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Speaker
Atul Chandra Pandit
Assistant Professor, BIBM
Credit Risk
It is the probability that a borrower will not be able to
pay interest or repay Principal according to terms
specified in the credit agreement.
It is probability of default on the part of the borrower
to act as per the agreement.
It also refers to the risk of negative effects on the
financial result and bank capital due to borrowers
default on its obligation to the bank.
Credit Risk
Credit risk comes from a banks dealing with
individual, Corporate, bank, NBFI or a sovereign.
It may arise due to inability or unwillingness to
perform
It may stem from on-balance sheet and off-balance
sheet activities
Types of Default
Technical default
Strategic default
Payment default
Economic default
Why CR is so Important?
Credit is the main source of earning and a source of
regular cash flow for a bank
Delay or default in payment cause cash flow
problems and affect bank liquidity
Erodes confidence of the depositors
It invites bank failure
Portfolio Risk
Systematic Risk
Risk in Planning
Risk in Execution/Implementation
Marketing Risks
Financial Risks
Managerial Risks
Input/Utility Availability
Govt. Policies
Natural Calamities
Technological Obsolescence
Political Situations
Use of CRG
Obligor-Level Analysis
Credit Selection and Pricing
Monitoring and Internal MIS
Also relevant for Portfolio Level
Analysis
Bangladesh Institute of Bank Management
SHORT
NAME
NUMBER
Superior
Good
Acceptable
Marginal/Watch list
Special Mention
Sub Standard
Doubtful
Bad & Loss
SUP
GD
ACCPT
MG/WL
SM
SS
DF
BL
1
2
3
4
5
6
7
8
Step-II:
Allocation
of Weightages to Risk
Components
Principle
Risk Components
Weights
Financial Risk
50%
18%
Management Risk
12%
Security Risk
10%
Relationship Risk
10%
Financial Risk
Leverage
Liquidity
Business/
Industry Risk
Size of
Business
Age of
Business
Management
Risk
Relationship
Risk
Experience
Security
Coverage
Account
Conduct
Succession
Collateral
Coverage
Utilization of
Limit
Team Work
Support
Compliance of
Covenants/
Condition
Business
Outlook
Profitability
Security Risk
Industry
Growth
Coverage
Market
Competition
Barriers to
Business
Bangladesh Institute of Bank Management
Personal
Deposits
Weights
50%
Leverage
15%
Liquidity
15%
Profitability
15%
Coverage
5%
18%
Size of Business
5%
Age of Business
3%
Business Outlook
3%
Industry Growth
3%
Market Competition
2%
2%
Weights
12%
Security
5%
Succession
4%
Teamwork
3%
Security Risk:
10%
Security Coverage
4%
Collateral Coverage
4%
Support
2%
Relationship Risk:
10%
Account Conduct
5%
Utilization of Limit
2%
Compliance of Covenants
2%
Personal Deposits
1%
RG/Short Name
Score
SUP
GD
85+
ACCPT
75-84
MG/WL
65-74
SM
55-64
SS
45-54
DF
35-44
BL
<35
Exceptions to CRG
Head of Credit Risk Management may also
downgrade/classify an account in the normal
course of inspection of a Branch or during the
periodic portfolio review. In such event, the Credit
Risk Grading Form will then be filled up by Credit
Risk Management Department and will be referred
to Corporate Banking/Line of Business/Credit
Administration Department/Recovery Unit for
updating their MIS/records.
Recommendation for upgrading of an account has
to be well justified by the recommending officers.
Essentially complete removal of the reasons for
downgrade should be the basis of any upgrading.
Bangladesh Institute of Bank Management
Exceptions to CRG
In case an account is rated marginal, special mention or
unacceptable credit risk as per the risk grading score sheet,
this may be substantiated and credit risk may be accepted if
the exposure is additionally collateralized through cash
collateral, good tangible collaterals and strong guarantees.
These are exceptions and should be exceptionally
approved by the appropriate approving authority.
Whenever required an independent assessment of the credit
risk grading of an individual account may be conducted by
the Head of Credit Risk Management or by the Internal
Auditor documenting as to why the credit deteriorated and
also pointing out the lapses.
If a Bank has its own well established risk grading system
equivalent to the proposed credit risk grading or stricter,
then they will have the option to continue with their own
risk grading system.
Bangladesh Institute of Bank Management
Annually
Annually
Annually
Half yearly
Quarterly
Quarterly
Quarterly
Quarterly
Other Areas
Thank You