Credit Risk Management lecture notes presentation

on credit risk management

1. MODULE: CREDIT RISK MANAGEMENT - ACC3030 BA International Logistics and Trade Finance

2. I n this M o dule Fundam e n t al of C red i t R i sk C redit R i s k G o v er n an c e M oni t or in g C redit R i s k Exposure M e as u re m e nt of C re d i t R i sk C redit A n a l ysis M ar k - t o - M ark e t Va l ua t i on Value-at-Risk Es t i ma t i on of C redit Qua l i t y Securitisations C redit Defau l t Swa p s C o l l a t eral Debt Ob l i g a t i ons Credit Insurance, Surety Binds, Letters of Credit Bankruptcy

3. Rearranged theme Original theme Day 1 . I n t roduc t i on to Cr e d i t R i s k M ana g e me n t Fund a me n t a l of Cr e d i t R i sk Cr e d i t R i s k Go v e r nan ce D1,2 2 . Cr e d i t P ro c e s s a n d Selection Cr e d i t A na l y s i s E s t i ma t i on of Cr e d i t Q u a l i t y C o ll a t e r a l De b t O b l i g a t i o n s Credit Insurance, Surety Binds, Letters of Credit Bankruptcy D2,3 3 . Cr e d i t R i s k an d O b j e c t iv e s of Cr e d i t Portfolio M a r k - t o - M a rk e t V a l u a t i on Value-at-Risk Securitisations Cr e d i t D e f a u l t S w a ps D4 4 . Cr e d i t R i sk M ea su re me n t M o n i t or i n g Cr e d i t R i s k Ex p o s ure M ea su re me n t of Cr e d i t R i sk D5 I n this M o dul e – Rearranged

4. Intr o ductio n to Credit Risk Management ▶ W hat i s B a nk i ng ▶ B a nk a s a n Enterp r i s e an d a s soc i ate d R i sk 2 . Co m p l i ance 4 . Co un t ry 6 . F i nancial Cr i me 8 . Model 1 0. Repu t at i onal 1 . Cap i t a l & L i qu i di t y 3 . Co ndu c t 5 . C redit 7 . Informa t i on & C y be r Sec u r i t y 9 . Operat i onal 1 1 . T ra d ed

5. Intr o ductio n to Credit Risk Management ▶ W hat i s Cred i t R i s k Ma na g ement Credit risk is most simply defined as the potential for lose due to the failure of a bank borrower or counterparty to meet its agreed obligations. The goal of credit risk management is to maximize a bank's risk- adjusted rate of return by maintaining credit risk exposure within acceptable parameters.

6. Intr o ductio n to Credit Risk Management ▶ Cred i t R i s k Related Pr i nc i ples Lend i ng to counterparts sho u l d be followed a stron g Cred i t assessment, an evaluation of credit quality and including willingness, ab i l i t y an d capac i ty to pay. b e i den t i f ied , asse s se d & m eas ured be mon i tored, l i m i t ed throug h the term of exposure be cap p ed b y a max i m u m acce p table exposure l i m i t & tenor not p r oh i b i t ed b y t he Bank’ s p o l i cies or ap p l i ca b l e law s or regulations

7. Intr o ductio n to Credit Risk Management ▶ Cred i t R i s k Related Pr i nc i ples be not used for illegal or immoral purposes or not known purposes be a s se s se d on mater i a l no n - cr e d i t r i sk a p p ro v ed b y a n author i zed i ndividu a l or com m i ttee

8. Intr o ductio n to Credit Risk Management ▶ Cred i t R i s k Su b - T y pes Cred i t Con cen t ra t i on R i sk Fx Len d i ng R i sk Cred i t Res i d u a l R i sk Re f i nanc ing R i sk Regula t ory R i sk Co l la t eral Managemen t Cred i t Mon i t or i n g Cre d i t A ppro v al Cred i t f u lf i l l me n t

9. Intr o ductio n to Credit Risk Management ▶ Lets introduce few terminologies ▶ Len d i ng v s Fac i l i t y ▶ Len d i ng v s T rade ▶ Corpo ra t e F i na n ce v s No n - CF ▶ Sen i or v s S u bor d i na t e ▶ Shor t T erm, m i d T erm, Lo ng T erm ▶ Direct Lending vs Indirect Lending ▶ Balance sheet lending vs Non-balance sheet lending ▶ Contingent labilities vs Non-contingent liabilities

10. Intr o ductio n to Credit Risk Management ▶ Lets introduce few terminologies ▶ Capital expenditure vs Working capital ▶ Co m m i tt ed v s U ncom m i tt ed ▶ Sec u red v s clean ▶ Discretionally lending vs Programmed lending ▶ S y nd i cat ed v s B i - la t e ral ▶ Standard Documentation vs Non-standard ▶ O u t er / Inne r or L i mit / Su b - l i m i t

11. Intr o ductio n to Credit Risk Management ▶ Lets introduce few terminologies ▶ IBOR , RFR – LIBOR, SLIBOR , A W PL R , Secured Overnight Financing Rate (SOFR), Swiss Average Rate Overnight (SARON), Sterling Overnight Index Average (SONIA), Tokyo Overnight Average Rate (TONAR)

12. Intr o ductio n to Credit Risk Management ▶ Se g ment at i on of Bu s i ness Retail S m a l l & Med i um Corporate

13. Intr o ductio n to Credit Risk Management ▶ T y p e of Cl i ents Personal S ole P ro p r i etor, Partnersh i p Pr i v a te L i m i ted, P ubl i c L i m i ted, J o i nt Ventures Sovereign, Governments, State owned enterprises B anks , C entral B a nks

14. Intr o ductio n to Credit Risk Management ▶ T y p es of Faci l i t ie s (Reta i l) Person a l Loans, O v erdrafts C red i t C a rds M ortg a ged Loans – Ho s i n g , Auto Le a s i ng, H ir e - Pur c ha s es

15. Intr o ductio n to Credit Risk Management ▶ Categorization of Credit Exposures (Corporate & SME) Lend i ng an d T rade fac i l i t i es T rea s ury fac i l i t ies Control and monitoring facilities

16. ▶ T y p es of Fac i l i t ies ▶ Lending Overdraft Shor t T erm Lo ans T erm Loans ▶ Leasing F i na n ce Leas i ng H i re P u r c hases Operat i ng Leas i ng Intr o ductio n to Credit Risk Management

17. ▶ T y pe s of Fac i l i ties ▶ T r ad e - Pre - shipmen t an d P o s t - shipm e nt Le t t e r o f Credit Col l ec t i o n D o cu m en t ar y Credit ( D A / DP) Sh i ppin g G uaran t ee I mpo r t l o ans Bank Guarantee – Bid, Performance, Advance Payment, Retention, C u s t om, G en eral Othe r Bil l di s c ou n t ing I n v o i ce f i nancing Buyer finance, Supplier finance, Vender prepayment, Trade payable Intr o ductio n to Credit Risk Management

18. ▶ T y p es of Fac i l i t ies ▶ T rade - Pr e - sh i pm e n t an d Pos t - sh i pm e n t Receivable finance – Buyer backed, Insurance backed, Cash/SBLC T rust Rece i p t s , Pledge fac i l i tie s – d y i ng Intr o ductio n to Credit Risk Management

19. ▶ T y p es of Fac i l i t ies ▶ T reasury fac i l i ties Fx facilities – Spot, Swap, Forward, Derivatives Repo, Re v erse Repo ▶ Control & Monitoring facilities (unadvised) Risk-collateral – Bank Guarantee, Corporate Guarantee, Insurance Product, Programmed facilities Intr o ductio n to Credit Risk Management

20. Governance Committee Board of Directors CEO Credit Risk Committee Policy & Procedure Credit Manual Credit Risk Appetite SBL Credit Risk Management & Control Identification Assessment Monitoring Mitigation Enable Culture People & Skill Infrastructure Information & Data quality Oversight Process inventory Health Check Audit Intr o ductio n to Credit Risk Management

21. ▶ Fac i l i ti e s – Bala n ce Shee t v i ew Intr o ductio n to Credit Risk Management Non-current Assets Current Assets Current Liabilities Equity Long Term Liabilities

22. Thank You ! Intr o ductio n to Credit Risk Management