Proiectul Meu de Curs

8/2/2019 Proiectul Meu de Curs

1/28

Chapter I:Theoretical aspects regarding the credit portfolio of a

commercial bank

1.1 Principles of credit activity management

All decisions regarding the credit activity process are based on the following

principles:

Compliance of legal requirements

Safety

Liquidity assurance

Profitability

1.1.1 Compliance of legal requirements

Compliance of legal requirements means performing the credit activity in the legal

framework provided by the legislation of the country in which the commercial bank

performs its activity. In the Republic of Moldova the following requirements

regarding the credit activity are set:

The net exposure undertaken by the bank vis--vis one person or a group of

people actioning together must not exceed 25% from its Total Required Capital

Maintaining the capital sufficiency coefficient at the required level of 12%

The participation of a bank to the social capital of a non-financial institution

must not exceed the stipulated level of 15% form the banks Total Required

Capital

The volume of credits launched to affiliated persons must not exceed the level

of 20% form the banks Total Required Capital

Banks must hold capital against 8% of their assets after adjusting their assets

for risk, according to the first pillar of Basel II

Banks must follow market discipline which is based on enhanced disclosure of

risk, according to the second pillar of Basel II

6


2/28

Based on the restrictions imposed by the legislation as well as by the National Bank

and taking into consideration the economical conjuncture and the banks position in

the total banking sector, each bank tries to create its own credit policy.

1.1.2 Safety

The credit represents the main and the most profitable activity from the banks active

operations but at the same time it is the most risky one. That is why the credits must

be carefully analyzed using a series of specific techniques regarding the

reimbursement capabilities in due time stipulated in contracts.

Each bank assumes a certain degree of risk when launching a credit and, for sure,

each bank experiences the definite loss of some placements or of a late recovery of

them. That is why each placement must be thoroughly analyzed.

The placements made on the banking market are relatively sure, in the case when the

debtors are well-known banks. More than that, these credits are pledged with

government securities which mean a high level of safety.

The credits offered to the state or other state organizations are not a problem becauseas we know the state is the best debtor.

The credits launched to enterprises are exposed to a high risk of not being reimbursed

at maturity and this risk may happen due to three causes:

1. because of the debtor, mainly, because of its financial situation and of the

enterprises management abilities.

Any enterprise may find itself in a situation of not being able to pay the interest

on credits or even the credit itself which is a result of a bad management, of an

unpredicted situation, of a wrong estimation of its own risks or due to a hard

competition.

2. because of the national economy situation.

The macroeconomic instability highly influences the banking activity in

conditions when the economic growth and the rate of inflation are in a permanent

7


3/28

evolution. In such a situation it is very difficult for a bank to evaluate the credit

risk.

3. because of the bank.

In the majority of cases, the problems regarding a portfolio of bad credits originate

in a poor management of the credit activity.

Analyzing the causes that lead to the failure of a number of banks, the following

main reasons were highlighted:

acceptance of overvalued mortgages

launching credits before performing and creating the credit file

the lack of cash flow analysis and of the ability of credit reimbursement

launching new credits to cover the afferent interest

the credit was used in other purposes than the one it was offered for

failure in mortgage valuation

ignorance of rumors and references regarding the clients credits at other

banks

launching the credit without complete documentation : feasibility studies,

marketing studies, authorizations ,contracts etc.

non observance of the rules regarding credit classification and creation of

specific reserves of risk

a wrong registration in accounting of some commitments

1.1.2 Liquidity assurance

The banks necessities of liquidity represent the immediate payments that the bank

must perform, such as: deposits withdrawal, the demand for new credits that the bank

has to satisfy in order to maintain its market share and other current payments that

need to be honored.

Some factors tend to impose placements with a longer maturity than the banks

resources. One of these factors is the clients wish to be offered long term loans,

anticipating the evolution of interest.

8


4/28

At the same time those people that make investments in the bank the deponents,

prefer short term maturities, in order to protect their money from inflation.

The satisfaction of the banks necessity for liquidity imposes a permanent correlation

between the maturity of its placements and resources.

More that that, the banks must face the constraint that it has to maintain a set level of

liquidity, which means less profitability.

The legal requirements set by the legislation of the Republic of Moldova regarding

the liquidity sufficiency were presented in the form of two principles that the banks

have to comply with:

Principle I: the sum on the banks assets with the maturity of reimbursement

greater than 2 years must not be greater than the sum of its financial resources

Principle II: the current liquidity of a bank, expressed as a coefficient of liquid

assets to total assets must be less than 20%

1.1.3 Profitability

A bank makes all its placements in order to obtain a profit. But it must assure that the

placements are well managed so that the ratio _

profit

owner equity will increase.

Each bank wants to maximize its profits in order to please its shareholders,

employees, to cover the eventual losses and to create legal reserves imposed by the

authorities.

So, obtaining a big profit is not just a simple aim, but a necessity for assuring a sound

financial position in the banking market.

1.2 Methods of determining the credit portfolio quality

The credits are the main assets of a bank and they generate the bigger part of its

revenues.

9


5/28

The credit activity implies a risk because it very easy to lend some money, but there

are situations when it is about an art to manage to recover a loan.

The credit risk may be defined as the risk of recording some losses or of not

performing profits, as a result of not honoring by the client the contractual

commitments. The decision of launching a credit is based on elements of anticipation

of the debtors activity ( the analysis of cash flows and some financial indices), which

implies the risk evaluation and its acceptance. Consequently, the risk may not be

avoided, but only prevented and diminished.

A credit portfolio may be defined as the

1. totality of credits launched by a bank at a given moment of time.

2. the weight of each type of credits offered by a bank.

The quality of a credit portfolio can be determined using the following criteria:

Structure

Liquidity (in terms of maturity)

The degree of utilization

Profitability

Stability

1.2.1 Computing the structure of the credit portfolio

By its structure the credit portfolio can be classified according to the following

criteria:

depending on the type of debtors, there are:

1. credits offered to juridical persons

2. credits offered to natural persons

depending on the type of credits, there are:

1. consumption credits

2. mortgage credits

3. investment credits and so on.

10


6/28

The scope of the credit allows to determine the degree of efficiency of each type of

credit for a bank. From its earlier experience the bank determines what types of

credits are the most profitable and the least risky for the bank, in order to stimulate

the growth of the volume of this type of credits in the credit portfolio.

Depending on the branch of the economy that is being credited, these are

credits offered to legal entities which can be classified into subgroups

according to branches:

1. industry

2. trade

3. agriculture

It is important to determine the type of credit which represents the optimum amount

for the bank and that needs further investment to be developed.

1.2.2 Credit portfolio analysis according to its degree of risk

In order co cover the losses which are a result of the risk appearance generated by the

credit activity, and to maintain its stability the bank creates a special fund, named risk

fund- for covering the losses generated by credits.

Following this idea, the bank classifies all the launched credits in five big categories,

according to their exposure to the risk of not being reimbursed:

1. Standard: the credit is considered standard if it is at maturity, all the

commitments stipulated in the contract are observed and there is no reason for

the bank to consider that, at present or in the future, it will be exposed to therisk of loss.

2. Supervised: the credit has potential problems, connected to the financial

situation of the client as well as to the pledge associated to the credit. These

type of credits require the bank managements attention, because if no

measures of solving the problems will be undertaken, they may lead to

damaging the banks assets and to the reduction of the probability regarding

the satisfaction, in the future, of the banks claims to the credits.

11


7/28

3. Substandard: these are credits characterized by a degree of the risk of losses

higher that the usual one, determined by one of the following factors:

a. the financial state of the debtor is unfavorable or is worsening

b. the pledge( in case this exists) is insufficient or is worsening

c. other unfavorable factors, that cause worrying regarding the debtors

ability to satisfy the banks claims, in conformity to the existing

conditions.

This type of conditioned commitment, requires the banks management special

attention, because there is a probability that the bank will suffer losses, if the

drawbacks will not be omitted.

4. Doubtful: when there are problems that arise doubts and diminish the

probability of satisfaction of a banks present/future claims afferent to the

whole volume of the credit, based on the circumstances, created conditions as

well as on the market value of the pledge in case when the asset is pledged.

