project on risk management

8/6/2019 Project on Risk Management

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General Operation & RiskManagement of BMCB

ACKNOWLEDGEMENT

This is the fact that Success can never be achieved single handled. The

project work is always an outcome of team efforts. A number of people have

contributed towards making this project a success. Some have given advice,

contributed towards making this project a success. Some have given advice, while

some have given their valuable suggestions. Without the help and guidance of The

Bhuj Mercantile Co-operative Banks staff members we would have neither instigate

nor accomplished this project to such a great extent. So we are very much thankful to

all of them for their kind co-operation and their efforts that made complete this project

successfully.

We express our deep sense of gratitude and special thanks to Mr. Mahendra

Morabia (Chairman) and Mr. V. P. Shankarwala ( Branch manager ), who gave us to

grab the opportunity our talent. We extent our sincere thanks to project guides Mr.

Ravi Pamwani (Assistant Manager), Mrs.Anjali Mulchandani (Chief Officer),

Mr.Hitesh Tank (EDP Clerk), Mr. Ashok Mishra (Chief Officer), Mrs. Charanjeet

Panjriwala (Officer),Miss Sandhya Tanna (Clerical staff) of BMCB Gandhidham

branch who helped us during the course of our project and for their gracious attitude.

We would like to thank the full staff of BMCB and would admit that they were very

cooperative and willing to share information.

We take this opportunity of expressing our heartiest gratitude to Dr.

Sampada Kapse and Prof.Suresh lalwani, faculties of TIMS for their kind cooperation

and guidance for the project. We thank them for their special interest, counsel and

encouragement.

1 Tolani Institute ofManagementStudies


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EXECUTIVE SUMMARY

This study is attempted with an objective of getting knowledge regarding

risk management, policies and procedure of The Bhuj Mercantile Co-operative Bank

Ltd., Gandhidham Branch. The whole project also gives us the knowledge regarding

core banking that is operational banking with risk associated with each activity. And

analysis of activities is done to understand the risk and its measuring tools.

Risk is inherent in any walk of life in general and in financial sectors inparticular. Till recently, due to regulated environment, banks could not afford to take

risks. But of late, banks are exposed to same competition and hence are compeled to

encounter various types of financial and non-financial risks. Risks and uncertainties

form an integral part of banking which by nature entails taking risks.

Thus the basis idea behind studying and analyzing the financial terms is not

only comparing their performance but to find out the scope and importance of it.



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DECLARATION

We, Komal Lalwani and Dinky Khandor students of Tolani Institute of

Management Studies, perusing post graduate diploma in business management declare

that the summer training project report prepared by our self at BMCB is our original

work and is based on study we have undertaken during two months training at BMCB

Dinky Khandor Komal lalwani



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OBJECTIVE

As we all know without aim life is nothing; in the same way each and every

activity also requires specific objective. Following were our objectives for this

project.

To study the banking operations in detail and risk associated with it.

To obtain general information about risk management and its measuring

tools. Measures taken by bank to reduce the risk which are faced by them.

To get the deeper knowledge of the banking sector.



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METHODOLOGY

Primary data:

Personal meetings with manager constituted as our basic source of

information. This includes discussion on various topics in different department and

with concerned person.

Secondary data:

Our secondary data constituted from various websites related to risk management.

The names of the websites respectively are mentioned in the bibliography.



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[1] INTRODUCTION

[1.1] Introduction of Banking

Define: Banking

Banking regulation act of India, 1949 defines banking as financial

intermediary that accepts deposits and channels those deposits into lending activities.

Banks are a fundamental component of the financial system, and are also active player

in financial markets. The essential role of a bank is to connect those who have capital

(such as investors or depositors), with those who seek capital (such as individuals

wanting a loan, or businesses wanting to grow). Accepting ,for the purpose of lending

or investment of deposits of money from the public ,repayable on demand or

otherwise and withdrawals by cheques, drafts, and order or otherwise.

The RBI was established to organize effective control over the currency

management in the interest of country benefits and to maintain financial stability. The

power of control and supervise the cooperative bank is with the RBI. The UCB is

wedded to the social objectives with a strong sense of social purpose. It has

democratic management and predominantly a democratic character which is the

essence of co-operation.



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ABOUT BANKS

An institute providing banking service is known as a bank. This

institute continuously tries to maintain balance between profitability and

liquidity. For maintaining this balance the management of the bank must be of a

high level. The History of banking in India dates back to the early half of the

18th century. 3 Presidency Banks that were established in the country namely

the Bank of Hindustan, Bank of Madras and Bank of Bombay can also be

referred to as some of the oldest banking institutions in the country. The State

Bank of India that was earlier known as the Bank of Bengal is also one of the

oldest in the genre.

IN modern age, banks have become centres of faith of millions of

persons that is why in real life its meaning has been derived as a place of

putting faith. For expressing faith it is said proverbially, I bank on you. Such

deposits are used for lending to others and not for financing its own business of

any kind. The term lending includes both direct lending to borrowers and

indirect lending through investment in open market securities. A bank generates

a profit from the differential between what level of interest it pays for deposits

and other sources of funds, and what level of interest it charges in its lending

activities. This difference is referred to as the spread between the cost of funds

and the loan interest rate.

Banks safeguard money and valuables and provide loans, credit, and

payment services, such as checking accounts, money orders, and cashiers

checks. Banks also may offer investment and insurance products. In spite of



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these changes, banks continue to maintain and perform their primary role

accepting deposits and lending funds from these deposits.

BANKING SECTOR IN INDIA

The banking sector is a lifeline of any modern economy. It is one of the

important financial systems, which plays a vital role in the success / failure of any

economy. Banks are one of the oldest financial intermediaries in the financial system.

They play an important role in the mobilization of deposits and disbursement of credit

to various sector of the economy. The banking system is the fuel injection system

which spurs economic efficiency by mobilizing savings and allocating them to high

return investments.

The banking system reflects the economic health of the country and

efficiency of financial system, which, in turn, depends on a sound and solvent banking

system. A sound banking system efficiently deploys mobilized saving in productive

sectors and a solvent banking system ensures that the bank is capable of meeting its

obligation to the depositors.



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Types of bank

Public sector banks in India - All government owned banks fall in this variety.

Besides the RBI, SBI and its associate banks and about 20 nationalized banks. Many

of the regional rural banks that are funded by the government banks can also be

clubbed in this genre.

Private sector banks in India - A new wave in the banking industry came about

with the private sector banks in India. With policies on liberalization being

generously taken up, these private banks were established in the country that also

contributed heavily towards the growth of the economy and also offering numerous

services to its customers. Some of the most popular banks in this genre are: Axis

Bank,HDFC Bank, ICICI Bank, Kotak Mahindra Bank and SBI Commercial and

International Bank.

Cooperative banks in India - With the aim to specifically cater to the rural

population, the cooperative banks in India were set up through the country. Issues

like agricultural credit and the likes are taken care of by these banks.



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SERVICES OFFERED BY BANKS:-

Although the type of services offered by a bank depends upon the

type of bank and the country, services provided usually includes:

1. Acceptance of deposits from the public.

2. Lending out money to companies and individuals.

3. Facilitating money transfers such as online transfers and Demand drafts.4. Issuing credit card, ATMs and debit card.

5. Internet banking.

6. Storing valuables particularly in a safe deposit vault or lockers to keep

jewellery.and valuable documents of customers in safe custody.

7. Acting as trustees.

8. Acting as intermediaries for customers to buy and sell securities on their

behalf, making and receiving payments on behalf of its depositor.

