credit risk management sadiaaaaa.docx

7/25/2019 credit risk management sadiaaaaa.docx

1/12

CREDIT RISK MANAGEMENT

CREDIT:

A contractual agreement in which a borrower receives something

of value now and agrees to repay the lender at some date in the

future, generally with interest. The term also refers to the

borrowing capacity of an individual or company.

RISK:

The chance of inquiry damages or losses. The degree of

probability of loss.

Dispersion in likely outcome.

The chance that actual outcome from an investment will

dier from the expected.

RISK MANAGEMENT:

The forecasting and evaluation of !nancial risks together withthe identi!cation of procedures to avoid or minimi"e their impact#

METHODS TO IDENTIFY RISK:

1: Brainstorming:

This process encourages a group of people meeting face to faceto put forward all their thoughts and ideas on a specic topic.

During a brainstorming session all input is encouraged without

evaluation. Evaluation of ideas occurs at the completion of the

session when the ideas are analyzed. The diversity of participants

will have an impact on the nature of the ideas and perspectives,


2/12

so some thought will need to be given to who will participate in

the process.

2: Focs gro!s:

A focus group is made up of individuals who are invited to attend

one or more meetings in order to focus their attention and provide

information and feedback on a specic topic or area of concern.

": F#o$ c%arts:

These allow a dynamic process to be represented

diagrammatically on paper. The process may then be analyzed forcritical activities and areas of higher risk.

&: S'OT ana#(sis:

An eective method for prospective risk identication is a

!trengths, "eaknesses, #pportunities and Threats $!"#T%

analysis. A !"#T analysis is a tool commonly used in planning

and is an e&cellent method for identifying areas of negative and

positive risk.

): Ana#(sis o* s(st+ms:

This involves studying the way a system or process functions and

interacts within an organization in order to nd any weaknesses.

!ystem may refer to the management processes as well as to the

policies and procedures that support those processes. 't may also

refer to an operational system of interlinking procedures or

processes.

,: A-its:

This is the name given to the process of analyzing a management

system, checking to see that the documented procedures and

operational methods are the same.


3/12

.: Sc+nario /i#-ing:

'n this process a situation or condition is created either on paper

or as a model to re(ect potential outcomes. These ctitious

situations allow analysis and treatment options to be consideredwhere, for e&ample, an event have not occurred before and no

data is available.

0: Acci-+nt in+stigation or *ai#r+ ana#(sis:

This process involves looking at previous accidents and incidents

and analyzing them to determine what went wrong or why the

process failed or broke down. This will highlight risk areas for

future situations.

: C%+c3#ists:

This involves using a list of items against which to check a

situation, event, scenario, process, etc.

14: Ris3 i-+nti5cation *orms:

These forms generally include standardized )uestions or a set of

steps to be followed in order to help identify risks. They are often

tailored to specic situations, processes, scenarios, etc.

11: F++-/ac3 an- commnication:

This includes safety meetings, customer feedback forms or phone

calls, complaints handling, etc.

12: Int+ri+$s:

'nterviews are an eective way to identify risk areas. *roup

interviews can assist in identifying the baseline of risk on a

pro+ect. The interview process is essentially a )uestioning

process. The interview can be conducted before or after the


4/12

brainstorming session. owever if it is accomplished before the

brainstorming session, the results should be shared with the

group after they have provided their input to the risk li

1": E6!+ri+ntia# Kno$#+-g+: E&periential knowledge is the collection of information that a

person has obtained through their e&perience. -aution must be

used when using any knowledge based information to ensure it is

relevant and applicable to the current situation.

1&: Docm+nt+- Kno$#+-g+:

Documented nowledge is the collection of information or data

that has been documented about a particular sub+ect. This is a

source of information that provides insight into the risks in a

particular area of concern. -aution must be used when using any

knowledge based information to ensure it is relevant and

applicable to the current situations.

Ris3 Ana#(sis:

/01ualitative Analysis

201uantitative Analysis

Too#s an- T+c%ni7+s *or 8a#itati+ Ris3

Ana#(sis:19Ris3 !ro/a/i#it( an- im!act ass+ssm+nt:

3isk probability and impact assessment investigating the

likelihood that each specic risk will occur and the potential eect

on a pro+ect ob+ective such as schedule, cost, )uality or


5/12

performance $negative eects for threats and positive eects for

opportunities%, dening it in levels, through interview or meeting

with relevant stakeholders and documenting the results.

