A STUDY ON CREDIT ASSESSMENT AND CREDIT

MANAGEMENT OF HDFC BANK FOR THE FINANCIAL YEARS

2005 TO 2010

Submitted in partial fulfillment of the requirements of

MBA

Submitted By

A.BALASHANMUGAM
09BA203
Under the Guidance of
Prof. DR.C.DHRAMARAJ

TABLE OF CONTENTS
Chapter No. Contents Page No.
1. INTRODUCTION 1- 45
• Introduction to Banking 1 – 20
 •Company Profile of HDFC Bank 21 – 45
2. RESEARCH DESIGN 46 - 48
• Title 46
• Statement of the Problem 46

• Scope of the Study 46

47
• Objectives
47
• Methodology
47
• Data Collection Methods
48
• Limitations

3. ANALYSIS AND INTERPRETATION 49 – 76

• Analysis of Loans and Advances 49 – 58
• NPA Analysis 58 – 67

• Study of the Credit Management Policy 68 – 76

4. FINDINGS AND SUGGESTIONS 77 – 80
• Loans and Advances 77 – 78
• Non-Performing Assets 78 – 79

• Credit Management Policy 79 - 80

5. CONCLUSION AND 81 - 82
RECOMMENDATIONS

LIST OF TABLES
Sl. No. Table Page No.
3.1 Growth in Loans and Advances 49
3.2 Sector/Scheme-Wise Increase/Distribution of Credit 51 – 53
3.3 Geographical Distribution of Credit and its 54
Percentage to Total Advances
3.4 Classification of Advances and its Percentage to 56
Total Advances
3.5 Gross NPA and its Percentage to Total Advances 58
3.6 Net NPA and its Percentage to Net Advances 60
3.7 NPA Provision Coverage Ratio 62
3.8 Percentage of Achievement of Targeted Gross NPA 64
3.9 Percentage of Achievement of Targeted Recovery 66
of NPA

LIST OF GRAPHS
Sl. No. Graphs Page No.
3.1a Comparison of Loans and Advances 50
3.3a Geographical Distribution of Credit and its 55
comparison for two years
3.4a Classification of Advances and its comparison for 57
two years
3.5a Comparison of Gross NPA and Total Advances for 59
two years
3.6a Comparison of Net NPA and Net Advances for two 61
 years
3.7a Comparison of Total NPA and Total Provisions for 63
two years
3.8a Comparison of Targeted and Actual level of Gross 65
NPA for two years
3.9a Comparison of Targeted and Actual Recovery of 67
NPA for two years

CHAPTER 1
 INTRODUCTION

BANKING

Origin and History of Banking

The word bank seems to have derived from the Italian word ‘Banco’ or the
German word ‘Banck’ both means a heap. Another argument in this respect
is that the term bank has been derived from the German word ‘Bancus’
which means bench. The origin of banking as a profession dates back to
2000 BC. The temples in Babylon used to lend money and safe keeping of
precious metals, coins and other items. Later on the temples of Greece also
started accepting deposits, lending money and safe keeping of valuables.
During 17th century, the English gold smiths started accepting valuables for
safekeeping and they extended their operations to accepting deposits and
lending money. Bank as an organized enterprise made its first appearance,
when the Bank of Venice started operation in Italy in 1157. According to G.
Crowther, the modern banker has three ancestors namely the merchant, the
goldsmith and the moneylender.

The merchant: In olden days the highly reputed merchants having wide
spread net work of business collected money from public for financing their
operations and issued certificates acknowledging receipt of money. These
certificates were accepted as title to money and used for transferring money
from one place to another place. Such certificates were the predecessor
modern demand draft issued by commercial banks.

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The moneylender: Moneylenders used to lend money to public out of their
own resources find it difficult to extend their operations due to lack of
liquid
money. They started accepting deposits at a lower rate of interest and made
profit by lending it at a higher rate of interest. Thus the moneylenders laid
foundation of modern banking.

The gold smith: When precious metals were used as money, the Gold
smiths in England used to accept precious stones and metals for safe
keeping. As documentary evidence, they have issued Gold Smiths
Certificates, which were accepted as title to money and transferred from
person to person.. Gold Smiths Certificates are the predecessor of modern
cheque.
Banks have influenced economies and politics for centuries. Historically, the
primary purpose of a bank was to provide loans to trading companies. Banks
provided funds to allow businesses to purchase inventory, and collected
those funds back with interest when the goods were sold. For centuries, the
banking industry only dealt with businesses, not consumers. Commercial
lending today is a very intense activity, with banks carefully analysing the
financial condition of their business clients to determine the level of risk in
each loan transaction. Banking services have expanded to include services
directed at individuals, and risk in these much smaller transactions are
pooled.

The name bank derives from the Italian word banco "desk/bench", used
during the Renaissance by Florentines bankers, who used to make
their transactions above a desk covered by a green tablecloth.[5]
However, there are traces of banking activity even in ancient times.

In fact, the word traces its origins back to the Ancient Roman Empire, where
moneylenders would set up their stalls in the middle of enclosed courtyards
called macella on a long bench called a bancu, from which the words banco
and bank are derived. As a moneychanger, the merchant at the bancu did not
so much invest money as merely convert the foreign currency into the only
legal tender in Rome- that of the Imperial Mint. [6]
Traditional Banking Activities

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. Banks also enable
customer payments via other payment methods such as telegraphic transfer,
EFTPOS, and ATM.

Banks borrow money by accepting funds deposited on current account,

accepting term deposits and by issuing debt securities such as banknotes and
bonds. Banks lend money by making advances to customers on current
account, by making installment loans, and by investing in marketable debt
securities and other forms of lending.

Banks provide almost all payment services, and a bank account is considered
indispensable by most businesses, individuals and governments. Non-banks
that provide payment services such as remittance companies are not
normally considered an adequate substitute for having a bank account.

Banks borrow most funds from households and non-financial businesses,

and lend most funds households and non-financial businesses, but non-bank
lenders provide a significant and in many cases adequate substitute for bank
loans, and money market funds, cash management trusts and other non-bank
financial institutions in many cases provide an adequate substitute to banks
for lending savings to.
Meaning and Definition

The definition of a bank varies from country to country.

Under English common law, a banker is defined as a person who carries on

the business of banking, which is specified as:[1]

• conducting current accounts for his customers

• paying cheques drawn on him, and
• collecting cheques for his customers.

In most English common law jurisdictions there is a Bills of Exchange Act

that codifies the law in relation to negotiable instruments, including cheques,
and this Act contains a statutory definition of the term banker: banker

includes a body of persons, whether incorporated or not, who carry on the

business of banking' (Section 2, Interpretation). Although this definition
seems circular, it is actually functional, because it ensures that the legal basis
for bank transactions such as cheques do not depend on how the bank is
organised or regulated.

The business of banking is in many English common law countries not

defined by statute but by common law, the definition above. In other English
common law jurisdictions there are statutory definitions of the business of
banking or banking business. When looking at these definitions it is
important to keep in mind that they are defining the business of banking for
the purposes of the legislation, and not necessarily in general. In particular,
most of the definitions are from legislation that has the purposes of entry
regulating and supervising banks rather than regulating the actual business
of banking. However, in many cases the statutory definition closely mirrors
the common law one. Examples of statutory definitions:

• "banking business" means the business of receiving money on current

or deposit account, paying and collecting cheques drawn by or paid in
by customers, the making of advances to customers, and includes such
other business as the Authority may prescribe for the purposes of this
Act; (Banking Act (Singapore), Section 2, Interpretation).

• "banking business" means the business of either or both of the

following:

1. receiving from the general public money on current, deposit, savings

or other similar account repayable on demand or within less than [3
months] ... or with a period of call or notice of less than that period;
2. paying or collecting cheques drawn by or paid in by customers[2]

Since the advent of EFTPOS (Electronic Funds Transfer at Point Of Sale),

direct credit, direct debit and internet banking, the cheque has lost its
primacy in most banking systems as a payment instrument. This has lead
legal theorists to suggest that the cheque based definition should be
broadened to include financial institutions that conduct current accounts for
customers and enable customers to pay and be paid by third parties, even if
they do not pay and collect cheques.[3]

Commercial Banking

However the commercial role of banks is wider than banking, and includes:

• issue of banknotes (promissory notes issued by a banker and payable

to bearer on demand)
• processing of payments by way of telegraphic transfer, EFTPOS,
internet banking or other means
• issuing bank drafts and bank cheques
• accepting money on term deposit
• lending money by way of overdraft, installment loan or otherwise

• providing documentary and standby letters of credit, guarantees,

performance bonds, securities underwriting commitments and other
forms of off balance sheet exposures
• safekeeping of documents and other items in safe deposit boxes
• currency exchange
• sale, distribution or brokerage, with or without advice, of insurance,
unit trusts and similar financial products as a 'financial supermarket'

Economic functions

The economic functions of banks include:

1. Issue of money, in the form of banknotes and current accounts subject

to cheque or payment at the customer's order. These claims on banks

can act as money because they are negotiable and/or repayable on
demand, and hence valued at par and effectively transferable by mere
delivery in the case of banknotes, or by drawing a cheque, delivering
it to the payee to bank or cash.
2. Netting and settlement of payments -- banks act both as collection
agent and paying agents for customers, and participate in inter-bank
clearing and settlement systems to collect, present, be presented with,
and pay payment instruments. This enables banks to economise on
reserves held for settlement of payments, since inward and outward
payments offset each other. It also enables payment flows between
geographical areas to offset, reducing the cost of settling payments
between geographical areas.

