Module III : Banking

Operations in India
Principles of Lending, working capital and term loans, Financing SME, credit
appraisal, credit monitoring and supervision, NPA management. Retail
credit like housing, car, consumer, loan against property and personal loan,
CIBIL. An overview of international banking, export & import financing. Risk
Management in banking, Asset Liability Management
Principles of Lending
• Lending, an essential function within the financial sector, involves
disbursing funds to individuals, businesses, and other entities under
the expectation of future repayment with interest. It encompasses a
variety of financial products, including loans, lines of credit, and
overdrafts. The principles of lending are fundamental guidelines that
lenders follow to minimize the risk of default and ensure profitability.
Here’s a detailed look at these principles:
1. Safety
• The primary concern for any lender is the safety of the funds disbursed as loans. This
principle ensures that the borrower is likely to repay the loan without defaulting.
Lenders assess the safety of a loan by considering the borrower's financial stability,
credit history, cash flow, and the security (collateral) provided. Assessing these factors
helps mitigate potential risks associated with lending.
2. Liquidity
• Liquidity in lending refers to the ease with which a loan can be converted back into cash
after it has been disbursed. This means the borrower should be able to repay the loan
either on demand or within a reasonable time frame agreed upon at the onset of the
lending agreement. Banks, especially, need to maintain adequate liquidity to meet the
withdrawal demands of depositors.
3. Profitability
• For lending to be sustainable, it must be profitable. Interest rates and fees associated
with loans are structured to cover the costs of funds, provide for the operational costs of
the lender, and allow for an adequate profit margin. This principle ensures that the
lending activity contributes positively to the bottom line of the financial institution.
4. Purpose
• This principle requires that the loan be issued for a specific, sensible purpose that is
not only legal but also economically and financially sound. The lender must evaluate
the purpose of the loan to determine if it aligns with sound banking practices and the
borrower's business or personal goals. This helps in ensuring that the funds are used
in a productive way which enhances the likelihood of repayment.
5. Diversification
• Diversification in lending is akin to the adage, “Do not put all your eggs in one basket.”
It involves spreading out the loan exposure over various types of loans, industries,
geographic regions, and borrower groups to minimize risks. This principle protects the
lender from significant losses that might occur if one sector or borrower fails.
6. Security
• Loans should be backed by adequate security to provide a secondary source of
repayment in case the borrower's primary source of repayment fails. Security could be
in the form of collateral, guarantees, or mortgages. The type and amount of security
required depend on the risk associated with the borrower. Security serves as a cushion
for the lender in the event of default.
7. Documentation
• Proper documentation is crucial in lending. It involves the systematic recording of all
pertinent information regarding the loan transaction, including the borrower’s
information, the terms of the loan, repayment schedule, security provided, and other
legal requirements. Adequate documentation helps in legal enforcement and in
tracking and managing the loan.
8. Regulation Compliance
• Lenders must comply with all relevant local and international regulations. This includes
adhering to banking laws, credit practices, consumer protection laws, and anti-money
laundering (AML) guidelines. Compliance ensures that the lender operates within the
legal framework and maintains its reputation.
9. Customer Relationship
• Maintaining a positive relationship with customers is key to successful lending.
Understanding customer needs, providing timely and courteous service, and offering
financial advice help in building trust and loyalty. A strong customer relationship can
also provide the lender with valuable insights into the borrower's financial situation,
which can be crucial for risk assessment.
Working Capital Loans
Definition and Purpose: Working capital loans are designed to finance the
everyday operations of a company. They are not used to buy long-term assets
or investments; rather, they are used to cover accounts payable, wages, and
other short-term operational needs.
Features:
• Short-term Nature: Typically, these loans are due within one year or less.
• Flexibility: Borrowers can use the funds as needed to smooth out cash flow
fluctuations due to seasonal business cycles or other operational demands.
• Types: They can come in various forms including a line of credit, overdraft
protection, or short-term loans.
• Security: These loans may be secured or unsecured, though unsecured loans
will typically have higher interest rates.
Benefits:
• Improves Liquidity: Quickly injects cash into the business to support daily
operations.
• Enhances Operational Efficiency: Ensures that a business can meet its
current liabilities by providing the necessary cash flow.
Risks:
• Debt Dependency: Businesses may become dependent on external
financing to sustain operational expenses.
• Interest and Fees: The costs associated with working capital loans can
impact overall profitability.
Term Loans
Definition and Purpose: Term loans are monetary loans that are repaid in regular
payments over a set period of time. Term loans usually last between one and ten
years, but may last as long as 30 years in some cases. They are typically used to
fund the purchase of assets that will have a long-term benefit for the business, such
as equipment, real estate, or large scale expansion projects.
Features:
• Fixed Amount: Provides a lump sum of cash upfront.
• Repayment Schedule: Includes a schedule of periodic payments that cover
principal and interest.
• Interest Rates: May have fixed or variable interest rates.
• Maturity: Longer-term than working capital loans, usually from 1 year up to 30
years for mortgage loans.
Benefits:
• Capital for Growth: Enables significant investment in business growth or
expansion.
• Tax Benefits: Interest expenses on term loans are tax-deductible.
• Budgeting Consistency: Fixed repayment schedule helps in financial planning and
budgeting.
Risks:
• Long-term Commitment: Requires foresight as it obligates the company to long-
term financial commitments.
• Collateral Requirement: Often requires collateral, which could be seized if the
loan is not repaid.
• Impact on Credit: Failing to manage term loans effectively can adversely affect a
company's credit rating.
