Ways to reduce lending risks. Credit risks and ways to reduce them. Fragment of the work for review
Send your good work in the knowledge base is simple. Use the form below
Students, graduate students, young scientists who use the knowledge base in their studies and work will be very grateful to you.
Posted on http://www.allbest.ru/
Introduction
Chapter 1. Credit risk and methods of managing it
1.1 The concept of risks and their classification
1.2 Goals, stages and methods of credit risk management
Chapter 2. Main ways to reduce credit risk
2.1 Assessing the borrower's creditworthiness as a way to mitigate credit risk
2.2 Diversification of the bank's loan portfolio
2.3 Provision for possible loan losses
Conclusion
List of used literature
Introduction
Banks are the central links in the system of market relations. The development of their activities is a necessary condition for the real creation of a market economy. The modern banking system is the most important sphere of the national economy of any developed state. It has undergone significant changes in recent years. All components of the banking system are being modified.
Russia's entry into the market is largely associated with the realization of the potential of credit relations, so one of the prerequisites for the formation of the market is a radical restructuring of money circulation and credit. The main task is the maximum reduction of the centralized redistribution of monetary resources and the transition to their predominantly horizontal movement in the financial market. The creation of a financial market implies a fundamental change in the role of credit institutions and an increase in the role of credit in the system of economic relations. Russia's transition to a market economy, increasing the efficiency of its functioning, and creating the necessary infrastructure cannot be ensured without the use and further development of credit relations.
Credit stimulates the development of productive forces, accelerates the formation of sources of capital to expand reproduction based on the achievements of scientific and technological progress. Without credit support, it is impossible to ensure the rapid and civilized development of farms, enterprises, the introduction of other types of entrepreneurial activity in the domestic and foreign economic space.
Credit relations are accompanied by risks. There are two points of view of risk consideration: Single risk, where any asset is considered separately; Portfolio risk, where the asset is part of a portfolio.
From another point of view, there are only portfolio risks, as banks seek to diversify their assets, so one cannot consider each asset separately.
Risk management is one of the functions of banking management, and one of its principles is the optimization of profitability and risks of banking operations, among which one of the most serious is credit risk.
The process of managing this risk deserves special attention, because the success of the bank's work depends on its quality. Studies of bank failures indicate that the main reason for many of them was poor asset quality.
The key elements of effective management are: prudent credit policy and procedures, quality management of the loan portfolio, effective credit monitoring and, most importantly, personnel trained to work in this system.
The relevance of the topic is confirmed by the fact that risk taking is the basis of banking. Banks are successful only when the risks they take are reasonable, controllable and within their financial capacity and competence. Assets, mainly loans, must be sufficiently liquid to cover any cash outflows, expenses and losses while ensuring a return acceptable to shareholders. Achieving these goals underpins the bank's policy of risk acceptance and management.
The purpose of this work is to study banking risks.
1) study credit risk and methods of managing it;
2) disclose the main ways to reduce credit risk.
Chapter 1. Credit risk and methods of managing it
1.1 The concept of risks and their classification
Credit operations are the operations of the lender to place free credit resources to the borrower on the terms of payment, urgency and repayment. Banks act in lending operations in the role of:
lenders, lending to clients or providing interbank loans;
borrowers receiving loans from the Central Bank or other commercial banks.
As a result of credit operations, a credit portfolio is formed. The dynamics of credit operations and their share in the assets of the balance sheets are formed under the influence of many factors depending on the policy of the bank, the general economic and political situation in the country. The decisive influence on the volume and nature of credit operations of commercial banks is still exerted by the policy of the Government and the Central Bank of the Russian Federation aimed at suppressing inflation, and the relatively low profitability of the production sector with high profitability of operations in the financial market.
Risk taking is the foundation of banking. Banks are successful when the risks they take are reasonable, controllable and within their financial capabilities and competence.
Banks strive to get the most profit. But this desire is limited by the possibility of incurring losses. The risk of banking activity means the probability that the actual profit of the bank will be less than planned, expected. The higher the expected return, the higher the risk. The relationship between the profitability of a bank's operations and its risk in a very simplified version can be expressed as a straight-line relationship.
The level of risk increases if:
problems arise suddenly and contrary to expectations;
new tasks are set that do not correspond to the bank's past experience;
the management is unable to take the necessary and urgent measures, which may lead to financial damage (deterioration of the opportunities for obtaining the necessary and / or additional profit);
the existing procedure for the bank's activities or the imperfection of the legislation hinders the adoption of some measures that are optimal for a particular situation.
The consequences of misjudgments of risks or the inability to oppose effective measures can be the most unpleasant. Here are some relevant examples from the practice of Western banks. credit risk creditworthiness diversification
There are common causes of banking risks and trends in their level. At the same time, when analyzing the risks of Russian banks at the present stage, it is important to take into account:
the crisis state of the economy in transition, which is expressed not only by the decline in production, the financial instability of many organizations, but also by the destruction of a number of economic ties;
instability of the political situation;
the absence or imperfection of some basic legislative acts, the discrepancy between the legal framework and the real situation;
inflation, etc.
In all cases, the risk must be identified and measured. Risk analysis and assessment is largely based on a systematic statistical method for determining the likelihood that an event will occur in the future. This probability is usually expressed as a percentage. Appropriate work can be carried out if risk criteria are developed.
Risk can be managed, i.e. use measures that allow, to a certain extent, to predict the onset of a risk event and take measures to reduce the degree of risk.
The effectiveness of the organization of risk management largely depends on the classification.
Risk classification should be understood as the distribution of risk into specific groups according to certain characteristics in order to achieve the set goals.
Science-based risk classification allows you to clearly determine the place of each risk in their overall system. It creates opportunities for the effective application of appropriate methods, risk management techniques. Risks depending on the state of each of the listed elements.
There are many different classifications of banking risks. The most interesting of them are presented below. Differing in the criteria they are based on, these classifications have in common that they all unambiguously consider credit and interest risks to be the main ones for banks. The presented classification needs some explanation and specification. Internal risks arise as a result of the activities of the banks themselves and depend on the operations carried out. Accordingly, the risks are divided:
associated with assets (credit, currency, market, settlement, leasing, factoring, cash, correspondent account risk, financing and investment, etc.);
associated with the bank's liabilities (risks on deposit and other deposit operations, on attracted interbank loans);
related to the quality of the bank's management of its assets and liabilities (interest rate risk, risk of unbalanced liquidity, insolvency, risks of the capital structure, leverage, insufficient capital of the bank);
associated with the risk of financial services (operational, technological risks, innovation risks, strategic risks, accounting, administrative, abuse, security risks).
Let's take a look at the last group. The bank's operational risks include the risks of an increase in the cost of the bank's services and an increase in current costs (for example, risks associated with the inability to recover administrative and business expenses).
Technological ones include the risks of failure of the technology of operations (risks of computer system failure, loss of documents due to lack of storage and iron cabinets, failure in the SWIFT system, errors in the concept of the system, disproportionate investments, the cost of lost or damaged computer equipment, loss or measurement of the electronic audit system or logical control, system vulnerability, computer fraud, destruction or disappearance of computer data).
Security risks consist of general bank security, internal and fire security risks.
Innovation risks consist of project risks (risk of unique projects, intra-bank risk, market or portfolio risk), selective risk (risk of wrong choice of innovations), time risk (wrong timing for innovation), risks of lack of necessary funds, risk of changing legislation towards cancellation of a new type of activity for the bank.
Strategic - these are the risks of not receiving the planned profit as a result of exceeding the acceptable risk, the risk of making the wrong choice and incorrectly assessing the size and degree of risk, the risk of the bank making the wrong decision (for example, the risk of repeatedly prolonging the same loan), the risks of incorrectly determining the timing of operations, lack of control for bank losses, incorrect financing of losses, incorrect choice of risk management methods (for example, obtaining a guarantee from a legal entity instead of signing a pledge agreement), etc. All of them characterize the quality of bank management from certain positions.
Accounting risks include: the risk of losing money due to incorrect or late charges, damage to the bank's reputation in the eyes of third parties, as well as the risk of fraud due to a large number of uncontrolled entries, easy access to bookkeeping and its simplified scheme.
Administrative risks are usually associated with the loss of payment and other documents. Administrative risks are closely related to the risks of banking abuse, which are associated with currency speculation, securities speculation, regulation of credit volumes and interest rates for the purpose of "pressing" the client, the possibility of influencing the financial condition of his client, violation of credit and contractual relations by the bank with a deliberate purpose, participation in collusion, incorrect examination of projects and consulting with the intent of theft, embezzlement, deceit.
