CREDIT MONITORNING
1 Credit Monitoring
2 Need for credit Monitoring
3 Signals of Borrowers financial sickness
4 Financial Distress prediction models
5 Rehabilitation process
6 Risk Management
7 Interest rate risk
8 Liquidity risk
9 Forex,Credit risk
10 Market risk
11 Operational &Solvency risk
12 Risk measurement process
13 Mitigation
14 Basic understanding of NPAs and ALM
15 ALM
Meaning:
The
credit monitoring in a bank is to ensure that the funds are utilized for the
sanctioned purpose and at the same time complying with all sanction terms
&conditions.
To avoid
the time lag and cost over runs
warning
the signals and symptoms of the sickness
Intimate
timely actions for recovery or rehabilitations
2 Need for credit monitoring
Accurate
& comprehensive credit reports
Account
details
Significant
events
An Extra
set of Eyes
A drawing
board for dealing with a bad or insufficient credit history
Identify
the theft protections
Unauthorized
user updates
Project
mapping & Planning
Proof of
collateral and assets
Over all
peace of mind Effective credit monitoring system
Understand
the financial position of the borrower
Ensure
that the funds are being used for the purpose for which they were sanctioned
Confirming
credit in compliance with the sanction terms
Continuous
monitoring of the projects cash flows that they are being realized by the
borrowers
Ensuring
that securities are in conformity with the terms
Identifying
the potential bad loans so that action/corrective action can be initiated by
the bank in time
3 SIGNALS OF BORROWERS FINANCIAL
SICKNESS
Sickness
at birth
The project itself has become infeasible either due
to faulty assumptions or a change in environment
Ø Induced sickness
caused by the management in competencies (or)
willful default.
Ø Genuine sickness
Where the circumstance leading to sickness are
beyond the borrowers control has happened inspite of the borrowers sincere
effort to avert the situations
Other signals &Guidelines to
the banker know about sickness
Warning
signals can be sensed.
Decline
in production &poor turnover
Changes
in the repayment schedules
Declining
sales
Bank
should examine why the unit is not able meet its liabilities towards the banks
Warning signals:
Continuous
irregularities in cash credit
Failure
to make timely payment of installments of principal &interest on term loans
Non
submission of statements
Downward
trend in credit summations
Steep
decline in production figures
Raising
the level of inventory
Failure
to pay statutory liabilities
Wide
variations in sales/receivables levels
Delay in
payment of installment due
4 FINANCIAL DISTRESS PREDICTIONMODELS
Alman‟s Z model
ZETA
EMS
Ø GAMBLER
model
Alman‟sZ model: statistical tool & used to predict the financial distress of
manufacturingcompany
Regression(use
past data &predict future)
Discrimination(generating
an index)
Discrimination function Z
Z=1.2 X1 +1.4 X2
+3.3 X3 +0.6 X4 +1.0 X5
Where
X1 - WORKING CAPITAL/ TOTAL
ASSETS(%)
X2- RETAINED EARNING / TOTAL
ASSETS(%)
X3- EBIT/ TOTAL ASSETS(%)
X4- MARKET VALUE OF EQUITY / BOOK
VALUE OF DEBT(%)
X5- SALES TO TOTAL ASSETS(TIME)
The firm
is classified
Financial
sound Z> 2.99
Financial
distress or bankrupt if z< 1.81
Attributes
Operating
leverage
Asset
utilization
Assumptions
Firms
equity is publically traded
Engaged
only manufacturing activities
ZETA
Score
enables banks to appraise the risks involved in firms out side the
manufacturing sector. Provide warning signals (3-5 years ) period to bankrptcy.
