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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