9. Issues letter of credit, Bank Guarantees.

10. Issues travellers cheques for the convenience of customers.



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[Chart-1] STRUCTURE OF BANKING IN INDIA

ABOUT CO-OPERATIVE BANKS

Co-operative bank is a special form of business organization aiming

at the economic enlistment of the members and laying a great emphasis on

moral principles and human value. The cooperative bank gave a special task of

taking up the responsibility of helping the economically weaker and poor as

well as other marginal sector of the society. These banks originated in India

with enactment of the cooperative credit societys act of 1904. a new act was



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passed in 1912, which provided for the establishment of cooperative banks by

the union of primary credit societies and individuals.

The Co-operative banks have a history of 100 years. The Co-operative

movement originated in the west, but the importance that such banks have

assumed in India is rarely paralleled anywhere else in the world. Their role in

rural financing continues to be important even today, and their business in the

urban areas also has increased phenomenally in recent years mainly due to the

sharp increase in the number of primary co-operative banks.

While the co-operative banks in rural areas mainly finance agricultural

based activities including farming, cattle, milk, hatchery, personal finance etc.

along with some small scale industries and some employment driven activities,

the co-operative banks in urban areas mainly finance various categories of

people for self employment, industries, small scale units, home finance,

customer finance, personal finance etc. Some of the co-operative banks are

quite forward looking and have developed sufficient core competencies to

challenge state and private sector banks.

According to NAFCUB the total deposits & lending of Co-operative

banks in much more than Old Private Sector Banks & also the new private

Sector Banks. This exponential growth of Private Sector Banks is attributed

mainly to their much better local reach, personal interaction with customers, and

their ability to catch the nerve of the local clientele.

[1.2] Introduction of BMCB

[Table-1]The Bhuj Mercantile Cooperative Bank



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NAME THE BHUJ MERCANTILE CO-OPERATIVE BANK LTD.

CORPORATE

OFFICE

PLOT NO. 19, SECTOR NO. 9, OPP.SBI,BMCB HOUSE,

BANKING AREA GANDHIDHAM- 370 201

TYPE PUBLIC

ESTABLISHED 2001

LOCATION GANDHIDHAM

KEY PERSONS SHRI MAHENDRA MORABIA( CHAIRMAN)

SHRI (VICE CHAIRMAN)

SHRI (MANAGING DIRECTOR)

GENERAL

MANAGER

MR.. V. P. SHANKARVALA

INDUSTRY BANKING

` FINANCIAL SERVICE

WEBSITE www.bmcbonline.com

DEPOSITS Rs.2279751046.49

LOANS &

ADVANCES

Rs.1071827396.42

NET INCOME Rs.10593527.64

NO. OF

EMPLOYEES

24
http://www.bmcbonline.com/http://www.bmcbonline.com/


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Need is the origin of creation. True, The Bhuj Mercantile

Cooperative Bank Limited was registered in April 1994 and commenced

Banking Business on 15/05/1995 with Bhuj branch. The Bank has been

promoted by its Founder Chairman Shri Mahendra H. Morabia (Chartered

Accountant).

The Bhuj Mercantile Cooperative Bank comes under the control of

RBI and UCB. To maintain the working of the bank properly the first step is to

study the basic operations of the bank. The basic operations help to study

management of the bank. The main power to control the currency supply in the

economy rests with the RBI. By credit control analysis is the way to find how

the bank maintains its liquidity

BMCB VISSION STATEMENT: To maximize customers and

shareholders value continuously.

BMCBS POLICY TO SURVIVE IN COMPETITIVE BANKING

SECTOR

Prime motto ANYTIME ANYWHERE BANKING SERVICE.

BMCB is the ONLY Cooperative Bank to have DOUBLED its Deposits

from 2001 to 2003 in the aftermath of MMCB crisis.

BMCB is the FIRST Bank in India to give ANYTIME ANYWHERE

BANKING through leased line and Optical Fiber Cable interconnectivity linking ALL

EIGHT BRANCHES. The NON PERFORMING ADVANCES of the Bank are NIL for NINE YEARS

IN A ROW! This shows SOUNDNESS of the Loans and Advances APPRAISEL,

DISBURSEMENT AND RECOVERY system in the Bank.

BMCB- The only Bank in the Country providing 365 days non-stop complete

banking. It offers 24hours total banking along with Telebanking, Homebanking and

ATM services.



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BMCB believes in CUSTOMER SATISFACTION (provides the banking

product as per the requirement of the customer.

BMCB takes into consideration the SOCIAL RESPONSIBILITY (like

maintenance of amusement park, school, hospital etc).

BMCB also provides BORROWERS FRIENDLY LOAN schemes.

BMCB has also made the special DEPOSIT SCHEMES for senior citizens, NRI,

shareholder.

Every service provided by BMCB is VALUE INTENSIVE AND COST-

EFFECTIVE.

BMCB have been in the forefront in removing economic backwardness of Kutch

district by providing TIMELY, QUICK AND CONTINUOUS finance to various

sectors.

Opened up its branches at many places in Kutch. It has its eight branches spread

all over Gujarat which include:

[Table-2] Different Branches of BMCB

Sr. no Branch Opening year

1 BMCB Bhid Bazaar now

(Market Yard) Bhuj

1995

2 BMCB station road Bhuj 1997

3 BMCB hospital road Bhuj 1999

4 BMCB Anjar 2000

5 BMCB Gandhiham 2001

6 BMCB Madhapar 2001

7 BMCB Nakhatrana 2001

8 BMCB Ahmedabad 2003



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BMCB - Special Features

Online Real Time Inter Branch Connectivity.

Internet Banking.

Mobile Banking.

Tele Banking.

Home Banking.

24*7 ATMs.

Safe Deposit Vaults.

DICGC Deposit Insurance cover upto Rs. 1 lac.

Accepting NRI Deposit

ACHIEVEMENTS OF BMCB:

1. Net profit (2006-07) - Rs.5.10 crores.

2. Net profit (first 5 months 2007-08) - Rs.3.78 crores.

3. 0% NPA Award.

4. Bank with difference Award 2007.

5. Best Bank Award.

6. Rajeev Gandhi shiromani Award.

7. BMCB- The fastest growing Bank

Future planning of BMCB.

Merger & acquisition.

Installation of ATMs at various branches.

Installation of KIOSK at various branches.



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[1.3] Introduction of Risk Management

The etymology of the word Risk can be traced to the Latin word

Rescummeaning Risk at Sea or that which cuts. Risk is associated with uncertainty

and reflected by way of charge on the fundamental/basic i.e. in the case of business it

is the Capital, which is the cushion that protects the liability holders of an institution.

These risks are inter-dependent and events affecting one area of risk can have

ramifications and penetrations for a range of other categories of risks. Foremost thing

is to understand the risks run by the bank and to ensure that the risks are properly

confronted, effectively controlled and rightly managed. Each transaction that the bank

undertakes changes the risk profile of the bank. The extent of calculations that need to

be performed to understand the impact of each such risk on the transactions of the

bank makes it nearly impossible to continuously update the risk calculations. Hence,

providing real time risk information is one of the key challenges of risk management

exercise.

Till recently all the activities of banks were regulated and hence operationalenvironment was not conducive to risk taking. Better insight, sharp intuition and

longer experience were adequate to manage the limited risks; Business is the art of

extracting money from others pocket, without resorting to violence. But profiting in

business without exposing to risk is like trying to live without being born. Everyone

knows that risk taking is failure prone as otherwise it would be treated as sure taking.

Hence risk is inherent in any walk of life in general and in financial sectors in

particular. Of late, banks have grown from being a financial intermediary into a risk

intermediary at present. In the process of financial intermediation, the gap of which

becomes thinner and thinner, banks are exposed to severe competition and hence are

compelled to encounter various types of financial and non-financial risks. Risks and

uncertainties form an integral part of banking which by nature entails taking risks.



