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TARAS SHEVCHENKO NATIONAL UNIVERSITY

OF KYIV
ECONOMIC FACULTY

International Banking
Individual Coursework

Risk management strategy for problem credits on


example of Platinum Bank

Nataliya Mirgorod
“International economics”
1 Masters Degree

Kyiv 2010
1. Methods of credit risk management

Credit risk - is the main type of risks in banking activities. In case of credit risk
there is possibility that at some point in the future value of bank assets will decrease
due to the non-return (incomplete or late return) of these assets.
The main innovation of Basel 2 is the establishment of three different options
for calculating credit risk and three options for calculating operational risk. As for the
credit risk, the main options are: Standardized method, Basic method OVR,
Modernized method. For operational risk, the main options are: Basic method of
indicators, Standardized method and Improved measurement methods.
Methods of credit risk management are divided into two groups (by the level of
risk):
1) Methods of credit risk management for the individual loans;
2) Methods of credit risk management for the banks` advances portfolio.

Methods of credit risk management

At the level of At the level of advances


individual credit: portfolio

Analysis of: Diversification

Limitation
Client`s credibility Credit itself

Provisioning

Structuring
Securitization

Documentation

Control

Pict.1.1. Methods for managing credit risk in commercial banks [3]


Methods of credit risk management for the banks` advances portfolio:
1) Diversification. The main aim of this method is to distribute the advances
portfolio among the wide range of borrowers, which differ from each other in
characteristics (size of capital, ownership) and in conditions of activity (sphere of the
economy, geographical region). There are three types of diversification - industrial,
geographic and portfolio diversification. [3]
Table 1.1
Volume of loans, depending on geographic location in the advances portfolio of Platinum Bank
in July 2009 *

New Total
Month
Accounts Ticket Size Accounts ENR
July 2009 12 324 6 681 713 101 560 41 220 486
Crimea 837 454 653 5 329 2 254 135
Dnepropetrovskaya 273 141 434 2 422 1 054 781
Donetskaya 671 396 351 5 265 2 186 346
Cherkasskaya 620 332 662 5 497 2 222 159
Chernigovskaya 830 430 542 6 884 2 408 792
Chernovitskaya 143 75 565 1 514 591 387
Ivano-Frankovskaya 576 314 862 3 681 1 388 107
Kharkovskaya 979 581 510 8 109 3 648 634
Khersonskaya 1 006 570 832 9 182 4 495 199
* developed on the basis of Credit MIS Platinum Bank

2) Limitation. The main purpose of limitation as a method of credit risk


management is to set the maximum allowable size of granted loans, which allows
limiting risks. Due to limitation of credits banks are able to avoid critical loss that
could be made because of critical concentration of any type of risk and to diversify the
advances portfolio and ensure stable incomes. Bank Credit risk is limited by setting a
limit of total size of advances portfolio, limitation of credit resources of bank`s
subsidiaries and etc. [2]
3) Provisioning for compensation losses from the credit operations of
commercial banks. Provisioning, as a method of managing credit risk, is the
accumulation of funds, which are then used to offset bad loans. On the one hand, the
provision for credit risk protects depositors, creditors and shareholders of the Bank, on
the other hand, provision increases reliability and stability of the banking system as a
whole. [2]
4) Securitization. Securitization is a sale of bank assets by converting them into
securities that are subsequently placed on the market. Mainly, securitization is used for
bank loans enabling banks transfer credit risk to other market participants - investors
who buy securities. In addition, through securitization the Bank can make a transfer of
risk of interest rate changes and risk of early repayment of a credit. Securitization
reduces the level of riskiness of the bank, improves asset quality, and increases the
capital adequacy ratio. [11]
Methods of credit risk management for the individual loans:
1) Analysis of the borrower`s creditworthiness. In the working process, prior to
the loan agreement, the bank employee should carefully analyze the borrower's
creditworthiness that means its ability to repay the loan on time, to identify factors that
may cause failure to repay loans. Creditworthiness of the borrower, in contrast to the
solvency, does not capture non-payment of past time or on a certain date and predicts
the ability to repay debt in the short term. [3]
Minimization of credit risk in banks by implementing advanced informational
technological credit risk-based scoring models is perspective direction of improvement
of credit risk management. The results of these models are shown in positive data of
Platinum Bank (Tabl.1.2 and Tabl.1.3).
Table 1.2
Advances Portfolio Performance of Platinum Bank (DPD by Groups) according to the class of
set scoring *
Current Past Due Coincident % ENR Lagged % ENR
Month
Accts % ENR Accts % ENR 30+ 60+ 90+ 30+ 60+ 90+
 July 2009 92 269 87,5 4 721 5,16 7,34 4,65 2,59 8,21 5,66 3,39
A 36 259 92,12 1 361 4,07 3,81 2,21 1 4,62 3,04 1,54
B 33 383 87,1 1 657 5,27 7,64 4,79 2,75 9,26 6,75 4,54
C 8 575 82,03 549 6,14 11,83 8,1 4,61 13,7 10,88 7,05
D 911 62,58 103 7,25 30,17 23,97 18,84 22,82 16,6 12,35
Old Portfolio 13 141 81,12 1 051 7,44 11,45 6,95 3,56 8,34 4,43 2,02
* developed on the basis of Credit MIS Platinum Bank
Table 1.3
Advances Portfolio Performance Platinum Bank (DPD by Buckets) according to the class of set
scoring *
Current Past Due 30-59 60-89 90-119
Month
Accts % ENR Accts % ENR Accts % ENR Accts % ENR Accts % ENR
July 2009 92 269 87,5 4 721 5,16 1 907 2,69 1 316 2,06 1347 2,59
A 36 259 92,12 1 361 4,07 408 1,6 273 1,21 232 1
B 33 383 87,1 1 657 5,27 697 2,85 453 2,04 507 2,75
C 8 575 82,03 549 6,14 261 3,73 186 3,49 220 4,61
D 911 62,58 103 7,25 54 6,2 42 5,13 94 18,84
Old Portfolio 13 141 81,12 1 051 7,44 487 4,5 362 3,38 294 3,56
* developed on the basis of Credit MIS Platinum Bank

With the deterioration of the scoring class (A to D) the data of delinquent loans
is also getting worse (DPD).
2) Analysis and estimation of credit. Evaluation of credit is determination of its
feasibility from business and economic point of view, establishing the degree of
conformity of the loan`s size and terms to the aim of a deal and determination the
riskiness of a project. One customer can get loans, which differ in size, terms, forms
and methods of repayment and thus accompanied by a variety of credit risk.
3) Structuring a loan. The process of structuring a loan consists of working out
such parameters that meet customer needs and minimize the credit risk of the bank,
providing a timely loan. Basic structural parameters of the loan are: volume, time,
terms of issue, repayment schedule, maintenance, price.
4) Documenting of credit transactions. The process of documenting a loan
means the preparing and signing a credit agreement, the terms of which satisfy the
needs of the borrower and the bank. Correct credit agreement must protect the interests
of the bank, especially its depositors and shareholders. [3]
5) Control of a credit. Credit control –is a necessary condition for successful
application of bank lending. Constant control helps managers to identify problem loans
in advance and verify the correspondence of the credit workers to basic requirements
of the bank's credit policy.
2. Features of credit risk management in terms of economic crisis

The economic crisis brought changes to the work of almost all financial
organizations in modern times. It happens because of its main features: high level of
unemployment, decreased economic growth and increase of risk in the banking system
(credit, currency, market risks) and others.
This is clearly viewed in indicators of increase of problem loans. Commercial banks
should increase the amount of provisioning according to credit transactions because of
rising number of problem credits. This fact becomes very heavy burden for domestic
banks because of large contributions to the reservation by credit transactions with
problem credit operations in terms of absence of many tools, which in turn reduces the
liquidity of commercial bank. (Pict.2.1)

Increase the share of Increased deductions for


problem loans in reservations for bank
bank`s advances
credit operations
portfolios

Pict.2.1. Pressure to increase the volume of bad loans on reservations

Methods of reducing the number of problem loans without the bank reservoir
methods (Pict.2.2) are very labor intensive and require much more time for the bank
but they avoid decreasing of potential financial revenues as a result of a sale of
advances portfolio.

