, Indian banking system has reached even to the remote corners of the country. This is one of the main reasons of India's growth process. The government's regular policy for Indian bank since 1969 has paid rich dividends with the nationalization of 14 major private banks of India. Not long ago, an account holder had to wait for hours at the bank counters for getting a draft or for withdrawing his own money. Today, he has a choice. Gone are days when the most efficient bank transferred money from one branch to other in two days. Now it is simple as instant messaging or dials a pizza. Money has become the order of the day. The first bank in India, though conservative, was established in 1786. From 1786 till today, the journey of Indian Banking System can be segregated into three distinct phases. They are as mentioned below:

Early phase from 1786 to 1969 of Indian Banks Nationalization of Indian Banks and up to 1991 prior to Indian banking sector Reforms. New phase of Indian Banking System with the advent of Indian Financial & Banking Sector Reforms after 1991.

2.2 PHASE IN DEVELOPMENT OF BANKING SECTOR Phase1

The General Bank of India was set up in the year 1786. Next came Bank of Hindustan and Bengal Bank. The East India Company established Bank of Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843) as independent units and called it Presidency Banks. These three banks were amalgamated in 1920 and Imperial Bank of India was established which started as private shareholders banks, mostly Europeans shareholders. In 1865 Allahabad Bank was established and first time exclusively by Indians, Punjab National Bank Ltd. was set up in 1894 with headquarters at Lahore. Between 1906 and 1913, Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set up. Reserve Bank of India came in 1935. During the first phase the growth was very slow and banks also experienced periodic failures between 1913 and 1948. There were approximately 1100 banks, mostly small. To streamline the functioning and activities of commercial banks, the Government of India came up with The Banking Companies Act, 1949 which was later changed to Banking Regulation Act 1949 as per amending Act of 1965 (Act No. 23 of 1965). Reserve Bank of India was vested with extensive powers for the supervision of banking in india as the Central Banking Authority. During those days public has lesser confidence in the banks. As an aftermath deposit mobilization was slow comparatively. Moreover, funds were largely given to traders.

PhaseII
Government took major steps in this Indian Banking Sector Reform after independence. In 1955, it nationalized Imperial Bank of India with extensive banking facilities on a large scale specially in rural and semi-urban areas. It formed State Bank of India to act as the principal agent of RBI and to handle banking transactions of the Union and State Governments all over the country. Seven banks forming subsidiary of State Bank of India was nationalized in 1960 on 19th July, 1969, major process of nationalization was carried out. It was the effort of the then Prime Minister of India,

Mrs. Indira Gandhi. 14 major commercial banks in the country wasnationalised.Second phase of nationalization Indian Banking Sector Reform was carried out in 1980 with seven more banks. This step brought 80% of the banking segment in India under Government.The following are the steps taken by the Government of India to Regulate Banking Institutions in the Country:

1949 : Enactment of Banking Regulation Act. 1955 :Nationalisation of State Bank of India. 1959 :Nationalisation of SBI subsidiaries. 1961 : Insurance cover extended to deposits. 1969 :Nationalisation of 14 major banks. 1971 : Creation of credit guarantee corporation. 1975 : Creation of regional rural banks. 1980 :Nationalisation of seven banks with deposits over 200 crore.

After the nationalisation of banks, the branches of the public sector bank India rose to approximately 800% in deposits and advances took a huge jump by 11,000%.Banking in the sunshine of Government ownership gave the public implicit faith and immense confidence about the sustainability of these institutions .

PhaseIII
This phase has introduced many more products and facilities in the banking sector in its reforms measure. In 1991, under the chairmanship of M Narasimham, a committee was set up by his name which worked for the liberalisation of banking practices. The country is flooded with foreign banks and their ATM stations. Efforts are being put to give a satisfactory service to customers. Phone banking and net banking is introduced. The entire system became more convenient. and swift. Time is given more importance than money. The financial system of India has shown a great deal of resilience. It is sheltered from any crisis triggered by any external macroeconomics shock as other East Asian Countries suffered. This is all due to a flexible exchange rate regime, the foreign reserves are high, the capital account is not yet fully convertible, and banks and their customers have limited foreign exchange exposure.

