The bank was established in 1895 at Lahore.

Punjab National Bank (PNB) is the second largest government-owned commercial bank in India. Having more than 3.5 crore customer, Punjab National Bank has one of the largest branch networks in India. The Head Office is situated at New Delhi. Total Income - Rs. 305990.603 Million ( year ending Mar 2011) Net Profit - Rs. 44334.953 Million ( year ending Mar 2011)

Risk is measure on a scale, with certainty of occurrence at one end and certainty of non-occurrence at the other end. Risk is the greatest where the probability of occurrence or non-occurrence is equal. Risk is the potentiality that both the expected and unexpected events may have an adverse impact the banks capital or earnings.

Risk is inevitable in everything we do. The process for managing risks is: identify all realistic risks analyze their probability and potential impact. decide whether action should be taken now to avoid or reduce the risk and to reduce the impact if it does occur where appropriate, make plans now so that the organization is prepared to deal with the risk should it occur constantly monitor the situation to watch for risks occurring, new risks emerging, or changes in the assessment of existing risks.

 a) b) c)

Credit Risk Market Risk Liquidity Risk Interest Rate Risk Forex Risk Operational Risk

Credit Risk is the potential that a bank borrower/counter party fails to meet the obligations on agreed terms. In a banks portfolio,losses stem from outright default due to inability or unwillingness of a customer or counterparty to meet commitments in relation to lending,trading,settlement and other financial transactions

 To

minimize the risk and maximize banks risk adjusted rate of return by assuming and maintaining credit exposure within the acceptable parameters.

 In

the case of direct lending: principal /and or interest amount may not be repaid. In the case of guarantees or letters of credit. In the case of treasury operations. In the case of securities trading businesses. In the case of cross-border exposure.

Policy and Strategy: The Board of Directors of each bank shall be responsible for approving and periodically reviewing the credit risk strategy and significant credit risk policies.

Credit Risk Policy

Credit Risk Strategy Organisational Structure: Sound organizational structure is sine qua non for successful implementation of an effective credit risk management system. Operations/ Systems: Banks should have in place an appropriate credit administration, credit risk measurement and monitoring processes .

Board of Directors The Risk Management Committee Credit Risk Management Committee (CRMC) headed by the Chairman/CEO/ED Credit Risk Management Department (CRMD)

Credit

administration process:

Portfolio management phase Relationship management phase i.e. business development. Transaction management phase

 Credit

risk rating framework (CRF) is necessary to avoit the limitation with asimplistic and broad classification of loans/exposures into good or bad category. The CRF deploys a number/alphabet/symbol as a primary summary indicator of risks associated with a credit exposure.

CRF can be used for the following purposes: Individual credit selection, wherein either a borrower or a particular exposures 'facility is rating on the CRF. Pricing and specific features of the loan facility. This would largely constitutes transaction-level analysis. Portfolio-level analysis. Surveillance, monitoring and internal MIS. Assessing the aggregate risk profile of bank/lender. These would be relevant for portfolio-level analysis. For instance, the spread of the credit exposures across various CRF category and overall migration of exposures would highlight the aggregated credit-risk for the entire portfolio of the bank.

Grading system for calibration of credit risk Nature of grading system Number of grades used Key outputs of CRF Operating design of CRF Which exposure are rating The risk rating process Assigning and monitoring risk ratings The mechanism of arriving at risk ratings Standardization and benchmark for risk ratings Written communication and formality of procedures CRFs and Portfolio Credit Risk Portfolio surveillance and reporting Adequate levels of provisioning for credit events Guideline for asset build up,aggregate profitability and pricing Interaction with external credit assessment institutions

 The

grades(symbols,no.s,alphabet,descriptive term) used in the internal credit-rates grading system should represent, without any ambiguity, the default risks assoiciated with an exposure. The grading system should enable comparison of risks for purpose of analysis and decision making management.

