Credit Risk in Retail Loan Portfolio with Reference to South Indian Bank Essay Sample

Hazard is an built-in portion of the banking concern and the Bank purposes at presenting superior value to stockholders by accomplishing an appropriate tradeoff between hazard and return. Sound hazard direction and equilibrating risk-return tradeoff are critical to a Bank’s success. Business and gross growing have therefore to be weighed in the context of the hazards embedded in the Bank’s concern scheme. Of the assorted types of hazards the Bank is exposed to. the most of import are recognition hazard. market hazard ( which includes liquidness hazard and monetary value hazard ) and operational hazard. The designation. measuring. monitoring and extenuation of hazards. continued to be a cardinal focal point country for the Bank. The hazard direction scheme of the Bank is based on a clear apprehension of assorted hazards. disciplined hazard appraisal. hazard measuring processs and uninterrupted monitoring for extenuation. The policies and processs established for this intent are continuously benchmarked with the best patterns followed in the Industry. Credit hazard is the hazard due to the uncertainness in counterparty’s ability to run into its duty. Because there are many types of counterparties from persons to sovereign authoritiess and many different types of duties from car loans to derivative dealing. recognition hazard takes many signifiers.

A bank or a fiscal establishment enters into a big figure of fiscal minutess. In these minutess. the bank is exposed to a hazard linked to a hazard linked to the fiscal strength of the counterparty. Credit hazard originates from the point where FI has completed its dealing and the duty of counterparty starts. The procedure of mensurating the recognition hazard for a portfolio of recognition assets is different from the one used for a individual loan because of the correlated between loans in a portfolio. Correlation reflects the extent to which loans tend to default at the same time. This may go on because of macroeconomic factors like recession or interrelatednesss between the assorted recognition assets. The consequence of correlativity may ensue extremely skewed loss distributions. Such consequences are difficult T discovery and so some theoretical accounts are used for mensurating the recognition hazard of a portfolio: –

* The Credit Risk+ Model
* The Credit Metrics Model
* The KMV Portfolio Manager Model
* The Modern Portfolio Theory

The South Indian Bank’s hazard direction construction is overseen by the Board of Directors. Appropriate policies to pull off assorted types of hazards are approved by Risk Management Committee ( RMC ) . which provides strategic counsel while reexamining portfolio behaviour. The senior degree direction commissions like Credit Risk Management Committee ( CRMC ) . Market Risk Management Committee ( MRMC ) and Operational Risk Management Committee ( ORMC ) develop the hazard direction policies and vet the hazard bounds. The Asset Liability Management Committee and Investment Committee guarantee attachment to the execution of the above hazard direction policies. develop Asset Liability Management Policy and Investment Policy within the above hazard model. Conformity with Basel II model

The Bank has migrated to Basel II norms during Fiscal Year 2008-09. In melody with regulative guidelines on Pillar I of Basel II norms. Bank has computed capital charge for recognition hazard as per the Standardized Approach. for market hazard as per the Standardized Duration Method and for operational hazard as per the Basic Indicator Approach. To turn to the issues of Pillar II. the Bank has implemented ICAAP ( Internal Capital Adequacy Assessment Process ) during the twelvemonth incorporating capital planning with budgetary planning and to capture residuary hazards which are non addressed in Pillar I like recognition concentration hazard. involvement rate hazard in the banking book. liquidness hazard. net incomes hazard. strategic hazard. repute hazard etc.

Bank has adopted a common model for extra revelations under Pillar III for adhering to market subject of Basel II guidelines. This requires the Bank to unwrap its hazard exposures. hazard appraisal processes and its capital adequateness to the market in a more consistent and comprehensive mode. Apart from the Risk Management Committee of the Board at apex degree. the Bank has a strong Bank-wide hazard direction construction with Credit Risk Management Committee. Market Risk Management Committee and Operational Risk Management Committee at senior direction degree. operational hazard direction specializers in all Regional Offices and dedicated mid-office at Treasury Department/International Banking Division at operational degree. Standardized Approach

