Global Banking Scenario
Commercial banking is undergoing a drastic alteration as a result of marketable instruments competing with demand deposits and loans. Strong competition has resulted in commercial banks to struggle to make satisfactory margins from their traditional business. The Asian crisis has again brought credit risk management into limelight, raising doubts on the efficiency and the effectiveness of current credit regulations.
The scenario that commercial banks at present are completely different from what was experienced in the past. Diversification among sub industries is defining an environment where banks compete with other financial-service companies to provide mutually exclusive products and services to the same customers. Traditional branch banking is under the threat of new competitors and technological innovation. Analyst are not sure if this mean that traditional banking is dying or not. But, most believe that the old-fashioned concept of the bank is dying and a new, more drastic and broader scenario is emerging.
Banks are changing as economic markets integrate, providing opportunities for diversification. Disintermediation, a well known concept, widely practiced in Western Europe during the 1970s has increasingly condensed the monopoly of banks over the collection of savings from customers. This has again resulted in a much tougher competition among financial service providers and has forced banks to find new and diversified sources of income. One of the major drawbacks is that the volatility of the earnings has increased many folds. The management of these new types of risk requires definite skills and proficiency. Hence, the risk profile of commercial banks is changing as a consequence of diversification. [1]
Barclays in the Global Market
The profitability of Barclays Bank's businesses could be unfavorably influenced by a deterioration of general economic conditions in the UK, globally or in individual markets such as the US or South Africa. There are many factors that can have a deep impact on the activity level of the customers. These factors can include interest rates, inflation, sentiments of the investor, cost of credit and its availability, the liquidity of the global financial markets and the level of equity prices and its volatility. For example:
An economic downturn or higher interest rates could unfavorably influence the credit quality of Barclays on-balance sheet and off-balance sheet assets by increasing the risk that a greater number of Barclays customers would be unable to meet their obligations.
A market downturn or decline of the economy could lead to the Bank to incur mark to market losses in its trading portfolios.
A market downturn could reduce the revenues of the bank by negatively affecting the fees Barclays earns for managing the assets. For instance, a higher level of foreign or domestic interest rates or a downturn in trading markets could affect the flows of assets under management.
A market downturn will most likely lead to a decline in the volume of transactions between the bank and the customer and, thus, a decline in the income it receives from fees and commissions and interest. [2]
Indian Banking Scenario
Structure of Indian Banking Sector
The Indian banking system can be broadly classified as organized and unorganized. The unorganized banking system comprises of moneylenders, indigenous bankers, lending pawnbrokers, landlords, traders, etc. Whereas the organized banking system, which is governed by the Banking Regulation Act of India, 1949 can be broadly classified into two major categories, non-scheduled banks and scheduled banks. Scheduled banks are those which have been included in the second schedule of Reserve Bank of India Act (RBI), 1934. RBI in turn includes only those banks in this schedule which satisfy the criteria laid down vide section 42 (6) (a) of the Act. Non-Scheduled banks constitute banks that are not included in the RBI Act, 1934.
Scheduled banks constitute of commercial banks and co-operative banks. There are about 67,000 branches of Scheduled banks spread across India. During the first phase of financial reforms, there was a nationalization of 14 major banks in 1969. This crucial step led to a shift from Class banking to Mass banking. Since then the growth of the banking industry in India has been a continuous process.
Also the Private Sector Banks can be classified as old private sector banks and new private sector banks, wherein the latter enjoy superior discounting in the bourses. Old Private Sector banks refer to the banks refers to the banks established before 1991 while New Private Sector banks refer to the banks established post 1991. After RBI reopened the banking sector to private players, about eight private sector banks were licensed in 1995, which brought with them latest technology, customer-oriented service, innovative products and aggressive marketing. The present scenario of the private sector banks in India is witnessing immense progress. They are leaders in Internet banking, mobile banking, phone banking, ATMs. Despite increasing competition, public sector banks continue to dominate the Indian banking landscape. However the scenario in undergoing a change with the growth of the new private sector banks which are in a more advantageous position because of their superior technology-based operations, low manpower and a lower non-performing assets (NPA) level.