3. Credit intermediation -- banks borrow and lend back-to-back on their

own account as middle men
4. Credit quality improvement -- banks lend money to ordinary
commercial and personal borrowers (ordinary credit quality), but are
high quality borrowers. The improvement comes from diversification
of the bank's assets and the bank's own capital which provides a buffer
to absorb losses without defaulting on its own obligations. However,
since banknotes and deposits are generally unsecured, if the bank gets
into difficulty and pledges assets as security to try to get the funding it
needs to continue to operate, this puts the note holders and depositors
in an economically subordinated position.
 5. Maturity transformation -- banks borrow more on demand debt and
short term debt, but provide more long term loans. Bank can do this
because they can aggregate issues (e.g. accepting deposits and issuing
banknotes) and redemptions (e.g. withdrawals and redemptions of
banknotes), maintain reserves of cash, invest in marketable securities
that can be readily converted to cash if needed, and raise replacement
funding as needed from various sources (e.g. wholesale cash markets
and securities markets) because they have a high and more well
known credit quality than most other borrowers.

Banking channels
Banks offer many different channels to access their banking and other

services:

• A branch, banking centre or financial centre is a retail location where

a bank or financial institution offers a wide array of face-to-face
service to its customers
• ATM is a computerised telecommunications device that provides a
financial institution's customers a method of financial transactions in a
public space without the need for a human clerk or bank teller. Most
 banks now have more ATMs than branches, and ATMs are providing
a wider range of services to a wider range of users. For example in
Hong Kong, most ATMs enable anyone to deposit cash to any
customer of the bank's account by feeding in the notes and entering
the account number to be credited. Also, most ATMs enable card
holders from other banks to get their account balance and withdraw
cash, even if the card is issued by a foreign bank.
• Mail is part of the postal system which itself is a system wherein
written documents typically enclosed in envelopes, and also small
packages containing other matter, are delivered to destinations around
the world. This can be used to deposit cheques and to send orders to
the bank to pay money to third parties. Banks also normally use mail
to deliver periodic account statements to customers.

• Telephone banking is a service provided by a financial institution

which allows its customers to perform transactions over the telephone.

• This normally includes bill payments for bills from major billers (e.g.
for electricity).

• Online banking is a term used for performing transactions, payments

etc. over the Internet through a bank, credit union or building society's
secure website
Types of banks

Banks' activities can be divided into retail banking, dealing directly with
individuals and small businesses; business banking, providing services to
mid-market business; corporate banking, directed at large business entities;
private banking, providing wealth management services to High Net Worth
Individuals and families; and investment banking, relating to activities on
the financial markets. Most banks are profit-making, private enterprises.
However, some are owned by government, or are non-profits.

Central banks are normally government owned banks, often charged with
quasi-regulatory responsibilities, e.g. supervising commercial banks, or
controlling the cash interest rate. They generally provide liquidity to the
banking system and act as Lender of last resort in event of a crisis.

10
On the basis of functions performed, banks can be classified into the
following categories:
1. Commercial Banks: These banks accept deposits, which are repayable
on demand or otherwise and lend money to customers in times of need.
These banks allow customers to withdraw money by issuing cheques.
Modern commercial banks deals in a large variety of financial products like
insurance policies, mutual funds etc.
2. Agricultural Banks: Banks specialized in agricultural financing are
called agricultural banks. They provide long term or short term finance for
agricultural operations.
3. Savings Banks: Banks, which pool the small and scattered savings of the
people, are called savings banks. Such banks try to promote habit of thrift
among the public. Eg. Post Office Savings Bank.
4. Industrial Banks: Those banks, which provide long-term and/ or short-
term loans to industrial units, are called industrial banks. For Eg. SIDBI,
KFC.
5. Exchange Banks: Financial institutions that facilitate the conversion of
foreign currencies into home currency.
6. Universal Banks: They are the financial super markets, which provide all
financial products and services under one roof. ICICI Bank is the first Indian
Universal Bank.
7. Central Banks: These are the apex monetary institution in an economy,
which issues currency notes, control credit, and act as a regulator of money
market.

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Banking Industry
Banking Industry has revolutionized the transaction and financial services
system worldwide. Through the development in technology banking services
has been availed to the customers at all times, even after the normal banking
hours, on a 24x7 basis. Banking Industry services is nothing but the access
of most of the banking related services (such as verification of account
details, going with the transactions, etc.). In todays world, progress of online
services is available to all customers of the concerned bank and can be
accessed at any point of time and from anywhere provided the place is
equipped with the Internet facility. Now-a-days, almost all the banks all over
the world, especially the multinational ones, provide their customers with
Online Banking facility.

Size of Global Banking Industry

Worldwide assets of the largest 1,000 banks grew 16.3% in 2006/2007 to

reach a record $74.2 trillion. This follows a 5.4% increase in the previous
year. EU banks held the largest share, 53%, up from 43% a decade earlier.
The growth in Europe’s share was mostly at the expense of Japanese banks
whose share more than halved during this period from 21% to 10%. The
share of US banks remained relatively stable at around 14%. Most of the
remainder was from other Asian and European countries. .[7]

The US had by far the most banks (7,540 at end-2005) and branches
(75,000) in the world. The large number of banks in the US is an indicator of

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its geography and regulatory structure, resulting in a large number of small

to medium sized institutions in its banking system. Japan had 129 banks and
12,000 branches. In 2004, Germany, France, and Italy had more than 30,000
branches each—more than double the 15,000 branches in the UK.[8]

Indian Banking Industry

The Indian Banking industry, which is governed by the Banking Regulation
Act of India, 1949 can be broadly classified into two major categories, non-
scheduled banks and scheduled banks. Scheduled banks comprise
commercial banks and the co-operative banks. In terms of ownership,
commercial banks can be further grouped into nationalized banks, the State
Bank of India and its group banks, regional rural banks and private sector
banks (the old/ new domestic and foreign). These banks have over 67,000
branches spread across the country.

The first phase of financial reforms resulted in the nationalization of 14

major banks in 1969 and resulted in a shift from Class banking to Mass
banking. This in turn resulted in a significant growth in the geographical
coverage of banks. Every bank had to earmark a minimum percentage of
their loan portfolio to sectors identified as “priority sectors”. The
manufacturing sector also grew during the 1970s in protected environs and
the banking sector was a critical source. The next wave of reforms saw the
nationalization of 6 more commercial banks in 1980. Since then the number
of scheduled commercial banks increased four-fold and the number of bank

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branches increased eight-fold.

After the second phase of financial sector reforms and liberalization of the
sector in the early nineties, the Public Sector Banks (PSB) s found it
extremely difficult to compete with the new private sector banks and the
foreign banks. The new private sector banks first made their appearance
after the guidelines permitting them were issued in January 1993. Eight new
private sector banks are presently in operation. These banks due to their late
start have access to state-of-the-art technology, which in turn helps them to
save on manpower costs and provide better services.

During the year 2000, the State Bank Of India (SBI) and its 7 associates
accounted for a 25 percent share in deposits and 28.1 percent share in credit.
The 20 nationalized banks accounted for 53.2 percent of the deposits and
47.5 percent of credit during the same period. The share of foreign banks
(numbering 42), regional rural banks and other scheduled commercial banks
accounted for 5.7 percent, 3.9 percent and 12.2 percent respectively in
deposits and 8.41 percent, 3.14 percent and 12.85 percent respectively in
credit during the year 2000.

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Bank Loans

Bank loans refers to the different types of banking loans offered by banks.
Banking loans may be availed of for various purposes. Banking loans are
governed by banking laws and banking regulations. Depending on the need
of an individual, banking loans should be applied for. The banking loans are
provided by different banking institutions after an individual satisfies certain
criteria.
A loan is a type of debt. This article focuses exclusively on monetary loans,
although, in practice, any material object might be lent. Like all debt
instruments, a loan entails the redistribution of financial assets over time,
between the lender and the borrower.

The borrower initially does receive an amount of money from the lender,
which they pay back, usually but not always in regular installments, to the
lender. This service is generally provided at a cost, referred to as interest on
the debt. A borrower may be subject to certain restrictions known as loan
covenants under the terms of the loan.

Acting as a provider of loans is one of the principal tasks for financial

institutions. For other institutions, issuing of debt contracts such as bonds is
a typical source of funding. Bank loans and credit are one way to increase
the money supply.

15

Legally, a loan is a contractual promise of a debtor to repay a sum of money

in exchange for the promise of a creditor to give another sum of money.

Types of loans
Secured

A secured loan is a loan in which the borrower pledges some asset (e.g. a car
or property) as collateral for the loan.
A mortgage loan is a very common type of debt instrument, used by many
individuals to purchase housing. In this arrangement, the money is used to
purchase the property. The financial institution, however, is given security
— a lien on the title to the house — until the mortgage is paid off in full. If
the borrower defaults on the loan, the bank would have the legal right to
repossess the house and sell it, to recover sums owing to it.

In some instances, a loan taken out to purchase a new or used car may be
secured by the car, in much the same way as a mortgage is secured by
housing. The duration of the loan period is considerably shorter — often
corresponding to the useful life of the car. There are two types of auto loans,
direct and indirect. A direct auto loan is where a bank gives the loan directly
to a consumer. An indirect auto loan is where a car dealership acts as an
intermediary between the bank or financial institution and the consumer.

16

A type of loan especially used in limited partnership agreements is the

recourse note.

A stock hedge loan is a special type of securities lending whereby the stock
of a borrower is hedged by the lender against loss, using options or other
hedging strategies to reduce lender risk.[citation needed]
Unsecured

Unsecured loans are monetary loans that are not secured against the
borrowers assets. These may be available from financial institutions under
many different guises or marketing packages:

• credit card debt

• personal loans
• bank overdrafts
• credit facilities or lines of credit
• corporate bonds

The interest rates applicable to these different forms may vary depending on
the lender and the borrower. These may or may not be regulated by law. In
the United Kingdom, when applied to individuals, these may come under the
Consumer Credit Act 1974.

17

Classification of Bank Advances

The bank advances are classified on the basis of the degree of well-defined
credit worthiness and the extent of dependence on the collateral security for
the realization of the dues.
 1. Standard Assets: These assets do not disclose any problem and also

do not carry normal risk attached to the business. They cannot be

treated as NPA.
2. Sub-standard Assets: Such assets have been classified as NPA for a

period not exceeding two years, where installment of term loans are
overdue for a period exceeding one year. It ensures enough recovery
of bank advances from the securities.
3. Doubtful Assets: An asset which has remained NPA for a period

exceeding 2 years and wherein the assets are not covered with
collateral security in full. In other words, the collateral security
provided against the advances are weak in realising or liquidating at
acurrent basis.
4. Loss Assets: They are assets which are being identified by the bank or

internal auditor or the RBI inspector as those that have have to be

written off wholly or partly. Such an asset is uncontrollable and
uncollectable because its value is very minimum and it is not desirable
to show it in the books of the bank.

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Non-Performing Assets (NPA)

Bank Advances are classified into performing and non-performing assets.

NPA means a credit facility in respect of which the principal repayment
installment is in arrears for more than 12 months or payment of interest is in
arrears for more than six months beyond the due dates.If one of the accounts
of the borrower comes under NPA, all the accounts of that borrower will be
treated as NPA, other than those liabilities which are less than
Rs.25000.Interest on NPA is considered as income as and when it is
received rather than on accrual basis.

Meaning and Requirements of Sound Credit Assessment

1. The bank's board of directors and senior management are responsible

for ensuring that the banks have appropriate credit risk assessment
processes and effective internal controls commensurate with the size,
nature and complexity of the bank's lending operations to consistently
determine provisions for loan losses in accordance with the bank's
stated policies and procedures, the applicable accounting framework
and supervisory guidance.
2. Banks should have a system in place to reliably classify loans on the
basis of credit risk.

3. A bank's policies should appropriately address validation of any

internal credit risk assessment models.

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4. A bank should adopt and document a sound loan loss methodology,

which addresses credit risk assessment policies, procedures and

5. controls for assessing credit risk, identifying problem loans and

determining loan loss provisions in a timely manner.
6. A bank's aggregate amount of individual and collectively assessed
loan loss provisions should be adequate to absorb estimated credit
losses in the loan portfolio.

7. A bank's use of experienced credit judgement and reasonable

estimates are an essential part of the recognition and measurement of
loan losses.

8. A bank's credit risk assessment process for loans should provide the

bank with the necessary tools, procedures and observable data to use
for assessing credit risk, accounting for impairment of loans and for
determining regulatory capital requirements.

9. Banking supervisors should periodically evaluate the effectiveness of

a bank's credit risk policies and practices for assessing loan quality.

10.Banking supervisors should be satisfied that the methods employed by

a bank to calculate loan loss provisions produce a reasonable and
prudent measurement of estimated credit losses in the loan portfolio
that are recognized in a timely manner.

11. Banking supervisors should consider credit risk assessment and

valuation policies and practices when assessing a bank's capital
adequacy.

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COMPANY PROFILE
HDFC BANK
HDFC Bank is a Nationalised Scheduled Commercial Bank. The Bank is
celebrating its Platinum jubilee during the current financial year as it was
established in 1931. The Bank was nationalised on 15.04.1980 under the
Banking Companies (Acquisition & Transfer of Undertakings) Act, 1980
and Nationalised Banks (Management & Miscellaneous Provisions) Scheme
1980. The Bank is also governed by the Banking Regulation Act, 1949 and
is engaged in various businesses as fully defined under Section 6 of the said
Act. Presently the Govt. of India’s share in the Bank’s equity works out to
53.87%. The Bank is managed by a duly constituted Board of Directors. The
present strength of Board of Directors of the Bank is 12, comprising of 2
Executive and 10 Non-Executive Directors having expertise in various
fields.

HDFC Bank, was founded on 23rd October 1931 by late Shri A.B.Shetty
and other enterprising farmers in Mangalore, Karnataka. The objective of the
founders was essentially to promote banking habit, thrift and
enterpreneurship among the farming community of Dakshina Kannada
district in Karnataka State. The bank became a scheduled bank in 1958.

HDFC Bank steadily grew into a large All India bank, with nine smaller
banks merging with it during the 1963-68. The credit for this merger as well
as growth goes to late Shri M.Sunder Ram Shetty, who was then the Chief
Executive of the bank. The bank was nationalised on 15th April 1980.

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The bank has built a network of 1061 branches,46 Extention Counters and
337 ATMs as at 04.10.2008, that span all 28 states and 4 union territories in
the country.Each branch provides effective and efficient services and
significantly contributes to the growth of the individual, and the
nation.HDFC Bank has the highest number of branches in its home state
Karnataka. During the Current Half Year, the bank has opened 10
Branches, of which 1 extension counter was upgraded .

In line with the prevailing trends, the bank has been giving greater thrust
towards technological upgradation of its operations.The bank has network
of 1061 branches, 46 Extention Counters and 337 ATMs. 823
branches,38 extention counters, 12 service branches are functioning on CBS
platform, and at 442 centers, covering 96.4 % of Bank's business.

Realising your constantly evolving and diverse needs, the bank has
diversified too. Entering several new areas such as credit card, merchant
banking, hire purchase and leasing, and electronic remittance services.

HDFC Bank is one among the few banks in the country to take up principal
membership of VISA International and MasterCard International. The
driving force behind HDFC Bank's every initiative has been its 11896 strong
dedicated workforce.

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Management
Today, living up to the ideals of the visionaries of the bank, the management
includes dedicated professionals, who bring with them a considerable
amount of expertise and experience in the banking industry. Board of
Directors comprising of nominees from the government of India, the RBI,
representatives of Officers and Workmen, and directors (non-offcio)
representing the shareholders manage the affairs of the bank. The Board is
constituted in accordance with the Banking Companies (Acquisition and
Transfer of Undertakings) Act, 1980. The directors have been contributing
their knowledge, experience and expertise in the respective areas of their
specialization for the development of the bank.

Organization Structure

The Bank has a three tier Organisation structure.

Head Office, Regional Office and Branches.The Head office hosts various
functional departments that are instrumental in policy formulations and
monitoring of performances of the regions and branches.The bank's 20
Regional Offices exercise immediate supervision and control over the
branches under their jurisdiction. The head office has various departments,
each headed by a General Mnager for policy formulation, performance
review, direction and management of affairs of the business of the bank
under the overall supervision of the ED/CMD and BOD.

23

The organization structure is as follows.

 Board of Directors

Chairman & Managing Director

Executive Director

General Managers

Regional Heads

Branch Heads

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Loan Schemes of the Bank

A. Retail Lending Scheme
1. HDFC Home Loan
The scheme covers financing

 For construction of a house building in the plot/site already

purchased /owned
 For purchase of a plot/site and a house building thereon.
 For purchase of a new house/flat.
 For purchase of old house /flat of age of 30 years and below.
 For Repairs, Renovation (including cost of kitchen Cabinet, racks,
wardrobes, electrical/solar power fittings) of existing house of age 50
years and below (HOME IMPROVEMENT LOAN).
 For extending the existing house building HOME EXTENSION
LOAN.
 Short term Bridge Finance for the interim period between sales of the
existing/ old house and purchase of a new house (HOME BRIDGE
LOAN) –to the extent of 80% of market price of the existing house or
80% of cost of the new house to be purchased whichever is less but
invariably against the Security of new house.
 For taking over of the existing Housing loans availed from other
Banks/Other lending Companies/Agencies

25

2. V Mortgage Loan
To meet the genuine financial needs of the borrowers of varied purpose
other than speculative purpose by taking the immovable property as a
primary security.
To provide loan against the security of equitable mortgage of property -Land
& Building (against vacant site is not permissible/ineligible) for meeting
the genuine needs of varied purpose other than speculative purpose

3. V Wheels

 For purchase of new two-wheeler / motorcar of any make for private

use or professional or business use.
 For purchase of second hand / used two-wheeler / motorcar of not
more than 5 years old.

