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Risk Managment in Commercial Banks

Risk Managment in Commercial Banks

“RISK MANAGEMENT IN COMMERCIAL BANKS” (A CASE STUDY OF PUBLIC AND PRIVATE SECTOR BANKS) – ABSTRACT ONLY Prof. Rekha Arunkumar Faculty (Finance), MBA Programme ABSTRACT: “Banks are in the business of managing risk, not avoiding it……… ……… …….. ” Risk 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. 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 public sector banks. “……… bank’s success lies in its ability to assume and ……… ……A aggregate risk within tolerable and manageable limits”. First Author; Prof. Rekha Arunkumar Ph. D. , from University of Mysore (awaiting result by September ’ 05), PGDCA, M. Com. , B.

B. M. , Faculty in Finance (10 years of experience), MBA Programme, Bapuji Institute of Engineering & Technology (affiliated to Visveswaraya Technical University) Davangere – 4. Karnataka Second Author; Dr. G. Kotreshwar Ph. D. , M. Com. , ICWAI. , Professor of Commerce (25 years of experience) University of Mysore, Manasagangotri Mysore – 6. 1 COMPLETE PAPER RISK MANAGEMENT IN COMMERCIAL BANKS (A CASE STUDY OF PUBLIC AND PRIVATE SECTOR BANKS) “Banks are in the business of managing risk, not avoiding it…… … …… .. ” …. … 1. PREAMBLE: 1. Risk Management: 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. 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. Competition from within and outside the country has intensified. This has resulted in multiplicity of risks both in number and volume resulting in volatile markets. A precursor to successful management of credit risk is a clear understanding about risks involved in lending, quantifications of risks within each item of the portfolio and reaching a conclusion as to the likely composite credit risk profile of a bank.

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. 1. 2 Significance of the study: The fundamental business of lending has brought trouble to individual banks and entire banking system. It is, therefore, imperative that the banks are adequate systems for credit assessment of individual projects and evaluating risk associated therewith as well as the industry as a whole.

Generally, Banks in India evaluate a proposal through the traditional tools of project financing, computing maximum permissible limits, assessing management capabilities and prescribing a ceiling for an industry exposure. As banks move in to a new high powered world of financial operations and trading, with new risks, the need is felt for more sophisticated and versatile instruments for risk assessment, monitoring and controlling risk exposures.

It is, therefore, time that banks managements equip themselves fully to grapple with the demands of creating tools and systems capable of assessing, monitoring and controlling risk exposures in a more scientific manner. Credit Risk, that is, default by the borrower to repay lent money, remains the most important risk to manage till date. The predominance of credit risk is even reflected in the composition of economic capital, which banks are required to keep a side for protection against various risks.

According to one estimate, Credit Risk takes about 70% and 30% remaining is shared between the other two primary risks, namely Market risk (change in the market price and operational risk i. e. , failure of internal controls, etc. ). Quality borrowers (Tier-I borrowers) were able to access the capital market directly without going through the debt route. Hence, the credit route is now more open to lesser mortals (Tier-II borrowers). With margin levels going down, banks are unable to absorb the level of loan losses. There has been very little effort to develop a method where risks could be identified and measured.

Most of the banks have developed internal rating systems for their borrowers, but there has 2 been very little study to compare such ratings with the final asset classification and also to fine-tune the rating system. Also risks peculiar to each industry are not identified and evaluated openly. Data collection is regular driven. Data on industry-wise, region-wise lending, industry-wise rehabilitated loan, can provide an insight into the future course to be adopted. Better and effective strategic credit risk management process is a better way to manage portfolio credit risk.

The process provides a framework to ensure consistency between strategy and implementation that reduces potential volatility in earnings and maximize shareholders wealth. Beyond and over riding the specifics of risk modeling issues, the challenge is moving towards improved credit risk management lies in addressing banks’ readiness and openness to accept change to a more transparent system, to rapidly metamorphosing markets, to more effective and efficient ways of operating and to meet market requirements and increased answerability to take holders. There is a need for Strategic approach to Credit Risk Management (CRM) in Indian Commercial Banks, particularly in view of; (1) (2) (3) (4) Higher NPAs level in comparison with global benchmark RBI’ s stipulation about dividend distribution by the banks Revised NPAs level and CAR norms New Basel Capital Accord (Basel –II) revolution According to the study conducted by ICRA Limited, the gross NPAs as a proportion of total advances for Indian Banks was 9. 40 percent for financial year 2003 and 10. 60 percent for financial year 20021.

The value of the gross NPAs as ratio for financial year 2003 for the global benchmark banks was as low as 2. 26 percent. Net NPAs as a proportion of net advances of Indian banks was 4. 33 percent for financial year 2003 and 5. 39 percent for financial year 2002. As against this, the value of net NPAs ratio for financial year 2003 for the global benchmark banks was 0. 37 percent. Further, it was found that, the total advances of the banking sector to the commercial and agricultural sectors stood at Rs. 8,00,000 crore. Of this, Rs. 75,000 crore, or 9. 40 percent of the total advances is bad and doubtful debt.

The size of the NPAs portfolio in the Indian banking industry is close to Rs. 1,00,000 crore which is around 6 percent of India’ s GDP2. The RBI has recently announced that the banks should not pay dividends at more than 33. 33 percent of their net profit. It has further provided that the banks having NPA levels less than 3 percent and having Capital Adequacy Reserve Ratio (CARR) of more than 11 percent for the last two years will only be eligible to declare dividends without the permission from RBI3. This step is for strengthening the balance sheet of all the banks in the country.

