A Critical Evaluation of Effectiveness of Management in Reducing Credit Risks

in Barclays Bank, Stratford, United Kingdom

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 Table of Index Page No
1 Introduction 3
2 Research Aims 4
3 Research Objectives 4
4 Research Background 4
5 Literature Review
• 5.1) Risks and Risk Management in Banking 5
• 5.2) Credit Risk 5
• 5.3) Objectives of Credit Risk Management 6
• 5.4) Instruments of Credit Risk Management 6
• 5.5) RBI Guidelines on Risk Management 7
6 Justification 7
7 Hypothesis 8
8 Research Methodology 8
• 8.1) Advantages of Secondary Research 8
• 8.2) Disadvantages of Secondary Research 9
• 8.3) Sources of Secondary Data 10
• 8.4) Advantages of Primary Research 10
• 8.5) Disadvantages of Primary Research 11
• 8.6) Sources of Primary Data 11
• 8.7) Research Design 12
9 Scope of Study 13
10 Limitation of Research 13
11 Ethics 13
12 Reference 14

Introduction

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The changes in the business environment of the organisations due to the effect of globalisation and
the high volatilities in the rates of interest and the price of the commodities along with the changes
in the exchange rates increased the the nature of risk in the financial institutions. This changes in the
markets resulted in the emergence of risk management concept within the organisation to protect
the organisation from the fall due to the risks of credit, liquidity etc. The major factor of risk in a
financial institution is always the risk caused due to the lending process which will result in the non
repayments by the counter-parties . These risk factors forced the organisations in the past decades to
concentrate more in the development of the risk management team within the organisation to reduce
the risk threats in front of the organisation.

The risk management concept became more popular and widely used tool in protecting the
organisations from the downturn as per the demand of the shareholders who feared in huge loss due
to the financial risks in the market. According to the Basle II committee, the division of risks were
done into four categories. The four types of risks that a financial institution faces are the credit risk ,
which is the most vital risk, liquidity risk, market risk and finally legal risks.

Credit risk is the largest single risk in banking. To enhance credit risk management, banks actively
evaluate strategies to identify, measure and control credit concentrations. Credit or counter party
risk is defined as the chance that a debtor or financial institution issuer will be be able to pay
interest or repay the principal according to the terms specified in a credit agreement. Thus credit
risk is an inherent part of banking as all the banking institutions are into the process of lending.
Credit risk means that payment may be delayed or ultimately not paid at all, which can in turn cause
cash flow problems and affect a bank's liquidity. Despite innovation in the financial services sector,
credit risk is still the major single cause of bank failures. The reason is that more than 80 percent of
a bank's balance sheet generally relates to this aspect of risk management.

Research Aims

“ To evaluate Effectiveness of Management of Barclays Bank in Reducing the risks caused due to

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the lending process in Stratford Branch, United Kingdom.”

Research Objectives

• To evaluate the effective management skills in reducing the financial risks in Barclays Bank,
Stratford Branch, United Kingdom.

• To critically analyse the measures implemented by the management in analysing the credit
strength of the customers in the process of loan sanctioning.

• To study the tools and methods in the modern business world in capturing the risks and
reducing the financial risks caused to the financial organisation.

• To Understand the various aspects verified by the organisation in understanding the credit
strength of the customer while making a loan application.

• To evaluate the overall effectiveness of the risk management process in a financial

organisation.

Research Background

The Barclays Bank who has their operational head quarters in United Kingdom has emerged to be
the leading commercial banks among the leaders of the industry. The organisation rooted their
business activities in United Kingdom in the year of 1896 and with their consistent growth in the
industry, they have been emerged to an organisation who is serving more than millions of customer
per day from their 5000 plus branches all around the world. The bank has spread their service to all
parts of United Kingdom and have facilitated their customer with more than 3000 ATMS. The
accessibility and the availability of the services on time and with minimum duration is the main
objective of the organisation and the strategy has performed well for their continuous growth
throughout the last decades.

The organisation is larger in size compared to the other financial organisations in the industry and
the services provided to the customers are numerous. The credit risk management has functioned
their best in the last decade which can be understood from the present condition of the organisation.
Although the credit crunch and other economical downturns has effected the organisations the risk
management has played a tremendous role in reducing the bad debts and controlling the situation is
a better manner compared to that of the competitor. The main reason for selecting this organisation

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is their healthy credit risk management which needs to be studies deeply for better understanding of
the concept.

Literature Review

Risks and Risk Management in Banking

The changes in the business environment of the organisations due to the effect of globalisation and
the high volatilities in the rates of interest and the price of the commodities along with the changes
in the exchange rates increased the the nature of risk in the financial institutions. This changes in the
markets resulted in the emergence of risk management concept within the organisation to protect
the organisation from the fall due to the risks of credit, liquidity etc. The major factor of risk in a
financial institution is always the risk caused due to the lending process which will result in the non
repayments by the counter-parties (Gebhardt and Mansch, 2001). These risk factors forced the
organisations in the past decades to concentrate more in the development of the risk management
team within the organisation to reduce the risk threats in front of the organisation.