4. V Equip Scheme
For purchase of consumer durables like Refrigerator, Airconditioner,
Furniture, Kitchen appliances, Vacuum cleaner, Electrical appliances, Home
appliances, Solar water heater, Sound system, Television, CD/VCD Players,
Personal computer, Portable generator, Electric motor etc. and Equipments
required for professional and self employed persons.

5. V Rent Scheme
Owners of the property who have let out the same to reputed Companies,
Commercial / Industrial, Software, Multinational companies, Banks, eputed

26
institutions, etc. This loan is available to the owners (lessors) of the property
only.
6. V Cash Scheme
V-CASH is a very convenient scheme that one can avail of to meet short-
term credit needs for individuals / working women /
For meeting unforeseen short time credit needs of the applicants / family
members which includes medical expenses, marriage of applicant / family
members, purchase of consumer durables, etc

7. V-Rakshak
An honour in recognition and appreciation of the role of Defence Personnel
to the nation. To meet the credit needs of the Defence Personnel
(serving/retired) for purchase of consumer durable/ motor vehicles, for
meeting any type of household expenses such as repairs/ renovations of the
house, educational / marriage/ medical expenses/ family functions, etc/
traveling expenses in India and abroad, etc.

8. V-Shikshak
An honour in recognition and appreciation of the role of teachers in serving
the society by imparting knowledge
Teachers can avail any of the following schemes under concessional rate :-

 V-Cash
 HDFC Home Loan

 HDFC Wheels

 V-Equip
27
9. V Swashakti
To expand the employment and Income Generating Schemes and
Programme so as to make women Self-reliant and economically
independent.
Offering assistance to Women Entrepreneurs for economic pursuits in Small
Business, Professional or Professional or Self Employed and Retail Trade
and Credit facilities to Women Entrepreneurs (Term Loan / Working capital)
for the following :

 Tailoring
 Canteen and Catering
 Pickle and Masala Making
 Clinics
 Papad Making
 Beauty Parlour
 Creche and Playschool
 Tuitions and Coaching Class
 Library
 Ceramics
 Departmental Stores
 Handicrafts
 Medical Shop
 Counseling
 Doctors / Chartered Accountants
 28

 Candle Making
 Health Center
 Laundry
 Bakery
 florist
 Travel Agency
 Milk Booth

10. V - PROFESSIONAL
Loans for the purpose of purchasing of equipments / vehicles for business,
repairing or renovating the existing equipments and / or acquiring and
repairing business premises or for purchasing tools and / or for working
capital requirements to eligible professionals to set up practice / business in
rural / semi urban centers.

11. V - SOLAR
Financing purchase and installation of domestic Solar home lighting system
including electrification Financing purchase and installation of domestic
solar water heating system including electrification

29
12. V - IPO

 Loan scheme to individuals for subscription to IPOs through public

issue including the Book Building route
 To provide the finance to confirmed employees to subscribe to the
shares of their own companies (which is acceptable to the Bank)
either under ESOP or IPO
 IPOs/ESOP (Employees Stock Option Plan) issued in Demat mode
only are to be accepted for financing. If the application is in joint
name, the Demat account will also be in joint names.
 IPOs /ESOPs to be financed under the scheme shall be those where
the full subscription money is called

13. Trade Finance

Individuals/proprietary concerns/partnership firms, private limited
companies or any legal entity engaged in business - retail trade, distributors,
stockists, commission agents, etc., are eligible for finance under this scheme,
for a period of 1 year, with the provision for yearly renewal.

14. Education Loan

Student should be an Indian National and should have secured admission to
the relevant Professional/ Technical courses in India or Abroad through
Entrance Test/ Merit Based Selection process. However there is no age
restriction for the applicant.
 30
Courses Eligible

A) Studies in INDIA

 Graduation courses : BA, B.Com., B.Sc., etc.

 Post Graduation courses : Masters & Phd.
 Professional Courses :Engineering, Medical, Agriculture, Veterinary,
Law, Dental, Management, Computer courses (BCA / MCA / BSc-
CS, etc)
 Animation /Cartooning/ multimedia/Graphic Designing, etc. where

the course period should be one year and above & the
courses conducted by reputed Institutions and the Institute to fulfil any
of the following criteria:
(i) NASSCOM rated/certified
(ii) AICTE affiliated
(iii) Accredited to any UGC affiliated university in India
(iv) Affiliated to reputed Foreign Universities
 Computer certificate courses of reputed institutes accredited to Dept.,
of Electronics or institutes affiliated to University.
 Courses like ICWA, CA, CFA etc.
 Courses conducted by IIM, IIT, IISc, XLRI.NIFT etc.
 Professional courses with ICFAI National College.
 Coursed offered by M/s. Frankfinn Institute of Air Hostess.
 31

 Pilot Training Programme. (Government or recognized private

institute approved by Director General of Civil Aviation, Government
of India).
 Courses offered in India by reputed foreign universities.
 Evening courses of approved institutes.
 Other courses leading to diploma/ degree etc, conducted by colleges/
universities approved by UGC/ Govt/ AICTE/ AIBMS/ ICMR etc.
 Courses offered by National Institutes and other reputed private
institutions. Banks may have the system of appraising other institution
courses depending on future prospects/ recognition by user institutions

B) Studies Abroad

 Graduation: For job oriented professional / technical courses offered

by the reputed university.
 Post graduation: MCA, MBA, MS, etc.
 Courses conducted by CIMA-London, CPA in USA, etc.
 Pilot Training Programme offered by recognized institutions abroad
approved by competent authority in that country. Example in USA the
Federal Aviation Administration, Government of USA.
The licences issued by such institutions should be convertible into
corresponding Indian Licences in case the applicant desires to take up
employment in India after completion of course/ training abroad, as
per directives of Director General of Civil Aviation, Government of
India.
 32
15. Jewel Loans
Individuals of all income groups

16. Loans To Small Road Transport Operators

Individuals/proprietary concerns/partnership firms, private limited
companies operating not more than 10 vehicles are eligible for loans to
purchase vehicles/meeting recurring expenses connected to transport
business.

17. V-Reverse Mortgage Loan Scheme

To meet the financial needs of senior citizens owning self acquired and self
occupied house property
For generating cash flow/to supplement pension/other income for day to day
requirements, renovation/up gradation of house, to meet medical expenses,
and for repayment of outside institutional liabilities.

B. Advances To Agriculture, MSME and Others

1. Agriculture
a) Agricultural Advances - Direct

Direct loans to Agriculture and allied activities include loans to individual

farmers or SHGs / JLGs of Farmers for the following purposes:
 33

 Short term loans for raising crops

 Short term loans to traditional Plantation and Horticulture.
 Pledge loans upto Rs. 10.00lakhs repayable in 12 mths irrespective of
whether farmers have availed crop loans or not.
 Working capital and term loans for financing production and
investment requirements for agriculture and allied activities.
 Loans to small and marginal farmers for purchase of land for
agricultural purposes.
 loans to distressed farmers indebted to Non-Institutional lenders
against appropriate collateral or group security.
 loans granted for Pre-Harvest or Post- harvest activities such as
spraying , weeding, harvesting, grading, sorting, processing and
transporting undertaken by individuals , SHGs and Co-operative in
rural areas.
 Short term loans for allied activities such as dairying, Fishery,
Piggery, Poultry, Bee Keeping etc.
 Purchase of agricultural implements and machinery – Iron ploughs,
harrows, hose, land - levellers, bund formers, hand tools, sprayers,
dusters, hay-press, sugarcane crushers, thresher machines etc.
 Purchase of farm Machinery - Tractors, trailers, power tillers, tractor
accessories viz Disc ploughs etc.
 Purchase of trucks, mini-trucks, jeeps, pick up vans, bullock carts and
other transport equipments etc., for agricultural purpose i.e.,
transportation of farm inputs / outputs.
 34

 Purchase of plough animals

 Construction of shallow and deep tube wells, tanks, etc.

 Constructing, deepening, clearing of surface wells, boring of wells,
electrification of well, purchase of oil engines and installation of
pumpsets, etc.
 Purchase and installation of turbine pumps, construction of field
chanelles .etc.
 Lift irrigation projects
 Installation of sprinkler / drip irrigation system (Mocro Irrigation)
 Purchase of generator sets for agricultural purpose
 Bunding of farm lands, levelling of land, terracing of dry paddy lands
into wet irrigable paddy lands, development of farm drainage,
reclamation of soil lands and prevention of salinisation, reclamation of
ravine lands, purchase bulldozers etc.
 Construction of Bullock sheds, implement sheds, tractor and tractor
sheds, vehicle sheds, farm stores etc.
 Construction and running of warehouses, godowns, silos and cold
storages.
 Production and processing of hybrid seeds of crops
 Development of dairying and animal husbandry in all its aspects
 Development of Fisheries
 Development of poultry, piggery, beekeeping / sheep, goat etc
 Development of sericulture
  Bio gas plants.

35

b) Direct Loans to Agriculture & Allied activities to Corporates,

Partnership Firms & Institutions

 Loans up to Rs.1.00 crore comes under Direct Agriculture.

 Loans in excess of Rs.1.00 crore, to the extend of only one third
portion over and above Rs.1.00 crore also come under direct
agriculture

c) Indirect loans to Agriculture

 Loans in excess of Rs.1.00 crore to Corporates, Partnership Firms &

Institutions, two thirds portion over and above Rs.1.00 crore come
under indirect agriculture
 Loans to Foor & Agro based processing units with investment cost on
plant and macheinery upto Rs.10.00 crore undertaken by those other
than individuals, SHGs and Co-Operatives in rural areas
 Credit for purchase & distribution of fertilizers, pesticides, seeds etc.
 Credit upto Rs.40.00 lakhs for purchase & distribution of inputs for
teh allied activities such as cattle feed, poultry feed etc
 Finance for hire purchase schemes for distribution of agricultural
machinery and implements.
 Loans for construction and running of storage facilities -warehouse,
market yards, godowns, silos, and cold storages designed to store
agriculture produce / products irrespective of the location.

36

 Advances to custom service units managed by individuals institutions

or organisations who maintain a fleet of tractors, bulldozers, well
boring equipment, threshers, combines etc. and undertake work for
farmers on contract basis.

 Finance for setting up of Agri Clinic and Agri Business Centers

 Loans to farments through primary agricultural credit societies
(PACS), Farmers Service Socities (FSS) Large Sized Adivasi
Multipurpose Societies (LAMPS)
 Loans to Co-operative Societies of farmers for disposing off the
produce of members.
 Financing farmers indirectly through the Co-operative system.
 Loans upto Rs.30.00 lakhs for dealers in Drip irregation / Sprinkler
Irregation / Agricultural Mechaniery irrespective of the location.
 Loans to NBFCs for on lending to individual farments or their SHGs
public JLGs.
 Loans granted to NGOs / MFIs for on lending to individual farmmers
of through SHGs / JLGs
2. Micro, Small and Medium Enterprises
a) Direct Finance
The Bank is encouraging credit flow to Small and Medium & Micro
Enterprises. This consist of both manufacturing and service sectors.

37
i) Micro (Manufacturing) Enterprises: The are Enterprises engaged in the
manufacture, production ,processing, preservation of goods and whose
investment cost in Plant & machinery does not exceed Rs.25.00 lakhs *.
ii) Small (Manufacturing) Enterprises: They are Enterprises engaged in
the manufacture, production , processing, preservation of goods and whose
investment cost in Plant & machinery does not exceed Rs.5.00 Crores.
iii) Micro (Service) Enterprises: Enterprises engaged in providing /
rendering of services, whose investent in equipment does not exceed Rs.
10.00 lakh **
iv) Small (Service) Enterprises: Enterprises engaged in providing /
rendering of services, whose investent in equipment does not exceed Rs.
2.00 Crores
The Micro and Small Service Enterprises will include Small Road and Water
Transport Operators, Small Business, Professional and Self-employed
persons and all other service enterprises as per the above definition.
Advances rendered to units in teh KVI Sector will also come under Micro &
Small Enterprises.
v) Medium (Manufacturing) Enterprises: Enterprises engaged in the
manufacture, production , processing, preservation of goods and whose
investment cost in Plant & machinery is above Rs.5.00 Crores & up to
Rs.10.00 crore
 38
vi) Medium (Service) Enterprises: Enterprises engaged in providing /
rendering of services, whose investent in equipment is above Rs. 2.00
Crores and upto Rs.5.00 crore
** original Cost excluding Land and Building and furniture fittings and
other items not directly related to the service rendered or as may be notified
under the MSMED Act.2006.
Loans to Micro and Small Enterprises will come under Priority Sector,
whereas loans to Medium Enterprises will come under Non-Priority Sector

b) Indirect Finance

i) Persons involved in assisting the decentralised sector in the supply of

inputs to and marketing of outputs of artisans, village and cottage
industries.
ii) Advances to co-operatives of producers in teh decentralised sector viz.
artisans, village and cottage industries.
iii) Loans granted by Banks to NBFCs for onlending to Small and Micro
Enterprises.

3. Others
a) Retail Traders
 i) Retail traders dealing in essential commodities (Fair Price shops)
consumer co-operative stores.

39

ii) Advances granted to Private Retail Traders with credit limits not
exceeding Rs.20.00 lakh

b) Micro Credit

i) Loans of very small amount not exceeding Rs.50,000.00 per borrower

provided either directly of indirectly through SHGs / JLG
mechanisum or to NBFC / MFIs for onlending upto Rs. 50,000.00 per
borrower.
ii) Loans to distressed persons (other than farmers ) to pre-pay their debt
to non- institutional lenders against approprate collateral or group
security

c) Educational Loans
Educational loans granted to individuals for educational purposes upto
Rs.10.00 lakh for studies

i) Rs.20.00 lakh for studies abroad.

ii) Loans to NBFCs for on lending to individuals for educational
purposes upto Rs.10.00lakh for studies in India and Rs.20.00 lakh for
studies abroad.

d) Housing Loans – Rural Housing

 i) Loans upto Rs.20.00 lakhs irrespective of location to individuals for
purchase / construction of dwelling unit per family.

40

ii) Loans for repairs to damaged dwelling units upto Rs. 1.00 lakh in
Rural & Semi Urban areas and upto Rs.2.00 lakh in Urban &
Metropolitan areas.
iii) Assistance given to any Governmental agencies for construction of
dewelling units or for slum clearence and rehabilitation of slum
dewellers, subject ot a ceiling of Rs.5.00 lakh of loan per dewelling
unit.
iv) Assistance given to a Non-Governmental agency approved by NHB
for the purpose of re-finance for construction / reconstruction of
dewlling units or for slum clearence and rehabliation of slum
dewellers subject to a ceiling of Rs.5.00 lakh per dewelling unit

Fair Practice Code on Lenders Liability

1. Product information

a. A prospective customer would be given all the necessary information

adequately explaining the range of loan products available with our
Bank to suit his needs.
b. On exercise of choice, the customer would be given the relevant
information about the loan product of his choice.
 c. The customer would be explained the processes involved till sanction
and disbursement of loan and would be notified of timeframe within
which all the processes will be completed ordinarily at our Bank.

40

d. The customer would be informed of the names and phone numbers of

branches and the persons whom he can contact for the purpose of loan
to suit his needs.
e. The customer would be informed the procedure involved in servicing
and closure of the loan taken.

2. Interest rates

a. Interest rates for different loan products would be made available

through and In anyone or all of the following media, namely:
i) In our Bank's Web site
ii) Over phone, if Tele Banking Services are provided.
iii) Through prominent display in the branches and at other delivery
points.
iv) Through other media from time to time.
b. Customers would be entitled to receive periodic updates on the
interest rates applicable to their accounts.
c. On demand, customers can have full details of method of application
of interest.

3. Revision in interest rate

 a. Our Bank would notify immediately or as soon as possible any
revision in the" existing interest rates and make them available to the
customers in the media: listed jn para 2(i).

41

b. Interest rate revisions to the existing customers would be notified

within 3 working days from the date of change.

4. Default interest / penal interest

Our Bank would notify clearly about the default interest/penal interest rates
to the prospective customers.

5. Charges

a. Our Bank would notify details of all charges payable by the customers
in relation to their loan account.
b. our bank would make available for the benefit of prospective
customers all the details relating to charges generally in respect of
retail products in the media as specified in para2(i).
c. Any revision in charges would be notified in advance and would also
be made available in the media as listed in para2(i).
d. Our bank would clearly specify the charge account for interest and
charges, wherever necessary and get a mandate for debiting the said
charge account alongwith the document.

6. Terms and Conditions for lending

 a. Our Bank would ordinarily give an acknowledgement of receipt of
loan request and if demanded by the customer.

42

b. Immediately after the decision to sanction the loan, our Bank would
show draft of the documents that the customer is required to execute
and would explain, if demanded by the customer, the relevant terms
and conditions for sanction and disbursement of loan,
c. Loan application forms, draft documents or such other papers to be
signed by customer should compre-henslvely contain all the terms and
conditions relating to the product or service of his choice.
d. Wherever possible, reasons for rejection of loan would be conveyed to
the customers.
e. Before disbursement of loan and on immediate execution of the loan
documents, our Bank would deliver a copy of the duly executed
documents to the customers.

7. Account Practices

a. Our Bank would provide regular statement of accounts, unless not

found necessary by the customers.
b. Our Bank would notify relevant due dates for application of agreed
interest, penal interest, default interest, and charges if they are not
mentioned in the Loan applications, documents or correspondence.
c. Our Bank would notify in advance any change in accounting practices
that would affect the customer, before implementation.
 43

8. Information Secrecy

a. All personal information of the customer would be confidential and

would not be disclosed to any third party unless agreed to by the
customer. The term "third party" excludes all Law Enforcement
agencies, Credit Information Bureau, Reserve Bank of India, other
banks and financial institutions.

