Credit Risk

Risk of loss that may occur from failure of the counter - party to make payments It includes non performance by a counter party in a variety of Off Balance Sheet contracts such as forward contracts / interest rate swaps, etc. Differs from market risk due to obligor behavior considerations The five Cs of Credit - Capital, Capacity, Condition, Collateral and Character Credit events include bankruptcy, failure to pay, loan restructuring, loan moratorium, accelerated loan payments

Types of Credit Risk

Borrower Risk Industry Risk Portfolio Risk

Borrower risk / Counter part / Default risk

The risk that one party in a contract will default or otherwise not fulfill his/her obligations (more than 90 days) For example, if A agrees to lends funds to B up to a certain amount, there is an expectation that A will provide the cash, and B will pay those funds back. There is still the counterparty risk assumed by them both. B might default on the loan and not pay A back or A might stop providing the agreed upon funds

Intrinsic / Industry Risk

It focuses on the risk inherent in certain lines of business and loans to certain industries

Concentration / Portfolio Risk

The risk associated with single exposure or group of exposures with the potential to produce large losses to threaten a bank's core operations

It may arise in the form of single name concentration or industry concentration

Tools of Credit Risk Management

Exposure Ceiling Limits

Risk based scientific pricing

Risk rating model

Portfolio management

Credit Exposure Ceiling

The exposure ceiling limits would be : - 15 % of capital funds in case of a single borrower - 40 % of capital funds in the case of a borrower group with additional 10% for infrastructure projects undertaken by the group The threshold limit should not exceed six to eight times of the capital funds of the bank

Risk Rating Model

It is a setup of comprehensive risk scoring system on a six to nine point scale RAM is an internal rating software offered by CRISIL designed to assist a bank or financial institution in complying with the requirements under the internal ratings based approach

RAM is the largest deployed Internal risk rating solution in India

Risk Based Scientific Pricing

Measurement of loan risk in terms of interest rates and other fees The interest rate on a loan is determined the time value of money and the lender's estimate of the probability Factors for consideration : - Borrower's credit score - Employment status

Portfolio Management
It benefits adverse impact of concentration of exposures to a particular borrower, sector or industry The distribution of borrowers in various industry, business group and conduct of rapid portfolio reviews helps to mitigate credit risk