Paper 4

CREDIT RISK MANAGEMENT

This paper is intended to equip the candidate with the knowledge, skills and attitudes to effectively manage credit risk in an organisation.

On completion, a candidate should be able to

Identify credit risks posed by different customers’ borrowing proposals
Assess, analyse and measure risks in borrowing proposals in line with an entity’s risk profile, using appropriate models and methodologies
Mitigate credit risks posed by borrowing proposals, based on their driving factors, and minimise their impact on profitability
Undertake credit risk monitoring and evaluation and report results, probabilities and impact of risk
Understand the working of credit risk insurance
Evaluate the impact of credit risk management on stakeholders

Content

1
Overview of Risk Management.
1. 1.1
  Definition of risk
2. 1.2
  Risks inherent in business organizations
3. 1.3
  Risk management process
4. 1.4
  Monitoring and evaluating risks
2
Fundamentals of credit risk
1. 2.1
  Meaning of credit risk
2. 2.2
  Need for credit risk analysis/ why manage credit risk/Credit risk management objectives
3. 2.3
  Causes of credit risk/Types of transactions that create credit risk
4. 2.4
  Who is exposed to credit risk?
5. 2.5
  Credit risk and return
6. 2.6
  Historical progress of credit risk analysis
7. 2.7
  Elements of credit risk analysis
8. 2.8
  Challenges of credit risk analysis
3
Assessing Credit Worthiness
1. 3.1
  The Credit appraisal process
2. 3.2
  Sources of information for credit appraisal
3. 3.3
  Overview of quantitative and qualitative credit assessment
4. 3.4
  Individual and corporate credit risk assessment
5. 3.5
  Models used in credit assessment (Five C’s of credit, CAMPARI, CCCPARTS)
6. 3.6
  Checklist for credit risk origination; Financial and non-financial firms
4
Credit governance overview
1. 4.1
  Credit guidelines/policies
2. 4.2
  Setting Credit limits
3. 4.3
  Skill s and oversight
4. 4.4
  Strategic position of credit risk management
5. 4.5
  Management context of credit risk management
6. 4.6
  Credit risk management structure
7. 4.7
  Credit risk culture and credit risk appetite (11)
8. 4.8
  Credit management process
5
Measurement of credit risk
1. 5.1
  The exposure
2. 5.2
  Default Probability
3. 5.3
  The recovery rate
4. 5.4
  Obligation tenure/period
5. 5.5
  Direct versus contingent exposure
6. 5.6
  The expected loss
6
Firm (or Obligor) credit risk
1. 6.1
  Business risks or operating risks
2. 6.2
  Financial risks
3. 6.3
  Risk matrix
4. 6.4
  Different risk levels (Low, medium and high)
7
External Risks
1. 7.1
  Credit risk in the business cycle
2. 7.2
  Economic conditions
3. 7.3
  Fiscal and monetary policies, balance of payments & exchange rates
4. 7.4
  Political risk
5. 7.5
  Demographic factors
6. 7.6
  Regulatory framework
7. 7.7
  International developments
8. 7.8
  Others (technology and environment issues)
9. 7.9
  Monitoring external risks
8
Overview of Industry risks
1. 8.1
  Understanding obligor’s industry or market
2. 8.2
  Types of industry risks, business cycles and industry life cycle
3. 8.3
  Industry and factors of production
4. 8.4
  Industry profitability (Existing firms’ competition, threat of new entrants, threat of substitute products and bargaining powers)
5. 8.5
  Competitor/peer group analysis
9
Entity level risks
1. 9.1
  Understanding the activity
2. 9.2
  Risk context and management
3. 9.3
  Internal risk identification steps
4. 9.4
  SWOT Analysis
5. 9.5
  Business strategy analysis
6. 9.6
  Management analysis
7. 9.7
  Other internal risks
10
Integrated view of firm-level risks
1. 10.1
  Relevance if integrated view
2. 10.2
  Identifying significant credit risks
3. 10.3
  Risk Mitigations (Qualitative and quantitative)
4. 10.4
  Principles of selecting risk mitigations
5. 10.5
  Planning and Monitoring of credit risk