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Index
Pg.No.
Certificate 4
Declaration 5
Acknowledgement 6
Preface 7
1. Executive Summary 8
2. Industry Profile 9
3. Company Profile 11
4. Introduction 13
5. Need For Sound Decision Making 17
6. Importance of Credit Risk Assessment 20
7. Inter-Relationship Between Credit and Risk 21
8. Overview of Four Credit Risk Models 24
9. Credit Risk Management with special reference to
Oriental Bank of Commerce 28
10.Conclusion 41
11.Suggestions 42
12.References 43
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Executive Summary
Success comes out of measuring because what cannot be measured cannot be managed. Banks
have developed sophisticated systems to quantify and aggregate credit risk in an attempt to
model the credit risk arising from important aspects of their business lines.
Such models are intended to aid banks in quantifying, aggregating and managing risk across
geographical locations and product lines. Banks credit exposures span across geographicallocations and product lines. The use of credit risk models offer banks a framework for examining
this risk in a timely manner, centralizing data on global exposures and analyzing marginal and
absolute contributions to risk
The motivation for this particular study stemmed from the desire to provide more accurate and
comprehensive base for the estimation of credit risk which will further aid the quantitative
estimation of the amount of economic capital needed to support a banks risk-taking activities.
Furthermore, a models-based approach may also bring capital requirements into closer alignment
with the perceived riskiness of underlying assets, and may produce estimates of credit risk thatbetter reflect the composition of each banks portfolio. However, before a portfolio modeling
approach could be used in the formal process of setting regulatory capital requirements, it has to
be ensured that the models are not only well integrated with banks day-to-day credit risk
management, but are also conceptually sound, empirically validated, and produce capital
requirements that are comparable across similar institutions.
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INDUSTRY PROFILE
History of Banking in India
Without a sound and effective banking system in India it cannot have a healthy economy.
For the past three decades Indias banking system has several outstanding achievements to its
credit. It is no longer confirmed to only metropolitan or cosmopolitans in India. In fact, Indianbanking system has reached even to the remote corners of country. This is the main reasons of
Indias growth process.To make this write-up more explanatory, we prefix the scenario as Phase I, Phase II, and Phase
III.
Phase I
The General Bank of India was set up in the year 1786. Next came Bank of Hindustan andBengal Bank. The East India Company established Bank of Bengal (1809), Bank of Bombay
(1840) and Bank of Madras (1843) as independent units and called it Presidency Banks. These
three banks were amalgamated in 1920 and Imperial Bank of India was established which started
as private shareholders banks, mostly Europeans shareholders.In 1865 Allahabad Bank was established and first time established by Indians. Punjab National
Bank Ltd. Was set up in 1894 with headquarters at Lahore. Between 1906 and 1913 Bank of
India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank and Bank of Mysorewere set up. Reserve Bank of India came in 1935.
During the first phase the growth was very slow and banks also experienced periodic failuresbetween 1913and 1948. There were approximately 1100 banks, mostly small. To streamline the
functioning and activities of commercial banks, the Government of India came up with The
Banking Companies Act, 1949which was later changed to Banking Regulation Act 1949 as peramending Act of 1965 (Act no. 23 of 1965). Reserve Bank of India was vested with extensive
powers for the supervision of Banking in India as the Central Banking Authority.
During those days public has lesser confidence in the banks as the aftermath depositmobilization was slow. Abreast of it the savings bank facility provided by the Postal department
was comparatively safer. Moreover, funds were largely given to traders.
Phase- II
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Government took major steps in this Indian Banking Sector Reform after independence. In 1955,it nationalized Imperial Bank of India with extensive banking facilities on a large scale
especially in rural and semi urban areas. It formed State Bank of India to act as the principal
agent of RBI and to handle banking transaction of the Union and State Governments all over thecountry.
Seven banks forming subsidiary of State Bank of India was nationalized in1960 on 19th July
1969, major process of nationalization was carried out. It was the effort of the then PrimeMinister of India, Mrs. Indra Gandhi. 14 major commercial banks in the country were
nationalized.
Second phase of nationalization Indian Banking Sector Reform was carried out in 1980 with
seven more banks. This step brought 80% of the banking segment in India under Government
ownership.
The following are the steps taken by the Government of India to Regulate Banking Institutions in
the Country:
1949: Enactment of Banking Regulation Act.
1955: Nationalization of State Bank of India.
1959: Nationalization of SBI subsidiary.
1961: Insurance cover extended to deposits.
1969: Nationalization of 14 major banks.
1971: Creation of credit guarantees cooperation.
1975: Creation of Regional rural banks.
1980: Nationalization of seven banks with deposits over 200crore.
After nationalization of Banks, the Branches of the public sector bank India rose approximately
800% in deposits and advances took a huge jump by 11.000%.
Banking in sunshine of Government ownership gave the public implicit faith and immense
confidence about the sustainability of these institutions.
Phase III
This phase has introduced many more products and facilities in the banking sector in its reformsmeasure. In 1991, under the chairmanship of M Narasimham, a committee was set up by his name
which worked for the liberalization of banking practices.
The country is flooded with foreign banks and their ATM stations. Efforts are being put to give a
satisfactory service to costumers. Phone banking and net banking is introduced. The entire systembecame more convenient and swift. Time is given more importance than money.
The financial system of India has shown a great deal of resilience. It is sheltered from any crisis
triggered by any external macroeconomics shook as each other East Asian Countries suffered. Thisis all due to a flexible exchange rate regime, the foreign reserves are high, capital amount is not yet
fully convertible, and banks and their customers have limited foreign exchange exposure.
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Introduction
Emergence of Risk management in Banks
The banking environment consists of numerous risks that can impinge upon the profitability of
the banks. These multiple sources of risk give rise to a range of different issues. In an
environment where the aspect of the quantitative management of risks has become a major
banking function, it is of lesser importance to speak of the generic concepts
There have been a number of factors that can be attributed to the stabilization of the banking
environment in nineties.
Prior to that period, the industry was heavily regulated.
Commercial banking operations were basically restricted towards collecting resources and
lending operations.
The regulators were concerned by the safety of the industry and the control of its money creation
power. Among the main driving forces that played a crucial role in the changes were the
inflating role of the financial markets, deregulation of the banking sector and the increase in the
competition among the existing and emerging banks.
Monetary policies favoring high levels of interest rates and stimulating their intermediation was
by far the major channel of financing the economy, disintermediation increased at an accelerated
pace. Those changes turned into new opportunities and threats for the players.
