bank rm.ppt

7/27/2019 Bank RM.ppt

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Credit Risk

• Risk of loss that may occur from failure of the counter - party

to make payments

• It includes non performance by a counter party in a variety of

Off Balance Sheet contracts such as forward contracts /

interest rate swaps, etc.

• Differs from market risk due to obligor behavior

considerations -

The five “C’s” of Credit - Capital, Capacity, Condition,

Collateral and Character

•

Credit events include bankruptcy, failure to pay, loanrestructuring, loan moratorium, accelerated loan payments



Types of Credit Risk

Borrower

Risk

Portfolio

Risk

Industry

Risk



Borrower risk / Counter part / Default risk

• The risk that one party in a contract will default or

otherwise not fulfill his/her obligations (more than 90

days)

• For example, if A agrees to lends funds to B up to a

certain amount, there is an expectation that A will

provide the cash, and B will pay those funds back.

There is still the counterparty risk assumed by them both. B might default on the loan and not pay A back

or A might stop providing the agreed upon funds



Intrinsic / Industry Risk

• It focuses on the risk inherent in certain lines of

business and loans to certain industries



Concentration / Portfolio Risk

• The risk associated with single exposure or group of

exposures with the potential to produce large losses to

threaten a bank's core operations

• It may arise in the form of single name concentration

or industry concentration



Tools of Credit Risk Management

ExposureCeilingLimits

Risk ratingmodel

Portfoliomanagement

Risk basedscientific pricing



Credit Exposure Ceiling

• The exposure ceiling limits would be :

- 15 % of capital funds in case of a single borrower

- 40 % of capital funds in the case of a borrower group

with additional 10% for infrastructure projectsundertaken by the group

•The threshold limit should not exceed six to eighttimes of the capital funds of the bank



Risk Rating Model

• It is a setup of comprehensive risk scoring system ona six to nine point scale

•RAM is an internal rating software offered byCRISIL designed to assist a bank or financialinstitution in complying with the requirements under the internal ratings based approach

• RAM is the largest deployed Internal risk ratingsolution in India



Risk Based Scientific Pricing

• Measurement of loan risk in terms of interest ratesand other fees

•The interest rate on a loan is determined the timevalue of money and the lender's estimate of the

probability

• Factors for consideration :- Borrower's credit score

- Employment status



Portfolio Management

• It benefits adverse impact of concentration of

exposures to a particular borrower, sector or industry

• The distribution of borrowers in various industry, business group and conduct of rapid portfolio reviews

helps to mitigate credit risk

bank rm.ppt

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