The recent global financial crisis underscored the impact of non-performing assets and caused banks' overhead to soar. An automated early warning system (EWS) can help these institutions avoid the risk of problem loans, better protect their assets and reduce the effects of delinquent payments.
BUSINESS CASE
An International Banking Group implemented Early Warning System and strategies
to reduce the number of cases to be treated in the recovery process and the overall
collection costs.
This presentation discusses credit monitoring and early alert processes. It defines credit monitoring as post-loan activities to ensure safety of lent money and reduce need for collateral. The presentation outlines methods for off-site and on-site monitoring of borrowers. It also discusses establishing an early warning system to identify early alert accounts showing potential weaknesses that could deteriorate recovery prospects if uncorrected. Key signs of early alerts are described as well as steps for prevention and tasks like early identification, reporting of credit signs, and proactive management of early alert accounts.
I’m a young Pakistani Blogger, Academic Writer, Freelancer, Quaidian & MPhil Scholar, Quote Lover, Co-Founder at Essar Student Fund & Blueprism Academia, belonging from Mehdiabad, Skardu, Gilgit Baltistan, Pakistan.
I am an academic writer & freelancer! I can work on Research Paper, Thesis Writing, Academic Research, Research Project, Proposals, Assignments, Business Plans, and Case study research.
Expertise:
Management Sciences, Business Management, Marketing, HRM, Banking, Business Marketing, Corporate Finance, International Business Management
For Order Online:
Whatsapp: +923452502478
Portfolio Link: https://blueprismacademia.wordpress.com/
Email: arguni.hasnain@gmail.com
Follow Me:
Linkedin: arguni_hasnain
Instagram : arguni.hasnain
Facebook: arguni.hasnain
Watch out full video on Youtube. Click on the link below-
https://youtu.be/48r3LhGRX_A
Credit monitoring is the continuous process of reviewing and following loan accounts, asset quality and credit reports to judge the accuracy and standard of loan asset.
Whenever loan is granted to customer, banker is required to ensure that it remains a standard asset and does not turn out to be non-performing asset.
Pre-disbursement Care
Sanction letter shall be issued detailing various terms and conditions on which the loan has been approved.
Acknowledgement letter should be obtained from borrower stating that he/she has well understood and noted the terms of sanction.
Security documents along with acknowledgement letter should be kept aside properly.
Credit report should be reviewed periodically to ensure that there are no adversity causing risk to loan recovery.
Documentation should be done in proper format with all signatures as a part of due diligence.
End use verification to ensure legality of purpose.
Post-disbursement Care
Post-disbursement monitoring involves both onsite monitoring (visiting the unit) and offsite monitoring (scrutiny of records)
OFFSITE MONITORING INVOLVES :-
Study of Quarterly Information System, Monthly Select Operational Data, Cash Budget and Financial Statements
Stock Statement Verification
Scrutiny of the register and bills
Annual report containing director’s report, management discussion analysis, auditor’s report and financial statements
Comparison of actual financials with projected one on the basis of which loan was sanctioned
ONSITE MONITORING INVOLVES :-
Physical verification of stock
Check whether all machinery are working in good condition
Checking of Register Books ( Sales register, Purchase register, Production register, Stock register)
Invoices and utility bills
No. of skilled and unskilled workers in the unit
Thank you for Watching
Subscribe to DevTech Finance
Watch full video on YouTube -
https://youtu.be/f3VgVOgAUoE
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.
Thank You For Watching
Subscribe to DevTech Finance
The document provides information on credit risk measurement and mitigation for banks. It defines credit risk as the potential failure of bank borrowers to meet their obligations. It discusses measuring credit risk through probability of default, loss given default, and exposure at default. It also covers credit ratings, rating agencies, and the factors banks examine when providing loans such as borrower details, loan details, and existing product usage.
The document summarizes the history and development of the Basel Committee on Banking Supervision and the Basel Accords. It discusses how the Basel Committee was formed in 1974 in response to banking crises. It then describes the three Basel Accords - Basel I established minimum capital requirements in 1988, Basel II introduced additional risk-based requirements in 2004, and Basel III strengthened capital and liquidity standards following the 2008 financial crisis. The document provides details on the pillars and key provisions of each accord.
BUSINESS CASE
An International Banking Group implemented Early Warning System and strategies
to reduce the number of cases to be treated in the recovery process and the overall
collection costs.
This presentation discusses credit monitoring and early alert processes. It defines credit monitoring as post-loan activities to ensure safety of lent money and reduce need for collateral. The presentation outlines methods for off-site and on-site monitoring of borrowers. It also discusses establishing an early warning system to identify early alert accounts showing potential weaknesses that could deteriorate recovery prospects if uncorrected. Key signs of early alerts are described as well as steps for prevention and tasks like early identification, reporting of credit signs, and proactive management of early alert accounts.
I’m a young Pakistani Blogger, Academic Writer, Freelancer, Quaidian & MPhil Scholar, Quote Lover, Co-Founder at Essar Student Fund & Blueprism Academia, belonging from Mehdiabad, Skardu, Gilgit Baltistan, Pakistan.
I am an academic writer & freelancer! I can work on Research Paper, Thesis Writing, Academic Research, Research Project, Proposals, Assignments, Business Plans, and Case study research.
Expertise:
Management Sciences, Business Management, Marketing, HRM, Banking, Business Marketing, Corporate Finance, International Business Management
For Order Online:
Whatsapp: +923452502478
Portfolio Link: https://blueprismacademia.wordpress.com/
Email: arguni.hasnain@gmail.com
Follow Me:
Linkedin: arguni_hasnain
Instagram : arguni.hasnain
Facebook: arguni.hasnain
Watch out full video on Youtube. Click on the link below-
https://youtu.be/48r3LhGRX_A
Credit monitoring is the continuous process of reviewing and following loan accounts, asset quality and credit reports to judge the accuracy and standard of loan asset.
Whenever loan is granted to customer, banker is required to ensure that it remains a standard asset and does not turn out to be non-performing asset.
Pre-disbursement Care
Sanction letter shall be issued detailing various terms and conditions on which the loan has been approved.
Acknowledgement letter should be obtained from borrower stating that he/she has well understood and noted the terms of sanction.
Security documents along with acknowledgement letter should be kept aside properly.
Credit report should be reviewed periodically to ensure that there are no adversity causing risk to loan recovery.
Documentation should be done in proper format with all signatures as a part of due diligence.
End use verification to ensure legality of purpose.
Post-disbursement Care
Post-disbursement monitoring involves both onsite monitoring (visiting the unit) and offsite monitoring (scrutiny of records)
OFFSITE MONITORING INVOLVES :-
Study of Quarterly Information System, Monthly Select Operational Data, Cash Budget and Financial Statements
Stock Statement Verification
Scrutiny of the register and bills
Annual report containing director’s report, management discussion analysis, auditor’s report and financial statements
Comparison of actual financials with projected one on the basis of which loan was sanctioned
ONSITE MONITORING INVOLVES :-
Physical verification of stock
Check whether all machinery are working in good condition
Checking of Register Books ( Sales register, Purchase register, Production register, Stock register)
Invoices and utility bills
No. of skilled and unskilled workers in the unit
Thank you for Watching
Subscribe to DevTech Finance
Watch full video on YouTube -
https://youtu.be/f3VgVOgAUoE
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.
