Banking. Credit risk. Evaluation criteria and regulatory methods (most important)

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Banking. Credit risk. Evaluation criteria and regulatory methods (most important)

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Topic 30. Credit risk. Evaluation criteria and regulation methods

Credit risk - the risk existing for the creditor of non-payment by the borrower of the main debt and interest on it. Risk management methods (its minimization):

▪ by diversifying the bank’s loan and investment portfolio;

▪ by preliminary analysis of creditworthiness, i.e. the borrower’s ability to repay the loan;

▪ by assessing the cost of loans issued and monitoring loans issued previously.

1) Diversification of credit risk assumes the dispersal of the opportunities available to banks for lending and investing in securities. Credit risk increases as total lending increases and the degree of concentration of loans among a limited number of borrowers increases. Therefore, banks prefer, with a constant volume of credit investments, to provide loans for smaller amounts to a larger number of independent customers. The distribution of loans and securities is carried out. by terms (regulation of the share of short-, medium- and long-term investments, depending on the expected change in the market situation); according to the purpose of loans (seasonal, for construction, etc.); by type of collateral (for various types of assets); by the method of setting the rate for the loan (fixed or variable); by industry, country, etc.

For the purpose of diversification, credit rationing is carried out - banks set floating lending limits or credit ceilings for borrowers, beyond which loans are not provided, regardless of the level of the interest rate.

2) Credit analysis - calculation of indicators characterizing the riskiness of the financial position of the prospective borrower, and their analysis. These are the indicators of solvency:

▪ absolute liquidity ratio shows to what extent short-term liabilities can be repaid at the expense of highly liquid assets = (cash + short-term financial investments) / short-term liabilities (norm = 0,2-0,25);

▪ intermediate coverage ratio shows whether the company will be able to pay off its short-term obligations in a timely manner = (cash + short-term financial investments + accounts receivable) / short-term obligations (0,7-0,8);

▪ total coverage ratio shows whether there are enough liquid assets to pay off short-term liabilities - the difference from the previous coefficient is that reserves and costs are still added to the numerator (1-2,5);

▪ financial independence ratio = equity / total balance. In addition, the bank needs to evaluate future receipts, net proceeds, at the expense of which the loan will be repaid, based on the calculation of the net proceeds ratio. The indicators of the financial stability of the enterprise are also calculated:

▪ ratio of borrowed and working capital;

▪ working capital turnover ratio (sales proceeds / average cost of working capital), etc.

Credit risk analysis can be carried out based on the study of 5 factors:

▪ the character (capacity) of the borrower: his reputation, readiness to repay the debt. The nature is determined based on data on past loan repayments and expert assessments;

▪ the borrower’s ability to repay the debt (it is important here to calculate his profit after taxes, as well as assess the possibilities of selling assets and attracting another source of lending);

▪ capital (equity capital - net) of the borrower;

▪ the economic situation and the degree of dependence of the borrower on it (the worst situation is considered in terms of the ability to repay the debt).

In a number of cases (primarily when making a decision to grant a consumer loan, when a potential borrower cannot submit its balance sheet for analysis), when assessing risk, a bank can use models credit score. In this case, the borrower is asked to fill out special standardized questionnaires. Points are awarded depending on age, gender, marital status, monthly income, residence, employment in a particular industry and length of work in a particular place, availability of a savings account in a bank, real estate, insurance policy, etc. To make a positive decision, it is necessary that the total score exceeded a certain level (Analysis of financial and economic activities).

Based on the creditworthiness analysis data, borrowers are classified, creditworthiness ratings are set, the volume of lending, the amount and methods of fixing interest rates, the maturity of loans, requirements for their collateral, etc. are determined. At the same time, the bank is guided by the fact that the higher its risk, the more should be the profit of the bank and the more detailed should be the loan agreement.

Interest rates on the loan should compensate the bank for the cost of funds provided for the term, the risk of changes in the value of collateral and the risk of default by the borrower.

In the process of current monitoring of a loan, a bank usually evaluates:

▪ capital adequacy of the borrower;

▪ the quality of its assets;

▪ quality of management and control at the enterprise;

▪ liquidity;

▪ profitability.

Depending on these indicators and the degree of credit risk of the bank, five categories of loans:

1) an ordinary loan - which will be repaid in accordance with the schedule, the risk for which is within acceptable limits for the bank;

2) a loan that has some features (for example, incomplete documentation), i.e., causing some doubts;

3) a loan, the risk of which is higher than usual, but the probability of default by the borrower of its obligations does not exceed 20%;

4) doubtful - the probability of bank losses is approximately 50%;

5) clearly unprofitable, when repayment of the loan is unlikely.

If the borrower's creditworthiness worsens, the bank may require a change in the terms of the loan agreement or protection of its interests (increasing the rate for the loan, paying fines and penalties, revising the loan repayment schedule, etc.) or urgently repaying the loan.

The correctness of the estimates and decisions made by the bank depends on the experience and knowledge of its staff.

Authors: Shevchuk D.A., Shevchuk V.A.

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