Whereas, Commercial Bank of Ethiopia (CBE) has changed its strategic direction to customer centricity with the aim of making saving and credit products more customer centric based on customer value propositions; WHEREAS, it has become necessary to improve customer experience by digitizing retail and micro business segment through Micro saving and loan products; WHEREAS, it is necessary to set eligibility requirements, terms and conditions of saving and credit products and services to the retail and micro business segment in view of risk involved and customer’s demand; WHEREAS, retail and micro business segments are viable and growing segments to be leveraged by the bank through designed products and services that can satisfy the segment’s demand; WHEREAS, Commercial bank of Ethiopia intends to diversify its credit portfolio mix in terms of tenure through expanding the short-term financing to be availed to retail and micro business segments; WHEREAS, it is necessary to attract the underserved segment of the society and enhance financial inclusion with low-cost financial services availed through mobile money platform; NOW, therefore, this procedure is issued to enable implementation of bank’s DMSL policy. 1.2. Short Title This procedure may be cited as” Digital Micro Saving And Loan Procedure of the Commercial Bank of Ethiopia.” 1.3. Definition of terms “Credit policy” means a general framework approved by the board that spells out and guides the bank’s credit/financing strategic directions and credit /financing decisions. “Credit Scoring” means judging/evaluating the creditworthiness of a customer based on basic characteristics and past performance in credit and other relationships with Bank. “Digital Micro Credit” means micro loans that are requested, received and repaid all through mobile phones (or any other appropriate tools) via interaction with a computer system. “Digital MSL Policy” means a policy document that governs the management of digital micro saving and credit services. “Fixed Account” means a saving account locked for a certain period, a minimum of three months, based on the preference of the customers to fulfil their designated plan. “Lending officials” means any person involved in MSL business of customer acquisition, Credit Worthiness evaluation, Credit operation, Collection, monitoring and decision-making as well as write off and post write off follow up process. “Loan Pricing” means setting the interest rate, fees, commission, and others to be charged by the Bank on loans, advances, and guarantees extended to customers. “Retail and Micro Business Segment” means a category of customers having less investible asset, trading transaction and return from business. “Micro loan” means a small amount of loan availed to micro businesses and individuals for the purpose of supporting businesses and consumption. “Micro Saving” means a saving scheme designed for small deposits from micro businesses and low income individ

1. Credit
Management
Jyoti Kumar Pandey
Deputy General Manager &
MOF
CAB, Pune

3. Credit Opportunity Credit Creation
Credit Management
Credit Completion
Credit Life Cycle Theory

4. Agenda
• Basics of credit management
• Introduction of credit risk management
• Other issues

5. Introduction
• Credit refers to
 Short Term Loans & Advances
 Medium / Long Term Loans
 Off-Balance Sheet Transactions
• Management refers to
 Pre-sanction appraisal
 Documentation
 Disbursement and Disbursal
 Post-lending supervision and control

6. Credit Management
• Credit Management now includes
 Capital adequacy norms
 Risk Management including ALM
 Exposure Norms
 Pricing policy and credit risk rating
 IRAC norms
 Appraisal, credit-decision making and loan review
mechanism

7. Approach for safety of loans
• Safety of loans is directly related
 to the basis on which decision to lend is taken
 Type and quantum of credit to be provided
 Terms and conditions of the loan

8. Approach for safety of loans (Contd.)
• Two-pronged approach
 Pre-Sanction appraisal
 To determine the ‘bankability’ of each loan proposal
 Post-Sanction control
 To ensure proper documentation, follow-up and supervision

9. Pre-Sanction appraisal
• Concerned with measurement of risk(iness) of a
loan proposal
 Requirements are:
 Financial data of past and projected working results
 Detailed credit report is compiled on the borrower / surety
 Market reports
 Final / audited accounts
 Income tax and other tax returns / assessments
 Confidential reports from other banks and financial
institutions
 Credit Report (CR) needs to be regularly updated
• Appraisal should reveal whether a loan proposal
is a fair banking risk

10. Post-Sanction appraisal
• Depends to large extent upon findings of pre-
sanction appraisal
 Requirements are:
 Documentation of the facility and ‘after care’ follow- up
 Supervision through monitoring of transactions in loan
amount
 Scrutiny of periodical statements submitted by the
borrower
 Physical inspection of securities and books of accounts of
the borrower
 Periodical reviews etc.