5. Compromised: at the moment of credit classification the banks present/futureclaims afferent to it can not be satisfied.

According to the legal requirements, the banks are obliged to create and maintain

reductions/provisions for losses from credits at a level not lower than the required

one.

Following this idea, the risk fund for losses from credits will be formed, by

weighting each type of credits to the afferent risk coefficient, as it follows:

1. Standard credits- 2%

2. Supervised credits- 5%

3. Substandard credits- 30%

4. Doubtful credits- 60%

5. Compromised credits- 100%

An analysis of the credit portfolio according to the risk criterion may offer

information about the validity of the models used for estimating the credit risk at the

12


8/28

stage of credit launching. In order to estimate the global degree of credit risk,

assumed by the bank, we can compute the coefficient of insurance against the credit

risk in the following way:

1

_ _*100%

_

risk fund volumek

credit portfolio=

(1.2.1)

This coefficient of following the credit risk may be used to evaluate the efficiency of

the banks credit policy and of the mechanisms used to determine the credit risk at the

stage of working with the debtor, of evaluating the minimum risk fund. A positive

tendency in credit risk management, at the portfolio level, is the reduction of this

coefficient.

In international practice the global risk fund must not be grater than 15%, because

otherwise the credit portfolio is considered too risky.

If this coefficient is placed in the interval 10-15% means the credit portfolio exposure

to a high level of risk, in the interval 5-10% the level of risk is acceptable and under

5% we can speak about a safe credit portfolio.

1.2.3 Credit portfolio analysis according to its components

A qualitative analysis of the credit portfolio in the field of risk supposes the

separation of the portfolio intoperformant credits, which are Standard and Supervised

credits.

The improvement of the credit portfolio quality implies the growth of the following

coefficient:

2

_*100%

_

performant creditsk

credit portfolio=

(1.2.2)

The level of credits classified as unperformant, is the total sum of Substandard,

Doubtful and Compromised credits.

A comparison of the level of credits classified as unperformant along a period of

analysis will indicate the negative tendency in the credit portfolio quality and this

13


9/28

may have as a result the increase of the volume of reductions made for losses from

assets and of the provisions made.

3

_*100%

_

unperformant creditsk

credit portfolio

=

(1.2.3)

In order to have a clearer image, the value of unperformant credits must be compared

with the Total Required Capital and Total Assets, as it follows:

4

_*100%

_ Re _


Total quired capital =

(1.2.4)

5

_*100%

_


Total assets=

(1.2.5)

A current rule in the Republic of Moldova at the moments is that if the total amount

of credits classified as unperformant increases the level of 50% from the banks Total

Required Capital, then the quality of assets is very low.Another useful analysis of the coefficient is to compare the level ofexpired credits to

Total credits. Normally, when the expired credits are at the level of 20% or more,

from the total amount of the banks credit portfolio, then the quality of assets is low

and any result higher than the level of 40% represents a serious problem for the bank.

6

exp _ *100%

_

ired creditsk

credit portfolio=

(1.2.6)

The expired credits and those in the state of non accumulation of interest are:

o doubtful and compromised credits

o credits with maturity expiration of 90 days and more

o credits with payment at sight at which the first payment of the interest has

expired

o reimbursed credits, in partial installments, at which the rate of credit

amortization has expired

14


10/28

An analysis of the rate between actual losses at the average of credits launched along

a set period of time will show the evolution of the credit risk management.

7

_*100%

_

credit lossesk

credit portfolio

=

(1.2.7)

If this coefficient increases, this may mean a high risk for the bank, generated by the

decrease of effects of the banks credit policy or by the banks inability to follow a

set policy or by the increase of the credit activities in domains characterized by a high

level of risk.

1.2.4 Determining the profitability of a credit portfolio

The profit, is finally, the most important aim of a banks shareholders, and the

objective is the increase of the banks value, through risk preventing and decrease as

well as through the increase of the banks market position. The main source of profit

in a banks activity is the credit operations. And by solving the problem of credit

portfolio profitability leads to the realization of the banks main objective.

