CREDIT RISK IN
INDIAN BANKING
SYSTEM
BY:
NOOPUR GUPTA (12MBA021)
RISHIKA SINGHAL (12MBA028)
RISK MANAGEMENT IN INDIAN
BANKS
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Banking is the business of money where high
risks are involved
An element of risk is inherent in the banking
operations. They have to manage and balance
risk.
Risk may be defined as an exposure to a
transaction with loss, which occurs with
some probability and which can be expected,
measured and minimised.
CREDIT RISK
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Bank Credit means the amount of credit available to a
company or individual from banking system. It is the
aggregate of the amount of funds financial institutions
are willing to provide to an individual or organisation.
Credit risk refers to the risk that a borrower will default
on any type of debt by failing to make payments which it
is obligated to do.
Credit risk is risk due to uncertainty in
a counterparty’s (also called an obligor’s or credit’s)
ability to meet its financial obligations
The risk is primarily that of the lender and includes
lost principal and interest, disruption to cash flows, and
increased collection costs.
EXAMPLES OF CREDIT RISK
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A consumer may fail to make a payment due on
a mortgage loan, credit card, or any other loan
An insolvent insurance company does not pay a
policy obligation
An insolvent bank won't return funds to a
depositor
A government grants bankruptcy protection to
an insolvent consumer or business
ASSESSMENT OF CREDIT RISK
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In assessing credit risk from a single counterparty, an
institution must consider three issues:
Default Probability: What is the likelihood that the
counterparty will default on its obligation either over
the life of the obligation or over some specified
horizon, such as a year?
 Credit Exposure: In the event of a default, how large
will the outstanding obligation be when the default
occurs?
 Recovery Rate: In the event of a default, what fraction
of the exposure may be recovered through bankruptcy
proceedings or some other form of settlement?
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TYPES OF CREDIT
RISK
Credit Default Risk
The risk of loss arising from a debtor being
unlikely to pay its loan obligations in full or the
debtor is more than 90 days past due on any
material credit obligation; default risk may impact
all credit-sensitive transactions, including loans,
securities and derivatives.
Concentration Risk
The risk associated with any single exposure or
group of exposures with the potential to produce
large enough losses to threaten a bank's core
operations. It may arise in the form of single
name concentration or industry concentration.
Country Risk
The risk of loss arising from a sovereign state
freezing
foreign
currency
payments
(transfer/conversion risk) or when it defaults on
its obligations (sovereign risk); this type of risk is
prominently associated with the country's
macroeconomic performance and its political
stability.
MITIGATING CREDIT RISK
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Risk-based pricing: Lenders generally charge a
higher interest rate to borrowers who are more likely to
default, a practice called risk-based pricing. Lenders
consider factors relating to the loan such as loan
purpose, credit rating, etc. and estimates the effect on
yield (credit spread).
Covenants: Lenders may write stipulations on the
borrower, called covenants, into loan agreements:
 Periodically report its financial condition
 Refrain from paying dividends, repurchasing shares,
borrowing further, or other specific, voluntary actions
that negatively affect the company's financial position
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Tightening: Lenders can reduce credit risk by reducing
the amount of credit extended, either in total or to certain
borrowers.
Diversification: Lenders to a small number of
borrowers (or kinds of borrower) face a high degree
of unsystematic credit risk, called concentration risk.
Lenders reduce this risk by diversifying the borrower
pool.
Deposit
insurance:
Many
governments
establish deposit insurance to guarantee bank
deposits of insolvent banks. Such protection
discourages consumers from withdrawing money when
a bank is becoming insolvent, to avoid a bank run, and
encourages consumers to hold their savings in the
banking system instead of in cash.
THANK YOU