Credit Risk Grading (CRG) and Importance of Credit Risk Grading

Credit Risk Grading (CRG) and Importance of Credit Risk Grading

Credit Risk Grading or CRG is a great tool for measuring credit risk. It directly works for credit risk management. It helps to determine credit risk for banks and financial institute. This credit risk grading system is vital to take decisions both before or after approval of loan facilities of customer. Before sanction of credit it helps to decide to give loan or not. It assists helps directly banks and financial institutions for safe and sound finance and better decision making. This allows bank management to observe change and trends in terms of risk. This process also helps to manage risk and to optimize or minimize risk.

IMPORTANCE OF CREDIT RISK GRADING:

1. Well-managed CRG System helps in bank wellbeing and soundness by encouraging educated basic leadership.
2. Grading system measure credit chance and separate individual credits and gatherings of credits by the hazard they posture. This permits bank administration and inspectors to screen changes and patterns in chance levels.
3. The process likewise permits bank administration to oversee hazard to enhance returns.

RISKS INVOLVED IN CREDIT RISK GRADING:

1. Financial Risks: Risk that occurs for loan clients due to financial distress, This typically entails analysis of financials.Financial risks are- Leverage (15%), Liquidity(15%), Profitability (15%), Coverage (5%).

2. Business or Industry Risk- Unfavorable condition or adverse business situation will affect borrower capacity to meet the obligation. It includes-Size of Business (5%), Age of Business (3%), Business outlook (3%), Industry Growth (3%), Market Competition (2%), Entry or Exit Barriers (2%).

3. Management Risk: It represents poor management condition and also includes-Experience (5%), Succession (4%), Team Work (3%).

4. Security Risk: Risk that occurs due to poor quality or strength of security in case of loan non repayment. It includes: Security Coverage (4%), Collateral Coverage (4%), Support (2%).

5. Relationship Risk: It includes: Account Conduct (5%), Utilization of Limit (2%), Compliance of loan conditions (2%), Personal Deposit (1%)