CREDIT RISK

MANAGEMENT IN

COMMERCIAL BANKS

By Prinsu Modi

Page | 0
 Project Report
(Submitted for the Degree of [Link]. Honours in Accounting & Finance
under the University Of Calcutta)

Title of the Project

Credit Risk Management in Commercial Banks: A case study of Axis
Bank Ltd and HDFC Bank

Submitted by
Name of the Candidate: PRINSU MODI
Registration No.: 145-1221-0294-16
Name of the College: GOENKA COLLEGE OF
COMMERCE AND BUSINESS ADMINISTRATION
College Roll No. : 473
Calcutta University Roll No.:1145-31-0092

Supervised by
Name of the Supervisor: Prof. Krishnendu Maji
Name of the College: Goenka College of Commerce
And Business Administraton

Month & Year of Submission

February, 2019

Page- 1
Annexure – IA
Supervisor’s Certificate
This is to certify that Ms. Prinsu Modi a student of [Link]. Honours in Accounting &
Finance in business of GOENKA COLLEGE OF COMMERCE AND BUSINESS
ADMINISTRATION under the University of Calcutta has worked under my supervision
and guidance for her Project Report with the title Credit Risk Management in Commercial
Banks: A case study of Axis Bank Ltd and HDFC Bank.
The project report, which she is submitting, is her genuine and original work to the best of
my knowledge.

Signature:
Name: Prof. Krishnendu Maji
Designation: FACULTY GOENKA
COLLEGE
Name of the College: GOENKA COLLEGE OF
COMMERCE AND BUSINESS
ADMINISTRATION

Place: Kolkata
Date:

Page- 2
Annexure – IIA

Student’s Declaration
I hereby declare that the Project Work with the title CREDIT RISK MANAGEMENT IN
COMMERCIAL BANKS: A CASE STUDY OF Axis Bank Ltd & HDFC
BANK submitted by me for the partial fulfillment of the degree of [Link]. Honours in
Accounting & Finance in Business under the University of Calcutta is my original work and
has not been submitted earlier to any other University/Institution for the fulfillment of the
requirement for any course of study.

I also declare that no chapter of this manuscript in whole or in part has been incorporated in
this report from any earlier work done by others or by me. However, extracts of any literature
which has been used for this report has been dully acknowledged providing details of such
literature in the references.

Signature:
Name: Prinsu Modi
Address: 267,Rabindra Sarani, Morijawala House
Kolkata-700 007
Registration No.:145-1221-0294-16
Calcutta University Roll No.:1145-31-0092

Place: Kolkata
Date:

Page- 3
 Acknowledgment
There are people, who, simply by being what they are influence and inspire you to do things
you never thought yourself capable of doing. Amongst these are my parents, teachers and
friends,relatives to whom I wish to extend my gratitude.

I am highly indebted to my supervisor Prof. KRISHNENDU MAJI for her constant

guidance and supervision as well as for providing necessary information regarding the
project.

I would like to express my special thanks of gratitude to our Head of Department as well as
our principal who gave me the golden opportunity to do this wonderful project on the topic
Credit Risk Management in Commercial Banks.

I have taken efforts in this project. However, it would not have been possible without the kind
support and help of the above mentioned individuals. So, I would like to express my thanks to
all of them.

PRINSU MODI

Page- 4
 TABLE OF CONTENT
Chapter Name Page No.
1. INTRODUCTION
BACKGROUND .............................................................................................. 6
OBJECTIVE OF THE STUDY ...................................................................... 7
LITERATURE REVIEW… ........................................................................... 7
LIMITATION ................................................................................................... 8
RESEARCH METHODOLOGY… ............................................................... 8
CHAPTER PLANNING… ............................................................................. 9
2. CONCEPTUAL FRAMEWORK
BANKING INDUSTRY..................................................................................10
CREDIT ........................................................................................................... 10
RISK ................................................................................................................. 11
CREDIT RISK ................................................................................................ 11
CREDIT RISK MANAGEMENT ................................................................ 13
AIMS OF CREDIT RISK MANAGEMENT .................................. 13
NEsED OF CREDIT RISK MANAGEMENT ................................ 14
KEY ELEMENTS OF CREDIT RISK MANAGEMENT.............14
COMMITTEE FOR CREDIT RISK MANAGEMENT ................ 15
NON PERFORMING ASSETS (NPA) ........................................................ 16
CAPITAL ADEQUACY RATIO (CAR) .................................................... 17
CONCENTRATION RISK ........................................................................... 19
CONCENTRATION RISK STRATEGY…........................................ 19
2.82 IMPACT OF CONCENTRATION RISK ON NPA LEVEL ............ 20
3. CASE STUDY- PRESENTATION OF DATA, ANALYSIS AND FINDINGS
COMPANY PROFILE OF AXIS BANK .................................................... 21
COMPANY PROFILE OF HDFC BANK ................................................... 28
COMPARATIVE STUDY ............................................................................. 35
4. CONCLUSION AND SUGGESTIONS .............................................................. 36
BIBLOGRAPHY....................................................................................................39

Page- 5
 CHAPTER 1: INTRODUCTION
BACKGROUND

R
isk is the fundamental element that drives financial behaviour. Without risk, the
financial system would be vastly simplified. However, risk is omnipresent in the
real world. Financial Institutions, therefore, should manage the risk efficiently to
Survive in this highly uncertain world. The future of banking will undoubtedly rest on risk
management dynamics. Only those banks that have efficient risk management system will
survive in the market in the long run. The effective management of credit risk is a critical
component of comprehensive risk management essential for long-term success of a banking
institution. Banking sector is directly linked to the country’s economy; each compliments the
other for growth, strength and status. A strong and resilient banking system is the foundation
for sustainable economic growth. The basis for efficient banking is simplicity in operations
based on effective risk management, transparency and accountability. Trust and confidence
are the bedrock of banking.
Credit risk is the oldest and biggest risk that bank, by virtue of its very nature of business,
inherits. This has however, acquired a greater significance in the recent past for various
reasons. Foremost among them is the wind of economic liberalization that is blowing across
the globe. India is no exception to this swing towards market driven economy. Better credit
portfolio diversification enhances the prospects of the reduced concentration credit risk as
empirically evidenced by direct relationship between concentration credit risk profile and
NPAs of private sector banks. The corner stone of credit risk management is the
establishment of a framework that defines corporate priorities, loan approval process, credit
risk rating system, risk-adjusted pricing system, loan-review mechanism and comprehensive
reporting system.
The exposure to the credit risks large in case of financial institutions, such commercial banks
when firms borrow money they in turn expose lenders to credit risk, the risk that the firm will
default on its promised payments. As a consequence, borrowing exposes the firm owners to
the risk that firm will be unable to pay its debt and thus be forced to bankruptcy.

