Credit Risk in Banks and Mitigation & Management

The course on the ”Credit Risk in Banks and its Management” throws light on understanding the risks in general and credit risk in particular, by using various methodologies to mitigate the same. The causes and consequences of credit risk are explained in detail. Various tools and methods used by banks to identify the risks, how to evaluate it and then mitigate the same by various techniques, so as to survive from the shocks of potential credit risks, are explained well.

An example of the systemic risk in banks which started at European and American countries, which later spread across to other continents, resulting into Sub-Prime crisis in the last decade, which affected all nations, either directly or indirectly, is explained well, by mentioning a list of several banks which have gone bust, during the crisis. The role of credit rating agencies, precautions to be taken by banks, while assessing the credit limits of the borrower, correct way of assessment of loan, in an un-biased manner, potential risks involved, like undue pressure from politicians as well as people from outside and inside, to get the limits sanctioned, collecting the required documents from the borrower and interviewing the borrower while processing the loan application, correct analysis of the financial documents submitted by the bank, inference taken from various financial ratios, complying with all statutory and regulatory guidelines of the Reserve Bank of India etc. which are key actions involved in processing and sanctioning the loan are narrated in detail, without using much jargons.

How the contingent liabilities, bonds and other securities become credit risk, are explained well. The necessity of close monitoring of the account after disbursement, the bad effects of outsourcing the assessment and sanctioning work of credit proposals and other activities, by unskilled and inexperienced people from outside, which is a serious threat to the bank, sometimes, turning the account into NPA, effects of NPA on bank’s assets and the staff, precautions to be taken while taking over of an account from another bank, are also explained. The organizational structure of Credit Risk Management team, framing the risk management policy, key functions of the CRMD, well laid out procedures, effective control and comprehensive risk reporting framework etc. are explained well.

The importance of involvement of the top management in the organizational structure, complete freedom for the CRMD for direct reporting to the MD / BOD which are the special features of the Risk Management, is clearly discussed in the session. The need of a good Credit Policy, containing all the details like delegations of power to Senior executives of the bank for credit sanction, need of credit review mechanism, fixation of prudential limits, credit risk rating and its review, review of the credit limits at stipulated intervals, which are essential for the credit risk management, are also dealt with, in a lucid manner. Instruments of credit risk management, a brief outlook on restrictions and general guidelines of the RBI on advances, is narrated, for a clear perception of credit and its management. What is risk management and how the risks are measured and mitigated, using various credit risk models like Altman’s Z score model, Credit Metrics model, Value at risk model, KMV model etc. are explained well with use of relevant mathematical formulae.