Credit Risk Grading
Credit risk grading (CRG) refers to a pre-specified scale which reflects the credit risk which is underlying for a given level of exposure. Credit risk uses employs the use of alphabet/symbol/number which represents the risks associated with a certain credit exposure. CRG is the appropriate module for establishing a system of credit risk management.
Credit Risk Grading is a crucial element that helps in the process of credit risk management as it helps the various financial institutions in understanding the dimensions of risk that come along when dealing with credit transactions. This task of credit risk grading of lines of business, borrowers and business activities provides a better view of the credit portfolio quality of a financial institution. Credit risk grading systems are important in taking appropriate decisions at both post and pre-sanction stages .
Credit grading helps at the pre-sanction stage to sanction authority in deciding on whether to lend or not, the extent of exposure, what the lending price should be, the various facilities, appropriate credit facility and the numerous risk mitigation techniques to put a cap on the level of risk.
CRG can be beneficial at the post-sanction stage in helping financial institutions decide about the depths of the renewal or review, the frequency of the review, frequency of the grading and several other measures to be taken. CRG should be invoked at the start of lending and it should be updated annually. Grading of credit risk should however be reviewed in instances of adverse events. Portfolio monitoring entails that financial institutions should come up with reports concerning credit risk exposure by risk grade. Enough migration and trend analysis should be done to come up with any credit facility deterioration. Accuracy and consistency of the grading of the credit risk should be periodically examined by a function for instance an independent credit review.
What we should know
Functions of Credit Risk Grading
CRG systems that are well managed promote soundness and safety in financial institutions through enhancing decision making which is informed. Credit risk is measured by grading systems which also differentiates groups and individual credits by the risks they offer. CRG allows management and examiners of financial institutions to observe trends and changes in their levels of risk. CRG further allows the management of financial institutions to efficiently manage risk and optimize their results.
Use of Credit Risk Grading
- The CRG matrix allows the use of standards which are uniform to credits in order to attain a common standardized view in order to easily asses the credit portfolio of a business, unit, line or the financial institution as a whole, or the quality of individual obligor.
- Grading of credit risk would be relevant in monitoring and surveillance and assessing the risk profile of a financial institution.
- The CRG provides a measurement of risk which is quantitative which gives the level 0f risk of the borrower hence enabling fast decision making.
- CRG offers a quantitative framework used for assessing the requirement in provisioning of the portfolio of credits of financial institutions.
- The CRG results are relevant for credit selection at individual level, as borrowers and their risk exposure is already rated .