Subject to above para, customer information would be revealed only under

the following circumstances, namely:
• If the Bank is compelled by law.
• If it is in the public interest to reveal the information.
• If the interests of our Bank require disclosure

9. Financial distress

a. Our Bank would reckon cases of customer's financial distress and

consider them sympathetically.
b. Customer would ne enchouraged to inform about their financial
distress as soon as possible.
c. Our Bank would adequately train the operational staff to give patient
hearing to the customer in financial distress and would render such
help as may be possible in their view.
 44

10. Grievance redressal

a. Our Bank would have a grievance redressal Cell/Department/Centre

within outside the organisation.
b. Our Bank would make available all the details namely:
• Where a complaint can be made
• How a complaint should be made
• When to expect a reply
• Whom to approach for redressal of grievance, etc.
To the customers individually on demand and through the media
listed in 2(i).
c. Response to a complaint whether positive or negative or requiring
more time for redressal would be given within a maximum period of
four weeks from the date complaint, unless the nature of complaint Is
such that It requires verification voluminous facts and figures.
 45

CHAPTER 2

RESEACH DESIGN
Title

A Study on Credit assessment and Credit management of HDFC Bank for

the financial years 2005-06 & 2006-07.

Statement of the Problem

HDFC Bank offers various loans which includes retail lending schemes like
V Trade Finance, V Cash, V Housing Loan ,etc. and others like Agriculture
loan, SME Credit, etc. It follows the RBI guidelines in formulating its
lending policy. This study is undertaken to analyse the loans & advances
made, ascertain the level of NPA, study the lending policy of the bank and
thereby to assess the credit position of HDFC Bank.

Scope of the Study

The area of study includes the following:-

• Analysis of the loan disbursements for two financial years and related
items like NPA, etc.
 • Study of the credit risk assessment document of the bank.
• Study of the credit policy of the bank.

46

Objectives of the Study

• To analyse the total loan disbursements during the two years.

• To analyse the distribution of credit scheme-wise and geographically.
• To undertake classification of advances and find out its percentage to
total advances.
• To analyse the NPA level for the two financial years.
• To study the credit management policy of the bank.

Methodology

The study is done by analysing the loan and financial statements, credit
management and assessment documents and lending policies of the bank.
This would be done by using secondary data. The data would be collected
from both published and unpublished sources.

Data Collection Methods

The secondary data would be collected from published and unpublished

sources which includes the following:-

• Lending policies
 • Loan and credit management documents
• Loan and financial statements
• Internet, etc.

47

Limitations

• The study is restricted to the use of secondary data.

• Lack of adequate data as complete details may not be available from
the sources mentioned.
• Time constraints, i.e., the study has to be complted within a specified
time.
• Inaccessibility to data as it involves the collection of confidential
information from the banks in terms of loan statements.
 48

CHAPTER 3
ANALYSIS AND
INTERPRETATION
ANALYSIS OF LOANS AND ADVANCES

1. TOTAL LOANS DISBURSEMENT

Table 3.1 Growth in Loans and Advances

(Rs. in crores)
PARTICULARS 31-3-06 31-3-07 INCREASE GROWTH

Total Loans and 17,062 24,644 7582 44.44 %

Advances
 49

30,000

25,000
Fig. 3.1a Comparison of Loans and Advances

INTERPRETATION
  The total loans and advances has increased by Rs.7582 cr. as on 31-3-
07.
 The bank has a growth of 44.44 % in the total loan disbursements
from 31-3-06.

50
2. SECTOR/SCHEME-WISE DISTRIBUTION OF CREDIT

Table 3.2 Sector/Scheme-Wise Increase/Decrease in Distribution of

Credit
(Rs. in crores)
Sl. No. PARTICULARS 31.3.06 31.3.07 INC / DEC INC/DEC(%)
SECTOR
1. Agriculture 2456 2865.72 409.72 16.68
2. SSI 1072 1208.12 136.12 12.69
3. Industry ( M&L) 1959 4105.99 2146.99 109.6
4. Wholesale Trade 252.1 324.41 72.31 28.68
5. Export Credit 882.8 1385 502.2 56.89
INDUSTRY-
WISE
DEPLOYMENT
6. Iron & Steel and 274.3 489.81 215.51 78.57
other Metals
7. Electricity 889.3 1570.81 681.51 76.63
8. Chemicals / Paints 266.1 450.25 184.15 69.2
/ Pharmaceuticals
9. Telecommunicatio 1973 3949.52 1976.52 100.18
n / Roads / Water
Supply
10. Engineering / 338.6 324.4 -14.2 -4.19
 Electronics

11. Builders & 382.9 450 67.1 17.52

Property
developers
12. Cotton Textiles 39.97 92.25 52.28 130.8
13. Other Textiles 111.3 156.34 45.04 40.47
14. Cement 62.21 55 -7.21 -11.59
15. Construction 187.8 390 202.2 107.76
16. Computer 33.21 45 11.79 35.5
Software
RETAIL
LENDING
SCHEME
17. Trade Finance 410.5 483.95 73.45 17.89
18. Housing Loan 3384 3819.39 435.39 12.87
19. Road Transport 81.29 100.78 19.49 23.97
Operators
20. LMV 241.7 922.55 680.85 281.69
21. V-Cash 708.1 683.48 -24.62 -3.47
22. V-Equip 20.06 15.46 -4.6 -22.93
23. V-Rent 398.8 729.10 330.3 82.82
24. V-Mortgage 212.7 269.89 57.19 26.89
25. V-Professional 12.82 10.67 -2.15 -16.77
26. V-Mangala 11.29 6.99 -4.3 -38.08
27. V-Kanyadan 7.97 7.74 -0.23 -2.88
28. V-Solar (light) 0.31 0.47 0.16 51.61
29. V-Solar (heat) 0.34 1.75 1.41 414.7
30. V-Pensions 9.76 11.69 1.93 19.77
31. Educational Loan 139.4 209.23 69.83 50.09
32. Jewel Loan 107 168.92 61.92 57.87
33. V-Arogya 0.07 0.09 0.02 28.57
34. V-IPO 0.07 -- -0.07 -100
35. V-Nivesh 0.35 0.17 -0.18 -51.43
36. V-Swashakti 0.8 2.90 2.1 262.5
37. V-Rakshak -- 0.45 0.45 100
38. V-Shikshak -- -- -- --

INTERPRETATION
 The above analysis shows that there is a constant growth in majority
of the sectors/schemes.
 There has been a decrease in the total loan disbursement from 31.3.06
in areas like Engineering and Cement and schemes like V-Cash, V-
Equip, V-Professional, V-Mangala, V-Kanyadan, V-IPO and V-
Nivesh.
 The increase in loans and advances is highest in the industrial sector,
i.e., an increase of Rs.2146.99 cr. having a growth of 109.6%.
 The V-Solar (heat) scheme has recorded the highest growth among the
various sectors and schemes, i.e., 414.7%.

53
 The increase in loan disbursement is lowest in the V-Arogya scheme
having an increase of only Rs.0.02 cr.
 In the SSI sector the growth is lowest having an increase of only
12.69% in the total advances.

3. GEOGRAPHICAL DISTRIBUTION OF CREDIT

Table 3.3 Geographical Distribution of Credit and its Percentage to

Total Advances
(Rs. in crores)
PLACE 31.3.06 31.3.07
CREDIT % OF CREDIT % OF
CREDIT CREDIT
Rural 1642.86 9.63 1988.2 8.07

Semi-Urban 1661.19 9.74 1799.41 7.3

Urban 3012.67 17.65 4081.61 16.56

Metro 10745.12 62.98 16774.69 68.07

Total 17061.84 100 24643.91 100

54
 18000

16000
Fig. 3.3a Geographical Distribution of Credit and its comparison for
two years

14000
INTERPRETATION
 There is a constant increase in the gross credit in all the geographical
regions from 05-06 to 06-07.
 The demand for credit is the highest in the metropolitan places and
lowest in the rural and semi-urban areas.
 For both the years, the metropolitan places comprise the major portion
of the gross credit while the rural and semi-urban areas comprise the

12000
lowest.
55
4. CLASSIFICATION OF ADVANCES AND ITS PERCENTAGE TO
TOTAL ADVANCES

Table 3.4 Classification of Advances and its Percentage to Total

Advances
(Rs. in crores)
PARTICULARS 31.3.06 31.3.07
AMOUNT % AMOUNT %
Standard 16521.7 96.83 24079.6 97.71
Advances

Sub-standard 267.97 1.57 289.48 1.17

Advances

Doubtful 238.02 1.4 208.95 0.85

Advances

Loss 34.16 0.2 65.88 0.27

Advances

Total 17061.84 100 24643.91 100

56
 30000

Fig. 3.4a Classification of Advances and its comparison for two years

INTERPRETATION 25000
 The standard advances comprise the major portion of the total
advances of the bank for both the years.
 The doubtful advances have decreased by Rs.29.07cr. from 31.3.06 to
31.3.07 and comprises of only 0.85% of the total advances as on
31.3.07.
57
  However, there is an increase in the loss advances by Rs.31.72cr.
 The standard and sub-standard advances comprise the major portion
of the total advances of the bank while the doubtful and loss advances
constitute only a small portion of the total advances.