Increasing score is a positive signal
Variables
Return on
assets (percentage how profitable a company's assets are in generating revenue.) ROA can be computed asset net
income/total average assets
Earning
stability
Debt
services
Cumulative
profitability
Current
ratio
Capitalization
Size of
business
EMS Model(Emerging Market scoring model)
Applied
in both manufacturing&non manufacturing companies origin from z score model
lack of
credit worthiness
EM SCORE=
6.56 X1 +3.26 X2 +6.72 X3 +1.05 X4 +3.25
Where
X1 - WORKING CAPITAL/ TOTAL ASSETS(%)
X2- RETAINED EARNING / TOTAL
ASSETS(%)
X3- OPERATING INCOME/ TOTAL
ASSETS(%)
X4- BOOK VALUE OF EQUITY / TOTAL
ASSETS(%)
GAMBLER model
To
predict bankruptcy
Networth(assets,liabilities)
Bankruptcy is a legal status of a person
or other entity that cannot repay
the debts it owes to creditors
Net cash
flows(cash inflows&cash outflows)
5 REHABITALIZATION PROCESS
Banks to
detect the sickness at an early stage and facilitate corrective action for
revival of the
firm
Steps involved in Rehabitalization
process
To
formulate a viability plan for the company
Float the
debt restructuring schemes
Detailed
presentations, site visits by the lenders and establishing the future viability
of the business
Borrower
issued confirmation of the terms and sanction for the scheme
Debt
restructuring services would involve a lot of compliance & legal work
Parameters for grant relief from sickness
Term
loans
Cash
credit accounts
Cash
losses
Additional
working capital
Contingency
assistance
Start up
expenses and margin for working capital
Promoters
contributions
Relief
and concessions from other agencies/institutions
Rehabilitation should not
consider for the followings
Deliberate
non payment of dues to the bank despite of adequate cash flow and net worth
Misrepresentation
/falsification of records (or)financial statements
Removal
of securities with out banks knowledge
Fraudulent
transactions by the borrowers
6 Risk management
Risk(meaning)
It is a condition where there is a possibilty of an
adverse deviation from a desired outcome that is expected or hoped for it.
Definition (Risk)
possibilities
of adverse results flowing from any circumstances.
Risk management
It is the
identification, assessment and prioritization of risks followed by co ordinated
and economical application of resources to minimize,monitor and control the
probability of unfortunate events.
Definition
According
to Jorion,risk management is the process by which various risk exposures are
identified, measuredand controlled.
Objectives
of risk management
To
achieve the corporate objectives & strategy
Provide a
high quality service to customers
Initiate
action to prevent the adverse effect of risk
Minimize
the human costs of risks, where reasonably practicable
Meet the
statutory/ legal obligations
Minimize
the financial & other negative
consequences of losses
Minimize
the risk associated with new development & activities
Be able
to inform decisions and make choices on possible outcomes
6.1 Risk management process
Banks to detect
the sickness at an early stage and facilitate corrective action for revival of
the firm
Steps involved in
Rehabitalization process
To
formulate a viability plan for the company
Float the
debt restructuring schemes
Detailed
presentations, site visits by the lenders and establishing the future viability
of the business
Borrower
issued confirmation of the terms and sanction for the scheme
Debt
restructuring services would involve a lot of compliance & legal work
3.7Interest
rate risk(IRR)
Meaning:
It is the
exposure of a banks financial condition to adverse movements in interest rates.
Perspectives
The
earning perspectives(short term earning)
Economic
perspectives (long term earning)
7 Sources/types of interest rate
risk
1.Repricing
/Gap or mismatch risk:
Holding of assets &liabilities in off
balancesheet with different principal amounts,maturity date(change in level of
market interest rate)
2.Basis
risk(banks have a different base rate)
composite
assets& composite liabilities.
3.Embedded
option risk(changes in market rate create some risk in the options)
4.Yield
curve risk(movement in yield curve)
5.Price
risk(assets are sold before it‘s maturity)- related to trading book&p/l
account 6.Reinvestment risk(future cash flows are again reinvested)
7.Net
interest position risk(non paying liabilities)
Effect of interest rate risk
Earnings
perspective
Economic
perspective
Embedded
losses
Internal
risk measurement models.
