Thread by @SAH16928046

What factors are considered by banks when assessing credit risk to customers?
@GARP_Risk

Credit Risk Management is part of IRA - Integrated Risk Assessment that is carried out by banks to measure transaction and obligor default risks.

The credit risk assessment goes through stages =>
Front Office (RMs at the branches and/or Head Office prepare the credit application/ Clp for further processing).

Middle Office (Financial Risk Management Analysis for checking the Basel Pillar 1/2 Compliance Requirements, to check the BRMC - Board Risk Management Approved and Assigned Risk Appetite Limits etc.)

Back Office (Exhaustive Credit Risk Analysis using Conventional Credit Risk Management Tools as per Credit Policy / Manual).

Pre - Disbursement AML /KYC Assessment before client onboarding.
Further CID - Customer Identification is required as part of the due diligence process, for example the credit team pays an on-site visit to gather business intelligence and undertake surveillance.

All Details are generally recorded in the Credit Call Visit Report.
Collateral Valuation and overall Security Packaging is done by the Credit and Risk Units.

The Legal Department is responsible for the final vetting of all the drafts (the Loan Agreement and Contract) prepared by the Credit Department to remove any legal lacunae/risk.

Also, the Legal department should verify the legal status of all documents presented by the client, attached as part of the disclosure requested by the Bank in the pre-authorization stages.

In some cases, the LEGAL UNIT may instruct the Credit Department to add certain covenants to the legal contractual draft. The Risk can ask the credit union to ask the client to see further guarantees from any other guarantor, such as an SBLC - Stand by letter of credit.

The Risk can also instruct the Credit Underwriting Unit to revise the Notional Amount proposed to be loaned/approved to meet the concentration, exposure type, correlation, Maximum loss tolerance, sector and industry-specific regulatory risk limits.

The Risk Unit in some cases describes the lending proposal as undercollateralized and can ask the Credit to see a better quality and/or quantity of security(collateral) from the customer to reduce LGD - Loss Given Default.

The Treasury can object to the Loan pricing model used and might instruct the Credit Underwriting Unit to reprice the loan after inserting all the risk factors and premiums into the markup/ rate using the market going rates.

This is done as part of the FTP - Fund transfer pricing policy to compare the opportunity costs of capital.
The Risk unit at the bank can also come up with its own model to guide the pricing of the loan.

PG - Personal Guarantees from the Top Executives (Business Directors and the Chairman) representing the company that is applying for the loan line approval, are also obtained by the HOCC (pre disbursement ideally, but in some countries, the law and practice vary).

Once, all risk is understood, controlled and analyzed as per policies, the Master Credit Line is assigned/signed -off by the HOCC - Head Office Credit Committee.

In some cases for higher notional amounts/exposures, the signed-off applications are forwarded to the BOD - Board of Directors, for further risk-based assessment and obtaining approval signatures as per policy.
Each Bank sets its own Authorization Limit.

Once the documents are approved and the Funded and/or Non-Funded line/s are assigned, the bank authorizes the branch manager or the Corporate Banking Department to disburse the credit amount into the company’s account.

For #TL - Term Loans it is the entire amount, but for revolving loans such as ODs - Overdraft it is based on online usage within a given period assigned before the line renewal date arrives.

Post Authorization, monitoring of the Credit Line Limit Utilization Rate and checking any misuse of funds or possible deterioration in the credit quality of the loan and/or the borrower is the responsibility of the CAD - Credit Administration Department

working under the CENOPS - Centralized Operations Unit or the Credit Underwriting Units.

Any infection in the loan due to non-payment of markup is reported to the Credit and Risk Units which take action as per internal policy, legal injunctions in the contract and the regulations laid down by the Central Bank.

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