Page- 6
 OBJECTIVE OF THE STUDY
1. To assess the trend of NPAs position in Indian Private Sector Banks.
2. Credit risk management practices in commercial banks.
3. To predict the status of capital adequacy ratio of Basel II together with profiling and
analysis of concentration risk in private sector banks.
4. To study the comparison of Axis Bank Ltd and HDFC Bank in credit risk
management.
5. To study, how banks mobilize their funds in an economy.

LITERATURE REVIEW
Risk Management in Banks has been the subject of study of many Agencies and Researchers
and Academicians. There is a treasure of literature available on the subject. A careful
selection of relevant material was a formidable task. Efforts have been made to scan the
literature highly relevant to the Context.

 Swaranjeet Arora (2013)[1] made an attempt to identify the factors that

contribute to Credit Risk analysis in Indian banks and to compare Credit

Risk analysis practices followed by Indian public and private sector banks, the
empirical study has been conducted and views of employees of various banks
have been tested using statistical tools. Present study explored the
phenomenon from different perspectives and revealed that Credit Worthiness
analysis and Collateral requirements are the two important factors for analyzing
credit risk.
 S.K. Bagchi (2013) observed that in the world of finance more specifically in
Banking, credit risk is the most predominant risk in Banking and occupies roughly 90-
95 per cent of risk segment. A well laid out Risk Management System should give its
best attention to Credit Risk and Market Risk.
 Mrudul Gokhale (2009) elaborately dealt with the subject of capital adequacy in
Banks in her publication “Evolution of Capital Adequacy Standards in Banks”. As
per her Banks mostly give adequate focus for the credit risk aspect. In tune with the
Page- 7
 regulatory insistence on capturing risks for the purpose of capital charge,
sophisticated risk models are being developed. These models help Banks to near
accurately quantify the potential losses arising from different risks viz., credit risk,
market risk and operations risk.
 Dr. Yogieta S. Mehra (2010)[4] analysed the impact of size and ownership of
banks on the range of operational risk management practices used by the banks
through execution of survey comprising of a questionnaire. The study aimed to
explore the range of practices used by Indian Banks in management of operational
risk essential for achievement of Advanced Measurement Approach (hereafter
referred to as AMA) for a cross –section of Indian Banks and perform a comparative
analysis with AMA compliant banks worldwide.

LIMITATIONS
1. The subject of credit risk management in commercial banks is vast and it requires
extensive study and research to have an in-depth knowledge of the various ways of
credit risk management. The main constraint in the study was time.
2. Explanation of the analysis was also limited due to restriction in the length of the
project size, so limited data was provided.
3. There can be loopholes as this analysis is based on secondary data.

RESEARCH METHODOLOGY
The present study is based on descriptive study where the methodology used to collect the
data is based on secondary data like internet sources, annual reports of banks including trend
and progress of banking in India. Simple statistical tools like charts and graphs were used.

Page- 8
 CHAPTER PLANNING
The study has been divided into the following chapters:
1. Introduction
2. Conceptual Framework
3. Case Study: Presentation of data, analysis and findings
4. Conclusion and Suggestions

Page- 9
 CHAPTER 2: CONCEPTUAL
FRAMEWORK
BANKING INDUSTRY
A Bank is a financial institution that serves as a financial intermediary. It acts as a payment
agent for customers, and borrows and lends money. Banks act as payment agents by
conducting checking or current accounts for customers, paying cheques drawn by customers
on the bank, and collecting cheques deposited to customers' current accounts. The Banking
Industry was once a simple and reliable business that took deposits from investors at a lower
interest rate and loaned it out to borrowers at a higher rate. However deregulation and
technology led to a revolution in the Banking Industry that saw it transformed. Banks have
become global industrial powerhouses that have created ever more complex products that use
risk and securitization in models. Through technology development, banking services have
become available 24 hours a day, 365 days a week, through ATMs, at online banking, and in
electronically enabled exchanges where everything from stocks to currency futures contracts
can be traded.
The banking industry at its core provides access to credit. In the lenders case, this includes
access to their own savings and investments, and interest payments on those amounts. In the
case of borrowers, it includes access to loans for the creditworthy, at a competitive interest
rate.
A commercial bank is a type of financial institution that provides services such as accepting
deposits, making business loans, and offering basic investment products. Commercial bank
can also refer to a bank, corporations or large/middle-sized business – as opposed to
individual members of the public/small business – retail banking or merchant banks.

CREDIT
The word ‘credit’ comes from the Latin word ‘credere’, meaning ‘trust’. When sellers
transfer his wealth to a buyer who has agreed to pay later, there is a clear implication of trust
that the payment will be made at the agreed date. It bears a cost, the cost of the seller having
to borrow until the customers payment arrives. Ideally, that cost is the price but, as most
customers pay later than agreed, the extra unplanned cost erodes the planned net profit.

Page- 10
 RISK
Risk is defined as uncertain resulting in adverse outcome, adverse in relation to planned
objective or expectation. An important input to risk management is risk assessment. Many
public bodies such as advisory committees concerned with risk management. There are
mainly four types of risk they are follows:

 Market Risk
 Credit Risk
 Operational Risk
 Liquidity Risk

Risk analysis and allocation is central to the design of any project finance, risk management
is of paramount concern.

CREDIT RISK
Credit risk is defined as the potential that a bank borrower
or counterparty will fail to meet its obligations in
accordance with agreed terms, or in other words it is
defined as the risk that a firm’s customer and the parties to
which it has lent money will fail to make promised

Page | 11
payments is known as credit risk. Credit risk may be defined as, “the risk of default on the
part of the borrower”. The lender always faces the risk of the counter party not repaying the
loan or not making the due payment in time. This uncertainty of repayment by the borrower
is also known as default risk. Credit risk or default risk involves inability or unwillingness of
a customer or counterparty to meet commitments in relation to lending, trading, hedging,
settlement and other financial transactions.

When Credit Risk Arises

i)Borrower’ failure to repay advance of failure to meet credit agreed terms and conditions

ii)Expecting the future cash flow to pay the current obligation

iii)Unwillingness to meet the commitments lending, trading and other financial transactions

Page | 12
 CREDIT RISK MANAGEMENT
Credit risk management is the practice of mitigating losses by understanding the adequacy
of a bank's capital and loan loss reserves at any given time – a process that has long been a
challenge for financial institutions.

Credit risk management is the process of managing the capital assets of banks and the loss of
loan reserves. It is important to formulate and implement a structured credit policy and
related processes to manage credit risk. Strategies for credit risk management, including
credit policy development and risk monitoring, is the responsibility of business unit and
senior management, and the board of directors. Credit risk management is the number one
issue for the banking sector. Banks primarily generate their business by offering credit -
which goes beyond loans - to customers in a business or to private individuals based on some
factors. It is this lending that is their bread, because the only real major source of their
earning comes from credit. So, when a customer to whom a bank or a lending institution
lends credit reneges on the payment; the lender is at a major risk, because their growth plans
are based on the investments they make out of the interest earned on this credit. This makes a
credit risk management process central to a bank or a financial institution. A credit risk
management process is the method or process of building steps to insulate a lender from the
possible risks arising out of lending credit. Banks and financial institutions offer credit in a
number of ways, and hence, a credit risk management process has to cover all these.

AIMS OF CREDIT RISK MANAGEMENT

The main aim of Credit Risk Management is to minimize the risk and maximize a bank's risk-
adjusted rate of return by maintaining credit risk exposure within acceptable parameters.
Credit Risk is generally made up of: -
1. Transaction risk or default risk,
2. Portfolio risk. The portfolio risk in turn comprises intrinsic and concentration risk.
3. Settlement of Outstanding balances.
4. Improving Cash Flows.
5. Safeguarding Customer Risks.

Page | 13
 NEED OF CREDIT RISK MANAGEMENT
There are many existing tools and basic principles of management theory of credit risk
management in Indian Commercial Banks; there is always scope for improvement and
correction. Banks are investing a lot of funds in credit risk. Credit risk management is very
important to banks as it is an integral part of the loan process. It minimizes bank risk,
adjusted risk rate of return by maintaining credit risk exposure with view to shielding the
bank from the adverse effects of credit risk. So strong and depth study of credit risk
management give strengthening the risk control management in Indian commercial banks.
For most banks loans are the largest and most obvious source of credit risk. Loans and
advances constitute almost sixty percent of the assets side of the balance sheet of any bank.
As long as the borrower the interest and the principal on the due dates, a loan will be a
performing asset. The problem however arises once the payments are delayed or defaulted
and such situations are very common occurrences in any bank. Delays / defaults in payments
affect the cash forecast made by the bank and further result in a change in risk profile, as the
bank will now have to face an enhance interest rate risk, liquidity risk and credit risk. Banks
are generally facing credit risk in various financial instruments other than loans, which
include interbank transactions, trade financing, foreign exchange transactions, financial
futures, swaps, bonds, equities, options, and in the extension of commitments and guarantees,
and the settlement of transactions.

KEY ELEMENTS OF CREDIT RISK MANAGEMENT

 Establishing appropriate credit risk environment
 Operating under sound credit granting process
 Maintaining an appropriate credit administration, measurement & Monitoring
 Ensuring adequate control over credit risk
 Banks should have a credit risk strategy which in our case is communicated throughout the
organization through credit policy.

The credit risk of a bank’s portfolio depends on:-

1. External factors:
The external factors are the state of the economy, rates and interest rates, trade restrictions,

Page | 14
economic sanctions, wide swings in commodity/equity prices, foreign exchange rates and
interest rates, trade restrictions, economic sanctions, Government policies, etc.

2. Internal factors:
The internal factors are deficiencies in absence of prudential credit concentration limits, loan
policies/administration, inadequately defined lending limits for Loan Officers/Credit
Committees, deficiencies in appraisal of borrowers financial position, excessive dependence
on collaterals and inadequate risk pricing, absence of loan review mechanism and post
sanction surveillance, etc.

COMMITTEE FOR CREDIT RISK MANAGEMENT

The credit risk management process should be articulated in the bank’s Loan Policy, duly
approved by the Board. Each bank should constitute a high-level credit policy committee also
called Credit Risk Management Committee or Credit Control Committee etc to deal with
issues relating to credit policy and procedures and to analyze, manage and control credit risk
on aback wide basis. The Committee should be headed by the Chairman/CEO/ED, and
should comprise heads of Credit Department, Treasury, Credit Risk Management Department
(CRMD) and the Chief Economist. The Committee should, inter alia, formulate clear policies
on standards for presentation of credit proposals, financial covenants, rating standards and
benchmarks, delegation of credit approving powers, prudential limits on large credit
exposures, asset concentrations, standards for loan collateral, portfolio management, loan
review mechanism, risk concentrations, risk monitoring and evaluation, pricing of loans,
provisioning, regulatory/legal compliance, etc.

In the light of the objectives of the study, the study is divided into the components of
credit risk management as,
1) Non Performing Assets’ Position: In Private Sector Banks;
2) Credit risk management practices in commercial banks
3) Capital Adequacy Ratio of Private Sector Banks Basel II together with profiling
of concentration risk.

Page | 15
 NON PERFORMING ASSETS (NPA)
The three letters “NPA” strike terror in banking sector and business circle [Link] is a
short form of “Non-Performing Assets”. In banking, NPA are loans given to doubtful
customers who may or may not repay the loan on time. There are two types of assets viz.
performing and non-performing. Performing loans are standard loans on which both the

principle and interest are secured and their return is guaranteed. Non Performing assets means
the debt which is given by the Bank is unable to recover it is called NPA .It is a result of asset
Liability mismatch. A NPA account in the books of accounts is an asset as it indicates the
amount receivable from the Defaulters. It means if any bank gives loan to the customer if the
interest for that loan is not paid by the customer till 90 days then that account is called as
NPA account.

NPAs do not generate interest income for the banks, but the same time banks are required to
make provisions for such NPAs from their current profits.
• They erode current profits through provisioning requirements.
• They result in reduced interest income.
• They require higher provisioning requirements affecting profits and accretion to
capital.
• They limit recycling of funds, set in assets-liability mismatches, etc.
• Adverse impact on Capital Adequacy Ratio.
• ROE and ROA goes down because NPAs do not earn.
• Bank’s rating gets affected.
• Bank’s cost of raising funds goes up.
• Bad effect on Goodwill and equity value.
Page | 16
The RBI has also develop many schemes and tools to reduce the NPA assets by introducing
internal checks and control scheme, relationship mangers as stated by RBI who have
complete knowledge of the borrowers, credit rating system , and early warning system and so
on. The RBI has also tried to improve the securitization Act and SRFAESI Act and other acts

related to the pattern of the borrowings. To improve NPAs each bank should be motivated to
introduce their own precautionary steps. Before lending the banks must evaluate the feasible
financial and operational prospective results of the borrowing companies or customer. They
must evaluate the borrowing companies by keeping in considerations the overall impacts of
all the factors that influence the business. NPAs reflect the performance of banks. A high
level of NPAs suggests high probability of a large number of credit defaults that affect the
profitability and net worth of banks and also erodes the value of the asset. The NPA growth
involves the necessity of provisions, which reduces the overall profits and shareholders’
value.

CAPITAL ADEQUACY RATIO (CAR)

Capital adequacy is also known as capital to risk (weighted) assets ratio (CRAR) is the ratio
of bank’s capital to its risks. National Regulators track a bank’s CAR to ensure that it can
absorb a reasonable amount of loss and complies with statutory Capital Requirements

Page | 17
It is a measure of Bank’s Capital. It is expressed as a percentage of a bank’s risk weighted
credit exposure.

The enforcement of regulated levels of this ratio is intended to protect depositors and
promote stability and efficiency of financial systems around the world.

Two types of capital are measured: tier one capital, which can absorb losses without a bank
being required to cease trading, and Tier two Capital, which can absorb losses in the event of
winding up and so provides a lesser degree of protection to depositors.

Capital adequacy ratio (CAR) is a measure of the amount of a bank’s core capital expressed
as a percentage of its Risk Weighted Asset.

CAR = [Tier I Capital+ Tier II Capital] / [Risk weighted assets (RWA)]

CAR = Capital / Risk
TIER 1 CAPITAL = (paid up capital + statutory reserves +disclosed free reserves )-
(equity investments in subsidiary + intangible assets +current & brought- forward losses )
TIER 2 CAPITAL = A) Undisclosed Reserves + B) General Loss Reserves + C) Hybrid
Debt capital Instruments and subordinated debts
Where risk can either be weighted assets (a) or the respective national regulator’s
minimum total capital requirement. If using risk weighted assets,
CAR= (T1+T2)/a >=10%
The percent threshold varies from bank to bank (10% in this case, a common requirement
for regulators conforming to the Basel Accords) and is set by the national banking
regulator of different countries.
Two types of capital are measured: tier one capital (T1 above), which can absorb losses
without a bank being required to cease trading, and tier two capital (T2 above), which can
absorb losses in the event of a winding-up and so provides a lesser degree of protection to
depositors.

Ever since its introduction in 1988, capital adequacy ratio has become an important
benchmark to assess the financial strength and soundness of banks. The Bank has a process
for assessing its overall capital adequacy in relation to the Bank's risk profile and a strategy
for maintaining its capital levels. The process provides an assurance that the Bank has
adequate capital to support all risks inherent to its business and an appropriate capital buffer
based on its business profile.

Page | 18
 CONCENTRATION RISK
Credit Risk strategy results from a bank’s tolerance for risk as evidenced by how it selects
manages and diversifies risk. Banks are moving away from a buy-and-hold strategy with
respect to their loans. They are now syndicating risk, distributing the risk to enhance the
value of their portfolio. When originating a loan, banks need to evaluate how much
incremental risk they are adding, how much they need to compensated for taking that risk.
Many banks look at each credit inside than across the enterprise to understand the
incremental risk that the new loan is adding the loans. Portfolio theory applies equally to
collections of credit risks as to equity and other investments. The purpose of having a
portfolio of assets, instead of a single asset, is to reduce risk through diversification without
sacrificing the rate of return. An efficient portfolio achieves a specified rate of return the

minimum possible risk for specified level of risk of for the maximum possible rate of
return. Concentration risk is the aggregation of transaction and intrinsic risk within the
portfolio and may result from loans to one borrower or one industry, geographic area,
or line of business. Managing concentration limits will become a high priority for these
lenders in the future because of the lingering pain from lessons learned in commercial real
estate, energy etc.

