Credit Risk

Credit Risk Types and Definitions

Credit risk encompasses the risks related to an MFI’s credit activities. It is the most frequently addressed risk by MFIs since it directly affects their main earning asset: the loan portfolio. It includes the risk of financial loss resulting from the inability to collect anticipated interest earnings, or on capital resulting from loan default, as well as the negative social performance resulting from credit activities which do not have the best interest of clients in mind (e.g., a lack of transparency toward the clients, continued lending to over-indebted clients). Two subcategories have been identified within credit risk: credit transaction risk and portfolio risk.

  • Credit Transaction Risk – Credit transaction risk is the risk of financial losses and negative social performance related to loans to clients, caused by inadequate policies regarding loan disbursement, follow-up, and recovery.
  • Portfolio Risk – Portfolio risk is the risk of financial losses and negative social performance related to the composition of the overall loan portfolio, caused by inadequate portfolio diversification.

Credit Transaction Risk

Policies

Tier 3 Guidelines
Tier 2 Guidelines
Tier 1 Guidelines
Formal set of credit policies and procedures to manage credit risk, including those covering: Formal set of credit policies and procedures to manage credit risk, including those covering: Formal set of credit policies and procedures to manage credit risk, including those covering:
Credit process • Credit process • Credit process
Identity checking / know your client (e.g., visit to client’s business) • Identity checking / know your client (e.g., visit to client’s business) • Identity checking / know your client (e.g., visit to client’s business)
Data verification • Data verification • Data verification
Products, services, and their characteristics • Products, services, and their characteristics • Products, services, and their characteristics
Use of credit bureau information • Use of credit bureau information • Use of credit bureau information
Parallel loans with other institutions • Parallel loans with other institutions • Parallel loans with other institutions
Internal parallel loans • Internal parallel loans • Internal parallel loans
Repayment capacity and overindebtedness prevention • Repayment capacity and overindebtedness prevention • Repayment capacity and overindebtedness prevention
Required guarantees and their valuation • Required guarantees and their valuation • Required guarantees and their valuation
Loan monitoring, recovery, and collection • Loan monitoring, recovery, and collection • Loan monitoring, recovery, and collection
Related-party loans • Related-party loans • Related-party loans
Loan restructuring • Loan restructuring • Loan restructuring
Loan provisioning • Loan provisioning • Loan provisioning
Write-offs • Write-offs • Write-offs
Non-permitted lending activities • Non-permitted lending activities • Non-permitted lending activities
Credit approval levels • Credit approval committees • Credit approval committees
Code of ethical conduct • Code of ethical conduct • Code of ethical conduct
Credit policies in line with SMART Campaign guidelines • Credit policies in line with SMART Campaign guidelines • Credit policies in line with SMART Campaign guidelines

Limits

Risk Management Tools

Tier 3 Guidelines
Tier 2 Guidelines
Tier 1 Guidelines
Standardized application of credit policies and procedures Standardized application of credit policies and procedures Standardized application of credit policies and procedures
Good and updated knowledge of the client’s main sectors Good and updated knowledge of the client’s main sectors Good and updated knowledge of the client’s main sectors
Systematic consultation of main credit bureau Systematic consultation of main credit bureau Systematic consultation of most credit bureaus
Tool for the calculation of repayment capacity by product Tool for the calculation of repayment capacity by product Tool for the calculation of repayment capacity by product
Systematic visit to client’s home and business Systematic visit to client’s and guarantor’s home and business Systematic visit to client’s and guarantor’s home and business
Professional and well-functioning central credit committee Professional and well-functioning central and local credit committees with good feedback mechanism to loan officers Professional and well-functioning central and local credit committees with independent opinions regarding exceptions and good feedback mechanism to loan officers
Tool for the monthly provisioning of loans Tool for the monthly provisioning of loans based on classification by risk category Automatic provisioning of loans based on automatic classification by risk category
Tool for the evaluation of guarantees Independent entity or person for the evaluation of guarantees
Approval of restructured loans by different committee from the committee which approved the underlying loan Approval of restructured loans by different committee from the committee which approved the underlying loan
Incentive system for field personnel in line with financial and social objectives Incentive system for field personnel in line with financial and social objectives
Statistical credit scoring model for loan analysis
Existence of dedicated recovery or collection department

