Gestión de proyectos

Industry risk can be multilateral in nature, usually spearheaded by economic environment of the country in which it operates. Unstable political environment can adversely affect economic growth. This at times compels investors to shy away leaving industry performance in jeopardy. Unstable political/economic factors thus make an industry highly vulnerable to financial losses. Industry structure (size, products, markets, competition, profit dynamics, growth profile, demand/supply forces, and cost structure), its attractiveness now and in future, and success factors should be thoroughly analyzed to determine the real risks an industry may face.

Risk Rating

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some extent of accuracy. The primary objective is to assess, at any given point of time, realistically recoverable value of an underlined asset. ‘Risk ratings’ is a unique system designed to weigh and compare all risk assets regardless of type, nature or location of the borrowers.

All banks/DFIs are required to assign internal risk ratings across all their credit activities including consumer portfolio. The internal risk ratings should be based on a two tier rating system:

1. An obligor rating, based on the risk of borrower default and representing the probability of default by a borrower or group in repaying its obligation in the normal course of business and that can be easily mapped to a default probability bucket.

A facility 'eating, taking into account transaction specific factors, and determining the loss parameters in case of default and representing loss severity of principal and/or interest on any business credit facility.”

In practice facility rating is calculated on the basis of a) the type and nature of facility and b) the type, quality, amount and recoverability of the collateral secured against that particular facility.

The obligor rating must be oriented to the risk of borrower default. Separate exposures to the same borrower must be assigned to the same borrower grade, irrespective of any differences in the nature of each specific transaction. There are two exceptions to this. Firstly, in the case of country transfer risk, where a bank may assign different borrower grades depending on whether the facility is denominated in local or foreign currency. Secondly, when the treatment of associated guarantees to a facility may be reflected in an adjusted borrower grade. In either case, separate exposures may result in multiple grades for the same borrower. Guarantor’s rating may also be assigned to the borrower if there is an absolute guarantee and in case of default the bank has 100% recourse on the guarantor.

Basel II requires the risk ratings to be carried out at an obligor level, spread over a scale of one (1) to twelve (12), one (1) rating being the highest quality risk and twelve (12) being the best equivalent to adversely classify as loss. (Refer Appendix 3).

Risk ratings are determined to:

1. Price each obligor- higher the risk rating of an obligor, steeper the risk will be.

2. Calculation of the loss a credit carries based on its Corporate Branch mark Loss Norm (CBLN) is not a prediction that there will be actual loss on a particular credit, it is rather a statement that a particular obligor displays characteristics similar to other obligors which over an average period of time, produced a present value loss equal to certain loss norm or written a range of loss norm.

Lending: Products, Operations and .Risk Management | Reference Book 1

The Chief Risk Officer (CRO) is responsible for advising loss norms to the line management. Obligor Risk Rating (ORRs) may be assigned systemically through the use of a debt rating models (DRM). DRMs perform complex analysis of both qualitative and quantitative factors pertaining to a borrower e.g. reliability of financial information, industry risk competitive conditions in terms of economic environment, quality of obligor’s management and compliance of PRs etc. ORRs must be assigned and approved for individual credits when initially extended and must be reviewed at least annually if otherwise warranted earlier due to any significant development. Also, must be reviewed immediately after a credit is adversely classified.

The facility rating must be oriented to the loss severity of principal and/or interest on any exposure. A Bank/DFI may have extended to a single counter party a number of credit facilities against different collaterals, having different priority rules and legal recourse to the recovery in case of default. The Banks should consider relevant transactions specific facts, based on the type of facility and collateral, while assigning the facility rating. This process may result in different facility ratings to the same entity. The banks are required to calculate and report loss severity of each facility provided to the borrowers.

(Refer Appendix 3B).

Compiled from:

Credit Lending Module and Specialized Lending Book-One of Chartered Bankers Institute and Contribution by: Mr. Akbar Chugtai

Lending: Products, Operations and Risk Management | Reference Book 1 47 Introduction: