This document provides an overview of credit monitoring and risk management in banks. It discusses the need for credit monitoring to ensure funds are used as intended and loan terms are followed. It describes methods to monitor borrowers' financial status. It also explains models to predict financial distress and the rehabilitation process. The document outlines different types of risks faced by banks including interest rate, liquidity, foreign exchange, credit, market, operational, and solvency risks. It discusses the risk measurement and mitigation process as well as non-performing assets and asset-liability management.

2. UNIT III - CREDIT MONITORING AND RISK MANAGEMENT
Need for credit monitoring, Signals of borrowers‟ financial sickness,
Financial distress prediction models – Rehabilitation process, Risk
management – Interest rate, liquidity, forex, credit, market,
operational and solvency risks – risk measurement process and
mitigation, Basic understanding of NPAs and ALM.

3. The credit monitoring in a bank is to ensure that the funds
are utilized for the sanctioned purpose and at the same
time complying with all sanction terms and conditions.

4.  Accurate and comprehensive credit reports
 Account details
 Significant events
 An Extra set of Eyes
 Identify the theft protections
 Unauthorized user updates
 Proof of collateral and assets

5.  Understand the financial position of the borrower.
 Ensure that the funds are being used for the purpose for which they
were sanctioned.
 Confirming credit in compliance with the sanction terms.
 Continuous monitoring of the projects cash flows that they are being
realized by the borrowers.
 Ensuring that securities are in conformity with the terms.
 Identifying the potential bad loans so that action/corrective action can
be initiated by the bank in time.

6.  Sickness at birth
 Induced sickness
 Genuine sickness

7. SICKNESS AT BIRTH
The project itself has become infeasible either due to faulty
assumptions or a change in environment.
INDUCED SICKNESS
Caused by the management in competencies (or) wilful default.
GENUINE SICKNESS
Where the circumstance leading to sickness are beyond the borrowers
control has happened inspite of the borrowers sincere effort to avert the
situations

9.  Alman’s Z Model
 ZETA Model
 EMS Model
 GAMBLER model

10. ALMAN’ S Z MODEL
It is a statistical tool which is used to predict the financial distress of
manufacturing company.
Discrimination function Z formula
Z=1.2 X1 +1.4 X2 +3.3 X3 +0.6 X4 +1.0 X5, Where
X1 - WORKING CAPITAL / TOTALASSETS(%)
X2- RETAINED EARNING / TOTALASSETS(%)
X3- EBIT (Earnings Before Interest and Taxes) / TOTALASSETS(%)
X4- MARKET VALUE OF EQUITY / BOOK VALUE OF DEBT(%)
X5- SALES TO TOTALASSETS(TIME)

11. ZETA
This model Score enables banks to appraise the risks involved in firms. It Provide
warning signals (3-5 years ) period to bankruptcy. If the Score is increased by
using this model it is a positive signal.
Variables
ROA can be computed asset net income/total average assets
 Earning stability
 Debt services
 Cumulative profitability
 Current ratio
 Capitalization
 Size of business

12. EMS Model(Emerging Market scoring model)
This Model is applied in both manufacturing and non manufacturing
companies
EM SCORE = 6.56 X1 +3.26 X2 +6.72 X3 +1.05 X4 +3.25, Where
X1 - WORKING CAPITAL/ TOTALASSETS(%)
X2- RETAINED EARNING / TOTALASSETS(%)
X3- OPERATING INCOME/ TOTALASSETS(%)
X4- BOOK VALUE (Share value) OF EQUITY / TOTALASSETS(%)

13. GAMBLER model
This model has no similar formulas as first three model it simply gives
the outcome of present status of the firm. It determines the status as
follows they are:
 To predict bankruptcy.
 Net worth(assets, liabilities) Bankruptcy is a legal status of a person
or entity that cannot repay the debts it owes to creditors.
 Net cash flows(cash inflows and cash outflows)

15. Rehabitalization is the process to identify the Banks to detect the
sickness at an early stage and facilitate corrective action for revival
of the firm.

16.  To formulate a viability plan for the company
 Float the debt restructuring schemes
 Detailed presentations, site visits by the lenders and establishing
the future viability of the business
 Borrower issued confirmation of the terms and sanction for the
scheme
 Debt restructuring services would involve a lot of compliance &
legal work

17. Rehabilitation should not consider for the followings:
 Deliberate non payment of dues to the bank despite of adequate
cash flow and net worth
 Misrepresentation / false of records (or) financial statements
 Fraudulent transactions by the borrowers

19. It is the identification, assessment and prioritization of risks
followed by co ordinated and economical application of
resources to minimize, monitor and control the probability
of unfortunate events.

20.  To achieve the corporate objectives and strategy.
 Provide a high quality service to customers.
 Initiate action to prevent the adverse effect of risk
 Minimize the human costs of risks, where reasonably practicable.
 Minimize the financial & other negative consequences of losses.
 Meet the statutory/ legal obligations

21.  To formulate a viability plan for the company
 Float the debt restructuring schemes
 Detailed presentations, site visits by the lenders and establishing the
future viability of the business
 Borrower issued confirmation of the terms and sanction for the
scheme
 Debt restructuring services would involve a lot of compliance and
legal work

23. It is the exposure of a banks financial condition to adverse
movements in interest rates.

24.  Repricing / Gap or mismatch risk
 Basis risk (banks have a different base rate)
 Embedded option risk
 Price risk
 Reinvestment risk
 Net interest position risk

25.  Repricing /Gap or mismatch risk: Holding of assets and liabilities in
off balance sheet with different principal amounts, maturity
date(change in level of market interest rate)
 Basis risk: (banks have a different base rate) composite assets&
composite liabilities.
 Embedded option risk: changes in market rate create some risk in the
options.

26.  Price risk(assets are sold before it‘s maturity) - related to trading
book and P& L account.
 Reinvestment risk : Future cash flows are again reinvested.
 Net interest position risk: Non paying liabilities.

27. It is a risk that a company or bank may be unable to meet
short term financial demands. This is usually occur due to
the inability to convert the securities or assets to cash with
out loss of capital or income in the process.

28.  Funding risk
 Time risk
 Call risk
 Opportunity risk

29.  Funding risk: Failure to replace net outflows due to withdrawal of
retail deposits and renewal of deposits.
 Time risk: Non receipt of expected inflows of fund where the
borrowers fail to meet their commitments.
 Call risk : Probability of loss due to redemption of bond or other
debt securities by its issuer before it‘s maturity.
 Opportunity risk : Bank can only grow big if their customers are
also prospering

30. It is the exposure of an institution to the potential impact of
movements in foreign exchange rates.

31. Market risk is the risk of losses due to movement in financial market
variables. It is the risk of fluctuations in portfolio value because of
movement in such variable. Adverse changes in interest rates,
foreign exchange rates, commodity prices, or equity prices. It is to
identify, measure, monitor, and control exposure to market risk.

32. Operational risk can be summarized as human risk; it is the
risk of business operations failing due to human error.

33.  People risk.
 System risk.
 Event risk.
 Business risk.

34.  People Risk : People risks typically result from staff constraints,
incompetence, dishonesty, or a corporate culture that does not
cultivate risk awareness.
 System Risk : As technology has become increasingly necessary,
in more and more areas of business, operational risk events due
to systems failure have become an increasing concern.

35.  Event Risk : Risk due to single event.
 Business Risk : Business risk is the risk of loss due to unexpected
changes in the competitive environment. It includes front-office
issues such as strategy, client management, product development,
and pricing and sales, and is essentially the risk that revenues will
not cover costs within a given period of time.

37.  Step:1 Communication and consult.
 Step: 2 Establish the context.
 Step :3 Identify the risk.
 Step :4 Analyse the risk.
 Step :5 Evaluate the risk.
 Step:6 Treat the risks
 Step :7 Monitor & review

38. Step:1 Communication and consult
 Assessment of risk
 Identification, analysis and evaluation of risk
 Eliciting the risk information
 Managing stakeholder perception for management of risk

39. Step: 2 Establish the context
 Objectives and goals of bank
 Needs should be considered
 Environmental factors must be considered
 Rules & regulation of the bank

40. Step :3 Identify the risk
 To identify the risk involved in the banks
 Identify the prospective risks
 Nature of activity must be considered
Step :4 Analyse the risk
 Combination of possible consequences/event
 Risk = Consequences X Likelihood
 Adopting quantitative &qualitative methods to analyse the risks

41. Step :5 Evaluate the risk
 Analyse and evaluate the risk
 To decide whether risks are acceptable or need treatment
Step:6 Treat the risks
 It is about considering option for treating risks that were not
considered acceptable or tolerable.
Step :7 Monitor & review
 Monitor the effectiveness of risk management, plan, strategies,
management system.

43.  Non performing assets(NPA)
Non performing assets as an asset or account of a borrower
which has been classified by the bank or financial
institutions as sub standard ,doubtful or loss assets in
accordance with the directions or guidelines relating to
assets classification issued by the RBI.

45.  Performing assets
 Non-Performing assets - Sub standard assets, Doubtful
assets, Loss assets

46.  Performing assets
These assets (advances) which continue to generate (interest)on
regular basis with out any default.
 Non performing assets
Sub standard assets( march 31/2005) : SSA are those assets which
have been classified as NPA for a period less than or equal to 12
months.
Doubtful assets: An assets would be classified doubtful if it remained
in the substandard category for 12 months.
Loss assets : These are considered uncollectable.

47. The traditional ALM (Assets, Liabilities Management)
programs focus on interest rate risk and liquidity risk
because they represent the most prominent risks affecting
the organization balance-sheet (as they require coordination
between assets and liabilities).

48. The responsibility for ALM is often divided between the treasury and
Chief Financial Officer (CFO). In smaller organizations, the ALM
process can be addressed by one or two key persons (Chief Executive
Officer, such as the CFO or treasurer). The vast majority of banks
operate a centralised ALM model which enables oversight of the
consolidated balance-sheet with lower-level ALM units focusing on
business units or legal entities.

49.  To ensure adequate liquidity while managing the bank's
spread between the interest income and interest expense
 To approve a contingency plan
 To review and approve the liquidity and funds
management policy at least annually
 To link the funding policy with needs and sources via mix
of liabilities or sale of assets.

50. Thank You