canara bank

Acknowledgement

I would like to thank, Mr. Shivanappa of IMS, for the

guidance that she has given to me in the conduction of my project work.

I express my profound thanks to Mr. Divakaran my teacher

and guide, who has been magnanimous in guiding, encouraging and

supporting me during this project and he/she guided me to choose this

immensely productive topic and it was because of his/her confidence in me

that I have been able to carry out such a study report.

I also wish to thank all those respondents who were patient

enough in giving answer to my questionnaire.

I would like to extend my gratitude to my parents, friends for

their consistent encouragement, suggestions and moral support.

Shivanappa

HET’s IMS, Hubli

HET’s INSTITUTE OF MANAGEMENT STUDIES HUBLI

Index

Chapter 1 Rationale for the study

Chapter 2 Objective of the study

Title of the project

Objective of the study

Scope of the study

Chapter 3 Profile of the company

Chapter 4 Theoretical Perceptive

Chapter 5 Research Methodology

Research Design

Data collection methods / sources

Sampling plan which should include sampling unit,

sampling size and sampling methods via questionnaire

methods, interview methods, observations etc

Chapter 6 Data analysis and interpretations using various charts and

graphs

Chapter 7 Findings

Chapter 8 Limitations if any

Chapter 9 Expected contribution from the study


RATIONALE FOR THE STUDY

Credit risk is defined as the possibility of losses associated with diminution in the credit

of quality of borrowers or counter parties. In a banks portfolio, losses stem from outright

default due to inability or unwillingness of a customer or counter party to meet

commitments in relation to lending, trading, settlement and other financial transactions.

As credit risk is one of the challenging tasks to banks I have selected this topic for

my study in order to know the various types of risk and the types of strategies the banks

use to mitigate the risk.

As part of its vision of using technology to provide affordable banking services to

the vast rural population of India, Canara bank has extend the performance and cost

benefits of enterprises Linux to its customers. With a modernized branch infrastructure,

Canara bank hopes to serve customers in a timely and efficient manner, reinforcing its

image of being a customer savvy bank


About the Canara Bank:

Founded in 1906, Canara Bank is one of the premier banks in India, with a net

work of 2578 branches across the country. The bank was the first two launch networked

ATMs in India and obtain and ISO certification. Canara bank has also achieved the

distinction of being the country’s highest net profit earner among nationalized banks for

the year march 2007.

The bank has already carved a niche in providing IT-based services such as

networked ATMs, anywhere banking, Telebanking, Remote access Terminals, Internet

and Mobile banking, Debit cards, etc. Canara bank a vision to help improve the economic

condition of the common people of India by inculcating the habit of savings in rural areas







Title of the project Objective of the study Scope of the study


Title of the Project

“Credit risk Management at Canara Bank”

Objective of the Study:

1. To know the methods to be implemented in banks.

2. To know the various methods used by bank to mitigate credit risk.

3. To know the various types of credit risk in bank.

4. To know the executing methods used in managing credit risk.

Scope of the Study:

Geographical Scope – The geographical scope of the study is limited to the boundary of

Whitefield Maski city by Government of Karnataka.

Theoretical Scope - The theoretical scope of the study is limited to analyzing the

dynamics of corporate salary accounts from the customer’s perspective in Branch Maski


COMPANY PROFILE

Founded in 1906, Canara Bank is one of the premier banks in India, with a net

work of 2578 branches across the country. The bank was the first two launch networked

ATMs in India and obtain and ISO certification. Canara bank has also achieved the

distinction of being the country’s highest net profit earner among nationalized banks for

the year march 2007.

The bank has already carved a niche in providing IT-based services such as

networked ATMs, anywhere banking, Telebanking, Remote access Terminals, Internet

and Mobile banking, Debit cards, etc. Canara bank a vision to help improve the economic

condition of the common people of India by inculcating the habit of savings in rural

areas.






Genesis

Founded as 'Canara Bank Hindu Permanent Fund' in 1906, by late, Mr.

Ammembal Subba Rao Pai, a philanthropist, this small seed blossomed into a limited

company as 'Canara Bank Ltd.' in 1910 and became Canara Bank in 1969 after

nationalization.

''A good bank is not only the financial heart of the community, but also one with


an. obligation of helping in every possible manner to improve the economic conditions of

the common people"

Canara Bank Founding Principles

1. To remove Superstition and ignorance.

2. To spread education among all to sub -serve the first principle.

3. To inculcate the habit of thrift and savings.

4. To transform the financial institution not only as the financial heart of the

community but the social heart as well.

5. To assist the needy.

6. To work with sense of service and dedication.

7. To develop a concern for fellow human being and sensitivity to the surroundings

with a view to make changes/remove hardships and sufferings.

Sound founding principles, enlightened leadership, unique work culture and

remarkable adaptability to changing banking environment have enabled Canara Bank

to be a frontline banking institution of global standards.

As Canara bank founded in 1906, Canara Bank is one of the premier banks in India,

with a network of 2578 branches across the country. The bank was the first to launch

networked ATMs in India and obtain an ISO Certification. Canara Bank has also

achieved the distinction of being the country's highest net profit earner among

nationalized banks for the year March 2007.

The bank has already carved a niche in providing IT -based services such as

Networked ATMs, Anywhere Banking, Tele-banking, Remote Access Tensional, Internet

& Mobile Banking, Debit Cards, etc. Canara Bank has a vision to help improve the

economic condition of the common people of India by inculcating the habit of savings in

rural areas.


Challenges

Canara 'Bank achieved 100% computerization very early in the course of its

operational history. It deployed a number of bank automation tools such as a customized

Total Branch Automation (TBA) package called Integrated Branch Banking Software

(18BS), which was developed by its subsidiary, Can Bank Computer Services Ltd.

(CCSL). IBBS was deployed on Novell NetWare at close to 1400 medium sized branches

across the country.

Canara Bank follows a detailed tendering process for new hardware purchases, in

which contracts are awarded on the basis of bids. After nearly a decade of deploying

IBBS, the bank had purchased different types of hardware from multiple vendors. As a

result, standardization on Novell NetWare became difficult, and supporting the legacy

IBBS application became a challenging task.

Moreover, IBBS was developed using Micro focus COBOL and designed to run

in a 16 bit DOS environment. With poor support for the TCP/IP protocol stack, the

NetWare servers running IBBS could not be integrated into the corporate network easily.

Essentially, the NetWare servers functioned as branch file servers, without any

data connectivity. Regular maintenance of different versions of IBBS across 1400

branches was a painstaking effort in the absence of network support. Patching,

troubleshooting and version upgrades had to be conducted onsite. Branches in rural and

remote areas were particularly difficult to access and required support personnel to travel

frequently. Also, the availability of certified hardware on NetWare was limited, which

made adding new machines difficult.

As Canara Bank's customer base expanded, its banking services began to scale,

creating an immediate need for Internet Banking, Anywhere Banking (banking from any


Can Bank branch across the country) and an expanded ATM network. Novell NetWare's

closed legacy environment did not allow room to accommodate these new technologies.

Canara Bank had to purchase additional machines running Microsoft Windows to

interface with these new technologies, which was extremely inefficient from a hardware

utilization standpoint. New hardware and Microsoft Windows licenses strained budgets

and made new technology projects difficult to scale and sustain.

When additional branches were added to the bank's network, procuring new

servers that were certified to run on NetWare was difficult, as IHVs had ceased to

provide support for older versions of the as. Micro Focus had also ceased support for the

COBOL version on which the IBBS package had been developed. A combination of all

these factors made migration attractive.

Migrating the 1400 odd legacy NetWare servers posed another challenge: Canara

Bank wanted to switch platforms but not hardware. Deploying the latest as available,

without going into a hardware refresh cycle that would cost millions of rupees was a

challenging task. The bank had amassed about a dozen different types of machines after a

decade of deploying IBBS. This heterogeneous mix of hardware that spanned across

more than1,000 server 10,000destopsmadethe project very complex. Canara Bank began

to look for a platform that could deliver the latest innovation along with complete hardware

freedom.

Future plan

Moving from the legacy NetWare platform to Red Hat Enterprise Linux has

opened up significant opportunities for Canara Bank. With networking support now

available, Canara Bank is planning to deploy Red Hat Network Satellite to send updates

for both IBBS as well as the operating system to all distributed machines across the

country. Enterprise Linux has also made Remote Management and health monitoring of

remote servers possible.

With the tremendous benefit’s provided by Enterprise Linux, Canara Bank plans


to move its Anywhere Banking and Internet Banking Ii steners to the Enterprise Linux

platform. Enterprise Linux has provided Canara Bank with the freedom and choice to

develop a scalable growth plan, which was not possible under NetWare's closed legacy

environment.

The power of Linux is not restricted by hardware limitations, as it can run on

different kinds of architectures. Canara Bank has managed to save crores of rupees in

new hardware acquisition costs, by using a lightweight customized Linux distribution on

its existing hardware

The Bank Today

Canara Bank is one of the premier banks in the country, accredited with umpteen

distinctions. The present stature of the Bank is due to its strong fundamentals and quality

customer orientations. Profit making since inception, the Bank today ep itomizes a

perfect blend of commercial and social banking.

For the year March 2007, the Bank clocked the highest net profit ( RS.1110 crore)

among nationalized banks, with significant improvement in capital adequacy ratio

(13.50%) and asset quality (net NPA ratio of 0.94%).

The Bank has already carved a niche in providing IT -based services. With 100%

computerization of the branches, the bank provides a wide array of services, such as,

Networked ATMs, Anywhere Banking, Telebanking, Remote Access Terminal also

Internet & Mobile Banking, Debit Card etc. The Bank was the first among banks to

launch networked ATMs and obtain ISO Certification.

Commercial consideration has, no way, diluted the Bank's role in national

priorities. Canara Bank is in fact the first bank to be conferred FICCl award for

contribution to rural development.


CANARA BANK SERVICES

Anywhere Banking:

Anywhere Banking is a technology-based, customer-friendly service designed to

provide greater convenience to our customers. With Anywhere Banking facility,once

customer has an account with any of the select branches, Customer can operate it

From any other designated branch across 85 cities.

FACILITIES:

Individuals I joint account holders (operated severally) maintaining Current I 58 I OD

Accounts:

I. Withdrawal of cash

2. Remittance of cash

3. Transfer of funds

4. Balance enquiry

5. Issue of mini statement

6. Depositing local cheques for collection

7. Purchase of Demand draft

Firmsl Companies I Other Bodies maintaining Current I OD I OCC Accounts:

1. Transfer of funds between accounts; from one Anywhere Banking branch to

another anywhere banking branch.

2. Depositing of local checks for collection and crediting to the respective account

at any Anywhere Banking branch.

ELIGIBILITY:

Account holders should have maintained a minimum average balance of

Rs.5,OOO / - in SB account and Rs.I 0,000/ - In Current account in the last six

months


FEATURES:

1. Cash withdrawal up to Rs.50, OOO/ - per occasion

2. Transactions permitted on production of identity card issued exclusively for

ANYWHERE BANKING FACILITY

3. Facilities of both intra-city and inter-city transactions.

4. HOME CLEARING - on line debit of checks drawn on our own A WB branches

within the city / clearing zone.

Tele services

Access information about your account right from your home, office or from

anywhere over telephone, a round the clock teller answering the enquiries from anywhere

presenting voice information at any time

You can make the following enquiries/requests over telephone:

Balance in the account including clear balance. Last five transactions in the

account.

Request for check book. Request for pass sheet.

Change in pass word. Fax on demand.

Note: The facility is password protected to ensure secrecy. Ask your Branch Manager

for details and enroll today itself the service 'is absolutely lice of cost

Personal Banking:

Deposits

Savings Bank Account

Current Account


Term Deposits

- Fixed Deposits

- Kamadhenu Deposits

- Recurring Deposits

- Can flexi Deposits

Loans & Advances

Retail Loan Products

- Home Improvement Loan

– Can cash

- Can mobile

- Can budget

- Teachers Loan

Card Services

Insurance

NRI

- NRE (Non Resident External Rupee Account)

- NRO (Non Resident Ordinary Account)

- FCNR (Foreign Currency Non Resident Accounts -Banks) - RFC Deposits

Loans & Advances

- Housing Loan

- Home Improvement

- Can carry (Consumer Durables)

- Can cash (Shares)

- Can mobile(vehicle)


General Facilities

-Safe Custody Services

-Safe Deposits Locker

-Nomination facility

Other Services/Facilities

-N R I Branches

-N R I Services

-Remittance Facility

-Facilities For Returning Indians

Rural Financing

-Agriculture & Rural Credit

-Kisan Credit

-Loans for setting up Agri Clinic

-Minor Irrigation Loans

-Farm Machinery Loans

-Farm Development Loans

-Vehicle Loan for Agriculturists

-Loans for Plantation Crops


VIDYASAGAR (EDUCATIONAL LOAN)

- Housing Loan

- Loans to SSIs

- Charter for SSIs

- Other Priority Sector Loans

- Government Sponsored Schemes

- Lead Bank Activities

- Agricultural Consultancy Services

Social Banking

- Rural Development Schemes

- CBJRDT Institutes

- Women Development

- Social Banking

- Community Concerns - RUDSETIs

International Banking Services

Canara Bank entered fore arena in 1953 with the opening of its first Foreign

Exchange Department in Mumbai

Today Canara Bank the 4th largest Bank in India catering to the cross border trade

& remittances and financing of foreign trade.


We finance exports at pre-shipment stage as well as post shipment stage, which

can be availed either in foreign currency or Indian Rupee s.

In addition we facilitate for fainting. That is, discounting of deferred export

receivables on 'without recourse basis' from an overseas forfeiting agency.

The Bank has been the pioneer in financing of LC based International Trade

transactions in India.

The Bank not only finance at customers option in foreign currency at pre -

shipment and post- shipment stages at LIB OR related rates but also finance the import

leg in foreign currency where imported inputs are required for exp0l1s.

The Bank has the expertise in handling project exports of goods and services.

The Bank has an excellent worldwide correspondent relationship and have the

capability to handle any export, import, remittance and related transactions anywhere in

the world and in any currency.

Non fund based transactions like adding confirmations to LC, issuing inward and

outward Bid bonds & guarantees, establishing LCs for import into India, arranging

buyer's credit at attractive terms etc. are our forte. Canara Bank has a branch in London

and holly owned subside in Hong Kong. We have a joint venture with SBI at Moscow

under the name Commercial Bank of India LLC. We have recently opened a

Representative Office at Shanghai, People Republic of china. They are engaged in Trade

finance and have expertise on the Indian market scenario. The Bank also manages 2

Exchange houses in the Gulf and arrangement with 20 Exchange Houses and 18 Banks

for drawing on DD’s from Gulf Countries on our select branches thought out India.

The Bank has 5 fore dealing rooms located in Mumbai, New Delhi, Calcutta,

Chennai and Bangalore in India. We provide a whole range of services and products like

purchases and sale of 7 world currencies forward booking and other fore hedging

instrument like currency swaps.


SUBSIDIARIES OF CANARA BANK & CAN FIN HOMES

LIMITED:

Can Fin Homes Limited was established on 29.10.1987 as a Sponsored Entity of

the Bangle some of the premier financial institutions such as HDFC, UTI and NHB are

the co-promoters of the Company.

Canara Bank holds 29.30% of equity in the Company.

Sri K Venkataramayya, General Manager of the Bank IS Managing Director of

the Company.

Apart from the Managing Director, the Board of Directors is complied of top

Executives of the Bank, institutional nominees of HDFC, UTI and NHB and also

professionals in the field of accounts/finance/Banking.

The Registered Office of the Company is at No. 29, Sir M N Krishna Rao Park

Road, Basavanagudi, Bangalore 560 004.

The Company has 41 branches and 5 Representative Office spread across the country.

Activities:

The prime objective and activity of the Company is to provide Ion g term finance

to individuals for construction or purchase of residential houses/flats and to

Companies or Corporations or Societies or Associations for the purpose of

construction or purchase of residential houses flats

Over the years, the company has added new products to their range and value

addition is done to the existing products to keep updated with the changing

market scenario and the competition, which is getting tougher with each passing


day. Personal loans to the existing borrowers, loans for purchase of sites,

insurance cover for loaners, etc., are some examples of innovation/value addition.

Bank's goodwill, the innate strength of the Company approach and an unflinching

business acumen have always kept the business on an envious platform making

good profits and paying rich dividends and their pragmatic ever since inspection.

The Company also took a major step in diversification by launching three Non-

housing Finance Products namely Premises Loan for practicing professionals

(Venture), Mortgages Loans (Net worth) and Loan against rent receivables (Non-

cash)

CANARA BANK FACTORS LIMITED:

Post Sale funds crunch is proving a handicap for many industries and business in

the smooth cycling of capital. Canara Bank Factors Limited (CFL) was established in

10.05.1991 to mitigate this problem of the industry and business and ensure a smooth

flow of capital in the entire cycle.

This Company is promoted by our Bank along with Andhra Bank and SIDB!. The

Registered office is at No. 17, Seshadri Road, Bangalore 56 0 009.

The Company is now being headed by Sri G R Seshadri as Managing Director a

senior executive in the cadre of Deputy General Manager deputed from the Bank.

The Board of the Company consists of Chairman & Managing Director,

Executive Director and a General Manager of the Bank, apart from the Managing

Director. SIDBI and Andhra Bank have appointed their nominees. There are 3 non-

official Directors from the profession of audit/accounts/ Banking/Finance.

Has a network of 8 branches in southern and we stem part of the courtly and

proposes to add some more during the next financial year.


Activity:

•• Factoring Services.

•• To cater to the needs of the clientele, Company has always on the look out for

innovative and competitive products. Introduction {)f variants of fact ling such as

International Factoring/Export Factoring and Sub -variants such as Invoice Discounting

backed by LCs/Hundisffripartite Agreement's are examples of their consistent Endeavour

to design/redesign their products.

CRISIL has given the following RATING to the Company:

"PH" - indicating highest safety for short term debt program allover Commercial

Papers "FAA+" - indicating higher safety for Public Deposits

"AA" - indicating higher safety for non-convertible debentures

Has developed a well designed "Management Information System" (MIS)

Prudential norms prescribed by RBI are strictly complied with.

Has developed in house "Internal Risk Evaluation System" (IRES)

Has attained Nil Net NPA position for 4 consecutive years 200 2-03, 2003-04, 2004 -05

and 2005-06

The Company is accredited with an ISO Certificate -"DIN EN ISO 9001:2000" by TUV

CERT Certification body of Germany.

Operations are fully computerized from Day one.


CANBANK VENTURE CAPITAL FUND LIMITED:

In our economic environment, assistance for establishment of new ventures in the

field of industry is not easily forthcoming. To assist the new ventures, our Bank had

formed a Venture Capital Fund in the year 1989. The Fund is managed by Canara bank

Venture Capital Fund Ltd, a wholly owned Subsidiary of Canara Bank.

This is the only Company of its kind sponsored by a Public Sector Bank in the

country. Sri B Sudhakar Shetty, Asst General Manager of the Bank is heading the

Company as Managing Director.

Apart from the Managing Director, the Company's Board of Directors consists of

our Chairman & Managing Director, Executive Director and a General Manager of the

Bangle There are two non-official Directors, each drawn from the field of industry and

Finance. The Registered Office is at No. 14, Naveen Complex, 4th Floor, M G Road,

Bangalore 560001.

Activity:

Trustee and Manager of Canara bank Venture Capital Fund

CANBANK COMPUTER SERVICES LIMITED:

With fast increasing impetus ~n information technology and extensive use of

computers in more and more spheres, the Bank found good opportunity for establishment

of a Company which can develop software’s and provide consultancy services to

computer users. This thought of the Bank culminated in the establishment of CCSL on

13.08 .1994. The Company is co-promoted by 2 other Public Sector Banks and 3 Private

Sector Banks. Canara Bank is holding 62.97% of the equity of the Company.

The Registered Office is situated at No. 14, Naveen Complex, 7 the Floor, M G

Road, Bangalore 560 001. B Sivaraman, Deputy General Manager of the Bank is heading

the Company as Managing Director of the Company.


Apart from the Managing Director, the Board of Directors consists of our

Chairman & Managing Director and Executive Director. There is one Director each from

Bank of Baroda, Lakshmi Vilas Bank, ING Vysya Bank Limited and Vijay Bank on the

Board

Activities:

CCSL designs and develops software for banks, financial institutions and

Government Departments, with its extensive in-house infra-structure and proven

technical expertise. All its products and Projects are well documented and user -friendly,

with on-line help, data encryption and audit features.

CCSL offers services in the following areas:

1. Software development

2. Business Process Outsourcing

3. Training

4. Data warehousing Solution

5. Web based solution

6. Information Systems Audit

7. Consultancy Service

GILT SUCURITIES TRADING CORPORATION LIMITED

• This is the latest of the Subsidiaries of Canara Bank so far. Established

on06.06.1996 and co-promoted by Corporation Bank and Bank of Baroda, is a

Primary Dealer Subsidiary accredited by RBI. Company is a wholly Owned

Subsidiary of Canara Bank since September 2004.

The Registered Office is at 1-1, Kalahari heritage, Manikin Wada Building, 127,

M G Road, Foi T, Mumbai 400 023.

Presently, the Company is under the stewardship of Sri D G Kamath as Managing


Director who is a Deputy General Manager of the Bank on second mint to the

Company.

The Board of the Company consists of our Chairman& Man aging Director,

Executive Director, 2 General Managers of the Bank and 2 Chartered Accountants

and a former Banker.

Activity:

Primary Dealer accredited by RBI for dealing III Government of India Dated

Securities and Treasury Bills.

Strengthening Infrastructure in the Government Securities (G Sec) Market so as to

make it vibrant, liquid and broad based.

Development of Underwriting and Market Making capabilities.

Improving Secondary Market Trading System.

With the mentioned objectives, GSTCL participates actively both III Security and Money

Market.

Reserve Bank of India, being the Regulator of Primary Dealers, sets certain goals

in tons of Bidding Commitments and Success Ratio in the Primary auction of G

Sec and T Bills, to be accomplished by them which form the basis for renewal of

PD's license. GSTCL has the distinction of achieving these benchmarks

consistently since inception. Underwriting of G Sec in the auction is yet another

obligation cast on PDs.

Bond yields being the function of interest rate, the Company's asset portfolio is

subject to market vagaries caused by factors like inflation, liquidity, government

borrowing programmed, coupon, maturities of papers issued and also event base

risks. In order to manage and mitigate these risks the Company has well defined

and board approved investment policy so also Risk Management Policy.

As typical of a trader, the Company is encasing price volatility to earn profits.

Day-to-day operations are largely supported by Call and Repo Borrow wings.

Thus efficient funds management holds key to improving profitability.


The Company is also into retailing G Sec to individual investors PF staffs/

Charitable Institutions through 24 designated branches of the parent, Canara

Bank. And also has put in place arrangements for retailing through Stock

Exchanges.

CANBANK INVESTMENT MANAGEMENT SERVICES LIMITED

Bank had established its Mutual Fund arm "Canara bank Mutual Fund" on

19.12.1987 for foraying into the Capital Market. CMF is an independent Trust

governed by a Board of Trustees,

When the RBI issued directives to form Asset Management Companies to manage

the assets of Mutual Funds and such other Trusts, Canara bank Investment Management

Services Limited was established by the Bank on 02.03.1993 as a Wholly Owned

Subsidiary of the Bank,

Sri N R Rarnanujam, Deputy General Manager of the Bank is at the helm of the

Company as Managing Director. Two General Managers of the Bank is also on the

Board. There are four non-official Directors on the Board drawn from various fields

connected to finance,

CANBANK FINANCIAL SERVICES LIMITED:

This is the first Subsidiary emerging from the stable of Canara Bank. Established on

01.06.1987 as a Wholly Owned Subsidiary of the Bank, cantina was very quick to carve a

niche for itself in the Merchant Banking arena as a premier institution providing a host of

financial services under one roof.