The term standardized attack ( or standardized attack ) refers to a set of recognition hazard measuring techniques proposed under Basel II capital adequateness regulations for banking establishments. Under this attack the Bankss are required to utilize evaluations from External Credit Rating Agencies to quantify needed capital for recognition hazard. In many states this is the lone attack the regulators are be aftering to O.K. in the initial stage of Basel II Implementation. The Basel Accord proposes to allow Bankss a pick between two wide methodological analysiss for ciphering their capital demands for recognition hazard. The other option is based on internal evaluations. There are some options in weighing hazards for some claims. below are the drumhead as it might be likely to be implemented: – For some “unrated” hazard weights. Bankss are encouraged to utilize their ain internal-ratings system based on Foundation IRB and Advanced IRB in Internal-Ratings Based attack with a set of expression provided by the Basel-II agreement.

The term Foundation IRB or F-IRB is an abbreviation of foundation internal ratings-based attack and it refers to a set of recognition hazard measuring techniques proposed under Basel II capital adequateness regulations for banking establishments. Under this attack the Bankss are allowed to develop their ain empirical theoretical account to gauge the PD ( chance of default ) for single clients or groups of clients. Banks can utilize this attack merely capable to blessing from their local regulators. Under F-IRB Bankss are required to utilize regulator’s prescribed LGD ( Loss Given Default ) and other parametric quantities required for ciphering the RWA ( Risk Weighted Assets ) . Then entire needed capital is calculated as a fixed per centum of the estimated RWA.

The term Advanced IRB or A-IRB is an abbreviation of advanced internal ratings-based attack and it refers to a set of recognition hazard measuring techniques proposed under Basel II capital adequateness regulations for banking establishments. Under this attack the Bankss are allowed to develop their ain empirical theoretical account to quantify needed capital for recognition hazard. Banks can utilize this attack merely capable to blessing from their local regulators. For more background on the types of theoretical accounts Bankss have applied. see the Jarrow-Turnbull theoretical account. Under A-IRB Bankss are supposed to utilize their ain quantitative theoretical accounts to gauge PD ( chance of default ) . EAD ( exposure at default ) . LGD ( loss given default ) and other parametric quantities required for ciphering the RWA ( risk-weighted plus ) . Then entire needed capital is calculated as a fixed per centum of the estimated RWA.

There be several alternate weights for some of the undermentioned claim classs published in the original Framework text.

* Claims on crowned heads
Credit Assessment| AAA to AA-| A+ to A-| BBB+ to BBB-| BB+ to B-| Below B-| unrated| Risk Weight| 0 % | 20 % | 50 % | 100 % | 150 % | 100 % |
* Claims on the BIS. the IMF. the ECB. the EC and the MDBs Risk Weight: 0 %
* Claims on Bankss and securities companies
Related to appraisal of crowned head as Bankss and securities companies are regulated. Credit Assessment| AAA to AA-| A+ to A-| BBB+ to BBB-| BB+ to B-| Below B-| unrated| Risk Weight| 20 % | 50 % | 100 % | 100 % | 150 % | 100 % |

* Claims on corporates
Credit Assessment| AAA to AA-| A+ to A-| BBB+ to BB-| Below BB-| unrated| Risk Weight| 20 % | 50 % | 100 % | 150 % | 100 % |
* Claims on retail merchandises
This includes recognition card. overdraft. car loans. personal finance and little concern. Hazard weight: 75 %
* Claims secured by residential belongings
Hazard weight: 35 %

* Claims secured by commercial existent estate
Hazard weight: 100 %
* Delinquent loans
more than 90 yearss other than residential mortgage loans.
Hazard weight:
150 % for commissariats that are less than 20 % of the outstanding sum 100 % for commissariats that are between 20 % – 49 % of the outstanding sum 100 % for commissariats that are no less than 50 % of the outstanding sum. but with supervisory discretion are reduced to 50 % of the outstanding sum *
Other assets

Hazard weight: 100 %
* Cash
Hazard weight: 0 %
From 2009-10 South Indian Bank has been following this attack harmonizing to the Basel II norms and therefore they are able to pull off their recognition hazard to a big extend.

Mention

*http: //www. southindianbank. com/userfiles/annualreport_2010_11. pdf * hypertext transfer protocol: //www. Bi. org/publ/bcbsca. htm

* Financial Risk Management- Vivek. PN Asthana