Question

Discuss the importance of a bank’s credit culture in managing credit risk.

Answer 1

A strong credit culture is very important towards a bank's survival and profitability, hence it is very important for managing credit risk.

Bank lend out long term loans like project financing and short term loans to corporates, individuals, and financial institutions , establishing a strong credit culture is vital towards the success of any banking entity. As the entire process of lending is very risky and banking business has changed both from a regulatory and industry perspective.

A proper assessment of the borrowers debt service capability , a strong credit culture means that after granting loans a stringent process of repayment is outlined, failure of which appropriate actions will be taken. Prior to approval, credits are all subject to a scrutinised analysis of the customers’ repayment capability. The credit culture of the bank decides the presentation and performance of the loan portfolio so that defaults are few. So this way the credit risk is managed.

Sometimes some risk management practices are too complex too be randomly and effectively implemented within the lending organisation.