International Journal of Risk and Contingency Management

Volume 5 • Issue 3 • July-September 2016

Risk Mitigation Practices in Banking:

A Study of HDFC Bank
Hasnan Baber, Department of Management Studies, Central University of Kashmir, Srinagar, India

ABSTRACT

The prime activity of a bank is to lend money and earn profits in the form of interest but by doing
so the money is exposed to the risk of default where the borrower is not able to pay the money back
in specified period or becomes insolvent. The research study carried out at HDFC Bank under the
topic “Risk Mitigation practices in banking- a study of HDFC bank” to fulfill the said motive turned
out to be useful in understanding the various policies and practices used by the bank to manage the
different types of risk that arise in banking. The study is grounded on the both primary as well as
secondary data. The purpose of the study was to examine the different practices followed by the bank
to such type of risks and how these practices has helped the bank to decrease the effect of the risk on
the profitability and operations . The study also coves the recent trends in the Non-Performing Asset
levels of the bank and how bank has been successful in decreasing the pace of NPAs to minimize
the burden of securitization.

Keywords
Banking, HDFC, Management, Mitigation, Risk

INTRODUCTION

Financial institutions world-wide began to recognize operational risk in the 1990s. In that sense, the
term operational risk is a recent phenomenon in the context of banking and financial institutions.
Heightened regulatory interest in operational risk, particularly since the late 1990s, after a series
of high profile incidents and losses (Barings, Allied Irish, Daiwa and others) finally culminated in
an overt treatment of operational risk under the Basel Accord (2004). The Committee should plan
stress situations to measure the impact of rare market conditions and monitor alteration between the
actual instability of portfolio value and that predicted by the risk measures. There are various risks
associated with borrowing and lending money. Credit risk or default risk comprises incapability or
indisposition of a customer or counterparty to meet obligations in relation to lending, trading, evading,
settlement and other financial transactions. The Credit Risk is generally made up of transaction risk
or default risk and portfolio risk. The portfolio risk in turn includes intrinsic and application risk. The
credit risk of a bank’s portfolio depends on both external and internal factors. Conventionally, credit
risk management was the main task for banks. With liberal deregulation, market risk arising from
opposing changes in market variables, such as interest rate, foreign exchange rate, equity price and
commodity price has become relatively more significant. Even a small change in market variables
causes considerable changes in income and financial value of banks. Market risk takes the form of:

DOI: 10.4018/IJRCM.2016070102

Copyright © 2016, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.

18
 International Journal of Risk and Contingency Management
Volume 5 • Issue 3 • July-September 2016

1. Liquidity Risk;
2. Interest Rate Risk;
3. Foreign Exchange Rate (Forex) Risk;
4. Commodity Price Risk; and
5. Equity Price Risk.

Managing operational risk is fetching an imperative piece of sound risk management practices in
contemporary financial markets in the wake of remarkable upsurge in the capacity of communications,
high degree of structural changes and complex support systems. The most significant type of
operational risk contains failures in internal controls and corporate governance. Such breakdowns
can lead to monetary loss through error, fraud, or failure to perform in a timely manner or cause the
interest of the bank to be bargained.

LITERATURE REVIEW

Risk is inherent in every business the survival of the business depends on how well the environment
is analyzed and risk is anticipated. Risk management in Indian banks is a relatively newer practice,
but has already shown to increase efficiency in governing of these banks as such procedures tend to
increase the corporate governance of a financial institution. In times of volatility and fluctuations in
the market, financial institutions need to prove their mettle by withstanding the market variations and
achieve sustainability in terms of growth and well as have a stable share value. Hence, an essential
component of risk management framework would be to mitigate all the risks and rewards of the
products and service offered by the bank. Thus the need for an efficient risk management framework
is paramount in order to factor in internal and external risks.
There has been lost of research work regarding how banks manage different risks in the business
and what are the impact of these risks on their day to day operations. Following are the some studies
which were conducted in different time periods in India by different authors:

• Safakli (2007) did an extensive study of credit risk associated with the banking sector and Northern
Cypress and found that the credit risk ratios were indicative of the credit risks associated with
the banking sector and correlated the risk ratios with key macroeconomic indicators;
◦◦ Radhakrishnan and Ravi (2009) state that capital requirements not only protect investors
but also safeguard them against the possibility of failure of big banks. They also improve
market discipline;
◦◦ Kumar (2010) conducted a study in Delhi to find out the various methodologies used by the
banks in their operational risk management activity complaining the rules and regulations.
The study reveal that the operational risk management functions is predominantly gaining
importance in banking operations in India along with credit risk. He concluded that the
banks are ready to improve their existing risk management framework in accordance with
Basel II to deal with risks more effectively;
• Ayyappan and Ramachandran (2011) conducted a study of 22 public sector and 15 private sector
banks to predict the determinants of the credit risk in the Indian Commercial banking sector by
using an econometric model. The outcome of the study is the non-performing assets had a strong
and statistically significant positive influence on the current non-performing assets. They opined
that the problem of NPA is not only affecting the banks but also the whole economy;