CONCENTRATION RISK STRATEGY

The bank does have an opportunity to reduce their concentration in one line of business or
industry. Outstanding would have to be replaced with more lending focused on lower risk
lines of business and borrowers. Banks must constantly monitor the risk profile to determine
it future lending practices are consistent with the desired risk profile.
Selecting a Risk Strategy:
Using the risk profile as a frame of reference, management should select a risk strategy that
will be consistent with long-term objectives for portfolio quality and performance. The three
variable risk strategies in order of riskiness are: Conservative, Managed and Aggressive. The
selection of the appropriate strategy depends on a bank’s priorities and risk appetite. Most
often, the choice is not made as part of a formal process but evolves as the bank seeks its
desired risk posture through its lending practices. Consequently, few banks have a clear
picture of the risk profile that will emerge. A selection of risk strategy with specific
implementation plans provides a much better idea of the future risk profile.
The following guidance should help in understanding, which strategy best serves
Page | 19
managements intent;
(i) Conservative : Accepts relatively low levels of transaction, intrinsic and concentration
risk. The strategy normally supports a values-driven culture.
(ii) Managed: Accepts relatively low levels of risk in two categories but high levels in one
category. For example: a bank that takes conservative levels of concentration and transaction
risk but is more aggressive with intrinsic risk. The strategy normally promotes the immediate
performance culture.
(iii) Aggressive: Accepts relatively low levels of risk in one category, more aggressive risk in
two categories. An example would be a bank that closely manages transaction risk but
accepts higher levels of intrinsic and concentration risk. This strategy is normally employed
in a production driven culture.
Obviously, credit volatility rises as the levels and categories of risk are increased. The
aggressive strategy requires more careful management because it operates closer to the
danger zone. If risk in all three categories reaches high levels, the bank’ s credit volatility
becomes so great in a downturn that capital adequacy and survival could become real issues.

IMPACT OF CONCENTRATION RISK ON NPAS LEVEL

The concentration risk is an important component of the credit risk and is prompted by the
concentration of the credit portfolio in one or two occupations or industries. It is desirable to
achieve a diversified credit portfolio in order to minimize the occupation-wise concentration
risk as well as industry-wise concentration risk. It has been the experience of the commercial
banks that higher NPAs level is generally associated with high degree of concentration risk-
both occupation-wise and industry-wise.

Page | 20
 CHAPTER 3
CASE STUDY: PRESENTATION OF
DATA ANALYSIS AND FINDINGS
For the study Axis Bank Ltd. was selected along with Housing Development Finance
Corporation (HDFC) bank and was evaluated on the basis of various risk parameters like
NPA as a percentage of advances, credit risk management practices by the banks and CAR
(Basel II) together with concentration risk.

COMPANY PROFILE OF AXIS BANK LTD

Axis Bank is the third largest private sector bank in India. The Bank offers the entire
spectrum of financial services to customer segments covering Large and Mid-Corporates,
MSME, Agriculture and Retail Businesses.
Axis Bank is one of the first new generation private sector banks to have begun operations
in 1994. The Bank was promoted in 1993, jointly by Specified Undertaking of Unit Trust
of India (SUUTI) (then known as Unit Trust of India), Life Insurance Corporation of India
(LIC), General Insurance Corporation of India (GIC), National Insurance Company Ltd.,
The New India Assurance Company Ltd., The Oriental Insurance Company Ltd. and
United India Insurance Company Ltd. The share holding of Unit Trust of India was
subsequently transferred to SUUTI, an entity established in 2003.
With a balance sheet size of Rs. 6,91,330 crores as on 31st March 2018, Axis Bank has
achieved consistent growth and with a 5 year CAGR (2012-13 to 2017-18) of 15% in Total
Assets, 12% in Total Deposits, 17% in Total Advances.

Page | 21
 BRANCHES
With its 3,882 domestic branches (including extension counters) and 12,660 ATMs across the
country as on 30th September 2018, the network of Axis Bank spreads across 2,211 cities and
towns, enabling the Bank to reach out to a large cross-section of customers with an array of
products and services. The Bank also has ten overseas offices with branches at Singapore,
Hong Kong, Dubai (at the DIFC), Shanghai and Colombo; representative offices at Dubai,
Abu Dhabi, Dhaka and Sharjah and an overseas subsidiary at London, UK.

ATM SERVICES
Axis provides easy access to money to its customers through more than 12660 ATMs in
India. The Bank also facilitates the free transaction of money at the ATMs.

Page | 22
 SUBSIDIARIES

The bank at present has following 11 subsidiaries namely

 Axis Capital Ltd. (ACL)

 Axis Securities Ltd. (ASL)
 Axis private Equity Ltd.(APE)
 Axis Trustee Services Ltd (ATSL).
 Axis Asset Management Company Ltd. (AAMC)
 Axis Mutual Fund Trustee Ltd.(AMFT)
 Axis Finance Ltd
 [Link] Ltd.(ATL)
 Axis Bank UK Ltd. (ABUK)
 Freecharge Payment Technologies Private Limited (Freecharge)
 Accelyst Solutions Private Limited (Accelyst).

Page | 23
 PRODUCT & SERVICES

 Axis Bank Credit Card

 Axis Bank Debit Card
 Axis Bank Car Loan
 Axis Bank Education Loan
 Axis Bank Gold Loan
 Axis Bank Home Loan
 Axis Bank Personal Loan
 Axis Bank Savings Account
 Internet Banking
 Mobile Banking
 International Banking
 Safe Deposit Locker
 E-Pay
 Gift Cheques

Page | 24
 1. NPA POSITION
Level of non-performing assets as percentage of advances is shown below:

YEARS GROSS NPA RATIO NET NPA RATIO

(%) (%)
2013-14 1.22 0.40
2014-15 1.34 0.44
2015-16 1.67 0.70
2016-17 5.04 2.11
2017-18 6.77 3.40
AVG 3.21 1.41

NPA management of Axis Bank Ltd shows a bad trend and hence the bank has a bad credit
position over the years. NPA has being increased from 2013-14 , it shows an increasing
trend , from 2015-16 NPA ratio has a high rate of increment, hence showing negative
impact on profitability of bank. The reason of increment of NPA is one of the willful
defaulter may be said. Hence we can say that the amount of NPA fluctuates.

