Blackbook Project On Research On Credit Risk Management

Credit Risk Management
RESEARCH DESIGN OBJECTIVES OF THE STUDY

Understanding credit risk management conceptuall ! Stud ing t"e #arious pri#ate $anks practicing credit risk management! To make a dept" stud o% t"e met"od in &"ic" t"e pri#ate $anks in India go a$out credit risk management! Stud ing t"e di%%erence $et&een retail credit risk management and corporate credit risk management practiced $ pri#ate $anks! Understanding t"e importance o% t"e credit risk management and "o& use%ul it is to t"e pri#ate $anks and "o& it $ene%its t"em in #arious &a s!
PURPOSE OF THE STUDY

T"e main reason to select 'C(EDIT (IS) *+,+-E*E,T. as a topic is to understand t"e importance o% t"e (ole pla ed $ credit risk management department and/or practices &"en t"e $ank lends mone to its $orro&ers! In t"is pro0ect1 I "a#e tried to understand t"e di%%erence $et&een corporate credit risk management and retail credit risk management! T"e anal sis and inter#ie&s &it" industr personnel "as gi#en me a practical and real li%e e2posure to t"e $anking scenario as %ar as t"e credit risk management goes1 &"ere$ I could correlate $et&een t"e t"eor and t"eir practical application!
RESEARCH METHODOLOGY
D+T+ CO33ECTIO,
T"e data collection i!e! t"e ra& material input %or t"e pro0ect "as $een collected keeping in mind t"e o$0ecti#es o% t"e pro0ect and accordingl rele#ant in%ormation "as $een %ound! T"e met"odolog used is a descripti#e met"od o% t"e (esearc"! Follo&ing are t"e sources4
PRIMARY DATA
T"e data regarding 'C(EDIT (IS) *+,+-E*E,T. &as collected t"roug" primar data4 Semi5structured inter#ie&s &ere conducted &it" *(666!!1 *anager (+7- personal loans o% ICICI $ank1 *r! 661 Credit +nal st o% IDBI B+,) 3TD!1 and *r! S"a"0i Jaco$1 C"ie% *anager o% T"e FEDE(+3 B+,) 3imited! T"is &as done to understand t"e current practices and t"e st le o% %unctioning o% t"e credit risk management departments o% pri#ate $anks!
SECONDARY DATA
T"e data "ad $een collected $ reading #arious $ooks on Credit (isk *anagement1 Bank 8uest1 Bank 9eekl Bi$liograp" ;! T"e data regarding t"e $anks introduction and "istor &as collected and rele#ant 9e$sites :re%er
%rom t"eir o%%icial &e$sites on t"e recommendations o% t"e persons
Credit Risk Management inter#ie&ed! +lso some part o% t"e data &as collected $ re%erring to t"e (BI Bulletin1 Bank Booklets1 and ,e&sletter!
SAMPLING METHOD
T"e Sampling *et"od &as used to collect t"e data a$out t"e current practices %ollo&ed $ t"e pri#ate $anks in India as %ar as credit risk management goes! Onl 7ri#ate Banks "a#e $een taken $ecause t"e purpose o% t"is pro0ect &as to understand t"e in5dept" kno&ledge on 7ri#ate Banks practicing Credit risk management!
LIMITATIONS:
(eluctance and resistance on t"e part o% t"e inter#ie&ees :7ri#ate Banks; to s"are in%ormation as t"e considered it as con%idential! Visiting all pri#ate sector $anks &as not possi$le! Banks "a#e certain rules and regulations!
INTRODUCTION
9it" t"e ad#ancing li$erali<ation and glo$ali<ation1 credit risk management is gaining a lot o% importance! It is #er important %or $anks toda to understand and manage credit risk! Banks toda put in a lot o% e%%orts in managing1 modeling and structuring credit risk! Credit risk is de%ined as t"e potential t"at a $orro&er or counterpart &ill %ail to meet its o$ligation in accordance &it" agreed terms! (BI "as $een e2tremel sensiti#e to t"e credit risk it %aces on t"e domestic and international %ront! Credit risk management is not 0ust a process or procedure! It is a %undamental component o% t"e $anking %unction! T"e management o% credit risk must $e incorporated into t"e %i$er o% $anks! +n $ank toda needs to implement e%%icient risk ad0usted return on capital met"odologies1 and $uild cutting5edge port%olio credit risk management s stems! Credit (isk comes %ull circle! Traditionall t"e primar risk o% %inancial institutions "as $een credit risk arising t"roug" lending! +s %inancial institutions entered ne& markets and traded ne& products1 ot"er risks suc" as market risk $egan to compete %or management=s attention! In t"e last %e& decades %inancial institutions "a#e de#eloped tools and met"odologies to manage market risk! (ecentl t"e importance o% managing credit risk "as gra$$ed management=s attention! Once again1 t"e $iggest c"allenge %acing %inancial institutions is credit risk! In t"e last decade1 $usiness and trade "a#e e2panded rapidl $ot" nationall and glo$all ! B e2panding1 $anks "a#e taken on ne& market risks and credit risks $ dealing &it" ne& clients and in some cases ne& go#ernments also! E#en $anks t"at do not enter into ne& markets are %inding t"at t"e concentration o% credit risk &it"in t"eir e2isting market is a "indrance to gro&t"! +s a result1 $anks "a#e created risk management mec"anisms in order to %acilitate t"eir gro&t" and to sa%eguard t"eir interests!
Credit Risk Management T"e c"allenge %or %inancial institutions is to turn credit risk into an opportunit ! 9"ile $anks attention "as returned to credit risk1 t"e nature o% credit risk "as c"anged o#er t"e period! Credit risk must $e managed at $ot" t"e indi#idual and t"e port%olio le#els and t"at too $ot" %or retail and corporate! *anaging credit risks re>uires speci%ic kno&ledge o% t"e counterpart ?s :$orro&ers; $usiness and %inancial condition! 9"ile t"ere are alread numerous met"ods and tools %or e#aluating indi#idual1 direct credit transactions1 compara$le inno#ations %or managing port%olio credit risk are onl 0ust $ecoming a#aila$le! 3ike&ise muc" o% traditional credit risk management is passi#e! Suc" acti#it "as included transaction limits determined $ management tec"ni>ues! t"e customer=s credit rating1 t"e transaction=s tenor1 and t"e o#erall e2posure le#el! ,o& t"ere are more acti#e
CREDIT
RISK
MANAGEMENT
PHILOSOPHY
*ostl all $anks toda practice credit risk management! T"e understand t"e importance o% credit risk management and t"ink o% it as a ladder to gro&t" $ reducing t"eir ,7+?s! *oreo#er t"e are no& using it as a tool to succeed o#er t"eir competition $ecause credit risk management practices reduce risk and impro#e return capital!
INTRODUCTION TO RISK MANAGEMENT

+n acti#it in#ol#es risk1 touc"ing all sp"eres o% li%e1 &"et"er it is personal or $usiness! +n $usiness situation in#ol#es risk! To sustain its operations1 a $usiness "as to earn re#enue/pro%it and t"us "as to $e in#ol#ed in acti#ities &"ose outcome ma $e predicta$le or unpredicta$le! T"ere ma $e an ad#erse outcome1 a%%ecting its re#enue1 pro%it and/or capital! Ho&e#er1 t"e dictum ',o (isk1 ,o -ain. "old good "ere! DEFINING RISK T"e &ord (IS) is deri#ed %rom t"e Italian &ord (isicare meaning 'to dare.! T"ere is no uni#ersall accepta$le de%inition o% risk! 7ro%! Jo"n -eiger "as de%ined it as 'an e2pression o% t"e danger t"at t"e e%%ecti#e %uture outcome &ill de#iate %rom t"e e2pected or planned outcome in a negati#e &a .! T"e Basel Committee "as de%ined risk as 't"e pro$a$ilit o% t"e une2pected "appening @ t"e pro$a$ilit o% su%%ering a loss.! T"e %our letters comprising o% t"e &ord (IS) de%ine its %eatures! ( A (are :une2pected; I A Incident :outcome; S A Selection :identi%ication; ) A )nocking :measuring1 monitoring1 controlling; (IS)1 t"ere%ore1 needs to $e looked at %rom %our %undamental aspects4 Identi%ication *easurement *onitoring
Credit Risk Management Control :including risk audit;
RISK V/S UNCERTAINTY :(isk is not t"e same as uncertaint ; In a $usiness situation1 an decision could $e a%%ected $ a "ost o% e#ents4 an a$normal rise in interest rates1 %all in $ond prices1 gro&ing incidence o% de%ault $ de$tors1 etc! + compact risk management s stem "as to consider all t"ese as an o% t"em could "appen at a %uture date1 t"oug" t"e possi$ilit ma $e lo&!
TYPES OF RISKS:
T"e risk pro%ile o% an organi<ation and in t"is case $anks ma $e re#ie&ed %rom t"e %ollo&ing angles4 +! Business risks4 I! Capital risk II! Credit risk III! *arket risk IV! 3i>uidit risk V! Business strateg and en#ironment risk VI! Operational risk VII! -roup risk B! Control risks4 I! Internal Controls II! Organi<ation III! *anagement :including corporate go#ernance; IV! Compliance
Bot" t"ese t pes o% risk1 "o&e#er1 are linked to t"e t"ree omni$us risk categories listed $elo&4 B! Credit risk C! *arket risk D! Organi<ational risk WHAT IS RISK MANAGEMENT? T"e standard de%inition o% management is t"at it is t"e process o% accomplis"ing preset o$0ecti#esE similarl 1 risk management aims at %ul%illing t"e same speci%ic o$0ecti#es! T"is means t"at an organi<ation/$ank1 &"et"er it?s a pro%it5 seeking one or a non5pro%it %irm1 must "a#e in place a clearl laid do&n parameter to contain @ i% not totall eliminate t"e %inanciall ad#erse e%%ects o% its acti#ities! Hence1 t"e process o% identi%ication1 measurement1 monitoring and control o% its acti#ities $ecomes paramount under risk management! T"e organi<ation/$ank "as to concentrate on t"e %ollo&ing issues4 Fi2ing a $oundar &it"in &"ic" t"e organi<ation/$ank &ill mo#e in t"e matter o% risk5prone acti#ities! T"e %unctional aut"orities must limit t"emsel#es to t"e de%ined risk $oundar &"ile ac"ie#ing $anks o$0ecti#es! T"ere s"ould $e a $alance $et&een t"e $ank?s risk p"ilosop" and its risk appetite!
IMPORTANCE OF RISK MANAGEMENT

T"e Concern o#er risk management arose %rom t"e %ollo&ing de#elopments4 In Fe$ruar BFFG1 t"e Barings Bank episode s"ook t"e markets and $roug"t a$out t"e do&n%all o% t"e oldest merc"ant $ank in t"e U)! Inade>uate regulation and t"e poor s stems and practices o% t"e $ank &ere responsi$le %or t"e disaster! +ll components o% risk management @ market risk1 credit risk and operational risk @ &ere t"ro&n o#er$oard! S"ortl t"erea%ter1 in Jul BFFH1 t"ere &as t"e +sian %inancial crisis1 $roug"t a$out again $ t"e poor risk management s stems in $anks/%inancial damaged t"e monetar s stem o% t"e institutions coupled &it" per%unctor super#ision $ t"e regulator aut"orities1 suc" practices could "a#e se#erel #arious countries in#ol#ed and "ad international rami%ications! B anal <ing t"ese t&o incidents1 &e can come to t"e %ollo&ing conclusions4 (isks do increase o#er time in a $usiness1 especiall en#ironment! Increasing competition1 t"e remo#al o% $arriers to entr to ne& $usiness units $ man countries1 "ig"er order e2pectations $ stake"olders lead to assumption o% risks &it"out ade>uate support and sa%eguards! T"e e2ternal operating en#ironment in t"e CBst centur is noticea$l di%%erent! It is not possi$le to manage tomorro&?s e#ents &it" esterda ?s s stems and procedures and toda ?s "uman skill sets! Hence risk management "as to address suc" issues on a continuing $asis and install sa%eguards %rom time to time &it" t"e tool o% risk management! Stake"olders in $usiness are no& demanding t"at t"eir long5term interests $e protected in a c"anging en#ironment! T"e e2pect t"e organi<ation to install 9 in a glo$ali<ed
Credit Risk Management appropriate s stems to "andle a &orst5case situation! Here lies t"e task o% a risk management s stem @ pro#iding returns and en0o ing t"eir con%idence!
RISK PHILOSOPHY AND RISK APPETITE

Ideall 1 t"e risk management s stem in an organi<ation/$ank must codi% its risk p"ilosop" and risk appetite in eac" %unctionall area o% its $usiness! Risk phil s ph!4 It in#ol#es de#eloping and maintaining a "ealt" port%olio &it"in t"e $oundar set $ t"e legal and regulator %rame&ork! Risk "pp#$i$#: Is go#erned $ contours o% risk perception! Risk phil s ph! "%& 'isk "pp#$i$# must go "and5in5"and to ensure t"at t"e $ank "as strengt" and #italit ! t"e o$0ecti#e o% ma2imi<ing earnings &it"in t"e
RISK ORGANISATIONAL SET(UP

9"ile creating a $alanced organi<ational structure1 it must $e $orne in mind t"at t"e primar goal is not to a#oid risks t"at are in"erent in a particular $usiness :%or e2ample1 in t"e $anking $usiness lending is t"e dominant %unction1 in#ol#ing t"e risk o% de%ault $ t"e $orro&er; $ut rat"er to steer t"em consciousl and acti#el to ensure t"at t"e income generated is ade>uate to t"e assumption o% risks! PRINCIPLES IN RISK MANAGEMENT +n acti#it or group o% acti#ities needs to $e done according to clear principles or I%undamental trut"s?! In risk management1 t"e %ollo&ing set o% principles dominates an organi<ation?s operating en#ironment! Close in#ol#ement at t"e top le#el not onl at t"e polic %ormulation stage $ut also during t"e entire process o% implementation and regular monitoring!
10
Credit Risk Management T"e risk element in #arious segments &it"in an organi<ation ma #ar
depending on t"e t pe o% acti#ities t"e are in#ol#ed in! For e2ample1 in $ank t"e credit risk o% loans to priorit sectors ma $e percei#ed as $eing o% I"ig" %re>uenc $ut lo& #alue?! On t"e ot"er "and1 t"e operational risk in#ol#ed in large deposit accounts ma $e seen as Ilo& %re>uenc $ut "ig" #alue?! T"e se#erit and magnitude o% #arious t pes o% risk in an organi<ation must $e clearl documented! T"e c"ecks and sa%eguards must $e stated in clear terms suc" t"at t"e operate consistentl and e%%ecti#el 1 and allo& t"e po&er o% %le2i$ilit ! T"ere s"ould $e clear times o% responsi$ilit and demarcation o% duties o% people managing t"e organi<ation! Sta%% accounta$ilit must $e clearl spelt out so t"at #arious risk segments are "andled $ #arious o%%icers &it" %ull understanding and dedication1 taking responsi$ilit %or t"eir actions! +%ter identi%ication o% risk areas1 it is a$solutel essential t"at t"ese are measured1 monitored and controlled as per t"e needs and operating en#ironment o% t"e organi<ation! Hence1 like t"e internal audit o% %inancial accounts1 t"ere "as to "e a s stem o% Iinternal risk audit?! 9it" regular risk audit %eed$ack1 t"e principles o% risk management ma c"anged! +ll t"e risk segments s"ould operate in an integrated manner on an enterprise5 &ide $asis! (isk tolerance limits %or #arious categories must $e in place and Ie2ception reporting? must $e pro#ided %or &"en suc" limits are e2ceeded due to e2ceptional circumstances! In t"e terminolog o% %inance1 t"e term credit "as an omni$us connotation! It not onl includes all t pes o% loans and ad#ances :kno&n as %unded %acilities; $ut also contingent items like letter o% credit1 guarantees and deri#ati#es :also kno&n as non5 %unded/non5credit %acilities;! In#estment in securities is also treated as credit e2posure! 11 $e laid do&n or
CREDIT RISK MANAGEMENT 9H+T IS C(EDIT (IS)J

'7ro$a$ilit o% loss %rom a credit transaction 'is t"e plain #anilla de%inition o% credit risk! +ccording to t"e Basel Committee1 'Credit (isk is most simpl de%ined as t"e potential t"at a $orro&er or counter5part &ill %ail to meet its o$ligations in accordance &it" agreed terms.! T"e (eser#e Bank o% India :(BI; "as de%ined credit risk as 't"e pro$a$ilit o% losses associated &it" diminution in t"e credit >ualit o% $orro&ers or counter5parties.! T"oug" credit risk is closel related &it" t"e $usiness o% lending :t"at is B+,)S; it is In%act applica$le to all acti#ities o% &"ere credit is in#ol#ed :%or e2ample1 manu%actures /traders sell t"eir goods on credit to t"eir customers;!t"e %irst record o% credit risk is reported to "a#e $een in BKLL B!C! CREDIT RISK MANGEMENT((((FUNCTIONALITY T"e credit risk arc"itecture pro#ides t"e $road can#as and in%rastructure to e%%ecti#el identi% 1 measure1 manage and control credit risk 555 $ot" at port%olio and indi#idual le#els555 in accordance &it" a $anks risk principles1 risk policies1 risk process and risk appetite as a continuous %eature! It aims to strengt"en and increase t"e e%%icac o% t"e organi<ation1 &"ile maintaining consistenc and transparenc ! Beginning &it" t"e Basel Capital +ccord5I in BFKK and t"e su$se>uent Barings episode inBFFG and t"e +sian Financial Crisis inBFFH1 t"e credit risk management %unction "as $ecome t"e centre o% gra#it 1 especiall in a %inanciall in ser#ices industr like $anking!
12
DISTINCTION )ETWEEN CREDIT MANGEMENT AND CREDIT RISK MANAGEMENT +lt"oug" credit risk management is analogous to credit management1 t"ere is a su$tle di%%erence $et&een t"e t&o! Here are some o% t"e %ollo&ing4
CREDIT MANAGEMENT B! It in#ol#es selecting
CREDIT RISK MANAGEMENT and B! It in#ol#es identi% ing and anal <ing t"e risk in a credit transaction! C! It re#ol#es around measuring1
identi% ing
$orro&er/counter part ! C! It re#ol#es around e2amining t"e
t"ree 7?s o% $orro&ing4 people :c"aracter managing and controlling credit risk in and capacit o% t"e $orro&er/guarantor;1 t"e conte2t o% an organi<ation?s credit purpose :especiall i% t"e pro0ect/purpose p"ilosop" and credit appetite! is #ia$le or not;1 protection :securit o%%ered1 $orro&er?s capital1 etc!; D! It is predominantl concerned &it" D! It is predominantl concerned &it" on t"e risk
t"e pro$a$ilit o% repa ment! pro$a$ilit o% de%ault! M! Credit appraisal and anal sis do not M! Depending o% sanction! G! T"e standard %inancial tools o%
usuall pro#ide an e2it %eature at t"e time mani%estations o% an e2posure1 an e2ist route remains a usual option t"roug" t"e sale o% assets/securiti<ation! G! Statistical tools like Va( :Value at
assessment %or credit management are (isk;1 CVa( :Credit Value at (isk;1 $alance s"eet/income statement1 cas" %lo& duration and simulation tec"ni>ues1 etc! statement coupled &it" computation o% %orm t"e core o% credit risk management! speci%ic accounting ratios! It is t"en %ollo&ed $ post5sanction super#ision and 13
Credit Risk Management a %ollo&5up mec"anism :e!g! inspection o% securities1 etc!;! N! It is more $ack&ard5looking in its antecedents/per%ormance $orro&er/counterpart ! o% N! It is %or&ard looking in its
assessment1 in terms o% stud ing t"e assessment1 looking1 %or instance1 at a t"e likel scenario o% an ad#erse outcome in t"e $usiness!
RISK MANAGEMENT POLICIES

*ere codi%ication o% risk principles is not enoug"! T"e need to $e implemented t"roug" a de%ined course o% action! T"ere%ore a $ank re>uires policies on managing all t pes o% risks! T"ese "a#e to $e dra&n up keeping in mind t"e %ollo&ing elements4 T"e risk management process must gi#e appropriate &eig"tage to t"e nature o% eac" risk considering t"e $ank?s nature o% $usiness and a#aila$ilit o% skill sets1 in%ormation s stems etc! +ccordingl 1 t"ere s"ould $e a clear demarcation o% risks and operating instructions! T"e met"odolog and models or risk e#aluation must $e $uilt into t"e s stem! +ction points o% correcting de%iciencies $e ond tolerance le#els must $e pro#ided %or in t"e polic ! (isk polic documents need to $e uni%orm %or all t pes o% risks and1 in %act1 it ma not $e practica$le! T"ere%ore1 separate polic documents "a#e to $e made %or eac" segment5like credit risk1 market risk or operational risk5&it"in t"e %rame&ork o% risk principles! +n appropriate *IS is a must %or t"e smoot" and success%ul operation o% risk management acti#ities in t"e $ank! Data collection1 collation and updating must $e accurate and prompt! T"e organi<ational structure must $e so designed as to %it its risk p"ilosop" and risk appetite! Functional po&ers and responsi$ilities must $e speci%ied %or t"e o%%icials in c"arge o% managing eac" risk segment!
14
Credit Risk Management + I$ack testing? process5&"ere t"e >ualit and accurac o% t"e actual risk measurement is compared &it" t"e results generated $ correcti#e actions taken5must $e installed! T"ere s"ould $e periodical re#ie&s5 pre%era$l on semi annual $asis5 o% t"e risk mitigating tools %or eac" risk segment! Impro#ements must $e initiated &"ere necessar in t"e lig"t o% e2perience gained! T"ere s"ould $e a contingent planning s stem to "andle crises situations t"at elude planned sa%et nets! t"e model and
THE C(EDIT (IS) *+,+-E*E,T 7(OCESS

T"e &ord Iprocess? connotes a continuing acti#it or %unction to&ards a
particular result! T"e process is in %act t"e last o% t"e %our &ings in t"e entire risk management edi%ice @ t"e ot"er t"ree $eing organi<ational structure1 principles and policies! In e%%ect it is t"e #e"icle to implement a $ank?s risk principles and policies aided $ $anks organi<ational structure1 &it" t"e sole o$0ecti#e o% creating and maintaining a "ealt" risk culture in t"e $ank! T"e risk management process "as %our components4 B! (isk Identi%ication! C! (isk *easurement! D! (isk *onitoring! M! (isk Control! RISK IDENTIFICATION: 9"ile identi% ing risks1 t"e %ollo&ing points "a#e to $e kept in mind4 +ll t pes o% risks :e2isting and potential; must $e identi%ied and t"eir likel e%%ect in t"e s"ort run $e understood! T"e magnitude o% eac" risk segment ma #ar %rom $ank to $ank! T"e geograp"ical area co#ered $ t"e $ank ma determine t"e co#erage o% its risk content! + $ank t"at "as international operations ma e2perience di%%erent 15
Credit Risk Management intensit o% credit risks in #arious countries &"en compared &it" a pure in it domestic
domestic $ank! +lso1 e#en &it"in a $ank1 risks &ill #ar operations and its o#erseas arms! RISK MEASUREMENT:
*E+SU(E*E,T means &eig"ing t"e contents and/or #alue1 intensit 1 magnitude o% an o$0ect against a ardstick! In risk measurement it is necessar to esta$lis" clear &a s o% e#aluating #arious risk categories1 &it"out &"ic" identi%ication &ould not ser#e an t"rust purpose! Using >uantitati#e tec"ni>ues in a >ualitati#e %rame&ork &ill %acilitate t"e %ollo&ing o$0ecti#es4 Finding out and understanding t"e e2act degree o% risk elements in Directing t"e e%%orts o% t"e $ank to mitigate t"e risks according to t"e Taking appropriate initiati#es in planning t"e organi<ation?s %uture areas and line o% $usiness and capital allocation! T"e eac" categor in t"e operational en#ironment! #ulnera$ilit o% a particular risk %actor!
s stems/tec"ni>ues used to measure risk depend upon t"e nature and comple2it o% a risk %actor! 9"ile a #er simple >ualitati#e assessment ma $e su%%icient in some cases1 sop"isticated met"odological/statistical ma $e necessar in ot"ers %or a >uantitati#e #alue! RISK MONITORING: )eeping close track o% risk identi%ication measurement acti#ities in t"e lig"t o% t"e risk1 principles and policies is a core %unction in a risk management s stem! For t"e success o% t"e s stem1 it is essential t"at t"e operating &ings per%orm t"eir acti#ities &it"in t"e $road contours o% t"e organi<ations risk perception! (isk monitoring acti#it s"ould ensure t"e %ollo&ing4 Eac" operating segment "as clear lines o% aut"orit and responsi$ilit ! 9"ene#er t"e organi<ations principles and policies are $reac"ed1 e#en i% t"e ma $e to its ad#antage1 must $e anal <ed and reported1 to t"e concerned aut"orities to aid in polic making! 16
Credit Risk Management In t"e course o% risk monitoring1 i% it appears t"at it is in t"e $anks interest to modi% e2isting policies and procedures1 steps to c"ange t"em s"ould $e considered! T"ere must $e an action plan to deal &it" ma0or t"reat areas %acing t"e $ank in t"e %uture! T"e acti#ities o% $ot" t"e $usiness and reporting &ings are monitored striking a $alance at all points in time! Tracking o% risk migration is $ot" up&ard and do&n&ard!
RISK CONTROL: T"ere must $e appropriate mec"anism to regulate or guide t"e operation o% t"e risk management s stem in t"e entire $ank t"roug" a set o% control de#ices! T"ese can $e ac"ie#ed t"roug" a "ost o% management processes suc" as4 +ssessing risk pro%ile tec"ni>ues regularl to e2amine "o& %ar t"e are e%%ecti#e in mitigating risk %actors in t"e $ank! +nal <ing internal and e2ternal audit %eed$ack %rom t"e risk angle and using it to acti#ate control mec"anisms! Segregating risk areas o% ma0or concern %rom ot"er relati#el insigni%icant areas and e2ercising more control o#er t"em! 7utting in place a &ell dra&n5out5risk5%ocused audit s stem to pro#ide inputs on restraint %or operating personnel so t"at t"e needless risks %or s"ort5term interests! It is e#ident1 t"ere%ore1 t"at t"e risk management process t"roug" all its %our &ings %acilitate an organi<ation?s sustaina$ilit and gro&t"! T"e importance o% eac" &ing depends upon t"e nature o% t"e organi<ations acti#it 1 si<e and o$0ecti#e! But it still remains a %act t"at t"e importance o% t"e entire process is paramount! GOAL OF CREDIT RISK MANGEMENT 17 do not take
T"e international regulator $odies %elt t"at a clear and &ell laid risk management s stem is t"e %irst prere>uisite in ensuring t"e sa%et and sta$ilit o% t"e s stem! T"e %ollo&ing are t"e goals o% credit risk management o% an $ank/%inancial organi<ation4 *aintaining risk5return discipline $ accepta$le parameters! Fi2ing proper e2posure limits keeping in #ie& t"e risk p"ilosop" and risk appetite o% t"e organi<ation! Handling credit risk $ot" on an 'entire port%olio. $asis and on an 'indi#idual credit or transaction. $asis! *aintaining an appropriate $alance $et&een credit risk and ot"er risks @ like market risk1 operational risk1 etc! 7lacing e>ual emp"asis on '$anking $ook credit risk. :%or e2ample1 loans and ad#ances on t"e $anks $alance s"eet/$ooks;1 'trading $ook risk. :securities/$onds; and 'o%%5$alance s"eet risk. :deri#ati#es1 guarantees1 3/Cs1 etc!; Impartial and #alue5added control input %rom credit risk management to protect capital! 7ro#iding a timel response to $usiness re>uirements e%%icientl ! *aintaining consistent >ualit and e%%icient credit process! Creating and maintaining a respecta$le and credit risk management culture to ensure >ualit credit port%olio! )eeping 'consistenc and transparenc 'as t"e &atc"&ords in credit risk management! CREDIT RISK MANGEMENT TECHNI*UES (isk @taking is an integral part o% management in an enterprise! For e2ample1 i% a particular $ank decides to lend onl against its deposits1 t"en its margins are $ound to $e #er slender indeed! Ho&e#er t"e $ank ma 18 keeping risk e2posure &it"in
Credit Risk Management also not $e in a position to deplo all its lenda$le %unds1 since o$#iousl takers %or loans &ill $e #er and occasional! T"e $asic tec"ni>ues o% an ideal credit risk management culture are4 Certain risks are not to $e taken e#en t"oug" t"ere is t"e likeli"ood o% ma0or gains or pro%it1 like speculati#e acti#ities! Transactions &it" si<ea$le risk content s"ould $e trans%erred to pro%essional risk institutions! For e2ample1 ad#ances to small scale industrial units and small $orro&ers s"ould $e co#ered $ t"e Deposit O Credit Insurance Sc"eme in India! Similarl 1 e2port %inance s"ould $e co#ered $ t"e E2port Credit -uarantee Sc"eme1 etc! T"e ot"er risks s"ould $e managed $ t"e institution &it" proper risk management arc"itecture! T"us I conclude t"at credit management tec"ni>ues are a mi2ture o% risk a#oidance1 risk trans%er and risk assumption! T"e importance o% eac" o% t"ese &ill depend on t"e organi<ations nature o% acti#ities1 its si<e1 capacit and a$o#e all its risk p"ilosop" and risk appetite!
FORMS OF CREDIT RISK T"e (BI "as laid do&n t"e %ollo&ing %orms o% credit risk4 ,on5repa ment o% t"e principal o% t"e loan and /or t"e interest on it! Contingent lia$ilities like letters o% credit/guarantees issued $ t"e $ank on $e"al% o% t"e client and upon cr stalli<ation5555 amount not deposited $ t"e customer! In t"e case o% treasur operations1 de%ault $ t"e counter5parties in meeting t"e o$ligations! In t"e case o% securities trading1 settlement not taking place &"en it?s due! 19
Credit Risk Management In t"e case o% cross @ $order o$ligations1 an de%ault arising %rom t"e %lo& o% %oreign e2c"ange and /or due to restrictions imposed on remittances out o% t"e countr !
COMMON CAUSES OF CREDIT RISK SITUATIONS For an organi<ation1 especiall one in $anking5related acti#ities1 losses %rom credit risk are usuall #er se#ere and non in%re>uent! It is t"ere%ore necessar to look into t"e causes o% credit risk #ulnera$ilit ! Broadl t"ere are t"ree sets o% causes1 &"ic" are as %ollo&s4 C(EDIT CO,CE,T(+TIO, C(EDIT -(+,TI,- +,D/O( *O,ITO(I,- 7(OCESS C(EDIT EP7OSU(E I, THE*+()ET +,D 3I8UIDITY SE,SITIVITY SECTO(S! CREDIT CONCENTRATION +n kind o% concentration "as its limitations! T"e cardinal principle is t"at all eggs must not $e put in t"e same $asket! Concentrating credit on an one o$ligor /group or t pe o% industr /trade can pose a t"reat to t"e lenders &ell $eing! In t"e case o% $anking1 t"e e2tent o% concentration is to $e 0udged according to t"e %ollo&ing criteria4 T"e institution?s capital $ase :paid5up capitalQreser#es O surplus1 etc;! T"e institutions total tangi$le assets! T"e institutions pre#ailing risk le#el! T"e alarming conse>uence o% concentration is t"e likeli"ood o% large losses at one time or in succession &it"out an opportunit to a$sor$ t"e s"ock! Credit concentration ma take an or $ot" o% t"e %ollo&ing %orms4 Con#entional4 in a single $orro&er/group or in a particular sector like steel1 petroleum1 etc!
20
Credit Risk Management Common/ correlated concentration4 %or e2ample1 e2c"ange rate de#aluation and its e%%ect on %oreign e2c"ange deri#ati#e counter5 parties!
INEFFECTIVE CREDIT GRANTING AND / OR MONITORING PROCESS:

+ strong appraisal s stem and pre5 sanction care are $asic re>uisites in t"e credit deli#er s stem! T"is again needs to $e supplemented $ an appropriate and prompt post5dis$ursement super#ision and %ollo&5up s stem! T"e "istor o% %inance is replete &it" cases o% de%ault due to ine%%ecti#e credit granting and/or monitoring s stems and practices in an organi<ation1 "o&e#er e%%ecti#e1 need to $e su$0ected to impro#ement %rom time to time in t"e lig"t o% de#elopments in t"e marketplace!
CREDIT E+POSURE IN THE MARKET AND LI*UIDITY( SENSITIVE SECTORS:

