get familiar with the risks inherent in banking business, realize the importance of credit risk management in banks, and understand the facts about the Vietnamese credit conditions. Four research questions will step by step guide the audience on how these objectives are achieved. In order to give out an evaluation of credit risk management practices, this thesis has tried to Research Design: Prior research finds that banks manage credit risk for two main primary purposes: to enhance interest earnings (profitability) and to reduce loan losses (bad obligations) which ends up up from credit default (Sim, ). We predict that banks with better credit risk management practice have lower loan losses (non performing loans).Estimated Reading Time: 6 mins extremely risky. Because main business of the bank is lending, the biggest risk is credit risk. Among the types of banking risks, credit risk is the biggest threat that the banks have to prevent. Credit risk is very close to bad debt. Credit risk occurs when the debtors cannot pay back their loans and interest for the bank. In order to preventFile Size: KB
Credit risk management in banks dissertation proposal
Policy statement. It is the policy of the Bangko Sentral to ensure that FIs under credit risk management in banks dissertation supervision have adequate and effective credit risk management systems commensurate with their credit risk-taking activities.
Towards this end, the following guidelines on credit risk management set forth the expectations of the Bangko Sentral with respect to the comprehensive management of credit risk. The guidelines further articulate sound principles and practices that shall be embedded in the credit risk management framework of FIs and shall cover the following areas: a establishing an appropriate credit risk environment; b operating under a sound credit granting process; and c maintaining appropriate credit administration, measurement, monitoring and control processes over credit risk.
While FIs may employ different approaches in the management of their credit risk, the Bangko Sentral expects that all these areas are effectively addressed. For purposes of these guidelines, FIs refer to UBs, KBs, TBs, RBs and Coop Banks and their respective credit-granting financial subsidiaries if any as well as stand-alone QBs.
Evaluation of credit risk management system. It will not restrict the scope of the credit risk-taking activities of an FI, so long as the FI is authorized to engage in such activities and:. Understands, measures, monitors and controls the risk assumed. Adopts risk management practices whose sophistication and effectiveness are commensurate with the risk being taken; and. Maintains capital commensurate with the risk exposure assumed. In evaluating the above parameters, the Bangko Sentral expects FIs to have sufficient knowledge, skills and appropriate system and technology necessary to understand and effectively manage their credit risk exposures.
The Bangko Sentral shall consider the following factors:. The major sources of credit risk exposure and the complexity and level of risk posed by the assets, liabilities, credit risk management in banks dissertation, and off-balance sheet activities. Establishing an Appropriate Credit Risk Environment. Role of the board and senior management.
Board of directors. The board of directors shall be responsible for the approval and regular review of credit risk strategy and credit policy, as well as the oversight of the implementation of a comprehensive and effective credit risk management system appropriate for the size, complexity and scope of operations of an FI.
The board shall ensure that the system provides for adequate policies, procedures and processes to identify, credit risk management in banks dissertation, measure, monitor and control all credit risks inherent in an FIs products and activities, both at the individual and portfolio levels on a consistent and continuing basis; and that an independent assessment of the system is periodically performed, the results of which shall be reported to it or to a board-level committee for appropriate action.
Senior management. Senior management shall be responsible for credit risk management in banks dissertation that the credit risk-taking activities of an FI are aligned with the credit risk strategy approved by the board of directors.
Credit risk management structure. Senior management or an appropriate level of management shall implement a board-approved credit risk management structure that clearly delineates lines of authority, establish accountabilities and responsibilities of individuals involved in the different phases of the credit risk management process.
The front office function performs credit originating; recommends internal credit ratings, classifications and allowances for losses including changes thereon, when necessary; and the on-going monitoring of credit exposures of borrowers on a day-to-day basis.
The back office provides support in the overall credit administration, including, among others: ensuring complete documentation, credit disbursement and recording of payments received; maintenance of credit and collateral files; and compilation of management information reports.
The middle office performs risk management and control functions that are independent from the credit originating and administration functions. The risk management function shall report directly to the Risk Management Committee RMC or appropriate board-level committee or the board. An independent credit review is a function within the middle office that performs an unbiased assessment of the quality of individual credits and the aggregate credit portfolio, including appropriateness of credit risk rating, classification and adequacy of allowance for loan losses.
