The Importance of Credit Risk Management in Banking

Banking operations come with the factor of risk; it’s inevitable. In the simplest way possible, risk is an uncertainty of a situation or event that may happen in the future and for banks, it’s the uncertainty of an outcome of business investments. The various types of banking risks may be classified as Strategic risk, Compliance risk, Credit risk, Cyber Security risk, Liquidity risk, Market risk, Operational risk, etc. Out of these ‘Credit Risk’ represents the most important type of risk for commercial banks.

Credit risk is understood simply as the risk a bank takes while lending out money to borrowers. They might default and fail to repay the dues in time and these results in losses to the bank. Loan portfolio management is very important but most times a bank can’t fully assess if it will retrieve the money back because even if the borrowers have been paying their dues on time, the economy might show shift and change the way things have always been. So, what do banks do then? They need to manage their credit risks.

The goal of credit risk management in banks is to maintain credit risk exposure within proper and acceptable parameters. It is the practice of mitigating losses by understanding the adequacy of a bank’s capital and loan loss reserves at any given time. For this, banks not only need to manage the entire portfolio but also individual credits.

How do banks set up a Credit Risk Management system?

Even though every bank may have their own approach to establishing credit risk management models, there are a few basic steps that every Credit Risk Management includes-

• A complete understanding of a bank’s own capital reserve.
• Understanding a bank’s overall credit risk based on individual, customer and portfolio levels.
• Implementing an integrated and quantitative credit risk solution to make an appropriate credit risk environment.
• The business model in place should be such that is ever-evolving, able to achieve real-time scoring to limit monitoring, have data visualization capabilities and business intelligence tools to make it available any time.
• Establishing a sound credit-granting process or criteria that will clearly indicate the bank’s target market. This should include appropriate credit administration, measurement and monitoring process.

These are some principle ways to set up a Credit Risk Management system that will help in minimizing risk and maximizing reputation and productivity. Often, banks do prefer having a consulting agency to look after their Credit Risk Management since managing credit risk is a tricky task due to a lot of recommendations and predictions, thus there shouldn’t be any possibility of loopholes in the process.

What are the advantages and disadvantages of Credit Risk Management?

The advantages-
• It helps in predicting and/ or measuring the risk factor of any transaction.
• It helps in planning ahead with strategies to tackle a negative outcome.
• It helps in setting up credit models which can act as a valuable tool to determine the level of risk while lending.

The disadvantages-
• Prediction is not entirely scientific, so judgement made can go either way.
• Cost and control of operating a credit scoring system are questionable.
• While different models may work, there are no guarantees. For this reason, some banks prefer ‘one model

Finally, …
Whether you’re trying to manage risk at your own company or you’re just trying to manage your credit, the study of credit risk management provides a framework for understanding the true nature of credit risk present in your organization. While profitability is a consideration, credit risk management is about seeing beyond profitability, and more precisely to help the CEO and CFO to develop a quantifiable sixth sense about operational cash flow.

Banking Ombudsman

Did you ever fight with your elder brother during your childhood? Whom did you go for the resolution? Your mother, right. However, we are sure that many times, you would have reached out to your father against the resolution made by your mother. Our families implicitly carry their own mechanisms to address and resolve complaints or grievances.

Given the number and the variety of interactions we engage with banks today, some of us are likely to have complaints or grievances against the services offered by the banks. Though such hierarchy for resolving complaints and disputes comes naturally into our homes, Reserve Bank of India (RBI) has defined such hierarchy for redressal of customers grievances through Banking Ombudsman Scheme, 2006.

According to the said scheme, any person who has a pending complaint against his bank in terms of deficiency of services or in respect of loans taken or not following fair practices etc may file a complaint online with the Banking Ombudsman appointed by RBI to get the issue resolved. RBI has appointed about 20 senior officials as Banking Ombudsman, one in-charge for a one or more states, for assisting you with your complaints.

The guidelines require the complainant to first exhaust the grievance redressal avenues within the bank such as writing to bank’s customer service desk or to the bank’s nodal officer and then only approach the Banking Ombudsman. The complainant may approach Banking Ombudsman in case he has not received any reply within a period of one month of the complaint or the complainant is not satisfied with the reply given by the bank.

While the Banking Ombudsman Scheme 2006 covered almost all types of banks operating in India, the RBI recently announced an Ombudsman setup for NBFCs for helping consumers with complaints against any service deficiencies of large NBFCs.

How About Complaints on Your Credit Report?

You may notice an error in your credit report which may be affecting your credit score as well, and thus your ability to take a loan for your needs. Since CRIF deals with a large amount of data emanating from many banks and other financial institutions and further, in respect of many borrowers, an inadvertent mistake in your credit report cannot be ruled out completely. Read more to understand how credit bureaus work.

Whenever you face such a situation, you may write to us highlighting the discrepancy along with the unique Report ID on the right top corner of your CRIF Credit Report. If you wish to enclose supporting documents, you can write to crifcare@crifhighmark.com. Our customer team ensures that your concerns are heard promptly. Technical issues, if any, are addressed at the earliest and a revised credit report is thereafter issued at no extra cost to you.

In case the issue is with the data provided by the bank to CRIF, we forward the issue to the concerned bank requesting a correction. At the same time, CRIF also requests you to directly take it up with the concerned bank to help expedite the correction. CRIF continues to follow-up with the concerned bank to support you with this correction. As soon as CRIF receives a confirmation for correction, we update our records and share a revised CRIF Credit Report with you.

Even though CRIF strives to offer best standards of customer service, in case you are not satisfied with the response from our customer service desk, you can escalate the matter to CRIF Nodal officer by writing to nodalofficer@crifhighmark.com.

If you do not hear from CRIF or the bank within a reasonable time of 30 working days, you can also approach the Banking Ombudsman for the said discrepancy.

Always at your service! Read FAQs on Banking Ombudsman

What Do Banks See When They Look At Your Credit Report?

Rakesh had applied for a housing loan with a leading housing finance company. However, when he read in the newspapers that XYZ Bank is offering relatively lower interest rate, it definitely appealed to him to approach XYZ Bank. Considering the high loan amount, even a 0.50% benefit in interest rate does make a huge difference in the overall outflow from one’s pocket. While the bank was doing its due diligence before sanctioning him the loan, Rakesh’s credit report was also fetched by the bank. Curious about what all would show up in the Credit Report, he visited Aditya, his neighbor and also a Chartered Accountant to look for answers.

“There’s more to a credit report than just how much of money you owe to banks. The credit report details out all of your credit information as has been gathered by the Credit Information Bureau (such as CRIF) from the banks, NBFCs and other types of lenders. Bankers keenly review various details in your credit report before approving the loan.” Aditya said and continued further.

Details Fetched By Bankers From The Credit Report:

1. Credit score: It is the first impression the banker can have of you as a borrower while going through your credit report. Reflecting your repayment tendencies, it indeed impacts your access to the credit. For an individual with a regular credit history, the credit score ranges from 300 to 900. For a bank, higher the credit score, lesser is the probability of customer defaulting on the loan. It, therefore, becomes imperative for you to have a better credit score i.e. above 700.

2. How much you owe and to whom – Your credit report includes information about each of your existing credit accounts, including credit cards, home loans, car loans, personal loans etc. This helps them since the existing liabilities on you and also the type of loans taken by you. Every loan will tend to reduce the repayment capacity of the borrower for a new loan. Bank will be able to understand your monthly outflows (sum of EMI amount and card payments) towards your loans.

3. Repayment habits – This is the primary parameter which impacts your credit score as well. Your credit report tells the potential lenders about your repayment tendencies. It shows up how much amounts are overdue presently, how much amounts had been overdue in the past and in case any one-time-settlement has been resorted to by the borrower in respect of the loans.

4. Are you a Loan Hungry Individual? – In case you applied for loans with many banks in a short period or applied for many loans or cards every couple of months, you’ll seem less appealing to potential lenders. A banker may conclude that you have a high dependency upon debts and therefore you may be desperate for loans.

5. Personal Details – Your credit report will also contain information of your addresses for your existing loans and credit cards. As such, the banker can have a fair idea about the stability of your residence i.e. how long you have been staying at your current place of residence etc.

