Professional Documents
Culture Documents
OF KYIV
ECONOMIC FACULTY
International Banking
Individual Coursework
Nataliya Mirgorod
“International economics”
1 Masters Degree
Kyiv 2010
1. Methods of credit risk management
Credit risk - is the main type of risks in banking activities. In case of credit risk
there is possibility that at some point in the future value of bank assets will decrease
due to the non-return (incomplete or late return) of these assets.
The main innovation of Basel 2 is the establishment of three different options
for calculating credit risk and three options for calculating operational risk. As for the
credit risk, the main options are: Standardized method, Basic method OVR,
Modernized method. For operational risk, the main options are: Basic method of
indicators, Standardized method and Improved measurement methods.
Methods of credit risk management are divided into two groups (by the level of
risk):
1) Methods of credit risk management for the individual loans;
2) Methods of credit risk management for the banks` advances portfolio.
Limitation
Client`s credibility Credit itself
Provisioning
Structuring
Securitization
Documentation
Control
New Total
Month
Accounts Ticket Size Accounts ENR
July 2009 12 324 6 681 713 101 560 41 220 486
Crimea 837 454 653 5 329 2 254 135
Dnepropetrovskaya 273 141 434 2 422 1 054 781
Donetskaya 671 396 351 5 265 2 186 346
Cherkasskaya 620 332 662 5 497 2 222 159
Chernigovskaya 830 430 542 6 884 2 408 792
Chernovitskaya 143 75 565 1 514 591 387
Ivano-Frankovskaya 576 314 862 3 681 1 388 107
Kharkovskaya 979 581 510 8 109 3 648 634
Khersonskaya 1 006 570 832 9 182 4 495 199
* developed on the basis of Credit MIS Platinum Bank
With the deterioration of the scoring class (A to D) the data of delinquent loans
is also getting worse (DPD).
2) Analysis and estimation of credit. Evaluation of credit is determination of its
feasibility from business and economic point of view, establishing the degree of
conformity of the loan`s size and terms to the aim of a deal and determination the
riskiness of a project. One customer can get loans, which differ in size, terms, forms
and methods of repayment and thus accompanied by a variety of credit risk.
3) Structuring a loan. The process of structuring a loan consists of working out
such parameters that meet customer needs and minimize the credit risk of the bank,
providing a timely loan. Basic structural parameters of the loan are: volume, time,
terms of issue, repayment schedule, maintenance, price.
4) Documenting of credit transactions. The process of documenting a loan
means the preparing and signing a credit agreement, the terms of which satisfy the
needs of the borrower and the bank. Correct credit agreement must protect the interests
of the bank, especially its depositors and shareholders. [3]
5) Control of a credit. Credit control –is a necessary condition for successful
application of bank lending. Constant control helps managers to identify problem loans
in advance and verify the correspondence of the credit workers to basic requirements
of the bank's credit policy.
2. Features of credit risk management in terms of economic crisis
The economic crisis brought changes to the work of almost all financial
organizations in modern times. It happens because of its main features: high level of
unemployment, decreased economic growth and increase of risk in the banking system
(credit, currency, market risks) and others.
This is clearly viewed in indicators of increase of problem loans. Commercial banks
should increase the amount of provisioning according to credit transactions because of
rising number of problem credits. This fact becomes very heavy burden for domestic
banks because of large contributions to the reservation by credit transactions with
problem credit operations in terms of absence of many tools, which in turn reduces the
liquidity of commercial bank. (Pict.2.1)
Methods of reducing the number of problem loans without the bank reservoir
methods (Pict.2.2) are very labor intensive and require much more time for the bank
but they avoid decreasing of potential financial revenues as a result of a sale of
advances portfolio.
Pict.2.2. Methods of reducing the number of problem loans without reservoir methods
[17]
1. "Holiday Credit" allows not making payments on the loan for a while. During
that time the bank will not charge interest rates, penalties, fines and won`t count this
time as overdue on the loan. This method is rare for the domestic banking system, and
is typically used in Western banks for serious lenders (mostly for mortgages). This
method increases the bank’s reputation and demonstrates high levels of liquidity,
which can function some time without revenues from the advances portfolio.
2. In case of restructuring bank usually offers the following:
- Extension of loan term (the bank adds from 1 to 10 years to lending period). It
decreases the loan itself, which must be paid monthly, though the monthly amount of
interest doesn`t minimize.
- Reduction of monthly payments (50 - 70%) for six months. The total loan
amount and maturity of the loan remain the same.
- The possibility for a term of 3 to 6 months not to pay the loan itself, but paying
interest only.
- Lower interest rates on loans.
One of the most common methods for the lowering the reserve for credit
operations during the economic crisis is selling problem advances portfolio to
collection agencies. The number of advances portfolios sold on average per month to
collection agencies rose from about one million in September 2009 to 5 million in
October 2010. Due to such agreements the Bank increases its own liquidity by
reducing the amount of reserve for credit operations and financial revenues from this
contract.
Main features of this process:
1) The assessment of portfolio;
2) Transfer of Due Diligence.
Depending on portfolio performance and history with this contractor the price can be
formed.
According to the terms of the buying and selling the advances portfolio should
take certain steps. (Pict.2.3)