The Banking sector is passing through a series of changes. The approaches of lending and credit portfolio management have undergone change in complexion and complexity. Measurement of Credit risk in case of banks is very important because 80% of bank's balance sheet contains credit risk directly and indirectly. But the banks are using the conventional tools for measuring the risks and this statistical analysis suffer from several limitations. The financial ratios are mainly used to arrive at the financial indicators. Here the modern portfolio theory can be applied. All the investors are risk-averse and the portfolio diversification helps to reduce the risk.

To reduce the risk exposure of a bank, this portfolio theory can be applied in loan portfolio. More they diversify the loan portfolio, lesser will be the credit risk exposure. The changes in the current market trends challenge the traditional approaches to management. The underlying concepts and their measures, however, many a time remain intact right through even paradigmatic changes

. Deregulation since 1991 has not only increased the intra- and inter-industry competition for banks, but also their risk taking and risk transferring capacities. The risk-taking ventures sometimes culminate in risk absorption by banks in pursuit of profit seeking. The approaches to lending function and credit portfolio management have undergone change in complexion and complexity. The credit risk management policies also have gone through a paradigm shift. But, the basic credit risk measurement tools remain the same.

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