NON-PERFORMING ASSETS ANALYSIS

5. GROSS NPA AND TOTAL ADVANCES

Table 3.5 Gross NPA and its Percentage to Total Advances

(Rs. in crores)
PARTICULARS 31.3.06 31.3.07

Gross NPA 540.15 564.31

Total advances 17061.84 24643.91

Percentage of NPA 3.17% 2.29%

 30000

Fig. 3.5a Comparison of Gross NPA and Total Advances for two years

INTERPRETATION
25000
 The percentage of gross NPA to total advances has reduced from 3.17%
to 2.29% from 31.3.06 to 31.3.07.
 The total gross NPA has increased to Rs.564.31cr. from Rs.540.15cr.
with the increase in total advances.

59
6. NET NPA AND NET ADVANCES

Table 3.6 Net NPA and its Percentage to Net Advances

(Rs. in crores)
PARTICULARS 31.3.06 31.3.07

Net NPA 142.32 143.96

Net advances 16664.01 24223.57

Percentage of NPA 0.85% 0.59%

60
 30000

Fig 3.6a Comparison of Net NPA and Net Advances for two years

INTERPRETATION 25000
 The percentage of net NPA to net advances has reduced to 0.59%
from 0.85%.
 The total net NPA has increased to Rs.143.96cr. from Rs.142.32cr.
with the increase in net advances.

61
7. NPA PROVISION COVERAGE RATIO (Provision as a
Percentage to Total NPA)

Table 3.7 NPA Provision Coverage Ratio

(Rs. in crores)
PARTICULARS 31.3.06 31.3.07

Total NPA 540.15 564.31

Total Provisions 391.83 420.35

Coverage Ratio 72.54% 74.49%

62
 600

Fig. 3.7a Comparison of Total NPA and Total Provisions for two years

INTERPRETATION
500
 The coverage ratio has improved to 74.49% from 72.54%, as on
31.3.06.
 The total provisions against NPA have increased to Rs.420.35cr. from
Rs.391.83cr. with the increase in NPA.

63
8. TARGET AND ACTUAL LEVEL OF GROSS NPA

Table 3.8 Percentage of Achievement of Targeted Gross NPA

(Rs. in crores)
PARTICULARS 31.3.06 31.3.07

Target level of Gross 450 430.3

NPA

Actual Gross NPA 540.15 564.31

Percentage of 83.31% 76.25%

achievement

64
 600

Fig. 3.8a Comparison of Targeted and Actual level of Gross NPA for

500two years

INTERPRETATION
 The target set for Gross NPA level has not been achieved for both the
years, i.e., the actual level is more than the targeted level.
 The percentage of achievement has also reduced to 76.25% from
83.31% in the year 06-07.
 For the year 06-07, the target set for NPA was lower than the previous
year but the actual gross NPA was higher than the previous year.
65

400
9. TARGET AND ACHIEVEMENT FOR RECOVERY OF
NPA

Table 3.9 Percentage of Achievement of Targeted Recovery of NPA

(Rs. in crores)
PARTICULARS 31.3.06 31.3.07

Target for Recovery of 245 275

NPA

Total Recovery of NPA 205.57 281.11

(including interest
income received)
Percentage of 83.9% 102.22%
achievement

66
 300

Fig 3.9a Comparison of Targeted and Total Recovery of NPA for two

250 years

INTERPRETATION
 The target set for recovery of NPA has been under achieved for the
year 05-06 and over achieved for 06-07.
 The percentage of achievement of NPA recovery has improved to
102.22% from 83.9%

67

200
STUDY OF THE CREDIT MANAGEMENT POLICY

The credit management policy of the bank is divided into two main
parts. They are:-
1. General Controls for Credit Risk Management or Risk
Management Architecture
2. Credit Risk Management Controls

1. General Controls for Credit Risk Management or Risk

Management Architecture
a) Adequacy of Credit Risk Management Structure
Risk management department has been set up in the bank to manage risks in
an integrated manner and to mitigate risks in various activities. Bank has
also set up a board level sub-committee known as management committee of
board besides dedicated risk management committees for credit,
market(ALCO) and operations risk to monitor and guide the functions of
risk management.

Risk management policies covering credit risk management and operational

riskmanagement aspects have been reviewed and integrated risk
management policy has been put in place. Risk management principles are
incorporated in the lending policy, investment policy, asset liability
management policy, country risk management pplicy etc. bank is imparting
68
necessary training on risk management and risk based supervision to the
core staff responsible for implementation of risk management policies.
The credit risk rating covers all retail borrowers and non retail borrowal
accounts with exposures beyond Rs. 2 lakhs. Advances against deposits,
government sponsored schemes are for the present kept outside the purview
of rating exercise.

b) Quality of Board and Top Management oversight over Credit

Management function
Apart from the board, which oversees the risk management system in the
bank, the bank, as per the RBI directives, has also constituted a board level
sub committee of the board to sub serve the board in recommending and
administering the risk policies. On half yearly basis, the board is apprised of
the overall risk management and ALM system implementation. Besides the
RMCB is also apprised of the proceedings of the various top
management/executive level risk management are familiar with the risk
appetite, risk bearing and risk taking capacity of the bank.

c) Frequency of review/monitoring of policies and procedures by the

Board and Board Committees
The board meets at periodical intervals to review the banks performance,
approve changes in the policy guidelines in keeping with Apex banks and
other regulatory Authorities guidelines and is assisted by several committees
like the following:

69
 1. Management committee
2. Audit committee
3. Directors promotion committee
4. Risk management committee
5. Committee to review the fraud cases of above Rs.1cr
6. Shareholders /investors grievances committee
7. Share transfer committee and
8. Customer service committee.

In order to monitor the progress and to assess the performance of banks

activities, the board meets at least 6 times in a year. During the first quarter
ending 30.06.07 the board met 9 times. The numbers of meetings held by
each of the committees of the board as well as board of directors during the
period 01.04.07 to 30.06.07 are as under:

Sl.No Board / Committee of the Board No of meetings

held
1 Board of Directors 3
2 Management Committee 2
3 Directors promotion committee 1
4 Audit Committee 2
5 Risk Management Committee 1
6 Committee to review fraud cases of Rs.1 -
crore and above
7 Shareholders / Investors Grievances 1
committee
8 Share Transfer committee 4
9 Customer Service Committee 1
d) Understanding of the policies, policies, procedures, risks, limits, etc.
by the senior management and line functionaries
The members of various risk management committees of executives are part
of the banks top management team. They are familiar with the risk appetite,
risk bearing and risk taking capacity of the bank. The regulatory as well as
advisory guidelines received are being appraised to RMC and the board for
information as well as guidance/directions.

Risk management is yet to become a fully centralized function. However,

supervisory responsibilities are demarcated among the members of senior
management team who are functional heads of operating departments.

e) Assessment of the independent review by the internal audit of the

effectiveness of credit risk management function
A well defined system of periodical as well as surprise internal audit is in
place in the bank. The same is supplemented by concurrent audits covering
more than 50% of total deposit and advances of the bank. Bank has also
systems and practices n place for revenue audit, computer audit etc. on an
on-going basis.

71
f) Adequacy of IT support for Credit Risk Management
Bank is implementing core banking solution with a centralized database
through WAN. This will improve the information flow for taking timely
decisions by the management. Also, currently the bank is in the process of
procuring software models, which will enhance the adequacy of MIS and
other support for effective credit risk management system.

2. Credit Risk Management Controls

a) Credit related policies
i) Adequacy of loan policy, restructuring policy, and recovery policies
The banks have already put in place comprehensive policies on lending,
recovery and restructuring, provisioning, compromise and write off. These
policies are being review and updated periodically in tune with the priorities
of the bank and the business environment.

ii) Adherence to the laid down policies-extent of deviations-pre-sanction

appraisal deficiencies not in alignment with the policy
Adherence to the laid down policies, deviations if any, etc are examined
independently under loan review mechanism. Within a period of three
months after the sanction, such review is carried out in respect of accounts
with exposure of Rs.2crores and above

72
iii) Pre-sanction appraisal
Lending policy of the bank stipulates the appraisal standards and criteria to
be followed while a credit process is initiated. The policy stipulates various
criteria, inter-alia, minimum risk rating for entertaining proposals, various
financial ratios, benchmark ratios, etc to be considered during the pre-
sanction appraisal.

