Credit Risk

Management
INDUSTRY BEST PRACTICES

Introduction
Credit Risk: The potential that a borrower fails to meet the obligations on
agreed terms.
Credit Risk Management: A process to proactively manage loan portfolios in
order to minimize losses and earn an acceptable level if return for
shareholders.

Guidelines for CRM

Policy guidelines
Lending guidelines
Credit Assessment & Risk Grading
Approval Authority
Segregation of Duties
Internal Audit

Preferred organizational Structure & Responsibilities

Procedural guidelines
Approval Process
Credit Administration
Credit Monitoring
Credit Recovery

Policy Guidelines
Lending Guidelines:
1.
2.
3.
4.
5.
6.
7.

Specifying Industry and Business segment and adding weight to them (e.g.
Textiles: grow, Cement: Maintain, Construction: Shrink)
Indicating types of loans only which are permitted (e.g. Working capital, Trade
Finance, Term Loan etc.)
Defining limits of loans to singular/group limits/syndication
Specifying Industry wise lending caps so that single industry can not be over
concentrated.
Outlining discouraged business types (e.g. Weapon finance, Highly leveraged
transactions etc.)
Clearly stated loan facility parameters (e.g. maximum size, maximum tenor,
covenants etc.)
Cross Border Risks

Credit Assessment & Risk

Grading
Credit Assessment
A thorough credit and risk assessment should be conducted prior to the granting of
loans
Results should be presented in the credit application, approved by CRM Department
Relationship managers must be responsible to ensure the accuracy of the entire
credit application submitted for approval.
The credit application should summarize the following details:
1.
2.
3.
4.

Amount of type of loan(s) proposed

Propose of loans
Loan Structure (Tenor, Covenants, Repayment Schedule, Interest)
Security arrangements

Credit Assessment & Risk

Grading
Other risk areas should be addressed in the credit application:
Borrower Analysis
Industry Analysis
Supplier/Buyer Analysis
Historical Financial Analysis
Projected Financial Performance
Account Conduct
Adherence to lending guidelines

Mitigating factors
Loan structure
Security
Name Lending

Risk Grading

Grade: 1 (Superior)
Facilities are fully secured by cash
deposits, government bonds or a counter
guarantee from a top tier international
Bank
All security documentation should be in
place.

Grade: 2 (Good)
Borrowers repayment facility is strong
The Borrower should have excellent
liquidity and low leverage
The company should demonstrate
consistently strong earnings and cash
flow.

Grade: 3 (Fair Risk)

Grade: 4 (Marginal)
Adequate financial Condition though may Requires greater attention due to
not be able to sustain any major or
conditions affecting the borrower, the
continued setbacks.
industry or the economic development
Demonstrate consistent earnings, cash
Have above average risk due to strained
flow and have a good track record.
liquidity
Assets would be normally be secured by
acceptable collateral

Risk Grading

Grade: 5 (Special Mention)

Have potential weaknesses that deserve
management close attention
Sustained deterioration in financial
condition.
Loan payments due for 30-60 days.

Grade: 6 (Substandard)
Financial Condition is weak and capacity
of inclination to repay is in doubt.
Loan payments due for 60-90 days
Not yet considered non-performing as
the correction of the deficiencies may
result in an improved condition.

Grade: 7 (Doubtful)
Full repayment of principal and interest is
unlikely ant he possibility of loss is
extremely high.
Loan payments due in excess of 90 days
Due to litigation, liquidation procedure or
capital injections, assets are not yet
classified as loss.

Grade: 8 (Bad & Loss)

Long outstanding with no progress in
obtaining repayment.
Loan payments due in excess of 180
days.
The proceeds expected from the
liquidation or realization of security may
be awaited.

Approval Authority
Approval authorities must be reviewed annually by MD/CEO/Board.
Credit approval section must be separated from the marketing/Relationship
management function
Role of Credit Committee must be restricted to only review of proposals.
All Credit Risks must be authorized by executives within the authority limit
delegated by the MD/CEO
Any Credit proposal that does not comply with lending guidelines should be
referred to Head Office for approval

Segregation of Duties: Banks should aim to segregate the following lending

functions:
Credit Approval / Risk Management
Relationship Management/ Marketing
Credit Administration

Segregated Internal Audit/ Control Department

Preferred Organizational Structure &

Responsibilities:
Managing
Director
Head of Credit Risk
Management (CRM)
Credit
Administrati
on
Credit
Approval
Monitoring/
Recovery

Head of Corporate

Relationship
Management/Marketing

Business Development

Other Direct Reports (Internal

Audit)

Procedural Guidelines
Approval Process:

Credit
Application
recommended
by
RM/Marketing

Zonal Credit
Officer

Head of Credit

Managing
Director

Executive
Committee/Boa
rd

Procedural Guidelines
Credit Administration
Disbursement
Custodial Duties
Compliance Requirements
Credit Monitoring
Early Alert Process

Credit Recovery

NPL (Non Performing Loan) Account Management

Account Transfer Procedures
NPL (Non Performing Loan) Monitoring
NPL Provisioning and write off
Incentive Programme

THANK YOU !!!