A credit portfolio profitability may be analyzed and appreciated using the following

indicators:

the degree of profitability of a credit portfolio (Dprof)

int _ inf int _ _ _ exp

_prof

erest lows erest outflows unperformant credit ensesD

credit profit

=

(1.2.8)

This indicator determines the net profitability of one MDL given as credit.

In this formula all types of credits are equivalent, that is why, it is recommended

to determine the net profitability associated to different types of credits. But the

problem is to determine the resources that finance these credits.

credit profitability (Cprof)

15


11/28

int _ inf int _ _ exp

_prof

erest lows erest outflows operational ensesC

total credits

=

(1.2.9)

This ratio allows the bank to determine the profitability of each type of credits in

particular.

1.3 Methods of credit portfolio management

One of the most significant changes to affect wholesale banking in recent years is the

shift from the traditional buy and hold origination model to active credit portfolio

management. In the active credit portfolio management approach, a centralized groupof portfolio managers assumes responsibility for making buy/sell/hedge decisions

about the composition of the portfolio and acts to optimize the risk/return

performance of credit assets. The active credit portfolio management method was

created in order to:

reduce concentration and credit portfolio volatility(unexpected losses)

increase capital velocity-use economic capital more efficiently and create thecapacity to do more business

improve returns on risk and capital

Active credit portfolio management involves three key principles:

hold credit only when the institution is being paid well for

the marginal portfolio risk-the extra portfolio risk associated with a small

increase in exposure size. reduce concentration and hence credit portfolio correlation

caused both by excessive origination in single names, countries and/or industries

and by deterioration in credit quality. When the credit quality deteriorates on an

obligor, correlation of that obligors exposure with the credit portfolio increases.

Those exposures are no longer being as well diversified by the portfolio.

to reward liquid and penalize illiquid exposures in the

portfolio through an illiquidity premium when measuring marginal portfolio

16


12/28

credit risk and return. Because a credit portfolio manager cannot forecast a priori

which exposures will deteriorate in credit quality and therefore need to be

reduced. Liquidity is very important for active credit portfolio management and

should be rewarded.

Historically, credit portfolio management had focused on the monitoring of

exposure by broad portfolio segment and, if necessary, the imposition of exposure

caps.

Source: Credit portfolio management, by T. Garside, A. Stevens

Figure 1.3.1 Optimization of origination and portfolio management activities

The creation of a stand-alone credit portfolio management function, armed

with sophisticated portfolio models and with controlling mandate over assets held

on the balance sheet, now enabled the credit portfolio to be optimized independent

of origination activity.

Active credit portfolio optimization has enormous potential to enhance profitability.

1.3.1 Credit risk measurement framework

Credit risk is conventionally defined using the concepts of expected loss (EL) and

unexpected loss (UL).

17


13/28


Figure 1.3.2 Credit loss volatility

Because expected losses can be anticipated, they should be regarded as a cost of

doing business and not as a financial risk. Obviously credit losses are not constant

across the economic cycle, there being substantial volatility (unexpected losses) about

the level of expected losses. It is this volatility that the credit portfolio models are

designed to quantify.

Volatility of portfolio losses is driven by two factors concentration and correlation

18


14/28


Figure 1.3.3 Effects of concentration and correlation on credit risk

Concentration describes the lumpiness of the credit portfolio.Correlation describes the sensitivity of the portfolio to changes in the underlying

macro-economic factors. In all but the smallest credit portfolios, correlation effects

will dominate.

When quantifying credit risk, two alternative approaches can be used when valuing

the portfolio:

Loss-based method: under this approach an exposure is assumed to be held tomaturity. The exposure is therefore either repaid at par or defaults, and thus

worth the recovery value of any collateral. Using this approach credit

migration has no effect on the book value of the obligation.

Net Present Value method: under this approach the embedded value of an

exposure is assumed to be realizable.

In general, the Net Present Value method is most applicable to bond portfolios when

for the majority of commercial banks exposures the Loss-based method is mostly

used.

1.3.2 Credit portfolio methodology

In order to accurately model portfolio credit risk the correlation between exposures

must first be measured. An attractive solution to calculating credit risk correlation is

to use a causative default model that takes several observable financial quantities as

inputs and then transforms them into a default probability. The most used models are:

Merton default model.