b) Delegation of Powers – Extent of unauthorized lending

• Powers for sanction/approval of various credit related activities have

been delegated to various authorities at the branches, regional offices
and head offices and head office with the management committee of
the board having full powers within the prudential lending limits
permissible under RBI guidelines.
• Judicious exercise of these powers is ensured through scrutiny of
control returns by the respective next higher authority and also
through Loan Review Mechanism

c) Post disbursement supervision

i) Documentation
Documentation standards have been dealt with in depth in the manual of
instruction on documentation, and also lending policy of the bank covering
all types of credit facilities and it is periodically reviewed and updated. Bank
has introduced the system of legal audit for exposures of Rs.1cr and above to
ensure proper documentation in terms of credit approval.
73

ii) Review and renewal

The lending policy of the bank has stipulated varying time schedule for
review of borrowal accounts on the basis of credit rating.
iii) Verification of collaterals
Securities verified at the time of disbursement and updated in case of fresh,
additions, closer, modification etc, wherever applicable. It is also ensured
that the prescribed margin is maintained and there is adequate cover for the
liability and no deterioration in the value of the security.

iv) Adequacy of insurance cover

Maintenance of assets collateralized to the bank plays an important role for
its use in generating sufficient income or value realization at a future date.
Accordingly, the movable/immovable assets secured to the bank facilities
are adequately insured with an insurance agency 9approved by IRDA), and
kept in force till the entire exposure is cleared.

v) Creation of charges
Charge creation is made within the stipulated time and monitoring of the
same is done through compliance of sanction terms through various review
reports.

vi) Verification of end-use of funds

Bank has been issuing several circulars from time time indicating the
verification of end use of funds. In order to supplement the efforts of the
74
branch officials, an executive from the R.O accompanied by the processing
officer concerned visits the branch and assist in release of the credit and this
is made mandatory in large credit facilities. Once the assignment is fully
completed, they must submit a visit report to the regional head as to the
steps/action taken and methodology adopted by them in assisting the branch
for ensuring that the funds have been released for the purpose for which the
sanction is made.

vii) Monitoring of problem credits

• The bank has a separate system of monitoring problem credit to
ensure proper and close monitoring of large borrowable account.
• All exposures above Rs.25 lakhs are under a regular monitoring
process at the controlling office/HO larger exposures Rs.1cr and
above are being reviewed every month.
• Accounts classified under HC 2 are given special attention and
reviewed so that it does not slip to NPA category.

viii) Monitoring of large credit exposures

Bank undertakes an independent loan review exercise, with regard to
sanction process and also quarterly review of large borrowable accounts,
beyond a cut-off limit.

ix) Review of off-balance sheet exposures

While entertaining proposals involving off-balance sheet exposures such as,
guarantees, LCs and other obligations, it is ensured that the exposure is
75
within the limit (counter party limits) fixed/allowed and simultaneously
undertakes suitable hedging activities to avoid related risk in the process.
Also they are being subjected to usual credit risk appraisal and for
compliance with the prudential limits.

x) Adequacy of loan review mechanism

Loan review mechanism is already put in place and it includes accounts with
the exposure of Rs.2 crores and above. Committee approach is being
adopted to make review of all exposure (fund and non fund based) either
fresh or renewals exceeding Rs.2 crores.

76
 CHAPTER 4
FINDINGS

The findings of the study are as follows:-

1. Loans and Advances

 The total loans and advances has increased by Rs.7582 cr. as on 31-3-
07.
 The bank has a growth of 44.44 % in the total loan disbursements
from 31-3-06.
 There is a constant growth in loan disbursements in majority of the
sectors/schemes.
 There has been a decrease in the total loan disbursement from 31.3.06
in areas like Engineering and Cement and schemes like V-Cash, V-
Equip, V-Professional, V-Mangala, V-Kanyadan, V-IPO and V-
Nivesh.
 The increase in loans and advances is highest in the industrial sector,
i.e., an increase of Rs.2146.99 cr. having a growth of 109.6%.
 The V-Solar (heat) scheme has recorded the highest growth among the
various sectors and schemes, i.e., 414.7%.
 The increase in loan disbursement is lowest in the V-Arogya scheme
having an increase of only Rs.0.02 cr.
 In the SSI sector the growth is lowest having an increase of only
12.69% in the total advances.
 There is a constant increase in the gross credit in all the geographical
regions from 05-06 to 06-07.
 The demand for credit is the highest in the metropolitan places and
lowest in the rural and semi-urban areas
77
 For both the years, the metropolitan places comprise the major portion
of the gross credit while the rural and semi-urban areas comprise the
lowest.
 The standard advances comprise the major portion of the total
advances of the bank for both the years.
  The doubtful advances have decreased by Rs.29.07cr. from 31.3.06 to
31.3.07 and comprises of only 0.85% of the total advances as on
31.3.07.
 There is an increase in the loss advances by Rs.31.72cr.
 The standard and sub-standard advances comprise the major portion
of the total advances of the bank while the doubtful and loss advances
constitute only a small portion of the total advances.

2. Non Performing Assets

 The percentage of gross NPA to total advances has reduced from
3.17% to 2.29% from 31.3.06 to 31.3.07.
 The total gross NPA has increased to Rs.564.31cr. from Rs.540.15cr.
with the increase in total advances.
 The percentage of net NPA to net advances has reduced to 0.59%
from 0.85%.
 The total net NPA has increased to Rs.143.96cr. from Rs.142.32cr.
with the increase in net advances.
 The coverage ratio has improved to 74.49% from 72.54%, as on
31.3.06.
78
 The total provisions against NPA have increased to Rs.420.35cr. from
Rs.391.83cr. with the increase in NPA.
 The target set for Gross NPA level has not been achieved for both the
years, i.e., the actual level is more than the targeted level.
  The percentage of achievement of targeted gross NPA has also
reduced to 76.25% from 83.31% in the year 06-07.
 For the year 06-07, the target set for NPA was lower than the previous
year but the actual gross NPA was higher than the previous year.
 The target set for recovery of NPA has been under achieved for the
year 05-06 and over achieved for 06-07.
 The percentage of achievement of NPA recovery has improved to
102.22% from 83.9%.

3. Credit Management Policy

 The Credit Risk Management structure consists of a Risk
Management Department and a board level sub-committee known as
Risk Management Committee of Board to sub-serve the Board in
recommending and administering the risk policies.
 An Integrated Risk Management Policy has been put in place.
 The Board meets at periodical intervals to review and monitor the
bank’s policies and procedures in keeping with the guidelines
provided by various Regulatory Authorities.
 A well-defined system of periodical as well as surprise internal audit
is in place in the bank.
79
 The bank is implementing Core Banking Solution with a Centralized
Database through with WAN.
 The bank has put in place comprehensive policies on Lending,
Recovery & Restructuring, Compromise and Write-off.
 The deviations from the laid policies are examined independently
under Loan Review Mechanism.
 The policy stipulates various criteria like minimum risk rating for
entertaining proposals, benchmark ratios, etc. during the pre-sanction
appraisal.
 The Management Committee of the Board has full powers for
approval of various credit related activities.
 The post disbursement supervision includes proper documentation,
review and renewal of borrowal accounts, verification of collaterals,
verification of end-use of funds, monitoring of large credit exposures,
adequacy of loan review mechanism, etc.

80
 CHAPTER 5
CONCLUSION

There is a nominal increase in the net advances of the Bank from

Rs.17062cr. as at 31.3.06 to Rs.24644cr. as at 31.3.07 (increase by
Rs.7582cr. Retail Lending, including Housing Loan segments were given
thrust to spread the risk and to improve yield on advance, as it contributes
30.21% of the net advances. As at 31.3.07, the Standard Advances account
for 97.71% of the total advances.

The Gross NPA which was Rs.540.15cr. as on 31.3.06 has increased to

Rs.564.31cr. as at 31.3.07. The percentage of Gross NPA to Gross Advances
has decreased from 3.17% as at 31.3.06 to 2.29% as at 31.3.07. The Net
NPA, which was at Rs.142.32cr. as on 31.3.06 has increased to Rs.143.96cr.
as at 31.3.07. In terms of percentage, the net NPA which was 0.85% of net
credit as on 31.3.06, has reduced to 0.59% of the net credit as at 31.3.07.
This is below 1% for the last three years.

The total provisions held on account of NPA as on 31.3.07 was Rs.420.35cr.

which includes floating provision of Rs.213cr. over and above the provision
of requirement as per IRAC norms. By virtue of this, the coverage ratio of
NPA as on 31.3.07 stood at 74.49%.

The Bank has adopted a comprehensive Recovery Management Policy

encompassing all aspects of Credit Recovery Management including
negotiated settlement. Close monitoring of credit exposure through
periodical ratings, migration analysis, Loan Review Mechanism, quarterly
Special Review of High Value Borrowal Accounts, periodical review of
81

special watch accounts & initiation of timely corrective actions, have

enhanced the quality of credit. Monitoring of Retail Portfolio has been
strengthened & risk rating models for retail lending has been put in place.
These measures have started yielding good results in reducing the credit
delinquency, as reflected in consistently low NPA ratio, at below one
percent & also quantum of unsecured advances to net advances is on the
declining trend & is at 13.12% as at 30.06.2007

With a view to meeting increased competition, the bank has given greater
thrust for mobilizing low cost deposits, disbursing retail credit, recovery of
NPAs, controls over operating expenses, etc., so that there is a constant
improvement in the profitability front. The bank is also giving importance to
enlarge coverage of core banking and develop new products so as to meet
the customer expectations. Single Window concept has been introduced to
enhance the customer service.

82