Thank You For Watching
Subscribe to DevTech Finance
The document provides information on credit risk measurement and mitigation for banks. It defines credit risk as the potential failure of bank borrowers to meet their obligations. It discusses measuring credit risk through probability of default, loss given default, and exposure at default. It also covers credit ratings, rating agencies, and the factors banks examine when providing loans such as borrower details, loan details, and existing product usage.
The document summarizes the history and development of the Basel Committee on Banking Supervision and the Basel Accords. It discusses how the Basel Committee was formed in 1974 in response to banking crises. It then describes the three Basel Accords - Basel I established minimum capital requirements in 1988, Basel II introduced additional risk-based requirements in 2004, and Basel III strengthened capital and liquidity standards following the 2008 financial crisis. The document provides details on the pillars and key provisions of each accord.
This document discusses advanced credit risk management methods, including structural credit models like KMV and CreditMetrics that estimate default probability based on a firm's assets and leverage. It also discusses reduced form models that assume an exogenous default rate and incomplete information models that recognize uncertainty about default barriers. The final sections describe extensions of incomplete information models to better incorporate market reactions to default and integrate risks.
The board of directors is responsible for overseeing the bank's credit risk strategy and policies. They should approve a credit risk strategy that defines the bank's risk appetite. Senior management is then responsible for implementing this strategy through establishing a sound credit granting and administration process. This includes setting credit policies, limits, and criteria and monitoring loans. An effective credit risk management system involves identifying, measuring, monitoring, and controlling credit risk, and includes internal risk ratings, management reporting, and independent credit reviews.
This document discusses the various financial sources for real estate purchases. It identifies three main categories: primary sources like savings and loan associations, commercial banks, life insurance companies, and mutual savings banks; financial middlemen such as mortgage brokers and mortgage bankers; and other sources including capital markets, retained earnings, borrowings, government programs, and business expansion schemes. Each category and source is briefly described in terms of their role in real estate financing.
Bank analysis and rating using the CAMEL modelRoger Aung
The document introduces the CAMELS rating system used by bank supervisory authorities to evaluate domestic and foreign banks. CAMELS ratings assess banks on capital adequacy, asset quality, management, earnings, liquidity, and sensitivity to market risk. Banks are given scores from 1 to 5 on each factor, with lower scores indicating stronger performance. An average score less than 2 signifies a high-quality institution, while scores above 3 require supervisory attention.
Safeguard your lending program by learning about the 8 steps of credit risk management. Learn about nonfinancial risks, structuring the loan, and more.
The document provides an overview of principles of banking, including the meaning and purpose of money, how the financial system works, and the banking structure in India. It discusses the functions of money, properties that make good forms of money, and how financial markets and intermediaries help allocate capital and share risks. It describes India's banking structure, including commercial banks, and the primary and secondary functions commercial banks perform, such as accepting deposits, lending, and providing agency services.
Liquidity risk arises from a bank's inability to meet its obligations. This document discusses various methods for measuring liquidity risk that were used before and after the 2008 global financial crisis. Before the crisis, models focused on bid-ask spreads, transaction volumes, and liquidity balances. Following the crisis, Basel III introduced two new ratios - the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) - to improve banks' short-term and long-term liquidity management. The LCR requires sufficient high-quality liquid assets to cover net cash outflows over 30 days, while the NSFR aims to ensure long-term assets are funded by stable sources over one year.
This document outlines the key components of an effective loan policy for credit risk management. It discusses the importance of having a written loan policy that establishes credit standards, procedures for managing delinquent loans, and target customer profiles. The policy should set prudential limits on loan concentrations, define appropriate collateral and credit rating standards, and provide guidelines for different business segments. Regular reviews and updates are needed to ensure the policy stays dynamic and aligned with regulatory requirements and market conditions. The overall goal is for the loan policy to balance risk and returns while guiding responsible credit expansion.
CREDIT RISK MANAGEMENT IN BANKING: A CASE FOR CREDIT FRIENDLINESSLexworx
This document provides an overview of a short course on credit risk management in banking. The course will cover risks in banking including new issues, why credit risk is important, credit risk analysis, and credit risk management. Credit risk analysis involves evaluating key information about loan purposes, amounts, borrower repayment capacity, duration, security, and other factors. Effective credit risk management requires independence, adherence to credit policies, loan reviews, audits, documentation controls, and external reporting. The primary risks associated with lending are credit, interest rate, liquidity, price, foreign exchange, transaction, compliance, strategic, and reputation risk.
This document discusses asset liability management (ALM) in banks. It defines ALM as a mechanism to address risks from mismatches between bank assets and liabilities due to liquidity or interest rate changes. The ALM framework focuses on profitability and viability. It aims to match asset and liability maturities across time horizons. The objectives of ALM include managing liquidity risk, interest rate risk, and currency risks to stabilize profits and the bank's financial position. Tools used in ALM include information systems, organizational structure, and processes to identify, measure and manage various risks.
Asset Liability Management (ALM) is concerned with strategic balance sheet management involving risks caused by changes in interest rates, exchange rates, and liquidity position. ALM aims to match assets and liabilities in terms of maturities and interest rate sensitivities to minimize interest rate risk and liquidity risk. It involves identifying, measuring, monitoring, and controlling risks like interest rate risk, liquidity risk, credit risk, and contingency risk through techniques like gap analysis and duration gap analysis. Effective ALM requires strong organizational framework, information systems, and regular monitoring and reporting to manage risks.
This presentation is the one stop point to learn about Basel Norms in the Banking
This is the most comprehensive presentation on Risk Management in Banks and Basel Norms. It presents in details the evolution of Basel Norms right form Pre Basel area till implementation of Basel III in 2019 along with factors and reason for shifting of Basel I to II and finally to III.
Links to Video's in the presentation
Risk Management in Banks
https://www.youtube.com/watch?v=fZ5_V4RW5pE
Tier 1 Capital
http://www.investopedia.com/terms/t/tier1capital.asp
Tier 2 Capital
http://www.investopedia.com/terms/t/tier2capital.asp
Basel I
http://www.investopedia.com/terms/b/basel_i.asp
Capital Adequacy Ratio
http://www.investopedia.com/terms/c/capitaladequacyratio.asp
Basel II
http://www.investopedia.com/video/play/what-basel-ii/?header_alt=c
Basel III
http://www.investopedia.com/terms/b/basell-iii.asp
RBI Governor - Raghuram G Rajan on the importance if Basel III regulations
https://youtu.be/EN27ZRe_28A
An Evaluation of Camels Rating System as a Measure of Bank PerformanceAbu Hasan Al-Nahiyan
The principle objective of the study is to evaluate the performance of First Security Islami Bank (FSIBL) on the bases of CAMELS rating system. Specifically this study will look into:
a) To understand the literature of CAMELS rating system.
b) To know about First Security Islami Bank Ltd.
c) To evaluate CAMELS components on FSIBL.
d) To evaluate composite rating on FSIBL.
To suggest some policy measures for financial improvement of FSIBL.
This document discusses various aspects of credit risk management. It defines different types of credit like trade credit, export credit, and consumer credit. It describes the roles and responsibilities of a credit manager in evaluating risk, monitoring performance, and collecting payments. It also provides details on credit evaluation processes, credit policies, credit limits, and methods to control and mitigate credit risk.
Basel I, II, and III are agreements that established regulatory standards for bank capital adequacy. Basel I, established in 1988, focused on credit risk and set minimum capital requirements of 8% of risk-weighted assets. Basel II, released in 2004, included three pillars: Pillar I established a revised minimum capital framework; Pillar II covered supervisory review; and Pillar III addressed market discipline through disclosure. It recommended a minimum ratio of total capital to risk-weighted assets of 8% and prescribed the minimum capital adequacy ratio of 9% for India. Basel III, finalized in 2017, strengthened bank capital requirements in response to the 2008 financial crisis.
This document discusses various types of risks faced in investment and banking. It defines risk management as identification, analysis and mitigation of uncertainties. It then lists different types of risks like interest rate risk, market risk, inflation risk, etc. It also discusses the responsibilities of board and senior management in risk management and outlines the components of an effective risk management process including organizational structure, systems and procedures.
This document discusses asset liability management (ALM) in banks. It begins by defining the components of a bank's balance sheet, including assets like cash, investments, advances, and fixed assets, as well as liabilities like capital, deposits, and borrowings. It then explains a bank's profit and loss account. The document traces the evolution of ALM from a focus on assets to incorporating liability management and interest rate risk. It defines ALM as managing a bank's balance sheet to allow for different interest rate and liquidity scenarios. Finally, it discusses the key risks managed by ALM - liquidity risk, currency risk, and interest rate risk - and some tools used, including maturity ladder analysis, duration, simulation,
The credit risk management team consists of Sanika Dixit, Shweta Vaidya, Sneha Salian, and Snehal Datta. Their goal is to assess and mitigate credit portfolio risks to reduce financial losses from borrower default. The BI solution enables accurate risk assessment, loss reduction, and faster reporting by analyzing key performance indicators like profit, customer growth, and credit risk at the region, product, and branch level.
The document discusses stress testing in banks, including what it is, its purpose, and key elements of an effective stress testing process. It notes that while stress testing is important, banks often get it wrong by using inappropriate scenarios, not considering linkages between risks and institutions, and having methodological issues. An effective stress testing process should identify exposures, construct plausible adverse scenarios, estimate losses using risk models, and implement corrective actions if needed.
Credit risk is the possibility that a borrower will fail to repay a loan according to the agreed terms. It arises when a bank lends money to customers or other banks. The probability of loss from credit risk is high if the likelihood of default is high. There are several types of credit risk, including default risk, concentration risk, and country risk. Banks assess credit risk through qualitative factors like loan documentation and quantitative factors like non-performing loans. Credit risk is managed through techniques such as risk-based pricing, collateral, and credit monitoring.
Topic 3 tools techniques of managing of receivablesRAJKAMAL282
The document discusses various techniques for managing accounts receivable, including establishing a credit policy, assessing customer creditworthiness, setting credit limits, invoicing promptly and collecting overdue debts, and monitoring the accounts receivable system. It also describes invoice discounting and factoring as methods to speed up the receipt of funds from accounts receivable, outlining the key services provided by invoice discounters and factors as well as the advantages and disadvantages of each approach.
Here are potential checklists to address risks embedded within the RE based on the analysis of the financial statements and additional information provided:
1. Liquidity Risk
- Current ratio is low, indicating potential liquidity issues
- Evaluate sources of funding and ability to meet short-term obligations
2. Credit Risk
- Review underwriting standards, portfolio quality, provisioning levels
- Assess risk management practices for different loan products
3. Interest Rate Risk
- Mismatch between asset and liability maturities and interest rates
- Stress test profitability under different interest rate scenarios
4. Operational Risk
- Review IT infrastructure, cybersecurity controls, business continuity plans
- Assess outsourcing arrangements and oversight
This document discusses advanced credit risk management methods, including structural credit models like KMV and CreditMetrics that estimate default probability based on a firm's assets and leverage. It also discusses reduced form models that assume an exogenous default rate and incomplete information models that recognize uncertainty about default barriers. The final sections describe extensions of incomplete information models to better incorporate market reactions to default and integrate risks.
The board of directors is responsible for overseeing the bank's credit risk strategy and policies. They should approve a credit risk strategy that defines the bank's risk appetite. Senior management is then responsible for implementing this strategy through establishing a sound credit granting and administration process. This includes setting credit policies, limits, and criteria and monitoring loans. An effective credit risk management system involves identifying, measuring, monitoring, and controlling credit risk, and includes internal risk ratings, management reporting, and independent credit reviews.
This document discusses the various financial sources for real estate purchases. It identifies three main categories: primary sources like savings and loan associations, commercial banks, life insurance companies, and mutual savings banks; financial middlemen such as mortgage brokers and mortgage bankers; and other sources including capital markets, retained earnings, borrowings, government programs, and business expansion schemes. Each category and source is briefly described in terms of their role in real estate financing.
Bank analysis and rating using the CAMEL modelRoger Aung
The document introduces the CAMELS rating system used by bank supervisory authorities to evaluate domestic and foreign banks. CAMELS ratings assess banks on capital adequacy, asset quality, management, earnings, liquidity, and sensitivity to market risk. Banks are given scores from 1 to 5 on each factor, with lower scores indicating stronger performance. An average score less than 2 signifies a high-quality institution, while scores above 3 require supervisory attention.
Safeguard your lending program by learning about the 8 steps of credit risk management. Learn about nonfinancial risks, structuring the loan, and more.
The document provides an overview of principles of banking, including the meaning and purpose of money, how the financial system works, and the banking structure in India. It discusses the functions of money, properties that make good forms of money, and how financial markets and intermediaries help allocate capital and share risks. It describes India's banking structure, including commercial banks, and the primary and secondary functions commercial banks perform, such as accepting deposits, lending, and providing agency services.
Liquidity risk arises from a bank's inability to meet its obligations. This document discusses various methods for measuring liquidity risk that were used before and after the 2008 global financial crisis. Before the crisis, models focused on bid-ask spreads, transaction volumes, and liquidity balances. Following the crisis, Basel III introduced two new ratios - the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) - to improve banks' short-term and long-term liquidity management. The LCR requires sufficient high-quality liquid assets to cover net cash outflows over 30 days, while the NSFR aims to ensure long-term assets are funded by stable sources over one year.
This document outlines the key components of an effective loan policy for credit risk management. It discusses the importance of having a written loan policy that establishes credit standards, procedures for managing delinquent loans, and target customer profiles. The policy should set prudential limits on loan concentrations, define appropriate collateral and credit rating standards, and provide guidelines for different business segments. Regular reviews and updates are needed to ensure the policy stays dynamic and aligned with regulatory requirements and market conditions. The overall goal is for the loan policy to balance risk and returns while guiding responsible credit expansion.
CREDIT RISK MANAGEMENT IN BANKING: A CASE FOR CREDIT FRIENDLINESSLexworx
This document provides an overview of a short course on credit risk management in banking. The course will cover risks in banking including new issues, why credit risk is important, credit risk analysis, and credit risk management. Credit risk analysis involves evaluating key information about loan purposes, amounts, borrower repayment capacity, duration, security, and other factors. Effective credit risk management requires independence, adherence to credit policies, loan reviews, audits, documentation controls, and external reporting. The primary risks associated with lending are credit, interest rate, liquidity, price, foreign exchange, transaction, compliance, strategic, and reputation risk.
This document discusses asset liability management (ALM) in banks. It defines ALM as a mechanism to address risks from mismatches between bank assets and liabilities due to liquidity or interest rate changes. The ALM framework focuses on profitability and viability. It aims to match asset and liability maturities across time horizons. The objectives of ALM include managing liquidity risk, interest rate risk, and currency risks to stabilize profits and the bank's financial position. Tools used in ALM include information systems, organizational structure, and processes to identify, measure and manage various risks.
Asset Liability Management (ALM) is concerned with strategic balance sheet management involving risks caused by changes in interest rates, exchange rates, and liquidity position. ALM aims to match assets and liabilities in terms of maturities and interest rate sensitivities to minimize interest rate risk and liquidity risk. It involves identifying, measuring, monitoring, and controlling risks like interest rate risk, liquidity risk, credit risk, and contingency risk through techniques like gap analysis and duration gap analysis. Effective ALM requires strong organizational framework, information systems, and regular monitoring and reporting to manage risks.
This presentation is the one stop point to learn about Basel Norms in the Banking
This is the most comprehensive presentation on Risk Management in Banks and Basel Norms. It presents in details the evolution of Basel Norms right form Pre Basel area till implementation of Basel III in 2019 along with factors and reason for shifting of Basel I to II and finally to III.
Links to Video's in the presentation
Risk Management in Banks
https://www.youtube.com/watch?v=fZ5_V4RW5pE
Tier 1 Capital
http://www.investopedia.com/terms/t/tier1capital.asp
Tier 2 Capital
http://www.investopedia.com/terms/t/tier2capital.asp
Basel I
http://www.investopedia.com/terms/b/basel_i.asp
Capital Adequacy Ratio
http://www.investopedia.com/terms/c/capitaladequacyratio.asp
Basel II
http://www.investopedia.com/video/play/what-basel-ii/?header_alt=c
Basel III
http://www.investopedia.com/terms/b/basell-iii.asp
RBI Governor - Raghuram G Rajan on the importance if Basel III regulations
https://youtu.be/EN27ZRe_28A
An Evaluation of Camels Rating System as a Measure of Bank PerformanceAbu Hasan Al-Nahiyan
The principle objective of the study is to evaluate the performance of First Security Islami Bank (FSIBL) on the bases of CAMELS rating system. Specifically this study will look into:
a) To understand the literature of CAMELS rating system.
b) To know about First Security Islami Bank Ltd.
c) To evaluate CAMELS components on FSIBL.
d) To evaluate composite rating on FSIBL.
To suggest some policy measures for financial improvement of FSIBL.
This document discusses various aspects of credit risk management. It defines different types of credit like trade credit, export credit, and consumer credit. It describes the roles and responsibilities of a credit manager in evaluating risk, monitoring performance, and collecting payments. It also provides details on credit evaluation processes, credit policies, credit limits, and methods to control and mitigate credit risk.
Basel I, II, and III are agreements that established regulatory standards for bank capital adequacy. Basel I, established in 1988, focused on credit risk and set minimum capital requirements of 8% of risk-weighted assets. Basel II, released in 2004, included three pillars: Pillar I established a revised minimum capital framework; Pillar II covered supervisory review; and Pillar III addressed market discipline through disclosure. It recommended a minimum ratio of total capital to risk-weighted assets of 8% and prescribed the minimum capital adequacy ratio of 9% for India. Basel III, finalized in 2017, strengthened bank capital requirements in response to the 2008 financial crisis.
This document discusses various types of risks faced in investment and banking. It defines risk management as identification, analysis and mitigation of uncertainties. It then lists different types of risks like interest rate risk, market risk, inflation risk, etc. It also discusses the responsibilities of board and senior management in risk management and outlines the components of an effective risk management process including organizational structure, systems and procedures.
This document discusses asset liability management (ALM) in banks. It begins by defining the components of a bank's balance sheet, including assets like cash, investments, advances, and fixed assets, as well as liabilities like capital, deposits, and borrowings. It then explains a bank's profit and loss account. The document traces the evolution of ALM from a focus on assets to incorporating liability management and interest rate risk. It defines ALM as managing a bank's balance sheet to allow for different interest rate and liquidity scenarios. Finally, it discusses the key risks managed by ALM - liquidity risk, currency risk, and interest rate risk - and some tools used, including maturity ladder analysis, duration, simulation,
The credit risk management team consists of Sanika Dixit, Shweta Vaidya, Sneha Salian, and Snehal Datta. Their goal is to assess and mitigate credit portfolio risks to reduce financial losses from borrower default. The BI solution enables accurate risk assessment, loss reduction, and faster reporting by analyzing key performance indicators like profit, customer growth, and credit risk at the region, product, and branch level.
The document discusses stress testing in banks, including what it is, its purpose, and key elements of an effective stress testing process. It notes that while stress testing is important, banks often get it wrong by using inappropriate scenarios, not considering linkages between risks and institutions, and having methodological issues. An effective stress testing process should identify exposures, construct plausible adverse scenarios, estimate losses using risk models, and implement corrective actions if needed.
Credit risk is the possibility that a borrower will fail to repay a loan according to the agreed terms. It arises when a bank lends money to customers or other banks. The probability of loss from credit risk is high if the likelihood of default is high. There are several types of credit risk, including default risk, concentration risk, and country risk. Banks assess credit risk through qualitative factors like loan documentation and quantitative factors like non-performing loans. Credit risk is managed through techniques such as risk-based pricing, collateral, and credit monitoring.
Topic 3 tools techniques of managing of receivablesRAJKAMAL282
The document discusses various techniques for managing accounts receivable, including establishing a credit policy, assessing customer creditworthiness, setting credit limits, invoicing promptly and collecting overdue debts, and monitoring the accounts receivable system. It also describes invoice discounting and factoring as methods to speed up the receipt of funds from accounts receivable, outlining the key services provided by invoice discounters and factors as well as the advantages and disadvantages of each approach.
Here are potential checklists to address risks embedded within the RE based on the analysis of the financial statements and additional information provided:
1. Liquidity Risk
- Current ratio is low, indicating potential liquidity issues
- Evaluate sources of funding and ability to meet short-term obligations
2. Credit Risk
- Review underwriting standards, portfolio quality, provisioning levels
- Assess risk management practices for different loan products
3. Interest Rate Risk
- Mismatch between asset and liability maturities and interest rates
- Stress test profitability under different interest rate scenarios
4. Operational Risk
- Review IT infrastructure, cybersecurity controls, business continuity plans
- Assess outsourcing arrangements and oversight
Accounts receivable and inventory managementluburtusi
This document discusses key aspects of accounts receivable management, credit analysis, and inventory control. It addresses setting credit policies, analyzing credit applicants, managing the billing and collection process, and following up on overdue accounts. It also outlines the five C's model for credit analysis - character, capacity, capital, collateral, and conditions. Finally, it discusses techniques for inventory control like ABC analysis, economic order quantity models, reorder points, and just-in-time systems. Effective accounts receivable and inventory management requires cooperation across sales, finance, accounting, and other functions.
Role of Credit Investigator in commercial bank Muhammad Ali
The role of a credit investigator is to evaluate the creditworthiness of individuals and businesses applying for loans. They do this by reviewing financial history and market conditions to determine the likelihood of repayment. The credit investigation process involves gathering information from applicant interviews, financial statements, credit reports, other banks, references, and visits to applicant worksites. Credit investigators analyze financial records, compile reports, and make recommendations to help lenders minimize risk and maximize successful repayment of loans.
Non-performing assets (NPAs) refer to loans that are in default or close to being in default. The document discusses NPA classification, factors contributing to rising NPAs, early warning signs of potential NPAs, and methods to manage and recover NPAs. It also covers income recognition norms for banks related to NPAs, such as reversing interest not realized from NPAs and appropriating recoveries received from NPAs according to an agreed-upon order of priority.
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.
Early warning signals (EWS) can help banks identify risks in loan portfolios in advance and take measures to limit non-performing assets. EWS can be based on quantitative factors like asset quality, capital, liquidity, and profitability, or qualitative factors. Identifying EWS allows banks to evaluate customer portfolios regularly, limit exposure in riskier segments, and minimize defaults. The benefits of EWS include reducing future NPAs, making effective risk management decisions, and utilizing capital efficiently. Banks should develop and regularly evaluate relevant EWS using IT systems to timely detect increased credit risk in aggregate portfolios and individual exposures.
Non-performing assets (NPAs) refer to loans that are in default or close to being in default. NPAs have become a major issue for Indian banks and financial institutions, totaling over Rs. 1.1 trillion. The origin of rising NPAs lies in poor credit risk management practices in banks. To resolve NPAs, the government established asset reconstruction companies (ARCs) to purchase NPAs from banks and resolve them to enable banks to focus on core operations and lending. ARCs operate under the legal framework of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act of 2002.
The document discusses credit risk management and outlines steps for managing a credit portfolio to minimize risk and optimize returns. It emphasizes formulating flexible credit policies, conducting target market planning and risk assessments, performing periodic reviews, and establishing a system to balance risk and revenue through various risk management objectives and capital adequacy requirements.
A slide deck from GBRW covering the key principles of problem loan management, based on GBRW's extensive experience with Non-Performing Loan (NPL) management, restructuring and work-out assignments.
Recievable Management in FMCG Sector:A sSudy of Selected Compniesprofessionalpanorama
The current study has tried to examine the sources used by the companies to finance their working capital requirements and to analyse and evaluate the receivables management. The present work therefore is a modest attempt in this direction by undertaking a study of Receivables Management. The study has also examined the liquidity position of companies. The study analysed the liquidity position of a limited sample consisting of five companies i.e. Nestle, HUL, Britannia, ITC and Dabur. The study of liquidity position is based only on one tool i.e. Ratio Analysis. Further the study is based on last 10 years Annual Reports of selected companies taken into consideration. As only FMCG sector was studied so the findings could only be generalised to this sector’s firms. Study of receivables management is very crucial for all firms. Unless the working capital is planned, managed and monitored effectively, company cannot earn profit and increase its turnover and it also helps in removing bottlenecks. Many companies go under because of cash flow issues, rather than declining profitability. Hence, traditional prudence always suggests that a firm should have sufficient cash to cover its immediate liabilities. However, there is a growing breed of FMCG companies that claim otherwise. Unlike most other industries, the turnover of a FMCG company is not limited by its ability to produce, but its ability to sell. They can generate cash so quickly they actually have a negative working capital. This happens because customers pay upfront and so rapidly, the business has no problem raising cash (like Nestle, Britannia). In these companies products are delivered and sold to the customer before the company even pays for them. A negative working capital is a sign of managerial efficiency in a business with low inventory and accounts receivables (which means it operates on an almost strictly cash basis). In other situation, it is a sign a company may be facing bankruptcy or serious financial trouble.
Commonly overlooked ineligible accounts receivable can significantly affect the amount of collateral available in a borrowing base. This document outlines common types of ineligible A/R, such as accounts over 60 days past due or with aged credits, that are often not properly reported by borrowers. A case example showed over $600,000 in unreported ineligible A/R, demonstrating how thorough reviews are needed. Prevention techniques for lenders include understanding industry practices, reviewing supporting documentation, and performing trend analyses or third party audits.
This document discusses non-performing assets (NPAs) in the Indian banking sector. It defines NPAs as loans where interest or principal payments are overdue by 90 days. NPAs hurt bank profitability, liquidity, and solvency. The growth of NPAs indicates inefficiencies in credit risk management. While NPAs pose a major challenge, banks must manage them to maintain a healthy banking environment. Quick identification, containment, and recovery of NPAs are essential, as is timely monitoring of loan accounts.
What is this Project’s Objective This project is designe.docxalanfhall8953
What is this Project’s Objective?
This project is designed to improve your ability to analyze a particular bank's performance. The
emphasis should be to explore your bank from a regulator’s point of view. In that respect you
should address the six CAMELS components and try to identify any "red flags" that could indicate
potential problems in your bank. The Excel file under the name of “Bank Financial Analysis”
should be used to capture the financial data for your bank and to show the associated financial
ratios. You should be able to find all your data in your bank’s Uniform Bank Performance Report
(UBPR) which is available at www.ffiec.gov. Your written report should be no less than 5 pages
long (typed, double-spaced) not including the Excel worksheet. The six CAMELS components
are: Capital adequacy; Asset quality; Management quality; Earnings record; Liquidity position;
and Sensitivity to market risk. Following is a more detailed listing of the items that you need to
address:
A. Liquidity
Consider your bank’s Uniform Bank Performance Report (UBPR) and provide an overview of your
bank’s liquidity by reviewing the following areas:
1. Liquidity and Funding Ratios especially the Net Non-Core Funding Dependence
and Loan to Assets Ratios – The first ratio measures the degree to which the bank is
funding longer-term assets (loans, securities that mature in more than one year, etc.) with
non-core funding. Non-core funding includes funding that can be very sensitive to
changes in interest rates such as brokered deposits, CDs greater than $100,000, and
borrowed money. Higher ratios reflect a reliance on funding sources that may not be
available in times of financial stress or adverse changes in market conditions. What are
the trends in these ratios? How do they compare to the peer?
2. The availability of liquid assets readily convertible to cash without undue loss-
Consider Federal funds sold, available for sale securities, loans for sale, etc.
3. Core deposit/asset growth - Are core deposits capable of funding anticipated asset
growth?
4. Diversification of funding sources - A bank with strong liquidity has a strong core
deposit base, established borrowings lines, and procedures in place for acquiring
internet-based or other forms of emergency borrowing.
5. External Forces - Economic conditions, competition, marketing efforts, etc. have a
material impact on the need for liquidity going forward.
You should also take a look at your textbook’s continuing case assignment for chapter 11 which
discusses various bank liquidity indicators.
B. Sensitivity to Market Risk
Sensitivity to Market Risk - refers to the risk that changes in market conditions could adversely
impact earnings and/or capital. Market Risk encompasses exposures associated with changes in
interest rates, foreign exchange rates, commodity prices, equity prices, etc. While all of these
items are important, the primary risk in most b.
This document summarizes key aspects of risk management and capital adequacy from CAIIB modules, including:
- Basel I focused on credit risk and assigned risk weights and factors, while Basel II expanded this to include market and operational risk.
