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The process of credit risk identification is divided into individual risk assessment (corporate clients, counteragent banks) and portfolio risk assessment (entire loan portfolio, retail clients).
Major components of credit risk management are: assessment of individual credit risk, quality management, provisioning, setting of limits, effective interest policy making, insurance, backing. Portfolio risk means reduced cost of bank assets. Portfolio risk results from cumulative debt to the bank under the operations characterized by credit risk, i.e. portfolio of homogenous credit operations.
Assessment of portfolio credit risk includes evaluation of concentration and diversification of bank assets. Credit decision criteria are: borrower type, motives of application for a credit, business plan, future business relations with a client, financial indicators, eligibility as per the credit and business risk assessment policy, alternative sources of repayment, earnings compared to expected risk. The Bank considers a loan security as a secondary source of loan repayment. The major thesis of the Bank lending policy is to provide loans against good financial condition of a borrower and future cash flow.
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In 2005 - 2006 the Bank continues to put efforts in creation of its database on incidents and defaults relating to lending in order to build its own credit risk model in accordance with Basel-2 recommendations.
To the end of credit risk minimization, the Bank has developed a system of setting limits for lending operations, which includes three levels of limits:
- Individual credit risk limits
- Portfolio credit risk limits
- Limitations of authority
The Bank in its lending operations is guided by the requirements to limit a credit risk as established by the NBU. The limits are calculated on the basis of regulatory capital of the Bank. Credit risk limits are proposed by the Risk Management Department and are subject to approval by the Credit Committee.
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