INTRODUCTION

Credit management is a term used to identify accounting functions usually conducted under
the umbrella of Accounts Receivables. Essentially, this collection of processes involves
qualifying the extension of credit to a customer, monitors the reception and logging of
payments on outstanding invoices, the initiation of collection procedures, and the resolution
of disputes or queries regarding charges on a customer invoice. When functioning
efficiently, credit management serves as an excellent way for the business to
remain financially stable.

The process of credit management begins with accurately assessing the credit-worthiness of
the customer base. This is particularly important if the company chooses to extend some
type of credit line or revolving credit to certain customers. Proper credit management calls
for setting specific criteria that a customer must meet before receiving this type of credit
arrangement. As part of the evaluation process, credit management also calls for
determining the total credit line that will be extended to a given customer.

The flow of credit in global financial markets slowed from a glacial pace to a virtual
standstill. And credit markets have threatened to stay that way despite immense amounts of
cash being pumped in by governments and central banks around the world.

But today, there are signs that the worst may be over and that a recovery may be imminent.
What will it take for banks to regain enough confidence in the financial system to get credit
markets moving smoothly – without risking another financial breakdown? Better credit risk
management practices are essential.

Risk Management In Banks

Risk Management in banking companies includes risk identification, risk measurement and
risk assessment. The objective of risk management in banking companies is to minimize
negative consequences of risks that can affect financial result and capital of the bank.
Almost every bank of the world is required to form a special risk control department for the
purpose of proper risk management. Followings are three major types of risks that actually
can affect any bank.

CREDIT RISK
Credit risk is known as the possibility or probability that a bank borrower or counter party
will be unsuccessful to meet its monetary obligations in compliance with agreed terms and
conditions. The objective of credit risk management is actually to maximize the bank's risk-
adjusted profitability by maintaining credit risk exposure within satisfactory parameters.
Banks need to manage and control the credit risk that exist in the entire portfolio and
banking transactions. Loans are the major and most understandable source of credit risk for
banks worldwide; nevertheless, other sources of credit risk also subsist throughout the
business activities of the bank.

MARKET RISK
Market risk is also a risk that does effects banks profitability. There are two types of risks
that are measured as the market risks for the bank.

1) Interest rate risk

2) Foreign exchange risk.

Due to foreign exchange rate fluctuations banks face foreign exchange risk and almost
every product of the bank is interest rate sensitive so interest rate risk is also a very
important risk for banks.

LIQUIDITY RISK
Liquidity risk is the probable incapability to pay the banker's liability when it become
payable. It occurs when banks are not capable to generate cash to meet fund withdrawal. It
forms from the unequal pattern of assets and liabilities. Managing liquidity needs are very
important for effectual operations of commercial banks the reason of occurrence and affect
of liquidity risk are first and foremost linked to the assets and liabilities.
OPERATIONAL RISK
Operational risk is ‘the risk of the loss resulting failure in internal processes, human assets
and system of a bank.

Sources of operational risk:

- Wrong /delayed decision

- Poor Internal control
- Weak or poor MIS
- Incompetent Employees
- Lack of Planning
- Less/Poor contingency planning,

Modern credit risk management techniques were initiated by the banking industry’s desire
to avoid a repeat of its late ‘80s and early ‘90s default experience. The heavy credit losses
during this period, driven by a poorly controlled rush to build market share at the expense
of asset quality and portfolio diversification, threatened the solvency of even well
capitalised institutions. The need to better understand portfolio credit risks was reinforced
by the publication of the Bank for International Settlements’ (BIS) capital adequacy
guidelines in 1988. These guidelines, whilst specifying minimum regulatory capital
requirements, were inadequate to provide an accurate measure of the risk/reward
characteristics of a credit portfolio. Banks therefore started to develop more sophisticated
credit risk management techniques that recognised both the credit risk of individual
exposures and the degree to which these risks were diversified.
Banks leading the development of credit risk management techniques quickly discovered
that credit pricing was highly inefficient. Typically pricing within a loan portfolio would be
almost flat across the credit risk spectrum, generating huge skews in customer profitability.
Initial efforts focused on mitigating these skews by calculating riskadjusted profitability (eg
risk adjusted return on [risk-adjusted] capital) by sub-portfolio and then using these
measures to create riskadjusted loan pricing tools. Leading banks thus started to rationalize
pricing in both loan and bond portfolios, and moving under-performing assets off their
balance sheets. Consequently banks that had not developed risk-adjusted performance
measures started to suffer from negative selection, often accepting significantly
underpriced assets from more sophisticated institutions.
In parallel to developing aggregate risk-adjusted performance measures, leading banks
were also starting to quantify credit risk at finer levels of detail. Credit portfolio models
were developed which could differentiate credit risk along multiple dimensions (credit
grade, industry, country/region etc) and, for large corporate exposures, on a name-by-name
basis.
These credit portfolio models have positioned leading institutions to take advantage of the
increasing liquidity of the credit markets and to adopt a far more active approach to credit
portfolio management than was previously possible. Historically, credit portfolio
management had focused on the monitoring of exposure by broad portfolio segment and, if
necessary, the imposition of exposure caps.
The creation of a stand-alone credit portfolio management function, armed with
sophisticated portfolio models and with a controlling mandate over assets held on the
balance sheet, now enabled the credit portfolio to be optimized independent of origination
activity. Active credit portfolio optimisation has enormous potential to enhance
profitability. Using only very basic optimisation techniques a typical institution might
expect to reduce the economic capital consumed by its credit portfolio by 25%–30%.
OBJECTIVES OF THE STUDY

 Credit Evaluation & Risk Assessment and Credit Monitoring & Control

 Assess and assure Credit Risk and manage it in such a way that risks are minimized
and return is optimized.

 To provide credit facilities in order to ease securities settlement and custody

operations

 The knowledge upgrade for internal inspectors and auditors in the areas of Credit
Management Bank.

Methodology
Research is an art of scientific investigation. In other word research is a scientific and
systematic search for pertinent information on a specific topic. The logic behind taking
research methodology into consideration is that one can have knowledge about the method
and procedure adopted for achievement of objectives of the project. With the adoption of
this others can evaluate the results also. Its main aim is to keep the researchers on the right
track. The study is based on secondary data.

Data Collection

The objectives of the project require secondary data to achieve them. Secondary data will
be use for the project.
Secondary Data Collection: The Secondary data refer to those data which are gathered
for some other purpose and are already available in the internal records and commercial,
trade, or government publications.
In my project, the tools for secondary data are-
 Newspapers,
 E-magazines
 E-journals
 Web sites