Risk is inherent in all aspects of a commercial operation, however for financial institutions, credit risk is an essential factor that needs to be managed. Credit risk is the possibility that a borrower or counter party will fail to meet its obligations in accordance with agreed terms. Credit risk, therefore, arises from the company’s dealings with clients who may carry out transactions and not pay the losses suffered.
Central to this is a comprehensive IT system, which should have the ability to capture all key customer data, risk management and transaction information including trade. Given the fast changing, dynamic global economy and the increasing pressure of globalization, liberalization, consolidation and dis- intermediation, it is essential that the company has robust credit risk management policies and procedures that are sensitive and responsive to these changes.
The purpose of this document is to provide directional guidelines to improve the risk management culture, establish minimum standards for segregation of duties and responsibilities, and assist in the ongoing improvement of the company. Credit risk management is of utmost importance to the company, and as such, policies and procedures should be endorsed and strictly enforced by the MD/CEO and the board of the company.
A thorough credit and risk assessment should be conducted prior to the opening of client accounts, and at least annually thereafter. The RM should be the owner of the customer relationship, and must be held responsible to ensure the accuracy of the entire credit application submitted for approval. RMs must be familiar with the company’s margining policies and should conduct due diligence on new clients.
It is essential that RMs know their customers and conduct due diligence on new Clients to ensure such parties are in fact who they represent themselves to be. KYCs should be completely filled up in all respects along with documentary evidences and Anti-Money Laundering guidelines which should be adhered to at all times.
In addition, the following risk areas should be addressed:
The company should aim to segregate the following functions:
The purpose of the segregation is to improve the knowledge levels and expertise in each department and obtain an objective and independent judgment of creditworthiness.
The company should have a segregated internal audit/control department charged with conducting audits of all departments. Audits should be carried out annually, and should ensure compliance with regulatory guidelines, internal procedures and anti-money laundering guidelines.
To act as the primary point of contact with borrowers.
To maintain thorough knowledge of borrower’s business and industry through regular contact, friendly visits. RMs should proactively monitor the financial performance and account conduct of clients.
To be responsible for the timely and accurate submission of KYCs and annual reviews.
To highlight any deterioration in client’s financial standing and amend the client’s Risk Grade in a timely manner.
Conducts independent inspections annually to ensure compliance with Exchange Guidelines, operating procedures, company policies and necessary directives. Reports directly to MD/CEO.
An Early Alert Account is one that has risks or potential weaknesses of a material nature requiring monitoring, supervision, or close attention by management.
If these weaknesses are left uncorrected, they may result in deterioration of client’s credit position at some future date with a likely prospect of being downgraded to Impaired status within the next twelve months.
Early identification, prompt reporting and proactive management of Early Alert Accounts are prime credit responsibilities of all Relationship Managers and must be undertaken on a continuous basis.
Despite a prudent credit approval process, loans may still become troubled. Therefore, it is essential that early identification and prompt reporting of deteriorating credit signs be done to ensure swift action to protect the company’s interest. Moreover, regular contact with customers will enhance the likelihood of developing strategies mutually acceptable to both the customer and the company. Representation from the company in such discussions should include the local legal adviser when appropriate.
No need for separate Recovery Unit has so far been felt. Credit Administration Department will directly manage accounts with sustained deterioration.
The primary functions are: