Credit Risk Management Quiz

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Questions and Answers

Which types of borrowers are exempt from the rating threshold for negative outlook sectors?

Regulatory and non-regulatory MSME borrowers, rural & agriculture borrowers, and food & agro processing units.

What is the maximum exposure amount for exempted borrowers under the Global Credit Exposure Management Policy?

Up to Rs. 50 crore from the banking system.

How often will the Risk Management Department prepare sectoral outlooks for each industry?

Monthly.

What are Priority Sector Lending Certificates (PSLC) used for?

To help banks achieve priority sector lending targets and sub-targets. Signup and view all the answers

What is the allowed issuance percentage of PSLC relative to the previous year's PSL achievement?

Up to 50%. Signup and view all the answers

What is the lot size for trading PSLCs?

Rs. 25 lakh and multiples thereof. Signup and view all the answers

What is the validity period of the PSLC?

Until March 31st every year. Signup and view all the answers

Who can sell or purchase PSLCs?

Scheduled Commercial Banks, Regional Rural Banks, Local Area Banks, Small Finance Banks, and Urban Co-operative Banks. Signup and view all the answers

What is meant by credit risk or default risk in financial transactions?

Credit risk or default risk refers to the inability or unwillingness of a customer or counterparty to fulfill contractual commitments in financial dealings. Signup and view all the answers

How does the nature of credit risk differ for a single customer compared to a portfolio?

For a single customer, credit risk includes transaction risk or default risk, while for a portfolio, it encompasses both intrinsic risk and concentration risk. Signup and view all the answers

What factors influence the credit risk of a bank’s lending portfolio?

The credit risk is influenced by the bank's strategic goals regarding risk-adjusted return and the regulatory and economic capital it needs to deploy. Signup and view all the answers

What are intrinsic risks and concentration risks in the context of credit risk?

Intrinsic risks refer to the individual risks associated with a customer, whereas concentration risks arise from the bank's exposure to a limited number of borrowers or sectors. Signup and view all the answers

What is the significance of data quality management in credit risk assessment?

Data quality management ensures that accurate and reliable data is used for assessing credit risk, leading to more informed decision-making. Signup and view all the answers

Explain the importance of an exit policy in credit management.

An exit policy is vital as it outlines the procedures for managing and terminating credit relationships, minimizing potential loss upon exit. Signup and view all the answers

How do breaches in credit policy get reported, and why is this important?

Breaches in credit policy should be reported through established channels to ensure accountability and risk management, preventing future occurrences. Signup and view all the answers

What role does training and development play in managing credit risk?

Training and development enhance employees' understanding of credit policies and risk management techniques, improving decision-making in credit assessments. Signup and view all the answers

What are the main conditions under which loans can be considered for promoters whose accounts have been written off?

Loans can be considered if the aggregate written-off amount is not more than Rs. 2 lakh, the current CIBIL score is at least 701, and the loan account was closed at least 5 years prior. Signup and view all the answers

What is the maximum aggregate amount that can be written off to still allow for fresh loan consideration under the stipulated policy?

The maximum aggregate amount that can be written off is Rs. 2 lakh. Signup and view all the answers

Why are promoters, partners, or directors of companies with fraud accounts restricted from obtaining loans?

They are restricted due to concerns over creditworthiness and the potential for continued financial mismanagement. Signup and view all the answers

What is the minimum CIBIL score required for borrowers seeking retail loans after a write-off?

The minimum CIBIL score required is 701. Signup and view all the answers

In what circumstances would the restrictions on fresh lending not apply to borrowers with previously written-off loans?

Restrictions do not apply when loans were written off under government loan waiver schemes. Signup and view all the answers

What role does the current application date play in evaluating loan requests from previously defaulted borrowers?

The loan accounts must have been closed at least 5 years prior to the current application date. Signup and view all the answers

Which authority has the power to sanction proposals falling below the ZOCC level?

The ZOCC-GM has the authority to sanction these proposals. Signup and view all the answers

What is the threshold amount for credit card account write-off cases to allow consideration for fresh credit?

The threshold amount for write-off cases is up to Rs. 0.50 lakh, or up to Rs. 1 lakh if the date of write-off is more than 5 years ago. Signup and view all the answers

What amount may the sanctioning authority consider for quantifying write-off when it is not available in the CIBIL report?

