credit risk loan portfolio management
TRANSCRIPT
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CREDIT RISK
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CREDIT RISK
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CREDIT RISK
Financial exposure resulting from a bank’sdependence upon another party to keep it
whole. It is acquired when bank funds are
extended or committed to another party.
Must be recognized and evaluated whenacquired and priced appropriately.
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IMPACT OF CREDIT
• Impacts capital through diminished earnings
from increased loan losses
• Increases personnel and legal costs
• Impacts bank’s ability to market new
equity or debt issues
• Increases the level of other risks, liquidity,
legal, and reputational risk
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MEASUREMENT NEEDS
• System to measure
risk at onset and
throughout duration of the loan
• Ability to aggregate
customer’s credit risk
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CONTROL ELEMENTS
• Policy
• Credit risk evaluated at the outset of the borrower’s ability to repay
• Credit structured so that the purpose of the
loan will match the source of repayment
• Secondary sources of repayment are
identified
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BANK LENDING POLICIES
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BANK LENDING POLICIES
• Provides the foundation for sound loan
portfolio management
• Basic objectives:
– Made on a sound and collectible basis
– Profitable for shareholders and provide
protection for depositors
– Serve the need of the communty
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LENDING POLICY
• Should contain general outline of scope and
allocation of credit
• Broad and not overly restrictive
• Flexible rules
• Provide for presentation of loans staff
believes are worthy of consideration which
may or may not be in scope of the policy
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DEVELOPING THE LENDING
POLICY
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DEVELOPING THE LENDING
POLICY
• Bank’s financial resources
• Personnel• Facilities
• Future growth potential
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COMPONENTS OF A LENDING
POLICY
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COMPONENTS OF A LENDING
POLICY
• Geographic Limits
• Distribution by loan
category
• Types of loans
• Maturities
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COMPONENTS OF A LENDING
POLICY
• Loan Pricing
• Loan-to-Value Ratios
• Financial Information
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COMPONENTS OF A LENDING
POLICY
• Concentrations
• Loan Authority
• Collections
• Exceptions to the
Policy
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LOAN PROCESSING
SEQUENCE
• A written application is made
• A credit file is maintained• Internal risk rating assigned
• Pricing
• Appropriate approval process• Conforms to established policy and
underwriting standards
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LOAN ADMINISTRATION
PROCESS
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LOAN ADMINISTRATION
PROCESS
• Policy development, revision and
implementation
• Underwriting standards
• Management Information Systems
• Loan approval process
• Credit file requirements
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LOAN ADMINISTRATION
PROCESS
• Collateral documentation requirements
• Monitoring reports• Collection guidelines
• Provision for bad loans
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INTERNAL LOAN REVIEW
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INTERNAL LOAN REVIEW
• Systematic analysis of Portfolio
• Independence• Qualified personnel
• Depth of reviews
• Review and follow-up