The banks should provide sufficient provisions from their profits so as to bring down the net NPAs level to 3 percent of their advances. NPAs are the primary indicators of credit risk. Capital Adequacy Ratio (CAR) is another measure of credit risk. CAR is supposed to act as a buffer against credit loss, which is ICRA Limited, (2004), “Report 1 : Global Benchmarking”, IBA Bulletin, special issue, January 2004, pp. 30 2 ICRA Limited, (2004), Op. cit. pp. 36 3 Parasmal Jain, (2004), “Basel II Accord : Issues and Suggestions”, IBA Bulletin, June 2004, pp. -10. 1 3 set at 9 percent under the RBI stipulation4. With a view to moving towards International best practices and to ensure greater transparency, it has been decided to adopt the ’ 90 days’ ‘ over due’ norm for identification of NPAs from the year ending March 31, 2004. The New Basel Capital Accord is scheduled to be implemented by the end of 2006. All the banking supervisors may have to join the Accord. Even the domestic banks in addition to internationally active banks may have to conform to the Accord principles in the coming decades.

The RBI as the regulator of the Indian banking industry has shown keen interest in strengthening the system, and the individual banks have responded in good measure in orienting themselves towards global best practices. 1. 3 Credit Risk Management(CRM) dynamics: The world over, credit risk has proved to be the most critical of all risks faced by a banking institution. A study of bank failures in New England found that, of the 62 banks in existence before 1984, which failed from 1989 to 1992, in 58 cases it was observed that loans and advances were not being repaid in time 5 .

This signifies the role of credit risk management and therefore it forms the basis of present research analysis. Researchers and risk management practitioners have constantly tried to improve on current techniques and in recent years, enormous strides have been made in the art and science of credit risk measurement and management6. Much of the progress in this field has resulted form the limitations of traditional approaches to credit risk management and with the current Bank for International Settlement’ (BIS) regulatory model.

Even in banks which regularly fine-tune credit policies and streamline credit processes, it is a real challenge for credit risk managers to correctly identify pockets of risk concentration, quantify extent of risk carried, identify opportunities for diversification and balance the risk-return trade-off in their credit portfolio. The two distinct dimensions of credit risk management can readily be identified as preventive measures and curative measures. Preventive measures include risk assessment, risk measurement and risk pricing, early warning system to pick early signals of future defaults and better credit portfolio diversification.

The curative measures, on the other hand, aim at minimizing post-sanction loan losses through such steps as securitization, derivative trading, risk sharing, legal enforcement etc. It is widely believed that an ounce of prevention is worth a pound of cure. Therefore, the focus of the study is on preventive measures in tune with the norms prescribed by New Basel Capital Accord. The study also intends to throw some light on the two most significant developments impacting the fundamentals of credit risk management practices of banking industry – New Basel Capital Accord and Risk Based Supervision.

Apart from highlighting the salient features of credit risk management prescriptions under New Basel Accord, attempts are made to codify the response of Indian banking professionals to various proposals under the accord. Similarly, RBI proposed Risk Based Supervision (RBS) is examined to capture its direction and implementation problems. 4 Information Bureau, (2004), The Economic Times, 4th August 2004, pp. 7 Prahlad Sabrani, “ Risk Management by Banks in India”, IBA Bulletin, July 2002. Ravi Mohan R. , “Credit Risk Management in Bank”, The Chartered Accountant, March 2001. 5 6 4 1. Objectives of the research: The present study attempts to achieve the following objectives: 1. 2. 3. 4. 5. 6. 7. 8. Analysis of trends in Non-Performing Assets of commercial banks in India. Analysis of trends in credit portfolio diversification during the post-liberalization period. Studying relationship between diversified portfolio and non-performing assets of public sector banks vis-a-vis private sector banks. Profiling and analysis of concentration risk in public sector banks vis-a-vis private sector banks. Evaluating the credit risk management practices in public sector banks vis-a-vis private sector banks.

Reviewing the New Basel Capital Accord norms and their likely impact on credit risk management practices of Indian commercial banks. Examining the role of Risk Based Supervision in strengthening credit risk management practices of Indian commercials banks. Suggesting a broad outline of measures for improving credit risk management practices of Indian commercial banks. 2. THE PROBLEM OF NON-PERFORMING ASSETS 2. 1 Introduction: Liberlization and Globalization ushered in by the government in the early 90s have thrown open many challenges to the Indian financial sector.

Banks, amongst other things, were set on a path to align their accounting standards with the International standards and by global players. They had to have a fresh look into their balance sheet and analyze them critically in the light of the prudential norms of income recognition and provisioning that were stipulated by the regulator, based on Narasimhan Committee recommendations. Loans and Advances as assets of the bank play an important part in gross earnings and net profits of banks. The share of advances in the total assets of the banks forms more than 60 percent7 and as such it is the backbone of banking structure.

Bank lending is very crucial for it make possible the financing of agricultural, industrial and commercial activities of the country. The strength and soundness of the banking system primarily depends upon health of the advances. In other words, improvement in assets quality is fundamental to strengthening working of banks and improving their financial viability. Most domestic public sector banks in the country are expected to completely wipeout their outstanding NPAs between 2006 and 20088. NPAs are an inevitable burden on the banking industry.

Hence the success of a bank depends upon methods of managing NPAs and keeping them within tolerance level, of late, several institutional mechanisms have been developed in India to deal with NPAs and 7 Kashinath B. G. , (1998) “Reduction of NPAs – legal bottlenecks and amendments suggested”, Conference paper, BECON 98, pp. 137-140 8 Dalbir Singh, (2003), Seminar on “Risk Management in Indian banks’ , Business Line, December 4, 2003, pp. 10 5 there has also been tightening of legal provisions. Perhaps more importantly, effective management of NPAs requires an appropriate internal checks and balances system in a bank9.

In this background, this chapter is designed to give an outline of trends in NPAs in Indian banking industry vis-a-vis other countries and highlight the importance of NPAs management. NPA is an advance where payment of interest or repayment of installment of principal (in case of Term loans) or both remains unpaid for a period of 90 days 10 (new norms with effect from 31 st March, 2004) or more. 2. 2 Trends in NPA levels: The study has been carried out using the RBI reports on banks (Annual Financial Reports), information / data obtained from the banks and discussion with bank officials.

