Risk Management Blackbook

A Study of Risk Management in SBI bank and ICICI Bank
In India
A Project Bachelor of Management submitted to
University of Mumbai for partial completion of the degree of
Studies
Under the Faculty of Commerce
By
Karishma Krishna Shetty
Under the Guidance of
Rahul Khachane
St John College of Humanities and Sciences
Palghar (E) 401404, Dist, Palghar, Tel:02525-297071
March 20-21
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A STUDY OF RISK MANAGEMENT IN SBI BANK AND ICICI BANK
Aldel Education Trust‘s
St. John College of Humanities and Science
(A Christian Religious Minority Institution)
Affiliated to University of Mumbai
St. John Technical Campus Vevoor, Manor Road, Palghar(East),

Tal.&Dist.Palghar,Maharashtra-401404.
Tel:(02525)-297071 ,Mob.:7219230156 Fax:(02525)-256834 Email: [email protected]

CERTIFICATE
This is to certify that Ms Karishma Shetty has worked and duly completed
her Project Work for the degree o f Bachelor of Management Studies under
the Faculty of Commerce in the subject of Rahul Khachane and her project
is entitled, ―A Study of risk management in SBI bank and ICICI bank in
India‘‘ under my supervision.
I further certify that the entire work has been done by the learner under my
guidance and that no part of its has been submitted previously for any
Degree or Diploma of any University.
It is her own work and facts reported by her personal findings and
investigations.
Name and Signature of
Guiding Teacher
Date of submission:
2
Declaration by learner
I the undersigned Miss/Mr Karishma Shetty here by,declare that the work
embodied in this project work titled ―A study of risk management in SBI
and ICICI bank in India‖, forms my own contributiton to the research work
and has Rahul Khachane is a result of my own research work and has not
been previously submitted to any other University for any other Degree
/Diploma to this or any other University.
Wherever reference has been made to previous works of others, it has been
clearly indicated as such and included in the bibliography.
I, here by further declare that all information of this document has been
obtained and presented in accordance with academic rules and ethical
conduct.
Name and signature of the learner
Certified by
Name and signature of the Guiding Teacher
3
Acknowledgment
To list who all have helped me is difficult because they are so numerous and
the depth is so enormous.
I would like to acknowledge the following as being idealistic channels and

fresh dimensions in the completion of this project.
I take this opportunity to thank the University of Mumbai for giving me

chance to do this project.
I would like to thank my Principal, DR. BRAJABANDHU DAS

for providing the necessary facilities required for completion of this project.
I take this opportunity to thank our Coordinator , for her moral

support and guidance.
I would also like to express my sincere gratitude towards my project guide

Rahul Khachane whose guidance an0d care made the project successful.
I would also like to thank my College Library, for having provided

reference books and magazines related to my project.
Lastly, I would like to thank each and every person who directly or
indirectly helped me in the completion especially my Parents and Peers
who supported me throughout my project.
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INDEX
SR.NO PARTICULARS PG NO
CHAPTER1: INTRODUCTION 8
1.1 RISK MANAGEMENT
1.2 ROLE OF RISK MANAGEMENT IN BANKS 9
1.3 HISTORICAL PERSPECTIVE OF RISK 10
MANAGEMENT
1.4 OBJECTIVES OF RISK MANAGEMENT 11
1.5 ADVANTAGE AND DISADVANTAGE OF RISK 11,12
MANAGEMENT
1.6 CLASSIFICATION OF RISK 12
A)FINANCIAL RISK 13
B)NON- FINANCIAL RISK 16
1.7 INTRODUCTION TO SBI BANK 16
1.8 INTRODUCTION TO ICICI BANK 17
CHAPTER 2: RESEARCH AND METHODOLOGY 18
2.1 OBJECTIVES OF STUDY
2.2 DATA COLLECTION
2.3 SCOPE OF THE STUDY
2.4 HYPOTHESIS
2.5 STRUCTURE OF THE STUDY 19
2.6 LIMITATION OF THE STUDY
CHAPTER 3: LITERATURE REVIEW 20
CHAPTER 4: DATA ANALYSIS, 26
INTERPRETATION & PRESENTATION
4.1 ROLE OF RBI ON RISK MANAGEMENT IN
BANKS
4.2 PROFILE OF THE BANKS SELECTED FOR THE 29
STUDY
5
4.3.1 RISK MANAGEMENT OVERVIEW 33
4.3.2 RISK MANAGEMENT PLAN 34
4.3.3 RISK IDENTIFICATION TOOLS & TECHNIQUE 35
4.3.4 LIQUIDITY MANAGEMENT THEORY 40
4.3.5 SHIFTABILITY THEORY 42
4.3.6 ANTICIPATED INCOME THEORY 43
4.3.7 LIABILITIES MANAGEMENT THEORY 43
4.3.8 BASEL NORMS 49
4.4 CREDIT MANAGEMENT OF BANKS 52
4.5 RISK MANAGEMENT TECHNIQUE 64
4.6 CALCULATING CAMEL RATING 67
4.7 PERFORMANCE OF SELECTED BANK 69
4.8 MEASURING THE MAGNITUDE OF CREDIT 70
RISK IN SBI BANK
4.9 MEASURING THE MAGNITUDE OF CREDIT 73
RISK IN ICICI BANK
4.10 A COMPARATIVE ANALYSIS OF CAPITAL 74
ADEQUACY RATIO
CHAPTER5: FINDINGS, SUGGESTION, 79
CONCLUSION
5.1 FINDINGS 79
5.2 CONCLUSION 80
5.3 REFERENCE 81
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LIST OF TABLES
SR.NO PARTICULARS PG NO
4.2.1.1 BALANCE SHEET OFSBI BANK 29
4.2.1.2 INCOME STATEMENT OF SBI BANK 30
4.2.2.1 BALANCESHEET OF ICICI BANK 31
4.2.2.2 INCOME STATEMENT OF ICICI BANK 32
4.6.2 RATING BASE OF CAMEL COMPONENT 67
4.6.3.1 THE CAMEL FOR SBI BANK 68
4.6.3.2 CALCULATION OF CAMELS FOR ICICI BANK 69
4.7.1 SBI BANK PERFORMANCE 69
4.7.2 ICICI BANK PERFORMANCE 70
4.8.1 RATIO OF TOTAL EQUITY TO TOTAL ASSETS 71
OF SBI BANK
4.8.2 RATIO OF NON-PERFORMING ASSETS TO NPA 72
& TOTAL EQUITY
4.9.1 RATIO OF TOTAL EQUITY TO TOTAL ASSETS 73
OF ICICI BANK
4.9.2 RATIO OF NON- PERFORMING ASSETS TO NPA 74
& TOTAL EQUITY
4.10.1 COMPARATIVE ANALYSIS OF CAPITAL 74
ADEQUACY RATIO
4.10.2 COMPARATIVE ANALYSIS OF RETURN ON 75
ASSETS
4.10.3 COMAPARATIVE ANALYSIS OF RETURN ON 75
EQUITY
4.10.4 COMPARATIVE ANALYSIS OF QUICK RATIO 76
4.10.5 COMPARATIVE ANALYSIS OF CURRENT RATIO 76
4.10.6 COMPARATIVE ANALYSIS OF DEBT EQUITY 77
RATIO
4.10.7 COMPARATIVE ANALYSIS OF CREDIT 77
DEPOSITS RATIO
4.10.8 COMPARATIVE ANALYSIS OF RETURN OF 78
CAPITAL EMPLOYED RATIO
5.1 RANKS OF BOTH THE BANKS 79
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LIST OF ABBREVIATION
ABBREVIATION FULL FORM
ICICI Industrial Credit and Investment Corporation of India
SBI STATE BANK OF INDIA
ROE RETURN OF EQUITY
ROA RETURN OF ASSETS
ROCE RETURN OF CAPITAL EMPLOYED
NPA NON-PERFORMING ASSETS
TA TOTAL ASSETS
TE TOTAL EQUITY
ALM ASSETS LIABILITY MANAGEMENT
LCR LIQUIDITY COVERAGE RATIO
RWA RISK-WEIGHTED ASSETS
BIS BANK FOR INTERNATIONAL SETTLEMENTS
BCBS COMMITTEE ON BANKING SUPERVISION
IRR
INTEREST RATE RISK
NIM NET INTEREST MARGIN
NIL NET INTEREST INCOME
OECD ORGANISATION FOR ECONOMIC CO-
OPERATION AND DEVELOPMENT
RAROC RISK ADJUSTED RETURN ON CAPITAL
CRAR AND CAR CAPITAL ADEQUACY RATIO
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CHAPTER 1: INTRODUCTION
1.1 Risk Management-

Risk Management is the identification, assessment, and prioritization of risks followed by
coordinated and economical application of resources to minimize, monitor, and control
the probability and/or impact of unfortunate events. Risks can come from uncertainty in
financial markets, project failures, legal liabilities, credit risks, accidents, natural causes
and disasters as well as deliberate attacks from an adversary.
Risk management is the acceptance of responsibility for recognizing, identifying, and

controlling the exposures to loss or injury which are created by the activities of the
University. By contrast, insurance management involves responsibility for only those
risks which are actually insured against.
Definition: In the world of finance, risk management refers to the practice of

identifying potential risks in advance, analyzing them and taking precautionary steps to
reduce/curb the risk.
Meaning: When an entity makes an investment decision, it exposes itself to a number

of financial risks. The quantum of such risks depends on the type of financial instrument.
These financial risks might be in the form of high inflation, volatility in capital markets,
recession, bankruptcy, etc.
So, in order to minimize and control the exposure of investment to such risks, fund
managers and investors practice risk management. Not giving due importance to risk
management while making investment decisions might wreak havoc on investment in
times of financial turmoil in an economy. Different levels of risk come attached with
different categories of asset classes.
For example, a fixed deposit is considered a less risky investment. On the other hand,
investment in equity is considered a risky venture. While practicing risk management,
equity investors and fund managers tend to diversify their portfolio so as to minimize the
exposure to risk.
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1.2 Role of Risk Management in Banks-
The risk management process in banking raises various questions. These issues highlight
the importance of having risk management practices in banking. These matters are:
 ―What kind of events can damage banking business and how much damage can be
done?‖
This question highlights the importance of investigating the activities of the banks that
are creating risk or losses and also assessing the potential damage that those risks could
cause. Therefore, it can be said that the risk management process starts with the
identification of the potential losses or risk and continues by assessing or measuring those
issues.
 ―What kind of actions should be taken by the institutions in order to manage those
risks?‖
After identifying and analyzing the risk, it is necessary to determine what kind of
actions/activities can be Otherwise, if banks do not address the risks, this can lead to
significant losses for the implemented by the banks to address these potential hazards
institution. Therefore, in order to have a sound have been many banking crises around the
world in previous decades. Now, many and healthy institution, new techniques have been
developed in the modern banking industry to manage these losses. There countries have
implemented risk management practices to deal with these crises
 ―Did the institution make the right decision?‖

After a decision has been made and implemented by an institution, monitoring and
reporting usually take place. This step is the last part of the risk management practices
checking and reporting the activities of bank risk management.
The risk management process can be summarised with the following three steps:
1. Identifying and assessing the potential risk in the banking business,
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2. Developing and executing an action plan to deal with and manage these activities
that incur potential losses,
3. Continuously reviewing and reporting the risk management practices after they
have been put into action/operation.
The overall purpose of the risk management process is to evaluate the potential
losses for the banks in the future and to take precautions to deal with these
potential problems when they occur.
1.3 Historical Perspective of Risk Management

The concept of risk management in banking arose in the 1990s. However, risk
management before the 1990s was used to explain the techniques and risks related to
insurance. This kind of risk management refers to the purchase of traditional insurance
products that are suitable for any events to protect from future hazards. More recently in
the financial markets, derivatives have also been promoted as risk management tools to
use for hedging activity purposes. This form of risk management is often called ―financial
risk management‖ and derivatives are used as solution to manage the risks associated
with financial activities. Derivatives are not only used for hedging, but these instruments
can also be used for speculation and arbitrage. Certainly, the derivative is a part of the
risk management practices employed in the financial markets. Also, banks are using
derivatives in their everyday business and showing those activities in their on/off balance
sheet, although the meaning of risk management in banking is slighting different from
financial risk management. The management of risk in banking became necessary in
1997 when the Basel Committee on Banking Supervision (BCBS) published the ―core
principles‖ for effective banking supervision. This framework provides an essential
linkage between capital and risks. In particular, banks need to adopt risk measurement
and risk management procedures and processes in order to guarantee their risk-adjusted
return in their business. Therefore, the core concept of banking risk management is to
ensure the profitability and the safety of the banking industry.
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1.4 Objectives of Risk Management
1. Ensure the management of risk is consistent with and supports the achievement of the
strategic and corporate objectives.
2. Provide a high-quality service to customers.
3. Initiate action to prevent or reduce the adverse effects of risk.
4. Minimize the human costs of risks, Where reasonably practicable.
5. Meet statutory and legal obligations.
6. Minimize the financial and other negative consequences of losses and claims.
7. Minimize the risks associated with new developments and activities.
8. Be able to inform decisions and make choices on possible outcomes.
1.5 ADVANTAGES AND DISADVANTAGES OF RISK

