Credit Risk Management
13.1 GENERAL ASPECTS
Credit risk exists in the major activities of a bank and hence, its effective management is crucial for long-term solvency. The primary objective of an effective credit risk management system is to maintain the quality of credit assets and prevent slippage of standard advances into the nonperforming category, since the latter affects the bottom line. Nonperforming advances do not earn, but the bank is required to bear the cost of funds to hold them and make substantial provisions against possible loan losses.
Credit risk management is concerned with the quality of credit before default, and the aim is to maintain the quality of credit over time and monitor those exposures that deteriorate in quality by tracking the migration of borrowers down the rating ladder, because each rating downgrade represents a higher quantum of credit loss to the bank. Credit risk management thus essentially focuses attention on good lending practices to minimize the incidences of default, and on initiation of timely action to arrest the deterioration in credit quality much before actual default. Management of credit risk continues to receive the focused attention of bank supervisors under the risk-based approach to bank supervision.
13.2 CREDIT MANAGEMENT AND CREDIT RISK MANAGEMENT
Credit management refers to the whole process of credit administration, beginning with the grant of credit and ending with the recovery of that credit. It involves sanction, ...