In the case of simple FIs, such independent credit review function may be concurrently performed by qualified personnel fulfilling other independent control oversight functions e. compliance, internal audit. The workout or problem loan management is another function within the middle office that is independent from the credit originating function to ensure that problem loans are managed effectively to minimize potential losses.
The structure shall likewise provide for independent audits, i. The scope of internal audit shall include the evaluation of the independence and overall effectiveness of the credit review function. Regardless of the organizational structure that an FI adopts, the board shall ensure that the aforementioned key functions are considered and independence and control oversight functions are effective to avoid or address any potential conflict of interest.
Their qualification standards, roles and responsibilities shall be clearly defined in the credit operating policies and procedures manual of the FI. The board and senior management shall ensure that adequate resources and appropriate level of staffing are allocated to execute all kinds of credit activities.
Credit risk strategy. In formulating the credit risk strategy, the FI shall articulate the desired market segments and types of credit exposures e, credit risk management in banks dissertation. collateral, restrictive covenants, etc. terms as well as likely downside scenarios and their possible impact on the obligors.
The FI shall likewise define acceptable and unacceptable types of credits, clients, activities, transactions and behaviors that could result or potentially result in conflict of interest, personal gain at the expense of the FI, credit risk management in banks dissertation, or unethical conduct.
The credit risk strategy shall consider the cyclical aspects of the economy and the varying effects of the economic cycle on the credit portfolio of the FI. Credit policies, processes and procedures. The board-approved policies, processes and procedures shall cover all phases of the credit risk management system. FIs shall establish appropriate processes and procedures to implement the credit policy and strategy. These processes and procedures, as well as the credit policy, shall be documented in sufficient detail, effectively communicated throughout the organization to provide guidance to staff, and periodically reviewed and updated to take into account new activities and products, as well as new lending approaches.
Subsequent major changes must be approved by the board. The credit practices shall be assessed periodically to ensure that the officers and staff conform to the desired standard and value. Operating Under a Sound Credit Granting Process. Credit approval process. The process shall include the different levels of appropriate approving authority and the corresponding approving authority limits, which shall be commensurate with the risks of the credit exposures, credit risk management in banks dissertation, as well as expertise of the approving individuals involved.
Further, there shall be proper coordination of relevant units and individuals and sufficient controls to ensure acceptable credit quality at origination. Consistent with safe and sound banking practice, an FI shall grant credits only in amounts and for the periods of time credit risk management in banks dissertation for credit risk management in banks dissertation effective completion of the activity to be financed and after ascertaining that the obligor 1 is capable of fulfilling his commitments to the FI.
FIs shall conduct comprehensive assessments of the creditworthiness of their obligors, and shall not put undue reliance on external credit assessments. Credit shall be granted on the basis of the primary source of loan repayment or cash flow, integrity and reputation of the obligor or counterparty as well as their legal capacity to assume the liability. Depending on the type of credit exposure and the nature of the credit relationship, the factors to be considered and documented in approving credits shall include, but are not limited to, credit risk management in banks dissertation, the following:.
In performing the financial analysis, FIs shall use, to the extent available, credible audited financial statements and other relevant documents and sources. When participating in loan syndications, an FI shall not place undue reliance on the credit analysis done by the lead underwriter and shall perform its own analysis and review of syndicate terms.
It shall analyze the risk and return on syndicated loans in the same manner as directly sourced loans and ensure that the loan is consistent with its credit risk strategy.
When an FI purchases securities issued by an obligor that is different from the counterparty e. asset swapsit shall also analyze issuer risk. For treasury and capital market activities, the structure of products and transactions shall be analyzed to determine the source and volatility of credit exposure.
When granting consumer credits, an FI shall conduct its credit assessment in a holistic and prudent manner, taking into account all relevant factors that could influence the prospect for the loan to be repaid according to its credit risk management in banks dissertation and conditions.