Risk Monitoring Tools

Tier 3 Guidelines
Tier 2 Guidelines
Tier 1 Guidelines
Mapping of credit transaction risks (at least every two years) Mapping of credit transaction risks (at least every two years) Annual mapping of credit transaction risks
Weekly arrears reports for field personnel Daily arrears reports for field personnel Automatic daily arrears reports for field personnel
Monthly report containing main credit risk indicators, including: Monthly report containing main credit risk indicators, including: Monthly report containing main credit risk indicators, including:
PAR30 PAR by ageing structure PAR by ageing structure
Restructured portfolio Restructured portfolio Restructured portfolio by ageing structure
Write-offs Write-offs Write-offs
Trend analysis Trend analysis Trend analysis
Compared to limits Compared to limits Compared to limits
Monthly monitoring of provisions, including: Monthly monitoring of provisions, including: Monthly monitoring of provisions, including:
Provisions over PAR30 Provisions over PAR30 Provisions over PAR30
Provisions by risk category Provisions by risk category Provisions by risk category
Trend analysis Trend analysis Trend analysis
Compared to limits Compared to limits Compared to limits
Provision expense ratio Provision expense ratio
Quarterly report of related-party loans Monthly report of related-party loans Automatic monthly report of related-party loans
Annual shared clients or client overindebtedness report Shared clients or client overindebtedness report at least twice a year
Monthly monitoring of statistical credit scoring reports
Vintage analysis
Portfolio transition analysis

Portfolio Risk

Policies

Limits

Tier 3 Guidelines
Tier 2 Guidelines
Tier 1 Guidelines
Maximum loan amount for each credit product Maximum loan amount for each credit product Maximum loan amount for each credit product
Portfolio concentration limits by: Portfolio concentration limits by: Portfolio concentration limits by:
• Product • Product Product
• Branch • Branch • Branch
• Economic sector • Economic sector
• Credit methodology
• Region
PAR limits by: PAR limits by: PAR limits by:
• Product • Product Product
• Branch • Branch • Branch
• Economic sector • Economic sector
• Credit methodology
• Region

Risk Management Tools

Risk Monitoring Tools

Tier 3 Guidelines
Tier 2 Guidelines
Tier 1 Guidelines
Mapping of portfolio risks (at least every two years) Mapping of portfolio risks (at least every two years) Annual mapping of portfolio risks
Weekly portfolio concentration reports, including those organized by: Weekly portfolio concentration reports, including those organized by: Weekly portfolio concentration reports, including those organized by:
• Trend analysis • Trend analysis Trend analysis
• Limits comparison • Limits comparison • Limits comparison
• By product • By product • By product
• By branch • By branch By branch
• By economic sector By economic sector
By credit methodology
By region
Weekly PAR reports, organized by: Weekly PAR reports, organized by: Weekly PAR reports, organized by:
• Trend analysis • Trend analysis Trend analysis
• Limits comparison • Limits comparison • Limits comparison
• Product • Product • Product
• Branch • Branch Branch
• Economic sector Economic sector
Credit methodology
Region

Evaluate

RIM’s Risk Management Graduation Model is continually being revised to reflect the consensus standards within the microfinance industry.

Your evaluation and feedback is of utmost importance within this process.

Please provide your valued evaluation and feedback on the Credit Risk component in the form below:

 

Evaluator Information:

 

 

Risk Types & Definitions

 

Please provide your valued evaluation and feedback on the Credit Risk Types & Definitions listed above:

 

Framework Guidelines

 

Please provide your valued evaluation and feedback on the Risk Management Graduation Model framework guidelines listed above: