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Credit Risk Grading Side

Credit risk grading is an important tool for credit risk management that helps financial institutions understand the various dimensions of risk involved in credit transactions. It involves assigning ratings to borrowers and exposures based on their financial risk, business risk, management risk, security risk, and relationship risk. This grading allows standardization and helps institutions assess credit quality at the individual, unit, branch and bank-wide levels both before and after granting loans.

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154 views10 pages

Credit Risk Grading Side

Credit risk grading is an important tool for credit risk management that helps financial institutions understand the various dimensions of risk involved in credit transactions. It involves assigning ratings to borrowers and exposures based on their financial risk, business risk, management risk, security risk, and relationship risk. This grading allows standardization and helps institutions assess credit quality at the individual, unit, branch and bank-wide levels both before and after granting loans.

Uploaded by

afroj4chandra
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 PPTX, PDF, TXT or read online on Scribd
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Credit Risk Grading Guideline

by Bangladesh Bank
CREDIT RISK GRADING

 Credit risk is the primary financial risk in the banking system.


 Identifying and assessing credit risk is essentially a first step in managing it
effectively
 Credit risk grading is an important tool for credit risk management as it helps the
Banks & financial institutions to understand various dimensions of risk involved in
different credit transactions.
 The aggregation of such grading across the borrowers, activities and the lines of
business can provide better assessment of the quality of credit portfolio of a bank
or a branch.
 The credit risk grading system is vital to take decisions both at the pre-sanction
stage as well as post-sanction stage.
CREDIT RISK GRADING

 At the pre-sanction stage, credit grading helps the sanctioning authority to decide
 whether to lend or not to lend,
 what should be the loan price,
 what should be the extent of exposure,
 what should be the appropriate credit facility,
 what are the various facilities,
 what are the various risk mitigation tools to put a cap on the risk level.
CREDIT RISK GRADING

 At the post-sanction stage, the bank can decide


 about the depth of the review or renewal,
 frequency of review, periodicity of the grading,
 and other precautions to be taken.
CREDIT RISK GRADING

 The Credit Risk Grading matrix allows application of uniform standards to credits to
ensure a common standardized approach to assess the quality of individual obligor
credit portfolio of a unit, line of business, the branch or the Bank as a whole.
 The CRG outputs would be relevant for individual credit selection, wherein either a
borrower or a particular exposure/facility is rated.
 The other decisions would be related to pricing (credit-spread) and specific features of
the credit facility. These would largely constitute obligor level analysis.
 Risk grading would also be relevant for surveillance and monitoring, internal MIS and
assessing the aggregate risk profile of a Bank. It is also relevant for portfolio level
analysis
CREDIT RISK GRADING
CREDIT RISK GRADING

 Credit risk for counterparty arises from an aggregation of the following:


 Financial Risk
 Business/Industry Risk
 Management Risk
 Security Risk
 Relationship Risk
CREDIT RISK GRADING
CREDIT RISK GRADING

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