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Business grows mainly by taking risk. Greater the risk, higher the profit and

hence the business unit must strike a trade off between the two. The essential

functions of risk management are to identify measure and more importantly monitor

the profile of the bank. While Non-Performing Assets are the legacy of the past in the

present, Risk Management system is the pro-active action in the present for the future.

Managing risk is nothing but managing the change before the risk manages. While

new avenues for the bank has opened up they have brought with them new risks as

well, which the banks will have to handle and overcome.



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OPERATIONS

IN

BMCB



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Banks usually perform these two basic services:

1. Accept deposit from general public.

2. Lending loan to general public.



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[2]

DEPOSITS



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[2.1] INTRODUCTION OF DEPOSITS

Acceptance of deposits and maintenance of deposits account in the core

activity in any bank. The very basic legal interpretation of the word BANKING as

defined in the baking regulation act, 1949 means accepting deposits of money, for the

purpose of lending or investment, from the public, repayable on demand or otherwise,

and withdrawable by cheque, draft, order or otherwise. Thus, deposits are the measure

resources and mainstay of a bank and the main objective of a bank are to mobilize

adequate deposits. Various instruction, guidelines, etc. issued from time to time

primary co-operative banks in regard to opening and conduct/monitoring of deposit

accounts.

Accepting deposit from general public

Banks provide this facility to their customer so that the customers can keep

their money in safe place. Banks also provide benefits to their customer in the form of

interest on deposit, which is based on the type of deposit which varies in period.

Deposits are of three types:

Demand deposit:

It is one type of current deposit. The customer can withdraw the

amount from current deposit at any time. In this type of deposit, the bank does

not pay any interest. But infact charges some amount from the customer.

Saving deposit:



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In this type of deposit, Bank pays certain percentage of interest to the

customer and also places certain restrictions on the withdrawals.

Fixed deposit:

In this type of deposit, period is fixed and a person can withdraw the

amount on at the expiry of specific period. Interest is also paid to customers

which vary from time to time.

PRODUCTS OF BMCB

Saving Accounts:

Minimum Balance: Rs. 1000

Ordinary saving account

Current Accounts:

Ordinary Current Account.

Minimum Balance: Rs. 2500

ADVANTAGE Current Account.

VISHESH Current Account: If minimum balance of Rs.1 lakh is there in the

account then no extra charges or commission on DD and for clearing is

taken

Fixed Deposit:

FD Simple (less than 18 months)

FD Quarterly

FD Double ( Period 84 months)

FD Accumulate (Above 18 months)In FD customer receive compound

interest.

FD Recurring: In FD Recurring, customer deposit the fixed amount.



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[Table-3] Fixed Deposits Interest Rate

Period Interest Rate

15 days to 30 days 3.5%



]181 days to 365 days 7.0%

366 days to 5 years 8.0%

For

Shareholder,Sr.Citizen & Trust

0.5%more

Expenses on activities pertaining to deposits accounts include:

Cost of opening an account including not only the cost of making

book entries, but verification of your antecedents.

Cost of transaction of deposit.

Cost of transaction of withdrawals.

Cost of transacting an inquiry.

Cost of processing cheques and other banking tools discussed earlier.

Cost of maintaining accounts.

Cost of making passbook or receipts.

Cost of closing account.

Cash Credit Accounts:

Ordinary Cash Credit Account

Interest charges on the basis of days



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Overdraft Account

When a customer maintain a current account is allowed by the bank to draw

more than the credit balance in the current account or in a separate loan account called

as overdraft account and such facilities is called an overdraft facility.

Overdraft is a running account and hence debits and credits are freely

allowed. Interest is applied on daily product basis and debited to the account on

monthly basis. Overdrafts are generally against the government securities, National

Saving Certificates, LIC policies and banks own deposits etc.

DOCUMENTS REQUIRED

1. Sanctioned Letter

2. FDR Duly Discharged

3. Letter of Appropriation

4. D.P. Note

5. Continuing Security Letter

6. Letter of lien and set off

FACILITIES PROVIDED

ATM facility is provided

In Outward Billing Collection commission is not charged by the customers.

Pass book and cheque book facility is provided.

Free Demand Draft facility up to opening balance for Gujarat / Mumbai

If pass book is not issued then bank statement is given once a month without

any charges taken.

Nomination facility is provided

Tele banking facility is provided

Net banking facility is provided



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Insurance up to Rs.100000

No charges on cash transaction

No limits for cash withdrawal

No switching charges

[Table-4] FINANCIAL FIGURES (In Rs.)

Sr.

No. Particular 31/03/2006 31/03/2007 31/03/2008 31/03/2009 31/03/2010

1 Deposits 1141093115 1426181431 1585778581 1900101781.51 2279271046.49

2 Advances 732891970 852798340 744051401 844026992.69 1071827396.19

3 Net Profit 24064462 32018382 22035178 61376055.70 10593527.64

4 Reserves 201614920 227943138 280044401 314386327.96 352871043.23



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[Chart -2]Deposits

[Chart-3] Advances

[Chart-4] Net Profit

[Chart-5] Reserves

POINTS TO BE TAKEN IN TO CONSIDERATION WHILE

RECEIVING THE CHEQUE



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Date on the cheque should not be post dated.

Name and amount on the cheque and voucher should be same.

Place should be kept in mind while receiving the cheque.

On counter & voucher, the name of the account, account number, dates etc.

Amount in words and figures should be same.

Validity of cheque is up to 6 months.

Cheques should be account payee only.

Vouchers should be filled according to their types of accounts.

[Table-5] Different Voucher for Different Types of Account

ACCOUNT TYPE COLOR

SAVING ACCOUNT WHITE WITH GREEN

CURRENT ACCOUNT WHITE WITH BLUE

LOAN YELLOW WITH BOTTLE GREEN

RECURRING ACCOUN/ FIXED

DEPOSIT

WHITE WITH LIGHT PINK

DEMAND DRAFT WHITE WITH DARK PINK

FRANKING WHITE WITH BROWN

CASH CREDIT/ OVERDRAFT WHITE WITH PURPLE

TELEPHONIC TRANFER CREAM WITH BLACK



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[2.2] TRANSFER

In Transfer, both the parties have accounts in the bank, and transfer of money

from one account to another is done.

PROCESS OF TRANSFER

Cheques are received from customer of BMCB during whole day.

Voucher is filled according to the types of accounts, voucher includes

details like account name, account number, date, drawee bank, cheque

number, customer name, amount in figures & words, customers contactnumber.

Transfer stamp is stamped on voucher and cheque.

Stamped counter is returned to customer and rest is sent for entry.

Before passing the entry, balance is checked.

If balance is sufficient then entry is passed in which amount is debited and

credited to accounts of account holders.

If there is insufficient then BMCB debited return charges, Rs.50/- from

cheque issuer and Rs.30/- from cheque receiver.

At the time of passing the entry scroll number is written on the cheque and

voucher.

After passing of entry authorization is done by high grade of officers with

the help of scroll number.



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[2.3]CLEARING

In clearing, the cheques received from other banks by the account holder of

the bank and are deposited in their accounts after the cheques are cleared.

PROCESS OF CLEARING

Cheques are received from the customers of different banks up to specified

time.

Cheques of 37 banks are received in clearing.

Voucher is filled according to the types of accounts, voucher includes

details like account name, account number, date, drawee bank, cheque

number, customer name, amount in figures & words, customers contact

number.

Clearing stamp is stamped on voucher and cheque.

Stamped counter is returned to customer and rest is sent for entry.

Entry includes account number, parties name, amount, bank code, bank

name, branch code, cheque number. Scroll number is written on the

voucher.

After passing of entry authorization is done by high grade of officers with

the help of scroll number.

Bank wise statement is printed and is attached with cheques of specified

banks.

Instruments are counted according to bank wise statement.

Daily there are two clearings in clearing house.

i. First at 1:00pm for exchanging of cheques.

ii. Second at 4:00pm for exchanging of returned cheques.

