group no 3 - credit risk

8/7/2019 Group No 3 - Credit Risk

1/69


2/69

Priyanka Biyani 70

Atit Sanghavi 78

Rohan Merchant 85 Kashish Shah 84

Hiren Parekh 86

Mehul Shah 97 Navin Todi 124

Priyanka Narvekar 126


3/69

1. CREDIT RISK & ITS TYPES

2. CREDIT RISK MODEL

3. PRINCIPLES OF CREDIT RISK

MANAGEMENT

4. CREDIT RISK MEASUREMENT

5. ASSESSING CREDIT RISK

6. MITIGATING CREDIT RISK

7. CLAIM PROCEDURE

8. POLICY FRAMEWORK FOR

INDIAN BANKS

9. CREDIT RATING AGENCIES

10.ECGC


4/69

Investors Risk of Loss on Default

Loss in the form of:

Loss of principal and interest

Decreased cash flow

Increased collection costs (cost of recovery)


5/69

Default on payment of:

Mortgage loan, credit card or any other loan

Trade invoice

Employees earned salary

Coupon rate or Principal amount (Govt Bonds)

Insolvent insurance company fails to pay policy obligation Insolvent bank fails to refund deposits

Government grants bankruptcy protection to an Insolvent Company


6/69

Investors are compensated for risks taken bythe way of interest payments (yields)

The yields correlate strongly to the perceived

risk the perceived risk the rate of interest

demanded by the investor Credit risks are calculated on borrowers

ability to repay and it includes: Collateral assets

Revenue generating ability

Credit ratings assigned


7/69

TypesTypes

ofofCreditCreditRisksRisks

DefaultRisk

CreditSpread Risk

DowngradeRisk


8/69


9/69

Credit ratings Bond Price

the ratings the risk

Such risk arises due to deteriorating financial condition of the

concerned company


10/69

Deterioration in the credit standing of bankscounterparties

Effective management of credit risk for long termsuccess of any banking organization

Sources of credit risk exist throughout the activities

of the bank

Learn from past experiences the need to identify,measure, monitor & control credit risk


11/69

Sound practices to be undertaken in

following areas:

Establish appropriate credit risk environment

Operate under sound credit granting process

Maintain appropriate credit administration,

measurement & monitoring process

Ensure adequate control over credit risk


12/69

Credit risk management chosen by

supervisors must be appropriate

Stipulation of the Basel Committee

Credit risk related to the process of

Settlement risk


13/69

There are two primary types of models:

1. Structural Model2. Reduced Form Model


14/69

Structural Model Use evolution of firms to

determine time ofdefault

Endogenously generated

within the model

Value of firms assets &liabilities at default will

determine recovery rates

Reduced Form

Model

Relation between firm value& default are not considered

Exogenously generated

Specific recovery rates


15/69

Pre settlement risk Banks should have a system to quantify pre-settlement risk

Techniques have evolved from using:

- the full notional amount of the contract,-to a percentage of the notional amount,-to loan equivalent estimates.

-Banks now employ highly sophisticated computer models

Credit risk in a derivative product is a function of severalfactors:-type of contract, cash flows, price volatility, tenor


16/69

Exposure at the beginning of a contract is usually at or near

zero

Most deals are done at market prices and most derivativecontracts do not involve an exchange of principal

After inception, the expected risk increases or decreases toreflect the impact of changing price factors

The longer the contract, the greater the potential for ratemovements and, hence, a change in potential exposure


17/69

Credit risk is generally reduced over the life of thecontract because :

i. Interim cash flows reduce payment uncertainty

ii. Shorter the remaining life of the contract the less potentialthere is that significant adverse rate movements will occur

Method used to measure counterparty credit risk

should be commensurate with the volume and levelof complexity of the derivative activity


18/69

Dealers and active position-takers have

access to statistically calculated loan-

equivalent exposures, which represent-the current exposure (replacement cost) plus