'High Credit' amount displayed in the CIBIL report. Signup and view all the answers

What must a borrower do if their loan account was previously with the bank and they wish to receive fresh credit facilities?

They must pay upfront the aggregate amount written off. Signup and view all the answers

Under what condition can sanctioning authorities review accounts without referring for deviations?

If deviation was already obtained or approved at the time of sanction. Signup and view all the answers

Which types of borrowers should not be granted fresh credit facilities according to the policy?

Wilful defaulters and fraud accounts. Signup and view all the answers

Who has the authority to permit fresh sanction of loans under specific OTS schemes for agriculture borrowers?

The Credit Policy Committee (CPC). Signup and view all the answers

What classification is used for directors of a company when evaluating credit facilities?

Directors are classified as Promoter, Elected, Professional, Nominee, or Honorary directors. Signup and view all the answers

What is the general approach for sanctioning loans to companies whose Promoter Directors are in the defaulters' list?

No ad hoc, enhancement, additional, or new credit facilities should be sanctioned until the name is removed from the defaulters' list. Signup and view all the answers

What is the role of Credit Information Companies (CIC) regarding defaulting companies?

CIC collects and circulates information on defaulting companies and their directors. Signup and view all the answers

Under what conditions can the renewal or continuation of credit limits be considered for an applicant company?

The renewal or continuation of credit limits may be considered if the performance and conduct of the applicant company's accounts are otherwise satisfactory. Signup and view all the answers

What is the consequence for a promoter director of a defaulting company regarding new credit facilities?

No ad hoc, enhancement, additional, or new credit facilities can be sanctioned until their name is removed from the defaulter's list. Signup and view all the answers

How are proposals evaluated if a director of an applicant company is connected to a defaulting company?

Proposals relating to the applicant company will be considered on merit if the director has no role in the day-to-day management of the defaulting company. Signup and view all the answers

What is the status of nominee, professional, or honorary directors of a defaulting company in terms of credit proposals?

Proposals relating to the applicant company are considered based on usual parameters since these directors are on the Board in their professional or honorary capacity. Signup and view all the answers

What additional requirement may be stipulated as security when reviewing proposals?

A personal guarantee of the Promoter(s) or Director(s) may be stipulated as additional security. Signup and view all the answers

In what scenario can proposals involving additional credit facilities be reconsidered?

Specific requests for enhancement, additional, or new credit facilities may be considered based on merits and should be recorded in writing. Signup and view all the answers

What document must account for the reasons when considering proposals for credit enhancements?

Reasons for considering proposals must be recorded in writing for those proposals that fall under the powers of COCC-CGM. Signup and view all the answers

What happens if an applicant company is a subsidiary of a defaulting company?

The approach previously mentioned for considering credit may be followed for proposals involving the applicant company if it is connected to a defaulting company. Signup and view all the answers

What are the main restrictions placed on banks regarding loans to their directors?

Banks are prohibited from granting loans or advances to their directors, firms where directors have interests, or companies associated with them. Signup and view all the answers

List two types of loans that can be provided to directors with prior board approval.

Loans against Government securities and loans to Agricultural Finance Corporation Ltd are allowed with prior board approval. Signup and view all the answers

What is the significance of Section 20 of the Banking Regulation Act, 1949 regarding loans and advances?

Section 20 defines specific regulations for banks concerning loans and advances, particularly those related to directors and conflicts of interests. Signup and view all the answers

Describe a circumstance under which a former employee of a bank may still receive loans after becoming a director.

A former employee who becomes a director may receive loans on the same terms as when they were an employee, provided they were an employee just before their directorship. Signup and view all the answers

What types of non-fund based facilities can banks provide without violating the restrictions on loans to directors?

Banks can provide facilities like bills purchasing, opening letters of credit, and issuing guarantees. Signup and view all the answers

Why are loans and advances from banks to their directors considered a potential risk?

Such loans can create conflicts of interest and may lead to unethical practices if not regulated properly. Signup and view all the answers

What role does the Board of Directors play in the context of loans or advances to bank directors?

The Board must approve any loans or advances made to directors, ensuring oversight and adherence to regulations. Signup and view all the answers

What are 'clean accommodation' bills, and how are they treated under the regulations?

