450+ experts on 30 subjects ready to help you just now
Starting from 3 hours delivery
Remember! This is just a sample.
You can get your custom paper by one of our expert writers.Get custom essay
121 writers online
Recently banks in many countries have been engaged with a procedure of redesigning their risk management capabilities. The rapid development and expanding complications of the financial related market along with increasing competitors have been significant reasons for the upgradation of risk management. The various risk faced by banks is credit risk, interest rate risk in the banking book, and operational risk. Among three of it, the credit risk is considered the biggest risk faced by the banks. However, the credit cycles in the bank cannot be omitted but the credit risk associated with it can be closely examined and analyzed.
Taking in account for the importance of credit risk management in the banking sector, we decided to prepare our group presentation on credit risk management for one of the banking services in our home country, called the Bank of Bhutan (BoB). Bank of Bhutan was established by a Royal Charter in May 1968, and it is the oldest and largest bank in the country, providing its services in every district and major township of Bhutan. BoB provides a wide range of financial products and services, such as deposits, loans, trade finance, and money market as well as facilitating financial transactions of customers. Elaborate on credit services offered by BoB, they are personal loans, education loans, construction loans, agricultural loans, commercial loans, vehicle loans, etc.
To understand the risk context, the Bank of Bhutan consists of the Board of Directors who are entrusted with the ultimate responsibility for guiding the strategic direction and performance of BoB to achieve the targets. The BoB Board consists of seven Directors, including the Chairman and the Chief Executive Officer. The management of BoB is headed by the Chief Executive Officer (CEO) for the management of day-to-day affairs of the Company. There are also other committees like the Board Credit Committee, which was established to make the decision on Credit related issues beyond the authority of the management, and The Board Risk Management Committee was established to monitor the key risk indicators of the Bank besides making the decision on risk-related issues and activities. The stakeholders of the Bank of Bhutan consist of customers, suppliers, employees, investors, and shareholders.
The Risk Management Framework of BoB is an exposition of the Bank’s approach to Risk Management and seeks to put in place comprehensive monitoring, management, and reporting framework that allows risks to be identified, managed, and overseen in a timely and efficient manner. The framework also seeks to set up systems and procedures to actively mitigate associated risks and optimize resources not only to protect the Bank but also to provide a return commensurate with the risk profiles adopted. The framework is administered by various risk management policies, activities, and exercises, which are updated to the management and the board periodically. Credit risk management of BoB can be defined as the practice of mitigating losses by understanding the bank’s capital adequacy and loan loss reserves at any point in time. The main goal is to increase the risk-adjusted rate of return by continuing credit risk exposure within acceptable parameters.
Credit risk identification is been carried out by brainstorming sessions, checklist, reviewing reports, and looking at the historical data. They also investigate Track Records, Credibility, Payment records, and others. Most of the common causes of credit risk are Asset loan quality, Asset liability mismatch, Fraud, and Backdated Credit Risk Management Policy. For Asset loan quality, it is found that if the quality of the loan is not good then it can be very risky for the bank. The loan is an asset for the bank, but if the loan which is taken by any people or organization is not repaid within due time this can result in the loan being a bad asset. That is why banks check the creditworthiness of the person or organization before giving a loan.
Risk Analysis and Evaluation can be carried out by adopting a Credit score rating, where there will be a three-digit number and must keep eye on the very first credit transaction. It helps in analyzing by tracing and tracked on the payment history, credit utilization, cash transactions, tax issues, and credit score inquiries. The trustworthiness of a lender is rated as below:
A credit risk matrix can also be used to tag a client’s account of the risk portfolio. When these individual risk profiles are aggregated, an overall idea of the credit risk profile of the receivable’s portfolio. It brings up the advantages of being comprehensive, compels the development of risk mitigation plans appropriate for each of the risk profiles, and tracks changes of receivables over time. The following credit risk matrix can be constructed with Financial Position and Payment Habit as bases.
The following conclusion can be derived from the credit risk matrix:
Bob also adopts an approach called 5 Cs to minimize the risk by data mining of the clients regarding the loan sanction. The factors of 5 Cs are as follows:
Risk Monitoring can be followed in accordance with the prudential norms prescribed by the Royal Monetary Authority of Bhutan for single borrowers and for group borrowers. Further, there are substantial exposures prescribed by the Loan policy for Single borrowers and Group borrowers. Risk monitoring can be done also by reviewing the report submitted to the board by the Board Risk Management Committee.
Risk treatment has various methods like placing sound lending policy and loan appraisal systems. Guarantees/collateral can be nominated as risk mitigators too, followed by proper documentation, supervision, follow-up, and monitoring of advances. Loan Review Mechanism can also play a vital role in risk treatment.
To conclude, better credit risk management offers an opportunity to significantly improve overall performance and secure a competitive advantage in this global economic scenario. Better credit risk management decreases financial risk and generates revenue for the Bank, which raises the Bank’s profitability and once the bank is in a good state, the country’s economy is also growing strong and adds to the GDP of the country. So, there is a symbiotic relationship. Therefore, effective ways of risk management have gained importance. The chief goal of effective credit risk management must be to maintain the key components of best practices that are followed worldwide and adopted universally.
We provide you with original essay samples, perfect formatting and styling
To export a reference to this article please select a referencing style below:
Where do you want us to send this sample?
Be careful. This essay is not unique
This essay was donated by a student and is likely to have been used and submitted before
Download this Sample
Free samples may contain mistakes and not unique parts
Sorry, we could not paraphrase this essay. Our professional writers can rewrite it and get you a unique paper.
Please check your inbox.
We can write you a custom essay that will follow your exact instructions and meet the deadlines. Let's fix your grades together!
Are you interested in getting a customized paper?Check it out!