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Induction Credit Risk
Sriram Natarajan provides an introduction to risk management within consumer banking. He outlines the main types of risk such as credit, market, interest rate, and operational risk. Credit risk, in particular, is the risk that borrowers do not repay loans in a timely manner or at all. He discusses the five "C's" of credit - character, capacity, capital, collateral, and cash flow - that are used to evaluate borrowers and make credit acquisition decisions. The role of the credit risk team is also summarized as setting risk appetite, managing lending policies, prescribing credit and collection policies, and monitoring portfolio performance. Specific challenges in credit risk management in the UAE are highlighted.
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Induction Credit Risk
- 1. Sriram Natarajan –Consumer Risk Guru Introduction to Risk Management
- 2. The Credit CycleInformation RISK MANAGEMENT PRODUCT PLANNING COLLECTIONS ACCOUNT MAINTENANCE Management CREDIT ACQUISITION WRITE-OFF Information
- 3. Types of Riskwithin Consumer Banking Credit Market Interest rate Operating Business Country Country
- 4. What is Risk?Risk is a part of everyday life. Risk management is about intelligently steering the business towards the objectives at optimal losses. Credit Risk is the risk that those who borrow money from the bank do not pay back interest and/or principal in a timely manner or at all.
- 5. Five “C’s” OfCredit Character : The willingness to pay Capacity : The ability to pay Capital : Borrower has sufficient stake in loan Collateral : Security in the event the borrower does not pay Cash Flow : Matching the cash flow to repayment terms
- 6. Credit Acquisition –How to use the 5 “C’s” Character : Determine willingness to pay Capacity : Check income or surrogate to determine ability to repay Capital : Impose loan to value (LTV) to establish the “equity” of the customer – i.e. customer’s monetary interest Collateral : Ensure sufficient security in case of default Cash Flow : Ensure timing of customer cash flows match repayment terms/dates
- 7. Role of CreditRisk Team Set the risk appetite in line with the company’s goals Manage the Lending Policy of the institution to be in line with market demands and business moves. Prescribe the Credit, Collection & Fraud Policies for the company Train and support employees engaged in underwriting loan and card applications from for customers Manage and monitor the portfolio performance of different products, delinquencies, quality & losses Advise the product team on the target segment for the products, pricings & profitability Handle frauds.
- 8. Credit Risk –UAE Perspective Accelerated growth of economy and debts Lack of reliable independent data of borrowers Extremely competitive market- Highest Density of Banks per thousand people Lack of Credit Bureau Information Floating population and higher expatriate workforce makes Collections more challenging/expensive due to skip menace
- 9. Approach to RiskManagement Integrated System For underwriting / account management & collection Use of Risk Technology- TRIAD, Falcon, Scorecards Optimal usage of EmCredit – nascent Bureau Manage exposure at customer level across products New Accounts guided by sound and easy to implement Credit Policy Locally relevant best practices and procedures Strong verification process Strong focus on analytics and monitoring.
- 10. Tools used byRisk Management Generic & Custom Score Card Application fraud tool - Instinct Risk system tools such as TRIAD & Falcon Organization wide & Product specific Credit Policies & Procedure for effective landings and control Data Warehouse.
- 11. Profitability - Risk/RewardLow Low High High Risk Reward (Return) Installment Bankcards Auto Mortgage
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Editor's Notes
- #3 Explain that the credit cycle is cyclical and that actions in one area impact all other areas. Explain that, throughout the course, we will be defining the stages of the credit cycle. We will not be able to go deep into each area but the participants will be able to describe what each area entails. They will also be able to discuss which areas need to liaise with each other throughout the cycle.
- #4 Try not to get sucked into the detailed definitions of each but Just in case (definitions from Economic Capital Group): Credit Risk is the risk that those who borrow money from the bank do not pay back interest and/or principal timely or at all. Country Event Risk is the risk that a certain event in a country triggers a repayment problem for a large number of corporates and/or banks in that country that would otherwise not have been in financial difficulty. The integrated approach of Credit Risk and Country Event risk reflects not only the risk that the counterparty may default by itself, but also the risk that country events in its country of residence and/or sales cause it to default . Market Risk is the risk that the assets owned by the bank for trading purposes decrease in value, because of changes in interest rate and/ or exchange rates. Market risk is primarily driven by the volatility of the market prices of the traded instruments. Interest Rate Risk is the risk that the value of assets, not being traded assets, decrease and/or that the value of the liabilities of the bank increases, because of a change in interest rates (and exchange rates). Interest rate risk is primarily driven by the volatility of interest rates. Operational Risk is the risk resulting from inadequate or failed internal processes, people and systems or from external events. The risk can be divided into two types: recurrent, relatively small risks (e.g. transactional and administrative faults) and large, singular hits, (e.g. a building burning down). Business Risk is the risk that operating income decreases because of lower revenues (e.g. lower margins, lower market share, market downturn) or increases in costs, not being caused by one of the aforementioned risk types. Business risk is driven by the volatility of the revenue stream and to what extent costs are fixed or variable with revenues.
- #5 Shown separately for definition as this is the subject of the course. This is the Economic Capital Group definition.
- #6 During the course we will be discussing the 5 Cs of credit and that at ABN AMRO these are used as a basis for establishing if a credit is likely to be good or poor quality. Ask the participants to name some of the attributes that they would consider important when assessing if an individual is likely to be a good credit. Walk the participants through the definitions.
- #7 A good revision slide Explain that how the 5Cs are used to define the acquisition policy
- #8 Shown separately for definition as this is the subject of the course. This is the Economic Capital Group definition.
- #11 Shown separately for definition as this is the subject of the course. This is the Economic Capital Group definition.
- #12 Have an open discussion with respect to placement of the above-mentioned products whether the pattern in their country is similar or not? Ask participants risk and return numbers from their respective countries and list on a flip chart as follows (note this exercise could be done now or, better, wait until the last day during the profitability module): Risk(NCL) Reward(Yield) Bankcards Installment loans Auto Mortgages