Credit Risk Management

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Credit Risk Management

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

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