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LENDING OPERATIONS & RISK MANAGEMENT

AREA-4

FINANCIAL RISK ASSESSMENT

Lending Operation's & Risk Management

Finance facilities required by customer 7 types and sources of risk therein:

Large manufacturing/processing units Small and medium scale manufacturing/ processing units Commodity traders Construction and supply contractors Service organizations

Lending Operation's & Risk Management

Understanding customers business 7 nature, size, and inherent risks:


Nature processing/manufacturing, wholesaling/ trading, retailing Sourcing of goods dealt with origin, brands, makes, product lines Physical and sale/distribution arrangements for conducting business Customers competitive position strengths and weaknesses Terms of payment to suppliers and buyers gap in trading cycle that needs financing
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Transactions to be financed identification 7 and capturing repayment sources

Transaction mechanics and risk stages reliability for timely completion of transaction Terms of payment to suppliers and buyers determining financing gap Primary & secondary sources of repayment, amount, reliability and methods for capturing Quantification of net bank risk Collateral requirements quantification and determining collateral type and mix

Lending Operation's & Risk Management

Assessing customer Integrity and capability market sources:

Tapping market intelligence reliability of sources Bank references and their deficiencies Informal bank inquiries Visit to customers premises the things to observe Customer interview and Visit Report

Lending Operation's & Risk Management

IMPORTANCE OF CREDIT RISK RATING

The Risk Rating System is a tool, which provides a uniform framework and common language for assessing and monitoring risk in a credit portfolio. Credit Risk Rating (CRR) is intended to reflect the overall risk profile of the borrower or guarantor. Determined through examining the following guidelines:
a. b. c. d. e. f. g. h. i. j. k.

Country Factors Industry / Company Stability / Regulatory Environment Competitive Position Operating Performance Cash Flow Strength Balance Sheet Strength Management and controls Debt Ratings / Credit Ratings (if available) Collateral Quality and Control Adherence to credit terms and documentation Company and Owner relations

Lending Operation's & Risk Management

Country Factors are evaluated by the following factors, which are prevalent in the country / economy:

Political Stability Economic Structure (per capita income; private sector development; strength of private sector; pace of economic development) Macro Economic Stability (fiscal and monetary policy; inflation and current account deficit) Debt Burden (extent of foreign debt; quantum of FX reserves) All borrowing customers must be credit risk rated. A customers credit risk rating must be re-assessed immediately if any deterioration in credit worthiness becomes evident.
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The purpose of this review is to:

Agree to an appropriate risk rating for the customer; Develop or commence development of an appropriate strategy and action plan with specific target outcomes and target dates.

Lending Operation's & Risk Management

RISK RATING BENCHMARKS

Risk Profile Range (%)


91-100 81-90 71-80 61-70 51-60 45-50 41-44 35-40 25-34 upto 25

Risk Rating
1 2 3 4 5 6 7 8 9 10

Minimum risk acceptable level of determining eligibility for financing is risk rating score of 61%

Lending Operation's & Risk Management

RISK RATING V/S CLASSIFICATION

Risk Rating 1-4 5 6-7 8 9 10

Category of Classification Current Watch list Special Mention/OAEM Substandard Doubtful Loss

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SPONSORS / MANAGEMENT

Sponsors Reputability

Sponsors reputability is of paramount importance at the time of sanctioning any credit exposure to the borrower. What needs to be determined is the sponsors past repayment record and meeting their financial obligation/commitments with all lenders / financial institutions. Particular emphasis should also be given to repayment track record of group and associate concerns and parent company, as the case may be.

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Sponsors Experience

Sponsors Experience plays a vital role in guiding. the affairs and setting long-term objectives of the company. Questions that needs to be answered
1. 2. 3.

Since when have the sponsors been in business? Experience in other related industry? Market creditability of the sponsors/directors?

Maximum point may be allocated, where sponsor have rich past industrial experience of at least 25 years. (Sources: Form-29, Certificate of incorporation etc should be referred to validate this information.).
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Sponsors Qualification

Sponsors Qualification indicates the technical qualification and professional/ academic background. System and procedures highlights what managerial and operational procedures and processes and jobs have been well defined, documented and communicated down-the-line and across-the-board. Has the borrower established standard operating procedures (SOPs), developed standard MIS, other control systems, obtained international accreditation e.g. ISO certifications and procedures & responsibilities thereto understood by the employees.
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System and Procedures

Sponsors Succession Planning

Sponsors succession planning are the sponsors equipped and have planned development of second line of management and professionals, and hierarchical mapping and planning is in place.

Managements Experience

Managements Experience deals with the ability and background of the senior Management, their qualification and experience in managing day-today affairs of such concerns. Highest weightage to be given where management has vast in-depth knowledge/expertise.
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Managements Reputability

Managements Reputability measures the past record/creditability of the individual(s) in the market/industry and their handling to pervious assignments.

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SECURITY / COLLATERAL

Prudential Regulations Commercial Banking)

for

Corporate/

It is vitally important to the banks credit quality to have and to maintain separate transaction documents, which are complete, correct and properly executed. Failure to obtain and maintain documentation may prevent the bank from enforcing its rights against a borrower and every precaution must be taken to prevent such situations.
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Realizability

Realizability of the security is to ascertain the force-sale value of the securities under the banks possession and its ease of conversation into cash under default scenario. Also to be analyzed is the marketability and acceptance of the particular asset incase of need for disposal /sale of asset?

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Charge Ranking and Sharing

Charge Ranking and Sharing determine the banks seniority of the charge and incase where parri-passu charge is acquired, all NOCs of existing charge holders have been acquired and consent secured.
Collateral (Debt/Asset) Coverage (Additional margin on security - strict compliance to the Minimum Prescribed Margin SBP Prudential Regulations R-13 specifying Margin Requirement
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Collateral (Debt/Asset) Coverage

Documentation and transaction/borrowers related information

Documentation and transaction / borrowers related information obtained by the bank at the time of sanctioning of limit/credit All security/supporting documents and material related information/valuations and borrowers details have been obtained, as per approvals and transaction specifications, and requirements of prudential regulations

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