Banks Risks
As stated, risks are usually defined by the adverse impact on profitability of several distinct
sources of uncertainty. Risk measurement requires that both the uncertainty and its potential
adverse effect on profitability be addressed. Let us now try to focus on the risk framework purely
from the perspective of a bank.
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Risk Framework
The various risks associated with the banking may be defined as below and these definitions
have the advantage of being readily recognizable to bankers.
(i) Credit Risk: Risk of loss to the bank as a result of a default by an obligator.
(ii) Solvency Risk: Risk of total financial failure of a bank due to its chronic inability to meet
obligations.
(iii) Liquidity Risk : the risk arising out of a banks inability to meet the repayment
requirements.
(iv) Interest Rate Risk: Volatility in operation of net interest income, or the present values of a
portfolio, to changes in interest rates.
(v) Price Risks: Risk of loss/gain in the value of assets, liabilities or derivative due to market
price changes, notably volatility in exchange rate and share price movements.
(vi) Operational Risk : Risks arising from out of failures in operations, supporting systems,
human error, omissions, design fault, business interruption, frauds, sabotage, natural disaster etc.
Credit Risk:
Credit risk with respect to bank is most simply defined as the risk of a borrowers payment
default on payment of interest and principal due to the borrowers unwillingness or inability to
service the debt. The higher the credit risk an institution is exposed to, the greater the losses may
be. For banks and most other credit institutions, credit risk is considered to be the form of riskthat can most significantly diminish earnings and financial strength
Need to Manage Credit Risk
For most banks loans are the largest and most obvious source of credit risk; loans and advances
constitute almost 60 per cent of the assets side of the balance sheet of any bank. As long as the
borrower pays the interest and the principal on the due dates, a loan will be a performing asset.
The problem however arises once the payments are delayed or defaulted and such situations are
very common occurrences in any bank. Delays/defaults in payments affect the cash forecasts
made by the bank and further result in a changed risk profile, as the bank will now have to face
an enhanced interest rate risk, liquidity risk and credit risk.
Traditional Credit Risk Measurement Approaches
It is hard to draw a clear line between traditional and new approaches, as many of the superior
concepts of the traditional models are used in the new models. One of the most widely used
traditional credit risk measurement approaches is the Expert System.
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Expert Systems
In an expert system, the credit decision is made by the local or branch credit officer. Implicitly,
this persons expertise, skill set, subjective judgment and weighting of certain key factors are the
most important determinants in the decision to grant credit. The potential factors and expert
systems a credit officer could look at are infinite. However, one of the most common expertsystems, the five Cc of credit will yield sufficient understanding. The expert analyzes these
five key factors, subjectively weights them, and reaches a credit decision:
Capital Structure: The equity-to-debt ratio (leverage) is viewed as a good predictor of
bankruptcy probability. High leverage suggests greater suggests greater probability of
bankruptcy than low leverage as a low level of equity reduces the ability of the business to
survive losses of income.
Capacity: The ability to repay debts reflects the volatility of the borrowers earnings.
Collateral: In event of a default a lender has claim on the collateral pledged by the borrower.
The greater the propagation of this claim and the greater the market value of the underlying
collateral, the lower the remaining exposure risk of the loan in t he case of a default.
Cycle / Economic Conditions: An important factor in determining credit-risk exposure is the
state of the business cycle, especially for cycle-dependent industries.
Character: This is measure of the firms reputation, its willingness to repay, and its credit
history. In particular, it has been established empirically that the age factor of an organization is
a good proxy for its repayment reputation.
Another factor, not covered by the five Cs, is the interest rate. It is well known from economic
theory that the relationship between the interest-rate level and the expected return on a loan (loss
probability) is highly non-linear. At low interest-rate levels, an increase in rates may lower the
return on a loan, as the probability of loss would increase.
Many financial institutions still use expert systems as part of their credit decision process, these
systems face two main problems regarding the decision process:
Consistency: what are the important common factors to analyze across different types of
groups of borrowers?
Subjectivity: What are the optimal weights to apply to the factors chosen?
In principle, the subjective weights applied to the five Cs derived by an expert can vary from
borrower to borrower. This makes comparability of rankings and decisions across the loan
portfolio very difficult for an individual attempting to monitor a personal decision and for other
experts in general.
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Management Information Systems Management of Credit Risk
Banks must have information systems and analytical techniques that enable management to
measure the credit risk inherent in all on- and off-balance sheet activities. The management
information system should provide adequate information on the composition of the credit
portfolio, including identification of any concentration of risk. Banks should have methodologiesthat enable them to quantify the risk involved in exposures to individual borrowers. Banks
should also be able to analyze credit risk at the product and portfolio level in order to identify
any particular sensitivities or concentrations. The measurement of credit risk should take account
of:
i. The specific nature of the credit (loan, derivative, facility, etc.) and its contractual and
financial conditions.
ii. The exposure profile until maturity in relation to potential market movements
iii. The existence of the collateral or guarantees
iv. The potential for default based on the internal risk rating. The analysis of credit risk data
should be undertaken at an appropriate frequency with the results reviewed against relevant
limits. Banks should use measurement techniques that are appropriate to the complexity and
level of the risks involved in their activities, based on robust data and subject to periodic
validation.
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Need For Sound Decision Making
Over the last few years financial markets have witnessed far-reaching changes at a fast pace.
Intense competition for business involving both the assets and liabilities, together with
increasing volatility in the domestic interest rates as well as foreign exchange rates with a
pronounced downward trend, has brought pressure on the banks to generate bigger volumes of
business in order to maintain good spreads, profitability and long-term viability. These pressures
call for structured and comprehensive measures and sound decision making on the part of banks.
Banks have to base their business decisions on a dynamic and integrated risk management
system and process, driven by corporate strategy. Banks are exposed to several major risks in the
course of their business-credit risk, interest rate risk, foreign exchange risk, liquidity risk,
operational risk etc. Risk management rather than risk avoidance is the goal.
Credit fundamentals are critical to soundness. The importance of developing sound credit
policies, that can reduce the risk of troubled loans, as well as help to maintain the integrity of a
quality portfolio are imperative.
Commercial banking is a world infrastructure profession with an ancient past. Debt propels
progress, and bankers have been the traditional intermediaries.
When an economy is in trouble, there is a flight to safety and quality, and the focus is on
currency values, cross-border exposure, risky lending, and bank liquidity. Government, industry,
commerce, and consumption all large users of credit are affected. Each needs a viable
banking system.