-an estimate of the potential change in value overthe remaining life of the contract


19/69

Settlement Risk

The cumulative amount of funds or assets deliveredfor payment

Duration of an individual banks settlement

exposure will depends on:- the characteristics of the relevant paymentssystems-on the banks internal reconciliation procedures


20/69

Banks maximum settlement exposure could

equal, or even surpass, the amount receivable

for three days worth of trades

FX transactions, in particular, involve a higherdegree of settlement risk because the full

notional value is exchanged


21/69

Banks can reduce settlement exposure bynegotiating their correspondent arrangements to

reduce the amount of time they are exposed to noncancellable payments awaiting settlement

Banks should review the time necessary for

reconciliation of payment receipt

Reducing the time it takes to identify final and failedtrades will reduce settlement exposure


22/69

Significant resources and sophisticated programs are used toanalyze and manage risk

Companies run a credit risk department whose job is toassess the financial health of their customers, and extendcredit (or not) accordingly

May use in house programs

Use third party provided intelligence Companies likeStandard & Poor's, Moody's Analytics and Fitch Ratingsprovide such information for a fee


23/69

Most lenders employ their own models (credit scorecards) to

rank potential and existing customers according to risk, andthen apply appropriate strategies

Credit risk has been shown to be particularly large andparticularly damaging for very large investment projects, so-

called megaprojects

Such projects are especially prone to end up in what hasbeen called the "debt trap,"


24/69

Sovereign risk

The risk of a government becoming unwilling or

unable to meet its loan obligations, or reneging on

loans it guarantees

The existence of sovereign risk means that creditors

should take a two-stage decision process whendeciding to lend to a firm based in a foreign country


25/69

Five macroeconomic variables that affect the

probability of sovereign debt rescheduling

are:i. Debt service ratio

ii. Import ratio

iii. Investment ratioiv. Variance of export revenue

v. Domestic money supply growth


26/69

Counterparty risk The risk that an organization does not pay out on a bond,

credit derivative, credit insurance contract, or other trade or

transaction when it is supposed to

Even organizations who think that they have hedged theirbets by buying credit insurance of some sort still face therisk that the insurer will be unable to pay, either due to

temporary liquidity issues or longer term systemic issues

Large insurers are counterparties to many transactions, andthus this is the kind of risk that prompts financial regulators

to act, e.g., the bailout of insurer AIG


27/69

Efforts taken to reduce the probability or

consequences of a threat

Types

physical measures (protective fences)

financial measures (stockpiling cash, insurance)


28/69

Necessary to mitigate risk in order to achieve

the greatest degree of success

Risk assessment allows

mitigate risk to a level that you feel comfortableliving with


29/69

Risk-based pricing

Covenants Credit insurance and credit derivatives

Tightening

Diversification

Deposit insurance


30/69

Default risk - risk that an organisation does

not pay out on its receivables to the

supplying firm when it is due

Influences the credit worthiness of a sourcefirm

Gives rise to credit risk


31/69

Buyer-backed supply chain financing, or BSCF

Credit assessment of the client


32/69

Situational

Letter of credit present

Letter of credit not present


33/69

Make a written exception

Hold the carrier liable for damage by registered letter

Do not get upset, when the carrier rejects the claim

Do NOT DEDUCT your claim from freight and or duty

charges payable to the carrier or the forwarder

Inform your insurance company

Invite every party involved to make a survey on the

damaged cargo


34/69

IMPORTANT: The Insured, the consignee or

others on their behalf, are always bound to

protect the recovery action of the Insurers inrespect of those who are responsible for the

loss and/or damage and to interrupt theperiod of prescription according to the terms

of Law.


35/69

Make sure to take out a cargo insurance

Remember an ALL RISK insurance does not

cover every risk!

Know the conditions of carriage and liabilities

of the NVOCC who is responsible for your

goods


36/69


37/69


38/69

Essential that each bank develops its own

credit risk strategy.

