Credit Risk Management in Axis Bank_Rajhans

Risk Management Management in Banks (Sec- B)

A Project Report on Credit Risk Management in Axis Bank 

Submitted To:

Submitted By:

Dr. Vighneswar Swamy

Abhishek Kumar Sinha 09BSHYD0023 Pratik Kamat

09BSHYD0349

Rajni Kant Rajhans

09BSHYD1105

Sumit Jain

09BSHYD 0879

T. Rahul

09BSHYD1108

TABLE OF CONTENTS: Contents 1.

About Axis

Page No. Bank

3

a. Business Overview

3

b.

Retail Banking

3

c.

Corporate Banking

4

2. Credit Risk Management at Axis Bank

6

a. Credit Risk Management Policy

7

b.

Credit rating System

7

c.

Credit Sanction & related Processes

8

d. Portfolio Management

9

e. Concentration Risk

10

f .

10

Policy for Hedging & Mitigating Credit Risk

3. Q uantif ying Credit Risk Using

13

a. ENPA approach

13

b.

CAR model

14

c.

Z- Score Model

15

4. Conclusion

17

5. Ref erences

18

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ABOUT AXIS BANK 

Axis Bank was the first of the new private banks to have begun operations in 1994, after the Government of  India allowed new private banks to be established. The Bank was promoted jointly by the Administrator of the specified undertaking of the Unit Trust of India (UTI-I), Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC) and other four PSU insurance companies, i.e. National Insurance Company Ltd., The New India Assurance Company Ltd., The Oriental Insurance Company Ltd. and United India Insurance Company Ltd. The Bank today is capitalized to the extent of Rs. 408.84 Crores with the public holding (other than promoters and GDRs) at 53.81%. The Bank has a very wide network of more than 1095 branches. The Bank has a network of over 4846 ATMs. This is one of the largest ATM networks in the co untry. The Bank has strengths in both retail and corporate banking and is committed to adopting the best industry  practices internationally in order to achieve exce llence. Business Overview:  RETAILBANKING:

In order to achieve the objective of becoming more customer-centric, rather than product-centric, the Bank has restructured Retail Banking into two groups namely

Mass

and

Mass

Affluent , and Affluent segments. The

Mass and Mass Affluent Segment owns, as the name indicates, mass-market customers, while the Affluent Segment owns clientele defined as affluent, comprising customers in the wealth and private banking space.

Source: Axis Bank¶s Annual Report 2009-10

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From

the table shown above we can easily infer that bank is providing constant attention in absorbing more

and more retail clients both in terms of assets and liabilities which provides bank a low cost of fund as well as good brand visibility . Moreover, more retail liabilities provide bank low risk in comparison to bulk loan as

the bargaining power of creditors distributed over a large population. The cross-sell strategy is also an important strategic goal for the company by providing more emphasis on Retail segment. The retail base of 12.5 million is being leveraged more effectively to increase cross-sell  penetration. The Bank also focuses on distribution of third party products, with a special thrust on mutual funds .The bank  is a leading distributor of Mutual Fund. During the year 2009-2010, the Bank set a milestone with a collection of Rs. 714 crores in the NFO of Axis Equity launched by the Axis Mutual Fund. Of the 92,000 applications collected in the NFO of Axis Equity, 77% was from retail investors investing less than Rs. 50,000 each, which reflects the Bank's ability to generate interest among small retail investors in investment opportunities.

The Bank offers Demat services from more than 750 branches across the country and presently has more than 2 lac accounts. Axis Bank offers 'Online Trading Services' in alliance with Geojit BNP Paribas, facilitating seamless stock-trading through electronic linkages of trading, bank and Demat accounts with high-security online features. During the year, ~ 47,000 customers have subscribed to the Bank's online trading account, the total traded volume in which was more than Rs. 8,000 crores.

In September 2009, Axis Bank launched the private banking business in the domestic market, christened 'Privée' to cater to highly affluent individuals and families offering them unique investment opportunities. Axis Bank Privée offers sophisticated investment and advisory services to clients who entrust the Bank with Assets under Management (AUM) of more than Rs. 5 crores. It has been rolled out across six cities in India in 200910 and follows a team-based appro ach for managing client relationships.

Corporate

Banking :

The Bank's Corporate Banking franchise aims to provide a wide array of products across several customer  segments, including credit, trade finance, structured finance and syndication services for debt and equity. Since each corporate engagement also offers opportunities on the retail side of the business, products anchored in the Retail SBUs also form a part of the corporate marketing effort. New customer acquisition and relationshipPage | 4

deepening constitute the two-pronged strategy for growth. In order to leverage growth opportunities offered by India's infrastructure sector, a separate infrastructure business group has been established within the corporate  banking group. The Bank has continued to retain its leadership position in the infrastructure debt market and syndicated an aggregate amount of Rs. 27,000 crores by way of Rupee and

Foreign

currency loans during 2009-10.