The so-called competitive risks for banks are associated with the possibility of a merger of banks and non-banking institutions, the emergence of new types of banking operations and transactions, a decrease in the cost of services of other banks, an increase in requirements for the quality of banking services, the ease of emergence of new banking institutions, the complexity of the bank bankruptcy procedure.
Macroeconomic risk is associated with a violation of the main proportions in the country's economy and the impact of unfavorable financial factors.
Translation risks include:
lack of currency;
liquidity risk of foreign trade and investments, balance of payments;
repudiation;
non-fulfillment of obligations in the future;
revision of the contract;
revision of the plan;
change in the value of foreign currency assets and liabilities in the national currency.
Organizational risks include:
lack of qualified personnel;
lack or lack of commercial and financial information, etc.
External risks in their totality are usually also characterized by a spatial aspect, meaning that different (regions) republics), different countries or groups of countries at any given moment have a special combination and a specific measure of the severity of external risks, which determine the particular attractiveness or unattractiveness of a given region or a given country from the point of view of banking. The expression "country (regional) risk" means only this aspect, but not meaningfully a separate type of risk along with financial, economic, political and other external risks.
The risks of the composition of the client are related to the marketing of banking services and contacts with the public. The variety of requirements of a small, medium and large client inevitably determines the degree of risk itself. Thus, the small borrower is more dependent on the contingencies of the market economy. At the same time, significant loans issued to one large client or a group of related clients are often the cause of bank failures.
The degree of banking risk, as can be seen from the classification, is determined by three concepts: full, moderate and low risks.
Full risk involves losses equal to the bank's investment in the operation. So, a doubtful or lost loan has a full, that is, 00 percent, risk. The bank does not receive profit, is in the zone of unacceptable or critical risk.
A moderate risk (up to 30%) arises when a small part of the principal or interest on a loan is not returned, with the loss of only a part of the amount on financial and other bank operations. The risk is in the tolerable zone. The bank receives a profit that allows it to cover its losses and have income.
Low risk - an insignificant risk that allows the bank not only to cover losses, but also to receive high incomes.
Credit risk - the risk associated with non-payment of obligations, is the most important of the bank's risks and the base one, initiating many other (liquidity) risks. This type of risk manifests itself in the form of a full non-repayment of the loan, partial non-repayment (often this case concerns accrued interest and commission payments) or a delay in repayment of the loan.
Credit risk can be defined as the lender's uncertainty that the borrower will be able and intend to meet its obligations to repay and repay the loan in accordance with the terms and conditions of the loan agreement. Credit risk can be formed in case of uncertainty or complexity, impossibility, inability of the borrower to create any of the cash flows that serve as a source of debt repayment or with shortcomings in the business reputation of the borrower, as well as the criminal moods of its owners and managers.
Currency exchange risk is the risk of incurring losses due to the exchange of a value denominated in a foreign currency on terms of the value of the bank's national currency. The risk of loss arises from the process of revaluing a foreign currency position into the national currency in terms of value. When banks have an open position in a foreign currency (in which assets in a currency do not equal liabilities in that currency), the revaluation process usually creates either a gain or a loss. Profit or loss is the difference between the generalized changes in the expression in the national currency of the values of assets, liabilities and capital, expressed in foreign currency.
Interest rate risk is the profit risk arising from adverse fluctuations in interest rates that result in higher interest costs or lower income from investments and proceeds from loans granted.
Liquidity is the ability to satisfy an anticipated and sudden need for cash in a company. The need for cash arises as a result of the withdrawal of deposits, the maturity (maturity) of obligations, the provision of funds for loans, both for new ones, and the continuation of the issuance of funds for old loans. The need for cash is satisfied by increasing the volume of deposits and borrowings, repaying debt obligations to this company, investing in securities with a fixed maturity and sale of assets.
Insufficient liquidity can cause an unexpected shortage of funds, which must be covered by unusually increased costs, thereby causing a decrease in the profitability of the institution. In the worst case scenario, inadequate liquidity could render the institution insolvent in terms of short-term liabilities. On the other hand, excessive liquidity can lead to low returns on assets and thus adversely affect the performance of an institution.
1.2 Goals, stages and methods of credit risk management
The main task of risk management is to maintain acceptable ratios of profitability with indicators of safety and liquidity in the process of managing the bank's assets and liabilities, that is, minimizing bank losses.
Effective risk management must solve a number of problems - from tracking (monitoring) risk to its cost estimate.
The level of risk associated with an event is constantly changing due to the dynamic nature of the external environment of banks. This forces the bank to regularly update its position in the market, assess the risk of certain events, review customer relationships and assess the quality of its own assets and liabilities, and therefore adjust its risk management policy.
Each bank should think about minimizing its risks. This is necessary for its survival and for the healthy development of the country's banking system. Risk minimization is the struggle to reduce losses, otherwise known as risk management. This management process includes: anticipating risks, determining their likely size and consequences, developing and implementing measures to prevent or minimize the losses associated with them.
All this presupposes the development by each bank of its own risk management strategy, that is, the basis of decision-making policy in such a way as to timely and consistently use all the opportunities for the development of the bank and at the same time keep risks at an acceptable and manageable level.
The goals and objectives of the risk management strategy are largely determined by the constantly changing external economic environment in which the bank has to work. The main signs of a change in the external environment in the banking industry in Russia in recent years are: rising inflation, an increase in the number of banks and their branches; regulation of the conditions of competition between banks by the Central Bank and other state bodies; redistribution of risks between banks with the participation of the Central Bank; expansion of money and credit markets; the emergence of new (non-traditional) types of banking services; increased competition between banks, cases of absorption by large banks of small competitors; an increase in the need for credit resources as a result of a change in the structure of the growth in the need of enterprises for working capital and a change in the financing structure towards a decrease in the bank's share of the bank's clients' own capital; an increase in bankruptcies in the sphere of small and medium-sized businesses with a simultaneous deviation from fulfilling the requirements of creditors: the absence of effective guarantees for the repayment of a loan.
The bank must be able to select such risks that it can properly assess and manage effectively. Having decided to accept a certain risk, the bank must be ready to manage it, monitor it. This requires skills in the qualitative assessment of the relevant processes.
Banking risk management should be based on the following principles:
forecasting possible sources of losses or situations that can cause losses, their quantitative measurement;
financing risks, economic incentives to reduce them;
responsibility and obligation of managers and employees, clarity of policy and risk management mechanisms;
coordinated risk control across all divisions and services of the bank, monitoring the effectiveness of risk management procedures.
The final, most important stage of the risk management process is the prevention (warning) of the occurrence of risks or their minimization. Appropriate methods, together with methods for compensating risks, constitute the content of the so-called risk management.
Since risk management is part of practical management, it requires constant evaluation and re-evaluation of the decisions made. Otherwise, there may be statistical, bureaucratic and technological illusions that are not destined to materialize in practice. With all the existing differences and details, the risk management models adopted in the banks of the Anglo-Saxon countries are a model for organizing such management.
The most important elements of risk management systems are:
Clear and documented principles, rules and directives on the bank's trading policy, risk management, organization of the labor process and the terminology used;
Establishment of special risk management groups independent of the bank's commercial divisions; the head of the market risk unit reports to the bank's executive director ("Chief Executive Officer"), the head of the credit risk unit - to the credit director ("Cief Credit Officer"), i.е. to members of the bank's senior management;
Establishing limits on market and credit risks and monitoring their compliance, as well as aggregating (combining) risks for individual banking products, counterparties and regions;
Determining the frequency of informing the bank's management about the risks. As a rule, such information is provided daily, especially on market risks;
For all types of risks, special small management groups are created, independent of the commercial divisions of the bank;
All elements of the control and risk management system are regularly audited by auditors who are independent of the commercial services of the bank.
In general, the risk management system in the banks of the Anglo-Saxon countries not only did not supplant classical control, but significantly supplemented and strengthened it. Swiss banks have recently followed suit and have made some headway in this area. The standards developed in Swiss banks can serve as a guideline for other European banks. However, it should be remembered that no, even the most perfect risk management does not completely eliminate losses and losses, which should save bank managers from complacency. The development of new, more flexible and improved models and methods of risk management must continue continuously.
Large banks usually have two risk management committees: the Credit Risk Committee and the Asset and Liability Management Committee of the bank. The Credit Department is responsible for implementing the policy developed by the Credit Risk Committee. The Operations Department, the Departments of Securities, International Credits and Settlements, Banking Analysis, Marketing are responsible for the implementation of the policy developed by the Asset and Liability Risk Management Committee.
The first committee usually consists of: the head of the bank (committee chairman), the heads of the credit and operations departments of the accounting department, the chief economist or head of the research department, the head of the credit risk analysis unit, two or more other top-level heads of the bank.
The composition of the second committee includes: the head of the bank (chairman of the committee), heads of the operating and credit departments, chief economist or head of the research department, heads of the financial control and accounting service, and several other senior managers.
Credit risk management is fundamental in banking. The key elements of effective credit management are well-developed credit policies and procedures, good portfolio management, and effective credit control. Credit risk management is both a process and a complex system. The process begins with the identification of lending markets, often referred to as "target markets". It continues in the form of a sequence of stages of debt repayment.
Chapter 2. Main ways to reduce credit risk
2.1 Assessment of the borrower's creditworthiness as a way to reducecredit risk
The problem of assessing the creditworthiness of a bank borrower is not sufficiently developed. First of all, the term "creditworthiness" itself needs to be clarified. Its definition is widespread (the ability of a person to fully and on time pay off his debt obligations), which makes it indistinguishable from another term - "solvency". The issues of creditworthiness were quite relevant and were widely covered in the economic literature of the pre-revolutionary period, as well as in the works of economists of the 1920s.
The latter generally understood creditworthiness as:
from the point of view of the borrower - the ability to make a credit transaction, the possibility of timely repayment of the loan received;
from the standpoint of the bank - the correct determination of the size of the allowable loan.
When determining the creditworthiness of a borrower, as a rule, the following factors were taken into account:
legal capacity and legal capacity of the borrower to complete a credit transaction;
his moral character, reputation;
availability of collateral for the loan;
borrower's ability to generate income.
The moral character of the client was given particular attention in the literature of the pre-revolutionary period. According to I. Adadurov, "the first and most important condition for a loan is the need for a person who is looking for opportunities to borrow money from us, does not inspire distrust in his moral qualities." At the same time, the moral basis of a credit transaction (honesty and decency) was directly associated with the factor of business management, competence, the ability of farm managers to anticipate changes in the economic situation and use them, reorganize production in a timely manner, etc.
Naturally, one of the most important aspects of creditworthiness was the availability of material security for the loan. Some experts even attached decisive importance to this factor. So, N. Bunge, who connected the highest creditworthiness with the greatest immobility of capital invested in real estate, wrote that "real estate is considered as the best guarantee."
Nevertheless, most economists of that time, when considering the issue of issuing a loan, put the possibility of obtaining income for borrowers at the forefront. The same I. Adadurov associated the possibility of lending to a particular farm "with its highest expediency, stability and profitability." This was also emphasized in the studies of the 1920s.
Returning to the basic concept that interests us, we can say the following.
Solvency is the ability and ability of a legal entity or individual to repay all types of debt in a timely manner. In contrast, creditworthiness is the ability to repay loan debt. From this side, creditworthiness is a narrower concept than solvency. Consequently, in order for a bank to decide to issue a loan to a given borrower, it is enough to be convinced of its creditworthiness, not necessarily considering the issue in a broader aspect (although it is clear from the correlation of concepts that if the borrower is solvent, then this includes his creditworthiness). There is another difference between solvency and creditworthiness. The enterprise must repay its usual debt (except for loans), as a rule, at the expense of proceeds from the sale of its products (works, services). As for the loan debt, in addition to the above, it has three more sources of repayment (not always, however, reliable):
proceeds from the sale of property accepted by the bank as collateral for a loan;
guarantee of another bank or other enterprise;
insurance indemnities.
Consequently, a bank that makes loans competently can count on full or at least partial reimbursement of them even in the case when the borrower is insolvent in the usual sense of the word.
But is it possible today to associate the borrower's creditworthiness mainly with one of the listed factors, as the former Russian economists did and as they do now in market developed countries in relation to the borrower's ability to receive a stable income?
If we keep in mind the last factor, then in the conditions of modern Russia it is not necessary to make the main bet on it. At least for the reasons of the continuation of the crisis and uncontrolled decline in production volumes and massive non-payments. Insurance companies are generally weak and unreliable. Bank guarantees are almost never used within the country, and enterprises generally cannot afford to guarantee anything to anyone. Banks are reluctant to sell the borrower's collateral for a number of objective reasons. The moral character and reputation of the modern average Russian businessman is at best unknown, at worst they contain nothing encouraging. Equally very specific is his ability to act, i.e. professional competence, the ability to effectively put things in the new historical conditions. It is no coincidence that the stability of banks today is inversely proportional to their activity in the sphere of lending to the economy.
What practical conclusion follows from this? Apparently, there is only one: modern Russian conditions do not allow us to talk about the overall high solvency of economic entities, and the really possible level of their creditworthiness must be determined without giving preference to any of its factors, but considering all factors in combination. Any of them can be decisive both in a positive and negative sense.
As already mentioned, the creditworthiness of the borrower depends on many factors. This in itself means difficulty, since each factor (for a bank - risk factors) must be evaluated and calculated. Added to this is the need to determine the relative "weight" of each individual factor for the state of creditworthiness, which is also extremely difficult. It is even more difficult to assess the prospects for changes in all those factors, causes and circumstances that will determine the creditworthiness of the borrower in the coming period. The ability of the borrower to repay the loan debt is important for the creditor only if it refers to the future period (it is a forecast of such ability, and the forecast is quite reasonable and plausible).
Additional difficulties in determining creditworthiness arise in connection with the existence of such factors, which cannot be measured and evaluated in numbers. This applies primarily to the moral character, reputation of the borrower, although not only them. The corresponding conclusions cannot be considered irrefutable.
In pre-revolutionary times, in order to take into account the moral character of the client, it was supposed to take into account even the past of the borrower and the past of his partners in business, as well as those firms with which he was dependent or in close business ties.
Finally, significant difficulties are generated by inflation, which distorts indicators that characterize the possibility of repaying loan debt (this applies, for example, to indicators of capital turnover and its individual parts - assets, fixed capital, reserves), and uneven dynamics of turnover (due to the outstripping price growth for products sold) and valuation of balances (fixed assets, stocks). So, it is impossible to get a single, synthetic assessment of the borrower's creditworthiness with a generalization of digital and non-digital data. For a reasonable assessment of creditworthiness, in addition to information in numerical values, an expert assessment of qualified analysts is needed. At the same time, the complexity of assessing creditworthiness leads to the use of various approaches to such a task, depending both on the characteristics of borrowers and on the intentions of a particular creditor bank. At the same time, it is important to emphasize that different methods of assessing creditworthiness do not exclude, but complement each other. This means that they should be used in combination.
There are the following ways to assess creditworthiness:
based on the system of financial ratios;
based on cash flow analyses;
based on business risk analyses.
Each of them complements each other. If business risk analysis allows assessing the creditworthiness of the client at the time of the transaction on the basis of only one loan transaction and the associated cash flow, then the system of financial ratios predicts the risk, taking into account its total debt, prevailing average standards and trends. The analysis of the customer's cash flow not only assesses the overall creditworthiness of the customer, but also shows on this basis the limits for new loans, as well as weak points in the management of the enterprise, from which credit conditions may arise.
Let us dwell in more detail on individual methods for assessing the creditworthiness of a client by a commercial bank.
In world banking practice, five groups of such coefficients are used:
liquidity ratios;
efficiency (turnover) ratios;
financial leverage ratios;
profitability ratios;
debt service ratios.
Let's consider them in order.
Liquidity ratios
There are two options: CURRENT LIQUIDITY (CTL) and FAST (OPERATIONAL) LIQUIDITY (CBL).
CURRENT ASSETS - this is cash in the client's cash desk and money in his bank accounts, net receivables, the value of inventories, other current assets (deferred expenses, investments in first-class securities, etc.). At the same time, net receivables are determined by subtracting the provision for bad debts from the balance of receivables, i.e. only receivables of a short-term nature (within 90 days) are taken. Stocks of inventory items should have a relatively fast turnover (within a year).
LIQUID ASSETS - the liquid part of current assets, which includes cash, marketable securities and receivables.
CURRENT LIABILITIES - loans of the nearest maturity (within a year), unpaid claims (suppliers, budget, etc.), other current liabilities.
The current liquidity ratio is also known as COVERAGE RATIO. It shows whether the bank's client has sufficient funds to pay off short-term debt obligations. These funds are either already available, or will soon be credited to the client's accounts, or can be obtained from the sale of inventory items and securities. Therefore, at a ratio level below 1, the client is usually considered uncreditworthy. An exception is allowed for borrowers with a very fast turnover of current assets (working capital).
The world banking practice is guided by the following standard levels of the current liquidity ratio when assessing the creditworthiness of the borrower: I, II, III class. - 2.0; IV class - 1.5; V, VI class. - 1.25. The higher the ratio, the higher the financial stability of the client. However, its very high level (more than 3-4) is a signal for the bank to understand the reasons for the growth of the indicator (it is usually associated with an increase in inventories and a slowdown in the turnover of funds).
QUICK LIQUIDITY RATIO (or simply liquidity ratio) shows whether the borrower can release funds from his turnover in time to pay off the debt. It is focused on the ability of the client to earn (and release from circulation) funds in the course of current activities. Its normative level for class I clients, according to world standards, should be on average more than 0.6.
FINANCIAL LEVERAGE COEFFICIENTS.
They make it possible to assess the degree to which the client is provided with own capital and its overall relative dependence on attracted sources. Own tangible assets represent the difference between share capital and intangible assets. A significant component of intangible assets is the difference between the book value and market value of acquired firms, real estate ("good will"). Therefore, the third version of this coefficient will be important with the development of the real estate market and enterprises in the country.
The profitability ratios show the effectiveness of the use of all funds, including borrowed funds. If the financial leverage ratios show an increase in the client's dependence on attracted sources, but the profitability ratios indicate the use of these funds with a high return, then the borrower's credit rating is not reduced.
In foreign practice commercial Bank chooses coefficients for practical use, solves questions about the peculiarities of the methodology for their calculation. Further, the coefficients are included in the standard customer reporting forms, i.e. calculated by clients. Bank employees use their own methods to check the "logic of the report", the correctness of the calculated coefficients.
As a result, the bank can compile and maintain a card index of the creditworthiness of its customers - a list of customers with a conclusion about their creditworthiness class. The latter is done on the basis of a rating in points calculated on the basis of basic and additional creditworthiness indicators. Key indicators should be the same over a long period. The set of additional indicators may be revised depending on the current situation.
The rating of indicators in relative terms characterizes the significance for the bank of each of them. It is determined on the basis of the economic value of the indicators, the bank's credit policy, the current situation, and the factors that reduce the level of creditworthiness of the bank's customers.
2.2 Diversificationbank loan portfolio
A loan portfolio is a characteristic of the structure and quality of loans issued by the court, classified according to certain criteria. One of such criteria used in foreign and domestic practice is the degree of credit risk. Therefore, the criterion determines the quality of the loan portfolio. Analysis and assessment of the quality of the loan portfolio allow bank managers to manage its lending operations.
Loan portfolio management has several stages:
selection of criteria for assessing the quality of a single loan;
identification of the main groups of loans with an indication of the risk percentages associated with them;
assessment of each loan issued by the bank based on selected criteria, i.e. assigning it to the appropriate group;
determination of the structure of the loan portfolio in the context of classified loans;
assessment of the quality of the loan portfolio as a whole;
analysis of factors influencing changes in the structure of the loan portfolio in dynamics;
determination of the amount of the reserve fund, adequate to the total risk of the bank's loan portfolio;
development of measures to improve the quality of the loan portfolio.
The fundamental moment in the management of the bank's loan portfolio is the choice of criteria for assessing the quality of a single loan.
With the development of credit relations in the market economy of foreign countries, the range of criteria for assessing the quality of loans also expanded. It currently covers over 10 positions. The main ones include: purpose and type of loan; its size, term and order of repayment; the degree of creditworthiness of the client, his industry affiliation and form of ownership; the nature of the relationship between the borrower and the bank; degree of awareness of the bank about it; volume and amount of loan repayment security.
In Russia, the number of criteria for assessing the quality of loans is still limited. Based on the recommendations of the CBR, two main criteria are currently being applied: the degree of security of the loan repayment and the actual state with the repayment of previously issued loans. They correspond to the content of the first stage of loan portfolio management.
From the point of view of ensuring the repayment of loans, the Bank of Russia proposes to distinguish three groups of loans that differ in the degree of risk.
The first group was called "secured loans". It includes loans that are secured by liquid collateral, the real (market) value of which is equal to or greater than the loan debt, or that have a bank guarantee, a guarantee from the government of the Russian Federation and constituent entities of the Russian Federation, or are insured in the prescribed manner.
The second group - "insufficiently secured loans" - covers loans that have partial collateral (at a value of at least 60% of the loan amount), but its real (market) value or ability to be realized is doubtful.
The third group is unsecured loans. They either have no collateral, or the real (market) value of the collateral is less than 60% of the loan amount.
The second classification criterion reflects the actual state of repayment of previously issued loans. In this regard, 5 groups of loans are distinguished:
Loans repaid on time;
Loans with arrears up to 30 days;
Loans with overdue debts from 30 to 60 days;
Loans with overdue debts from 60 to 180 days;
Loans overdue over 180 days.
Taking into account the specified criteria, the Central Bank of Russia proposes to allocate 5 groups of loans with a differentiated level of deductions to the bank's reserve fund, which corresponds to the content of the second stage of loan portfolio management.
2.3 Provision for possible loan losses
Reserve funds are created in order to maintain the stability and sustainability of the banking system, and therefore the Russian economy. The creation of such a fund entails a decrease in profits and may cause losses. The reserve for possible losses on loans is a special reserve, the need to form which is due to credit risks in the activities of banks. This reserve ensures that the bank creates more stable conditions for financial activities and avoids fluctuations in the amount of profits of banks in connection with the write-off of losses on loans. Loans are classified according to the level of credit risk, i.e. the risk of non-payment by the borrower of the principal debt and interest due to the creditor within the period established by the loan agreement. Depending on the amount of credit risk, all loans are divided into 4 groups:
Group 1 - standard (practically risk-free loans),
Group 2 - non-standard loans (moderate risk of non-return),
Group 3 - doubtful loans (high risk of non-return),
Group 4 - bad loans (the probability of repayment is practically absent, the loan represents the actual losses of the bank).
The allowance for possible losses on loans is formed at the expense of deductions attributable to banks' expenses. The allowance for possible losses on loans is used only to cover outstanding loans by customers (banks) on the principal debt. The reserve is used to write off losses on uncollectible bank loans. The amount of deductions to the reserve fund depends on the credit policy pursued by the bank, the composition of the loan portfolio, varying its composition, the bank has the opportunity to reduce the amount of deductions, increasing the amount of profit. The amounts of deductions are differentiated in the form of percentages to the absolute amount of the loan, depending on the observance of the terms of its repayment and the state of security.
The Central Bank of Russia has approved the following standards for deductions to the reserve fund for possible losses on loans.
The amount of deductions to the reserve for the part of the loan is determined equal to the difference between the funds provided by the bank to the borrower on the specified loan and the funds provided by the bank and equal to the amount of funds transferred to the bank by a third party on the basis of loan agreements (loan agreements). The amount of deductions to the reserve is determined at 20% of the part of the loan provided by the bank and equal to the amount of funds transferred to the bank by the 3rd person on the basis of loan agreements (loan agreements). Commercial banks daily, after the end of customer service, make deductions to the reserve for each loan issued during the day. The total amount of the reserve is specified at least once a quarter, depending on the state of security and compliance with the terms of return. If the loan goes into the category of bad, it is debited from the balance at the expense of the previously formed reserve fund. If the reserve relating to a bad loan is less than its size, then the corresponding amount is attributed to the bank's losses.
The use of the reserve for bad loans is possible only after the bank has taken exhaustive measures to repay such a loan. The reserve for possible losses on loans is used only to cover the outstanding debt of the clients (banks) on the principal debt. Loan indebtedness that is uncollectible and / or recognized as uncollectible by decision of the Board of Directors or the Supervisory Board of the bank is written off from the bank's balance sheet at the expense of the reserve for possible losses on loans (accounts for accounting for the reserve for possible losses on loans), and in case of a shortage, it is written off for losses of the reporting year . Loan debt is recognized as unrealistic for collection, for which the measures taken to collect are complete (including the sale of collateral) and indicate the impossibility of further actions to repay the loan.
Compensation for the loss received in the reporting year is carried out in accordance with the procedure established by the Bank of Russia. The decision to write off loan debt from the balance sheet of a credit institution at the expense of a reserve for possible losses on loans without fail for all large loans, soft loans, loans to insiders, all unsecured loans must be confirmed by a procedural document (determination, decision) of judicial, notarial bodies, attesting that at the time of the decision, repayment (partial repayment) of the debt at the expense of the debtor is impossible. The write-off of loan debt at the expense of the reserve in respect of loans is lawful, subject to all the procedures established by law for its collection. Recognition as bad and / or uncollectible loans that are not classified as large, soft, unsecured, insider loans may be written off from the allowance for possible losses on loans by decision of the Board of Directors of the bank or the Supervisory Board of the bank without mandatory confirmation by procedural documents.
The Bank regularly, at least once a quarter, sends to the client - the debtor statements confirming the presence of overdue debt of the bank's clients on the principal debt and interest accrued but not received on time (discount not received), corresponding to the balances of individual personal accounts in the context of clients. These extracts (along with other documents) are the basis for collecting overdue debts from the client. Writing off funds from the balance of loans issued to bank customers at the expense of loans from the Bank of Russia, and transferring debt on such loans, including accrued but not received on time (overdue) interest on them, to off-balance sheet accounts of the bank does not cancel the bank's average debt to the Bank of Russia, which is repayable in accordance with previously concluded loan agreements.
Conclusion
In conclusion, I would like to once again emphasize the great practical importance of the topic of this thesis. The problem of non-payments in the country is largely related to the underestimation of the moments of credit risks, with the uncivilized approach of banks at the beginning of the development of market relations to their credit policy. When considering the economic situation of a potential borrower, literally all moments are important, otherwise the bank may suffer huge losses. Credit departments of the bank must constantly take into account, analyze foreign and ever-increasing Russian experience.
Banking is in the process of change. In an effort to increase economic efficiency and improve the mechanism for allocating resources, the government is taking steps to create an open, competitive and market disciplined economy. In order to survive and thrive, bankers must shed their bureaucratic traditions and become entrepreneurs, responsive and adaptable to the market economy.
The principles of direct state management of the banking system must also change. In most countries, the government must create the legal, regulatory and policy environment for sound banking. Financial liberalization, increased competition and diversification pose new challenges for banks and create new risks. Without developing new ways of managing, banks may find themselves in a crisis, which is happening to many banks in Russia.
In a competitive market, banks need autonomy to determine their role, strategy and independence in their lending and management policies.
Management is often defined as an art that cannot be defined and put into practice. Banking analysts often mistake excellent leadership performance as signs of good management. This is important, but it is not at all a reliable criterion for leadership and vision, the quality of management, the ability to control risk, the quality of personnel or financial prospects. Governance systems, in particular the degree to which they are formalized and decentralized, are determined by many factors, including the size and structure of the bank, management style, and competition and economic regulation. As the bank expands and diversifies, more emphasis should be placed on non-personal management systems.
Although it is very difficult to give a precise definition of good governance, there are several points that can be used to assess the quality of governance. Success in any business requires leadership and competence in the strategic analysis, planning, policy making, and management functions inherent to the business. Banks are no exception.
...Similar Documents
The essence of credit risk and its determining factors. Sequence of steps in the credit risk management process. Methods for determining the borrower's creditworthiness. Loan portfolio risk management. The level of liquidity of the loan portfolio.
term paper, added 04/07/2012
Bank's policy in the field of retail lending to individuals. Formation of a reserve for possible losses on loans. Dealing with arrears. Ways to ensure sufficient diversification of the loan part of the loan portfolio.
term paper, added 05/02/2016
The essence of the creditworthiness of the borrower, methods of its assessment. Credit risk management. Assessment of the borrower's creditworthiness on the example of "Ural Innovative Commercial Bank". Measures to improve the assessment of the borrower's credit risk in the bank.
term paper, added 11/17/2014
Regulatory aspects of assessing creditworthiness in the Russian Federation. Comparative evaluation of methods for assessing the creditworthiness of bank borrowers. Organization of work on credit risk management. Assessment of the creditworthiness of a legal entity. Risk reduction methods.
thesis, added 06/25/2013
Credit risks as a kind of banking risks. Analysis of the creditworthiness of the borrower. Development of recommendations and measures for credit risk management. Classification of bank credit risk. Risk management in the "bank-client" system.
thesis, added 03/01/2011
Essence of credit risk; ways to minimize it - diversification, limiting, insurance. A brief description of the activity of HKF Bank LLC, analysis of its financial condition and determination of the methodology used to assess credit risk.
term paper, added 04/01/2011
Analysis of credit risks in the banking system of Russia. Determination of the borrower's credit rating. Evaluation of the bank's credit risk using the VaR model and simulation procedures on the example of the loan portfolio of Sberbank of Russia.
thesis, added 01/18/2015
Essence of credit risk and factors influencing it. General characteristics and evaluation of the economic performance of the bank JSC "Alfa-Bank". Analysis of the creditworthiness of the borrower. Prospects and emerging problems in the field of credit risk management.
thesis, added 12/05/2014
Types of risk in banking. Analysis of credit risk management on the example of OJSC "Sberbank". Application of optimal credit policy as a basis for credit risk management. Measures to reduce credit risk. Bank risk insurance.
term paper, added 01/06/2015
Analysis and assessment of the quality of the loan portfolio of the commercial bank OJSC "Sotsinvestbank". Loan portfolio management, the procedure for using the provision for loan losses. Analysis of the impact of the quality of the loan portfolio on the implementation of liquidity standards.
Credit operations are the most important component of the bank's activity, which forms its income. This source forms the main part of the net profit allocated to reserve funds, which is used to pay dividends to the bank's shareholders. Bank loans are the main source of replenishment of working capital. Bank loans not only play a huge role in the development of banks and organizations, determine the functioning of the country's economy as a whole, but also have huge potential losses arising from non-repayment of debts to banks.
To anticipate possible losses in case of non-repayment of debts to banks, there is a differentiation of lending.
Differentiation of lending means the need to take into account the creditworthiness of the client when issuing a loan and provide loans only to those borrowers whose financial situation gives the credit institution confidence in the possibility of repaying the loan within the terms established by the agreement.
The principle of security can be added to the above principle. Collateral may be in the form of a pledge, surety, bank guarantee or insurance. At the same time, the legislation provides for the possibility of granting a loan without appropriate security (blank credit).
Loans provided by commercial banks can be classified according to various criteria (Appendix 1).
The credit policy of the bank is the strategy and tactics of the bank in the field of organizing the credit process. Commercial banks develop general principles of credit policy, determine its main goal, priorities in the credit market and the main directions of lending. These positions are fixed in
Regulations on the credit policy of the bank, which is an internal document of each bank. Conditions
Competition in the banking market dictates the requirements for expanding the range of banking services provided, but this path can only be followed by assessing possible risks and identifying ways to reduce them, developing an optimal organization of the lending process for the bank and measures to ensure the liquidity of the loan portfolio, as well as maintaining the correct interest rate policy.
Credit risk is the potential losses arising from non-repayment or untimely return by customers - borrowers of amounts owed to banks. Risk forecasting, such as a creditworthiness assessment, includes such things as checking the client's legal capacity, financial situation, credit history and the quality of the collateral offered by him. Factors affecting the creditworthiness of the borrower (Appendix 2).
The objectives of the credit policy are:
General, implying the creation of conditions for the effective allocation of funds by providing loans, ensuring a stable increase in bank profits in the process of growing income from lending operations and reducing expenses on them.
Private, consisting in improving customer service, changing structural indicators, increasing the reputation of the bank.
The bank's priorities in the credit market determine the choice of industries representing the zone of interests of the bank at this stage of its development, optimal structure for each category of loans, by terms and types, the planned level of large loans, the feasibility and introduction of new types of loans.
The organization of the lending process includes the development of regulations on the lending unit, its employees, the procedure for conducting a loan transaction, changes in lending conditions and the procedure for collecting overdue debts.
Measures to ensure the liquidity of the loan portfolio include the preferred forms of ensuring the repayment of loans, the procedure for assessing the creditworthiness of customers and the loan portfolio, possible options for restructuring the loan portfolio in times of crisis, the procedure for covering losses.
Interest rates are set taking into account the refinancing rate of the Bank of Russia, average interest rates on interbank loans, demand for loans, the stability of money circulation in the country, the type of loan, the quality of collateral, the financial condition of the borrower and the cost of attracted credit resources.