 The

grading system adopted in CRF could be an alphabetic or numeric or an alpha-numeric scale. Since rating agencies should follow a particular scale (AAA,AA+,BBB etc),it would be prudent to adopt different rating scale to avoid confusion in internal communications. Besides,the adoption of different rating scale would permit comparable benchmarking between the two mechanisms. The number of grades for the acceptable and unacceptable credit-risk categories would depend upon the finesse of risk gradation.

 The

number of grades used in the CRF depends on the anticipated spread in credit quality of the exposures taken by the banks. This ,in turn, depends upon the present and future profile of the bank and the anticipated level of specialization/diversification in the credit portfolio.

 The

calibration on the rating scale is expected to define the pricing and related terms and the condition for the accepted credit exposures. The calibration on the rating scale would allow prescription of limits on the maximum quantum of exposure permissible for any credit proposal. The rating scale could also be used for deciding on the tenure of the proposed assistance. The rating scale could be used to decide on the frequency /intensity of monitoring of the exposure . Though loss-provisions are often specified by the regulator(e.g. the RBI norms), banks should develop their own internal norms and maintain certain level of reasonable over-provisioning as the best practice

Which exposures are Rated ? The first element of the operating design is to determine which exposures are required to be rated through the CRF. There may be a case for size based classification of exposure and linking the risk rating process to these size based categories

Step 1 : Identify all the principal business and financial risk elements . Step 2 : Allocate weights to principal risk components . Step 3 : Compare with weights given in similar sectors and check for consistency Step 4 : Establish the key parameters Step 5 : Assign weight to each of the key parameters Step 6 : Rank the key parameters on the specified scale Step 7 : Arrive at the credit risk rating on the CRF Step 8 : Compare with the previous risk rating of similar exposures and check for consistency Step 9 : Conclude the credit risk calibration on the CRF.

In a lending environment dominated by industrial and corporate credits the assigners of risk rating utilize benchmarks or prespecified standards for assessing the risk profile of a potential borrower . These standards usually consist of financial ratios and credit migration statistics , which capture the financial risk faced by the potential borrower (e.g. operating and financial leverage , profitability , liquidity etc). The business risk associated with an exposure (e.g. cyclicality of industry , threats of product or technology substitution etc ) are also addressed in the CRF . The output of the credit appraisal process , specifically the financial ratios , is directly compared with the specified benchmarks for a particular risk category . In these cases , there risk rating is fairly standardized and CRF allocates a grade or a numeric value for the overall risk profile of the proposed exposure.

MANAGEMENT RISK
Promoters/Patners experience in the business/industry

MAXIMUM SCORE
4

SCORE AWARDED

REMARKS IF ANY

Credibility
Payment Records to banks/Fis including our bank Percentage achievement of Sales projections

integrity

Percentage achievement of Net Profit Projection

Exposure Ceilings Review/Renewal Risk Rating Model Risk based scientific pricing Portfolio Management Loan Review Mechanism

During the cost of its business a bank may assume to exposures on other banks,arising from trade transaction,money placement for liquidity management,purposes,hedging,trading and transactional banking services such as clearing and custody etc. The financial parameters to be evaluated for the bank are: Capital adequacy Asset quality Liquidity Profitability

 Market

Risk may be defined as the possibility of loss to bank caused by the changes in the market variables. Market risk is the risk to the banks earnings and capital due to changes in the market level of interest rates or prices of securities, foreign exchange and equities, as well as the volatilities, of those prices. Market Risk Management provides a comprehensive and dynamic frame work for measuring, monitoring and managing: Liquidity Interest rate Foreign exchange Equity and commodity price risk of a bank

 Liquidity

Risk Funding Risk Time risk Call risk Interest Rate Risk Gap/Mismatch risk Basis Risk Reinvestment risk Reprise risk Forex Risk

 This

is the risk that arises due to cross border transactions that are growing dramatically in the recent years owing to economic liberalization and globalization. It is the possibility that a country will be unable to service or repay debts to foreign lenders in time. In the process there can be a situation in which seller (exporter) may deliver the goods, but may not be paid or the buyer (importer) might have paid the money in advance but was not delivered the goods for one or the other reasons.