19


15/28


Figure 1.3.4 The Merton default model

The Merton default model assumes that a firm will default, if over a 12 month period,

the market value of assets falls below the value of callable liabilities. This enables

asset correlation to be transformed into credit risk correlation.


Figure 1.3.5 Joint probability density function for company asset values

In Figure (1.3.5) the more correlated the movements in the two companies assets the

greater the twist in the joint asset value distribution. Hence the greater the

probability that the credit quality of the two firms will rise, fall and ultimately default

together.

Macro-economic factor model

20


16/28


Figure 1.3.6 Macro-economic factor model

In figure 1.3.6 a positive factor weight indicates that a positive change in that

factor produces an increase in asset value, with a corresponding rise in credit

quality and reduction in default rate. Conversely, a negative factor weight

indicates that a positive change in that factor produces a decrease in asset value,

with corresponding fall in credit quality and increase in default rate. Simulation method. While the risk of small credit portfolios can be calculated

analytically, the large number of calculations required, mean that for most

portfolios it is better to employ a numerical simulation technique. Monte Carlo

simulation is the standard method that generates all possible states of the

economy and the resulting impact on the value of the credit portfolio. In this

way a distribution of all possible portfolio values is built up, from which its

credit risk profile can be calculated.

21


17/28


Figure 1.3.7 Monte Carlo simulation

Now, we can illustrate a number of management applications of portfolio models.

1. Solvency analysis. The most obvious application of a credit portfolio

model is to calculate economic capital requirement.

2. Credit risk concentrations and portfolio optimization. Breaking down the

aggregate credit risk distribution to show the credit risk of each portfolio

element allows risk concentrations and hence diversification

opportunities to be identified. For most credit portfolios simple

optimization techniques will substantially reduce economic capital

requirements.

22


18/28


Figure 1.3.8 Potential diversification benefits in a typical bank portfolio

3. Sensitivity analysis. Portfolio models can be used to calculate expected

loss rates under different economic scenarios and thus drive dynamic

provisioning estimates or loan loss reserving methodologies.

Chapter II: Credit portfolio analysis of Moldova Agroindbank CB,

branch X

2.1 Analysis of the Moldova Agroindbank CB, branch X credit portfolio

structure.

23


19/28

As it was previously mentioned the structure of a credit portfolio may be determined

by classifying it according to different criteria. And after the classification is

performed relevant conclusions can be drawn.

In our particular situation the credit portfolio of Moldova Agroindbank CB, Branch

X can be classified according to the following criteria:

by the type of the debtor

by the type of the credit

by the branch of the economy that is credited

by the maturity of the credits offered

by the type of relationship of the debtor with the bank

1. By the type of the debtor. As it is known, according to this criterion there are

two types of debtors: juridical and natural persons. In our particular case, the

distribution of the debtors of Moldova Agroindbank BC, branch X,

according to this criteria can be illustrated in the following way:

Table (2.1.1)

Credits offered to types of debtors according to the number of debtors

Source:Moldova

Agroindbank CB,

branch X, credit

portfolio

Table (2.1.2)

Credits launched to types of debtors according to the volume offered

Type of debtorWeight in the total

portfolio

Juridical persons 66,75%

Natural persons 33,25%

Total 100%Source:Moldova Agroindbank CB, branch X, credit portfolio

2. By the type of the credit. By performing this classification we want to

determine the weight of each type of credit that Moldova Agroindbank BC,

Type of debtorWeight in the total

portfolio

Juridical persons 5,5%

Natural persons 94,5%

Total 100%

24


20/28

branch X, offered and the profitability of each type of credit (Annex 1,

Annex 2).