The risk management concept became more popular and widely used tool in protecting the
organisations from the downturn as per the demand of the shareholders who feared in huge loss due
to the financial risks in the market. According to the Basle II committee, the division of risks were
done into four categories. The four types of risks that a financial institution faces are the credit risk ,
which is the most vital risk, liquidity risk, market risk and finally legal risks.

Credit Risk

According to Lopez and Saidenberg (2000), Credit risk is defined as the degree of value
fluctuations in debt instruments and derivatives due to changes in the underlying credit quality of
borrowers and counter-parties. Credit risk is the basic and classical risk involved in banking among
the all other risks. This is because of the unavailability of the sufficient information required for
evaluating the credit risk compared to the market risk. The monitoring process of credit risk is
comparatively harder than that of the market risk and in the case of market risk, the monitoring
process can be conducted on a daily basis because of the availability of the required information.
Today, the data management and accumulation processes and the formal methods have improved, a
trend which is furthered by regulatory influences.

Objectives of Credit Risk Management

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The objectives of the credit risk management differ from the financial organisation and the non
financial organisations . Financial organisations faces financial risk more severely than that of non
financial organisations as the financial organisations takes financial risk to make profit in the sense
of interest. But in he case of non financial organisation, the objectives of the credit risk management
in a non financial management is to increase the sales revenue and the collection processes Also the
changes in the objectives of financial organisation is less as vary from time to time as there are lot
of changes happening due to the changes in the environment. (Ciby Joseph, 2006)Some of the
common objectives of the organisations which is involved in financial activities are as follows.

• The main objective of the credit risk management is to decrease the bad loans by initiating
certain credit collection activities.

• Along with this, the risk management must be able to price the credit risks accurately which
will help the reduction of the bad loans in the future.

• Maximising the benefits from the opportunities which are potentially good must be
recognised and utilised.

• The management must conduct the financial activities of the organisation with due
consideration by adhering to the credit policies to reduce bad debts and losses.

• Along with these objectives, the organisation can maintain a effective database where the
details regarding the profitable customers and the non profitable customers can be identified
and this helps the management in increasing the loyalty of the customers.

Instruments of Credit Risk Management

According to Frank J Fabozzi (2004), there are three important variables when considering credit
risk from a portfolio perspective. They are the probability of default for each obliger, the loss given
default and the default correlations. Banks and software vendors have designed risk management
systems taking these variables into consideration. The output of these systems provide a measure of
credit risk, the valued of default-able obligations and in the case of regulated entities, the amount f
the capital charges for credit risk. Fostered by the Basel committee on bank supervision , the
measure of credit risk estimated by these models is Value At Risk (VAR), referred to as Credit VAR.
This measure is similar to VAR for market risk and seeks to capture specific risk that includes
concentration risk, downgrade risk and credit spread risk. The major industry sponsored analytical
tools for credit risk management are

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 • Credit Metrics

•KMV

•CreditRisk+

•CreditPortfolioView

RBI Guidelines on Risk Management

The RBI guideline on risk management place the primary responsibility of laying down risk
parameters and establishing risk management and control systems on the board of directors. The
guidelines require that top management give priority to credit risk. The banks should put in place a
loan policy, approved by the board of directors, covering the methodologies for measurement,
monitoring and the control of credit risk. Banks are expected to evolve comprehensive in relation to
credit and investment decisions.

Source : Credit Risk and Credit Access in Asia (2006)

Taking into consideration the diversity and varying size of the balance sheet items between banks,
the RBI also indicated that it would be difficult to develop uniform risk management systems for all
banks. Hence it was suggested that banks design their risk management framework according to the
bank's requirement dictated by the size and complexity of the business risk philosophy, market
perception and the existing level of capital. In other words, banks can evolve their own systems
compatible with the type and size of operation as well as risk perception. With regards to the credit
risk, the guidance note covers areas pertaining to the policy framework, the types of credit risk
models, managing credit risk in the inter bank and off balance sheet exposures and implications for
credit risk management arising from the new capital accord.

Source : Credit Risk and Credit Access in Asia (2006)

Justification

The concept of risk and the management of risk in the financial institutions are the most important
factor which influence the smooth running of the organisation along with the long term success. So
the selection of the concept and the application of the same in a real life research is vital for me to
understand the proper functioning of the management in managing the risk factors involved in the
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financial dealings of the organisation. This study will help me a lot in the future as the concept can
used for any type of organisation whether it is a financial or non financial organisation. Along with
that, the research will be made in order to create successful remarks for the future expansions of the
organisation and the recommendations of some risk management models in the organisation.