11. Bankers’ Credit Report
• Includes seeking information including other
banks – (writing or over telephone etc.)
• Sharing of information could be a sensitive issue
 Advisable to take an undertaking from customers
 Make the condition as part of account opening form or
loan application

12. Types of loans and advances
• Working Capital Finance
 Extended to meet day-to-day short term operational
requirements (sales & purchase of commodities,
purchase of raw materials etc.)
• Loan for setting up new project, expansion and
diversification of existing project etc.
 Short term or medium term

13. Loans and Advances (Contd.)
• Difference between Loans and Advances
 Loans are extended in accounts in which no drawings
are permitted to the borrowers
 Generally there is one debit to principal amount to loan
account – though disbursal in stages is possible
depending on the need of the borrower
 For operational purposes loan can be credited to a
special account where withdrawal from time to time can
be done by the party depending upon his requirements
 In case of advances, the sanctioned limit is placed at the
disposal of the borrower, subject to terms of sanction, in
running accounts which can be drawn upon by cheques
by the borrower

14. Loans and Advances (Contd.)
• Working capital finance in form of loan is also
known as demand loan
• As an advance it is commonly known as cash
credit facility
• Banks apart from working capital and medium
term and long term finance may also extend
casual overdrafts to approved customers
 In current accounts
 Loans against security of shares, FDs, housing loans etc.

15. Securities for lending
• Section 5 of B. R. Act defines secured and
unsecured loans
 Secured – Loans and advances made on security of
assets the market value of which is not at any time less
than the amount of the loan or advances
 Unsecured – Means a loans or advance not so secured
• Security taken as an insurance against
unwarranted situations

16. Securities for lending
• Two types: Primary and Collateral
 Primary Security – Generally from a viable and
professionally managed enterprise
 Personal
– Created by a duly executed promissory note, acceptance or
endorsement of bill of exchange etc.
– Gives bank the right of action to proceed against the borrower
personally in the event of default
 Impersonal
– Created by way of a charge (pledge, hypothecation,
mortgage, assignment etc.)

17. Securities for lending
 Collateral Security – Meaning running parallel or
together
 Taken as additional and separate security
 Could be secured / unsecured guarantees, pledge of shares
and other securities, deposits of title deeds etc.
 Used to reinforce the primary security (for e.g. plantation
advances are not considered fully secured until crop is
harvested)

18. Preconditions of loans
• Willingness or intention to repay as per
agreement
 Relatively easier to assess
 Determined by good track record of payments and debt
servicing
 Uncertain / uncontrollable events could affect the
judgment
• Purpose for which loan is sought
 Should be documented carefully
 Type of loan applied for - Working capital loan, term loan,
personal loan etc.
• Conditions which can set the trend of future

19. Conditions determining future trends
• Three factors which can undergo changes:
 Prospects
 Future risk profile
 Repayment capacity

20. Tools for determining future trends
• Financial Analysis – past and projected
• Credit rating
• Assessment of credit needs
• Terms of sanction
• Documentation and creation of security interest
• Post-lending supervision – 3 stages
 Regular surprise verification of security
 Stock audit
 Obtaining and scrutiny of control statement (stock
statements, financial statements)
• Repayment and / or rollover

21. Risks in Bank Lending
• Credit Risk
• Market Risk
• Operational Risk

22. Credit Risk
• RBI defines credit risk as:
 the possibility of losses associated with diminution in the
credit quality of borrowers or counterparties. In a bank’s
portfolio, losses stem from outright default due to
inability or unwillingness of a customer or counterparty
to meet commitments in relation to lending, trading,
settlement and other financial transactions.
Alternatively, losses result from reduction in portfolio
value arising from actual or perceived deterioration in
credit quality.

23. Credit Risk Management
• Credit risk is defined, “as the potential that a
borrower or counter-party will fail to meet its
obligations in accordance with agreed terms”
• It is the probability of loss from a credit
transaction

24. Credit Risk Management
• According to Reserve Bank of India, the following
are the forms of credit risk:
 Non-repayment of the principal of the loan and/or the
interest on it
 Contingent liabilities like letters of credit/guarantees
issued by the bank on behalf of the client and upon
crystallization amount not deposited by the customer
 In the case of treasury operations, default by the
counter-parties in meeting the obligations
 In the case of securities trading, settlement not taking
place when it is due
 In the case of cross-border obligations, any default
arising from the flow of foreign exchange and/or due to
restrictions imposed on remittances out of the country

25. Principles of sound credit risk
management
• BOD should have responsibility for approving and
periodically reviewing credit risk strategy
• Senior management should have the
responsibility to implement the credit risk
strategy
• Bank should identify and manage credit risk
inherent in all product and activities

26. Prudential Norms for appropriate
Credit Risk environment
• Norms for Capital Adequacy
• Exposure Norms
 Credit Exposure and Investment Exposure Norms to
individual and group borrowers
 Capital Market Exposures
 Banks-specific internal exposure limits
• IRAC norms
• Credit rating system and risk pricing policy
• ALM
• Norms for setting up loan policy

27. Framework for Credit Risk
Management
• CRM framework includes:
 Policy framework: requires the following distinct building
blocks: (1) Strategy and policy, (2) organization, and
(3) operations/systems
 Credit risk rating framework
 Credit risk limits
 Credit risk modeling
 RAROC pricing
 Risk mitigants
 Loan review mechanism/credit audit

28. Policy Framework
• Strategy and Policy:
 Credit policies and procedures of banks should
necessarily have the following elements:
 Written policies defining target markets, risk acceptance
criteria, credit approval authority, credit origination and
maintenance procedures and guidelines for portfolio
management and remedial management
 Systems to manage problem loans to ensure appropriate
restructuring schemes
 A conservative policy for the provisioning of non-
performing advances should be followed

29. Policy Framework (Contd.)
• Strategy and Policy:
 Credit policies and procedures of banks should
necessarily have the following elements:
 Consistent approach towards early problem recognition,
classification of problem exposures, and remedial action
 Maintain a diversified portfolio of risk assets in line with the
capital desired to support such a portfolio
 Procedures and systems, which allow for monitoring
financial performance of customers and for controlling
outstanding within limits

30. Policy Framework (Contd.)
• Organizational Structure
 Banks should have an independent group responsible for
the CRM
 Responsibilities to include formulation of credit policies,
procedures and controls extending to all of its credit risk
arising from corporate banking, treasury, credit cards,
personal banking, trade finance, securities processing,
payments and settlement systems
 Board of Directors should have the overall responsibility
for management of risks

31. Policy Framework (Contd.)
• Organizational Structure
 The Board should decide the risk management policy of
the bank and set limits for liquidity, interest rate, foreign
exchange and equity price risks
 Risk Management Committee will be a Board level Sub
committee including CEO and heads of Credit, Market
and Operational Risk Management Committees. It will
devise the policy and strategy for integrated risk
management containing various risk exposures of the
bank including the credit risk
 RMC should effectively coordinate between the Credit
Risk Management Committee (CRMC), the Asset Liability
Management Committee and other risk committees of
the bank, if any

32. Policy Framework (Contd.)
• Operations / Systems
 Credit process typically involves the following phases:
 Relationship management phase, that is, business
development
 Transaction management phase to cover risk assessment,
pricing, structuring of the facilities, obtaining internal
approvals, documentation, loan administration and routine
monitoring and measurement, and
 Portfolio management phase to entail the monitoring of
portfolio at a macro level and the management of problem
loans.

33. Credit Risk Rating Framework
• Use of credit rating models and credit rating
analysts
• Loans to individuals or small businesses, credit
quality is assessed through credit scoring which is
based on a standard formulae which incorporates
party’s information viz. annual income, existing
debts, other details such as homes (rented or
owned) etc.