Banking Sector Reforms in India
The banking sector reforms in India initiated since 1992 in the first phase has provided necessary platform to the banking sector to operate on the basis of operational flexibility and functional autonomy, thereby enhancing efficiency, productivity and profitability. The reforms brought out structural changes in the financial sector, eased external constraints in their working, introduced transparency in reporting procedures, restructuring and recapitalization of banks and have increased the competitive element in the market. The salient features of these reforms include:
Phasing out of statutory pre-emption - The SLR requirement have been brought down from 38.5% to 25% and CRR requirement from 7.50% to 5.75%. (Presently 4.5%)
Deregulation of interest rates - All lending rates except for lending to small borrowers and a part of export finance have been de-regulated. Interest on all deposits are determined by banks except on savings deposits.
Capital adequacy - CAR of 9 % prescribed with effect from March 31, 2000.
Debt Recovery Tribunals - 22 DRTs and 5 DRATs have already been set up and 7 more DRTs will be set up during the current financial year. Comprehensive amendment in the Act have been made to make the provisions for adjudication, enforcement and recovery more effective.
Transparency in financial statements - Banks have been advised to disclose certain key parameters such as CAR, percentage of NPAs, provisions for NPAs, net value of investment, Return on Assets, profit per employee and interest income as percentage to working funds.
Entry of new private sector banks - 9 new private sector banks have been set up with a view to induce greater competition and for improving operational efficiency of the banking system. Competition has been introduced in a controlled manner and today we have nine new private sector banks and 36 foreign banks in India competing with the public sector banks both in retail and corporate banking
Functional autonomy - The minimum prescribed Government equity was brought to 51%. Nine nationalized banks raised Rs.2855 crores from the market during 1994-2001. Banks Boards have been given more powers in operational matters such as rationalization of branches, credit delivery and recruitment of staff.
Hiving off of regulatory and supervisory control - Board for financial supervision was set up under the RBI in 1994 bifurcating the regulatory and supervisory functions.
India has made significant progress in payment systems by introducing modern payment media viz., smart/credit cards, electronic funds transfer, debit/credit clearing, e banking, etc. RBI would soon put in place Real Time Gross settlement System (RTGS) to facilitate efficient funds management and mitigating settlement risks.
Company Profile
Quick Facts
Type
Public (LSE: BARC, NYSE: BCS, TYO: 8642)
Founded
1690
Headquarters
London, England, UK
Key people
Marcus Agius, Chairman
John S. Varley, Chief Executive
Robert Diamond, President
Industry
Banking
Products
Retail banking
Commercial banking
Investment banking
Investment management
Private Equity
Revenue
£29,800 million (2009)
Operating income
£6,077 million (2008)
Net income
£5,287 million (2008)
Employees
148,000 (2008)
Barclays is an important financial services provider in retail banking, corporate banking, investment banking, wealth management, credit cards and investment management services and has presence in Europe, the Americas, Africa and Asia.
It has operations in over 50 countries and has employee base of around 148000.
Barclays has majorly two 'Clusters': Global Retail Banking, and Corporate and Investment Banking and Wealth Management.
Global Retail Banking (GRB)
Barclays Global Retail Banking (GRB) includes all of its retail banking businesses around the world. Operating in over 26 countries, it encompasses UK Retail Banking, Barclaycard, and the retail banking and card businesses in Western Europe and Emerging Markets.
Investment Banking and Wealth Management
Under the leadership of Robert E. Diamond, Jr, the organisation of Investment Banking and Investment Management gives a single point of strategic direction and control to a group of global businesses which enjoy substantial synergies. These businesses include:
Barclays Capital
Barclays Wealth
The third major area of the business is Group Centre, which comprises all our essential support functions. [3]
Barclays Group Chairman is Marcus Agius, and the Group Chief Executive is John Varley. They are supported by Barclays Executive Committee and the Board of Directors.
Barclays in India
Barclays launched commercial banking services in India in November 2006, and retail banking followed in May 2007. Now customers there can benefit from a range of personal or business accounts, loans and other services developed to suit the local market, and a variety of Barclaycard options.