Maturity
gap analysis
Simple
tools
Fixed
rate &floating rate
Earning
at risk
Evaluate
earning exposure
Earning
at risk ( EaR) Duration GAP analysis
Managing
the economic value of banks
Off
Balance sheet
Different
weights and interest rate to the assets Simulation methods
Assumption
about future path of interest rates, shape of yield curve, changes in the
business activity Pricing etc
Provide
Current&expected
periodic gaps
Duration
gap
Balance
sheet
&income statement performance measures
Budget
Financial
reports
8 Liquidity risk
It is a
risk that a company or bank may be unable to meet short term financial
demands.this is usually occur due to the inability to convert the securities or
assets to cash with out loss of capital or income in the process.
Sources
Incorrect
judgement or attitude of the bank towards timing of it‘s cash inflows
&outflows
Unanticipated
changes in the cost of capital(coc) or availability of funds
Abnormal
behaviour of financial market under stress
Range of
assumption used in predicting cash flows
Risk
activation by secondary sources
Break
down payment in settlement system
Macro
economic imbalances
Types of liquidity risk
Funding
risk(failure to replace net outflows due to withdrawal of retail
deposits&renewal of deposits)
Time risk
(non receipt of expected inflows of fund) where the borrowers fail to meet
their commitments.
Call
risk(probability of loss due to redemption of bond or other debt securities by
its issuer
before
it‘s maturity)
Opportunity
risk
Bank can
only grow big if their customers are also prospering
Need/features
To
prevent the business from losses
Control
over liquidity &cashflows
Close the
liquid gap through reserves
Fair
value of maturity of assets
Analysis
the actual liquidity &evaluation of risk
To make
recommendation for necessary changes
Develop a
new methodology for evaluating the deposits
Develop
and improve liquidity contingency plans under the crisis conditions
Evaluation
of assets &liability management
9 Forex and credit risk
It is the
exposure of an institution to the potential impact of movements in foreign
exchange rates.
Types Of Foreign Exchange Risk
Translation
exposure.
Economic
exposure
Transaction
exposure.
Country risk
a
domestic banking institution may transform itself in to an international one
when it starts lending across its borders are invests in instruments in issued
by foreign business.
Types of country risk.
Economic
factors
Political
factors.
Social
community factors.
Legal
frame work.
Value at risk (VaR)
It
measure the potential of economic losses
VaR corresponded
to a presently of portfolio P&L
And can
be expressed as potential loss from the current value of the portfolio or as
the loss from the expected value at the horizon.
Procedure of measuring interest
rate risk.
Step 1:
recording assets liabilities
Step 2: calculating gap in each time band by
netting the positions of asset, liabilities and net off balance sheet position
in the time band.
Step 3:
calculate cumulative gap.
Step 4:
evaluating impact on earnings from interest rate.
Step 5:
the exposure of interest rate risk in banking book is equal to the sum of
impact on
earnings
from interest rate.
Step 6:
comparing the interest rate risk.
Value At Risk Models /Method For
Computing Value At Risk
Historical
simulation
Monte
carlo simulation
Parametric
modeling
STEPS FOR STRESS TESTING
Step-1:
Generate Scenarios`
Step-2:
Revalue portfolio.
Step-3:
Summarize results.
10 Market risk
Market
risk is the risk of losses due to movement in financial market variables.
Interest
rate , foreign exchange rate , security prices etc.
Market
risk is the risk of fluctuations in portfolio value because of movement in such
variable.
Adverse
changes in interest rates, foreign exchange rates, commodity prices, or equity
prices.
To
identify, measure, monitor, and control exposure to market risk.
Non
trading positions.
Management
Of Market Risk
Clearly
defined responsibilities and authorities.
Specialized
committee set-up by the board.
Risk
taking and operational units.
Be
supported by an effective risk management information system.
Be
provided adequate resources and competent personal to perform its duties.
1 Price
risk
a seller
who wants to sell it in the future is thus concerned about the potential fall
in the price and a reduction in the realization or profits of the transactions.
Types of price risk.
symmetrical versus unsymmetrical
movement
of an asset price in either direction leads to a corresponding impact on the
position value.
Absolute risk various relative
risk
Absolute
risk is measured with reference to the initial investment. Relative risk is
measured relative to the benchmark index
Asset liquidity risk
large
number of stock listed on a stock market
Credit spread risk
credit
risk is the risk that yield on duration matched credit sanctity bonds and
treasury bonds could move differently
Volatility risk.
volatility
refers to the degree of unpredictable change in a financial variable over
period of time.
Systematic risk.
Systematic
risk can arise in the context of a failiure of a major and market system or
institution, some times called the ‗domino effect ‗
11Operational and Solvency risk
Operational
risk can be summarized as human risk; it is the risk of business operations
failing due to human error.
TYPES of operational risk:
PEOPLE RISK: People
risks typically result from staff constraints, incompetence, dishonesty, or a corporate culture that does not
cultivate risk awareness.
SYSTEM
RISK: As technology has become increasingly necessary, in more and more areas of business, operational risk events
due to systems failure have become an increasing concern.
EVENT RISK: Risk due
to single event.
BUSINESS RISK: Business
risk is the risk of loss due to unexpected changes in the competitive environment. It includes ―front-office‖ issues such as
strategy, client management, product development, & pricing and sales, and
is essentially the risk that revenues will not cover costs within a given
period of time.
12 Risk measurement process.
Step:1 Communication and consult
Assessment
of risk
Identification,analysis
and evluation of risk
Eliciting
the risk information
Managing
stakeholder perceptionfor management of risk
Step: 2 Establish the context
Objectives
and goals of bank
Needs
should be considered
Environmental
factors must be considered
Rules
& regulation of the bank
Step :3 identisy the risk
To
identify the risk involved in the banks
Identify
the prospetive risks
Nature of
activity must be considered
Step :4 analyse the risk
Combination
of possible consequences/event
Risk=consequences*
likelihood
Adopting
quantitative &qualitative methods to
analyse the risks
Step :5Evaluate the risk
analyse
&evaluate the risk
to decide
whether risks are acceptable or need treatment
Step:6 Treat the risks
Ø it is about considering optiona
for treating risks that were not considered acceptable or
tolerable
Step :7 Monitor & review
Ø monitor the effectivenessof risk
management , plan,strategies,management system
13 Mitigation/managing the
risk/methods to handling the risk
Avoidance:
Elimination
of risk
Loss control
reducing
the probability of risks & minimizes the loss
Risk retention(active
retention/risk assumptions)
it is
retaining the risk because it is unknown &it consider a lesser risks what
actually is
Non insurance transfers
Contract
(transfering risks through contract)
Hedging(reducing
portfolio risk)
For
business risk by incorporating( limited company)
14BASIC UNDERSTANDING OF NPAS
Non performing assets(NPA)
Former
principal+ interest (180 days)
March
2004(default status – dues not paid for 90 days)
The securitization reconstruction
of financial assets and enforcement of security interest
act 2002 ,
Non
performing assets as an asset or account of a borrower which has been
classified by the bank or financial institutions as sub standard ,doubtful or
loss assets in accordance with the directions or guidelines relating to assets
classification issued by the RBI.
Calculation of NPA
To
maintain NPA‘S both on gross/net basis
It is
expressed in term of %
NPA‘s = gross
or net NPA‘s
Total Advances * 100
Net NPA‘s
= gross NPAs- Provisions for NPA‘s
Net NPA‟S are obtained from gross
NPA
Balance
in interest suspense account ,interest but not received
Claims
received from credit guarantors and kept in suspense account account
Part
payment received and kept in suspense account
Total
provisions held on trend and progress of banking in india
Classification of assets
Performing assets(standard
assets)
These
assets (advances) which continue to generate( interest )on regular basis with
out any default
Non performing assets
Sub standard assets( march
31/2005)
SSA are
those assets which have been classified as NPA for a period less than or equal
to 12months
Not
recover the due
Doubtful assets
An assets would be classified doubtful if it
remained in the substandard category for 12 months
Loss assets
These are
considered ucollectable.
