Development of a customized MIS software for Credit Risk Grading (CRG) to assess loan portfolio

Abstract

Risk is inherent in all aspects of a commercial operation, however for Banks and financial institutions, credit risk is an essential factor that needs to be managed. Credit risk is the possibility that a borrower or counter party will fail to meet its obligations in accordance with agreed terms. Credit risk, therefore, arises from the bank's dealings with or lending to corporate, individuals, and other banks or financial institutions. Credit risk management needs to be a robust process that enables banks to proactively manage loan portfolios in order to minimize losses and earn an acceptable level of return for shareholders. Central to this is a comprehensive IT system, which should have the ability to capture all key customer data, risk management and transaction information. Currently almost all Banks in Bangladesh are computerized. Online banking system has been implemented in almost all the banks. In the field of assessing credit risk, no complete tool has been developed so far. Bankers uses spread sheet to calculate credit risk grading, which involves wastage of time, accurate grading may not be obtained and there is no way to store the credit risk record of a loan party. Banks should use a database management system to store party’s information from which Credit Risk Grading can be automatically calculated. Researches have been done to evolve Credit Risk Grading Model. Most popular Methods are external ratings approaches, financial statement analysis models, the Merton / KMV structural model, and the transition based models. Bangladesh has her own model prescribed by Bangladesh Bank. Research has been done in BUET in the area of principle, policies and guideline for sustainable credit risk management in Bangladesh. In today's environment of intense competitive pressures, volatile economic conditions, rising bankruptcies and defaults, and increasing levels of consumer & commercial debt, an organization's ability to effectively monitor & manage its credit risk could mean the difference between success and survival. Implementing the proposed system, advantage of a DBMS over file system can be achieved and access to information will be more user friendly.