2. CREDIT RISK MANAGEMENT PRACTICES BY THE BANK

The key components of our risk management policy rely on the risk governance architecture,
comprehensive processes and internal control mechanisms based on approved policies and
guidelines
Our risk governance architecture focuses on the key areas of risk such as credit, market
(including liquidity) and operational risk and quantification of these risks, wherever possible,
for effective and continuous monitoring and control.
The risk management processes are guided by well-defined policies appropriate for various
risk categories, independent risk oversight and periodic monitoring through the sub-
committees of the Board of Directors.
The overall risk appetite and philosophy is set by the Board
The Committee of Directors, the Risk Management Committee and the Audit Committee of
the Board, which are sub committees of the Board, review various aspects of risk arising
from the businesses of the Bank. Various senior management committees operate within the
broad policy framework.
We have put in place risk management processes for products and / or changes in products
and processes:
The Product Management Committee (PMC) is responsible for reviewing and approving new
products to ensure that these are being introduced as per the laid down process, the risks
Page | 25
 associated with such products at various stages of their lifecycle have been duly identified
and that the requisite controls have been put in place.
The Change Management Committee (CMC) is responsible for reviewing and approving
change in any product and/or any process that might have a bearing on other products, the
customer base, or on the existing system in the place. The Business Continuity Policy frames
guidelines to develop a resilient management framework and approach towards business
continuity of our critical services /products during disaster while safeguarding the interest of
our clients, protecting the life of our employees and minimising losses to our assets.
The Emergency Response Plan (ERP) and Crisis Management Plan (CMP) are put in place
under the Business Continuity Management framework to minimise losses during an
emergency and strategise the recovery process after disaster.
We have rolled out ‘Sustainable Lending Policy & Procedures’, which in conjunction with
credit risk policies will enable us to assess environmental and social risks associated with
Project Finance activities of a certain size and actively engage with clients towards ensuring
adequate safeguards.

CREDIT RISK: MITIGATION MEASURES

Axis bank uses SAS to measure and mitigate risk

Page | 26
Expanding service offerings and a changing regulatory environment encouraged Axis Bank
Limited’s President and Chief Risk Officer Bapi Munshi to take a fresh look at the bank’s
risk management strategy. He found that an investment in people, processes and technology
would give the bank a significant improvement in its data quality, reporting and compliance.

Today, Axis Bank is India’s third-largest private sector bank. The organization has more
than 2,402 domestic branches (including extension counters) and nearly 13,000 ATMs
across the country, with overseas offices in Asia and the Middle East, to reach a large cross-
section of customers with an array of products and services.

Axis Bank is using SAS to improve Risk Management throughout the organization and make
the best possible business decisions. In this short question and answer session, he talks
through his challenges, discoveries and successes.

What was the impetus to build a better risk management framework?

Basel II compliance was one of the big drivers. To comply with the regulation, we had to
move to a standardized, advanced internal ratings-based approach (A-IRB). There was also a
big internal push. A risk management committee had been created at the board level, and it
lobbied for an advanced risk management framework and more sophisticated modeling
techniques.

3. CAPITAL ADEQUACY RATIO (CAR) TOGETHER WITH

PROFILING OF CONCENTRATION RISK
We examine the CAR of Axis Bank for the years 2013-14 to 2017-18 as per Basel norms II.

YEAR 2013-14 2014-15 2015-16 2016-17 2017-18

CAR 16.07 15.09 15.29 14.95 16.57

The above table and chart shows that Axis Bank have maintained CAR above the stipulated
requirement i.e., 9%. The given study revealed that Axis Bank is maintaining adequate level
of CAR. It shows that Axis Bank is in good position in maintaining higher capital adequacy
ratio. Axis Bank is able to meet the norms of capital adequacy ratio as per RBI guidelines.
Impact of concentration risk on NPAs level:
The highest level of NPAs in Axis Bank, i.e., 3.40% in the year 2017-18 corresponds to the
maximum index value in the same year. Similarly, the minimum level of NPAs in , [Link]
Bank, 0.40% in the year 2013-14 corresponds to the lowest index value in the same year.
Overall, the decrease in occupation-wise concentration risk is matched by the corresponding
decrease in NPAs level.

Page | 27
 COMPANY PROFILE OF HOUSING
DEVELOPMENT FINANCE CORPORATION
BANK (HDFC)

HDFC Bank (Housing Development Finance Corporation) is an Indian banking and financial
services company headquartered in Mumbai, Maharashtra. It has about 88,253 permanent
employees and has a presence in Bahrain, Hong Kong and Dubai. HDFC Bank is the largest
private sector bank in India as measured by assets. It was ranked 69th in 2016 BrandZ Top
100 Most Valuable Global Brands. HDFC Bank was incorporated in August 1994. As of
October 9,2018 the Bank’s distribution network was at 4805 branches and 12260 ATM’ s
across 2657 cities and [Link] Banks also installed 4.30 lakhs POS terminals and issued
235.7 lakhs
Debit cards and 85.4 lakhs credit cards in F.Y 2017.
The HDFC was amongst the first to receive as ‘in principle’ approval from the Reserve Bank
Of India to set up a bank in the private sector, as part of RBI’s liberalisation of the Indian
Banking Industry in 1994. The bank was incorporated in August 1994 in the name of ‘HDFC
Bank Limited’, with its registered office in
Mumbai, India. HDFC Bank commenced
operations as a Scheduled Commercial
Bank in January 1995.

HDFC Bank’s mission is to be a World

Class Indian Bank. The objective is to build
sound customer franchises across distinct
businesses so as to be the preferred provider of banking services for target retail and
wholesale customer segments, and to achieve healthy growth in profitability, consistent with
the bank’s risk appetite. The bank is committed to maintain the highest level of ethical
Page | 28
standards, professional integrity, corporate governance and regulatory compliance. HDFC
Bank’s business philosophy is based on five core values: Operational Excellence, Customer
Focus, Product Leadership, People and Sustainability.

At present, HDFC Bank boasts of an authorized capital of Rs 650 crore , of this the paid-up
amount is Rs 520.8 crore . In terms of equity share, the HDFC Group holds 20.86%. The
bank has about 548942 shareholders. Its shares find a listing on the Bombay Stock Exchange
limited

and National Stock Exchange, while its American Depository Shares are listed on the New
York Stock Exchange (NYSE), under the symbol 'HDB'.
HDFC Bank offers a wide range of commercial and transactional banking services and
treasury products to wholesale and retail customers.

