Mr.Rengarajan started his session with the basic definition of Credit and went on to explain Credit Risk- a possibility that a counter party fails to meet obligations, a risk that is inherent in every Commercial Bank’s operations. He said that while lending money, a bank should know the party, to whom it is lending – through analysis, proper enquiries, studying of the Balance Sheets.

He mentioned various guidelines to Credit Risk Management like Policy Guidelines, Lending Guidelines, Credit Assessment and Risk Grading, Approval Authority, Segregation of Duties, Internal Audit. Mr.Rengarajan then went on to explain the various Lending Guidelines mentioning that they should reflect changes in the economic outlook and evolution of the bank’s portfolio. The Principles of Lending should include safety/security, liquidity, desirability, profitability etc.

Mr.Rengarajan also explained how risk is transmitted from the environment to the industry to the business and finally to the lenders. The Spectrum of Risks includes both Financial and Non-Financial risks. A fine balance is required between these types of risks to avoid a Reputation Risk. He further said that there are various Safety (or Comfort) Zones to the funds loaned which include apart from the amount owed to the bank plus interest, the customer’s expected profit, customer’s resources, personal guarantees, pledges.

The various things that should be looked into by the banks while lending money include Promoter’s Profile (constitution of borrower, vintage, length of association with the bank, net worth of the concern, tax payments, market enquiry report), Business Risk Profile (sales turnover, borrower’s status), Finance Risk Profile (leverage, profitability, current ratio, sales to current assets), Security Risk Profile (cash collateral, immovable property mortgaged).

All in all, a very informative session for all the students in general and students planning to take up finance, in particular.