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Credit risk is the risk of loss due to a debtor's non-payment of a loan or other
borrower repayments, and bankruptcy. Now a day’s bank gives different types of
credit or loans to the people but there is one risk in returning of loan it mostly happen
in Pakistan.
several effects of credit risk management on loan recovery in PAKISTAN. There has
to engage in a case study analysis of credit risk models affecting loan recoveries of
BACKGROUNG:
The assessment of risks can be the basic strategy in all of the organizations.
Through this strategy, the organization can take wide decision and well plan. This all
can help the success of the organization there are various system that are involved
in the assessing and managing the risk, the credit risk management and loan
recovery is an emerging activity that lies within the organization. Many researches
attempted to answer the benefits of the credit and loan management within the
PROBLEM STATEMENT:
The problem focus on this study is the investigation of how effective the Pakistani
bank recovers the loan by using credit risk management. Because of change in the
value of money banks faces problem in recovering the loan although they use credit
risk management.
RESEARCH QUESTIONS:
Does the bank recover all the amount of credit?
RESEARCH OBJECTIVE:
The first objective of the study is to deliver the purpose as well as the center
of the credit risk management
.
And the second is how much percentage has been recovered in most
cases
FRAME WORK:
In this we find out the relationship between dependent variable and independent
variable and in this research we have three main independent variables that affect
the one dependent variable credit risk. And these three are: (i) the probability of
default (PD), (ii) the “loss given default” (LGD), which is equal to one minus the
recovery rate in the event of default (RR), and (iii) the exposure at default (EAD).
PD=probability of default
Through this relationship we can derive the expected recovery rate on a defaulted
firm, as well as its default probability. While the latter has been given much attention
by subsequent research (see e.g. Crosbie, 1999),
.
We have briefly emphasizing for recovery rates, and empirical link between default
probabilities and severity.
Default happens if and only if, at time, the value of the firm’s assets is lower than its
debt. That means that the firm’s probability of default, PD is higher than the RR.
LITERATURE REVIEW:
Loans are the largest and obvious source of credit risk for most banks. Credit risk is
simply defined as the prospective that a bank borrower or counterparty will fail to
meet its obligation in accordance with agreed terms and condition. The aim of credit
risk management is to maximize a bank s risk adjusted rate of return by maintaining
credit risk exposure with in a acceptable boundary. Bank need to manage the credit
risk inherent in the entire loan portfolio as well as risk in individual credit or
transaction. .it is very difficult for bank to identify their borrowers and for this the
theory of asymmetric information argues that it may be impossible to distinguish
good borrowers from bad borrowers (Auronen, 2003) which may result in adverse
selection and moral hazards problems. The management of CR in banking industry
follows the process of risk identification, measurement, assessment, monitoring and
control. It involves identification of potential risk factors, estimate their
consequences, monitor activities exposed to the identified risk factors and put in
place control measures to prevent or reduce the undesirable effects. banks should
know have a keen awareness of a need to identify measure, monitor and control
credit risk as well as to determine that they hold adequate capital against these risk.
These are terms commonly used in the papers today to describe the current
economic climate and reflect the key causes of customers’ inability to repay their
loan and credit. As the financial and economic crisis deepens, companies across
many industries are faced with increasing cases of credit defaults. Ensuring
effective credit control management with clear policies and debt recovery practices
that can help to improve cash flow and business profitability is key to survival in the
midst of uncertainties. Those responsible for credit management and debt recovery
have to re-evaluate their strategies in managing accounts receivables, billing and
credit collection as well as to understand the legal procedures for debt recovery as
default cases increase.
INTRODUCED BASEL I:
For control the risk in 1988 Basel Capital Accord (Basel I) was introduced
revolutionary in the world that it sought to develop a single risk-adjusted capital
standard that would be applied throughout the major banking countries of the world.
This level playing field would cause best practices to be adopted by banks
throughout the world, thereby enhancing the efficiency, productivity, safety and
soundness of the global financial system.
The 1988 accord set minimum capital requirements based on a ratio of capital to
risk-weighted assets of 8%. Assets were risk-weighted according to the identity of
the borrower. Government bonds, for example, had a 0% risk weighting, while
traditional corporate loans had a 100% risk 6 weighting, so that capital constituting
the full 8% of the value of the loan must be held against it. Unlike later versions of
the accord, Basel I only dealt with credit risk, the classic risk in banking of a debtor
defaulting on his loan.
The basic achievement of Basel I have been to define bank capital and the so-called
bank capital ratio. In order to set up a minimum risk-based capital adequacy
applying to all banks and governments in the world, a general definition of capital
was required. Indeed, before this international agreement, there was no single
definition of bank capital. The first step of the agreement was thus to define it.
. By the late 1990s, the accord had come to be seen as a blunt instrument that was ‘useless for
regulators and costly for banks’
BASEL II:
Capital adequacy is the key measure of the soundness and stability of banks. Basel
II, introduced in June 2004 by the Basel Committee on Banking Supervision based
in the Bank for International Settlements, Basel, Switzerland, is the current
international standard framework for assessing capital adequacy of banks. This new
framework replaces Basel I as the international capital adequacy norm for banks.
The purpose of Basel II, is to create an international standard that banking
regulators can use when creating regulations about how much capital banks need to
put aside to guard against different types of risks banks face. Basel II aims to better
align the level of capital with the risk profile of each bank, thereby ensuring that a
bank holds capital reserves appropriate to the risk the bank exposes itself to through
its lending and investment practices. A 2003 study by the US Federal Deposit Insurance
Corporation (FDIC) found that average capital levels in American banks adopting the most
advanced approach would fall by 18-29%, with some seeing reductions of more than 40%.18
Since the large banks likely to adopt this approach hold a significant share of the market,
overall capital levels in the banking system are likely to decline, in explicit contradiction to
Basel If’s primary objective.
The accord has also failed to achieve its second stated objective, to continue to enhance
Competitive equality amongst banks.
BASEL III:
But after that bank will have to raise hundreds of billions of euros in fresh capital
under new regulations designed to prevent the repeat of another financial crisis. The
new rules, known as Basel III will require banks to hold top quality capital totaling 7%
of their risk-bearing assets, a big increase from 2%, but banks are being given more
time than expected to comply with the rules - in some cases until 2019.
METHODOLOGY:
The reason for this is to be able to provide adequate discussion for the
readers that will help them understand more about the issue and the different
variables that involve with it. A structured questionnaire will be
developed and it will be used as the survey tool for the study through it
the researcher interview the manager and collect the related
information.
The bank is selected through the convenience sampling. The researcher
Collect last 5 to 10 years data of loan that the bank has given to
different client and the recovery rate of loan that how much amount of
loan has been recovered then find out the probability of default through
correlation until they use the credit risk management
REFRENCES:
SUBMITTED TO
SIR MAZHAR MANZOOR
SUBMITTED BY:
ANEELA MAHMOOD