19
International Journal of Risk and Contingency Management
Volume 5 • Issue 3 • July-September 2016

◦◦ Gupta and Meera (2011) feel that Basel II regulations have led to a significant improvement
in the risk structure of banks because their capital adequacy has improved. Also, there
exists an inverse relation between CAR and Non-Performing Assets (NPAs), which clearly
indicates that due to capital regulation, banks have to increase their CAR which leads to
decrease in NPAs;
◦◦ Choudhary and Navin (2011) designed to develop an internal credit rating model for banks
which improves their current predictive power of financial risk factors. He highlights how
banks assess the creditworthiness of their borrowers and how can they identify the potential
defaulters so as to improve their credit evaluation. He concluded that the business of lending
has given rise to credit risk, which is the risk of default;
◦◦ Prof. Rekha Arun kumar and Dr. G. Kotreshwar (2008) concluded that Credit risk
management in today’s deregulated market is a challenge. The very appearance of credit
risk is likely to experience a physical change in view of migration of Tier- I borrowers and,
more mainly, the entry of new segments like retail offering in the credit portfolio. These
developments are probable to contribute to the augmented potential of credit risk and would
range in their effects from awkwardness to disaster. To avoid being blindsided, banks must
develop a competitive Early Warning System (EWS) which combines strategic planning,
competitive intelligence and management action. EWS discloses how to change strategy to
meet novel truths, evade common follows like benchmarking and tell managers what they
need to know – not what they want to hear;
◦◦ R.S. Raghavan (2003) concluded that Risk management underscores the fact that the
survival of an organization depends heavily on its capabilities to anticipate and prepare for
the change rather than just waiting for the change and react to it, a committee method may
be adopted to achieve various risks. Risk Management Committee, Credit Policy Committee,
Asset Liability Committee, etc are such groups that handle the risk management features.
The efficiency of risk measurement in banks depends on well-organized Management
Information System, computerization and networking of the branch activities.

RESEARCH METHODOLOGY AND OBJECTIVES

Research Methodology
The population taken for research was the banking industry. The sample taken for the production of
a good work was therefore HDFC. Risk management tools were employed in assessing the level of
the bank’s risk. The information used was entirely secondary data, obtained from various articles on
risk management from the internet, Banks Annual Reports, financial reports.
This involved a valuation of the income statement and balance sheet to identify inherent risks
in their mechanisms and structure. It also involved using various tools (ratios, charts and tables)
to ascertain the level of credit and market risks (liquidity, interest rate, foreign currency) the bank
is exposed to. These tools will also enable an evaluation of the effectiveness of the bank‘s risk
management framework for managing its credit, market and operational risks.

Objectives of the Study

1. To study the broad outline of management of credit, market and operational risks related with
banking sector;
2. To evaluate the risk management practices used by the bank;
3. To examine the role of Risk Based Supervision in strengthening risk management practices of
the Bank;
4. To analyze the trends in Non-Performing Assets of the bank.

20
 International Journal of Risk and Contingency Management
Volume 5 • Issue 3 • July-September 2016

Research Design
It is a descriptive study consisting of qualitative factors.

DATA ANALYSIS

Assessment of Capital Adequacy

The Bank has a process for assessing its overall capital adequacy in relation to the Bank’s risk profile
and a strategy for maintaining its capital levels. The process provides an assurance that the Bank has
adequate capital to support all risks inherent to its business and an appropriate capital buffer based
on its business profile. The Bank identifies, assesses and manages comprehensively all risks that it
is exposed to through sound governance and control practices, robust risk management framework
and an elaborate process for capital calculation and planning.
The Bank has a comprehensive Internal Capital Adequacy Assessment Process (‘ICAAP’). The
Bank’s ICAAP covers the capital management policy of the Bank, sets the process for assessment
of the adequacy of capital to support current and future activities / risks and a report on the capital
projections for a period of 2 to 3 years.
The Bank has implemented a Board approved Stress Testing Framework which forms an integral
part of the Bank’s ICAAP. Stress Testing involves the use of various techniques to assess the Bank’s
potential vulnerability to extreme but plausible stressed business conditions.

Credit Risk Management

The Board supervises the credit risk management functions of the Bank. The Risk Policy & Monitoring
Committee (‘RPMC’), which is a committee of the Board, guides the development of policies,
procedures and systems for managing credit risk, towards applying the credit risk strategy of the Bank.
The RPMC ensures that these are adequate and appropriate to changing business circumstances as
shown in Table 1, the structure and needs of the Bank and the risk appetite of the Bank. The RPMC
periodically reviews the Bank’s portfolio configuration and the status of impaired assets, in Table 2 and
Table 3 capital requirements for market risk and operational risk respectively for year 2014 is shown.

Table 1. Capital requirements for credit risk

March 31,
Particulars March 31, 2015*
2014
Portfolios subject to standardized approach 272,864.8 236,550.8
securitization exposures 12,477.3 10,267.4
Total 285,342.1 246,818.2
Note: Amounts in million
*Computed as per Basel II- New capital Adequacy Framework

Table 2. Capital requirements for market risk

March 31,
Standardized duration approach March 31, 2013*
2014
Interest rate risk 8,377.7 7,552.5
Equity Risk 765.5 5,910.4
Foreign Exchange Risk(including Gold) 1,260.0 270.0
Total 10,403.2 13,732.9
Note: Amounts in million
*Computed as per Basel II- New capital Adequacy Framework

21
International Journal of Risk and Contingency Management
Volume 5 • Issue 3 • July-September 2016

Table 3. Capital requirements for operational risk

March 31,
Particulars March 31, 2013
2014
Basic indicators approach 28,100.9 22,564.6
Note: Amounts in million

The Bank’s Credit & Market Risk Group determinations credit risk management centrally in
the Bank. It is primarily accountable for implementing the risk strategy approved by the Board,
developing procedures and systems for handling risk, carrying out an independent valuation of credit
and market risk, approving individual credit exposures and monitoring portfolio composition and
quality. Within the Credit & Market Risk group and independent of the credit endorsement process,
there is a framework for review and endorsement of credit ratings. With regard to the Wholesale
Banking business, the Bank’s risk organization functions are centralized. In respect of the Bank’s Retail
Assets business, while the various purposes relating to policy, portfolio management and analytics are
centralized, the underwriting function is distributed across various geographies within the country.
The risk management function in the Bank is clearly defined and independent from the operations
and business units of the Bank. The risk management function is not allocated any business targets.

Credit Risk: Portfolios Subject to the Standardized Approach

Standardized Approach
For exposure amounts after risk mitigation subject to the standardized approach (including exposures
under bills re-discounting transactions, if any), the Bank’s outstanding (rated and unrated) in three
major risk buckets as well as those that are deducted, are shown in Table 4. Geographical distribution
of gross credit risk exposure is also given in Table 5.

Table 4. Three credit risk baskets of banks

Gross Credit Exposure Mar 31, 2014 Mar 31, 2013

Below 100% risk weight 1,549,738.2 1,262,143.2
100% risk weight 1,370,459.4 984,786.9
More than 100% risk weight 943,986.9 865,084.1
Deducted 18.4 -
Total 3,864,202.9 3,112,014.2

Table 5. Geographic distribution of gross credit risk exposures

March 31,2014 March 31,2013

Exposure
Distribution Non-Fund Non-Fund
Fund Based* Total Fund Based* Total
Based** Based**
Domestic 3,183,539.5 402,418.6 3,585,958.1 2,624,090.8 382,949.5 3,007,040.3
Overseas 242,329.0 35,915.8 278,244.8 100,980.3 3,993.6 104,973.9
Total 3,45,868.5 438,334.4 3,864,202.9 2,725,071.1 386,943.1 3,112,014.2
Note: Amounts in million
*Fund based exposure comprise loans and advances including bills re-discounted and investment in debenture and bonds, commercial papers, security
receipts, on-balance sheet securitization exposure purchased or retained and deposits with NABARD, SIDBI and NHB under priority/weaker section lending
schemes.
** Non-fund based exposure comprise guaranteed, acceptances, endorsements and letters of credit

22
 International Journal of Risk and Contingency Management
Volume 5 • Issue 3 • July-September 2016

Credit Rating Agencies

The Bank is using the ratings allocated by the following domestic external credit rating agencies,
permitted by the RBI, for risk weighting claims on domestic entities:

• Credit Analysis and Research Limited (‘CARE’);

• Credit Rating Information Services of India Limited (‘CRISIL’);
• ICRA Limited (‘ICRA’);
• India Ratings and Research Private Limited (earlier known as Fitch India).

The Bank is using the ratings allocated by the following international credit rating agencies,
accepted by the RBI, for risk allowance claims on overseas entities:

• Fitch Ratings;
• Moody’s;
• Standard & Poor’s.

Types of Exposures for which Each Agency is Used

The Bank has used the petitioned ratings assigned by the above accepted credit rating agencies for all
qualified exposures, both on balance sheet and off balance sheet, whether short term or long term, in
the way permitted in the RBI guidelines on Basel III capital regulations. The Bank has not finished
any discrimination among ratings assigned by these agencies nor has restricted their usage to any
particular type of exposure.

Credit Risk Mitigation: Disclosures for Standardised Approach

Policies and Process

The Bank’s Credit Policies & Procedures Manual and Product Programs include the risk mitigation and
collateral management policy of the Bank. The policy covers aspects on the nature of risk mitigants/
collaterals acceptable to the Bank, the documentation and custodial arrangement of the collateral,
the valuation approach and periodicity etc.

Instruments of Credit Risk Management Suggested by RBI and Adopted by Bank

Credit Approving Authority

Bank has carefully formulated scheme of delegation of powers. The bank also evolves multi-tier credit
approving system where the loan proposals are approved by an ‘Approval Grid’ or a ‘Committee’. The
credit facilities above a specified limit are approved by the ‘Grid’ or ‘Committee’, comprising at least
3 or 4 officers and invariably one officer represents the CRMD, who has no volume and profit targets.
Bank also considers credit approving committees at various operating levels i.e. huge branches (where
reflected necessary), Regional Offices, Zonal Offices, Head Offices, etc. Bank considers delegating
powers for authorization of upper limits to the ‘Approval Grid’ or the ‘Committee’ for better rated /
quality customers. The essence of the credit approving system may be that no credit proposals should
be accepted or suggested to upper authorities, if mainstream members of the ‘Approval Grid’ or
‘Committee’ do not settle on the creditworthiness of the borrower. In case of difference, the specific
views of the dissenting member/s are recorded.
The bank also has a suitable framework for reporting and evaluating the quality of credit decisions
taken by various functional groups. The quality of credit decisions are evaluated within a reasonable
time, say 3 – 6 months, through a well-defined Loan Review Mechanism.

23
International Journal of Risk and Contingency Management
Volume 5 • Issue 3 • July-September 2016

Prudential Limits
In order to limit the magnitude of credit risk, prudential limits are being laid down on various aspects
of credit:

1. Specify benchmark current/debt equity and profitability ratios, debt service coverage ratio or other
ratios, with elasticity for deviations. The conditions subject to which deviations are permitted
and the authority therefore clearly spelt out in the Loan Policy;
2. Single/group borrower limits, which may be lesser than the limits agreed by Reserve Bank to
deliver a filtering mechanism;
3. Considerable exposure limit i.e. sum total of exposures assumed in respect of those single
borrowers enjoying credit facilities in excess of a threshold limit, say 10% or 15% of capital
funds. The substantial exposure limit are fixed at 600% or 800% of capital funds, depending
upon the degree of concentration of risk exposure;
4. Extreme exposure limits to industry, sector, etc. are set up. There are also systems in place to
evaluate the exposures at reasonable intervals and the limits are adjusted especially when a
particular sector or industry faces slowdown or other sector/industry specific problems. The
experience limits to delicate sectors, such as, advances against equity shares, real estate, etc.,
which are subject to a high degree of asset price volatility and to specific industries, which are
subject to frequent business cycles, are necessarily restricted. Similarly, high-risk industries,
as perceived by the bank, are placed under lower portfolio limit. Any excess exposure are fully
backed by adequate collaterals or strategic considerations; and
5. Bank considers maturity profile of the loan book, keeping in view the market risks inherent in
the balance sheet, risk evaluation capability, liquidity, etc.

Risk Rating
Banks also employs a comprehensive risk scoring / rating system that serves as a single point indicator
of diverse risk factors of counterparty and for taking credit decisions in a consistent manner. To
assist this, a considerable degree of standardization is obligatory in ratings across debtors. The risk
rating system is designed to reveal the overall risk of lending, critical input for setting pricing and
non-price terms of loans as also present meaningful information for review and management of loan
portfolio. The risk rating, in short reflects the underlying credit risk of the loan book. The rating
exercise also facilitates the credit granting authorities some comfort in its knowledge of loan quality
at any moment of time.
The risk rating system is drawn up in a structured manner, incorporating, inter alia, financial
analysis, projections and sensitivity, industrial and management risks. The bank uses number of
financial ratios and operational parameters and collaterals as also qualitative aspects of management
and industry characteristics that have bearings on the creditworthiness of borrowers. Banks weighs the
ratios on the basis of the years to which they represent for giving importance to near term developments.
Within the rating framework, bank can also prescribe certain level of standards or critical parameters,
beyond which no proposals are entertained. Bank also considers separate rating framework for large
corporate / small borrowers, traders, etc. that exhibit varying nature and degree of risk.

