Credit Risk Management in Banks (1)

8/2/2019 Credit Risk Management in Banks (1)

http://slidepdf.com/reader/full/credit-risk-management-in-banks-1 1/19

BY SUBHOJIT PYNE



RISK :

Risk is defined as uncertain resulting in adverse outcome, adverse in relation

to planned objective or expectation. It is very difficult to find a risk freeinvestment. An important input to risk management is risk assessment.

Many public bodies such as advisory committees concerned with risk

management

CREDIT RISKCredit risk is defined as the potential that a bank borrower or counterparty

will fail to meet its obligations in accordance with agreed terms, or in other

words it is defined as the risk that a firm’s customer and the parties to which

it has lent money will fail to make promised payments is known as credit

risk.



Credit risk may take the following forms:

In the case of direct lending: principal/and or interest amount may not be repaid;

In the case of guarantees or letters of credit: funds may not beforthcoming from the constituents upon crystallization of the liability;

In the case of treasury operations: the payment or series of paymentsdue from the counter parties under the respective contracts may not be forthcoming or ceases;

In the case of securities trading businesses: funds/ securitiessettlement may not be effected;

In the case of cross-border exposure: the availability and free transferof foreign currency funds may either cease or restrictions may beimposed by the sovereign.



Default risk:- Systemic or intrinsic risk.

Concentration risk.

Credit spread risk or downgrade risk

Corporate assets

Retail assets

Non-SLR portfolioMay result from trading and banking book

Inter bank transactions

Derivatives

Settlement etc



Credit risk management encompasses identification,

measurement, monitoring and control of the credit

risk exposures.

Credit Risk Management for Banking enables you toquickly and accurately calculate critical risk measures,

such as probability of default, exposure at default,

credit migration, regulatory capital, risk weighted

assets, credit value at risk (CVAR) and economiccapital.



Establishing appropriate credit risk environment

Operating under sound credit granting process

Maintaining an appropriate credit administration,measurement & Monitoring

Ensuring adequate control over credit risk

Banks should have a credit risk strategy which in our caseis communicated throughout the organization throughcredit policy.



At the transaction level, the objectives of credit

risk management ideally should be:

Setting an appropriate credit risk environment.

Framing a sound credit approval process.

Maintaining an appropriate credit administration,measurement and monitoring process.

Employing sophisticated tools/techniques to enable

continuous risk evaluation on a scientific basis.

Ensuring adequate pricing formula to optimize risk

return relationship



At the Portfolio level, the objectives of credit risk

management should be:

Development and Monitoring of methodologies & norms

to evaluate and mitigate risks arising from concentrating by

industry, group, product, etc.

Ensuring adherence to regulatory guidelines.

Driving asset growth strategy.



Expert Systems: The expert analyzes these five key factors,

subjectively weights them, and reaches a credit decision.



Exposure Ceilings

Review/Renewal

Risk Rating Model

Risk based scientific pricing

Portfolio Management Loan Review Mechanism

CREDIT ADMINISTRATION,MEASUREMENT

& MONITORING PROCESS

Principle 1: Banks should have in place a system for the

ongoing administration of their various credit risk-bearing

portfolios.



Principle 2: Banks must have in place a system for monitoring

the condition of individual credits, including determining the

adequacy of provisions and reserves

Principle 3: Banks should develop and utilize internal risk rating

systems in managing credit risk. The rating system should be

consistent with the nature, size and complexity of a bank’s

activities. Principle 4: Banks must have in place a system for monitoring the

overall composition and quality of the credit portfolio.

Principle 5: Banks must have a system in place for managingproblem credits and various other workout situations.



A ‘Non-performing asset’ (NPA) was defined as a credit facility in

respect of which the interest and/ or installment of principal has

remained ‘past due’ for a specified period of time.

With a view to moving towards international best practices and to

ensure greater transparency, it has been decided to adopt the ‘90

days’ overdue’ norm for identification of NPAs, from the yearending March 31, 2004.

WHY AN ACCOUNT BECOME NPA?

Non-payment by borrowers due to various internal and external

factors and in some extreme cases willful default.

Non-initiation of effective recovery steps by banks.

NON-PERFORMING ASSETS (NPA)





Recovery is defined as the process of regaining and saving

something lost or in danger of becoming costs .

Certain important points for debt recovery Don’t violate or breach the recovery policy, procedure etc. prescribed by the

principal.

Don’t make anonymous calls or bunched calls to the debtor, which may beperceived as harassment.

Don’t conceal or misrepresent your identity during calls and visit or otherinteraction with the debtor.

Don’t show uncivil/indecent/dirty behavior or use such language during callsand visits to the debtor.

Don’t harass/humiliate/intimidate/threaten the debtor-verbally or physically.



Improper selection of an entrepreneur

Deficient analysis of project Viability

Inadequacy of Collateral Security/Equitable Mortgage againstLoan

Unrealistic Terms and Schedule of Repayment

Lack of Follow up Measures

calamities

Default due to natural

Loan recovery policy

Giving notice to borrowers

Repossession of Security

Valuation and Sale of Property

Opportunity for the borrower to take back the security



Difficult recovery process

Assets possession process

Legal recovery process

USE OF LOK ADALAT

The Honorable Supreme Court also observed that

loans, personal loans, credit card loans and housing

loans with less than Rs.10 lakhs can be referred to Lok

Adalats



Debt Recovery Agent may now be defined as person orentity engaged by a bank for the purpose of collecting

specified loans, or advances or other kind of debts from

the debtors ( or borrowers) in accordance with the

specified terms and conditions.

FUNCTIONS OF DEBT RECOVERY AGENTS Collecting Dues Receivables:

Remitting Collected Funds:

Book Keeping Of Recovery Management:



To conclude with, till recent past, corporate borrowers even

after defaulting continuously never had any real fear of banktaking any action to recover their dues despite the fact that

their entire assets were hypothecated to the banks. This is

because there was no legal Act framed to safeguard the real

interest of banks.However with the introduction of Securitization Act, 2002

banks can now issue notices to their defaulters to repay

their dues or else make defaulters face hard and tough

actions under the aforementioned Act. This enables banks to

get rid of sticky loans thereby improving their bottom lines.

Also, the passing of the Securitization Act, 2002 came as a

bonanza for investors in banking sector stocks that in turn

resulted into an improvement in their share prices.



Documents

Credit Risk Management in Banks (1)