MANAGEMENT
1.5.1 Advantages of Risk Management

1. It encourages the firm to think about its threats. In particular, risk management
encourages it to analyze risks that might otherwise be overlooked.
2. In clarifying the risks, it encourages the firm to be better prepared. In other words, it
helps the firm to manage itself better.
3. It lets the organization prioritize its investment and reduces internal disputes about how
money should be spent.
4. It reduces duplication of systems. Integration of environmental and health and safety

systems are one instance.
1.5.2 Disadvantages of Risk Management

1. Qualitative risk assessment is subjective and lacks consistency.
2. Unlikely events do occur but if the risk is unlikely enough to occur is maybe better to
simply retain the risk and deal with the result if the loss does in fact occur.
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3. Spending too much time assessing and managing unlikely risks can divert resources
that could be used more profitably.
1.6 Classification of risk

Bank faces different types of risks like credit risk, market risk, political risk, liquidity
risk, foreign exchange risk, interest rate risk, sovereign risk, etc. This risk can be divided
into sub classes. This referred to as risk decomposition. For the assessment of risk there
are different types of techniques. The alternate approach for framing risk management is
called risk aggregation.
These all types of risk are interdependent in nature and affect bank‘s performance. So, it
is mandatory to keep the risk at acceptable level. Therefore balanced tradeoff is required
between risk and return to avoid chance of bankruptcy.
The banks face various kinds of risks that put unconditional adverse impact on the
activities of banking business. Risk management is the process of managing risks which
consists risk identification, measurements and assessment and the main objectives of risk
management is to reduce the negative impact of risks which can affect the financial
performance and capital structure of a bank. Basically risk can be classified as:
Risks are mainly categorized in to

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A) Financial Risk
B) Non-Financial Risk
A) Financial Risk-
Financial Risk is that the risk that involves loss to corporations. This risk typically arises
attributable to instability of organization and losses within the money market caused by
movement in costs, currencies, and interest rates and additional factors. There are various
types of Financial Risk. These are:
Credit Risk
The risk of losing amount from a borrower who does not make payments as promised is
called credit risk. In other words the risk arise from non-payment of principal amount or
interest due to unwillingness of payment or insolvent position of borrower is termed as
default risk. The party making default is called defaulter.
The term credit risk or default risk is interchangeably used in banks. The counter party
risk refers to uncertainty of loss of principal stemming from a borrower‘s failure to repay
a loan. In other terms credit risk arise when a loan which has been granted by bank will
not be repaid on time and there is a risk of customer default in payments.
Counterparty risk is increasingly faced by banks. It is the non-payment of amount by

trading partner. The primary business of banks is granting credit because it is the source
of net interest margin will be high which inevitably leads to high credit risk.
The credit creation process of bank involves huge risk, the higher the exposure of bank to
default risk, the greater the chances of banks to face the financial distress. Credit risk is
the biggest risk faced by banks. There are many reasons for increasing credit risk in
banking transactions such as ratio of impaired loan, doubtful debts increasing level of
non-performing assets, variations in assets value. Therefore adequately managing credit
risk is the need of hour for banks to survive.
Credit risk may increase if banks lead to borrower without getting adequate knowledge
about the person or his capability to repay the loan. Thus careful attention to the impact
of credit risk level on bank‘s profitability is necessary because intense risk puts serious
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threat to banks and increasingly level of risk may create a chance of closing down the
bank‘s operations. However credit risk directly hit the financial strength, earnings of
banks.
In view of this various practices are followed to manage risk. There are many parameters
to observe the intensity of risk. It is very critical for bank to ensure a healthy risk
management practice for achieving its goal. Credit risk may be classified within the
following ways:
Forms of Credit Risk
The elements of credit risk are:
Portfolio risk= concentration risk + intrinsic risk
Transaction risk= down gradation risk + default risk
Concentration risk is the type of risk engaged with any single exposure or group exposure
which contains huge risk that easily prompts bank failure.
Transaction risk includes down gradation risk & default risk, a bank is said to face down
gradation risk when borrower‘s credit worthiness and assets quality declines gradually
and default is the extreme form of down gradation. Default risk is the risk arises due to
unwillingness of debtor to fulfill his obligations.
Credit risk is rooted to the business of lending funds to the borrower. The exposure to
that risk make situation more critical when counter party does not meet the obligation on
agreed terms. It mainly exists in
• Default by counter-parties
• Contingent liabilities such as guarantees
• Non repayment of amount of loan
• Delay in Settlement of transactions
• Flow of foreign exchange
• Change in portfolio value arising from deterioration of credit quality
• Fluctuations in financial instruments

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• Loans and advances
• Intrinsic or industry
Banks are facing credit risk in financial instruments including financial future, swap,
option loan & advances, interbank transactions, bonds, equities (categorized as off
balance sheet exposure) and the settlement of transactions. Credit risk also occurs when a
guarantee is provided by bank on behalf of customers. Furthermore, credit risk is present
where dealing in treasury and credit functions is done.
Credit risk comprises mainly two components, viz,
• Quantity of risk- it is the outstanding loan balance as on date of default.
• Quality of risk- it is the severity of loss determined by probability of

default.
Probability of default is the parameter that measure the likelihood that borrower will not
repay the loan over a given time horizon. Thus credit risk is the outcome of default risk
and exposure risk.
• Credit risk= default risk + exposure risk.
• Market risk
Market risk is defined as the risk in adverse variations of market value of trading
portfolio due to market changes. This risk occurs due to adverse movements or ‗volatility
in the market prices of interest rate, equities, commodities, and currencies.‘ It is also
known as Price Risk. It is possibility of gaining losses due to factors which affect the
complete performance of the financial markets. It is also known systematic risk which
cannot be removed through diversification but it can be hedged.
Market risk includes two types of risks. These are: interest rate risk and foreign exchange
risk.
• Interest rate risk: It affects the value of bonds more directly than stocks. It is one of
the major risks to all bondholders. As interest rates falls, bond prices rise, and vice versa.
The rationale is that as interest rates decreases, the opportunity cost of holding a bond
increases. It's the chance that arises for bond homeowners from unsteady interest rates.
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Borrowing from the international capital markets bank funds its operation and provides
loans in currencies distant from those borrowed.
•Foreign exchange risk: It is the risk of adverse effects on the monetary result of the
bank arises by changes in exchange rates. It is a financial risk that exists when a financial
transaction is denominated in a currency which is other than that of the base currency of
the company. It is also referred to as charge per unit risk or currency risk could be a
monetary risk exhibit by associate exposure.
B) Non- Financial Risk
Non- financial risk refers to those actions or events other than financial transactions that
can adversely impact the operations or action of a business. It can be related to
compliance failure, misconduct, technology or operational challenges, has only a
downside and that downside is large. Examples of non-financial risk are – Political risk,
operational risk, regulatory risk, legal risk etc.
1.7 Introduction to SBI Bank

State Bank of India (SBI) is an Indian multinational, public sector banking and financial
services statutory body headquartered in Mumbai, Maharashtra. SBI is the 43rd largest
bank in the world and ranked 221st in the Fortune Global 500 list of the world's biggest
corporations of 2020, being the only Indian bank on the list. A Nationalized bank, it is the
largest in India with a 23% market share by assets and a 25% share of the total loan and
deposits market.
The bank descends from the Bank of Calcutta, founded in 1806 via the Imperial Bank of
India, making it the oldest commercial bank in the Indian subcontinent. The Bank of
Madras merged into the other two presidency banks in British India, the Bank of
Calcutta and the Bank of Bombay, to form the Imperial Bank of India, which in turn
became the State Bank of India in 1955. The Government of India took control of the
Imperial Bank of India in 1955, with Reserve Bank of India (India's central bank) taking
a 60% stake, renaming it State Bank of India.
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1.8 Introduction to ICICI Bank
ICICI Bank Limited is an Indian multinational banking and financial services company
with its registered office in Vadodara, Gujarat and corporate office
in Mumbai, Maharashtra. It offers a wide range of banking products and financial
services for corporate and retail customers through a variety of delivery channels and
specialized subsidiaries in the areas of investment banking, life, non-life
insurance, venture capital and asset management. The bank has a network of 5,275
branches and 15,589 ATMs across India and has a presence in 17 countries.
ICICI Bank is one of the Big Four banks of India. The bank has subsidiaries in the United
Kingdom and Canada; branches in United States, Singapore, Bahrain, Hong Kong, Qatar,
Oman, Dubai International Finance Centre, China and South Africa as well as
representative offices in United Arab Emirates, Bangladesh, Malaysia and Indonesia. The
company's UK subsidiary has also established branches in Belgium and Germany.
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CHAPTER 2: Research and Methodology
2.1 OBJECTIVES OF THE STUDY
 To study and analyze the risk management in ICICI bank and SBI
 To compare the risk management of ICICI bank and SBI bank.
 To know the banking sector risk management performance
2.2 DATA COLLECTION
The data collection is very important task for the researcher study. This research study is
mainly secondary data. The data for study will be collected from various sources like
books, journals, magazines, internet sources, etc
2.3 SCOPE OF THE STUDY
The study of the research will be based on the functioning of selected ICICI bank and
SBI bank in India. As such the universe of my research study is restricted with the
reference to ICICI and SBI banks, which are working in India. So, I have done the study
on ICICI bank of India and SBI bank of India. The data regarding selected banks have
been obtain and collected from the banks websites and other related websites. So,
researchers have an option to study on risk management of other public and private sector
banks. I will be thereby highlighting the performance of these selected banks and
compare the managing of risk. By the change of era, there are constant changes
happening in the banking sector. There is an exponential growth in the Indian banking
sector as the demand of services is increased which lead to expansion of risk management
in banks than earlier.
2.4 HYPOTHESIS
H0: ICICI bank has the better risk management strategy compare to SBI bank (Null)
H1: ICICI bank not having better risk management strategy compare to SBI bank
(Alternative)
2.5 STRUCTURE OF THE STUDY

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 The present study is parted and coordinated into five chapters
 The first chapter includes the Introduction and definition of Risk management and
introduction to the research topic.
 The second chapter defines the objectives, data collection, scope, hypothesis,
structure and limitation of the study.
 The third chapter describes the ―Review of Literature‖ in which an attempt is
made to review the available sources and to get empirical findings related to the
topic chosen for the present study.
 The fourth chapter
 The fifth chapter is ―The Summary of the Findings, Suggestions and the
Conclusion‖ of the present study.
2.6 LIMITATION OF THE STUDY

 The study is related with the selected SBI and ICICI bank
 The study is based on the secondary data only.
 While selecting the SBI and ICICI banks for research purposes, focus has been
given on the basis of the availability of requisite information needed for
conducting the research only.
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CHAPTER 3: Literature Review
Ali Ataullah (2004) Concluded that there is still room for improvement in the efficiency
of banks in both the countries. A step forward for the liberalization programmer ,
therefore, is not only to deregulate interest rates and enhance the level of competition but
also to strengthen the instutional structure to support good practices in the banking
industry .
Gupta Sumeet&VermaRenu (2008) concluded that management of non-performing

assets and risk emanating from adverse event is the key to higher profitability of the
Indian banking. Transparency and good governance would work as principal guiding
force in present scenario.
GhoshSaibal (2009) concluded that with international standards, Indian banks would
need to improve their technological orientation and expand the possibilities for
augmenting their financial activities in order to improve their profit efficiency in the near
future.
Dr. Ibrahim Syed M (2011) concluded that this is diagnostic and exploratory in nature
and makes use secondary data. The study finds and concludes that the scheduled
commercial banks in India have significantly improved their operational performance.
Dr. Pardhan Kumar Tanmaya (2012) Concluded that-The study is based on primary
data. The data has been analyzed by Percentage method. The tool used to collect data
from the bank officials was a structured questionnaire. Responses obtained from the 50
Bank managers / senior officers.
Dr. Dhanabhakyam M &Kavitha M. (2012) studied that banks have to re-orient their
strategies in the light of their own strength and the kind of market in which their likely to
operate on. In the perspective of this domestic and international development, the
banking sector has to chart perfect for development.
Gupta Shipra (2012) concluded that- Public and Private sector banks both are giving
good service in India .Financial condition of any bank is measured by the help of
financial ratio. A leverage ratio cannot do the job alone it needs to be complemented by
21
other prudential tools or measures to ensure a comprehensive picture of the buildup of
leverage in individual banks or banking groups as well as in the financial system.
Sharma Esha (2012) concluded that- The liberalized policy of the govt. of India
permitted entry to the ICICI in the banking; the industry has witnessed a generation of
private players. That‘s why the present paper special emphasis has been laid down on the
financial analysis of the bank by using different research ant statistical tools.
GejalakshamiSandanam& et.al (2012),Concluded that the public sector banks

performed remarkably well during the period than that of the private sector banks the
overall regression analysis show that the financial performance of the banking industries
strongly.
GoelCheenu&RekhiBhutaniChitwan (2013) concluded that the analysis supports that

new banks are more efficient than old ones. The public sector banks are as not profitable
as other sectors are. It means that efficiency and profitability are inter related.
Davda V. Nishit (2012) Concluded that a review of fundamental analysis research in

accounting the paper has outlined the development of different accounting valuation
model and reviewed related emperical work .
Dr. KoundalVirender (2012) concluded that although various Reforms have produced
favorable effects on commercial banks in India and because of this transformation is
taking place almost in all categories of the banks.
Sai Naga Radha V & et.al. (2013) concluded that net profit margin, operating profit
margin, return on capital employed, return on equity and debt equity ratio there is no
significant difference in these ratios before after merger. Significant difference with
respect to gross profit margin.
Mishra Kumar Aswini& et.al. (2013) Concluded that DEA provide significant insights
on efficiency of different banks and places private sector ones at an advantage situation
and there by hints out the possibility of further improvisation of most of the public sector
banks.
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Kamraj K. &Somu A. (2013) Conclude that Indian overseas bank is one of the oldest
nationalized commercial banks in India. Banking industry is an indicator of for many
development activities in the nation. Indian overseas bank has higher potential to provide
better and quality services to the billions of people in India.
Samir &KamraDeepa (2013) Concluded that this analysis the position of NPAs in
selected banks SBI, PNB & Central bank of India. It also highlights the policies pursued
by the banks to tackle the NPAs and suggest a multi-pronged strategy for speedy
recovery of NPAs in banking sector.
SelvamPaneer& et.al. (2013) Concluded that-The Present study was aimed to analyze
the financial assistance of nationalized bank in India .To identify the relative performance
of the operational variables the linear and compound growth rates have been calculated .
The performance of nationalized banks followed by private sector banks is found to be
higher when compared to SBI and its associates and Foreign Banks.
Dr. Gupta R. & Dr. Shikarwar N.S. (2013) Concluded that the banking industry
occupies a unique place in a nation‘s economy. A well-developed banking system is a
necessary precondition of economic development in a modern economy .the main
parameters of growth in banks are net profit growth , net assets growth , EPS growth and
Reserve and surplus growth and the results reveal that in terms of the parameters defined
key words : net assets ,EPS , reserves ,surplus growth .
Desrani R Hiralal (2013) Concluded that scheduled bank has wide scope in India. It is
providing loans to various industries, business mans, small scale sector industries. It is
very helpful to all people who want loan.
BansalRohit (2014) Concluded that Federal has best price earnings ratio among other
banks. The total assets turnover ratio of federal bank shows that it keeps significantly
highly assets to meet the debt. Overall Federal bank is the most financially stable
company in comparison to others.
Dr. Tamilarasu A. (2014) concluded that mere opening of no-frill bank account is not
the purpose or the end of financial inclusion while formal financial institution must gain
23
the trust and goodwill of the poor through developing strong linkages with community
based financial ventures and coopratives.
Dr. ShuklaSmita&MalusareRakesh Studied that this evaluates the changes in the

capital structure and solvency position of banks by using various risk indicators for
highlighting risk profile of Indian Bank entities . This evaluates risk profile of ten public
and private sector banks.
YeboahSebe Gilbert &Mensah Charles (2014) concluded that ADB‘s focus on

agriculture financing is diminishing since a sector analysis of loans and advance indicates
that agriculture sector lost its first position to service sector. The Bank‘s liquidity showed
a downward and slipped trend.
Ms. Gupta Shikha (2014) Concluded that it focused on operational control, profitability
and solvency etc. It aimed to analyze and compare the financial performance of ICICI
banks and offer suggestion for improvement of efficiency in the bank.
Gaur Arti&Arora Nancy (2014) Concluded that it study about the causes and
consequences of the various component of the financial statement in relation to the
profitability of the bank. We analyzed the financial stability and overall performance of
SBI and study profitability of SBI.
V. Naseer Abdul (2014) Studied that – Study compares the financial performance and
employee efficiency of Indian banks during 2007-2013. Both the financial performance
and employee efficiency of foreign banks working in India are better than domestic banks
and private sector banks performance are better than the public sector banks. It is noted
that the public sector bank performance are more stable when compared to the private
sector banks.
Sharma Pooja&Hemlata (2014) Concluded that - The banking mirrors the larger
economy its linkages to all sector make it proxy for what is happening in the economy as
a whole. Banking plays a silent yet crucial role in our day to day economy. The data is
taken from financial reports of both the banks for last five years ranging from 2008-09 to
24
2013-13. The results depicts that ICICI Bank is performing better than SBI Bank as it is
Able to generate more loans from its deposits to the customers.
Soni Kumar Anil &KapreAbhay, Regional rural bank play a vital role in the agriculture
and rural development of India. The Study Is diagnostic and exploratory in nature and
makes use of secondary data. The study finds and concludes that performance of RRBs
has significantly improved.
VarathanSathiya& el.at. Concluded that- In canara bank the credit appraisal is done by
the study involves the evaluation in management, technical feasibility, financial viability,
Risk analysis and credit rating. This shows canara bank has sound system for credit
appraisal. The credit appraisal Process carried out at canara bank has good parameters to
appraise.
Dr. RaoMadhusudhana K. (2014) Concluded that – with respect to the banking

activities the performance of HDFC is better than the SBI and for the investor who are
intended for long term investment & risk takers HDFC is better but with respect to the
growth in the market for the company price SBI is better. SBI shares value market more
than HDFC.
Patel S Vijay & et.al. Concluded that information has its own value but if someone
wants to have better judgment of the concern he has to analyze them. This provides
guideline about analysis of profitability ratio of krishakbharati bank.
Gul Shah & et.al. (2014) concluded that the study has it limitation in term of selection of
banks. The present research work serve as a guideline to public sector banks to look up
the financial performance and make superior allocation for improving efficiency for the
coming time.
ThakarshibhaiChiragLoryia (2014) Concluded that it attempt to analyze profitability of

selected public and private sector banks in India. This study which looks into three key
factors which affect the profitability analysis of Indian banking sector using mean,
standard deviation, and ANOVA model.
25
Movalia P. Nilesh&et.al (2014) Concluded that Public sector banks is quite good
compared to private sector banks in the area of profitability debt equity , earning per
share found that price earning ration of private sector banks is high compare to public
sector banks.
26
CHAPTER 4: Data Analysis, Interpretation and Presentation
4.1ROLE OF RBI ON RISK MANAGEMENT IN BANKS
4.1.1 ROLES AND TOOL USED BY RBI
Here, we will discuss the role of RBI Management and how the tool called CAMELS was
used by RBI to evaluate the financial soundness of the Banks. CAMELS is the collective
tools of six components namely
C - Capital Adequacy
A - Asset Quality
M – Management
E – Earnings
L – Liquidity
S - Sensitivity to market risk
(i) Capital Adequacy
It is the amount of capital which is required to be held by the bank as required by
its financial regulator. It is defined as the ratio of the financial regulator. It is
defined as the ratio of the bank‘s capital to risk-weighted assets which ensure the
protection of depositors and financial soundness of the bank. It indicates that the
bank can meet its entire customer‘s obligation when exposed to risk.
(ii) Asset Quality
Asset quality ensures the quality of asset/loan the bank offers. Loans represent the
majority of the bank‘s asset. It provides returns in terms of interest but carries
high risk. It deals with effectiveness in controlling and monitoring the credit risk.
(iii) Management
Successful operation of a bank requires competent management, effective
policies and guidelines. It reflects the management‘s capability to identify
measure and control risks of the bank. It determines the ability of the bank to
diagnose and react to financial stress.
(iv) Earnings
27
This is based on the bank‘s ability to earn returns on its assets. This factor
reflects the quantity, trend in earnings and the factors which affect the
sustainability of earnings. It reflects the total income earned by the bank through
various sources.
(v) Liquidity
Banks must maintain liquid cash and assets which can be easily converted into
cash in order to meet unexpected withdrawals by the depositors without falling
into a crunch. It is a measure of cash reserves maintained by the banks.
(vi) Sensitivity to Market Risk
It refers to the bank‘s sensitivity to changes in interest rates, foreign exchange
rates, changes in prices of commodities etc. It basically evaluates the interest rate
risk of the banks.
The CAMELS was recommended for the financial soundness of a bank in 1988 while the
sixth component called sensitivity to market risk (S) was added to CAMEL in 1997.
In India, the focus of the statutory regulation of commercial banks by RBI until the early
1990s was mainly on licensing, administration of minimum capital requirements, pricing
of services including administration of interest rates on deposits as well as credit, reserves
and liquid assets requirements.
RBI in 1999 recognized the need for an appropriate risk management and issued
guidelines to banks regarding assets liability management, management of credit, market
and operational risks. The entire supervisory mechanism has been realigned since 1994
under the directions of newly constituted Board for Financial Supervision (BFS), which
functions under the aegis of the RBI, to suit the demanding needs of a strong and stable
financial system.
A process of rating of banks on the basis of CAMELS in respect of Indian banks and
CACS (Capital, Asset Quality, Compliance and Systems & Control) in respects of
foreign banks has been put in place from 1999.
4.1.2 Camels Rating
28
A- Sound in every respect
B- Fundamentally sound, but with moderate weakness
C- Financial, Operational and/or compliance weakness that gives cause for
supervisory concern
D- Serious or moderate weakness that could impair future viability
E- Critical financial weakness that renders the possibility of failure in near term.
4.1.3 Supervisory Process
(i) Offsite Supervision
An offsite supervision monitoring system was started by RBI in March 1996. RBI has set
up off site surveillance and monitoring system (OSMOS) to detect ‗early warning
signals‘ in the identification of risk. It consists of 28 structured returns that capture
prudential and statistical information about the banks at periodic intervals. The
information so gathered is populated into the OSMOS database which is used by the
offsite supervisor to undertake the analysis of capital, assets, earning, liquidity etc.
(ii)Onsite Supervision
It is an overall supervising framework which involves an Annual Financial Inspection

(AFI) modeled around the CAMEL framework used for Indian commercial banks and
CALCS for foreign banks. These models are transaction based examination with a matrix
which is used for the calculation of a rating for each of the components of CAMEL and
give a final adjusted supervisory rating for each bank. The Weights of various parameters
of rating system under CAMEL / CALCS is given below in table. The Weights of various
parameters of rating system under CAMEL / CALCS
29
4.2 PROFILE OF THE BANKS SELECTED FOR THE STUDY
4.2.1 STATE BANK OF INDIA
4.2.1.1 BALANCE SHEET OF SBI BANK FROM 2016 TO 2020
Equities &
Mar-20 Mar-19 Mar-18 Mar-17 Mar-16
Liabilities
Share
Capital 892 892 892 797 776
Reserves &
Surplus 231,114 220,021 218,236 187,488 143,498
Deposits 3,241,620 2,911,386 2,706,343 2,044,751 1,730,722
Borrowings 314,655 403,017 362,142 317,693 323,344
Liabilities &
Provisions 163,110 145,597 167,138 155,235 159,276
Total
Liabilities 3,951,393 3,680,914 3,454,752 2,705,966 2,357,617
Assets
Fixed Assets 38,439 39,197 39,992 42,918 10,389

Loans &
Advances 2,325,289 2,185,876 1,934,880 1,571,078 1,463,700
Investments 1,046,954 967,021 1,060,986 765,989 575,651
Other Assets 314,655 403,017 362,142 317,693 323,344
30
Total Assets 3,951,393 3,680,914 3,454,752 2,705,966 2,357,617
Other Info
Capital
Adequacy
Ratios (%) 13 13 13 13 13
Gross NPA
(%) 6 8 11 7 7
Net NPA (%) 2.23 3 6 4 4
Contingent
Liabilities 1,214,994 1,116,081 1,162,020 1,046,440 971,956
4.2.1.2. INCOME STATEMENT OF SBI BANK FROM 2016 TO 2020
Annual Mar-20 Mar-19 Mar-18 Mar-17 Mar-16
Interest
Earned 257,323 242,868 220,499 175,518 163,998
Other Income 45,221 36,774 44,600 35,460 27,845

191,
Total Income 302,545 279,643 265,100 210,979 843
Total
Expenditure 234,412 224,207 205,589 160,131 148,585
Operating
Profit 68,132 55,436 59,510 50,847 43,257
Provisions &
Contigencies 43,330 53,828 75,039 35,992 29,483
PBT 24,802 1,607 -15,528 14,855 13,774

Tax 10,314 745 -8,980 4,371 3,823
Net Profit 14,488 862 -6,547 10,484 9,951
NPA
Gross NPA 149,091 172,753 223,427 112,342 98,172
31
Gross NPA
(%) 6 8 11 7 7
Net NPA 51,871 658,947 110,854 58,277 55,807
Net NPA (%) 2.23 3 6 4 4
4.2.2 ICICI BANK OF INDIA
4.2.2.1 BALANCE SHEET OF ICICI BANK FROM 2016 TO 2020
Equities &
Mar-20 Mar-19 Mar-18 Mar-17 Mar-16
Liabilities
Share
Capital 1,294 1,289 1,285 1,165 1,163
Reserves &
Surplus 121,661 112,959 109,338 103,460 92,940
Deposits 800,784 681,316 585,796 512,587 451,077
Borrowings 213,851 210,324 229,401 188,286 220,377
Liabilities
&
Provisions 87,414 73,940 192,445 175,671 149,834
Total
Liabilities 1,377,292 1,238,793 1,124,281 986,042 918,756
Assets
Fixed Assets 10,408 9,660 9,465 9,337 8,713

Loans &
Advances 706,246 646,961 566,854 515,317 493,729
Investments 443,472 398,200 372,207 304,501 286,044
Other
Assets 213,851 210,324 229,401 188,286 220,377
Total Assets 1,377,292 1,238,793 1,124,281 986,042 918,756
Other Info
Capital
Adequacy
Ratios (%) 16 17 18 17 17
Gross NPA
(%) 6 7 0 9 6
32
Net NPA
(%) 1.54 2.29 5 5 3
Contingent
Liabilities 3,003,053 2,612,071 1,891,035 1,307,841 1,070,233
4.2.2.2. INCOME STATEMENT OF ICICI BANK FROM 2016 TO

2020
Annual Mar-20 Mar-19 Mar-18 Mar-17 Mar-16
Interest
Earned 74,798 63,401 54,965 54,156 52,739
Other
Income 16,448 14,512 17,419 19,504 15,323
Total
Income 91,246 77,913 72,385 73,660 68,062
Total
Expenditure 63,144 54,475 47,643 47,174 44,179
Operating
Profit 28,102 23,437 24,741 26,486 23,882
Provisions
&
Contigencies 14,053 19,661 17,306 15,208 11,667
PBT 14,049 3,776 7,434 11,278 12,214

Tax 6,117 413 657 1,477 2,469
Net Profit 7,932 3,363 6,777 9,801 9,745

NPA
Gross NPA 40,829 45,676 53,240 42,159 26,221
Gross NPA
(%) 6 7 0 9 6
Net NPA 9,923 13,449 27,823 25,216 12,963
Net NPA
(%) 1.54 2.29 5 5 3
33
4.3.1Risk Management Overview
Risk Management is about anticipating risks and having a plan in place that will resolve
it when it occurs. Risk management saves time, money and efforts. It reduces
unnecessary stress on the project team. Risk management helps prevent many problems
and helps make other problems less likely. Risk Management activities are integral to a
project manager's daily work. Through risk management, the project changes from being
in control of the project manager to the project manager being in control of the project.
Risk Management
Risk management includes risk management planning, risk identification, the qualitative
and quantitative analysis of risks, risk response planning, monitoring and controlling the
risk responses. Risk management helps in increasing the possibility of positive events on
the project and effectively reduces the possibility of negative events on the project.
Threats And Opportunities
Threats are events when occurred can negatively impact the project, whereas
opportunities are events when occurred can positively impact the project.
Upto 90% of threats identified and investigated in risk management process can be
eliminated.
Uncertainty
Lack of knowledge about an event that may occur and reduce confidence in the
conclusions drawn from the data is termed as uncertainty.
Risk Factors
Risks can have various factors such as:
 How likely is the probability that the risk event will occur?
 The impact of the risk
34
 When will the risk occur during the course of this project?
 How many times will this risk occur?
Risk Averse
An individual who avoids risk and thus, does not want to take risks is known as Risk
Averse.
Risk Tolerances And Thresholds
The degree or level of risk that is acceptable is known as Risk Tolerance. The specific
point where risk becomes unacceptable is known as Risk Thresholds.
The Risk Management Process
In processes where risk management is effectively carried out, we see:
 Risk response planning is very robust. Hence, even if risks occur, they are eliminated.
 An agenda is set to discuss risk items in every meeting.

 There is always a plan to deal with any risk events.
4.3.2 Risk Management Plan
The individuals involved in Planning Risk Management include:
 Project Manager
 Sponsor
 Team
 Customer
 Other Stakeholders
 Experts
35
Risk management process is structured and performed for the process. Risk management
efforts is not limited to creating a standardized checklist basis the experience gained from
past projects. Risk management efforts should be based on the size, complexity and the
skill levels of the project and project members.
Plan Risk Management process involves planning the total time to be spent on risk
management based on the needs of the project. It involves identifying the resources and
the process of performing risk management. Organizational process assets are used
effectively by the project manager to plan risk management.
OUTPUTS OF RISK MANAGEMENT PLAN
The risk management plan may include:
 Methodology: The process of performing risk management is defined

 Roles and responsibilities: Individuals involved in performing risk managements are
identified
 Budgeting: Cost of risk management process is determined
 Timing: The time when risk management process should start is determined
4.3.3 Risk Identification tools and techniques
Documentation Reviews
The standard practice to identify risks is reviewing project related documents such as
lessons learned, articles, organizational process assets, etc
Information Gathering Techniques
The given techniques are similar to the techniques used to collect requirements. Lets look
at a few of them:
Brainstorming
36
Brainstorming is done with a group of people who focus on identification of risk for the
project.
Delphi Technique
A team of experts is consulted anonymously. A list of required information is sent to

experts, responses are compiled, and results are sent back to them for further review until
a consensus is reached.
Interviewing
An interview is conducted with project participants, stakeholders, experts, etc to identify

risks.
Root Cause Analysis
Root causes are determined for the identified risks. These root causes are further used to
identify additional risks.
SWOT Analysis (STRENGTH, Weakness, Opportunities And Threats)
Strengths and weaknesses are identified for the project and thus, risks are determined.
Checklist Analysis
The checklist of risk categories is used to come up with additional risks for the project.
Assumption Analysis
Identification of different assumptions of the project and determining their validity,

further helps in identifying risks for the project.
Outputs to Identify Risks
This process of Risk Identification results in creation of Risk Register.
37
Risk Register
A Risk Register is a living document that is updated regularly throughout the life cycle of
the project. It becomes a part of project documents and is included in the historical
records that are used for future projects. The risk register includes:
 List of Risks
 List of Potential Responses
 Root Causes of Risks
 Updated Risk Categories
Tools and Techniques:
Some of the tools that can be used for qualitative risk analysis include:
Probability And Impact Matrix
The matrix helps in identifying those risks which require an immediate response. The
matrix may be customized according to the needs of the project. Most companies do have
a standardized template for this matrix and project managers could leverage those
templates as well. Use of standardized matrix makes the matrix list more repeatable
between projects.
Risk Data Quality Assessment
Data is collated for the identified risks. The project manager will try to find the precision
of the data that must be analyzed for completing the qualitative analysis of risks.
For each risk, in Risk Data Quality Assessment, the project manager needs to determine:
 Extent of the understanding of the risk

 Data available
 Quality and reliability of the data
 Integrity of the data
38
PERFORM QUANTITATIVE RISK ANALYSIS
The next step of Qualitative risk analysis is to analyze the probability and impact of risks
in Perform Quantitative Risk. The purpose of Quantitative Risk Analysis is:
 Identification of risk response that requires urgent attention

 Identify the exposure of risk on the project
 Identify the impact of risk on the objective of the project
 Determine cost and schedule reserves that could be required if risk occurs
 Identify risks requiring more attention
DETERMINING QUANTITATIVE PROBABILITY AND IMPACT
Some of the techniques of quantitatively determining probability and impact of a risk

include:
 Interviewing
 Cost and time estimating
 Delphi technique
 Historical Records
 Expert judgment
 Expected monetary value analysis
 Monte Carlo Analysis
 Decision tree
Expected Monetary Value Analysis
Expected Monetary Value is a good measure to determine the overall ranking of risks.
The formula is:
EMV = P X I
Where, EMV = Expected Monetary Value
39
P = Probability
I = Impact
Monte Carlo Analysis (SIMULATION Technique)
The Monte Carlo analysis simulates the cost or schedule results of the project. The
primary inputs for this analysis are the network diagram and estimates to perform the
project
A Monte Carlo analysis:
 Requires a computer based program

 Evaluates the overall risk in the project
 Determines the probability of completing the project on any specific day, or for any
specific cost
 Determines the probability of any activity actually being on critical path
 Path convergence is taken into account
 Cost and schedule impacts can be assessed
 Results in a probability distribution
Decision Tree
Decision tree helps to analyze many alternatives at one single point of time. They are
models of real situation. A decision tree takes into account future events in making the
decision today. It helps calculate Expected Monetary Value in more complex situations.
It also involves Mutual Exclusivity.
RISK REGISTER UPDATES
 Prioritized list of quantified risks

 Amount of contingency time and cost reserves needed
 Possible realistic and achievable completion dates and project costs, with confidence
levels, versus the time and cost objectives for the project
40
 The quantified probability of meeting the project objectives
 Trends in quantitative risk analysis
4.3.4 LIQUIDITY MANAGEMENT THEORY
There are probable contradictions between the objectives of liquidity, safety and
profitability when linked to a commercial bank. Efforts have been made by economists
to resolve these contradictions by laying down some theories from time to time.
In fact, these theories monitor the distribution of assets considering these objectives.
These theories are referred to as the theories of liquidity management which will be
discussed further in this chapter.
Commercial Loan Theory
The commercial loan or the real bills doctrine theory states that a commercial bank
should forward only short-term self-liquidating productive loans to business
organizations. Loans meant to finance the production, and evolution of goods through
the successive phases of production, storage, transportation, and distribution are
considered as self-liquidating loans.
This theory also states that whenever commercial banks make short term self-liquidating
productive loans, the central bank should lend to the banks on the security of such short-
term loans. This principle assures that the appropriate degree of liquidity for each bank
and appropriate money supply for the whole economy.
The central bank was expected to increase or erase bank reserves by rediscounting
approved loans. When business started growing and the requirements of trade increased,
banks were able to capture additional reserves by rediscounting bills with the central
banks. When business went down and the requirements of trade declined, the volume of
rediscounting of bills would fall, the supply of bank reserves and the amount of bank
credit and money would also contract.
Advantages
41
These short-term self-liquidating productive loans acquire three advantages. First, they
acquire liquidity so they automatically liquidate themselves. Second, as they mature in
the short run and are for productive ambitions, there is no risk of their running to bad
debts. Third, such loans are high on productivity and earn income for the banks.
Disadvantages
Despite the advantages, the commercial loan theory has certain defects. First, if a bank
declines to grant loan until the old loan is repaid, the disheartened borrower will have to
minimize production which will ultimately affect business activity. If all the banks
pursue the same rule, this may result in reduction in the money supply and cost in the
community. As a result, it makes it impossible for existing debtors to repay their loans in
time.
Second, this theory believes that loans are self-liquidating under normal economic
circumstances. If there is depression, production and trade deteriorate and the debtor
fails to repay the debt at maturity.
Third, this theory disregards the fact that the liquidity of a bank relies on the salability of
its liquid assets and not on real trade bills. It assures safety, liquidity and profitability.
The bank need not depend on maturities in time of trouble.
Fourth, the general demerit of this theory is that no loan is self-liquidating. A loan given
to a retailer is not self-liquidating if the items purchased are not sold to consumers and
stay with the retailer. In simple words a loan to be successful engages a third party. In
this case the consumers are the third party, besides the lender and the borrower.
4.3.5 Shiftability Theory
This theory was proposed by H.G. Moulton who insisted that if the commercial banks
continue a substantial amount of assets that can be moved to other banks for cash
without any loss of material. In case of requirement, there is no need to depend on
maturities.
42
This theory states that, for an asset to be perfectly shiftable, it must be directly
transferable without any loss of capital loss when there is a need for liquidity. This is
specifically used for short term market investments, like treasury bills and bills of
exchange which can be directly sold whenever there is a need to raise funds by banks.
But in general circumstances when all banks require liquidity, the shiftability theory
need all banks to acquire such assets which can be shifted on to the central bank which
is the lender of the last resort.
Advantage
The shiftability theory has positive elements of truth. Now banks obtain sound assets
which can be shifted on to other banks. Shares and debentures of large enterprises are
welcomed as liquid assets accompanied by treasury bills and bills of exchange. This has
motivated term lending by banks.
Disadvantage
Shiftability theory has its own demerits. Firstly, only shiftability of assets does not
provide liquidity to the banking system. It completely relies on the economic conditions.
Secondly, this theory neglects acute depression, the shares and debentures cannot be
shifted to others by the banks. In such a situation, there are no buyers and all who
possess them want to sell them. Third, a single bank may have shiftable assets in
sufficient quantities but if it tries to sell them when there is a run on the bank, it may
adversely affect the entire banking system. Fourth, if all the banks simultaneously start
shifting their assets, it would have disastrous effects on both the lenders and the
borrowers.
4.3.6 Anticipated Income Theory
This theory was proposed by H.V. Prochanow in 1944 on the basis of the practice of
extending term loans by the US commercial banks. This theory states that irrespective of
the nature and feature of a borrower‘s business, the bank plans the liquidation of the
43
term-loan from the expected income of the borrower. A term-loan is for a period
exceeding one year and extending to a period less than five years.
It is admitted against the hypothecation (pledge as security) of machinery, stock and

even immovable property. The bank puts limitations on the financial activities of the
borrower while lending this loan. While lending a loan, the bank considers security
along with the anticipated earnings of the borrower. So a loan by the bank gets repaid by
the future earnings of the borrower in installments, rather giving a lump sum at the
maturity of the loan.
Advantages
This theory dominates the commercial loan theory and the shiftability theory as it
satisfies the three major objectives of liquidity, safety and profitability. Liquidity is
settled to the bank when the borrower saves and repays the loan regularly after certain
period of time in installments. It fulfills the safety principle as the bank permits a relying
on good security as well as the ability of the borrower to repay the loan. The bank can
use its excess reserves in lending term-loan and is convinced of a regular income. Lastly,
the term-loan is highly profitable for the business community which collects funds for
medium-terms.
Disadvantages
The theory of anticipated income is not free from demerits. This theory is a method to
examine a borrower‘s creditworthiness. It gives the bank conditions for examining the
potential of a borrower to favorably repay a loan on time. It also fails to meet emergency
cash requirements.
4.3.7 LIABILITIES MANAGEMENT THEORY
This theory was developed further in the 1960s. This theory states that, there is no need
for banks to lend self-liquidating loans and maintain liquid assets as they can borrow
reserve money in the money market whenever necessary. A bank can hold reserves by
building additional liabilities against itself via different sources.
44
These sources comprise of issuing time certificates of deposit, borrowing from other
commercial banks, borrowing from the central banks, raising of capital funds through
issuing shares, and by ploughing back of profits. We will look into these sources of bank
funds in this chapter.
Time Certificates of Deposits
These deposits have different maturities ranging from 90 days to less than 12 months.
They are transferable in the money market. Thus, a bank can have connection to
liquidity by selling them in the money market. But this source has two demerits.
First, if during a crisis, the interest rate layout in the money market is higher than the
ceiling rate set by the central bank, time deposit certificates cannot be sold in the market.
Second, they are not reliable source of funds for the commercial banks. Bigger
commercial banks have a benefit in selling these certificates as they have large
certificates which they can afford to sell at even low interest rates. So the smaller banks
face trouble in this respect.
Borrowing from other Commercial Banks
A bank may build additional liabilities by borrowing from those banks that have excess
reserves. But these borrows are only for a very short time, that is for a day or at the most
for a week.
The interest rate of these types of borrowings relies on the controlling price in the
money market. But borrowings from other banks are only possible when the economic
conditions are normal economic. In abnormal times, no bank can afford to grant to
others.
Borrowing from the Central Bank
Banks also build liabilities on themselves by borrowing from the central bank of the
country. They borrow to satisfy their liquidity requirements for short-term and by
discounting bills from the central bank. But these types of borrowings are comparatively
costlier than borrowings from other sources.
45
Raising Capital Funds
Commercial banks hold funds by distributing fresh shares or debentures. But the
availability of funds through these sources relies on the volume of dividend or interest
rate which the bank is prepared to pay. Basically banks are not prepared to pay rates
more than paid by manufacturing and trading enterprises. Thus they fail to get enough
funds from these sources.
Ploughing Back Profits
The ploughing back of its profits is considered as an alternative source of liquid funds
for a commercial bank. But how much it can obtain from this source relies on its rate of
profit and its dividend policy. Larger banks can depend on these sources rather than the
smaller banks.
Functions of Capital Funds
Generally, bank capital comprises of own sources of asset finances. The volume of
capital is equivalent to the net assets worth, marking the margin by which assets
outweigh liabilities.
Capital is expected to secure a bank from all sorts of uninsured and unsecured risks
suitable to transform into losses. Here, we obtain two principle functions of capital. The
first function is to capture losses and the second is to establish and maintain confidence
in a bank.
The different functions of capital funds are briefly described in this chapter.
The Loss Absorbing Function
Capital is required to permit a bank to cover any losses with its own funds. A bank can
keep its liabilities completely enclosed by assets as long as its sum losses do not deplete
its capital.
Any losses sustained minimize a bank‘s capital, set off across its equity products like
share capital, capital funds, profit-generated funds, retained earnings, relying on how its
general assembly decides.
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Banks take good care to fix their interest margins and other spreads between the income
derived from and the price of borrowed funds to enclose their ordinary expenses. That is
why operating losses are unlikely to subside capital on a long-term basis. We can also
say that banks with a long and sound track record owing to their past efficiency, have
managed to produce enough amount of own funds to easily cope with any operating
losses.
For a new bank without much of a success history, operating losses may conclude
driving capital below the minimum level fixed by law. Banks run a probable and greater
risk of losses coming from borrower defaults, rendering some of their assets partly or
completely irrecoverable.
The Confidence Function
A bank may have sufficient assets to back its liabilities, and also adequate capital power
which balances deposits and other liabilities by assets. This generates a financial flow in
the ordinary course of banking business. Here, it is an important necessity that a bank‘s
capital covers its fixed investments like fixed assets, involving interests in subsidiaries.
These are used in its business operation, which basically generate no financial flow.
If the cash flow generated by assets falls short of meeting deposit calls or other due
liabilities, it is not difficult for a bank with sufficient capital backing and credibility to
get its missing liquidity on the interbank market. Other banks will not feel
uncomfortable lending to it, as they are aware of the capacity to conclude its liabilities
with its assets.
This type of bank can withstand a major deposit flight and refinance it with interbank
market borrowings. In banks with a sufficient capital base, anyhow, there is no reason to
fear a mass-scale depositor exodus. The logic is that the issues which may trigger a bank
capture in the first place do not come in the limelight. An alternating pattern of liquidity
with lows and highs is expected, with the latter occurring at times of asset financial
inflow outstripping outflow, where the bank is likely to lend its excess liquidity.
Banks are restricted not to count on the interbank market to clarify all their issues. In
their own interest and as expected by bank regulators, they expect to match their assets
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and liability maturities, something that permits them to sail through stressful market
situations.
Market rates could be affected due to the intervention of Central Bank. There can be
many factors contributing to it like the change in monetary policy or other factors. This
could lead to an increase in market rates or the market may collapse. Depending upon
the market problem the banks may have to cut down the client lines.
The Financing Function
As deposits are unfit for the purpose, it is up to capital to provide funds to finance fixed
investments (fixed assets and interests in subsidiaries). This particular function is
apparent when a bank starts up, when money raised from subscribing shareholders is
used to buy buildings, land and equipment. It is desirable to have permanent capital
coverage for fixed assets. That means any additional investments in fixed assets should
coincide with a capital rise.
During a bank‘s life, it generates new capital from its profits. Profits not distributed to
shareholders are allocated to other components of shareholders‘ equity, resulting in a
permanent increase. Capital growth is a source of additional funds used to finance new
assets. It can buy new fixed assets, loans or other transactions. It is good for a bank to
place some of its capital in productive assets, as any income earned on self-financed
assets is free from the cost of borrowed funds. If a bank happens to need more new
capital than it can produce itself, it can either issue new shares or take a subordinated
debt, both an outside source of capital.
The Restrictive Function
Capital is a widely used reference for limits on various types of assets and banking
transactions. The objective is to prevent banks from taking too many chances. The
capital adequacy ratio, as the main limit, measures capital against risk-weighted assets.
Depending on their respective relative risks, the value of assets is multiplied by weights
ranging from 0 to 20, 50 and 100%. We use the net book value here, reflecting any
adjustments, reserves and provisions. As a result, the total of assets is adjusted for any
devaluation caused by loan defaults, fixed asset depreciation and market price declines,
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as the amount of capital has already fallen due to expenses incurred in providing for
identified risks. That exposes capital to potential risks, which can lead to future losses if
a bank fails to recover its assets.
The minimum required ratio of capital to risk-weighted assets is 8 percent. Under the
applicable capital adequacy decree, capital is adjusted for uncovered losses and excess
reserves, less specific deductible items. To a limited extent, subordinated debt is also
included in capital. The decree also reflects the risks contained in off-balance sheet
liabilities.
In the restrictive function context, it is the key importance of capital and the precise
determination of its amount in capital adequacy calculations that make it a good base for
limitations on credit exposure and unsecured foreign exchange positions in banks. The
most important credit exposure limits restrict a bank‘s net credit exposure (adjusted for
recognizable types of security) against a single customer or a group of related customers
at 25% of the reporting bank‘s capital, or at 125% if against a bank based in Slovakia or
an OECD country. This should ensure an appropriate loan portfolio diversification.
The decree on unsecured foreign exchange positions seeks to limit the risks caused by
exchange rate fluctuations in transactions involving foreign currencies, capping
unsecured foreign exchange positions (the absolute difference between foreign exchange
assets and liabilities) in EUR at 15% of a bank‘s capital, or 10% if in any other currency.
The total unsecured foreign exchange position (the sum of unsecured foreign exchange
positions in individual currencies) must not exceed 25% of a bank‘s capital.
The decree dealing with liquidity rules incorporates the already discussed principle that
assets, which are usually not paid in banking activities, need to be covered by capital. It
requires that the ratio of the sum of fixed investments (fixed assets, interests in
subsidiaries and other equity securities held over a long period) and illiquid assets (less
readily marketable equity securities and nonperforming assets) to a bank‘s own funds
and reserves not exceed 1.
Owing to its importance, capital has become a central point in the world of banking. In
leading world banks, its share in total assets/liabilities moves between 2.5 and 8 %. This
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seemingly low level is generally considered sufficient for a sound banking operation.
Able to operate at the lower end of the range are large banks with a quality and well-
diversified asset portfolio.
4.3.8 BASEL NORMS
Capital adequacy deserves constant attention. Asset growth needs to respect the amount
of capital. Eventually, any problems a bank may be facing will show on its capital. In
commercial banking, capital is the king.
 The foundation of the Basel banking norms is attributed to the incorporation of

the Basel Committee on Banking Supervision (BCBS), established by the central
bank of theG-10 countries in 1974. This was under the sponsorship of Bank for
International Settlements (BIS), Basel, Switzerland.
 The Committee forms guidelines and provides recommendations on banking

regulation on the basis of capital risk, market risk and operational risk. The
Committee was established in response to the chaotic liquidation of Herstatt
Bank, based in Cologne, Germany in 1974. The incident demonstrated the
existence of settlement risk in international finance.
 Later, this committee was renamed as Basel Committee on Banking Supervision.

The Committee acts as a forum where regular collaboration concerning banking
regulations and supervisory practices between the member countries takes place.
The Committee targets at developing supervisory knowhow and the quality of
banking supervision quality worldwide.
 Presently, there are 27 member countries in the Committee since 2009. These
member countries are being represented in the Committee by the central bank and
the authority for the prudential supervision of banking business. Apart from
banking regulations and supervisory practices, the Committee also stresses on
closing the differences in international supervisory coverage.
Basel I
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 In 1988, the Basel Committee on Banking Supervision (BCBS) in Basel,
Switzerland, announced the first set of minimum capital requirements for banks
— Basel I. It completely aimed on credit risk or the default risk. That is the risk
of counter party failure. It stated capital need and structure of risk weights for
banks.
 Under these norms assets of banks were categorized and grouped into five
categories according to credit risk, carrying risk weights of 0% like Cash,
Bullion, Home Country Debt Like Treasuries, 10, 20, 50 and100% and no rating.
Banks with an international presence were expected to hold capital equal to 8%
of their risk-weighted assets (RWA). These banks must have at least 4% in Tier I
Capital that is Equity Capital + retained earnings and more than 8% in Tier I and
Tier II Capital. The target was set to be achieved by 1992.
 One of the major functions of Basel norms is to standardize the banking practice
across all countries. Anyhow, there are major problems with definition of Capital
and Differential Risk Weights to Assets across countries, like Basel standards are
computed on the basis of book-value accounting measures of capital, not market
values. Accounting practices vary extremely across the G-10 countries and
mostly yield outcomes that differ markedly from market assessments.
 Another major issue was that the risk weights do not attempt to take account of
risks other than credit risks, like market risks, liquidity risks and operational risks
that may be critical sources of insolvency exposure for banks.
Basel II
 Basel II was introduced in 2004. It speculated guidelines for capital adequacy that
is with more refined definitions, risk management like Market Risk and
Operational Risk and exposure needs. It also expressed the use of external ratings
agencies to fix the risk weights for corporate, bank and sovereign claims.
 Operational risk is defined as ―the risk of direct and indirect losses resulting from
inadequate or failed internal processes, people and systems or from external
events‖. This comprises of legal risk, but prohibits strategic and reputation risk.
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Thereby, legal risk involves exposures to fines, penalties, or punitive damages as
a result of supervisory actions in addition to private agreements. There are
complex methods to appraise this risk.
 The exposure needs permit participants of market to evaluate the capital

adequacy of the foundation on the basis of information on the scope of
application, capital, risk exposures, risk assessment processes, etc.
Basle III
 It is believed that the shortcomings of the Basel II norms resulted in the global
financial crisis of 2008. That is due to the fact that Basel II norms did not have
any explicit regulation on the debt that banks could take on their books, and
stressed more on individual financial institutions, while neglecting systemic risks.
 To assure that banks don‘t take on excessive debt, and that they don‘t depend too
much on short term funds, Basel III norms were introduced in 2010.The main
objective behind these guidelines were to promote a more resilient banking
system by stressing on four vital banking parameters — capital, leverage, funding
and liquidity.
 Needs for mutual equity and Tier 1 capital will be 4.5% and 6%, respectively.
The liquidity coverage ratio (LCR) requires the banks to acquire a buffer of high
quality liquid assets enough to cope with the cash outflows encountered in an
acute short term stress scenario as specified by the supervisors. The minimum
LCR need will be to meet 100% on 1 January 2019. This is to secure situations
like Bank Run. The term leverage Ratio > 3% denotes that the leverage ratio was
calculated by dividing Tier 1 capital by the bank's average total combined assets.
4.4 CREDIT MANAGEMENT OF BANK
 Credit management is the process of monitoring and collecting payments from

customers. A good credit management system minimizes the amount of capital
tied up with debtors.
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 It is very important to have good credit management for efficient cash flow.
There are instances when a plan seems to be profitable when assumed
theoretically but practical execution is not possible due to insufficient funds. In
order to avoid such situations, the best alternative is to limit the likelihood of bad
debts. This can only be achieved through good credit management practices.
 For running a profitable business in an enterprise the entrepreneur needs to