- Pillar 1 of Basel II covers minimum capital requirements calculated for credit, market, and operational risk. Pillar 2 involves supervisory review, and Pillar 3 covers disclosure requirements.
- Components of regulatory capital include Tier 1, Tier 2, and Tier 3 capital. Capital requirements are calculated based on risk-weighted assets.
- Guidelines in India selected the standardized approaches for credit and operational risk and the basic indicator approach for banks to initially adopt
This document discusses factors contributing to the rise in non-performing assets (NPAs) in public sector banks in India compared to private sector banks. It identifies external factors such as ineffective recovery tribunals, willful defaults, natural calamities, industrial sickness, and changing government policies, as well as internal factors in public sector banks like defective lending processes, inappropriate technology, and improper SWOT analyses. The document provides background definitions on NPAs and outlines objectives and methodology for analyzing the NPA levels across different banks.
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Bank Case Assignment
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CaseRequirements.pdf
Home>Business & Finance homework help>Bank Case Assignment
What is this Project’s Objective?
This project is designed to improve your ability to analyze a particular bank's performance. The
emphasis should be to explore your bank from a regulator’s point of view. In that respect you
should address the six CAMELS components and try to identify any "red flags" that could indicate
potential problems in your bank. The Excel file under the name of “Bank Financial Analysis”
should be used to capture the financial data for your bank and to show the associated financial
ratios. You should be able to find all your data in your bank’s Uniform Bank Performance Report
(UBPR) which is available at www.ffiec.gov. Your written report should be no less than 5 pages
long (typed, double-spaced) not including the Excel worksheet. The six CAMELS components
are: Capital adequacy; Asset quality; Management quality; Earnings record; Liquidity position;
and Sensitivity to market risk. Following is a more detailed listing of the items that you need to
address:
A. Liquidity
Consider your bank’s Uniform Bank Performance Report (UBPR) and provide an overview of your
bank’s liquidity by reviewing the following areas:
1. Liquidity and Funding Ratios especially the Net Non-Core Funding Dependence
and Loan to Assets Ratios – The first ratio measures the degree to which the bank is
funding longer-term assets (loans, securities that mature in more than one year, etc.) with
non-core funding. Non-core funding includes funding that can be very sensitive to
changes in interest rates such as brokered deposits, CDs greater than $100,000, and
borrowed money. Higher ratios reflect a reliance on funding sources that may not be
available in times of financial stress or adverse changes in market conditions. What are
the trends in these ratios? How do they compare to the peer?
2. The availability of liquid assets readily convertible to cash without undue loss-
Consider Federal funds sold, available for sale securities, loans for sale, etc.
3. Core deposit/asset growth - Are core deposits capable of funding anticipated asset
growth?
4. Diversification of funding sources - A bank with strong liquidity has a strong core
deposit base, established borrowings lines, and procedures in place for acquiring
internet-based or other forms of emergency borrowing.
5. External Forces - Economic conditions, competition, marketing efforts, etc. ...
Treasury as a business partner and strategist can add significant value to wo...CashPerform Ltd
Treasury functions can act as a business pertner to functions like accounts, sales and procurement so as to add real value to to optimising working capital.
The trick is to have a great strategy.
The webinar will provide enriching insights of Credit appraisal, why it is required and the advantages of the same. The key areas of elucidation will include banker's preference for credit appraisal, traditional method Vs current trends, understanding various business models. The discussion shall also include the role of Chartered Accountants in credit appraisal, the edge CA's have over others and also the added advantages it brings in to their professional practise.
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Data Modernization: Breaking the AI Vicious Cycle for Superior Decision-makingCognizant
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Safeguarding Bank Assets with an Early Warning System
1. Safeguarding Bank Assets with
an Early Warning System
To alleviate the risks of non-performing loans, banks must build
an effective early warning system to protect their assets and
reduce the impact of payment delinquency.
Executive Summary
The last decade’s global financial crisis create
a tough terrain for the banking industry. Th
impact of nonperforming assets caused overhea
to soar — a predicament that continues unabate
in certain market segments (e.g., retail an
mortgage banking). For example, as shown o
page 2, in 2012 a significant number of banks
portfolios suffered from nonperforming assets.
In this uncertain environment, multiple stake
holders, as well as regulators, need constant reas
surance that their expectations of good-qualit
low-risk loans can be met through ongoing sur
veillance and early detection. Accordingly, insti
tutions realize they must be more proactive i
monitoring their assets.
The warning signs of problem assets can b
grouped into five areas: financial, behavioral
geographic, industry and perception. In this whit
paper, we will analyze these areas and identif
measurable indicators. We will also pinpoint an
discuss steps that banks can take to safeguar
their assets, and present a basic framework tha
can be used to develop an early warning system.
d
e
d
d
d
n
’
-
-
y,
-
-
n
e
,
e
y
d
d
t
An Early Warning System: Overview
and Business Case
An early warning System (EWS) is a set of guided
processes for identifying risks at a nascent stage.
A well designed EWS helps senior management
forecast impending events likely to negatively
affect the organization. Moreover, such a system
can significantly strengthen oversight of a bank’s
assets.1
Effective monitoring can lower loan-loss contin-
gency by 10% to 20%.2
Institutions with sound
credit-monitoring practices have a strong risk
appetite, a higher return on equity, and a better
capital yield. They can maintain tighter control
over their assets by:
• Minimizing the likelihood of customer
defaults: Evaluating a portfolio on a regular
basis helps to maintain loan quality. In the
case of a single customer, the monitoring
mechanism systematically scans the portfolio —
exposure by exposure — with the relevant EWS.
If a red flag is raised, the system triggers the
appropriate action to prevent default.
cognizant 20-20 insights | august 2014
• Cognizant 20-20 Insights
2. 2
• Proliferating the collateral value of defaulted
loans (reducing loss in case of default):
Evaluating a portfolio, as well as monitoring
individual customers, involves augmenting and
maximizing the collateralization for sectors
and/or individual customers under surveil-
lance, thereby mitigating loss in the event of
an actual default.
• Decreasing the exposure of defaulting
customers: While monitoring and analyzing
portfolios helps ensure that banks lower their
exposure to at-risk sectors, timely interven-
tion at the individual level can help to minimize
exposure to high-risk customers.3
Early Warning Indicators
As noted, the warning signs of problem loans span
financial, behavioral, geographic, industry and
perception categories. In the following sections,
we will analyze and identify indicators, as well as
remediation measures, that pertain to each of
these areas.
Financial Indicators
Financial indicators are among the most reliable
ways to target asset-related issues, and can be a
major red flag for banks (see Figure 2, page 3). A
late loan payment or a sudden overdraft can be
very revealing.4
Financial indicators can also signal other
problems, such as:
• Frequent credit checks and inquiries about a
customer, hinting at anomalies in his or her
credit history.
• Guaranteed payments towards creditors
become a necessary requirement.
• A rise in the number of returned items from
the deposits or returned checks drawn on the
customer’s account.
• Utilizing operating loans completely — and for
extended periods.
• Breaching the limit of operating loans; for
example, a sudden overdraft without any
business logic.
• Pending unpaid dues to third parties, such as
healthcare providers.
• Delayed or missed employee payrolls.
• A noticeable increase in collection activity,
either on behalf of or against the customer.
• Regular and unplanned requests for a
temporary loan accommodation.
• Operating loan covenants fully utilized or
actually out of covenant.
• Changes in the health of accounts receivable,
inventory and accounts payable.
cognizant 20-20 insights
The Price of Non-Performing Assets: Results from 2012
Non-Performing Loans of
Commercial Banks in Billion Yuan
Percentage of NPLS to
Total Lending
Mar.
Jun.
Sep.
Dec.
Mar.
Jun.
Sep.
Dec.
Mar.
433.3
422.9
407.8
427.9
438.2
456.4
478.8
492.9
526.5
2011
2012
2013
1.10
1.00
0.90
1.00
0.94
0.94
0.95
0.95
0.96
Mar.
Jun.
Sep.
Dec.
Mar.
Jun.
Sep.
Dec.
Mar.
Source: Wind Information, LIYI/China Daily.
Figure 1
3. 3cognizant 20-20 insights
Financial Indicator Measures
Figure 2
Indicators Measure High Medium Low
Customer’s
creditworthiness
Increase in number of credit checks and
inquiries about the customer.
X
Customer’s
creditworthiness
More necessity for guaranteed payments
towards creditors, i.e., Letters of Credit or bank
checks.
X
Customer’s
creditworthiness
Returned items from deposits made by the
client.
X
Customer’s
creditworthiness
Returned checks drawn on the client’s account.
X
Operating loan utilization Operating loans fully utilized for extended
periods.
X
Operating loan utilization Operating loans over their limit; for example, a
sudden unrequested overdraft.
X
Legal proceedings Increased litigation against the client. X
Legal proceedings Third-party claims such as those due to the
government or healthcare providers.
X
Expenses management Payroll delayed or missed (a very serious
situation).
X
Operating margin Increased collection activity either by or against
the client.
X
Cash flow requirements Frequent and sudden requests for a temporary
bulge or loan accommodation.
X
Covenants and collateral
tracking
Operating loan covenants squeezed or actually
out of covenant.
X
Appropriate use of
operating loans
Any inappropriate trend relative to events; for
example, a fully used operating loan inconsistent
with sales or credit policy.
X
Accounts receivable (A/R)
should represent actual
realizable value in the
normal course of business.
A conservative measure would be to deduct all
of any account that is well beyond the normal
terms of trade. For example, this would be over
90 days for accounts with 30-day terms.
X
Inventory must represent
actual items that are in
good/usable condition.
For inventory, obsolete, spoiled, recalled or
unsalable items should be deducted. X
Accounts payable must
include all amounts that
are due.
AP principally addresses trade debt, and may
include such things as employee deductions
for accrued insurance payments or other
third-party liabilities. Can also include more
exotic liabilities, such as amounts due for
environmental or labor fines.
X
4. cognizant 20-20 insights 4
Behavioral Indicators
Behavioral warning signs give lenders clues about
the integrity and competency of owners and
managers. The symptoms of behavioral problems
can be identified by the following indicators:
• Any attempt at deception/misrepresentation of
facts (this is a clear warning sign and needs to
be heeded).
• Regular and consistent attempts at delaying
financial reporting requirements; reluctance or
unwillingness to respond to various communi-
cations.
• Avoiding direct and complete responses to
specific questions; bluffing by answering a
question with a question.
• Evading requests or providing irrelevant
information to a request; excessive delays in
responding to a request for no valid reason.
• Evidence that points to the possibility of
records being misrepresented or inadvertently
destroyed.
• Key resources/personnel not present in
important planning and strategy sessions.
• A sudden and significant decline in liquidity,
reflected by a lack of major investments,
expansion plans, etc.
• Frequent personnel changes to the accounting
team or in accounting practices.
• Frequently approaches different accounting
firms.
• Overemployment, i.e., employee strength
does not correlate with business volume;
maintains non-existent employees on the
company payroll.
• Transferring assets without any concrete
business reason to back up the decision; dis-
posing of the asset at less than the fair value.
• Excessive number of business accounts that
seem irrelevant to the needs of the business.
• Misdirection of current payments to clear dues
related to older accounts.
• Creating fake or shell entities for the purpose
of misappropriating goods and services.
Geographic Indicators
Some of the symptoms of geographic problems
can be identified by the following indicators:
• Exchange rate devaluation.
• Continuous decline in economic growth in the
region.
• Degraded creditworthiness in the country.
• Continuous increase in yield on sovereign bonds.
• Steady growth in money laundering. Country
risks due to unfavorable political environment.
Industry Indicators
The symptoms of industry-specific problems can
be identified by the following indicators:
• Steady decline in industrial growth rate.
• Increase in adverse industry regulations, such
as a ban on exports.
• Inability to control increasing costs and rising
input prices.
• Threat of business shift to emerging markets.
• Changing customer behavior with respect to
the business segment.5
Perception Indicators
Perception plays a major role in augmenting a
company’s growth and its assets. Perception-
based problems can be identified by some of the
following indicators:
• A decrease in awareness of the client’s brand
and/or logo.
• Less positive media exposure.
• Deteriorating relationships.
• Equity market collapse.
• Negative price perception in the eyes of end-
customers.
• Recall of sold products.
Key Preventive Measures
The most important rule for protecting assets is
“know thy client.” This is essential — from loan
origination through the process of monitoring
debt obligation. Understanding the client is the
first principle in loan monitoring. With this in
mind, we advise banks to:
1. Maintain frequent communication with the
client. This practice throws light on the client’s
ongoing operations — highlighting if there are
any debt-related security issues to consider.
It also offers an opportunity to communicate
directly with company employees.
2. Pursue active interaction with accounting
teams. Communicate and interact with the
core members of the internal accounting team
and the external accounting firm representing
the customer. This should include a meeting at
the offices of the accounting firm.
5. cognizant 20-20 insights 5
Behavioral Indicator Measures
Indicators Measure High Medium Low
Trust and credibility Any deception, misrepresentation or lie.
(This is a clear and strong warning sign).
X
Sound and timely
financial reporting
Any consistent delay in financial reporting
requirements.
X
Customer communication A reluctance or unwillingness to communicate. X
Customer communication Failure to respond to a specific question directly
and entirely.
X
Customer communication In an interview, answering a question with a
question.
X
Customer communication Providing evasive or unspecific information to a
request.
X
Customer communication Unreasonable and frequent delays in response to
a request.
X
Asset records
maintenance
Any indication that records have been mislaid or
inadvertently destroyed.
X
Stakeholder interest in
business strategy and
planning
Absence of key personnel from crucial planning or
strategic sessions. X
Liquidity decline A very rapid and significant decline in liquidity that
does not seem to be supported or explained by
business conditions or events.
X
Accounting staff and
procedures
Too much change in accounting personnel or
procedures.
X
External accounting
firm changes
Changing external accounting firms too often.
X
Improper documentation Excessive photocopies of invoices, particularly if
they are out of sequence.
X
Number of employees A disconnect between the number of employees
relative to business volumes; also, false payroll
using nonexistent employees.
X
Asset transfer Asset transfer without a sound business reason or
at less than fair value.
X
Large number of
accounts
A large number of business accounts inappropriate
for business needs.
X
Lapping Lapping, or misdirecting customer payments, such
as using a current payment to pay older accounts.
X
Fake entities The use of fake or shell entities to manipulate
goods and services.