On the other hand, there is a no business that can get into trouble faster. Among financialinstitutions, only a commercial bank can create money. It does this when it provides demands
deposits for borrowers or buys investments for its own account. A bank can expand its deposits
to the extent that reserves and reserve requirements permit. No matter how carefully it manages
its liabilities, a bank that strains liquidity by excessive risk taking will come to a financial
moment of truth.
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Credit is extended to many types of borrowers, for varying periods, in differing patterns, on
many bases, and for a variety of purposes. In each case, the credit is based on the credit
worthiness of the borrower, not the bank. A bank uses its own credit to attract funds or as a
substitute for a customers credit for example, a letter of credit.
The borrower and bank credit join to become the banks credit when write-offs reach the point atwhich a premium must be paid by the bank to attract funds. This prompts questions about the
banks credit worthiness and management capability.
Tight margins on commercial loans and fewer legal obstacles to capital markets activities led
banks to consolidate and make other adjustments, including:
A closer relationship between commercial and investing banking
Increased expansion into fee-driven services
Increasing use of technology in credit scoring, trading and positioning. New software productshave fostered development of derivatives and other such products. Sound judgment in computer
application is imperative.
Credit Elements: Policy, Process, Behavior
Credit elements ultimately come together within the framework of credit policy, process, credit
officers behavior and audit. Policy is the credit cultures anchor and the banks credit
conscience. Its role is to assist credit officers in balancing the volume and quality of credit.
Process is the line-driven operational arm of credit and credit strategy. It makes the credit system
work, defends its integrity through close supervision and built-in checks and balances and by
anticipating problems, guards against surprises.
Credit officers behavior reflects the attitudes and patterns of behavior of the CEO and
supervisory management as well as institutional philosophies, traditions, priorities and standards.
Audits role is more than being counting. It also evaluates such matters as conformity to policy,
credit practices and procedures, portfolio quality, adherence to business plans, development and
distribution of credit talent and the competence of individual credit officers. Credit behavior
ranges from defensive conservatism to irresponsible aggressiveness. There must be a balance,
and this is what a bank expects of its credit officers:
Understand each aspect of each credit proposal thoroughly.
Balance the quantity and quality of credit to achieve earning objectives while meeting
appropriate credit needs.
Always maintain acceptable credit standards.
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Not be greedy and keep risks to reasonable limits.
Evaluate new business opportunities in a balanced way, avoiding risks that should not be taken.
Not be mesmerized by house names or by size. Big borrowers can swing big and be high
rollers when in trouble. The amount of the banks exposure should be related to the quality ofthe borrower.
Place the banks interest ahead of the profit centers
Be mindful of banks liquidity and loan port-folio objectives.
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Importance of Credit Risk Assessment
The importance of credit risk management for banking is tremendous. Banks and other financial
institutions are often faced with risks that are mostly of financial nature. These institutions must
balance risks as well as returns. For a bank to have a large consumer base, it must offer loanproducts that are reasonable enough. However, if the interest rates in loan products are too low,
the bank will suffer from losses. In terms of equity, a bank must have substantial amount of
capital on its reserve, but not too much that it misses the investment revenue, and not too littlethat it leads itself to financial instability and to the risk of regulatory non-compliance.
Credit risk management, in finance terms, refers to the process of risk assessment that comes inan investment. Risk often comes in investing and in the allocation of capital. The risks must be
assessed so as to derive a sound investment decision. Likewise, the assessment of risk is alsocrucial in coming up with the position to balance risks and returns.
Banks are constantly faced with risks. There are certain risks in the process of granting loans to
certain clients. There can be more risks involved if the loan is extended to unworthy debtors.
Certain risks may also come when banks offer securities and other forms of investments.
The risk of losses that result in the default of payment of the debtors is a kind of risk that must be
expected. Because of the exposure of banks to many risks, it is only reasonable for a bank to
keep substantial amount of capital to protect its solvency and to maintain its economic stability.The second Basel Accords provides statements of its rules regarding the regulation of the bank'scapital allocation in connection with the level of risks the bank is exposed to. The greater the
bank is exposed to risks, the greater the amount of capital must be when it comes to its reserves,
so as to maintain its solvency and stability. To determine the risks that come with lending andinvestment practices, banks must assess the risks. Credit risk management must play its role then
to help banks be in compliance with Basel II Accord and other regulatory bodies.
To manage and assess the risks faced by banks, it is important to make certain estimates, conduct
monitoring, and perform reviews of the performance of the bank. However, because banks areinto lending and investing practices, it is relevant to make reviews on loans and to scrutinize and
analyze portfolios. Loan reviews and portfolio analysis are crucial then in determining the creditand investment risks.
The complexity and emergence of various securities and derivatives is a factor banks must beactive in managing the risks. The credit risk management system used by many banks today has
complexity; however, it can help in the assessment of risks by analyzing the credits and
determining the probability of defaults and risks of losses.
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Credit risk management for banking is a very useful system, especially if the risks are in linewith the survival of banks in the business world.
Inter-Relationship Between Credit And Risk
Risk is a fact of business life. Taking and managing risk is part of what organizations must do to
create profits and shareholder value. But the corporate scenario of recent years suggests that
many organizations neither manage risk well nor fully understand the risks they are taking.
Risk, in very broad terms can be defined as the chance that some event will have a positive or
negative effect on something of value. In financial contexts, it is defined as the chance that the
returns on an investment will be different from what were expected. This includes the possibility
of losing some or all of the original investment.
Hedging usually involves taking positions in assets that are negatively correlated, so that if the
value of one asset goes down, the value of another asset would go up, thereby keeping the net
losses of the firm at the minimum. To take a hedge position, it is necessary that the firm
estimates the risk it is exposed to.
The importance of the assessment (and then the management) of risk also arises from the relation
between the risks undertaken by a firm and the returns it gets. The reason is that the investors
expect to be compensated for the additional risk that they bear.
The necessity to measure risk becomes more important because firms need to know their stand;
about how much risk they are bearing for what amount of returns. Sometimes, it is not only thefirm and its owners and employees who are affected but the common people are also effected if a
firm goes bankrupt due to the extreme risk positions it takes too much risk, like in cases of banks
becoming bankrupt due to low quality lending.
But there would be very low returns without being exposed to any risk. Therefore there is a need
to strike a middle path to find the maximum amount of risk that can be taken without having a
fear of bankruptcy.
Credit Risk is the risk that a firm (or any party) will not recover the payment due to it, because
the borrower will default. Though this risk exists for almost all businesses (as there is a risk thatthey might not receive their receivables), the risk is huge for financial institutions and banks,
which are in the business of lending.
Risk is the potential impact (positive or negative) on an asset due to some present or future
occurrence. In financial terms, risk is the probability that an assets value will reduce or
diminish, creating problems for the firm owning the asset. The asset could be the cash flows of
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the firm, the fixed assets of the firm, or the positions that the firm takes in various financial
instruments.
Measurement of risk comprises the quantification of the risk that the firm expects it will face,
and the firm is therefore in a position to take decisions that mitigate (in financial terms hedge)
the risk.
Credit Risk is the first kind of risk identified, it is the risk that a firm will not be able to collect
the loans it lent. As can be expected, credit risk is the most predominant form of risk for banks
and financial institutions.
The assessment of credit risk has been one of the major necessities for compliance with the
Basel I norms (which were set out for all international banks). Basel I gave the minimum capital
that banks required to maintain so that the probability of the bank defaulting is minimal. This
minimum capital that is required to be maintained is determined by using the credit exposures of
the bank.
Basel II developed this context of assessing and minimizing credit risk further by assigning
weights to the various credit exposures of the bank. The net capital that is required to be
maintained is then determined. The benefit is that the capital requirements according to Basel II
are usually much lesser than under Basel I, therefore banks have more free cash flows that can
be used for the further expansion of their business.
The banks determine the risk-weight that has to be assigned to each asset according to the Basel
guidelines. One method is based on the credit ratings of the borrowers (called the Standardized
Approach); a borrower firm that has a high credit rating is given a low weight and vice versa.
Another way is to use the Internal Ratings Based Approach (IRB Approach), where the bank
calculates the credit risk inherent in its exposures. The estimation of the probability of default
(PD) is a very crucial part of the IRB approach. The Probability of Default, along with measures
like Expected Loss and Loss Given Default are used to find the final credit exposure of the bank,
and therefore assess the adequate capital requirements of the bank.
Because there are many types of counterpartiesfrom individuals to sovereign governments,
and many different types of obligationsfrom auto loans to derivatives transactionscredit risk
takes many forms.
Credit Quality of an obligation, refers to counterpartys ability to perform on an obligation. Thisencompasses both the obligation's default probability and anticipated recovery rate. The term
Credit Analysis is used to describe any process for assessing the credit quality of counterparty.
Credit Analysis is often done based on the balance sheets and the financial statements of the
firms. Credit risk modeling is a concept that broadly encompasses any algorithm-based methods
of assessing credit risk.
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For loans to individuals or small businesses, credit quality is typically assessed through a process
of Credit Scoring. Prior to extending credit, a bank or other lender will obtain information about
the party requesting a loan. In the case of a bank issuing credit cards, this might include the
party's annual income, existing debts, whether they rent or own a home, etc. A standard formula
is applied to the information to produce a number, which is called a Credit Score. Based upon
the credit score, the lending institution will decide whether or not to extend credit. The process is
formulaic and highly standardized.
There are many ways that credit risk can be managed or mitigated. The first line of defense is the
use of credit scoring or credit analysis to avoid extending credit to parties that entail excessive
credit risk. Credit risk limits are widely used. These generally specify the maximum exposure a
firm is willing to take to counterparty. Industry limits or country limits may also be established
to limit the sum credit exposure a firm is willing to take to counterparties in a particular industry
or country finally; firms can hold capital against outstanding credit exposures.
For most banks, loans are the largest and most obvious source of credit risk; however, othersources of credit risk exist throughout the activities of a bank, including in the banking book and
in the trading book, and both on and off the balance sheet. Banks are increasingly facing credit
risk (or counterparty risk) in various financial instruments other than loans, including
acceptances, inter-bank transactions, trade financing, foreign exchange transactions, financial
futures, swaps, bonds, equities, options, and in the extension of commitments and guarantees,
and the settlement of transactions.
The goal of credit risk management is to maximize a bank's risk-adjusted rate of return by
maintaining credit risk exposure within acceptable parameters. Banks need to manage the credit
risk inherent in the entire portfolio as well as the risk in individual credits or transactions. Banksshould also consider the relationships between credit risk and other risks. The effective
management of credit risk is a critical component of a comprehensive approach to risk
management and essential to the long-term success of any banking organization.
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Overview of Four Credit Risk Models
A brief overview of the four credit risk models that have achieved global acceptance as
benchmarks for measuring stand-alone as well as portfolio credit risk is given below:
The four models are:
Altmans Z-Score model
KMV model for measuring default risk
Credit Metrics
Credit Risk
The first two models were developed to measure the default risk associated with an individual
borrower. The Z-Score model separates the bad firms or the firms in financial distress from the
set of good firms who are able to service their debt obligations in time. The KMV model, on
the other hand, estimates the default probability of each firm. Thus, the output of this model can
be used as an input for risk based pricing mechanism and for allocation of economic capital. The
other two models are the most frequently used portfolio risk models in credit risk literature. They
are intended to measure the same risks, but impose different restrictions, make different
distributional assumptions and use different techniques for calibration.
Z score Model
Altmans Z score model is an application of multivariate discriminant analysis in credit risk
modeling. Discriminant analysis is a multivariate statistical technique that analyses a set of
variables in order to differentiate two or more groups by minimizing within group variance and
maximizing the between group variance simultaneously.
Altman started with twenty variables (Financial Ratios) and finally five of them were found to be
significant. The resulting discriminant function was:
Z = 0.72X1 + 0.85X2 +3.1X3 + 0.42X4 +X5
Where,
X1 = Working Capital / Total Assets
X2 = Retained Earnings/Total Assets
X3 = Earnings before Interest and Taxes/Total Assets
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X4 = Market Value of Equity/Book Value of Total Liabilities
X5 = Sales/Total Assets
Altman found a lower bound value of 1.2 (Critical Zone and an upper bound value of 2.8(Safe
Zone) to be optimal. Any score in between 1.2 and 2.9 was treated as being in the gray zone.
KMV Model
KMV Corporation has built a credit risk model that uses information on stock prices and the
capital structure of the firm to estimate its default probability. The starting point of this model is
the proposition that a firm will default only if its asset value falls below a certain level (Default
Point), which is a function of its liability. It estimates the asset value of the firm and its asset
volatility from the market value of equity and the debt structure in the option theoretic
framework.
Using these two values, a metric (Distance from default or DD) is constructed that representsthe number of standard deviation i.e. the number of times the firms assets value is away from
the default point.. However, this method was successfully commercialized by Moodys KMV
(formerly KMV Corporation).
