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Asset Management in Banks!

Understanding Nature of Assets:

—Resources owned and controlled by a business

—Assets are used  to run a business

—Assets are the sources of revenue

—Some assets are simply financial contracts

—Some assets are subject to depreciation

—Some assets are subject to appreciation

 

Understanding Asset of a Bank:

—Cash

—Balance with other Banks & FIs

—Money at Call and Short Notice

—Investments

—Loans and Advances

—Fixed Assets

—Other Assets

—Non-banking Assets

 

Grouping of Asset for Management

Asset Group Based on Earning

—Zero-Earning Assets

—Low-Earning Assets

—High-Earning Assets

 

Asset Group Based on Liquidity

—Liquid Assets

—Semi-Liquid

—Illiquid Assets

 

Zero-Earning Asset

—Cash

—Fixed Assets

—Other Assets

—Non-banking Assets

 

Management of Non-Earning Asset

—Comply regulatory requirement

—Neither excess nor insufficient liquidity

—Rethink about purchase or lease of fixed asset

—Consider tax implications of fixed asset decision

—Hold as minimum as possible

 

Low-Earning Asset

—Balance with other Banks & FIs

—Money at Call and Short Notice

—Investments

 

Management of Low-Earning Asset

—Consider Liquidity Management Strategy

+ Asset conversion strategy

+ Borrowed Liquidity Strategy

+ Balanced Liquidity Strategy

—Hold neither excess nor insufficient liquidity

—Comply regulatory requirement

—Consider tax implications

 

High-Earning Asset

—Loans

—Advances

 

Management of High-Earning Asset

—Plan for a diversified earning asset portfolio

—Create and maintain asset quality

—Hold as high as possible

—Manage Related Risk

—Manage NPA

 

Managing Asset Portfolio

—Review Regulatory Environment

—Consider Government Priority

—Ensure Diversification

—Consider Term-Structure Liability

 

Managing Asset Portfolio

—Create and Maintain Asset Quality

—Maximize the volume within legal requirement

—Offer best quality service at  a competitive price

—Offer quality support services

—Ensure Proper Risk Management

worldbanks.news

worldbanks.news

Types of Credit Risk

+Credit Risk

+Standalone.

+ Portfolio

+ Default

+ Downgrade

+ Concentration

+ Systematic

 

Causes of Standalone Credit Risk

  • Improper or weak need assessment
  • Wrong structuring
  • Insufficient cash flow generation
  • Failure to understand forex risk
  • Name lending ignoring fundamentals
  • Lack of monitoring of approval condition
  • Lack of proper succession
  • Insufficient security and guarantee
  • Incomplete documentation
  • Undermining the importance of interbank deposits and OBSA
  • Poor Governance (corruption, failure to stand in pressure, related party transaction)

 

Causes of Portfolio Credit Risk

  • Credit concentration
  • Economic downturn
  • Absence of in-depth portfolio review (Structure, Quality, Security, Guarantee, delinquent performance, monitoring, provision)

 

Credit Risk Management

  • Traditional Approach to CRM
  • New Approaches

 

Traditional Approaches to CRM

  • Formulation of lending guideline and implementation
  • Selection of Good Borrower by improving credit Appraisal standard
  • Segregation of Duties in Lending Functions
  • Diversification of Credit Portfolio
  • Asset classification
    • Formulation of lending guideline and implementation
    • Selection of Good Borrower by improving credit Appraisal standard
    • Segregation of Duties in Lending Functions
    • Diversification of Credit Portfolio
    • Asset classification
    • Provision for known expected losses
    • Capitalization for unknown losses
    • Mitigation of risk by taking collateral and guarantee, insurance
    • Portfolio monitoring/ review/ workout

     

Limitations of Traditional Approaches
  • Information asymmetry and adverse selection
  • Credit limit should be tied up with capital. What is the prudent limit?
  • Diversification should not come at the cost specialization
  • Provision is a curative way of handling credit risk

 

Modern Approaches of CRM
  • Credit Derivatives
  • Credit Swap
  • Total Return swap
  • Loan portfolio swap
  • Credit options
  • Securitization
  • Factoring
  • Loan sales

 

Management of NPA
  • Non-legal Measures
  • Legal Measures

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