Term Paper
CHAPTER 1:
INTRODUCTION
1.1 Introduction
Financial services firms are in the business of accepting risk. Primary aims of any financial services firm are collect and manage risks on behalf of their customers and make a profit for its shareholders. We may define ‘Risks’ as uncertainties resulting in adverse outcome, adverse in relation to planned objective or expectations. In the financial arena, enterprise risks can be broadly categorized as credit risk, operational risk, market risk and other risk. Credit risk is the oldest and important risk which banks exposure and important of credit risk and credit risk management are increasing with time because of some reasons like economic crises and stagnation, company bankruptcies, infraction of rules in company accounting and audits, growth of off-balance sheet derivatives, declining and volatile values of collateral, borrowing more easily of small firms, financial globalization and BIS risk-based capital requirements.
Credit risk can be defined as the risk of losses caused by the default of borrowers. Default occurs when a borrower can not meet his financial obligations. Credit risk can alternatively be defined as the risk that a borrower deteriorates in credit quality. This definition also includes the default of the borrower as the most extreme deterioration in credit quality. Credit risk is managed at both the transaction and portfolio levels. But, banks increasingly measure and manage the credit risk on a portfolio basis instead of on a loan-by-loan. In credit risk management banks use various methods such as credit limits, taking collateral, diversification, loan selling, syndicated loans, credit insurance, securitisation and credit derivatives. Credit risk is considered as a critical factor that needs to be managed by the banks and financial institutions.
Credit Risk Management process permits the banks to proactively manage loan portfolios in order to minimize losses and earn a satisfactory
INTRODUCTION
1.1 Introduction
Financial services firms are in the business of accepting risk. Primary aims of any financial services firm are collect and manage risks on behalf of their customers and make a profit for its shareholders. We may define ‘Risks’ as uncertainties resulting in adverse outcome, adverse in relation to planned objective or expectations. In the financial arena, enterprise risks can be broadly categorized as credit risk, operational risk, market risk and other risk. Credit risk is the oldest and important risk which banks exposure and important of credit risk and credit risk management are increasing with time because of some reasons like economic crises and stagnation, company bankruptcies, infraction of rules in company accounting and audits, growth of off-balance sheet derivatives, declining and volatile values of collateral, borrowing more easily of small firms, financial globalization and BIS risk-based capital requirements.
Credit risk can be defined as the risk of losses caused by the default of borrowers. Default occurs when a borrower can not meet his financial obligations. Credit risk can alternatively be defined as the risk that a borrower deteriorates in credit quality. This definition also includes the default of the borrower as the most extreme deterioration in credit quality. Credit risk is managed at both the transaction and portfolio levels. But, banks increasingly measure and manage the credit risk on a portfolio basis instead of on a loan-by-loan. In credit risk management banks use various methods such as credit limits, taking collateral, diversification, loan selling, syndicated loans, credit insurance, securitisation and credit derivatives. Credit risk is considered as a critical factor that needs to be managed by the banks and financial institutions.
Credit Risk Management process permits the banks to proactively manage loan portfolios in order to minimize losses and earn a satisfactory
Bibliography: Abeyrante, S. (2001) Banking and Debt Recovery in Emerging Markets: The Law Reform Context, Adlershot, Ashgate found in www.bog.us Ahmed,S.M.H.,(2004), Artha Rin Adalat Ain, 2003, 1st edition, New Warsi Book Corporation, Bangladesh. Bank for International Settlements Publications found in http://www.bis.org/publ/pub_list.htm Basel Committee on Banking Supervision, (2000), Principles for the Management of Credit Risk, found in www.bis.org Bernanke,B.S., (2006), Modern Risk Management and Banking Supervision, found in www,protiviti.com Bhargava,A., (2000), Credit Risk Management Systems in Banks, found in www.sas.com Burns,P.,and Stanley,A., (2001), Managing Consumer Credit Risk, found in www.rmahq.org Credit Policy (2005) of Pubali Bank Limited Credit Policy (2005) of SouthEast Bank Limited Chowdhury, L.R., (2002), A Text Book on Banker 's Advances, 2nd edition, Fair Corporation, Bangladesh Counts,A. (1996), Give Us Credit, New York, Times Books Focus Group on Credit Risk Management, (2005), Credit Risk Management: Industry Best Practices, Managing Core Risks of Financial Institutions, Bangladesh Bank found in www.bangladesh-bank.org Kastle,K.V.D.,(2004), Credit Risk Management: Gaining Prominence in the Global Banking Industry, found in www.skora.com Glantz, M Pirok,K.R. (1994), Commercial Loan Analysis: Principles and Techniques for Credit analysts and Lenders, Chicago, Probus Pub Corp. Saunders, A. (1999), Credit Risk Measurement: New Approaches to Value-at-risk and other Paradigms, New York, Willy The Federal Reserve Bank of NY: The Credit Process: A Guide for Small Business Owners found in www.ny.frb.org/pihome/addpub/credit.html