Table (2.1.3)

Credits offered to juridical persons

Type of credit Amount offered,%

Overdraft 27

Investitional (MT) 23,7

Investitional (LT) 1,77

Circulant (trade) 1,23

Circulant (agriculture) 11,67

Investitional pentru

reparatii capitale

1,38

Total 66,75Source:Moldova Agroindbank CB, branch X, credit portfolio

Table (2.1.4)

Credits offered to natural persons

Type of credit Amount offered,%

Imobiliar 5,83

Multioptional 24,37

Nenominalizat 3,05

Total 33,25

Source:Moldova Agroindbank CB, branch X, credit portfolio

3. By the branch of the economy that is credited. At this criterion we can analyze

only the credits offered to juridical persons depending on the type of activity

each juridical person performs according to its statute. Moldova

Agroindbank CB, branch X, financed the development of the following

branches of the economy (Annex 3).

Table (2.1.5)

Branches credited

Branch of the economy Amount offered,%

Agriculture 37,14

Trade 29,6Source:Moldova Agroindbank CB, branch X, credit portfolio

25


21/28

4. By the maturity of the credits offered. Here we can determine the liquidity of

the credit portfolio, because a short-term oriented credit portfolio is considered

more liquid than a long-term one (Annex 4).

Table (2.1.6)

Credit portfolio liquidity

Time period Amount offered,%

Long term loans 7,58

Medium term loans 28,14

Short term loans 64,28Source:Moldova Agroindbank CB, branch X, credit portfolio

5. By the type of relationship of the debtor with the bank. According to this

criterion we can distinguish between credits offered to affiliated persons and to

non-affiliated persons. In our particular case, Moldova Agroindbank CB,

branch X, has no credits offered to affiliated persons. This way we can

conclude that 100% from the amount of credits launched are offered to non-

affiliated persons.

Conclusion: After performing structural analysis of the credit portfolio of Moldova

Agroindbank CB, branch X, we can conclude that its credit portfolio can be

characterized by a high degree of liquidity as the weight of short-term credits exceeds

50% and constitutes 64%. This is a quite applaudable situation because, as we know,

the biggest amount of deposits are short-term deposits and in this case we can

confidently state that the upper mentioned bank is not threatened by the

transformation risk of liquidity. At the same time we can speak about the

disadvantage that short-term and medium-term credits are less profitable than long-

term ones.

According to Moldova Agroindbank CB policy of credit, the agriculture is the

sector of the Republic of Moldovas economy sector that is considered to have a

priority in crediting. This fact can explain the increased weight of credits offered by

Moldova Agroindbank CB, branch X, to the agricultural sector. The second

sector that has been credited in large proportions is the trade sector. Here we can

notice that the mentioned credit portfolio is not enough diversified because the

26


22/28

subsidiary depends on the evolution only of two sectors of the economy. But at the

same time this fact can be explained in the following way:

1. the priority given to the agricultural sector

2. the dependence of the territorys size, because in a small region like X it is

difficult to diversify the activity

3. the existence of competition

Referring to the credit portfolios structure according to the type of debtors, we can

say that although the number of juridical persons credited is small (only 5,5%) the

volume of credits offered to these clients is relatively high (66,75%). Here we ca see

the advantage that the collaboration with juridical persons is less risky, because they

have a profitable activity in comparison with natural persons that are dependent on

constant incomes (the salary). More than that, in small subsidiaries, the juridical

persons are in the majority of cases permanent clients, and this way the subsidiary

knows the credit history of the client and has general experience of collaboration with

the client. But the disadvantage here is the fact that in this case we can notice a high

degree of concentration- a small number of juridical persons clients and a highamount of credits launched to them. The credit portfolio, and the subsidiary as well,

becomes too dependent from the activity of these clients. The failure of one client

may lead to serious qualitative and quantitative damages to the credit portfolio.

2.2 Qualitative analysis of the Moldova Agroindbank CB, branch X credit

portfolio

As it was mentioned before, each bank has to classify all its credits into five

categories of credits, according to the level of risk supposed by each credit. In the

particular case of Moldova Agroindbank CB, branch X, the classification of

credits looks in the following way:

Table (2.2.1)

Moldova Agroindbank CB, branch X, credit portfolio classification

Type of credit Sum, m.u. % in the risk fund Amount of the

27


23/28

risk fund

Standard 28728110 2 574562,2

Supervised 6880500 5 344025

Substandard 600000 30 180000

Doubtful 6000000 60 3600000Compromised 1105000 100 1105000

Total 43313610 - 5803587,2Source:Moldova Agroindbank CB, branch X, credit portfolio

Once the classification is done, we can calculate the global degree of credit risk

coefficient (k1)

1

5803587,2*100% 13,4%

43313610k = =

(2.2.1)

Conclusion: The global risk fund can be characterized by a high degree of risk,

because it is higher that 10%, but at the same time it is acceptable as it is lower than

the internationally level set at 15%.

