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.

Credit Assessment

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 quick profits.
  • 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.

Internal Audit

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 laundering guidelines.

Key Responsibilities

  • 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.

Internal Audit/Control

  • Conducts independent inspections annually to ensure compliance with Exchange Guidelines, operating procedures, company policies and necessary directives. Reports directly to MD/CEO.

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.

Credit Recovery

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 losses.
attention investors
1. Stock Brokers can accept securities as margin from clients only by way of pledge in the depository system w.e.f. September 01, 2020.      2. Update your email id and mobile number with your stock broker / depository participant and receive OTP directly from depository on your email id and/or mobile number to create pledge.      3. Check your securities / MF / bonds in the consolidated account statement issued by NSDL/CDSL every month.      4. Prevent Unauthorized Transactions in your demat account --> Update your Mobile Number with your Depository Participant. Receive alerts on your Registered Mobile for all debit and other important transactions in your demat account directly from NSDL on the same day.     5. KYC is one time exercise while dealing in securities markets - once KYC is done through a SEBI registered intermediary (broker, DP, Mutual Fund etc.), you need not undergo the same process again when you approach another intermediary.     6. No need to issue cheques by investors while subscribing to IPO. Just write the bank account number and sign in the application form to authorise your bank to make payment in case of allotment. No worries for refund as the money remains in investor's account.     .......... Issued in the interest of Investors    World Investor Week October 10 - 16, 2022 being Celebrated under aegis of IOSCO and SEBI
attention investors
1. All clients are requested to record their email id for electronic despatch of contract and statement. In case of electronic contract note, the link/login for the same is available on website for download.      2. Pay 20% upfront margin of the transaction value to trade in the cash market segment.      3. Investors may please refer to the Exchange's Frequently Asked Questions (FAQs) issued vide circular reference NSE/INSP/45191 dated July 31, 2020 and NSE/INSP/45534 dated August 31, 2020 and other guidelines issued from time to time in this regard.      4. Submit application letter along with photocopy of PAN and address proof requesting activation of Dormant Account.     5. All clients are requested to providing the NEFT details of your bank account for receiving directly credit to your account by online. Please summit a cancel cheque in your operating branch.
investor section
Notice on Collection of Upfront Margin from 1 Aug, 2020 in CashSegment : It is to inform you that SEBI Vide circular dated August 01, 2019 & February 25, 2020 has made Margin collection (Initial Margin & M2M) mandatory for trading in Cash/Equity Segment effective August 01,2020 failing which Penalty will be levied by the Exchanges for not meeting the Margin requirement.Therefore in compliance with the same, we request all the clients to provide us the sufficient margin either in the form of Funds and or securities before undertaking any trade on the Exchange through us. Moreover it is also applicable for intraday trades undertaken by the client.      We request you to provide the securities in our client Collateral account if you wish to undertake the trade and comply with the SEBI requirement of fulfilling the Margin obligation requirement in Cash Segment (Applicable on both Delivery & Non Delivery).It is also reiterated that SEBI circular also envisages that the Shares can be given for Margin to the Stock broker through Pledge Instruction only initiated through depository System.Therefore in lieu of the same any charges levied by the Depository will be simultaneously charged to clients on actual basis.      Therefore we request you to kindly Provide us the Margin as required through SEBI circular as mentioned above in order to meet the margin requirement as applicable for trading in the Cash segment.
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