For assessing comparative position on CARR, NPAs and their recoveries in all scheduled banks viz. , Public sector Banks, Private sector banks were perused to identify the level of NPAs. The Table 2. 1 lists the level of non-performing assets as percentage of advances of pubic sector banks and private sector banks. An analysis of NPAs of different banks groups indicates, the public sector banks hold larger share of NPAs during the year 1993-94 and gradually decreased to 9. 36 percent in the year 2003. On the contrary, the private sector banks show fluctuating trend with starting at 6. 3 percent in the year 1994-95 rising upto 10. 44 percent in year 1998 and decreased to 8. 08 percent in the year 2002-03. Table 2. 1 Gross and Net Non-Performing Assets (NPAs) as percentage of Advances of Public Sector Banks and Private Sector Banks : 1994 – 2003 Year / Banks Public Sector Banks Gross NPAs 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 24. 80 19. 50 18. 00 17. 84 16. 02 15. 89 13. 98 12. 37 11. 09 9. 36 Net NPAs 14. 5 10. 7 8. 9 9. 18 8. 15 8. 13 7. 42 6. 74 5. 82 4. 54 Private Sector Banks Gross NPAs 6. 23 6. 47 7. 45 8. 49 8. 7 10. 44 8. 17 8. 37 9. 64 8. 08 Net NPAs 3. 36 4. 10 4. 34 5. 37 5. 26 6. 92 5. 14 5. 44 5. 73 4. 95 9 Pricewaterhouse Coopers, (2004), “Management of Non Performing Assets by Indian Banks”, IBA Bulletin, Special Issue, January, 2004, pp. 61. Tamal Bandyopadhya, (2002), “Debt Wish for ARCs? ”, Business Standard, July 4, 2002. 10 6 Source : Report on Trend and Progress of Banking in India from 1994-2003. Reserve Bank of India. Graph 2. 1 : Gross NPAs as percentage of advances of Public and Private Sector Banks : 1994-2003 30. 00 25. 00 20. 00 (in %) 15. 00 10. 00 5. 00 0. 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Year Public Sector Banks Private Sector Banks 2. 3 International comparison of NPA levles: Comparison of the problem loan levels in the Indian banking system vis-a-vis those in other countries, particularly those in developed economies, is often made, more so in the context of the opening up of our financial sector. The data in respect of NPAs level of banking system available for countries like USA, Japan, Hong Kong, Korea, Taiwan & Malaysia reveal that it ranged from 1 percent to 8. 1 percent during 1993-94, 0. 9 percent to 5. percent during 1994-95, 0. 6 to 3. 0 percent during 2000 as against 23. 6 percent, 19. 5 percent and 14 percent respectively for Indian banks during this year 11. The NPAs level in Japan, for example is at 3. 3 percent of total loans, it is 3. 1 percent in Hong Kong, 7. 6 percent in Thailand, 11. 2 percent in Indonesia, and 8. 2 percent in Malaysia during 94-95, whereas the corresponding figure for India is very high at 19. 5 percent 12. According to Ernst & Young13, the actual level of NPAs of banks in India is around $40 billion, much higher than the government own estimates of $16. billion 14 . This difference is largely due to the discrepancy in the accounting of NPAs followed by India and rest of the world. According to Ernst & Young, the accounting norms in India are less stringent than those of the developed economies. Further more, Indian banks also have the tendency to extend past due loans. Considering India’ s GDP of around $ 470 billion, NPAs were around 8 percent of the GDP which was better than many Asian economic power houses. In China, NPAs were around 45 percent of GDP, while equilent figure for Japan was around 11 ww. SomeAspectandIssuesRelatingToNPAsInCommercialBanks. htm, (2001), pp. 2 Katuri Nageswar Rao, (2000), “NPAs Ground realities”, Chartered Financial Analysts, April 2000, pp. 46. 13 Banking Bureau, (2003), “India and Non-Performing Assets”, IBA Bulletin, January 2003, pp. 36 14 Banking Bureau, (2003), Op. cit. pp. 36 12 7 28 percent and the level of NPAs for Malaysia was around 42 percent. On an aggregate level. Asia’ s NPAs have increased from $ 1. 5 trillion in 2000 to $ 2 trillion in 2002- an increase of 33 percent.

This accounts for 29 percent of the Asian’ s countries total GDP. As per the E & Y’ s Asian NPL report for 2002, the global slowdown, government heisting and inconsistency in dealing with the NPAs problem and lender complacency have caused the region’ s NPAs problem to increase. However looking from a positive angle, India’ s ordinance, on Securitization and Reconstruction of Financial Assets and Enforcements of Security Interest is a step in the right direction. This ordinance will help banks to concentrate on good business by eliminating the business of bad loans15. . 4 Reasons for NPAs in India: An internal study conducted by RBI 16 shows that in the order of prominence, the following factors contribute to NPAs. Internal Factors: * diversion of funds for – expansion / diversification / modernization – taking up new projects – helping promoting associate concerns * time / cost overrun during the project implementation stage * business (product, marketing etc) failure * inefficiency in management * slackness in Credit Management and monitoring * inappropriate technology / technical problems * lack of co-ordination among lenders.

External Factors: * recession * input / power shortage * price escalation * exchange rate fluctuation * accident and natural calamities etc. * changes in government policies in excise / import duties, pollution control orders etc. 2. 5 Conclusion: Asset quality is one of the important parameters based on which the performance of a bank is assessed by the regulation and the public. Some of the areas where the Indian banks identified to for better NPA management like credit risk management, special investigative audit, negotiated settlement, internal checks & systems for early indication of NPAs etc. 3. MANAGEMENT OF CREDIT RISK – A PROACTIVE APPROACH 3. 1 Introduction: Risk is the potentiality that both the expected and unexpected events may have an adverse impact on the bank’ s capital or earnings. The expected loss is to be borne by the borrower and hence is taken care by adequately pricing the products through risk premium 15 16 Banking Bureau, (2003), Op. cit. pp. 36 Pricewaterhouse Coopers, (2004), Op. cit. pp. 67-68 8 and reserves created out of the earnings. It is the amount expected to be lost due to changes in credit quality resulting in default.

