Managing Portfolio Credit Risk in Banks

Abstract

Credit risk is the risk resulting from the uncertainty that a borrower or a group of borrowers may be unwilling or unable to meet their contractual obligations as per the agreed terms. It is the largest element of risk faced by most banks and financial institutions. Potential losses due to high credit risk can threaten a bank's solvency. After the global financial crisis of 2008, the importance of adopting prudent risk management practices has increased manifold. This book attempts to demystify various standard mathematical and statistical techniques that can be applied in measuring and managing portfolio credit risk in the emerging market in India. It also provides deep insights into various nuances of credit risk management practices derived from the best practices adopted globally, with case studies and data from Indian banks.

Requisite variety theory and third‐party guarantee loans: How local bank branches can reduce loan defaults

“…A third theoretical implication is the importance of strategic planning and execution in managing portfolio diversity over time (Bandyopadhyay, 2016; Chorafas, 1998). Managing a diverse loan portfolio requires a well‐defined and well‐executed strategy that takes into account the unique characteristics and risks of each geographic region.…”

“…On the other hand, industry diversity also introduces additional complexity and risks, such as legal and regulatory compliance, operational challenges, and communication barriers. Therefore, banks must carefully balance the benefits of diversification with the costs and A third theoretical implication is the importance of strategic planning and execution in managing portfolio diversity over time (Bandyopadhyay, 2016;Chorafas, 1998). Managing a diverse loan portfolio requires a well-defined and well-executed strategy that takes into account the unique characteristics and risks of each geographic region.…”

Bankruptcy Prediction: Evidence-based Experiences in the Banks

“…For this reason, many previous studies indicated that an "AltmanZ-score's model" is one of the most common models used for financial failure analysis [8], and determining the financial position of any company based on adopting Z-score's indicators [36]. It contributes to predicting bankruptcy or predicting failure for companies by carrying out multivariate analysis with the relative importance of each factor in the discriminatory and analyzed [10]. That adopted mathematical equations to investigate the performance of companies [6], [36].…”

“…Where more than 90 years ago, previous studies indicated that the majority of companies were interested in studying the prediction of financial failure to survive, grow, and continue in market competition [3], [8]. Many of the financial analysis approaches have been used [9], [10], however, the most important ones are Altman's model due to its accuracy in detecting the early bankruptcy of companies [3], [14], [35]. In the context of the prediction of financial failure at banks, frequently, the annual financial reports are the main source for evaluating the performance of banks [2], [23].…”

Modeling SMEs Credit Default Risk: The Case of Saudi Arabia

“…The measuring of uncertainty in financial lending is related to credit risk modeling. It refers to the due diligence carried out by a financial institution to evaluate the risk of the borrower individually, as well as collectively from the time application to full repayment (Bandyopadhyay, 2016). The modeling of credit risk is a forward-looking process that helps a bank to forecast the extent of the loan portfolio's fluctuation in value in the underlying credit of the borrower.…”