Credit risk management: A survey of practices in Indian Private Banks

Abstract

Purpose: Proposes to look at current credit risk management practices by the Indian private banks. Due to the increasing diversity of types of counterparties and the growing diversity of forms of bonds, credit risk management has emerged as a leading edge in the risk management activities of financial service companies. The purpose of this study is to provide an insight into the current practices of Indian Private Banks

Approach – A brief questionnaire containing eight questions was mailed to 100 bank representatives from 10 randomly selected private banks headquartered in India.

Findings - The identification of counterparty default risk was found to be the most important goal of the credit risk models employed. Nearly half of the participating banks use models that are also able to handle the risk of counterparty migrating. Surprisingly, only a minority of banks currently use a vendor-owned or marketed model for credit risk management.

Interestingly, those who use their own internal model also use a model commercialized by the vendor. It is not surprising that these models are more widely used for the management of non-trading credit loan portfolios than for the management of negotiated loan portfolios.

Value –The results make it possible to understand the common practices of these banks. As such, they allow us to draw conclusions about how important the risks are perceived to be.

The document is of particular value to Treasurers to better understand current trends in CRM, and scholars intend to carry out research in the field.