Transcript RISK MANAGEMENT ARCHITECTURE

Dr. Ajit Kumar
Assistant General Manager
RBI CAB Pune
UCB CHANNEL, CAB RBI PUNE
7/20/2015
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Difference between
CREDIT MANAGEMENT
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&
 CREDIT RISK MANAGEMENT
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Credit risk framework envisages measurement of
credit risk through scoring, quantifying through
expected / unexpected loan losses, risk pricing on
scientific basis & controlling risk through effective
Loan Review Mechanism.- RAROC
Loan policy of the bank gives direction to the bank
in regard to the desired levels of risk to be taken
by the bank within the overall regulatory
prescription.
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Responsibilities
Primary responsibility- understanding the risks run by the
bank and ensuring that the risks are appropriately managed
Set risk limits by assessing the bank’s risk and risk-bearing
capacity
Review the risk exposure limits from time to time to ensure
that the limits conform to the changes in business strategies,
addition of new products and changes in market conditions.
Approve the overall business strategies and significant
policies including policy relating to managing and taking
risks.
Ultimate responsibility for the level of risk taken
by banks rests with the Board of Directors.
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Credit Risk Management Committee (CRMC)
To be headed by Chairman/CEO/ED
Members- Heads of Credit, Treasury, CRMD & Chief
Economist
Functions:
 Responsible for implementation of credit risk policy /
strategy
 Monitor credit risk on bank-wide basis
 Ensure compliance with limits
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CRMC Functions – contd.
Recommend to Board-
◦ Policies & standards for credit proposals , financial
parameters, rating standards,& benchmarks
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Other action points-
◦ Decide on delegation of sanctioning powers,
Prudential limits
◦ Loan review mechanism
◦ Risk concentration
◦ Risk rating migration analysis
◦ Risk monitoring & evaluation
◦ Pricing of loans
◦ Regulatory / Legal compliance
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Credit Risk Management Department should be
independent of Credit Administration Dept.
Functions of CRMD:
◦ Measure, control & manage credit risk on bankwide basis within limits set
◦ Ensure compliance with risk parameters &
prudential limits
◦ Lay down risk assessment systems
◦ Develop MIS
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CRMD Functions- contd.
◦ Monitor asset quality
◦ Identify problems, correct deficiencies
◦ Undertake loan review / credit audit
◦ Protect quality of entire loan / investment
portfolio
◦ Undertake portfolio evaluations
◦ Conduct studies on the environment to test
the resilience of the loan portfolio
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Risk Rating
◦ A single point indicator of diverse risk factors
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Risk Pricing
◦ Borrower placed in high credit risk category
should be priced high.
◦ The pricing should have a bearing on the
expected probability of default.
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Loan review mechanism
Objective:
◦ Identify promptly loans which develop credit
weakness & initiate timely corrective action
◦ Evaluation of portfolio quality
◦ Assessment of adequacy and adherence to
Loan Policies & procedures
◦ Provide top management with information
on credit administration
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LOAN
PLOCY
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A written documentation setting forth minimum credit
standards of acceptance of borrowers and sanctioning of
credit
It is broader framework of Do’s and Don’ts of Credit
beyond the regulatory prescription.
It articulates bank’s approach to areas where the
regulator required the bank to take a considered view.
It sets policies in regard to ‘risk –return’ equation on
credit exposures.
It is also a document of COMMITMENT to the regulators
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 Studies
Market Analysis, Peer group review
Identifying niche market segment
Study of credit culture of the area
Macro economic environment and it’s likely impact
Statutory issues & Regulatory requirement
Determining risk appetite in tune with risk absorbing
capacity
 Enunciation
A reflection of mission and vision of the bank.
Indication of the thrust area in tune with the mission
document
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 Enunciation
(contd.)
Laying out broader parameters for credit appraisal
standards, schematic lending, fixation of internal
norms & prudential ceilings, dealing with delinquent
loans
Loan Policy should also contain ‘Take Over of Loan’
strategy
What type of borrower accounts
What level of exposures
Take over from whom
Take over standards
Pricing
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 Overriding
 Healthy
objective of credit policy
Balance between
 Credit Volumes, Earnings & Asset Quality
 Within
the framework of
Regulatory prescriptions (Statutory restrictions &
exposure norms)
Corporate goals - social responsibilities
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 Credit
Rating & Loan policy
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 Loan
Policy should provide for rating of all loan
accounts- very little exceptions
 The rating should consist of 7-8 parameters
(minimum)
 Policy to specify minimum entry rating i.e. Hurdle Rate
Policy to lay down exceptions to Hurdle rate
Policy to lay down procedures to handle accounts
which fall below hurdle rating
 Annual review of ratings- Quarterly, half yearly
updates
 Study of Rating migration
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 Loan
Policy serves a ‘Gate Keeping’ function
 Defines thrust areas in relation to credit culture,
profit objectives and regulatory directions
 Defines acceptable levels of risk by identifying
industry segments for fresh exposures
 Prevents risk concentrations and ensures
diversification by setting limits on sectors and
individual transactions
 It provides pricing strategies through the use of
Credit Risk Rating framework
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 An
ideal loan policy should
Create right for business growth
Maintain quality of assets
Provide platform for good procedures/process
Ensure regulatory and statutory compliances
Be the platform for Credit Risk
Management
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 Tool
for the measurement of credit risk
 To enable an informed and considered credit
decision as ‘good ‘ or ‘bad’
 To appropriately price loan products
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Why Credit Rating
◦
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Measure of Credit risk
Disciplined way of looking at Credit Risk
Significant co-relation between credit rating and default
Reasonable estimate of the health of a borrower
Decision on taking fresh or additional exposure
Threshold level- Hurdle rate below which no exposure
Concentration risk assessment
Pricing
Anticipatory provisioning
An early warning signal
Monitoring- exit strategies
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Banks free to use any number of financial ratios,
operational parameters,
Free to add qualitative aspects of management and
industry characteristics having bearing on the
creditworthiness of the borrower,
Free to consider separate rating framework for large
corporate, for small borrowers, for traders etc.
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Quantitative evaluations
I.

II.
Financial analysis- ratios, profits, turnover, sales
Qualitative evaluations
 Management Capacity,
 Structure,
 Existence,
 Competitive strength
 Adoption of technology,
 Demand for the product,
 Regulatory/legal environment,
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Extant RBI Guidelines on Credit Management
(management of advances)
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Banks are required to publish the minimum
and maximum interest rates charged on
advances and display the information in
every branch{Base Rate}
A Board approved Policy for charging of
Penal Interest
No Penal Intt. for loans upto Rs 25000/-for
priority sector borrowers.
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Banks should ensure that the total interest
debited to an account should not exceed
the principal in respect of short term
advances granted to small and marginal
farmers. SMF= land holding of five acres
and less.
An appropriate ceiling of interest+
processing and other charges to be decided
and publicised.
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UCBs should not finance a borrower already
availing credit facility from another bank
without
obtaining
a
‘No
objection
Certificate’ from the existing financing bank
(as per declaration of the borrower/financial
statement) – Credit opinion report.
Certification of accounts of non corporate
borrowers
Defaults of payment of statutory dues by
borrowers
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A declaration that the borrower is not
having any credit facility with any other
bank.
If yes, NoC required from that bank
If no response to the request for NoC is
received, account may be opened after a
minimum waiting period of a fortnight.
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Proper Appraisal of Loan
No oral sanction
Deviation to be recorded
Adhoc sanction only when original limit
utilised fully and supported by proper
documents
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Early warning system: Recognition of potential NPA
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Monitoring end use of fund/fund flow to
and fro- no loan for FD/KVP
Site visit
Stock statement
The primary responsibility for preventing
misuse of funds rests with the management
of banks. UCBs to take appropriate steps to
review and tighten control measures.
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UCBs required to take membership of at
least one credit information company and
provide credit data (positive as well as
negative)
to
the
credit
information
company.
- to incorporate suitable clauses in the loan
agreement for the purpose.
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Scheduled UCBs are required to submit to
RBI at the end of Sept and March every year
data on defaulting doubtful, loss and suit
filed borrowers with outstanding limit of
Rs.1.0 cr. and above
Data on suit filed case of Rs.1.0 cr & above
and willful defaulters of Rs.25.0 lakh and
above
is
availbale
on
CIBIL
sitewww.cibil.com
Scheduled UCBs to report to CIBIL all cases
of willful default Rs.25.0 lakh and above
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There will not be any asset class degradation
upon restructuring in following cases:
(i) Project Financing (ii) borrowers engaged in
important business activities (iii) housing
loan
This exceptional treatment is not available to
(i) Consumer and Personal advances
(ii) Advances to traders
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In case of default in payment of agricultural loans due to
natural calamities UCBs on their own may decide to
convert the short term production loan into a long term
loan or reschedule the repayment period and
sanction fresh short term loans
these fresh/ restructured loans will not be treated as
NPAs and will be governed by fresh terms and
conditions
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PRECONDITIONS:
(i)Provision for diminution in the fair value of
restructured Advances
 Interest sacrifice to be calculated on the basis of
discounting present value of cash flow with both
pre and post restructuring rate of bank’s BPLR+
appropriate term premium +credit risk premium
 Simpler method:5% of the exposure
(ii)The dues of the bank are fully secured with certain
exceptions
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Exceptions of (ii)
(a) SSI borrowers where outstanding is up to
Rs.25.0 lakh
(b) Infrastructure projects with an escrow
account with valid legal claim and where the
cash flows generated form the project are
adequate for repayment of the advance
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UCBs should frame comprehensive prudential
norms relating to the ceiling on the total amount of
real estate loans, single/aggregate limit for such
loans, margins, security, repayment schedule etc
Policy should be approved by the Board
While framing the policy the banks may also
consider for inclusion the National Building Code
framed by Bureau of Indian Standards (BIS)
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Banks to have Board approved policy on bill
discounting-proper appraisal
Banks should not extend bill discounting
facility or other non fund based facilities to
non-constituent borrower.
No accommodation bills; onus on bank to
ensure genuineness of trade transactionsany violation Penal Action
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THANK Q
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