CREDIT RISK MANAGEMENT AT TOWN CO-OPERATIVE

BANK LTD SIRA

Different countries, there is no unanimous view regarding the origin of the
word bank. The word Bank is said to have derived from the French word
Banco or Baucus or Banc or Basque which means, a bench. In ancient
branches were set up in market places for the people dealing in money
transaction.
RESERVE BANK OF INDIA [RBI]
The rbi established in 1935 is central banking and monetary authority in
India. The RBI manages the countrys money supply bank for government of
india and for the countrys commercial banks. The rbi undertakes certain
development and promotional roles the RBI guidelines on various areas
including exposure standards. Income recognition investment valuation
capital adequacy standards for commercial banks. Long term landing
instructions etc.
Commercial banks:
The commercial banks in india are governed by the siddaganga urban cooperative banking regulation act 1949. Brought up to data include addition
rules threats.
Commercial banks are addest biggest financial intermediaries in india and its
usually short term loans and advances they occupy a dominant in the money
market.

CREDIT RISK MANAGEMENT

Credit risk faced by the banks requires treatment, in future. It is nothing but
possibility of default due to non-payment or delayed payment banks are
familiar. With risk on non-payment in the performs period due to failure of
the venture or willful default banks cover it partly by taking the guarantees
from credit guarantee corporation.
The main concern of present day banks is to reduce the store of nonperforming advances to total advances therefore by improving efficiency by
the management of banks and by adopting appropriate methods of credit
management.
Investors shift through a companys strategic plan to understand low top
leadership manage corporate affairs especially when it comes to evaluating
business partners solvency exchange players may strike a definant tone if
they believe management is not administering credit risk effectively a

chorous of complaints from financial market administering from risk

effectively a chorus of complaints from financial market participants may
PERSONAL INVOLMENT
In the corporate and banking setting various professionally understand that
the problem of credit losses needs attention these personal include portfolio
it reviews financial accountants trade credit supervisors and corporate
treasure analysis also combine their business to recommend. Adequate risk
management policies.
Internal recievers and external auditors also pitch in credit risk management
strategies advising top leadership on methodologies necessary to rein
inadequate credit extension.

SOVEREIGN RISK:
Sovereign risk fodder foq debate among top personnel, especially in
companies with a large international business risk. It is the expectation that
a government will default on its obligation. It is also the loss profitability that
may when a government restricts the ability of domestic borrowers to meet
their financial commitments.

RISK MIGRATION
Risk migration lays out the occupation foundation that enables an organization
to manage operating exposures various tools, methodologies and mechanism help
department heads make good on their adequate administration of corporate affairs
often atarts with identifying and mitigating potential risk before they cause
operational harm.

SOLVENCY RATIOS
Lenders and companies often review specific performance metrices
before granting credit or advancing funds to lousiness partners these ration
include working capital and current ration working capital equal current
assets minus current debts and measures how much cash a firm will have in
the next 12 months current ratio solvency ratio gauges whether a company
or bank can repay its short term assets.

Meaning of Credit risk management:

It refers to the process of risk assessment comes in an investment risk often
comes in investing and in the allocation of capital, the risk must be assessed
so as to derive sound investment decision the assessment of risk is crucial in
coming up with the position to balance risk and returns.

Importance of credit risk management it tremendous banks and other

financial institutions are often Faced with risk that are mostly of financial
nature, these institutions must balance risk as well as return for a bank to
have a large consumer base, it must offer loan product that are reasonable
enough. However if the interest rates in loan products are too low the bank
will suffer from losses. In terms of equity a bank must have substantial
amount of capital on its but not too much that it misses the investment
revenue and not too little that it laeds itself to financial instability and to the
risk of regulatory non compliance.
Importance of analyzing the credit risk management
1

it helps avoid dealing with financial unstable partners and reduce

the risk of losing assets or badly impacting business reputation.

It is related a high risk decision than a comprehensive credit check
provideding a detailed analysis of the business financial standing

can be more beneficial.

It can give up to date information about the bank payment loan

leasing bankproperty information about shareholders cashflow etc.

It can to protect business from any financial danger and a
unnecessary risk of losing your assets.

Techniques available analysis the credit risk management.

Close out netting.
Collateral and gurantees for on specific exposure or all exposures of given
counterpart.
Freedom to model any contract strature whether from the corpoarate trading
or retail business.
Credit Line analysis:
Modelling of the expected usage of undrawn part of a credit risk.
Credit Risk Analysis:

Scenaries for the potential exposure calculation can be taken directly from
the market risk scenario simulation.

Adoption of a comprehensive credit policy

Delegation of appropriate credit sanctioning powers to various

authorities.
Censuring a strong appraisal system.
Having credit risk rating system
Evolution benchmaking financial ratios
Adopting proper pricing mechanisim for loan products.
Fixation of exposure ceiling to various industries sector activities.
Regular meeting of risk management committee to address matters
relating to among others credit risks.

Objectives of Credit Risk management:

1

The main objectives of c redit risk management are portfolio level,

development and monitoring and mitigate the risk.

The objective at transaction level, should be setting an appropriate

credit risk environment.

Maintaining an appropriate credit.

TYPES OF RISK
1

Credit Risk:

Credit risk of banks portfolio depends on internal factors relation to both the
borrower and the bank .
A)

Internal factors:
Deficiencies in loan policies.
Absence of prudential credit concentration limits.
Inadequatley defined delegation of borowers financial positions.
Excessive dependence on collateral
Inadequate risk pricing.
Inadequate technical know-how.
Location disadvantages.
Outdated production process.
High cost of inputs.
Uneconomic size of the projects.

b) external Factor:

Credit worthiness of the counter party.

Default risk.
Interest rate high
Foreign exchange risk.
Country risk.
Concentration risk.
Portfolio risk
Transaction risk
Economic risk.
Economic scenario.
Market Risk:

It is the risk of losses in on and off balance sheet positions arising from
movements in market prices, including exchange rates, equity prices interest
rate commodity prices etc.
Market risk arises an account of the following:
Liquidity risk
Interest rate risk
Foreign exchange risk
Equity price risk etc.
3

operational risk:

In this the risk of loss arising from failed or inadequate internal processes
systems and people of from external events.
The various types of operational risks

portfolio risk
organizational risk
strategic risk
personnel risk
reputational risk.

Measurement of Credit Risk:

The credit risk is mainly related to

default

Credit quality

Default:
It is a situation in which bank does not receive the amount due from the
obligatror as per the contract mainly due to two aspects.
They are :
Solvency: mainly due to non-payment.
Liquidity: mainly due to delay in payment.
Credit Quality:
It reduces to changes in asset value the of credit asset may decline due to
increase in probability of default
The two types of credir risk assessment: