Credit Risk Management Policy of Banks

8/9/2019 Credit Risk Management Policy of Banks

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WHAT SHOULD BE AN IDEAL RISK MANAGEMENT POLICY?

(W ITH SPECIAL R EFERENCE T O C REDIT R ISK M ANAGEMENT P OLICY )

R ESEARCH W ORK T OWARDS P ARTIAL F ULFILLMENT O F T HE ASSESSMENT I N T HE SUBJECT

O F P RINCIPLES AND P RACTICES O F BANK M ANAGEMENT

NATIONAL LAW UNIVERSITY, JODHPUR

Submitted to:

DR . R ITUPARNA DAS

ASSOCIATE PROFESSOR ,

FACULTY OF MANAGEMENT

WORD COUNT: 1 ,

Submitted by:

NEHA SHARMA

R OLL NO. 960

SIXTH SEMESTER

B.B.A., LL.B. (hons.)

CONTENTS

1. I NTRODUCTION ....................................................................................................................!


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". C REDIT R ISK : B ACKGROUND ..............................................................................................#

!. T OOLS O F C REDIT R ISK M ANAGEMENT ...........................................................................$

%. CREDIT R ISK M ANAGEMENT : P OLICIES ............................................................................&

#. C REDIT R ISK M ANAGEMENT : P ROCESS ............................................................................'

. C REDIT R ISK M ANAGEMENT : P RUDENTIAL L IMITS .......................................................11

$. C REDIT R ISK : R ATING ......................................................................................................1"

&. CREDIT R ISK : P ORTFOLIO M ANAGEMENT ......................................................................1!

'. C REDIT R ISK AND I NVESTMENT BANKING ......................................................................1

1 . C REDIT R ISK M ANAGEMENT IN O FF BALANCE SHEET E *POSURE ...............................1

11. P RINCIPLES FOR THE ASSESSMENT OF BANKS + MANAGEMENT OF C REDIT R ISK .........1$

1". C REDIT R ISK M ANAGEMENT IN I NDIA ............................................................................."

1!. C OMPARATIVE ANALYSIS : A DVANCED AND E MERGING M ARKETS ................................"

13. A. United Kingdom....26

13. B. The United States of America....................................................................................2

13. !. Korea:.........................................................................................................................2"

13. #. Ba$tic States:..............................................................................................................2"

1%. CREDIT R ISK M ANAGEMENT : A NALYTICAL F RAMEWORK ............................................!"

1#. C ONCLUSION ......................................................................................................................!!

1 . R EFERENCES ......................................................................................................................!%

1. I NTRODUCTION

C !"#$ #s% #s $h! %!hoo" $h'$ ' "! $o o #n'n*#'& #ns$ + !n$ #ss+! #s +n-#&n o +n' &! $o

/' #n$! !s$ o !/' $h! / #n*#/'& '**o "#n $o $h! $! s s/!*# #!" #n ' * !"#$ ' !! !n$ !s+&$#n

#n !*ono #* &oss $o $h! 'n%#n #ns$#$+$#on.

1 2P ' !
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In$! n'$#on'& #ns$#$+$#ons, 'n'& s$s 'n" '$#n ' !n*#!s $!n" $o ! ' " ! ! #n ' %!$s (EM)

'n%s 's h# h #s%. A"3'n*!" *o+n$ 'n%s ' ! $ho+ h$ $o ! o +s$ 'n" -!&& ! +&'$!". B+$ $h!

&o '& #n'n*#'& * #s#s (GFC) 'n" $h! *on$#n+#n E+ o/!'n so3! !# n "! $ * #s#s "! ons$ '$!"

4+s$ $h! o//os#$!. A $! $h! E's$ As#'n * #s!s, E ! #n M' %!$s h'3! s$ !n $h!n!", -#$h !$$!

'* o s$' #s'$#on 'n" o$h! ! o s. Ho-!3! , $h! IMF (1055) h's ' '#n -' n!" ' o+$ "'n ! s

$o E ! #n M' %!$ 'n%s. In O*$o ! 1055, Moo" "o-n '"!" $h! In"#'n SBI o C $o 78,

'n" #n No3! ! , !3#s!" #$s o+$&oo% on In"#' s 'n%#n s!*$o o s$' &! $o n! '$#3!, '&$ho+ h

S:P '3! ' s$' &! 'ss!ss !n$. Th#s #s /' $ o ' !n! '& 'ss!ss !n$ o h# h! #s%s o 'n%s

' o+n" $h! &o !.

;h#&! #n'n*#'& #ns$#$+$#ons h'3! '*!" "# #*+&$#!s o3! $h! !' s o ' +&$#$+"! o !'sons, $h!

'4o *'+s! o s! #o+s 'n%#n / o &! s *on$#n+!s $o ! "# !*$& !&'$!" $o &'< * !"#$ s$'n"' "s

o o o-! s 'n" *o+n$! /' $#!s, /oo /o $ oo #s% 'n' ! !n$, o ' &'*% o '$$!n$#on $o

*h'n !s #n !*ono #* o o$h! *# *+ s$'n*!s $h'$ *'n &!'" $o ' "!$! #o '$#on #n $h! * !"#$ s$'n"#n

o ' 'n% s *o+n$! /' $#!s. Th! -o &"-#"! = credit crunch , -h#*h s$' $!" #n 1006 -#$h s+ / # !

o $ ' !s #n $h! Un#$!" S$'$!s, h's h# h h$!" $h! +n"' !n$'& # /o $'n*! o $h! * !"#$

"!*#s#on. As $h! / o &! s #n $h!s! o $ ' !s h'3! +n o&"!", #$ h's "! ons$ '$!" $h'$ +nso+n"

* !"#$ "!*#s#ons -! ! '"! 'n" &!ssons 's $o ho- $o ! !*$#3!& 'n' ! * !"#$ #s% -! ! !#$h!

# no !" o n!3! &!' n!". I$ sho-s $h'$ /oo &!n"#n "!*#s#ons, -h!$h! ' #n'n*#'& #ns$#$+$#on

o ' *o /o '$!, *'n &!'" $o s# n# #*'n$ &oss!s. ;h'$ $h! #n* !"# &! &oss!s s+s$'#n!" 'n%s 'n"

o$h! s *'+ h$ +/ #n $h! * !"#$ * +n*h h'3! +n"! n!" #s $h! '4o # /'*$ o * !"#$ #s% 'n" >

# /*'$#on > * !"#$ #s% 'n' ! !n$ on $h! -!&& !#n 'n" / o #$' #$ o +s#n!ss!s. B!#n ' &!

$o 'n' ! $h#s #s% #s ' %! !?+# ! !n$ o 'n &!n"#n "!*#s#on.

R#s% M'n' ! !n$ #s ' !'s+ ! $h'$ #s +s!" o #"!n$# #n , 'n'& @#n 'n" $h!n !s/on"#n $o '

/' $#*+&' #s%. I$ #s ' / o*!ss $h'$ #s *on$#n+o+s #n n'$+ ! 'n" ' h!&/ +& $oo& #n "!*#s#on '%#n

/ o*!ss. C !"#$ #s% #s os$ s# /& "! #n!" 's $h! /o$!n$#'& $h'$ ' 'n% o o-! o *o+n$! /' $

-#&& '#& $o !!$ #$s o '$#ons #n '**o "'n*! -#$h ' !!" $! s. Th! o'& o * !"#$ #s%

'n' ! !n$ #s $o '


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#s% #s ' * #$#*'& *o /on!n$ o ' *o / !h!ns#3! '// o'*h $o #s% 'n' ! !n$ 'n" !ss!n$#'& $o $h!

&on $! s+**!ss o 'n 'n%#n o 'n#s'$#on.

S$ +*$+ '& #s%s ' ! o+n" $o h'3! '&&!n o In"#'n 'n%s +$ * **'& #s%s ' ! #s#n . Th! /'/!

o+$n!s $h! # /*'$#ons o $h! #s% 'ss!ss !n$ o '* o!*ono #* /o* 'n" o $h! s$ +*$+ !o #n$! n'$#on'& ! +&'$#on. A &o'n 's!" 'n%#n s s$! s+ ! s # $h! ! ' ! sh' / *h'n !s #n

#n$! !s$ '$!s. L' ! &+*$+'$#ons #n !


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". C REDIT R ISK : B ACKGROUND

C !"#$ #s% *'n ! "! #n!" 's $h! /o$!n$#'& $h'$ ' *on$ '*$+'& /' $ -#&& '#& $o !!$ #$s o '$#ons

#n '**o "'n*! -#$h $h! ' !!" $! s. C !"#$ #s% #s '&so 3' #o+s& ! ! !" $o 's "! '+&$ #s%,

/! o 'n*! #s% o *o+n$! /' $ #s%. Th!s! '&& +n"' !n$'&& ! ! $o $h! s' ! $h#n $h!

# /'*$ o * !"#$ ! !*$s on ' # s $ 'ns'*$#ons.

2. A. There are three characteristics that define credit ris%:

i. e&'osure ($o ' /' $ $h'$ ' /oss# & "! '+&$ o s+ ! 'n '"3! s! *h'n ! #n #$s ' #$ $o

/! o )ii. the $i%e$ihood that this 'arty (i$$ defau$t (o $h! "! '+&$ / o ' #$ ) on #$s o '$#ons

iii. the reco)ery rate ($h'$ #s, ho- +*h *'n ! !$ #!3!" # ' "! '+&$ $'%!s /&'*!). No$! $h'$ $h!

&' ! $h! # s$ $-o !&! !n$s, $h! !'$! $h! !


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2. B. !ommon sources of !redit 'rob$ems are:

i. !redit concentrations: $h!s! ' ! 3#!-!" 's 'n !


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s*o/! 'n" so/h#s$#*'$#on o $h! 'n% s '*$#3#$#!s. Fo s '&&! o &!ss so/h#s$#*'$!" 'n%s,

s+/! 3#so s n!!" $o "!$! #n! $h'$ $h! * !"#$ #s% 'n' ! !n$ '// o'*h +s!" #s s+ #*#!n$ o

$h!# '*$#3#$#!s 'n" $h'$ $h! h'3! #ns$#&&!" s+ #*#!n$ #s% !$+ n "#s*#/n! #n $h!# * !"#$ #s%

'n' ! !n$ / o*!ss!s.

A + $h! /' $#*+&' #ns$'n*! o * !"#$ #s% !&'$!s $o $h! / o*!ss o s!$$n #n'n*#'& $ 'ns'*$#ons.

I on! s#"! o ' $ 'ns'*$#on #s s!$$&!" +$ $h! o$h! '#&s, ' &oss ' ! #n*+ !" $h'$ #s !?+'& $o $h!

/ #n*#/'& ' o+n$ o $h! $ 'ns'*$#on. E3!n # on! /' $ #s s# /& &'$! #n s!$$n , $h!n $h! o$h!

/' $ ' #n*+ ' &oss !&'$#n $o #ss!" #n3!s$ !n$ o//o $+n#$#!s. S!$$&! !n$ #s% (#.!. $h! #s%

$h'$ $h! *o /&!$#on o s!$$&! !n$ o ' #n'n*#'& $ 'ns'*$#on -#&& '#& $o $'%! /&'*! 's ! s' 5 o #n"#3#"+'&

o o-! !n$#$ , 0 o ' o+/ -#$h '""#$#on'& 50 o #n 's$ +*$+ ! / o4!*$s +n"! $'%!n

$h! o+/, Th !sho&" #$ #s #

600 $o 00 o $h! C'/#$'& F+n"s o $h! 'n% (#.!. s#< $o !# h$ $# !s).

3. B. 0e)ie( 0ene(a$: M+&$# $#! C !"#$ A// o3#n A+$ho #$ , *ons$#$+$#on -#s! "!&! '$#on o

/o-! s, H# h! "!&! '$!" /o-! s o !$$! '$!" *+s$o ! sD "#s* # #n'$o $# ! s*h!"+&! o !3#!- !n!-'&, H+ "&! '$!s 'n" B!n*h ' %s o !sh !


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3. !. 0is% 0ating ode$: S!$ +/ *o / !h!ns#3! #s% s*o #n s s$! on ' s#< $o n#n! /o#n$ s*'&!.

C&!' & "! #n! '$#n $h !sho&"s 'n" !3#!- $h! '$#n s /! #o"#*'&& / ! ! ' & '$ h'& !' &

#n$! 3'&s. R'$#n # '$#on #s $o ! '//!" $o !s$# '$! $h! !


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b+ #etai$ed and forma$i7ed credit e)a$uation '// '#s'& / o*!ss, '" #n#s$ '$#on 'n"

"o*+ !n$'$#onDc+ !redit a''ro)a$ authority '$ 3' #o+s h#! ' *h &!3!&s #n*&+"#n '+$ho #$ o '// o3#n

!


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!*h'n#s , #s% *on*!n$ '$#ons, #s% on#$o #n 'n" !3'&+'$#on, / #*#n o &o'ns, / o3#s#on#n ,

! +&'$o &! '& *o /'n*!, !$*. Con*+ !n$& , !'*h 'n% sho+&" '&so s!$ +/ C34506 R09

M- -@474 6 D4=-3674 6 (CRMD) , #n"!/!n"!n$ o $h! C !"#$ A" #n#s$ '$#on 7!/' $ !n$.

Th! CRM7 sho+&" !n o *! 'n" on#$o *o /'n*! o $h! #s% /' ' !$! s 'n" / +"!n$#'& #$s

s!$ $h! CPC. Th! CRM7 sho+&" '&so &' "o-n #s% 'ss!ss !n$ s s$! s, on#$o ?+'$ o

&o'n /o $ oo, #"!n$# / o &! s 'n" *o !*$ "! #*#!n*#!s, "!3!&o/ MIS 'n" +n"! $'%! &o'n

!3#!- '+"#$. L' ! 'n%s ' *ons#"! s!/' '$! s!$ +/ o &o'n !3#!- '+"#$. Th! CRM7 sho+&"

'&so ! '"! '**o+n$' &! o / o$!*$#n $h! ?+'$ o $h! !n$# ! &o'n /o $ oo. Th! 7!/' $ !n$

sho+&" +n"! $'%! /o $ oo !3'&+'$#ons 'n" *on"+*$ *o / !h!ns#3! s$+"#!s on $h! !n3# on !n$ $o

$!s$ $h! !s#!n*! o $h! &o'n /o $ oo.

E'*h 'n% sho+&" h'3! ' *' ! +&& o +&'$!" s*h! ! o "!&! '$#on o /o-! s. Th! 'n%s sho+&"

'&so !3o&3! +&$# $#! * !"#$ '// o3#n s s$! -h! ! $h! &o'n / o/os'&s ' ! '// o3!" 'n

= A''ro)a$ rid o ' = !ommittee . Th! * !"#$ '*#$#!s ' o3! ' s/!*# #!" #$ ' ! '// o3!"

$h! =G #" o =Co #$$!! , *o / #s#n '$ &!'s$ o o #*! s 'n" #n3' #' & on! o #*!

sho+&" !/ !s!n$ $h! CRM7, -ho h's no 3o&+ ! 'n" / o #$ $' !$s. B- 9 - -/9 90543

34506 -==3 0 @ 77066449 -6 -30 9 =43-60 @ /4 4/9 #.!. &' ! 'n*h!s (-h! ! *ons#"! !"

n!*!ss' ), R! #on'& O #*!s, Kon'& O #*!s, H!'" O #*!s, !$*. B'n%s *o+&" *ons#"! "!&! '$#n

/o-! s o s'n*$#on o h# h! #$s $o $h! =A// o3'& G #" o $h! =Co #$$!! o !$$! '$!"

?+'$ *+s$o ! s. Th! s/# #$ o $h! * !"#$ '// o3#n s s$! ' ! $h'$ no * !"#$ / o/os'&s

sho+&" ! '// o3!" o !*o !n"!" $o h# h! '+$ho #$#!s, # '4o #$ ! ! s o $h! =A// o3'&

G #" o =Co #$$!! "o no$ ' !! on $h! * !"#$-o $h#n!ss o $h! o o-! . In *'s! o

"#s' !! !n$, $h! s/!*# #* 3#!-s o $h! "#ss!n$#n ! ! s sho+&" ! !*o "!".

R!s! 3! B'n% o In"#', R#s% M'n' ! !n$ S s$! s #n B'n%s

Id

50 2P ' !


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FIGURE 5 C RE7IT PROCESS OF BAN S

(Source: Through Internet from Danske Banks Credit Process)

. C REDIT R ISK M ANAGEMENT : P RUDENTIAL L IMITS

In o "! $o #$ $h! ' n#$+"! o * !"#$ #s%, / +"!n$#'& #$s sho+&" ! &'#" "o-n on 3' #o+s

's/!*$s o * !"#$

a+ sti'u$ate benchmar% *+ !n$ "! $ !?+#$ 'n" / o #$' #$ '$#os, "! $ s! 3#*! *o3! ' ! '$#o

o o$h! '$#os, -#$h &!