29ro/a/i#it( an- im!act matri6:4robability and impact matri& rating risks for further )uantitative

analysis using a probability and impact matri&, rating rules should

be specied by the organization in advance.

"9Ris3 cat+gori;ation:

3isk categorization in order to determine the areas of the pro+ect

most e&posed to the eects of uncertainty. *rouping risks by

common root causes can help us to develop eective risk

responses.

&9Ris3 rg+nc( ass+ssm+nt:

'n some )ualitative analyses the assessment of risk urgency canbe combined with the risk ranking determined from the

probability and impact matri& to give a nal risk sensitivity rating.

E&ample0 a risk re)uiring a near0term response may be

considered more urgent to address.

)9E6!+rt


6/12

19Int+ri+$ing:

5ou can carry out interviews in order to gather an optimistic $low%,

pessimistic $high%, and most likely scenarios.

29 ro/a/i#it( -istri/tions:

-ontinuous probability distributions are used e&tensively in

modeling and simulations and represent the uncertainty in values

such as tasks durations or cost of pro+ect components6 work

packages. These distributions may help us perform )uantitative

analysis. Discrete distributions can be used to represent uncertain

events $an outcome of a test or possible scenario in a decision

tree%.

TYES OF RISK:

7ollowing are the types of risk8


7/12

19S(st+matic Ris3:

$ystematic risk is uncontrollable by an organi"ation and macro

in nature.#

!ystematic risk is due to the in(uence of e&ternal factors on an

organization. !uch factors are normally uncontrollable from an

organization9s point of view.

't is a macro in nature as it aects a large number of

organizations operating under a similar stream or same domain. 't

cannot be planned by the organization.

/. 19Int+r+st rat+ ris3:


8/12

%nterest&rate risk arises due to variability in the interest rates

from time to time. %t particularly aects debt securities as they

carry the !xed rate of interest.#

2= Mar3+t ris3

'arket risk is associated with consistent (uctuations seen in the

trading price of any particular shares or securities. That is, it

arises due to rise or fall in the trading price of listed shares or

securities in the stock market.#

"= rc%asing !o$+r or in>ationar( ris3:

)urchasing power risk is also known as in(ation risk. %t is so,

since it emanates *originates+ from the fact that it aects a

purchasing power adversely. %t is not desirable to invest in

securities during an in(ationary period.#


9/12

29?ns(st+matic Ris3:

nsystematic risk is controllable by an organi"ation and micro in

nature.#

:nsystematic risk is due to the in(uence of internal factors

prevailing within an organization. !uch factors are normally

controllable from an organization9s point of view.:nsystematic

risk is controllable by an organization and micro in nature.

19Bsin+ss Ris3:

-usiness risk is also known as liquidity risk. %t is so, since it

emanates *originates+ from the sale and purchase of securities

aected by business cycles, technological changes, etc.#


10/12

29Financia# Ris3:

inancial risk is also known as credit risk. %t arises due to change

in the capital structure of the organi"ation. The capital structuremainly comprises of three ways by which funds are sourced for

the pro/ects.

These are as follows8

#wned funds. 7or e.g. share capital.

;orrowed funds. 7or e.g. loan funds.

3etained earnings. 7or e.g. reserve and surplus.

"= O!+rationa# ris3


11/12

0perational risks are the business process risks failing due to

human errors. This risk will change from industry to industry. %t

occurs due to breakdowns in the internal procedures, people,

policies and systems.#

SO?RCES OF RISK:

19Sc%+-#+- Ris3:

1xposure to loss from a program not meeting its scheduled

ob/ectives. $cheduled risk is the risk that the pro/ect takes longer

than scheduled. %t can lead to cost risks.

29Cost Ris3:

)robability of loss due to cost overrun.

"9T+c%nica# Ris3:

1xposure to loss arising from activities such as design and

engineering, manufacturing, technological processes and test

procedures.

&9Fn-ing Ris3:The risk associated with the impact on a pro/ect2s cash (ow from

higher funding costs or lack of availability of fund.

)9Contract Ris3:


12/12

)robability of loss arising from failures in contract performance.

3endors have highest risk in !xed price contracts and least in the

cost type contracts.

,9Organi;ationa# Ris3:0rgani"ational risk encompasses the totality of risk concerns as

de!ned by the stakeholders.

E6am!#+:

#rganizational 3isk includes8

investment risk

budgetary risk program management risk

legal liability

inventory risk

Documents

credit risk management sadiaaaaa.docx