Improvement of the mechanism for assessing and regulating the risk of the loan portfolio of the bank

Table of contents: The Kazakh-American Free University Academic Journal №9 - 2017

Authors:
Kabdullina Diana, Kazakh-American Free University, Kazakhstan
Nepshina Victoria, Kazakh-American Free University, Kazakhstan

The problem of minimizing of credit risk requires the creation of an adequate methodology for assessing its risk, which can be unified only by a certain measure, because each bank has its own clientele, its market segment, industry specifics, specific opportunities, etc.

Nevertheless, it is necessary to determine the minimum composition of credit risk assessment indicators, as this helps banks to develop their own system of supporting management decisions on granting loans and provides a given level of quality of the loan portfolio of the bank.

That is, at the moment, it is very important to determine the composition of the indicators that characterize the total credit risk of the bank and which are selected in such a way that management can effectively monitor the level of risk [1].

The creation of a comprehensive risk assessment of the bank's loan portfolio, which involves simultaneous quantitative and qualitative assessment of credit risk, can serve as a solution to this problem.

The optimal methodology for quantifying the risk of the loan portfolio of the bank is the methodology for assessing the risk level of the loan portfolio of the bank in the process of application-theoretic aspects of the risk assessment of the bank's credit operations.

This is a mathematical procedure for the structuring and hierarchical provision of a set of indicators that determine the actual level of risk, serve as a basis for predicting the possible consequences of a negative manifestation of risk and provide an opportunity to choose effective methods for its regulation.

The process of building an integrated system for assessing the risk of the loan portfolio of the bank must begin with the formation of a hierarchical structure of integral indicators.

Dispersion (variance) and root-mean-square deviation characterize the degree of dispersion of credit risk relative to loan portfolio agreements and weighted average loan portfolio risk.

This indicator is a generalized quantitative characteristic, which does not allow making a decision on the application of the main methods of risk management of the loan portfolio.

However, it is necessary to determine the measure of the variability of the risk of the loan portfolio in order to make a decision.

The greater the variance (variation) and the root-mean-square deviation, the more diversified in terms of risk the loan portfolio of the bank is.

But the variance and the root-mean-square deviation show a measure of the dispersal of credit risk relative to loan portfolio agreements for the better (their values are less than the average weighted loan portfolio risk) and for the worse (their values are greater than the weighted average loan portfolio risk).

Therefore, these indicators do not provide an opportunity to unambiguously assess the degree of riskiness of the loan portfolio. It is more appropriate to apply such a risk indicator as semevariation for this purpose [2].

Depending on the result of the deviation of credit risk, relative to loan portfolio agreements from weighted average credit risk, semevariation of the risk inherent in the loan agreements can be positive or negative.

Positive semevariation can be determined by following formula (1):

where n - the volume of the loan portfolio (number of agreements);

ti - positive deviation of credit risk relative to agreements.

Negative semevariation can be determined by following formula (2):

where n - the volume of the loan portfolio (number of agreements);

li - negative deviation of credit risk relative to agreements.

An indicator characterizing the quality of management of the loan portfolio of a bank is the specific weight of non-standard (overdue) loan debt in the total volume of loans granted, formula (3):

In the world banking practice, the presence in the loan portfolio of 5-10% of overdue credit operations is normal [3].

This coefficient can also be determined by summing the indicators K21, K22, K23, K24, the calculation of which is necessary for determining the factors of the change in the share of overdue loans.

One of the first indicators characterizing the quality of the loan portfolio of the bank is the specific weight of credit operations "under control" in the aggregate volume of the loan portfolio, using formula (4):

Reduction of the given coefficient gives a signal to the bank about the need to improve the efficiency of control over the financial condition of counterparties that own the largest loans.

The next step in calculating the proportion of overdue debt in the volume of the loan portfolio of the bank is to determine the proportion of substandard credit operations of the bank in the total volume of the loan portfolio of the bank, formula (5):

It is important for the bank to monitor customers experiencing certain specific difficulties and control the volume of credit transactions with them.

For this purpose, it is necessary to determine the specific weight of the bank's doubtful debts in the loan portfolio, according to the formula (6):

The level of doubtful debt characterizes the quality of the loan portfolio in terms of the problematic return of long-term, short-term and inter-bank loans.

The most significant impact on the quality of the loan portfolio of the bank is provided by the specific weight of bad loans, since the risk on such transactions is equal to the sum of the total debt, calculated by the formula (7):

Based on the results of the complex analysis of the aggregate credit risk of the bank, its degree can be determined as follows in the Table 1:

Table 1. The proposed scale of bank credit risk assessment

A credit portfolio with a low (permissible) level of credit risk should be understood as such a loan portfolio, which provides profitability to the bank even in the event of all possible risks.

The loan portfolio with a high level of risk is characterized by the presence of such a level of risk in credit operations, the full implementation of which threaten the functioning of the banking institution as a whole, i.е. the bank's own resources will not be enough if all risks are realized.

This can lead to bankruptcy of the bank, its closure and sale of assets.

This approach to assessing the risk of the loan portfolio of the bank is based on an analysis of the sensitivity of credit risk to a change in its structure.

The accuracy of the risk assessment of the loan portfolio in this case will depend on the choice of the classification features of the loan portfolio of the bank, for which the average level of credit risk can be determined most accurately [4].

As such a criterion, it is proposed to use:

- classification of the loan portfolio by the main groups of counterparties of the bank, which facilitates the definition of credit risk in the diversification of the portfolio and the choice of methods for its regulation;

- classification of credit operations for standard and non-standard (under control, substandard, doubtful and hopeless).

The proposed system for assessing the risk of the loan portfolio of the bank is constructed with maximum consideration of the bank's clientele, the resource capabilities of the institution and embody a diversified approach to managing the credit portfolio risk.

A comprehensive risk assessment of the loan portfolio of the bank, based on data on the structure of the loan portfolio, provides for the calculation of absolute and relative indicators, on the basis of which the bank receives a more reliable assessment of the level of risk on the ongoing credit operations.

But this is not enough for the effective and profitable work of the bank. It is also necessary to forecast the level of risk

Modern banks should not only assess the level of loan portfolio risk, but also determine its predictive value in the conduct of credit activities.

However, at present, a serious problem is the lack of effective tools for forecasting the risk level of the bank's loan portfolio.

This task is especially acute in the difficult economic conditions, when the audit is conducted according to international financial reporting standards and managers who set the task of reducing the level of aggregate credit risk to the world average.

The use of qualitatively new approaches to forecasting economic-mathematical methods and computer technology can serve as a solution to this problem [5].

The use of economic-mathematical models in the forecasting process allows the bank manager:

- identify the main factors that affect the essence of the problem, and formulate it more accurately and concisely - in the form of a model;

- to show which conclusions can be reached, I use the model;

- get the optimal solution and compare it with others;

- develop a step-by-step strategy for achieving the goals.

Thus, the use of economic and mathematical forecasting methods brings a significant economic effect.

The process of building a model for predicting the loan portfolio risk of a bank should begin with the definition of criteria for changing its level.

The amount of overdue debt in the total volume of loans granted should be applied as a criterion. It most accurately characterizes the quality of the loan portfolio and is the most predictable among the portfolio risk indicators of the bank.

Overdue loans increase the degree of credit risk and, accordingly, reduce the quality of the bank's loan portfolio.

It should be noted that forecasting the emergence of such debt at the initial stage, involves the classification of credit operations with the allocation of a separate group of problem loans, but which are not yet hopeless.

The second factor that determines the change in the share of the cut-off debt in the loan portfolio is the average level of solvency of borrowers.

The higher the average level of creditworthiness, the greater the likelihood of timely and full calculation of the borrower with the bank, i.e. the maximum value of this indicator will be 100%. The high value of this indicator also indicates an ineffective system for assessing the creditworthiness of the borrower.

Consequently, these factors can have a long-term determining effect on the formation of the average value of the level of overdue loan debt, as well as the riskiness and quality of the loan portfolio, reducing or increasing them.

The next step in the forecasting process is to determine the laws for changing the standard and non-standard debt in the volume of the loan portfolio of the bank.

It is necessary to analyze and quantify the degree of influence of these factors on the change of standard and non-standard loans.

This approach to determining the laws for changing non-standard and standard loans allows to determine the percentage of changes in the bank's credit resources and quantify the degree of influence of the main factors, which reflects the correction factor.

The main directions of risk management of the loan portfolio are the development and implementation of measures to prevent or minimize losses associated with it.

This presupposes the creation by each bank its own strategy for managing credit risk, that is, the basis of the decision-making policy in such a way as to timely and consistently use all the opportunities for the development of the bank while simultaneously keeping risks at an acceptable and manageable level.

Banking practice has developed certain methods of regulating the risk of the loan portfolio of the bank [6].

These methods include diversification, concentration, limitation and redundancy.

Diversification of the loan portfolio of the bank should be carried out by allocating loans to various categories of borrowers, the terms of provision, types of collateral, by sector and geographic feature.

Diversification of borrowers can be carried out through the distribution of loans between different groups of the population (youth, people with a steady income level, persons of pre-retirement age, etc.); depending on the purpose of lending (for consumer needs, for housing construction, for training, etc.).

Concerning economic subjects, the diversification of the loan portfolio can be carried out between such categories of borrowers as: large and medium-sized companies, small businesses, government and public organizations, households, etc.

Loans provided in the small business sector are often accompanied by an increased level of credit risk.

Such borrowers are often limited in choosing a lender, so the bank can dictate its own terms of the loan transaction.

If the borrower is a large company, then the credit risk is assessed as insignificant.

At the same time, it is recommended to diversify the loan portfolio by placing more average loans than a small number of large loans.

Diversification of collateral for loans allows the bank to provide an opportunity to recover credit losses at the expense of the borrower's property values acting as collateral for the loan.

As is known, the loans that form the loan portfolio are divided into secured, under-secured and unsecured ones.

The predominance of the last two groups increases the likelihood of losses for the bank. At the same time, secured loans vary depending on the types of collateral, its quality, the feasibility of implementation.

Branch diversification involves the allocation of loans between customers who operate in different areas of the economy [7].

It is crucial to select the areas that are implemented based on the results of statistical research to reduce the overall risk of the loan portfolio. The best effect is achieved when borrowers work in the opposite phases of the business cycle. If one area is at the stage of economic growth, the other is experiencing a stage of recession, and over time their positions are reversed.

The decrease in revenues from one group of customers is compensated by the increase in income from another group that helps to stabilize the bank's revenues and significantly reduce the risk.

Geographic diversification involves the allocation of credit resources between borrowers who are in different regions, geographical areas, countries with different economic conditions.

Geographic diversification as a method of reducing credit risk is available only to large banks with an extensive network of branches and branches on a large territory.

This helps to offset the impact of climatic and weather conditions, political and economic shocks that affect the creditworthiness of borrowers.

The method of diversification should be used carefully, based on statistical analysis and forecasting, taking into account the capabilities of the bank itself and, above all, the level of training. Diversification requires professional management and deep market knowledge. That is why excessive diversification leads not to a decrease, but to an increase in credit risk.

Bank experts in the formation of the loan portfolio should avoid excessive diversification and concentration. The task of determining the optimal relationship between these methods can be solved by setting credit limits and reserving.

Thanks to the establishment of credit limits, banks manage to avoid critical losses due to the thoughtless concentration of any type of risk, as well as diversify the loan portfolio and ensure stable incomes.

The most effective method of reducing the level of credit risk on the bank's portfolio is reserving.

This method is aimed at protecting depositors, creditors and shareholders, while improving the quality of the loan portfolio and the reliability of the bank.

The reservation is made to prevent losses from non-repayment of debt due to the insolvency of borrowers (bank counterparties) by assessing the risks for all credit transactions in both national and foreign currencies.

In the conditions of dynamic development of the banking industry in the credit sector, in particular, the situation develops in such a way that banks are forced to constantly seek new mechanisms for managing credit risk.

The rapid growth of this market in recent years, both in terms of volume and complexity of products, makes bankers make greater use of information technology, develop better analytical systems and create databases that ensure an optimal balance of risk and return on investment.

RESOURCES

1. Belyakov A.V. Banking risks: problems of accounting, management and regulation: Textbook. - Moscow: Publishing group "BDC-press", 2013.

2. Kabushkin S.N. Management of bank credit risk: Textbook. - Moscow: The New Edition, 2014.

3. Taktarova G.A. Financial environment of entrepreneurship and entrepreneurial risks: Textbook. - Moscow: Finance and Statistics, 2014.

4. Lukasevich I.Y. Financial management. - Moscow: Eksmo, 2015.

5. Buyanov V.P. Riskology. Risk management. - Moscow: Ankil, 2014.

6. Gilyarovskaya L.T. The economic analysis: the Textbook for high schools. - Moscow: UNITY-DANA, 2014.

7. Glushkova N.B. Banking: Textbook. - Moscow: Academic Project, 2014.



Table of contents: The Kazakh-American Free University Academic Journal №9 - 2017

  
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