prepare and design new policies and procedures for credit management. For
example, the terms and conditions, invoicing promptly and the controlling debts.
 Principles of Credit Management
 Credit management plays a vital role in the banking sector. As we all know bank
is one of the major source of lending capital. So, Banks follow the following
principles for lending capital −
 Liquidity
 Liquidity plays a major role when a bank is into lending money. Usually, banks
give money for short duration of time. This is because the money they lend is
public money. This money can be withdrawn by the depositor at any point of
time.
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 So, to avoid this chaos, banks lend loans after the loan seeker produces enough
security of assets which can be easily marketable and transformable to cash in a
short period of time. A bank is in possession to take over these produced assets if
the borrower fails to repay the loan amount after some interval of time as decided
 A bank has its own selection criteria for choosing security. Only those securities
which acquires enough liquidity are added in the bank‘s investment portfolio.
This is important as the bank requires funds to meet the urgent needs of its
customers or depositors. The bank should be in a condition to sell some of the
securities at a very short notice without creating an impact on their market rates
much. There are particular securities such as the central, state and local
government agreements which are easily saleable without having any impact on
their market rates.
 Shares and debentures of large industries are also addressed under this category.
But the shares and debentures of ordinary industries are not easily marketable
without having a fall in their market rates. Therefore, banks should always make
investments in government securities and shares and debentures of reputed
industrial houses.
 Safety
 The second most important function of lending is safety, safety of funds lent.
Safety means that the borrower should be in a position to repay the loan and
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interest at regular durations of time without any fail. The repayment of the loan
relies on the nature of security and the potential of the borrower to repay the loan.
 Unlike all other investments, bank investments are risk-prone. The intensity of
risk differs according to the type of security. Securities of the central government
are safer when compared to the securities of the state governments and local
bodies. Similarly, the securities of state government and local bodies are much
safer when compared to the securities of industrial concerns.
 This variation is due to the fact that the resources acquired by the central
government are much higher as compared to resourced held by the state and local
governments. It is also higher than the industrial concerns.
 Also, the share and debentures of industrial concerns are bound to their earnings.
Income varies according to the business activities held in a country. The bank
should also consider the ability of the debtor to repay the debt of the governments
while investing in their securities. The prerequisites for this are political stability
and peace and security within the country.
 Securities of a government acquiring large tax revenue and high borrowing

capacity are considered as safe investments. The same goes with the securities of
a rich municipality or local body and state government of a flourishing area.
Thus, while making any sort of investments, banks should decide securities,
shares and debentures of such governments, local bodies and industrial concerns
which meets the principle of safety.
 Therefore, from the bank‘s way of perceiving, the nature of security is very
essential while lending a loan. Even after considering the securities, the bank
needs to check the creditworthiness of the borrower which is monitored by his
character, capacity to repay, and his financial standing. Above all, the safety of
bank funds relies on the technical feasibility and economic viability of the project
for which the loan is to be given.
 Diversity
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 While selecting an investment portfolio, a commercial bank should abide by the
principle of diversity. It should never invest its total funds in a specific type of
securities, it should prefer investing in different types of securities.
 It should select the shares and debentures of various industries located in

different parts of the country. In case of state governments and local governing
bodies, same principle should be abided to. Diversification basically targets at
reducing risk of the investment portfolio of a bank.
 The principle of diversity is applicable to the advancing of loans to different

types of firms, industries, factories, businesses and markets. A bank should abide
by the maxim that is ―Do not keep all eggs in one basket.‖ It should distribute its
risks by lending loans to different trades and companies in different parts of the
country.
 Stability
 Another essential principle of a bank‘s investment policy is stability. A bank

should prefer investing in those stocks and securities which hold a high degree of
stability in their costs. Any bank cannot incur any loss on the rate of its securities.
So it should always invest funds in the shares of branded companies where the
probability of decline in their rate is less.
 Government contracts and debentures of industries carry fixed costs of interest.

Their cost varies with variation in the market rate of interest. But the bank is
bound to liquidate a part of them to satisfy its needs of cash whenever stuck by a
financial crisis.
 Else, they follow their full term of 10 years or more and variations in the market
rate of interest do not disturb them. So, bank investments in debentures and
contracts are more stable when compared to the shares of industries.
 Profitability
 This should be the chief principle of investment. A bank should only invest if it
earns sufficient profits from it. Thus, it should, invest in securities that have a fair
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and stable return on the funds invested. The procuring capacity of securities and
shares relies on the interest rate and the dividend rate and the tax benefits they
hold.
 Broadly, it is the securities of government branches like the government at the

center, state and local bodies that hugely carry the exception of their interest from
taxes. A bank should prefer investing in these type of securities instead of
investing in the shares of new companies which also carry tax exception. This is
due to the fact that shares of new companies are not considered as safe
investments.
 Now lending money to someone is accompanied by some risks mainly. As we

know that bank lends the money of its depositors as loans. To put it simply the
main job of a bank is to rent money from depositors and give money to the
borrowers. As the primary source of funds for a bank is the money deposited by
its customers which are repayable as and when required by the depositors, the
bank needs to be very careful while lending money to customers.
 Banks make money by lending money to borrowers and charging some interest
rates. So, it is very essential from the bank‘s part to follow the cardinal principles
of lending. When these principles are abided, they assure the safety of banks‘
funds and in response to that they assure its depositors and shareholders. In this
whole process, banks earn good profits and grow as financial institutions. Sound
lending principles by banks also help the economy of a nation to prosper and also
advertise expansion of banks in rural areas.
ASSETS LIABILITY
Asset liability management is the process through which an association handles its
financial risks that may come with changes in interest rate and which in turn would
affect the liquidity scenario.
Banks and other financial associations supply services which present them to different
kinds of risks. We have three types of risks — credit risk, interest risk, and liquidity risk.
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So, asset liability management is an approach or a step that assures banks and other
financial institutions with protection that helps them manage these risks efficiently.
The model of asset liability management helps to measure, examine and monitor risks. It
ensures appropriate strategies for their management. Thus, it is suitable for institutions
like banks, finance companies, leasing companies, insurance companies, and other
financing bodies.
Asset liability management is an initial step to be taken towards the long term strategic
planning. This can also be considered as an outlining function for an intermediate term.
In particular, liability management also refers to the activities of purchasing money

through cumulative deposits, federal funds and commercial papers so that the funds lead
to profitable loan opportunities. But when there is an increase of volatility in interest
rates, there is major recession damaging multiple economies. Banks begin to focus more
on the management of both sides of the balance sheet that is assets as well as liabilities.
ALM Concepts
Asset liability management (ALM) can be stated as the comprehensive and dynamic
layout for measuring, examining, analyzing, monitoring and managing the financial
risks linked with varying interest rates, foreign exchange rates and other elements that
can have an impact on the organization‘s liquidity.
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Asset liability management is a strategic approach of managing the balance sheet in such
a way that the total earnings from interest are maximized within the overall risk-
preference (present and future) of the institutions.
Thus, the ALM functions include the tools adopted to mitigate liquidly risk,
management of interest rate risk / market risk and trading risk management. In short,
ALM is the sum of the financial risk management of any financial institution.
In other words, ALM handles the following three central risks −
 Interest Rate Risk
 Liquidity Risk
 Foreign currency risk
FORMULATING LOAN POLICY
Basically, loan portfolios have the largest effect on the total risk profile and earnings
performance. This earning performance comprises of various factors like interest
income, fees, provisions, and other factors of commercial banks.
The mediocre loan portfolio marks approximately 62.5 percent of total centralized assets
for banking organizations with less than $1 billion in total assets and 64.9 percent of
total centralized assets for banking organizations with less than $10 billion in total
assets.
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In order to limit credit risk, it is compulsory that suitable and effective policies,
procedures, and practices are developed and executed. Loan policies should coordinate
with the target and objectives of the bank, in addition to supporting safe and sound
lending activity.
Policies and procedures should be presented as a layout for all major credit decisions
and actions, enclosing all material aspects of credit risk, and mirroring the complexity of
the activities in which a bank is engaged.
Policy Development
As we know risks are inevitable, banks can lighten credit risk by development of and
cohesion to efficient and effective loan policies and procedures. A well-documented and
descriptive loan policy proves to be the milestone of any sound lending function.
Ultimately, a bank‘s board of directors is accountable for flaying out the structure of the
loan policies to address the inherent and residual risks. Residual risks are those risks that
remain even after sound internal controls have been executed in the lending business
lines.
After formulating the policy, senior management is held accountable for its execution
and ongoing monitoring, accompanied by the maintenance of procedures to assure they
are up to date and compatible to the current risk profile.
Policy Objectives
The loan policy should clearly communicate the strategic goals and objectives of the
bank, as well as define the types of loan exposures acceptable to the institution, loan
approval authority, loan limits, loan underwriting criteria, and several other guidelines.
It is important to note that a policy differs from procedures in which it sets forth the
plan, guiding principles, and framework for decisions. Procedures, on the other hand,
establish methods and steps to perform tasks. Banks that offer a wider variety of loan
products and/or more complex products should consider developing separate policy and
procedure manuals for loan products.
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Policy Elements
The regulatory agencies‘ examination manuals and policy statements can be considered
as the best place to begin when deciding the key elements to be incorporated into the
loan policy.
In order to outline loan policy elements, the bank should have a consistent lending
strategy, identifying the types of loans that are permissible and those that are
impermissible. Along with identifying the types of loans, the bank will and will not
underwrite regardless of permissibility. The policy elements should also outline other
common loan types found in commercial banks.
The major policy elements for a bank are −
 A statement highlighting the features of a good loan portfolio in terms of types,

maturities, sizes, and quality of loans. In short, a goal statement for entire loan
portfolio.
 Stipulation of lending authority prescribed to each loan officer and loan

committee. The main task of loan officers and loan committee is to measure the
maximum amount and types of loan approved by each employee and committee
and what signatures of approval are needed.
 Boundaries of duty in making assignments and reporting information.
 Functioning procedures for soliciting, examining, accessing and making

decisions on customer loan applications.
 The documents required for each loan application and all the necessary papers
and records to be kept in the lender‘s files like financial statements, pass book
details, security agreements, etc.
 Lines of authority and accountability for maintaining, monitoring, updating and

reviewing the institution‘s credit files.
Loan policies vary significantly from one bank to another. It is completely based on the
complexity of the activities they are engaged in. The policy elements of a private bank
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may slightly differ from the government bank. Anyhow, a general loan policy
incorporates specific basic lending tenets.
ASSETS LIABILITY
Banks which facilitate forex functions also handles one more central risk — currency
risk. With the support of ALM, banks try to meet the assets and liabilities in terms of
maturities and interest rates and reduce the interest rate risk and liquidity risk.
Asset liability mismatches − The balance sheet of a bank‘s assets and liabilities are the
future cash inflows & outflows. Under asset liability management, the cash inflows &
outflows are grouped into different time buckets. Further, each bucket of assets is
balanced with the matching bucket of liability. The differences obtained in each bucket
are known as mismatches.
RISK WITH ASSETS
Risks have a negative effect on a bank‘s future earnings, savings and on the market
value of its fairness because of the changes in interest rates. Handling assets invites
different types of risks. Risks cannot be avoided or neglected in bank management. The
bank has to analyze the type of risk and necessary steps need to be taken. With respect
to assets, risks can further be categorized into the following −
Currency Risk
Floating exchange rate arrangement has brought in its wake pronounced volatility
adding a new dimension to the risk profile of banks‘ balance sheets. The increased
capital flows across free economies following deregulation have contributed to an
increase in the volume of transactions.
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Large cross-border flows together with the volatility have rendered the banks‘ balance
sheets vulnerable to exchange rate movements.
Dealing in Different Currencies
It brings opportunities as also risks. If the liabilities in one currency exceed the level of
assets in the same currency, then the currency mismatch can add value or erode value
depending upon the currency movements. The simplest way to avoid currency risk is to
ensure that mismatches, if any, are reduced to zero or near zero.
Banks undertake operations in foreign exchange like accepting deposits, making loans
and advances and quoting prices for foreign exchange transactions. Irrespective of the
strategies adopted, it may not be possible to eliminate currency mismatches altogether.
Besides, some of the institutions may take proprietary trading positions as a conscious
business strategy. Managing Currency Risk is one more dimension of Asset Liability
Management.
Mismatched currency position besides exposing the balance sheet to movements in

exchange rate also exposes it to country risk and settlement risk. Ever since the RBI
(Exchange Control Department) introduced the concept of end of the day near square
position in 1978, banks have been setting up overnight limits and selectively
undertaking active daytime trading.
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Interest Rate Risk (IRR)
The phased deregulation of interest rates and the operational flexibility given to banks in
pricing most of the assets and liabilities have exposed the banking system to Interest
Rate Risk.
Interest rate risk is the risk where changes in market interest rates might adversely affect
a bank‘s financial condition. Changes in interest rates affect both the current earnings
(earnings perspective) as also the net worth of the bank (economic value perspective).
The risk from the earnings‘ perspective can be measured as changes in the Net Interest
Income (Nil) or Net Interest Margin (NIM).
Therefore, ALM is a regular process and an everyday affair. This needs to be handled
carefully and preventive steps need to be taken to lighten the issues related to it. It may
lead to irreparable harm to the banks on regards of liquidity, profitability and solvency,
if not controlled properly.
4.5 RISK MEASUREMENT TECHNIQUE
In order to deal with the different types of risks involved in the management of assets
and liabilities, we need to manage the risks for efficient bank management. There are
various techniques used for measuring disclosure of banks to interest rate risks −
Gap Analysis Model
The gap analysis model portions the flow and level of asset liability mismatch through
either funding or maturity gap. It is calculated for assets and liabilities of varying
maturities and is derived for a set time horizon. This model checks on the repricing gap
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that is present in the middle of the interest revenue earned on the bank's assets and the
interest paid on its liabilities within a mentioned interval of time.
This model represents the total interest income disclosure of the bank, to variations
occurring in the interest rates in different maturity buckets. Repricing gaps are estimated
for assets and liabilities of varying maturities.
A positive gap reflects that assets are repriced before liabilities. Meanwhile, a negative
gap reflects that liabilities need to be repriced before assets. The bank monitors the rate
sensitivity that is the time the bank manager will have to wait so that there is a variation
in the posted rates on any asset or liability of every asset and liability on the balance
sheet.
The general formula that is used is as follows −
ΔNII = ΔRi×GAPi
In the above formula −
 NII is the total interest income.
 R is the interest rates influencing assets and liabilities in the relevant maturity
bucket.
 GAP is the difference between the book value of the rate sensitive assets and the
rate sensitive liabilities.
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Hence, when there is a variation in the interest rate, we can easily analyze the influence
of the variation on the total interest income of the bank. A change in interest rate has
direct impact on their market value.
The main drawback of this model is that this method considers only the book value of
assets and liabilities and thus neglects their market value. So, this method is an
incomplete measure of the true interest rate exposure of a bank.
Duration Model
Duration or interval is a critical measure for the interest rate sensitivity of assets and
liabilities. This is due to the fact that it considers the time of arrival of cash flows and
the maturity of assets and liabilities. It is the measured average time to maturity of all
the preset values of cash flows. This model states the average life of the asset or the
liability. It is denoted by the following formula −
DPp = D (dR /1+R)
The above equation briefs the percentage fall in price of the agreement for a given
increase in the necessary interest rates or yields. The larger the value of the interval, the
more sensitive is the cost of that asset or liability to variations in interest rates.
According to the above equation, the bank will be protected from interest rate risk if the
duration gap between assets and the liabilities is zero. The major advantage of this
model is that it uses the market value of assets and liabilities.
Simulation Model
This model assists in introducing a dynamic element in the examination of interest rate
risk. The previous models — the Gap analysis and the duration analysis for asset-
liability management endure from their inefficiency to move across the static analysis of
current interest rate risk exposures. In short, the simulation models use computer power
to support ―what if‖ scenarios. For example,
What if
 the total level of interest rates switches

