Aarsh Management Solutions Newsletter - July 2015 Edition

Transcription

1 Be Prepared Aarsh Management Solutions Newsletter - July 2015 Edition

2 Early Warning Indicator Framework: Introduction In addition to regular Portfolio Management activities, it is crucial to have an effective Early Warning Indicator (EWI) Framework to identify Early Warning Signals on Credit Accounts. An Early Warning Account is one that has risks or potential weaknesses of a material nature requiring closer monitoring, supervision, or close attention by the risk and line management including Relationship Managers, Product & Portfolio Management. If these weaknesses are left uncorrected in a proactive manner, they may result in the deterioration of the repayment prospects of the Obligor or the Bank's credit position at some future date with a likely prospect of being downgraded or turning into a Non-Performing Asset forcing for An Early Warning Indicator (EWI) Framework is a systemic process for evaluating and measuring the risks at an early stage in order to take pre-emptive steps to minimize its impact on the financial The EWI Framework allows policy-makers to detect economic weaknesses and vulnerabilities of the credit portfolio in a proactive manner. It gives the senior management several leading indicators about the uncertain events in the financial system at an early stage and contributes significantly to the process of on-going supervision of the financial institutions. If the early leading indicators are left uncorrected, they may result in deterioration of the credit portfolio. Major disruptions in the banking system typically stem from the changes in the macroeconomic environment. Senior management needs to understand the environment adequately to assess the risk profile of banking institutions. Banks can meet these expectations both through early detection and effective mitigation of credit risk. Although this sounds straight forward, differences among bank's credit-monitoring practices are much greater than might be expected. While banks with sound credit-monitoring practices and effective EWI Framework identify risky customers six to nine months before they face serious problems, others may only take notice once a customer is past due or ratings have deteriorated substantially. Early Warning Indicator Framework: Objectives The objectives of this framework is to describe an Early Warning Indicator, which is a leading indicator in its characteristics using which the Risk Management Group can introduce this metric as part of the Bank's Risk Rating Framework. The objectives of this approach are: 1. To reduce the probability of Customer default. 2. Increasing collateral value of defaulted loans (reducing loss given default, or LGD). 3. Reducing exposure at default (EAD) of defaulting customers.

3 4. To place the responsibility on the Supervisor to regularly re-evaluate the risk on the facilities to their customers and identify problem lending at an early stage, where the opportunities for successful remedial action still exist. 5. To establish an early warning system for detecting deterioration in credit quality and problem lending. 6. To set a standard approach for Relationship Managers to assess, report and escalate their concerns on problem credits to and to senior management. 7. To provide a mechanism to consistently respond to early stage problems and take remedial action as soon as deterioration in credit quality is detected, as well as allowing for the degree of severity of concern to be categorized, driving different actions based on that severity i.e. a 'risk based' approach. The EWI Framework will enable Relationship Managers to recognize their role as the 'first line of defence' in identifying 'new risk' inherent in their portfolios. The EWI Framework will also enable to report increased credit risk and weaknesses associated with an individual customer's trading performance. Aarsh s Early Warning Indicator EWIEval Framework are: Early warning signals are classified at two levels, Alpha signals which can be picked up through comprehensive Reporting or client behaviour and Beta signals that are not easily identifiable through system and MIS and need more pro-active Relationship as well as Portfolio Management by the front end Management. To know in detail about the early warning Signals, Kindly drop mail to sales@aarshmanagement.com.

4 Components of Early Warning Framework EWIEval Periodic review of the current model and to check if there is any changes to be done to improve. the existing model. Regular improvement on the existing model. Different predictive EWIs have different Hit Rate and False Alarm Rate. Relevant EWIs are identified and assigned weights (statistically, business intuition, expert inputs) while ensuring minimal correlation between them Multiple EWIs are rated (through techniques like Decision Trees and Generalized Linear Models) enabling rank-ordering of customers on basis of their likelihood to default PD calibration and classification into various categories like Red/Amber/Green Performance of individual triggers and the scorecard is tested on an out-of-sample data Periodic assessment and any changes required thereof to improve performance. 4 EWI MONITORING 3 PERIODIC REVIEW Aarsh EWF GOVERNANCE Identify the scope of business unit or sector on which the EMI monitoring has to be triggered. Determine the process, threshold, escalation matrix, hierarchy contacts, control measures etc. Classifying the customers under various watch-list categories. Delegating roles and responsibilities Assessment of current monitring system. 1 EARLY WARNING INDICATOR Identify the existing EWI based on industries best practices. Based on behavioural, transactional and dimensional data points 2 from core banking system, EWI will be obtained. Significant variables are identifiied based on analysis. Focus on Mandatory actions

5 Aarsh s Early Warning Framework EWIEval - Key Features 1. Web- based Early Warning System for Corporate and Retail portfolios. 2. Automates daily monitoring of over 60 automatic and manual EWIs for borrowers. 3. Multiple dashboards allow user to monitor their portfolio at varying levels of granularity such as portfolio, industry, group, customer and individual facilities. 4. Proactively identify problematic credit exposures. 5. Parameterized thresholds for identifying EWI breaches. 6. Corrective action planning for Red/Amber categories to take timely mitigating actions such as exposure reduction, account exit, collateral enhancement etc. 7. Data is automatically loaded and transformed as a batch process. Aarsh s Early Warning Famework EWIEval Sample Screenshots Aarsh

6 Aarsh s Early Warning Famework EWIEval Sample Screenshots Aarsh Product Demo To view the entire Aarsh s ERM Suite Solution... Schedule a demo with us today!!! You can us at sales@aarshmanagement.com or call See All Aarsh Products Visit our website /products_details to view all Products of Aarsh ERM Suite. Feedback please! We would love to hear your feedback at marketing@aarshmanagement.com