Credit risk management is one of the most important tasks for achieving high financial performance in the lending industry . It is carried out in the following ways:
diversification of the bank's loan and investment portfolio
preliminary analysis of the borrower's creditworthiness
assessment of the cost of loans issued and their subsequent support
credit insurance
attracting sufficient collateral
The essence of the diversification policy is to provide loans to a large number of independent clients. In addition, loans and securities are distributed by maturity (regulation of the share of short-term, medium-term and long-term investments depending on the expected change in the market), by purpose (seasonal, for construction, etc.), by type of collateral, by the method of establishing interest loan rates (fixed or variable), by industry, etc. In order to diversify, banks set floating limits on lending to borrowers or credit limits beyond which loans are not granted, regardless of the level of interest rates.
A preliminary analysis of creditworthiness is recognized as one of the most effective methods for reducing the risk of lending. The result is most noticeable if the high requirements inherent in this method for the qualification of personnel in assessing risk acceptability, the correctness of the chosen theories and methods for assessing the creditworthiness of customers, depending on the volume of their operations and the stages of formation of a business entity, are satisfied.
Estimation of the cost of issued loans and their subsequent support is expressed in the classification of loans by risk groups and the creation of a reserve for doubtful debts, depending on the risk group.
Credit insurance assumes the full transfer of the risk of its non-return to the insurance company. Currently, there are various options for credit insurance, but all costs associated with their implementation are usually borne by the borrowers.
The attraction of sufficient collateral means that the bank is guaranteed the return of the loan and interest on it. The amount of security should cover not only the amount of the loan, but also the amount of interest on it, as well as the costs of collecting overdue debts.
In case of non-repayment of problematic or overdue debts, the department for supporting credit operations, the legal department, the security service, the department for settlement and cash services and accounting for credit operations, the necessary measures are taken to collect it.
Based on the results of the first chapter, we can conclude that the methods of Russian banks for qualitative risk assessment are similar in some parameters. So, almost everyone considers indicators of equity, liquidity and profitability. The difference lies in the number of indicators corresponding to one indicator, and the specific weight of the indicators in the formation of the overall assessment. In a number of banks, much attention is paid to the parameters of the client's business: the turnover of various types of assets. In some banks, a general credit rating is compiled, in others, the borrower is separately rated, and the collateral is separately rated. The number of indicators is quite large - from 10 or more.
It should be emphasized that each bank implements its own understanding of risk, based on knowledge of the characteristics of the clientele, the volume and price of credit resources. However, I can say with confidence that the methods of large banks, which are too extensive, formalized and rigid, are not suitable for medium-sized banks.
The most relevant banking risk is credit risk. Credit risk- this is the risk of non-repayment or incomplete and untimely repayment of the principal amount and interest on it. Since the bank conducts its main operations in the field of lending, it is due to credit risk that the bank incurs its main losses. The profitability of the bank decreases, the size of the required intra-bank reserves increases, and there are problems with liquidity. An outstanding loan is, relatively speaking, someone's deposit, and, losing money due to problem loans, the bank, nevertheless, retains obligations to its creditor customers - enterprises and individuals.
External causes of credit risk, i.e. reasons outside the bank and beyond the control of the bank are macroeconomic circumstances that sharply reduce the creditworthiness of borrowers. It is possible that their creditworthiness was analyzed quite well, but some objective and negative market factors, both within the country and abroad, were not taken into account.
Economic crises significantly reduce the creditworthiness of clients, the probability of which is not always realized even by the most competent world analysts.
The creditworthiness of borrowers is affected by the declining dynamics of world prices for raw materials, consumer and industrial products. As a result, national exporters, whose creditworthiness was calculated on the basis of higher prices, are unable to fulfill their obligations under the loan agreement.
The creditworthiness of the clientele is strongly influenced by one or another dynamics of the national currency exchange rate. Upward dynamics reduces the creditworthiness of national producers and exporters, while downward dynamics reduces the creditworthiness of households and importers, as domestic prices rise and purchases and sales decrease.
All manufacturers in the market are in a changing competitive environment. Changes in this environment are very difficult to predict, which significantly distorts the characteristics of the creditworthiness of a particular borrower. A simple example. One supermarket successfully operated in the microdistrict. All of this borrower's loans were repaid on time, as its creditworthiness was based on stable earnings. In a matter of months, another supermarket was built nearby and the income of the first trading establishment was noticeably reduced. Shortly before this, the first supermarket took a large loan from the bank for one year. The borrower repaid the rest of the loan with great difficulty.
Sudden changes in legislation, in tax rates, in railway tariffs are also possible, which can also reduce the creditworthiness of borrowers.
And, finally, accidents, diseases, criminal "showdowns" and man-made disasters. It is almost impossible to predict their occurrence and the degree of impact on the creditworthiness of the borrower.
The internal causes of credit risk are due to the activities of the bank's specialists. Credit risk arises as a result of miscalculations by bank managers and security specialists.
The probability of credit risk occurrence can be significantly reduced if at every stage of lending, from the development of a credit policy to the methods of monitoring the repayment of loan debt, one should remember about its existence.
The credit policy of a commercial bank is the cornerstone of good credit management. In the “Memorandum of Credit Policy”, bank analysts, as a rule, analyze the state and volatility of the market in the country and in the region.
This analysis has several aspects and can comprehensively assess the demand for money in each particular period. It is possible to compile statistical information on various types of borrowers in the industry and economic context. Such an analysis can be called fundamental and it allows bank managers to have a theoretical idea of potential borrowers, even before they apply to the bank for a loan. In other words, knowing the forest, you can tell a lot about the trees.
In our opinion, this “general to specific” approach is essential to reduce credit risk. Natural phenomena occurring in various economic sectors, one way or another, affect the creditworthiness of potential borrowers.
Of course, the economic and legal security service will assess the economic legal competence of the borrower in more detail, but without taking into account the macroeconomic situation, it may turn out to be incomplete and unreliable.
Some protection against the likelihood of credit risk is created by the quality of credit documentation. This is, first of all, a loan agreement that comprehensively provides for the rights and obligations of the parties, loan clauses. Documents confirming the security of the loan are also important: contracts - guarantees, guarantees, collateral in one form or another. Properly executed loan and security documentation allows the bank to take legal protection measures by applying to the courts.
The key factor that reduces credit risks in lending to individuals and legal entities is the verified creditworthiness of borrowers. According to Russian scientists O.I. Lavrushin, O.N. Afanasyeva, S.L. Kornienko, the Bank of Russia needs to formulate the necessary criteria to bring internal banking methods for assessing the creditworthiness of a borrower in line with international standards. The requirements of the Bank of Russia lag far behind international standards for assessing the creditworthiness of clients. For example, when assessing a borrower's creditworthiness, the Bank of Russia proposes to use 5 rating grades, while the Basel Committee requires 8-11 rating grades.
The existing methods of assessing creditworthiness used in the practice of domestic banks do not take into account the impact of external risk factors that may occur in the future. To do this, it is necessary to develop computer programs that are able to take into account the impact of objective macroeconomic factors on the creditworthiness of borrowers in the forecast period.
The principle of loan security allows the bank to return the lost loan by selling collateral or attracting funds from guarantors, guarantors. This measure significantly reduces the likelihood of losses. Why do banks not always apply this principle and are ready to provide a loan without guarantees and sureties “within 15 minutes”?
Indeed, many banks do thorough credit checks and insist on adequate collateral only when it comes to large loans. Insignificant, by the standards of this bank, loans, say, up to 100 thousand rubles, are provided without a detailed assessment of creditworthiness and without collateral at a sufficiently high level.
which percentages. The calculation is simple. There are always more law-abiding and honest borrowers. It is they who, by paying the increased interest to the bank in a timely manner, offset the losses associated with bad loans. As they say, they pay "for themselves and for that guy."
In the case of leasing or mortgage transactions, banks also practically do not assess creditworthiness, since they own real estate, machinery and equipment and are confident that in case of non-return of funds they will be able to quickly sell them and compensate for losses and losses.
How dangerous and erroneous such a position was, the mortgage crisis in the United States in 2008 showed. loans, leading to global credit risk and then to strategic and systemic risk.
There is only one conclusion that can be drawn: bank managers must evaluate the creditworthiness and insist on some form of collateral for all borrowers, regardless of the size and terms of the loans provided. It is unacceptable to "shift" your miscalculations and unwillingness to work for responsible borrowers. Sberbank of Russia can serve as an example, where the position of management and specialists in the process of regulating credit risk is based on a detailed assessment of the creditworthiness of individuals and legal entities and the execution of sufficient collateral for loans issued.
A significant reduction in credit risk is facilitated by control over the timely and full repayment of the loan. It is necessary not only to promptly remind about the inadmissibility of overdue payments, but also to monitor large borrowers - legal entities and individuals.
Each commercial bank forms a certain loan portfolio. To reduce the risk probability of the loan portfolio, its quality should be managed.
The risk assessment of the loan portfolio has the following features. It is important to assess the overall credit risk, which in turn depends on the degree of risk of individual segments of the loan portfolio. Each segment has its own lending specifics due to the diversified structure of the loan portfolio. Therefore, to assess the quality of the loan portfolio, a system of indicators should be used that takes into account many aspects, and not just the profitability of the loan portfolio.
Of course, the profitability of the loan portfolio is the most important criterion for its quality. Elements of the loan portfolio can be divided into two groups: income-producing assets and non-income-producing assets. The latter group includes loans with low interest rates, loans with frozen interest, loans with a long delay in payments. The profitability of the loan portfolio has a lower and an upper limit. The lower limit is determined by the cost of credit operations (payment for purchased funds, wage bank personnel, other expenses). The upper limit takes into account profit, i.e. bank margin. The margin must be sufficient:
But in our opinion, it is necessary to analyze what factors account for such income: due to high interest rates on loans or due to the expansion of the lending market.
The current assessment of the liquidity level of the loan portfolio, which is also a characteristic of its quality. Liquidity is characterized by a high degree of repayment of bank loans. It is important that the loans provided by the bank are returned within the terms established by the agreements. The higher the proportion of "good" repayable loans, the higher the bank's liquidity.
Thus, the quality of the loan portfolio is determined by such indicators as the degree of credit risk, the level of profitability and liquidity. What indicators for a given period are priorities are decided by bank managers.
A few words about the reserve for possible losses on loans. Serious Russian economists, such as L.G. Batrakova, O.I. Lavrushin, N.I. Valentseva consider this reserve to be a kind of credit risk absorber. It is known that the method of formation of this reserve is such that the more bad loans, the greater the amount of the reserve. In our opinion, this fund is more likely to compensate for deposit risk, rather than credit risk. But in a general sense, this is not important.
A significant negative point in the activities of a commercial bank is the insufficient development of a credit risk management strategy, both in organizational and analytical aspects. If in the current period there are fewer losses in the lending process, then it is considered that the bank has coped with credit risks, and if there are more losses, then the bank does not pay due attention to these risks.
In our opinion, the bank's position should be fundamentally different.
Losses and losses of the bank associated with non-repayment of loans unambiguously provoke other risks and new losses. And it's not about quantity, it's about quality. It is necessary, in our opinion, to study the relationship between losses on loans and other areas of banking activity. In other words, it is necessary to assess the consequences of credit risk in a comprehensive manner.
Shelkova N.V. Credit risks and ways to reduce them.
Risk research methods are very diverse, since they cover both theoretical aspects and practical aspects of the manifestation of the latter. In this regard, this paper will not consider the theory of research (for example, the abstraction method or the synthesis method), but considerable attention will be paid to the analysis and risk assessment in practice.
Modern business is not possible without risk. Risk is the flip side of free enterprise. With the development of market relations in our country, competition intensifies and business opportunities expand. To succeed in your business, you need original solutions and actions. We need a constant creative search, we need mobility and readiness to introduce all possible technical and technological innovations, and this is inevitably associated with risk.
Every activity, whatever it may be, and life itself contain a certain amount of risk and chance of the most varied nature. Any economic activity is subject to uncertainty associated with changes in market conditions, i.e. to a large extent with the behavior of other economic entities, their expectations and their decisions.
Risk represents an element of uncertainty that may affect the activities of a business entity or the conduct of any economic transaction. So the bank cannot work without risk. And since the goal of the bank is to maximize profits, it must pay great attention to the implementation of its operations with the lowest possible risks. In order to avoid bankruptcy, its liquidation, in order to achieve and maintain a stable position in the banking services market, banks need to look for and apply effective methods and tools for managing these risks.
Credit operations are the most profitable item in the banking business. Due to this source, the main part of the net profit is formed, deducted to reserve funds and used to pay dividends to the bank's shareholders.
At the same time, these operations are again associated with credit risks to which banks are exposed. Therefore, the process of credit risk management deserves special attention, because the success of the bank's work depends on its quality. Studies of bank failures around the world indicate that the main reason was the poor quality of assets. Credit risk - non-payment by the borrower of the principal and interest on the loan, interest rate risk, etc. Avoiding credit risk allows careful selection of borrowers, analysis of the conditions for issuing a loan, constant monitoring of the financial condition of the borrower, his ability (and willingness) to repay the loan. The fulfillment of all these conditions guarantees the successful conduct of the most important banking operation - the provision of loans.
The success of a commercial bank depends on how efficiently it uses the available funds by investing them in various assets. The most common way to use bank resources is to provide loans. Studies of bank failures around the world indicate that the main cause of bankruptcies was the poor quality of assets (usually loans). Thus, the acceptance of credit risks is the basis of banking, and their management was traditionally considered the main problem of the theory and practice of banking management.
Credit risk can be defined as the lender's uncertainty that the debtor will be able and intend to meet its obligations in accordance with the terms and conditions of the loan agreement.
This condition can be caused by:
– first, the inability of the debtor to generate adequate future cash flow due to unforeseen adverse changes in the business, economic and/or political environment in which the borrower operates;
- secondly, uncertainty about the future value and quality (liquidity and the possibility of selling on the market) of collateral for a loan;
- thirdly, the fall of the business reputation of the borrower.
In banking, the levels of credit risk should be distinguished:
– credit risk under a separate agreement;
- the probability of losses from the borrower's failure to comply with a specific loan agreement;
- credit risk of the entire portfolio - the amount of risk for all agreements in the loan portfolio.
Accordingly, different risk assessment methods and risk management methods are used for each level. The amount of credit risk is the amount that can be lost due to non-payment or delay in paying debts. The maximum potential loss is the full amount of the debt in case of non-payment by the client. Late payments do not lead to direct losses, but indirect losses, which are interest costs (due to having to finance debtors for a longer time than necessary) or the loss of interest that could be received if the money were returned earlier and placed on deposit. Exposure to credit risk exists throughout the entire lending period. When a loan is granted, the risk arises from the moment of sale and remains until the moment the repayment is received. Improving the credit policy of a commercial bank.
One of the organizational measures aimed at improving the quality of checking the borrower's creditworthiness may be a credit assessment. The preparation of this document will help the loan officer to systematize the information he has and present it in a concise and complete form for presentation to management. The credit committee, which actually makes the decision to issue a loan, having such a document, can better assess the prospects of this transaction, since all the necessary information on the loan is collected in one place and in a form convenient for perception. There is no need to stir up piles of financial reports, certificates, conclusions and other documents.
The work on drawing up a credit assessment is carried out as follows: in the process of checking a client's application for a loan, an assessment is made of its creditworthiness, the prospects of the project being financed, the quality and sufficiency of collateral. The loan officer receives the necessary materials from the client, from enterprises and banks that have previously interacted with him, studies the business plan for the implementation of which the loan is requested, visits the borrower in order to: - make sure the information in the business plan is correct; – obtain the necessary information that is needed to assess the loan and is not included in the business plan; - evaluate the viability of the business plan and especially determine the ability of management to successfully implement it; – calculate the assets of the proposed borrower, especially those assets that are proposed to be taken as collateral based on average market prices and subject to a forced sale; - offer the borrower to accept such conditions under which he has the greatest chance of a positive decision.
After receiving all the necessary information, a credit review is compiled, which summarizes the available facts and sets out the recommendations and conclusions of the loan officer. If the financial condition of the borrower deteriorates, the repayment of the loan may be in jeopardy. Having identified such a borrower, it is necessary to take urgent measures to prevent deterioration of the bank's loan portfolio. The sale of collateral is a last resort. Therefore, it is advisable to assess the financial condition of the borrower and recommend measures to improve it. It is advisable to assess the financial condition of the enterprise in the context of balance sheet items that affect the creditworthiness of the enterprise. If there is a tendency for the deterioration of the company's creditworthiness indicators, then it should make efforts to prevent creditworthiness indicators. These measures should be:
– improving the organization of settlements with debtors and creditors in order to prevent the outstripping growth of accounts payable over accounts receivable;
– reduction of expenses for fixed assets and increase in expenses for the formation of working capital;
- Reducing the size of working capital in stocks and costs.
Thus, the implementation of these measures will help the borrower achieve higher financial performance, which will allow him to use a bank loan more efficiently in the future. Having considered ways to improve the creditworthiness of the borrower, it is necessary to consider working with problem loans, since experience shows that the lending process is not limited to assessing the creditworthiness of the borrower.