ATM SERVICES
HDFC bank provides easy access to money to its customers through more than 12260
ATMs in India. With a wide spread network of ATMs across India, enjoy the following
benefits at your convenience:
 24 hour access to cash.
 Personalised cash withdrawals
 Pay Utility Bills
 View account statements and mini-statements
 Make HDFC Bank Credit Card payments
 Transfer funds between accounts linked to the same ATM / Debit Card
 Mobile Banking registration for other Bank customer

Page | 29
 PRODUCTS & SERVICES

Wholesale Banking Services – The Bank's target market ranges from large, blue–chip
manufacturing companies in the Indian corporate to small & mid–sized corporates and agri–
based businesses.
Retail Banking Services – The objective of the Retail Bank is to provide its target market
customers a full range of financial products and banking services, giving the customer a one–
stop window for all his/her banking requirements.
Treasury – Within this business, the bank has three main product areas – Foreign Exchange
and Derivatives, Local Currency Money Market & Debt Securities, and Equities. The
Treasury business is responsible for managing the returns and market risk on this investment
portfolio.
HDFC Securities (HSL) and HDB Financial Services (HDBFSL) are its subsidiaries.

Page | 30
 Services offered by the company:

Personal Banking
 Accounts & Deposits
 Loans
 Cards
 Forex
 Investments & Insurance
NRI Banking
 Accounts & Deposits
 Remittances
 Investments & Insurance Loans Payment Services
Wholesale Banking
 Corporate
 Small & Medium Enterprises
 Financial Institutions & Trusts
 Government Sector

1. NPA POSITION
Level of non-performing assets as percentage of advances is shown below:

YEARS GROSS NPA RATIO NET NPA RATIO

(%) (%)
2013-14 1.00 0.20
2014-15 0.90 0.30
2015-16 0.94 0.82
2016-17 1.05 0.33
2017-18 1.30 0.40

AVG 1.038 0.41

NPA management of HDFC Bank shows a bad trend and hence the bank has a bad credit
position over the years. NPA has being increased from 2014-15 to 2015-16 so it is negative
impact on profitability of bank. But it shows decreasing trend from 2015-16 to 2016-17 hence
showing positive impact on profitability of bank. Hence we can say that the amount of NPA
does not fluctuate. The growth in NPA involves the necessity of provisions, which reduces
the overall profits and shareholders’ value.

Page | 31
 2. CREDIT RISK MANAGEMENT PRACTICES BY THE BANK

Integral to its business, the Bank takes on various types of risk, the most important of which
are credit risk, market risk, liquidity risk and operational risk. The identification,
measurement, monitoring and management of risks remain a key focus area for the Bank.
Sound risk management and balancing risk-reward trade-offs are critical to the Bank’s
success. Business and revenue growth are therefore to be weighed in the context of the risks
implicit in the Bank’s business strategy. The Board of Directors of HDFC Bank endorses the
risk strategy and approves the risk policies. The Risk Policy and Monitoring Committee of
the Board supervise implementation of the risk strategy. It guides the development of
policies, procedures and systems for managing risk. The committee periodically reviews risk
level and direction, portfolio composition, status of impaired credits as well as limits for
treasury operations.
To manage credit risk, the Bank has a comprehensive centralized risk management
function, independent from the operations and business units of the Bank. Distinct
policies, processes and systems are in place for the retail and wholesale lending businesses.
In the retail loan businesses, the credit cycle is managed through appropriate front-end credit,
operational and collection processes. For each product, programmes defining customer
segments, underwriting standards and security structure are specified to ensure consistency of
credit buying patterns. Given the granularity of individual exposures, retail credit risk is
monitored largely on a portfolio basis, across various products and customer segments.
For wholesale credit exposures, management of credit risk is done through target market
definition, appropriate credit approval processes, ongoing post-disbursement monitoring
and remedial management procedures. HDFC Bank did not witness any significant
deterioration in overall asset quality and continues to maintain the highest standards of
governance in respect of recognition and provisioning of non-performing loans. Highest
standards of governance in respect of recognition and provisioning of non-performing loans.
During the year ended March 31, 2018, Bank’s ratio of gross non-performing assets (NPAs)
to gross advances was 1.30 per cent. Net non-performing assets (gross non-performing assets
less specific loan loss provisions) were 0.40 per cent of net advances as of March 31, 2018b.
The specific loan loss provisions that the Bank has made for its non-performing assets
continue to be more conservative than the regulatory requirements. In addition, the Bank has
made general provisions for standard assets which are

Page | 32
as per the regulatory prescription. A dedicated team within the risk management function is
responsible for assessment, monitoring and reporting of operational risk exposures across the
Bank. Key Operational Risk Indicators are employed to alert the Bank on impending
problems in a timely manner to ensure risk mitigation actions. Market Risk in the trading
portfolio of our bank has been adequately managed through a well-defined Board approved
market risk policy and stringent trading risk limits such as positions limits, gap limits, tenor
restrictions, sensitivity limits viz. PV01, Modified Duration and Option Greeks. The Bank
also has an approved investment policy which is adhered to while investing or trading.
In accordance with RBI’s guidelines, the Bank is currently on the Standardized Approach for
Credit Risk, the Basic Indicator Approach for Operational Risk and the Standardized
Approach for Market Risk. Parallely, the Bank is progressing with its initiatives for migrating
to the advanced approaches for these risks. The framework of the advanced approaches is in
harmony with the Bank’s objective of adopting best practices in risk management. The Bank
has a structured management framework in the Internal Capital Adequacy Assessment
Process (ICAAP) for the identification and evaluation of the significance of all risks that the
bank faces, which may have a material adverse impact on its business and financial position.
The changes in the levels of various risks and the changes in the on and off balance sheet
positions of the Bank are assessed under assumed stress scenarios and sensitivity factors.
Typically, these relate, inter alia, to the impact on the Bank’s profitability and capital
adequacy.