“So in a nutshell, a credit report is the mirror of my credit profile and repayment habits. A bank is giving my incentive on interest rate if I have a good credit score the since they see me as the less risky customer.”
Rakesh tried summarizing his lesson.

“Spot on!” Aditya beamed hearing his disciple’s summarization. “You are the solution of all my financial worries. No wonder, I totally rely upon you.” Rakesh quipped.

3 Musts For a SAFE Digital Banking Experience

Technology has impacted every aspect of human life and banking is no stranger to this. Digital banking has taken the world by a storm and made it possible to avail banking services all through a simple click of the mouse. While digital banking is safe and convenient, there are a few aspects you need to look into to ensure a safe and secure experience. Awareness is the best defence, so here we go!

Do Not Share Your Account and Card Information With Anyone

It is always advisable to resist from sharing any of your account or card information with anyone, especially over calls, even if the person at the other end is posing to be a bank official. Further, to protect your online and digital banking experience, you should create strong passwords with a mix of alphabets, numbers, and special characters. Do remember that many fraudsters are just waiting for one mistake from your end. Since past few days, one SMS is moving across the mobile devices:
– Dear Customer, your XXXX Bank Debit Card points worth Rs. 6897 expired by XXXXXX. Kindly convert your points in cash by click here. We came across several instances where the receiver of the message clicked on the link and shared their card details on the link in the message. While no points got converted into cash as such points were non-existent, the card holder became a victim of fraudulent activity.

Protect Your Device

Digital banking is highly dependent on the use of physical devices such as smartphones, tablets, and laptops. In the unfortunate event that we lose any of these devices, all personally identifiable information (PII) about our bank accounts becomes prone to loss or theft. So always protect your devices through passwords, screen locks and the like. This will make it almost impossible for any other individual with access your device to read into private data, especially the financial one.

Ensure That KYC Documents Submitted By You Are Put To That Use Only

When you submit some documents to the bank officials as part of Know Your Customer (KYC) process, make sure that such documents are stored in the records only for that very purpose only. There have been instances of use of such documents for opening of fraudulent accounts in your name. Since the documents disclose your identity in the bank’s records, you may be held liable for any such fraudulent activity in that account. It is a general practice to hand over the PAN card and other identity/ address copy duly forsigned for applying a new credit card when executives visit our office with great card deals. Make sure you also put up the purpose of the document submission on the self-attested copy so that the document cannot be used another time.

These small yet significant practices form the cornerstone of secure digital banking, and should be followed diligently by one and all. We, at CRIF, deploy the best safety practices to deal with your sensitive data and make sure that any unauthorised access to such information is detected and eliminated at the first instance.

Unauthorised Electronic Banking Transaction- Loss To Consumer Or The Bank?

This year, the Financial Literacy Week by RBI focuses on “Consumer Rights” to educate consumers on their liability for unauthorised electronic banking transaction.

Can you imagine the possibilities of electronic banking transactions? Having the ability to receive or send money whenever and wherever. Buying things online in the quickest way. Or getting your bank related work done in minutes if not seconds. Well yes, it’s all that and more. Electronic banking has given consumers convenience like never before. Saving time and energy of physically getting things done are diminishing by each passing day. But with all that power, also comes a great deal of caution and responsibility.

Do you remember the times you have received a message saying- ‘Do not share your user ID and password with anyone’? Is it safe to say more than once? Definitely. So, what is a banking fraud and how is electronic transaction susceptible to such a cause quite easily sometimes? Let’s say that you got an email from your bank asking for your details for xyz type of update and you enter the site only to realise there is something odd. Or you put in your details on some random site without genuine or easily recognisable credentials? Or the very common act of responding to Spam messages that claim to send you 10 million dollars because someone is really ‘generous’? And most recently, where sites have actually been known to sell your data that you entered trusting that one and only social website?

Fraudulent acts of banking can come from anywhere and anytime. A known term for this is called ‘phishing’ where an organisation or an individual tries to illegally obtain your personal information to do just about anything. So, how do you deal with it? Earlier, a commonly known fact was bearing the loss. Why? Is it because you didn’t know whom to ask for help? What to tell the bank if they question you for sharing details to a third party website? Or you just didn’t get notification soon enough to realise the urgency of notifying an authority? Can be one and can be all.

With the day-by-day shift to digitisation, which acts as a boon to advancing technology meant to simplify processes as well as optimise security; it also brings a need to educate people on safe practices and awareness in case of being victimised by a fraudulent act. Considering the surge on consumer grievances relating to unauthorised transaction resulting in debits to their account / cards, the criteria for determining customer liability in these circumstances have also been reviewed. All said and done, you may now understand your power as a consumer, thanks to RBI’s law on safeguarding consumer rights and their money.

According to the law, RBI makes it clear that the consumer has no liability when an unauthorised transaction happens in case of a fraud or even contributory negligence and/or deficiency on part of the bank. But what if neither the consumer nor bank is at fault? The law says that the consumer will not bear the loss if he/she notifies the bank within 3 days of the fraudulent occurrence. In this case, the bank shall be liable to pay the consumer full amount within 10 days of time.

However, in cases where the fraud is due to consumer’s negligence by sharing payment credentials then the loss till the time he/she reports to the bank shall be borne by the consumer only. Now, here’s a catch! What if the consumer is not!at fault and the bank blames them for sharing their information with a third party that inherently led to an unauthorised transaction? The bank will play dumb to admit their leniency in the matter or even admitting a third-party breach. Fret not, the law by RBI as dated July 2017 clearly states, ‘the burden of proving customer liability in cases of unauthorised electronic banking transactions shall lie on the bank’.

In other words, the bank has to do all the hard part to prove their innocence in the matter and your complete fault. Sounds easy? It is not. The RBI further emphasizes the need for banks’ attention to not only send immediately and without fail, SMS and e-mail alerts, but also ensure that such messages are enabled to carry the customer’s reply too so that a consumer can report any such fraud immediately.

So, to sum it up- as consumers, know your rights and don’t ever share your personal and banking information with other people for your own security. Now that you know, share this blog and let’s unite with RBI to spread the importance of being financially-sound this Financial Literacy Week 2018.

Safe Digital Banking Experience- How We As Consumers Can Help

This year, the Financial Literacy Week by RBI focuses on “Consumer Rights” to educate consumers on their part to have a safe digital banking experience.

“Ignorance is bliss” is a common phrase that falls in the negative of banking or finance related books. Regardless of what we hear every day or read in every passing ad- we all fall short to follow the simplest of steps to ensure a safe online banking experience. An online banking fraud happens when a person (or in this case, a hacker) takes hold of your bank account details to do absolutely anything, from taking out cash to selling details to another party to posing threats to someone under your name.

As our financial transactions become more digital, banking and other financial institutions are making sure to secure their own network and their customer’s money in the best possible manner. But as an individual, it is important to follow few simple steps that ensure security provided by your bank is supported by your diligence and caution.

First and foremost, secure the basics-

Password- Keep it Gibberish, one that no one can predict. Use uppercase, lowercase, numbers, symbols and anything that you can think of!

Log in- Only through secure networks. Do not use the free Wi-Fi available at public places for your banking work. Keep all bank related work preferably at home with your private network or mobile data.

Monitor- Your debit and credit cards are vital mediums for potential hacking. Make sure you always keep an eye out on every transaction and SMS sent by the bank.

More of the above 3, the better- To safeguard your bank account, keep another level of security at every stage. Login with OTP sent to your mobile number, or use secret question to avoid potential hacking at that moment, and do monthly reviews of your bank statements.

Second, understand the enemy-

System attack- A commonly known term “malware” is software designed to infiltrate or damage a computer system without your knowledge. Examples of malware (malicious software) include computer viruses, trojan horses, spyware and adware. Don’t fall prey to such an attack by making sure you have updated anti-virus software that scans everything including emails, on your computer as well as on your mobile phones and tablets.

Email attack- Your bank will never ask you to provide personal information via any email or online communication. Similarly, nobody is ever so rich to just send you money from abroad by only getting your personal information. Do not pay heed to such activities or emails. Such kind of activity is called “phishing” where an individual or organisation tries to acquire your details for a fraudulent act.