Finally, a mapping is done between the DD value and the actual default rate, based on the
historical experience. The result probability is called Expected Default.
Credit Metrics Approach
In April 1997, J.P Morgan released the credit metrics technical document that immediately set a
new benchmark in the literature of risk management. This provides a method for estimating the
distribution of value of assets in a portfolio subject to changes in the credit quality of individual
borrower. A portfolio consists of different stand along assets, defined by a stream of future cash
flows each asset has over the possible range of future rating class.
Starting from its initial rating, an asset may end in any one of the possible rating categories. Each
rating category has a different credit spread, which will be used to discount the future cash
flows. Moreover, the assets are correlated among themselves depending on the industry they
belong to. It is assumed that the asset returns are normally distributed and change in the asset
returns cause the change in rating category in the future. Finally, the simulation technique is used
to estimate the value distribution of the assets.
Credit Risk
Introduced by Credit Suisse Financial Products, Credit Risk is a model of default risk. Each asset
has only two possible ends of period states: Default and Non-default. In the event of default, the
lender recovers a fixed proportion of the total exposure. The default rate is considered as a
continuous random variable. It does not try to estimate the default correlation directly. The
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default correlation is assumed to be determined by a set of risk factors. The final step is to obtain
the probability generating function for losses. The losses are entirely determined by the exposure
and recovery rate.
Hence, while implementing Basel II, prime focus will be on regulation and risk management.
After March 31st 2007, the banking industry will be ruled by bankers who learn to manage theirrisks effectively.
The banks may evaluate the utility of these models with suitable modifications to the country
specific environment for fine-tuning the credit risk management. Banks may therefore attempt
building adequate database for switching over to credit risk modeling after a specified period of
time.
Credit Risk modeling results in a better internal risk management. Banks credit exposures
typically are spread across geographical locations and product lines. The use of credit risk
models offer banks a framework for examining this risk in a timely manner, centralizing data onglobal exposures and analyzing marginal and absolute contributions to risk. These properties of
models may contribute to an improvement in a banks overall ability to identify measure and
manage risk.
Loan review, administration, and management (LRM) are an inherent process of credit
management among banks. The obvious and more serious banking problems arise due to lax
credit standards, poor portfolio risk management, or a lack of attention to changes in economic,
or other circumstances that lead to a deterioration in the credit standing of a banks portfolio.
Therefore, the banking industry has been focusing more attention than ever on risk management.
Basel II Accord:
Many credit problems reveal basic weaknesses in the credit granting and monitoring processes.
While shortcomings in underwriting and management of market-related credit exposures
represent important sources of losses at banks, many credit problems would have been avoided
or mitigated by a strong internal credit process. Many banks find carrying out a thorough credit
assessment a substantial challenge. For traditional bank lending, competitive pressures and the
growth of loan syndication techniques create time constraints that interfere with basic due
diligence. Globalization of credit markets increases the need for financial information based on
sound accounting standards and timely macroeconomic and flow of funds data. When this
information is not available or reliable, banks may dispense with financial and economic
analysis and support credit decisions with simple indicators of credit quality, especially if they
perceive a need to gain a competitive foothold in a rapidly growing foreign market. Finally,
banks may need new types of information to assess relatively newer borrowers, such as
institutional investors and highly leveraged institutions.
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Whilst refocusing of credit practices is essential, certain credit rating models that are being
adopted still follow the outdated practices of the past, which focus on risk avoidance, rather than
risk management and if banks seek to continually avoid risk, significant opportunities will be
lost. As a consequence the banks will lose out to more sophisticated competitors. However,
banks have now become more sophisticated in their hedging and pricing of interest rate risk.
New modeling methods are changing the way banks understand and handle credit risk. One has
to wait and watch for the implications.
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Credit Risk Management
CREDIT RISK MANAGEMENT POLICY OF THE BANK-2009-10
The Credit Risk Management Policy formulated by the Bank was last reviewed and approved
vide item no- RM-02 by the Board of Directors in the meeting held on 29.09.08. The policy for
2009-10 has been reviewed based on the feedback / suggestions received from field functionaries
and other departments, RBI guidelines, AND AFI observations. The policy has been approvedby the Board of Directors vide item no. RM-07 in the meeting held on 24.09.09 The major
changes / modifications, which have been effected, are summarised as under.
The bank has introduced 10 new credit rating models developed by M/s IMaCS and the same
have been implemented in the bank w.e.f 01/08/2009 thus replacing the earlier NIBM models.These models cover all the segments of advances i.e. Large Corporate, SME, SBS, NBFC,
Green Field Projects, Infrastructure Projects, Retail and agriculture.
The mapping of credit rating grades as per new models vis-a vis NIBM models has alreadybeen done and the pricing of loans based on new models as approved by the Board has been
incorporated in the Credit Risk Management policy.
Consequent upon the special package for concession in rate of interest on MSME sector
w.e.f 18/12/2008, the policy has been revised and the rate of interest applicable for Microenterprises have also been incorporated in Credit Risk Management policy.
The discretionary powers of Regional Heads to allow concessions in rate of interest were
revised in view of the competitive market conditions, value of the account etc, vide guidelinesissued as per circular letter no. HO/ADV/69/2008-09 dated 18.11.2009. The policy has
accordingly been revised and also the discretionary powers of the Regional Heads to reduce
rate of interest on small and medium enterprises have been delinked from rating grades.
The revision in the discretionary powers of CMD/ ED and other functionaries were last
approved by the Board of Directors vide item no. RM-6 dated 11.09.2006 wherein it wasstipulated that in respect of borrowers rated below A, the powers shall be reduced to 80% of
the normal powers under Corporate as well as non-corporate borrowers.
However, in terms of the approved loan policy for 2009-10, if the rating in IMaCS models is
below 5 as equivalent to below B+ in NIBM models, the powers shall stand reduced to
80% of the normal powers under corporate as well as non-corporate borrowers. The same hasbeen incorporated in the credit Risk management Policy.
The bank has introduced the concept of TRIGGER POINTS to mitigate the creditrisk. The ceilings for exposures to various sectors have been prescribed in Banks loan policy.
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In order to contain the credit flow to various sectors well within the prescribed limit, twotrigger points for each sector have been proposed based on the sensitivity of the sector. More
sensitive is the sector, lower is the trigger point. First trigger point to be called Caution will
be the indicator for slowing down fresh exposures to that sector. Second trigger point to becalled Management Attention will restrict the further fresh exposures and only renewals or
enhancement (on selective basis) will be considered. The above trigger points have beenapproved by the Board in its meeting held on 23.06.2009 and the same have been incorporated
in the Credit Risk Management policy.