Registered Office of the Company is housed at No. 14, Naveen Complex, 6 th Floor, M G

Road, Bangalore 560 001. Sri M. S. Prabhu, Divisional Manager of the Bank is

heading the Company Executive Director. Apart from the Executive Director, the Board

of Director consist of two General Managers of the Bank and a Chartered Accountant

who is ;; non -official Nominee as Chairman.


Activities:

Activities of Cantina were curtailed post security scam of 1992. Cantina is

presently attending to matters like collection of lease rentals and realizations of

investments.

DETAILS OF SECTIONS/DIVISIONS/DEPARTMENTS COMINC UNDER

EACH FUNCTIONAL WIN G OF HEAD OFFICE

PERSON N EL WING:

I. Personnel Management Section..

2. Industrial Relations Section.

3. Human Resources and Organisation Development Section.

4. Head Office Staff Administration Section.

5. House Magazine and Library Section.

6. Official Language Section.

7. Staff Training College

8. Recruitment Cell.

9. SC/ST Cell.


CORPORATE CREDIT WING

1. General Credit Sanctions-I Section.

2. General Credit Sanctions-II Section

3. Export Import Credit and Development Section.

4. Project Finance Department

5. Technology Up gradation Fund Scheme Cell.

RISK MANAGEMENT WING'

1. Credit Policy Section.

2. Industrial Advisory Division.

3. Operational Risk Management Group.

4. Credit Statistics Section.

5. Credit Review And Monitoring Section.

6. Integrated Mid Office.

PRIORITY CREDIT WING

1. Priority Credit Section.

2. Agricultural Consultancy Services.

3. Small Scale Industries Division.

4. Regional Rural Banks Division.

5. Rural Development Section. 6. Social Banking Cell.


PLANNING AND DEVELOPMENT WING

1. Development Section.

2. Economic Research Section.

3. Management Information and Planning Section.

4. Customer Service Section.

5. Publicity and Public Relations Section.

6. Corporate Merchant Banking Division.

7. Marketing, Research & Product Development Section.

8. Corporate Cash Management Services.

RECOVERY WING

1. Recoveries Section.

2. NP A Management Section.

3. Legal Section.

4. Sick Industries and Rehabilitation Section.


FINANCIAL AND GENERAL ADMINISTRATION WING:

a) General Administration Department -

1. Furniture and Bills Section.

2. Premises, Policy and Administration Section.

3. Technical Cell.

4. Records and Tappal Section.

5. Premises and Estate Section.

6 Printing Section.

7 Stationery Section.

8 Central Security Cell.

9 Estate Policy and Control Section.

b) Accounts and Taxation Department -

1. Balance Sheet and Central Accounts Section.

2. Staff Provident Fund.

3. Staff Welfare Fund.

4. Pension Fund.

5. Government Accounts Section.

6. Executor, Trustee and Taxation Section.

7. IBA Reconciliation Section.

8. DD Reconciliation Section.

9. ATM and Debit Card Reconciliation Section.

TREASURY AND INTERNATIONAL OPERATIONS WING'

1. Treasury and Investment Division.

2. Overseas Banking Division.


RETAIL BANKING AND SUBSIDIARIES WING'

a) Can card Division

b) Retail Banking Division

1. Retail Banking Division.

2. Bank assurance Section.

3. Cross Selling of Mutual Fund Products Section.

c) Subsidiaries Division

1. Subsidiaries Section.

Names of Subsidiaries and Associates

a) Canbank Mutual Fund Limited.

b) Canbank Factors Limited.

c) Canfm Homes Limited.

d) Canbank Investment Management Services Limited.

e) Canbank Computer Services Limited.

f) Canbank Venture Capital Fund Limited.

g) Gilt Securities Trading Corporation Limited.

h) Canbank Financial Services Limited.

INSPECTION WING.

1. Planning Section.

2. Follow Up Section.

3. Review and Reporting Section.

4. Information Systems Audit Section.


5. Vigilance Department.

6. Staff Administration Section.

7. Organisation and Methods Section.

DEPARTMENT OF INFORMATION TECHNOLOGY- WING'

1. Planning Establishment & Training Group.

2. Administrative Software Group.

3. Service Units Software Group.

4. Branch Software Group.

5. Delivery Channel & Communication Group.

6. Procurement Group.

7. Payment System Group.

8. New Projects Group.

9. Core Banking Group.

INDUSTRIAL PROFILE

Overview:

The enhanced role of the banking sector in the Indian economy, the increasing

levels of deregulation along with the increasing level of the competition have

facilitated globalization of the Indian banking system and placed numerous

demands on banks. Operating in this demanding environment has exposed banks

to various challenges. The last decade has witnessed major changes in the

financial sector-new banks, new financial institutions, new instruments, new

windows and new opportunities- and, along with all this, new challenges. While

deregulation has opened up new vistas for banks to augment revenues, it has

entailed greater competition and consequently greater risks. Demands for new

products, particularly derivatives, has required banks to diversify their product


mix and also effect rapid changes in their processes and operations in order to

remain competitive in the globalize environment.

The benefits of globalization have been well documented and are being

increasingly recognized. Globalization of domestic banks has also been facilitated

by tremendous advancement in information and communication technology.

Globalization has thrown up lot of opportunities but accompanied by concomitant

risk. There is a growing realization that the ability of countries to conduct

business across national borders and the ability to cope with the possible

downside risks would depend, inter – alia, on the soundness of the financial

system and the strength of the individual participants. Adoptaion of appropriate

prudential, regulatory, supervisory, and technological framework on par with

international best practices enables strengthening of the domestic banking system,

which would help in fortifying it against the risks that might arise out of

globalization in India

we had strengthened the banking sector to face the pressures that may arise out of

globalization by adopting the banking sector reforms in a calibrated Mann

followed the twin governing principles of non-disruptive progress and

consultative process.

Legal prescriptions for ownership and governance of banks in banking regulation

Act, 1949 have been supplemented regulatory prescriptions issued by RBI from

time to time.


Outsourcing risk:

Banks are increasingly using outsourcing for achieving strategic aims lading to either

ratio nationalization of operational costs are taping specialist expertise which is not

available internally. ‘Outsourcing’ may be defined as a banks use of a third party,

including an affiliated entity within a corporate group, to perform activities on a

continuing base that would normally be undertaken by the bank itself. Typically

outsourced financial services include applications processing (loan organization, credit

card), document processing, investment management, marketing and research,

supervision of loans data processing and bank office related activities etc.

Application of advanced technology:

Technology is a key driver in the banking industry, which creates new business modules

and process, and also revolutionizes distribution channels. Banks which have made in

adequate investment in technology have consequently faced and erosion of there market

shares. The beneficiaries are those banks which have invested in technology. Adoption of

technology also enhanced the quality of risk management systems in banks. Recognizing

the benefits of modernizing their technology infrastructure banks is taking the right

initiatives. While doing so, banks have four options to choose from: they can build a new

system those selves, or buy best of he modules, or buy a comprehensive solution, or

outsource. In this context banks need to clearly define their core competencies to be sure

that they are investing in the areas that will distinguish them from other market players,

and give them a competitive advantage.

The global challenges which banks face or not confined only to the global banks, these

aspects are also highly relevant for banks which are part of a globalized banking system.

Further, over coming these challenges by the other banks is excepted to not only stand

them in good stead during difficult times but also augurs well for the banking system to

which they belong and will also equip them to launch themselves as a global bank.


CREDIT RISK MANAGEMENT IN BANKS

The financial sector especially the banking industry III most emerging economies

including India is passing through a process of change. As the financial activity has

become a major economic activity in most economies, any disruption or imbalance in its

infrastructure will have significant impact on the entire economy. By developing a sound

financial system, the banking industry can bring stability within the financial markets.

Deregulation in the financial sector had widened the products range in the

developed markets. Some of the new products introduced are LBOs, structured

transaction, credit cards, housing finance, derivatives and various off balance sheet items.

Thus new vistas have created multiple sources for banks to generate higher profits than

the traditional financial intermediation. Simultaneously they have opened new areas of

risk also. Many unknown issues that are intricately related to new products have exposed

banks to various risks across the globe and India is no exception.

During the past decade, the Indian banking industry continued to respond to the

emerging challenges of competition, risks and uncertainties. Risks originate in the forms

of customer default, funding a gap or adverse movements of markets.

Measuring and quantifying risks is neither easy nor intuitive. Our regulators have

made some sincere attempts to bring prudential and supervisory norms conforming with

international bank practices with an intention to strengthen the stability of the banking

system.


Banks in general face the following risk:

Liquidity Foreign Exchange

Credit Market

Interstate Operational

The industry has undergone drastic changes in the last three decades. Horizontal

expansion of the financial markets, deregulation across the globe in financial markets and

stiff competition have led the banks to multiply their activities. Increased activities in the

industry have exposed the banks to more uncertainties and more risks.

RISK MANAGEMENT IN BANKS IS BROADLY DIVIDED INTO SIX

SECTIONS:

Funds Management is a major activity of the banks. Liquidity management is an

integral part of funds management. Banks mobilize the deposits and deploy funds in

advances and investments. Banks also float funds through various subsidiary services

extended to their clients.

There will be always a time gap between the availability of resources and their

deployment. Hence banks will often swing between excess liquidity and liquidity crunch

in their funds position. Liquidity management essentially deals with efficient handling of

inflows and outflows of funds. Section -I discusses the liquidity management in banks in

India and across the globe.

Cash Management is a subset of the entire funds management. The lead time is

reduced in collection of cheques and other instruments by the banks, if they introduce

efficient cashmanagement services. From the bank's point of view it increases the fee

based income. Cash management services are one innovative product introduced by the

banks in the recent times. Section-II discusses the cash management techniques adopted

by banks and corporate clients.


Credit risk is as old as money. When the default rate increases in the portfolio of

the bank< it may lead to its total collapse. To circumvent the credit risk, the system tries to

design innovative products. Section-III discusses the credit risk management in banks.

The Basle committee defines the operational risk as "the risk of direct or indirect

loss resulting from inadequate or failed internal processes, people and systems or from

external events". This definition excludes operational: risk but includes legal risk. Such

operational risks can be broadly classified into four categories as information technology

risk, human resource risk, loss to assets risk and 'relationship risk. Quantification of

operational risk is a major challenge to the .risk management group of the bank: Section -

IV attempts to elucidate few issues involved in the operational risk management.

One of the core activities of the regulators is proper of the system. The Basle

committee had set certain guidelines for the bank s. The Reserve Bank of India had set up

an advisory committee under the chain Ulship of M S Verma and the committee had

submitted its report in May 2001. The committee recommended corporate governance,

internal controls, risk management, loan accounting transparency and disclosures,

financial conglomerates and cross border banking supervision. The supervisor should

provide a safety net to the financial system. Section -V discusses the important issues of

any risk management technique.

Section-VI consists of two case studies. It briefly discusses the risk management

Technique's to be adopted by banks. Derivatives are the hedging instruments which help

minimize the risks. But a 300 year old investment bank collapsed because of its exposure

to derivatives. The Barings' collapse is a classic example of failure of supervision and

incidence of human sours risk.

In the global scenario, the increased credit risk arises due to two reasons. Banks

have been forced to lend to riskier clients because well-rated corporates have moved

away from banks as they have access to low cost funds through disinter mediation. The

other reason is the lurking fear of global recession. Recession in the economy could lead

to low industrial output which may lead to defaults by the industry under recession


culminating into credit risk. Hence, the markets are in search of new credit risk

management models. Credit derivatives which were a new innovation in the market stood

the real test in 1997 during the Asian financial crisis. Several European and US banks

which were exposed to high risk areas in Korea, Philippines and Thailand were able to

save themselves from losses as they could hedge themselves with credit derivatives. The

papers "Credit Risk Management - Models and Judgments" and "Use of Credit Derivati

ves" discuss the critical operational issues in managing credit risk through credit

derivatives.