At 1:00pm one employee of BMCB takes all the cheques and a floppy disk

to clearing house. In Gandhidham clearing house is at State Bank of India.

At clearing house all 37 banks come to exchange their cheques with other

banks.



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Statement is received at clearing house by S.B.I. including all information

about exchanging of cheques.

In the case of GL/PL vouchers, ensure that the relevant particulars of

transaction are entered in the computer. Proper GL/PL head is

Debited/Credited. Such vouchers bear signatures of TWO authorized

officials of which one should be of branch head.



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[Table-6] THE BHUJ MERCANTILE CO-OP BANK

CLEARING HOUSE BALANCE REGISTEROf 27th

June,2010



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Sr.No. Name of the banks To Pay To Receive

Cheques Amount (Rs.) cheques Amount (Rs.)

1 STATE BANK OF INDIA 26 4638172 22 1229553

2 BANK OF BARODA 18 309239 21 4299552

3 BANK OF INDIA 11 1601078 22 1141383

4 CENTRAL BANK OF INDIA 2 22320 2 180615

5 STATE BANK OF SAURASHTRA

6 THE KUTCH DIST. CENT. 1 19800

7 DENA BANK 4 183465 7 49525

8 UCO BANK 5 600788 2 20370

9 GANDHIDHAM CO-OP BANK 22 356225 29 379687

10 INDIAN OVERSEAS BANK 5 93364 12 612707

11 SYNDICATE BANK 2 27475 1 14900

12 PUNJAB NATIONAL BANK 4 2124615 2 16122

13 STATE BANK OF INDORE 4 99403 4 205852

14 GANDHIDHAM MER.CO-OP.BANK 24 955968 36 1585194

15 DENA GUJARAT GRAMIN BANK 3 25688 3 229125

16 STATE BANK OF BIKANER &

JAIPUR

2 377070 3 344739

17 CORPORATION BANK 8 595750 37 936905

18 ORIENTAL BANK OF COMM. 2 51660 2 175000

19 MEHSANA URBAN CO OP BANK 3 64429 14 117162

20 UNION BANK OF INDIA 2 93189

21 LAXMI VILAS BANK 1 11000

23 HDFC BANK LTD 98 16584440 43 2047505

24 UTI BANK 18 911976 40 1615805.6

25 VIJYA BANK 6 61966 2 16300

26 ICICI BANK LTD 19 1706834 9 213296

27 INDUSIND BANK 12 1143469 12 304857

CENTURION BANK


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IN WHAT WAYS CHEQUE CAN BE RETURNED

Effects not yet cleared, please present again tomorrow

Not arranged for.

Drawers signature required.

Drawers joint signature required.

Refer to drawer.

Drawers signature differs.

Endorsements required banks guarantee.

Alteration requires full signatures of drawer.

Cheque is post-dated.

Cheque is out of date.

Amount in words and figures differs.

Crossed cheque is out of date.

Amount in words and figures differs.

Crossed cheque must be presented through a bank.

Advice not received, please present again.

Payment stopped by the drawer.

Payees separate discharge to the bank required.

Date incomplete.

Insufficient funds.

Account closed.

Today clearing stamp required.

Not drawn on us.

Exceeds arrangement

Fund expected, please present again tomorrow.

Cheque is incomplete.

Cheques are mutilated.

Thumb impression authentication required.

Account is frozen.

Cheque is crossed by two banks



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[Table-6] DIFFERENCE BETWEEN TRANSFER AND CLEARING

POINT OF

DIFFERENCE

TRANSFER CLEARING

DEFINITION In Transfer, both the parties

have accounts in the bank, and

transfer of money from one

account to another is done.

In clearing, the cheques

received from other banks

by the account holders of

the bank and are deposited

in their accounts after the

cheques are cleared.

STAMPING Red colour stamp is used for

transfer cheques.

Green colour stamp is used

for clearing cheques.



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TIME

DURATION

It takes maximum half an

hour.

It takes approximately one

day.

SERVICE Service is provided for whole

day.

From Monday to Friday

cheques are received up to

12:30am and on Saturday

cheques are received up to

11:00am

WITHDRAW In transfer, money can be

withdrawn within half an hour.

In clearing, money can be

withdrawn after one day.

RETURNED

CHARGES

Rs.25/- is charged if the

cheque is returned.

Rs.50/- is charged if the

cheque is returned.

DATE Same date cheques are

received.

Next date cheques are

received after 12:30/11:00.

STAMPS

INCLUDED

Banks name, date and transfer. Bank name, date, and

received payment through

clearing house payeesaccount credited.

[2.4] INWARD BILLS COLLECTION

In IBC, the cheques are received from different banks all over India other then local

cities.

Once IBC is received, bank checks whether it is BMCB cheque or it is local.

Than it is entered in the IBC register manually including all details like, date,

amount, banks name, in favour of, cheque number.

If it is BMCBs cheque, then it is sent for transfer or if it is local (other banks)

cheques then it is sent for clearing.

After that same process is followed of transfer and clearing.

Payment for IBC is made in three ways:



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i. Gujarat State Co-operative advised.

ii. Account payees.

iii. Demand Draft.

If cheque is of BMCB then, balance is checked, and if cheques are of other

banks then send for clearing.

1. If there is sufficient balance then,

i. GUJARAT STATE CO-OPERATIVE:

If cheque is of co-operative bank and having tie-up with Gujarat state

co-operative (mutual arrangement scheme code) then advised is sent to

Gujarat state co-operative and no commission and postage is charged.

ii. ACCOUNT PAYEE:

The bank sending IBC having account in BMCB then bank transfers

amount to their account. Bank sends a statement showing all the

details.

iii. DEMAND DRAFT:

If bank does not having tie-up with GSC and not even having account

then bank issues demand draft in favor of opposite bank. For that bank

takes commission of Rs.1.25/1000 and Rs.35/- for postage charges.

1. If there is insufficient balance then,

i. Cheque is sent back with written memo.

ii. Return charges are taken Rs.50/-

iii. It is sent through value payable post.



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After this procedure, entry is passed in the IBC register and then IBC send

back through post.

[2.5] OUTWARD BILLS COLLECTION

Once cheques are received and if it is not local then OBC stamped is on the

cheque.

Entries are made in the computer, details like: banks name, city name, banks

code, commission charges, postage charges, document number, document

amount etc.

After entries are made then endorsement stamps are stamped behind the

cheque.



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Authorization of cheques is done by officer.

There are no commission charges and up to Rs.1000/- no postage charges are

taken in saving accounts and above that Rs.35/- are taken.

The BMCB is having tie up with HDFC, State bank of Patiala etc.

OBC number is on the cheque and on the voucher so that whenever customer

needs any information then with the help of that number information is

provided.

According to the tie-up with banks, cheques and statement are sent.

If cheques are passed then payments are made in 3 ways:

i. Advised

ii. Account payee

iii. Demand Draft.

i. GUJARAT STATE CO-OPERATIVE:

If cheque is of co-operative bank and having tie-up with Gujarat state

co-operative (mutual arrangement scheme code) then advised is

received from Gujarat state co-operative and no commission and

postage is charged.

ii. ACCOUNT PAYEE:

The bank receiving OBC having BMCB account in there bank then

bank transfers amount to BMCB account. Bank sends a statement

showing all the details.

iii. DEMAND DRAFT:

If bank does not having tie-up with GSC and not even having account

then bank issues demand draft in favour of BMCB bank.

If cheques are not cleared then return charges are taken according to the banks.

BMCB takes Rs.50/- as return charges from their customers.

When OBC is realized, net amount (after commission and postage charges) is

credited to customers account.



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[2.6] BILLTY

It is one type of service provided to its customers, it is mainly for safety

purpose, and bank acts as a mediator between two parties. For that it earns

commission. For their safety, supplier takes the decision for keeping the bank.

