Credit risk arises from the potential that a bank’s borrower will fail
to meet its obligations in accordance with agreed terms. Credit risk also
refers the risk of negative effects on the financial result and capital of the
bank caused by borrower’s default on its obligations to the bank.
The following risks are
inherent in lending.
|
Business/ Industry risk
·
Industry
·
Size
·
Maturity
·
Production
·
Distribution
·
Vulnerability
·
Competition
·
Demand- supply situation
·
Strategic importance for the group and
for the country
·
Concentration
·
Market reputation
|
Financial risk
·
Profitability
·
Liquidity
·
Debt management
·
Post Balance sheet events
·
Projections
·
Sensitivity Analysis:
·
Peer Group Analysis:
·
Other Bank Lines:
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|
Management
Risk
·
Experience/relevant background
·
Track record of management in see
through economic cycles
·
Succession
·
Reputation
Security
Risk
·
Perishability
·
Enforceability /Legal structure
·
Forced Sale
Value
|
Structural
Risk
·
working capital requirement
·
requirement of asset conversion cycle
·
Purpose of the facilities
·
Payments of wages
& salaries and other daily expenses.
Account
Performance Risk
·
Credit Turnover vs stock movement &
sales
·
Hard Core element or good swing
·
Repayment track record of working
|
Risk
mitigation Tools & Techniques:
Introduction
to Accrual Accounting
1.
Scrutinize the information provided by the
balance sheet and profit and loss account
2.
Identify the connecting links between the two
statements
3.
Prepare and manipulate simple financial
statements that reflect the business activities of a small company
Industry
Risk Analysis:
Managers should be
addressing: Cost structure, Maturity, Cyclicality, Profitability, Dependence,
Vulnerability to substitute products & Regulatory environment (like
Bangladesh Bank guidelines, Judiciary, Tax authority guidelines e.g. work
hazard, child labor etc.)
Business
Risk Analysis
1.
Determine whether the business’s strategy
increase or decrease the risks faced by all businesses in its industry
2.
State what additional risks are inherent in the
company’s strategy and practices on its financial statements- state how you
would expect those statements to look
Internal
Credit rating system as like CRG & rating from authorized rating agency
like CRISL, CRAB can mitigate the credit risk some extent.