2.3 Nationalization of Banks in India

The nationalization of banks in India took place in 1969 by Mrs. Indira Gandhi the then prime minister. It nationalized 14 banks then. These banks were mostly owned by businessmen and even managed by them. After the nationalization of banks in India, the branches of the public sector banks spread through out the India. These branches as follows:

Central Bank of India Bank of Maharashtra Dena Bank Punjab National Bank Syndicate Bank Canara Bank Indian Bank Indian Overseas Bank Bank of Baroda Union Bank Allahabad Bank United Bank of India UCO Bank Bank of India Before the steps of nationalization of Indian banks, only State Bank of India

(SBI) was nationalized. It took place in July 1955 under the SBI Act of 1955. Nationalization of Seven State Banks of India (formed subsidiary) took place on 19th July, 1960.The State Bank of India is India's largest commercial bank and is ranked one of the top five banks worldwide. It serves 90 million customers through a network of 9,000 branches and it offers -- either directly or through subsidiaries -- a wide range of banking services. The second phase of nationalization of Indian banks took place in the year 1980. Seven more banks were nationalized with deposits over 200 corers. Till this year, approximately 80% of the banking segment in India was under Government ownership. After the nationalization of banks in India, the branches of the public sector

banks rose to approximately 800% in deposits and advances took a huge jump by 11,000%.

1955: Nationalisation of State Bank of India. 1959: Nationalisation of SBI subsidiaries. 1969: Nationalisation of 14 major banks. 1980: Nationalisation of seven banks with deposits over 200 crores.

Chapter -3 Company profile

Date of Establishment Revenue Market Cap Corporate Address Management Details 1895 6052.14 ( USD in Millions ) 274977.11166815 ( Rs. in Millions ) 7 BhikaijiCama Place, , New Delhi-110066, New Delhi www.pnbindia.com Chairperson - K R Kamath MD - K R Kamath Directors - Anurag Jain, AshwaniChadha, B BChaudhry, D K Singla, Devinder Kumar Singla, G P Khandelwal, G R Sundaravadivel, Gautam P Khandelwal, Jasbir Singh, K C Chakrabarty, K R Kamath, KvbnRao, L M Fonseca, M A Antulay, M V Tanksale, Mohan LalBagga, Mohinder Paul Singh, Mushtaq A Antulay, NageshPydah, Pradeep Kumar, R K Kochar, RakeshSethi, RavneetKaur, S R Khurana, S Ranganathan, T N Chaturvedi, T N Chatuvedi, TribhuwanNathChaturvedi, UshaAnanthasubramanian, V K Khanna, V K Mishra, Vinod Kumar Mishra Bank Public Established in 1895 in Lahore, Punjab National Bank is one of the oldest banks in India having a virtual presence in every important center of the country. The bank has over 35 million customers through 4540 offices including 421 extension counters, out of which 2/3 of its branches in rural and semi rural areas-the largest among nationalized banks, which makes it enjoy one of the highest pe Total Income - Rs. 305990.603 Million ( year ending Mar 2011) Net Profit - Rs. 44334.953 Million ( year ending Mar 2011) R K Kochar V SankarAiyar& Co, NC Rajagopal& Co, Gupta & Gupta, P Jain & Co, Kalani& Co, Anjaneyulu& Co

Business Operation Background

Financials

Company Secretary Bankers Auditors

3.1 Punjab National Bank: An Introduction

Punjab National Bank with 4497 offices and the largest nationalised bank is serving its 3.5 crore customers with the following wide variety of banking services:

Corporate banking Personal banking Industrial finance Agricultural finance Financing of trade International banking Punjab National Bank has been ranked 38th amongst top 500 companies by The

Economic Times. PNB has earned 9th position among top 50 trusted brands in India. Punjab National Bank India maintains relationship with more than 200 leading international banks world wide. PNB India has Rupee Drawing Arrangements with 15 exchange companies in UAE and 1 in Singapore. Punjab National Bank (PNB) is the second largest government-owned commercial bank in India. Having more than 3.5 crore customer, Punjab National Bank has one of the largest branch networks in India. The bank's assets for financial year 2007 were about US$60 billion.

3.2 History of PNB

Established in 1895 in Lahore, Punjab National Bank is one of the oldest banks in India having a virtual presence in every important center of the country. The bank has over 35 million customers through 4540 offices including 421 extension counters, out of which 2/3 of its branches in rural and semi rural areas-the largest among nationalized banks, which makes it enjoy one of the highest penetration rate of banking activities in the country. Punjab National Bank caters to a wide variety of audience through spectrum of services including corporate and personal banking, industrial finance, agricultural finance and international finance. Sitting on a vast banking resources and significant presence in almost every lending sphere, the bank has a capital adequacy ratio (CAR), well above the Basel-2 regulatory requirement, at 12.96% as on June 2008, despite being exposed to numerous market and credit risk