Foreign e2c"ange and deri#ates contracts1 letter o% credit and li>uidit $ack up lines etc! &"ile $eing remunerati#eE create sudden "iccups in t"e organi<ations %inancial $ase! To guard against rude s"ock1 t"e organi<ation must "a#e in place a Compact +nal tical S stem to c"eck %or t"e customer?s #ulnera$ilit to li>uidit pro$lems! In t"is conte2t1 t"e Basel Committee states t"at1 '*arket and li>uidit 5 sensiti#e e2posures1 $ecause t"e are pro$a$ilistic1 can $e correlated &it" credit5 &ort"iness o% t"e $orro&er.! CONFLICTS IN CREDIT RISK MANGEMENT +n organi<ation dedicated to optimall manage its credit risk %aces con%lict1 particularl &"ile meeting t"e re>uirements o% t"e $usiness sector! Its customers e2pect t"e $ank to e2tend "ig" >ualit lender5ser#ice &it" e%%icienc and responsi#eness1 placing increasing demands in terms o% "ig"er amounts1 longer tenors
21
Credit Risk Management and lesser collateral! T"e organi<ation on t"e ot"er "and ma "a#e a limited credit risk appetite and like to reap t"e ma2imum $ene%its &it" lesser credit and o% a s"orter duration! +n articulate $alancing o% t"is con%lict re%lects t"e strengt" and soundness o% risk management practices o% t"e $ank! COMPONENTS ,)UILDING )LOCKS- OF CREDIT RISK MANAGEMENT T"e entire credit risk management edi%ice in a $ank rests upon t"e %ollo&ing t"ree $uilding $locks1 in accordance &it" (BI guidelines4 ./ FORMULATION OF CREDIT RISK POLICY AND STRATEGY: +ll $anks cannot use t"e same polic and strateg 1 e#en t"oug" t"e ma $e similar in man respects! T"is is $ecause eac" $ank "as a di%%erent risk polic and risk appetite! Ho&e#er one aspect t"at is common %or an $ank is t"at it must "a#e an appropriate polic %rame&ork co#ering risk identi%ication1 measurement1 monitoring and control! In suc" a polic initiati#e1 t"ere must $e risk control/mitigation measures and also clear lines o% aut"orit 1 autonom and accounta$ilit o% operating o%%icials! +s a matter o% %act1 t"e polic document must pro#ide %le2i$ilit to make t"e $est use o% risk5re&ard opportunities! (isk strateg &"ic" is a %unctional element in#ol#ing t"e implementation o% risk polic is concerned more &it" sa%e and pro%ita$le credit operations! it takes in to account t pes o% economic / $usiness acti#it to &"ic" credit is to $e e2tended1 its geograp"ical location and suita$ilit 1 scope o% di#ersi%ication1 c clical aspects o% t"e econom and a$o#e all means and &a s o% e2isting &"en t"e risk $ecome too "ig"! 0/ CREDIT RISK ORGANISATION STRUCTURE: Depending upon a $anks nature o% acti#it 1 and a$o#e all its risk p"ilosop" and risk appetite 1 t"e organi<ation structure is %ormed taking care o% t"e core %unctions o% risk identi%ication1 risk measurement1 risk monitoring and risk control! T"e (BI "as suggested t"e %ollo&ing guidelines %or $anks4
22
Credit Risk Management T"e Board o% Directors &ould $e in t"e superstructure1 &it" a role in t"e o#erall risk polic %ormulation and o#erseeing! T"ere "as to $e a $oard5le#el su$5committee called t"e (isk *anagement Committee :(*C; concerned &it" integrated risk management! T"at is1 %raming polic issues on t"e $asis o% t"e o#erall polic prescriptions o% t"e Board and coming up &it" an implementation strateg ! T"is su$5 committee1 entrusted &it" enterprise &ide risk management1 s"ould comprise t"e c"ie% e2ecuti#e o%%icer and "eads o% t"e Credit (isk *anagement and *arket and Operational (isk *anagement Committee! + Credit (isk *anagement Committee :C(*C; s"ould %unction under t"e super#ision o% t"e (*C! T"is committee s"ould $e "eaded $ t"e CEO/e2ecuti#e director and s"ould include "eads o% credit1 treasur 1 t"e Credit (isk *anagement Department :C(*D; and t"e c"ie% economist! FUNCTIONS OF CRMC: Implementation o% Credit (isk 7olic ! *onitoring credit risk on t"e $asis o% t"e risk limits %i2ed $ t"e $oard and ensuring compliance on an ongoing $asis! Seeking t"e $oard?s appro#al %or standards %or entertaining credit/in#estment proposals and %i2ing $enc"marks and %inancial co#enants! *icro5management o% credit e2posures1 %or e2ample1 risks concentration/di#ersi%ication1 pricing1 collaterals1 port%olio re#ie&1 pro#isional/compliance aspects1 etc! Besides setting up macro5le#el %unctionaries on a committee $asis eac" $ank is re>uired to put in place a Credit (isk *anagement Department :C(*D;1 &"ose %unctions "a#e $een prescri$ed $ t"e (BI! FUNCTIONS OF CRMD4 *easuring1 controlling and managing credit risk on a $ank @ &ide $asis &it"in t"e limits set $ t"e $oard/C(*C! 23
Credit Risk Management En%orce compliance &it" t"e risk parameters and prudential limits set $ t"e Board/C(*C! 3a do&n risk assessment s stems1 de#elop an *IS1 monitor t"e >ualit o% loan /in#estment port%olio1 identi% pro$lems1 correct de%iciencies and undertake loan re#ie& /audit! Be accounta$le %or protecting t"e >ualit loan/in#estment port%olio! o% t"e entire
1/ CREDIT RISK OPERATION 2 SYSTEM FRAMEWORK: *easurement and monitoring1 along &it" control aspects1 in credit risk determine t"e #ulnera$ilit or ot"er&ise o% an organi<ation &"ile e2tending credit1 including deplo ment o% %unds in trada$le securities! +s per (BI guidelines1 t"is s"ould in#ol#e t"ree clear p"ases4 (elations"ip management &it" t"e clientele &it" an e e on $usiness de#elopment! Transaction management in#ol#ing %i2ing t"e >uantum1 tenor and pricing and to document t"e same in con%ormit regulator guidelines! 7ort%olio management1 signi% ing appraisal/e#aluation on a port%olio $asis rat"er t"an on an indi#idual $asis :&"ic" is co#ered $ t"e t&o earlier points; &it" a special t"rust on management o% non5per%orming items! In t"e lig"t o% all t"e a$o#e t"ree p"ases1 a $ank "as to map its risk management acti#ities :identi%ication1 measurement1 monitoring and control;! It "as to emp"asi<e on t"e %ollo&ing aspects4 T"ere s"ould $e periodic %ocused industr studies identi% ing1 in particular1 stagnant and d ing sectors! &it" statutor /
24
Credit Risk Management Hands5on super#ision o% indi#idual credit accounts t"roug" "al%5 earl /annual re#ie&s o% %inancial1 position o% collaterals and o$ligor?s internal and e2ternal $usiness en#ironment! Credit sanctioning aut"orit and credit risk appro#ing aut"orit to $e separate! 3e#el o% credit sanctioning aut"orit proportion to t"e amount o% credit! Installation o% a credit audit s stem in@"ouse or "anded5out to a competent e2ternal organi<ation! +n appropriate credit rating s stem to operate! 7ricing s"ould $e linked to t"e risk rating o% an account 555 "ig"er t"e risk1 "ig"er t"e price! Credit appraisal and periodic re#ie&s55555 toget"er &it" en"ancement &"en necessar 555 s"ould $e uni%orm1 $ut operate %le2i$l ! T"ere s"ould $e a consistent approac" :keeping in #ie& prudential guidelines &"ere#er e2isting; in t"e identi%ication1 classi%ication and reco#er o% non5per%orming accounts! + compact s stem to a#oid e2cessi#e concentration o% credit s"ould operate &it" port%olio anal sis! T"ere s"ould $e a clearl laid do&n process o% risk reporting o% data/in%ormation to t"e controlling / regulator aut"orities! + conser#ati#e long pro#isionar polic s"ould $e in place so t"at all non per%orming assets are pro#ided %or1 not onl as per regulator re>uirements $ut also &it" some additional cus"ioning :some $anks in India pro#ide %or a %i2ed percentage55555usuall L!CGR555555o% standard assets;! T"ere s"ould $e detailed delegation o% po&ers1 duties and responsi$ilities o% o%%icials dealing &it" credit! T"ere s"ould $e sound *anagement In%ormation S stem! is to $e "ig"er in
25
Credit Risk Management T"ese make it clear t"at operations/s stems in credit risk management $ecome reall e%%ecti#e tools onl &"en t"e are led $ principles o% consistenc and transparenc !
THE CREDIT RATING MECHANISM (ating implies an assessment or e#aluation o% a person1 propert 1 pro0ect or a%%airs against a speci%ic ardstick/$enc"mark set %or t"e purpose! In credit rating1 t"e o$0ecti#e is to assess/e#aluate a particular credit proposition :&"ic" includes in#estment; on t"e $asis o% certain parameters! T"e outcome indicates t"e degree o% credit relia$ilit and risk! T"ese are classi%ied into #arious grades according to t"e ardstick/$enc"mark set %or eac" grade! Credit rating in#ol#es $ot" >uantitati#e and >ualitati#e e#aluations! 9"ile %inancial anal sis co#ers a "ost o% %actors suc" as t"e %irm?s competiti#e strengt" &it"in t"e industr /trade1 likel all 3"%"4#3#%$ %actors! T"e Basel Committee "as de%ined credit rating as a s533"'! i%&i6"$ ' o% t"e risk in"erent in indi#idual credit1 em$od ing an assessment o% t"e risk o% loss due to t"e de%ault counter5part credit risk! WHO UNDERTAKES CREDIT RATING T"ere is no restriction on an one rating anot"er $ank as long as it ser#es t"eir purpose! For instance1 a &ould5$e emplo ee ma like to do a rating $e%ore deciding to 0oin a %irm! Internationall rating agencies like Standard O 7oor?s:SO7; and undertake rating e2ercises generall t"e &"en an *ood ?s are &ell kno&n! In India1 t"e %our aut"ori<ed rating agencies are C(ISI31 IC(+1 C+(E1 and FITCH! T"e organi<ation &ants to issue de$t instruments like commercial paper1 $onds1 etc! t"eir ratings %acilitate in#estor decisions1 alt"oug" normall do not "a#e an $ considering rele#ant >uantitati#e and >ualitati#e in%ormation! T"us1 credit rating is a tool %or t"e measurement or >uanti%ication o% e%%ects on t"e %irm?s $usiness o% an ma0or tec"nological c"anges1 regulator /legal c"anges1 etc!1 &"ic" are
26
Credit Risk Management statutor /regulator lia$ilit in respect o% a rated instrument! T"is is $ecause rating is onl an pi%i % on t"e %inancial a$ilit o% an organi<ation to "onor pa ments o% principal and/or interest on a de$t instrument1 as and &"en t"e are d e in %uture! Ho&e#er1 since t"e rating agencies "a#e t"e e2pertise in t"eir %ield and are not tainted &it" an on t"em! Banks do undertake structured rating e2ercises &it" >uantitati#e and >ualitati#e inputs to support a credit decision1 &"et"er it is sanction or re0ection! Ho&e#er t"e ma $e in%luenced B t"e rating 555&"et"er a#aila$le5555 o% an instrument o% a particular part $ an e2ternal agenc e#en t"oug" t"e purpose o% a $ank?s credit rating ma $e an omni$us one555 t"at is to c"eck a $orro&er?s capacit and competence5555&"ile t"at o% an e2ternal agenc ma $e limited to a particular de$t instrument! UTILITY OF CREDIT RATING In a de#eloping countr like India1 t"e $iggest sources o% %unds %or an $ias1 t"eir ratings are "and %or market participants and regulator aut"orities to %orm 0udgments on an instrument and/ or t"e issuer and take decisions
organi<ation to ac>uire capital assets and/or %or &orking capital re>uirement are commercial $anks and de#elopment %inancial institutions! Hence credit rating is one o% t"e most important tools to measure1 monitor and control credit risk $ot" at indi#idual and port%olio le#els! O#erall1 t"eir utilit %ollo&ing angles4 Credit selection/re0ection! E#aluation o% $orro&er in totalit and o% an particular e2posure/%acilit ! Transaction5le#el anal sis and credit pricing and tenure! +cti#it 5&ise/sector5&ise port%olio stud position! Fi2ing outer limits %or taking up/ maintaining an e2posure arising out o% risk rating! keeping in #ie& t"e macro5le#el ma $e #ie&ed %rom t"e
27
Credit Risk Management *onitoring e2posure alread appropriate cases! +llocation o% risk capital %or poor graded credits! +#oiding o#er5concentration o% e2posure in speci%ic risk grades1 &"ic" ma not $e o% ma0or concern at a particular point o% time1 $ut ma in %uture pose pro$lems i% t"e concentration continues! Clarit and consistenc 1 toget"er &it" transparenc in rating a particular $orro&er/e2posure1 ena$ling a proper control mec"anism to c"eck risks associated in t"e e2posure! Basel5II "as summed up t"e utilit o% credit rating in t"is &a 4 'Internal risk ratings are an important tool in monitoring credit risk! Internal risk ratings s"ould $e ade>uate to support t"e identi%ication and measurement o% risk %rom all credit risk e2posures and s"ould $e integrated into an institution?s o#erall anal sis o% credit risk and capital ade>uac ! T"e ratings s stem s"ould pro#ide detailed ratings %or all assets1 not onl %or critici<ed or pro$lem assets! 3oan loss reser#es s"ould $e included in t"e credit risk assessment %or capital ade>uac !. METHODS OF CREDIT RATING B! T"roug" t"e c cle4 In t"is met"od o% credit rating1 t"e condition o% t"e o$ligor and/or position o% e2posure are assessed assuming t"e '&orst point in $usiness c cle.! T"ere ma $e a strong element o% su$0ecti#it on t"e e#aluator?s part &"ile grading a particular case! It is also di%%icult to implement t"e met"od &"en t"e num$er o% $orro&ers/e2posures is large and #aried! C! 7oint5in5time4 + rating sc"eme $ased on t"e 65''#%$ 6 %&i$i % o% t"e $orro&er/e2posure! T"e inputs %or t"is met"od are pro#ided $ %inancial statements1 current market position o% t"e trade / $usiness1 corporate go#ernance1 o#erall management e2pertise1 etc! In India $anks usuall adopt t"e point5in5time met"od $ecause4 in t"e $ooks and deciding e2it strategies in
28
Credit Risk Management It is relati#el simple to operate &"ile at t"e same time
pro#iding a %air estimate o% t"e risk grade o% an o$ligor/e2posure! It can $e applied consistentl and o$0ecti#el ! 7eriodical re#ie& and do&ngrading are possi$le depending upon t"e position! T"e point5in @time %ull ser#es t"e purpose o% credit rating o% a $ank! SCORES / GRADES IN CREDIT RATING: T"e main aim o% t"e credit rating s stem is t"e measurement or >uanti%ication o% credit risk so as to speci%icall identi% t"e pro$a$ilit o% de%ault :7D;1 e2posure at de%ault :E+D; and loss gi#en de%ault :3-D;!Hence it needs a tool to implement t"e credit rating met"od :generall t"e point in time met"od;!T"e agenc also needs to design appropriate measures %or #arious grades o% credit at an indi#idual le#el or at a port%olio le#el! T"ese grades ma generall $e an o% t"e %ollo&ing %orms4 B! +lp"a$et4 +++1 ++1 BBB1 etc! C! ,um$er4 I1 II1 III1 IV1 etc! T"e %undamental reasons %or #arious grades are as %ollo&s4 Signaling de%ault risks o% an e2posure! Facilitating comparison o% risks to aid decision making! Compliance &it" regulator e2posures! 7ro#iding a %le2i$le means to ultimatel measure t"e credit risk o% an e2posure! COMPONENTS OF SCORES/GRADES: Scores are mere num$ers allotted %or eac" >uantitati#e and >ualitati#e parameter555out o% t"e ma2imum allo&a$le %or eac" parameter as ma $e %i2ed $ an organi<ation 555o% an e2posure! T"e issue o% identi%ication o% speci%ic parameters1 its o#erall marks and %inall relating aggregate marks :%or all >uantitati#e and >ualitati#e 29 o% asset classi%ication $ased on risk
Credit Risk Management parameters; to #arious grades is a matter o% management polic and discretion5555 t"ere is no statutor or regulator compulsion! Ho&e#er t"e management is usuall guided in its e%%orts $ t"e %ollo&ing %actors4 Si<e and comple2it o% operations! Varieties o% its credit products and speed! T"e $anks credit p"ilosop" and credit appetite! Commitment o% t"e top management to assume risks on a calculated $asis &it"out $eing risk5a#erse! FUNDAMENTAL PRINCIPLE OF RATING AND GRADING + $asic re>uirement in risk grading is t"at it s"ould re%lect a clear and %ine distinction $et&een credit grades co#ering de%ault risks and sa%e risks in t"e s"ort run! 9"ile t"ere is no i&#"l num$er o% grades t"at &ould %acilitate ac"ie#ing t"is o$0ecti#e1 it is e2pected t"at 3 '# 4'"%5l"'i$! ma ser#e t"e %ollo&ing purposes4 O$0ecti#e anal sis o% port%olio risk! +ppropriate pricing o% #arious risk grade $orro&er?s1 &it" a %ocus on lo&5 risk $orro&ers in terms o% lo&er pricing! +llocation o% risk capital %or "ig" risk graded e2posures! +c"ie#ing accurac and consistenc ! +ccording to t"e (BI1 t"ere s"ould $e an ideal $alance $et&een 'accepta$le credit risk and unaccepta$le credit risk. in a grading s stem! It is suggested t"at4 + rating scale ma consist o% K5F le#els! O% t"e a$o#e t"e %irst %i#e le#els ma represent accepta$le credit risks! T"e remaining %our le#els ma represent unaccepta$le credit risks! T"e a$o#e scales ma $e denoted $ num$ers :B1 C1 D etc!; or alp"a$ets :+++1 ++1 BBB1 etc!;
30
TYPES OF CREDIT RATING -enerall speaking credit rating is done %or an t pe o% e2posure irrespecti#e o% t"e nature o% an o$ligor?s acti#it 1 status :go#ernment or non5go#ernment; etc! Broadl 1 "o&e#er1 credit rating done on t"e %ollo&ing t pes o% e2posures! 9"olesale sector:COI;! (etail e2posure4 Consumer lending1 like "ousing %inance1 car %inance1 etc! T"e parameters %or rating t"e risks o% &"olesale and retail e2posures are di%%erent! Here are some o% t"em4 In t"e &"olesale sector1 repa ment is e2pected %rom t"e $usiness %or &"ic" t"e %inance is $eing e2tended! But in t"e case o% t"e retail sector1 repa ment is done %rom t"e mont"l /periodical income o% an indi#idual %rom "is salar / occupation! In t"e &"olesale sector1 apart %rom assets %inanced %rom $ank %unds1 ot"er $usiness assets/personal assets o% t"e o&ner ma $e a#aila$le as securit ! In case o% retail e2posure1 t"e assets t"at are %inanced generall constitute t"e sole securit ! Since &"olesale e2posure is %or $usiness purposes1 en"ancement lasts :especiall %or &orking capital %inance; as long as t"e $usiness operates! In t"e retail sector1 "o&e#er1 e2posure is limited to appoint o% time agreed to at t"e time o% dis$ursement! 'Unit. e2posure in t"e retail categor is >uite small generall compared to t"at o% &"olesale e2posure! T"e %re>uenc o% credit rating in t"e case o% &"olesale e2posure is generall annual1 e2cept in cases &"ere more %re>uent : sa "al% earl ; rating is &arranted due to certain speci%ic reasons : %or e2ample1 declining trend o% asset >ualit ! Ho&e#er retail credit ma $e su$0ected to a lo&er %re>uenc e2posure4 E2posed to t"e commercial and institutional
31
Credit Risk Management :sa once in t&o ears; o% rating as long as e2posure continues to $e under t"e standard asset categor ! USUAL PARAMETERS FOR CREDIT RATING +! Wh l#s"l# #7p s5'#: For &"olesale e2posures1 &"ic" are generall meant %or t"e $usiness acti#ities o% t"e o$ligor1 t"e %ollo&ing parameters are usuall important4 8uantitati#e %actors as on t"e last date o% $orro&er?s accounting ear4 B! -ro&t" in sales/main income! C! -ro&t" in operating pro%it and net pro%it! D! (eturn on capital emplo ed! M! Total de$t5e>uit ratio! G! Current ratio! N! 3e#el o% contingent lia$ilities! H! Speed o% de$t collection! K! Holding period o% in#entories/%inis"ed goods! F! Speed o% pa ment to trade creditors! BL! De$t5ser#ice co#erage ratio :DSC(;! BB! Cas" %lo& DSC(! BC! Stress test ratio :#ariance o% cas" %lo&/DSC( compared &it" t"e preceding ear;! 8ualitati#e %actors are ad0uncts to t"e >uantitati#e %actors1 alt"oug" t"e cannot $e measured accuratel Sonl complete! T"ese %actors usuall include4 B! Ho& t"e particular $usiness complies &it" t"e regulator %rame&ork1 standard and norms1 i% laid do&n! C! E2perience o% t"e top management in t"e #arious acti#ities o% t"e $usiness! an o$0ecti#e opinion can $e %ormed! ,e#ert"eless1 &it"out assessing >uantitati#e %actors1 credit rating &ould not $e
32
Credit Risk Management D! 9"et"er t"ere is a clear cut succession plan %or ke personnel in t"e organi<ation! M! Initiati#es s"o&n $ t"e top management in sta ing a"ead o% competitors! G! Corporate go#ernance initiati#e! N! Honoring %inancial commitments! H! Ensuring end5use o% e2ternal %unds! K! 7er%ormance o% a%%iliate concerns1 i% an ! F! T"e organi<ation?s a$ilit to cope &it" an ma0or &ere tec"nological1 regulator 1 legal c"anges1 etc! BL! C clical %actors1 i% an 1 t"e $usiness and "o& t"e industr /trade anal sis! BB! 7roduct c"aracteristics5555scope %or di#ersi%ication! BC! +pproac" to %acing t"e t"reat o% su$stitutes! B/ R#$"il E7p s5'#: In undertaking credit rating %or retail e2posures5555&"ic" consists mainl o% lending %or consumer dura$les and "ousing %inance1 or an ot"er %orm o% need $ased %inancial re>uirement o% indi#iduals/groups in t"e %orm o% educational loansSt"e t&o #ital issues need to $e addressed4 B! Borro&er?s a$ilit to ser#ice t"e loan! C! Borro&er?s &illingness at an point o% time to ser#ice t"e loan and / or compl &it" t"e lenders re>uirement! T"e parameters %or rating retail e2posures are an admi2ture o% >uantitati#e and >ualitati#e %actors! In $ot" situations1 t"e e#aluator?s o$0ecti#it in assessment is considered crucial %or 0udging t"e >ualit parameters ma $e grouped into %our categories4 ./ PERSONAL DETAILS: a! A4#4 Economic li%e1 producti#e ears o% li%e! o% e2posure! T"e "andled $ t"e management in t"e past ear5555macro le#el
33
Credit Risk Management $! E&56"$i % 85"li9i6"$i %s4 7ro$a$ilit tendenc to ser#ice and repa t"e loan! c! M"'i$"l s$"$5s4 -reater need o% a permanent settlement1 lesser tendenc to de%ault! d! N53:#' 9 &#p#%&#%$s4 Impact on mont"l out%lo&1 reduced a$ilit to repa ! e! M :ili$! 9 $h# i%&i;i&5"l< l 6"$i %4 +%%ects t"e $orro&er?s repa ment capacit and also "is &illingness to repa ! 0/ EMPLOYMENT DETAILS: a! E3pl !3#%$ s$"$5s4 Income o% t"e sel%5emplo ed is not as sta$le as t"at o% a salaried person! $! D#si4%"$i %: 7eople at middle management and senior management le#els tend to "a#e "ig"er income and sta$ilit ! c! -ross 3 %$hl! i%6 3#1 a$ilit to repa ! d! N53:#' 9 !#"'s in current emplo ment / $usiness1 sta$le income! o% "ig"er income and greater
1/ FINANCIAL DETAILS: a! M"'4i%/p#'6#%$"4# 9 9i%"%6i%4 9 : '' =#'s4 more t"e $orro&er?s
in#ol#ement1 less t"e amount o% t"e loan! $! D#$"ils 9 : '' =#'>s "ss$s4 land O $uilding1 &ort" o% t"e $orro&er or securit ! c! D#$"ils 9 " : '' =#'>s "ss#$s4 $ank $alances and ot"er securities1 &ort" o% t"e $orro&er or securit ! ?/ OTHER DETAILS A)OUT THE LOAN AND )ORROWER: a! 7resence and percentage o% collateral555additional securit ! $! 7resence o% grantor555additional securit !
34
Credit Risk Management c! Status s m$ol/li%est le :telep"one1 tele#ision1 re%rigerator1 &as"ing mac"ine1 t&o &"eeler1 car1 cellular p"one;! d! +ccount relations"ip! +s per (BI guidelines1 all e2posure :&it"out an cut o%% limit; are to $e rated!
CREDIT AUDIT Credit also kno&n as loan re#ie& mec"anism is t"e outcome o% modern commerce1 a result o% proli%eration o% credit/loan institutions t"e &orld o#er &it" sop"isticated loan products on one "and and t"e gro&ing concern a$out asset >ualit on t"e ot"er! T"e core emp"asis is on compliance &it" credit polic 1 procedures1 documentation process and a$o#e all1 ad"erence to stipulated terms and conditions %or sanction1 dis$ursements and monitoring!
CREDIT AUDIT DEFINED Credit audit is concerned &it" t"e #eri%ication o% credit :loan; accounts1 including t"e in#estment port%olio! +lt"oug" t"e $usiness o% credit/loans is predominantl t"e domain o% $anks1 "o&e#er an commercial institution can $e in#ol#ed in it as &ell %or e2ample1 credit sales creating accounts recei#a$les! Credit audit ma $e de%ined as t"e process o% e2amining and #eri% ing credit records %rom t"e #ie&point o% compliance &it" laid do&n policies1 s stem procedures %or t"e dis$ursement o% credit and t"eir monitoring! T"e (BI "as de%ined credit audit as a mec"anism to e2amine 'compliance &it" e2tant sanction and post sanction processes/procedures laid do&n $ t"e $ank %rom time to time.!
35
Credit Risk Management Credit audit is not a statutor regulator port%olios! re>uirement! Ho&e#er %rom t"e
angle o% credit risk management1 t"e (BI "as asked $anks to
implement an appropriate credit audit s stem %or t"eir loan / in#estment
O)@ECTIVES Credit audit acts as an ena$ler in $uilding up and monitoring asset >ualit &it"out compromising on policies1 norms and procedure! Its $asic o$0ecti#e is implanted in t"e independent #eri%ication process1 co#ering4 B! T"e sanction process! C! T"e modalities o% dis$ursement! D! Compliance &it" regulator e2isting in "ouse policies! M! T"e monitoring mec"anism and "o& it is suited to stop a possi$le decline in asset >ualit ! T"us an independent assessment :&it"out $eing carried a&a $ t"e 0udgment o% t"ose in#ol#ed in sanctioning1 dis$ursing and monitoring credit; is t"e &"ole and sole o% credit audit! T"e %indings o% t"e credit audit process &it" t"e suggested course o% action %or impro#ements operate as a sa%et #al#e %or t"e organi<ation! SCOPE Credit audit must co#er not onl %unded credit/loans 55555555including accounts recei#a$le555555$ut also t"e in#estment port%olio1 o% $ot" go#ernment and corporate securities! It s"ould also co#er non5%unded commitments :letter o% credit1 guarantees1 $id $onds1 etc;!indi#idual account #eri%ication s"ould $e %ollo&ed up $ port%olio #eri%ication :%or e2ample1 loan/credit port%olio on t"e &"ole1 sectoral position1 etc!; prescriptions $esides ad"erence to
36
Credit Risk Management T"e scope and co#erage o% suc" an audit depends on t"e si<e and comple2it o% operations o% an organi<ation and past trends :sa a period o% t"ree5%i#e ears; re%lected in t"e indi#idual / port%olio >ualit o% accounts! DISTINCTION )ETWEEN CREDIT AUDIT AND ACCOUNTS AUDIT +lt"oug" t"e $asic element o% $ot" credit audit and accounts audit is #eri%ication/e2amination1 t"e %ollo&ing points o% distinction $et&een t"e t&o are important4
CREDIT AUDIT
ACCOUNTS AUDIT
B! Concerned &it" loan /in#estment assets o% an Concerned &it" all t pes o% assets and lia$ilities organi<ation like a $ank! limited compan :pri#ate/pu$lic;! o% an organi<ation! %or all t pes o% limited companies :no statutor C! T"is is not a statutor re>uirement e#en %or a It is a statutor re>uirement :at least once a ear; re>uirement %or ot"ers;! D! T"e scope o% credit audit :ot"er&ise kno&n as T"e scope o% accounts audit co#ers all assets loan re#ie& mec"anism; &it" respect and is restricted to to /lia$ilities &it"out an restrictions1 $ut &it"in t"e compliance sanction %rame&ork o% t"e +ccounting Standards o% t"e
:loan/in#estment;
post5sanction Institute o% C"artered +ccountants! o% audit rests &it" t"e auditor
processes/procedures as ma e2ist in a $ank! M! modalit /periodicit ma $e decided $ t"e *odalit %inancing institution su$0ect to t"e regulator guidelines o% t"e (BI!
concerned1 &"o "as to %ollo& accepted %inancial practices/standards! For a limited compan
:pu$lic / pri#ate;1 an audit once a ear is a must! G! T"e audit ma $e undertaken in5"ouse $ an +udit o% limited companies :pri#ate/pu$lic; can organi<ation1 and t"e auditor need not $e a $e undertaken onl >uali%ied c"artered account! accountants! $ >uali%ied c"artered
37
Credit Risk Management N! Credit auditor is not re>uired to #isit I% need $e1 an auditor ma not onl #eri% t"e $orro&er?s %actor /o%%ice1 $ut %rames "is opinion $ooks o% accounts1 "e ma onl on t"e $asis o% records! also p" sicall inspect %actor /place o% storage o% assets!
COMPONENTS OF CREDIT AUDIT S"%6$i % p' 6#ss4 In a $ank/%inancial institution1 t"e sanction o% a credit %acilit :%unded loan as &ell as non5%unded %acilit 5%or e2ample1 guarantees1 letters o% credit etc!;+s &ell as in#estment in marketa$le securities "a#e to go t"roug" c"annels %i2ed $ t"e institution according to its needs and s stems and procedures! -enerall 1 t"e process goes t"roug" t"e %ollo&ing steps4 a; (eceipt o% credit application %rom t"e client at t"e operating unit1 like t"e $ranc" o% t"e $ank concerned! $; Scrutin o% t"e application in t"e lig"t o% t"e $ank?s norms and guidelines as &ell as speci%ic directi#es o% t"e (BI! c; 7reparation o% an assessment note :credit proposal; a%ter #eri% ing t"e necessar aspects o% t"e $orro&ers and guarantors1 i% an terms and conditions o% securities! d; E2ercise o% t"e %inancial po&ers o% t"e delegated aut"orities %or sanction! Dis:5's#3#%$ 3 &"li$!4 T"is is t"e conse>uence o% t"e sanction process and includes4 a;Securit documentation as per t"e terms and conditions o% sanction! $; 7re5dis$ursement p" sical inspection o% t"e $usiness site/place %or $usiness lending! c; In t"e case o% ac>uisition o% capital assets/in#estment in securities1 direct pa ment to t"e seller/insurer concerned is to $e made to ensure proper end5use! :t"is includes credentials stud 1 p" sical inspection o% t"e $usiness site/securities1 t"is in#ol#es details o% t"e issuer1
38
Credit Risk Management C 3pli"%6#4 It is necessar t"at t"e $ank/%inancial institution compl &it" regulator guidelines and its internal norms/s stems during t"e sanction process1 t"e dis$ursement stage and t"e post5dis$ursement stage/In %act1 t"roug"out t"e tenure o% an credit/in#estment asset in t"e $ooks1 t"e $ank/%inancial institution must ensure t"at no guidelines are $reac"ed! T"e (BI?S ne& (isk Based Super#ision S stem &ill %ocus1 inter alia1 on t"e Tcompliance? angle o% t"e $ank/%inancial institution! ,on5 compliance ma in#ite penal measures! M %i$ 'i%44 T"e credit audit process ensures t"at t"e $ank/%inancial institution concerned %ollo&s necessar monitoring measures so t"at t"e asset >ualit :loan/in#estment;remains at an accepta$le le#el1 and in cases o% signs o% deterioration1 necessar recti%ication measures are initiated! *onitoring is an ongoing mec"anism and in realit a sa%et #al#e %or a $ank/%inancial institution! T"ere%ore1 a credit audit is complementar s stem! to t"e entire credit risk management
HOW CREDIT AUDITS ARE TO )E CONDUCTED B; +n in5"ouse department ma e2perienced people! C; In t"e alternati#e1 an arrangement ma $e made &it" pro%essionals? institutions to undertake suc" an audit :$usiness process outsourcing; D; Credit audit is to $e restricted to t"e records mentioned &it" respect to appraisal1 post5sanction super#ision and %ollo& up! M; Credit audit does not usuall in#ol#e t"e p" sical #eri%ication o% securities/#isit $orro&er?s %actor /premises! G; T"e credit audit process ma co#er all credit records/documents or a statistical sampling o% a $atc" o% records! +ccording to (BI guidelines1 in $anks/%inancial institutions1 all %res" credit decisions and rene&al cases in t"e past t"ree5si2 mont"s :preceding t"e date o% commencement o% t"e credit; s"ould $e su$0ected to t"e credit $e set up &it" pro%essionall >uali%ied and
39
Credit Risk Management audit process! + random selection o% G5BLRma port%olio! N; Credit audit is an ongoing process! Ho&e#er1 %or indi#idual accounts1 t"e %re>uenc depends upon t"e >ualit o% t"e accounts! T"e audit ma e#en $e on a >uarterl $asis in t"e case o% "ig"5risk accounts! H; 3arge $anks/%inancial institutions usuall pre%er to co#er credit audit &it" a cut5o%% si<e :sa 1 indi#idual e2posures o% (s D5G crores and o#er;on a "al%5 earl $asis t"roug" t"eir in5"ouse o%%icials! $e made %rom t"e rest o% t"e
R)I G5i&#li%#s % C'#&i$ A5&i$ Credit audit e2amines compliance &it" e2tant sanctions and post5sanction processes/procedures laid do&n $ t"e $ank %rom time to time and is concerned &it" t"e %ollo&ing aspects45 O)@ECTIVES OF CREDIT AUDIT: 5Impro#ement in t"e >ualit o% t"e credit port%olio 5(e#ie&ing t"e sanction process and compliance status o% large loans! 5Feed$ack on regulator compliance! 5Independent re#ie& o% credit risk assessment! 57icking up earl &arning signals and suggesting remedial measures! 5(ecommending correcti#e action to impro#e credit >ualit 1 credit administration and credit skills o% sta%%1 etc! STRUCTURE OF THE CREDIT AUDIT DEPARTMENT: T"e credit audit/loan re#ie& mec"anism ma department or t"e inspection and audit department! F5%6$i %s 9 $h# 6'#&i$ "5&i$ &#p"'$3#%$: 5To process credit audit reports! $e assigned to a speci%ic
40
Credit Risk Management 5To anal <e credit audit %indings and ad#ise t"e departments/%unctionaries concerned! 5To %ollo& up &it" t"e controlling mac"ines! 5To apprise t"e top management! 5To process t"e responses recei#ed and arrange %or t"e closure o% t"e relati#e credit audit reports! 5To maintain a data$ase o% ad#ances su$0ected to credit audit! S6 p# "%& 6 ;#'"4#: T"e %ocus o% credit audit needs to $e $roadened %rom t"e account le#el to kook at t"e o#erall port%olio and t"e credit process $eing %ollo&ed! T"e important areas are4 P '$9 li '#;i#=4 E2amining t"e >ualit o% credit and in#estment :>uasi5control; port%olio and suggesting measures %or impro#ement1 including t"e reduction o% concentrations in certain sectors to le#els indicated in t"e loan polic and prudential limits suggested $ t"e (BI! L "% '#;i#=: (e#ie& o% t"e sanction process and status o% post5sanction process/procedures :not 0ust restricted to large accounts;! T"ese include4 5+ll proposals and proposals %or rene&al o% limits :&it"in t"ree5si2 mont"s %rom t"e date o% sanction;! 5+ll e2isting accounts &it" sanction limits e>ual to or a$o#e a cut5o%% point1 depending upon t"e si<e o% acti#it ! 5(andoml selected :sa G5BLR; proposals %rom t"e rest o% t"e port%olio! 5+ccounts o% sister concerns/groups/associate concerns o% t"e a$o#e accounts1 e#en i% t"e limit is less t"an t"e cut5o%% point! A6$i % p i%$s 9 ' '#;i#=: 5Veri% ing compliance &it" t"e $ank?s policies and regulator regard to sanction! 5E2amining t"e ade>uac o% documentation! 5Conducting t"e credit risk assessment! 5E2amining t"e conduct o% account and %ollo&5up looked at $ line %unctionaries! 5O#erseeing action taken $ line %unctionaries on serious irregularities! 5Detecting earl &arning signals and suggesting remedial measures! F'#85#%6! 9 '#;i#=: compliance &it"
41
Credit Risk Management T"e %re>uenc o% re#ie& #aries depending on t"e magnitude o% risk :sa 1 t"ree mont"s %or "ig" risk accounts1 and si2 mont"s %or a#erage risk accounts1 one ear %or lo&5risk accounts;! 5Feed$ack on general regulator compliance! 5E2amining ade>uac o% policies1 procedures and practices! 5(e#ie&ing t"e credit risk assessment met"odolog ! 5E2amining t"e reporting s stem and e2ceptions to t"em! 5(ecommending correcti#e action %or credit administration and credit skills o% sta%%! 5Forecasting likel "appenings in t"e near %uture!
PROCEDURE TO )E FOLLOWED FOR CREDIT AUDIT: 5+ credit audit is conducted on5site1 i!e! at t"e $ranc" &"ic" "as appraised t"e ad#ance and &"ere t"e main operati#e credit limits are made a#aila$le! 5(eports on t"e conduct o% accounts o% allocated limits are to $e called %rom t"e corresponding $ranc"es! 5Credit auditors are not re>uired to #isit $orro&er?s %actor /o%%ice premises! MODEL FORMAT OF CREDIT AUDIT REPORT :(BI "as not speci%icall prescri$ed an %ormat; Here?s a model report %or t"e credit audit %or $ank credit/loan accounts! T"e %ormat ma $e modi%ied to meet organi<ation5speci%ic re>uirements! -OOD B+,) 3TD! C(EDIT +UDIT S7ECI*E, (E7O(T FO(*+T :+CCOU,T59ISE; 7eriod co#ered in t"e report :%rom6666666to66666666; Credit audit report as on66666666666666666666
42
5,ame o% t"e $orro&er and group a%%iliation1 i% an 4 5*ain place o% $usiness/registered o%%ice4 5Date o% esta$lis"ment/incorporation4 53ine o% acti#it /$usiness segment4 5Financing pattern Sole/multiple/consortium S"are :percentage and amount o% credit limit %or suc" a lender;4 5Date and aut"orit o% last sanction/rene&al4 5Credit rating $ t"e $ank/rating agenc and &"at it indicates4 5Total e2posure :%unded and non5%unded; To t"e part 4 To t"e group :i% an ;4 To state speci%icall i% t"ere is an %oreign currenc loan/commitment4 Credit arrangement &it" t"e $ank/%inancial institution4 since &"en; Facilit 3imit/line Outstanding +mount o% O#erdues1 i% an 5Comments4 59"et"er guidelines laid do&n "a#e $een ad"ered to &"ile appraising/assessing4 5Comments on industr a#erages %or in#entor 1 recei#ea$les1creditors etc! taken into account4 :(s! In lak"s1 O#erdue
43
Credit Risk Management 5Comments on %inancial per%ormance o% t"e part #is5 a5#is estimates and industr position1i% a#aila$le4 59"et"er management >uail5 ties &ere anal <ed at sanc5 tion/rene&al stage4 5+n ot"er important issues4 59"et"er all t"e terms and conditions o% t"e sanction &ere complied &it"1 i% not details and reasons and &"en t"e same is e2pected to $e done4 5Comments on %irst dis$urse5 ment o% %acilities:applica$le %or %res" sanctions!; 5Sanctions co#er stipulated as per sanction4 Securities 5Securit documentation4 5Date o% document4 5Details o% unrecti%ied irregula5 rities1i% an 4 59"et"er c"arge %iled &it" (OC :(egistrar o% Comp5 De%iciencies1 i% an
44
Credit Risk Management +nies; %or primar as &ell as Collateral securities in case o% + compan 1 i% not details &it" 7resent status4 5Conduct o% t"e account4 5Interest ser#iced up to :*ont"/ ear;4 5Su$mission o% return/state5 ment $ t"e part 4 Stock statement/statement o% $ook5 de$ts su$mitted up to :mont"/ ear;4 5Insurance %or securities4 +ggregate amount insured! Date up to &"ic" insurance polic &ill remain #alid4 57rimar securities4 5Collateral securities4 5 7" sical inspection o% securities4
5 9"et"er pre5sanction inspection carried out and %ound in order!
45
Credit Risk Management 59"et"er post5dis$ursement inspection is regularl carried out and %ound in order4 5Date o% last inspection4 5+ccounts o% sister concerns4 5 Suggestions o% credit audit %or remedial measures1 &"ere asset >ualit is s"o&ing signs o% concern!
CREDIT RISK MODEL

