INTRODUCTION AND

BACKGROUND

1.1 Purpose of the Study

The banking sector is one of the cornerstones of a nation's

financial system, and its ability to lend funds effectively and
safely is crucial to economic development. Credit risk, which
refers to the possibility of a borrower defaulting on loan
repayments, remains the most significant type of risk faced
by commercial banks. As the economic landscape evolves
and borrowers’ financial behavior becomes increasingly
complex, banks must constantly refine and upgrade their
credit risk management (CRM) practices.
This study aims to delve into the systems, processes, and
tools used by commercial banks—particularly HDFC Bank—to
identify, assess, monitor, and mitigate credit risk. The
research explores the regulatory framework under which
banks operate, the internal policies followed by HDFC Bank,
and the role of technology in shaping effective credit risk
management. The study also seeks to understand the
common gaps and challenges faced by credit officers and to
propose practical recommendations based on empirical
observations and data analysis.

Through this study, the researcher aims to contribute to

academic literature as well as provide actionable insights for
practitioners in the banking industry.

in
 REVIEW OF LITERATURE

2.1 Domain/Topic Specific Review

Credit risk management is one of the most crucial aspects of

modern commercial banking. It refers to the process of
identifying, measuring, and mitigating the potential losses
that a bank may incur if a borrower defaults on their loan
obligations. The importance of credit risk management has
been underscored by various financial crises around the
world, including the 2008 global financial crisis and the
recent disruptions due to the COVID-19 pandemic. This
section reviews the major theories, regulatory frameworks,
tools, and institutional practices that shape the domain.

The roots of credit risk theory lie in classical financial

models. Edward Altman's Z-Score (1968) is a pioneering
model that predicts corporate bankruptcy using financial
ratios. It remains widely used in credit risk evaluation even
today. Merton’s structural model (1974) brought a
revolutionary approach by treating corporate debt and
equity as derivative instruments, where equity is a call
option on the firm’s assets. This laid the foundation for more
dynamic and market-sensitive risk measurement tools like
KMV model and CreditMetrics.

In practical application, commercial banks often rely on

Probability of Default (PD), Loss Given Default (LGD), and
Exposure at Default (EAD) as the three pillars of expected
loss calculations. These elements are part of the Basel II
framework, which introduced a more risk-sensitive capital
requirement structure. Basel III, developed after the 2008
crisis, further emphasized liquidity risk and required banks to
maintain capital buffers to absorb losses during financial
shocks.

In India, the Reserve Bank of India (RBI) acts as the primary

regulator and enforcer of credit risk management guidelines.
It has mandated that banks follow asset classification norms
(Standard, Substandard, Doubtful, and Loss assets) and
maintain provisioning based on risk weights. Banks must
also adhere to Capital Adequacy Ratios (CAR) and disclose
Non-Performing Assets (NPAs) quarterly.

Empirical studies in the Indian context have further enriched

our understanding. A study by Rajan and Dhal (2003) in RBI
Occasional Papers showed that macroeconomic factors like
GDP growth, interest rate changes, and inflation significantly
impact the level of NPAs in Indian banks. Chaudhary and
Sharma (2011) found that private sector banks tend to adopt
superior credit risk techniques compared to their public
sector counterparts.

Technological innovation is also transforming the landscape.

Banks are
several key gaps exist in the literature—especially related to
private sector banks and the post-COVID environment.

RESEARCH METHODOLOGY
3.1 Objectives of the Study

The main aim of this study is to assess and analyze the

credit risk management practices adopted by HDFC Bank in
Kolkata. It intends to understand the risk control systems in
place, evaluate their effectiveness, and identify areas for
improvement. The study is guided by the following key
objectives:
1. To understand the theoretical and practical aspects of
credit risk management in commercial banks.

2. To examine the risk assessment and mitigation

techniques employed by HDFC Bank.

3. To explore the impact of RBI and Basel regulatory norms

on the credit policy framework.

4. To analyze primary responses from credit officers

regarding risk practices and implementation.

5. To recommend improvements to existing credit risk

strategies based on findings.

3.2 Scope of the Study

This study focuses exclusively on credit risk—one of the

most significant risks faced by banks. It is confined to HDFC
Bank's operational practices in Kolkata, giving it a regional
dimension while retaining relevance at the national level due
to the bank’s standardized systems.

The scope includes:

1. A detailed examination of credit evaluation processes.

2. Internal credit rating systems.

3. Monitoring of loan performance and early warning

mechanisms.
 4. The role of technology in credit risk assessment.

5. Regulatory influence on lending behavior and

provisioning.

While limited to one bank, the insights gained may be

applicable across other private sector institutions with
similar structures.

3.3 Research Methodology

 DATA ANALYSIS AND
INTERPRETATION
This chapter presents the analysis and interpretation of data
obtained through a field survey conducted among 30 credit
officers and risk professionals at HDFC Bank, Kolkata. The
objective of the survey was to gather insights into the
effectiveness of credit risk management practices, the use of
internal tools and technologies, and the challenges faced by
professionals involved in credit operations. The responses
are analyzed using descriptive statistics and are presented
in tabular form for clarity.
4.1 Credit risk is adequately identified during loan
evaluation

Q. How familiar are you with the concept of credit risk?

Table 4.1 – Familiarity of Employees with

Credit Risk Concept
Response No. of Percen
Respondents tage
Very Familiar 18 60%
Somewhat 10 33%
familiar
Not familiar 2 7%
 Graph 4.1: Familiarity Level of Employees with
Credit Risk Concept
70%

60%

50%

40%

30%

20%

10%

0%
Very Familiar Somewhat familiar Not Familiar

Percentage

Analysis - This data suggests that most employees involved

in credit risk management at HDFC Bank have a solid
understanding of the concept.

Interpretation - The high percentage of familiarity reflects

the bank’s effective communication and training on credit
risk concepts. However, the presence of a few respondents
who are not familiar highlights an opportunity for the bank to
reinforce knowledge through refresher training sessions,
ensuring uniform expertise across all credit professionals.

4.2 Involvement of Employees in Evaluating or

Managing Credit Risk

Q. Does your role involve evaluating or managing credit risk?

Table 4.2: Involvement of Employees in Evaluating

or Managing
 Response No. of Percenta
Respondents ge
Yes 25 83%
No 5 17%

Graph 4.2: Employee Involvement in

Credit Risk Evaluation or Management

17%

83%

Yes No

Analysis - A large majority of respondents (83%) confirmed

that their roles involve evaluating or managing credit risk,
whereas 17% reported that their roles do not involve credit
risk responsibilities.

Interpretation - This high involvement level indicates that

most employees surveyed are directly engaged in credit risk
functions, ensuring that the insights gathered from this
study reflect informed perspectives from professionals
actively managing credit risk. The smaller percentage not
involved may belong to support or administrative roles,
which do not require direct credit risk management.