Best Practices in Credit Risk Management

Observation: Banks make bulk of their money from good loans; Banks lose bulk of their money from bad loans! Conclusion: Thus making more good loans and less bad loans is the dream of every banker!

Credit Risk Management Standardized Approach PD, LGD, EAD, Haircuts, Off-Balance sheet Exposure (CCF), Internal Rating Models, Scorecards, CVaR Regulatory Reports RWA Computation Risk-based Loan Pricing Global Limits Management Comprehensive Coverage of all Risk Mitigants Collaterals Simple Approach Comprehensive Approach Guarantees Credit Derivatives Netting Agreements F-IRB A-IRB Assuring Compliance & Capital Adequacy Top Management Involvement Risk Policies Data Quality Continuous Monitoring Model Validation Stress Testing Back Testing Credit Risk Operational Risk Market Risk Ensure Capital Adequacy Better Align Regulatory Capital with various Risk Continuous Risk Profiling Evaluate Banks Capital Adequacy Strategies Certify Internal Models Proactive Monitoring of Capital levels & Ensuring Remedial Action Increased Information Disclosure Improved Transparency of Financial Disclosures to the Market Minimum Capital Requirements Supervisory Review Process Market Discipline Pillar1 Pillar2 Pillar3

Best Practices in Credit Risk Management Effectiveness-focused (decision support) versus Efficiency-focused (workflow) Structured & granular risk data for AIRB Compliance Robust Collateral & Limits Management End-to-end, integrated platform versus piecemeal solutions Proactive concentration risk management Risk-based and relationship-based lending OLAP – based portfolio management Flexible and scalable technology platform

End-to-end Integrated Platform Treasury Collection & Recovery System Collateral & Limits Management System Credit Rating System Credit Processing System SmartLender Exposure Management Concentration Reports Excess Validation Event Handler CRM Engine Haircut Engine Collateral Maintenance Documentation Valuation Engine Financial Analysis Risk Rating Engine Risk-based Pricing Group Exposure Prospecting Pre-qualification Covenants Monitoring Facility Structuring Credit Underwriting Call Management Document Generator Queue Management Perf Incentives Strategy Templates SmartView/Reports Trade Finance Relationship Mgrs Core Banking Credit Admin Officers Data Warehouse & RWA Engine Credit Bureau Remedial Officers Reuters Credit Risk Managers Front Office Mid - Office Back Office

Collateral Maintenance Concentration Reports Structured & Granular Risk Data for AIRB Compliance SmartLender Basel II Risk Components Credit Processing System Prospecting Pre-qualification Group Exposure Facility Structuring Credit Underwriting Covenants Monitoring Credit Rating System PD Financial Analysis Risk Rating Engine Risk-based Pricing Collateral & Limits Management System Collateral Maintenance Documentation Valuation Engine EAD LGD M Event Handler CRM Engine Haircut Engine Exposure Management Concentration Reports Excess Validation Collection & Recovery System Queue Management Call Management Document Generator SmartView/Reports Perf Incentives Strategy Templates

Collateral Maintenance Concentration Reports Robust Collateral & Limits Management Drivers for Collateral Management Basel II Minimum Operational Requirements Expanding Range of Acceptable Collaterals Dynamic Valuation & Covenants Monitoring Concentration Risk Management (Pillar II) Limitations of Legacy Systems Collection & Recovery System Collateral & Limits Management System Credit Rating System Credit Processing System SmartLender Event Handler CRM Engine Haircut Engine Collateral Maintenance Documentation Valuation Engine Exposure Management Concentration Reports Excess Validation Financial Analysis Risk Rating Engine Risk-based Pricing Group Exposure Prospecting Pre-qualification Covenants Monitoring Facility Structuring Credit Underwriting Call Management Document Generator Queue Management Perf Incentives Strategy Templates SmartView/Reports

Robust Collateral & Limits Management Basel II BCBS Para 115 The use of CRM (Credit Risk Mitigation) techniques reduces or transfers credit risk but introduces other risks e.g. legal, operational, liquidity and market risks Imperative that banks employ robust procedures and processes to control these risks e.g. valuation, roll-off risk & concentration risk

Types of collaterals supported with proper categorization Robust Collateral & Limits Management Types of collaterals supported with proper categorization Cash (Same Currency, Different Currency) Marketable Securities (Bonds, Stocks/Index, Stocks/Non-Index) Guarantees (Corporate, Government, Standby LC) Insurance & Protection (Credit Insurance, Credit Default Swap) Document (FX/Derivatives – Netting Agreement, Letter of Undertaking) Properties (Residential/Standard, Residential/Luxury) Asset Based (Plant & Machinery, Vehicle, Receivables, Post-dated Cheques) Commodities (Soft, Metals, Energy)

Best Practices in Collateral Management Robust Collateral & Limits Management Best Practices in Collateral Management Quality & Comprehensive Collateral Data Collateral Mark to Market Automatic Multi-Limit Collateral Allocation Automatic Security Covenant Monitoring Sophisticated Documentation Workflow Combined View of Limits & Collaterals Concentration Risk Management Automated Global Collaboration Tasks Supports LGD & AIRB Computation

Multi–limit Iterative Collateral Allocation Robust Collateral & Limits Management Multi–limit Iterative Collateral Allocation Limits sharing among legal entities Outer and inner limits Multiple accounts per limits Collateral specifically charged to a limit Collateral sharing among legal entities Many-to-many linkages between collaterals & limits Hierarchical and pari passu charging Prior charge amount Collateral value not to exceed limit

OLAP – based Portfolio Management

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