Now we have to compute the amount of profitable and unprofitable credits at the

Moldova Agroindbank BC, branch X, that are needed to calculate the value of

other relevant indicators that show the quality of a credit portfolio.

Table (2.2.2)

Classification of credits launched according to their quality

Performant credits 35608610 MDL

Unperformant credits 7705000 MDLSource:Moldova Agroindbank CB, branch X, credit portfolio

28

2

35608610*100% 82,2%

43313610k = =


24/28

(2.2.2)

3

7705000*100% 17,8%

43313610

k = =(2.2.3)

Conclusion: According to the performed analysis we could determine that the sum of

credits characterized by a low degree of risk amounts to 82,2% in the Moldova

Agroindbank CB, branch X, credit portfolio and correspondingly, the sum of

credits characterized by a high degree of credit risk amounted to 17,8%. Moldova

Agroindbank CB, branch X, is advised to minimize the amount of credits with a

high degree of risk . The credit risk can be eliminated using the following methods:

1. Increase in the quality of credits launched

2. Launching credits to clients with a good financial situation

3. Increase of the crediting profitability.

2.3 Credit risks at Moldova Agroindbank CB, branch X

The credit risk can be defined as the risk that the interest, credit or the both of them

will not be reimbursed at maturity or will be reimbursed partially. This risk is specific

to the banks that have the important function in the economy of crediting.

The credit risk appears as a result that the enterprises that were offered the credit are

not able to reimburse it which may be a result of the postponement between revenues

and expense, the risk appearing as their future inflow will decrease or will disappear,

or a result of the debtors dishonesty, which is a risk that the bank is not able to

appreciate or quantify very efficiently.

The risk of future revenues insufficiency is very difficult to be anticipated especially

in conditions when the evolution of inflation imposes the credit interest increase.

At the same time the enterprises inability to reimburse the credit may be a result of itsenvironment. An enterprises environment is defined as the totality of the enterprises

29


25/28

external factors of economic, political, social and branch situation nature in which the

enterprise performs its activity, and the influence of which may affect its future

performance.

Political decisions such as the embargo set on particular products, some regional and

international agreements, have a deep influence on some enterprises. When these

decisions are taken the enterprise sees its market changed in a very short period of

time, and this fact negatively influences the enterprises viability.

The economical risks are determined by some changes in the structure of the

economy of a country. In periods of recession the enterprises face some difficulties

that may lead even to bankruptcy.

The situation and the evolution of the branch, in which the enterprise activates,

contradictory influences some enterprise. The innovations may modify the production

procedure, but may determine the introduction of new products which are more

competitive, and this may determine that the demand for the products of some

enterprises may decrease or even disappear.

So, the bank has to know the evolution of the enterprises environment throughpermanent monitoring and analysis.

In the particular case of Moldova Agroindbank CB, branch X, the credit risk is

highlighted by the lack of the credit portfolio diversification according to braches. As

it was upper shown Moldova Agroindbank, CB, branch X, launched credits only

to the agriculture and trade sectors which makes the portfolio too sensitive to the

changes that may occur in these sectors of the economy. Speaking about the

agricultural sector than it is well known that in the past 5-10 years the changes in the

climate, as a result of the greenhouse effect, determined very small quantities of

harvest characterized by poor quality. So the floods and droughts that were following

one another influenced in a very bad way the financial situation of those enterprises

that activate in this sector of the economy. We can state that these changes in the

climate indirectly may seriously influence the situation of the up mentioned bank,

30


26/28

that may find itself in the situation that the biggest part of its credits will have to be

restructured and prolonged.

