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INTRODUCTION
Definition of Credit Risk
Credit Risk is the risk of default by borrower due to inability and/or unwillingness to repay his debts in accordance with the agreed terms and conditions.
Factors determining Credit Risk
The credit risk of a bank's portfolio depends on both external and internal factors. The external factors can be economy wide as well as company specific.
Some of the economy wide factors are:
State of the economy
Wide swings in commodity prices
Fluctuations in foreign exchange rates and interest rates
Trade restrictions
Economic sanctions
Government policies, etc.
Some company specific factors are:
Management expertise
Company policies
Labour relations
The internal factors within the bank, influencing credit risk for a bank is:
Deficiencies in loan policies/administration
Absence of prudential credit concentration limits
Inadequately defined lending limits for Loan Officers/Credit Committees
Deficiencies in appraisal of borrowers' financial position
Excessive dependence on collateral without ascertaining its quality/realisability
Lack of risk pricing mechanisms
Absence of loan review mechanism
Ineffective system of monitoring of accounts
While the bank can influence and control the internal factors to improve quality of its credit portfolio, the risk due to external factors can be minimised by proper diversification across industries and by initiating necessary changes in the loan portfolio in anticipation of adverse developments. Development of effective risk assessment and monitoring systems will help in improving the quality of credit decisions thereby reducing loan losses on an on going basis and thus gradually improving the quality of loan portfolio.
Need for Credit Risk Management
The liberalisation of the Indian economy has brought about sweeping changes in the economic environment. Changes in economic environment have induced new anticipated and unforeseen risks in lending. The
Definition of Credit Risk
Credit Risk is the risk of default by borrower due to inability and/or unwillingness to repay his debts in accordance with the agreed terms and conditions.
Factors determining Credit Risk
The credit risk of a bank's portfolio depends on both external and internal factors. The external factors can be economy wide as well as company specific.
Some of the economy wide factors are:
State of the economy
Wide swings in commodity prices
Fluctuations in foreign exchange rates and interest rates
Trade restrictions
Economic sanctions
Government policies, etc.
Some company specific factors are:
Management expertise
Company policies
Labour relations
The internal factors within the bank, influencing credit risk for a bank is:
Deficiencies in loan policies/administration
Absence of prudential credit concentration limits
Inadequately defined lending limits for Loan Officers/Credit Committees
Deficiencies in appraisal of borrowers' financial position
Excessive dependence on collateral without ascertaining its quality/realisability
Lack of risk pricing mechanisms
Absence of loan review mechanism
Ineffective system of monitoring of accounts
While the bank can influence and control the internal factors to improve quality of its credit portfolio, the risk due to external factors can be minimised by proper diversification across industries and by initiating necessary changes in the loan portfolio in anticipation of adverse developments. Development of effective risk assessment and monitoring systems will help in improving the quality of credit decisions thereby reducing loan losses on an on going basis and thus gradually improving the quality of loan portfolio.
Need for Credit Risk Management
The liberalisation of the Indian economy has brought about sweeping changes in the economic environment. Changes in economic environment have induced new anticipated and unforeseen risks in lending. The