ROADMAP Introduction. Credit Risk Mgt Framework. Credit Risk Mgt through LRM. Securitization. Credit Derivatives(CDs) and Scope in India. Basel accord I & need for new framework. Computing capital charge for Credit Risk. Is India ready for Basel II??
INTRODUCTION Introduction to Basle accord(Revised capital framework) & Types of Risks. What is Credit Risk? The inability or unwillingness of the customer to meet contractual obligations/commitments. Need for risk management.
CREDIT RISK MGT THROUGH LRM Effective tool for constantly evaluating the quality of loan book & to bring about qualitative improvements in credit admin. Objectives of LRM. Importance of Credit Grading process. Qualification & independence of Loan review officers. Frequency & scope of Reviews.
SECURITIZATION Refers to a transaction where financial securities are issued against the cash flow generated from a pool of assets. Creation of SPV for this purpose. Traditional and Synthetic securitization. Securitization exposures.
CREDIT DERIVATIVES CDs transfer risks in a credit asset without transferring the underlying asset themselves from the books of the originator. Off balance sheet financial exposure. Mechanism of CDs. Credit Default Swaps & Credit linked Notes. Scope in India.
BASEL ACCORD I(1988) Portfolio Approach – It focused primarily on credit risk and assets of the banks were categorized into risk buckets with risk weights ranging from 0% to 150%. Minimum Capital Requirement – 8% of risk weighted assets only for credit risk (9% by RBI) Based on 1988 accord, RBI initiated various actions for the banks like classification of assets, provision norms, classification of asset class etc. Need for a new framework.
COMPUTATION OF CAP CHARGE FOR CREDIT RISK Under pillar I the framework offers three distinct options for computing capital requirement for credit risk. Approaches available for computing credit risk are : Standardized Approach. Foundation IRB approach. Advanced IRB Approach.
IS INDIA READY FOR BASEL II FRAMEWORK? First set of banks has successfully implemented Basel II within March 31 2008. 19 banks reported CAR as per Basel I & II,11 banks reported lower CAR as per Basel II and rest 8 reported higher CAR(CARE ratings). Training sessions for employees & information for customers are being provided regarding Basel II framework and rating systems. Banks are moving towards Advanced approaches for determining credit Risk.