Hypothesis

“ To evaluate Effectiveness of Management of Barclays Bank in Reducing the risks caused due to
the lending process of the organisation.”

The study is based on the Barclays Bank, Stratford Branch, United Kingdom.

Research Methodology

Research methodology is a tool for the researcher which helps him to decide the process of the
research activities. The process of the research activities includes the selection of the research
methods, the selection of the collection of the primary data and the secondary data and also the
analysis methods for the evaluation of the research objectives with the collected information. The
research methodology is classified into primary research method and secondary research method.
The classification of these research approaches are done according to the type of data collected by
each researches. In the case of secondary research method, the research is conducted on the basis of
the existing hypothesis which is already evaluated in the previous researches. The primary research
method is that research where the researches sets a desk study before collecting the information
which helps him to understand the concept and the details of the subject which he is researching. In
this case, the primary research method is selected for the research due to the type of the concept is
based on the application skill of the management activities.

Advantages of Secondary Research

Less Costly: The most cheaper form of research is the secondary research method as the data are
collected from the journals, websites, books, etc. These collection of data can be conducted from
the libraries and online web articles and in some situations, the information required for the research
will have to be purchased from the agents who holds the information regarding the particular
subject. Example for these kinds of information are the census and other reports of different
subjects where the data has to be purchased. These purchase of the data is also less expensive and

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comparing the cost of primary research, the secondary research is too cheap and affordable for
everyone who is conducting the research.

Less Duration: The consumption of the time for the completion of the secondary research is less
compared to that of the primary research. This is because of the quick availability of the
information from various sources which are required for the research. In the case of the secondary
research, the time consumed for the data collection can be said as one forth of the primary research.

Availability of more information: The secondary research is more quick and cheap compared to that
of the primary research and the main advantage of the researcher is the availability of sufficient
information required for the research. There are certain information which cannot be availed with
the help of primary research such as the census and the annual reports of the organisation. All these
benefits of the research make secondary research more simplified than that of the primary research.

Disadvantage of Secondary Research

Lack of Quality: The limitation of the secondary research is higher as the quality of the data
collected cannot be measured up to a certain extend. The collection of information are gathered
from different sources such as journals, internet and books and also the agents who are gathering
information. But the quality of the data collected cannot be measures as the collection process and
the type of data analysis conducted may not be proper. All these will effect the quality of the
secondary data which will result in the final objective of the research.

Lack of Accuracy: The accuracy of the information gathered cannot be guaranteed as the secondary
data will be collected from the different journals and articles or even the previous researches
conducted by researchers. The information gathered from these will not be always accurate and so
the limitation of the secondary research in gathering wrong information for the research will be on
the higher edge.

Lack of Relevancy: The relevancy of secondary data is subjected to maximum risk as the data will
be collected according to the past standards and theories. The age of the data collected is also a vital
factor which makes the relevancy of the secondary data to its minimum. The data gathered for the
previous research will not be up to date and this results in the wrong results of the secondary
research in certain situations.

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Sources of Secondary Information

The sources of secondary data is wider than that of the primary data. The common sources of data
are the websites and the books. Some of the major areas of data collection in the case of secondary
data are as follows.

• Periodicals
• Online Libraries
• Journals
• Newspapers
• Previous Case Studies
• Previous Researches
• Articles
• Books
• Websites
• Reports of Companies

In the case of this research, a combination of many options of the above are used to gather the
required information of the secondary data which gives the research a theoretical view and helped
to conduct a desk study regarding the concept of risk managements in financial institutions.

Advantages of Primary Research

Latest information: The information gathered in the primary research will be the present scenario
and so the results of the research will be more relevant and accurate. The main advantage of the
primary research is the direct understanding of the concept and the practical study of the subject
when conducting the research.

Direct Collecting of Data: The direct collection of data will help the research to get an accurate and
most important informations and the researcher can ask all the questions wherever he need the
clarification. The main advantage of the primary research can be said is the direct communication of
the researcher with the respondents which will create a trust in the result of the research.

Disadvantage of Primary Research

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Accuracy Dependence: The most crucial disadvantage that the primary research is facing is the
collection of data and the accuracy fact as these information and their accuracy depends upon the
person who is providing the information to the researcher. So the accuracy will depend on the
sincerity of the respondent and the researcher cannot even measure the level of accuracy of the
information collected in the primary research.

Process Duration: The length and the duration required for the collection of information in primary
research is higher than the secondary research. The cost incurred for the research will increase as a
result in the increase in the length of the research. And the process of collecting primary data is
quite difficult because of the nature of the collection process as the respondents need not to be
capable or helpful as considered by the researcher.

Expensive Research Process: The process of primary research is quite expensive than that of the
secondary research. The researcher has to make direct visits to the organisations and the preparation
of the collection method will cost higher. Along with that, as stated earlier, the length of the process
is also an influencing factor that effects the cost of the research.