Risk Pricing
Risk-return pricing is an essential principle of risk management. In a risk-return setting, borrowers
with weak financial position and hence placed in high credit risk category are priced high. Thus, bank
evolves scientific systems to price the credit risk, which has a bearing on the expected probability
of default. The pricing of loans normally is linked to risk rating or credit quality. The likelihood
of default could be resulting from the past conduct of the loan portfolio, which is the purpose of
loan loss delivery/charge offs for the last five years or so. Bank has built historical database on the

24
 International Journal of Risk and Contingency Management
Volume 5 • Issue 3 • July-September 2016

portfolio quality and provisioning / charge off to equip them to price the risk. But value of collateral,
market forces, perceived value of accounts, future business potential, portfolio/industry exposure and
strategic reasons also play important role in pricing. Flexibility is also being made for revising the
price (risk premia) due to changes in rating / value of collaterals over time. Bank also has put in place
Risk Adjusted Return on Capital (RAROC) framework for pricing of loans, which calls for data on
portfolio behavior and allocation of capital commensurate with credit risk inherent in loan proposals.
Under RAROC outline, lender begins by alleging an interest mark-up to cover the expected loss –
expected default rate of the rating category of the borrower. The creditor then assigns enough capital
to the potential loan to cover some amount of unforeseen loss- variability of default rates. Generally,
international banks allocate enough capital so that the expected loan loss reserve or provision plus
allocated capital cover 99% of the loan loss outcomes.
There is, however, a need for likening the prices quoted by contestants for borrowers perched on
the same rating /quality. Thus, any effort at price-cutting for market share would result in mispricing
of risk and ‘Adverse Selection’.

Loan Review Mechanism (LRM)

LRM is an operative tool for continuously assessing the quality of loan book and to bring about
qualitative developments in credit administration. Bank, therefore, put in place proper Loan Review
Mechanism for large value accounts with responsibilities assigned in various areas such as, evaluating
the effectiveness of loan administration, maintaining the integrity of credit grading process, assessing
the loan loss provision, portfolio quality, etc.

Non-Performing Assets in HDFC Bank

The Bank will categorize an account as NPA if the interest due and charged during any quarter is not
examined fully within 90 days from the end of the quarter. When a particular facility of a borrower
has become non-performing, the facilities granted by the Bank to that borrower (whether a wholesale
or retail borrower) will be classified as NPA and not the particular facility alone which triggered the
NPA classification for that borrower.
Advances against term deposits, National Savings Certificates eligible for surrender, Indira
VikasPatras, KisanVikasPatras and Life Insurance policies need not be treated as NPAs, provided
adequate margin is available in the accounts. Credit facilities backed by the Central Government though
overdue may be treated as NPA only when the Government repudiates its guarantee when invoked.
State Government assured advances and investments in State Government guaranteed securities would
appeal asset classification and provisioning norms if interest and / or principal or any other amount
due to the Bank leftovers overdue for more than 90days.
A advance for an infrastructure project will be classified as NPA during any time before beginning
of marketable operations as per record of recovery (90 days overdue), lest it is restructured and
becomes eligible for classification as ‘standard asset’ in terms of conditions laid down in the related
RBI guidelines. A loan for an structure project will be classified as NPA if it flops to commence
commercial operations within two years from the original Date of Commencement of Commercial
Operations (‘DCCO’), even if it is steady as per record of recovery, unless it is rationalized and
becomes eligible for arrangement as ‘standard asset’ in terms of conditions laid down in the related
RBI guidelines.
A loan for a non-infrastructure project (other than commercial real estate exposures) will be
classified as NPA during any time before commencement of commercial operations as per record of
recovery (90 days overdue), unless it is restructured and becomes eligible for classification as ‘standard
asset’ in terms of conditions laid down in the related RBI guidelines. A loan for a non-infrastructure
project (other than commercial real estate exposures) will be classified as NPA if it fails to commence
commercial operations within one year from the original DCCO, even if is regular as per record of

25
International Journal of Risk and Contingency Management
Volume 5 • Issue 3 • July-September 2016

recovery, unless it is restructured and becomes eligible for classification as ‘standard asset’ in terms
of conditions laid down in the related RBI guidelines.
A loan for commercial real estate project will be classified as NPA during any time before
commencement of commercial operations as per record of recovery (90 days overdue), or if the
project fails to commence commercial operations within one year from the original DCCO or if the
loan is restructured.

