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07 FRM v0.01

The document outlines the 8 step credit risk management process used by Indian banks. The process includes sourcing proposals, preliminary due diligence, document collection, third party due diligence, proposal preparation, credit note review, disbursement, and monitoring.

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Aishwarya Jibhakate
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47 views16 pages

07 FRM v0.01

The document outlines the 8 step credit risk management process used by Indian banks. The process includes sourcing proposals, preliminary due diligence, document collection, third party due diligence, proposal preparation, credit note review, disbursement, and monitoring.

Uploaded by

Aishwarya Jibhakate
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Financial Risk Management

Credit Risk in Banks


Session Agenda Credit Risk Management Process

(c) Shailendra Marathe 2023


Credit Risk in Banks

(c) Shailendra Marathe 2023


Credit Risk - definition
‘Credit risk refers to the probability of the loss (due to the non-recovery of ) emanating
from the credit extended as a result of the non-fulfilment of the contractual obligations
arising from unwillingness or inability of the counterparty or for any other reason’.
Credit Risk - meaning
▪ Risk of non-repayment
▪ Risk of non- servicing, example- interest
▪ Delay in payment
▪ Part payment
▪ Also called default risk or counterparty risk
Credit Risk Management Process

(c) Shailendra Marathe 2023


Credit Risk Management Process- Indian Banks
1. Sourcing Proposal
▪ Direct walk in
▪ Existing customer referrals (Inbound cross sell) – customer wallet share
▪ Consultants, CAs
▪ Portals - DIC, MCCIA
▪ Bank specific log in- various government portals like Startup India, Mudra loans
▪ DSA/ BSA - Commission basis
▪ Outbound Call centers
▪ Take over of existing loans - reasons for take over, take over norms
2. Preliminary Due Diligence
▪ Interaction with key personnel - legal constitution of the customer - proprietor,
partnership, LLP, Pvt Ltd company
▪ Generating various credit information reports available in the public domains and on
Bank specific logins - CIBIL - personal and corporate, Equifax, CRILC, MCCIA, Willful
defaulter list and website of entity
▪ Points to understand - Credit score, past credit history, number of inquiries by the
prospect
▪ Documents Required - KYC of promoters and company, CIN number
▪ Preliminary decision whether to go ahead or drop the proposal is made
3. Documents Collection
▪ Standard checklists created by the banks
▪ Profile of Company
▪ Brief background of promoters
▪ Statutory permissions
▪ Audited Financial Statements along with form 3 CA and 3 CD
▪ Estimate of current year and projections for future year as per required credit facility
▪ Application form/s
▪ Asset liability statements of promoters and guarantors
▪ Sanction letter and statement of accounts of all other credit facilities enjoyed
▪ Orders in hand
4. Third-Party Due Diligence
▪ Inspection of factory premises, or premises offered as collateral, promoters’ address,
stock statements, orders, debtors’ realization
▪ Search of property titles by empaneled lawyer, where report is required in the bank's
prescribed format, specifying all boundaries and giving clear opinion about Legal issues
involving property offered as collateral
▪ Valuation -/By empaneled valuer- market value, govt value and distress value
▪ Report from CS for company and LLP
▪ Third party due diligence – inquiries with key customers and vendors, other bankers
5. Proposal Preparation
▪ Credit proposal – also called credit note (CN), credit assessment memo (CAM)
▪ Credit assessment depending upon type of facility required by entity
▪ Brief regarding major facilities enjoyed by corporates - term loan, working capital and
non- fund- based facilities
▪ Brief regarding financial statement analysis (key ratios like D/E, ICR and DSCR)
▪ Preparation of credit rating models and pricing of credit
▪ Importance of collateral and its acceptability to Bank
6. Credit Note Review
▪ Banks have approval hierarchy for loans depending on criteria such as amount of facility,
nature of borrower, product and size of business
▪ The approval must be obtained from appropriate level as per delegation guidelines
▪ Typical hierarchy structure - branch level, ZO level, regional office level, HO level
▪ Banks may provide for deviation of process in exceptional cases, and the reasons for
deviation have to be documented
▪ Presentation of credit note in front of committee will results in approval, rejection or
asking for more information (resubmission)
▪ The terms are documented for subsequent processing
7. Disbursement
▪ Approved proposal are taken up for disbursement as per terms of approval
▪ Post sanction compliance- documentation, creation of mortgage, stamping of
documents, power of attorney, vetting of documents by empaneled lawyer, compliance
of all pre disbursement sanction terms
▪ Disbursement must be made as per terms in sanction note
8. Monitoring
▪ Compliance of post disbursement conditions
▪ Quarterly/ yearly inspection
▪ Monitoring of stock statements, book debtors’ statements
▪ Observation of any quick mortality signs (early warnings)
▪ Follow up in case of delinquency in account
Thank You

(c) Shailendra Marathe 2023

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