1.0 Introduction
Risk is the element of uncertainty or possibility of loss that prevail in any business transaction in any place, in any mode and at any time. In the financial arena, enterprise risks can be broadly categorized as Credit Risk, Operational Risk, Market Risk and Other Risk. Credit risk is the possibility that a borrower or counter party will fail to meet agreed obligations. Thus managing credit risk for efficient management of a Financial Institution has gradually become the most crucial task.
Credit risk management needs to be a robust process that enables Financial Institution s to proactively manage facility portfolios in order to minimize losses and earn an acceptable level of return for shareholders. Credit risk is most simply defined as the potential that a bank borrower or counterparty will fail to meet its obligations in accordance with agreed terms. The goal of credit risk management is to maximize a bank's risk-adjusted rate of return by maintaining credit risk exposure within acceptable parameters. Banks need to manage the credit risk inherent in the entire portfolio as well as the risk in individual credits or transactions. Banks should also consider the relationships between credit risk and other risks. The effective management of credit risk is a critical component of a comprehensive approach to risk management and essential to the long-term success of any banking organization. Prime Bank primarily lends for trade finance although some amount of project financing is also undertaken. The bank has generally maintained a conservative approach towards lending and management claims that their credit appraisal process is more stringent than that of its local peers. The Prime bank follows a two-tier credit screening process: the branch prepares a credit proposal and sends it to the Head Office, where the credit officers analyze the business