In the recent times, we have witnessed runs on the banks - mainly the Urban

Cooperative Banks like Madhavpura Coop Bank in Gujarat/Mumbai, Charminar Bank, a

scheduled bank in Hyderabad and many others.

When the banks give the signals of distress, the depositors panic and run for their

money. As per the existing rules, Deposit Insurance and Credit Guarantee Corporation of

India (DICGC) guarantees the depositors' money up to one lakh rupees subject to certain

conditions. Till now, the banks used to pay the insurance premium for the deposits they

hold to get insurance coverage from DICGC. Now the committee set up by the RBI under

the Chairmanship of J Captor suggested that the risk premium is to be paid which Is

sensitive to the probability of the bank in question going bankrupt. The paper "What

Makes Banks Fragile tries to compute the volatility of banks' assets and deposit insurance

premium with an illustrate on and presents a view point of fixing higher deposit insurance

premium if reserve requirements are to be phased out.


Credit Risk Management at Canara Bank

Introduction

Credit risk is defined as the possibility of losses associated with diminution in the

credit quality of borrowers or counter parties. In a bank's portfolio, losses stem from

outright default due to inability or unwillingness of a customer or counter party to meet

commitments in relation to lending, trading, settlement and other financial transactions.

Alternatively, losses result from reduction in portfolio value arising from actual or

perceived deterioration in credit quality. Credit risk emanates from a bank's dealings with

an individual, corporate, bank, financial institution or a so vereign.

Credit risk takes in the following forms:

1. In the case of direct lending: principal/and or interest amount not be repaid;

2. In the case of guarantees or letters of credit: funds not forthcoming from the

constituents upon crystallization 0 f the liability.

3. In the case of treasury operations: the payment or series of payments due from the

counter parties under the respective contracts may not be forthcoming or ceases;

4. In the case of securities trading businesses: funds/ securities settlement may not be

effected.


Credit Risk Management

In this backdrop, it is imperative that Canara bank has credit risk management system,

which is sensitive and responsive to these factors. The effective management of credit

risk is a critical component of comprehensive risk management and ie essential for the

long-term success of Canara banking organisation. Credit risk managemnt encompasses

identification, measurement, monitoring and control of the credit risk sources. The Bank

has put in place a unified risk management architecture to attain global best practices for

effective implementation of risk management initiatives in consistence with the Basle II

framework and RBI guidelines. The Board of Directors drives the Risk Management

initiatives in the Bank. The Risk Management Committee of the Board is operational.

Top Executive Committees for Credit Risk, Operational Risk and Market Risk

Management oversee and monitor the respective risk management processes and

procedures. Asset Liability Committee (ALCO) meets periodically for effective and pro-

active ALM in the Bank.

An exclusive Risk Management Wing at the Head Office is functioning as a nodal centre

for overall implementation of various risk management initiatives across the Bank.

Integrated Mid Office of both domestic and Forex Treasury are functioning under the

Risk Management Wing for effective and independent supervision and monitoring of

Market Risk in investment and forex functions. Risk Management Sections are

functioning at all the 34 Circle Offices of the Bank as an extended arm of the Risk

Management Wing at the Corporate Office.

The Bank has put in place various risk management policies, which include policy for

management of Credit Risk, Market Risk, Operational Risk, Asset Liability, Liquidity

Risk, Country Risk, Counterparty Bank Risk, Corporate Governance, Disclosures,

Collateral Management, Stress Testing, Compliance Functions, Disaster Recovery and

Business Continuity Planning, Business Lines, Outsourcing, Group Risk, Legal Risk etc.

The Bank has also framed risk management policies for its overseas branches. These

policies are being reviewed and fine tuned annually.


Building Blocks of Credit Risk Management at Canara Bank'

In a bank, an effective credit risk management framework would ,'omprise of the

following distinct building blocks:

Policy and Strategy

Organizational Structure

Operations/ Systems

Policy and Strategy

The Board of Directors shall be responsible for approving and periodic a II y

reviewing the credit risk strategy and significant credit risk policies.

Credit Risk Policy

1. Bank has credit risk policy document approved by the Board. The document include

risk identification, risk measurement, risk grading/ aggregation techniques, reporting

and risk controlV mitigation techniques, documentation, legal issues and management

of problem loans.

2. Credit risk policies defined target markets, risk acceptance criteria, credit approval

authority, credit origination! maintenance procedures and guidelines for portfolio

management.

3. The credit risk policies approved by the Board communicated to branches/controlling

offices. All dealing officials should clearly understand the barne's approach for credit

sanction and are held accountable for complying with established policies and

procedures.

4. Senior management of a Canara bank shall be responsible for implementing the credit

risk policy approved by the Board.


Credit Risk Strategy

1. Each branch of Canara bank should develop, with the approval of its Board, its own

credit risk strategy or plan that establishes the objectives guiding the Canara bank's

credit-granting activities and adopt necessary policies/ procedures for conducting

such activities. This strategy should spell out clearly the organisation's credit appetite

and the acceptable level of risk -reward trade-off for its activities.

2. The strategy would, therefore, include a statement of the Canara bank's willingness to

grant loans bas ed on the type of economic activity, geographical location, currency,

market, maturity and anticipated profitability. This would necessarily translate into

the identification of target markets and business sectors, preferred levels of

diversification and concentration, the cost of capital in granting credit and the cost of

bad debts.

Credit risk Management Committee (CRMC]

Each Canara bank may, depending on the size of the organization or loan!

Investment book, constitute a high level Credit Risk Management Committee

(CRMC). The Committee should be headed by the Chairman and should comprise of

heads of Credit Department, Treasury, Credit Risk Management Department

(CRMD) and the Chief Economist.

The functions of the Credit Risk Management Committee should be as under:

1. Responsible for the implementation of the credit risk policy/ strategy approved by the

Board.

2. Monitor credit risk on a Canara bank wide basis and ensure compliance with limits approved

by the Board.

3. Recommend to the Board, for its approval, clear policies on standards for presentation of

credit proposals, financial covenants, rating standards and benchmarks,

4. Decide delegation of credit approving powers, prudential limits on large credit exposures,

standards for loan collateral, portfolio management, loan review mechanism, risk


concentrations, risk monitoring and evaluation, pricing of loans, provisioning,

regulatory/legal compliance, etc.

Concurrently, Canara bank set up Credit Risk Management Department (CRIVID),

independent of the Credit Administration Department.

The CRMD does the followings:

1. Measure, control and manage credit risk on a Canara bank -wide basis within the

limits set by the Board/ CRMC

2. Enforce compliance with the risk parameters and prudential limits set by t.he

Board! CRMC.

3. Lay down riskassesment system develop loan/ investment portfolio. identify

problems, correct deficiencies and undertake loan review/audit. Large Canara

banks could consider separate set up for loan review/audit.

4. Accountable for protecting the quality of the entire loan! investment portfolio.

The Department undertakes portfolio evaluations and makes comprehensive

studies on the environment to test the resilience of the loan portfolio

Operations 1st Systems

Canara banks have an appropriate credit administration, credit risk measurement

and monitoring processes.

The credit administration process typically involved the following

1. Relationship management phase i.e. business development.

2. Transaction management phase covers risk assessment, loan pricing, structuring the facilities,

internal approvals, documentation, loan administration, on going monitoring and risk

measurement.

3. Portfolio management phase entails monitoring of the portfolio at a macro level and the

management of problem loans.

4. On the basis of the broad management framework stated above, the Canara banks has


following credit risk measurement and monitoring procedures:

5. Canara banks established proactive credit risk management practices like annual / half yearly

industry studies and individual obligor reviews (recently established) periodic credit calls that

are documented, periodic visits of plant and business site, and at least quarterly management

reviews of troubled exposures/weak credits

Canara bank has system of checks and balances in place for extension of

credit viz.:

1. Separation of credit risk management from credit sanction

2. Multiple credit approvers making financial sanction subject to approvals at various

stages viz. credit ratings, risk approvals, credit approval grid, etc.

3. An independent audit and risk review function.

4. The level of authority required to approve credit will increase as amounts and

transaction risks increase and as risk ratings worsen.

5. Every obligor and facility must be assigned a risk rating.

6. Mechanism to price facilities depending on the risk grading of the customer, and to

attribute accurately the associated risk weightings to the facilities.

7. Banks ensure that there are consistent standards for the origination, documentation

and maintenance for extensions of credit

8. Banks has a consistent approach towards early problem recognition, the classification

of problem exposures, and remedial action.

9. Banks maintain a diversified portfolio of risk assets; have a system to conduct regular

analysis of the portfolio and to ensure ongoing control of risk concentrations.

10. Credit risk limits include, obligor limits and concentration limits by industry or

geography. The Boards should authorize efficient and effective credit approval

processes for operating within the approval emits.

11. Bank has systems and procedures for monitoring financial performance of customers

and for controlling outstanding within limits.

12. A conservative policy for provisioning in respect of non -performing advances adopted.


Credit Risk Rating [CRR]

Canara bank concern with following risk while rating them:

1. Financial risk

2. Industry risk

3. Business risk

4. Market risk

Treatment of Credit risk at bank.

The unsecured portion of NPA accounts net of specific provisions is also to be

subject to risk weighting mechanism; unsecured portion means the NP A amount

obtained after deducting the eligible and guarantee amounts.

The risk weights for NPA accounts are as follows:

Other than residential mortgage loans

When specific provisions are < 20% of NPA risk weights amount 150%

When specific provisions are at least 20% of NPA risk weight is 100%

When specific provisions are at least 50% of NPA risk weight amounts to 50%

Fully Covered by Plant and Machinery and Land and Building

When specific provision reaches at least 15% of NPA risk weight amount 100%

Residential Mortgage loans

Generally risk weight applicable is 100%

If specific provisions are at least 20% of NPA risk weights amount to 75%


An Illustration

Credit Risk assessment at branch level (Traffic Island Branch)

Major Segments Scores Scores assessed Level of Risk I

allotted

(1) Assessment area-

I Credit

I Low • Credit- Growth 10 05

Trend

• Credit- Quality 20 08 I Low

• Non-Fund based I Medium

exposure 05 03

~ Adequacy of

portfolio 05 02 Low

Total 40 18 Low

Branch Authorities (Authority to sanction loans to Corporate)

Branch Office:

Braches allowed transaction loan from I to 75 lacks for respective sectors.

Regional Office:

If loan amount is more than 75 lacks then that proposal goes to regional office, Regional

office has authority to sanction from 75 lacks to 3 crores for industries.

Circle Office:


Circle office has authority of sanctioning loan from 3 crores and above.

Factors considered for sanction loans:

1) Individual Capacity.

2) Securities

3) Additional securities

4) Prompt repayment of L02.

5) Deposits in Banks

Individual Capacity:

Bank considers individual capacity h) repayment of loan with term or agreed term

with bank and also considers his transaction with bank if any.

Securities:

Bank considers securities of borrowers while lending money to him. Ex: Shares

cel1ificate, Insurance policies

Additional Securities:

Banks consider or accept additional securities like land, home and other securities

while sanctioning new loan to customers when customers has existing loan in bank.

Prompt repayment of Loan:

Existing transaction or previous transact ion consider while grant new loan to

customers/ Clients. His prompt repayment of loan consider for new loans.

Bank Deposits

Bank deposits with bank or any other banks consider as security for loans.


Existing Credit Risk Management at Canara Bank

Follow up clients/Customers.

Recovery systems.

Review of loan.

Additional securities

Providing additional loans to make repayment of existing loans.

Loan Review Mechanism.

Low and High credit risk ratings.

Low interest rate for high credit rating companies

High interest rate for low credit rating companies

Single/group borrower limits

Authorities to branches • Authorities to Committees.

Following Up customers/Clients:

Bank remind borrowers to repay loan and interest according to term and condition

which he has agreed while taking loan from banks, and also ensure that ifhe fails to pay

the loanwhat is next step of banks.

Recovery Systems:

Bank directly collect dues from customers They have separate department, which look

\after all matters related to recovery of loan.

Review of loan:

If the amount not recovered within specified term mentioned as per the policy of bank,

bank goes for review of loan if required.


Additional Securities:

Additional securities will be taken from the customer in two situations:

1) If existing loan extended by the bank.

2) When additional loan is given to the customer in addition to existing loan.

Low and High credit risk ratings.

Interest rate is depend on credit worthy nests of the company, if the credit worthy

Ness of the company is high he will be charged low interest, opposite is the case for low

credit worthiness

Following Securities as eligible for treatment as Credit risk mitigates:

1) Bank Deposits

2) Gold Jewellery ( Benchmarked to 99.99 purity)

3) State Govt securities

4) Central Govt securities

5) National Saving Certificates, Vikas Patras and Kisan Vikas Patras

6) Life Insurance Policies

7) Equities ( Including convertible bonds)

8) Mutual fund securities

9) Land and Building

10) Plant and Machinery


Guarantors Types

• State Government

• Central Government

• Public Sector Entities

• Banks

• Primary Dealers Corporate

Substitution approach

In this approach risk weight of the guarantor replace the lisk weight of the

borrower provided it result in application of a lower risk weight, thus only guarantee

issued by entities with a lower risk weight provides credit risk mitigation effect in the

form of lower capital charges.

Proportional Cover

This method is taken note of is that the risk mitigation effect will be available to

the extent of protection provided b Guarantor and the remaining unprotected portion

carry the risk weight applicable to borrower.

Thus in order to avail capital relief it is necessary that the following details on guarantors

are captured:

Name of the Guarantor

Extent of Guarantee cover available

Customer type of the guarantor

Techniques for Measuring Credit Risk


In the measurement of credit risk, models may be classified along three different

dimensions:

1. The techniques employed,

2. The domain of applications in the credit process and

3. The products to which they are applied.

Techniques:

The following are the more commonly used techniques:

1. Econometric Techniques such as linear and multiple discriminate analysis,

Multiple regression, logic analysis and probability of default, etc

2. Neural networks are computer-based systems that use the same data employed in

the econometric techniques but arrive at the decision model using alternative

implementations of a trial and error method.

3 Itemization models are mathematical programming techniques that discover the

optimum weights for borrower and loan attributes that minimize lender error and

maximize profits.

3. Rule-based or expert are characterized by a set of decision rules, a knowledge base

consisting of data such as industry financial ratios, and a structured inquiry process to

be used by the analyst in obtaining the data on a particular borrower.

4. Hybrid Systems In these systems simulation are driven in part by a direct causal

relationship, the parameters of which are determined through estimation techniques.


Domain of application:

These models are used in a variety of domains:

Credit approval

Models are used on a stand alone basis or in conjunction with a judgemental

override system for approving credit in the consumer lending business. The use of such

models has expanded to include small business lending. They are generally not used in

approving large corporate loans, but they may be one of the inputs to a decision.

Credit rating determination:

Quantitative models are used in deriving 'shadow bond rating' for unrated

securities and commercial loans. These ratings in turn influence portfolio limits and other

lending limits used by the institution. In some instances, the credit rating predicted by the

model is used within an institution to challenge the rating assigned by the traditional

credit analysis process.

Credit risk models may be used to suggest the risk premier that should be charged

in view of the probability of loss and the size of the loss given default. Using a mark -to-

market model, an institution may evaluate the costs and benefits of holding a financial

asset. Unexpected losses implied by a credit model may be used to set the capital charge

in pricing.

Instruments of Credit Risk Management

Credit Risk Management encompasses a host of management techniques, which

help the banks in mitigating the adverse impacts of credit risk.

1. Credit Approving Authority

Each bank should have a carefully formulated scheme of delegation of powers.


The banks should also evolve multi-tier credit approving system where the loan proposals

are approved by an 'Approval Grid' or a 'Committee'. The credit facilities above a

specified limit may be approved by the 'Grid' or 'Committee', comprising at least 3 or 4

officers and invariably one officer should represent the CRMD, who has no volume and

profit targets. Banks can also consider credit approving committees at various operating

levels i.e. large branches (where considered necessary), Regional Offices, Zonal Offices,

Head Offices, etc. Banks could consider delegating powers for sanction of higher limits

to the 'Approval Grid' or the 'Committee' for better rated / quality customers. The spirit of

the credit approving system may be that no credit proposals should be approved or

recommended to higher authorities, if majority members of the 'Approval Grid' or

'Committee' do not agree on the creditworthiness of the borrower. In case of

disagreement, the specific views of the dissenting member/s should be recorded.

The banks should also evolve suitable framework for reporting and evaluating the

quality of credit decisions taken by various functional groups. The quality of credit

decisions should be evaluated within a reasonable time, say 3 - 6 months, through a well-

defined Loan Review Mechanism.

2. Prudential Limits

In order to limit the magnitude of credit risk, prudential limits should be laid

down on various aspects of credit:

a) Stipulate benchmark current/debt equity and profitability ratios, debt service coverage

ratio or other ratios, with flexibility for deviations. The conditions subject to which

deviations are permitted and the authority therefore should also be clearly spelt out

in the Loan Policy;

b) Single/group borrower limits, which may be lower than the limits prescribed by

Reserve Bank to provide a filtering mechanism;

d) maximum exposure limits to industry, sector, etc. should be set up. There must also

be systems in place to evaluate the exposures at reasonable intervals and the limits


should be adjusted especially when a pm1icular sector or industry faces slowdown

or other sector/industry specific problems. The exposure limits to sensitive sectors,

such as, advances against equity shares, real estate, etc., which are subject to a high

degree of asset price volatility and to specific industries, which are subject to

frequent business cycles, may necessarily be restricted. Similarly, high-risk

industries, as perceived by the bank, should also be placed under lower portfolio

limit. Any excess exposure should be fully backed by adequate collaterals or

strategic considerations.

e) Banks may consider maturity profile of the loan book, keeping in view the market

risks inherent in the balance sheet, risk evaluation capability, liquidity, etc.

3 Risk Rating

Banks should have a comprehensive risk scoring / rating system that serves as a

single point indicator of diverse risk factors of counterparty and for taking credit

decisions in a consistent manner. To facilitate this, a substantial degree of standardization

is required in ratings across borrowers. The risk rating system should be designed to

reveal the overall risk of lending, critical input for setting pricing and non -price terms of

loans as also present meaningful information for review and management of loan

portfolio. The risk rating, in short, should reflect the underlying credit risk of the loan

book. The rating exercise should also facilitate the credit granting authorities some

comfort in its knowledge of loan quality at any moment of time.

4 Risk Pricing

Risk-return pricing is a fundamental tenet of risk management. In a risk -return

setting, borrowers with weak financial position and hence placed in high credit risk

category should be priced high.

Banks should evolve scientific systems to price the credit risk, which should have

a bearing on the expected probability of default. The pricing of loans normally should be

linked to risk rating or credit quality. The probability of default could be derived from the


past behavior of the loan portfolio, which is the function of loan loss provision.

Banks should build historical database on the portfolio quality and provisioning /

charge off to equip themselves to price the risk. But value of collateral, market forces,

perceived value of accounts, future business potential, portfolio/industry exposure and

strategic reasons may also play important role in pricing. Flexibility should also be made

for revising the price (risk premier) due to changes in rating / value of collaterals over

time. Large sized banks across the world have already put in place Risk Adjusted Return

on Capital (RAROC) framework for pricing of loans, which calls for data on portfolio

behavior

And allocation of capital commensurate with credit risk inherent in loan

proposals. Under RAROC framework, lender begins by charging an interest mark -up to

cover the expected loss - expected default rate of the rating category of the borrower. The

lender then allocates enough capital to the prospective loan to cover some amount of

unexpected loss- variability of default rates. Generally, international banks allocate

enough capital so that the expected loan loss reserve or provision plus allocated capital

cover 99% of the loan loss outcomes.

Portfolio Management

The existing framework of tracking the Non Performing Loans around the balance

sheet date does not signal the quality of the entire Loan Book. Banks should evolve

proper systems for identification of credit weaknesses well in advance. Most of

international banks have adopted various portfolio management techniques for gauging

asset quality. The CRMD, set up at Head Office should be assigned the responsibility of

periodic monitoring of the portfolio.

The portfolio quality could be evaluated by tracking the migration (upward or

downward) of borrowers from one rating scale to another. This process would be

meaningful only if the borrower-wise ratings are updated at quarterly / half-yearly

intervals. Data on movements within grading categories provide a useful insight into the


nature and composition of loan book.

The banks could also consider the following measures to maintain the portfolio

1) Evaluate the rating-view distribution of borrowers In vanous industry, business

segments,

2) Exposure to one industry/sector should be evaluated on the basis of overall rating

distribution of borrowers in the sector/group. In this context, banks should weigh the

pros and cons of specialization and concentration by industry group. In cases where

port folio exposure to a single industry is badly performing, the banks may increase

the quality standards for that specific industry;

6. Loan Review Mechanism (LRM)

LRM is an effective tool for constantly evaluating the quality of loan book and to

bring about qualitative improvements in credit administration. Banks should, therefore,

put in place proper Loan Review Mechanism for large value accounts with

responsibilities assigned in various areas such as, evaluating the effectiveness of loan

administration, maintaining the integrity of credit grading process, assessing the loan loss

provision, portfolio quality, etc. The complexity and scope of LRM normally vary based

on banks' size, type of operations and management practices. It may be independent of

the C RMD or even separate Department in large banks.

The main objectives of LRM could be:

To identify promptly loans which develop credit weaknesses and initiate timely

corrective action;

To evaluate portfolio quality an~ isolate potential problem areas;

To provide information for determining adequacy of loan loss provision;

To assess the adequacy of and adherence to, loan policies and procedures, and


to monitor Compliance with relevant laws and regulations.

To provide top management with information on credit administration,

including credit Sanction process, risk evaluation and post-sanction follow-up.

Accurate and timely credit grading is one of the basic components of an effective

LRM. Credit grading involves assessment of credit quality, identification of problem

loans, and assignment of risk ratings. A proper Credit Grading System should support

evaluating the p0l1folio quality and establishing loan loss provisions. Given the

importance and subjective nature of credit rating, the credit ratings awarded by Credit

Administration Department should be subjected to review by Loan Re view Officers who

are independent of loan administration.

The Risk Management Group of the Basle Committee on Banking Supervision has

released a consultative paper on Principles for the Management of Credit Risk. The Paper

deals with various aspects relating to credit risk management. The Paper is enclosed for

information of banks.

6. Qualification and Independence

The Loan Review Officers should have sound knowledge in credit appraisal,

lending practices and loan policies of the bank they should also be well versed in the

relevant laws/regulations that affect lending activities. The independence of Loan Review

Officers should be ensured and the findings of the reviews should also be reported

directly to the Board or Committee of the Board.

7. Frequency and Scope of Reviews

The Loan Reviews are designed to provide feedback on effectiveness of credit

sanction and to identify incipient deterioration in portfolio quality. Reviews of high value

loans should be undertaken usually within three months of sanction /renewal or more

frequently when factors indicate a potential for deterioration in the credit quality. The

scope of the review should cover all loans above a cut -off limit. In addition, banks

should also target other accounts that present elevated risk characteristics. At least 30-


40% of the portfolio should be subjected to LRM in a year to provide reasonable

assurance that all the major credit risks embedded in the balance sheet have been tracked.

Depth of Reviews

The loan reviews should focus on:

Approval process;

Accuracy and timeliness of credit ratings assigned by loan officers;

Adherence to internal policies and procedures, and applicable laws / regulations;

Compliance with loan convents;

Post-sanction follow-up;

Sufficiency of loan documentation;

Portfolio quality; and

Recommendations for improving portfolio quality

The findings of Reviews should be discussed with line Managers and the corrective

actions should be elicited for all deficiencies. Deficiencies that remain unresolved should

be reported to top management.

The Risk Management Group of the Basle Committee on Banking Supervision has

released a consultative paper on Principles for the Management of Credit Risk. The Paper

deals with various aspects relating to credit risk management. The Paper is enclosed for

information of banks.

Early warning:

Credit models are used to flag potential problems in the portfolio to facilitate early

corrective action.

Common credit language:

Credit models may be used to select assets from a pool to construct a portfolio acceptable

to investors at the time of asset securitization or to achieve the minimum credit quality


needed to obtain the desired credit rating. Underwriters may use such models for due

diligence on the portfolio (such as a collateralized pool of commercial loans).


Collection strategies:

Credit models may be used in deciding on the best collection or workout strategy

to pursue. If, for example, a credit model indicates that a borrower is experiencing short -

term liquidity problems rather than a decline in credit fundamentals, then an appropriate

workout may be devised.

Credit Risk Models: Approaches

The literature on quantitative risk modeling has two different approaches to credit

risk measurement. The first approach is the development of statistical models through

analysis of historical data. This approach was frequently used in the last two decades. The

second type of modelling approach tries to capture distribution of the firm's asset -value

over a period of time.

The statistical approach tries to rate the firms on a discrete or continuous scale.

The linear model introduced by Altman (1967), also known as the Z -score Model,

separates defaulting firms from non-defaulting ones on the basis of carat in financial

ratios. Altman, Hartwell, and Peck (1995,1996) have modified the original Z -score

model to develop a model specific to emerging markets. This model is known as the

Emerging Market Scoring (EMS) model.

The second type of modeling approach tries to capture distribution of the financial

asset value over a period of time. This model is based on the expected default frequency

(EDF) model. It calculates the asset value of a film from the market value of its equity

using an option pricing based approach that recognizes equity as a call option on the

underlying asset of the firm. It tries to estimate the asset value path of the firm over a

time horizon. The default risk is the probability of the estimated asset value falling below

a prespecified default point. This model is based conceptually on Merton's (1974)

contingent hassock and has been working very well for estimating default risk in a liquid

market.


Closely related to credit risk models are portfolio risk models. In the last three

years, important advances have been made in modeling credit risk in lending portfolios.

The new models are designed to quantify credit risk on a portfolio basis, and thus are

applied at the time of diversification as well as portfolio based pricing. These models

estimate the loss distribution associated with the P0l1folio and identify the risky

components by assessing the risk contribution of each member in the portfolio.

Banks may adopt any model depending on their size, complexity, risk bearing capacity

and risk appetite, etc. However, the credit risk models followed by banks should, at the

least, achieve the following:

1. Result in differentiating the degree of credit risk in different credit exposures of a

bank. The system could provide for transaction -based or borrower-based rating or

both. It is recommended that all exposures are to be rated. Restricting risk

measurement to only large sized exposures may fail to capture the p0l1folio risk

in entirety for variety of reasons. For instance, a large sized exposure for a short

time may be less risky than a small sized exposure for a long time.

2. Identify concentration in the portfolios

3. Identify problem credits before they become NPAs

4. Identify adequacy/ inadequacy of loan provisions

5. Help in pricing of credit

6. Recognize variations in macro-economic factors and a possible impact under

alternative scenarios

7. Determine the impact on profitability of transactions and relationship.


DATA COLLECTION METHOD

Primary data: Primary data collected through the interaction with chief manager, senior

manager and bank staff.

Secondary Data: Secondary data collected from bank circulars, bank guidelines book

and internet.

Brief Findings

Current system of credit risk management

Canara Bank has a system of checks and balance in place of extension of credit.

The aspect covered under the present system is multiple credit approvals, independt audit

and risk review and risk rating system for various categories of system and corresponding

pricing mechanism. The bank maintains a diversified portfolio of risk assets, and ensures

on going control of risk considerations .All credit exposures above RS 5 Crores are

assigned risk waiting assigned by domestic credit rating agencies recognized by RBI

The credit risk management system at the branch level has been maped out in detail

1. Internal rating based (IRB) approach the standardized approach adopted so far,

provides incentives to banks improving their credit risk management techniques.

2. Banks may have discretion and flexibility in defining the exposure classes, such as

corporate, project finance, etc.

3. Unless suitable modified, the adoption of the new Accord in its present format

would result in significant increase in the capital charge for banks.


OUTLOOK FOR 2010-11

The International Monetary Fund (IMF), in its World Economic Outlook, April 2010

raised its forecast for world economic growth in 2010 to 4.2% as against a 0.6%

contraction in 2009. However, IMF forecasted that advanced economies would not exit

the global recession until the middle of 2010 and emerging economies, which are

increasingly driven by domestic growth factors, will continue to drive global recovery.

Financial year 2010-11 started on a positive note for Indian economy with major macro

economic parameters performing well. Industrial growth and exports have been showing

steady increase and the continued strong growth in manufacturing indicates the resilience

of domestic demand. A strong saving and investment rate, favourable capital market

conditions and improved capital flows and positive business outlook will also help the

economy towards a faster revival. Going forward, the strong domestic demand and

sustained increase in per capita income will ensure faster economic growth. Thrust on

inclusive growth and focus on the rural economy would propel the growth engine of the

economy further.

Indian economy will remain one of the fastest growing economies in the world in view of

the expected recovery in agricultural production, industrial output, demand for higher

exports and the revival of global economy. The RBI in its Annual Monetary Policy

Statement for 2010-11 placed real GDP growth for 2010-11 at 8%, with an upward bias.

The RBI envisages containing money supply (M3) at around 17% in consonance with the

outlook on growth and inflation. While aggregate deposits of SCBs are projected to grow

at 18%, adjusted non-food credit is likely to record a growth of 20% during 2010-11, as

indicated by the RBI. The annual policy also endeavors to contain inflation at a benign

level of 5.5%, with a medium term goal of 3%.


FINANCE PERFORMANCE

Canara Bank crossed three major milestones during 2009-10. First, its total business

crossed the Rs.400000 crore marks, signifying a growth of 24.3%. Second, Net profit

crossed Rs.3000 crore to reach Rs.3021 crore, up by Rs.45.8%. Third, the Bank’s branch

network crossed the 3000 mark to reach 3046, with an addition of 314 branches during

the year

For Canara Bank, 2009-10 was a year of reckoning and crossing of milestones. It was a

year of robust performance on the business front coupled with unprecedented gains in

profits and profitability. Continued buoyancy in core business operations and costs

containment helped the Bank to sustain and enhance the top line earnings while

maintaining a stronger bottom line.

Net profit reached an all time high of Rs.

3021 crore, signifying a strong 45.8%

growth y-o-y and substantially higher than

Rs. 2072 crore recorded during the

preceding year. Operating profit recorded

a 27.7% growth to reach a level of Rs.

5061 crore.

Return on average assets (RoAA) for the year stood at 1.30%, well above the

international benchmark of 1%. Cost to Income ratio declined by 288 basis points to

40.73%. Profit per employee, moved up to Rs.7.36 lakh compared to Rs.4.97 lakh in the

previous financial year.


2959

1565

3964

2072

5061

3021

100

1100

2100

3100

4100

5100

2007-08 2008-09 2009-10

Operating and Net Profit(Rs. in Crore)

Operating Profit Net Profit

Dividend of 100% for 2009-10

Enhancing Shareholder Value: In

conformity with its commitment to enhance

value for shareholders, the Bank showed

steady improvement in Earnings Per Share

(EPS) and Book Value. While Book Value

increased to Rs.305.83 as at March 2010 as

compared to Rs.244.87 for the previous

financial, EPS rose to Rs.73.69 for the year ended March 2010 compared to Rs.50.55 a

year ago. A dividend of 100%, amounting to Rs.410 crore, was recommended by the

Board of Directors of the Bank for 2009-10.

Key Financial Ratios (%) March.2009 March.2010

Cost of Funds 6.32 5.65

Yield on Funds 8.72 8.10

Cost of Deposits 6.87 6.12

Yield on Advances 10.79 9.81

Yield on Investments 7.94 7.52

Spread as a % to AWF* 2.40 2.45

Net Interest Margin (NIM) 2.78 2.80

Operating Expenses to AWF 1.56 1.50


Dividend and Earnings per share

38.17

50.55

73.69

8.0

8.0

10.0

0

10

20

30

40

50

60

70

80

2007-08 2008-09 2009-10

0.0

2.0

4.0

6.0

8.0

10.0

12.0Earnings Per ShareDividend Per Share

Return on Avg. Assets (RoAA) 1.06 1.30

Return on Avg. Net worth 22.61 26.76

Business per Employee (Rs. in Crore) 7.80 9.83

Profit per Employee (Rs. in Lack) 4.97 7.36

Book Value (Rs.) 244.87 305.83

Earnings per Share (Rs.) 50.55 73.69

AWF - Average Working Funds

Income and Expenditure Analysis

The Bank’s interest income recorded a

y-o-y growth of 9.5% to reach

Rs.18752 crore compared to Rs.17119

crore recorded during the previous

financial. Non-interest income

increased to Rs. 2858 crore, recording a robust growth of 23.7%.

Concerted focus on mobilization of low cost deposits and strong resistance to high cost

preferential rate deposits helped the Bank to reduce the cost of deposits to 6.12% from

March 2009 level of 6.87%. Yield on advances decreased by 98 basis points to 9.81% as

against 10.79% in March 2009 due to low

interest rates. Interest spread increased to

2.45% from 2.41% as at March 2009.

While interest expenditure marginally

increased to Rs.13071 crore, the Bank

reasonably contained its rise in non-interest


Composition of Expenditure(2009-10)

Staff Cost 13%

Other Operating

Expenditure 8%

Interest Expenditure

79%

Composition of Income(2009-10)

Others1%

Non-Interest Income

13%

Investments21%

Loans and Advances

65%

expenditure at 13.5%. Notably, the net interest income of the Bank registered a good

20.41% growth to reach Rs. 5681 crore and Net Interest Margin (NIM) improved to

2.80% compared to 2.78% as at March 2009.

Capital and Reserves

Net worth of the Bank, as at March 2010, stood at Rs.12949 crore compared to Rs.10040

crore as at March 2009. With the paid-up capital at Rs.410 crore, reserves and surplus

increased to Rs.14262 crore. To augment the capital resources, the Bank raised Rs. 600

crore through the Innovative Perpetual Tier I Bonds during the year.

(Amt. in Rs.

Crore)

As at March

2010, Capital

to Risk Weighted Assets Ratio (CRAR) of the Bank under Basle II stood at 13.43%, well

above the 9% regulatory benchmark. Significantly, the Bank has attained a Tier I capital

ratio of 8.54%. The medium term objective of the Bank is to maintain the CRAR ratio

above 12%. With the still undiluted 73.17% Government of India shareholding, the Bank

has large headroom available under both Tier I and Tier II options to raise capital and

support business growth momentum.


Composition of Capital March 2009

Basle II

March 2010

Basle II

Risk Weighted Assets 125111 150623

Tier I Capital 10023 12870

CRAR (%)(Tier I) 8.01 8.54

Tier II Capital 7623 7362

CRAR (%)(Tier II) 6.09 4.89

Total Capital 17646 20232

CRAR (%) 14.10 13.43

Business Volumes Cross Rs.4 lack Crore

BUSINESS GROWTH

Deposits

Total Deposits of the Bank

registered a growth of 25.6%

to reach Rs. 2,34,651 crore as

at March 2010. In accordance

with the strategic focus, the

Bank's core deposits recorded

a growth of 32.3%, supported

by 19.3% growth in savings

deposits.

Unrelenting focus on augmenting of low cost resources yielded good results. The Bank’s

mega savings bank deposit campaign (Savings Utsav) resulted in an addition of Rs.8064

crore in savings deposits during FY10 as against Rs.6544 crore in FY09. The share of

CASA (current and savings bank deposits) deposits in domestic deposits stood at 29.85%.

With a CASA per branch at Rs. 22.4 crore, the Bank continues to be one of the best

among the peers. Pursuing a strategy of broad basing deposit clientele, all the branches

together added nearly 2.35 million deposit

accounts, taking the total tally under

deposit accounts to 32.85 million.


