How To Reduce Credit Risk In Banks – Credit Analyst Interview Question (Entry Level). There are various vacancies for the post of Credit Analyst, Credit Officer in various private sector Banks like Kotak Mahindra Bank, ICICI Bank, Indusdind Bank etc and one of the common interview questions asked is “How can Credit Risk be minimised in Banks”. Read the below mentioned post for details on how to answer these queries in an Interview.
What is Credit Risk
Credit Risk refers to the risk when a borrower will fail to meet his obligations as per the agreements made. In these cases a borrower will default on any type of debt by failing to make required payments. The lender faces the risk of complete or partial loss in principal and interest, uneven cash flows, and increased collection costs and can occur in case of mortgage loans, credit card, line of credit, asset secured debts etc.
How to Minimise Credit Risk
To reduce the risk banks have to set up an appropriate credit granting, administering, measuring and monitoring process. Banks should be able to do a thorough screening of the prospective borrower by understanding his financial transactions and background. This can be done by KYC, verifying the salary slips, bank statements, income statements, balance sheet etc. The banks can also approach the credit rating agencies like CIBIL, CRISIL etc to assess the credit history of the prospective borrowers. Collateral for a loan significantly reduces credit risk where the borrower is highly persuaded to repay the loan, and also the collateral can be sold to repay the debt in case of default. Asking the borrower to take adequate mortgage insurance, or to seek securities or guarantee of third parties are some methods adopted by banks to reduce credit risk.
Do’s Before Offering Bank Load
When banks offers loans to non customers, then the bank has to rely more on credit risk analysis to determine the credit risk of the loan applicant. Credit risk analysis is the determination of how much risk a potential borrower poses and what interest rate should be charged. Banks generally charge a higher interest rate to borrowers who are more likely to default or who poses greater risk, and this is called risk-based pricing. The banks consider factors relating to the loan such as loan purpose, credit rating, and loan-to-value ratio and estimate the effect on yield. By tightening the amount of credit granted banks can reduce risk to some extent. Banks can diversify their borrower pool i.e. they can offer credit to businesses in different industries or to borrowers in different locations.
Banks should have an efficient monitoring system and need to periodically analyze the financial conditions of its borrowers and take proactive measures to reduce the credit risk.
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