5 Questions
What is the purpose of the credit risk assessment structure in PNB?
To focus on assessing the risk associated with the loan
How does PNB manage its exposure to credit risk using the credit risk rating system?
Assigning a risk rating to each borrower
What does the credit appraising authority in PNB help to ensure?
Effective risk management by approving only viable projects
How does PNB define an account as overdue for bill purchases and discounts?
If it remains overdue for more than 90 days
What is the purpose of establishing prudential exposure limits in PNB?
To control total exposure to any individual or industry
Study Notes
Credit Administration Process Analysis: Risk Management in Punjab National Bank
As part of our ongoing series of articles, we will delve into the intricacies of the credit administration process, specifically focusing on the subtopic of risk management within Punjab National Bank (PNB). Understanding the credit procedures of a bank is crucial for both potential borrowers and investors alike, as it provides insight into the bank's lending practices and its commitment to managing risk effectively.
Background on PNB's Credit Administration Process
The credit administration process in PNB involves several steps, which are outlined briefly below:
- Assessment of Credit Need: This involves analyzing the borrower's requirements and determining whether a loan is necessary and feasible for the organization.
- Financial Statement Analysis: The bank evaluates the financial statements of the borrower to assess their financial health, which includes examining income statements, balance sheets, and cash flow statements.
- Financial Ratios: The bank uses financial ratios to assess the borrower's financial performance, including liquidity, profitability, and solvency ratios.
- Project Appraisal: This step involves assessing the feasibility of the project for which the loan is sought. It involves analyzing the project's technical, financial, and economic viability.
- Credit Risk Assessment: PNB has a risk assessment structure that focuses on complete segregation of credit risk assessment from credit underwriting by centralizing the process. This includes evaluating the borrower's ability to repay the loan and assessing the risk associated with the loan.
Risk Management in PNB
Risk management is a critical aspect of the credit administration process in PNB. The bank employs several tools and policies to ensure effective risk management:
- Credit Appraising Authority: The bank has established authority that approves loans, which helps to ensure that only viable projects are funded.
- Prudential Exposure Limits: These limits are put in place to control the total exposure to any individual customer, industry, or business unit.
- Industry Exposure Limits: The bank sets limits on the total exposure to any particular industry to minimize concentration risk.
- Credit Risk Rating System: This system assigns a risk rating to each borrower, which helps the bank to manage its exposure to credit risk.
- Risk-Based Pricing: This pricing model adjusts the interest rate charged on a loan based on the perceived risk of the borrower.
- Loan Review Mechanisms: These mechanisms regularly review the bank's loan portfolio to identify potential problems and take corrective action as necessary.
PNB's Risk Assessment Structure
PNB's risk assessment structure has been designed to focus on complete segregation of credit risk assessment from credit underwriting by centralizing the process. This structure includes several key elements:
- Overdue Accounts: PNB considers an account to be overdue if the interest or installment of principal remains overdue for more than 90 days in respect of a term loan or if the account remains out of order for more than 90 days in respect of an overdraft/cash credit.
- Bill Purchases and Discounts: The bank considers a bill to be overdue if it remains overdue for more than 90 days in the case of bills purchased and discounted.
- Direct Agricultural Loans: The installment of principal or interest thereon remains overdue for two crop seasons for short duration crops and one crop season for long duration crops.
Conclusion
In conclusion, the credit administration process in Punjab National Bank is designed to assess the creditworthiness of borrowers and manage credit risk effectively. By employing tools such as financial statement analysis, financial ratios, and risk-based pricing, PNB ensures that its loan portfolio remains healthy and sustainable. The bank's risk assessment structure, which focuses on complete segregation of credit risk assessment from credit underwriting, is a testament to its commitment to managing risk. As this series continues, we will delve deeper into the various aspects of the credit administration process, providing valuable insights for all stakeholders involved.
Test your knowledge on the credit administration process and risk management practices at Punjab National Bank (PNB). Learn about the steps involved in assessing credit needs, financial statement analysis, project appraisal, credit risk assessment, and more. Explore the tools and policies used by PNB for effective risk management and understand the bank's risk assessment structure.
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