Risk Management
Article Index
Risk Management
Operational Risk
Credit Risk Management
Market Risk Management
Foreign Exchange Risk Management
Liquidity Risk Management
Supervisory Review


Credit Risk Management


Credit risk is the major risk that banks are exposed to during the normal course of lending and credit underwriting. Within Basel II, there are two approaches for credit risk measurement: the standardized approach and the internal ratings based (IRB) approach. Due to various inherent constraints within the Nepalese banking system, the standardized approach in its simplified form, Simplified Standardized Approach (SSA), has been prescribed in the initial phase. Credit risk is the probability that a Bank’s borrower or counter party will fail to meet its payment obligations in accordance with the terms of approval of the credit. This includes non-repayment of capital and/or interest within the agreed time frame, at the agreed rate of interest and in the agreed currency. The goal of credit risk management is to maximize a bank's risk-adjusted rate of return by maintaining credit risk exposure within acceptable parameters. The effective management of credit risk is a critical component of a comprehensive approach to risk management and essential to the long-term success of any banking organization.

For most banks, loans are the largest and most obvious source of credit risk; however, other sources of credit risk exist throughout the activities of a bank, including in the banking book and the trading book, and both on and off the balance sheet. Banks increasingly face credit risk in various financial instruments other than loans, including acceptances, interbank transactions, trade financing, foreign exchange transactions, and in the extension of commitments and guarantees and the settlement of transactions. NIBL has developed methodologies to assess the credit risk involved in exposures to individual borrowers or counterparties as well as at the portfolio level. The credit review assessment of capital adequacy, at a minimum, covers risk rating systems, portfolio analysis/aggregation, large exposures and risk concentrations. Internal risk ratings are an important tool in monitoring credit risk and supporting the identification and measurement of risk from all credit exposures, and are integrated into our overall analysis of credit risk and capital adequacy. The ratings system provides detailed ratings for all assets, not only for problem assets.

Our various branches are the business units of our bank. Each branch forwards business proposals to the head of credit division, Head Office. The credit division critically analyzes the proposal from different perspectives in line with statutory, regulatory and internal guidelines. Thereafter, if the business proposal is found to be credit worthy, it is placed in the credit committee. The Credit Committee is comprised of seasoned bankers who evaluate credit proposals. The committee analyzes in depth financial as well as non financial information regarding the borrower such as business history, market situation, future prospects of the market, managerial capabilities, cash flow and then declines or recommends approval of the designated credit authorities. To ensure proper and adequate risk analysis and timely customer service, our credit policy and procedures guide (CPPG) provides various layers in the credit approval process. The CPPG has conferred specific discretion ranging from the General Managers to the Executive Credit Committee, the penultimate credit authority of the Bank.

Adoption of international standards via our in-house Credit Policy and Procedures Guide.
Formation of Credit Quality Control (CQC) unit for monitoring the quality of credit, both at the account level and portfolio level.

 

  • Regular review of the credit portfolio by the senior Management with periodic reporting to the Board of Directors.
  • Separate independent audit and inspection of borrowers by internal auditors in addition to audit and inspection by statutory auditors.
  • Strict adherence to the prudential guidelines of the Central Bank on Loan Classification, Interest Recognition, Asset Classification, Single Obligor Limit, Sectoral Exposure etc.
  • Establishing suitable exposure limits for borrowers and sectors and monitoring the limits on a regular basis.
  • Risk mitigation steps with a special emphasis on collateral.
  • Setting counterparty limits based on their financial strength.
  • Training of lending and legal officers on documentation and professional valuations. Developing skills and expertise of lending officers to scientifically assess project viability and customer integrity.
  • Educating the staff on provisions in the Banks and Financial Institution Act and other relevant statues and the regulatory guidelines of the Central Bank.
    Seeking external legal opinion and advice.
  • Identifying Early Warning Signals (EWS) and taking prompt action thereon.
  • Constant posts sanction monitoring with special independent team for verification of current assets


 

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