Credit and operation risk management policies

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ABSTRACT

The project will elaborate the Credit and Operation Risk Management Policies of Frontier Provincial Cooperative Bank Ltd. The said Bank was once a profitable institution and used to finance agriculture sector. The bank has many non performing loans on its balance sheet.

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The said Bank was in the state of Liquidation months back. Liquidator was appointed by the Government but later Government has rejected the proposal of Liquidation. Provincial Assembly has asked the Finance department to inject funds in the bank for its revival. Bank has got Fund of PKR 1 Bn and now is in the phase of revival. The violation of credit policy and not having proper mortgage assessment and documentation has led to increase in the NPLs. The operations risk is the other element that can impact the business of the organization.

We have consulted Primary and Secondary sources to achieve the desired results to be suggested. We have analyzed various possible options during study which address the mentioned issues. 5 Cs of Credit, Heat Map, Key Risk Indicators and criteria for mortgage assessment are among the possible options. We have suggested the Bank about credit risk management department, models to address credit risk, operational risk, and developed criteria for the better documentation and assessment of asset as collateral.

Chapter # 1: Introduction

1.1) Background of Problem

Credit risk is the risk of counterparty to default on periodic interest payments and/or on the principal amount of the loan. Most of the banks face this sort of problem that leads the bank to default or in other terms going bankrupt. Because of the inability to recover the amount from the debtors they face liquidity shortage which lead the creditors, depositors and shareholders to rush to the bank to get their money back. But due to shortage of money with them they could not meet the obligations that result the Bank to the final step of getting liquidated. That is where government intervene either on request or to save its institutions.

The problem originates when Bank manager or the credit advancing authority at bank, advanced loans without assessing credit risk, credit rating and other similar criteria of the counterparty to save itself from NPLs. Most of the banks have their own policies, rules, and regulations and even they have their own Risk Management Departments. The bank under discussion does not even have a proper management and experienced professionals at top positions.

Always in the History of Pakistan we have been gone through very bad experiences while giving chance to the previous corrupt Political Party or to the Current one for the next term. That created a lot of transparency issues in our Executive, Legislative and even in Judiciary.

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