'Clean accommodation' bills are treated as 'loans and advances' for regulatory purposes under Section 20. Signup and view all the answers

Study Notes

Global Credit Exposure Management Policy 2024 (Bank of Baroda)

This policy outlines credit risk management for the Bank of Baroda, globally
It covers all types of credit exposures, both individual and consolidated (for the Banking Group)
The policy aims to ensure the Bank operates within risk tolerance, maximizing return on risk-adjusted exposures
The policy and its implementation are governed by RBI guidelines, operating country regulations, and other relevant regulatory bodies.

Governance Structure

Board of Directors: Overall responsibility for credit risk management
Risk Management Committee of the Board (RMCB): Approves the policy and sets credit risk appetite, monitoring limits
Credit Policy Committee (CPC): Oversees policy implementation, evaluates risk decisions, and manages the credit portfolio
Product & Process Approval Committee (PPAC): Board approved for new products/processes. Approves product or process modifications
Risk Management Department: Measures, monitors, and controls credit risk, enforces compliance with risk parameters, and develops MIS for credit risk
These components outline responsibilities and decision-making processes for credit risk management within the Bank.

Credit Governance and Segmentation

Corporate & Institutional Credit (C&IC): Borrowers with gross annual turnover above Rs. 250 crore (excluding exports)
MSME: Borrowers meeting MSME Act 2006's criteria (plant & machinery/equipment investment max Rs. 50 crore, annual turnover up to Rs. 250 crore, excluding exports)
Regulatory MSME: Meet both criteria above
Non-Regulatory MSME: Satisfy second criterion above but fall outside the first criterion for regulatory MSME
Rural & Agricultural Banking Business: Focuses on agriculture, food, and agro-processing
Retail Lending: Covers personal consumption & business loans not specified under other segments
The policy categorizes customers to allocate resources and manage risk effectively within specified segments.

Credit Delivery Channels

Credit channels include: Branches, Processing Centers, and SME Factories/Cells/Branches, and more (Annex)
This section details the distribution networks for delivering credit products/services.

Credit Strategy

Target Sectors/Target Markets: Prioritizes Digital Lending, MSMEs, and Retail Finance, considering future outlook (positive, neutral, or negative) and risk. Target markets and specific segments are defined
Priority Sector Lending Certificate (PSLC): The bank can use PSLCs to meet priority sector lending targets.
Credit Rating Matrix: Categorizes borrowers based on their credit rating for effective exposure management.
Specific Industries: Identifies industries where industrial licensing is mandatory (e.g., alcoholic beverage production).
Restricted Exposures: Outlines restrictions on providing credit to willful defaulters, firms with compromised accounts, and other specific scenarios.

Exposure Norms

Defines specific maximum exposure limits on borrowers, industry-wide exposures, single and group exposure limits based on the borrower’s credit profile (AAA through BB).
Specifies limits for the different types of borrowers, including individuals, non-corporate companies, private limited companies and other classes of entities,
Includes detailed exposure limitations/ requirements, in various parameters.

Underwriting Criteria

Provides guiding principles and processes for credit risk evaluation.
Explains the policies and procedures for evaluating and managing credit risk exposures
outlines different factors for evaluating risk.

Monitoring and Control

Three Lines of Defense: Defines the roles and responsibilities for risk management (first, second, and third line).
Credit Risk Management: Outlines the bank’s responsibility for credit risk identification, communication, and management. This is based on relevant risk management policy.
Monitoring Credit Limits: Outlines systems and procedures for monitoring credit exposures.
This section details procedures for ongoing monitoring.

Data Quality Management

Highlights the importance of accurate and consistent data for sound decision-making.
States that the credit risk decisions depend on the availability and quality of data.

Exit Policy

Provides guidelines for exiting problem accounts.
Describes procedures for exiting high-risk accounts promptly to improve resource allocation & manage risk.

Abbreviations

Provides a list of abbreviations used in the policy document.

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Description

Test your knowledge on credit risk management concepts, including borrower types, sectoral outlooks, Priority Sector Lending Certificates (PSLC), and intrinsic risks. This quiz covers essential aspects of credit risk assessment and management practices. Challenge yourself to understand the nuances of credit exposure and risk mitigation strategies.