Financing Small and Medium Enterprises
(SMEs)
• Financing is a critical factor for the growth and sustainability of small
and medium enterprises (SMEs). Access to finance allows these
businesses to manage day-to-day operations, expand into new
markets, invest in new technologies, and hire additional staff.
However, SMEs often face significant challenges in securing financing
due to perceived high risks, lack of collateral, and insufficient credit
history. Here’s a detailed look at the financing options available to
SMEs and strategies to improve their access to funds.
 Common Financing Options for SMEs
1. Traditional Bank Loans
• Description: Banks provide loans with specific repayment terms and interest rates.
• Challenges: High eligibility criteria that may include detailed business plans,
collateral, and a strong credit history.
• Benefits: Lower interest rates compared to other forms of credit if the SME qualifies.
2. Government Grants and Subsidies
• Description: Governments often provide financial support to SMEs through grants,
subsidies, or favorable loan terms to encourage entrepreneurship and support small
businesses.
• Challenges: The application process can be competitive and time-consuming.
• Benefits: Non-repayable funds or low-cost financing to support business growth
without the burden of repayment.
3. Venture Capital (VC) and Private Equity (PE)
• Description: Investment from VC or PE firms in exchange for equity in the
company.
• Challenges: May require giving up a significant portion of business control
and profits.
• Benefits: Access to large amounts of capital, along with business expertise
and networks provided by investors.
4. Business Credit Cards
• Description: Credit cards issued in the business’s name to manage
expenses and improve cash flow.
• Challenges: Higher interest rates and the risk of accumulating debt.
• Benefits: Flexibility and immediate access to funds; some cards offer
rewards and business-related perks.
5. Crowdfunding
• Description: Raising small amounts of money from a large number of
people, typically through online platforms.
• Challenges: Can be time-consuming to set up and manage campaigns;
success is not guaranteed.
• Benefits: Allows businesses to raise funds without giving up equity or
taking on debt.
6. Invoice Financing
• Description: Borrowing money against the amounts due from customers.
• Challenges: Can be expensive; dependency on the invoicing cycle can
affect stability.
• Benefits: Immediate access to funds; helps manage cash flow effectively.
Credit Appraisal
• Credit appraisal is the process of assessing the financial and operational
aspects of a potential borrower, whether an individual or an organization, to
determine the ability and willingness to repay a loan. The assessment is
based on a thorough analysis of financial statements, credit history,
collateral, and other relevant factors.
• Key Elements of Credit Appraisal
1. Financial Analysis
1. Income Evaluation: For individuals, this might include salary, other
income sources, and overall financial stability. For businesses, this
involves reviewing profit and loss statements, cash flow statements, and
balance sheets.
2. Debt-to-Income Ratio: Measures the proportion of a borrower's income
that goes towards debt repayment, indicating their debt burden.
2. Credit History
•Credit Scores and Reports: A review of the borrower’s credit scores and
past credit activity to assess their credit behavior and repayment history.
•Previous Loans and Repayment Track Record: Examination of past loan
records and how effectively the borrower has managed previous credit
responsibilities.
3. Collateral
•Asset Evaluation: Analysis of the assets offered as collateral to secure
the loan, assessing their value and liquidity.
•Legal Check: Ensuring that the collateral is free from legal disputes and
is fully available to be used as security.
4. Business or Employment Stability
•Employment History: For individual borrowers, long-term and stable
employment is considered a positive indicator.
•Business Performance and Industry Condition: For corporate
borrowers, factors like market position, industry risks, and operational
efficiency are crucial.
5. Purpose of Loan
•Assessing the purpose of the loan to ensure it is valid, economically
feasible, and likely to generate returns or income to facilitate repayment.
6. Market Conditions
•Analysis of economic and market conditions that could affect the
borrower's financial stability or the business's performance.
 Credit Monitoring
Definition: Credit monitoring refers to the ongoing assessment of a borrower’s financial
health and ability to repay the loan. It involves keeping track of the borrower’s financial
activities, operational performance (for businesses), and adherence to the loan
agreement.
Objectives of Credit Monitoring:
• Early Detection of Warning Signs: Identify potential financial difficulties or signs of
distress, such as declining business revenues or cash flow shortages, before they
escalate into defaults.
• Loan Repayment Adherence: Ensure that the borrower is making timely payments of
both interest and principal as per the loan agreement.
• Maintain Loan Quality: Continuously assess the quality of the loan to prevent it from
becoming a Non-Performing Asset (NPA).
• Risk Mitigation: Adjust the lender’s strategies to minimize risk exposure based on the
Key Activities in Credit Monitoring:
• Tracking Financial Performance: Regularly reviewing financial statements, cash flows, and
market conditions (for corporate borrowers) to gauge the borrower’s financial health.
• Payment Monitoring: Ensuring that interest and principal repayments are made as per
schedule.
• Loan Covenants Compliance: Ensuring that the borrower adheres to specific covenants or
conditions, such as maintaining a certain level of working capital or not taking on additional
debt without lender approval.
• Account and Transaction Review: Monitoring the borrower's bank account activities,
especially in the case of working capital loans, to ensure that the loan proceeds are being used
for the intended purpose.
Tools for Credit Monitoring:
• Credit Monitoring Software: Automated tools and software can track borrower activities,
payment schedules, and financial performance in real-time.
• Field Visits: Periodic visits by bank officials to the borrower’s premises (in the case of business
loans) to assess the operational status and asset quality.
• Reports and Financial Reviews: Regular submission of financial statements, audit reports, and
Credit Supervision
Definition: Credit supervision is the process of actively overseeing and
managing the loan once it has been disbursed. It involves ensuring that the
borrower complies with the loan terms and taking corrective action when
needed.
