Professional Documents
Culture Documents
VIJAY VIKAS
Credit Opportunity
Credit Creation
Credit Completion
Credit Management
Agenda
Basics of credit management Introduction of credit risk management Other issues
Introduction
Credit refers to
Short Term Loans & Advances Medium / Long Term Loans Off-Balance Sheet Transactions
Management refers to
Pre-sanction appraisal Documentation Disbursement and Disbursal Post-lending supervision and control
Credit Management
Credit Management now includes
Capital adequacy norms Risk Management including ALM Exposure Norms Pricing policy and credit risk rating IRAC norms Appraisal, credit-decision making and loan review mechanism
Post-Sanction control
To ensure proper documentation, follow-up and supervision
Pre-Sanction appraisal
Concerned with measurement of risk(iness) of a loan proposal
Requirements are:
Financial data of past and projected working results Detailed credit report is compiled on the borrower / surety Market reports Final / audited accounts Income tax and other tax returns / assessments Confidential reports from other banks and financial institutions
Post-Sanction appraisal
Depends to large extent upon findings of presanction appraisal
Requirements are:
Documentation of the facility and after care follow- up Supervision through monitoring of transactions in loan amount Scrutiny of periodical statements submitted by the borrower Physical inspection of securities and books of accounts of the borrower Periodical reviews etc.
Loan for setting up new project, expansion and diversification of existing project etc.
Short term or medium term
(Contd.)
Loans are extended in accounts in which no drawings are permitted to the borrowers Generally there is one debit to principal amount to loan account though disbursal in stages is possible depending on the need of the borrower For operational purposes loan can be credited to a special account where withdrawal from time to time can be done by the party depending upon his requirements In case of advances, the sanctioned limit is placed at the disposal of the borrower, subject to terms of sanction, in running accounts which can be drawn upon by cheques by the borrower
(Contd.)
Working capital finance in form of loan is also known as demand loan As an advance it is commonly known as cash credit facility Banks apart from working capital and medium term and long term finance may also extend casual overdrafts to approved customers
In current accounts Loans against security of shares, FDs, housing loans etc.
Impersonal
Created by way of a charge (pledge, hypothecation, mortgage, assignment etc.)
Preconditions of loans
Willingness or intention to repay as per agreement
Relatively easier to assess Determined by good track record of payments and debt servicing Uncertain / uncontrollable events could affect the judgment
Credit Risk
RBI defines credit risk as:
the possibility of losses associated with diminution in the credit quality of borrowers or counterparties. In a banks portfolio, losses stem from outright default due to inability or unwillingness of a customer or counterparty to meet commitments in relation to lending, trading, settlement and other financial transactions. Alternatively, losses result from reduction in portfolio value arising from actual or perceived deterioration in credit quality.
IRAC norms Credit rating system and risk pricing policy ALM Norms for setting up loan policy
Policy Framework
Strategy and Policy:
Credit policies and procedures of banks should necessarily have the following elements:
Written policies defining target markets, risk acceptance criteria, credit approval authority, credit origination and maintenance procedures and guidelines for portfolio management and remedial management Systems to manage problem loans to ensure appropriate restructuring schemes A conservative policy for the provisioning of nonperforming advances should be followed
Policy Framework
Strategy and Policy:
Credit policies and procedures of banks should necessarily have the following elements:
(Contd.)
Consistent approach towards early problem recognition, classification of problem exposures, and remedial action Maintain a diversified portfolio of risk assets in line with the capital desired to support such a portfolio Procedures and systems, which allow for monitoring financial performance of customers and for controlling outstanding within limits
Policy Framework
Organizational Structure
(Contd.)
Banks should have an independent group responsible for the CRM Responsibilities to include formulation of credit policies, procedures and controls extending to all of its credit risk arising from corporate banking, treasury, credit cards, personal banking, trade finance, securities processing, payments and settlement systems Board of Directors should have the overall responsibility for management of risks
Policy Framework
Organizational Structure
(Contd.)
The Board should decide the risk management policy of the bank and set limits for liquidity, interest rate, foreign exchange and equity price risks Risk Management Committee will be a Board level Sub committee including CEO and heads of Credit, Market and Operational Risk Management Committees. It will devise the policy and strategy for integrated risk management containing various risk exposures of the bank including the credit risk RMC should effectively coordinate between the Credit Risk Management Committee (CRMC), the Asset Liability Management Committee and other risk committees of the bank, if any
Policy Framework
Operations / Systems
(Contd.)
Risk Mitigants
Credit risk mitigation means reduction of credit risk in an exposure by a safety net of tangible and realisable securities including third-party approved guarantees/insurance Various risk mitigants are:
Collateral (tangible, marketable) securities Guarantees Credit derivatives On-balance-sheet netting
Risk Mitigants
Conditions for use of credit risk mitigants
(Contd.)
All documentation used in collateralized transactions must be binding on all parties and must be legally enforceable in all relevant jurisdictions Banks must have properly reviewed all the documents and should have appropriate legal opinions to verify such, and ensure its enforceability
Bank cannot grant loans against security of its own shares Prohibition on remission of debts for UCBs without prior approval of RBI Restrictions on loans and advances to Directors and their relatives Ceiling on advances to Nominal Members With deposits up to Rs. 50 crore (Rs. 50,000/- per borrower) and RS. 1,00,000/- for above Rs. 50 crore
that against capital / debentures issues Loan and advances against shares, debentures
UCBs are prohibited from permitted to extend any facilities to stock brokers Margin of 40 per cent to be maintained on all such advances
RBI Guidelines on Credit Exposure and Management Prohibition on UCBs for bridge loans including
Restriction on advances to real estate sector only for genuine constriction and not for speculative purposes
Thank You