The functioning of every commercial bank is inherent in the financial risk. It is expressed in the probability that the bank will reduce financial losses (losses) or not receive income compared to the planned ones, as well as the uncertainty regarding future cash flows due to various reasons, including incorrect actions or their absence.
The financial risk of a bank contains a number of components, the main of which are:
1. Operational risk
2. Bank transaction risks
3. Risk of loss of bank liquidity
In turn, the risk of banking transactions can be divided into price and credit.
Credit risk is the main banking risk management, which is a key factor in determining the effectiveness of the bank. This is because, as a rule, commercial banks form a significant part of their income through lending activities, therefore, the assessment of potential profit in relation to the probability of loan default by the client is of particular relevance.
In a narrow sense, credit risk is related not only to direct lending operations, but also to leasing, factoring, forfaiting, and guarantee operations to form a portfolio of securities.
The credit risk of a bank can be considered as the risk of a particular borrower and the risk of the loan portfolio.
On the one hand, credit risk is the risk of a particular borrower, which represents the potential loss of the bank in case of full or partial failure by the client to financial obligations before the bank (failure to return the principal amount of the debt, interest on it within the time limits established by the terms of the agreement)
Here, credit risk includes the risk of non-repayment of the principal debt (loss of part of the bank's assets), the risk of non-payment of interest on the loan (loss of part of the income), the risk of loss of loan collateral as a result of the destruction of collateral or bankruptcy of the guarantor. Operational transactions also arise during the execution of a credit transaction: Risk of legal registration of a credit transaction, risk computer systems etc. If the borrower is a non-resident, then country risk may arise. If the loan is granted in foreign currency - currency risk.
If we consider bank loans in their totality, then for such a totality of credit investments there is a risk of a credit (loan portfolio of the bank). Therefore, on the other hand, credit risk is the probability of a decrease in the value of a part of the bank's assets, which is represented by the amount of loans issued and debt obligations acquired, or the probability that the actual return on this part of the assets will be significantly lower than the expected calculated level.
The constituent elements of the risk of the bank's loan portfolio can be: the risk of the country and the risk of concentration of loans. Country risk arises if banks carry out foreign economic activity and have a wide network of correspondent accounts with foreign banks.
The risk of loan concentration arises when large loans are provided to an individual borrower (failure to repay a large amount of a loan may cause the bank to lose solvency and liquidity) or to a group of related borrowers, as well as as a result of the bank’s borrowers belonging either to individual industries and sectors of the economy, or to geographical regions .
Based on this, we can say that the credit risk of a bank can be defined as the maximum expected loss that can occur, with a given probability, over a certain period of time as a result of a decrease in the value of the loan portfolio, due to the partial or complete insolvency of borrowers, by the time the loan is repaid. .
The credit risk management process (reducing credit risks) consists of the following steps
1. Credit risk identification - involves the identification of credit risk determines the occurrence of the causes and conditions for its occurrence.
2. Credit risk assessment - the following methods can be used to assess credit risks:
Comparison of actual indicators and risk standards established by the Bank of Russia
· Expert assessments, including, but not limited to, an analysis of the financial and economic activities of the borrower, rating scales, etc.
· Mathematical calculations and statistical methods, which should be reviewed periodically in the light of emerging market changes.
Scenario analysis including development stress tests(worst-case scenarios) associated with the onset of risk
3. Analysis of credit risk, constant monitoring of its level
4. Minimize or limit credit risk by applying appropriate management practices
Modern banks use the following methods of credit risk management:
1. Preliminary analysis of the creditworthiness and solvency of the borrower
2. Current monitoring of loans
3. Diversification of the bank's loan portfolio
4. Formation of reserves to cover possible losses on loans
The 1st and 2nd methods are more of a theoretical approach to risk management (forecasting and taking measures to eliminate possible adverse events), they are applicable to each specific loan application and each specific loan.
In the 3rd and 4th methods, the approach of creating additional (alternative) sources of funds to eliminate or reduce financial losses in the event of an adverse event was embodied
What is collateral and collateral. Examples and calculation formulas
Pledge is a way of securing obligations between a debtor (pledger) and a creditor (mortgagor).
Collateral can be primary or secondary. In the 1st case, the pledge is transferred to the bank as a pledge of the first stage. If the borrower receives another loan (while refinancing the first loan), the second stage pledge mechanism is triggered in another bank. In this case, the contractual relationship between the first bank and the second (transferring) bank is concluded in writing and the pledge is transferred to the second bank. The creditor has a preferential right to pledge over other creditors. The relationship between the parties is specified in the contract and regulated by the Civil Code. Russian Federation, Federal Law "On Pledge", Federal Law "On Mortgage"
Security is a set of conditions that gives the creditor confidence that the debt will be repaid.
A loan can be secured by a pledge in the form of real estate, movable property, and other highly liquid assets (securities, guarantees), as well as sureties.
In addition to the basic collateral for a loan, in a number of countries there is a need to provide additional sources of income, because the credit risk for the lender is higher.
SIMILARITY AND DIFFERENCE.
Thus, "collateral" and "collateral" are two different concepts. However, in the banking system there is a generalized expression - collateral, which implies the entire system of contractual relations and obligations between the debtor and the creditor
Loan security
There are types of loans in which a prerequisite is the provision of collateral. These include: commercial, mortgage, consumer, leasing, etc.
For them, banks necessarily require a "hard" collateral. With car loans, student loans and other "light" loans, Banks generally accept as collateral the purchased car, inventory, movable property. The pledger can be both the debtor himself and a third party with his written permission.
Accounting and reporting
After the loan is issued, a borrower's package is formed. It contains a pledge for a loan, an agreement and all the necessary documents in accordance with the “loan procedure”. Each unit of collateral in the bank is accounted for as one unit per balance sheet liability and is reflected in the corresponding accounting entry. In practice, the nominal value of one collateral is usually equal to one unit of currency and is kept until the end of the loan term. At the end of the loan term, the balance obligation is written off from the bank's obligations and returned to the borrower against signature.
Measures taken by the bank in case of non-payment
In case of non-fulfillment of obligations by the mortgagor specified in the agreement, the bank delivers to the debtor a notice registered with the relevant authority on the commencement of the procedure for the enforcement of collateral to pay off the debt. If the debtor does not respond to the bank's actions in court proceedings, the bank has the right to satisfy the obligations by selling the collateral. The lawyer prepares a package of documents (correspondence between the debtor and the creditor, signed contracts are attached, the full amount of the debt is calculated and the case is submitted to the court). When the court decides in favor of the creditor, the debtor's property passes into the possession of the bank and is sold at an open auction under the hammer. If the court decides in favor of the debtor, then this debtor can only be envied, because this is a very small percentage of all court cases.
Calculation of collateral and liabilities
In order to secure a loan as collateral, the loan officer first calculates the amount of the debtor's obligations: loan amount + accrued interest for the period according to the repayment schedule = loan obligation. Next, evaluates the loan commitment.
The collateral must cover the amount of the liabilities. Registration of pledge agreements takes place in the relevant authorities and is certified by a notary.
Example 1
you took out a loan
Loan options:
1. Target for replenishment of working capital
2. Amount -5 million rubles
3. Interest rate - 11% per annum
4. Term -60 months (5 years)
As security for the loan, a three-room apartment is provided, with an approximate market value of 16 million rubles.
1. When calculating the collateral value of real estate, banks apply a liquidity ratio of approximately 40-70% of the value of the property. Interest rate-11% per annum
2. Term -60 months (5 years)
In our case, it will be 50. Thus, your apartment will be evaluated by a bank specialist in the amount of 8 million rubles. Now let's calculate the amount of obligations 7,750,000 rubles. Your collateral fully and with a margin covers and you have a chance to get a loan
Example 2
You receive a mortgage loan to buy an apartment, the cost of which is 14 million rubles
The goal is to buy an apartment
Parameters - a loan for the purchase of an apartment
1. Amount -14 million
2. Interest rate - 10% per annum
3. Term-120 months (10 years)
Mortgage lending requires the provision of the acquired real estate as collateral for the loan.
What will be the calculation of collateral?
The liquidity ratio will also be equal to 50%, if the purchased property is worth 14 million rubles, then after applying the coefficient, its assessed value as security will be 7 million rubles, and the amount of your liabilities to the bank is 28 million rubles (10 million x 10% x 10 years)
A difference of 21 million rubles has formed, in this case you need to provide additional collateral for the difference in your obligations. However, one of the conditions for mortgage loans is own contribution to the acquired property.