elements. Constantly strengthening the capital adequacy ratio through internal accruals and a regular increase in Tier 1 capital has put the bank on a very comfortable and formidable position. Punjab National Bank has a net interest margin (NIM) higher than the industry average due to a mix of improving yields and low cost funding base and has one of the healthiest low cost current account saving account (CASA) ratio of 41.31%. It also enjoys the highest rating by all four domestic rating agencies and one of the few banks to boast a AAA rating on its perpetual debt issue. The bank has ambitious plans of major technological up-gradation to establish capability of having 100,000 terminals under the Core Banking Solutions (CBS) with a greater thrust on increasing international footprints. The bank has successfully migrated to the Basel 2 accord in February this year. Punjab National Bank has always stood with the time even in the most dire of circumstances. The bank is facing stiff challenges from its private sector counterparts. According to the RBI data, the banking business composition breakup between private sector banks and nationalized banks stood at 4% and 60% respectively, But the equation has taken a paradigm shift in favour of private sector banks owing to phased liberalisation of the BFSI sector, the composition stood at 21% as against nationalised banks share with reduced 49% in 2007. In a macro-prudential analysis of the Indian economy, it seems as the Indian banking industry has come a long way and entered in its ever challenging growth phase in a very prominent time as more than 49% of population financially excluded offers immense opportunity to the bank. Pursuing its financial inclusion, Punjab National Bank has opened more than 7.86 lakh No frills Accounts and intends to cover 30,000 villages, 75 million people by 2010 through Biometric Technology apart from comprehensive scheme launched for covering finance and insurance (health and life) for rickshaw pullers, project for empowering women weavers, vegetables vendors, etc. The core focus of the bank will be on retaining and further improving low cost deposits, lending to agriculture and small and medium enterprises and repositioning of subsidiaries and joint ventures. At the time of global financial turmoil, where the banks all over the world are creeping under tremendous pressure, Punjab National Bank has managed to insulate itself away from fatal transactions and has strictly adhered to the RBI guidelines. In July 2011, Punjab National Bank agreed to pick up a 30% stake in MetLife India which will make it the single largest shareholder in the private insurance

company. The two parties have agreed that once the deal is finalized the company will be renamed PNB MetLife India.

3.3 FOUNDERS OF PNB:

Bakshi Jaishi Ram EC Jessawala Kali Prosanna Roy Lala Dholan Dass Lala HarKishen Lal Lala Lajpat Rai Prabhu Dayal Lala Lalchand Dyal Singh Majithia

3.4 FIRST OFFICE: Punjab National Bank Lahore:

With over 56 million satisfied customers and 5002 offices, PNB has continued to retain its leadership position amongst the nationalized banks. The bank enjoys strong fundamentals, large franchise value and good brand image. Besides being ranked as one of India's top service brands, PNB has remained fully committed to its guiding principles of sound and prudent banking. Apart from offering banking products, the bank has also entered the credit card & debit card business; bullion business; life and non-life insurance business; Gold coins & asset management business, etc.

Since its humble beginning in 1895 with the distinction of being the first Indian bank to have been started with Indian capital, PNB has achieved significant growth in business which at the end of March 2010 amounted to Rs 435931 crore. Today, with assets of more than Rs 2,96,633 crore, PNB is ranked as the 3rd largest bank in the country (after SBI and ICICI Bank) and has the 2nd largest network of branches (5002 offices including 5 overseas branches ). During the FY 2009-10, with 40.85% share of CASA deposits, the bank achieved a net profit of Rs 3905 crore. Bank has a strong capital base with capital adequacy ratio of 14.16% as on Mar10 as per Basel II with Tier I and Tier II capital ratio at 9.15% and 5.01% respectively. As on March10, the Bank has the Gross and Net NPA ratio of 1.71% and 0.53% respectively. During the FY 2009-10, its ratio of Priority Sector Credit to Adjusted Net Bank Credit at 40.5% & Agriculture Credit to Adjusted Net Bank Credit at 19.7% was also higher than the stipulated requirement of 40% & 18%. The Bank has maintained its stake holders interest by posting an improved NIM of 3.57% in Mar10 (3.52% Mar09) and a Return on Assets of 1.44% (1.39% Mar09). The Earning per Share improved to Rs 123.98 (Rs 98.03 Mar09) while the Book value per share improved to Rs 514.77 (Rs 416.74 Mar09)

Punjab National Bank continues to maintain its frontline position in the Indian banking industry. In particular, the bank has retained its NUMBER ONE position among the nationalized banks in terms of number of branches, Deposit, Advances, total Business, Assets, Operating and Net profit in the year 2009-10. PNB has always looked at technology as a key facilitator to provide better customer service and ensured that its IT strategy follows the Business strategy so as to arrive at Best Fit. The bank has made rapid strides in this direction. All branches of the Bank are under Core Banking Solution (CBS) since Dec08, thus covering 100% of its business and providing Anytime Anywhere banking facility to all customers including customers of more than 3000 rural & semi urban branches. The bank has also been offering Internet banking services to the customers of CBS branches like booking of tickets, payment of bills of utilities, purchase of airline tickets etc. Towards developing a cost effective alternative channels of delivery, the bank with more than 350 ATMs has the largest ATM network amongst Nationalized Banks. With the help of advanced technology, the Bank has been a frontrunner in the industry so far as the initiatives for Financial Inclusion is concerned. With its policy of

inclusive growth in the Indo-Gangetic belt, the Banks mission is Banking for Unbanked. The Bank has launched a drive for biometric smart card based technology enabled Financial Inclusion with the help of Business Correspondents/Business Facilitators (BC/BF) so as to reach out to the last mile customer. The Bank has started several innovative initiatives for marginal groups like rickshaw pullers, vegetable vendors, dairy farmers, construction workers, etc. Under Branchless Banking model, the Bank is implementing 40 projects in 16 States. The Bank launched an ambitious Project Namaskar under which 1 lakh touch points will be established in unbanked villages by 2013 to extend the Banks outreach. Under this, 30 Kiosks have been opened covering 119 Villages reaching 1.32 Lakh beneficiaries. Backed by strong domestic performance, the bank is planning to realize its global aspirations. Bank continues its selective foray in international markets with presence in 9 countries, with branches at Kabul and Dubai, Hong Kong & representative offices at Almaty, Dubai, Shanghai and Oslo, a wholly owned subsidiary in UK, a joint venture with Everest Bank Ltd. Nepal and a JV banking subsidiary DRUK PNB Bank Ltd. in Bhutan. Bank is pursuing upgradation of its representative offices in China & Norway and is in the process of setting up a representative office in Sydney, Australia and taking controlling stake in JSC Dana Bank in Kazakhastan

3.5 PNB Online

Punjab National Bank of India is also a member of SWIFT and more than 150 PNB Branches are connected with terminals in Mumbai. It promotes "Any Time, Any Where Banking". PNB offers Internet Banking services for both to the Corporate and Individuals. It provides 24 hours, 365 days banking from the PC of the user. A user can operate anytime and from anywhere its accounts. The following are some of the services available online:

Access to account Complete details of transactions and statement of account Online information of deposits, loans overdraft account etc. Online Payment Facility for railway reservation through IRCTC Payment Gateway Project

Online Utility Bill Payment Services which allows Internet Banking account holders to pay their telephone, mobile, electricity, insurance and other bills anytime from anywhere from their desktop.

Punjab National Bank Card user can buy goods and enable services from 45,000 merchant outlet in India and can withdraw cash from over 4500 ATMs with its own 450ATMs.

3.6 Punjab National Bank Branches

Punjab National Bank has its Branches in all the 7 metropolitan and cosmopolitan cities in India namely New Delhi, Mumbai, Calcutta, Chennai, Bangalore, Hyderabad and Ahmadabad. It even has its branches in small town in both urban as well as rural areas. PNB is always focusing on expanding abroad and till date has identified some emerging economies abroad. They are in few of these places.

Almaty Kazakhstan Shanghai China London Kabul Afghanistan

3.7 Punjab National Bank Housing Loan

Any individual can avail Punjab National Bank Housing Loan for any of the following purpose:

For construction of house. For purchase of house/ flat. For purchase of house/ flat from the original allottee, i.e. on First Power of Attorney basis. For carrying out repairs/ renovation/ additions/ alterations in the existing house. Approximately 80% of the cost of project is sanctioned by PNB Housing

Finance, subject to a maximum of Rs. 50 lac. In case of carrying out repairs/

renovation/ additions/ alterations in the existing house, the ceiling is Rs. 5 lac. The loan is available for a period of 5 years to 20 years or before the borrowers attain the age of 65.Interest of Punjab National Bank Home Loan is charged on reducing balance and the amount to be sanctioned depends upon the repaying capability of the borrower. The following securities are required by the cell of PNB Housing Loan:

Mortgage of property for which finance is being given. In case of purchase of house flat from housing board/ society where mortgage cannot be created immediately, a tripartite agreement shall be executed amongst the housing board/society, borrower and the Bank.

In case of purchase of house/ flat on first power of attorney, additional security by way of mortgage of some other property or pledge of Bank's Fixed Deposit Receipt/ LIC policy/ Govt. securities has to be provided.

Suitable third party guarantee acceptable to the Bank which may include guarantee from family members/ other relatives.

3.8 Subsidiaries of Punjab National Bank

PNB Gilts PNB Housing Finance PNB Investment Services PNB Insurance Broking PNB Life Insurance Co.