Euromoney Project Finance (Deals of the Year 2009) has conferred several awards in the area of infrastructure financing to the Bank. These include categories such as 'Road Deal of the Year', 'Indian Rail Deal of the Year' and 'Indian PPP Deal of the Year'.

CORPORATE CREDIT

During the year2009-2010, corporate credit, including lending to large and mid-corporate and to infrastructure, grew to Rs. 52,503.53 crores, increasing by Rs. 11,292.63 crores, or 27.40% over last year. This includes the lending out of the Bank's overseas branches at Rs. 12,285.40 crores (equivalent to USD 2.74 billion).

The credit policy of the Bank has put in place a matrix of industry exposure limits with a view to de-risking of  the portfolio through diversification. In keeping with this strategy, the highest exposure to any sector was 17.50% of the Bank's total lending (10.65% previous year). The practice of internal and external rating continues to be undertaken on an ongoing basis. The entire corporate credit portfolio is internally rated with 74.42% of the ratings accorded being A and above. 74.13% of the portfolio has been externally rated till the end of the year 2009-2010.

BUSINESS BANKING

Business Banking initiatives have consistently focused on procuring low-cost funds by offering a range of  current account products and cash management solutions across all business segments covering corporates, institutions, central and state government ministries and undertakings, as well as small and retail business customers. The cross-selling of transactional banking products have also succeeded in enlarging the customer   base and growing current account balances. Thus, sourcing of current accounts is one of the key enablers for  the growth of the balance sheet. As on 31 March 2010, current account balances for the Bank stood at Rs. 32,167.74 crores, against Rs. 24,821.61 crores on 31 March 2009, rising 29.60% over the year. On a daily

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average basis, current account balances grew from Rs. 14,658.35 crores on 31 March 2009 to Rs. 18,321.75 crores on 31 March 2010, thus increasing 24.99% over the year. With the intent of providing business clients greater flexibility in meeting their transactional banking requirements, the Bank has made significant improvements in its alternate banking channel using mobile and internet banking. Cash Management Services (CMS) also leveraged the network and reach to provide a wide range of customized collection and payments solutions.

Source: Axis Bank¶s Annual Report 2009-10

CREDIT RISK  MANAGEMENT IN AXIS BANK:

The wide variety of businesses undertaken by the Axis Bank requires it to identify, measure, control, monitor  and report risks effectively. The Bank's risk management processes are guided by well-defined policies appropriate for various risk  categories, independent risk oversight and periodic monitoring through the sub-committees of the Board of  Directors. The Board sets the overall risk appetite and philosophy for the Bank. The Committee of Directors, the Risk Management Committee and the Audit Committee of the Board, which are sub-committees of the Board, review various aspects of risk arising from the businesses of t he Bank. Various Senior Management Committees, Credit Risk Management Committee (CRMC), Asset-Liability Committee (ALCO) and Operational Risk Management Committee (ORMC) operate within the broad policy framework as illustrated below.

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Source: Axis Bank s Annual Report 2009-10 The Bank has also formulated a global risk policy for overseas operations and a country specific risk policy for  its Singapore, Hong Kong and Dubai branches. The policies were drawn based on the risk dimensions of  dynamic economies and the Bank's risk appetite. Credit Risk Management Policy

Credit risk covers the inability of a borrower or counter-party to honor commitments under an agreement and any such failure has an adverse impact on the financial performance of the Bank. The Bank is exposed to credit risk through lending and capital market activities. The Bank's credit risk management process integrates risk management into the business management   processes, while preserving the independence and integrity of risk assessment. The goal of credit risk  management during the year has been to maintain a healthy credit portfolio by managing risk at the portfolio level as well as at the individual transaction level. The Board of Directors establishes the parameters for risk  appetite, which is defined quantitatively and qualitatively in accordance with the laid-down strategic business  plan. The foundation of credit risk management rests on the internal rating system. Credit Rating System

Internal reporting and oversight of assets is principally differentiated by the cred it ratings applied. y

The Bank has developed rating tools specific to market segments such as Large corporate, midcorporate, SME, financial companies and microfinance companies to objectively assess underlying risk  associated with such exposures.

