Upload
subhojitpyne
View
223
Download
0
Embed Size (px)
Citation preview
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
8/2/2019 Credit Risk Management in Banks (1)
http://slidepdf.com/reader/full/credit-risk-management-in-banks-1 2/19
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.
8/2/2019 Credit Risk Management in Banks (1)
http://slidepdf.com/reader/full/credit-risk-management-in-banks-1 3/19
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.
8/2/2019 Credit Risk Management in Banks (1)
http://slidepdf.com/reader/full/credit-risk-management-in-banks-1 4/19
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
8/2/2019 Credit Risk Management in Banks (1)
http://slidepdf.com/reader/full/credit-risk-management-in-banks-1 5/19
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.
8/2/2019 Credit Risk Management in Banks (1)
http://slidepdf.com/reader/full/credit-risk-management-in-banks-1 6/19
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.
8/2/2019 Credit Risk Management in Banks (1)
http://slidepdf.com/reader/full/credit-risk-management-in-banks-1 7/19
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
8/2/2019 Credit Risk Management in Banks (1)
http://slidepdf.com/reader/full/credit-risk-management-in-banks-1 8/19
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.
8/2/2019 Credit Risk Management in Banks (1)
http://slidepdf.com/reader/full/credit-risk-management-in-banks-1 9/19
Expert Systems: The expert analyzes these five key factors,
subjectively weights them, and reaches a credit decision.
8/2/2019 Credit Risk Management in Banks (1)
http://slidepdf.com/reader/full/credit-risk-management-in-banks-1 10/19
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.
8/2/2019 Credit Risk Management in Banks (1)
http://slidepdf.com/reader/full/credit-risk-management-in-banks-1 11/19
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.
8/2/2019 Credit Risk Management in Banks (1)
http://slidepdf.com/reader/full/credit-risk-management-in-banks-1 12/19
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)
8/2/2019 Credit Risk Management in Banks (1)
http://slidepdf.com/reader/full/credit-risk-management-in-banks-1 13/19
8/2/2019 Credit Risk Management in Banks (1)
http://slidepdf.com/reader/full/credit-risk-management-in-banks-1 14/19
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.
8/2/2019 Credit Risk Management in Banks (1)
http://slidepdf.com/reader/full/credit-risk-management-in-banks-1 15/19
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
8/2/2019 Credit Risk Management in Banks (1)
http://slidepdf.com/reader/full/credit-risk-management-in-banks-1 16/19
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
8/2/2019 Credit Risk Management in Banks (1)
http://slidepdf.com/reader/full/credit-risk-management-in-banks-1 17/19
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:
8/2/2019 Credit Risk Management in Banks (1)
http://slidepdf.com/reader/full/credit-risk-management-in-banks-1 18/19
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.