MODULE 3:
Credit Risks Credit Risk Management models - Introduction, Motivation, Funtionality of good credit. Risk Management models- Review of Markowitz’s Portfolio selection theory –Credit Risk Pricing Model – Capital and Rgulation. Risk management of Credit Derivatives.
,
principles of sound lending
,
loans & advances
,
types of loans & advances
,
forms of advances or style of credit:
,
sources of credit information:
,
factors limiting the level of bank’s advanc
Credit risk refers to the risk that a borrower will default on any type of debt by failing to make payments which it is obligated to do. The risk is primarily that of the lender and includes lost principal and interest, disruption to cash flows, and increased collection costs. The loss may be complete or partial and can arise in a number of circumstances. For example:
• A consumer may fail to make a payment due on a mortgage loan, credit card, line of credit, or other loan
• A company is unable to repay amounts secured by a fixed or floating charge over the assets of the company
• A business or consumer does not pay a trade invoice when due
• A business does not pay an employee's earned wages when due
• A business or government bond issuer does not make a payment on a coupon or principal payment when due
• An insolvent insurance company does not pay a policy obligation
• An insolvent bank won't return funds to a depositor
• A government grants bankruptcy protection to an insolvent consumer or business.
To reduce the lender's credit risk, the lender may perform a credit check on the prospective borrower, may require the borrower to take out appropriate insurance, such as mortgage insurance or seek security or guarantees of third parties, besides other possible strategies. In general, the higher the risk, the higher will be the interest rate that the debtor will be asked to pay on the debt.
General Principles of Lending:
When a request for a loan is received, it is important to ensure that the borrower has the legal capacity to borrow. The other matters upon which the information should be obtained are: the purpose of advance, the amount involved, the duration of the advance, the sources of repayment, the profitability of transaction, and, where applicable, the security offered. The most fundamental principle of all is that the bank should have confidence in the integrity, competence and continuing credit worthiness of the borrower.
• Know Your Customer:
While entertaining a proposal for advance, the branch has to first ensure compliance with the KYC norms.
• Pre- Sanction Stage:
Obtain/compile the following:
• Bio-data/declaration of assets owned by the borrower and guarantor along with latest income tax/wealth tax assessment copies and compilation of opinion reports.
• Particulars of immediate family members/legal heirs along with their father’s name and age.
• Audited balance sheets for the previous 3 years, estimated balance sheet for the current year and projected balance sheet for the next year.
• Particulars of existing borrowing arrangements and credit reports/no objection letters from existing banks if any.
• It should be followed by independent verification by the branch incumbent.
• Details of associate/group concerns, their borrowing arrangements and their latest balance sheets.
• No objection letter from term loan lender(s) if already financed by them and their permission/willingness to cede pari passu/ second charge on their security.
• The position of term working capital liabilities with various banks/FIs and details thereof viz., Limit, DP, Out standings, Irregularities (if any).
• Conduct a search/obtain a search report from Registrar of Companies to ascertain position of charges created already.
•
• Due Diligence:
• Branch Manager should do adequate Due Diligence before bringing an asset to the Bank’s books. This will avoid NPA.
• Thorough inquiry about the prospective borrower (with other banks, Financial Institutions, etc.) market intelligence, his past track record of performance and repayment of obligations, credit worthiness (Net Worth) must be done.
• Personal visit to his office/place of business will give an idea of his business.
• Processing of Applications:
While processing the applications, the following should be looked into and commented upon in the proposal:
• Due diligence on promoters’ background, their track record of repayment by checking with their existing bankers (NPA status) (any rephasements, any compromise entered into), credit worthiness, market reputation etc.
• Latest RBI defaulters’ list and willful defaulters' list —Company and their Directors.
• Bank’s loan policy.
• Contractual capacity of the borrower regarding borrowing powers/any restrictions on borrowings and names of persons authorized to borrow by verifications of:
• Partnership deed
MODULE 3:
Credit Risks Credit Risk Management models - Introduction, Motivation, Funtionality of good credit. Risk Management models- Review of Markowitz’s Portfolio selection theory –Credit Risk Pricing Model – Capital and Rgulation. Risk management of Credit Derivatives.
,
principles of sound lending
,
loans & advances
,
types of loans & advances
,
forms of advances or style of credit:
,
sources of credit information:
,
factors limiting the level of bank’s advanc
Credit risk refers to the risk that a borrower will default on any type of debt by failing to make payments which it is obligated to do. The risk is primarily that of the lender and includes lost principal and interest, disruption to cash flows, and increased collection costs. The loss may be complete or partial and can arise in a number of circumstances. For example:
• A consumer may fail to make a payment due on a mortgage loan, credit card, line of credit, or other loan
• A company is unable to repay amounts secured by a fixed or floating charge over the assets of the company
• A business or consumer does not pay a trade invoice when due
• A business does not pay an employee's earned wages when due
• A business or government bond issuer does not make a payment on a coupon or principal payment when due
• An insolvent insurance company does not pay a policy obligation
• An insolvent bank won't return funds to a depositor
• A government grants bankruptcy protection to an insolvent consumer or business.
