Entrepreneurial activity always comes with certain risks. This applies to all forms and types of ownership. Banking institutions are no exception to the general rule - these are the financial arteries of the modern state. They can suffer a large number of problems, like other commercial structures. But due to the nature of their activities, they have to work with some shift in priorities. The credit risks of the bank play the first role here. What are they? What is their management process? These questions will be answered within the article.
General information
Start with terminology. What is credit risk? This is a complex concept, which includes possible problems when working with a borrower. But most often it is used in the meaning of the risk of delay or non-repayment of payments on a bank loan. As the main reasons forsimilar developments come:
- Loss (reduction) of the borrower's solvency.
- The deterioration of his business reputation.
The credit risks of a bank can be realized both in individual loans provided by a financial institution, and in the entire portfolio. Therefore, it is important to develop an adequate policy - a documented scheme of organization, as well as a system for monitoring ongoing activities. After all, if a single incident is still somehow possible to survive, then the total credit risk can pose a significant danger.
To teach how to cope with emerging problems, a specialized course was developed. It's called credit risk management. He solves the problem of reducing the likelihood of non-fulfillment by counterparties of their obligations to return the principal amount of the debt, as well as interest on it within the agreed time frame. Engaged in this area:
- Legislative and regulatory bodies that set liquidity requirements, minimum statutory capital and other influencing indicators.
- Supervisory authorities (in their role are Central Banks) that monitor compliance with regulations.
- Shareholders who appoint the board of directors, senior management and auditors;
- Rating agencies involved in informing the public about hidden risks.
- Board of directors. He is responsible for the commercial structure, determines the credit policy pursued, as well as the procedures and measures aimed atcontrol.
- External and internal auditors who assess compliance with the designated performance parameters, and also provide an opinion on performance.
How credit risk is managed
This process is carried out in several stages. Initially, it is necessary to determine the credit policy, which will consider the main guidelines on which the formation of the portfolio directly depends. Then the attention switches to the analysis of solvency, monitoring of client-borrowers, and work on the restoration of problem debts. The third stage is the assessment and audit of the effectiveness of the implemented credit policy. There are several methods to help you deal with challenges:
- Setting limits on the amount of loans issued. The target can be one or a group of borrowers, an entire industry or even a region.
- Portfolio diversification. In this case, a whole group of criteria is created. Attention is paid to the degree of risk, categories of borrowers, types of loans, terms of loans, provided collateral.
- Reservation. It involves the creation of special funds from which money will be taken to cover emerging losses, according to possible problems. In this case, credit risk assessment plays a big role.
- Insurance and hedging.
It should be noted that credit risk management is carried out not only when forming portfolios. Financial institutions constantly monitor itsstate and are engaged in optimization. This can be done by concluding assignment agreements, which are called cessions. This creates a secondary market for loans. It enables even more active credit risk management.
About performance
Credit risk and management effectiveness is a key factor on which the success of a financial institution depends. But in moments of crisis, the importance of an effective system further increases, because it allows you to survive in the fierce competition from many other banking organizations and products offered.
It also allows minimizing the negative impact due to the imperfection and instability of financial legislation. Banks must constantly monitor their loan portfolio and its qualitative composition. Here it is necessary to mention the dilemma "profitability - risk". Because of its inexorable influence, it is necessary to limit the rate of profit. This is done to insure against unnecessary risks. A dispersal policy should be pursued.
No need to allow the concentration of loans from a few large borrowers. After all, this is fraught with significant consequences if one of them cannot repay the loan. Also, the bank should not risk the money of its depositors, providing financing for speculative (albeit highly profitable) projects. This is closely monitored by regulatory authorities during periodic audits. In order for a bank to operate effectively, a creditthe portfolio should be presented according to the factors influencing it:
- Return and risk of individual loans.
- Demand from borrowers for certain types of loans.
- Risk standards set by the Central Bank.
- The structure of credit resources in terms of their maturity.
It is necessary to try to have a balanced loan portfolio, when the increased risk in one case is offset by reliability and profitability in the other.
A small digression on activities and evaluations
It should be noted that lending operations are inherently risky. Therefore, it is necessary to seek to reduce the level of problems. For this, the following methods are mainly used:
- Assessing the solvency of the borrower and assigning him a credit rating.
- Using a policy of diversifying loans. Their division is made by groups of borrowers, types, sizes.
- Deposit and loan insurance.
- Formation of an effective organizational structure of a financial institution.
- Creating reserves to cover possible losses on existing loans.
Most importantly, an adequate assessment of credit risk is needed. If you take this lightly, in a not very difficult situation, it may turn out that an important moment was missed, and there is not enough money for further work. If you form a very large number of reserves, then the profitability decreases and the bank may end the reporting period with losses. All this must be taken into account. In Russian realities, external sources of information are widely used for this purpose.corporate risk management, as well as assessment of the solvency of potential customers.
What factors to consider
Credit risk analysis assumes that potential weaknesses are known. They may be influenced by the following factors:
- The political and economic situation in the country, as well as in the region, when the action of macro- and microeconomic factors is well manifested. As an example of a potential source of problems, one can cite the incompleteness of the formation of the banking system, as well as the crisis state of the transition economy.
- Solvency, reputation and types of borrowers.
- The degree of concentration of lending activities in certain industries, as well as sensitivity to possible changes in the economy.
- Probability of the borrower going bankrupt.
- The share of loans, as well as other banking contracts, that fall on clients who are experiencing financial difficulties.
- The level of abuse (fraud) by borrowers.
- Proportion of new and recently attracted clients about whom the bank does not have enough information.
- Using hard-to-market or rapidly depreciating values as collateral.
- Degree of collateral diversification.
- Failure to obtain collateral for a loan or loss of collateral.
- Accuracy of feasibility study for commercial/investment project and loan transaction.
- Presence/absence of private changes inthe policy of the financial institution on the provision of loans and the formation of their portfolio.
- Types, forms and amounts of loans provided, as well as the collateral used for them.
It should be noted that these factors can influence in opposite directions, for example, positive moments can offset negative results. If they all cause problems, then their influence may increase due to their combined action.
About internal and external factors
The credit risk of a commercial bank can only be stabilized by employees within a limited range. After all, a bank alone cannot, for example, correct the political or economic situation in the country. Therefore, a division into external and internal factors is carried out. The first ones include:
- The state and prospects for the development of the country as a whole.
- The monetary, foreign and domestic policy pursued in the state.
- Existing regulatory mechanisms, as well as their possible changes.
In addition, it is necessary to remember such external credit risks: political, social, sectoral, legislative, macroeconomic, regional, inflationary, interest rate changes. None of this can be accurately predicted. These factors affect the conditions for the functioning of the bank. What about internal? These factors include those related to the activities of the financial institution as well as borrowers. They are under control. Here you need to remember:
- The guiding factor at all levels.
- Selected type of market strategy.
- Adequacy of credit policy.
- Ability to develop, offer and promote new banking products.
- Temporary risk factors (for example, when lending in foreign currency, interest margin, returns on securities).
- Early withdrawal of agreements due to non-fulfillment of the terms of the contract.
- Qualification of staff.
- The level of technology used.
If we talk about the borrower, they play a role:
- Its terms of business.
- Reputation.
- Risk factors.
- Control level.
Based on all these factors, external and internal risks are distinguished.
Needs and Opportunities
What causes problems? The risks of a credit institution, depending on their scale, are divided into:
- Fundamental. This includes possible problems that are associated with decision-making by managers who are engaged in passive and active operations. That is, this is a decision to issue a loan to a borrower who does not fully meet the requirements, collateral margin, interest and currency risks on the part of a banking institution.
- Commercial. This is all that is connected with the activities of the departments. Commercial credit risk is the bank's ongoing policy towards individuals, small, medium and large businesses.
- Individual and aggregate. This includes credit riskportfolio. In other words, this is the probability of problems due to shortcomings in the loan product, services, operations, as well as possible interruptions in the borrower's activities due to reasons beyond his control.
Therefore, when considering any product and portfolio, you need to make sure that it meets the needs and opportunities. It's about time and amount. In addition, it is necessary to carefully consider which event is being financed, whether the source of loan repayment is reliable. It will not be superfluous to make sure of the sufficiency and quality of the security.
If we talk about total credit risk, it should be noted that it has its own characteristics. To designate its objects of influence, such a concept as a "portfolio of assets and liabilities" is used, as well as its qualitative aspect. What do you need to pay attention to? On the qualitative aspect, on the structures and methods of evaluation.
About regulation
Here you can work at the macro and micro levels. In the first case, regulation by the Bank of Russia (in the Russian Federation) is implied, in the second, independent actions of a separate commercial financial institution. The first option includes the establishment of a maximum risk level and the formation of a reserve at the legislative and regulatory level. But what is more interesting for us is what is done directly by the commercial structures themselves:
- The loan portfolio is being diversified. Increasing diversity reduces risk.
- Preliminary analysis of the client.
- Insuring credit risks, attracting sufficient collateral.
Based on the available data on the possibility of problems, banks decide how to protect themselves. To do this, the following credit risk methods are used:
- Development of regulations for the procedures for making decisions on issuing loans.
- Building additional reserves in case of outstanding loans.
- Making decisions about acceptable risk levels, use of floating interest rates, review of business and financial activities, continuation of work after the loan issuance.
In order for all this to be properly implemented in practice, it is necessary to take care of the quality organization of affairs. For example, create analytical, credit, research departments. The main thing is to reduce credit risk. But you shouldn't overinflate the staff.
On the current credit policy, goals and mechanisms
It is necessary to define tasks as well as priorities for the activities of the financial institution. The credit policy should include strategy and tactics in the field of operations. Its main task is to create the best conditions for the effective allocation of funds received in order to ensure a stable growth in profits. Here the most important principles are adequacy, optimality, scientific validity and unity of all elements. As a result, credit risk can be minimized. There are also specific principles (profitability, profitability, safety and reliability).
In general, strategy refers topriorities and goals. Whereas at the tactical level, issues are resolved about the use of financial and other tools that are necessary for the implementation of transactions, as well as the rules for their completion and the procedure for organizing the process of transferring funds. If everything is done correctly and adequately, then bank credit risks fall to almost zero. The goals pursued at the same time are to determine priority areas for development, as well as to improve banking activities while investing available resources and developing the investment process while minimizing all negative processes. What mechanisms are used to achieve them? This is:
- Creation and organization of the work of the credit operations management apparatus with clear authority of employees.
- Control and management of processes. Reasonable analysis of all cases of issuing loans, accepted approval processes, systematic monitoring of all issued loans and their status.
- Organization of the credit process at different stages of the conclusion and implementation of the contract.
Conclusion
In general terms, it was considered what constitutes credit risk. The article also raises questions about internal and external risk factors, about what policy credit institutions should pursue when working with clients of different status (permanent, primary, taking large loans and small ones). The material provided quite clearly explains what financial and credit risks are, as well as what kind of policy organizations providing such services should pursue.