X
Figure 3
6. cognizant 20-20 insights 6
Geographic Indicator Measures
Industry Indicator Measures
Indicators Measure High Medium Low
Exchange rate
devaluation
Volume, composition and volatility of any foreign exchange
trading positions taken by the financial institution.
X
Economic growth Sustained YOY decline in economic growth of the region. X
Change in
creditworthiness
Country ratings downgraded by credit rating agencies like
S&P.
X
Yield on
sovereign bonds
Consistent YOY increase in yield on sovereign bonds of the
region.
X
Money
laundering
Consistent increase in number and volume of reported
money laundering activities in the region.
X
Country risks Enhanced probability of unstable political situation. X
Indicators Measure High Medium Low
Industrial growth rate Consistently less than expected growth rate YOY
in the asset industry.
X
Industry regulations Industry regulations resulting in losses such as
exporting bans.
X
Inability to control costs/
rising input prices
Continuous decrease in operational margins
across the industry.
X
Emerging markets Inability to penetrate emerging markets. X
Changing customer
behavior
Failure to respond to shifting consumer behavior.
X
Figure 4
Figure 5
Perception Indicator Measures
Indicators Measure High Medium Low
Brand awareness Brand impact due to multiple mismanaged deliveries. X
Media exposure Multiple negative news stories published. X
Relationships Deteriorating relationships with suppliers and end-
customers.
X
Stock trading Consistently declining company stock QOQ. X
Price perception Feeling of overpriced products, and better-quality goods
being available in the market.
X
Recall of sold
products
Multiple YOY recall of goods already sold to customers
due to hazardous defect detection.
X
Figure 6
7. cognizant 20-20 insights 7
3. Institute performance tracking. This informa-
tion should be used to draw parallels in order to
track performance in key areas such as sales,
cost of goods sold and working capital.
4. Identify behavioral signals. Use plant visits
and monthly reporting as opportunities to
identify behavioral red flags.
5. Establish a minimum number of asset
covenants that have maximum import. There
is little point in creating many covenants, most
of which will be breached and almost all auto-
matically waived.
6. Heed multiple warning signals. Multiple
warning signs from any quarter are an
indication of distress.
An Early Warning System Framework
A rules-based EWS identifies borrowers at risk
of distress or default. Such a system must not
only integrate a reliable database and rigorous
statistics; it must also ensure that “soft” success
factors are in place, i.e., close collaboration among
monitors, underwriters and the front line
Identified cases are assigned to different watch-
list categories, depending on the nature and
severity of the risk. Assignment to a watch-list
category triggers a predefined set of risk-mitigat-
ing actions, including some that are mandatory
and others that are optional (for example,
reducing internal limits or increasing pricing).
However, as always, the devil is in the detail.”
Our framework defines an approach for creating
an early warning system for assets. For every
asset, the framework would need to be populated
at the creation stage.
There are generally three stages in the lifecycle
of an asset: creation, servicing/monitoring and
closure. The EWS process will run in parallel,
and reverberate throughout these stages. The
following constitute the three major phases of
operation of an early warning system:
1. Identification and capture: This phase encom-
passes three steps:
>> Indicator identification: Relevant indicators
against the five early warning indicator cat-
egories are identified and selected, based on
their significance for the asset type.
>> Definition of measures against indicators:
For each selected indicator, one or more
measures need to be defined; most must be
defined quantitatively.
>> Trigger definition: Depending on the sever-
ity assessment of the measures, triggers
A Framework for Capturing Early Warnings
Early Warning Measures Against Indicators
Financial
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Remove Early Warning Indicators Against the Closed Loan
Warning Trigger Process
Behavioral Geographic Industry Perception
Automated Asset Monitoring
Critical
High
Indicators
Trigger
DeDefinfinititioionsns
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Indicators
Trigger
DeDefinfinititioionsns
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……
Indicators
Trigger
DeDefinfinititioionsns
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……
Indicators
Trigger
DeDefinfinititioionsns
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Indicators
Trigger
DeDefinfinititioionsns
DDefifin ded measure
brbreaeachcheses ttririggggerer
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ununrereququesestetedd
ovovererdrdrafaftsts bbrereacachehess
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PPrPrPrevevevenenentitititiveveve AAAA tctctctiioioionnn 1111
PPrPrevevenentititiveve AAA tctctiioionn 222
PrPrPrevevevenenentititiveveve AAActctctioioionnn 333
Asset/Loan
Creation & Capture
Asset/Loan
Servicing & Monitoring
Asset/Loan
Closure
Figure 7
8. cognizant 20-20 insights 8
EWS Framework Sample Data Points
Inputs Output
Type Indicator Measure
Critical
Severity
Criteria
High
Severity
Criteria
Medium
Severity
Criteria
Preventive
Measures
(Examples)
Financial
Customer’s
credit
worthiness
More necessity for
guaranteed payments
to creditors (i.e.,
letters of credit or
bank checks).
Greater
than 100 per
month
Between 10
and 100 per
month
Less than 10
per month
Do not give
fresh loans to
the customer.
Behavioral
Trust and
credibility
Any deception,
misrepresentation
or lie (This is a
clear and strong
warning sign).
More
than five
instances
Between
two and five
instances
Less
than two
instances
Consult with
account
manager and
start reducing
the customer’s
credit line.
Geographic
Economic
growth
Sustained YOY
decline in economic
growth of the region.
Three years
continuous
decline
Two years
continuous
decline
One year
continuous
decline
Reduce
exposure
in financial
instruments
of the region,
e.g., sell the
government
bonds.
Industry
Industrial
growth rate
Consistent YOY less
than expected growth
rate in the Asset
industry.
Three years
continuous
decline
Two years
continuous
decline
One year
continuous
decline
Reduce
exposure in
the asset
segment.
Perception
Recall of sold
products
Multiple YOY recall
of goods already sold
to customers due
to hazardous defect
detection.
Three
or more
instances
Between
one and two
instances
One instance
of recall
Consult with
account
manager and
start reducing
the customer’s
credit line.
Figure 8
must be defined to generate appropriate
warnings.
>> Preventive action definition: Define pre-
ventive actions to be taken, based on the
severity level of warning, in the event that
warnings are generated.
2. Monitoring and generating preventive
actions: This phase runs in parallel with asset
servicing, and monitors the day-to-day events
and activities recorded against the asset.
Based on the defined criteria in Phase 1, when a
measure breaches the defined trigger point, the
system generates an appropriate warning and
offers a recommendation for preventive action
to be taken to mitigate the risk emanating
from the warning. In the example discussed
above, if a critical warning is generated, the
system would generate a preventive action; for
example, a recommendation to increase the
collateral position against the asset.
3. Early warning removal: Once the asset
reaches its maturity, the early warning criteria
defined against it would be removed. This
would happen at the time of asset closure.
Looking Ahead
It is a challenge for banks to assess pre-default
identification of high-risk customers. To do so,
they must transform their processes quickly
and comprehensively, and develop a system for
effectively monitoring risky accounts. This means
gradually reengineering business processes from
“quarterly or annual” monitoring to a continuous,
“day-on-day” or “event-based” monitoring mode.
Banks’ IT systems must also evolve to address
more automated monitoring and mitigation, and
reduce manual triggering. These steps will act
as building blocks in establishing a robust early
warning system that helps banks to substantially
reduce the number of non-performing assets.