Whereas, the unexpected loss on account of individual exposure and the whole portfolio is entirely is to be borne by the bank itself and hence is to be taken care by the capital. Banks are confronted with various kinds of financial and non-financial risks viz. , credit, market, interest rate, foreign exchange, liquidity, equity price, legal, regulatory, reputation, operational etc. These risks are highly interdependent and events that affect one area of risk can have ramifications for a range of other risk categories.

Thus, top management of banks should attach considerable importance to improve the ability to identify measure, monitor and control the overall level of risks undertaken. 3. 2 Credit Risk: The major risk banks face is credit risk. It follows that the major risk banks must measure, manage and accept is credit or default risk. It is the uncertainty associated with borrower’ s loan repayment. For most people in commercial banking, lending represents the heart of the Industry. Loans dominate asset holding at most banks and generate the largest share of operating income.

Loans are the dominant asset in most banks’ portfolios, comprising from 50 to 70 percent of total assets17. Credit Analysis assigns some probability to the likelihood of default based on quantitative and qualitative factors. Some risks can be measured with historical and projected financial data. Other risks, such as those associated with the borrower’ s character & willingness to repay a loan, are not directly measurable. The bank ultimately compares these risks with the potential benefits when deciding whether or not to approve a loan. . 3 Components of credit risk: The credit risk in a bank’ s loan portfolio consists of three components18; (1) Transaction Risk (2) Intrinsic Risk (3) Concentration Risk (1) Transaction Risk: Transaction risk focuses on the volatility in credit quality and earnings resulting from how the bank underwrites individual loan transactions. Transaction risk has three dimensions: selection, underwriting and operations. (2) Intrinsic Risk: It focuses on the risk inherent in certain lines of business and loans to certain industries.

Commercial real estate construction loans are inherently more risky than consumer loans. Intrinsic risk addresses the susceptibility to historic, predictive, and lending risk factors that characterize an industry or line of business. Historic elements address prior performance and stability of the industry or line of business. Predictive elements focus on characteristics that are subject to change and could positively or negatively affect future performance. Lending elements focus on how the collateral and terms offered in the industry or line of business affect the ntrinsic risk. (3) Concentration Risk: 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 lines of business. Bank must define acceptable portfolio concentrations for each of these aggregations. Portfolio diversify achieves an important 17 18 Timothy W. Koch, (1998), “Overview of credit policy and loan characterstics”, Bank Management, 3rd Edition, The Dryden Press, Harcourt Brace College Publishers, pp. 629-630. John E. Mckinley & John R.

Barrickman, (1994), “Strategic Credit Risk ManagementIntroduction”, Robert Morris Associates, , pp. 4-5. 9 objective. It allows a bank to avoid disaster. Concentrations within a portfolio will determine the magnitude of problems a bank will experience under adverse conditions. 3. 4 Strategic credit risk management: The post liberalization years have seen significant pressure on banks in India, some of them repeatedly showing signs of distress. One of the primary reasons for this has been the lack of effective and strategic credit risk management system.

Risk selection, as part of a comprehensive risk strategy that grows and supports from corporate priorities, is the foundation for future risk management. This is the underlying premise of an integrated proactive approach to risk management and entails a four step process19 : Step 1. Establishing corporate priorities Step 2. Choosing the credit culture. Step 3. Determining credit risk strategy Step 4. Implementing risk controls These steps (strategies) focus on reducing the volatility in portfolio credit quality and bank earning’ s performance.

Strategic CRM will provide all bank personnel a clear understanding of the bank’ s credit culture and of the risk acceptable in the loan portfolio. Senior management then manages the process and the portfolio to align them with corporate priorities. 3. 5 Conclusion: Credit Risk Management in today’ s deregulated market is a big challenge. Increased market volatility has brought with it the need for smart analysis and specialized applications in managing credit risk.

A well defined policy framework is needed to help the operating staff identify the risk-event, assign a probability to each, quantify the likely loss, assess the acceptability of the exposure, price the risk and monitor them right to the point where they are paid off. The management of banks should strive to embrace the notion of ‘ uncertainty and risk’ in their balance sheet and instill the need for approaching credit administration from a ‘risk-perspective’ across the system by placing well drafted strategies in the hands of the operating staff with due material support for its successful implementation.

The principal difficulties with CRM models are obtaining sufficient hard data for estimating the model parameters such as ratings, default probabilities and loss given default and identifying the risk factors that influence the parameter, as well as the correlation between risk factors. Because of these difficulties one should be aware that credit systems are only as good as the quality of the data behind them. 4. CONCENTRATION RISK PROFILE OF INDIAN COMMERCIAL BANKS 4. 1 Introduction: “Risk selection is more important than risk management in determining a bank’s credit performance”20.

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 evaluate how much incremental risk they are adding, how much they need to be compensated for taking that risk. Many banks 19 20 John E. Mckinley & John R. Barrickman, (1994), Op. cit. pp. 3-8. John E. Mckinley & John R.

Barrickman, (1994)“Strategic Credit Risk Management”, Robert Morris Associates, pp. 36 10 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 21 . An efficient portfolio achieves a specified rate of return with the minimum possible risk for specified level of risk of for the maximum possible rate of return.

The principle, which underlines portfolio management, is ‘ diversification of risk22’ . The objective of this chapter is to present a general framework for quantification of concentration risk followed by concentration risk profiling of public sector banks vis-a-vis private sector banks; and to explore the relationship between concentration risk profile and NPAs level. 4. 2 Concentration risk: A new methodology adopted to evaluate the volatility in portfolio performance predicated on the risk profile of the institution.

The banking industry has relied heavily on prior experience as a predictor of future credit performance. Concentration risk 23 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. Senior management must define acceptable portfolio concentrations for each of these aggregations. The most conservative banks manage borrower exposure through restrictive house limits and maximum exposure to industries and lines of business.