As per buyers convenience, they decide the bank.

Commission is charged on invoice amount Rs.1/1000.

As per buyers order supplier sends the goods in transport and invoice, lorry

number, etc. is sent to bank.

Invoice including instructions framed by supplier relating to delivery of goods.

I. Collect all charges from drawee- like, commission charges,

transportation charges, courier etc.

II. Discount is allowed if payment is made within stipulated time.

III. Penalty is charged from buyer if payment is not made within

stipulated time.

IV. Ways of payment are specified.

Bank informs the buyer about the Billty received.

When buyer comes to make the payment then billty is realized.

After payment is made lorry receipt is given to them.

As per suppliers instruction bank sends the payment.

If payment is not made, then billty is send back to supplier.

[3.] DEMAND DRAFT

It is a service provided to the customer by the bank. It is a safe instrument for

making payment. If one company does not have trust on their opposite party then they

to issue demand draft. Authorization is must in D.D. for which bank follows scale-1&

scale-2.In scale-1 there are 3 managers and in scale-2 there are 3officers.1manager

from scale-1 & 1 officer from scale-2 are required for authorization.



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Demand draft is issued by 2 ways:

i) CASH

ii) TRANSFER

i) CASH:

Firstly, Pink colour voucher is filled by a customer, all details are included in

that voucher e.g. in favour of, customer details, amount with commission, place, date

etc. then cash is paid at payment counter. And demand draft is issued as per voucher.

For that bank charges commission from the customer. DEMAND DRAFT in cash is

made up to Rs.50000/- including commission above that cash is not accepted.

Charges

For all parties and all centers bank charge Rs.3.00/1000

Minimum charges are taken by bank Rs.30/-

i) TRANSFER:

Firstly, Cream colored voucher is filled by a customer, all details are

included in that voucher e.g. in favor of, customer details, amount with commission,

place, date etc. cheque of yourself is attached with the voucher. Cheques are stamped

and send for further processing. And demand draft is issued as per voucher. For that

bank charges commission from the customer.



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BMCB have tie up with HDFC BANK, STATE BANK OF PATIALA

(NATIONALISE D.D.),ICICI BANK,GSC, ETC.

Bank mainly prefers to make demand draft of HDFC Bank, if nothing is

specified by the customer. If branch of HDFC bank is not located in that area

then other tie up banks D.D. is made.

[Table -7] D.D Commission

Sr.No. Mode of issue Ordinary CA/SB with

minimum balanceRs.2500/Rs.1000 & OD

A/c

Minimum commission

1 On BMCB

Branches

Re.1 per RS. 1000 Rs.25

2 On other center Rs.2per RS.1000 Rs.25

GUJARAT STATE CO-OPERATIVE

If there is no bank facility available in village area then D.D. of GSC bank is issued

by BMCB.

NATIONALIZED DEMAND DRAFT

Nationalized D.D. are issued when customers/parties does not have trust on

private & co-operative banks. As per the requirement of the customer bank issue D.D.



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of nationalized bank. The bank issue the D.D. of STATE BANK OF PATIALA as it

have tie up.

Charges taken by BMCB Rs.3/Rs.1000

Minimum charges Rs. 30/-

BMCM pay commission to state bank of Patiala is Rs.1.25/Rs.1000

Rs.3-Rs.1.25/Rs.1000 = Rs.1.75/1000

For that BMCB earns of 17.5% commission on issuance of D.D.

In what all ways D.D. can be cancelled

Stop payment made by the issuer

Lost or torn

Above validity (valid for 6 months)

Mistake in opposite partys name.

For cancellation of D.D. bank takes charges Rs.50/-.

[3.1] PAY ORDER



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Pay order is also known as BANKERS CHEQUE. It is issued for local

parties (GANDHIDHAM & KANDLA). For authorization, it is not compulsory for

the managers to authorize the pay order two officers can do the authorization.

BMCB take charges as same as demand draft from the customer.



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[4.] CASH DEPARTMENT

Cash section of the bank is the custodian of the cash. It has to keep the cash

of the bank safe and at the time give prompt service to the customers without delay.

To meet day to day obligations the bank has to maintain certain amount of cash on

hand.

The board may fix up a cash retention limit for every branch taking into

consideration the turnover of the cash for that branch. The retention limit will be fixed

for all types of cash including cash on counter and reserve cash in safe etc. Limit of

the cash on closing is fixed by the bank i.e. Rs. 2.5crore at BMCB.



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[Table-8] DAILY REGISTER OF CASH TAKEN AND KEPT IN

SAFEOPENING BALANCE

(+) RECEIVED TODAY

TOTAL

(-) PAID TODAY

CLOSING BALANCE

PARTICULAR OF COINS PARTICULAR OF CURRENCY

NO.

OF

COINS

DENOMINATIO

N

AMOUN

T

NO.

OF

NOTE

S

DENOMINATIO

N

AMOUN

T

500 np Rs. 1000

200 np Rs. 500

100 np Rs. 100

50 np Rs. 50

25 np Rs 20

20 np Rs. 10

10 np Rs. 5

Rs. 2

Rs. 1

COINS

TOTAL

CLOSING BALANCE IN WORDS RS.



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Firstly opening balance is written in the daily register of cash taken and kept

in safe. After that the total cash received during the day is added in the opening

balance, and the payment made during the day is deducted in the total of opening and

cash received. Finally closing balance is calculated, which is the opening balance

[4.1] RECEIPT OF CASH

Receipt of cash is the most important function of the cash department in the

bank. In BMCB there is one counters of cash receipt.

The cash is received through the pay-in-slips filled in by the customer on

different accounts.

Pay-in-slip includes of account name, date, depositors name, amount in words

and figures, number of notes and coins, account number, contact number.

Cash can be received up to Rs.99000/- without pan card and above that pan

card is needed.

Points must be kept in mind while receiving the cash:

1) Once the cash is received check it twice.

2) Physical notes and notes written in voucher should be tallied.

3) Count manually and by machine.

4) Money should be deposited correctly in the said account.

After entry is passed, the amount is deposited at customers account and

received voucher is stamped and counter foil is returned back to customer.

Then the slip is submitted to the higher official where it is verified that

whether the amount is credited to right persons account with right amount. The

cahier and the higher official should sign the slip.



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[4.2] PAYMENT OF CASH

Payment of cash is the most important function of the cash department in the

bank.

In BMCB there is one counters of cash payment.

The cash is given according to the daily requirements of the counter.

Before giving the cash it is written in the cash register and cash officer

distributes it among the cashier.

After that cashier passes the opening entry in the Book and starts the

payments.

Payment is made by two ways:

1. Withdrawal form

2. Cheque

If account holder does not have cheque book then with the help of withdrawal

form they can withdraw the cash.

If money is withdrawn with the help of cheque then, cheque should be in the

account holders name or it should of SELF.

Firstly balance is checked, if balance is sufficient then entry is passed.

Scroll number and transaction is written on the cheque or withdrawal form

while passing the entry.

Authorization is done by high grade officer. And for these both officers are

responsible.

In authorization, signature, balance, date, cheque number, is checked with the

scroll number.



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[5.] SAFE DEPOSIT VAULT

BMCB provides dedicated services to safe holders for their valuables.

BMCB lead in the local banking industry with the highest number of lockers.

Customer has to deposit the amount as locker deposit for utilizing this facility, which

is refundable. The bank does not charge any other rent except deposit. Bank provides

four types of lockers.

[Table-9]TYPES OF LOCKERS:

LOCKER TYPE SECURITY DEPOSIT

A RS. 7000/-

B RS. 12000/-

C RS. 15000/-

D RS. 50000/-

DOCUMENTS REQUIRED

Customers account number if not then it is opened

Passport size photograph

Residence proof

Photo id-



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1) Election card

2) Pan card

3) Licence

UNIQUE FEATURES

One time securing deposit instead of yearly rentals.

Four categories of safe deposit vaults available.

Providing a separate floor for operators.

Quite specious safe room.

Offers maximum time for in local area.

There is no limit of members opening the locker.

Master key is kept with the bank and locker holders key is given to the

operator. Locker is not open until both the keys are inserted together. There is no

duplicate key of the locker with the bank. So, in case of keys are misplaced or lost by

the customers then locker is broken and all the cost is bear by the locker holder. The

expense for breaking the locker is RS.3500/-. Locker can be sealed when there is income tax

inquiry.

To verify the photo, signature, locker number, the locker card is maintained

by the bank for daily check during the locker is operated.



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PROCESS FOR OPERATING LOCKER

Firstly, one register is maintained consisting of sr. number, locker number,

time, and signature.

When customer comes to operate locker he has to write all the details in the

register.

Then signature, photo, locker number is verified by the operator.

After that operators key and locker holders key is inserted in the locker

Finally locker is opened.

Locker surrender charges taken by BMCB is Rs.250/-.



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[6.] SHARE DEPARTMENT

Co-operative banks can obtain their capital by issuing shares. Even BMCB

has issued shares to obtain the capital. Every year bank issues right shares to the share

holders only from the authorized capital. Bank does not allow people other than its

share holders, so it issues right shares only.

Membership fee is Rs.10/share. Shares can be transferred in blood relation

only. Transfer is not allowed to outsiders. There is no Transfer fee. Shares can

be sold to the shareholders only. Shares are sold on market value.

Bank pays dividend up to 15%. Gifts are also given to its share holders. Paid

up capital for 31/03/2010 was RS.4,35,83,100 and authorized capital is RS.

5,00,00,000.

According to R.B.I, co-operative banks can pay maximum 15% dividend to its

share holders. Since last three years BMCB has maintained this percentage.

TRANSFER OF SHARES



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Shares of BMCB can be transferred in three ways:

i) Member to Member Transfer

ii) Transfer in blood relation

iii) Transfer in death case

i) Member to Member Transfer

A) Already a member

In case of partly transfer of shares; share holder can transfer their shares only to share

holders.

B) Not a member

Share holder can transfer their shares to a person who is not a share holder in

that case, his membership gets cancelled and a new member comes in to

existence.

ii) Transfer in blood relation

Fully transfer of shares is done only in blood relation. The person transfers

their shares then their membership is cancelled and new member gets the

membership.

iii) Transfer in death case

In case of the death of a share holder then their all the shares are transferred

to their nominee. And in case there is no nominee then shares are transferred to any of

their family members.



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NOTE Transfer of shares is done after one year.

Why people wish to be share holder of the BMCB

i) Loan:

It is a facility provided to their share holders only. BMCB does not provide

loan other than share holders.

ii) Dividend:

According to R.B.I norms a co-operative bank can declare dividend up to

15%, and BMCB maintains this percentage since three years, which attracts the

people to buy the shares.

iii) Gifts:

Every year during Diwali share holders are given gifts, which is one type of

attraction to the people for becoming the member of the bank.

iv) Goodwill:



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Trust and reputation of the BMCB is good in the market, so people want to

be its member.

v) Voting Rights:

Share holders are having the rights to vote at the time of selection of

board of directors.

Facilities

i) Insurance:

Bank has tie up with ICICI for accident insurance of share members. Bank

provides Rs.100000 Insurance to its share members and its premium is paid by bank.

This money of insurance is given to the nominee of the share member only in the case

of death due to accident of the share member

In case ofNatural death of any member Rs.10000 is given to nominee.

ii) Tax Deducted At Source:

All the share holders get the benefit of TDS in all the deposits. Once

membership number is feed in to the data then TDS is not deducted from the deposits

of the share holders.

DUPLICATE SHARES



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i) Lost of shares:

If shares are lost by the share holders then duplicate shares are issued by the

bank on request of share holders. In that case forms are to be filled for the same. If in

case lost shares are found then original shares are to be returned to bank.

ii) Torn or Destroyed:

If shares are torn or destroyed then shares are returned to the bank.

Duplicate shares are issued for the same.



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[7]

LOANS



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Lending in form of loan involves a number of risks. In addition to the risks

related to creditworthiness of the borrower, the banks are also exposed to interest risk.

Credit risk involves inability or unwillingness of the borrower to repay the loan.

Bank provides loan in the form of TERM LOAN, DEMAND LOAN,

VEHICLE LOAN, HOUSING LOAN, BUSSINESS LOAN AGAINST PROPERTY

etc. Loan policy of the bank should decide the exposure limit to particular firm/sector.

When the exposure limit per firm is decided no loan should be granted beyond that

limit to that firm. It applies to the financial limit for the sector. The exposure limit to

sensitive sectors such as advances against equity shares, real estates etc, which are

subject to high degree of price volatility. Some specific industries where there are

frequent business cycles more dependent on market conditions/natural calamities are

high risk prone for advances. Any excess exposure should be backed by adequatecollateral security.

There are two types of credit i.e. fund based and non fund based.

Fund based: loans and advances, cash credit, overdraft,

purchasing/discounting of bills.

Non fund based: bank guarantees and letter of credit.



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[7.1] FACTORS TO BE CONSIDERED WHILE GIVING LOANS

Credit risk for a bank depends on external and internal factors.

EXTERNAL FACTORS

1. State of economy

2. Foreign exchange rates and interest rate

3. Trade restrictions

4. Government policies

5. Failure of borrower

INTERNAL FACTORS

1. Deficiency in loan policies

2. Absence of prudential credit limits

3. Deficiency in appraisal of borrowers financial position

4. More dependence on securities

5. Inadequate risk pricing

6. Absence of post sanction supervision on borrowers account



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[7.2] PROCESS

1. Analysis of the financial statement and project report

The loan in charge/manager makes the detailed financial analysis considering

various RBI guidelines; banks specific policies and procedures, accounting standards

issued by ICAI and prepare LOAN REVIEW REPORT.

2. Pre inspection report

After getting the loan proposal from the party and making the preliminary

analysis of the loan proposal, the authorized loan officer/manager makes the site visit

of the party. (Business place, property/ security visit for verification) after the site

visit and interview of the party, and considering the available documents, the

concerned officer/manager prepares the pre inspection report giving his

recommendation for the loan subject to the terms and conditions required to be

fulfilled. A copy of the inspection report has been attached.

1. Sanction of the board

In the board meeting the loan proposal file containing the necessary

documents along the pre inspection report and the branch managers remark is

presented for consideration. The member of the board discuss the loan proposal with

the concerned officer/manager and finally either approve or reject or modify the loan

proposal subject to some specific terms and conditions to be compiled with either

before or after the disbursement of the loan amount.



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2. Completion of documentation formalities

After the board sanction of the loan proposal, security charge/

mortgage/hypothecation/pledge/lien (what so ever applicable) formalities are

completed through the advocate nominated by bank. Then the banks documentation

procedures are completed within 7 days of sanction of the board.

3. Pre disbursement audit report

Before making the disbursement of the loan amount the internal auditor of

the bank verifies the compliance of terms and conditions of loan specified by the

board and gives his report for any deviation for non compliance of terms and

conditions.

4. Disbursement of loan amount

After the completion of all documentation formalities, procedures and

rectifying any discrepancy reported by the internal auditor the bank makes the

disbursement of loan amount as per terms of sanction of the board.

Expenses on activities pertaining to loans include:

Cost of organizing loan.

Cost of processing/appraisal of loan application.

Cost of processing payment.

Cost of maintaining account.

Cost of recovery procedure.

Cost of bad loans.

Cost of final realization/settlement



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[8.]

RISK

MANAGEMENT



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[8.1] Define RISK

Risk is the probability or likelihood of injury, damage or loss in some

specific environment and over some stated period of time. Thus, Risk involves

two elements

Probability

Loss of amount

RISK MANAGEMENT

Risk management is the culture, processes, and structures that are

directed towards the effective management of potential opportunities and

adverse effects.

This definition applies rightly in nearly all fields of management from

financial and human resources management. Risk management can be taken to

mean the process of gathering information to make informed decisions to

minimize the risk of adverse effects to people and the Environment.

Banking is the management of risk. Banks accept risk in order to earn

profits. They must balance alternative strategies in terms of their risk/ return

characteristics with a goal of maximizing shareholders wealth. In doing so,

banks recognize that there are different type of risk and that the impact of a

particular investment strategy on shareholders depends on the impact on the

total risk of the organization.



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[8.2] Risk drivers

Risk drivers helps in identifying what kind of risks your business is

exposed to. There are two types of risk drivers. They are as follows:

External drivers

Strategic risks: Competition, Customer needs & demands, Industry

changes

Operational risks: Government regulations, Political environment,

Culture, Vendors/suppliers, contracts

Financial risks: Interest rates, Foreign exchange, Credit analysis.

Hazardous risks: Natural disasters

Internal drivers

Strategic risks: R&D, Intellectual capital

Operational risks: HR, Systems & processes

Financial risks: Cash flow, liquidity

Hazardous risk: Safety (Employee and Equipment), Security

The next step is to analyze and evaluate your risks.

Risk assessment: It involves estimating the level of risk estimating the

probability of an event occurring and the magnitude of effects if the event does

occur. Essentially risk assessment lies at the heart of risk management,

because it assists in providing the information required to respond to a potential

risk.



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Risk analysis: It is a technique to identify and assess factors that may

endanger the success of a project or achieving a goal. This technique also helps

to define preventive measures to reduce the probability of these factors from

occurring and identify countermeasures to successfully deal with these

constraints when they develop to avert possible negative effects on the

competitiveness of the company.

There are a number of tools you can employ to analyze risks:

Market surveys.

Research & Development.

SWOT: Analysis of Strengths, Weakness, Opportunities, and Threats.

PEST: Political, Economic, Social and Technology analysis.

Scenario Analysis: It is a process of analyzing possible future events by

considering possible outcomes (scenarios). It is also useful for decision

making.

Auditing and Inspection.

Industry benchmarking: It is the process of measuring an organizations

internal processes then identifying, understanding and adapting

outstanding practices from other organizations considered to be best in

class.

Business process analysis.

Risk map: It is a way to visualize the risk of the market. The purpose of

a risk map is to identify and classify areas, taking into account the

probable damages that could occur as a result of a disaster.

Brainstorming: To think quickly and creatively and to have a rigorous

group discussion in order to generate creative ideas and to encourage

problem solving.



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Once the risks have been identified, one can usually rank them basedon their probability of occurrence and their impact.

Dealing with risk

Once the risk have been identified, evaluated and analyzed, the next

step is how to deal with them. One can do one of four things for each risk:

Accept: There are certain risks which are not in our control and the

cost of eliminating such risks is also very high.

Transfer: A well-known method to transfer risk is insurance.

Reduce: By introducing systems and processes one can reduce risks.

Eliminate it: It is ideal situation to deal with the risk.

BENEFITS OF RISK MANAGEMENT

Provides a structured framework for more effective strategic planning to

ensure maximizing of opportunities and minimization of losses.

Widens management perspective and encourages initiative and pro-

active behaviour.

Contributes to improved organizational efficiency and effectiveness

Optimizes the use of resources.

Promotes greater openness in decision-making and improves

communication.

Provides senior management with a concise summary of the major risks

affecting the organization and a mechanism to ensure that appropriate

resources are directed towards areas of high risk.

Provides a framework for ensuring that unavoidable risks are adequately

insured.

Provides an effective and systematic approach which enables

management to focus on areas of risk in their operations.



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Improves the level of accountability in the organizations.

[8.3] RISK MANAGEMENT PROCESS

It is the systematic application of management policies, procedures

and practices to the tasks of establishing the context, identifying, analyzing,

assessing, treating, monitoring and communicating risks.

It is a repetitive process of well defined steps which, when taken in

sequence, helps in continual improvement in decision making by providing

management with a greater insight into organizational risks and their impact.

[Chart-6] Risk Management Process



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[8.4] BANKS EXPOSURE TO RISK

Banks in the process of financial dealing of various natures face various

kinds of financial and non financial risks such as credit risk, interest rate risk foreign

exchange risk, etc. There are also other areas of risk such as liquidity, equity price,

commodity price, legal, regulatory, reputation etc. all this risks are highly

interdependent on each other and events that affect on area can have ramifications for

a range of other risk categories. The risk factors if triggered in adverse direction can

bring the bank in trouble in different ways. It effects may be very serious and may

bring the bank in danger for even its existence. Therefore, any bank management has

to attach considerable importance to improve the ability to identify, measure, monitor

and control the overall level of risks undertaken. Banks are subjected to wide array of

risks in the course of their operations. The four categories of banking risks are as

follows:

Financial risk: Financial risk is often defined as the unexpected variability orvolatility of returns and thus includes both potential worse-than-expected as well as

better-than-expected returns. References to negative risk below should be read as

applying to positive impacts or opportunity unless the context precludes

In finance, risk is the probability that an investment's actual return will be

different than expected. This includes the possibility of losing some or all of the

original investment. Some regard a calculation of the standard deviation of the

historical returns or average returns of a specific investment as providing somehistorical measure of risk. Financial risk may be market-dependent, determined by

numerous market factors, or operational, resulting from fraudulent behavior.

It increases banks overall risk profile. For e.g. A bank engaged in the

foreign currency business is normally exposed to currency risk, but will also be

exposed to additional liquidity and interest rate risk.

http://en.wikipedia.org/wiki/Financial_riskhttp://en.wikipedia.org/wiki/Volatility_(finance)http://en.wikipedia.org/wiki/Financehttp://en.wikipedia.org/wiki/Financial_riskhttp://en.wikipedia.org/wiki/Volatility_(finance)http://en.wikipedia.org/wiki/Finance


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Pure risk: It includes liquidity, credit and solvency risk. They can result in aloss for a bank if they are not properly managed.

Speculative risk: It is based on financial arbitrage. If the arbitrage is correct

then it results in profit otherwise it results in loss. The main categories of

speculative risk are as follows:-

Interest rate risk.

Currency risk.

Market price risk.

Operational risk: This risk is related to banks overall organization and

functioning of internal system which includes computer related and other

technologies, compliance with banks policies and procedures and measures

against mismanagement and frauds.

Business risk: They are associated with a banks business environment

including macroeconomic and policy concerns, legal and regulatory factors and

the overall financial sector infrastructure and payment system.

Event risk: It includes all types of exogenous risks which, if they were to

materialize, could endanger banks operations or undermine its financial

condition and capital adequacy.

CAPITAL ADEQUACY RATIO



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Capital Adequacy Ratio, also called Capital to Risk Asset Ratio

(CRAR), is a ratio of banks capital to its risk. Capital adequacy ratio has been

developed to ensure that bank can absorb reasonable level of losses before

becoming insolvent.

Subsequent to nationalization of banks, capitalization in banks was not given

due importance as it was felt necessary for the reason that the ownership of the banks

rested with the government, creating the required confidence in the mind of the

public. Combined forces of globalization and liberalization compelled the public

sector banks, hitherto shielded from the vagaries of market forces, to come to terms

with the market realities where certain minimum capital adequacy has to be

maintained in the face of stiff norms in respect of income recognition, asset

classification and provisioning. It is clear that multi pronged approach would be

required to meet the challenges of maintaining capital at adequate levels in the face of

mounting risks in the banking sector.

Capital adequacy ratio measures the amount of banks capital

expressed as a percentage of its risk weighted credit exposure. This ratio helps

in determining the capacity of the bank in terms of meeting the time liabilities

and risk such as credit, operational risk etc. Banks capital is a Cushion for

potential losses which protect the banks depositors or other lenders. it also

maintains stability and efficiency of financial system.

The specifics of CAR calculations vary from country to country but general

approaches tend to be similar for the countries that apply for the Basel Accords.

Two types of capital are measured Tier One and Tier Two.

Tier one capital absorbs losses without a bank being required to cease

trading e.g. Ordinary Share Capital.

Tier two capital which can absorb losses in the event of winding up and

so provides a lesser degree of protection to depositors e.g. Subordinated

debts.



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The minimum capital adequacy ratios that apply are: Tier one capital to

total risk weighted credit exposure to be not less than 4%. Total capital (tier one

plus tier two less certain deductions) to total risk weighted credit exposure to be

not less than 8%.

The higher the CRAR the higher the level of protection available to

depositors.

There are nine types of risk for the purpose of bank supervision credit,

interest rate, operational, liquidity, market, compliance, foreign exchange,strategic, and reputation.

1. CREDIT RISK: Credit risk is the risk that a loss will be incurred if the

counter party does not fulfill its financial obligations in a timely manner.

Although banks fail for many reasons, the single most important reason is bad

loans. Credit risk is the primary cause of bank failures, and it is the most visible

risk facing bank managers.

2. INTEREST RATE RISK: Risk is the potential negative impact on. the Net

Interest Income and it refers to the vulnerability of an institutions financial condition

to the movement in interest rates. Changes in interest rate affect earnings, value of

assets, liability off-balance sheet items and cash flow. Hence, the objective of interest

rate risk management is to maintain earnings, improve the capability, ability to absorb

potential loss and to ensure the adequacy of the compensation received for the risktaken and effect risk return trade-off.

Interest rate risk arises due to the changes in the general rate of interest,

which depends on the inflation rate, regulatory policies, sudden changes in demand

and supply of money etc.



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1. OPERATIONAL RISK: Always banks live with the risks arising out of

human error, financial fraud and natural disasters. The recent happenings such as

WTC tragedy, Barings debacle etc. has highlighted the potential losses on account of

operational risk. Exponential growth in the use of technology and increase in global

financial inter-linkages are the two primary changes that contributed to such risks.

Operational risk, though defined as any risk that is not categorized as market or credit

risk, is the risk of loss arising from inadequate or failed internal processes, people and

systems or from external events. In order to mitigate this, internal control and internal

audit systems are used as the primary means.

It is the risk of loss resulting from inadequate or failed internal processes,

people and systems, or from external events. Operational risk encompasses the

efficiency and effectiveness of all back-office operations including management

information systems, personnel, external and internal frauds, lawsuits, and so on.

2. LIQUIDITY RISK: Bank Deposits generally have a much shorter

contractual maturity than loans and liquidity management needs to provide a cushion

to cover anticipated deposit withdrawals. Liquidity is the ability to efficiently

accommodate deposit as also reduction in liabilities and to fund the loan growth and

possible funding of the off-balance sheet claims. The cash flows are placed in

different time buckets based on future likely behaviour of assets, liabilities and off-

balance sheet items. Liquidity risk consists of Funding Risk, Time Risk & Call Risk.

Liquidity risk arises from the failure to recognize or address changes in

market conditions that affect the ability to liquidate assets quickly and with minimal

loss in value.



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3. MARKET RISK:

Market Risk may be defined as the possibility of loss to bank caused by the

changes in the market variables. It is the risk that the value of on-/off-balance sheet

positions will be adversely affected by movements in equity and interest rate markets,

currency exchange rates and commodity prices. Market risk is the risk to the banks

earnings and capital due to changes in the market level of interest rates or prices of

securities, foreign exchange and equities, as well as the volatilities, of those prices.

Market Risk Management provides a comprehensive and dynamic frame work for

measuring, monitoring and managing liquidity, interest rate, foreign exchange and

equity as well as commodity price risk of a bank that needs to be closely integrated

with the banks business strategy.

Market risk is the risk that the value of an investment will decrease due

to moves in market factors. Market risk results from changes in the prices of

equity instruments, commodities, money and currencies.

The four standard market factors are:

Equity risk: The risk in which the stock prices changes.

Interest rate risk: It is the risk in which the interest rate will change.

Currency risk: It is the risk in which foreign exchange rates will change.

Commodity risk: It is the risk in which commodity prices will change.

4. COMPLIANCE RISK: Compliance Risk is the risk to earnings or

capital arising from violations of laws, rules, and regulations and so on. For

example, banks failing to meet minimum capital requirements must raise new

capital, or they may be closed, forced to merge, or required to take some other

corrective action.

5. FOREIGN EXCHANGE/CURRENCY RISK: Foreign exchange

risk results from changes in exchange rate between a banks domestic currency

and other currencies. It originates from mismatches between the values of assets

and liabilities denominated in different currencies, or because of mismatch



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between foreign receivable and foreign payables that are expressed in domestic

currency.

Foreign exchange risk is the risk that a bank may suffer loss as a result of

adverse exchange rate movement during a period in which it has an open position,

either spot or forward or both in same foreign currency. Even in case where spot or

forward positions in individual currencies are balanced the maturity pattern of

forward transactions may produce mismatches. There is also a settlement risk arising

out of default of the counter party and out of time lag in settlement of one currency in

one center and the settlement of another currency in another time zone. Banks are also

exposed to interest rate risk,which arises from the maturity mismatch of foreign

currency position.

6. STRATEGIC RISK: In statistics, risk is often mapped to the

probability of some event seen as undesirable. Usually, the probability of that

event and some assessment of its expected harm must be combined into a

believable scenario (an outcome), which combines the set of risk, regret and

reward probabilities into an expected value for that outcome. Strategic Risk is

the risk to earnings or capital arising from making bad business decisions that

adversely affects the value of the bank.

7. REPUTATIONAL RISK: Reputation Risk is the risk to earnings or

capital arising from negative public opinion of the bank. Negative public

opinion can arise from poor service, failure to serve the credit needs of their

communities, and for other reasons. A recent survey revealed that consumers

rank telephone companies ahead of banks in terms of service. Regulators feared

that negative public opinion would contribute to a loss of market

http://en.wikipedia.org/wiki/Scenariohttp://en.wikipedia.org/wiki/Expected_valuehttp://en.wikipedia.org/wiki/Scenariohttp://en.wikipedia.org/wiki/Expected_value


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[Chart-7]THE FOUR MAJOR RISK FACED BY BANKS:

OPERATIONAL RISK

Always banks live with the risks arising out of human error, financial fraud

and natural disasters. The recent happenings such as WTC tragedy, Barings debacle

etc. has highlighted the potential losses on account of operational risk. Exponential



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growth in the use of technology and increase in global financial inter-linkages are the

two primary changes that contributed to such risks. Operational risk, though defined

as any risk that is not categorized as market or credit

risk, is the risk of loss arising from inadequate or failed internal processes, people and

systems or from external events. In order to mitigate this, internal control and internal

audit systems are used as the primary means.

An operational risk is a risk arising from a companys business

functions and from the practical implementation of the managements strategy.

Operational risk includes:

Employee errors.

Systems failures.

Fire, floods or other losses to physical assets.

Fraud or other criminal activity.

Internal Fraud: Loss due to acts of a type intended to defraud,

misappropriate property or avoid regulations, the law or company policy,

excluding diversity / discrimination events, which involves at least one internal

party.

External Fraud: Theft of inf

project on risk management

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