Credit Process

AN OVERVIEW……
Objectives

 Basic Elements and components

 Importance of each components

 Evaluate quality of Credit Process
 Credit Rating Process
Credit Life Cycle

Credit
Initiation and
Analysis

Evaluation of
Credit
Credit
Underwriting
Process

Loan
Loan
Disbursemen
Monitoring
t
 Credit Types-
A. Short term Loans/Advances

B. Medium/Long Term Loans

C. Off Balance Sheet Transactions

 Management of Loans-
A. Pre-Sanction

B. Documentation

C. Disbursement

D. Post lending supervision and control

 Safety of Loans-

1. Basis on which loan is taken

2. Type and time of the loan to be provided

3. Terms and Conditions

 Approach

1. Pre-Sanction Appraisal

 Financial data of the past

 Detailed report on borrower/security

 Audit statements if any

2. Post Sanction Control

 Documentation

 Supervision

 Scrutiny

 Periodical Reviews
Types of Loans/Advances

 Secured Loans-Loans/Advances made on security of assests

the market value of which is not at any time less than the
amount of loan or advance

 Unsecured Loan
Types of Security-
o Primary-Generally from a viable and professionally managed enterprise
 Personal–Created by a duly executed promissory note, acceptance or
endorsement of bill of exchange etc.Gives bank the right of action to
proceed against the borrower personally in the event of default

 Impersonal-Created by way of a charge (pledge, hypothecation, mortgage,

assignment etc.)
o Collateral-Meaning running parallel or together
 Taken as additional and separate security
 Could be secured / unsecured guarantees, pledge of shares and other
securities, deposits of title deeds etc.
Preconditions of loan
 Willingness or intention to repay as per agreement

 Purpose for which loan is sought

 Conditions that can set future trends-

 Prospect

 Future Risk Profile

 Repayment Capacity

 Financial analysis-Past and Present

 Credit Rating

 Repayment/Rollover
Risks in Banking

 Credit Risk
 Market Risk
 Operational Risk
Norms in Credit Risk

 Capital Adequacy
 Exposure 
 IRAC norms
 Credit rating system and risk pricing
policy
 ALM
Credit Risk Framework
 Policy Framework
 Credit Risk Rating
 Credit Risk Limits
 Credit Risk Modelling
 RAROC Pricing
 Mitigatns
 Review Mechanism
Components of Credit Risk

 Default risk-Risk that a borrower or counterparty

is unable to meet its commitment.
 Portfolio Risk-Risk which arises from the
composition / concentration of bank‟s exposure to
various sectors
Factors affecting Credit Risk
 Internal Factors- Bank Specific
 Good Policy
 Loan monitoring
 Good credit analysis
 Sound credit culture

 External Factors-State of economy, size of fiscal deficit etc.

 Well diversified loan portfolio
 Good Norms
 Strong Monitoring
 Delegation and accountability.