Back to Basics in Credit Banking
Insights, Policies & Deep Dive Analysis
CREDIT ADMINISTRATION
There are a number of guidelines for compliance with regard to Capital Adequacy, Income Recognition, Asset Classification and Provisioning Standards. Compliance of the new set of norms hinges around one key factor - How efficiently we manage our Assets and Liabilities.
Lending activity represents the heart of Commercial Banking as loans dominate our asset holdings and generate the largest share of operating income. Credit Administration has, therefore, become a matter of crucial importance. Credit Administration includes three major functions:
- Business Development & Credit Appraisal
- Credit Sanction
- Review and follow up
In today's context, it is not sufficient to appraise a loan and release it. The most important aspects are follow up regarding utilization and whether the unit is generating sufficient surplus to service interest and installment dues and watching out for any red signal that can help the bank prevent possible sickness and consequential loan losses.
We have to look for collateral to enhance the asset backing. We have to be watchful about utilization by seeing every check. We have to review our earlier practice of referring in our Funds Book, the accounts where interest/installments are not serviced.
It’s never too late to reinforce our strength in Appraisal and Effective Monitoring.
Yes, we have to Return to Basics!.
RISK MANAGEMENT
In the intricate world of finance, risk management stands as a cornerstone of sound decision-making and financial stability. This section delves into the multifaceted nature of risk, exploring its identification, assessment, classification, and profound impact on profitability. The Basel Committee on Banking Supervision (BASEL) has outlined key areas of risk management, encompassing risk identification, assessment, classification, policies, limits, rating, estimation, management systems, supervision, and risk-based auditing.
A scientific approach to risk management has yielded valuable outcomes, including risk quantification, risk-adjusted pricing, risk-adjusted rate of return, and risk-related capital norms. These tools empower financial institutions to make informed decisions that balance risk and reward.
This concise overview aims to serve as a refresher for bankers, enabling them to refine their risk judgment, for which there is no substitute. By comprehending the intricacies of risk management, bankers can navigate the financial landscape with greater confidence and prudence.
CONSORTIUM LENDING
Consortium lending stands as a hallmark of collaborative finance, where multiple banks or financial institutions join forces to extend credit to a single borrower. This dynamic arrangement transcends mere expediency, embodying a collective approach to harnessing banking resources effectively.
While the consortium model initially emerged in response to fluctuating liquidity conditions, its evolution has yielded significant benefits, refining credit appraisal processes and fostering a more regulated flow of credit to borrowing entities. This collective approach empowers banks to pool their resources and expertise, fostering the growth of progressive banking practices.
Adopting consortium lending as a core banking philosophy allows institutions to transcend mere resource pooling. Instead, it fosters a culture of shared expertise and collective responsibility, enabling banks to contribute to the overall growth and stability of the financial landscape.
In essence, consortium lending represents a paradigm shift in the banking industry, moving away from individualistic lending practices towards a collaborative approach that optimizes resource allocation, enhances credit risk management, and promotes sustainable growth.