Barclays Wealth launched its business in India in 2008, offering asset management to the country's growing segment of high net-worth individuals. Barclays Wealth's international private banking business has offices in Mumbai, New Delhi, Bangalore, Chennai and Kolkata.
In India, Barclays provides:
Retail banking: everyday personal banking including Hello Money, a service which allows customers to access their bank account through their mobile phone
Commercial banking: offers business banking services tailored to meet the needs of corporate clients
Barclaycard: a range of credit cards are available across the country
Barclays Capital: provides government, large corporates and institutional clients complete range of solutions to their strategic advisory, risk management and financing management needs
Barclays Wealth: provides well off, strong net-worth and intermediary clients with investment management, private banking, fiduciary services and brokerage.
Methodology
I am presently working as an intern under the Emerging Corporate Group. I work closely with the Relationship Managers and therefore, my first hand experience will be one of the major source information mentioned here under the credit sanction process.
Along with this I will use interact with employees from other department, for example, Legal Team and Credit Team to gain further insights into the process.
I have tried to give a definite structure to my study. This will include:
Objectives of the study
The main objective behind this research is as follows:
To understand the meaning of Emerging Corporates and SME's.
To study the credit policy for financing of the SME's.
To study the growing importance of financing this sector in the recent days.
To study the guidelines given by the RBI for the financing of the SME's.
To study the importance of financing the SME's and the future prospects of the sector.
To study the different products offered by Barclays to the SME's.
Scope of the study
This study was done just to analyze the credit risk management system of Barclays Bank. There is a scope for further research that can be done to find out the role of Credit Rating Companies in India and a vital role of Management information system in banks.
Data collection
This is a descriptive report and the data collected is through personal interactions and secondary sources. As the project is descriptive in nature, there is no scope of using sampling techniques or statistical tools. The data has been recorded as per the availability from different sources such as:
The credit files of the companies who have actually taken the credit from the bank.
The intranet website of the company.
The Bank's credit policy circular.
Visit to the companies for Negotiations and Documentations.
The analysis and interpretation is purely made on the data available.
Limitations of the study
Efforts have been made to involve all the possible aspects related to the project and study them thoroughly. But still there are certain limitations of the study.
The data obtained is secondary in nature and has been collected from the files of the Credit approval by the Bank.
The names of the companies could not be mentioned, keeping in view the confidentiality maintained by the Bank for its customers.
The report is descriptive in nature and hence research methodology and sampling techniques could not be used.
Since Barclays Commercial banking division has set up in India in 2007, the figures of NPA (Non Performing Assets) of the bank is not available.
Number of companies analyzed for credit sanction is small.
Theoretical Framework of the Study
Introduction to Credit Risk
Credit Risk constitutes about 50-60% of the total risk faced by banks. In simple words it is probability or the chance that a bank borrower or counterparty will fail to meet its obligations in accordance with agreed terms or as generally put, default. Credit risk management aims to maximize a bank's risk-adjusted rate of return by setting up an acceptable range and then maintaining the credit risk exposure within acceptable parameters. Total risk that a bank needs to manage includes firstly the credit risk inherent in the portfolio and secondly the risk in individual credits or transactions. The long term success of any banking organization depends on how well that bank manages its credit risk.
Across the banks, loans are considered to be the biggest source of credit risk; however, there are other sources of credit risk as well that exist throughout the activities of a bank. These include the trading and the banking book, and both on and off the balance sheet.
Another significant aspect of credit risk is related to the process of settlement of financial transactions. As per the BIS, "If one side of a transaction is settled but other fails, a loss may be incurred that is equal to the principal amount of the transaction .Even if one party is simply late in settling, then the other party may incur a loss relating to missed investment opportunities. Settlement Risk (i.e. the risk that the completion or settlement of a financial transaction will fail to take place as expected) thus includes elements of liquidity, market, operational risk as well as credit risk." The level of settlement risk is affected by the particular arrangements for settlement. Arrangement related factors that have a bearing on credit risk include: the timing of the exchange of value ; payment /settlement finality; and the role of intermediaries and clearing houses. [4]
Credit Risk can therefore be divided into three parts:
Default Risk
Exposure Risk
Recovery Risk
The Basel Committee has issued a document in order to encourage banking supervisors globally to promote sound practices for managing credit risk.
