BY SUBHOJIT PYNE

RISK : Risk is defined as uncertain resulting in adverse outcome, adverse in relation to planned objective or expectation. It is very difficult to find a risk free investment. An important input to risk management is risk assessment. Many public bodies such as advisory committees concerned with risk management CREDIT RISK Credit risk is defined as the potential that a bank borrower or counterparty will fail to meet its obligations in accordance with agreed terms, or in other words it is defined as the risk that a firms customer and the parties to which it has lent money will fail to make promised payments is known as credit risk.

Credit risk may take the following forms:

In the case of direct lending: principal/and or interest amount may not be repaid; In the case of guarantees or letters of credit: funds may not be forthcoming from the constituents upon crystallization of the liability;

In the case of treasury operations: the payment or series of payments due from the counter parties under the respective contracts may not be forthcoming or ceases;
In the case of securities trading businesses: funds/ securities settlement may not be effected; In the case of cross-border exposure: the availability and free transfer of foreign currency funds may either cease or restrictions may be imposed by the sovereign.

Default risk:Systemic or intrinsic risk. Concentration risk. Credit spread risk or downgrade risk

Corporate assets Retail assets Non-SLR portfolio May result from trading and banking book Inter bank transactions Derivatives Settlement etc

Credit risk management encompasses identification, measurement, monitoring and control of the credit risk exposures. Credit Risk Management for Banking enables you to quickly and accurately calculate critical risk measures, such as probability of default, exposure at default, credit migration, regulatory capital, risk weighted assets, credit value at risk (CVAR) and economic capital.

Establishing appropriate credit risk environment Operating under sound credit granting process Maintaining an appropriate credit administration, measurement & Monitoring Ensuring adequate control over credit risk

Banks should have a credit risk strategy which in our case is communicated throughout the organization through credit policy.

At the transaction level, the objectives of credit risk management ideally should be: Setting an appropriate credit risk environment. Framing a sound credit approval process. Maintaining an appropriate credit administration, measurement and monitoring process. Employing sophisticated tools/techniques to enable continuous risk evaluation on a scientific basis. Ensuring adequate pricing formula to optimize risk return relationship

At the Portfolio level, the objectives of credit risk management should be:
Development

and Monitoring of methodologies & norms to evaluate and mitigate risks arising from concentrating by industry, group, product, etc.

Ensuring

adherence to regulatory guidelines.

Driving

asset growth strategy.

Expert Systems: The expert analyzes these five key factors, subjectively weights them, and reaches a credit decision.

Exposure Ceilings Review/Renewal Risk Rating Model Risk based scientific pricing Portfolio Management Loan Review Mechanism

CREDIT ADMINISTRATION,MEASUREMENT & MONITORING PROCESS

Principle 1: Banks should have in place a system for the
ongoing administration of their various credit risk-bearing portfolios.

Principle 2: Banks must have in place a system for monitoring the condition of individual credits, including determining the adequacy of provisions and reserves

Principle 3: Banks should develop and utilize internal risk rating systems in managing credit risk. The rating system should be consistent with the nature, size and complexity of a banks activities. Principle 4: Banks must have in place a system for monitoring the overall composition and quality of the credit portfolio.
Principle 5: Banks must have a system in place for managing problem credits and various other workout situations.

NON-PERFORMING ASSETS (NPA)

A Non-performing asset (NPA) was defined as a credit facility in respect of which the interest and/ or installment of principal has remained past due for a specified period of time. With a view to moving towards international best practices and to ensure greater transparency, it has been decided to adopt the 90 days overdue norm for identification of NPAs, from the year ending March 31, 2004. WHY AN ACCOUNT BECOME NPA?

Non-payment by borrowers due to various internal and external factors and in some extreme cases willful default. Non-initiation of effective recovery steps by banks.

Recovery is defined as the process of regaining and saving something lost or in danger of becoming costs .
Certain important points for debt recovery Dont violate or breach the recovery policy, procedure etc. prescribed by the principal.

Dont make anonymous calls or bunched calls to the debtor, which may be perceived as harassment. Dont conceal or misrepresent your identity during calls and visit or other interaction with the debtor. Dont show uncivil/indecent/dirty behavior or use such language during calls and visits to the debtor. Dont harass/humiliate/intimidate/threaten the debtor-verbally or physically.

Improper selection of an entrepreneur Deficient analysis of project Viability Inadequacy of Collateral Security/Equitable Mortgage against Loan Unrealistic Terms and Schedule of Repayment Lack of Follow up Measures calamities Default due to natural

Loan recovery policy Giving notice to borrowers Repossession of Security Valuation and Sale of Property Opportunity for the borrower to take back the security

Difficult recovery process Assets possession process Legal recovery process

USE OF LOK ADALAT

The Honorable Supreme Court also observed that loans, personal loans, credit card loans and housing loans with less than Rs.10 lakhs can be referred to Lok Adalats

Debt Recovery Agent may now be defined as person or entity engaged by a bank for the purpose of collecting specified loans, or advances or other kind of debts from the debtors ( or borrowers) in accordance with the specified terms and conditions.

FUNCTIONS OF DEBT RECOVERY AGENTS

Collecting Dues Receivables: Remitting Collected Funds: Book Keeping Of Recovery Management:

To conclude with, till recent past, corporate borrowers even after defaulting continuously never had any real fear of bank taking any action to recover their dues despite the fact that their entire assets were hypothecated to the banks. This is because there was no legal Act framed to safeguard the real interest of banks. However with the introduction of Securitization Act, 2002 banks can now issue notices to their defaulters to repay their dues or else make defaulters face hard and tough actions under the aforementioned Act. This enables banks to get rid of sticky loans thereby improving their bottom lines. Also, the passing of the Securitization Act, 2002 came as a bonanza for investors in banking sector stocks that in turn resulted into an improvement in their share prices.