RISK

MANAGEMENT &
CREDIT RATING
 MEANING OF CREDIT RISK:
Operational Risks: The examples of such risks are losses due to frauds,
disruption of business due to natural calamities like floods, etc.

Market Risks: These are the risks resulting from adverse market movements
of interest rates, exchange rate, etc.
Credit Risks: The credit risk can be defined as the unwillingness or inability
of a customer or counterparty to meet his commitment relating to a financial
transaction with the bank. For example, in a fund based limit, the credit risk
is the non payment of principal and interest by the borrower, as per the
agreed terms of repayment
STEPS TAKEN TO MITIGATE CREDIT RISKS:

At the macro Level: The risks to the overall credit portfolio of the bank are
mitigated through frequent reviews of norms and fixing internal limits for
aggregate commitments to specific sectors of the industry/business so that
the exposures are evenly spread over various sectors and the likely loss is
retained within tolerable limits.
At Micro Level: This pertains to policies of the bank regarding appraisal
standards, sanctioning and delivering process, monitoring and review of
individual proposals/categories of proposals, obtention of collateral security
etc.
 CREDIT RATINGS:
The level of credit risk involved in each loan proposal depends on the unique
features of that proposal. Two similar projects, with different promoters, may be
appraised by a bank as having different credit risks

To decide about accepting, rejecting or accepting with modifications/special

covenants
To determine the pricing, i.e., the rate of interest to be charged
To help in the macro evaluation of the total credit portfolio by classifying it
on the ratings allotted to individual accounts
 INTERNAL AND EXTERNAL RATINGS:

Most of the banks in India have set up their credit rating models as in the
recent past, the rating agencies were not equipped well enough to provide the
ratings so reliable as banks depending on these for credit decisions. However,
with experience gained in the last few years, these rating agencies have gained
the confidence of the banks. A few of such rating agencies are CARE, ICRA,
CRISIL, and SMERA.
 METHODOLOGY OF CREDIT RATING:
Based on its loan policies and risk perceptions, each bank has its own rating
model. Common feature in all the risk models is that a score is given for
different perceived risks by allotting different weightages.

Normally, the broad categories of risk areas which are scored, are:
Promoters/Management aspects and the securities available
Financial aspects based on analysis of financial statements
Business/project risks In view of the dynamic market scenario, there is
need to review the ratings of a borrower at regular intervals, upgrade or
downgrade or maintain it.
RBI GUIDELINES ON CREDIT RISK MANAGEMENT
Lenders should carry out their independent and objective credit appraisal
in all cases and must not depend on credit appraisal reports prepared by
outside consultants, especially the in-house consultants of the borrowing
entity.
Banks/lenders should carry out sensitivity tests/scenario analysis,
especially for infrastructure projects, which should include project delays
and cost overruns.
Lenders should ascertain the source and quality of equity capital brought in
by the promoters/ shareholders.
 CREDIT INFORMATION SYSTEM:
The need of credit information system was felt in order to alert the banks and
financial institutions (FIS) and put them on guard against borrowers who
have defaulted in their dues to other lending institutions.
It was also imperative to arrest accretion of fresh NPAs in the banking system
through an efficient system of credit information on borrowers as a first step
in credit risk management. In this context, the requirement of an adequate,
comprehensive and reliable information system on the borrowers through an
efficient database system was keenly felt by the Reserve Bank/ Government as
well as credit institutions.
 Central Repository Of Information On
Large Credits (CRILC):
The RBI has set up a Central Repository of Information on Large Credits
(CRILC) to collect, store, and disseminate credit data to lenders. The banks are
required to report credit information, including classification of an account as
SMA, to CRILC on all their borrowers having aggregate fund- based and non-
fund based exposure of Rs. 5 crore and above with them. However, Crop loans
are exempted from such reporting, but, banks should continue to report their
other agriculture loans.
THANK YOU