Sources of Primary Information

The collection of the primary data is quite difficult compared to that of the secondary data. There
are different techniques for acquiring the primary information and some of the most common
methods of primary data collection are as follows.

• Questionnaire
• Direct Interviews
• Direct Discussion
• Observation
• Survey

Research Design

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The proper designing of a research method is vital for the research as this forms the crucial changes
in the success determination for achieving the research objectives. There are many options as said
earlier in collecting the primary and secondary data for the research. The secondary data is collected
with the help of the periodicals and books which are mainly collected from the college library and
online libraries and especially from the British Library of London.

The primary data will be collected with the help of the questionnaire in which a minimum of 15
questions will be included for achieving the required information for the research. The primary
collection is conducted on the employees of the Barclays Bank of Stratford branch and the level of
employees used for the research is managerial level. All the employees will be visited personally
and will be provided a brief outline of the research which will help the research to get the adequate
results as planned.

More over, the research questionnaire is planned in such a simple manner so that, the employees
require only minimum time to answer the questions. The main technique used for making the
questionnaire simplified is the inclusion of the objective type questions where the employees need
to select the correct answers from the list prepared. More information will be collected from the
managers regarding the concept while conducting this personal visit to the branch and so the vital
answers for the questions which are not included in the questionnaire can be availed. Some of the
major questions which will be definitely included in the questionnaire with respect the conducted
secondary data are as follows.

Question 1- The main objective of the research is to evaluate the effectiveness of the current risk
management system within the organisation and so a question regarding this aim will be included in
the research.

Question 2- The study is also focusing on the evaluation of the implementation strategies of the risk
management policies and this question regarding the application and amendments in the policies of
the risk management will be questioned.

Question 3- This question involves the measures undertaken by the organisation in creating an
excellent credit risk management is included in the questionnaire to evaluate the different measures
available in the industry for the process of risk management.

Question 4- The measures undertaken by the organisation in evaluation of the credit history of the

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customer while making a loan application will be questioned.

Scope of Study

The concept of risk and the management of risk in the financial institutions are the most important
factor which influence the smooth running of the organisation along with the long term success. So
the selection of the concept and the application of the same in a real life research is vital for me to
understand the proper functioning of the management in managing the risk factors involved in the
financial dealings of the organisation. This study will help me a lot in the future as the concept can
used for any type of organisation whether it is a financial or non financial organisation. Along with
that, the research will be made in order to create successful remarks for the future expansions of the
organisation and the recommendations of some risk management models in the organisation.

Limitations of Research

There are few limitations for the research as the collection of the primary data is accessed according
to the questions asked with the help of the questionnaire. A complete focus of the concept cannot be
acquired from the organisation as the questionnaire is made simple and specific with limited
number of questions in order to satisfy the employees who are answering the questionnaire. The
accuracy and the relevancy of the information are highly depended on these employees who are
answering the questionnaire and so the accuracy level of the research data collection is on the
sincere approach of the employees answering the questionnaire for the research.

Ethics

The research will be done by meeting all the standards of the university and research requirements
with prior consideration. All the objectives of the research will be analysed and evaluated with a
satisfied collection of information as stated in the research methodology. Sincere efforts will be
undertaken for the research and the completion of the research will be scheduled and planned
according to the duration allowed by the university. All the responsibility in maintaining high
standards regarding the privacy factor of the data will be maintained to ensure proper usage of the
information collected from the organisation for the purpose of the research.

References

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• Lucas, Douglas J., Laurie S. Goodman, and Frank J. Fabozzi. (2006). Collateralized Debt
Obligations: Structures and Analysis, 2nd ed. Hoboken, N.J.: John Wiley & Sons.
• Pausenberger and Nassauer 2005, “Governing the Corporate Risk Management Function”,
in Frenkel, M. Hommel, U. and Rudolf, M. 2005, “Risk Management: Challenge and
Opportunity”, 2nd Edition, Springer.
• Harrington, S.E. and Niehaus, G. R. 1999, “Risk Management”, Irwin/McGraw-Hill, New
York
• Barton, T. L., Shenkir, W.G. and Walker, P. L. 2002, “Making Enterprise Risk Management
Pay Off”, USA, Prentice Hall PTR, Financial Times.
• Akkizidis, I. and Khandelwal, S. K. 2008, “Financial Risk Management for Islamic Banking
and Finance”, Palgrave Macmillan, First Ed.
• Dixit, A.K.; Pindyck, R.S. (1994): Investment under uncertainty. Princeton University Press,
Princeton, New Jersey.
• Banks, E. (1997): The credit risk of complex derivatives, 2nd ed. Macmillan Business,
Basingstoke, England.
• Bessis, J. (2002): Risk management in banking, 2nd ed. John Wiley, Chichester, England.

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