y

For

retail and schematic SME exposures, scorecards and borrower-scoring templates are used for 

application screening. Hence, for these exposures, the credit risk is measured and managed at the Page | 7

 portfolio level. The Bank is also trying to use internal database of retail loans for building up statistical  behavioral scorecards as well as for refining credit assessment at the application sourcing level. The credit rating tool uses a combination of quantitative inputs and qualitative inputs to arrive at a 'point-intime' view of the rating of counterparty. The monitoring tool developed by the Bank helps in objectively assessing the credit quality of the borrower taking into cognizance the actual behavior post-disbursement. The output of the rating model is primarily to assess the chances of delinquency over a one-year time horizon. Each internal rating grade corresponds to a distinct probability of default. Model validation is carried out  periodically by objectively assessing its calibration accuracy and stability of rat ings. Credit Sanction and related processes followed at Axis bank:

The Bank has put in place the following hierarchical committee structure for credit sanction and review:  Zonal Office Credit Committee (ZOCC)  Central Office Credit Committee (COCC)  Committee of Executives (COE)  Senior Management Committee (SMC)  Committee of Directors (COD)

The guiding principles behind the credit sanction process are as under:

1. Know your Customer' is a leading principle for all activities.

2. Sound credit approval process with well laid cred it-granting criteria.

3. The acceptability of credit exposure is primarily based on the sustainability and adequacy of borrower's normal business operations and not based solely on the availability of security.

4. Portfolio level risk analytics and reporting to ensure optimal spread of risk across various rating classes  prevent undue risk concentration across any particular industry segments and monitor credit risk quality migration. Page | 8

5. Sector specific studies are periodically undertaken to highlight risk and opportunities in those sectors.

6. Rating linked exposure norms have been adopted by the Bank.

7. Industry-wise exposure ceilings are based on the industry performance, prospects and the competitiveness of the sector.

8. Separate risk limits are set up for credit portfolios like advances to NBFC and unsecured loans that require special monitoring.

9. With heightened activity in the real estate sector, the Bank has strengthened its risk management systems to ensure that its advances are to borrowers having a good track record and satisfying the criterion of minimum acceptable credit rating.

10. Appropriate covenants are stipulated for risk containment and monitoring.

Portfolio

Management

The Bank continues to track the quality of all portfolios through appropriate risk metrics. Periodic delinquency reporting, vintage analysis of the portfolio and rating-wise distribution of its borrowers provides insight for  future course of action. In the backdrop of the economic slowdown, the Bank has pursued a strategy of growth with consolidation of  asset quality. The exposure to sectors that had been most affected by the downturn were kept under control and there was an increased focus on borrowers having good and stable rating.

During the year the Bank has been selective in choosing a growth path for retail assets. The focus has been on increasing lending to secured portfolios (mortgage, auto), while maintaining a cautious approach to unsecured lending (personal loans and credit card business). Move has been to improve the quality of incremental origination through tighter  credit underwriting standards, increased use of bureau level data and

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leveraging on internal customer base of the Bank for cross sell . Account management and focus on

collection are a priority to control delinquencies at the portfolio level.

Concentration Risk 

The Bank controls and limits concentration risk by means of appropriate structural limits and borrower limits based on creditworthiness . These include: Large Exposures to Individual Clients or Group

The Bank has individual borrower-wise exposure ceilings based on the internal rating of the borrower as well as group-wise borrowing limits. The Bank monitors the level of credit risk (Low/Moderate/High/Very High) and direction of change in credit risk (increasing /decreasing/stable) at the portfolio level based on the following six parameters that capture concentration r isk. While determining level and direction of credit risk, parameters like percentage of low-risk credit (investment grade and above) to credit risk exposure and migration from investment to non-investment grade (quantum as  percentage of credit risk exposure) are also considered. Industries

Industry analysis plays an important part in assessing the concentration risk within the loan port folio. Particular  attention is given to industry sectors where the Bank believes there is a high degree of risk or potential for  volatility in the future. The Bank has fixed internal limits for aggregate commitments to different sectors so that the exposures are evenly spread over various sectors. Policies for Hedging and

Mitigating

Credit Risk 

Credit Risk Mitigants (CRM) like financial collateral, non-financial collateral and guarantees are used to mitigate credit risk exposure. Availability of CRM either reduces effective exposure on the borrower (in case of collaterals) or transfers the risk to the more creditworthy party (in case of guarantees). A major part of the eligible financial collaterals is in the form of cash, the most liquid of assets and thus free from any market and liquidity risks. The Bank has formulated a Collateral Management Policy as required under Basel II guidelines.

