Prestige Institute of Management Dewas

Guided by

Prof.Rashami Sharma

Seminar Click to edit PresentationMaster subtitle style on our group members Credit risk management

Abhishek Gulati AditiyaVijayva Ankit Dubey

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CONTENTS
Credit Risk and its Management Importance of credit risk management components of Credit risk Credit Risk Management- A Map

Credit Risk Management

Basel-I Basel-II Basel-III

Click to edit Master subtitle style

Conclusion

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Credit risk management

Loan only to borrowers who will pay you back

Questions?????

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What is Credit Risk?

Credit Risk is the risk that a loss will be incurred if a counterparty does not fulfill its financial obligations in a timely manner. Credit Risk is the potential of loss arising out of the inability or unwillingness of a customer or counterparty to meet its commitments in relation to lending, trading, settlement and other financial transactions

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Credit risk

Credit risk is the major single cause of bank failures because 80% of a banks balance sheet relates to aspects of risk management. types of credit risk are :
Personal or consumer risk Corporate or company risk Sovereign or country risk

Main

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How to manage risk

Hedging Exposure Reserves

limits and Provisioning

More importantly by having Adequate Capital

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Risk covered by banks

Lending

funds to individuals

Coporates Trade Industry Agriculture Transport/

financial institutions

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Credit Risk Management

Credit

risk is the risk of financial loss owing to the failure of the counterparty to perform its contractual obligations. of diversification of credit risk has been the primary reason for many bank failures. have a comparative advantage in making loans to entities with whom they have an ongoing relationship. creates excessive concentrations in geographic or industrial sectors.
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Lack

Banks

This

Credit risk Management

Credit

risk is more difficult to quantify than market risk. probabilities are difficult to assess because of the infrequency of defaults. risk has effectively three components.

Default Credit

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The three components of Credit risk

Default

risk The risk of default by the counterparty and is measured by the probability of default. exposure risk The risk of fluctuations in the market value of the claim on the counterparty. default, this is known as exposure at default. risk Uncertainty in the fraction of the claim recovered after default. depends on the seniority of debt,
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Credit

At

Recovery This

Credit Management
Credit

Management is a cross-functional activity between SD and FI

Sales Peopl e want to sell

SD

C R E D I T

F I

People want to reduce risk

Credit is an independent function

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Credit Risk Management - A Map

Historical Data Borrower Rating Credit Risk Model Loss Distribution Value at Risk

Economic Capital Allocation

Provisioning Marginal Analysis

Exit Decisions Limit Setting

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Credit Risk Management Basel I

Risk

management

Capital

adequacy, Sound supervision & regulation of operations accepted by developed and developing countries = 8% of assets 14% 2 4% on Credit risk
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Transparency

Unquestionably Capital Tier Tier

Focused

Basel II
Ensuring Enhance

sensitive;

that capital allocation is more risk

disclosure requirements which will allow market participants to assess the capital adequacy of an institution; that credit risk, operation risk and market risk are quantified based on data and formal techniques; Attempting to align economic and regulatory capital more closely to reduce the scope for regulator arbitrage
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Ensuring

Basel III
Developed

in a response to the deficiencies in financial regulation revealed by the global financial crisis. capital requirements and introduces new regulatory requirements on bank liquidity and bank leverage. annual GDP growth by 0.05 to 0.15 percentage point.

Bank

Decrease

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CONCLUSIONS
THE

ADVENT OF ACTIVE AND LIQUID CREDIT TRADING WILL REQUIRE

COMPLETE RE-ENGINEERING OF THE CREDIT FUNCTION & PROCESS THE NATURE OF BANKING FUNDAMENTALLY

ALTER

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Hope you have enjoyed our presentation

Thank you

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