According to the Basel committee document, banks should establish an appropriate credit risk environment; operating under a sound credit- granting process; maintaining an appropriate credit administration, measurement and monitoring process; and ensuring adequate controls over credit risk. [5]
Introduction to SME
The definition of Small and Medium Enterprises is not standardized as yet. In some countries, there are certain objective standards, which classify the units as micro, small or medium enterprises depending on the number of employees. In some other countries, annual turnover of the company determines the size of an enterprise. The concept of size is also a relative phenomenon with reference to the local economies, since a large company in a small country could possibly be considered as a small company in a larger country. It changes from organization to organization. In general, statistical definitions of an SME use one or more of three defining measurements:
Number of employees;
Turnover;
Size of the balance sheet.
The SME segment has lately come into the limelight, with increased focus from several government institutions, corporate bodies and banks, and is viewed as agents of growth. Apart from the policy focus and government's thrust towards promoting the SME segment, globalisation and India's robust economic growth has opened several latent business opportunities for this segment. Providing SME finance and support is thus an important area of economic policy.
MSMED Act, 2006
According to the MSMED Act 2006, the term 'industries' has been replaced by 'Enterprise'.
Enterprises classified broadly into:
i) Enterprises engaged in the manufacture/production of goods pertaining to any industry.
ii) Enterprises engaged in providing/rendering of services.
Manufacturing Enterprises:
Defined in terms of investment in plant and machinery (excluding land & buildings) and further classified into:
• Micro Enterprises - investment up to Rs.25 lakh.
• Small Enterprises - investment above Rs.25 lakh & up to Rs.5 crore.
• Medium Enterprises - investment above Rs.5 crore & up to Rs.10 crore.
Service Enterprises:
Defined in terms of their investment in equipment and further classified into:
• Micro Enterprises - investment up to Rs.10 lakh.
• Small Enterprises - investment above Rs.10 lakh & up to Rs.2 crore.
Medium Enterprises - investment above Rs.2 crore & up to Rs.5 crore.
It is estimated that SMEs account for almost 90% of industrial units in India and 40% of value addition in the manufacturing sector. They contribute 35% to India's merchandise exports.
In India, SME sector is the second largest manpower employer, after agriculture and the output from the SSI sector alone constitutes 40 percent share of the value added in the manufacturing sector and one third of national exports.
Within the SME sector, the small sector serves as a green field for nurturing of entrepreneurial talent and helping the units to grow in to medium and large size. The promotion of SMEs, therefore, becomes a major area for policy focus, both in developed as well as developing countries.
Products Offered by Barclays Bank to SMEs
Short term financing
Fund Based (Working Capital limits)
Cash Credit: 1 year
Based on Working Capital Gap of the Company.
Based on Current Assets and Liabilities.
Working Capital Demand Loans (WCDL) : as sub limit of Cash Credit
30 days to 180 days.
Non-Fund Based
Letter of Credit ( L/c )
Bank Guarantee ( BG)
Buyer's Credit
PCFC ( Pre shipment/ Post shipment Finance)
Long term Financing
Term loan ( Rs.) - 5 years
Term loan - 5 years
External Commercial Borrowings (ECB) - 5 to 7 years
Buyer's credit capex - 3 years
The Process & Analysis
The credit sanctioning process starts from the time when the customer walks in with a request for a credit facility or from the time a Relationship Manager approaches a potential client, till the time the facility is finally disbursed. Then the regular monitoring and risk management is also done as a part of the process. Each type of credit facility goes through the essential phases with some variations depending upon the processes and policies defined by the bank. The processes revolve around two key aspects:
Critically appraising the credit worthiness, and;
Analyzing the risk in lending
Tracking these phases and the performance of the process is an underlying phase that runs across the application processing cycle and is critical for monitoring and profitability which finally completes the process of credit sanction. The basic steps involved in the credit sanction process are defined in the following schematic diagram:
Credit selection
Credit appraisal
Negotiation (pricing & security)
Presentation
Sanction & Noting
Documentation & Creation of security
Disbursement, Monitoring, Review/ Renewal.