Always banks live with the risks arising out of human error, financial fraud and natural disasters. Exponential growth in the use of technology and increase in global financial inter-linkages are the two primary changes that contributed to such risks. Operational risk, thoughdefined as any risk that is not categorized as market or credit risk, is the risk of loss arising from inadequate or failed internal processes, people and systems or from external events. The key to management ofoperational risk lies in the banks ability to assess its process for vulnerability and establish controls as well as safeguards while providing for unanticipated worst-case scenarios 20% charge on the Capital Funds is earmarked for operational risk and based on subsequent data/feedback, it was reduced to 12%. While measurement of operational risk and computing capital charges as envisaged in the Baselproposals are to be the ultimate goals, what is to be done at present is start implementing the Basel proposal in a phased manner andcarefully plan in that direction.

When owned funds alone are managed by an entity, it is natural that very few regulators operate and supervise them. However, as banks accept deposit from public obviously better governance is expected of them. This entails multiplicity of regulatory controls. As banks deal with public funds and money, they are subject to various regulations. The very many regulators include: RBI, SEBI, Department of Company Affairs (DCA), etc. Banks should learn the art of playing their business activities within the regulatory controls

As the years roll by and technological advancement take place, expectation of the customers change and enlarge. With the economic liberalization and globalization, more national and international players are operating the financial markets, particularly in the banking field. This provides the platform for environmental change and exposes the bank to the environmental risk. Thus, unless the banks improve their delivery channels, reach customers, innovate their products that are service oriented, they are exposed to the environmental risk resulting in loss in business share with consequential profit.

The Basel Committee on banking Supervision had released in june 1999 the first consultative paper on a New Capital Adequacy Frameworkwith the intention of replacing the current broad-brush 1988 Accord. The Basel Committee has released a Second Consultative Document in January 2001,which contains refined proposals for the three pillars of the New Accord-Minimum Capital Requirements Supervisory Review and Market Discipline. It focused on the total amount of bank capital so as to reduce the risk of bank solvency at the potential cost of banks failure for the depositors Basel standards currently require banks to have a capital adequacy ratio of 8% with Tier I not less than 4%, RBI has mandated the banks to maintain CAR of 9%.

 The

capital Adequacy Ratio is the percentage of banks Capital Funds in relation to the Risk Weighted Assets of the bank. The Basel standards currently require banks to have a capital adequacy ratio of 80% with Tier 1 ratio not less than 4 %.The RBI requirement is 9%.The Basel Committee is planning to introduce the New Capital Accord and these requirements could change the dimensions of the capital of banks. Capital adequacy needs to be appropriate to the size and structure of the balance sheet as it represents the buffer to absorb losses during difficult times.

EXISTING CCORD Focus on single risk

NEW ACCORD More emphasis on banks measure own internal methodology supervisory Review and market discipline Flexibility, menu of approaches, incentive for better risk management

One size fits all

Broad brush structure

More risk sensitivity

Capital Adequacy in relation to economic risk is a necessary condition for the long-term soundness of banks. Aggregate risk exposure is estimated through Risk Adjusted Return on Capital (RAROC) and Earnings at Risk (EaR) method. Former is used by bank with international presence and the RAROC process estimates the cost of Economic Capital & expected losses that may prevail in the worst-case scenario and then equates the capital cushion to be provided for the potential loss. RAROC is the first step towards examining the institutions entire balance sheet on a mark to market basis, if only to understand the risk return trade off that have been made.

Risk management underscores the fact that the survival of an organization depends heavily on its capabilities to anticipate and prepare for the change rather than just waiting for the change and react to it. . The objective of risk management is not to prohibit or prevent risk taking activity, but to ensure that the risks are consciously taken with full knowledge, clear purpose and understanding so that it can be measured and mitigated. It also prevents an institution from suffering unacceptable loss causing an institution to fail or materially damage its competitive position. Any risk management model is as good as the data input. With the onslaught of globalization and liberalization from the last decade of the 20th Century in the Indian financial sectors in general and banking in particular, managing Transformation would be the biggest challenge, as transformation and change are the only certainties of the future.