To reduce the lender's credit risk, the lender may perform a credit check on the prospective borrower, may require the borrower to take out appropriate insurance, such as mortgage insurance or seek security or guarantees of third parties, besides other possible strategies. In general, the higher the risk, the higher will be the interest rate that the debtor will be asked to pay on the debt.
General Principles of Lending:
When a request for a loan is received, it is important to ensure that the borrower has the legal capacity to borrow. The other matters upon which the information should be obtained are: the purpose of advance, the amount involved, the duration of the advance, the sources of repayment, the profitability of transaction, and, where applicable, the security offered. The most fundamental principle of all is that the bank should have confidence in the integrity, competence and continuing credit worthiness of the borrower.
• Know Your Customer:
While entertaining a proposal for advance, the branch has to first ensure compliance with the KYC norms.
• Pre- Sanction Stage:
Obtain/compile the following:
• Bio-data/declaration of assets owned by the borrower and guarantor along with latest income tax/wealth tax assessment copies and compilation of opinion reports.
• Particulars of immediate family members/legal heirs along with their father’s name and age.
• Audited balance sheets for the previous 3 years, estimated balance sheet for the current year and projected balance sheet for the next year.
• Particulars of existing borrowing arrangements and credit reports/no objection letters from existing banks if any.
• It should be followed by independent verification by the branch incumbent.
• Details of associate/group concerns, their borrowing arrangements and their latest balance sheets.
• No objection letter from term loan lender(s) if already financed by them and their permission/willingness to cede pari passu/ second charge on their security.
• The position of term working capital liabilities with various banks/FIs and details thereof viz., Limit, DP, Out standings, Irregularities (if any).
• Conduct a search/obtain a search report from Registrar of Companies to ascertain position of charges created already.
•
• Due Diligence:
• Branch Manager should do adequate Due Diligence before bringing an asset to the Bank’s books. This will avoid NPA.
• Thorough inquiry about the prospective borrower (with other banks, Financial Institutions, etc.) market intelligence, his past track record of performance and repayment of obligations, credit worthiness (Net Worth) must be done.
• Personal visit to his office/place of business will give an idea of his business.
• Processing of Applications:
While processing the applications, the following should be looked into and commented upon in the proposal:
• Due diligence on promoters’ background, their track record of repayment by checking with their existing bankers (NPA status) (any rephasements, any compromise entered into), credit worthiness, market reputation etc.
• Latest RBI defaulters’ list and willful defaulters' list —Company and their Directors.
• Bank’s loan policy.
• Contractual capacity of the borrower regarding borrowing powers/any restrictions on borrowings and names of persons authorized to borrow by verifications of:
• Partnership deed
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
Watch out full video on youtube-
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Principles of Credit Lending
1. Safety
2. Liquidity
3.Spread
4. Security
5. Purpose
6. Profitability
7. Policy Validation
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Credit management is the process of granting credit , setting the term its granted on, recovering this credit when its due and ensuring compliance with company credit policy.
The difference in the rate of interest that a bank charges on the amount lent and the rate it pays to the depositors is technically called spread or interest rate spread.
This spread bank has to use to meet all its overheads and interest on deposit but also provide for NPA.
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3.0 Project 2_ Developing My Brand Identity Kit.pptxtanyjahb
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loan policy and investment management
1. Haryana School of Business
Topic – Formulating Loan Policy and Intro to
Investment Management
Presented To-
Prof. Komal Dhanda
Presented By-
G77Sukhmanjot Singh
G75 Sourabh
2. Content
Loan Policy
Principle of formulating loan
Major factors affecting loan policy
Meaning of Investment
Investment management
Objectives of investment management
Importance of investment management
3. Loan Policy
Based on the general principles of lending stated above, the Credit Policy
Committee (CPC) of individual banks prepares the basic credit policy of the Bank,
which has to be approved by the Bank's Board of Directors.
Lending Guidelines-
standards for presentation of credit proposals,
rating standards and benchmarks,
delegation of credit approving powers,
prudential limits on large credit exposures,
loan review mechanism,
risk monitoring and evaluation,
pricing of loans,
provisioning for bad debts,
regulatory/ legal compliance etc.
5. Safety:- Banks need to ensure that advances are safe
and money lent out by them will come back. Since the
repayment of loans depends on the borrowers' capacity to
pay, the banker must be satisfied before lending that the
business for which money is sought is a sound one.
