CREDIT RISK MANAGEMENT :

Credit risk arises when one of the counter parties fails to fulfill the obligation to settle the payment or repay the borrowed amount. It is also called as default risk and/or settlement risk.

Identification of credit risk: Close monitoring of operations in operating loan account like working capital finance, cash credit and overdraft accounts would assist the bank to identify the risk based on the signals and warnings from the manner in which the account is being operated. Also non submission of stock statements, wrong information provided in stock statements, regular inspections of stocks, and review of market reports are essential tools to identify the credit risk.

Mitigation of Credit Risk:

Credit Risk can be mitigated if the banks follow certain norms like:

(a) Adherence to KYC norms: Clear identity of the borrower and the borrowing company, and the nature of business model

(b) Credit Appraisal: The loan proposals should be considered as per bank’s loan policy and guidelines of the Reserve Bank of India and other directives. The credit limits (both fund based as well as non-fund based) should be fixed after due assessment of many risks associated with the type of borrower, nature of industry and other factors. Such limits should be subject to sufficient margin and appropriate collateral requirements to safe guard the banks’ interests. Regular monitoring of the loan accounts should be an integral part of effective risk management system. Respecting the credit limits and allowing the clients to operate within the credit limits and ensuring other terms and conditions of the credit sanction, and adherence to the exposure norms as per regulators’ guidelines would assist the banks to manage the credit risks. Risk based pricing of loans and advances and credit rating can be used as an effective tool as part of credit management.