Methods of reducing the number


of problem loans

Restructuring "Holiday Credit"

Pict.2.2. Methods of reducing the number of problem loans without reservoir methods
[17]

1. "Holiday Credit" allows not making payments on the loan for a while. During
that time the bank will not charge interest rates, penalties, fines and won`t count this
time as overdue on the loan. This method is rare for the domestic banking system, and
is typically used in Western banks for serious lenders (mostly for mortgages). This
method increases the bank’s reputation and demonstrates high levels of liquidity,
which can function some time without revenues from the advances portfolio.
2. In case of restructuring bank usually offers the following:
- Extension of loan term (the bank adds from 1 to 10 years to lending period). It
decreases the loan itself, which must be paid monthly, though the monthly amount of
interest doesn`t minimize.
- Reduction of monthly payments (50 - 70%) for six months. The total loan
amount and maturity of the loan remain the same.
- The possibility for a term of 3 to 6 months not to pay the loan itself, but paying
interest only.
- Lower interest rates on loans.
One of the most common methods for the lowering the reserve for credit
operations during the economic crisis is selling problem advances portfolio to
collection agencies. The number of advances portfolios sold on average per month to
collection agencies rose from about one million in September 2009 to 5 million in
October 2010. Due to such agreements the Bank increases its own liquidity by
reducing the amount of reserve for credit operations and financial revenues from this
contract.
Main features of this process:
1) The assessment of portfolio;
2) Transfer of Due Diligence.
Depending on portfolio performance and history with this contractor the price can be
formed.
According to the terms of the buying and selling the advances portfolio should
take certain steps. (Pict.2.3)

Collecting general Data transfer (Register


information about Signing confidential
of Debtors)
advances portfolio agreement

Conducting Due Portfolio assessment Data transfer (Register


Diligence and analysis of Debtors)

Discussion of the Formation of proposal to


contract purchase the advances portfolio

Signing of the contract Receipt of advances Start of collecting


portfolio

Pict.2.3. Steps of buying and selling the advances portfolio *


* based on data of the Association of Collecting Businesses of Ukraine

Another major cooperation agreement of bank and collection agency is an


agreement on commission.

Pict.2.4. Dependence of efficiency on the DPD *


* based on data of CCG

While cooperation on terms of a commission the bank establishes the percentage


of commission (sustainable or flexible), provided to collection agency for obtaining
payment from the debtor's bank. Interest rate can be permanent (for example, 15%
from all payments received from the proposed by bank advances portfolio) or flexible,
depending on the observed performance, the term of debt (DPD) and from other
activities (for example, portfolio with average DPD=200 days and portfolio with
average DPD=360 days even in terms of equal work will have different effectiveness,
and the sum of money, which companies will receive will be different. That`s why,
percent commission on portfolio DPD = 360 should be higher). Dependence of
efficiency on the DPD can be presented on Pict.2.4.
Under normal conditions it is believed that the complexity of obtaining debt
increases with the increase of DPD, the loan amount (more than 20000 thousand) and
percentage of fines and penalties in the whole debt (with penalties more than 50% of
all debt).
Cooperation with collection agencies is the dynamic part of outsourcing in every
commercial bank, especially in terms of economic crisis.
References list

1. Annual Financial Report of “Platinum Bank”


2.Герасимович А.М., Алексеєнко М.Д., Парасій-Вергуненко І.М. та
інші Аналіз банківської діяльності: Підручник – Вид. 2-ге, без змін. – К.:
КНЕУ, 2006
3. Примостка Л.О. Фінансовий менеджмент у банку: Підручник. – 2-
ге вид., доп. і перероб. – К.: КНЕУ, 2004.
4.http://www.acbu.com.ua/ - сайт Асоціації учасників Колекторського
Бізнесу України
5. http://www.bank.gov.ua/ - сайт Національного банку України
6. http://www.minfin.gov.ua/ - сайт Міністерства фінансів України
7.http://www.platinumbank.com.ua/ - сайт Платинум банку
8.http://www.acbu.com.ua/ - сайт Асоціації учасників Колекторського
Бізнесу України
9.http://www.nauca.com.ua/ - сайт Незалежної Асоціації Українських
Колекторських Агентств
10.http://ccg.ua/ - сайт колекторської компанії Credit Collection Group
11.http://www.ufin.com.ua/ - інформаційно-аналітичний портал
Українського агентства фінансового розвитку
12. http://www.bis.org/publ/bcbs54.htm - Principles for the Management
of Credit Risk
13. http://www.uabanker.net/daily/2010/08/080510_1400.shtml -
консолидированные IFRS результаты Platinum Bank за первое полугодие
2010 года
14. http://www.ecb.int/home/html/index.en.html - ECB