3. CAPITAL ADEQUACY RATIO (CAR) TOGETHER WITH

PROFILING OF CONCENTRATION RISK

We examine the CAR of HDFC Bank for the years 2013-14 to 2017-18 as per Basel
norms II.

YEAR 2013-14 2014-15 2015-16 2016-17 2017-18

CAR 16.10 16.80 15.5 14.6 14.82

The above table shows that HDFC Bank has maintained CAR above the stipulated
requirement i.e., 9%. The given study revealed that HDFC Bank is maintaining high level of
CAR. It shows that HDFC Bank is in good position in maintaining higher capital adequacy
ratio. HDFC Bank is able to meet the norms of capital adequacy ratio as per RBI guidelines.

Rise in CAR shows a good sign for the investors and depositors. Increase in CAR in 2014-15
Page | 33
shows efficient management of credit risk as per Basel norms.
Impact of concentration risk on NPAs level:
The highest level of NPAs in HDFC, i.e., 0.30% in the year 2014-15 corresponds to the
maximum index value in the same year. Similarly, the minimum level of NPAs in HDFC,
i.e., 0.20% in the year 2011-14 and 2015-16 corresponds to the lowest index value in the
same year. Overall, the decrease in occupation-wise concentration risk is matched by the
corresponding decrease in NPAs level.

Page | 34
 3.3 COMPARATIVE STUDY

The trends in NPAs level, the response of CAR under Basel Accord II and profiling and
analysis of concentration risk were examined and compared between Axis Bank and HDFC
Bank in this study.

Basis AXIS BANK HDFC BANK

NPA position i) Bad trend and hence the bank i) Bad trend and hence the bank
has a bad credit position. has a bad credit position.
ii) The amount of NPA fluctuates ii)The amount of NPA does not
over the past years. fluctuate over the past years.
iii)Higher NPA than HDFC. iii)Lesser NPA than
Axis Bank.
CAR High level. Efficient High level. Efficient management
management of credit risk. of credit risk.

The study shows that there is a significant relationship between bank performance (in terms
of return on assets) and credit risk management (in terms of loan performance). Better credit
risk management results in better bank performance. The extent of NPA is comparatively
higher in Axis Bank. To improve the efficiency and profitability, the NPAs have to be
scheduled. Various steps have been taken by government to reduce the NPAs.
CAR is higher in case of both the banks . On the basis of the above findings we can say that
the performance of HDFC Bank is much better than Axis Bank. The banks those who are
facing low competitiveness on credit risk management and positive changes in productivity
should improve their credit risk management to maintain high productivity. However it needs
to build up its capital adequacy ratio and control its nonperforming assets. The poor credit
risk management affects bank failures in India. Therefore effective credit risk management is
important in banks and allows them to improve their performance and prevent bank distress.

Page | 35
 CHAPTER 4: CONCLUSION
SUGGESTIONS
The project undertaken has helped a lot in gaining knowledge of the “Credit Risk
Management” in commercial bank with special reference to Axis Bank and HDFC
Bank. Credit Policy and Credit Risk Policy of the Bank has become very vital in the smooth
operation of the banking activities. Credit Policy of the Bank provides the framework to
determine (a) whether or not to extend credit to a customer and (b) how much credit to
extend. The Project work has certainly enriched the knowledge about the effective
management of “Credit Risk” in banking sector.
“Credit Risk Management” is a vast subject and it is very difficult to cover all the aspects
within a short period. However, every effort has been made to cover most of the important
aspects, which have a direct bearing on improving the financial performance of Banking
Industry.
Credit risk in Axis Bank is higher than that of HDFC Bank.

3.5

2.5
RATIO IN PERCENT

2 Axis Bank
HDFC Bank

1.5 Column1

0.5

0
2013-14 2014-15 2015-16 2016-17 2017-18
YEARS

Page | 36
The extent of NPA is comparatively higher in Axis Bank . To improve the efficiency and
profitability, the NPAs have to be scheduled. Various steps have been taken by government
to reduce the NPAs. The NPAs level of our banks is still high as compared to the
international standards. It is highly impossible to have zero percentage NPAs. But at least
Indian banks can try competing with foreign banks to maintain international standard. One

cannot ignore the fact that a part of the reduction in NPAs is due to the writing off bad loans
by the banks. The Indian banks should take care to ensure that they give loans to creditworthy
customers as prevention is always better than cure.

Putting Basel II in place is going to be far more challenging than Basel I. The adoption of
Basel II will boost good risk management practices and good corporate governance in banks.

17

16.5

16
R
A 15.5
T Axis Bank
I 15 HDFC Bank
O
Column1
14.5

14

13.5
2013-14 2014-15 2015-16 2016-17 2017-18
YEARS

SUGGESTIONS
The RBI has laid down the policy but it has to make all the banks to implement in a
systematic manner.
The following are the major suggestions for the study:

 The level of NPA in Axis Bank is high when compared to HDFC Bank, therefore
proper management is required to reduce the percentage of NPA. Existing NPAs
should be taken seriously and banks should set up speedy recovery cells and task
forces to deal with them.
Page | 37
 Banks should take legal measures against willful defaulters to recovery of debts.
Though, the legal measures are lengthy, complex and expensive, they are the only
way to recover the debts from them.
 Regular contact with borrowers and regular monitoring of the accounts is very
necessary.
 The bank employees have to take up still more initiatives to follow the credit policies
during lending process.
 Both the banks should keep on revising its Credit Policy which will help its effort to
correct the course of the policies.
 RBI Guidelines on Basel III Capital Regulations have been implemented in Axis
Bank and HDFC Bank.
 HDFC Bank should structure a credit management framework in the capital adequacy
ratio and concentration risk areas.

 Banks has to grant the loans for the establishment of business at a moderate rate of interest.
Because of this, the people can repay the loan amount to bank regularly and promptly.

Page | 38
 BIBLIOGRAPHY
Name of websites used:
 [Link]
 [Link]
 [Link]
 [Link]
 [Link]

Reports:
 Annual Report of Axis Bank Ltd (2017-18)
 Annual Report of HDFC Bank (2017-18)

Page | 39