3.9 Joint Ventures of Punjab National Bank

Principal PNB Asset Management Company Principal Trustee Company Assets Care Enterprises India Factoring & Finance Solutions

3.10 VISION

"To be a Leading Global Bank with Pan India footprints and become a household brand in the Indo-Gangetic Plains providing entire range of financial products and services under one roof"

3.11 MISSION
"Banking for the unbanked"

3.12 Awards & Achievements:

Gold trophy of SCOPE Meritorious Award for Excellence in Corporate Governance 2009 by Standing Conference of Public Enterprises As per Financial Express-Ernest & young (FE-EY) Indias Best Banks Survey, PNB is identified as the best bank among the nationalized banks in terms of overall ranking. As per HT-Mars Survey on Customer Satisfaction, PNB stood NUMBER ONE in Delhi and Chennai in terms of customer satisfaction. As per the Forbes Annual list of 2000 global giants, PNB tops the list of nationalized banks with a global ranking of 695, substantial improvement over last years placement at 946th position. The Economic Times has ranked CEO of PNB as the 32nd Most Powerful CEO of 2010. Skoch Challenge Award 2010 for Livelihood Linkage of the milk producers in Bulandshahr District, Uttar Pradesh. IDC Financial Insights Innovation awards 2010 by IDC Financial Insights.

3.13 List of Board of Directors

S.No 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Name K R Kamath K R Kamath RavneetKaur Jasbir Singh V K Mishra T N Chaturvedi G R Sundaravadivel D K Singla PRADEEP KUMAR Mohinder Paul Singh Mushtaq A Antulay B BChaudhry UshaAnanthasubramanian RakeshSethi V K Khanna

Designation Chairman Managing Director Director Director Director Director Director Director Director Director Director Part Time Non-Official Director Executive Director Additional Director Chief Financial Officer Table 3.1

3.14 SWOT Analysis of PNB Bank

Strengths: 1. Right strategy for the right products. 2. Superior customer service vs. competitors. 3. Great Brand Image. 4. Products have required accreditation. 5. High degree of customer satisfaction. 6. Good place to work 7. Lower response time with efficient and effective service. Weakness: 1. Some gaps in range for certain sectors. 2. Customer service staff needs training. 3. Processes and systems, etc. 4. Management cover insufficient. 5. Sectoral growth is constrained by low unemployment levels and competition for staff. Opportunities: 1. Profit margins will be good. 2. Could extend to overseas broadly. 3. New specialist applications. 4. Could seek better customer deals. 5. Fast-track career development opportunities on an industry-wide basis. 6. An applied research center to create opportunities for developing techniques to provide added-value services. Threats: 1. Legislation could impact. 2. Great risk involved 3. Very high competition prevailing in the industry. 4. Vulnerable to reactive attack by major competitors. 5. Lack of infrastructure in rural areas could constrain investment.

3.15 PNB Schemes:

The loans are marketed under attractive brand names to differentiate the products offered by different banks. As the Report on Trend and Progress of India, has shown that the loan values of these retail lending typically range between Rs.20,000 to Rs.200 lakh. The loans are generally for a of duration of five to seven years with housing loans granted for a longer duration of 25 years. Credit card is another rapidly growing sub-segment of this product group.

3.16 The products offered in our bank are:

Housing loans (Public / NRI ) OD for existing Housing Loan borrowers Conveyance Loan Car & 2 wheeler PNB Vidya Lakshyapurti (Educational loan) PNB Baghban (Reverse Mortgage) Scheme for financing Traders. Scheme for financing Property Owners Against Future Lease Rentals Scheme for financing professional Medical Practitioners Scheme for financing training/ skill up- gradation of construction workers Personal Loan Scheme for Pensioners & Public PNB Doctor Loan scheme (Gramin Chikitsak) Gold & Jewellary Advance Consumer Loan PNB Credit Card

3.17 Challenges:
Sustaining Customer Loyalty NPA reduction Fraud Prevention Avoid Debt Trap for Customers Competition from New Generation Banks

 Bringing Rural masses into mainstream banking Improving quality of Retail Credit

3.18 Strategies for Future:

Performance oriented Leadership Sophisticated marketing & Sales Efficient distribution Channels Superior Credit Policy, Procedures & Skills Reaching to Masses- Higher penetration Customer segmentation/ differentiation Promoting LOW RISK retail lending products Offer an array of products & financial advisory Renewed emphasis on superior execution by front-line employees

Chapter -4 Research Methodology

4.1 INRODUCTION
This chapter focuses on the methodology & the techniques used for the collection, classification & tabulation of data. It sheds light on the research problem, the objective of study & its limitations. The later part of this chapter explain the manner in which the data is collected, classified, tabulated & so as to reach on conclusive results. It is written game plan for concluding research. There for into design a research problem it is necessary to design a research methodology as the same may differ from problem to problem

4.2 STATEMENT OF THE PROBLEM

In this project my statement of the problem is to analysis the credit risk management in PNB Bank. The study is very useful for the bank in formulation of the various plans, strategies and policies.