Objectives of Credit Supervision:
• Ensuring Loan Compliance: Ensure that the borrower is complying with all
the agreed-upon terms of the loan, including payment schedules and
covenants.
• Corrective Actions: Implementing necessary measures to address
deviations or risks that could lead to defaults.
• Loan Performance Improvement: Take proactive steps to improve the
performance of the loan, including restructuring or rescheduling in case of
temporary financial challenges faced by the borrower.
Key Activities in Credit Supervision:
• Risk Reassessment: Continuously evaluating the loan’s risk profile based on
the borrower’s changing financial situation and market conditions.
• Loan Restructuring: If the borrower faces temporary difficulties,
restructuring the loan (i.e., extending the repayment period, reducing
interest rates) may help ensure the borrower’s ability to repay.
• Corrective Action for Delinquencies: In case of missed payments, lenders
may issue reminders, impose penalties, or even initiate legal action to
recover the loan amount.
• Field Investigations: Conducting periodic checks on collateral and the
borrower’s assets to ensure their value remains intact and they are still in
possession of the borrower.
• Loan Classification: Regularly reclassifying loans based on performance.
Loans may be downgraded to substandard, doubtful, or non-performing
based on their repayment status.
Importance of Credit Monitoring and
Supervision
•Risk Mitigation: Continuous monitoring and supervision help identify early signs of
trouble, allowing the lender to take proactive measures to reduce credit risk.
•Loan Recovery: By keeping track of the borrower’s financial position and enforcing
timely repayments, lenders can recover loans more effectively and reduce defaults.
•Maintaining Portfolio Health: Proper supervision ensures that the overall loan
portfolio remains healthy, reducing the chances of an increase in non-performing
assets (NPAs).
•Compliance with Regulations: Financial institutions must comply with regulatory
standards that require regular supervision and monitoring of credit facilities.
•Protecting Stakeholders' Interests: By preventing bad loans and defaults, credit
monitoring and supervision protect the interests of depositors, shareholders, and
other stakeholders.
Challenges in Credit Monitoring and
Supervision
•Complexity in Large Portfolios: For large financial institutions with many
borrowers, keeping track of each borrower’s financial health can be
challenging.
•Dynamic Business Environments: Rapid changes in market conditions,
industry downturns, or geopolitical risks can affect a borrower’s ability to repay,
and these changes may not always be easy to anticipate.
•Information Gaps: In some cases, borrowers may not provide updated
financial information or may misrepresent their financial situation, making it
difficult for lenders to accurately assess their status.
•Legal and Operational Barriers: Legal constraints or operational difficulties,
such as access to accurate records or borrower cooperation, may hamper
effective monitoring and supervision.
Non-Performing Assets (NPA)
Management in Banks
Definition: An NPA is a loan or advance where the borrower has defaulted
on payment of interest or principal, or where the account remains out of
order for more than 90 days.
Types of NPAs:
• Substandard Assets: Assets that have remained non-performing for a
period less than or equal to 12 months.
• Doubtful Assets: Assets that have remained in the substandard
category for 12 months.
• Loss Assets: Assets where loss has been identified by the bank or its
auditors but has not been written off entirely.
Causes of NPAs
External Factors:
•Economic Downturn: Global or domestic economic slowdowns reduce
borrower income, leading to defaults.
•Industry-Specific Issues: Certain industries may face sectoral crises, affecting
businesses within the sector.
•Natural Disasters: Events like floods, droughts, or earthquakes can lead to
widespread financial distress.
•Government Policies: Sudden changes in regulations or taxation policies can
adversely impact certain businesses.
Internal Factors:
•Weak Credit Appraisal: Poor assessment of borrower creditworthiness can
lead to loans being given to high-risk borrowers.
•Diversion of Funds: Borrowers divert funds for purposes other than those
originally intended, leading to an inability to repay.
•Willful Default: Borrowers deliberately fail to meet their loan obligations
even when they have the financial capacity to do so.
•Lack of Proper Monitoring: Inadequate post-disbursement monitoring by
banks can lead to mismanagement of funds by the borrower.
Impact of NPAs on Banks
•Profitability Erosion: NPAs do not generate income, but banks still have to
make provisions for potential losses. This reduces profitability and can
affect a bank's overall financial position.
•Liquidity Issues: High NPAs reduce the available cash flow of banks,
making it harder to lend to other potential borrowers and affecting their
liquidity position.
•Capital Constraints: Higher NPAs require banks to set aside more capital
as provisions, leading to less available capital for expansion or new loans.
•Increased Cost of Borrowing: Banks with higher NPAs may need to raise
interest rates for other customers to compensate for the losses, thereby
making borrowing more expensive.
•Reputation Risk: Continuous rise in NPAs can harm a bank’s credibility in
the market, affecting its ability to attract new customers and investors.
NPA Management Strategies
• Effective management of NPAs is crucial to ensure that the banking
system remains stable and sustainable. Here are some strategies used
by banks to manage and reduce NPAs:
1. Identification and Classification
• Early Detection: Identifying loans that are showing early signs of
stress through regular monitoring and reporting. Banks should
analyze financial statements, cash flows, and market trends to spot
potential risks.
• Loan Classification: Timely classification of loans as substandard,
doubtful, or loss assets to ensure appropriate actions are taken early.
2. Prevention and Early Intervention
• Stringent Credit Appraisal: A robust loan evaluation process that includes a detailed credit
assessment, risk analysis, and stress testing can help in preventing future NPAs.
• Post-Disbursement Monitoring: Regular follow-ups on how the loan is being used, especially in large
projects, to ensure the funds are not misused.
• Restructuring of Loans: For businesses or individuals facing temporary financial difficulty,
restructuring the loan terms (e.g., extending repayment periods or reducing interest rates) can help
avoid default.
3. Resolution of NPAs
• One-Time Settlement (OTS): A process where the bank offers the borrower an opportunity to repay
a lump sum amount lower than the actual outstanding, but which is agreed upon as final settlement.
• Restructuring and Rescheduling: This involves modifying the loan repayment terms, including
reducing the interest rates, increasing the loan term, or giving a moratorium period to distressed
borrowers.
• Debt Recovery Tribunals (DRT): Special tribunals set up to facilitate the speedy recovery of bad
loans. Banks can file cases against defaulters through the DRT process.
• Lok Adalats: A system where banks, in conjunction with legal services, settle cases of bad loans
through mutual agreement in out-of-court settlements.
4. Use of Asset Reconstruction Companies (ARCs)
• Securitization and Reconstruction: Banks sell NPAs to ARCs, which take on the responsibility
of recovering the loan. ARCs buy bad loans at a discounted price, clean up the bank's balance
sheet, and attempt to recover as much as possible.
• Transfer of NPA to ARCs: Banks can reduce the burden of NPAs on their balance sheets by
selling bad loans to ARCs, allowing them to focus on more profitable operations.
5. Recovery Mechanisms
• SARFAESI Act (Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002): This act allows banks and financial institutions to auction
residential or commercial properties of defaulters to recover outstanding loans. It provides
faster recovery of loans by bypassing long court proceedings.
• Insolvency and Bankruptcy Code (IBC): Under the IBC, banks can initiate insolvency
proceedings against borrowers, leading to either the resolution of debt or liquidation of
assets. This has become an effective tool for recovering large NPAs.
6. Write-offs
• Write-off NPAs: In some cases, if the loan is deemed irrecoverable, the bank may decide to
write off the loan entirely. This clears the bad loan from the bank’s books, although efforts to
recover the loan continue.
NPA Recovery Tools
1.Compromise Settlements: Banks negotiate with borrowers to settle
for a reduced amount rather than continue to pursue full recovery
through lengthy legal processes.
2.Loan Sale: Selling NPAs to other financial institutions or investors
willing to take on the risk in exchange for potential returns.
3.Special Recovery Teams: Banks form dedicated teams or outsource
recovery efforts to professionals specializing in bad debt recovery.
Retail Credit
• Retail credit refers to the various forms of credit provided by financial
institutions to individual consumers for personal purposes. These
loans are typically smaller in amount and are granted for personal
consumption rather than for business or investment purposes. Retail
credit includes loans such as housing loans, car loans, consumer
loans, loans against property (LAP), and personal loans.
• Here’s a detailed overview of each of these retail credit products:
 1. Housing Loans
Definition: Housing loans, also known as home loans, are loans provided by financial
institutions to individuals for the purchase, construction, renovation, or repair of a residential
property. These are long-term loans typically repaid over 10 to 30 years.
Key Features:
• Interest Rates: Can be fixed or floating. Fixed-rate loans have consistent monthly payments,
while floating rates vary with market conditions.
• Loan-to-Value (LTV) Ratio: Banks usually offer up to 75-90% of the property's market value as
a loan.
• Tenure: Typically long-term (up to 30 years), offering lower monthly EMIs (Equated Monthly
Installments).
• Tax Benefits: In many countries, borrowers can claim tax deductions on interest payments
and principal repayments under government schemes.
Eligibility:
• Based on the applicant's income, credit score, property valuation, and employment stability.
Challenges:
• Longer tenure means a higher total interest payout.
 2. Car Loans (Auto Loans)
Definition: Car loans are provided by banks or financial institutions to individuals for purchasing new
or used vehicles. These loans are typically short to medium-term, often repaid over 3 to 7 years.
Key Features:
• Down Payment: Borrowers are usually required to make a down payment, with the remaining cost
financed by the loan.
• Interest Rates: Vary depending on the car model (new vs. used), loan tenure, and borrower’s
creditworthiness.
• Loan-to-Value Ratio: Banks generally finance 70-90% of the car's value, with the remainder to be
paid as a down payment.
• Collateral: The vehicle itself acts as collateral, giving the bank the right to repossess the car in case
of loan default.
Eligibility:
• Based on the borrower’s income, credit history, and repayment capacity.
Challenges:
• Depreciating asset value, as cars lose value over time.
 3. Consumer Loans
Definition: Consumer loans are short-term loans provided to individuals to finance
consumer goods such as home appliances, electronics, or furniture. These are typically
small-ticket loans, with a repayment period of 1 to 5 years.
Key Features:
• Purpose: Financing the purchase of consumer durables like TVs, refrigerators, washing
machines, etc.
• Unsecured: Most consumer loans are unsecured, meaning they do not require collateral.
• EMI Schemes: Many consumer goods retailers partner with banks to offer zero-interest
or low-interest EMI schemes, making such loans attractive to consumers.
Eligibility:
• Based on income, credit score, and previous credit history.
Challenges:
• Higher interest rates compared to secured loans.
• Shorter tenure means higher monthly installments.
 4. Loan Against Property (LAP)
Definition: A loan against property (LAP) is a secured loan where the borrower pledges
residential, commercial, or industrial property as collateral. The loan can be used for a variety of
personal or business purposes, including education, medical expenses, or business expansion.
Key Features:
• Loan Amount: The loan amount is typically 50-70% of the property’s market value.
• Interest Rates: Lower than unsecured loans due to the collateral backing the loan.
• Tenure: Usually ranges from 5 to 15 years.
• Repayment Flexibility: Some banks offer flexible repayment options based on the borrower’s
needs.
Eligibility:
• Based on the market value of the property, the borrower’s income, credit score, and the
ability to repay.
Challenges:
• Risk of losing the property in case of default.
 5. Personal Loans
Definition: Personal loans are unsecured loans provided to individuals for personal needs such as
medical emergencies, weddings, vacations, or debt consolidation. These loans are not tied to a
specific purpose, giving borrowers flexibility in how they use the funds.
Key Features:
• Unsecured Nature: Personal loans do not require collateral, making them riskier for banks and
resulting in higher interest rates.
• Interest Rates: Typically higher than secured loans due to the lack of collateral. Interest rates
depend on the borrower’s credit score, income, and employment stability.
• Loan Tenure: Usually ranges from 1 to 5 years.
• Quick Disbursal: Banks often disburse personal loans quickly, making them suitable for
emergencies or immediate financial needs.
Eligibility:
• Based on credit score, income, employment status, and existing liabilities.
Challenges:
• High-interest rates compared to secured loans.
CIBIL (Credit Information Bureau (India) Limited)

• CIBIL (Credit Information Bureau (India) Limited) is India's premier

credit information company. It collects and maintains records of
individuals' and companies' credit-related activities, such as loans and
credit cards. CIBIL compiles this data to create credit reports and
CIBIL scores, which are widely used by banks, non-banking financial
companies (NBFCs), and other lenders to assess the creditworthiness
of borrowers.
 What is a CIBIL Score?
CIBIL Score is a three-digit number, ranging from 300 to 900, that reflects an
individual's creditworthiness based on their credit history. The score is generated
from the data provided by lenders on credit cards and loan accounts, including
details about repayment behavior and outstanding balances. A higher score
indicates a stronger credit profile, making it easier for the individual to secure loans
or credit cards.
Breakdown of CIBIL Scores:
• 750 – 900: Excellent; indicates good credit behavior and high chances of loan
approval.
• 700 – 749: Good; acceptable score with moderate chances of approval.
• 650 – 699: Fair; creditworthiness is average, and lenders may hesitate.
• 600 – 649: Poor; high-risk category, and obtaining credit can be challenging.
• Below 600: Very Poor; indicates a high risk of default, making it very difficult to
obtain loans.
 Factors Affecting CIBIL Score
1. Payment History (35%):
•Timely repayment of loans and credit card dues has the highest impact on
your CIBIL score.
•Late payments, defaults, or settlements lower the score.
2. Credit Utilization Ratio (30%):
•This is the percentage of available credit being used by the individual.
•High utilization (using more than 30-40% of your credit limit) negatively
impacts the score.
3. Length of Credit History (15%):
•A long history of responsible credit behavior improves the score.
•Closing old credit accounts can reduce the average age of accounts and
lower the score.
4. Type of Credit (10%):
•A healthy mix of secured loans (like home loans) and unsecured loans
(like personal loans or credit cards) positively influences the score.
•Reliance on only unsecured credit can lower the score.
5. New Credit Inquiries (10%):
•Applying for multiple loans or credit cards within a short time can
lower the score, as lenders see it as a sign of credit hunger.
•Soft inquiries (such as checking your own credit score) do not impact
the score.
How is CIBIL Score Used?
•Loan and Credit Card Approvals:
•Lenders evaluate an individual's CIBIL score as one of the primary factors in
approving or rejecting loan and credit card applications. A score of 750 and above is
considered ideal for approval.
•Interest Rates:
•Individuals with higher CIBIL scores are often offered better interest rates on loans
as they are deemed less risky.
•Lower scores may result in higher interest rates or loan rejections.
•Credit Limit Decisions:
•Banks and credit card issuers use the CIBIL score to determine how much credit to
extend to borrowers. Higher scores often result in higher credit limits.
•Loan Processing Time:
•Borrowers with high CIBIL scores can experience faster loan processing and
disbursement due to their perceived creditworthiness.
 CIBIL Report
• CIBIL Report is a comprehensive document that includes an individual’s credit
history and other credit-related information. It is used by lenders to assess a
borrower's creditworthiness before approving any credit or loans. The report
includes the following components:
1.Personal Information: Name, address, PAN, date of birth, etc.
2.Credit Score: The three-digit CIBIL score.
3.Employment Information: Income details as reported by the borrower.
4.Credit Summary: Overview of active and closed credit accounts (loans, credit
cards).
5.Account Details: Details of individual loans and credit card accounts, including
repayment history, outstanding balances, and credit limits.
6.Inquiry Information: List of inquiries made by lenders on your report when you
applied for credit.
 How to Improve Your CIBIL Score
1. Timely Payments:
•Make sure to pay all loan EMIs and credit card bills on time, as delayed
payments have a significant negative impact on your CIBIL score.
2. Maintain a Low Credit Utilization Ratio:
•Keep your credit card utilization below 30% of the available credit limit to avoid
a drop in your score.
3. Limit Credit Inquiries:
•Avoid making frequent loan or credit card applications. Multiple inquiries within
a short time can hurt your score.
4. Maintain a Good Mix of Credit:
•Try to maintain a healthy mix of secured loans (home loans, auto loans) and
unsecured loans (personal loans, credit cards) to boost your credit score.
5. Regularly Check Your CIBIL Report:
•Check your CIBIL report regularly for errors or discrepancies.
Correcting these errors promptly can improve your credit score.