+ credit risk model is a >uantitati#e stud o% credit risk1 co#ering $ot" good $orro&ers and $ad $orro&ers! + risk model is a mat"ematical model containing t"e loan applicants? c"aracteristics eit"er to calculate a score representing t"e applicant?s pro$a$ilit o% de%ault or to sort $orro&ers into di%%erent de%ault classes! + model is considered e%%ecti#e i% a suita$le T#alidation? process is also $uilt in &it" ade>uate po&er and cali$ration! +s a matter o% %act1 a model &it"out t"e necessar appropriate #alidation is onl a " pot"esis! UTILITY Banks ma deri#e t"e %ollo&ing $ene%its i% t"e install an appropriate credit risk model4 It &ill ena$le t"em to compute t"e present #alue o% a loan asset o% %i2ed income securit 1 taking into account t"e organi<ations past e2perience and assessment o% %uture scenario! It %acilitates t"e measurement o% credit risk in >uantitati#e terms1 especiall in cases &"ere promised cas" %lo&s ma not materiali<e! and
46
Credit Risk Management It &ould ena$le an organi<ation to compute its regulator capital re>uirement $ased on an internal ratings approac"! +n appropriate credit risk model &ill %acilitate an impact stud deri#ati#es and loan sales/securiti<ation initiati#es! It %acilitates t"e pricing o% loans and pro#ides a competiti#e edge to t"e pla ers! It "elps t"e top management in an organi<ation in %inancial planning1 customer pro%ita$ilit anal sis1 port%olio management1 and capital structuring/restructuring1 managing risk across t"e geograp"ical and product segments o% t"e enterprise! (egulator aut"orities %ind it easier to e#aluate $anks t"at "a#e suita$le credit risk model in place! +$o#e all1 a credit risk model ena$les ac"ie#ing t"e o$0ecti#es o% &"at to measure1 "o& to measure and "o& to interpret t"e results! o% credit
DISTINCTION )ETWEEN CREDIT RATING AND CREDIT RISK MODEL Bot" credit rating and a credit risk model ser#er t"e common purpose o% e#aluating t"e >ualit o% an e2posure! Ho&e#er %rom t"e risk management angle1 t"ere is a su$tle distinction $et&een t"e t&o4 C'#&i$ '"$i%4 +pplies to all t pes o% e2posures so as to identi% poor >ualit "ig" >ualit 1 medium >ualit 1 lo& >ualit and e2posures using a on t"e $enc"mark process! Focus is mainl C'#&i$ 'isk 3 &#l +pplies predominantl to lo& and poor >ualit e2posures to ascertain Tpresent #alue?1 especiall in cases &"ere t"e promised cas" %lo& ma not materiali<e! Focus is mainl on t"e Tpro$a$ilit o% de%ault?! Sop"isticated statistical tec"ni>ues like linear and multiple discriminant anal sis1 etc are used 47
Tpro$a$ilit o% repa ment?! Financial parameters and state o% e2posures o#er a s"ort period55555 usuall o% one ear55555%orm t"e
Credit Risk Management core o% credit rating e2ercise! Facilitates grading e2posures to an ideal range o% K5F grades comprising $ot" o% good and $ad e2posures! as tools %or anal sis o#er t"e long term! Facilitates computation o%
Te2posure o% de%ault?1 Tpro$a$ilit o% de%ault?1 loss gi#en de%ault? to&ards risk capital re>uirement!
CREDIT RISK MANAGEMENT TECHNI*UES Tec"ni>ues are met"ods to accomplis" a desired aim! In credit risk modeling1 t"e aim is essentiall to compute t"e pro$a$ilit o% de%ault o% an asset/loan! Broadl t"e %ollo&ing range is a#aila$le to an organi<ation going in %or a credit risk model4 Econometric tec"ni>ue4 Statistical models suc" as linear pro$a$ilit and logit model1 linear discriminant model1 (+(UC model1 etc! ,eural net&orks4 Computer $ased s stems using economic tec"ni>ues on an alternati#e implementation $asis! Optimi<ation model4 *at"ematical process o% identi% ing optimum &eig"ts o% $orro&er and loan assets! H $rid s stem4 simulation $ direct casual relations"ip o% t"e parameters!
FOCAL POINTS OF APPLICATION OF MODELS In all lending decisions1 especiall in t"e retail lending segment1 models are #er use%ul since in t"e ordinar course o% t"e lending $usiness1 t"e pro$a$ilit decisions! It acts as an instrument to #alidate :or in#alidate; t"e credit rating process in an organi<ation! It?s possi$le to &ork out reasona$l t"e >uantum o% risk premium t"at is loaded in pricing credit &it" t"e $acking o% an appropriate credit risk model! Credit risk models "elp in diagnosing potential pro$lems in a credit/allied $usiness proposition and at t"e same time %acilitate prompt correcti#e action! o% de%ault "as an o#erriding implication on credit appraisal
48
Credit Risk Management In t"e securiti<ation process1 credit risk models ena$le t"e construction o% a pool o% assets t"at ma $e accepta$le to in#estors! +ppropriate strategies can $e designed to monitor $orro&al accounts &it" t"e aid o% credit risk models! PRERE*UISITES FOR ADOPTING A MODEL T"e adoption o% an statistical/mat"ematical model $ an organi<ation depends upon t"e compan ?s si<e and comple2it o% operations1 risk $earing capacit 1 risk appetite1 o#erall risk e#aluation and t"e control en#ironment! Ho&e#er1 &"ile adopting an particular %orm o% t"e credit risk model1 t"e %ollo&ing prere>uisites s"ould $e satis%ied4 + &ide range o% "istorical data must $e used! T"ere must $e assistance %rom a compact *anagement In%ormation S stem :*IS;! T"e data must $e relia$le and aut"entic! +ll t"e signi%icant risk elements depending on t"e organi<ation?s range o% acti#ities must $e $uilt into t"e model! T"e model?s assumptions must $e realistic! T"e model s"ould $e capa$le o% di%%erentiating t"e element and intensit o% risk in #arious categories o% e2posures! T"e model s"ould $e in a position to identi% o#er5 concentration5555555"ence "ig"er order risk555555555555in t"e port%olio! T"e model s"ould pro#ide clear signals o% incipient sickness and pro$lems in e2posures! It s"ould %acilitate &orking out ade>uac pro#isions %or non per%orming e2posures! It s"ould "a#e room %or making impact anal sis o% macro situations on #arious e2posures o% t"e organi<ation! It s"ould $e in a position to "elp t"e management determine t"e likel e%%ect on pro%ita$ilit o% t"e #arious risk contents in t"e e2posures! / inade>uac in t"e
49
Credit Risk Management T"ere s"ould $e periodical #alidation o% t"e model! T"ere s"ould $e an ongoing s stem o% re#ie& %or t"e model to 0udge its e%%icac !
CREDIT RISK PORTFOLIO MANAGEMENT

Banks e2tend credit to indi#idual $orro&ers! T"e lending / e2tension o% credit ma stretc" to a num$er o% $orro&ers &"o ma "a#e a common linkage! T"is linage ma $e t"e result o%4 In#ol#ement in t"e same trade or $usiness! 3ocated in t"e same geograp"ical setting or in close pro2imit ! Common o&ners/management! + credit port%olio t"ere%ore consists o% indi#idual $orro&ers in a pool &"o are connected to eac" ot"er in some &a or t"e ot"er! %rom t"e #ie& point o% enterprise5&ide risk management1 credit risk port%olio management is t"e process o% identi%ication1 measurement1 monitoring and control o% concentration risk arising out o% t"e common link $et&een t"e $orro&ers555555&"et"er tec"nical1 economical1 %inancial or in an ot"er $usiness manner! O)@ECTIVE OF CREDIT RISK PORTFOLIO MANAGEMENT To identi% 1 measure1 monitor and control not onl e2pected losses %rom eac" credit transaction $ut also une2pected losses %rom t"e entire port%olio! To ac"ie#e an Toptimum port%olio?1 &it" t"e lo&est risk content %or a gi#en le#el o% income or "ig"est income &it" a speci%ied risk content!
50
Credit Risk Management To o$tain ma2imum $ene%it o% di#ersi%ication and to reduce likel losses o&ing to credit concentration to parties &it" some %orm o% common linkage! To act as a re%ined su$stitute to t"e %or&ard5looking approac" in"erent in t"e asset/e2posure relations"ip $ pro#iding &ide5ranging inputs o% correlation and #olatilit ! To reduce i% not eliminate t"e risks o% une2pected "appenings to a port%olio $ecause o% t"e occurrence o% e#ents arising out o% t"e linkage 5555 like $eing in t"e same industr /trade1 same o&ner management1 etc! To %acilitate credit decisions and risk5mitigating steps in an integrated manner keeping in #ie& t"e intimate relations"ip in a credit port%olio o% correlation and #olatilit !
ADVANTAGES OF CREDIT RISK PORTFOLIO MANAGEMENT It is rig"tl said t"at de%aults and credit migration are directl linked to t"e macroeconomic situation! Credit c cles mo#e in tandem &it" $usiness c cles in an econom ! + credit port%olio stud $rings out t"e actual situation on an ongoing $asis1 ena$ling t"e management to initiate risk5 mitigating actions >uickl ! 7ort%olio management ena$les t"e measurement o% credit concentration risk in an dimension "a#ing a direct e%%ect on one or t"e ot"er! For e2ample industr /trade grouping1 location closeness1 and instrument $ased relations"ip! + s stematic approac" to port%olio anal sis ena$les t"e di#ersi%ication o% risk e2posures1 going $ t"e age old principle t"at +33 E--S SHOU3D ,OT BE 7UT I, THE S+*E B+S)ET! + clear cut and rational capital allocation process is possi$le $ ensuring regular anal sis o% di#ersi%ication $ene%its and concentration risks! (isk 51
Credit Risk Management increases &it" a decline in credit >ualit impro#ement in credit >ualit ! Credit deri#ati#es can $e managed $etter &it" port%olio management $ecause t"eir risk contents are more intensi%ied and "a#e a more crucial e%%ect on an organi<ation! *ore rational pricing o% credit e2posure is possi$le &"en an organi<ation "as an appropriate credit risk management s stem in place! )ASIC PRINCIPLES OF CREDIT RISK PORTFOLIO MANAGEMENT Indi#idual $orro&er/e2posure le#el is t"e %oundation o% t"e port%olio stud ! + %rame&ork is to $e designed depending on t"e si<e and comple2it o% t"e $ank in &"ic" t"ere is aggregation o% all credit risk e2posures and &a s and means to compare products and sectoral risks! + s stem to measure #arious t pes o% credit e2posures s"ould $e put in place keeping in #ie& t"e element o% correlation and #olatilit ! )ASIC ATTRI)UTES OF CREDIT RISK PORTFOLIO MANAGEMENT +ccording to t"e (eser#e Bank o% India1 port%olio credit risk measurement and management depends on t&o ke attri$utes4 correlation and #olatilit ! Correlation indicates a relation $et&een t&o or more t"ings1 impl ing an intimate or necessar connection! T"ese ma $e mat"ematical1 statistical or an ot"er #aria$les t"at tend to $e associated or occur toget"er in an une2pected &a ! In ot"er &ords1 i% t"ere is interdependence $et&een t&o or more #aria$le >uantities in suc" a manner t"at a c"ange in t"e #alue or e2pectation o% t"e ot"er1 t"en t"e are said to $e correlated %rom a statistical angle! T"e (BI guidelines state 'Credit port%olio correlation &ould means num$er o% times companies/counterparties in a port%olio de%aulted simultaneousl ! Volatilit 1 on t"e ot"er "and1 means rapid or une2pected c"ange &"ic" ma $e di%%icult to capture or "old permanentl !. T"e main purpose o% port%olio management &ould $e to e2amine t"e correlation $et&een t"e de%aulting o% a pool o% e2posure :port%olio; to t"e #olatilit o% a particular industr / sector acti#it ! T"is is done so as to measure and manage t"e 52 and goes do&n &it" an
Credit Risk Management non5di#ersi%ia$le risk in a port%olio as distinguis"ed %rom di#ersi%ia$le risk! + lo& de%ault correlation &ould mean t"at non5di#ersi%ia$le risk content in a port%olio "as little signi%icance! + "ig" de%ault correlation1 on t"e ot"er "and1 means more risk! T"e implication o% correlation and #olatilit in a port%olio stud "as $een succinctl e2plained $ t"e (BI guidelines4 'consider t&o companiesE one operates in large capacities in t"e steel sector1 promoted $ t&o entirel unrelated promoters! T"oug" t"ese &ould classi% as t&o separate counter parties1 $ot" o% t"em &ould $e "ig"l sensiti#e to go#ernment?s e2penditure in ne& pro0ects/in#estments! T"us1 :correlation;1 impacting t"e credit >ualit o% suc" a port%olio reduction in go#ernment?s in#estments could impact t"ese t&o companies simultaneousl :#olatilit ;1 e#en t"oug" %rom a regulator or con#entional perspecti#e1 t"e risk "as $een di#ersi%ied :t&o separate promoters1 t&o separate industries;! T"us t"oug" t"e credit port%olio ma $e &ell di#ersi%ied and %ul%ills t"e prescri$ed criteria %or counter part e2posure limits1 "e "ig" correlation in potential per%ormance $et&een t&o counter parties ma impact t"e port%olio >ualit under stress conditions.! CONSTRAINTS IN PORTFOLIO MANAGEMENT T"oug" credit risk port%olio management5555&it" t"e aid o% concepts like correlation and #olatilit 55555 is #er use%ul1 it does su%%er %rom some constraints! Here are some4 T"ere are a num$er o% #aria$les like correlation o% returns1 correlation o% %actors e2plaining returns1 correlation o% de%ault pro$a$ilit 1 correlation o% rating categor 1 correlation o% spreads1 etc! Depending on t"e si<e1 comple2it and co#erage o% t"e port%olio1 it "as to $e decided &"ic" o% t"ese #aria$les need to $e considered1 and is a constraint in computing t"e coe%%icient o% correlation! Distri$ution o% returns contains T%at tails? &"ic" ma indicate t"at1 in t"e region o% loan loss1 t"e pro$a$ilit is more t"an t"at dictated $ t"e normal distri$ution cur#e!
53
Credit Risk Management + multi5period model to address t"e issue o% transaction costs o% credit risk needs to $e put in place as against t"e eas solution o% t"e single period approac"! T"e a$sence o% price disco#er in a port%olio o% de$t securiti<ation taking into account seniorit 1 co#enants1 call options1 etc! pose pro$lems! Data limitation1 &it" t"e %ocus on geograp" reduces t"e e%%icac o% port%olio management! CREDIT PARADO+ T"e attri$utes o% correlation and #olatilit in port%olio management %acilitate di#ersi%ication o% credit risks! But o%ten in t"e process a parado2 emergesE &"et"er to e2pand a particular port%olio &it" a "ig"er order o% risk $ut &it" lo&er transaction costs and / or "ig"er spreads or could $e content &it" lo& risk and lo& earning e2posures! Furt"ermore1 increasing e2posure to t"e same part / group t"at is kno& to an organi<ation %or a long time and pro#ides a good source o% income ma apparentl $e in its interests $ut ma lead to concentration o% risks! T"is in turn ma lead to une2pected losses! T"is kind o% situation is called C(EDIT 7+(+DOP! TECHNI*UES OF PORTFOLIO CREDIT RISK CONTROL +n e%%ort at credit risk control555555$e it at t"e indi#idual credit or port%olio le#els55555"as t"e %ollo&ing main ingredients! E2pected and une2pected losses are estimated on a consistent $asis &it" relia$le data $ack5up! T"ere must $e a $alance $et&een income and risk le#el! +de>uate sa%et nets must $e $uilt in s"ould estimates and actuals at an time #ar 1 putting t"e organi<ation in peril! T"e %ollo&ing t&o tec"ni>ues aimed at controlling e2posure at t"e port%olio le#el ma $e adopted simultaneousl $ut not in isolation4 and industr identi%ication1
54
Credit Risk Management B! -roup e2posure ceilings4 T"e (BI "as prescri$ed t"at $anks/%inancial institutions limit t"eir e2posures5555$ot" %unded and non5%unded 55555555 to a certain portion o% t"eir capital %und! T"is is applica$le %or $ot" single e2posure and group e2posure! From t"e #ie&point o% port%olio e2posure control1 t"e pre#ailing guideline suggests t"at a $ank must place a ceiling on group e2posure :$e ond &"ic" no group e2posure can $e taken up &it"out (BI?s appro#al;! T"e ceilings are4 Single e2posure4 ceiling o% BGR o% t"e $anks capital %und :additional GR in case o% in%rastructure e2posure;! -roup e2posure4 ceiling o% MLR o% t"e $ank?s capital %und :additional GR %or in%rastructure e2posure;! T"is tec"ni>ue aims at port%olio control1 at $ot" t"e indi#idual and group :i!e! $orro&ers interlinked t"roug" s"are"olding1 commonalit o% management1 etc!; le#els! +s a result o% correlating t"e o#erall single/group e2posure ceiling &it" its capital %und1 a $ank ensures 55555%rom t"e credit risk angle55555t"at its o&n stake in an une2pected situation does not go out o% gear! T"is mec"anism ma $e treated as Trisk limits?! C! Industr /sectoral ceiling4 +longside t"e a$o#e measure it ma $e use%ul to "a#e an industr ceiling as a part o% port%olio management! In t"is respect1 a $ank ma %ollo& t"ese rules4 Fi2 an a$solute amount as a ceiling %or a particular industr :like te2tiles1 p"armaceuticals1 etc!; or sectoral :real estate1 etc!; In doing so t"e organi<ation ma go $ t"e position o% a particular industr /sector! For e2ample1 i% a particular place/state is considered unsuita$le %or a particular line o% acti#it it s"ould $e kept in #ie& &"ile e2amining t"e e2posure ceiling! Industr /sectoral anal sis/stud s"ould not $e a one5time a%%air $ut $e on an ongoing $asis! T"e %eed$ack %rom suc" anal sis/stud ceiling desired %or a particular industr /sector! &ill determine t"e
55
Credit Risk Management CONDUCTING INDUSTRY/SECTORAL ANALYSIS T"is t pe o% anal sis/stud is $est per%ormed $ e2perts like tec"nocrats and economists! T"ere are organi<ations in India t"at do suc" studies and sell t"eir reports! C(IS5I,F+C :a C(ISI3 concern;1 IC(+1 C+(E and C*IE "a#e skilled sta%% t"at prepares t"eir reports on a continuing $asis $ased on market sur#e and inputs %rom #arious sources! -enerall 1 t"e %ollo&ing aspects "a#e to $e taken into account &"ile preparing industr /sectoral reports4 O#erall position o% t"e domestic econom as per -D7 gro&t"! O#erall consumption gro&t"55555domestic and o#erseas! + particular industr /sector?s position in t"e econom as a &"ole! E%%ect o% go#ernment policies on t"e industr /sector! +#aila$ilit o% inputs55555ra& materials1 la$or1 po&er1 transportation1 etc! Scope %or di#ersi%ication! Demand suppl gap! 7ossi$ilities o% t"reats %rom su$stitutes/ne& parties! Signi%icant %actors like c clicalit and seasonalit ! Industr sector %inancials in terms o% return on capital emplo ed :(OCE;1 operating pro%it gro&t"1 de$t5e>uit ratio1 current ratio1 etc! Capacit utili<ation! (a& material consumption in relation to sales! +#erage de$tors collection in relation to sales! +#erage creditors pa ment in relation to purc"ases! +#erage in#entor "olding!
)RIEF SPECIMEN OF INDUSTRY/SECTORAL REPORT 9"ile t"e structure and content o% report ma #ar %rom industr to industr according to t"e purpose %or &"ic" t"e anal sis/stud is undertaken1 a $rie% specimen report on t"e 9 & p' 6#ssi%4 i%&5s$'! is presented $elo& %or credit risk port%olio monitoring purposes!
56
INTRODUCTION T"e %ood processing sector consists o% t"e %ollo&ing sectors4 Food grains! *ilk products! Fruits! Vegeta$les! Ot"er agro5$ased items! T"e acti#it in#ol#es lo& capital e2penditure and t"e re>uirement o% tec"nical kno&ledge and e2pertise is %airl small! PRODUCTION PROCESS Depending on t"e end process1 t"e production process ma $e o% t"e %ollo&ing t pes4 7rimar processing! Secondar processing! Tertiar processing! 7rimar processing co#ers cleaning1 po&dering and re%ining agricultural produce! Secondar processing is a #alue5addition process suc" as making tomato puree1 processing meat products1 etc! Tertiar processing on t"e ot"er "and co#ers %ood items t"at "a#e gone t"roug" t"e tertiar process and are read %or consumption at t"e point o% sale1 like $aker products1 0ams1 sauces1 etc! CHARACTERISTICS OF THE FOOD PROCESSING )USINESS
57
Credit Risk Management Fragmented1 &it" #arious small units as against t"e glo$al situation o% massi#e scales o% operation! Hig" le#els o% &astage! 3o& %arm met"ods! Hig" emplo ment potential:it is estimated t"at an in#estment o% (s BLL crores creates around GM1LLL 0o$s as compared to CG1LLL in a mass consumption item like paper;! MA@OR CONSTRAINTS Inade>uate in%rastructure! T"e %ood processing industr deals in items t"at are #er peris"a$le! 3ack o% dependa$le storage and transportation %acilities "inders its gro&t"! 3a&s/directi#es on pre#ention o% %ood adulteration are not su%%icientl stringent! DEMAND AND SUPPLY POSITION It is reported t"at t"e Indian %ood processing market is &ort" around (s CG1LLL crores! In #ie& o% t"e peris"a$le nature o% t"e items1 t"e industr concentrates on local operations! 9it" a gro&ing population t"e industr potential! "as "ig" gro&t" ield mainl due to t"e lack o% moderni<ation o% agricultural
COMPANY Hindustan 3e#er 3imited
PRODUCTS Ice creams1 packaged &"eat %lour1 salt1 tea1 $read1 oils1 %ats and diar products!
Haldirams *T( Foods
Snack %ood1 traditional Indian s&eets! Con#enience %ood1 ice creams1 snack %ood!
58
Credit Risk Management Cad$ur India (uc"i group C"ocolates1 sugar con%ectionar 1 malt drinks! So a products1 palmolein oil1 sun%lo&er oil1 " drogenated #egeta$le %at and oil! Da$ur -la2oSmit" )line -u0arat Co5operati#e Fruit 0uices1 cooking paste and sauces! *alt drinks *ilk Ice creams1 $utter1 c"eese1 milk po&der1 traditional Indian s&eets1 c"ocolates! Fruit 0uices1 tomato puree1 nuts1 groundnut oil1 re%ined palmolein oil and " drogenated oil! 7epsi Foods India So%t drinks $ut also a large consumer o% tomatoes and c"ilies %or preparing pastes %or e2ports! Britannia Industries s 7arle Foods *ot"er Diar Biscuit1 milk products like c"eese and $utter! Biscuits and ot"er related products! Ice creams1 $utter1 c"eese1 milk po&der1 traditional Indian s&eets1 c"ocolates! ,estle India C"ocolates1 sugar con%ectioner 1 malt drinks1 milk po&der! E+PORT SCENARIO 7rocessed %ood accounts %or around CGR o% our countr ?s total agro e2ports! Fruits1 spices1 #egeta$les1 rice and #arious animal products are t"e main items e2ported! GOVERNMENT POLICY CONTROLS
*arketing Federation -odre0 %oods
59
Credit Risk Management ,o industrial license is generall necessar %or %ood processing! Ho&e#er1 a license is needed %or industries engaged in $eer1 pota$le alco"ol1 &ines1 sugar cane1 " drogenated animal %ats and oils! O$taining ISI mark is relati#el eas and carries a good #alue in $randed processed items! IMPORTANT OVERALL INFORMATION )ASE OF THE FOOD
PROCESSING INDUSTRY
(eturn on capital emplo ed Operating pro%it gro&t" De$t5e>uit (atio Current (atio Capacit Utili<ation (a& material consumption +#erage de$tors collection +#erage creditors pa ment +#erage in#entor "olding period
DK!MMR F!MDR L!M4B B!G4B 3o& HLR o% sales CGda s NBda s CCda s
CONCLUSION
T"e %ood processing industr in India "as ample opportunities %or gro&t"555555nationall and internationall ! T"e industr "as t"e uni>ue ad#antage o% lo& capital in#estment1 lo&er gestation periods and operating c cles and to top it all1 an industr %riendl en#ironment %rom industr point o% #ie&! +t t"e same time it "as t"e potential to en"ance agricultural acti#it and emplo ment! In sum1 t"e gro&t" o% t"is industr needs to $e encouraged &it" a pro#ision %or an ongoing re#ie& mec"anism! 60
CREDIT IN NON(PERFORMING ASSETS

