CREDIT RISK MEASUREMENT

& MANAGEMENT

Presented by Manav Gupta

A credit risk is the risk of default on a debt that may arise from
a borrower failing to make required payments.
 Forms of Credit Risk
• Non-repayment of the interest on loan or loan principal.
• Inability to meet contingent liabilities such as letters of credit,
guarantees issued by the bank on behalf of the client.
• Default by the counterparties in meeting the obligations in terms of
treasury operations.
While giving out any loan the Bank’s needs to assess the credit risk
in a proper way. It is very important you do a proper decision
making of the same before giving out the loan. This is basically the
part of decision making. Assessing credit risk requires us to model
the probability of a counterparty defaulting in full, or in part, on its
obligation.
 Three scenarios arises now
 Extend credit and you get returns. ………. (1)
 Extend credit but loan is not re- payed (loan turns bad) ………. (2)
 Refuse credit ………. (3)

Now it depends on bank’s discretion which way to go depending on the

decision tree, if extending credit yields a positive result then it should go
with it. But if the result is negative the bank should refuse the credit.

This totally depends on bank’s research and findings while giving out a
loan.
 Value at Risk or VAR is used to find the level of financial risk within a firm for a
certain period of time. This is basically a statistical technique that is widely used
by the banks to assess the total financial risk that it possesses.

 Calculated through the statistical method of Covariance.

 Generates a Normal Distribution Curve.
 It has a certain level of confidence that the loan given out will not turn bad.
 Helps the bank to track which kind of its asset are at risk
It is a visual tool which tags a client’s account to the risk portfolio. When these
individual risk profiles are aggregated, we can get an overall idea of the credit risk
profile of the receivables portfolio.

It brings up following advantages:

 Easily understandable

Compels development of risk mitigation plans appropriate for each of the risk
profiles

 Tracks changes of receivables over time.

 Mitigating Credit Risk

Mitigation
1. Risk based pricing
2. Credit insurance
3. Collaterals
 Expert Systems
 Check credit worthiness through internal & external ratings-ex
CRISIL,ICRA etc
 Proper Database Management
 Credit Scoring Model
 Focusing more on holistic approach making credit risk important part of
enterprise risk
 Increase IT spending on risk and compliance systems
 Centralized Data warehouse like enterprise data-warehouse.
 Business Intelligence model and big data analytics
 Using new software like SAS,IFRS etc
 Outsourcing IT risk and compliance work to IT and consulting giants like
TCS,EY,PWC etc.