Credit Risk Models in Financial Institutions Essay

Credit Risk Models in Financial Institutions - Essay Example The most critical factor that affects the 3Cs of a bank is 'Credit Risk'. Banking is a domain where 'risk-free' activity is an unknown concept. Particularly in the field of credit appraisal, risk is associated with every decision made by the portfolio analyst. Although it is not possible to wipe out risk altogether, it can be reduced to a manageable level. Stated simply, 'zero-risk' situation is impossible to be achieved in banking. There have been considerable discussions regarding the role of the portfolio analysts and credit officers in banks. It has been noted that in several cases, officers are forced to 'take' a decision rather than 'making' a decision due to the lack of freedom to analyze and make a decision based on the merits of the case. There are two ways of reaching to a decision; subjective and objective. A subjective decision is based on the impression the bank has about the counterparty. Although this method has a substantial role to play in the decision making process, an objective analysis instils a certain degree of integrity, security and refinement. Credit Risk Management is an activity of paramount importance for any bank. Effective risk management increases the stakeholder value by providing for 'value creation', 'value preservation' and 'capital optimization'. Credit Risk Modelling is the first step towards implementing a robust risk mitigation environment. Credit risk models are intended to aid banks in quantifying, aggregating and managing risk across geographical and product lines (BIS, 1999). The pith of the report will cover various aspects of credit risk modelling such as 'techniques to measure risk', 'building an assessment model' and the various prevalent credit risk models being used world wide. In the process the report also throws light on subjects such as banking risks and credit risk parameters. What is Credit Risk Risk taking is a synonymous with credit appraisal. Risk taking is not an activity that takes place by chance; rather it is a deliberate action in the process of financial decision making. Risk is a factor, which, if it takes effect, produces undesirable outcomes for the bank. Bhargava (Bhargava, 2000) presents an insightful pie chart describing the main financial risks that are prevalent in the banking industry. Figure: Pie Chart showing the proportion of Financial Risks (Bhargava, 2000) It can be clearly seen that Credit Risks occupy a major portion of the pie and a bane for most bankers across the world. Risk Management Group of the Basel Committee on Banking Supervision defines credit risk as "potential that a borrower or counterparty of a financial institution will fail to meet the obligations in accordance with the agreed terms" (bcbs54, 2000). In other words, the probability that the receiver of the loan will not pay back in full, within the specified time frame, the complete repayment amount {including any interest and service charge} is called credit risk. Lack of appropriate lending discipline and inadequate system of control generally results in setbacks to banks. Several major banks such as Enron have collapsed due to poor transaction management, incomplete credit information and

Impact of service quality on customer satisfaction and customer Dissertation

Impact of service quality on customer satisfaction and customer loyalty an application on the banking sector - Dissertation Example With the aim to evaluate the impact of service quality and customer satisfaction on customer loyalty, three objectives were set in Chapter I. Based on a qualitative approach, only secondary data has been used for this study. With customer loyalty as the dependent variable, three independent variables – perceived value, service quality and customer experience have been considered in this study. The study finds that certain dimensions of service quality directly impact customer loyalty - reliability, empathy, responsiveness and assurance. Staff training is thus of importance in delivering quality training to evoke such feelings in customers. In the service economy the relationship between service quality and customer experience has gained immense importance. Customers base their future decisions on the ‘moment of truth’ and hence staging and designing an experience has become an important tool to gain competitive advantage in the banking sector. Banks need to unders tand individual customer needs and personalize service. Perceived value enhances customer satisfaction and this leads to enhanced customer loyalty. Customers evaluate the benefits they receive against the costs they pay for such services. Thus Perceived value in the banking sector independently impacts customer satisfaction leading to customer loyalty. ... 1.4 Conceptual framework 4 1.5 Structure of the Study 6 1.6 Scope of the Study 6 Chapter II Literature Review 2.1 Chapter Overview 7 2.2 Definitions 2.2.1 Service Quality 7 2.2.2 Customer Satisfaction and Customer Experience 8 2.2.3 Customer-perceived Value 9 2.2.4 Customer Loyalty 10 2.3 Dimensions and perceptions of service quality 2.3.1 Dimensions of Service Quality 10 2.3.2 The Gap Model 11 2.3.3 Perceptions of Service Quality 12 2.3.4 Summary 15 2.4 Service Quality and Customer Loyalty 16 2.5 Service Quality and Customer Experience 19 2.6 Perceived Value on Customer Satisfaction and Customer Loyalty 22 Chapter III Methodology 3.1 Research Philosophy 23 3.2 Research Design 23 3.3 Research Methodology 23 3.4 Choice of Method 24 3.5 Data Collection 25 3.6 Sources of data 25 3.7 Justification for Literature Review 25 3.8 Data Analysis 26 3.9 Ethical Concerns 26 Chapter IV Findings and Discussion 4.1 The Banking Industry 27 4.2 Service Quality and Customer Loyalty 27 4.3 Service Qual ity and Customer Experience 29 4.4 Perceived Value on Customer Satisfaction and Customer Loyalty 31 4.5 Discussion 33 Chapter V Conclusion and Recommendation 5.1 Conclusion 36 5.2 Recommendations to enhance customer loyalty 37 5.3 Limitations of the Study 37 5.4 Recommendations for further research 37 5.5 Personal Reflections 39 References 40 Figures Figure I Framework for the Study 5 Figure II Customer Experience and Service Quality 30 Chapter I Introduction 1.1 Background In an intensely competitive business environment, sustainable competitive advantage has become imperative. The service industry has been forced to create new ways of finding competitive advantage (Chen & Hu, 2012). Retaining customers is considered to be more important than creating new customers. Retaining existing