Details of the policy have been mentioned inthe following chapters.
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INTRODUCTION
1.1 Definition Of Credit Risk
Credit risk is defined as the possibility of losses associated with diminution in the credit
quality of borrowers or counter parties. In a banks portfolio, losses stem with outright
default due to inability or unwillingness of a customer or counter party to meet
commitments in relation to lending, trading, settlement and other financial transactions.Alternatively, losses result from reduction in portfolio value arising from actual or
perceived deterioration in Credit quality. Credit Risk emanates from a banks dealings
with an individual, corporate, bank, financial institution or a sovereign.
1.2 Summary of Latest Rbi Guidelines Relating To Risk Management
The summary of RBI guidelines relating to risk management is given below:
(i) All commercial banks in India (excluding Local Area Banks and Regional Rural Banks)shall adopt Standardized Approach (SA) for Credit Risk, Basic Indicator Approach (BIA)
for Operational Risk and shall continue to apply Standardized Duration Approach (SDA)
for computing capital requirement for Market Risk.
(ii) Banks are required to maintain minimum CRAR of 9.00% on an ongoing basis.(iii) Under Standardized Approach in Credit Risk, Reserve Bank of India have advised that
banks may use the rating of any of the following credit rating agencies for the purposes of
risk weighting their claims i.e.
Credit Analysis and Research Limited (CARE)
CRISIL Limited
Fitch India ; and
ICRA Limited.
(iv) The risk weight shall vary from 20% to 150% based on ratings assigned by the ratingagencies.
(v) An analysis of the Banks CRAR under existing guidelines and the guidelines on
revised framework shall be reported to the Board of Directors by each Bank onquarterly intervals.
(vi) Each Bank will have a Board approved Policy on utilization of credit risk mitigation
techniques and collateral management.
(vii) Each Bank will have a Board approved policy on Disclosures.(viii) Board approved policy on Internal Capital Adequacy Assessment Process (ICAAP)
along with the capital requirement as per ICAAP.(ix) Each Bank will develop requisite MIS to meet the requirements under Basel II.(x) RBI vide circular no. DBOD.BP.BC.No.23/21.06.001/2009-10 dated 07.07.2009 has
advised all the Banks to take steps for migration to advanced approaches as per the
time schedule given below.
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Approach The earliest date ofmaking application
by banks to the RBI
Likely date of
approval by the RBI
Our Bank's
position in this
regard
FOUNDATION InternalRatings-Based (FIRB)
Approach for Credit Risk
April 1, 2012 March 31, 2014 April 1, 2012
ADVANCED Internal
Ratings-Based (AIRB)
Approach for Credit Risk.
April 1, 2012 March 31, 2014 April 1, 2012
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OBJECTIVES AND STRATEGIES
2.1 Need for Credit Risk Management Policy
Keeping in view RBI guidelines on the subject, it has become imperative that each Bank should
have a robust credit risk management system, which is sensitive and responsive to the emerging
needs of the Organization. The implementation of Basel Accord-II is going to have far reachingimplications for banks. Keeping in view these factors, the Credit Risk Management Policy has
since been reviewed.
2.2 Philosophy of Credit Risk Management Policy
The Credit Risk Management philosophy of the Bank shall be to sustain diversified business
growth, with particular emphasis on low risk, thrust areas and retail sectors to optimize/ theoverall risk in lending in order to achieve reduction in default probability and thereby improving
Return on Assets (ROA).
Broad Objectives of Credit Risk Management Policy
The Credit Management & Risk Policy of the Bank at the macro level is an embodiment of theBanks approach to understand measure and manage the credit risk and aims at ensuring
sustained growth of healthy loan portfolio while dispensing the credit and managing the risk.
The Bank that truly understands various kinds of risks and can properly identify and quantify thespecific risks would certainly gain business advantages.
a) Within the parameters of the Risk Management Philosophy outlined above, theobjectives of Credit Risk Management Policy shall be to strive for a balanced and healthier
Credit portfolio by understanding properly the Credit Risk involved and by measuring thesame with a scientifically developed independent and accurate rating mechanism.
b) Credit Risk being inherent in exposures in which funds are deployed, the policy aims toachieve that risk taking decisions are explicit, transparent and clear and are consistent with
the strategic business objectives and policies laid down.
c) The Bank shall view the policy as a framework where risk mitigation will be consideredappropriate and as a means of achieving organizational objectives of higher net return for
which bank shall gear up mechanism to understand credit risk in all related activities and
improve lending techniques.
2.3 Implementation of RBI Guidelines
Risk Management Guidelines issued by RBI shall continue to act as a guiding factor whileformulating and implementing the risk system in the Bank. The Bank shall continue to comply
with all statutory and regulatory restrictions on credit as stipulated by RBI from time to time.
In order to implement the guidelines of RBI, following measures have been taken by the Bank.
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2.5 Exposure Management Measures
Exposures ceilings prescribed by RBI and approved by Board of Directors as incorporated in theLoan Policy will continue to be followed.
2.6 Sector Wise Ceiling
Compliance with the exposure limits incorporated in the Loan Policy for aggregate commitments
to specific sectors, industries, categories of borrowers etc, fixed having regard to performance of
different sectors /industries and the risk perceived, shall be ensured while approving any freshcredit/investment exposure or renewal/enhancement of an existing limit.
2.7 Thrust and Restricted Areas of Banks Lending
Achievement of targets set by RBI for advances to Priority Sector/Agriculture / Weaker
Section/DRI/ SSI/ Export from time to time shall be ensured.
Retail sector with emphasis on capturing larger share of the retail segment and increase the
component of the Banks lending to the retail sector. Besides marketing of the retail credit
products already developed, new products will continue to be developed as per the market needand necessary customization.
Thrust areas and Restricted areas of lending as incorporated in the Loan Policy shall befollowed.
2.8 Provisioning Compliance
Provisioning for NPA is being monitored by Recovery and Law Deptt as per RBI guidelines and
Recovery Policy approved by the Board of Directors
2.9 Credit Approval Grids
Credit approval Grids have been formed at the level of all the Regional Offices and Head Officeand all the proposals falling within the discretionary powers of Regional Head and various
functionaries at Head office are routed through the Credit Approval Grids wherein presence of
an official from Credit Risk Management Department is mandatory for the quorum. This isproposed to be continued.
