Credit Risk

Credit Risk
Possibility of loss from the failure of loan or debt
instrument repayments.
Change in the repayment capacity of borrowers or debt
instruments that indicates possible failure by bank
borrowers.
Banks represent credit risk through rating systems.
Rating Methods
Rating agencies.
Agencies gather financial and qualitative
information to access the possibility of the
instrument not repaying the obligations in the
future.
Rating agencies assign codes to indicate the
repayment status of firms / instruments that have
applied for an evaluation with them.
Internal rating system.
Banks establish their own procedures and
methods to rate their customers.
Risk Rating
Rating grades
- (AAA, AA, A, BBB, BB, B, B, C, D)
Qualitative grades
- Good loans, Substandard loans, Default loans, Bad
loans
Rating Scale
- 1, 2, 3, 4, 5, 6 (Good -------- Bad)
Credit Life Cycle
Bank Credit Risk Origination
Business Loans and advances
Short term
Long term commitments
Consumer Loans
Vehicle
J ewellery
Consumer durables / White goods
Micro Credit
Off-Balance Sheet Transactions
Loans and Advances
Loans are given through bank accounts from which the
customer will not be able to withdraw.
Loan sanctions are mostly through the purpose for which
they have been sanctioned.
Example, if the loan sanction is for purchase of
machinery, the amount involved will be directly paid
to the machinery supplier than the borrower of the
bank.
Loans and Advances
Loan payments can also be made on a time basis where
payments will be made in stages to the borrower for the
purpose for which the loan has been sanctioned.
Loans sanctioned by the bank can be utilized by the
customer on a withdrawal basis only if the customer
opens an operational account for this purpose.
Advances that are sanctioned are at the disposal of the
bank customer and can be withdrawn whenever the
customer has a need. Withdrawal is permitted based on
the terms of advance sanction.
Working Capital Finance
Working capital finance can be through the sanction of
loans or advances.
Demand loans
Cash credit facility (advance)
Overdraft facility from banks
Current accounts (advance)
Loans against collateral security of fixed deposits,
house documents, jewellery or shares.
Credit Worthiness
Influences the loan / bank commitment decision.
Determination of terms and prerequisites for loan
decisions.
Type of credit / service to be granted to the customers.
Quantum of loan / service to be offered to the customers.
Credit Worthiness
Bankable projects / proposals from the customer.
Projected cash flows from the proposal.
Projected investment from the proposal.
Past data on the performance of the company.
On going performance of the project after the credit
sanction by the banks.
Rating Guidelines by Reserve Bank India
Individual banks can use their own internal rating
methods to determine credit worthiness of their
borrowers.
Banks can define default on credit exposures when a
scheduled payment obligation by a borrower is not met
within 90 days from the due date.
Exposure Risk for Banks
Loss of value outstanding at the time of default by a
borrower.
Loss on default is computed based on
- Default percentage (D)
- Exposure value for the bank (E)
- Recovery rate (R)
Loss on default = D x E x (1-R)
Credit Risk Evaluation Information Requirement by
Banks
Account Number of Applicant
Date of Account Opening
Branch of Applicant Account
Whether Existing Borrowing Customer
Credit Risk Evaluation Information Requirement by
Banks
DetailsofApplicants
Nameoftheentity
Registeredofficeaddress
Nameofthecontactperson
Addressoffactory/
establishment
Addressforcorrespondence
Officecontactdetails
Dateofincorporation
Datebusinesscommenced
Dateofformation
DetailsofApplicants
Line of business
Natureofproduct/service
offered
Typeofconstitutionofthe
business
Existingactivityofthe
businessentity
Proposedactivityofthe
businessentity
Nameofparentcompanyif
any
Credit Risk Evaluation Information Requirement by
Banks
Purpose of Loan
Expectedsourceoffunds
Businessowner
Expectedaccountturnover
Returnoninvestment
Saleproceeds
DetailsofDirector
DetailsoftheBoard
Principalshareholdersof
thecompanyandtheir
address
Purpose of Loan
Exposure of the
borrowing entity with
other bank groups
Credit facility availed
Credit facility applied
Type of facility
Amount
Purpose
Tenor
Primary security
Collateral security
Currency of security
Credit Risk Evaluation Information Requirement by
Banks
Details of Assets
Land
Tools
Electrical
Machinery
Other assets
Information on each type
of Assets
Purpose of asset
Imported / Indigenous
Supplier
Total cost
Promoters contribution
Loan required
Credit Risk Evaluation Information Requirement by
Banks
Business Information
Details of collateral
Details of customers of
business
Currencies in which
business is conducted
Number of employees
Existing Credit Facility
Details
Types of facility
Limits (value)
Outstanding as on the
previous accounting date
Names of banks
presently working with
Security lodged
Rate of interest
Repayment terms
Credit Risk Evaluation Information Requirement by
Banks
Past Performance (Two
years)
Net Sales
Net profit
Capital (net worth)
Total debt
Imports
Exports
Future Estimate (Current
year and next year)
Net Sales
Net profit
Capital (net worth)
Total debt
Imports
Exports
Additional Details Required
Purpose of request detailing various heads under which financial
assistance is sought
Organization chart, affiliate information, subsidiaries, and ownership
pattern
Copies of IT returns for the last three years
All bank account statement for the last 12 months
All loan account statement for the last 12 months with amortization
schedule / sanction letter
Copy of latest sanction letter with existing banker/s
Value of stock / debtors and creditors for the last 6 months
Month wise sales / purchases for the past 12 months (break up
showing exports / imports and domestic).
Sales / purchases to/from top 5 buyers / suppliers with contact
details
Details of bad debts during the past three years
Additional Details Required
Latest net worth statement of the proprietor / partners /
directors / guarantors certified by a Chartered
Accountant
Projected financials for the business for the next 3 years.
Photocopy of the documents of property offered as
collateral security (agreement for sale and related
documents, share certificate, sanction plan, no-objection
certificate (NOC) from concerned society)
Detailed project report (expenses, machinery to be
purchased, project cost, method of finance, financial
projections for the tenor of the term loan sought with
necessary assumptions, break even analysis)