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'"4+s$!" !s/!*#'&& -h!n ' /' $#*+&' s!*$o o #n"+s$ '*!s s&o-"o-n o o$h!

s!*$o #n"+s$ s/!*# #* / o &! s. Th! !

$h! !/ !s!n$ o #3#n # /o $'n*! $o n!' $! "!3!&o/ !n$s. ;#$h#n $h! '$#n ' !-o %,

'n%s *'n '&so / !s* # ! *! $'#n &!3!& o s$'n"' "s o * #$#*'& /' ' !$! s, ! on" -h#*h no

/ o/os'&s sho+&" ! !n$! $'#n!". B'n%s ' '&so *ons#"! s!/' '$! '$#n ' !-o % o &' !

*o /o '$! s '&& o o-! s, $ '"! s, !$*. $h'$ !


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e&'osures of borro(ers '&so #n $h! '$#n ' !-o %. Th! o3! '&& s*o ! o #s% #s $o ! /&'*!"

on ' n+ ! #*'& s*'&! 'n #n !$-!!n 5 6, 5 , !$*. on $h! 's#s o * !"#$ ?+'$ . Fo !'*h

n+ ! #*'& *'$! o , ' ?+'n$#$'$#3! "! #n#$#on o $h! o o-! , $h! &o'n s +n"! & #n ?+'$ , 'n"

'n 'n'& $#* !/ !s!n$'$#on o $h! +n"! & #n #n'n*#'&s o $h! o o-! sho+&" ! / !s!n$!".

9. #. 4urther- as a 'rudent ris% management 'o$icy- each ban% shou$d 'rescribe the minimum

rating !&o- -h#*h no !

9. 4. n order to ensure the consistency and accuracy of interna$ ratings- the res'onsibi$ity for

setting or confirming such ratings shou$d )est (ith the 5oan 0e)ie( function 'n" !


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The ban%s cou$d a$so consider the fo$$o(ing measures to maintain the 'ortfo$io ua$ity:

i. sti'u$ate uantitati)e cei$ing on ' ! '$! !

s'n*$#ons, *h'n !s #n $h! #s*'& on!$' /o*#!s, !n! '& s&o-"o-n o $h! !*ono ,

' %!$ #s% !3!n$s, !


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)iii. Ban%s shou$d a$so a''oint ortfo$io anagers $o -'$*h $h! &o'n /o $ oo s "! !! o

*on*!n$ '$#ons 'n" !

/o $ oo. Th! * !"#$ #s% o"!&s o ! 'n%s ' !-o % o !


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'. C REDIT R ISK AND I NVESTMENT BANKING

S# n# #*'n$ ' n#$+"! o * !"#$ #s%, #n '""#$#on $o ' %!$ #s%, #s #nh! !n$ #n #n3!s$ !n$ 'n%#n .

Th! / o/os'&s o #n3!s$ !n$s sho+&" '&so ! s+ 4!*$!" $o $h! s' ! "! !! o * !"#$ #s% 'n'& s#s,

's 'n &o'n / o/os'&s. Th! / o/os'&s sho+&" ! s+ 4!*$!" $o "!$'#&!" '// '#s'& 'n" '$#n

' !-o % $h'$ '*$o s #n #n'n*#'& 'n" non #n'n*#'& /' ' !$! s o #ss+! s, s!ns#$#3#$ $o !

/' $#*+&' & #n #n3!s$ !n$ / o/os'&s, -h#*h ' ! no$ '$!" 'n" sho+&" !ns+ ! *o / !h!ns#3! #s%

!3'&+'$#on. Th! ! sho+&" ! !'$! #n$! '*$#on !$-!!n C !"#$ 'n" T !'s+ 7!/' $ !n$s 'n" $h!

/o $ oo 'n'& s#s sho+&" '&so *o3! $h! $o$'& !


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The tota$ e&'osures to the counter'arties on a dynamic basis shou$d be the sum tota$ of:

i. the current re'$acement cost (+n !'s!" &oss $o $h! *o+n$! /' $ )D 'n"ii. the 'otentia$ increase in re'$acement cost (!s$# '$!" -#$h $h! h!&/ o 'R o o$h! !$ho"s

$o *'/$+ ! +$+ ! 3o&'$#$#!s #n $h! 3'&+! o $h! o+$s$'n"#n *on$ '*$s o '$#ons).

Th! *+ !n$ 'n" /o$!n$#'& * !"#$ !


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+n"! s$'n"#n o $h! o o-! o *o+n$! /' $ , 's -!&& 's $h! /+ /os! 'n" s$ +*$+ ! o $h! * !"#$,

'n" #$s so+ *! o !/' !n$.

rinci'$e ?: Ban%s shou$d estab$ish o)era$$ credit $imits at the $e)e$ of indi)idua$ borro(ers

'n" *o+n$! /' $#!s, 'n" o+/s o *onn!*$!" *o+n$! /' $#!s $h'$ ' ! '$! #n *o /' ' &! 'n"!'n#n +& 'nn! "# ! !n$ $ /!s o !


19/35

rinci'$e 12: Ban%s must ha)e in '$ace a system for monitoring $h! o3! '&& *o /os#$#on 'n"

?+'$ o $h! * !"#$ /o $ oo.

rinci'$e 13: Ban%s shou$d ta%e into consideration 'otentia$ future changes #n !*ono #*

*on"#$#ons -h!n 'ss!ss#n #n"#3#"+'& * !"#$s 'n" $h!# * !"#$ /o $ oos, 'n" sho+&" 'ss!ss $h!# * !"#$ #s% !


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1". C REDIT R ISK M ANAGEMENT IN I NDIA

1". A. R EGULATION OF I NDIAN BANKS

Th! /os$ ! o sh# $ o #* o #n$! 3!n$#on $o ' s$ '$! o '* o 'n' ! !n$ #n*&+"!"

s$ !n $h!n#n / +"!n$#'& (s' !$ ) no s 'n" $h! s+/! 3#so ' !-o %. Th! B-94/ I A 35

-=06-/ 96- 5-359 -! ! # /&! !n$!" +&& M' *h 5996. G+#"!n!s on #n*o ! !*o n#$#on,

'ss!$ *&'ss# #*'$#on, / o3#s#on#n , 'n" *'/#$'& '"!?+'* -! ! $# h$!n!". In"#'n 'n%s -#$h o !# n

+s#n!ss -! ! !?+# !" $o # /&! !n$ $h! s$'n"' "#@!" 3! s#on o B's!& II M' *h 100 'n"

o$h! s 1009, '&$ho+ h *'/#$'& '"!?+'* '& !'" !


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R!&'$#3!& *ons! 3'$#3! '**o+n$#n s$'n"' "s -#$ho+$ +&& ' % $o ' %!$ !?+# ! !n$s "o no$

/! #$ !*o n#$#on o +n !'s!" '#ns #n !?+#$ o $h! / o #$ 'n" &oss '**o+n$, +$ +n !'s!"

&oss!s h'3! $o ! '**o+n$!". B'n%s ' ! !?+# !" $o /! #o"#*'&& ' % $o ' %!$ $h!#

#n3!s$ !n$s, +$ on& $hos! h!&" #n $ '"#n *'$! o #!s. Th! h'3! $o / o3#"! o n!$ &oss!s -h#&!

# no #n n!$ '#ns. Th#s !"+*!s / o * **'& #n*!n$#3!s. Un"! +#"!n!s on s!*+ #$#s'$#on,

#ss+!" #n F! +' 1006, !


22/35

FIGURE 1 B AN S NON P ERFORMING LOANS TOTAL GROSS LOANS ( )

S#n*! $h! G&o '& F#n'n*#'& C #s#s '&so "! ons$ '$!" ! +&'$o '#&+ !, s# /&! o +s$ ! o s $h'$

*h'n ! ' %!$ #n*!n$#3!s 'n" ' ! &!ss 3+&n! ' &! $o ! +&'$o "#s* !$#on 'n" "!&' s ' ! !?+# !".

P +"!n$#'& ! +&'$#on "o!s ' n #n*!n$#3!s /+$$#n $h! !n$#$ s o-n *'/#$'& '$ #s% 'n"

/ o3#"#n ' + ! $o ' so sho*%s. B+$ &oss ' so #n + ! s $!n" $o ! / o* **'& + ! s

' h'3! $o ! +#&$ +/ #n '" $# !s. S#n*! $h#s #s no$ !'s# &!, "!&' s -#&& ! n! o$#'$!", 's #n

$h! *+ !n$ B's!& III, -h! ! +&& *'/#$'& '"!?+'* "o!s no$ %#*% #n +n$#& 105 . In $h! !'n$# !,

!' o s/#&&o3! s o ' * #s#s, s+*h 's $h! E+ o so3! !# n "! $, o *! '#&o+$s * !'$#n + $h!

o '& h'@' ". Th! s s$! #* ! !*$s o #n'n*#'& * #s!s '%! !< /os$ "#s*#/n! "# #*+&$ $o

# /os!. So $h! "!'"n! o B's!& III ' ! + $h! /os$/on!". Sh#n (1055) ' +!s $h! o*+s

sho+&" ! on / !3!n$#n #s% !h'3#o+ '$h! $h'n on $h! &oss ' so #n o sho*% #ns+&'$#no&! o + ! s .

1". B. T HE I NDIAN E*PERIENCE : R EFORMS

In 596J, ' /o* o so*#'& *on$ o& o3! 'n%s '# !" $o *h'n ! *o ! *#'& 'n%s 'n' ! !n$

'n" "#s$ # +$#on o * !"#$. A $! s+**!ss#3! -'3!s o n'$#on's'$#on, $h! /+ * s!*$o s sh' ! o

"!/os#$s -'s 91 /! *!n$ #n 59 0. Th! sh' ! o "# !*$!" &!n"#n $o / #o #$ s!*$o s s$oo" '$ 0 /!

*!n$. Th! s$'$+$o ?+#"#$ '$#o (SLR) 'n" $h! *'sh !s! 3! '$#o (CRR) -! ! '$ 5 /! *!n$ 'n"

. /! *!n$ !s/!*$#3!& #n 5995, *o /' !" $o 1 'n" 1 /! *!n$ #n 5960. Th! '3! ' ! !$+ n on

'ss!$s -'s on& ' o+$ 0.5 /! *!n$ 'n" *'/#$'& 'n" !s! 3!s ' /'&$ 5. /! *!n$ o 'ss!$s.

In! #*#!n*#!s * !'$!" $h!s! s!3! ! !s$ #*$#ons on $h! +s! 'n" $h! / #*! o +n"s / o /$!"

! 's'$#on, 's /' $ o $h! o/!n#n o+$ o $h! !*ono . Th! sh# $ o *on$ o&s $o ' %!$s

Su!ra "ote

11 2P ' !


23/35

so+ h$ $o !3! s! #n'n*#'& !/ !ss#on. B+$ $h! *h'n ! -'s '"+'&. Th! ! o !, 'n%s "!/!n"!n*!

on sho $ $! o o3! n# h$ -ho&!s'&! +n"#n #s #$!". Mos$ o $h! 'n%s o&&o- ' !$'#&

+s#n!ss o"!&. Lo'ns "o #n'$! ' %!$ #n3!s$ !n$s #n '&'n*! sh!!$s, !"+*#n ' %!$ #s%.

Th! s!*on" h'& o $h! 59 0s s'- $h! #n$ o"+*$#on o $ !'s+ #&&s, $h! * !'$#on o on!' %!$s, 'n" ' /' $#'& "! ! +&'$#on o #n$! !s$ '$!s h#$h! $o +s!" 's ' $oo& o * oss s+ s#"#s'$#on.

F+ $h! ! o s #n*&+"!" ' !"+*$#on #n s$'$+$o / ! ! /$#ons 'n" !n$ "! ! +&'$#on o o$h

/ #3'$! "o !s$#* 'n" o !# n 'n%s, # / o3!" / +"!n$#'& no s 'n" $h! "!3!&o/ !n$ o #n$!

'n% 'n" o$h! ' %!$s. L! '& *h'n !s s+*h 's $h! SARFAESI A*$ '"! #$ !'s#! o 'n%s $o

!*o3! &o'ns. Ano$h! / o/os!" ! o -'s $o !"+*! / #o #$ s!*$o '"3'n*!s o 0 /! *!n$

$o 50 /! *!n$. A&$ho+ h $h#s -'s no$ # /&! !n$!", !


24/35

so ! s!*$o s, /os#$#on #$s 'n" #$s on !

! +&'$o s -#&& # /&! !n$ -h'$!3! B's!& III * #$! #' ' ! ' !!" $o. Th! RBI /o#n$s o+$ $h'$

ho&"#n s o ?+#", &o- #s%, s$'$+$o ?+#"#$ '$#o (SLR) G s!*s sho+&" no$ ! *o+n$!" 's

&!3! ' ! #n *'&*+&'$#n $h! &!3! ' ! '$#o. Th! sho+&" '&so ! ! ' "!" 's *on$ # +$#n $o

?+#"#$ . Th!s! ' ! o3! n !n$ on"s ' '#ns$ -h#*h $h! *!n$ '& 'n% / o3#"!s ?+#"#$ +n"!

s$ !ss!" *on"#$#ons, s#n*! $h! RBI A*$ "o!s no$ '&&o- $h! *!n$ '& 'n% (CB) $o / o3#"! ?+#"#$

!


25/35

#n' #$ $o #n! $+n! ?+#"#$ #n !s/ons! $o sho*%s $h'$ #n*&+"! &o '& sho*%s. C+ "#' 'n"

;oo" o " (1009) s+ !s$ $h'$, #n '"3'n*!" *o+n$ #!s, on& ' *h'n ! #n s/ !'"s h's # /*'$#ons

o o/$# '& on!$' /o* . To $h'$ !


26/35

1!. C OMPARATIVE ANALYSIS : A DVANCED AND E MERGING M ARKETS

SCALE AND C ROSS B ORDER E *POSURES

A"3'n*!" E+ o/!'n B'n%s 'n" E ! #n In"#'n B'n%s "# ! #n o$h ?+'n$#$ 'n" ?+'$ . T' &!

5, F# + ! 'n" sho- $h! *o+n$ #!s -hos! 'n%s (T' &! 5), 'n" $h! *o+n$ #!s #n -h#*h 'n%s

(F# + ! 5) h'" $h! &' !s$ #n$! n'$#on'& /os#$#ons #n 1050. Th! $o$'&s #3!n #n $h! *h' $s sho- $h!

/os#$#ons o 'n%s #n "!3!&o/!" *o+n$ #!s -! ! n!' & n#n! $# !s &' ! $h'n #n EMs. Th!s!

*o+n$ #!s US, U , E+ o A !', F 'n*! 'n" G! 'n '&so h'" $h! !'$!s$ # /'*$ on $h!

#n'n*#'& * #s#s 'n" o ! $h! '4o +n$ o #$. Th! s' ! *o+n$ #!s "o #n'$! #n$! n'$#on'& "! $,

on! ' %!$s, 'n" "o !s$#* "! $, 'n" $h! ! o !, ' ! os$ '$ #s% o $h! so3! !# n "! $ * #s#s.

Mos$ MNC 'n%s o # #n'$! o $h!s! *o+n$ #!s. In *o /' #son, ! ! #n ' %!$ /os#$#ons, 'n"

!3!n $hos! o A+s$ '' 'n" C'n'"', ' ! $#n .

13. A. United Kingdom:

In 1050, U h'" 5 'n%s o -h#*h 1 5 -! ! o !# n 'n%s -#$h 'n*h!s o s+ s#"#' #!s #n

U , *o /' !" $o 5 'n%s (o -h#*h 1 -! ! o !# n) #n In"#'. Th! ' ! '$! U 'n% '&'n*!

sh!!$ !


27/35

FIGURE E XTERNAL POSITIONS OF REPORTING BAN S IN 7E ELOPE7 COUNTRIES L IABILITIES

(TOTAL 59 0J. USS B)

1J 2 P ' !


28/35

FIGURE E XTERNAL POSITIONS OF REPORTING BAN S IN EMERGING MAR ETS L IABILITIES

(TOTAL 15 5.5 USS B)

13. B. The United States of America

Th! U.S. "o&&' 's $h! !s! 3! *+ !n* #s $h! +n"#n *+ !n* o &o '& 'n%s. Sh#n (1055)

!/o $s ' o+n" 560 o !# n 'n%s '#s! ' o+$ 5 $ #&on o -ho&!s'&! "o&&' +n"#n #n US *'/#$'&

' %!$s $o s!n" 600 #&on $o h!'" o #*!. Th!s! #n$! o #*! 'ss!$s o o !# n 'n% 'n*h!s #n

$h! US #n* !'s!" s$!!/& s#n*! $h! n#n!$#!s. Th! "#" '&& sh' /& #n 100 , +$ os! ' '#n $h! n!