At the same time Moldova Agroindbank CB, branch X, faces the risk of poor

client diversification. As it was shown the number of juridical persons that are clients

of this bank amounts to 5,5% from the total amount of clients. And at the same time

the amount of credits launched to these clients is 66,75% from the total portfolio

which means that the bank depends a lot on the financial health of its several but

important clients. In order to avoid this risk and improve the situation the bank is

advised to have a more aggressive politics of credit. Which means, offering more

credits of smaller amounts, to a bigger number of clients. This way the risk of credit

non reimbursement of one client will affect the banks credit portfolio and the banks

financial health in smaller proportions.

At the same time Moldova Agroindbank CB, branch X, faces the problem of a

considerable weight of unperformant credits which amounted to 17,8% in the total

amount of credit portfolio. In its further activity the bank will have to struggle to

solve this problem by undertaking a particular approach to each unperformant creditby restructuring the reimbursement schedule, taking additional mortgage or by sueing

the bad debtor. But in the last case the bank will face the risk of selling the mortgage

at the market value which frequently is significantly lower than the book value.

2.4 Methods of credit portfolio diversification

The credit portfolio diversification represents a way of optimization the banks

performance. Credit portfolio diversification has two major aims:

1. risk minimization

2. maintaining and increase of the existent level of profit

Credit portfolio diversification is subordinated to the principle of risk dispersation.

The disadvantage here is that risks dispersation minimizes the risk but it also leads to

smaller profits. The persistence towards certain placements and debtors, multiplies, in

some cases, the risks, but at the same time amplifies the profits. So it is the banks

31


27/28

responsibility to decide on the placements to be made and on the directions of credits

to be launched.

The diversification of a credit portfolio may be made on specific single directions or

on several directions simultaneously. These directions can be enumerated as it

follows:

1. on the debtor

2. on the branch

3. on the type of credit

4. on maturity

The credit portfolio diversification on the debtor means an accurate selection of

debtors which implies a persistent study of the debtors history, financial soundness,

and, of course, the debtors future performance. The aim of studying the debtors

history is to identify the enterprises performances, risks and its management. This

study is made at the first stage of discussion with the potential client. The bank has to

analyze the potential debtors financial situation by calculating relevant indicators

showing the debtors ability to pay on the credit commitments and classify the debtoraccording to credit scoring into one of the five categories.

Then the bank has to analyze the debtors future. The aim of this analysis is to

determine the risks of the business that the bank is about to credit, to identify all the

potential sources of credit recovery, to determine the degree to which the

stockholders support the business and its viability on the market.

Once the study is made and the client has been granted the credit then the next stage

comes up: the work with the client and permanent credit monitoring. This will help

the bank to determine whether the credit is used according to the scope stipulated in

the credit contract and whether the financial health of the client remained stable,

improved, or worsened. Depending on the conclusion made the bank has to create a

plan of actions in order to minimize the risk.

Credit portfolio diversification on the branch refers to the idea that a sound credit

portfolio must not be dependent on a single or few branches of the economy because

32


28/28

even unessential fluctuations in these sectors may significantly affect the banks

health. The most relevant sample to support this statement is the current situation of

the global economy the crisis. Due to the fact that a big number of banks betted on

the real estate market development, the crash of this market lead to an even huger

crash of a number of banks.

A sound credit portfolio must also contain different types of credits launched. The

difference between these credits is in the form of sum, maturity, scope of credit and

other credit attributes. These variables must be well alternated in order to obtain the

optimum result in the form of a low risk and high profitable credit portfolio. The

bank has to establish the optimum proportion between long-term and short-term

credits, between secured and unsecured credits, between big and insufficient

exposures.

The maturity of the credits also plays an important role in the credit diversification

function. On the credits maturity depends the liquidity of the credit portfolio. And

here the optimum level of liquidity must also be efficiently set. This must be done

because a too liquid portfolio limits its profitability, while a less liquid portfolioincreases the profitability and the risk as well. The maturity of the credits must also

be coordinated with the maturity of the banks financing sources. A bank is not

supposed to offer long-term credits when the deposits that it holds are short-term

oriented.

33

Proiectul Meu de Curs

Documents

Transcript of Proiectul Meu de Curs