Browser attack- Known as “domain spoofing”, this cyber crime interferes during browsing activity, only to reroute you to a fraudulent site. Once there, you are asked to enter personal information, just as with “phishing”.

Thirdly, now that you know the above two, be alert:

Do not share your card or account details- No matter how trusting you are towards the other person; you or the other person might still be unaware whether they’ve been a victim of online fraud. Banking is a personal activity which you should never let anyone else handle for you.

Turn off the Bluetooth- It’s very common to be hacked via your Bluetooth device in your mobile phone. Hackers, once getting access into your phone can create chaos in unimaginable places, including your bank account.

Log out properly- Thinking that by cancelling your browser window, all processes will be shut down is a myth. Always make sure you log out of your profile before exiting the window.

Update your systems- Whether it’s iOS, Android or Windows; your system will always prompt you when an update for operating system is needed- do not ignore it. Keeping your system updated ensures safety against potential threats that change their ways every day!

Online fraud is becoming common day-by-day but so is it’s antidote with various software and techniques. Having said that, at our end, we must ensure conscientious practise of safety measures for a fraud-free online banking experience.Now that you know what to do, spread this knowledge and let’s unite to help RBI attain financial literacy all across the nation this RBI Financial Literacy Week 2018.

Risk Vs Returns – Be Alert Towards ‘Quick Money’ Investment Schemes

This year, the Financial Literacy Week by RBI focuses on “Consumer Rights” to educate consumers about the crimes by investment fraudsters and how they should always be on a lookout to never fall into such schemes.

Thinking about securing your future always tends to aim at an understanding spree about investments. Sometimes though, we come across hard-to-believe schemes in the name of banks associated with it. Here’s a quick tip: Do not fall prey to these kinds of activities. Understanding investment plans are realizing that higher the returns, higher would be the risks- that is the principle. But one needs to grasp that higher returns may come with higher risks but higher risks might not necessarily always come up with higher returns. You must understand that it’s the market time you enter and not your timing in the market.

Before understanding the fruitful returns, be wary of the sources you plan on investing in or with. Investment frauds generally pose as a wide range of deceptive practices used by scammers to entice investors into making blind investing decisions. Given the game-changing ways of fraud each day, investment frauds generally follow one or all traits listed as below:

High ‘guaranteed’ returns-
Let’s face it, the principle says “higher the returns, higher are the risks”, but even then is no guarantee to it. So, if a scheme claims to guarantee your returns portion- do not engage further with it.

High initial investment-

This is like a “Ponzi” scheme. Here, investors are lured to invest large sums of money because the returns received are chunks of their own money as there is no other source of income.

Vague/complicated investment strategy-
At all times, financial experts always advise on investing in schemes that you understand properly, in and out. Now, when a representative approaches you with a scheme that you try to understand better and in return get a more complex version of it- you are probably talking to a con man.

Unsustainable business model-
A company promising you ‘incredibly’ high returns should ideally have a sound business model with proper affiliations. If the story sounds odd or fake to you- simply walk away.

Being generous by paying back of losses-
When a representative says that he/she shall pay any losses if incurred from their own pocket- you definitely should run towards the door.

So, what can you do?
Ask for proper regulatory approvals
A registered company will never give an entity permission to mobilize public money. It needs approval from either Sebi or RBI.

Do your own research of the company and the scheme
Do not hesitate to ask one of your trusted financial consultants, consult your friends and search on the internet about the company and the scheme for any consumer reviews. If you are in doubt, better to avoid.

Do not issue cheques in the name of a third party
Always issue payments in the name of a bank or an institution and not towards any individual or third party. Also, remember never to issue blank cheques or sign on blank papers.

Ask for regular account statements
A genuine investment scheme will always provide account statements at regular intervals, either monthly, quarterly, half-yearly or annually. If it isn’t doing so, something might be wrong.

Match performance with stated investment strategy
The performance of your invested scheme must be in line with the returns promised. If not, investigate and if needed, take necessary action by reporting the case.

Now that you know, be alert of the frauds that claim fast money with your hard earned income. Share this knowledge with others and let’s unite with RBI to spread financial literacy this Financial Literacy Week 2018.