154072

186893

234651

10000

60000

110000

160000

210000

260000

(Rs. in Crore)

2007-08 2008-09 2009-10

Deposits

CAGR for 3 Yrs at 23%

107238

138219

169335

0

20000

40000

60000

80000

100000

120000

140000

160000

180000

(Rs. in Crore)

2007-08 2008-09 2009-10

Advances (Net)


Advances (net)

The Bank's advances (net) witnessed a robust 22.5% growth in 2009-10 to reach Rs.

1,69,335 crore. In quantum terms, credit increased by over Rs.31000 crore. The Bank

stepped up credit to all productive segments of the economy like agriculture and Micro,

Small and Medium Enterprises (MSME), exposure to corporate and infrastructure

segments. The number of borrowal accounts, as at March 2010, rose to 4.49 million.

Total Business of the Bank grew

by 24.3% to reach Rs. 4,03,986

crore as at March 2010 as against

Rs. 3,25,112 crore during the

preceding year. Productivity, as

measured by business per

employee, increased to Rs.9.83

crore from Rs.7.80 crore a year

ago, continuing to be one of the best among the peers. With several enterprise-wide

initiatives and measures, the Bank added 2.54 million clientele during the year.


154072

107238

186893

138219

234651

169335

0

50000

100000

150000

200000

250000

300000

350000

400000

450000

(Rs.

in C

rore

)

2007-08 2008-09 2009-10

Total Business

Deposits Advances

4,03,986

2,61,310

3,25,112


Retail Lending Operations

Retail lending operations of the

Bank regained the growth

momentum during the year. While

disbursals under the retail lending

stood at Rs. 8653 crore, the

outstanding advances rose to Rs.

23902 crore, accounting for about

15% of the domestic credit.

(Amt. in Rs. Crore)

The

Bank took several measures during the year to expand retail credit, including special

packages for housing and auto loans. Under Canara Mobile loan, the Bank sanctioned

24,000 accounts, amounting to Rs. 803 crore. To facilitate speedy disposal of proposals

and credit flow, a total of 25 Centralized Processing Units (CPU)/ Retail Assets Hubs

(RAH) for housing and personal loans were functioning at major centres across the

country.


Retail Lending March 2009 March 2010 Growth (%)

Retail Lending 19798 23902 20.7

Housing (Direct) 7896 10116 28.1

Retail Trade 4451 5383 20.9

Other Personal (Including

Education Loan)

7451 8403 12.8

Composition of Retail Lending (2009-10)

Other Personal

35%

Retail Trade23%

Housing (Direct)

42%

Business performance of overseas branches as on 31.03.2010

Overseas Branch Deposits Advances Gross

Profit

Net Profit

London (GBP Mn) 992.69 771.08 8.88 0.3

Hong Kong (USD Mn) 61.85 363.25 5.50 2.48

Shanghai In first year of operation

The Bank has already obtained approval from the RBI to open 10 branches/offices in

Johannesburg, Frankfurt, Muscat, Manama, QFC-Qatar, New York, Sao Paulo, Dar-er-

Salam, Tokyo and Sharjah, out of the 20 international financial centres identified for

global expansion in the medium term.

The Bank's international operations are supported by a wide network of 395

correspondent banks, spread across 80 countries. The Bank has rupee drawing

arrangements with 22 exchange houses and 18 banks in the Middle East for channelising

the remittances of expatriates. The Bank has been managing two exchange houses viz.,

Al Razouki International Exchange Company, Dubai and Eastern Exchange Est., Qatar,

under secondment and management agreement respectively. The Bank, during the year,

expanded its arrangement under 'Remit Money', a web based product by extending to 17

Exchange Companies/Banks and 4 branches abroad.


FINANCIAL SOUNDNEES

CAPITAL

The Bank's paid-up capital stood at Rs410 crore with 1.08 lack shareholders.

Capital to Risk Weighted Assets Ratio worked out to 1 3.50% vis-à-vis the 9%

benchmark.

During FY07, the Bank raised lower/upper Tier II capital worth Rs. 1975 crore

from the domestic market and US$250 million overseas by way of a medium term note

programmed.

The Bank's Capital Roadmap duly factors in the likely scenario in advances

movement and expected regulatory changes. The overarching objective has been to

maintain CRAR above 12% so as to support the buoyancy in credit deployment.

RESERVES AND OWNED FUNDS

Reserves increased to Rs.9944 crore, additional accrual during the year being

Rs.3222 crore. Owned funds stood at Rs.8111 crore as compared to Rs.7132 crore at the

end of the previous year.

PROFITS AND PROFITABILITY

Gross profit for the year 2006-07 stood at Rs.2912 crore, while net profit was of

the order of Rs. 1421 crore.

Return on Average Assets (RoAA), worked out to 0.98%, despite a 25% growth in total

assets. Net Interest Income was up 12.43%to Rs.4027 crore.


SHAREHOLDERS'VALUE

A dividend of 70%, amounting to Rs.287 crore, is proposed by the Board of

Directors of the Bank, as against 66% (Rs.270.60 crore) paid last year, subject to the

approval of shareholders. Bank's performance under earnings is reflected in a consistent

uptrend in Book Value and Earnings Per Share. While book value increased to

Rs.197. 83 as at March 2007 compared to Rs. 171 .19 recorded for last financial,

Earnings per Share further rose from Rs.32.76 to Rs.34.65 for the year ended March 2007

NATIONAL PRIORITIES

Priority Sector Advances

As one of the leading players in the domestic banking industry, the Bank continues to

accord importance to varied goals under national priorities. The remarkable performance

during 2009-10 has further reinforced the Bank’s commitment to the large and growing

productive segments of the economy, including agriculture, small enterprises, education,

micro-credit, weaker sections, SC/STs and minorities.

The Bank has achieved stipulated mandatory targets under Total Priority, Total

Agriculture and Weaker Sections Advances with comfortable margin.

Priority Sector Advances of the Bank as at March 2010 increased by Rs.10547 crore to

reach Rs.59310 crore, recording a y-o-y growth of 21.6% covering 38 lakh borrowers.

Priority Sector Advances formed 43.92% of the Bank’s Adjusted Net Bank Credit

(ANBC), well above the 40% stipulated norm.

(Amt. in Rs. Crore)

Priority Sector

Advances

As on 31st March Growth

2009 2010 Amount Percentage

Agriculture 20144 25051 4907 24.36

Micro & Small

Enterprises

16316 24180 7864 48.20


Total Priority Sector 48763 59310 10547 21.63

With a focus on credit delivery to agriculture, the Bank’s advances under agriculture

rose by Rs. 4907crore to reach Rs. 25051 crore, covering 29 lakh farmers. Agriculture

credit as a proportion of ANBC rose to 18.55%, surpassing the mandatory targeted level

of 18%. Advances to agriculture (direct) reached a level of Rs. 19069 crore, with a 23%

y-o-y growth and accounting for 14.12% of ANBC.

Under Kisan Credit Card Scheme, the Bank issued 3.02 lakh cards during the year with

credit coverage of Rs.2432 crore. As at March 2010, the cumulative number of Kisan

Credit Cards reached 30 lakhs, involving credit coverage of Rs.14507 crore.

Over the years, the Bank

has supported lakhs of

promising students to

pursue higher education in

India and abroad. In

doing so, the Bank has built

up a sizable education loan

portfolio and has been

sustaining the premier

position among

nationalized banks in India. The Bank's advances under Education Loan Scheme

recorded a growth of 25.9% to reach Rs.2896 crore. The bank has financed more than

1.71 lakh students as at March 2010. The Bank also extended financial assistance to other

priority sectors, such as, retail traders, housing and micro credit.

During the year, the Bank actively participated in various Government Sponsored

Schemes, such as, PMRY, SGSY, SJSRY, SLRS and DRI. As at 31st March 2010, the

outstanding advances under these schemes aggregated to Rs.556 crore, involving 1.40

lakh beneficiaries.


Education Loan Portfolio

2896

1737

2301

119000

146851

171327

0

500

1000

1500

2000

2500

3000

3500

2007-08 2008-09 2009-10

(Am

ount in

Rs.

Cro

re)

0

20000

40000

60000

80000

100000

120000

140000

160000

180000

(No.

of St

ude

nts

)

Education LoanNo. of Students

Performance under Various Government Sponsored Schemes

Name of the Scheme No. of Accounts Amt. in Rs. Crore

PMRY 61980 295.81

SGSY 16071 50.11

SJSRY 33734 158.48

SLRS 1164 2.50

DRI 27188 49.50

Total 140137 556.40

In support of the underprivileged sections of the society, the Bank’s advances to

SC/ST beneficiaries reached Rs.3905 crore as at March 2010. Advances to SC/ST

reached a level of 6.58% of total priority sector advances and total accounts under

SC/ST advances were 17% of total priority sector accounts.

Advances to weaker sections aggregated to Rs.14631 crore, with 25 lakh borrowers.

Advances to weaker sections formed 10.83% of ANBC against the norm of 10%.

As at March 2010, advances by the Bank to minority communities aggregated to Rs.

9348 crore and crossed the stipulated target of 15% of total priority by reaching

15.76%.

During the year, the Bank has formed 44890 Self-Help Groups (SHGs), taking the

cumulative number of SHGs formed to 3.20 lakhs as at March 2010. With 50,701 SHGs

credit linked during the year, the cumulative tally under credit linking reached 2.75 lakhs

since inception.

The total exposure of the Bank under

SHG finance rose to Rs. 926 crore,

spreading over 97,498 SHGs.


18600

23823

31074

5000

10000

15000

20000

25000

30000

35000

2007-08 2008-09 2009-10

Micro, Small & Medium Enterprises(Rs. in Crore)

Advances to Micro Small and Medium Enterprises (MSMEs) reached Rs.31074 crore,

with a y-o-y growth of over 30%, far above the mandatory y-o-y growth of 20%.

The Bank has covered 37,608 accounts with an exposure of over Rs. 948 crore as at

March 2010 under Credit Guarantee for Micro and Small Enterprises (CGMSE).

Considering the importance of MSME sector in the national economy, the Bank has

developed specific loan products to meet the diverse requirements of entrepreneurs in this

particular segment. Cluster based lending is adopted to cater to the units in industrial

clusters. Area/ cluster specific loan products have been introduced to meet specific

requirements.

To enable the MSME sector to face the challenges of economic slowdown, the Bank

acted swiftly and rolled out a Special Package to provide relief to MSMEs during

December 2008. The special package continued during the year 2009-10 also. The

comprehensive package includes, among other facilities, additional/adhoc working

capital, extended tenability for receivables, concession in interest and debt restructuring.

MSME Care Centers were established across the country to resolve the grievances of

MSMEs.

During the year, the Bank has launched "SME SULABH", a new business model for

speedy credit delivery to MSME Sector. The SME Sulabhs are independent centralized

loan processing centres aimed at fast processing/quick delivery of credit to MSMEs.

They are equipped with specialized marketing, credit appraisal and monitoring teams. 15

SME Sulabhs have been established at Agra, Ahmedabad, Bangalore, Chandigarh,

Chennai, Coimbatore, Delhi, Hubli, Hyderabad, Kolkata, Lucknow, Madurai, Mumbai,

Pune and Trivandrum. The Bank has embarked upon reaching out to large section of

MSMEs at major centres in the country through this model. The contributions of the

Sulabhs in the growth of MSME credit of the Bank during 2009-10 has been substantial

resulting in Bank achieving the MSME targets for the year.


Rural Development

The Bank, through its Canara Bank Centenary Rural Development Trust, has established

exclusive training institutes to promote entrepreneurship development among rural youth

and encourage them taking up self-employment activities. During the year, 9 new training

institutes were opened at Aligarh and Etah districts in Uttar Pradesh, Sheikhpura district

in Bihar, Calicut and Palakkad districts in Kerala, Nilgiris, Erode, Theni and Dindigul in

Tamil Nadu enhancing the number of such training institutes to 26. These institutes have

so far trained 94935 unemployed youth, comprising 60% women with an impressive

settlement rate of 70%. The Trust is also supporting the activities of Society for

Educational and Economic Development (SEED), a voluntary organization based in

Sriperambadur, Tamil Nadu, working for the welfare of the socially marginalized

children.

