Credit Rate Risk Management In Banks-B.V.Raghunandan

Unit 7 Credit Risk Management in Banks

RBI Guideline on ALM
A Statement of Structural Liquidity
to capture maturity structure of the cash inflows and outflows
A Statement of Short-term Dynamic Liquidity
A Statement of Interest Rate Sensitivity

Credit Risk Rating
CRR is a systematic classification of loans and investments into standardized grades on the basis of the risk involved in each loan or investment.
risk in loan and investment portfolios
alphabetical (A, B, C)
numerical (a grading scale of 1 to10)
alphanumerical (A1, A2, A3)
mathematical signs of + and minus (A+, A-, B, B+, B++)
comprehensible, widely used and widely popular

Three Pillars of ALM Process
ALM Information Systems
ALM Organisation
ALM Process

ALM Information Systems
Management Information Systems
Information Availability
Accuracy
Adequacy
Expediency

ALM Organisation
Structure
Responsibilities
Level of Top-Management Involvement.

ALM Process
Risk Parameters
Risk Identification
Risk Measurement
Risk Management
Risk Policies and
Tolerance levels

Liquidity Risk Management
Maturity Profile as given in Appendix-1for measuring the future cash flows of banks in different time buckets
-main focus should be on the short-term mismatches, viz., 1-14 days and 15-28 days
-mismatches upto one year would be relevant since these provide early warning signals of impending liquidity problems
-The mismatches (negative gap) during 1-14 days and 15-28 days in normal course may not exceed 20% of the cash outflows in each time bucket

Interest Rate Risks
The Gap or Mismatch risk
Gap analysis measures mismatches between rate sensitive liabilities and rate sensitive assets
An asset or liability is normally classified as rate sensitive within the time interval under consideration, if there is a cash flow or
The interest rate resets/reprices contractually during the interval, i t is contractually pre-payable or withdrawal before the stated maturities.

Objectives of Credit Risk Rating
internal parameters
third party credit rating
enabling analysis at two levels
At micro-level, evaluating every single loan
At the macro-level, determining, the risk-weighted capital as per Basel Norms

Interest Rate Risks..contd
The Gap Reports should be generated by grouping rate sensitive liabilities, assets and off balance sheet positions into time buckets
The Gap is the difference between Rate Sensitive Assets (RSA) and Rate Sensitive Liabilities (RSL) for each time bucket

Interest Rate Risks contd….
The positive Gap indicates that it has more RSAs than RSLs
negative gap indicates that it has more RSLs
having a positive Gap (RSA>RSL) benefits from rising interest rates
negative Gap (RSL>RSA) benefits from declining interest rates

THANK YOU

CRR Methodology
Developing the System
Working out operational Details
Post Rating Functions

Credit Rate Portfolio Management
Credit Rate Portfolio management involves designing, operating, monitoring and churning the portfolio (of a bank or any other entity) of investment or loans on the basis of credit rating tagged on to the products contained in the portfolio.
managing the portfolio on the basis of credit rating assigned
credit rating should help in determining the asset quality
credit rating is dynamic
standard deviation and correlation analysis

Asset – Liability Management in Banks
Information Infrastructure for ALM
Asset Liability Management Committee
-top-level committee operating under the Board of Directors with the CEO as a Member

Asset Liability Management Committee
senior level management
compositions and the size of the ALCO depend upon the organisation
Executive Chief heading ALCO
major role in balance sheet planning
setting the risk- return matrix and profile of the organization
determining the interest rates on deposits and loans
determining the interest rates on deposits and loans the sale of investments or purchase of securities.

Components of a Bank’s Balance Sheet
Bank’s Liabilities
Capital
Reserves and surplus
Deposits
Borrowings
other Liabilities, Provisions & Contingencies
Bank’s Assets
Cash and Balances with RBI
Balances with other Banks
Money at Call and at Short Notice
Investments
Advances
Fixed Assets
other Assets

Credit Rate Risk Management In Banks-B.V.Raghunandan

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