Best Practices in Credit Risk Management

1. Best Practices in Credit Risk Management

2. Observation: • Banks make bulk of their money from good loans; Banks lose bulk of their money from bad loans! Conclusion: • Thus making more good loans and less bad loans is the dream of every banker!

3. Credit Risk PD, LGD, EAD, Haircuts, Off-Balance sheet Exposure (CCF), Internal Rating Models, Scorecards, CVaR Regulatory Reports Assuring Compliance & Capital Adequacy RWA Computation F-IRB A-IRB Standardized Approach Market Discipline Risk-based Loan Pricing Collaterals Guarantees Credit Derivatives Netting Agreements Global Limits Management Supervisory Review Process Simple Approach Comprehensive Approach Comprehensive Coverage of all Risk Mitigants Credit Risk Management Minimum Capital Requirements Pillar1 Pillar2 Pillar3

4. Best Practices in Credit Risk Management • Effectiveness-focused (decision support) versus Efficiency-focused (workflow) • Structured & granular risk data for AIRB Compliance • Robust Collateral & Limits Management • End-to-end, integrated platform versus piecemeal solutions • Proactive concentration risk management • Risk-based and relationship-based lending • OLAP – based portfolio management • Flexible and scalable technology platform

5. End-to-end Integrated Platform Treasury Trade Finance SmartLender Relationship Mgrs Credit Processing System Prospecting Pre-qualification Group Exposure Core Banking Facility Structuring Credit Underwriting Covenants Monitoring Credit Rating System Credit Admin Officers Financial Analysis Risk Rating Engine Risk-based Pricing Data Warehouse & RWA Engine Collateral & Limits Management System Documentation Valuation Engine Collateral Maintenance Event Handler CRM Engine Haircut Engine Credit Bureau Remedial Officers Excess Validation Exposure Management Concentration Reports Collection & Recovery System Reuters Queue Management Call Management Document Generator SmartView/Reports Perf Incentives Strategy Templates Credit Risk Managers Front Office Mid - Office Back Office

6. Structured & Granular Risk Data for AIRB Compliance Basel II Risk Components PD LGD M EAD SmartLender Credit Processing System Prospecting Pre-qualification Group Exposure Facility Structuring Credit Underwriting Covenants Monitoring Credit Rating System Financial Analysis Risk Rating Engine Risk-based Pricing Collateral & Limits Management System Collateral Maintenance Documentation Valuation Engine Event Handler CRM Engine Haircut Engine Exposure Management Concentration Reports Excess Validation Collection & Recovery System Queue Management Call Management Document Generator SmartView/Reports Perf Incentives Strategy Templates

7. Robust Collateral & Limits Management SmartLender Credit Processing System Pre-qualification Prospecting Group Exposure Facility Structuring Credit Underwriting Covenants Monitoring Credit Rating System Financial Analysis Risk Rating Engine Risk-based Pricing Drivers for Collateral Management Collateral & Limits Management System Documentation Valuation Engine Collateral Maintenance Event Handler CRM Engine Haircut Engine • Basel II Minimum Operational Requirements • Expanding Range of Acceptable Collaterals • Dynamic Valuation & Covenants Monitoring • Concentration Risk Management (Pillar II) • Limitations of Legacy Systems Exposure Management Concentration Reports Excess Validation Collection & Recovery System Queue Management Call Management Document Generator SmartView/Reports Perf Incentives Strategy Templates

8. Robust Collateral & Limits Management Basel II BCBS Para 115 • The use of CRM (Credit Risk Mitigation) techniques reduces or transfers credit risk but introduces other risks e.g. legal, operational, liquidity and market risks • Imperative that banks employ robust procedures and processes to control these risks e.g. valuation, roll-off risk & concentration risk

9. Robust Collateral & Limits Management Types of collaterals supported with proper categorization • Cash (Same Currency, Different Currency) • Marketable Securities (Bonds, Stocks/Index, Stocks/Non-Index) • Guarantees (Corporate, Government, Standby LC) • Insurance & Protection (Credit Insurance, Credit Default Swap) • Document (FX/Derivatives – Netting Agreement, Letter of Undertaking) • Properties (Residential/Standard, Residential/Luxury) • Asset Based (Plant & Machinery, Vehicle, Receivables, Post-dated Cheques) • Commodities (Soft, Metals, Energy)

10. Robust Collateral & Limits Management Best Practices in Collateral Management • Quality & Comprehensive Collateral Data • Collateral Mark to Market • Automatic Multi-Limit Collateral Allocation • Automatic Security Covenant Monitoring • Sophisticated Documentation Workflow • Combined View of Limits & Collaterals • Concentration Risk Management • Automated Global Collaboration Tasks • Supports LGD & AIRB Computation

11. Robust Collateral & Limits Management Multi–limit Iterative Collateral Allocation • Limits sharing among legal entities • Outer and inner limits • Multiple accounts per limits • Collateral specifically charged to a limit • Collateral sharing among legal entities • Many-to-many linkages between collaterals & limits • Hierarchical and paripassu charging • Prior charge amount • Collateral value not to exceed limit

12. OLAP – based Portfolio Management

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