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CREDIT RISK MANAGEMENT
CREDIT:
A contractual agreement in which a borrower receives something
of value now and agrees to repay the lender at some date in the
future, generally with interest. The term also refers to the
borrowing capacity of an individual or company.
RISK:
The chance of inquiry damages or losses. The degree of
probability of loss.
Dispersion in likely outcome.
The chance that actual outcome from an investment will
dier from the expected.
RISK MANAGEMENT:
The forecasting and evaluation of !nancial risks together withthe identi!cation of procedures to avoid or minimi"e their impact#
METHODS TO IDENTIFY RISK:
1: Brainstorming:
This process encourages a group of people meeting face to faceto put forward all their thoughts and ideas on a specic topic.
During a brainstorming session all input is encouraged without
evaluation. Evaluation of ideas occurs at the completion of the
session when the ideas are analyzed. The diversity of participants
will have an impact on the nature of the ideas and perspectives,
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so some thought will need to be given to who will participate in
the process.
2: Focs gro!s:
A focus group is made up of individuals who are invited to attend
one or more meetings in order to focus their attention and provide
information and feedback on a specic topic or area of concern.
": F#o$ c%arts:
These allow a dynamic process to be represented
diagrammatically on paper. The process may then be analyzed forcritical activities and areas of higher risk.
&: S'OT ana#(sis:
An eective method for prospective risk identication is a
!trengths, "eaknesses, #pportunities and Threats $!"#T%
analysis. A !"#T analysis is a tool commonly used in planning
and is an e&cellent method for identifying areas of negative and
positive risk.
): Ana#(sis o* s(st+ms:
This involves studying the way a system or process functions and
interacts within an organization in order to nd any weaknesses.
!ystem may refer to the management processes as well as to the
policies and procedures that support those processes. 't may also
refer to an operational system of interlinking procedures or
processes.
,: A-its:
This is the name given to the process of analyzing a management
system, checking to see that the documented procedures and
operational methods are the same.
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.: Sc+nario /i#-ing:
'n this process a situation or condition is created either on paper
or as a model to re(ect potential outcomes. These ctitious
situations allow analysis and treatment options to be consideredwhere, for e&le, an event have not occurred before and no
data is available.
0: Acci-+nt in+stigation or *ai#r+ ana#(sis:
This process involves looking at previous accidents and incidents
and analyzing them to determine what went wrong or why the
process failed or broke down. This will highlight risk areas for
future situations.
: C%+c3#ists:
This involves using a list of items against which to check a
situation, event, scenario, process, etc.
14: Ris3 i-+nti5cation *orms:
These forms generally include standardized )uestions or a set of
steps to be followed in order to help identify risks. They are often
tailored to specic situations, processes, scenarios, etc.
11: F++-/ac3 an- commnication:
This includes safety meetings, customer feedback forms or phone
calls, complaints handling, etc.
12: Int+ri+$s:
'nterviews are an eective way to identify risk areas. *roup
interviews can assist in identifying the baseline of risk on a
pro+ect. The interview process is essentially a )uestioning
process. The interview can be conducted before or after the
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brainstorming session. owever if it is accomplished before the
brainstorming session, the results should be shared with the
group after they have provided their input to the risk li
1": E6!+ri+ntia# Kno$#+-g+: E&periential knowledge is the collection of information that a
person has obtained through their e&perience. -aution must be
used when using any knowledge based information to ensure it is
relevant and applicable to the current situation.
1&: Docm+nt+- Kno$#+-g+:
Documented nowledge is the collection of information or data
that has been documented about a particular sub+ect. This is a
source of information that provides insight into the risks in a
particular area of concern. -aution must be used when using any
knowledge based information to ensure it is relevant and
applicable to the current situations.
Ris3 Ana#(sis:
/01ualitative Analysis
201uantitative Analysis
Too#s an- T+c%ni7+s *or 8a#itati+ Ris3
Ana#(sis:19Ris3 !ro/a/i#it( an- im!act ass+ssm+nt:
3isk probability and impact assessment investigating the
likelihood that each specic risk will occur and the potential eect
on a pro+ect ob+ective such as schedule, cost, )uality or
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performance $negative eects for threats and positive eects for
opportunities%, dening it in levels, through interview or meeting
with relevant stakeholders and documenting the results.
