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CHAPTER 9: BANK REGULATION & MANAGEMENT (ASSET QUALITY (What is Bad…
CHAPTER 9: BANK REGULATION & MANAGEMENT
ASSET QUALITY
Asset of a bank
Loan is an important assets as it contributes largest source of income to bank.
Good asset quality refers to the loan and advances that do not become bad
What is Bad Loan?
Interest are service by borrowers according to loan agreements.
If the loans are not being paid for six consecutive months, it is classified as bad loan.
Bad loan is measured by NPL ratio.
Factors to the bad loan
:pen: Poor credit evaluation
:pen: Insufficient risk diversification
:pen: Criminal breach of trust
CREDIT EVALUATION
:pencil2: 5 C's Process
Character
Capacity
Conditions
Capital
Collateral
Problem Loan Detection
Operations of the business
One person management
Change of customer or suppliers
Poor management of plant and equipment
Threat in the changing environment
Adverse economic conditions
Changes in government regulations and policies
Changes in technology
Operations of the account
Income statement
Sales decline
Large losses
Suffer operating or net loss
Balance Sheet
Slow down in few period
Failure to adhere to principal repayment schedule
Recovery Methodology
Cooperative workout agreement
Collateral liquidation
Reducing debt to judgement
Enforcement and collecting of judgement
Bankcruptcy
PERFORMANCE EVALUATION OF BANKS
Analysing financial Ratio
Liquidity: Loans to TA
Capital Adequacy Ratio: RWCR, Core capital ratio
Profitability: ROA, ROE, Spread
Asset quality: NPL ratio, loan to deposit
CAMEL Framework
M
: MANAGEMENT
Nature and range of services provided
Level of professionalism
Integrity
E
: EARNING CAPACITY
Take full recognition of interest-in-suspense
Adequate provision against NPL
A
: ASSET QUALITY
Related to the market value of the assets and the adequacy of provision against asset losses
L
: LIQUIDITY
Sufficient liquidity to meet customers withdrawals
C
: CAPITAL ADEQUACY
To support up and down of business
To provide cushion against unexpected losses
To ensure continuing commitment of the shareholders to long-term viability of the financial institutions