Asset Quality Remains Healthy

On the asset quality front, the absolute gross NPA levels for the bank decreased by 0.9% qoq while
net NPAs increased by 2.8% qoq, which, given the context of the current macro challenges and low
base for the bank, appears to be a moderate increase. The Gross NPA ratio declined marginally by
3bp sequentially to 1.0%, while the Net NPA ratio remained flat at 0.3% as shown in Figure 1. The
PCR (excluding write-offs) for the bank remained largely stable sequentially at 72.6%. Restructured
advances for the bank remained flat at 0.2% of gross advances. The bank has been able to maintain its
asset quality consistently, as reflected in the decline in slippages, i.e. from 5.2% in FY2009 to 1.9%
in FY2014. Provisions to average assets also declined from 1.2% in FY2009 to 0.4% in FY2014 as
shown in Figure 2. Though the bank did not make any floating provisions during 4QFY2014, it has

Figure 1. Trend of NPA’s

Figure 2. Distribution of NPA’s

26
 International Journal of Risk and Contingency Management
Volume 5 • Issue 3 • July-September 2016

been actively making floating provisions otherwise and now has a cumulative floating provision of
around 1,835cr, which provides additional comfort as shown in Table 6 and Table 7. Going forward,
even if specific credit costs increase to normalized levels, the overall provisioning burden is expected
to be manageable due to the buffer created by these floating provisions as shown in Table 8:

• Amongst the best portfolio quality (wholesale & retail) in the industry;
• Strong credit culture, policies, processes;
• Specific provision cover at 73% of NPAs, total coverage ratio over 100%;
• Restructured loans at 0.2% of the Bank’s gross advances as on March 31, 2014;
• Floating provisions at `18.4 Bn as on March 31, 2014;
• NPA rate lower than 10 year average even in current challenging environment.

Operational Risk
Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and
systems or from external events. The way operational risk is managed has the potential to positively
or negatively impact a bank’s customers, its financial performance and reputation. The Bank has

Table 6. Non-performing assets

Particulars March 31, 2014 March 31, 2013

Movement of Gross NPAs 23,739.2 20,031.7
Opening balance 48,756.3 32,118.3
Additions during the year (41,487.9) (28,410.8)
Reductions 31,007.6 23,739.2
Closing balance
Movement of provision for NPAs 18,829.1 16,489.8
Opening balance 30,936.3 22,294.0
Provisions made during the year (15,437.7) (11,653.3)
Write-off (12,103.7) (8,301.4)
Write back of excess provisions 22,223.9 18,829.1
Closing balance

Table 7. Non-performing investments

Particulars March 31, 2014 March 31, 2013

Gross non- performing investments 1,108.8 1,654.6
Less: provisions 1,014.7 1,582.9
Net non-performing investments 94.1 71.7

Table 8. Provisions for depreciations on investments

Particulars March 31, 2014 March 31, 2013

Opening balance 2,382.7 2,269.3
Provisions made during the year 627.5 1,054.7
Write-off (532.0) (161.6)
Write back of excess provisions (728.7) (779.7)
Closing balance 1,749.5 2,382.7

27
International Journal of Risk and Contingency Management
Volume 5 • Issue 3 • July-September 2016

put in place Board approved governance and organizational structure with clearly defined roles and
responsibilities to mitigate operational risk arising out of the Bank’s business and operations.

Capital Requirement
The Bank has devised an operational risk measurement system compliant with Advanced Measurement
Approach for estimating operational risk capital estimate for the Bank. The Bank is in the process of
fine tuning the approach and will subsequently submit the same for regulatory approval. Presently
the Bank tracks the Basic Indicator Approach for estimating operational risk capital.

Asset Liability Management (‘ALM’) Risk Management

ALM risk management procedure consists of supervision of liquidity risk and Interest Rate Risk in
the Banking Book (‘IRRBB’). Liquidity risk is the risk that the Bank may not be capable to fund
increases in assets or meet requirements as they tumble due without incurring intolerable losses.
IRRBB refers to the possible opposing financial influence on the Bank’s banking book from variations
in interest rates. The banking book is comprised of assets and liabilities that are tapered on account
of relationship or for steady income and legal obligations and are generally held till maturity. The
Bank moves various assets, liabilities and off-balance sheet items across markets, maturities and
benchmarks revealing it to risks from altering interest rates. The Bank’s objective is to uphold liquidity
risk IRRBB within bearable limits.

Risk Measurement Systems and Reporting

Liquidity Risk is measured using flow method and stock approach. Flow approach involves complete
chasing of cash flow disparities. Stock approach includes measurement of critical ratios in respect of
liquidity risk. Analysis of liquidity risk also involves exploratory how funding requests are likely to
be affected under crisis situations. The Bank has a Board approved liquidity stress outline guided by
regulatory instructions. The Bank has a wide-ranging intraday liquidity risk management framework
for checking intraday positions throughout the day.
IRRBB is measured and organized using both Earnings Perspective (Traditional Gap Analysis)
and Economic Value Perspective (Duration Gap Analysis). Earnings Perspective (Traditional Gap
Analysis) measures the compassion of net interest income to changes in interest rate over the next
12 months. It includes bucketing of rate sensitive assets, liabilities and off-balance sheet items as per
residual maturity/ re-pricing date in various time bands and computing change of income under 200
basis points upward and downward rate shocks over a one year horizon. Economic Value Perspective
(Duration Gap Analysis) calculates the change in the present value of the Bank’s expected cash flows
for a 200 basis point upward and downward rate shock. The Bank also assumes periodic stress testing
for its banking book. This delivers a measure to assess the Bank’s financial standing from extreme
but reasonable interest rate fluctuations. The stress testing outline is approved by the Board.