Many banks also have wisely sought to mitigate risk through geographic diversification. Aggressive banks have traditionally accepted hogs ‘ shares’ of individual borrower, lines of business, and industry exposures. Managing concentration limits will become a high priority for these lenders in the future because of the lingering pain from lessons leaned in commercial real estate, energy etc. 4. 3 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 profile24. 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, 21 Ravimohan R, (2001), “A New Perspective – CRM in Banks”, The Chartered Accountant, March 2001. 22 Joseph F. Sinkey, Jr. , (1998), “Commercial Bank Financial Management – In the Financial Services Industry”, Fifth Edition, Prentice-Hall International Inc. New Jersey. pp. 403. John E. Mckinley & John R.

Barrickman, (1994) Op. cit. pp. 41 John E. Mckinley & John R. Barrickman, (1994), Op. cit. pp50 23 24 11 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 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 riven 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. 4. 4 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. In order to analyse the observed relationship between NPAs level and concentration risk, the relevant data is presented in this section. The highest level of NPAs, i. e. , 24. percent in the year 1994 corresponds to the maximum index value in the same year. Similarly, the minimum level of NPAs, i. e. , 9. 36 percent in the year 2003 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. An attempt was made to quantify the relationship between concentration-index and NPAs level by way of coefficient of correlation and the results found to be satisfactory in reinforcing our earlier observations. Table 4. 1 lists the results. Table 4. : Coefficient of correlation between Concentration-Index and NPAs for the period 1994 – 2003 Public Sector Banks Private Sector Banks (a) Occupation-wise concentration risk Coefficient of correlation = r 0. 80 0. 67 12 Coefficient of determination = r 2 (b) Industry-wise concentration risk Coefficient of correlation = r Coefficient of determination = r 2 0. 64 0. 45 0. 89 0. 78 -0. 52 0. 27 As observed earlier, there exists a strong positive relationship between occupationwise concentration-index and NPAs level in case of both the public sector banks and private sector banks with the coefficient of correlation value being 0. 0 and 0. 67 respectively. This is confirmed by the higher values of coefficient of determination of 0. 64 and 0. 45 for public sector banks and private sector banks respectively. Similarly, there exists a strong positive relationship between industry-wise concentration-index and NPAs level in case of public sector banks as confirmed by a very high value of r2 = 0. 78. But this is not clearly pronounced in the case of private sector banks as indicated by lower value of r 2 = 0. 27. 4. Conclusion: Concentration risk is a very significant component of overall credit risk profile of a banking institution. A prudent credit risk management is based on the principle of diversified portfolio to avoid concentrations in any one or couple of occupations or industry. Trends in concentration risk profile of public sector banks during the post-liberalization period clearly indicate a paradigm shift in the portfolio approach to credit risk management. The occupation-wise and industry-wise concentrations reduced significantly during the study period.

On the contrary, the trends in concentration risk profile of private sector banks signify an opposite direction. The occupation-wise concentration risk increased substantially from 37 percent in 1999 to 59 percent in 2003. Both the approaches suggested for quantification of concentration risk yielded satisfactory results. Under the profile-score method, with a score of less than 10 for public sector banks, and more than 10 for private sector banks, it is concluded that public sector bank’ s risk profile is low while that of private sector bank’ s risk is moderate.

Similarly, under the concentration-index method it was found that there exists strong relationship between occupation-wise concentration risk profile and NPAs level with higher values of coefficient of determination of 0. 64 and 0. 45 for public sector banks and private sector banks respectively. Similarly, strong positive relationship between industry-wise concentration risk and NPAs level in case of public sector banks, as confirmed by high value of r 2 =0. 78. But same is not pronounced in case of private sector banks.

Based on these results it can be concluded that 1. “The declining trends in Non-Performing Assets (NPAs) in public sector banks during the post-liberalization period is an outcome mainly caused by the improved credit portfolio diversification”. “The concentration risk profile of credit portfolio of private sector banks is higher than that of public sector banks impacting adversely the NPAs level of private sector banks vis-a-vis public sector banks”. 2. 13 5. CREDIT RISK MANAGEMENT PRACTICES IN EVALUATION 5. 1 Introduction: COMMERCIAL BANKS – AN

The objective of this chapter is to evaluate the credit risk management practices in public sector banks vis-a-vis private sector banks based on primary data. Primary data have been collected from the credit department executives serving in public and private sector banks at head office level and regional office level in Karnataka with the help of predesigned questionnaires. In this case, direct interview method has been followed for data accuracy and to get first-hand information from respondents about credit risk management practices. 5. 2 Sample data:

The study has analyzed the credit portfolio risk management policies and practices of 21 Banks of which 12 are public sector banks and 9 private sector banks. Though it was originally aimed to cover 20 percent of over 800 credit department executives in the selected banks, it was possible to get the response of only about 10 percent of the number. Credit department executives were not easily accessible. They were found either closeted in a meeting or busy otherwise. Therefore, the generalizations formulated here are based on the opinions of this small number. 5. 3 Analysis of CRM practices:

This section is devoted for analysis of CRM practices in public sector banks vis-a-vis private sector banks. For this purpose, various issues covered include scope for NPAs reduction, credit risk measurement, credit evaluation processes, credit rating system and training in credit risk assessment. CRM perform index – Public and Private sector banks: The questionnaire was designed with a focus on standards of CRM practices envisaged under the New Basel Capital Accord. The important parameters of performance standards considered for analysis included the following table. Table 5. CRM Performance Index Public and Private sector banks Performance Index ( % ) Performance Evaluation Public Sector Private Sector Banks Banks Project appraisal procedures 58 49 Availability of comprehensive data 46 39 Risk based loan pricing 48 40 Deployment of information technology 46 57 Efficacy of Internal credit rating system 54 50 Sharing experience with other lenders over 40 36 problem loans Practice of fine-tuning loan policies 55 46 Internal audit of CRM procedures 42 49 Bank credit standards 51 48 Credit decision: merit v/s extraneous 60 46 considerations Frequency of credit portfolio reviews 61 58 Sl. No. 1 2 3 4 5 6 7 8 9 10 11 4 12 13 Renewal of borrowers limits Periodical review of customer credit ratings Total Performance Index 34 33 632 49 42 57 617 47 Overall CRM performance is at below the satisfactory level for both the public and private sector banks. Furthermore, with performance index score of 49 percent and 47 percent for public sector banks and private sector banks respectively, there is no significant difference between public sector banks and private sector banks as regards CRM performance. 5. 4 Conclusion: The analysis of the primary data revealed some interesting aspects about the credit risk management practices of commercial banks in India.

