Question

1. List ten (10) elements that should be included in your institution's credit policy.
2. What are the advantages of a credit institution having a written loan policy?
3. State the four (4) things an effective credit risk management system should do.
5. Explain, in general terms, how to conduct a credit risk assessment.

Answer 1

1. 10 element that should be included in Institution`s credit risk policy:

1.Based on studies of industries /Business activities , bank should identify those which are doing well and have encouraging outlook/potential for growth. Such activities should should be placed under target/preferred credit while others which are not doing well and have uncertain prospect/default risk may be kept under a watch list wherein exposures are increased- contained -reduced.

2.Delegation of loan approving /sanctioning powers of officials , linking the same with risk rating of the borrower. The level of loan sanctioning authority may increase as the risk rating worsens.

3.Linking Credit scoring and rating system and acceptance criteria with the risk rating of borrower so that no loan proposal below a certain cuttoff level is entertained.

4. The credit policies and procedures should lay down prudential exposure limits for loans to individuals and group of borrowers as also for different industries /sensitive sectors as a proportion of bank`s capital fund

5.Bank should evolve effective systems of monitoring the operation/financial performance of the borrower , as also the conduct of their bank accounts so that outstanding remain within limits.

6.The policies and procedures should discuss the system /procedures for judging the credit quality on an on going basis and any migration of credit from low to high risk categories and vice versa.

7.They should lay down clear guide lines for pre loan sanction appraisal and monitoring of funded and non funded exposures, which can get converted into funded liabilities in case of customers does not meet commitment.

8.The should discuss Forex risks, which may comprise of transfer risk, currency risk, cross border risk, soverign risk, non sovereign risk or political risk and son and lay down countrywise exposure limits based on a analytical review and guidelines so as to mitigate such risks.

9.They should lay down policies and Fx limits for inter bank exposures based on internal/externalratings or any other prudential parameters.

10. They should lay down guidelines on multiple credit approver , making financial sanctions subject to approvals at various stages, namely credit risk rating, risk approvals,credit approval grid and so on.

2. Advantages of Credit Institution having a Written loan policy.

In view of growing complexities in the banking sector particularly speed of their operations and development of new financial products and services, leading to various risk it imperative for them to articulate their risk management philosophy and put in place appropriate risk management policy in writing. Bank should define in detail , the varuois types of risk, indicting the tolerance levels.As regards measurement of the various types of riskbank should design clear policy guidelines indicating the actions to be initiated to mitigate the risk .

3. Four things Credit Risk management systems should do:

a.Laying down risk assessment systems, developing the MIS , monitoring the quality of or loan or investment portfolio, identifying problems and correcting deficiencies.

b. Enforcing compliance with the risk parameter and prudential limits set up by the Credit risk management Committee/ board.

c. Measuring ,controlling , and managing credit risk on bank -wide basis, within the limit set up by the board/ committee.

d. Being accountable for protecting the quality of the entire loan/ investment portfolio.