Credit Risk Management Overview

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Questions and Answers

What is the primary goal of optimizing Economic Value Addition (EVA) for shareholders?

To diversify credit portfolio

To achieve higher market share

To ensure compliance with regulations

To compare risk-adjusted returns with benchmarks (correct)

Which of the following is a responsibility of the Board of Directors regarding credit risk exposure management?

Developing interest rate strategies

Setting customer service standards

Launching new credit products

Ensuring compliance with regulatory requirements (correct)

What is the purpose of establishing a risk-based pricing framework for credit products?

To align pricing with risk factors (correct)

To mitigate credit risk concentration

To evaluate employee performance

To enhance marketing strategies

Who heads the Credit Policy Committee (CPC)?

Managing Director & CEO Signup and view all the answers

Which committee is responsible for approving the credit risk management Policy?

Risk Management Committee of the Board (RMCB) Signup and view all the answers

What is the primary role of the Product & Process Approval Committee (PPAC)?

To vet new products or modifications in existing products Signup and view all the answers

What is a key aspect of building a well-diversified credit portfolio?

Yielding adequate risk-adjusted returns Signup and view all the answers

What is the role of the Risk Management Committee of the Board (RMCB) in credit risk exposure management?

To set credit risk appetite and monitoring limits Signup and view all the answers

What task is NOT assigned to the Risk Management Department?

Approve new loans for customers Signup and view all the answers

Which committee is responsible for oversight of credit risk management policy implementation?

Credit Policy Committee Signup and view all the answers

What is a fundamental requirement for the credit risk management system in the bank?

Risk identification, measurement, monitoring, and mitigation Signup and view all the answers

How does the bank ensure growth in credit risk-related business and income?

By aligning with annual and medium-term plans Signup and view all the answers

What action can be taken for urgent approvals in committee decisions?

Agenda notes can be circulated for member approval Signup and view all the answers

What does the sub-committee of the CPC aim to do?

Handle the detailed implementation of credit guidelines Signup and view all the answers

Which of the following is NOT a responsibility of the Risk Management Department?

Formulate marketing strategies Signup and view all the answers

How should agendas approved through circulation be handled?

They are to be noted by the committee subsequently Signup and view all the answers

Which industry requires industrial licensing for the distillation and brewing of alcoholic drinks?

Distillation and brewing of alcoholic drinks Signup and view all the answers

Which of the following substances does NOT require industrial licensing according to the provided information?

Common household chemicals Signup and view all the answers

What is the target share for BOB 5 rated corporate loan exposures in the current financial year?

35% Signup and view all the answers

Which of the following is categorized under hazardous chemicals requiring licensing?

Methyl Isocyanate Signup and view all the answers

What is the maximum allowed percentage for BOB 7 rated obligors in the loan book?

4% Signup and view all the answers

According to the Credit Rating Matrix, which external rating corresponds to a target share of 25%?

A / CMR 3 Signup and view all the answers

Which of the following does NOT fall under the compulsory industrial licensing list?

Non-hazardous chemical production Signup and view all the answers

What is the target share for BOB 4 rated exposures in the corporate loan book?

20% Signup and view all the answers

What is the main focus of the Bank's digital lending operations?

Retail, MSME, and Agri segments Signup and view all the answers

Which sectors will the Bank primarily target based on their outlook?

Positive outlook sectors Signup and view all the answers

For sectors with a neutral outlook, what type of exposure will the Bank consider?

Moderate exposure Signup and view all the answers

What is the maximum external rating allowed for borrowers in negative outlook sectors for C&IC exposure?

A Signup and view all the answers

How will the Bank handle MSME and Rural & Agriculture borrowers with an exposure above Rs. 50 crore in negative outlook sectors?

Consider proposals at discretion of COCC-CGM Signup and view all the answers

Which of the following is NOT a focus area for domestic operations of the Bank?

Consumer electronics loans Signup and view all the answers

In terms of Industrial Risk Scores, what does the Bank take into account for categorizing sectors?

Demand-supply situation and government policies Signup and view all the answers

What is the potential growth outlook for MSMEs according to the Bank's strategy?

Likely to grow faster Signup and view all the answers

What is the maximum amount that can be written off before restrictions on further lending apply?

Rs. 2 lakh Signup and view all the answers

Which condition must be met for further lending to borrowers whose loan accounts were settled under compromise?

The current CIBIL score must be at least 701. Signup and view all the answers

In which scenario can deviations from lending restrictions be exercised?

If authorities grant deviation powers. Signup and view all the answers

What is the required age of the loan accounts for applicants seeking fresh credit facilities?

At least 5 years Signup and view all the answers

For credit card accounts, what is the threshold write-off amount that triggers restrictions on new borrowings?

Rs. 0.50 lakh Signup and view all the answers

Who is the sanctioning authority for proposals falling below the power of ZOCC?

ZOCC-GM Signup and view all the answers

If a loan account is closed by a bank but was settled under a compromise settlement, what is a condition for considering further lending?

It must be at least 5 years old. Signup and view all the answers

Which of the following groups are prohibited from receiving loans?

Wilful defaulters and fraud accounts Signup and view all the answers

What type of transactions are considered as 'loans and advances' under Section 20 of the Banking Regulation Act, 1949?

Loans to directors enacted as clean accommodation Signup and view all the answers

Which of the following is NOT prohibited for banks regarding loans to directors?

Loans to directors who were employees before becoming directors Signup and view all the answers

Which of the following facilities are generally prohibited for banks to provide to their directors?

Loans to firms where directors are employed or hold interest Signup and view all the answers

What facilitates smooth settlement concerning loans or advances to NSCCL?

Overdraft facilities from banking companies Signup and view all the answers

Which of the following is an exempted loan that may be extended to directors with prior board approval?

Loans against government securities Signup and view all the answers

Which type of banking transaction is explicitly permitted among banking companies?

Call loans made between banking companies Signup and view all the answers

What is required for a bank to extend loans or advances to its directors?

Approval from the Board of directors Signup and view all the answers

What non-fund based facility can banks provide to directors?

Acceptance or co-acceptance of bills Signup and view all the answers

Study Notes

Global Credit Exposure Management Policy 2024

Bank of Baroda's policy for managing credit risk
Covers various aspects including governance structure, credit segmentation, credit delivery channels, and credit strategy
Applies to all credit exposures globally, both standalone and consolidated levels
Individual group entities are governed by their respective credit policies

Governance Structure

Board: Responsible for overall credit risk management
Risk Management Committee of the Board (RMCB): Approves the policy, sets credit risk appetite and monitoring limits, provides support in credit risk exposure management
Credit Policy Committee (CPC): Senior management committee responsible for effective credit risk management policy implementation and guidelines
Product & Process Approval Committee (PPAC): Approves new or modified products and processes
Risk Management Department: Measures, monitors, and controls credit risk, enforces compliance with credit risk parameters, prescribes and implements risk measurement tools, identifies and analyzes problem exposures

Credit Governance and Segmentation

Classification of Customers
- Corporate & Institutional Credit (C&IC): Annual turnover of over Rs. 250 crore
- MSME: Meets the definition of MSMED Act 2006, with investment in plant machinery/equipment not exceeding Rs. 50 crore and annual turnover of up to Rs. 250 crore
- Rural & Agricultural Banking Business: Includes all agriculture and allied activities irrespective of priority sector status, and food/agro processing units with credit facilities up to Rs. 100 crore
- Retail Lending: Personal consumption and business that are not covered in other categories.

Credit Delivery Channels

Credit channels: Branches, specialized SME branches, proposal processing centers, and other channels set up by the Bank.

Credit Strategy

Target Sectors and Markets:
- Positive Outlook: Primary target
- Neutral Outlook: Moderate exposure
- Negative Outlook: Limited exposure to borrowers with external ratings of 'A' or 'BBB' or below (for specific categories)
Priority Sector Lending Certificate (PSLC): A mechanism for banks to achieve priority sector lending targets.
Industries requiring Compulsory Licensing: Distillation and brewing of alcoholic drinks, cigarettes, cigars, and certain types of electronic equipment.
Credit Rating Matrix: Specific limits based on credit rating.

Restricted Exposures

Wilful Defaulters/Fraud Accounts: No lending allowed to wilful defaulters, fraud accounts, or directors/partners of companies in default
Loans settled under compromise/Write-off: Restrictions on lending to promoters/directors of companies with written-off loans
Loans to Directors of the Bank: Restrictions and regulations
Regulatory Restrictions: Compliance with regulations like the Banking Regulation Act 1949

Exposure Norms

Exposure limits: Various types of prudential limits for credit portfolios, following RBI guidelines
Single/Group Exposure Limit: Defined by the Large Exposure Framework (LEF) of RBI, related to exposures equal to or above 10% of the Bank's ECB.

Underwriting criteria

Assessment Parameters/ Guiding Principles: Eligibility criteria, financial position, future projections, operational ability and past credit performance
Credit risk evaluation process (CREP): Procedures and principles for evaluating credit risk exposures.
Internal Credit Rating: Bank's internal credit rating system (BOBICON)
External Credit Rating criteria for internal rating, and relevant authorities for considering fresh/enhancement proposals, including cases where relaxation or deviation from criteria is needed

Other Specific guidelines

Country Exposure Limit: Assessing and managing risk associated with lending to borrowers in specific countries
Financing to NBFCs: The bank can finance/lend to registered NBFCs with suitable increases in margin requirements
Project Loans: Process for funding long-term infrastructure, industrial, and public projects.
Capital Market Exposure: Guidelines on financing capital markets activities.

Credit Process

Credit Approval Process: Procedures and approval paths to ensure no one individual can originate or sanction credit.
Facility Structure: Credit facilities should contain appropriate covenants.
Application: Procedures for applying for credit with established timelines for processing.

Monitoring and Control

Three Lines of Defence: First line is customer relations, second line Risk management, and third line Internal audit, all with respective roles and responsibilities
Credit Risk Management
Credit Mitigation

Data Quality Management

Data quality is critical for accurate business decisions.
Specific responsibilities for data quality and consistency.

Reporting of Breaches

Risk management monitors adherence to prudential limits.
Breaches are reported through appropriate channels for action and remediation.

Training and Development

Specific training programs and initiatives to enhance credit risk management competency
Required knowledge and certification requirements.

Policy Administration and Review

Policies are maintained and updated according to regulatory requirements
Risk management department manages and reviews policies regularly

Other Information

Abbreviations: Definitions of various acronyms and terms used in this policy.

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Description

This quiz explores key concepts and responsibilities related to credit risk management in financial institutions. Topics include the roles of various committees, the importance of credit risk exposure management, and the establishment of pricing frameworks. Test your knowledge on how banks manage credit risk effectively.