4.3 OBJECTIVE OF RESEARCH

To find out the various methods of credit risk mitigation by which NPAs is minimize in the bank. To study about the credit risk which occur due to borrower default or other line of credit interest. To analyse the methods of institution to assessing the risk.

4.4 RESEARCH DESIGN: This study is based on a Descriptive research

design. Descriptive research is a type of conclusive research that has as its major objective the description of something.

4.5 SAMPLING TECHNIQUE: In this research I select the Non-Probability

sampling technique because I was familiar with the research field.

4.6 SAMPLING METHOD: - Convenient sampling method. Because it is most

efficient and simplest method of data collection so I use this method in this study.

4.7 SAMPLING UNIT

The unit refers to the definitions of the particular person who is to be survey. In this study the unit is the respondent, which is operating in various branches of PNB in Chandigarh. Sample Unit: Banks of Chandigarh 4.8 SAMPLING SIZE This refers to the procedure by which we describe the total number of respondents from whom the information is to be collected. Here I have selected 100 respondents. Sample Size: 100

4.9 SCOPE OF STUDY

The scope has been limited to sample size of 100 respondents due to time and cost constraints. However, the area of study with respect to geographical city is CHANDIGARH..

4.10 COLLECTION OF DATA SOURCES

After the research problem has been defined and the research design has been chalked out, the task of data collection begins. Data can be collected from either primary or secondary source. In this study although the data was collected mainly through primary sources, it was supplemented by secondary data. For the collection of primary data, the respondents were contacted personally and the tool for gathering the data was the questionnaire.

4.11 Methods of Collection of Data

Since the report required studying the theoretical as well as practical aspects of Project Finance, the books have provided in the theoretical aspects of the study. To get the latest information, Internet was also used as a medium at various stages. The data for the project report has been collected from the Primary Data

Visiting various branches of bank for information regarding Long Term

Sources of Project Finance who are directly connected with the Credit Risk Management department. The report thus contains the most of primary data mentioned sources. In this study although the data was collected mainly through primary sources.

4.12 TOOLS OF DATA ANALYSIS

Quite often the questionnaire is considered as the HEART of a survey operation. Hence, it should be carefully constructed. In the words of GOOD & HATT, In general, the word questionnaire refers to a device for securing answer to questions by using a form which the respondent fills in himself. All the questions in a questionnaire are framed with a specific objective in mind and are placed in logical, sequential order. The questionnaire framed for the purpose of the study consists of a limited number of questions placed in a logical order.

4.13 LIMITATIONS OF THE STUDY

1. The first and foremost limitation was time constraints was only few days but still efforts have been made to put the picture as clear as possible. 2. The sample size is only 100 respondents, so the sample may not be truly representative of the population. 3. Samples were selected as per convenience so errors are bound to creep in the study

Chapt er-5
DATA ANALYSIS & INTERPRETATION
5.1 ANALYSIS AND INTERPRETATION Analysis is the process of breaking a complex topic or substance a into smaller parts to gain a better understanding of it. The technique can be applied in every field of study i.e. business, economics, banking, philosophy etc. If asked what analysis means, most people today immediately think of breaking something down into its components; and this is how analysis tends to be officially characterized. In the Concise Oxford Dictionary, for example, analysis is defined as the resolution into simpler elements by analysing (opp. synthesis), Analysis has always been at the heart of philosophical method, but it has been understood and practiced in many different ways. Perhaps, in its broadest sense, it might be defined as a process of isolating or working back to what is more fundamental by means of which something, initially taken as given, can be explained or reconstructed. Data interpretation is part of daily life for most people. Interpretation is the process of making sense of numerical data that has been collected, analyzed, and presented. People interpret data when they turn on the television and hear the news anchor reporting on a poll, when they read advertisements claiming that one product is better than another, or when they choose grocery store items that claim they are more effective than other leading brands. An interpretation is an explanation of the meaning of some object of attention. It also refers to making ideas more understandable, including translation. An interpretation may express ones' own understanding of things, for instance, a work of art, a poem, performance, or piece of literature.

Q: 1 Have you got the risk management policy in your bank?

Employees agree to having policy Yes No Total

No of respondent 100 0 100

% of the respondent 100 0 100

100% 80% 60% 40% 20%

100%

Yes No

0% 0% % of the respondent

INTERPRETATION: Above graph shows that all the respondents who are the employees of the bank have got risk management policy because PNB has implemented this policy to all branches. So no respondent was in favour of above question.

Q: 2 Which type of risk is more in your bank?

Type of risk Credit risk Business risk Operational risk Total

No of respondent 98 2 0 100

% of the respondent 98% 2% 0 100%

100% 80% 60% 40% 20% 0% % of the respondent Credit risk Business risk Operational risk

INTERPRETATION: By above it can be said that Credit risk is more in bank rather than that of the others. Which is maximum 98%, business risk is found just 2% & no operational risk is being found at all. So it is clear that in this bank the risk of credit is rated high which can be minimize through the various techniques of risk management.

Q:3 What is the main reason for default in Credit?

Reason for default in credit Careless Lending Borrower default Government Policies Natural Calamities Total

No of respondent 1 92 7 0 100

% of the respondent 1% 92% 7% 0% 100%

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

92%

Careless Lending Borrower default Government Policies Natural Calamities 1% 7% 0%

% of the respondent INTERPRETATION: By above it can be classified that 92% default in credit is more due to Borrowers default, 7% due to Government policies and 1% due to Careless lending. So, borrower default mean to non-payment of due money which the bank has granted to its customers. Above data also shows that bank is very careful in lending service.

Q: 4 Does your institution has a credit recovery department that handles collection of credit in default?

Having credit Recovery department Yes No Total

No of respondent 85 15 100

% of the respondent 85% 15% 100

90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

85%

Yes No 15%

% of the respondent

INTERPRETATION: 85% of the respondents said that they have their own Credit Recovery Department to handle the cases of credit in default. So such type of functions improve the operational efficiency of the bank .In the absence of such type of department it is very difficult to recover the default money from the defaulter. But also 15% respondents response in negative.

Q: 5 What are the methods your bank is using for assessing credit risk?

Methods of assessing credit risk Risk mitigation Monitor and inspection With the help of external audit and committee Total

No of respondent 17 81 2 100

% of the respondent 17% 81% 2% 100%

2%

17%

Risk mitigation

Monitor and inspection with the help of external audit and committee

81%

INTERPRETATION: Under this 81% employees said that they use Monitor and Inspection technique to asses the credit risk while 17% said that they use Risk Mitigation technique and 2% take the help of External Audit and Committee. To assessing the risk, monitor and inspection method is suitable for bank.

Q: 6 What are various techniques of risk mitigation?

Techniques of risk mitigation Mortgage Guarantor Insurance Working Status Total

No of respondent 79 4 0 17 100

% of the respondent 79% 4% 0% 17% 100%

4% 0%

17%

Mortgage Gurantor Insurance working status

79%

INTERPRETATION: By above it can be explained that 79% of them use Mortgage as Risk mitigation technique where as 17% uses the Working status of the bank and 4% of them uses guarantor as Risk Mitigation techniques in their banks & insurance technique is not in their use.

Q: 7 What are the key components of credit risk management?

Key components of risk management Risk mitigation approach Training to the staff Guideline to loan procedure Total

No of respondent 90 8 2 100

% of the respondent 90% 8% 2% 100%

90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

90%

8%

Risk mitigation approach Training to the staff Guideline to loan procedure 2%

% of the respondent

INTERPRETATION: Above tables explains that 90% of them prefer Risk Mitigation Approach as a key component of risk management, where as 2% of them like the technique of giving Guideline to loan procedure.& 8% respondents favour to give training to staff.

Q: 8 Whether training should be given to your employees to minimize the Credit Risk?

Training program given to employees Yes No Total

No of respondent 76 24 100

% of the respondent 76% 24% 100

80% 70% 60% 50% 40% 30% 20% 10% 0%

76%

24%

Yes No

% of the respondent

INTERPRETATION: Above graph shows that bank should give proper training to their employees regarding credit risk. 76% of the respondents were agreeing to provide the special training for minimizing the credit risk & 24% of them was in against of the above question. So bank should provide the training for the same.

Q:9 Which sector is rated under high Credit Risk?

Sector under high credit risk Industry Sector Retail Sector Service Sector Public Sector Individual Total

No of respondent 89 5 3 0 3 100

% of the respondent 89% 5% 3% 0 3% 100%

90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

89%

Industry Sector Retail Sector Service Sector Public Sector Individual 5% 3% 0% 3% % of the respondent

INTERPRETATION: 89% of them said that Industry sector is high rated for credit risk where as 5% were in favour of Retail sector and 3% defined Service sector as highly rated under Credit risk and no one consider the public sector is risky one because only this sector ensures you good creditworthiness and 3% respondents agreed with individual.

Chapt er-6 Findings, Suggestions & conclusion

6.1 Findings
In this study I observe that 100% respondents who are the employees of the bank have got risk management policy because PNB has implemented this policy to all branches. So no respondent was in favour of above question. 1. By the above study it can be said that Credit risk is more in bank which is maximum 98%, business risk is found just 2% & no operational risk is being found at all. So this data shows that in the bank the risk of credit is rated high. 2. As per study it can be concluded that 92% default in credit is more due to Borrowers default, 7% due to Government policies and 1% due to Careless lending. 3. Maximum respondents which were 81% employees said that they use Monitor and Inspection technique to asses the credit risk while 17% said that they use Risk Mitigation technique and 2% take the help of External Audit and Committee. 4. As per my study I found that most of the respondents use Mortgage as Risk mitigation technique which was 79% where as 17% uses the Working status of the bank and 4% of them uses guarantor as Risk Mitigation techniques. 5. Above analysis explains that 90% of the respondents prefer Risk Mitigation Approach, where as 2% of them like the technique of giving Guideline to loan procedure.& 8% respondents favour to give training to staff. 6. Above graph shows that bank should give proper training to their employees regarding credit risk. 76% of the respondents were agreeing to provide the special training for minimizing the credit risk & 24% of them was in against. 7. In this study 89% respondents said that Industry sector is high rated for credit risk where as 5% were in favour of Retail sector and 3% defined Service sector

as highly rated under Credit risk and no one consider the public sector is risky one because only this sector ensures you good creditworthiness and 3% respondents agreed with individual.

6.2 Suggestions
Credit risk report should suggest weakness and strength of the project and risk mitigation measures. While rating existing financial institutions it would be desirable to obtain three years of working results (B/S and P&L account) analyze and rate the proposals. Benchmark values for each parameter shall be on par with the leading banks / financial institutions in order to access risk adequately. Risk can be diversified in the industrial portfolio by reducing concentration in single activities. There various types of parameters for different segments like commercial loans, house loans, personal loans etc. While rating the company, the proper financial information is sufficient, but in this case we have only 2 years financials. If more than 2 years information is available more accurate ratings can be given.

6.3 Conclusion
Banks or financial institutions undertake structure rating exercise with quantitative and qualitative input support to the credit decision. Whether it is a sanction or rejection. Credit rating enables to check borrowers capacity and competence and also repaying capacity. The different banks also introduced credit risk management recently and developed internally credit risk models for evaluating the loan proposals of the borrowers. In the present scenario where a cut throat competition is prevailed in the market, the banks are very conscious towards the different risk specially in the case of credit risk because this risk alone can make the bank or financial organization a bankrupt. Hence it can be concluded that to decrease the risk under credit it is necessary to manage and analyze all the necessary documents before taking any decision regarding credit.

Reference
Patel Rashna, Indias strengths Tremendous sourcing centers, Home

Fashion , Servewell Printers, Mumbai, Vol-1, No.1,pp-08-09.

Kothari C. R., Research methodology, Second edition(1985) , Wishwa

Prakashan , New Delhi,pp-71-80.

Cherunilam Francis, International Business, 2nd Edition , pp120. Bhalla K. V. and Shivaramu S., 10th revised edition, International Business

Environment and Management, Export Management, Anmol Publications, pp-417.

Sharan K. Vyukta , International Business- Concept, Environment and

Strategy, Pearsons Publications, 2nd edition, pp-383-386.

Business, 2nd edition, Tata Mcgraw Hill Publications,pp-260. Websites

Pnb.org.in Scribd.com Economywatch.com

Questionnaire on Credit Risk Management in Banks

Name _______________________ Branch_________________________

Business Description _______________________________ Q:1 Have you got the risk management policy in your bank? Yes No Q: 2 Which type of risk is more in your bank? Credit risk Business risk Operational risk Q:3 What is the main reason for default in Credit? Careless Lending Borrower Default Government Policies Natural Calamities Q:4 Does your institution has a credit recovery department that handles collection of credit in default? Yes No Q: 5 What are the methods your bank is using for assessing credit risk? Risk mitigation Monitor and inspection With the help of external audit and committee Q: 6 What are various techniques of risk mitigation? Mortgage Guarantor Insurance Working Status

Q: 7 What are the key components of credit risk management? Use risk mitigation approach Training to the staff Guideline to loan procedure Q: 8 Whether training is given to your employees to minimize the Credit Risk? Yes No Q:9 Which sector is rated under high Credit Risk? Industry Sector Retail Sector Service Sector Public Sector Individual Q: 10 Do you like to give any suggestion from your side regarding Credit Risk? ____________________________________________________ ___________________________________________________