Credit Risk Management

In: Business and Management

Submitted By Mushu12
Words 2136
Pages 9
I. Information Asymmetry
Information asymmetry exists in transactions where one party has more or better information than the other leading to an imbalance of power. Adverse Selection is the associated problem of information asymmetry that arises before the parties to a contract reach an agreement. It occurs when bad credit risks (firms with poor investment channels and high inherent risks) become more probable to acquire loans than good credit risks (firms with better investment opportunities and less inherent risks). Moral Hazard is the associated problem of information asymmetry that arises after the parties to a contract reach an agreement. It arises when the borrower has an incentive to breach the loan covenants by investing in ‘immoral projects’ which are unacceptable to the borrower and also have a high possibility of default. Both these risks occur because of the lenders’ imperfect knowledge about the borrowers and their activities. For Financial institutions, information asymmetry inherent to credit disbursement is a key risk that needs to be managed.

II. Bangladesh Bank Guidelines for Credit Risk Management
As the central bank and apex regulatory body for the country's monetary and financial system, Bangladesh Bank provides a number of recommended policy and procedural guidelines to the financial sector that are directional in nature and aims to improve the risk management culture. Policy guidelines of Bangladesh Bank include Lending Guidelines, Credit Assessment & Risk Grading, Approval Authority, Segregation of Duties and Internal Audit while Procedural Guidelines include Credit Approval, Administration, Monitoring and Recovery.

III. Credit Risk Management System of Trust Bank Limited
The Risk Management Committee of Trust Bank Limited (TBL) is composed of three directors from the BOD. It is the responsibility of this committee to…...

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