Credit risk for retail loans

Credit risk for retail loans

Credit risk - the risk of default or late payment on a bank loan.

The main causes of the risk of non-repayment of the loan:
decrease (loss) the creditworthiness of the borrower;
the deterioration of the business reputation of the borrower.

Credit risk can arise for every single loan provided by the bank, or the bank's entire loan portfolio (gross credit risk). Therefore, it is important to develop the bank credit policy - documented organization chart and on the credit activity monitoring system.

The main requirement for the formation of the loan portfolio is a balance of the latter, which should compensate for the increased risk for a loan reliability and profitability of other loans.

The structure of the loan portfolio is influenced by the following factors:
profitability and risk of individual loans;
borrower demand for certain types of loans;
standards of credit risks, the Central Bank;
credit resources of the bank structure in the maturity profile of loans.

The credit operations of banks themselves are risky, so the credit risk management should be aimed at their reduction, which are the main methods:
assessment of the creditworthiness of the borrower and the establishment of its credit rating;
holding the loans policy of diversification (by size, species, groups of borrowers);
insurance of loans and deposits;
the formation of reserves to cover possible losses on loans granted;
the formation of effective organizational structure of the bank in order to minimize credit risk.

In modern conditions of operation of Russian banks should take into account the development of external sources of information on the creditworthiness of borrowers, the international experience of corporate risk management and assessment of the solvency of potential bank clients.

Credit risk management

Credit risk management - a key factor in determining the effectiveness of the bank's activities. It is particularly important to have an effective credit risk management system in the financial crisis, fierce competition among the many credit institutions and banking products, as well as instability and imperfection of the banking legislation.

Credit risk factors

Credit risk is the risk of default of credit obligations to the credit institution by a third party. The risk of this type of risk exists for conducting loan and other equivalent operations, which are recorded on the balance sheet and off-balance character can wear.

The credit risk depends on the following factors:
economic and political situation in the country and the region, ie, on it affect macroeconomic and microeconomic factors (crisis in the economy of the transition period, the incompleteness of the formation of the banking system, etc.);
the degree of concentration of credit activity in some sectors that are sensitive to changes in the economy (ie, a significant amount of the sums granted to a narrow circle of borrowers or sectors);
credit, reputation and types of borrowers by ownership, affiliation and their relationships with suppliers and other creditors;
Borrower's bankruptcy;
a large share of loans and other bank contracts relating to customers experiencing financial difficulties;
the concentration of the credit institution in a little-known, new, non-traditional areas of lending (leasing, factoring, etc.);
the proportion of new and newly attracted customers, which the bank does not have enough information;
abuse by the borrower, fraud;
taking as collateral difficult to be realized or subject to rapid depreciation of the assets or the inability to obtain appropriate security for the loan, the loss of the collateral;
the diversification of the loan portfolio;
the accuracy of the feasibility study and the commercial credit transaction or investment project;
making frequent changes in the policy of the credit institution to provide credit and the formation of a portfolio of loans issued;
the type, shape and size of the loan granted and its maintenance, etc.

Since, in practice, these factors can act in opposite directions, the positive effect of the action eliminates the negative factors, and if they act in the same direction, and possibly other - negative effect of one factor will increase the action of another. These credit risk factors can be grouped as external and internal.

The group of external factors include: state and prospects of development of the economy as a whole, monetary, external and internal policy of the state and its possible changes as a result of government regulation.

The external credit risks include: political, macroeconomic, social, inflation, sectoral, regional, the risk of legislative changes (for example, the creation of regulatory conditions conducive to the provision of certain types of loans and other restrictions), interest rate risk. A credit institution may not accurately predict the rate of interest, but only taken into account in the management of credit risk for additional reserves to cover potential losses both direct and hidden nature.

The internal factors may be associated with the activities of the creditor bank, as well as with the activities of the borrower. The first group of factors include: the level of management at all levels of the credit institution, the type of market strategy, ability to develop, propose and promote new credit products, the adequacy of the choice of the credit policy, the structure of the loan portfolio, the interim risk factors (with a long term credit transactions increases the probability of changing interest , exchange rates, income from securities, interest margins, etc.), pre-term review of credit for failure to meet the conditions of the loan agreement, staff qualifications, quality of technology, etc.