6. Avoid Closing Old Accounts:
•Retain old credit accounts with good repayment histories, as they
improve the average length of your credit history, which positively
impacts your score.
 Importance of CIBIL Score for
Borrowers
1. Access to Loans:
•A good CIBIL score is crucial for gaining access to personal loans, car loans, home
loans, and other financial products. It reflects your financial discipline and helps
lenders decide whether to offer you credit.
2. Lower Interest Rates:
•Individuals with higher CIBIL scores are considered low-risk borrowers and can
benefit from lower interest rates on loans and credit cards.
3. Higher Credit Limits:
•A high CIBIL score can result in lenders offering higher credit limits on credit cards
and loans, allowing more flexibility in managing finances.
4. Faster Approvals:
•A high credit score can speed up the loan approval process, as it reassures
lenders of your reliability in repaying borrowed funds.
 Overview of International Banking
• International banking refers to banking operations that occur across national borders. It
involves financial institutions providing services to individuals, businesses, and
governments in different countries, facilitating international trade, investment, and
global economic integration.
Types of International Banking Services:
• Foreign Currency Exchange: Banks facilitate currency exchange for international trade
and travel.
• International Payments and Transfers: Handling cross-border transactions, including
remittances, wire transfers, and SWIFT payments.
• Trade Finance: Supporting international trade by offering letters of credit, export
financing, and guarantees to ensure smooth trade flows.
• Foreign Investment Banking: Providing advisory services and capital for international
mergers, acquisitions, and investments.
• Correspondent Banking: Relationships between banks in different countries to provide
Key Players in International Banking:
• Global Banks: Large multinational banks like HSBC, JPMorgan Chase, Citi, and
Barclays provide international banking services across multiple countries.
• Central Banks: Regulate the flow of currency, manage exchange rates, and
oversee international reserves to maintain stability in the global economy.
• Multilateral Institutions: The World Bank, International Monetary Fund (IMF),
and regional development banks provide funding and support to countries for
development projects.
Benefits of International Banking:
• Facilitating Global Trade and Investment: International banking supports the flow
of goods, services, and capital across borders, boosting global economic growth.
• Diversification: Banks can diversify risks by operating in multiple markets,
spreading their exposure to economic downturns.
• Access to Global Capital: International banking enables businesses and
governments to access financing from global sources, allowing for greater
opportunities for expansion.
Challenges in International Banking:
• Regulatory Differences: Each country has its own banking regulations, making
compliance complex. International banks must navigate varying legal and regulatory
frameworks.
• Currency Risk: Fluctuations in exchange rates can affect the profitability of
international transactions and investments.
• Political and Economic Risks: Geopolitical instability, economic sanctions, and inflation
in different countries can impact the operations of international banks.
• AML and KYC Compliance: International banks face stricter anti-money laundering
(AML) and Know Your Customer (KYC) regulations to prevent illicit activities across
borders.
Role of Technology in International Banking:
• Digital Platforms: Technology allows international banks to provide online and mobile
banking services, making global transactions easier and more secure.
• Blockchain and Cryptocurrencies: These technologies are revolutionizing cross-border
payments by reducing costs and increasing the speed of transactions.
Global Regulatory Framework:
• Basel III: An international regulatory framework that strengthens the
regulation, supervision, and risk management of banks to ensure stability
in the global financial system.
• FATF (Financial Action Task Force): Sets global standards for combating
money laundering and terrorist financing, with a focus on maintaining the
integrity of the international financial system.
Export and Import Financing
• Export and import financing refers to the financial services and instruments
provided to facilitate international trade by supporting exporters and
importers in their transactions. This type of financing ensures that both
parties involved in a cross-border trade transaction can manage their cash
flows effectively while mitigating risks such as non-payment or delivery delays.
• Key Instruments of Export Financing:
Export financing helps exporters get paid for their goods or services while
reducing the risks associated with international trade.
• Pre-Shipment Financing:
Exporters often require working capital to produce goods for export. Pre-
shipment finance allows exporters to receive funds in advance to cover raw
materials, labor, and production costs before shipping goods. Example:
Packing credit (a short-term loan given to an exporter before the goods are
shipped).
•Post-Shipment Financing:
After goods are shipped, exporters may need immediate funds rather than waiting
for the buyer to pay. Post-shipment financing provides payment after the goods are
dispatched but before the buyer settles the invoice. Example: Export bills
discounting (the bank provides the exporter with funds by discounting the bill of
exchange).

•Letter of Credit (LC):

A letter of credit is a guarantee provided by the importer's bank to the exporter that
payment will be made upon meeting certain conditions (such as delivering the
goods or services as per the agreement). This is a widely used instrument in export
financing to reduce payment risk for exporters. Example: An irrevocable LC ensures
that the exporter will receive payment, provided they fulfill the terms of the
agreement.
•Export Credit Insurance:
Exporters can take out export credit insurance to protect themselves
against the risk of non-payment due to commercial or political reasons.
This insurance covers losses if the importer defaults or if the exporting
country faces political instability. Example: Export Credit Guarantee
Corporation (ECGC) in India provides insurance to exporters against the
risk of non-payment.

•Forfaiting:
Forfaiting allows exporters to sell their long-term receivables (such as
promissory notes or bills of exchange) to a forfaiter at a discount. This
provides the exporter with immediate cash while transferring the risk of
default to the forfaiter. Example: A company exporting heavy machinery
may use forfaiting for a large, long-term transaction.
Key Instruments of Import Financing
• Import financing helps importers purchase goods or services from foreign
suppliers while ensuring that they can manage their cash flow effectively
and meet their obligations.