2.10 Discretionary Powers
The Board of Directors has approved revision in the discretionary powers of various
functionaries for Loans and Advances in the meeting held on 11.09.2006. In terms of theirdiscretionary powers, the loaning powers of HO functionaries are lesser for non-corporate
borrowers in comparison with corporate borrowers as per guidelines received from RBI under
Basel II norms.
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2.11 Credit Appetite as well as the Acceptable Level
In order to clearly define the Banks credit appetite as well as acceptable level of risk-rewardtrade off for its credit activities, the Bank shall consider fresh proposals for credit under credit
rating category up to credit rating category 7 ( i.e. 1 to 7) or any other equivalent ratingassigned by the External Credit Rating Agency. Executive Director or Chairman & Managing
Director can consider any deviation in this regard and such deviation shall generally relate tocases where:
a) The borrower is State / Central Government undertakingb) The borrower rating has been affected due to poor financials on account of
circumstances beyond borrowers control such as unexpected losses due natural calamities.
c) Additional credit exposure is required to be sanctioned under CDR cases ofCorporate/SME Borrowers.
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ORGANIZATIONAL STRUCTURE
3.1 Board of Directors
Board of Directors shall be the overall authority for assessing and monitoring the progress on on-going
basis.
3.2 Supervisory Committee of Directors on Risk Management - SCDRM (Board Level Committee)
A committee at the Board Level with Chairman and Managing Director, as the Chairman of the
Committee has since been constituted to review the progress at regular interval. The Committee
shall meet at quarterly interval or oftener as the case may be.
3.3 Credit Risk Management Committee (also called Credit Policy Committee):-
This committee has been constituted with the following members in order to effectively monitor and
implement Credit Risk guidelines / strategies approved by the Board / Supervisory Committee of theBoard on Risk Management (SCDRM) from time to time:
(i) Chairman & Managing Director
(ii) Executive Directors
(iii) General Manager (IT & Risk Management)
(iv) General Manager (Accounts and Services)
(v) General Manager (Corporate Strategy & Planning)
(vi) General Manager (Investment and Large Corporate Credit)
(vii) General manager (Mid Corporate, SME & IBD)(viii) General manager(RDRPSC)
(ix) Dy. General manager(Investment)
(x) Dy. General manager (Risk Management)
(xi) Asst. General manager (Risk Management) Member Secretary
3.4 Credit Risk Management Department
This Department, independent of Credit Administration Department, has been set up at Head
Office under the overall charge of General Manager (Risk Management) to implement, executeand monitor work relating to Credit Risk Management on day to day basis in coordination with
other departments.
3.5 Loan Review Mechanism Cell
The Loan Review Mechanism cell already set up under Inspection & Control Department, Head
Office evaluates the Credit decisions of:
a) Assigning rating grades.
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b) Sanctioning of various limits and its structures.
c) Documentation etc. With the sole objective of bringing about systematic improvementswhile verifying and ensuring the integrity of the existing system and that it is functioning
within the framework of existing policies and procedures.
d) This Department also identifies potential problematic loans having exposure of Rs.5.00crore and above for special monitoring.
e) Exception report in respect of irregularities/ deviations of serious nature, if any, inrespect of cases falling under the powers of GM (Credit) /ED/CMD/MCB shall be put up
by Loan Review Deptt to the Audit Committee of the Board through Executive Director
on quarterly basis. However, the department concerned shall ensure monitoring andrectification thereof.
The Loan Review Mechanism Cell at present reviews sanction-process and status of postsanction process of:
1. All fresh proposals and proposals for renewal of limits of all existing accounts
with sanction limit equal to or above Rs. 5 crore.2. Randomly selected accounts from rest of the portfolio.
3. The LRM cell at Regional office reviews sanction-process and status of post
sanction process of all such accounts sanctioned by Regional Office having exposure ofRs 1.00 crore and above but less than 5.00 crore.
Besides above, to have effective monitoring for compliance of terms and condition of sanction
the LRM cell will also review
a. Accounts above Rs. 1.00 Crore of sister concerns / group / associate concerns of aboveaccounts, even if the limit is less than Rs. 5.00 crore shall also be reviewed.
b. All accounts sanctioned by the Branch Incumbent having total exposure of Rs 5.00 croreand above shall also be reviewed by the Loan Review Mechanism Cell at Regional office
periodically and submit the monthly report directly to the Regional Head.
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CREDIT RISK RATING FRAMEWORK
The Bank has developed framework for Credit Risk Rating of 10 different categoriesof borrowers and implemented the same w.e.f 01.08.2009.
4.1 Credit Rating Of Borrowers
The credit rating of borrowers shall be done on the 10 different models provided by M/S
IMaCS from ICRA
4.2Rating Of NON-SLR Investments
As per RBI guidelines, all Non-SLR investment proposals have to be subjected to similar
credit risk assessment as is done in case of proposals for advances. A Model for assessing
Credit Risk in Non-SLR investments has been developed and implemented.
4.3Bank Wise Exposure Limit (BEL)
A Credit Risk Rating Model for measuring credit risk in exposure to banks and fixing Bank wise
Exposure Limit (BEL) has been developed and implemented. The Bank wise exposure limit is
revised annually.
4.4 Rating Models (IMaCS)
There are eight models (1 to 8) for the corporate and two are for the retail sector(9 & 10)
which caters the requirement of different fields/proposals of our credit portfolio.
S.NO Rating model Criteria Financial DataRequirement
1 Large Corporate (LC) Turnover >=100 cr Three years audited
financial statement
2 Small & Medium
Enterprises (SME)
Turnover < 100 cr
(manufacturing)
Three years audited
financial statement
3 Small Business &
Service (SBS)
Turnover < 100 cr
(trading & services
sector)
Three years audited
financial statement
4 NBFC Activity based Three years audited
financial statement
5 Banks Activity based Three years audited
financial statement
6 Green field
infrastructure project
(Infra)
New project
(infrastructure only)
One year projected
financial statement
7 Green field real estate New project One year projected
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project (RE) (real estate only) financial statement
8 Green field project (GF) New project (other
than infra & real estate
only)
One year projected
financial statement
9 Retail
1.Home Loan2.Education Loan
3.Personal Loan
(Loan To Individuals)
Housing loanEducation loans
Any retail other than
home/education
Income & net worthIncome & net worth
Income & net worth
10 Agriculture
1.Agri Loan(Term Loan)
2.Agri Loan Working
Capital)
3.Allied Loan (Term
Loan)
4.Allied Loan (Working
Capital)
(Loan To Individuals)
Agriculture Loan
Depending On The
Type Of The Facility/
Purpose Of Loan
Income & net worth
4.5 Grading Pattern Used In The IMaCS Credit Risk Rating System
The credit rating under IMaCS models is based on rating grade of 1 to 10.The risk level and its
description is given in the following table
Ratinggrade
Risk level Description
1 Minimal risk Highest quality, with minimal risk.
2 Modest risk Highest quality and are subject to very low credit risk
3 Average risk Upper medium grade and subject to low credit risk
4 Acceptable risk Adequate credit quality and subject to Average credit
risk.