,on5per%orming ad#ances :,7+?s; 5555 kno&n as non5per%orming loans :,73?s; in man countries 555555 are generall t"e outcome o% ine%%ecti#e or %ault credit risk management $ a $ank! *ore o%ten t"an not1 t"e pro$lem is not recogni<ed at an earl stage and "ence remedial action is not initiated on time! T"is is precisel &" t"e (BI "as ad#ised t"e $anks to undertake credit risk management! WHY NPA IS A MATTER OF CONCERN TO )ANKS? ,7+ management in $anks is a #er crucial %unction $ecause o% t"e %ollo&ing4 Funds remain sunk &it"out an returns in terms o% cas" %lo&s!
61
Credit Risk Management B; C; T"e credit c cle o% $anks gets c"ocked up causing li>uidit constraints! (ec cling o% %unds is a%%ected! 7ro%ita$ilit is a%%ected t&o5%old On t"e pro#isioning %or principal/interest c"arged! ,il income %rom e2posure!
WHY AN ACCOUNT )ECOME NPA? T"ere is an emp"asis on credit gro&t" especiall to t"e priorit sector and small $orro&ers! +s a result t"ere is $ot" credit and ,7+ gro&t" in t"e s stem! It is estimated t"at during t"e past decade1 t"e credit gro&t" &as around FLR1 o% &"ic" contaminated credit :,7+; accounted %or one5t"ird s"are! Broadl t&o %actors are responsi$le %or t"e increase in ,7+?s1 &"ic" are as %ollo&s4 A/ ,on5pa ment $ $orro&ers due to #arious internal and e2ternal %actors and in ,on5initiation o% e%%ecti#e reco#er steps $ $anks! REASONS FOR NON(PAYMENT )Y )ORROWERS: some e2treme cases &ill%ul de%ault!
+ccording to (BI1 t"e %ollo&ing are t"e main reasons %or non pa ment $ $orro&ers4 INTERNAL REASONS: $; Di#ersion o% %unds to&ards e2pansion1 di#ersi%ication1 modi%ication1 ne& pro0ect and in some cases pro#iding %unds to associates/sister concerns &it"/&it"out an interest! c; Time/cost o#erruns o% pro0ects! d; Business %ailure :product1 marketing1 etc;! e; Strained la$or relations! %; Inappropriate tec"nolog /recurrent tec"nical pro$lems! 62
Credit Risk Management g; 7roduct o$solescence1 &"ic" again is a ma0or %actor! E+TERNAL REASONS: a; (ecession! $; ,on5pa ment $ $orro&er?s customers 555555$ot" a$road and local! c; Inputs/po&er s"ortage! d; 7rice escalation :especiall $orro&er?s product &it"out t"e a$ilit to pass on %ull >uantum o% increase to t"eir $u ers! e; +ccidents and massi#e eart">uakes! %; C"anges in go#ernment policies regarding e2cise dut /import dut /pollution control orders! WILFUL DEFAULT: So %ar t"ere "as $een no standard de%inition o% &ill%ul de%ault! T"e (BI "as stated t"e %ollo&ing e2amples o% &ill%ul de%ault! a; De%ault occurs &"en t"e unit "as t"e capacit to "onor its o$ligations! $; 9"en t"e unit "as not used t"e %unds %or t"e speci%ic purposes and di#erted t"em %or ot"er purposes! c; T"e unit "as sip"oned o%% t"e %unds in $reac" o% t"e speci%ic purposes o% t"e %inanceE t"e %unds are not a#aila$le &it" t"e unit in t"e %orm o% ot"er assets! In essence1 &ill%ul de%ault ma $e de%ined as an non pa ment o% commitment $ an o$ligator 555e#en &"en t"ere is no cas" / asset crunc" 5555 &it" t"e sole intent o% causing "arm to a lender! + &ill%ul de%ault is generall t"e conse>uence o% sip"oning o%% %unds $ means o% misappropriation / %raud! Cases o% &ill%ul de%ault need stern action including %iling o% a criminal suit &"en so ad#ised! )! LACK OF EFFECTIVE STEPS )Y )ANKS:
63
Credit Risk Management Banks "a#e to accept t"eir s"are o% $lame in ,7+?s $ $eing ine%%ecti#e in dealing &it" $orro&ers?! T"e %ollo&ing are t"e main points t"at need to $e mentioned4 Inordinate dela in sanction and dis$ursement o% need $ased %inance! +s a result1 t"e $orro&ing units ma $e star#ed o% re>uisite %inance at t"e rig"t time1 %orcing t"em to %ace %inancial losses! It is e2pected t"at $anks s"ould decide on a credit proposal generall &it"in D5M mont"s %rom t"e date o% application! 3ack o% coordination $et&een t"e %inancing institution speci%icall in t"e case o% s ndicate %unding and e2c"ange o% necessar in%ormation! Ine%%ecti#e credit management1 especiall at t"e post @ dis$ursement stage and ina$ilit to detect and pre#ent unaut"ori<ed deplo ment or di#ersion o% %unds! Timel reco#er steps in#ol#ing cr stalli<ation o% securities and / or legal action not initiated!
64
ICICI )ANK
ICICI Bank is India=s second5largest $ank &it" total assets o% a$out (s!B1NHN!GF $n:USU DK!G $n; at *arc" DB1 CLLG and pro%it a%ter ta2 o% (s! CL!LG $n:USU MNB mn; %or t"e ear ended *arc" DB1 CLLG :(s! BN!DH $n:USU DHN mn; in %iscal CLLM;! ICICI Bank "as a net&ork o% a$out GHD $ranc"es and e2tension counters and o#er C1LLL +T*s! ICICI Bank o%%ers a &ide range o% $anking products and %inancial ser#ices to corporate and retail customers t"roug" a #ariet o% deli#er c"annels and t"roug" its speciali<ed su$sidiaries and a%%iliates in t"e areas o% in#estment $anking1 li%e and non5li%e insurance1 #enture capital and asset management! ICICI Bank set up its international $anking group in %iscal CLLC to cater to t"e cross $order needs o% clients and le#erage on its domestic $anking strengt"s to o%%er products internationall ! ICICI Bank currentl "as su$sidiaries in t"e United )ingdom1 Canada and (ussia1 $ranc"es in Singapore and Ba"rain and representati#e o%%ices in t"e United States1 C"ina1 United +ra$ Emirates1 Banglades" and Sout" +%rica! ICICI Bank=s e>uit s"ares are listed in India on t"e Bom$a Stock E2c"ange and t"e ,ational Stock E2c"ange o% India 3imited and its +merican Depositar (eceipts :+D(s; are listed on t"e ,e& York Stock E2c"ange :,YSE;! ICICI Bank "as %ormulated a Code o% Business Conduct and Et"ics %or its directors and emplo ees! A$ S#p$#3:#' 0A< 0AAB< ICICI )"%k< =i$h 9'## 9l "$ 3"'k#$ 6"pi$"liC"$i %D 9 ": 5$ Rs/ ?AA/AA :illi % ,USE F/AA :illi %- '"%k#& $hi'& "3 %4s$ "ll $h# 6 3p"%i#s lis$#& % $h# I%&i"% s$ 6k #76h"%4#s/ ICICI Bank &as originall promoted in BFFM $ ICICI 3imited1 an Indian %inancial institution1 and &as its &"oll 5o&ned su$sidiar ! ICICI=s s"are"olding in
65
Credit Risk Management ICICI Bank &as reduced to MNR t"roug" a pu$lic o%%ering o% s"ares in India in %iscal BFFK1 an e>uit o%%ering in t"e %orm o% +D(s listed on t"e ,YSE in %iscal CLLL1 ICICI Bank=s ac>uisition o% Bank o% *adura 3imited in an all5stock amalgamation in %iscal CLLB1 and secondar market sales $ ICICI to institutional in#estors in %iscal CLLB and %iscal CLLC! ICICI &as %ormed in BFGG at t"e initiati#e o% t"e 9orld Bank1 t"e -o#ernment o% India and representati#es o% Indian industr ! T"e principal o$0ecti#e &as to create a de#elopment %inancial institution %or pro#iding medium5 term and long5term pro0ect %inancing to Indian $usinesses! In t"e BFFLs1 ICICI trans%ormed its $usiness %rom a de#elopment %inancial institution o%%ering onl pro0ect %inance to a di#ersi%ied %inancial ser#ices group o%%ering a &ide #ariet o% products and ser#ices1 $ot" directl and t"roug" a num$er o% su$sidiaries and a%%iliates like ICICI Bank! In BFFF1 ICICI $ecome t"e %irst Indian compan and t"e %irst $ank or %inancial institution %rom non5Japan +sia to $e listed on t"e ,YSE! +%ter consideration o% #arious corporate structuring alternati#es in t"e conte2t o% t"e emerging competiti#e scenario in t"e Indian $anking industr 1 and t"e mo#e to&ards uni#ersal $anking1 t"e managements o% ICICI and ICICI Bank %ormed t"e #ie& t"at t"e merger o% ICICI &it" ICICI Bank &ould $e t"e optimal strategic alternati#e %or $ot" entities1 and &ould create t"e optimal legal structure %or t"e ICICI group=s uni#ersal $anking strateg ! T"e merger &ould en"ance #alue %or ICICI s"are"olders t"roug" t"e merged entit =s access to lo&5cost deposits1 greater opportunities %or earning %ee5$ased income and t"e a$ilit to participate in t"e pa ments s stem and pro#ide transaction5$anking ser#ices! T"e merger &ould en"ance #alue %or ICICI Bank s"are"olders t"roug" a large capital $ase and scale o% operations1 seamless access to ICICI=s strong corporate relations"ips $uilt up o#er %i#e decades1 entr into ne& $usiness segments1 "ig"er market s"are in #arious $usiness segments1 particularl %ee5$ased ser#ices1 and access to t"e #ast talent pool o% ICICI and its su$sidiaries! In Octo$er CLLB1 t"e Boards o% Directors o% ICICI and ICICI Bank appro#ed t"e merger o% ICICI and t&o o% its &"oll 5o&ned retail %inance su$sidiaries1 ICICI 7ersonal Financial Ser#ices 3imited and ICICI Capital Ser#ices 3imited1 &it" ICICI Bank! T"e merger &as appro#ed $ s"are"olders o% ICICI and ICICI Bank in Januar CLLC1 $ t"e Hig" Court o% -u0arat at +"meda$ad in *arc"
66
Credit Risk Management CLLC1 and $ t"e Hig" Court o% Judicature at *um$ai and t"e (eser#e Bank o% India in +pril CLLC! Conse>uent to t"e merger1 t"e ICICI group=s %inancing and $anking operations1 $ot" &"olesale and retail1 "a#e $een integrated in a single entit ! RISK MANAGEMENT AT ICICI (isk is an in"erent part o% ICICI Bank?s $usiness1 and e%%ecti#e (isk Compliance O +udit -roup is critical to ac"ie#ing %inancial soundness and pro%ita$ilit ! ICICI Bank "as identi%ied (isk Compliance O +udit -roup as one o% t"e core competencies %or t"e ne2t millennium! T"e Risk C 3pli"%6# 2 A5&i$ G' 5p ,RC 2 AG- at ICICI Bank $enc"marks itsel% to international $est practices so as to optimi<e capital utili<ation and ma2imi<e s"are"older #alue! 9it" &ell de%ined policies and procedures in place1 ICICI Bank identi%ies1 assesses1 monitors and manages t"e principal risks4 Credit risk :t"e possi$ilit counterparties; *arket (isk :t"e possi$ilit o% loss due to c"anges in market prices and rates o% securities and t"eir le#els o% #olatilit ; Operational risk :t"e potential %or loss arising %rom $reakdo&ns in policies and controls1 "uman error1 contracts1 s stems and %acilities; T"e a$ilit to implement anal tical and statistical models is t"e true test o% a risk met"odolog ! In addition to t"ree departments &it"in t"e (isk Compliance O +udit -roup "andling t"e a$o#e risks1 an A%"l!$i6s U%i$ de#elops >uantitati#e tec"ni>ues and models %or risk measurement! Credit risk1 t"e most signi%icant risk %aced $ ICICI Bank1 is managed $ t"e C'#&i$ Risk C 3pli"%6# 2 A5&i$ D#p"'$3#%$ ,CRC 2 AD- &"ic" e#aluates risk at t"e transaction le#el as &ell as in t"e port%olio conte2t! T"e industr anal sts o% t"e department monitor all ma0or sectors and e#ol#e a sectoral outlook1 &"ic" is an important input to t"e port%olio planning process! T"e department "as done detailed studies on de%ault patterns o% loans and prediction o% de%aults in t"e Indian conte2t! (isk5$ased pricing o% loans "as $een introduced! o% loss due to c"anges in t"e >ualit o%
67
Credit Risk Management T"e %unctions o% t"is department include4 ./ R#;i#= 9 C'#&i$ O'i4i%"$i % 2 M %i$ 'i%4 Credit rating o% companies! De%ault risk O loan pricing! (e#ie& o% industr sectors! (e#ie& o% large e2posures in industries/ corporate groups/ companies! Ensure *onitoring and %ollo&5up $ $uilding appropriate s stems suc" as C+S C! D! Design appropriate credit processes1 operating policies O procedures! 7ort%olio monitoring M! *et"odolog to measure port%olio risk! Credit (isk In%ormation S stem :C(IS;!
Focused attention to structured %inancing deals! 7ricing1 ,e& 7roduct +ppro#al 7olic 1 *onitoring!
G!
*onitor ad"erence to credit policies o% (BI! During t"e ear1 t"e department "as $een instrumental in reorienting t"e
credit processes1 including delegation o% po&ers and creation o% suita$le control points in t"e credit deli#er acti#ities! +#aila$ilit o% in%ormation on a real time $asis is an important re>uisite %or sound risk management! To aid its interaction &it" t"e strategic $usiness units1 and pro#ide real time in%ormation on credit risk1 t"e C(C O +D "as implemented a 68 process &it" t"e o$0ecti#e o% impro#ing customer response time and en"ancing t"e e%%ecti#eness o% t"e asset creation and monitoring
Credit Risk Management sop"isticated in%ormation s stem1 namel t"e C'#&i$ Risk I%9 '3"$i % S!s$#3/ In addition1 t"e C(C O +D "as designed a &e$5$ased s stem to render in%ormation on #arious aspects o% t"e credit port%olio o% ICICI Bank!
INTERVIEW In relation to m pro0ect1 I decided to meet someone %rom t"e credit department %rom t"e #er &ell kno& ICICI Bank! T"ere%ore1 I met *r! Vi#ek 7al1 manager1 (+7- 7ersonal loans at ICICI Bank 3imited1 &"ic" is situated at (7To&ers1 J!B!,agar1 +nd"eri1 *um$ai5MLL LGF! T"e >uestions put %ort" to "im and t"e ans&ers gi#en $ "im are as %ollo&s4 ./ Wh"$ is 6'#&i$ 'isk 3"%"4#3#%$? +! Credit risk management is a #er important %unction o% $anks toda ! In a %inancial institute like ours credit risk management is o% utmost importance as t"e #olumes t"at &e deal in on a dail $asis are enormous1 $ot" in retail as &ell as corporate $anking! 9e pro#ide ou &it" all kinds o% loans1 ou name it and &e "a#e it1 $e it personal loan1 car loan or pro0ect %inancing taken $ corporates! T"ere%ore &e la a lot o% emp"asis on credit risk management! 0/ D #s $h# :"%k h";# " s#p"'"$# 6'#&i$ 'isk &#p"'$3#%$? Wh"$ "'# i$s 95%6$i %s? / D #s $h# :"%k h";# &i99#'#%$ &#p"'$3#%$s 9 ' h"%&li%4 6 'p '"$# 6'#&i$ 'isk "%& R#$"il 6'#&i$ 'isk? +! Yes1 &e do! In%act t"ere is a separate %loor %or t"e loans department1 &"erein t"ere are credit managers1 &"o take care o% t"e #arious aspects o% credit1 rig"t %rom gi#ing credit to a customer till reco#ering t"e E*I?s %rom t"em! T"e "ierarc" at ICICI in t"e credit department is as %ollo&s4 ,ational Credit *anager
69
Vonal Credit *anager
(egional Credit manager :Eac" o% t"e regional credit managers "as M5G area credit managers under t"em!; ICICI in%act "as separate $ranc"es %or retail $anking and corporate $anking and eac" $ranc" "as separate credit departments! D/ Is s 3# i%s5'"%6# $h#'# 9 ' 6 ;#'i%4 6'#&i$ 'isk? H"s $h# :"%k $"k#% :5si%#ss 6'#&i$ i%s5'"%6#? +! 9ell1 I am not sure i% suc" a t"ing e2ists! Ho&e#er &e pro#ide insurance co#er &it" t"e loans t"at &e gi#e! +t present1 ICICI pro#ides insurance &it" Home 3oan $ut t"at is $uilt5in and is optional! M! Is l "% "l="!s 4i;#% % s#65'i$!? Wh"$ "'# $h# li3i$s 5%$il =hi6h $h# :"%k 4i;#s l "% =i$h 5$ s#65'i$! "%& =i$h s#65'i$!? $e gi#en on securit ! 7ersonal 3oans are +! ,o1 loans need not necessaril
completel unsecured! In case o% +uto loan t"e #e"icle?s papers are mortgaged &it" t"e $ank1 same is t"e case %or "ome loan! So in suc" a case t"e car or t"e "ouse $ecomes t"e securit ! G/ N =( "( &"!s "l3 s$ "ll $h# :"%ks h";# 6 3# 5p =i$h s 3"%! s6h#3#s "%& "'# 4i;i%4 "="! " l $ 9 6'#&i$/ H = p' 9i$":l# is $his $ $h# :"%k? C"% "ll $his :# 3"%"4#& =i$h 5$ " p' p#' 6'#&i$ 'isk &#p"'$3#%$ i% pl"6#? +! T"at?s true1 t"ere are a lot o% sc"emes in t"e market toda and is primaril t"ere to attract t"e customer! +nd es t"e credit risk management is #er important and no %inancial institution1 or e#en an organi<ation %or t"at matter can do &it"out one! N/ Th# R#45l"$ '! ) &! =hi6h '#45l"$#s $h# 6'#&i$ 4i;#% :! :"%ks?
70
Credit Risk Management +! 9e %ollo& our compan guidelines &"ic" are inline &it" t"e (BI! T"e (BI is t"e regulator $od %or all %unctions carried on $ t"e $anks!
H! Wh"$ i%9 '3"$i % & #s " :"%k 6 ll#6$ ": 5$ i$s : '' =#'s? Wh 6 ll#6$s i$? +! 9"ile granting credit to an indi#idual &"o is a salaried person1 &e consider last t"ree mont"s Salar slip and/or last t"ree mont"s $ank statement! 9"ile in t"e case o% a sel% emplo ed person!9e take into consideration "is last t&o ears IT( :Income Ta2 (eturn;! Our DS+?s :Direct Selling +gents; and DST?s :Direct Selling Teams; collect t"e in%ormation a$out people &"om t"e $orro&ers is stored in t"e compan ?s *IS! K/ D #s $h# :"%k 4i;# "="! " l $ 9 6'#&i$ &5# $ 6 3p#$i$i;# p'#ss5'#? This 6 5l& $5'% 5$ $ 'isk!< s h = & #s $h# :"%k s$'ik# " :"l"%6# :#$=##% p' 9i$":ili$! "%& ; l53# 9 :5si%#ss? +! Frankl 1 competition does not $ot"er ICICI! ICICI "as a #er strong $rand name! T"e statistics speak %or t"em sel#es! ICICI does a $usiness o% KLL crores per mont" &"ere as our nearest competitor HDFC does a $usiness o% CLL crores per mont"! Ho&e#er &e keep on pus"ing our DS+?s to o$tain a greater market s"are! Ho&e#er to keep a"ead o% competition &e do gi#e attracti#e sc"emes to t"e masses1 %or e2ample i% an HDFC account "older comes to ICICI %or a loan t"en "e "as to pa CR less interest and "e need not gi#e "is $ank statements1 "o&e#er "e must "a#e a &ell maintained $alance! F! H = l %4 & #s " p#'s % $"k# $ account &it" ICICI can also a#ail o% loan %rom t"e $ank! 9"ile sanctioning t"e loan &e take into consideration :$"i% 6'#&i$ 9' 3 ! 5' :"%k? approac" and &"o ma $e prospecti#e $orro&ers $ut once t"e loan is granted t"e in%ormation a$out t"e
+! 9it"in a &eeks time t"e loans are sanctioned! + person &"o does not "a#e an
71
Credit Risk Management #arious %actors like sta$ilit 1 a$ilit and intent! For e2ample in case o% personal loans t"e minimum age limit is CG ears1 minimum &ork e2perience is B ear1 sta$ilit is B ear and t"e minimum net income must $e K t"ousand rupees per mont"! .A/ Wh#% $"lki%4 ": 5$ 6'#&i$< is i$ li3i$#& $ G5s$ l "%s $"k#% :! i%&i;i&5"ls ' i$ "ls i%6l5&#s L#$$#' 9 C'#&i$s< #$6? +! In t"e case o% lending to indi#iduals it is 7ersonal loans1 +uto loan and Home loan and in t"e case o% corporate loan t"e letter o% credit is included! ../ Wh"$ & #s Ass#$ *5"li$! 3#"%? H = is i$ 3"%"4#&? +! 9"en a $ank gi#es a loan it appears on t"e asset side o% t"e $alance s"eet! T"e >ualit o% t"e loan is credi$ilit o% t"e person and "is a$ilit and &illingness to pa $ack! 9"ile determining t"e asset >ualit a lot o% ratios are considered! .0/ A'# $h#'# &i99#'#%$ R5l#s "%& P' 6#&5'#s 9 ' C 'p '"$# 6'#&i$ 'isk 3"%"4#3#%$ "%& 9 ' R#$"il C'#&i$ 'isk 3"%"4#3#%$? +! Yes t"ere are di%%erences primaril due to t"e #olume o% $usiness!
.1/ Wh"$ is $h# )"s#l R#p '$? D #s $h# :"%k 9 ll = i$? +! I t"ink Basel (eport "as 0ust guidelines! It talks a$out t"e $est practices! For us t"e go#erning $od is t"e (BI and &e %ollo& our compan guidelines1 &"ic" are %le2i$le enoug" so as to ser#e customers $etter!
72
Credit Risk Management .?/ Wh"$ is $h# '#6 ;#'! p' 6#&5'# i% 6"s# 9 " &#9"5l$#'? Is $h#'# " p' p#' p' 6#&5'# p'#s6'i:#& :! $h# R)I? +! It depends on a num$er o% %actors1 like &"o is t"e person1 is it a genuine reason or not1 etc :%or pa ing t"e E*I;! In case o% +uto 3oan &e take a&a t"e #e"icle and it is t"e easiest loan to reco#er1 "ome loan "as its limitations $ecause "ome is one o% t"e $asic necessities o% man and t"ere are some Hig" Court speci%ications! 7ersonal loan is t"e most risk loan as in case o% personal loan t"ere is no securit ! Ho&e#er in a cit like *um$ai1 t"e de%ault rate is #er good1 as in less t"an CR o% t"e $orro&ers de%ault1 an t"ing $elo& GR is considered good! T"is is "o&e#er t"e case &it" *um$ai it is di%%erent %or di%%erent cities! In ot"er cases &e %ollo& t"e compan guidelines &"ic" are in lieu &it" t"e (BI speci%ications! .B/ H = 9$#% & #s $h# :"%k 9 ll =(5p "%& k##p % 6h#6ki%4 $h# 6"p"6i$! 9 $h# : '' =#'s "%& is i$ & %# 9 ' "ll $h# 6"s#s? +! Once t"e loan is gi#en at least in case o% retail $anking &e do not %ollo& up t"e customer as long as "e is pa ing t"e E*I?s regularl 1 it?s onl i% "e approac"es %or anot"er loan t"at #arious t"ings &ill $e c"ecked! In t"e corporate $anking t"ings are a slig"tl di%%erent! .H/ H = & #s $h# :"%k $"k# % i$s &#9"5l$#'s? Wh"$ & #s $h# :"%k & =h#% $h# : '' =#' :#6 3#s :"%k'5p$? a! In case o% t"e E*I?s not paid on time &e generall rela2 t"e procedure i% it is a case o%
73
Credit Risk Management genuine de%ault! Ho&e#er i% t"e person is in no position to pa at all in case o% +uto loan 1 Home loan 1 etc t"e securit t"at is t"e #e"icle or "ome &ill $e taken a&a as t"e last resort!
74
THE INDUSTRIAL AND DEVELOPMENT )ANK OF INDIA LIMITED ID)I
@5l! .FH?: Set up under an +ct o% 7arliament as a &"oll 5o&ned su$sidiar o% (eser#e Bank o% India! F#:'5"'! .FIH: O&ners"ip trans%erred to -o#ernment o% India! Designated 7rincipal Financial Institution %or co5ordinating t"e &orking o% institutions at national and State le#els engaged in %inancing1 promoting and de#eloping industr !
M"'6h .FJ0: International Finance Di#ision o% IDBI trans%erred to E2port5 Import Bank o% India1 esta$lis"ed as a &"oll 5o&ned corporation o% -o#ernment o% India1 under an +ct o% 7arliament!
Ap'il .FFA: Set up Small Industries De#elopment Bank o% India :SIDBI; under SIDBI +ct as a &"oll 5o&ned su$sidiar to cater to speci%ic needs o% small5scale sector! In terms o% an amendment to SIDBI +ct in Septem$er CLLL1 IDBI di#ested GBR o% its s"are"olding in SIDBI in %a#or o% $anks and ot"er institutions in t"e %irst p"ase! IDBI "as su$se>uentl di#ested HF!BDR o% its stake in its erst&"ile su$sidiar to date!
@"%5"'! .FF0: +ccessed domestic retail de$t market %or t"e %irst time &it" inno#ati#e Deep Discount BondsE registered pat"5$reaking success! D#6#3:#' .FF1: Set up IDBI Capital *arket Ser#ices 3td! as a &"oll 5 o&ned su$sidiar to o%%er a $road range o% %inancial ser#ices1 including Bond 75
Credit Risk Management Trading1 E>uit Broking1 Client +sset *anagement and Depositor Ser#ices! IDBI Capital is currentl a leading 7rimar Dealer in t"e countr !
S#p$#3:#' .FF?: Set up IDBI Bank 3td! in association &it" SIDBI as a pri#ate sector commercial $ank su$sidiar 1 a se>uel to (BI=s polic %inancial sector re%orms! o% opening up domestic $anking sector to pri#ate participation as part o% o#erall
O6$ :#' .FF?: IDBI +ct amended to permit pu$lic o&ners"ip upto MFR! @5l! .FFB: *ade Initial 7u$lic O%%er o% E>uit and raised o#er (s!CLLL crores1 t"ere$ reducing -o#ernment stake to HC!BMR!
M"'6h 0AAA: Entered into a JV agreement &it" 7rincipal Financial -roup1 US+ %or participation in e>uit and management o% IDBI In#estment *anagement Compan 3td!1 erst&"ile a BLLR su$sidiar ! IDBI di#ested its entire s"are"olding in its asset management #enture in *arc" CLLD as part o% o#erall corporate strateg !
M"'6h 0AAA: Set up IDBI Intec" 3td! as a &"oll 5o&ned su$sidiar undertake IT5related acti#ities!
to
@5%# 0AAA: + part o% -o#ernment s"are"olding con#erted to pre%erence capital1 since redeemed in *arc" CLLBE -o#ernment stake currentl GK!MHR! A545s$ 0AAA: Became t"e %irst +ll5India Financial Institution to o$tain ISO FLLC4BFFM Certi%ication %or its treasur %or its %ore2 ser#ices! operations! +lso $ecame t"e %irst organi<ation in Indian %inancial sector to o$tain ISO FLLB4CLLL Certi%ication
M"'6h 0AA.: Set up IDBI Trustees"ip Ser#ices 3td! to pro#ide tec"nolog 5 dri#en in%ormation and pro%essional ser#ices to su$scri$ers and issuers o% de$entures!
F#:'5"'! 0AA0: +ssociated &it" select $anks/institutions in setting up +sset (econstruction Compan :India; 3imited :+(CI3;1 &"ic" &ill $e in#ol#ed &it" t"e strategic management o% non5per%orming and stressed assets o% Financial Institutions and Banks!
S#p$#3:#' 0AA1: IDBI ac>uired t"e entire s"are"olding o% Tata Finance 3imited in Tata Home %inance 3td1 signaling IDBI=s %ora into t"e retail
76
Credit Risk Management %inance sector! T"e "ousing %inance su$sidiar "as since $een renamed =IDBI Home %inance 3imited=!
D#6#3:#' 0AA1: On Decem$er BN1 CLLD1 t"e 7arliament appro#ed T"e Industrial De#elopment Bank :Trans%er o% Undertaking and (epeal Bill; CLLC to repeal IDBI +ct BFNM! T"e 7resident=s assent %or t"e same &as o$tained on Decem$er DL1 CLLD! T"e (epeal +ct is aimed at $ringing IDBI under t"e Companies +ct %or in#esting it &it" t"e re>uisite operational %le2i$ilit to undertake commercial $anking $usiness under t"e Banking (egulation +ct BFMF in addition to t"e $usiness carried on and transacted $ it under t"e IDBI +ct1 BFNM!
@5l! 0AA?: T"e Industrial De#elopment Bank :Trans%er o% Undertaking and (epeal; +ct CLLD came into %orce %rom Jul C1 CLLM! @5l! 0AA?: T"e Boards o% IDBI and IDBI Bank 3td! take in5principle decision regarding merger o% IDBI Bank 3td! &it" proposed Industrial De#elopment Bank o% India 3td! in t"eir respecti#e meetings on Jul CF1 CLLM!
S#p$#3:#' 0AA?: T"e Trust Deed %or Stressed +ssets Sta$ilisation Fund :S+SF; e2ecuted $ its Trustees on Septem$er CM1 CLLM and t"e %irst meeting o% t"e Trustees &as "eld on Septem$er CH1 CLLM!
S#p$#3:#' 0AA?: T"e ne& entit WIndustrial De#elopment Bank o% IndiaW &as incorporated on Septem$er CH1 CLLM and Certi%icate o% commencement o% $usiness &as issued $ t"e (egistrar o% Companies on Septem$er CK1 CLLM!
S#p$#3:#' 0AA?:,oti%ication issued $ *inistr o% Finance speci% ing S+SF as a %inancial institution under Section C:";:ii; o% (eco#er o% De$ts due to Banks O Financial Institutions +ct1 BFFD!
S#p$#3:#' 0AA?: ,oti%ication issued $ *inistr o% Finance on Septem$er CF1 CLLM %or issue o% non5interest $earing -oI IDBI Special Securit 1 CLCM1 aggregating (s!FLLL crores1 o% CL5 ear tenure!
S#p$#3:#' 0AA?: ,oti%ication %or appointed da as Octo$er B1 CLLM1 issued $ *inistr o% Finance on Septem$er CF1 CLLM!
77
S#p$#3:#' 0AA?: (BI issues noti%ication %or inclusion o% Industrial De#elopment Bank o% India 3td! in Sc"edule II o% (BI +ct1 BFDM on Septem$er DL1 CLLM!
O6$ :#' 0AA?: +ppointed da 5 Octo$er LB1 CLLM 5 Trans%er o% undertaking o% IDBI to IDBI 3td! IDBI 3td! commences operations as a $anking compan ! IDBI +ct1 BFNM stands repealed!
@"%5"'! 0AAB: T"e Board o% Directors o% IDBI 3td!1 at its meeting "eld on Januar CL1 CLLG1 appro#ed t"e Sc"eme o% +malgamation1 en#isaging merging o% IDBI Bank 3td! &it" IDBI 3td! 7ursuant to t"e sc"eme appro#ed $ t"e Boards o% $ot" t"e $anks1 IDBI 3td! &ill issue BLL e>uit s"ares %or BMC e>uit s"ares "eld $ s"are"olders in IDBI Bank 3td! E-* "as $een con#ened on Fe$ruar CD1 CLLG %or seeking s"are"older appro#al %or t"e sc"eme!
78
INTERVIEW
9it" regard to m pro0ect Credit (isk *anagement1 I met *r! Bilal +n&ar1 Credit +nal st1 at IDBI Bank 3TD! at "is o%%ice in ,ariman 7oint1 *um$ai5MLL LCB! T"e %ollo&ing are t"e >uestions asked to *r! Bilal and t"e ans&ers gi#en $ "im! ./ Wh"$ is 6'#&i$ 'isk 3"%"4#3#%$? +! Credit risk *anagement is managing credit gi#en $ t"e $ank to its $orro&ers1 suc" t"at t"e $ank does not lose its mone ! 0/ D #s $h# :"%k h";# " s#p"'"$# 6'#&i$ 'isk &#p"'$3#%$? Wh"$ "'# i$s 95%6$i %s? Wh"$ is $h# hi#'"'6h! i% $h# 6'#&i$ 'isk &#p"'$3#%$? +! Yes1 t"e $ank "as a separate credit risk department! T"e "ierarc" department is as %ollo&s4 o% t"e
HE+D (IS)
HE+D C(EDIT (IS)
C(EDIT *+,+-E(S 1/ Is s 3# i%s5'"%6# $h#'# 9 ' 6 ;#'i%4 6'#&i$ 'isk? H"s $h# :"%k $"k#% :5si%#ss 6'#&i$ i%s5'"%6#?
79
Credit Risk Management +! Yes1 e#en I "a#e "eard o% it $ut it is still in its nascent stage and caug"t up in India as o% no&! ?/ H = & #s $h# :"%k 4 ": 5$ 6 ll#6$i%4 i%9 '3"$i % ": 5$ i$s : '' =#'s? Wh & #s i$? +! Be%ore gi#ing loan to t"e $orro&ers &e take in to account #arious %actors in order to a#oid risk n loss! Various %actors like age o% t"e person1 e2isting commitments1 %inancial conditions o% t"e person1 annual report in case o% corporate loan and salar in case o% personal loan is taken into consideration! B/ Is l "% "l="!s 4i;#% % s#65'i$!? Wh"$ "'# $h# li3i$s 5%$il =hi6h $h# :"%k 4i;#s l "% =i$h 5$ s#65'i$! "%& =i$h s#65'i$!? +! In t"e corporate $anking sector mostl loans are gi#en on securit $asis $ut a lot o% $usiness is done on t"e $asis o% trust also and so is t"e case in retail $anking! H/ D #s $h# :"%k 4i;# "="! " l $ 9 6'#&i$ &5# $ 6 3p#$i$i;# p'#ss5'#? This 6 5l& $5'% 5$ $ 'isk!< s h = & #s $h# :"%k s$'ik# " :"l"%6# :#$=##% p' 9i$":ili$! "%& ; l53# 9 :5si%#ss? +! Competition is "ealt" E &e al&a s tr to $e a"ead o% competition! Ho&e#er1 at all times &e do not mindlessl gi#e a&a loans to gain market s"are! 9e see to it t"at t"ere is a "ealt" $alance $et&een (isk and (eturn! I/ Th# R#45l"$ '! ) &! =hi6h '#45l"$#s $h# 6'#&i$ 4i;#% :! :"%ks/ +! T"ere is onl one regulator $od &"ic" go#erns t"e &orkings o% t"e $anks1 t"e (BI! J/ D #s $h# :"%k h";# &i99#'#%$ &#p"'$3#%$s 9 ' h"%&li%4 6 'p '"$# 6'#&i$ 'isk "%& R#$"il 6'#&i$ 'isk? +! Yes1 t"e $ank "as di%%erent departments %or "andling corporate $usiness and retail $usiness!
80
Credit Risk Management F/ A'# $h#'# &i99#'#%$ R5l#s "%& P' 6#&5'#s 9 ' C 'p '"$# 6'#&i$ 'isk
3"%"4#3#%$ "%& 9 ' R#$"il C'#&i$ 'isk 3"%"4#3#%$? +! ,ot reall 1 t"e #olume o% $usiness di%%ers "o&e#er some $asic rules remain t"e same! .A/ H = l %4 & #s " p#'s % $"k# $ t"e loan is granted almost immediatel ! ../ Wh#% $"lki%4 ": 5$ 6'#&i$< is i$ li3i$#& $ G5s$ l "%s $"k#% :! i%&i;i&5"ls ' i$ "ls i%6l5&#s L#$$#' 9 C'#&i$s< #$6/? +! Yes1 it is $ot"! In case o% retail $anking t"e loans are gi#en to indi#iduals and rest comes under corporate $anking! .0/ Wh"$ & #s Ass#$ *5"li$! 3#"%? +! 9"en a $ank gi#es a loan to an indi#idual or a compan 1 it comes on t"e asset side o% t"e $alance s"eet! It is an asset $ecause it earns an income %or t"e $ank! +sset >ualit means t"e (IS) 7E(CE7TIO, t"at t"e $ank associates &it" a particular $orro&er! For e2ample1 i% *r! +<im 7rem0i approac"es t"e $ank %or an amount o% sa 1 one lak" rupees1 t"e $ank &ill gi#e "im t"e mone &it"out an securit 1 $ecause o% risk perception $eing lo&! T"at is $ecauseE *r! 7rem0i &ill not de%ault in pa ment! Ho&e#er a certain procedure &ill "a#e to $e %ollo&ed i% an common man comes to t"e $ank %or a loan o% t"e same amount $ecause t"e risk perception di%%ers! .1/ Wh"$ is $h# )"s#l R#p '$? +! +s %ar as I kno& T"e Basel (eport1 is an international set o% rules and regulations! .?/ H = 9$#% & #s $h# :"%k 9 ll =(5p "%& k##p % 6h#6ki%4 $h# 6"p"6i$! 9 $h# : '' =#'s "%& is i$ & %# 9 ' "ll $h# 6"s#s? +! Yes %ollo& ups are done in some cases and t"at too in t"e corporate sector $ut in most cases &e need not do a %ollo&5up1 0ust $eing a&are as to &"at is going on in t"e market $ updating oursel% &it" t"e latest ne&s is su%%icient! :$"i% 6'#&i$ 9' 3 ! 5' :"%k?
+! +s soon as t"e in%ormation recei#ed %rom t"e &ould5$e $orro&er is aut"enticated1
81
Credit Risk Management .B/ Wh"$ is p '$9 li 3"%"4#3#%$? +! In case o% corporate $anking1 7ort%olio management is t"e di%%erent companies in &"ic" t"e $ank puts or &ants to put t"eir mone in! t"is depends on t&o criterias4 -ro&t" o% a particular industr ! T"e le#el o% e2posure t"e $ank &ants in a particular industr !
+s o% no& t"e entire econom is $ooming and I,DI+ is SHI,I,- as %ar as t"e $usiness scenario is concerned! +n $ank &ill not t"ink t&ice $e%ore in#esting in construction1 auto components1 IT1 etc! .H/ H = & #s $h# :"%k $"k# % i$s &#9"5l$#'s? Is $h#'# " p' p#' p' 6#&5'# p'#s6'i:#& :! $h# R)I? +! It depends %rom case to case! I% t"e de%ault is a case o% &ill%ul de%ault1 t"en t"e $ank is compelled to take legal action! Ho&e#er i% t"e de%ault is a genuine $usiness de%ault1 t"en t"e $ank goes in %or one time settlement! T"ere are (BI regulations in case o% OTS! .I/ Wh"$ is $h# '#6 ;#'! p' 6#&5'# i% 6"s# 9 " &#9"5l$#'? +! +s mentioned a$o#e i% t"e de%ault is due to &ill%ul de%ault &e tr to reco#er it $ legal proceedings! Ho&e#er in case o% genuine de%ault1 t"e $ank goes in %or O,E TI*E SETT3E*E,T! OTS ma $e done $ taking mone %rom t"e persons Fi2ed Deposits1 S"ares1 7ropert 1 etc!
82
)USINESS OVERVIEW OF FEDERAL )ANK