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 marketing plans are under-achieved or over-achieved
 balance sheets shrink or expand
This develops the information available for management in terms of precise assessment
of current exposures of asset and liability, portfolios to interest rate risk, variations in
distributive target variables like the total interest income capital adequacy, and liquidity
as well as the future gaps.
There are possibilities that this simulation model prevents the use to see all the complex
paper work because of the nature of massive paper results. In this type of condition, it is
very important to merge the technical expertise with proper awareness of issues in the
enterprise.
There are particular demands for a simulation model to grow. These refer to accuracy of
data and reliability of the assumptions or hypothesis made. In simple words, one should
be in a status to look at substitutes referring to interest rates, growth-rate distributions,
reinvestments, etc., under different interest rate scenes. This may be difficult and
sometimes contentious.
An important point to note here is that the bank managers may not wish to document
their assumptions and data is readily available for differential collision of interest rates
on multiple variables. Thus, this model needs to be applied carefully, especially in the
Indian banking system.
The application of simulation models addresses the commitment of substantial amount

of time and resources. If in case, one can‘t afford the cost or, more importantly the time
engaged in simulation modeling, it makes perfect sense to stick to simpler types of
analysis
4.6 CALCULATING CAMELS RATING OF SELECTED BANKS
4.6.1 FORMULA OF CAMELS
CAPITAL ADEQUACY RATIO (CAR) = TIER 1 +TIER 2/ WEIGHTED ASSETS
ASSETS QUALITY RATIO = NET NPA TO NET ADVANCE
67
MANAGEMENT QUALITY= MANAGEMENT EXPENSES TO TOTAL INCOME
EARNING QUALITY= RETURN ON ASSETS AND RETURN ON EQUITY
ROA= NET PROFIT/ TOTAL ASSETS
ROE= NET PROFIT/ OWN CAPITAL
LIQUIDITY QUALITY= L1=TOTAL LOANS/ TOTAL DEPOSITS
L2= CIRCULATING ASSETS TO TOTAL ASSETS
SENSITIVITY TO MARKET= TOTAL SECURITIES/ TOTAL ASSETS
4.6.2 RATING BASE OF CAMELS COMPONENT
CAMELS RATING 1 RATING 2 RATING 3 RATING 4 RATING 5

RATING
COMPONENTS
CAPITAL ABOVE 12%-14.99 8%-11.99% 7%-7.99% BELOW
ADEQUACY 15% 6.99%
RATIO
ASSETS BELOW BELOW BELOW BELOW ABOVE
QUALITY 1.25% 2.5%-1.26 3.5%-2.6% 5.5%-3.6% 5.6%
MANAGEMENT BELOW 30% - 26% 38%-31% 45%-39% ABOVE
25% 46%
EARNINGS ABOVE 0.9%-0.8 0.35-0.7 0.25%-0.34 BELOW
(ROA) 1% 0.24
ROE ABOVE 17%- 10%- 7-9.99% BELOW
22% 21.99% 16.99% 6.99
LIQUIDITY BELOW 0.62-0.56 0.68-0.63 0.80-0.69 ABOVE
RATIO 1 0.55% 0.81
LIQUIDITY ABOVE 45%- 38%- 33%-37.99 BELOW
RATIO 2 50% 49.99% 44.99% 32%
SENSITIVITY BELOW 30%-26% 37%-31% 42%-38% ABOVE
RATIO 25% 43%
TABLENO- 4.6.2
4.6.3.1 CALCULATION OF CAMELS FOR SBI BANK
CAMELS 2020 2019 2018 2017 2016 MEAN

C 13 12.72 12.6 13.11 13.12 12.91
A 2.57 3.01 5.73 3.71 3.81 3.76
68
M 0.86 -19.94 -14.5 18.56 14.76 -0.052
E 9.87 12.44 12.98 12.75 13 12.21
L 37.81 40.98 40.91 39.37 38.43 39.5
S 2.40 2.49 2.45 2.46 2.6 2.48
TABLENO- 4.6.3.1
4.6.3.2 CALCUTION OF CAMELS FOR ICICI BANK
CAMELS 2020 2019 2018 2017 2016 MEAN

C 16 16.89 18.42 17.39 16.64 17.07
A 4.90 2.06 4.77 4.89 2.67 3.86
M 3.87 0.69 6.58 9.7 10.85 6.34
E 5.6 5.1 4.95 4.4 4.32 4.87
L 44.56 43.41 44.59 46.82 52.05 46.29
S 2.6 2.94 2.8 2.92 3.11 2.87
TABLE NO- 4.6.3.2
4.7 PERFORMANCE OF SELECTED BANK
4.7.1 SBI BANK PERFORMANCE FROM 2016 TO 2020
The below table shows the performance highlights of the SBI Bank for the year period
March 2016 to March 2020
March 2016 March 2017 March 2018 March 2019 March 2020
Deposits 1730722.44 2044751.39 2706343.29 2911386.01 3241620.73
(Rs in
Crores)
Advances 1463700.42 1571078.38 1934880.19 2185876.92 2325289.56
(Rs in
Crores)
Net 9950.65 10484.10 -6547.45 862.23 14488.11
profit(Rs in
Crores)
Branches 16784 17170 22414 22010 22141
Employees 207739 209567 264041 257252 249448
TABLE NO-4.7.1
From the above table we can observe that the SBI bank has the lowest amount in 2020 i.e
₹1730722.44 crores compared to ₹3241620.73 crores in year 2016. Besides the deposits,
advances in year it is Rs 1463700.42 and in 2019, 2018, 2017, 2016 it is Rs 2044751.39,
69
2706343.29, 2911386.01, 3241620.73 respectively. Net profit has the negative figure in
year 2018.The year 2020 has the less figure compared from the other year as shown in
the table 4.7.1.
4.7.2 ICICI BANK PERFORMANCE FROM 2016 TO 2020
The below table shows the performance highlights of the bank from 2016 March to 2020
March
2016 2017 2018 2019 2020
Deposits(Rs 421425.71 490039.06 560975.21 652919.67 770968.99

in Crores)
Advances 435263.94 464232.08 512395.29 586646.58 645289.97
Net 9726.29 9801.09 6777.42 3363.30 7930.81

Profit(Rs in
Crores)
Branches(Rs 4450 4850 4867 4874 5324

in Crores)
Employees 72175 82841 82724 86763 99319

TABLE NO- 4.7.2
From the above table we can observe that the ICICI bank has the lowest amount in 2020
i.e ₹421425.71 crores other years. The net-profit of ICICI bank has the highest figure and
it is increasing from 2016. It can easily be understood the performance of the bank from
the above table.
4.8 MEASURING THE MAGNITUDE OF CREDIT RISK IN SBI

BANK
The following ratios are used to analyse the credit risk in SBI Bank:
1. Ratio of Total Equity (TE) to Total Assets (TA)
2. Ratio of Non-Performing Assets (NPA) to NPA and Total Equity (NPA + TE)
70
4.8.1 RATIO OF TOTAL EQUITY (TE) TO TOTAL ASSETS (TA): This ratio is
used to help determine how much shareholders would receive in the event of a bank-wide
liquidation. The ratio expressed in percentage, is calculated by dividing total
shareholders' equity by total assets of the bank, and it represents the amount of assets on
which shareholders have a residual claim. The figures used to calculate the ratio are taken
from the bank‘s balance sheet.
Total Shareholder Equity
Shareholder Equity Ratio = ――――――――――
Total Assets
Maintaining a high ratio of equity to total assets provides a degree of protection against
the risk that interest payments will exceed earnings, particularly, for banks that generate
their earnings from interest on loans. The equity to assets ratio indicates the finance and
profitability of the bank. It shows what proportion of total assets is financed by equity,
and hence, what proportion is financed by loans and non-equity shares. A low equity to
assets ratio means much of the business is financed by loans, or non-equity shares,
whereas a high equity to assets ratio means that most or all of the long-term capital is
equity. Under the same conditions, the more higher, the better, it shows the good finance
and profitability.
RATIO OF TOTAL EQUITY TO TOTAL ASSETS
(RS IN CRORES)
YEARS TOTAL EQUITY TOTAL ASSETS TE/TA(%)

2020 892 3951393 0.02
2019 892 3680914 0.02
2018 892 3454752 0.02
2017 797 2705966 0.02
2016 776 2357617 0.03
(TABLENO 4.8.1)
The table indicates the total equity and total assets of SBI bank from year 2020 to 2016.
The total equity from 2020 to 2018 is same having the figure 892, and 2017 and 2016
having the figure of 797 and 776 respectively. The total assets of SBI bank in the year
2020 have the highest figure comparing with the other 4 years. Hence, the credit risk ratio
is low in this case.
71
4.8.2 RATIO OF NON-PERFORMING ASSETS TO NPA AND TOTAL EQUITY:
It is another measure of evaluation of credit risk position of the bank. It establishes the
relationship between non-performing assets and non-performing assets and equity. Lower
the ratio, lower the credit risk ratio. For the purpose of analysis equity means capital in
the balance sheet on a particular date. The ratio is calculated as follows:
Non-Performing Assets
―――――――――――――――――――――
Non-performing Assets and Total Equity
RATIO OF NON-PERFORMING ASSETS TO NPA AND TOTAL EQUITY

(RS IN CRORES)
YEARS NON- NPA & EQUITY NPA/NAP& TE%

PERFORMING
2020 51871 52763 98.31
2019 658947 659839 99.86
2018 110854 111746 99.20
2017 58277 59074 98.65
2016 55807 56583 98.63
(TABLENO 4.8.2)
The above table indicates the non-performing assets to NPA & Equity. In year 2019, the
non-performing assets take the highest position comparing with the other year as it has
the highest figure. As the ratio has the very high percentage it can be consider as the high
credit risk ratio.
4.9 MEASURING THE MAGNITUDE OF CREDIT RISK IN ICICI

BANK
4.9.1 RATIO OF TOTAL EQUITY TO TOTAL ASSETS
YEAR TOTAL EQUITY TOTAL ASSETS TE/TA (%)

2020 1295 1098365.15 0.12
2019 1289 964459.15 0.13
2018 1286 879189.16 0.14
2017 1165 771791.45 0.15
2016 1163 720695.10 0.16
72
(TABLENO 4.9.1)
The above table presents the total equity and total assets of ICICI bank. It has been
divided so that we can able to identify the credit risk ratio is low or high. The total assets
year 2020 is 1098365.15 which the highest figure comparing with the other 4 years.
4.9.2 RATIO OF NON-PERFORMING ASSETS TO NPA AND TOTAL EQUITY
(RS IN CRORES)
YEAR NON- NPA & EQUITY NPA/NPA+E

PERFORMING (%)
ASSETS
2020 9923.24 11218.24 88.46
2019 13449.72 14738.72 91.25
2018 27823.56 29109.56 95.58
2017 25216.81 26381.81 95.58
2016 12963.08 14126.08 91.77
(TABLENO 4.9.2)
The above table indicates the non- performing assets to NPA and total Equity. In year
2020 the non- performing assets has the low figure i.e 9923.24 comparing with other
year. The credit risk ratio is low in the year 2020 as the (%) shown in the above table is
88.46%., which is low from the other 4 years.
4.10 A COMPARATIVE ANALYSIS OF ICICI BANK AND SBI

BANK THROUGH CAMEL APPROACH
4.10.1 COMPARATIVE ANALYSIS OF CAPITAL ADEQUACY RATIO
BANKS 2020 2019 2018 2017 2016 MEAN

SBI 13 13 13 13 13 13
ICICI 16 17 18 17 17 17
Table no-4.10.1
The above table is calculated by the formula tier1 + tier 2/ risk weighted assets.
The Table demonstrates that the Capital Adequacy Ratio (CRAR) of both the banks
under study are highly satisfactory and well above the standard set by RBI for Indian
banks. The highest CRAR of both SBI and ICICI were registered in the year 2018 and
73
were 13 and 18% respectively, whereas the lowest CRAR of ICICI was 16% in the year
2020. From the table, it is clear that the mean CRAR of ICICI Bank (17%) is higher than
that of SBI (13%) for the study period, which implies that the CRAR of ICICI Bank is
4% more than that of SBI.
4.10.2 COMPARATIVE ANALYSIS OF RETURN ON ASSETS (%)
BANKS 2020 2019 2018 2017 2016 MEAN

SBI 0.38 0.02 -0.21 0.41 0.45 0.21
ICICI 0.77 0.36 0.82 1.31 1.42 0.94
TABLE NO- 4.10.2

Return on Assets (%) of SBI and ICICI for the study period is exhibited in the above
table. Return on Assets is a measure of asset quality and management efficiency of an
institution and the higher the ratio, better is said to be the performance of the firm. It is
quite clear from this table that for both the banks under study, Return on Assets is at a
very low level. The highest Return on Assets (%) of SBI was 0.45% in 2016 and that of
ICICI was 1.42% in the year 2017, whereas the lowest Return on Assets (%) of SBI bank
was -0.21% registered in year 2018 and ICICI was 0.36% .registered in the year 2019 and
were 0.46% and 1.49% respectively. It is also evident that the mean Return on Assets (%)
of ICICI Bank (0.94%) is higher than that of SBI (0.21%) for the study period, which
implies that ICICI Bank scores over SBI in terms of return on assets
4.10.3 COMPARATIVE ANALYSIS OF RETURN ON EQUITY (%)
BANKS 2020 2019 2018 2017 2016 MEAN

SBI 7.16 0.44 -3.73 6.97 7.30 3.63
ICICI 7.25 3.24 6.81 10.66 11.63 39.59
TABLE NO- 4.10.3

The above table demonstrates that the Return on Equity of both the banks under study is
fluctuating from year to year. Return on Equity is the ratio of net earnings to equity
shareholders to the total equity shareholders fund. It is a measure of profitability and
earnings of an institution and the higher the return on equity, the better is said to be the
performance of the firm. The highest Return on Equity of SBI was 7.30% in the year
74
2016 and in case of ICICI Bank, it was 11.63% in the year 2016, whereas the lowest
Return on Equity of SBI was (-3.73)% in 2018 and that of ICICI was 3.24% in 2019. It is
also evident that the mean Return on Equity of ICICI Bank (39.59%) is higher than that
of SBI (3.63%) by 35.95%, which implies that ICICI Bank provides a higher return to
equity shareholders as compared to SBI.
4.10.4 COMPARATIVE ANALYSIS OF QUICK RATIO (%)
BANKS 2020 2019 2018 2017 2016 MEAN

SBI 9.71 13.84 13.38 15.54 18.68 14.23
ICICI 0.68 0.59 0.36 0.35 0.36 0.47
Table no- 4.10.4

The above table exhibits the Quick Ratio of SBI and ICICI Bank for the study period and
it is quite clear that the SBI banks have a very high level of quick ratio. Quick Ratio is
another measure of the liquidity position of a firm and is determined by the ratio of quick
assets to quick liabilities. It is evident from Table 4.10.4 that the highest Quick Ratio of
SBI, i.e. 18.68, was observed in 2016 and that of ICICI Bank, i.e. 0.68, was observed in
2020. Whereas, the lowest Quick Ratio of SBI was 9.71 in 2020 and that of ICICI Bank
were 0.35% in 2017. It is also clear that the mean Quick Ratio of SBI (14.23) is higher
than that of ICICI (0.47) and as such, it may be concluded that SBI Bank has maintained
a higher Quick Ratio than ICICI for the period under study.
4.10.5 COMPARATIVE ANALYSIS OF CURRENT RATIO (%)

BANKS 2020 2019 2018 2017 2016 MEAN
SBI 0.32 0.33 0.39 0.37 0.33 0.348
ICICI 0.32 0.32 0.36 0.33 0.38 0.342
TABLE NO- 4.10.5

The above table exhibits the Current Ratio of SBI and ICICI Bank for the study period
and it is quite clear that both the banks have a very low level of current ratio. Current
Ratio is an indicator of the liquidity position of an enterprise and is measured by the ratio
of current assets to current liabilities. From this table, it is clear that the highest Current
Ratio of SBI was observed in 2018 and ICICI was observed in 2016 and were 0.39 and
0.38 respectively. Whereas, the lowest Current Ratio of SBI was 0.32 in 2020 and that of
75
ICICI Bank was 0.32 in 2020 and 2019. The mean Current Ratio of SBI (0.348) is higher
than that of ICICI (0.342) and as such, it may be concluded that SBI Bank has been a
better performer of the two in terms of Current Ratio for the period under study.
4.10.6 COMPARATIVE ANALYSIS OF DEBT EQUITY RATIO (%)
BANKS 2020 2019 2018 2017 2016 MEAN

SBI 0.05 0.06 0.06 0.06 0.07 0.06
ICICI 0.05 0.06 0.06 0.06 0.06 0.058
Debt Equity Ratio of SBI and ICICI Bank for the study period are exhibited in Table
4.10.6. Debt Equity Ratio is a measure of the solvency and management efficiency of an
institution and is determined as the ratio of total debt to shareholders fund.
From the table, it is clear that both the banks have maintained an unstable Debt Equity
Ratio over the period under study. The highest Debt Equity Ratio of SBI was 0.07 in
2016 and in case of ICICI Bank, it was 0.06 for the year 2016,2017,2018,2019, whereas
the lowest Debt Equity Ratio of both bank was 0.05 in 2020. It is also evident that the
mean Debt Equity Ratio of SBI (0.06) is equal to ICICI (0.058).
4.10.7 COMPARATIVE ANALYSIS OF CREDIT DEPOSITS RATIO (%)
BANKS 2020 2019 2018 2017 2016 MEAN

SBI 0.10 0.14 0.13 0.16 0.19 0.144
ICICI 21.13 25.32 32.60 30.11 41.48 30.13
Table 4.10.7 exhibits the Credit Deposit Ratio (%) of both the banks for the last five
years from 2016 to 2020 Credit Deposit Ratio denotes the proportion of loan assets
created by a bank from the deposits received. The higher the credit deposit ratio better is
the performance of bank. It is clear from the table that the Credit Deposit Ratio of ICICI
Bank is showing an increasing trend, whereas in case of SBI, it is more or less stable
throughout the study period. The highest Credit Deposit Ratio of SBI was 0.19 in 2016
and that of ICICI was 41.48 % in 2016, whereas the lowest Credit Deposit Ratio of both
SBI and ICICI was registered in the year 2020 and were 0.10% and 21.13% respectively.
It is also evident from the table that the mean Credit Deposit Ratio of ICICI Bank
76
(30.13%) is higher than that of SBI (0.144%) for the study period, which implies that
ICICI Bank has created more loan assets from its deposits as compared to SBI.
4.10.8 COMPARATIVE ANALYSIS OF RETURN OF CAPITAL EMPLOYED

RATIO (%)
BANKS 2020 2019 2018 2017 2016 2016

SBI 6.26 2.75 -1.03 4.71 5.42 3.622
ICICI 8.28 4.86 5.96 8.13 8.57 7.16
TABLENO- 4.10.8
The above table exhibits the Capital Employed Ratio of SBI and ICICI Bank for the
study period and it is quite clear that both the banks have a very low level of capital
employed. From this table, it is clear that the highest Capital Employed Ratio of SBI was
observed in 2020 and ICICI was observed in 2017 and were 6.26 and 8.13 respectively.
Whereas, the lowest Capital Employed Ratio of SBI was -1.03 in 2018 and that of ICICI
Bank was 4.86 in 2019. The mean Capital Employed Ratio of SBI (3.622) is lower than
that of ICICI (7.16) and as such, it may be concluded that ICICI Bank has been a better
performer of the two in terms of Capital employed Ratio for the period under study.
77
CHAPTER 5: FINDINGS, SUGGESTION, & CONCLUSION
5.1 FINDINGS
As per the table 4.6.3.1 and 4.6.3.2, we are going to give the ranks by comparing the
mean of both the banks.
TABLE NO -5.1 RANKS OF BOTH THE BANKS
CAMELS SBI BANK (MEAN) ICICI BANK(MEAN)

Capital Adequacy 12.91 17.07
RANK 2 1
Assets quality 3.76 3.86
RANK 2 1
Management efficiency -0.052 6.34
RANK 2 1
Earnings quality 12.21 4.87
RANK 1 2
Liquidity 39.5 52.05
RANK 2 1
Sensitivity analysis 2.48 3.11
RANK 2 1
From the above table we can observe that the ICICI bank is performing better than SBI
bank. Hence, H0 : ICICI bank has the better risk management strategy compare to SBI
bank (Null) hypothesis is accepted, whereas H1: ICICI bank is not having better risk
management strategy compare to SBI bank (Alternative)
5.2 CONCLUSION
This chapter contains conclusion on various issues analyzed and examined in the present
study. Risk Management is the acceptance of responsibility for recognizing, identifying,
and controlling the exposures to loss or injury which are created by the activities of the
78
University. State Bank of India (SBI) and ICICI Bank are the two largest banks in India
in public and private sectors respectively. To compare the financial performance of the
banks, various ratios have been used to measure the banks‘ profitability, solvency
position, and management efficiency. According to the analysis, both the banks are
maintaining the required standards and running profitably. From the present study, ICICI
has been a better performer in terms of profitability and management efficiency as
compared to SBI for the study period. This study will help enhance further research on
the subject by researchers and academicians.
5.3 REFERENCE
LINKS-
http://processnews.blogspot.com/2019/06/risk-management-objectives-advantages-and-
disadvantages.html
http://shodh.inflibnet.ac.in:8080/jspui/bitstream/123456789/2794/3/03_litreature%20revi
ew.pdf
https://gradeup.co/risk-management-in-Indian-banking-sector-role-of-RBI-i-257b7efc-
8ddc-11e5-9323-7aed798fd5ce
https://www.greycampus.com/opencampus/certified-associate-in-project-
management/risk-identification-tools-and-techniques-in-capm
https://www.tutorialspoint.com/bank_management/bank_management_liquidity_theory.h
tm
https://stock-financials.valuestocks.in/en/sbi-ratio-analysis
https://stock-financials.valuestocks.in/en/icici-bank-ratio-analysis
BOOKS-
Gupta R. (2014). An Analysis of Indian Public Sector Banks using CAMEL Approach.
IOS Journal of Business and Management. 16(1). 94-102.
Kwan, S. & Eisenbeis, RA. (1997). Bank risk, capitalization and operating efficiency.
Journal of Financial Services Research. 12 (2/3). 17-31.
79
Prasuna, D.G. (2004). Performance Snapshot 2003-04.Chartered Financial Analyst.
X(11). 6-13.
Sarker, A. (2005). CAMEL Rating System in the Context of Islamic Banking: A
Proposed ‗S‘ for Shariah Framework. Journal of Islamic Economics and Finance. 1(1).
78-84.
80

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A Study of Risk Management in SBI bank and ICICI Bank

A Project Bachelor of Management submitted to

University of Mumbai for partial completion of the degree of

Under the Faculty of Commerce

Karishma Krishna Shetty

Under the Guidance of

St John College of Humanities and Sciences

Palghar (E) 401404, Dist, Palghar, Tel:02525-297071

(A Christian Religious Minority Institution)

Affiliated to University of Mumbai

St. John Technical Campus Vevoor, Manor Road, Palghar(East),

Tel:(02525)-297071 ,Mob.:7219230156 Fax:(02525)-256834 Email: [email protected]

Name and Signature of

Name and signature of the learner

Name and signature of the Guiding Teacher

I would like to acknowledge the following as being idealistic channels and

I take this opportunity to thank the University of Mumbai for giving me

I would like to thank my Principal, DR. BRAJABANDHU DAS

I take this opportunity to thank our Coordinator , for her moral

I would also like to express my sincere gratitude towards my project guide

I would also like to thank my College Library, for having provided

1.1 Risk Management-

Risk management is the acceptance of responsibility for recognizing, identifying, and

Definition: In the world of finance, risk management refers to the practice of

Meaning: When an entity makes an investment decision, it exposes itself to a number

 ―Did the institution make the right decision?‖

1. Identifying and assessing the potential risk in the banking business,

1.3 Historical Perspective of Risk Management

1.5 ADVANTAGES AND DISADVANTAGES OF RISK

1.5.1 Advantages of Risk Management

4. It reduces duplication of systems. Integration of environmental and health and safety

1.5.2 Disadvantages of Risk Management

1.6 Classification of risk

Risks are mainly categorized in to

Counterparty risk is increasingly faced by banks. It is the non-payment of amount by

Forms of Credit Risk

The elements of credit risk are:

Portfolio risk= concentration risk + intrinsic risk

Transaction risk= down gradation risk + default risk

• Contingent liabilities such as guarantees

• Non repayment of amount of loan

• Delay in Settlement of transactions

• Flow of foreign exchange

• Change in portfolio value arising from deterioration of credit quality

• Fluctuations in financial instruments

Credit risk comprises mainly two components, viz,

• Quantity of risk- it is the outstanding loan balance as on date of default.

• Quality of risk- it is the severity of loss determined by probability of

• Credit risk= default risk + exposure risk.

B) Non- Financial Risk

1.7 Introduction to SBI Bank

2.1 OBJECTIVES OF THE STUDY

2.2 DATA COLLECTION

2.3 SCOPE OF THE STUDY

2.5 STRUCTURE OF THE STUDY

2.6 LIMITATION OF THE STUDY

Gupta Sumeet&VermaRenu (2008) concluded that management of non-performing

GejalakshamiSandanam& et.al (2012),Concluded that the public sector banks

GoelCheenu&RekhiBhutaniChitwan (2013) concluded that the analysis supports that