• Import Letters of Credit (LC):
This is a financial instrument provided by the importer’s bank to guarantee
payment to the exporter, provided the conditions specified in the letter of
credit are fulfilled. It provides security to both parties involved. Example: An
importer might use an LC to ensure payment to the exporter only when the
goods are delivered as specified.
• Bank Guarantees:
A bank guarantee is a promise made by a bank on behalf of the importer,
ensuring that the exporter will receive payment in case the importer
defaults. It’s used to provide payment assurance to exporters. Example: A
bank guarantee may be used when an importer negotiates payment terms
• Trade Credit:
Trade credit refers to an arrangement where the exporter allows the importer to pay
for the goods after they have been delivered. It’s a short-term financing option where
the importer can receive goods on credit and make the payment within an agreed-
upon period. Example: An importer may have 30, 60, or 90 days to pay for goods after
delivery under trade credit terms.
• Supplier’s Credit:
Supplier's credit is a financing arrangement in which the exporter offers extended
payment terms to the importer. This allows the importer to purchase goods without
needing immediate cash flow. Example: A manufacturer in India importing machinery
from Germany may negotiate to pay for the goods over a 12-month period.
• Bill of Exchange (Documentary Bill):
A bill of exchange is a written order used by exporters to request payment from the
importer. When the goods are shipped, the bill of exchange is sent to the importer’s
bank, which collects payment on behalf of the exporter. Example: Documents Against
Payment (D/P) where the importer must pay the bill to receive the shipping
documents.
Types of Export and Import Financing
Providers
• Banks:
Commercial banks are the primary providers of export and import
financing, offering instruments like letters of credit, loans, and trade
finance facilities.
• Export Credit Agencies (ECAs):
Government agencies such as the Export Credit Guarantee Corporation
(ECGC) in India or Export-Import Bank of the United States (EXIM Bank)
provide financial products like export credit insurance, loans, and
guarantees to promote export activities.
• Factoring and Forfaiting Companies:
These companies specialize in buying receivables (invoices) at a discount to
provide exporters with immediate liquidity.
Risks in Export and Import Financing
•Currency Risk:
Exchange rate fluctuations can affect the value of payments made or
received in foreign currency. Hedging instruments like forward contracts
or currency swaps can mitigate this risk.
•Credit Risk:
There is always a risk that the buyer may default on payment, leaving the
exporter exposed. Instruments like export credit insurance and letters of
credit help mitigate this risk.
•Political Risk:
Political instability in the importing or exporting country can lead to
disruptions in payment or delivery. Export credit agencies often provide
coverage against such risks.
Benefits of Export and Import
Financing
•Cash Flow Management:
Financing allows businesses to manage their cash flows effectively by
providing funds when they are needed, either before or after shipment.
•Risk Mitigation:
Financing instruments like letters of credit and export insurance reduce
the risks associated with international trade, including non-payment,
political instability, and fluctuating exchange rates.
•Access to Global Markets:
Export and import financing facilitates international trade by allowing
companies to explore global markets and expand their operations
beyond domestic boundaries.
 Risk Management in Banking
• Risk management in banking is a multifaceted process that involves identifying,
analyzing, and controlling the various risks banks face in their operations. Banks
operate in a dynamic environment, where they encounter various types of risks
that can threaten their stability and profitability.
• Key Risks in Banking:
1.Credit Risk: The potential that borrowers will fail to meet their obligations. Banks
manage this through credit scoring, lending limits, and loan portfolio
diversification.
2.Market Risk: Fluctuations in market prices (interest rates, foreign exchange rates,
etc.) that can impact a bank's financial standing. Market risk is mitigated through
hedging and setting position limits.
3.Liquidity Risk: The risk that a bank will not have sufficient liquid assets to meet its
short-term liabilities. This is managed through liquidity ratios and holding a
•Operational Risk: The risk of loss due to inadequate or failed internal
processes, systems, or external events. Strong internal controls and
governance structures help mitigate operational risk.
•Regulatory/Compliance Risk: The risk of non-compliance with
regulations, which can lead to fines, penalties, or legal issues.
Ensuring adherence to the Basel III framework, for example, helps
mitigate these risks.
•Reputational Risk: A loss of trust due to poor customer service,
scandals, or regulatory fines. This is harder to quantify but essential
for maintaining a bank's credibility and trustworthiness.
Risk Management Frameworks in
Banking
• Banks typically employ a structured risk management framework based on
the following elements:
A. Risk Identification
• The first step in risk management is identifying the specific risks that a bank
faces. This involves both qualitative and quantitative analysis, and involves
input from different departments (treasury, credit, operations, etc.).
• Tools Used: Risk mapping, interviews with business units, historical data
analysis, and scenario analysis.
B. Risk Measurement
• After identification, banks must measure the potential impact of each risk.
Quantitative models are commonly used to gauge exposure and the likelihood
of a particular risk materializing.
• Tools Used: Stress testing, scenario analysis, and risk modeling (e.g., Value-at-
Risk, Monte Carlo simulations, credit scoring models).
C. Risk Mitigation
• Once risks are identified and measured, banks must decide how to mitigate them.
This involves implementing controls, setting limits, and using financial instruments
like derivatives to offset risk.
• Tools Used: Hedging, insurance, diversification, and setting operational controls.
D. Risk Monitoring
• Ongoing monitoring ensures that risk controls remain effective, and helps detect
any emerging risks early on.
• Tools Used: Real-time reporting systems, Key Risk Indicators (KRIs), and regular
audits.