Credit risk strategy should provide continuity

in approach.

Different credit risk policies & procedures fordifferent sectors.


39/69

Procedures to ensure that all risks associated

are promptly and fully evaluated by therelevant lending and credit officers.

Procedures and systems which allow formonitoring financial performance of

customers.


40/69

Banks should have written credit policies

Credit risk management practices

The level of authority required to approve credit

will increase as amounts and transaction risks

increase.

Consistent approach toward early problem

recognition, the classification of problem

exposures, and remedial action.


41/69

Create individual group for risk management.

Full authority to be given to the team.

The credit risk strategy and policies should beeffectively communicated throughout the organisation.

Depending on the size of the organization, constitute a

high level Credit Policy Committee also called CreditRisk Management Committee or Credit Control

Committee


42/69


43/69

In ICICI Bank this department is managed and

taken care by Credit Risk Compliance & AuditDepartment (CRC & AD).


44/69

Review of Credit Origination & Monitoring:

Checking the Credit rating of companies/structures

Analysing Default risk & loan pricing

Review of industry sectors

Review of large exposures in industries/ corporate

groups/ companies

Ensuring Monitoring and follow-up by building

appropriate systems.


45/69

Designing appropriate credit processes,

operating policies & procedures.

Focussed attention to structured financing deals

Monitor adherence to credit policies of RBI

Portfolio monitoring

Designing a Methodology to measure portfolio risk

Developing Credit Risk Information System (CRIS)


46/69


47/69

For instance, Companies issue bonds whichcan be traded in the secondary market. A

credit rating for an issuer takes into

consideration the issuer's credit worthiness(i.e., its ability to pay back a loan), and affects

the interest rate applied to the particular

security being issued. If a company is given agood rating, it can get loans at a lower rate ofinterest


48/69

Credit ratings are used by investors, issuers,

investment banks, broker-dealers, andgovernments.


49/69


50/69


51/69


52/69

Do not downgrade companies fast enough

Good relationship with companymanagement

Engaging in heavy-handed "blackmail" tactics

Accused of being oligopolistic


53/69

Errors of judgment in rating structured products

Lower quality loans when pooled together in a

CDO, were given AAA rating

Conflicted in assigning sovereign credit ratings


54/69

It is India's leading Ratings, Research, Risk and

Policy Advisory Company based in Mumbai.

CRISILs majority shareholder is Standard &Poor's, a division of The McGraw-Hill Companies.

Largest number of rated entities and ratingproducts: CRISIL's rating experience covers more

than 24654 entities, including 14,500 small and

medium enterprises (SMEs).


55/69

CRISIL offers domestic and internationalcustomers with independent information,opinions and solutions related to credit ratings

and risk assessment; energy, infrastructure andcorporate advisory; research on India's economy,industries and companies; global equity research;fund services; and risk management.

IREVNA is the off-shoring Knowledge ProcessOutsourcing arm of CRISIL, with niche analyticalskills to cater to financial analysis.


56/69

RatingsCRISIL is the largest credit rating agency in India.CRISIL pioneered ratings in India more than 20

years ago, and is today the undisputed businessleader, with the largest number of rated entitiesand rating products: CRISIL's rating experiencecovers more than 37000 entities, including17,000 small and medium enterprises (SMEs). As

on December 31, 2010, they had more than12,000 ratings (including over 6000 SMEs)outstanding.


