Statement of Purspoe of the Reasearch:-

Financial institutions across the globe over the years have faced many difficulties for a

number of reasons but one of the major cause of serious banking problems is Credit risk

management/measurement. Credit risk is also directly related with the liquidity and solvency of the

company. This paper discusses the number of factors associated with the credit risk in banking

industry and is an attempt to identify and minimize the various risks associated with the operation.

Different methods adopted by certain banks like Bank of Montreal in Canada and Corporation

Bank (Nationalized bank in India) in this aspect is discussed here in detail for the retail as well as

corporate credit exposures. The project will also cover in brief about the lending practice in

financial instituiions and how and why they differ in their approach dependng on the security and

credit worthiness of tbe borrowing party. Though credit risk measurement is not quantitative in

nature and is affected by numerous factors like inflation, economic growth, geaography, regulaiton ,

central bank policy and many more, an effeort has been made to quantify the same based on

qualitative and qualitative factors

Credit Analysis

The key component of credit analysis is to find out the risk associated with the exposure

and then determine what price (rate of interest) is to be charged. In the process there are 4 importnat

factors to look into which is called 4 Cs sometimes

Character:

It is the ability of the management integrity and their commitment to pay the loan. In also

includes the qualification of the management, their expertise and experince in the related field, their

personal credit history. Credit rating agencies also look for qualities the way management react to

unforeseen circumtancess.
 so continues to be directly related to lax credit standards for borrowers and counterparties,

poor risk management and lack of attention to changes in economic or other circumstances. This

has finally resulted in the deterioration of credit standing of the bank's counterparties and failure of

some of the major investment banks. This experience is common in almost all countries and needs

to be addressed.

This paper explains that the trading policies of Merrill Lynch depend on the integrated

management of its client-driven accurate positions, together with the associated hedging and

financing; moreover, several trading habits make Merrill Lynch susceptible to market, credit,

liquidity, process and other threats, which are practical and need exhaustive controls and

supervision. The author points out that where suitable, credit risk alleviation methods comprise of

the prerogative to need start-up collateral or margin, the privilege to cease transaction or get

guarantees in case any untoward incidents happen, the prerogative to ask for the guarantee in the

event when some exposure ceilings are crossed and the purchase of credit default safeguards. The

paper stresses that, to respond in a better fashion to credit risk management, Merrill Lynch needs

guarantees mainly from U.S. government and agencies securities, on several derivative business

deals.
 This project is a detailed analysis of the current economy, the performance of industry in

totality and the impact of these factors on credit related issues. The primary task to find out the

credit risk measurement techniques used in banking/financial instituiions and what are the factors

effect the pricing. In the process data collected through the reseacch is also presented

In this project the conceptual, practical and empirical aspect for credit risk pricing and risk

measurement will be discussed in the light of USA, Canada (developed economy) and Indian

economy (developing economy). It will be a combination of the use of theory of Accounting and

Finance, and practical banking to assess various kinds of risks associated while lending and the

effect of pricing on debt repayment by borrowers. The role of managers and investment bankers in

the changing interest rate environment and the impact on consumers/corporate clients will be given

emphasis.

This project will be helpful to understand “what are the various kinds of credit risk

measurement practices in banking” and “how credit risks are assessed while sanctioning

retail/commercial/corporate loans by the bankers”, how the risk can be mitigated using primary

security or collateral, and how the risk is priced. It will also focus on various methods used by

major banks across the globe for assessment of credit risk.

Purpose od this research report is designed to provide a educational/working knowledge of the

essentials of credit analysis for today's marketplace. Students, professionals, ----
learn credit and credit analysis in application-based courses that convey how to conduct and write a
credit analysis report; manage a loan or loan portfolio; structure term- and asset-based loans;
manage workouts and business bankruptcies; and understand trade financing transactions, project
financing, and reorganization. The program is designed by a faculty of leading credit practitioners
whose teaching is responsive to the changing economic environment.
The program is designed for professionals who wish to acquire expertise in a consolidated time
frame and can be completed in nine months.
Who Should Enroll:
M.B.A.s, recent college graduates, professionals who work in finance, banking executives, bankers
who currently work with or on credit topics, bankers who wish to transition into the credit area,
bankers from foreign banks or branches who wish to learn how U. S. banks do business, business
owners, accountants, lawyers, and professionals from any field who want to understand or advance
their knowledge of credit analysis.
Upon completion of the course students are able to:
• Write a credit analysis report.
• Manage a commercial loan or loan portfolio.
• Manage workouts and business bankruptcies.
• Negotiate loan agreements.
• Structure asset-based loans and trade finance transactions.
• Structure term loans, syndicated transactions, and project finance transactions.
This certificate is awarded to students who complete five courses--two required and three electives.
Required courses must be taken sequentially. Students who prefer to take more than one course a
semester can take a required course along with an elective course.
Students with minimal writing experience are advised to take X58.8112, Writing Skills for
Accounting and Finance Professionals.
 
Credit appraisal involves analysis of liquidity position/ financial soundness of the company.
Although, the analysis also covers understanding growth trends in revenues and earnings,
and profit margins, more emphasis is required to be placed on liquidity-both long term and
short term. Credit analysis or credit appraisal typcically involves micro-analysis of the key
financial statements ie Income Statement, Balance Sheet and Cash flow Statement. The
important paramters that are to be looked while analysing liquidity are:

a) Debt Equity Ratio

b) Total Debt to Total Assets
c) Current Ratio and Quick Ratio
d) Sales to Working capital Ratio
e) Inventory Turnover Ratio

Along with the above mentioned ratios, one needs to look at aspects like aging schedule of
debtors, quality of inventory ( fast-moving, slow-moving and obsolete). Credit risk analysis
or credit appraisal basically revolves around the premise of ability of borrower to service its
debt through cash flows. Primary cash flows are those that are generated through
operations while secondary cashflows are cash & cash equivalents plus marketable
securities.

While analysing credit risk of the borrower, the bank/ credit rating agency needs to
consider even the future growth potential of the business and incorporate in its judgement,
those issues that can possibly put business at risk. For this one needs to understand the
future growth strategy & business outlook and how the company wants to move ahead
with its plans. The potential impact of any future growth initiatives can be critical today as it
may put additional stress on current profitability and liquidity of the business.

Hope the above gives you some idea on how to progress. However, if things aren`t clear
or you haev any questions, please feel free to drop your query on e-mail stated below or
on this forum. Wishing you all the best for the project...!!

Warm Regards,
Sameer Sakharkar
more at http://www.citefin.com/1325-credit-risk-analysis-project.html#ixzz17HzwEFiX

Table of Contents
Introduction
Risk Analysis
Threats/Risks - Market Risk
Credit Risk
Foreign Asset Risk
Governmental Risk
Competition Risk
Analysis
Data Systems
Mitigation/Countermeasures
Information Assurance Policies
Disaster Recovery Policies
Summary

From the Paper

"The World Trade tower attack in September of 2001 prompted the Bank of New York to re-
evaluate and amend its disaster recovery policies. At the time of the disaster, the Bank had over
8,300 employees located in four lower Manhattan facilities who were evacuated in a matter of
hours. The recovery plan was immediately implemented, and they temporarily relocated
headquarters to midtown Manhattan. By that evening, they had relocated operating departments to
five existing contingency sites in New Jersey, New York State, and Connecticut. Staff was
reassigned to alternate sites as specified in disaster recovery plans while systems were restored at
backup sites over the course of the following days. Well-executed contingency plans led to quick
recovery of many businesses, including ADR, BNY Clearing, Core Custody, Brokerage, European
Transfer Agency, Foreign Currency Transfer, Fund Accounting and Administration, Investment
Management, Performance Measurement, Retail Fund Administration and Securities Lending (BNY
annual report, 2001)."

Tags: inflation, consumer, Federal, Reserve, Board, 911 Their main goal is to identify and track
the various risks associated with the Bank of New York and offer recommendations as to how
to minimize or eliminate them. The paper shows how threats and risks in the banking
industry can be divided into the following categories: Market Risk, Credit Risk, Foreign Asset
Risk, Competition Risk, Governmental Risk, as well as risks to the physical structure and
data systems. This paper discusses these risk areas and the Bank of New York's plan for
minimizing them.