29/35


30/35

s$ on "!/!n"!n*! o *+ !n$ *ons+ /$#on on sho $ $! o !# n #n3!s$ !n$s *'+s!" o !

s+ s$'n$#'& !*!ss#on o $h! !*ono #!s $h'n #n o$h! E+ o/!'n *o+n$ #!s 'n" ' s+ s$'n$#'&

"!* !'s! o $h! !'& !s$'$! ' %!$ (s!! # + ! ).

FIGURE T HE UANTITY OF 7EALS CONCLU7E7 ON REAL ESTATE MAR ET

(Source: Data o#tained through the internet from Statistics $stonia (htt!:%%&&&' Stat'ee%), the

and egister of at ia (htt!:%%&&&'*emesgramata'l ) and the and egister of ithuania

(htt!:%%&&&'registrucentras'lt%ntr%stat%))

S#n*! 5990 $h! 'n%#n s s$! s o $h! $h !! B'&$#* S$'$!s h'3! '*!" s!3! '& #n'n*#'& * #s!s.

7+ #n &'s$ #n'n*#'& * #s!s $h! '/#" o-$h o !'& G7P -'s s+ s$'n$#'&& s+//o $!" '/#"&o'n /o $ oo o-$h #n !3! B'&$#* S$'$!. 7+ #n $h! /! #o" 599J $o 1009 $h! L'$3#'n 'n%#n

s!*$o !


31/35

o 1J.59 +/ $o 5JJ. , o $h! L'$3#'n !*ono o 5J.01 +/ $o 116. , o $h!

L#$h+'n#'n !*ono o 51. +/ $o 9 .9 . 50

FIGURE 6 T HE LE EL OF NON PERFORMING LOANS IN BALTIC STATES AS A PERCENTAGE OF

AGGREGATE LOAN PORTFOLIOS

(Source: Data o#tained through the internet from the Bank of $stonia (htt!:%%&&&'

eesti!ank'info), the +inancial and Ca!ital Commission of at ia (htt!:%%&&&'fktk'l ) and the

Bank of ithuania (htt!:%%&&&'l#'lt))

FIGURE J B ALANCE OF CURRENT ACCOUNT OF BALTIC STATES FOR THE PERIO7 599 1009, AS

OF G7P

(Source: #tained through Internet from $urostat (htt!:%%e!!' eurostat'ec'euro!a'eu))

50 G # o # F'#ns$!#n, The Com!arati e -nalysis of Credit isk Determinants In the Banking

Sector of the Baltic States , R E IE; OF ECONOMICS : F INANCE (5 M' . 1055).

5 2 P ' !


32/35

Th! #ns+ #*#!n$ 'n" $# !& #n'"!?+'$! 'n'& s#s o * !"#$ #s% o #n'n*!" / o4!*$s *'n ! $ !'$!"

's $h! #n#$#'& !'son o $h! '/#" "!3!&o/ !n$ o $h! #n'n*#'& * #s!s s$' $!" #n $h! B'&$#* S$'$!s #n

!' s 100J > 100 . Th#s *'+s!" $h! s+ s$'n$#'& o-$h o $h! &!3!& o / o &! &o'ns, 's F# + ! 1

/ !s!n$!".

1%. CREDIT R ISK M ANAGEMENT : A NALYTICAL F RAMEWORK

enera$$y- there can be identified t(o ty'es of credit ris% ana$ysis mode$s de'ending on the

re uired in'uts:

*i+ o"!&s, -h#*h ' ! / !s!n$!" 's ' sim'$e function , 'n"

*ii+ o"!&s, -h#*h ' ! / !s!n$!" 's ' com'osite function . E


33/35

3' #' &!s, 'n" #n o "! $o !$$! +n"! s$'n" n%s !$-!!n * !"#$ #s% 'n" '* o!*ono #*s,

'n%#n s!*$o 'n" #* o!*ono #* &!3!& 3' #' &!s, $h! n!- o"!& #s *ons$ +*$!".

1#. C ONCLUSION

To *on*&+"!, s$ +*$+ '& #s%s ' ! &o- #n In"#'n 'n%s. Th! /'$h o s$!'" ' %!$ "!3!&o/ !n$ 'n"

! +&'$o !3o&+$#on h's h!&/!" !"+*! $h!s! #s%s. C **'& #s%s ' ! #s#n +$ $h! ' ! no$ o '

3! &' ! ' n#$+"!, 's &on 's /o* '%! s o"! '$! &' ! &+*$+'$#ons #n 'ss!$ / #*!s. Th#s

#s !?+# !" s#n*! ' %!$s ! '#n $h#n.

M+*h o ! n+'n*!" 'ss!ss !n$s o #s%s #n '&$! n'$#3! 'n%#n s s$! s, *o /&! !n$'

'* o!*ono #* /o*#!s 'n" ! +&'$o s$ +*$+ !, 'n" !3o&+$#on o ! +&'$#on ' ! !?+# !".

Mo !o3! , $h! o'& /os$s o 'n%#n s$ +*$+ ! 'n" ! +&'$#on *'nno$ ! '#n $h! s' ! ' $! $h!

GFC. EM 'n%s h'3! $o *on$#n+! $o o"! n#s! +$ 'n #"!'& ! +&'$o s s$! sho+&" '"o/$ so !

*+ !n$ EM / '*$#*!s. R! +&'$#on 's!" on o'" '$#os #s ' -' o !"+*#n #s% o 'n%s

-#$ho+$ $h! "#s#n*!n$#3!s o '*$#3#$ $h'$ +&& o no ' #$ #n3o&3!s. A-' !n!ss h's $o !

* !'$!" ' o+$ $h!s! #ss+!s s#n*! ' %!$s $!n" $o /+n#sh 'n "!3#'$#on o '"3'n*!" *o+n$

no s -#$ho+$ +n"! s$'n"#n $h! *on$!

!s/!*#'&& s#n*! $h! sh'"o- 'n%#n s s$! $h'$ /&' s ' &' ! /' $ #n 3o&'$#&! &o-s $o $h! ! #on

!s*'/!s ! +&'$#on. I"!'&& , $h! ! +&'$o /'*%' ! sho+&" ! !"!s# n!" 'n" h$!n!" o 'n%s,

!$ ! s/ !'" o ! -#"!& $o *o3! sh'"o- 'n%s $oo.

2 P ' !


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1 . R EFERENCES :

5) B&'s*h%!, ;., on!s, M.T., M'4onn#, G. 'n" P! #', M. (1005 )' Stress Testing of +inancial

Systems: -n er ie& of Issues, .ethodologies, and +S-P $/!eriences . IMF. 0orking

Pa!er, ;P 05 (1005).1) Bon # 7. (1009). Credit risk dri ers: $ aluating the contri#ution of firm le el information

and of macroeconomic dynamics' OURNAL OF BAN ING : F INANCE , (1009), 1 5 199.) 7's, A. (1001). isk and Producti ity change of Pu#lic Sector Banks , EP;, F! +' , //.

J J.) 7 . #shn A.Go '&, isk .anagement in Indian Banks 1Some emerging issues . I NT . ECO. .

R ES., 1050 5(5) 501 509.) G'sh', . G. 'n" Mo '&!s, R. A. (100 ). I"!n$# #n $h !sho&" ! !*$s #n * !"#$ #s% s$ !ss

$!s$#n . IMF, ;o %#n P'/! , (100 ).5 0.6) Go '&, A., (1055*). 2istory of .onetary Policy in India since Inde!endence . IGI7R &orking

!a!er no ;P 1055 05 . - aila#le at h$$/ ---.# #" .'*.#n /" /+ *'$#on ;P 1055

05 ./" V.J) Go '&, A., (1055"). +inancial egulation and The 3 45: !tions for India . ICRIER 7EA

M#n#s$ o F#n'n*! / o4!*$ on G 10.) Go '&, A., (1051). Banks, Policy and isks . IGI7R Po* S! #!s No. 51 ( 'n+' , 1051).

9) G # o # F'#ns$!#n, (1055). Th! Co /' '$#3! An'& s#s o C !"#$ R#s% 7!$! #n'n$s In $h!

B'n%#n S!*$o o $h! B'&$#* S$'$!s, R E IE; OF ECONOMICS : F INANCE (5 M' . 1055).50) In$! n'$#on'& Mon!$' F+n" (IMF), 1055. 3lo#al +inancial Sta#ility e!ort: 3ra!!ling

&ith Crisis egacies . Wonn! ;'sh#n $on In$! n'$#on'& Mon!$' F+n". S!/$! ! .

- aila#le at h$$/ ---.# .o !


35/35

5J)M C NAMEE , 7. (599J). R IS MANAGEMENT TO7AY AN7 TOMORRO; . (; ELLINGTON , NE;

KEALAN7 S TATE SER ICES COMMISSION ).5 ) M! ! P. A. 'n" Y!' ! . T. (1005). -re small rural #anks ulnera#le to local economic

do&nturns . FE7ERAL R ESER E BAN OF ST. LOIUS . R E IE; (M' *h A/ #& 1005) 1 .

59)N!!& , M#*h!&&! C&' %, 'n" 7'3#" ;h!!&o*%, (599J). 0hy Does Bank Performance 6ary -cross States7 FE7ERAL R ESER E BAN OF ST. LOUIS R E IE; , M' *h A/ #&, 1J> 0.

10)P!so&' . (1005). The role of macroeconomic shocks in Banking Crisis . B'n% o F#n&'n".

R!s!' *h "!/' $ !n$. (1005). 6.15) P!so&' . (100 ). B'n%#n ' #$ 'n" "#s$ !ss An !*ono !$ #* s$+" o '* o!*ono #*

"!$! #n'n$s. B'n% o F#n&'n". R!s!' *h 7#s*+ss#on P'/! s, (100 ). 5 .11) P &!, H. 7'3#" (599J). Bank isk .anagement Theory , ;o %#n /'/! RPF 1J1, H''s

S*hoo& o B+s#n!ss, Un#3! s#$ o C' o n#', B! %!&! .P' ! 1.1 ) R!s! 3! B'n% o In"#', isk .anagement Systems in Banks .

1 )S'n$o ! o, An$hon M. (599J). Commercial Bank isk .anagement: -n -nalysis of the Process , OURNAL OF FINANCIAL SER ICES R ESEARCH , 51, 55 .

1 ) Sh#n, H +n Son , (1055). G&o '& L#?+#"#$ . R! ' %s '$ $h! IMF *on ! !n*! on .acro and

3ro&th Policies in the 0ake of the Crisis' ;'sh#n $on 7C, M' *h J , 1055.16) Sh#n, H +n Son 'n" -'nho Sh#n, (1055). Procyclicality and .onetary -ggregates' NBER

0orking Pa!er "o' 89 ;9 . - aila#le at h$$/ ---.n ! .o /'/! s -56 6./" .1J) S#nh', A., (1055). .acro!rudential Policies: Indian $/!erience' A"" !ss '$ E&!3!n$h Ann+'&

In$! n'$#on'& S! #n' on Po* Ch'&&!n !s o $h! F#n'n*#'& S!*$o on Seeing Both the

+orest and the Trees< Su!er ising Systemic isk . ;'sh#n $on, 7.C, +n! 5 , 1055.

1 ) S+ ' 'o, 7., (1055). F#n'n*#'& R! +&'$#on o G o-$h, E?+#$ 'n" S$' #$ #n $h! Pos$ * #s#s-o &". Inaugural address at the C-+ -

Documents

Credit Risk Management Policy of Banks