Credit risk in brief

Credit Risk is the risk of default by a borrower to meet commitment as per agreed terms
and conditions. In terms of extant guidelines contained in BASEL-II, there are three
approaches to measure Credit Risk given as under:
 Standardized approach
IRB (Internal Rating Based) Foundation approach
 IRB (Internal Rating Based) Advanced approach

1. Standardized Approach
RBI has directed all banks to adopt Standardized approach in respect of Credit Risks. Under standardized approach, risk rating will be done by credit agencies. Following
Agencies are approved for external rating:
(AI) CARE 2. FITCH India (New name – India Rating.) 3.CRISIL 4. ICRA
5.Brickwork
(BI) SMERA (For SME units) and 7. Onicara (also for
SME units) Risk weights prescribed by RBI are as under:
Rated Corporate
Rating Risk Percentage
AAA 20%
AA 30%
A 50%
BBB 100%
BB & below 150%
Education Loans 75%
Retail portfolio and SME portfolio 75%
Housing loans secured by mortgage 50 to 75%
Commercial Real Estates 100%
Unrated Exposure 100%
2. IRBA – Internal rating Based Approach
At present all advances of Rs. 5.00 crore and above are being rated from external agencies
in our bank.
IRBA
IRBA is based on bank‘s internal assessment. It has two variants (Foundation and
advanced). Bank will do its own assessment of risk rating and requirement of Capital will be
calculated on
 Probability of default (PD)- It measures the likelihood that borrower will default.  Loss given default (LD) – It measures proportion of exposure that will be lost in
case of default
 Exposure of default (ED) – It measures the facility that is likely to be drawn in
the event of default.  Effective maturity. (M) – It measures the remaining economic maturity of
Exposure.

Bank has developed its own rating module system to rate the undertaking internally. The
internal rating is being used for the following purposes:
Credit decisions
Determination of Powers
 Price fixing