F#&#'"l )"%k 1 one o% t"e leading pri#ate sector $anks in India &it" a "istor o% HG ears o% pu$lic con%idence and trust1 "as also $uilt up a reputation o% $eing an agile1 IT sa## and customer %riendl Bank! T"e Bank "as a #er &ide net&ork o% more t"an GLL o%%ices co#ering almost all t"e important cities in t"e countr &it" a dominant presence in t"e State o% )erala &it" more t"an DLL $ranc"es! Business Figures as on DB5LD5CLLG :(s Crores; Deposits +d#ances In#estments BGBFD KKCD GHFF
S$' %4 Fi%"%6i"ls T"e Bank1 "a#ing a net &ort" o% o#er (s!HBG crores and a $usiness turno#er e2ceeding (s!CMLLL crores1 "as turned in an e2cellent per%ormance in t"e current %inancial ear &it" a net pro%it o% o#er FL crores! +s on *arc" LG1 t"e Bank=s s"are :%ace #alue (s BL/5; "as a Book Value o% (s BBL/5 and an Earnings per S"are :E7S; o% (s BD!HD!
83
Credit Risk Management Pi %##'s i% E%h"%6i%4 C5s$ 3#' C %;#%i#%6# Federal Bank "as pla ed a pioneer role in de#eloping and deplo ing ne& tec"nolog assisted customer %riendl products and ser#ices! + %e& o% its earl mo#es are Ser#ice cited t"roug" $elo&4 Fed,et X First1 among t"e traditional $anks in t"e countr to introduce Internet Banking X First among t"e traditional $anks to "a#e all its $ranc"es automated! X First and onl Bank among t"e traditional Banks in India to "a#e all its $ranc"es inter5connected X First Electronic Telep"one Bill 7a ment in t"e countr &as done t"roug" Federal Bank! X First and onl $ank among t"e older Banks to "a#e an e5s"opping pa ment gate&a ! X First traditional Bank to introduce *o$ile +lerts and *o$ile Banking ser#ice! X First Bank to implement an E2press (emittance Facilit %rom +$road T"e Bank "as also t"e distinction o% $eing one o% t"e %irst $anks in t"e countr to deplo most o% t"ese tec"nolog ena$led ser#ices at t"e smaller $ranc"es including rural and semi5ur$an areas! A%!Ti3#(A%!Wh#'#(A%!W"! )"%ki%4 T"e Bank "as t"e %ull range o% deli#er c"annels including1 Internet Banking1 *o$ile Banking and +lerts1 +n 9"ere :Branc"; Banking1 Interconnected Visa ena$led +T* net&ork1 E5mail +lerts1 Telep"one Banking and a Centrali<ed customer Call Centre &it" toll %ree num$er! Customers t"us "a#e t"e a$ilit to a#ail CM "our $anking ser#ice %rom t"e c"annel o% "is c"oice1 according to "is con#enience! T"e Bank is currentl in t"e process o% $uilding a net&ork o% +T*s1 across t"e countr to supplement its deli#er options! Its current net&ork o% CHG plus +T*s is $eing e2panded aggressi#el ! Federal Bank alread "as t"e largest num$er o% +T*s in )erala1 taking round5t"e5clock $anking con#enience to e#en man rural areas! T"e
84
Credit Risk Management Bank "as launc"ed its an &"ere $anking ser#ice1 ena$ling customers to $ranc" at an $ranc" o% "is c"oice regardless o% t"e place &"ere t"e account is maintained! Fi%"%6i"l S5p#' M"'k#$ T"e Bank "as no& emerged into a %inancial supermarket gi#ing t"e customers a range o% products and ser#ices! +part %rom t"e entire sle& o% Banking products and deli#er X X X X X X X X X X X X X Utilit Bill E BS,3 On5line 7a ment 3IC t"roug" 3i%e E2port E2press Cas" 3ock Insurance Credit c"annels &e Credit 7roducts Insurance 3ine Ser#ice in association in also pro#ide t"e %ollo&ing Ser#ices Cards &it" ICICI 7rudential EC-C %acilities4 Depositor
X -eneral Insurance 7roducts in association &it" United India Insurance 7roducts association +$road Cas" in 5 &it" (emittance 5On5 Bo2 Cas" *erc"ant s"opping Bill Insurance Tele$anking C"annel Facilit %or *anagement Banking 7a ment %rom E2press ,(I=s FEDF+ST (emittance t"e Ser#ices Ser#ices gate&a 7a ment 7a ment 5 Fed e57a US
X Eas 7a 5 On5line %ee pa ment s stem U%i85# T#6h% l 4! &'i;#% s#';i6#s T"e Bank=s *o$ile Banking Ser#ices ena$les customers to access t"eir account details o#er t"e mo$ile p"one! T"e Bank also "as t"e *o$ile +lert %acilit 1 &"ic" ena$les customers in an part o% t"e &orld to recei#e instant alerts on transactions in t"eir account in India on t"eir mo$ile! + note&ort" %eature o% t"e %acilit is t"at it is "ig"l %le2i$le and can $e personali<ed according to t"e needs o% t"e customer at an time! E#en &"ile le#eraging on tec"nolog to impro#e
85
Credit Risk Management con#enience1 &e "a#e al&a s stri#ed to ensure t"at our product and ser#ices are simple1 eas to use and most a%%orda$le! P'#9#''#& )"%ki%4 P"'$%#' 9 NRI s Federal Bank continues to $e t"e %a#orite c"oice %or ,(Is as is e#idenced %rom t"e %act t"at a$out MLR o% our deposits come %rom t"e ,(I segment! Our s"ort term deposit "as $een rated $ C(ISI3 and a&arded a "ig" score o% 7BQ t"e Bank "as correspondent Bank arrangements &it" Banks in most o% t"e ma0or cities in t"e &orld! S9IFT connecti#it ensures speed trans%er o% %unds to accounts maintained &it" t"e Bank! In addition1 t"e Bank "as an E2press (emittance Facilit :FEDF+ST; ena$ling ,on (esident Indians in t"e -ul% to e%%ect >uick trans%er o% %unds to t"eir accounts! FedFast &"en com$ined &it" t"e *o$ile +lert %acilit ena$les t"e customer to not onl recei#e >uick credit o% "is remittance in t"e account $ut also to recei#e instant con%irmation o% t"e credit on t"eir mo$ile p"one an &"ere in t"e &orld1 t"roug" S*S!
INTERVIEW 9it" regard to m pro0ect1 I met *r! S"a"0i Jaco$1 C"ie% *anager o% Federal Bank?s Fort $ranc"! T"e >uestions asked to "im and t"e ans&ers gi#en $ "im are as %ollo&s4 ./ Wh"$ "66 '&i%4 $ ! 5 is 6'#&i$ 'isk 3"%"4#3#%$?
86
Credit Risk Management +! Credit risk management is Dou$le C"ecking! It is risk a#oidance! 0/ D #s $h# :"%k h";# " s#p"'"$# 6'#&i$ 'isk &#p"'$3#%$? +! T"e $ank "as a separate (isk Department1 called t"e Integrated (isk *anagement Department! T"is department "as &it"in it sel% Credit (isk Di#ision1 *arket (isk Di#ision1 Etc! t"ere%ore it is called I,TE-(+TED (IS) *+,+-E*E,T DE7+(T*E,T! T"us1 &it"in t"e (isk Department t"ere is a Credit 7rocessing Department! 1/ Is s 3# i%s5'"%6# $h#'# 9 ' 6 ;#'i%4 6'#&i$ 'isk? +! T"ere is an EC-C co#er %or loans taken &"ile doing e2port! ?/ Is l "% "l="!s 4i;#% % s#65'i$!? Wh"$ "'# $h# li3i$s 5%$il =hi6h $h# :"%k 4i;#s l "% =i$h 5$ s#65'i$! "%& =i$h s#65'i$!? +! *ostl loan is al&a s gi#en on securit ! 9e gi#e loans on collateral securit and primar securit ! Ho&e#er as a part o% social responsi$ilit loans are gi#en to t"e &eaker sections &it"out an securit ! B/ N =("(&"!s "l3 s$ "ll $h# :"%ks h";# 6 3# 5p =i$h s 3"%! s6h#3#s "%& "'# 4i;i%4 "="! " l $ 9 6'#&i$/ H = p' 9i$":l# is $his $ $h# :"%k? C"% "ll $his :# 3"%"4#& =i$h 5$ " p' p#' 6'#&i$ 'isk &#p"'$3#%$ i% pl"6#? +! It is purel a marketing gimmick! ,o $ank compromises on pro%ita$ilit 1 it is all to attract customers! It goes &it"out sa ing t"ere are "idden costs in#ol#ed! H/ Th# R#45l"$ '! ) &! =hi6h '#45l"$#s $h# 6'#&i$ 4i;#% :! :"%ks? +!T"e (BI is t"e regulator $od in all cases! I/ H = l %4 & #s " p#'s % $"k# $ :$"i% 6'#&i$ 9' 3 ! 5' :"%k? +! On an a#erage it takes C5D da s! T"e $ranc" sanction mig"t take place on t"e same da ! Depending on t"e amount t"e loan sanction ma e#en take C5D &eeks! J/ D #s $h# :"%k 4i;# "="! " l $ 9 6'#&i$ &5# $ 6 3p#$i$i;# p'#ss5'#? This 6 5l& $5'% 5$ $ 'isk!< s h = & #s $h# :"%k s$'ik# " :"l"%6# :#$=##% p' 9i$":ili$! "%& ; l53# 9 :5si%#ss? +! ,o1 &e do not gi#e in due to competition! I% &e t"ink t"e $orro&er does not "a#e t"e capacit to pa $ack i!e! it is a pro$a$le ,7+ and &e &ill "a#e to make e%%orts to make reco#er &e do not grant t"e loan!
87
Credit Risk Management F/ Wh#% $"lki%4 ": 5$ 6'#&i$< is i$ li3i$#& $ G5s$ l "%s $"k#% :! i%&i;i&5"ls ' i$ "ls i%6l5&#s L#$$#' 9 C'#&i$s< #$6/? +! Yes1 it includes e#er t"ing &"ere in t"e $ank gi#es a&a loan or guarantees! .A/ H = & #s $h# :"%k 4 ": 5$ 6 ll#6$i%4 i%9 '3"$i % ": 5$ i$s : '' =#'s? Wh & #s i$? +! T"e personnel %rom t"e credit department collect in%ormation a$out t"e $orro&ers! T"e in%ormation is stored in t"e $anks data$ase! ../ A'# $h#'# &i99#'#%$ R5l#s "%& P' 6#&5'#s 9 ' C 'p '"$# 6'#&i$ 'isk 3"%"4#3#%$ "%& 9 ' R#$"il C'#&i$ 'isk 3"%"4#3#%$? +! Yes1 t"e procedures are di%%erent $ut t"e $asic rules remain t"e same! In simple terms1t"e #olume o% $usiness c"anges! .0/ D #s $h# :"%k h";# &i99#'#%$ &#p"'$3#%$s 9 ' h"%&li%4 6 'p '"$# 6'#&i$ 'isk "%& R#$"il 6'#&i$ 'isk? +! ,o1 t"ere are no separate departments %or "andling corporate credit risk and retail credit risk! .1/ Wh"$ is $h# )"s#l R#p '$? +! I do not "a#e an idea a$out it! .?/ H = 9$#% & #s $h# :"%k 9 ll =(5p "%& k##p % 6h#6ki%4 $h# 6"p"6i$! 9 $h# : '' =#'s "%& is i$ & %# 9 ' "ll $h# 6"s#s? +! 9e %ollo& a Tracking S stem $ut it is %ollo&ed onl in t"e case o% de%ault o% pa ment $ t"e $orro&er! .B/ D #s $h# :"%k '"$# i$s : '' =#'s? +! Yes1 rating is done on t"e $asis o% integrit 1 past per%ormance1 %inancial standing and strengt"! .H/ H = & #s $h# :"%k 4 ": 5$ P '$9 li 3"%"4#3#%$? +! T"e %ollo&ing are t"e criterias t"at are kept in mind &"ile managing t"e port%olio! T"e are E2posure to t"e compan ! :In case o% corporate;! E2posure to t"e group! :In case o% corporate;! E2posure to t"e industr ! :In case o% corporate;! E2posure to t"e indi#idual! :In case o% retail;! 88
Credit Risk Management E2posure to t"e countr ! :In case o% e2port;!
.I/ Wh"$ is $h# '#6 ;#'! p' 6#&5'# i% 6"s# 9 " &#9"5l$#'? Wh"$ & #s $h# :"%k & =h#% $h# : '' =#' :#6 3#s :"%k'5p$? +! + $orro&er does not $ecome $ankrupt1 all o% a sudden! 9e "a#e an e2cellent tracking s stem! +n asset $ecomes a ,7+ :dou$t%ul asset1 not repa a$le; i% t"e amount due :E*I; is not paid &it"in FL da s! T"en &e make e%%orts %or reco#er ! One &a is taking possession o% t"eir securities!
89
ANALYSIS
For m pro0ect I #isited t"ree pri#ate $anks555 ICICI Bank1 IDBI Bank 3td and T"e Federal Bank 3imited! T"e #isits &ere e2tremel kno&ledgea$le and "elped me to gain an insig"t into t"e practical &orld! T"e importance o% credit risk management is clearl e#ident a%ter t"e %ield inter#ie&s! I %ound out t"at t"oug" t"e names o% t"e designations are di%%erent %or di%%erent $anks1 t"e core %unction remains remain t"e same! Furt"er more t"e di%%erence $et&een credit risk managers in t"e corporate department and retail credit risk is $asicall t"e #olume o% $usinesses! T"e process o% credit risk management remains t"e same in all t"e companies and is carried out $ all t"e companies o% course &it" a %e& c"anges in terms o% &"o collects and stores t"e data1 etc a$out t"e $orro&ers! T"e %ield #isits ga#e me a clear cut idea a$out t"e importance laid $ t"e $anks on credit risk management! *anaging credit risk is o% utmost importance as it "elps t"e $anks to reduce t"e risk o% ,7+?s :,on 7er%orming +ssets;! +n #enture taken $ an $od toda in#ol#es a certain amount o% risk toda ! 9it"out risk t"ere can $e no gain! +s %ar as t"e $anking industr goes1 one o% t"eir main aims is gi#ing loans
90
Credit Risk Management :credit; to indi#iduals and corporates %or personal as &ell as personal needs! Credit risk is closel related &it" t"e $usiness o% lending! T"is comprises a "uge percentage o% t"eir $usiness! Credit risk reduces t"e 7ro$a$ilit o% loss %rom a credit transaction! T"us it is needed to meet t"e goals and o$0ecti#es o% t"e $anks! It aims to strengt"en and increase t"e e%%icac o% t"e organi<ation1 &"ile maintaining consistenc and transparenc ! It is predominantl concerned &it" pro$a$ilit o% de%ault! It is %or&ard looking in its assessment1 looking1 %or instance1 at a likel scenario o% an ad#erse outcome in t"e $usiness! T"e credit risk management %unction "as $ecome t"e centre o% gra#it 1 especiall in a %inanciall in ser#ices industr like $anking! *oreo#er t"e are no& using it as a tool to succeed o#er t"eir competition $ecause credit risk management practices reduce risk and impro#e return on capital! In t"e terminolog o% %inance1 t"e term credit "as an omni$us connotation! It not onl includes all t pes o% loans and ad#ances :kno&n as %unded %acilities; $ut also contingent items like letter o% credit1 guarantees and deri#ati#es :also kno&n as non5 %unded/non5credit %acilities;! In#estment in securities is also treated as credit e2posure! Furt"er I %ound out t"at t"e met"od o% o$taining t"e $usiness %or t"e $anks :loans in t"is case; is outsourced $ ICICI! T"e "a#e a lot o% DS+?s :Direct selling +gents; and DST?s :Direct Selling Teams; &orking %or t"em1 &"o get t"em $usiness! T"us t"e credit managers at ICICI do not meet t"eir clients in person as per popular perceptionE it is onl t"e DS+ t"at t"e customers come in contact &it"! Ho&e#er t"eir counterparts at IDBI Bank 3td and T"e Federal Bank 3imited meet t"eir clients %ace to %ace and act as relations"ip managers! +not"er %act I %ound out %rom all t"e inter#ie&s &as t"at appro2imatel in a$out KLR o% t"e cases o% corporate loans t"e $anks do not sanction t"e entire amount asked %or $ t"e $orro&ers e#en i% t"e are %ull con#inced t"at t"e $orro&er is in a position to pa $ack t"e loan! T"is is done to reduce t"eir credit risk in un%oreseen circumstances! In credit risk management perception o% t"e $ank a$out t"e $orro&er also pla s a #er important role1 i% t"e manager %eels t"at t"e person is not an "onest
91
Credit Risk Management person and is capa$le o% de%ault :in t"is case it is called 9ill%ul de%ault; t"e $ank does not sanction t"e loan amount at all! Furt"er a %act t"at &as $roug"t out and discussed in all t"e inter#ie&s &as t"at in t"e corporate loans t"e $anks &ere not #er "esitant to gi#e loans to most o% t"e companies $ecause t"e econom as a &"ole is doing &ell and t"us all t"e sectors and industries also!
R#6 33#%&"$i %s
Esta$lis"ment o% an appropriate credit risk en#ironment / culture! T"is s"ould operate under a sound and independent credit appro#al process! *aintaining appropriate credit administration1 measurement and monitoring processes! Ensuring ade>uate controls o#er credit risk! +&areness o% t"e implications o% ot"er %orms o% risk1 suc" as market risk and operational risk! Instilling risk5return discipline keeping in #ie& t"e sop"istication o% a particular t pe o% $usiness acti#it o% $anking!
)ENEFITS
T"e stake"olders5555especiall s"are"olders1 depositors :in t"e case o% $anks; and t"e go#ernment5555 are t"e $ene%iciaries since t"e economic and social costs o%
92
Credit Risk Management poor credit risk practices strengt"ens t"e con%idence in t"e operation o% t"e organi<ation concerned1 $esides ena$ling s stematic peer5le#el anal sis and comparison! It is also a %act t"at suc" practices %acilitate %or&ard5looking assessment1 aided $ t"e tools o% stress testing1 credit Va(1 etc! T"e end result is certainl en"anced in#estor con%idence and returns!
CONCLUSION
T"e aim o% credit risk management is to reduce t"e 7ro$a$ilit o% loss %rom a credit transaction! T"us it is needed to meet t"e goals and o$0ecti#es o% t"e $anks! It aims to strengt"en and increase t"e e%%icac o% t"e organi<ation1 &"ile maintaining consistenc and transparenc ! It is predominantl concerned &it" pro$a$ilit o% de%ault! It is %or&ard looking in its assessment1 looking1 %or instance1 at a likel scenario o% an ad#erse outcome in t"e $usiness! T"us &e conclude t"at Credit risk management is not 0ust a process or procedure! It is a %undamental component o% t"e $anking %unction! T"e management o% credit risk must $e incorporated into t"e %i$er o% $anks! Credit risk s stems are currentl e2periencing one o% t"e "ig"est gro&t" rates o% an s stems area in
93
Credit Risk Management %inancial ser#ices! T"ere is a direct correlation $et&een market risk and credit risk and credit risk "as an impact on t"e operational market! In m opinion credit risk management is an important %unction o% $anns toda ! +ll $anks need to practice it in some %orm or t"e ot"er! T"e need to understand t"e importance o% credit risk management and t"ink o% it as a ladder to gro&t" $ reducing t"eir ,7+?s! *oreo#er t"e must use it as a tool to succeed o#er t"eir competition $ecause credit risk management practices reduce risk and impro#e return on capital!
ANNE+URES
*5#s$i %%"i'# B! 9"at is credit risk managementJ C! Does t"e $ank "a#e a separate credit risk departmentJ 9"at are its %unctionsJ D! Is some insurance t"ere %or co#ering credit riskJ Has t"e $ank taken $usiness credit insuranceJ M! Ho& does t"e $ank go a$out collecting in%ormation a$out its $orro&ersJ 9"o does itJ
94
Credit Risk Management G! Is loan al&a s gi#en on securit J 9"at are t"e limits until &"ic" t"e $ank gi#es loan &it"out securit and &it" securit J N! ,o&5a5da s almost all t"e $anks "a#e come up &it" so man sc"emes and are gi#ing a&a a lot o% credit! Ho& pro%ita$le is t"is to t"e $ankJ Can all t"is $e managed &it"out a proper credit risk department in placeJ H! Does t"e $ank gi#e a&a a lot o% credit due to competiti#e pressureJ T"is could turn out to risk 1 so "o& does t"e $ank strike a $alance $et&een pro%ita$ilit and #olume o% $usinessJ K! T"e (egulator Bod &"ic" regulates t"e credit gi#en $ $anks! F! Ho& does t"e $ank take on its de%aultersJ Is t"ere a proper procedure prescri$ed $ t"e (BIJ BL! Ho& long does a person take to o$tain credit %rom our $ankJ BB! 9"en talking a$out credit1 is it limited to 0ust loans taken $ indi#iduals or it also includes 3etter o% Credits1 BC! +re t"ere di%%erent (ules and 7rocedures %or Corporate credit risk management and %or (etail Credit risk managementJ BD! Does t"e $ank "a#e di%%erent departments %or "andling corporate credit risk and (etail credit riskJ BM! 9"at does +sset 8ualit meanJ Ho& is it managedJ BG! 9"at is t"e Basel (eportJ BN! Ho& o%ten does t"e $ank %ollo&5up and keep on c"ecking t"e capacit o% t"e $orro&ers and is it done %or all t"e casesJ BH! 9"at is t"e reco#er procedure in case o% a de%aulterJ BK! 9"at does t"e $ank do &"en t"e $orro&er $ecomes $ankruptJ BF! Does t"e $ank rate its $orro&ersJ Does t"e $ank %ollo& a credit rating mec"anismJ CL! Ho& does t"e $ank go a$out credit risk port%olio managementJ
95
)I)LIOGRAPHY
ks '#9#''#&:
C(EDIT (IS) *+,+-E*E,T $ S!)! Bagc"i N#=sl#$$#' "%& M"%5"ls: Bank 8uest (BI Bulletin W#:si$#s Visi$#&: &&&!icici$ank!com &&&!id$i$ank!com 96
Credit Risk Management &&&!t"e%ederal$ank!com &&&!google!com
97

Blackbook Project On Research On Credit Risk Management

Încărcat de

Informații document

Titlu original

Drepturi de autor

Formate disponibile

Partajați acest document

Partajați sau inserați document

Opțiuni de partajare

Vi se pare util acest document?

Este necorespunzător acest conținut?

Drepturi de autor:

Formate disponibile

Blackbook Project On Research On Credit Risk Management

Încărcat de

Drepturi de autor:

Formate disponibile

Credit Risk Management

RESEARCH DESIGN OBJECTIVES OF THE STUDY

PURPOSE OF THE STUDY

Credit Risk Management

%rom t"eir o%%icial &e$sites on t"e recommendations o% t"e persons

Credit Risk Management

Credit Risk Management

INTRODUCTION TO RISK MANAGEMENT

Credit Risk Management Control :including risk audit;

Credit Risk Management

Credit Risk Management

IMPORTANCE OF RISK MANAGEMENT

RISK PHILOSOPHY AND RISK APPETITE

RISK ORGANISATIONAL SET(UP

Credit Risk Management

CREDIT RISK MANAGEMENT 9H+T IS C(EDIT (IS)J

Credit Risk Management

CREDIT MANAGEMENT B! It in#ol#es selecting

$orro&er/counter part ! C! It re#ol#es around e2amining t"e

RISK MANAGEMENT POLICIES

THE C(EDIT (IS) *+,+-E*E,T 7(OCESS

Credit Risk Management

INEFFECTIVE CREDIT GRANTING AND / OR MONITORING PROCESS:

CREDIT E+POSURE IN THE MARKET AND LI*UIDITY( SENSITIVE SECTORS:

Credit Risk Management

1/ FINANCIAL DETAILS: a! M"'4i%/p#'6#%$"4# 9 9i%"%6i%4 9 : '' =#'s4 more t"e $orro&er?s

angle o% credit risk management1 t"e (BI "as asked $anks to

implement an appropriate credit audit s stem %or t"eir loan / in#estment

post5sanction Institute o% C"artered +ccountants! o% audit rests &it" t"e auditor

Credit Risk Management

5 9"et"er pre5sanction inspection carried out and %ound in order!

CREDIT RISK MODEL

CREDIT RISK PORTFOLIO MANAGEMENT

Credit Risk Management

COMPANY Hindustan 3e#er 3imited

Haldirams *T( Foods

*arketing Federation -odre0 %oods

Credit Risk Management

CREDIT IN NON(PERFORMING ASSETS

Credit Risk Management

Credit Risk Management

Vonal Credit *anager

Credit Risk Management

THE INDUSTRIAL AND DEVELOPMENT )ANK OF INDIA LIMITED ID)I

Credit Risk Management

Credit Risk Management

HE+D C(EDIT (IS)

+! +s soon as t"e in%ormation recei#ed %rom t"e &ould5$e $orro&er is aut"enticated1

Credit Risk Management

)USINESS OVERVIEW OF FEDERAL )ANK

Credit Risk Management E2posure to t"e countr ! :In case o% e2port;!

Credit Risk Management

Credit Risk Management

Credit Risk Management &&&!t"e%ederal$ank!com &&&!google!com

S-ar putea să vă placă și

THE C(EDIT (IS) +,+-EE,T 7(OCESS