Credit risk management in commercial banks (First Bank Nigeria Plc) - Dissertation Example

Credit Risk Management is one of the most crucial operations for any financial company. The financial crises occurred in USA, the Euro zone countries and in other parts of the world. It made the global economy fragile and susceptible to any kind of shocks. One of the major reasons behind the global meltdown was the lack of proper finance management practices including a poor credit risk management system by many of the top global financial corporations (George, Sinha and Murali, 2007, pp.18-19).

But the financial crisis was an eye opener. It prompted the top managements of all the banks to give special attention to the management of their credit risk. The rise in competition coupled with the risk-taking attitude of individuals and enterprises have led to the invention of several financial instruments for transferring risks. This has caused much imbalance in the global financial system. Therefore further studies are required to understand the problem of credit risks and challenges that encompass it.

To achieve that we need to have a better understanding of the core issues and the problems they cause. We also need to search for their solution. Taking the risk of investment is very crucial for a bank to make profit. Without risk there will be no returns. But due to that risk, assessment of such risk and ways to deal with it becomes very necessary.Any bank or financial institutions face such risks and they must balance their risk through various methods.The challenges for a bank are to survive in the current competitive market and maintain a large customer base.

So it must offer a range of loans at a reasonable interest rate. But the interest rate cannot be too low or the bank would face losses. At the same time it must maintain a wide capital base to comply with the law and to avoid economic fragility. However it cannot be so large that the bank does not have much money to invest. The nature of risk management is often investigative- collecting information about the borrower and then analyzing their capacity to repay the loan. It also contains some policy prescriptions from the bank to the borrower so that the chances of default are reduced.

So assessment of risk is very necessary for any financial institutions including banks to make a prudent investment decision. It is necessary for the bank to manage its portfolio by striking a balance between its risk and return. The kinds of credit risks that a modern bank faces are varied in nature. The bank may have undertaken a risk if they have provided a loan to an individual or an enterprise. The risk of loss of principal and interest if the borrower defaults on their loan is one risk that the banks have to face.

The bank needs to have a sound credit management policy not only to offer loans to the right candidates but also to gain the confidence of the depositors. If the depositors lose their confidence the banks will be short of fund to offer loans. A sudden loss of confidence of the depositors may even lead to a bank run. The banks face other risks if they offer securities and other modes investments. To avoid that risk the banks must maintain a capital base to ensure its solvency. The second Basel Accord provides guidelines for the capital a bank must to give a certain amount of loan.

The higher risk the bank takes the higher is the capital base it must have. Credit Risk Management thus have to comply itself with the Basel II or other financial regulatory bodies. Usually apart from core banking activities these days the banks are also involved in investment activities. Therefore for a bank it is also very important to analyze their investment and risk portfolios to balance their risk. Review of loans and portfolio analysis are two of the main functions of credit risk management.

The importance of credit risk management has also increased due to the operation of the banks in the security