34. Credit Risk Limits
• Bank generally sets an exposure credit limit for
each counterparty to which it has credit exposure
• Depending on the assessment of the borrower
(commercial as well as retail) a credit exposure
limit is decided for the customer, however, within
the framework of a total credit limit for the
individual divisions and for the company as a
whole

35. Credit Risk Limits
• Also within the limit as per RBI, i.e. not more
than 15% of capital to individual borrower and
not more than 40% of capital to a group
borrower
• Threshold limits are set which are dependent
upon
 Credit rating of the borrower
 Past financial records
 Willingness and ability to repay
 Borrower’s future cash flow projections

36. Risk Mitigants
• Credit risk mitigation means reduction of credit
risk in an exposure by a safety net of tangible
and realisable securities including third-party
approved guarantees/insurance
• Various risk mitigants are:
 Collateral (tangible, marketable) securities
 Guarantees
 Credit derivatives
 On-balance-sheet netting

37. Risk Mitigants (Contd.)
• Conditions for use of credit risk mitigants
 All documentation used in collateralized transactions
must be binding on all parties and must be legally
enforceable in all relevant jurisdictions
 Banks must have properly reviewed all the documents
and should have appropriate legal opinions to verify
such, and ensure its enforceability

38. Loan Review Mechanism / Credit
Audit
• Credit audit examines the compliance with extant sanction
and post-sanction processes and procedures laid down by
the bank from time to time
• The objectives of credit audit are:
 Improvement in the quality of credit portfolio
 Review of sanction process and compliance status of large
loans
 Feedback on regulatory compliance
 Independent review of credit risk assessment
 Pick-up of early warning signals and suggest remedial
measures, and
 Recommend corrective actions to improve credit quality, credit
administration, and credit skills of staff

39. RBI Guidelines on Credit Exposure
and Management
• Credit exposure to an individual borrowers not to
exceed 15% of capital funds
• Group borrowers exposure not to exceed 40% of
capital funds
• Aggregate ceiling in unsecured advances should
not exceed 15 % of total DTL of the bank from
earlier 33.33%

40. RBI Guidelines on Credit Exposure
and Management (Contd.)
• Bank cannot grant loans against security of its
own shares
• Prohibition on remission of debts for UCBs
without prior approval of RBI
• Restrictions on loans and advances to Directors
and their relatives
• Ceiling on advances to Nominal Members – With
deposits up to Rs. 50 crore (Rs. 50,000/- per
borrower) and RS. 1,00,000/- for above Rs. 50
crore

41. RBI Guidelines on Credit
Exposure and Management
• Prohibition on UCBs for bridge loans including
that against capital / debentures issues
• Loan and advances against shares, debentures
 UCBs are prohibited from permitted to extend any
facilities to stock brokers
 Margin of 40 per cent to be maintained on all such
advances
• Restriction on advances to real estate sector –
only for genuine constriction and not for
speculative purposes

42. Components of Credit Risk
• Default Risk – Risk that a borrower or
counterparty is unable to meet its commitment
• Portfolio Risk – Risk which arises from the
composition / concentration of bank’s exposure
to various sectors
• Two factors affect credit risk
 Internal Factors – Bank specific
 External factors – State of economy, size of fiscal deficit
etc.

43. Managing Internal Factors
• Adopting proactive loan policy
• Good quality credit analysis
• Loan monitoring
• Sound credit culture

44. Managing External Factors
• Well diversified loan portfolio
• Scientific credit appraisal for assessing financial
and commercial viability of loan proposal
• Norms for single and group borrowers
• Norms for sectoral deployment of funds
• Strong monitoring and internal control systems
• Delegation and accounatbility

45. Credit Risk Management as per RBI
• Measurement of risk through credit scoring
• Quantifying risk through estimating loan losses
• Risk pricing – Prime lending rate which also
accounts for risk
• Risk control through effective Loan Review
Mechanism and Portfolio Management

46. Thank You