57/69

CRISIL ResearchCRISIL Research is India's largest independent research house.Through constant innovation, and comprehensive researchofferings covering economy, industry, companies CRISILResearch meets the requirements of more than 750 Indian andglobal clients. Apart from off the shelf research reports, CRISILalso provides incisive, customised research that allows clientsto take informed business and investment decisions.Comprehensive research coverage on over 65 industries and150 corporates makes CRISIL a preferred service provider to -

90% ofIndia's commercial banks 4 of the world's largest consulting firms All the leading brokers, investment banks and private equity

players


58/69

CRISIL Capital MarketsCRISIL is an eminent player in the capitalmarkets space with detailed perspective covering

both debt and equity markets. CRISIL's capitalmarket offerings can be categorised under equityresearch, initial public offer grading, mutual fundservices, and fixed income services. Additionally,

CRISIL provides customised research solutions aswell.CRISIL Equities Offerings

CRI

SI

L Fund Services


59/69

Global Off shoring (IREVNA)It is the world's top-ranked Knowledge Process Outsourcingfirm, focused on the global financial services industry. Withover 1400 employees, 75% of whom hold advanced degrees infinance, accounting and management, across 7 officesworldwide, Irevna supports the world's leading commercial andinvestment banks, insurance companies, corporations,consulting firms, private equity players and asset managementfirms.Irevna has served more than 200 financial services firms and

enjoys strategic relationship with: 11 of the top 15 global investment banks

2 of the top 10 consulting groups 3 of the top 10 Asset Management Companies

3 of the top 15 insurance companies

Several fortune 500 companies


60/69

Infrastructure AdvisoryIt provides practical and innovative solutions to governments, donorfunded agencies and leading organizations in over 20 emergingeconomies across the world to: Transform efficiency of public institutions and sector

Design and strengthen reform programmes to catalyse privatesector participation Improve infrastructure service deliverySome of the key assignments executed : CRISIL Infrastructure Advisory strategized the takeout finance scheme - a

method of making long term debt financing available to large infrastructure

projects forIndia

Infrastructure Company Ltd (

IIFCL).

CRISIL Infrastructure Advisory's Energy Practice has designed andimplemented first of its kind novel Electricity Distribution FranchiseeContract in Maharashtra.

Effective April 01, 2007, CRISIL transferred its advisory and riskconsulting business into a wholly owned subsidiary, CRISIL Risk andInfrastructure Solutions Ltd (CRIS).


61/69

CRISIL Risk Solutions

It provides comprehensive risk management services tobanks, financial institutions, and corporates across allareas of risk including: credit, market and operational. In

addition to providing innovative software products, it alsoextends consultancy services and analytical insights,which are focused on helping customers become Basel II-compliant.Ranked as the No. 1 Risk Solution provider in the last

Indian Banks' Association (IBA) Finsight media survey,CRISIL Risk Solutions has delivered risk solutions to about50 financial institutions in India and abroad and has largestuser base of more than 100000 users. CRS's flagshipproduct RAM is the largest deployed Internal risk rating

solution inIndia.


62/69

Symbol(Rating category)Description(with regard to the likelihoodof meeting the debt obligations on time)

AAA Highest Safety

AA High Safety

A Adequate Safety

BBB Moderate Safety

BB Inadequate Safety

B High Risk

C Substantial Risk

D Default


63/69


64/69

Export Credit Guarantee Corporation ofIndia Limited.

Established on 31st July, 1957 by the

Government ofIndia. An export promotion organization which

functions under Ministry of Commerce &

Industry.


65/69

Fifth largest credit insurer of the world in terms ofcoverage of national exports.

The present paid-up capital of the company isRs.900 crores.

Authorized capital Rs.1000 crores.

An ISO Organisation with 5 Regional offices and 51Branches .


66/69

Provides a range of credit risk insurance covers toexporters against loss in export of goods andservices.

Offers guarantees to banks and financial institutionsto enable exporters to obtain better facilities fromthem.

Provides Overseas Investment Insurance to Indiancompanies investing in joint ventures abroad in theform of equity or loan.


67/69

RiskAssociated

withExports

Political andEconomical

ChangesForeignbuyer

unable topay

Risk ofInsolvency

Balance ofPaymentproblems

Outbreak ofcivil war

Natural

Calamities &Emergency


68/69


69/69

group no 3 - credit risk

Documents