The important among them are listed below: (1) More popular credit evaluation techniques like Altman’ s Z score model, J. P. Morgan credit matrix, Zeta analysis do not find a place in the credit evaluation tool kit of the commercial banks in India. (2) Employees are not given enough training to enhance their conceptual understanding of credit risk and improving their skills in handling it. (3) The leverage provided by information technology for efficient credit risk administration is not satisfactorily harnessed by commercial banks in India, particularly in public sector banks. 4) The availability of comprehensive data for credit evaluation is far from satisfactory in commercial banks in India. (5) Overall CRM performance of commercial banks in India as against the standard set out under New Basel Capital Accord is not satisfactory. (6) With CRM performance Index of 49 percent in public sector banks and 47 percent in private sector banks respectively, the performance of public sector banks is at par with the performance of private sector banks. Based on these findings it can be concluded that; 1. Credit risk management practices of commercial banks in India do not meet the standards set out under the New Basel Capital Accord”. 2. “There exists no marked difference between public sector banks and private sector banks as regards their credit risk management performance”. 6. RISK BASED SUPERVISION PROBLEMS AND PROSPECTS Changes over the past ten years in the banking system have been dramatic. Advances in technology, closer interrelations among economies, liberalization and deregulation etc. have made the world of banking a far more complex place.

The system of annual inspection of banks by RBI may soon be a thing of the past. The central bank is expected to follow a system of random and more frequent inspections based on the risk profile of individual banks. RBI insisted that all commercial banks move towards the system 15 of Risk- Based Supervision (RBS) by January 1st 2003 25 , its inspections would be more focused on areas of potential risk such as credit risk, market risk and operational risk. Based on the guidelines to be drafted by the RBI all banks have to submit information to the central bank periodically.

With this information, bankers believe that the RBI will always be in the know as how particular bank is operating and can monitor its performance almost on a day-today basis. RBI inspections, both on-site and off-site can be conducted as and when the central bank deems necessary and could be as often as possible based on RBI’ s risk perception of a bank. “After the recent scams, the RBI wants to tighten norms so that the central bank is informed well in advance about any irregularity 26 ”.

The Basel Committee on Banking Supervision had advocated Risk- Based Supervision of banks and this has been put to practice in various countries. Now RBI has come with a discussion paper on “Move towards Risk Based Supervision of Banks” in Aug 2001 and RBI roll out the process and implemented from the financial year April 200427. This chapter describes the main features of proposed RBS and analyses the responses of executives to the modalities of implementing it.

In moving towards a Risk Based Supervision of banks the goal of Reserve Bank of India and the concern of banks converge in a common point: we want strong, healthy institutions that offer loans to worthy borrowers who in turn repay the loan interest, so that the bank can build its capital base and provide a reasonable return to its shareholders. If the goal can be achieved, the public, including both borrowers and depositors, will be better served through a network of safe and sound financial institutions that properly identify, measure, monitor and control their risks.

The risk based supervision project would lead to prioritization of selection and determining frequency and length of supervisory cycle, targeted appraisals, and allocation of supervisory resources in accordance with the risk perception of the supervised institutions. The RBS will also facilitate the implementation of the supervisory review pillar of the New Basel Capital Accord, which requires that national supervisors set capital ratios for banks based on their risk profile. Private sector banks executives are not n-favour for implementation of RBS as vindicated by the sample data according to which 94 percent (an average) of them are against the various proposals of RBS. This negative response reflect the reservations hosted by the private sector banks in general about the various proposals coming from a Central Bank leading to more interfere in their internal affairs. On the other hand, the public sector banks show a different scenario as they have almost balanced opinion in favour of RBS. 7. NEW BASEL CAPITAL ACCORD – IMPLICATIONS FOR CRM PRACTICES

OF COMMERCIAL BANKS IN INDIA 7. 1 Introduction: One of the most crucial methods of risk control in banks and financial institutions around the world is regulatory capital requirement, which is vital in reducing the risk of bank insolvency and the potential cost of a bank’ s failure for its customers. Rajalakshmi Menon, (2002), “RBI may shift to risk-based supervision of banks”, Business Line, July 3, 2002, pp. 10. 26 Rajalakshmi Menon, (2002), Op. cit. pp. 10 27 Pathrose P. P. (2002), Op. cit pp. 21 25 16

The Basel Committee of the Bank for International Settlements (The Committee) that sets the capital adequacy requirements for banks and other financial institutions drew up Basel Accord-I in 1988 28 . This Accord recommends a method of relating the capital requirement of banks to their assets, using a simple system of risk weights and minimum capital ratio of 8 percent. This Accord provides a standard approach to measuring credit, market risk of the banks to arrive at the minimum capital requirement. Basel-I have served the banking world for over 10 years.

The business of banking, risk management practices, supervisory approaches and financial markets have seen a sea change over the years. In 1996, the initial Accord was extended to include market risk that banks incur in their trading account. The BCBS (Basel Committee on Banking Supervision) brought out a consultative paper on New Capital Adequacy framework in June 1999, followed by second and third consultative package in January 2001 and April 200329. Implementation is expected to take effect in member countries by 2006.

