Sample theoretical framework for lending system

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Seventh step is to assess profitability whether the cost of credit and incurred expenses related to this are exceeded by the returns and gains from interest of the loans. Chiefly through analyzing the financial statements of each commercial bank, the computation of the profitability ratios is sine qua non in this study in order for the researchers to reach their objectives.

Usually, security is required when the credit risk is high.

Theoretical and Conceptual Framework Essay Sample

In credit enhancement, banks purchase credit protection in a form of guarantees or credit derivative products. This division will further facilitate understanding and management of credit risk.

The assumption is that large amounts of credit would normally lead to high credit risk and small amounts to low credit risk. In making assumptions and projections, historic performance of the borrower and appropriate sensitivity analysis by the lender is taken into consideration. First step is to know the nature and purpose of the credit.

Examples of this credit are government issued bonds and bills. The structure must suit the intended purpose of the credit. Division of Credit Risk Wiley, Credit risk refers to the probability of the loss emanating from the credit extended as a result of the non-fulfilment of contractual obligations arising from unwillingness or inability of the counterparty or for any other reason.

Second step is to know the type of credit facility the customer wants to borrow. Based on the policies implemented, each unit also has its own strategy in credit-granting activities, taking into Sample theoretical framework for lending system the risk-reward trade-off of each granted loan.

The famous facility that has been increasingly used by customers is the credit card which can be used to purchase goods and services on credit, and to obtain cash advances. Techniques in Credit Risk Management Van Gestel and Baesens, There are four techniques in credit risk management namely selection, limitation, diversification and credit enhancement.

The shorter the term of the credit, the more its repayment capacity is predictable. In limitation, the bank determines up to what amount they can give credit to a certain lender based on given risk profiles; this is called credit limit.

Conditions must be mutually agreed by the lender and borrower, and its violation is tantamount to default and the lender may seek claims and start legal proceedings, depending upon the agreement. Next step is forecasting the repayment capacity of the borrower.

Fourth step is to assess whether there is a necessity to demand a security from the borrower.

It plays a crucial role in determining the quantum of economic capital required, which is a function of expected credit loss. If the bank is larger, the credit risk is more likely to be highly diversified. If the counterpart is riskier, the system of credit limit will be more restricted.

An example is an overdraft which allows an individual to withdraw in excess of his credit balance on his current account, but this type of facility is not allowed in the Philippines.

The aforementioned organizational structure is also the one accountable for the measurement, control, protection and mitigation of credit risk. The last step is constant monitoring which includes checking of risk limitations, determining capital allocation and issuing periodical reports on borrowers.

If there is higher default risk, more collateral should be asked to reduce recovery risk. Various measures include liquidity, solvency, efficient and repayment capacity, and other financial parameters are used by the lenders. Another type is non-funded lines wherein no funds are provided.

Fifth step is to analyze the financial status of the borrower. The lender should have reasonable assurance that the borrower has the ability to pay when its obligations fall due. Thus, resulting to an evaluation of the relationship between credit risk management and profitability of each commercial bank.

In selection, good risk assessment models and good credit officers are necessary in order to have the best selection strategy. Second is the portfolio credit risk which focuses on credit exposure on a group of borrowers. However, in some instances, low credit-high risk and high credit-low risk relationships may apply due to several internal and external factors.

Eighth step is to construct the structure of the credit facility including conditions and covenants. Minors, undischarged insolvent and mentally incapacitated are just a few who are not allowed to obtain credit from financial institutions.

First is the single borrower credit risk also known as firm or obligor credit risk which can be traced from economic, industry or customer specific factors. Relationship between credit and risk in commercial banks Figure 5 illustrates the possible relationship between credit and risk in commercial banks.

The necessary profitability ratios to be considered are operating margin, profit margin, return on total assets, basic earning power ratio and return on equity, all based on the core business of the commercial banks which is the credit business.

Uncontrollable risk or systematic risk is the external forces that affect all businesses and households in the economic system. The diagram is divided into four quadrants, the low credit-high risk, high credit-high risk, low credit-low risk and high credit-low risk relationships.

In diversification, the banks accommodate different types of borrowers to spread the risk and avoid concentration of credit risk default and problems.

It is important for the lender to know and verify the legal status of the person who applies for credit.

They are primarily concerned with the evaluation of the relationship between credit risk management and the profitability of the top 3 commercial banks in the Philippines based on assets.Theoretical and Conceptual Framework Essay Sample. Figure 1. Division of Credit Risk (Wiley, ) Credit risk refers to the probability of the loss emanating from the credit extended as a result of the non-fulfilment of contractual obligations arising from unwillingness or inability of.

Chapter 6-THEORETICAL & CONCEPTUAL FRAMEWORK 1. Theoretical and Conceptual Framework 2. DEFINITION OF TERMS 3. FRAMEWORK• Described as the abstract, logical structure of meaning that guide the development of the study.• All frameworks are based on the identification of key concepts and the relationships among those concepts.

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Sample theoretical framework for lending system
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