Loan Policy- Credit Risk Management N.Gopal Deputy General Manager/MOF CAB Pune RBI CAB Pune July 5, 2010 RBI CAB Pune July 5, 2010  Loan policy- Genesis, Importance- Credit risk Management  Need for loan policy  Ingredients of a good loan policy  Loan Policy and risk Management  Prudential ceilings and loan policy  Final Analysis RBI CAB Pune July 5, 2010 RBI CAB Pune July 5, 2010 RBI CAB Pune July 5, 2010 Credit sanctioning guidelines, and the written documentation setting forth standards as determined by a bank's senior management A bank's loan policy also establishes minimum credit standards for taking on loans It sets policies and procedures in treatment of delinquent loans, and the type of customer a bank wants as a borrower RBI CAB Pune July 5, 2010 RBI CAB Pune July 5, 2010 1980s The world and the way of banking changed American banking history witnessed several credit induced bank disasters  E.g Continental, Sea First and Texan Banks  1990s Credit freeze due to East Asian Crisis  2000 GTB’s credit induced problems  Lessons  The common “triggers of crisis” Aggressive and unplanned lending  Credit concentration failure to diversify,  Risky practices, inadequate monitoring   Result Poor credit culture  Credit culture is largely dependent on the loan policies pursued by a bank RBI CAB Pune July 5, 2010  First six years of the millennium saw paradigms shifts in bank lending  India became more closely integrated to the global economy  Interest rates moved both ways  Traditional avenues for lending slowed down  Competition  Policies responses had to become dynamic outward and forward looking to meet challenges July 5, 2010 RBI CAB Pune Board & Management Oversight Portfolio Management Management Information Systems Market Analysis Credit Underwriting Standards Portfolio Stress Testing & Sensitivity Analysis Credit Risk Review Function RBI CAB Pune July 5, 2010 10  Tool for the measurement of credit risk  To enable an informed and considered credit decision as ‘good ‘ or ‘bad’  To appropriately price loan products “BCBS defines credit rating as summary indicator of risk inherent in individual credit signifying the risk of loss due to default of a counterparty by considering qualitative and quantitative information Policy should provide for rating of all loan accountsvery little exceptions  The rating should consist of 8-9 parameters (minimum)  Policy to specify minimum entry rating i.e Hurdle Rate   Policy to lay down exceptions to Hurdle rate  Policy to lay down procedures to handle accounts which fall below hurdle rating Annual review of ratings- Quarterly, half yearly updates  Study of Rating migration  Pricing linked to Rating  Mapping of external ratings to internal ratings  RBI CAB Pune July 5, 2010 42 RBI CAB Pune July 5, 2010 43 A good loan policy to provide leeway for  It should balance the risk and returns on the retail front  Schematic Lending Directed credit flow to certain sectors  Housing, farming, SME, retail, personal loans, special tieups etc  Retail loans under various products and schemes designed by the Bank July 5, 2010 RBI CAB Pune 44  Returns from retail/schematic lending commensurate with risks?  Schemes to match customer expectations?  Standard of Due Diligence and KYC?  Outsourcing risks adequately addressed?  Delinquencies under control in specific product categories?  What is the growth in terms of size, earnings and quality? July 5, 2010 RBI CAB Pune 45 RBI CAB Pune July 5, 2010 46  Take over route to grow business  Policy to clearly lay down ground rules What type of borrower accounts What level of exposures Take over from whom Take over standards Pricing RBI CAB Pune July 5, 2010 47 RBI CAB Pune July 5, 2010 48 Profitability, Customer Friendliness/service, Compliance Capital Conversation   Challenges arise when what the customer needs are not provided for in the policy Trade off business considerations, social responsibility, RBI CAB Pune July 5, 2010 49  Area of potential conflict in perceptions differences between regulator and banks  Every policy has to provide for exceptions  RBI the regulator also recognizes this  But question is how far and how much  Deviations/ needs  Extent exceptions dictated by business of their impact on risk profile to be seen  Within the overall credit culture of the bank RBI CAB Pune July 5, 2010 50 RBI CAB Pune July 5, 2010 51  Credit Policy serves a ‘Gate Keeping’ function  Defines thrust areas in relation to credit culture, profit objectives and regulatory directions  Defines acceptable levels of risk by identifying industry segments for fresh exposures  Prevents risk concentrations and ensures diversification by setting limits on sectors and individual transactions  It provides pricing strategies through the use of Credit Risk Rating framework July 5, 2010 RBI CAB Pune 52  Knowledge is the most potent of risk mitigant Does the policy provide for dissemination of knowledge on credit? Is the policy in itself, - Comprehensive, Articulate, accurate and  User friendly? RBI CAB Pune July 5, 2010 53  An ideal loan policy should  Create right for business growth  Maintain quality of assets  Provide platform for good procedures/process  Ensure regulatory and statutory compliances  Be the platform for Credit Risk Management RBI CAB Pune July 5, 2010 54 RBI CAB Pune July 5, 2010 55 ... 2010  Loan policy- Genesis, Importance- Credit risk Management  Need for loan policy  Ingredients of a good loan policy  Loan Policy and risk Management  Prudential ceilings and loan policy. .. Board & Management Oversight Portfolio Management Management Information Systems Market Analysis Credit Underwriting Standards Portfolio Stress Testing & Sensitivity Analysis Credit Risk Review... postulations- chance for different understanding interpretations  Loan policy must clearly mark the boundaries  Government  RBI  Bank  Loan policy should ideally list out restrictions that credit