E. Risk Reporting
• Clear reporting lines and structures ensure that risk information is effectively
communicated to senior management and regulators. Many banks have a Chief
Risk Officer (CRO) who oversees the risk management function.
• Frameworks: Many banks follow international risk management frameworks, such
as those outlined by Basel III, which mandates banks to maintain capital buffers,
liquidity standards, and leverage ratios to manage systemic risk.
 Basel III Framework
• The Basel III framework, developed by the Basel Committee on Banking
Supervision, is a global regulatory standard that aims to strengthen banks'
risk management and resilience.
• Capital Requirements: Banks must hold a minimum of 8% of risk-weighted
assets in Tier 1 capital to absorb losses.
• Leverage Ratio: A non-risk-based leverage ratio was introduced to limit
excessive borrowing.
• Liquidity Standards: The Liquidity Coverage Ratio (LCR) ensures that banks
have enough HQLAs to survive a 30-day stressed liquidity scenario, while the
Net Stable Funding Ratio (NSFR) encourages longer-term, stable funding.
• Countercyclical Buffers: Capital buffers that can be built up during good
economic times and drawn down in bad times to absorb shocks.
 Emerging Trends in Risk
Management
A. Cybersecurity
• With the rapid digitalization of banking services, cybersecurity has emerged as one of the top
risks. Banks are vulnerable to data breaches, fraud, and cyberattacks that can lead to significant
financial losses and reputational damage.
• Mitigation: Advanced encryption, intrusion detection systems, regular audits, and incident
response teams.
B. Climate-related Financial Risks
• Environmental risks related to climate change are becoming more important. Banks are under
increasing pressure to manage the financial risks stemming from climate-related events and the
transition to a low-carbon economy.
• Mitigation: Green financing, environmental stress tests, and ESG (Environmental, Social, and
Governance) risk assessments.
C. Fintech Disruption
• Fintech innovations, such as blockchain, mobile payments, and peer-to-peer lending, introduce
both opportunities and risks. Banks must assess the operational risks and market risks associated
Asset Liability Management (ALM)
• Asset Liability Management (ALM) is a key practice in banking and
financial institutions aimed at managing risks arising from the
mismatch between assets and liabilities, particularly concerning
interest rate risk and liquidity risk. It focuses on balancing the bank’s
assets and liabilities in such a way that it optimizes profitability while
minimizing risks.
 Objectives of ALM
A. Interest Rate Risk Management
• Interest rate risk is the potential for losses due to fluctuations in interest rates, which can affect both the
income generated from assets and the cost of servicing liabilities. Banks face mismatches between the
maturities or repricing periods of their assets and liabilities (e.g., loans with long maturities and deposits
with short maturities), leading to sensitivity to interest rate changes.
• Objective: The goal is to manage the impact of changing interest rates on the bank's net interest margin
(NIM) and economic value of equity (EVE). The bank seeks to match the maturity and repricing structures of
assets and liabilities to avoid losses.
B. Liquidity Risk Management
• Liquidity risk arises when a bank cannot meet its short-term obligations because of an inability to convert
assets into cash or obtain funding. A proper ALM system ensures the bank can meet all its payment
obligations as they arise.
• Objective: ALM ensures that the bank has sufficient liquidity at all times, balancing the need for liquid assets
(to meet withdrawal demands) with the need for profitability (through long-term, less liquid investments).
C. Market Risk and Exchange Rate Risk
• Banks also face market risk from changes in asset prices and exchange rates, particularly if they hold foreign
currency-denominated assets and liabilities. ALM involves managing these risks using hedging strategies or
derivative instruments.
Key Elements of Asset Liability
Management
A. Gap Analysis
• Gap analysis measures the difference between the amounts of rate-sensitive assets and rate-
sensitive liabilities, over a specific time period, within a bank’s balance sheet.
• Rate-Sensitive Assets (RSA): Assets whose returns change as interest rates change (e.g.,
floating-rate loans, short-term securities).
• Rate-Sensitive Liabilities (RSL): Liabilities whose costs vary with interest rate changes (e.g.,
variable-rate deposits).
• Positive Gap: When RSA > RSL, the bank is asset-sensitive, meaning it benefits from rising
interest rates but is exposed to losses if rates decline.
• Negative Gap: When RSL > RSA, the bank is liability-sensitive, meaning it benefits from declining
interest rates but faces losses if rates rise.
B. Duration Analysis
• Duration measures the sensitivity of the value of assets and liabilities to changes in interest
rates. Duration analysis is used to quantify how much the value of an asset or liability will
change with a 1% change in interest rates.
C. Liquidity Gap Analysis
• This approach examines the mismatch between liquid assets and expected liabilities
over different time buckets (short, medium, and long-term). It ensures that the bank has
sufficient liquid assets to cover maturing liabilities.
• Objective: Maintain an adequate liquidity buffer to handle withdrawals and other
outflows, especially during periods of financial stress.
D. Scenario Analysis and Stress Testing
• Banks use scenario analysis to predict the impact of various hypothetical situations (e.g.,
rising interest rates, a bank run) on their balance sheets. Stress testing is a more rigorous
form of scenario analysis, where extreme but plausible events are simulated.
• Objective: Understand how the bank’s financial health and liquidity might be affected
under adverse conditions, and make adjustments accordingly.
E. Repricing Risk
• Repricing risk refers to the risk that arises from differences in the timing of rate changes
in assets and liabilities. If a bank’s liabilities reprice faster than its assets (or vice versa), it
exposes the institution to earnings volatility due to interest rate changes.
• Objective: Align the timing of rate changes in assets and liabilities to minimize exposure