The Bank has co-sponsored 23 Rural Development and Self Employment Training

Institutes (RUDSETIs) engaged in training of rural youth for taking up self-employment

programmes. 23 RUDSETIs have trained more than 2,38,000 unemployed youth, with a

settlement rate of 70%.

The Bank is also co-sponsoring Deshpande-RUDSETI at Haliyal in Karnataka and

Andhra Pradesh Bankers Institute of Rural Development (APBIRED) at Hyderabad in

Andhra Pradesh. These two institutes are also engaged in promoting entrepreneurship

development among rural unemployed youth.

The new campus for Canara Bank Institute for Artisans, Karaikudi was inaugurated by

Hon'ble Union Home Minister, Shri P Chidambaram, during the year.

Canara Bank's Rural Clinic Service Scheme provides basic health care services in

remote areas lacking basic medical infrastructure facilities. Under the Scheme, the Bank

encourages doctors to set up clinics in identified rural areas. As at March 2010, the total


number of such clinics rose to 518. The Bank under 'Jalayoga', a scheme to provide safe

drinking water, has so far implemented 35 projects in its lead districts.

The Bank donated a hi-tech, custom built, solar powered 'Mobile Sales Van' to assist

women entrepreneurs, SHGs and artisans to market their products.

Visits by Parliamentary Committees

The third Sub-Committee of Parliamentary Committee on Official Languages had

inspected our Khajuraho, Ghaziabad, Raipur Branches and CO Mysore and lauded the

efforts put in by the Bank in the field of Official Language implementation.


Expanded Pan India Presence

Branch Network

The year was significant for the Bank in expanding domestic operations across the

country. Befitting its 104th year of existence, the Bank on its Founder’s Day i.e., 19 th

November, 2009, opened 104 branches across the country, inaugurated by Hon’ble

Finance Minister Shri Pranab Mukherjee. The Bank opened 314 branches during the year,

taking the total tally under the branch network to 3046 branches.

Composition of domestic branch network


Category

No. of Branches

31.03.2009 31.03.2010

Metropolitan 629 727

Urban 674 744

Semi-urban 691 793

Rural 735 779

Total Branches 2729 3043

The Bank has 118 specialized branches catering to the specific financial needs of

different clientele categories.


Categories of Specialized Branches 31.03.2010

1. SMEs 37

2. Overseas 17

3. Agri-Finance 10

4. Micro Finance Branches 9

5. Savings 7

6. NRIs 7

7. Asset Recovery Management 7

8. Prime Corporate 7

9. Industrial Finance 5

10. Stock Exchange 3

11. Capital Market 3

12. Mahila Banking 3

13. Consumer Finance 1

14. Housing Finance 1

15. Branch for Physically Challenged 1

TOTAL 118

GOALS FOR 2007-08

Bank targets a global business level of Rs.2, 90, 000 crore for 2007-08, with a

growth rate of over 20%, comprising Rs. I,70,000 crore under deposits and

Rs.I,20,000 crore under advances. Advances growth will be significantly driven

by agriculture, SME, infrastructure and other productive segments, including

services sector.

Towards faster implementation of Core Banking Solution (CBS), the Bank targets

to cover all the branches under CBS by March 2008.

The Bank has taken up a major brand building exercise and comprehensive

review of its business strategies covering products, processes, people and its

organization structure.

In pursuit of the Bank's global aspirations, 21 prominent centers have been

identified by the Bank for expanding its global reach. With the preliminary moves

underway, the Bank's Representative Office at Shanghai is being converted into a

full fledged branch.

After creation of JVs in Insurance and Asset Management, the Bank is exploring

similar options in other financial services.

The Bank is geared up to comply with the revised guidelines issued under priority

sector lending.

Under HR, Assessment Development Centre concept will be implemented to map

training competence and upgrade manpower skill. Plans are underway to

introduce 'Internship' programmed to assist students pursuing professional course.

`


Analysis of the financial statement

Financial statements and reports are the tools which provide information of the

firms financial affairs. This information is required for financial analysis & decision

making. It assesses the financial status of organization which is prepared with help of

accounting principle.

Financial statement has mainly as follow:

Balance sheet

Profit & loss account

Financial statement is prepared on basis of generally accepted accounting

principle. These are

a. Business entity principle

b. Going concern principle

c. Monetary principle

d. Historical principle

e. Realizations principle

f. Accrual concept

Basic conventions under which financial statements prepared is:

consistency

conservativeness

disclosure

Analyzing of financial statements helps to know the financial health of the

borrower, which provides the detail of the liabilities and the assets of the applicant. It also

helps to study the trends in the financial matters of the company. It helps to valuate the

assets of the applicant company. It assists in decision making process relating to the

future activities.


Profit and Loss account:-

Meaning:- profit and loss account is one of the essential document which shows the

summary of revenues, expenses and net income of the firm during the particular financial

period.

Functions of the Profit and Loss account:-

It gives a concise summary of the firm’s revenue and expenses during the

particular period.

It measures the firm’s profitability.

It represents the activity of the firm.

Ratio Analysis:-

Ratios are classified into four parts like:-

1. Liquidity ratios

2. Activity ratios

3. leverage ratios

4. profitability ratios


Canara Bank Balance Sheet

Mar '06 Mar '07 Mar '08 Mar '09 Mar '10

12 mths 12 mths 12 mths 12 mths 12 mths

Capital and Liabilities:

Total Share Capital 410.00 410.00 410.00 410.00 410.00

Equity Share Capital 410.00 410.00 410.00 410.00 410.00

Share Application Money 0.00 0.00 0.00 0.00 0.00

Preference Share Capital 0.00 0.00 0.00 0.00 0.00

Reserves 6,608.86 7,701.11 7,885.63 9,629.61 12,129.11

Revaluation Reserves 113.38 2,242.87 2,204.86 2,168.16 2,132.68

Net Worth 7,132.24 10,353.98 10,500.49 12,207.77 14,671.79

Deposits 116,803.23 142,381.45 154,072.42 186,892.51 234,651.44

Borrowings 25.82 1,574.35 2,517.23 7,056.61 8,440.56

Total Debt 116,829.05 143,955.80 156,589.65 193,949.12 243,092.00

Other Liabilities & Provisions 8,860.57 11,651.25 13,438.55 13,488.91 6,977.30

Total Liabilities 132,821.86 165,961.03 180,528.69 219,645.80 264,741.09

Assets

Cash & Balances with RBI 7,914.00 9,095.19 13,364.79 10,036.79 15,719.46

Balance with Banks, Money at Call 4,909.56 7,278.74 4,513.25 6,622.99 3,933.75

Advances 79,425.70 98,505.69 107,238.04 138,219.40 169,334.63

Investments 36,974.18 45,225.54 49,811.57 57,776.90 69,676.95

Gross Block 1,718.60 4,056.39 4,254.33 4,440.07 4,480.37

Accumulated Depreciation 1,030.13 1,195.04 1,337.46 1,510.61 1,620.99

Net Block 688.47 2,861.35 2,916.87 2,929.46 2,859.38

Capital Work In Progress 0.00 0.00 0.00 0.00 0.00

Other Assets 2,909.95 2,994.53 2,684.17 4,060.26 3,216.92

Total Assets132,821.8

6165,961.04 180,528.69 219,645.80 264,741.09

Contingent Liabilities 47,062.37 52,150.75 95,710.87 136,851.39 110,627.02

Bills for collection 12,260.93 15,660.41 25,299.63 25,757.73 21,206.47

Book Value (Rs) 171.19 197.83 202.33 244.87 305.83


Profit & Loss account of Canara Bank

Income

Interest Earned 8,711.51 11,364.56 14,200.74 17,119.05 18,751.96

Other Income 1,377.51 1,511.80 2,308.31 2,427.10 3,000.82

Total Income 10,089.02 12,876.36 16,509.05 19,546.15 21,752.78

Expenditure

Interest expended 5,130.01 7,337.73 10,662.94 12,401.25 13,071.43

Employee Cost 1,515.30 1,609.29 1,661.28 1,877.15 2,193.70

Selling and Admin Expenses 1,061.42 957.77 1,491.09 1,540.27 2,164.65

Depreciation 145.03 148.18 169.97 173.64 155.13

Miscellaneous Expenses 894.05 1,402.58 958.76 1,481.42 1,146.44

Preoperative Exp Capitalised 0.00 0.00 0.00 0.00 0.00

Operating Expenses 2,982.32 3,023.26 3,666.30 3,965.24 4,903.79

Provisions & Contingencies 633.48 1,094.56 614.80 1,107.24 756.13

Total Expenses 8,745.81 11,455.55 14,944.04 17,473.73 18,731.35

Mar '06 Mar '07 Mar '08 Mar '09 Mar '10

Net Profit for the Year 1,343.22 1,420.81 1,565.01 2,072.42 3,021.43

Extraordionary Items 0.00 0.00 0.00 0.00 0.00

Profit brought forward 0.00 0.00 0.00 0.00 0.00

Total 1,343.22 1,420.81 1,565.01 2,072.42 3,021.43

Preference Dividend 0.00 0.00 0.00 0.00 0.00

Equity Dividend 270.60 287.00 328.00 328.00 410.00

Corporate Dividend Tax 38.00 48.78 56.00 55.75 70.00

Per share data (annualised)

Earning Per Share (Rs) 32.76 34.65 38.17 50.55 73.69

Equity Dividend (%) 66.00 70.00 80.00 80.00 100.00

Book Value (Rs) 171.19 197.83 202.33 244.87 305.83

Appropriations

Transfer to Statutory Reserves -867.12 362.21 802.00 1,508.64 1,676.35

Transfer to Other Reserves 1,901.74 722.82 379.01 180.03 865.08

Proposed Dividend/Transfer to Govt 308.60 335.78 384.00 383.75 480.00

Balance c/f to Balance Sheet 0.00 0.00 0.00 0.00 0.00

Total 1,343.22 1,420.81 1,565.01 2,072.42 3,021.43


Findings


1. The proposed standardized Basel2 to approach does not fits the needs of smaller

banking organization engaged primarily traditional banking.

2. The current nor proposed capital frameworks yet address what is perhaps the most

critical risk factor for the smaller banks - geographic and sect oral concentrations

of credit risk.

3. Internal ratting based approach provides positive incentives to banks in improving

their credit risk management techniques.

4. Banks may have discretion and flexibility in defining the exposure classes that

which corporate, project finance, etc.

5. Unless suitably modified the adoption of the new accord in its present format

would result in significant increase in the capital charge for bank.

6. Additional cost of capital will increase to the bank and bank may go for capital

market to raise the found.

7. Bank as well documented schemes delegation powers for credit sanction.


LIMITATIONS

1. The study restricted to only one branch.

2. The time constraint was a limiting factor, as more time required carrying 0 ut study

on other aspects of the topic.

3. Due to secrecy it is difficult obtain actual facts and figures of advances of branches.


suggestion

1. The bank will now have to adopt the credit risk assessment system which is an

international standard specified for the banking system.

2. Due to increased sensitivity towards risk under the new norms, the risk will come

down significantly. This will lead to an increase in the regulatory capitalization

levels, which will increase the cost of capital, which may be passed on to the

customers.

3 The banks will have to exercise due care in maintaining the portfolio of risk assets

in order not to increase unduly the required regulatory capitalization level. This may in

turn in duce conservatism in the bank in taking of risky portfolio of advances, a danger

they have to guard against. It will indeed be a delicate balancing task.


Conclusion

The variability of return around the expected average is thus a quantitative

description of risk .Moreover, this measure of risk is simply a proxy for risk

because other measures cud be used.

The total variance is the rate of return on a stock around the expected average that

includes both systematic and unsystematic risk.


BIBLIOGRAPHY

Refer By

1 Bank circulars.

2 Internal magazines.

3 www.mis.org.

4 www.canbankindia.com.

5 www.rbi.org.in.


http://www.rbi.org.in/

http://www.canbankindia.com/

http://www.mis.org/

canara bank

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