Each step will be discussed in detail in the final report.
Credit Assessment
GRCB (Global Retail & Commercial Banking) does not have separate internal policies and procedures for different products. In general the credit risk associated with all products is assessed on a case by case basis, with regards to RBI requirements. GRCB does not distinguish between funded and non-funded products for the purpose of assessing credit risk, and the same level of due-diligence is applied for both categories of risk. There is:
Customer Segmentation
Individual Counterparty Caps
Product Caps and Restrictions
Sector Caps
Methods of Assessing Credit Requirements
I am still working on this part.
Monitoring
When a proposal has been agreed at the appropriate level, authorisation is released to the Relationship Manager via the CRE. Care must be taken to record and pass on all the conditions of the authorisation and the relevant comments of the sanctioner(s). Upon completion of a review, the Relationship Manager receives confirmation of the renewal and/or agreement of facilities usually via ICA generated credit authorisations, or an e-mail or a copy of the aforesaid credit committee minutes where appropriate.
It also includes:
Documentation & Collateral/Security
Valuation of Collateral/Security
Monitoring of Sanction Terms/Conditions subsequent/Excesses
Reporting Process
The procedure for monitoring and reporting shall be as given as follows:
Anomalies: All discrepancies/anomalies shall be immediately brought to the notice of the concerned relationship managers via an e-mail message for their comments.
Overdues/Overutilisation: A weekly report shall be prepared collating accounts with overdues/overutilisations as at the close of business on each Friday. The comments of the relationship team shall be incorporated in the same. This report shall be circulated to the Head of Commercial Banking.
Facility Review: A monthly report shall be prepared and circulated to the Relationship Team and Head of Commercial Banking in the first week of the month, highlighting :
Reviews falling due in the current and forthcoming month
Overdue reviews
Master Report: A Month-end date report shall be prepared and circulated to Relationship Team, Head Commercial Banking and the M.D. highlighting :
Excesses
Documentation & Security deficiencies
Overdue reviews
Pending plant visits, stock inspections, stock statements, QIS/FFR, Insurance, valuation reports, ROC Search etc.
Escalation Procedure
Overutilisation/Overdues
Any financial excess/overdue which is not rectified within one week shall be separately brought to the notice of the Head of Commercial Banking. All excesses / overdues not rectified within two weeks shall be reported to the MD and GRCB Credit London. For this purpose, data shall be collated as of each Friday.
Expired Facility Limits
All reviews overdue for a period of 15 days shall be reported the Head of Commercial Banking and those overdue for 45 days shall be reported to the MD and GRCB Credit London. For this purpose, data shall be collated as at the first day of each month.
Documentation/Security discrepancies
All Documentation/Security discrepancies not rectified within 15 days shall be reported to the Head of Commercial Banking and those not rectified within one month shall be reported to the MD & GRCB Credit London. For this purpose, data shall be collated as at the 15th day of each month.
Post Sanction Monitoring and Control
Any deficiencies in post sanction monitoring and control that are not rectified within one month shall be reported to the Head of Commercial Banking and those not rectified within two months shall be reported to the MD. For this purpose, data shall be collated as at the 25th day of each month.
Recommendations & Conclusion
Recommendations:
Relationship Managers should not constraint themselves to NCR region.
A firewall should be maintained between the Credit Team and the Relationship Managers. Communication should take place through a supervisor. This way personal relation between the employees will not affect the process.
Knowledge of Credit Policy of the bank should be made mandatory for the Relationship Managers.
Conclusion:
The importance of Small and Medium Enterprises (SME's) in any economy cannot be overlooked as they form a major chunk in the economic activity of nations. They play a key role in industrialization of a developing country like India. They have unique advantages due to their size, high labor- capital ratio, shorter gestation period and they focus on relatively smaller markets. They need lower investments, ensures a more equitable distribution of national income and stimulates the growth of industrial entrepreneurship. The SMEs are also expanding and proving to be more creditworthy than they were expected a few years back. They are also going global and trading their shares in global stock exchanges.
