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Providing Officers with Best Practices in selling Credit Risk

Date: March 24, 2015 Author: Ramzi Watfa
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There seems to be a missing link between what bank officers try and sell and what good Credit Risk practices require them to sell.

Best in Class Training
Best in Class Training

In a recent exchange of correspondence, one client asked us to provide training over a 2 days period on improving the underwriting process for SME and Corporate officers, using Best in Class and Best Practices. Although a 2 days period is hardly enough to cover a case, never mind trying to bring officers up to speed with the world of Credit Risk, we obliged the client by advising him of what went into such training. I thought it would be interesting to share this with you.

Let’s Start with the Basel Guidelines In line with the Basel Accords, a bank has to be conscientious of the credit quality of the portfolio (Expected Loss). This is normally assessed as a Probability of Default (PD), and usually a bank uses a tool to assess that. If the PD is perceived to be high with some obligors, then the bank has to manage either (a) Exposure at Risk (EAR – amounts and type given to obligors), and/or (b) the Loss Given Default (LGD – ie the structure in which the offering is made). This is done in concert with appropriate pricing that will cover the perceived risk so that the Return on Risk Adjusted Capital (RORAC) is in line with what the Board of Directors of the bank is targeting (see also our earlier article on How Do You Manage Credit Risk At Your Bank?).

So how do we apply these in practice? From a Business perspective, the bank has to underwrite as much of the “right” type obligor as possible, in the most efficient way. This means that to abide by Basel’s guidelines (and Best Practices), the officers have to have the following traits:

  1. Ability to assess risk accurately and effectively. If the tools used in the bank were insufficient, then the training has to cover these in full.
  2. Where data is unavailable or scarce, the officers have to be able to create the data from interviews or company records. That means they have to have strong accounting and cash flow background; and are able to know what to focus on to create figures on the fly.
  3. Ability to measure how much the obligor needs. The starting point of any dialogue is to know what the obligor needs, not what the obligor says it wants, as most of the time obligors ask for much more than what they need. This structuring of facilities is part of managing LGD.
  4. From the risk profile of the obligor, the ability to assess how much of that need the bank should take (we call that Share of Wallet or SOW for short). This helps control the EAR mentioned earlier.
  5. For obligors that are perceived to be acceptable, then the officer has to be able to calculate the obligor’s capacity to take on term loans, and structuring these appropriately.
  6. In all cases, the officer needs to understand the potential and limitations of what can be cross-sold to obligors in line with their perceived risk profiles.

So any training that is undertaken has to cover all of the above sufficiently, along with cases to drum in the point. Where the accounting backgrounds are strong, the training will focus primarily on facility structuring and cross sell methodologies, whilst maintaining the sanctity of the portfolio risk rating. Where accounting backgrounds are week, time has to be spent in bringing this knowledge to par. The assessments in all cases can easily be done using quizzes, and can be supplemented with our e-learning modules.

General Training Needs Ordinarily, a bank already has in its Credit Processes and Procedures rules on how to manage Expected Loss, and within these Basel’s 16 Principles on Managing Credit Risk. If not, then the training has to also introduce these notions to all officers so that they understand the implications of the businesses they are bringing on board. Central to these is the need to create a Target Market (TM), Risk Acceptance Criteria (RACs), Industry Studies and Product Programs (Principle 3). As such, in the training program, the notion of creating TM and RACs will also have to be introduced to ensure that the SOW concept addressed earlier is well understood and is tied to the credit policies of the bank in all of its underwriting processes.

I wonder, without all this knowledge at hand, how do bank officers operate today anyways? What sort of business do they bring in? Perhaps by having this knowledge, they can add to their efficiencies such as:

  1. Calling on the right obligors in the first place
  2. Knowing how to structure facilities from the outset
  3. Appreciating how far and what to cross sell
  4. Ensuring that pricing is in line with the risk profile of the transaction.

For more details on 6 Sigma’s e learning packages, please visit http://goo.gl/pyXs52.

© 2014 6 Sigma Group

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