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Credit Risk Management Presentation

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Sumant Palwankar
Sumant Palwankar
BusinessEconomy & Finance
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An Overview of Credit Risk Management practices - A Banker’s perspective Sumant A. Palwankar Credit Risk Analyst 8 th October 2009.
What do Banks do for their Customers ??? ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Bank Goals and Constraints Maximise Shareholder Wealth Amount of Cash Flow Timing of Cash Flow Risk of Cash Flow Constraints
Risk ???? ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Why Manage Risks ?? ,[object Object],[object Object],[object Object],[object Object]
Key Banking Risks ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Kindly note that these are conceptually arrived numbers. Risk Grid-Institutional Players 20% 40% 40% Investment Banks 25% 60% 50% 25% Operational Risk 40% -do- 12% 30% ALM Risk 38% 10% Market Risk Depends on positions –proprietary trading Securities Broking 35% 35% Credit Risk Insurance Asset Management Banks Risk Category
THE BASEL-II CAPITAL ACCORD Minimum Capital Requirements Supervisory Review Market Discipline Three Basic Pillars
Minimum Capital Requirement Provides for capital calculations for Credit, Market and Operational Risk ,[object Object],[object Object],[object Object],[object Object],Standardized Approach Internal Rating based Approach
Credit Risk “ There is one big difference between selling a credit product and selling soap. The sale of money is not final, you expect it back with interest.”
Credit Risk basics … ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
[object Object],[object Object],[object Object],[object Object],[object Object]
Contributors to Credit Risk ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Liabilities of a Bank are very credit –sensitive as compared to that of a typical industrial firm.
[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Broad Principles of Credit Risk Management in Banks
Important factors for Credit approval.
Traditional approaches to Credit Risk Measurement ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Some Quantitative techniques for Credit Risk Measurement ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Quantitative techniques for Credit Risk Measurement … contd ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Corporate Credit Risk models based on Stock Prices (KMV Model)
 
Some Credit Risk jargons ,[object Object],EXPECTED LOSS INR = Probability of Default (PD) % x Loss Severity Given Default (Severity) % Loan Equivalent Exposure (Exposure) INR x What is the probability of the counterparty defaulting? If default occurs, how much of this do we expect to lose? If default occurs, how much exposure do we expect to have? Borrower Risk Facility Risk Related
[object Object],[object Object],Amt of loss (Rs) Frequency of default Expected loss Unexpected loss Confidence interval (95%, 99.9%) Bank is required to keep Capital to absorb such losses.
Credit Rating Process ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Credit Ratings helps in….. ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Internal Credit Risk Rating process Credit Risk Industry Risk Business Risk Management Risk Financial Risk Industry Characteristics Industry Financials Market Position Operating Efficiency Track Record Credibility Payment Record Others Existing Fin. Position Future Financial Position Financial Flexibility Accounting Quality ,[object Object],[object Object],[object Object],[object Object]
 
Rating system ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Improved risk environment Time
But after all this, Institutions with best risk management systems failed…………….!!! What went wrong and learnings from these ???
[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Some afterthoughts …. ,[object Object],[object Object],[object Object]
Case Study…. ,[object Object],[object Object]
Thanks for your attention . . .

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Credit Risk Management Presentation

  • 1. An Overview of Credit Risk Management practices - A Banker’s perspective Sumant A. Palwankar Credit Risk Analyst 8 th October 2009.
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  • 3. Bank Goals and Constraints Maximise Shareholder Wealth Amount of Cash Flow Timing of Cash Flow Risk of Cash Flow Constraints
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  • 8. Kindly note that these are conceptually arrived numbers. Risk Grid-Institutional Players 20% 40% 40% Investment Banks 25% 60% 50% 25% Operational Risk 40% -do- 12% 30% ALM Risk 38% 10% Market Risk Depends on positions –proprietary trading Securities Broking 35% 35% Credit Risk Insurance Asset Management Banks Risk Category
  • 9. THE BASEL-II CAPITAL ACCORD Minimum Capital Requirements Supervisory Review Market Discipline Three Basic Pillars
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  • 11. Credit Risk “ There is one big difference between selling a credit product and selling soap. The sale of money is not final, you expect it back with interest.”
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  • 16. Important factors for Credit approval.
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  • 28. But after all this, Institutions with best risk management systems failed…………….!!! What went wrong and learnings from these ???
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  • 32. Thanks for your attention . . .