Banks in India will not meet a 2006 deadline for implementing the revised Basel Capital Accord and will need at least two additional years to comply with the new international banking rules30. The Basel II Accord will put further pressure on banks requiring them to also hold capital to offset operational risk that the Committee expects on an average to constitute approximately 20 percent of the overall capital requirement. Recognising the importance of Basel-II and the need for a reasonable timeframe to switch over, the RBI has already initiated discussions in several areas well in time.

The adoption and implementation of the new capital accord by all banks in India may further result in the improvement in our country rating which, in turn, will increase our competency to adopt the new accord. 7. 2 The New Basel Capital Accord(Basel -II): The New Accord is being proposed to introduce greater risk sensitivity. The New Accord provides a spectrum of approaches from simple to advance methodologies for the advancement of both credit and operational risks in determining capital levels.

The new accord is built around the THREE Pillars as shown in Figure 7. 1 31: (1) Pillar-I : Minimum Capital Requirement (2) Pillar-II : Supervisory Review (3) Pillar-III : Market Discipline 7. 3 New Basel Accord – Issues in the Indian context: The Accord, aims at boosting the safety of the world banking system. Regulators in both India and China are anxious to nudge their banks on to the proposed risk-based capital regime, to ensure that they are competitive and managed to the highest standards32.

True, Geetha Bellu, (2003), “Discloures in the forefront”, Decan Herald, Monday, October 6, 2003, pp. 1 . 29 Geetha Bellu, (2003), Op. cit. pp. 1 30 Gautam Chakravorthy, (2003), “Indian banks not ready for capital rule deadline”, International Herald Tribune, Wednesday, Septermber 24, 2003. 31 BIS, (2003), “An overview of the New Basel Capital Accord”, IBA Bulletin, September 2003, pp. 33-34 32 28 Melvyn Westlake, (2003), “India, China still undecided on adopting new accord”, Gulf News, September, 2003, pp. . 17 banks in these two Asian giants may not all be ready to adopt the full rigorous of the accord dubbed Basel II from the outset, at the end of 2006. The RBI agrees with committee’ s view that the focus of the New Accord may be primarily on Internationally Active Banks, that is, those with 20% of the business from foreign operations. SBI’ s Chairman Mr. A. K. Purwar says that SBI’ s International operations (India’ s largest bank) contribute about 6% of its business33.

So the new accord feared by many central banks, including the RBI. In this regard, RBI is of the view that all banks with cross border business exceeding 20% of the total business may be defined as ‘ Internationally Active’ banks and ‘ Significant’ banks may be defined as those banks with complex structures and whose market share in the total assets of the domestic banking system exceed 1 percent 34. The Basel II accord is a challenge to Indian banks. Indian Banks are conceptually and academically ready to adopt the new norms.

It would involve shift in direct supervisory focus away to the implementation issue and also there are lot of difficulties and issues in its implementation in the Indian Context35. These difficulties like availability of historical data, higher risk wrights for sovereign, cost factor, technological up-gradation, diversified products, legal and regulatory guidelines, higher risk weight to small and medium enterprises, credit rating etc. 7. 4 Conclusion: The response to Basel Accord II reforms world over is not uniform and spontaneous.

Basel-II is known for complicated risk management models and complex data requirements. Big international banks, as those in the US, prefer this new version, as they perceive that their superior technology and systems would make them Basel compliant and provide an edge in the competitive environment, in the form of lower regulatory capital. Indian banks do not perceive any immediate value in the new norms as they are globally insignificant players with simple and straight forward balance-sheet structures.

This is clearly vindicated by the sample study according to which 57 per cent of the executives of public sector banks are sceptical about Basel Accord II norms, particularly in respect of investment cost and the complexity of proposed internal rating system. As against this, the private sector banks with supposedly more investment in technology related infrastructure are in favour of the proposals under New Basel Capital Accord as vindicated by the sample study according to which 67 percent of executives of private sector banks are in-favour for New Basel Capital Accord.

However, 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. However, the cost of putting in place robust system today is viewed in an increasingly number of countries as a price worth paying to prevent such crisis. Assuming that the banks can get over the technological and operational hurdles, switching over to Basel II norms can no doubt turn the Indian banks, mainly the public sector banks, more efficient and competitive globally.

This, in turn, will help strengthen the financial sector to undertake further reforms including capital account convertibility more confidently. Information Bureau, (2003), “SBI to be Basel-II compliant: Purwar”, The Hindu Business Line, September 2003. 34 Information Bureau, (2003), “Testing waters: RBI to meet bank CEOs on Basel II soon”, The Economic Times, September 19, 2003. 35 Parasmal Jain, (2004), Op. cit. pp. 8-10 33 18 8. FINDINGS, SUGGESTIONS & CONCLUSION: 8. 1 SUMMARY OF FINDINGS:

The trends in NPAs level, CRM practices of commercial banks and the response to reforms under Basel Accord II and Risk Based Supervision were examined and compared between public sector banks and private sector banks in this study. The analysis of secondary and primary data resulted in satisfactory results, a summary of which is presented in the following paragraphs. While NPAs level of public sector banks did register a clear decreasing trend during the post-liberalization period, NPAs level of private sector banks remained constant during this period. 2) The concentration risk profile of private sector banks is found to be higher than that of public sector banks. (3) In case of public sector banks, there exists a strong relationship between NPAs level and credit portfolio diversification as vindicated by higher co-efficient of correlation values. The decrease in NPAs level is caused by reduction in concentration risk. This relationship is however, not clearly pronounced in case of private sector banks. (4) Credit risk management performance of commercial banks in India is not satisfactory. 5) There exists no marked difference between public sector banks and private sector banks as regards their credit risk management performance: (6) Though the private sector banks executives are not in-favour of implementation of Risk Based Supervision, yet they are receptive to the proposals under New Basel Capital Accord. This is vindicated by sample data according to which only 6 percent of respondents have expressed their concurrence with RBS and the remaining 94 percent of them opposing it.

In contrast, 67 percent of the respondents expressed their concurrence to the proposals under NBCA and remaining 33 percent of respondents opposing it. (7) The executives of public sector banks have almost balanced their opinions in-favour of RBS and New Accord. While 54 percent of them expressed their concurrence to the proposals under RBS, 43 percent of them agree with the proposed reforms under NBCA. (1) 8. 2 SUGGESTIONS: (1) Achieving a better portfolio equilibrium: Commercial banks need to diversify further to achieve a better credit portfolio equilibrium.

The share of transport operations and finance occupations in case of public sector banks was very minimal i. e. , 1. 21 percent and 6. 53 percent respectively as on March 31, 2003. Similarly, in case of private sector banks, the share of occupations like transport and finance was very minimal at 1. 52 percent and 6. 46 percent respectively as on March 31, 2003. (a) In India now the services sector (including transportation, financial services etc. ) is playing an important role and in fact it accounts for about one half of India’ s GDP and this sector is also generating more income and more employment opportunities. Banks will, therefore, have to sharpen their credit assessment skills by providing better training to enhance their conceptual understanding of credit risk and improving their skills in handling it which lay more emphasis in providing finance to the wide range of activities in the services sector. b) Retail loans are also a relatively small fraction of the Indian banking system’ s total loans and advances. In India retail loans constitute about 5 percent of aggregate GDP compared to an average of around 30 percent for other Asian economies. The implication of all this data is that the retail market is relatively ‘ under-penetrated’ and has significant potential for growth both for public and private sector banks. 19 (c) Retail products help banks in diversifying their risk by spreading credit to widely dispersed set of individual customers.

Retail loans offers banks the opportunity to cross sell various other value added services and retail products like insurance and mutual fund to the depositors. (2) Establishing Risk Management Information System (RMIS): The effectiveness of risk management depends on efficient information system, computerization and networking of the branch activities. An objective and reliable database has to be built up for which bank has to analyse its own past performance data relating to loan defaults, operational losses etc. a) Added to IT expenditure is the cost and effort of training and redeployment of manpower. Besides training in the ‘ hard’ aspects of understanding risk and using software, it is also need for building in a risk orientation in individual officers at the operating level, to create awareness about credit assessment skills and risk mitigation processes is needed. (b) Public sector banks need to set up modern IT infrastructure in place within one to two years in line with foreign and new generation private banks. There is a need of centralized database so that core banking solution can be implemented. 3) Redesigning the Internal Rating System: In order to ensure a systematic and consistent credit assessment process within the bank, a robust and auditable rating system must be in place. A list of credit drivers or factors that influence the creditworthiness of a barrower / company with a weight assigned on measurable element data like financial ratios and subjective elements like management quality, industry prospects etc. , The Basel Committee set up by BIS has been urging banks to set up internal systems to measure and manage credit risk. It is important that Indian banks use credit atings available from agencies in conjunction with their internal models to measure credit risk. (4) Early Warning Signals: It is essential to identify signs of distress or early recognition of problem loans. The need for early identification of problem loans has been established as one of the principles of the Basel Committee for the management of credit risk. Problem loans most commonly arise from a cash crisis facing the borrower. As the crisis develops, internal and external signs emerge, often subtly. A typical Early Warning Signals process is listed below: a. Continuous Monitoring by Loan Officers b.

Scheduled Loan Reviews c. External Examination d. Loan Covenants e. Warning Signs f. Asset Classification and Downgrade Report 8. 3 CONCLUSION: Credit risk management in today’ s deregulated market is a challenge. The very complexion of credit risk is likely to undergo a structural change in view of migration of TierI borrowers and, more particularly, the entry of new segments like retail lending in the credit portfolio. These developments are likely to contribute to the increased potential of credit risk and would range in their effects from inconvenience to disaster.

To avoid being blindsided, 20 banks must develop a competitive Early Warning System (EWS) which combines strategic planning, competitive intelligence and management action. EWS reveals how to change strategy to meet new realities, avoid common practices like benchmarking and tell executives what they need to know – not what they want to hear. The reputation of a bank is very important for corporate clients. A corporation seeks to develop relationship with a reputable banking entity with a proven track record of high quality service and demonstrated history of safety and sound practices.

Therefore, it is imperative to adopt the advanced Basel-II methodology for credit risk. The Basel Committee has acknowledged that the current uniform capital standards are not sensitive and suggested a Risk Based Capital approach. Reserve Bank of India’ s Risk Based Supervision reforms are a fore-runner to the Basel Capital Accord-II. For banks in India with the ‘ emerging markets’ tag attached to them going down the Basel-II path could be an effective strategy to compete in very complex global banking environment. Indian banks need to prepare themselves to be competed among the world’ s largest banks.

As our large banks consolidate their balance sheets size and peruse aspirations of large international presence, it is only expected that they adopt the international best practices in credit risk management. “… ……A bank’s success lies in its ability to assume and … …… . ……… aggregate risk within tolerable and manageable limits”. BIBLIOGRAPHY: Books: Bidani S. N. , (2002), “Managing Non-Performing Assets in Banks”, Vision Books publishers, Ref:#8-02-06-12, pp. 71-74. Eddie Cade, (1997), “Managing Banking Risks”, First Edition, Woodhead Publishing Ltd. In association with The Chartered Institute of Bankers, England, pp. 104 – 144. James T. Gleason, (2001), “ Risk – The New Management Imperative in Finance”, Jaico Publishing house, pp. 13-19. & 113-121. Johan E. Mckinley & John. R. Barrickman, (1994), “Strategic Credit Risk Management”, Robert Morris Association, Philadelphia, pp. 1-12, 20-27, 36-42, 62-68. Joseph F. Sinkey, Jr. , (1998), “Commercial Bank Financial Management – In the Financial Services Industry”, Fifth Edition, Prentice-Hall International Inc. , New Jersey. pp. 22-35, /213-220 and 404-408. Timolthy W.

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