credit risk management
Risk is inherent in all aspects of a commercial operation, however for financial
institutions, credit risk is an essential factor that needs to be managed. Credit
risk is the possibility that a borrower or counter party will fail to meet its obligations
in accordance with agreed terms. Credit risk, therefore, arises from the company's
dealings with clients who may carry out transactions and not pay the losses suffered.
Central to this is a comprehensive IT system, which should have the ability to capture
all key customer data, risk management and transaction information including trade.
Given the fast changing, dynamic global economy and the increasing pressure of globalization,
liberalization, consolidation and dis- intermediation, it is essential that the
company has robust credit risk management policies and procedures that are sensitive
and responsive to these changes.
The purpose of this document is to provide directional guidelines to improve the
risk management culture, establish minimum standards for segregation of duties and
responsibilities, and assist in the ongoing improvement of the company. Credit risk
management is of utmost importance to the company, and as such, policies and procedures
should be endorsed and strictly enforced by the MD/CEO and the board of the company.
A thorough credit and risk assessment should be conducted prior to the opening of
client accounts, and at least annually thereafter. The RM should be the owner of
the customer relationship, and must be held responsible to ensure the accuracy of
the entire credit application submitted for approval. RMs must be familiar with
the company's margining policies and should conduct due diligence on new clients.
It is essential that RMs know their customers and conduct due diligence on new Clients
to ensure such parties are in fact who they represent themselves to be. KYCs should
be completely filled up in all respects along with documentary evidences and Anti-Money
Laundering guidelines which should be adhered to at all times.
In addition, the following risk areas should be addressed:
- Financial capacity:KYCs should ask for nature of income of the prospective
client and the quantum of such income. An insight is absolutely necessary to draw
in mind the financial capacity of the client.
- Trading Pattern:Ongoing analysis of trading pattern of clients must be done
by concerned RMs to notice any divergence from normal pattern, and to early detect
over-indulgence in the trading.
- Segment Analysis:The derivatives segment offers very high credit risk for
the reason of leverage effect. The margin requirements are very less compared to
the exposure and may lull investors to overindulge in the market in the hope of
- Payment History:The delay between incidence of payment and the time when
the payment becomes due needs monitoring. A deteriorating situation is alarming
and may require reduction of exposure by the concerned party.
- Name Lending:Account opening should not be unduly influenced by an over
reliance on the introducing constituent's reputation.
Segregation of Duties
The company should aim to segregate the following functions:
- Credit Approval/Risk Management.
- Credit Administration.
The purpose of the segregation is to improve the knowledge levels and expertise
in each department and obtain an objective and independent judgment of creditworthiness.
The company should have a segregated internal audit/control department charged with
conducting audits of all departments. Audits should be carried out annually, and
should ensure compliance with regulatory guidelines, internal procedures and anti-money
- Credit Administration
- To monitor dues from/ to clients.
- To require payments for pay-in, margin.
- To make payments for pay-out, margin release.
- To monitor adequacy of margins and funds with us.
- To make Ageing Schdule of customers and identify clients with tendency to lag payments.
Relationship Management/Marketing (RM)
- To act as the primary point of contact with borrowers.
- To maintain thorough knowledge of borrower's business and industry through regular
contact, friendly visits. RMs should proactively monitor the financial performance
and account conduct of clients.
- To be responsible for the timely and accurate submission of KYCs and annual reviews.
- To highlight any deterioration in client's financial standing and amend the client's
Risk Grade in a timely manner.
- Conducts independent inspections annually to ensure compliance with Exchange Guidelines,
operating procedures, company policies and necessary directives. Reports directly
Early Alert process
An Early Alert Account is one that has risks or potential weaknesses of a material
nature requiring monitoring, supervision, or close attention by management.
If these weaknesses are left uncorrected, they may result in deterioration of client's
credit position at some future date with a likely prospect of being downgraded to
Impaired status within the next twelve months.
Early identification, prompt reporting and proactive management of Early Alert Accounts
are prime credit responsibilities of all Relationship Managers and must be undertaken
on a continuous basis.
Despite a prudent credit approval process, loans may still become troubled. Therefore,
it is essential that early identification and prompt reporting of deteriorating
credit signs be done to ensure swift action to protect the company's interest. Moreover,
regular contact with customers will enhance the likelihood of developing strategies
mutually acceptable to both the customer and the company. Representation from the
company in such discussions should include the local legal adviser when appropriate.
No need for separate Recovery Unit has so far been felt. Credit Administration Department
will directly manage accounts with sustained deterioration.
The primary functions are:
- Determine Account Action Plan/Recovery Strategy.
- Pursue all options to maximize recovery, including placing customers into receivership
or liquidation as appropriate.
- Ensure adequate and timely loan loss provisions are made based on actual and expected