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Managing Risks in Commercial and Retail Banking by AMALENDU GHOSH

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CHAPTER 6

Credit Problems and Credit Risk

6.1 GENESIS OF CREDIT PROBLEMS

Banks follow standardized procedures for credit management. Yet a good number of credit exposures become nonperforming every year. Important factors that cause credit problems are discussed here.

Lack of Due Diligence in Loan Processing

Under the traditional method of lending, banks carry out due diligence of credit proposals received from new customers to find out whether there are reasonable chances for success of the customer's project/business. Banks collect data and detailed particulars about new customers from published documents and markets, and process and analyze those data to generate three sets of information to screen the customers and select the ones that fall within the loan sanction standards. The first set of information relates to the societal background, the track record, and the market standing of the customer. The analysis enables the bank to form a view about the honesty, integrity, and trustworthiness of the customer. The second set of information relates to the technical feasibility of the project, the infrastructure support, the availability of inputs and personnel, the product quality and marketability, and the past experience and managerial capability of the customer. The analysis reveals whether the customer has reasonable infrastructure support and competency to carry on business in a competitive environment without interruption. The third set of information relates to the financial ...

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