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Credit Risk Asset Quality

Rating scale for large and mid corporates is a 14-point granular scale that ranges from AB-AAA to AB-D. The rating tool for SME has an 8-point rating scale, ranging from SME 1 to SME 8. There are separate rating tools for financial companies and schematic SME and retail agricultural exposures. Definitions of Non-Performing Assets

Advances are classified into performing and non-performing advances (NPAs) as per RBI guidelines. NPAs are further classified into sub-standard, doubtful and loss assets based on the criteria stipulated by RBI. An asset, including a leased asset, becomes non-performing when it ceases to generate income for the Bank. An NPA is a loan or an advance where: 1. Interest and/or installment of principal remains overdue for a period of more than 90 days in respect of a term loan; 2. The account remains "out-of-order'' in respect of an Overdraft or Cash Credit (OD/CC); 3. The bill remains overdue for a period of more than 90 days in case of bills purchased and discounted; 4. A loan granted for short duration crops will be treated as an NPA if the installments of principal or interest thereon remain overdue for two crop seasons; and 5. A loan granted for long duration crops will be treated as an NPA if the installments of principal or interest thereon remain overdue for one crop season. 6. In respect of derivative transactions, the overdue receivables representing positive mark-to-market value of a derivative contract, if these remain unpaid for a period of 90 days from the specified due date for payment. Definition of Impairment

At each balance sheet date, the Bank ascertains if there is any impairment in its assets. If such an indication is detected, the Bank estimates the recoverable amount of the asset. If the recoverable amount of the asset or the cash-generating unit, which the asset belongs to, is less than its carrying amount, the carrying amount is reduced to its recoverable amount. The reduction is treated as an impairment loss and is recognized in the  profit and loss account.

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Credit Risk: Use of Rating Agency under the Standardized Approach

The Bank is using issuer ratings and short-term and long-term instrument/bank facilities' ratings which are assigned by the accredited rating agencies viz. CRISIL, ICRA, Fitch and CARE and published in the public domain to assign risk-weights in terms of RBI guidelines. In respect of claims on non-resident corporates and foreign banks, ratings assigned by international rating agencies i.e. Standard & Poor's, Moody's and Fitch is used.

For

exposures with contractual maturity of less

than one year, a short-term rating is used. For cash credit facilities and exposures with contractual maturity of  more than one year, long-term rating is used. Issue ratings would be used if the Bank has an exposure in the rated issue and this would include fund-based and non-fund based working capital facilities as well as loans and investments. In case the Bank does not have exposure in a rated issue, the Bank would use the issue rating for its comparable unrated exposures to the same  borrower, provided that the Bank's exposures are senior and of similar or lesser maturity as compared to the rated issue. Structured Obligation (SO) ratings are not used unless the Bank has a direct exposure in the 'SO' rated issue.

If an issuer has a long-term or short-term exposure with an external rating that warrants a risk weight of 150%, all unrated claims on the same counterparty, whether short-term or long-term, also receive 150% risk weight, unless the Bank uses recognized cred it risk mitigation techniques for such claims. Issuer ratings provide an opinion on the general credit worthiness of the rated entities in relation to their senior  unsecured obligations. Therefore, issuer ratings would be used to assign risk-weight to unrated exposures   provided that the unrated exposures are senior as compared to senior unsecured obligations of the same  borrower. CREDIT RISK  MITIGATION

The Bank uses various collaterals both financial as well as non-financial, guarantees and credit insurance as credit risk mitigants. The main financial collaterals include bank deposits, NSC/KVP/LIP, and gold, while main non-financial collaterals include land and building, plant and machinery, residential and commercial mortgages. The guarantees include guarantees given by corporate, bank and personal guarantees. This also includes loan and advances guaranteed by Export Credit & Guarantee Corporation Limited (ECGC), Credit Guarantee Fund Trust for Small Industries (CGTSI), Central Government and St ate Government.

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The Bank has in place a collateral management policy, which underlines the eligibility requirements for credit risk mitigants (CRM) for capital computation as per Basel II guidelines. The Bank reduces its credit exposure to counterparty with the value of eligible financial collateral to take account of the risk mitigating effect of the collateral. To account for the volatility in the value of collateral, haircut is applied based on the type, issuer, maturity, rating and re-margining/revaluation frequency of the collateral. The Bank revalues various financial collaterals at varied frequency depending on the type of collateral. The Bank has a valuation policy that covers  processes for collateral valuation and empanelment o f valuers. QUANTIFYING CREDIT RISK  USING NPAs:

As we know ENPA= PBT/ NPA The table shows the ENPA calculation over the years and we plotted the graph of the same to have a trend understanding of ENPAs over the years.

Year

PBT (Cr)

NPA (Cr)

ENPA

(%)

=

PBT*100/NPA 2005

503.7

311.1

161.91

2006

731.3

374.28

195.39

2007

996.24

418.67

237.95

2008

1646.3

494.61

332.85

2009

2785.19

897.77

310.23

2010

3851.36

1318

292.21

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ENPA (%) = PBT*100/NPA 350.00 300.00 250.00 200.00 ENPA (%) = PBT*100/NPA

150.00 100.00 50.00 0.00 2005

For

2006

2007

2008

2009

2010

an example ENPA of 292.2 % for the year 2010 means when 292.2 % of NPAs turns into loss assets the

entire profit of the company will get eroded. As the NPA management of the company shows a good trend (upward slopping from 2005-2008) and hence company has a very good credit position over the years as the minimum ENPA (%) is 161.9. The downward slope for the year 2009 & 2010 can be attributed to the global financial crisis but still the percentage ENPA shows a healthy position. Using CAR model:

CAR as per BASEL II Year

Capital

Risk Weighted Assets CAR 

(Cr)

(Cr)

(%)

2005

3013.15

23799.52

12.66

2006

4278.26

38598.25

11.08

2007

6554.5

56643.37

11.57

2008*

11890.89

84990.65

13.99

2009

15027.64

109787.49

13.69

2010

22307.89

141169.77

15.80

*Shows the year from which BASEL II was followed before it BASEL I was followed by the bank.

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The Capital Adequacy Ratio of the Bank over the years is above than the BASEL II requirement and hence the  bank has a sound credit risk management as per the CAR approach.

Z' Score Bankruptcy

Model:

Applying Z Score Bankruptcy model on Axis Bank, we tried to find out its ³Zone´ of operation. We used this model considering us as a lender and Axis Bank as a borrower and hence we have to take decision whether to lend to Axis Bank or not i.e. assess the Axis Bank¶s credit worthiness using Z-Score Bankruptcy model.

Formula

for Z' Score for non-manufacturing company is

Z' = 6.56T1 + 3.26T2 + 6.72T3 + 1.05T4 Where T1 = (Current Assets-Current Liabilities) / Total Assets T2 = Retained Earnings / Total Assets T3 = Earnings Before Interest and Taxes / Total Assets T4 = Book Value of Equity / Total Liabilities

Source: ( http://en.wikipedia.org/wiki/Altman_Z-score)

From Financial

statements (Year 2009-2010) of Axis Bank, we ca lculated Ti where i= {1, 4}.

Current Assets

179425.44

Current

141300.22

Liabilities Total Assets

180647.87

Retained

5784.69

Earnings EBIT

11874.1

Book Value of 

16044.61

Equity Page | 15

T1

0.211

T2

0.032

T3

0.066

T4

0.089

Therefore, Z Score for a non-manufacturing firm can be given as Z' Score

6.56T1 + 3.26T2 + 6.72T3 + 1.05T4

Hence, Z' Score

Zones

2.024

of Discrimination:

Z > 2.6 -³Safe´ Zone 1.1 < Z < 2. 6 -³Grey´ Zone Z < 1.1 -³Distress´ Zone

As the Z¶ Score for Axis Bank is 2.02 and hence the bank is in Grey Zone. The year 2009-2010 being a year  having a lot of financial stress in the economy, still the bank has managed to be in the Grey Zone. With improve in the situation of the financial market and economy as a whole; we can believe that bank will come in the safe zone.

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Conclusion:

The Axis Bank has a well defined Credit Risk Management policies and a well structured organization hierarchy. It uses both the Internal Rating Based (IRB) as well as External Rating Approach for assessing the creditworthiness for different categories of its borrowers. The bank has also set exposures ceilings on different categories of borrowers thereby limiting the concentration risk. The Axis Bank also has a well defined collateral management policy for the credit risk management and to account for volatility in the collateral an appropriate hair-cut is applied. From the quantitative findings we can conclude that an ENPA of 292.2 % for  the year 2009-10; the Axis Bank has a sound NPA management. Moreover, from CAR model finding we can infer that Axis Bank has an adequate Capital as per BASEL II norm which provides sufficient cushion to the  bank.

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References: 1. Annual Reports of Axis Bank from the year 2005 to 2010. 2. http://en.wikipedia.org/wiki/Altman_Z-score 3. http://www.axisbank.com/aboutus/aboutaxisbank/About-Axis-Bank.asp

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