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"Credit Risk Management: Policy Framework for Indian Banks"

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Part - VII

1.6      Operations / Systems

1.6.1      Banks should have in place an appropriate credit administration, measurement and monitoring process. The credit process typically involves the following phases: -

  1. Relationship management phase i.e. business development.

  2. Transaction management phase: cover risk assessment, pricing, structuring of the facilities, obtaining internal approvals, documentation, loan administration and routine monitoring and measurement.

  3. Portfolio management phase: entail the monitoring of the portfolio at a macro level and the management of problem loans.

1.6.2      Successful credit management requires experience, judgement and a commitment to technical development. Each bank should have a clear, well-documented scheme of delegation of limits. Authorities should be delegated to executives depending on their skill and experience levels. The banks should have systems in place for reporting and evaluating the quality of the credit decisions taken by the various officers.

1.6.3      The credit approval process should aim at efficiency, responsiveness and accurate measurement of the risk. This will be achieved through a comprehensive analysis of the borrower's ability to repay, clear and consistent assessment systems, a process which ensures that renewal requests are analyzed as carefully and stringently as new loans and constant reinforcement of the credit culture by the top management team.

1.6.4      Commitment to new systems and IT will also determine the quality of the analysis being conducted. There is a range of tools available to support the decision making process. These are: -

  • Traditional techniques such as financial analysis.

  • Decision support tools such as credit scoring and risk grading.

  • Portfolio techniques such as portfolio correlation analysis.

The key is to identify the tools that are appropriate to the bank.
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 the bank's activities.

1.6.5      Banks must have a MIS, which will enable them to manage and measure the credit risk inherent in all on- and off-balance sheet activities. The MIS should provide adequate information on the composition of the credit portfolio, including identification of any concentration of risk. Banks should price their loans according to the risk profile of the borrower and the risks associated with the loans.

Concluded.

Compiled by CoolAvenues Knowledge Management Team