FIs shall factor into their credit-granting decisions the likelihood of providing allowance for identified and expected losses and holding adequate capital to absorb unexpected losses for credits with apparent weaknesses. FIs may utilize physical collateral like real estatefinancial guarantees and other instruments to help mitigate risk in credit exposures. However, these shall not substitute for a comprehensive assessment of the obligor or fully compensate for insufficient information.
FIs shall establish adequate policies in determining the acceptability of various forms of credit mitigants and appropriate collateral value limits; procedures for regularly assessing the value of physical collaterals and availability of financial guarantees; and a process to ensure that these are, and continue to be, enforceable, realizable and marketable, credit risk management in banks dissertation.
Finally, FIs need to consider that the realizable value of the physical collateral or the quality of financial guarantees and other credit mitigants may be impaired by the same factors that have led to the diminished recoverability of the credit. In the case of guarantees, the level of coverage being provided in relation to the credit quality, financial and legal capacity of the guarantor shall be evaluated.
Netting arrangements also mitigate risks, especially in interbank and off-balance sheet transactions. In order to actually reduce risk, such agreements need to be sound and legally enforceable in all relevant jurisdictions. For more complex credit risk exposures, e. Each complex credit risk product or activity, especially those that are new to banking, shall be subject to a thorough analysis in addition to the regular assessment that is done with traditional credit-granting activities.
For new products and activities, the credit risk shall be appropriately identified and managed through a formal risk assessment program. FIs shall ensure that they fully understand the risk involved in new products and activities and put in place adequate policies, procedures and controls before being introduced or undertaken, credit risk management in banks dissertation.
Renewal or extension of maturity date of credits. FIs shall adopt and adhere to the credit risk management in banks dissertation explicit standards credit risk management in banks dissertation control the use of renewals and extensions of maturity date of credits:. Credits and other accommodations shall only be renewed or its maturity date extended:. A policy on clean-up of principal, either partial or full, shall be established and appropriate controls put in place to prevent continuous renewal or extension over a long period of time without reduction in principal; otherwise, such credits and other accommodations shall be subject to classification and allowance for credit losses.
Specific and reasonable standards shall be provided for renewals or extensions of certain types of credit exposures that take into consideration the following factors:.
Credit limits, large exposures, and credit risk concentrations, credit risk management in banks dissertation. An FI is exposed to various forms of credit risk concentration which if not properly managed, monitored and controlled may cause significant losses that could threaten its financial strength and undermine public confidence in the FI. Concentration risk can arise from excessive exposures to individual obligors, groups of connected counterparties and groups of counterparties with similar characteristics e.
While concentration of credit risks is inherent in banking and cannot be total eliminated, this can be mitigated by adopting policies and processes that would limit and control credit exposures and employing portfolio diversification strategies. Policies and procedures may include, but are not limited to the following:. Policies and procedures for identifying, reviewing, credit risk management in banks dissertation, managing and reporting large exposures and concentration risks of the FI.
common management, familial ties. Defining limit structure on each of the foregoing categories. Such limits can be based in part on the internal risk rating assigned to the obligor or counterparty. Procedures shall ensure that limits are not exceeded and are clearly communicated, periodically reviewed and modified, as appropriate.
Should exceptions to policy be allowed, the circumstances under which limits may be exceeded and the party authorized to approve such excesses shall be clearly articulated in the credit policy. Country and transfer risks. Country risk refers to uncertainties arising from economic, social and political conditions of a country which may cause obligors in that country to be unable or unwilling to fulfill their obligations. Transfer risk exists when an obligor is unable to secure foreign exchange to service external obligations due to restrictions imposed by the country on foreign exchange remittance or repayment on foreign-currency denominated assets to a foreign lender.
FIs that have cross-border credit risk exposures shall have adequate internal capacity for identifying, measuring, monitoring and controlling country and transfer risks in its international lending and investment activities, and shall not place undue reliance on external ratings.
An FI shall consider the following:. Establishing credit-granting criteria taking into consideration country risk factors that shall include the potential for default of foreign private sector obligors arising from country-specific economic, social and political factors, the enforceability of loan agreements, and the timing and ability to realize collateral under the national legal framework.
The results of the country risk analysis shall be integrated into the internal credit risk rating of the obligor. These country risk factors shall be regularly monitored.
Credit Risk Introduction
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