This lesson examines the ongoing management of credit risk, including portfolio monitoring and early identification of problem loans.

7.1 Credit Risk Management Framework

Credit risk is the risk of loss from borrower default. Effective credit risk management is a core function of commercial banking . The H.L. College of Commerce includes “Risk Management in Banks” as a core unit . Key elements include:

• Credit Policy: A formal document outlining lending criteria and risk limits .

• Credit Investigation: Evaluating the borrower’s financial and non-financial factors .

• Risk Assessment: Quantifying the probability and impact of default.

7.2 Loan Monitoring and Early Warning Systems

Ongoing monitoring is essential to maintain portfolio quality. The Lincoln University course covers “effective stewardship through regular monitoring of management information, covenants, and the best value of security” . Key monitoring activities include:

• Financial Covenant Monitoring: Tracking compliance with loan covenants.

• Site Visits: Inspecting borrower operations and collateral.

• Review of Payment Patterns: Watching for late payments or other signs of stress.

7.3 Managing Non-Performing Loans (NPLs)

When loans become distressed, a structured approach is required. The Lincoln University curriculum covers problem loans and follow-up as a core topic . The Coursera module covers “Classification of NPA, debt restructuring, and other recovery options” . Key strategies include:

• Loan Restructuring: Modifying terms to help the borrower recover.

• Workout: Managing recovery through negotiation or legal action.

• Recovery and Liquidation: Enforcing security and recovering funds.