* The Credit Risk Grading (CRG) is a collective definition based on the pre-specified scale and reflects the underlying credit-risk for a given exposure. * A Credit Risk Grading deploys a number/ alphabet/ symbol as a primary summary indicator of risks associated with a credit exposure. * Credit Risk Grading is the basic module for developing a Credit Risk Management system.
FUNCTIONS OF CREDIT RISK GRADING
Its managed credit risk grading systems promote bank safety and soundness by facilitating informed decision-making. Grading systems measure credit risk and differentiate individual credits and groups of credits by the risk they pose. This allows bank management and examiners to monitor changes and trends in risk levels. The process also allows bank management to manage risk to optimize returns. How to Compute CRG
Risk| Key Parameters| Grade|
Financial Risk| Leverage, Liquidity, Profitability, Coverage ratio| 50%| Business/Industry | Size, Age of Business, Business Outlook, Industry Growth, Competition, & Barrier to business.| 18%| Management| Experience, Succession & Team Work| 12%| Security| Security, Collateral Coverage & Support | 10%| Relationship| Account Conduct, Utilization of Limit, Compliance & Personal Deposit.| 10%| Total| 100%|
CRG METHODOLOGY & MODEL
When a credit applicant comes to the bank the credit department of the bank calculates the performance ratio of the proposed project. Also calculate the IRR, NPV, Payback period of the project. Credit Risk Grading must be measure by the bank before and after loan sanction & loan collection steps. A sample is provided to understand the methodology of CRG. Companies named Butterfly Marketing Ltd. which leverage ratio calculate by the bank 4.72, Liquidity ratio 1.01, and Profitability ratio 8.35 Coverage ratio 2.35. After scoring it’s found that the company’s total score stand by 65. According to the score sheet it’s categorized as a marginal/watch-list. The procedure has been focused in the next pages. The credit department provides loan to the company by keep regular watch-list its financial position & repayment trend. In that way bank decide which project/which party is flexible for sanction loan. Credit Assessment & Risk Grading
A thorough credit and risk assessment should be conducted prior to the granting of loans, and at least annually thereafter for all facilities. The results of this assessment should be presented in a Credit Application that originates from the relationship manager/account officer (“RM”), and is approved by Credit Risk Management (CRM). 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 bank’s Lending Guidelines and should conduct due diligence on new borrowers, principals, and guarantors. It is essential that RMs know their customers and conduct due diligence on new borrowers, principals, and guarantors to ensure such parties are in fact who they represent themselves to be. All banks should have established Know Your Customer (KYC) and Money Laundering guidelines which should be adhered to at all times. Credit Applications should summaries the results of the RMs risk assessment and include, as a minimum, the following details: * Amount and type of loan(s) proposed.
* Purpose of loans.
* Loan Structure (Tenor, Covenants, Repayment Schedule, Interest) * Security Arrangements
In addition, the following risk areas should be addressed:
* Borrower Analysis. The majority shareholders, management team and group or affiliate companies should be assessed. Any issues regarding lack of management depth, complicated ownership structures or inter-group transactions should be addressed, and...