5 Acceptable with
care
Moderate credit quality and may posses speculative
characteristics.
6 Management
attention
Speculative elements and are subject to high credit risk.
7 Special care Speculative and are subject to high credit risk
8 Substandard Poor standing and are subject to very high credit risk
9 Doubtful Highly Speculative and are likely to become default in the
near future.
10 Loss Lowest and are typically in default or close to default
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4.6 Frequency For Review- Based On Credit Risk Rating
All accounts including Term Loan falling under rating grade 1 to 5 are rated once in a year
irrespective of nature and amount of limit at the time of renew/review.
The accounts with rating grade 6 & 7 are reviewed on half yearly basis. Such accounts shall
be closely monitored by the Regional Heads on regular basis.
The accounts with rating grade 8 to 10 are being reviewed on quarterly basis. A quarterly
progress report on the accounts under Credit Rating Grade 8 to 10 is also being put up to theSupervisory Committee of Directors on Risk Management (SCDRM).
4.7 Renewal/ Review of accounts under Credit Rating Grade 8 to 10
To have proper control over such advances, It has been decided that for all the accounts having limit
of Rs.5.00 Crore and above and rated as 8 to 10 , branchesshall not have delegated powers to
renew such facility. Such cases shall be renewed only at R.O level and shall be monitored closely by
the Regional Heads. The renewing authority shall also advise branches to monitor specific areas of
operation of account and guide the borrower for improving the performance vis--vis the rating.Quarterly review of all such accounts, however, shall continue to be done by branches.
4.8 Reporting and Analysis of Credit Risk
Presently, the rating awarded by the branches is verified by the Branch Managers and
Specific Certificate to this effect has to be appended to the rating sheet, whenever theproposal is sanctioned under branch powers. In those cases where the proposal falls under theRegional Office and Head Office powers, the ratings is confirmed by an officer not below
the rank of Scale IV.
The rating process has been decoupled from originator to ensure the quality and consistency of basic
risk related data and to avoid conflicts of interest. The process of rating and vetting has been defined
as under:
S.NO Loan Sanctioning
Authority
Credit Risk
Rating
Officer
Credit Risk
Rating
verification
Authority
Credit Risk
Rating Vetting
Authority
1 Branch Incumbent up to
scale III
Loan
Incharge
Officer not related
to Loans
Branch Incumbent
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2 Branch Incumbent in
scale IV &V
Loan
Incharge
Officer not related
to Loans
Branch Incumbent
3 Branch Incumbent in
scale VI which isreporting directly to
HO for Loan
Proposals
Loan
Incharge
Branch Incumbent Credit Risk
ManagementDeptt at Head
Office
4 Regional Head LoanIncharge
Officer not relatedto Loans
Credit RiskManagement Cell
at RO
5 Head Office Loan
Incharge atRegional
Office
Second Man at
Regional office
Credit Risk
ManagementDeptt at Head
Office
Specific Certificate that account has been vetted by the Competent Designated Authority hasto be appended to the rating sheet.
4.9 Validity/ Review of Credit Risk Rating
Rating shall be reviewed within 3 months of the due date of submission of Audited Balance
Sheet, irrespective of the date of previous rating.
After the expiry of the above period, the rating shall be treated as over due for renewal.
In case a borrower has extended the accounting period, the vetting authority may consider theextension of the validity of the earlier rating on the merit of each case.
Fresh rating should be assigned to a borrower account, irrespective of the validity period stated
above, in case any material development/ information on the borrower comes to light, which may affect
the rating adversely.
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Conclusion
The management of credit risk is possible only with its measurement. Models are the tools toeffectively measure the risk exposure of various financial institutions. With the correct measure
of the credit risk, its management will become effective and efficient. This work concentrates on
developing an approach to measure the credit risks associated with various borrowers of a bank.
For this the major assessment parameters for the bank are taken as the predictor variables.There are many approaches to developing credit risk model which have been discussed already
in report. It is difficult to say conclusively, which of the approaches has the best ability to predict
default, each having its pros and cons.However, with the absence of any theoretical structure, The choice depends on the individual
business circumstances and portfolio specifics of each bank. Depending on the circumstances, it
may sometimes be prudent to use types of methodologies simultaneously to refine the creditdecision system of the bank.
Banks analyze and interpret different credit exposures on the basis of the credit ratings
provided by different organizations. And proper evaluation and control measure are taken tominimize the credit risk .
The availability of data is a major constraint for such studies and with the availability of more
accurate data such findings can be even more useful for a bank. However, key hurdles,
principally concerning data limitations and model validation, must be cleared before models maybe used in the process of setting regulatory capital requirements.
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Suggestions
a) The Bank shall provide the needed organization capable of designing and developingsuch tools.
b) The Bank shall also develop the skills and capabilities of associated staff in the process
of measuring, monitoring and controlling Credit Risk and thus implement the tool/modelin the organization.
c) The Bank shall specify the acceptable level of risk-reward trade off for its various
products and activities where it is exposed to Credit Risk.d) In the loan policy it is addressed by way of deciding the thrust and restricted areas of
lending, statutory, and regulatory restrictions, exposure norms, criteria of lending to specific
industries etc.e) Pre, Post and recovery Mechanism should be strengthened.
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References:
Altman E, A Resti and A Sironi (2004): Default Recovery Rates in Credit RiskModeling: A Review of the Literature and Empirical Evidence, economic Notes, vol 33,
iss 2, pp 183-208.
Barth, M., D. Cram, and K. Nelson. 2001. Accruals and the prediction of future cash
flows. The Accounting Review 76(1): 27-58.
Basel capital Accord., Jan 2001. Basel Committee on Banking supervision ., Consultative
document on The New Fama, E. and K. French. 1997. Industry cost of equity. Journal of
Financial Economics 43: 153193.
www.bis.org
www.rbi.org.in
www.moodyskmv.com/research/whitepaper/Credit_Valuation.pdf.
www.obcindia.co.in
http://www.bis.org/http://www.rbi.org.in/http://www.rbi.org.in/http://www.bis.org/http://www.rbi.org.in/Top Related