29ro/a/i#it( an- im!act matri6:4robability and impact matri& rating risks for further )uantitative
analysis using a probability and impact matri&, rating rules should
be specied by the organization in advance.
"9Ris3 cat+gori;ation:
3isk categorization in order to determine the areas of the pro+ect
most e&posed to the eects of uncertainty. *rouping risks by
common root causes can help us to develop eective risk
responses.
&9Ris3 rg+nc( ass+ssm+nt:
'n some )ualitative analyses the assessment of risk urgency canbe combined with the risk ranking determined from the
probability and impact matri& to give a nal risk sensitivity rating.
E&le0 a risk re)uiring a near0term response may be
considered more urgent to address.
)9E6!+rt
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19Int+ri+$ing:
5ou can carry out interviews in order to gather an optimistic $low%,
pessimistic $high%, and most likely scenarios.
29 ro/a/i#it( -istri/tions:
-ontinuous probability distributions are used e&tensively in
modeling and simulations and represent the uncertainty in values
such as tasks durations or cost of pro+ect components6 work
packages. These distributions may help us perform )uantitative
analysis. Discrete distributions can be used to represent uncertain
events $an outcome of a test or possible scenario in a decision
tree%.
TYES OF RISK:
7ollowing are the types of risk8
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19S(st+matic Ris3:
$ystematic risk is uncontrollable by an organi"ation and macro
in nature.#
!ystematic risk is due to the in(uence of e&ternal factors on an
organization. !uch factors are normally uncontrollable from an
organization9s point of view.
't is a macro in nature as it aects a large number of
organizations operating under a similar stream or same domain. 't
cannot be planned by the organization.
/. 19Int+r+st rat+ ris3:
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%nterest&rate risk arises due to variability in the interest rates
from time to time. %t particularly aects debt securities as they
carry the !xed rate of interest.#
2= Mar3+t ris3
'arket risk is associated with consistent (uctuations seen in the
trading price of any particular shares or securities. That is, it
arises due to rise or fall in the trading price of listed shares or
securities in the stock market.#
"= rc%asing !o$+r or in>ationar( ris3:
)urchasing power risk is also known as in(ation risk. %t is so,
since it emanates *originates+ from the fact that it aects a
purchasing power adversely. %t is not desirable to invest in
securities during an in(ationary period.#
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29?ns(st+matic Ris3:
nsystematic risk is controllable by an organi"ation and micro in
nature.#
:nsystematic risk is due to the in(uence of internal factors
prevailing within an organization. !uch factors are normally
controllable from an organization9s point of view.:nsystematic
risk is controllable by an organization and micro in nature.
19Bsin+ss Ris3:
-usiness risk is also known as liquidity risk. %t is so, since it
emanates *originates+ from the sale and purchase of securities
aected by business cycles, technological changes, etc.#
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29Financia# Ris3:
inancial risk is also known as credit risk. %t arises due to change
in the capital structure of the organi"ation. The capital structuremainly comprises of three ways by which funds are sourced for
the pro/ects.
These are as follows8
#wned funds. 7or e.g. share capital.
;orrowed funds. 7or e.g. loan funds.
3etained earnings. 7or e.g. reserve and surplus.
"= O!+rationa# ris3
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0perational risks are the business process risks failing due to
human errors. This risk will change from industry to industry. %t
occurs due to breakdowns in the internal procedures, people,
policies and systems.#
SO?RCES OF RISK:
19Sc%+-#+- Ris3:
1xposure to loss from a program not meeting its scheduled
ob/ectives. $cheduled risk is the risk that the pro/ect takes longer
than scheduled. %t can lead to cost risks.
29Cost Ris3:
)robability of loss due to cost overrun.
"9T+c%nica# Ris3:
1xposure to loss arising from activities such as design and
engineering, manufacturing, technological processes and test
procedures.
&9Fn-ing Ris3:The risk associated with the impact on a pro/ect2s cash (ow from
higher funding costs or lack of availability of fund.
)9Contract Ris3:
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)robability of loss arising from failures in contract performance.
3endors have highest risk in !xed price contracts and least in the
cost type contracts.
,9Organi;ationa# Ris3:0rgani"ational risk encompasses the totality of risk concerns as
de!ned by the stakeholders.
E6am!#+:
#rganizational 3isk includes8
investment risk
budgetary risk program management risk
legal liability
inventory risk