Client's solvency and disputed loan placements

Abstract

Solvency represents creditworthiness of a bank and its ability to meet its financial obligations i.e. loan repayments. Solvency factors of the bank's clients can be represented through: character, capacity, capital, and environmental conditions. Basel II standards define the principles of internal rating of the bank's clients. Internal rating of clients is determined by the bank's management. IRB model is used to quantify key features of creditworthiness of the bank's debtors. The internal rating system of the bank's clients should be an integral part of the bank's credit risk management. Bank's rating scale is divided into categories: low risk, indentified risk, high risk, high risk and sub-categories which range from very good, good, satisfactory, substandard, doubtful and bad ratings. In banking practice, there are three types of internal rating: (1) clean rating, (2) combined rating, (3) adjusted rating, and (4) multiple rating. Problem loans management is classified into risk categories from 'A' (good assets) to 'E' (bank loss). Client manager should pay particular attention to (1) the ratio of the borrower and the bank, (2) the ratio of the borrower and his other business partners, (3) the expertise of the borrower's management, (4) the borrower's financial statements and the like. A special place in problem loans management belongs to the legal department of the bank (to ensure the adequacy of the collateral for the bank).

Keywords

• bank
• credit
• solvency