The Hindu Business Line : Lack of transparency in valuations impacting banks’ credit risk assessment: Survey

Hyderabad, May 23 Lack of transparency in valuations and volatility in the current market environment are the main challenges being faced by the banks and other financial institutions in evaluating credit risk, according to a survey conducted by Professional Risk Manager’s International Association (PRMIA).

Presenting the key findings of the global survey at a seminar here on Saturday, Dr Yerram Raju, Regional Director, PRMIA (Hyderabad Chapter), said a majority of the respondents preferred monitoring of counterparties to mitigate risk in times of market dislocation.

On the valuation, the survey showed that fundamental analysis should be used to assess valuation of various assets by using the standard assumptions and models.

The survey was conducted by Harland Financial Solutions under PRMIA Global event series by taking into account the opinions of various banks, others financial institutions and regulators.

NO METHODOLOGIES

On the methodologies to be adopted in understanding the credit risk in times of economic stress, there were no adequate credit risk capital methodologies to suit the current challenging times, the study said.

An essential input calculation for credit loss across a portfolio is the correlation between assets. In an extreme situation, the past correlations break down completely and they cannot be depended upon, it pointed out.

The current crisis was the result of credit risk and was not irrational fear resulting in a complete choking off inter-bank liquidity as generally thought, the study highlighted.

The industry practitioners and even some regulators appear to be recognising that the current accounting standards were not designed to handle extreme stress situations and, therefore, should not be used to evaluate credit assets, it said.

Most of the regulators also believed that a change in underwriting criteria would help reduce credit losses in an economic downturn.

CREDIT COLLECTION

In the current economic context, the lenders should renegotiate the terms and conditions with the borrower and encourage them to obtain debt counselling assistance.

The adverse impact of downturn on consumer portfolios should be recognised with internally developed early warning systems, the study added.

The seminar was co-sponsored by the State Bank of India, State Bank of Hyderabad and the International Institute of Insurance & Finance (IIIF).

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Lack of transparency in valuations impacting banks’ credit risk assessment: Survey