FINDINGS, SUGGESTIONS AND CONCLUSION

The analysis of the bank was undertaken with the help of the benefits associated with the techniques
followed by bank to manage different types of risks which helped to determine why and how risk
management is important in banking. May be it is because of the supervision, commitment from the
top level co-operation of the staff or the bank’s ability to come up instruments which has helped the
bank to control the risk and maximize value for its stakeholders.
In general, the banks have attained incredible growth over the years. All the banks have healthy
financial performances. But due to HDFC Bank’s sophisticated technology and the use of IT based
network, the bank has worked wonders by fulfilling all its customers’ desires. The bank has been able
to achieve heavy growth across multiple parameters, including customer’s acquisition, geographical
spread, business volumes and revenues.

28
 International Journal of Risk and Contingency Management
Volume 5 • Issue 3 • July-September 2016

• Banks total capital adequacy ratio calculated in line with Basel capital regulations stood at 16.8%,
well above the regulatory minimum of 9.0%;
• Net interest income grew by 21.2% due to acceleration in loan growth of 20.6% coupled with a
net interest margin of 4.4%;
• Banks ratio of gross non-performing assets to gross advances was 0.9%.

Suggestions
1. The interest rate should be set as per the income level of the population concerned, this will help
bank to mitigate credit risk;
2. The bank should extend its savings regular account to lower income group also because currently
this facility is not available to this class and customers cannot open account at zero balance. This
will increase the profitability of bank and will boost banks customer base;
3. The bank should provide its employees information beyond the job requirements so that employees
will become more informative and anticipative about the ongoing marketing trends;
4. Strengthen incentives and accelerate results oriented training and communication program for
staff to encourage the use of new technology;
5. The bank should promote discounts for quick repayment of loan and decrease loss on bad debts;
6. Bank should adopt automatic error detection software’s while preparing day to day business
operation reports this will control the operational risk to a large extent;
7. Although the products and offerings of the company are identical at all branches but most of the
branches are confined to few products only the company should increase its product offerings
in various branches;
8. The company should explore rural markets more and more because the demand for the
sophisticated products and services is increasing day by day and income levels of rural people
are also increasing;
9. The company needs to change the perception of people about the bank because most of the people
perceive the bank as bank for rich;
10. The company should diversify its loans and advances to different sects so as to minimize the
concentration risk.

Conclusion
Risk management underlines the fact that the existence of an organization depends deeply on its
competences to forestall and get ready for the change rather than just waiting for the change and
respond to it. The objective of risk management is not to forbid or stop risk taking activity, but to
safeguard that the risks are deliberately taken with full knowledge, clear determination and considerate
so that it can be measured and moderated. It also averts an organization from suffering intolerable
loss causing an organization to flop or materially damage its competitive position. Functions of
risk management should actually be bank precise dictated by the size and quality of balance sheet,
complexity of functions, technical/ professional manpower and the status of MIS in place in that bank.
There might not be one-size-fits-all risk management segment for all the banks to be made applicable
homogeneously. Balancing risk and return is not an easy job as risk is subjective and not quantifiable
whereas return is objective and measurable. If there exist a way of adapting the subjectivity of the
risk into a number then the balancing exercise would be significant and much easier.
HDFC Bank is of the leading bank in the country the bank has gained the competitive advantage
over its rivals because of its dynamic strategies and policies from top management to lower
management. As revealed by the study, a committee approach have been adopted to manage various
risks. Risk Management Committee, Credit Policy Committee, Asset Liability Committee, etc. are
such committees that lever the risk management facets. While a centralized department has been
made responsible for monitoring risk, risk control actually takes place at the functional departments

29
International Journal of Risk and Contingency Management
Volume 5 • Issue 3 • July-September 2016

as it is generally fragmented across Credit, Funds, and Investment and Operational areas. Integration
of systems that includes both transactions processing as well as risk systems is one of the perquisite
for effective risk management system which the bank has been successful at all.
The success of risk measurement in banks depends on competent Management Information
System, computerization and networking of the division activities. The data warehousing solution
should effectually interface with the transaction systems like core banking solution and risk systems
to organize data. An objective and dependable data base has to be constructed up for which bank has
to examine its own past performance data relating to loan defaults, trading losses, operational losses
etc., and come out with standards so as to prepare themselves for the future risk management activities.
Any risk management conventional is as good as the data input. With the attack of globalization and
liberalization from the last decade of the 20th Century in the Indian financial sectors in general and
banking in particular, managing Change would be the main challenge, as transformation and change
are the only inevitabilities of the future.

30
 International Journal of Risk and Contingency Management
Volume 5 • Issue 3 • July-September 2016

REFERENCES

Ayyappan, S., & Ramachandran, A. (2011). Market Discipline, Behavior and Capital Adequacy of Public and
Private Sector Banks in India. European Journal of Soil Science, 23(1), 109–115.
Baber, H. (2014). Financial inclusion—scope and limitations “a case study of J & K Bank”. International Journal
of Management. IT and Engineering, 4(6), 435–448.
Basel Committee on Banking Supervision. (1999). Principles for the Management of Credit risk. Basel: Bank
for International Settlements.
Basel Committee on Banking Supervision. (2001). Principles for the Management and Supervision of Interest
Rate Risk. Basel: Bank for International Settlements.
Basel Committee on Banking Supervision. (2003). Sound Practices for the Management and Supervision of
Operational Risk. Basel: Bank for International Settlements.
Basel Committee on Banking Supervision. (2003). Trends in risk integration and aggregation. Basel: Bank for
International Settlements.
Basel Committee on Banking Supervision. (2006). Corporate Governance for Banking Organizations (Enhancing
Corporate Governance for Banking Organizations). Basel: Bank for International Settlements.
Basel Committee on Banking Supervision. (2008). Principles for Sound Liquidity Risk Management and
Supervision. Basel: Bank for International Settlements.
Bessis, J. (2010). Risk Management in Banking (3rd ed.). Wiley.
Fatemi, A., & Glaum, M. (2000). Risk management practices in German firms. Managerial Finance, 26(3),
1–17. doi:10.1108/03074350010766549
Froot, K. A., Scharfstein, D. S., & Stein, J. C. (1994). A Framework for Risk Management. Harvard Business
Review, 76(6), 91–102.
Gates, S. (2006). Incorporating Strategic Risk into Enterprise Risk Management: A Survey of Current Corporate
Practice. Journal of Applied Corporate Finance, 18(4), 81–90. doi:10.1111/j.1745-6622.2006.00114.x
Greuning, H. V., & Bratanovic, S. B. (2003). Analyzing Banking Risk: A Framework for Assessing Corporate
Governance and Risk Management. World Bank Publications. doi:10.1596/0-8213-5418-3
Jan, A., & Baber, H. (2014). Bancassurance-Growth Guaranteed In India. The Economics and Finance Letters,
1(9), 104–113. doi:10.18488/journal.29/2014.1.4/29.4.104.113
Merton, R. C. (1989). The application of the continuous-time theory of finance to financial intermediation and
insurance. Geneva Papers on Risk and Insurance. Theory, 14(3), 225–261. doi:10.1057/gpp.1989.21
Nandi, J. K., & Choudhary, N. K. (2011). Credit Risk Management of Loan Portfolios by Indian Banks: Some
Empirical Evidence. IUP Journal of Bank Management, 10(2), 32.
Pyle, D. H. (1997, July). Bank Risk Management: Theory (Finance Working Paper No. RPF-272). Institute of
Business and Economic Research, University of California.
Sabato, G. (2009, August). Financial Crisis: Where did Risk Management Fail? Royal Bank of Scotland, Group
Credit Risk.
Safakli, O. V. (2007). Credit risk assessment for the banking sector of northern Cyprus. Banks and Bank Systems,
2(1), 21.
Santomero, A. M. (1997). —Commercial Bank Risk Management: An Analysis of the Process. Journal of
Financial Services Research, 12(2/3), 83–115. doi:10.1023/A:1007971801810

31
International Journal of Risk and Contingency Management
Volume 5 • Issue 3 • July-September 2016

Schmit, J. T., & Roth, K. (1990). Cost Effectiveness of Risk Management Practices. The Journal of Risk and
Insurance, 57(3), 455–470. doi:10.2307/252842
Slywotzky, A. J., & Drzik, J. (2005). Countering the Biggest Risk of All. Harvard Business Review, 82, 78–88.
PMID:15807041
Torben, J. A. (2009). Effective risk management outcomes: Exploring effects of innovation and capital structure.
Journal of Strategy and Management, 2(4), 352–379. doi:10.1108/17554250911003845

Hasnan Baber is an Assistant Professor in Department of Management Studies, Central University of Kashmir. As
an academician, he has gained valuable experience leading postgraduate discussion for both management’s majors
and non-majors. In addition to classroom instruction, he has rich experience of advising students on appropriate
research topics and editing and evaluating their work. He has published and presented more than dozens of
research papers on diversified subjects of Management. He has sole authored a book on Business Ethics and
Corporate Governance. His course work has covered a wide range of topics in the various management areas.
He is associated with University of Roehampton as online Instructor. He is also serving as Advisory and Editorial
board member of Inter-Continental Management Research Review.

32