Liquidity:- To maintain liquidity, banks have to ensure
that money lent out by them is not locked up for long time
by designing the loan maturity period appropriately.
6. Profitability:- To remain viable, a bank must earn
adequate profit on its investment. This calls for
adequate margin between deposit rates and lending
rates. In this respect, appropriate fixing of interest rates
on both advances and deposits is critical.
Risk Diversification:- To mitigate risk, banks should
lend to a diversified customer base. Diversification
should be in terms of geographic location, nature of
business etc.
7. The loan policy typically lays down lending
guidelines in the following areas:
• Level of credit-deposit ratio
• Targeted portfolio mix
• Ratings
• Loan pricing
• Collateral security
Major Factors Affecting Loan Policy
8. • A bank can lend out only a certain proportion of its
deposits, since some part of deposits have to be
statutorily maintained as Cash Reserve Ratio (CRR)
deposits, and an additional part has to be used for
making investment in prescribed securities
(Statutory Liquidity Ratio or SLR requirement).
• It may be noted that these are minimum
requirements. Banks have the option of having more
cash reserves than CRR requirement and invest
more in SLR securities than they are required to.
Credit
Deposit
(CD) Ratio:
9. Targeted Portfolio Mix:
• The CPC aims at a targeted portfolio mix keeping in view both
risk and return.
• Toward this end, it lays down guidelines on choosing the
preferred areas of lending (such as sunrise sectors and profitable
sectors) as well as the sectors to avoid.
• Banks typically monitor all major sectors of the economy. They
target a portfolio mix in the light of forecasts for growth and
profitability for each sector.
• If a bank perceives economic weakness in a sector, it would
restrict new exposures to that segment and similarly, growing
and profitable sectors of the economy prompt banks to increase
new exposures to those sectors. This entails active portfolio
management.
10. Ratings:
• There are a number of diverse risk factors associated with
borrowers. Banks should have a comprehensive risk rating
system that serves as a single point indicator of diverse risk
factors of a borrower. This helps taking credit decisions in a
consistent manner.
Pricing of loans:
• Risk-return trade-off is a fundamental aspect of risk management.
Borrowers with weak financial position are placed in higher risk
category and are provided credit facilities at a higher price (that
is, at higher interest).
• The higher the credit risk of a borrower the higher would be his
cost of borrowing. In other words, if the risk rating of a borrower
deteriorates, his cost of borrowing should rise and vice versa
11. Collateral security:
• As part of a safe lending policy, banks usually advance loans against some
security. The loan policy provides guidelines for this.
• In the case of term loans and working capital assets, banks take as 'primary
security' the property or goods against which loans are granted. In addition to
this, banks often ask for additional security or 'collateral security' in the form
of both physical and financial assets to further bind the borrower. This reduces
the risk for the bank.
Capital adequacy:
• The amount of capital bank needs as a backup depends on the risk of individual
assets that the bank acquires. The riskier the asset, the larger would be the
capital it needs as backup.
• A key norm for this is the Capital Adequacy Ratio (CAR) known as Capital Risk
Weighted Assets Ratio, which is a simple measure of the soundness of a bank.
• The ratio is the capital with the bank as a percentage of its risk-weighted
assets. Given the level of capital available with an individual bank, this ratio
determines the maximum extent to which the bank can lend.
12. Lending Rates:
• Banks are free to determine their own lending rates on all kinds
of advances except a few.
• Interest rates on these exceptional categories of advances are
regulated by the RBI.
Benchmark Prime Lending Rate (BPLR):
The rate at which commercial banks charge their customers who
are most credit worthy. According to the Reserve Bank of India
(RBI), banks can fix the BPLR with the approval of their Boards.
• BPLR system failed to bring transparency in the lending rates
of the banks. The calculations of BPLR is not that transparent
and sometimes the banks under this system could lend to
customers below the BPLR. So, Base Rate was introduced
subsequently and replaced BPLR in 2010.
13. Meaning of Investment
A Commitment of Funds made In
expectation of some positive rate of
return.
15. Investment Management
Investment management refers
to the handling of financial
assets and other investments—
not only buying and selling
them. Management includes
devising a short- or long-term
strategy for acquiring and
disposing of portfolio holdings.
17. Objectives of Investment management
It should yield a steady current
income.
Should provide tax shield.
Portfolio should be balanced and
should yield good return.
Should ensure that there are
sufficient liquidity.
Investment safe.
18. Importance of Investment Management
Potential for Higher Returns
Provide safety to Investor.
Provides Regular Income
To Meet Financial Goals.
19. How to Manage your own Investments
Robo Advisors.
Online Financial
Planing Services.
Traditional
Financial
Advisors.