Factors
for risein NPA‘S
INTERNAL FACTORS
Defective
lending process
Inappropriate
technology
Improper SWOT
analysis
Poor
credit analysis system
Managerial
deficiencies
Absence
in regular industrial visits& Reloaning process
EXTERNAL FACTORS
In
Effective recovery tribunals
willfull
defaults
Natural
calamities
Industrial
sickness
Lack of
demand
Ø Change on government policies
Problems /impact of NPA‟S
Impact on
the bank
do not generate any income
Banks has
to make provisions for NPA out of its profits
Capital
is blocked
Customer
confidence will low & high cost
Impact on
the depositors
Owners do
not receive a market return on their capital
Depositors
do do not receive a market return on saving
charging
high Interest rate
Misallocation
of capital
MANAGEMENT
OF NPA
PREVENTIVE MANAGEMENT
Credit
Assessment &risk management mechanism
Organizational
restructuring
Reduce
dependence on interest
Potential
and borderline NPA‘s under check
CURATIVE MANAGEMENT
Debt
recovery tribunals(DRT)
Asset
reconstruction company (ARC)
15 ALM
The traditional ALM programs focus on interest rate risk and liquidity risk because they represent the most
prominent risks affecting the organization balance-sheet (as they require
coordination between assets and liabilities).
But ALM
also now seeks to broaden assignments such as foreign exchange
risk and capital management. According to the Balance sheet management
benchmark survey conducted in 2009 by the audit and consulting company PricewaterhouseCoopers
(PwC),
51% of the 43 leading financial institutions participants look at capital
management in their ALM unit.
Scope of the ALM function
The current and prospective risk arising when the
bank is unable to meet its obligations as they come due without adversely
affecting the bank's financial conditions. From an ALM perspective, the focus
is on the funding liquidity risk of the bank, meaning its ability to meet its
current and future cash-flow obligations and collateral needs, both expected
and unexpected. This mission thus includes the bank liquidity's benchmark price
in the market.
The risk of losses resulting from movements in
interest rates and their impact on future cash-flows. Generally because a bank
may have a disproportionate amount of fixed or variable rates instruments on
either side of the balance-sheet. One of the primary causes are mismatches in
terms of bank deposits and loans.
Currency risk management
The risk
of losses resulting from movements in exchanges rates. To the extent that
cash-flow assets and liabilities are denominated in different currencies.
Funding and capital management
As all the mechanism to ensure the maintenance of
adequate capital on a continuous basis. It is a dynamic and ongoing process
considering both short- and longer-term capital needs and is coordinated with a
bank's overall strategy and planning cycles (usually a prospective time-horizon
of 2 years).
Treasury and ALM
For simplification treasury management can be
covered and depicted from a corporate perspective looking at the management of
liquidity, funding, and financial risk. On the other hand, ALM is a
discipline relevant to banks and financial institutions whose balance sheets
present different challenges and who must meet regulatory standards.
ALM governance
The responsibility for ALM is often divided between
the treasury and Chief Financial Officer (CFO). In
smaller organizations, the ALM process can be addressed by one or two key
persons (Chief Executive
Officer, such as the CFO or treasurer).The vast majority of banks
operate a centralised ALM model which enables oversight of the consolidated
balance-sheet with lower-level ALM units focusing on business units or legal
entities.
To ensure
adequate liquidity while managing the bank's spread between the interest income
and interest expense
To
approve a contingency plan
To review
and approve the liquidity and funds management policy at least annually
To link
the funding policy with needs and sources via mix of liabilities or sale of
assets.
Related Topics
Privacy Policy, Terms and Conditions, DMCA Policy and Compliant
Copyright © 2018-2024 BrainKart.com; All Rights Reserved. Developed by Therithal info, Chennai.