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"Credit Risk Management: Policy Framework for Indian Banks"

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Part - III

1.3.4      The credit risk strategy should provide continuity in approach, and will need to take into account the cyclical aspects of any economy and the resulting shifts in the composition and quality of the overall credit portfolio. This strategy should be viable in the long run and through various credit cycles.

1.3.5      An organisation's risk appetite depends on the level of capital and the quality of loan book and the magnitude of other risks embedded in the balance sheet. Based on its capital structure, a bank will be able to set its target returns to its shareholders and this will determine the level of capital available to the various business lines.

1.3.6      Keeping in view the foregoing, a bank should have the following in place: -

  1. dedicated policies and procedures to control exposures to designated higher risk sectors such as capital markets, aviation, shipping, property development, defence equipment, highly leveraged transactions, bullion etc.

  2. sound procedures to ensure that all risks associated with requested credit facilities are promptly and fully evaluated by the relevant lending and credit officers.

  3. systems to assign a risk rating to each customer/borrower to whom credit facilities have been sanctioned.

  4. a mechanism to price facilities depending on the risk grading of the customer, and to attribute accurately the associated risk weightings to the facilities.

  5. efficient and effective credit approval process operating within the approval limits authorized by the Boards.

  6. procedures and systems which allow for monitoring financial performance of customers and for controlling outstandings within limits.

  7. systems to manage problem loans to ensure appropriate restructuring schemes. A conservative policy for the provisioning of non-performing advances should be followed.

  8. a process to conduct regular analysis of the portfolio and to ensure on-going control of risk concentrations.

1.4      Credit Policies and Procedures
The credit policies and procedures should necessarily have the following elements: -

  • Banks should have written credit policies that define target markets, risk acceptance criteria, credit approval authority, credit origination and maintenance procedures and guidelines for portfolio management and remedial management.

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Compiled by CoolAvenues Knowledge Management Team