CHAPTER THREE: CREDIT RISK MANAGEMENT PROCESSES
IN
ECOBANK GHANA LTD
Problem loans are at the end of the credit channel. Before a loan
becomes bad, it needs to be
granted. Moreover, as we referred to so far, the poor quality
of a loan is sometimes due to factors not attributable to the lending
bank such as adverse selection and moral hazard (Stiglitz and Weiss
(1981)) or any other external shock that may alter the borrower's ability to
repay the loan (Minsky, 1982 & 1985). Nevertheless, there are cases where
the way banks grant and monitor credits can be responsible for the bad loan
portfolio. In other terms, weak credit risk management systems can also
be sources of problem loans (Nishimura and al,
2001).
For this last reason, it was essential to overview the credit
risk management process of the Bank in order to capture the framework of
the bad loans management before scanning the problem loans files.
For competitive and confidential reasons, only
significant details related to the credit management processes are
revealed here. Yet, we put enough information to overview the process
and give an opinion on it.
This chapter is divided in two parts:
- the first part deals with the credit management process
- the second explains the problem loans management.
The information in this chapter is mostly based on the
Group Credit Policy and Procedure
Manual (GCPPM) and interviews with the portfolio manager.
I. Credit management process
Ecobank Ghana Limited credit management processes can be
summarized in three main
stages:
- credit initiation
- documentation and disbursement
- credit administration
30 MBA in Banking and Finance
1. Credit initiation
The credit initiation is a process that starts from a
market analysis and ends at the credit
application approval. The steps of the credit initiation are
listed below:
- Surveys and industry studies:
Relationship Officers scan the market and economic sectors
to identify key players and potential business for the Bank. In
the same vein, industries with high potential of growth that can be good
business for the Bank are also listed.
- Risk Asset Acceptance Criteria (RAAC):
for each industry, criteria are designed to guide
the relation with both industry and clients in order to limit
the level of exposure at credit risk. RAACs applied to industries include both
quantitative and qualitative information such as net sales, net profit, years
of experience in the business and the quality of corporate governance.
- Prospect lists: some prospects
(companies and individual customers) identified as the main role players are
short listed in accordance with the industry studies and the minimum
risk criteria. This prospect list is ranked in order of preference.
- Customer solicitation: at that
stage, although the primary source of target is the prospect list, the
initiation of a credit comes either at the bank request in the
frequent contact with existing customers or at the clients request if they
have a need for financing.
- Negotiation: the relationship
officer identifies the financing needs of the borrower and gathers
background information such as the latest financial statements, project
details, projections over the loan life. This information will allow the
officer to check whether the risk
is bearable by the Bank and its compliance with the bank's
targets.
- Presentation: the conformity of
information given with the market and industry analysis is
the reliability of the information once again verified by
consulting other sources. A draft of
the credit application (CA) is prepared in conformity with the
GCPPM and I consideration of
the market and industry analysis by the account officer based on
information collected.
- Credit committee approval: a copy of
that CA is submitted to each member of the credit committee. The members review
and approve submission of the final CA.
- Control and reporting requirements:
the final CA package is submitted to the credit committee
with highlights on the credit exposures of the bank.
- Advise to customers: once the credit
is approved, the customer is advised in writing with details concerning the
terms and conditions and with the statement that the credit can
be
subject to review, modification or cancellation at the Bank
option.
31 MBA in Banking and Finance
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