With the increased pressure on banks to improve the shareholders' returns, banks have had to assume higher risks and at the same time, manage these risks to avoid losses. Recent changes in the banking environment (deregulation, globalization, conglomeration etc) have posed serious risk challenges for banks but have also offered productive opportunities. In the past decade, rapid innovations in financial markets and the internationalization of financial flows have changed the face of banking. Financial substitutes such as guarantees and letters of credit, as well as derivative instruments such as futures and options, are not always shown as assets or liabilities even though they expose banks to certain risks. Banks are subjected to wide array of risks in the course of their operation. In general banking risks fall in to four categories: financial, operational, business and event risks. Financial risks in turn comprise two types of risks, pure risks- including liquidity, solvency and credit risks. The other type of financial risks is speculative risks- including interest rate, currency, and market price risks.
Credit risk means that payments may be delayed or ultimately not paid at all, which can in turn cause cash floe problems and affect a bank's liquidity. Despite the innovation in the financial services sector, credit risk is still the major single cause of bank failures. The reason is that more than 80 percent of a bank's balance sheet generally relates to this aspect of risk management. In banks, loans are the largest and most obvious source of credit risk. However, other sources of credit risk exist through out the activities of a bank, both on and off the balance sheet.
In this research, an over all credit risk management review of HSBC will be done which will include the evaluation of credit risk management policies and practices of the bank.
LITERATURE REVIEW
Now we look at the key aspects available in the literature pointing out the key facts and problem areas regarding credit risks in banking or other financial services.
Anonymous (1998) explains that the assumption and management of risk are central area of attention to banking. Assessing risk is increasingly more complex, according to John Brooks of The Chartered Institute of Bankers in the UK. The banking industry is undergoing a time of rapid change. Brooks believes that information technology is altering the process of identifying and measuring risk. Actual default patterns are more useful in spotting trends in credit quality than data on debt-to-income ratios in the personal sector. Credit scoring techniques also are useful in determining credit quality. Brooks sees a major change in attitudes toward corporate customers, the greatest being a willingness to make term loans. He recommends a formal loan categorization structure, like that used by US banks, to spot potential credit problems early. Technology has given rise to a new credit risk, the daylight overdraft, which Brooks warns must be controlled. He recommends a clear credit policy and an independent credit control function.
Anonymous (1999) states that credit risk management is core to the traditional business of banking but only recently has the risk management industry, particularly the quantitative and information technology disciplines, started to apply its full expertise to credit risk management. Developments in methodology have both responded to and encouraged this shift in emphasis. Another important reason for this development has been the surge in volatility in financial markets over the past year. The volatility has affected credit markets dramatically and has highlighted the inextricable link between credit and market risk.
McKenzie (2007) reveals that a number of financial institutions have made progress in the risk management area but there is still a lot of work to do, according to Dr Alessandra Mongiardino, vice-president, senior credit officer and risk management specialist at Moody's Investors Service in London. Moody's says that Credit ratings and research help investors to analyse the credit risks associated with fixed-income securities. Independent credit ratings and research also contribute to efficiencies in fixed income markets and other obligations, such as insurance policies and derivative transactions, by providing credible and independent assessments of credit risk.
Majumder (2006) argues that in the current decade, modelling credit risk is increasingly gaining attention by risk managers of banks and researchers. Among the available credit risk models, Merton's equity-based approach is considered as a pioneering tool for measuring default risks. From the day it was developed by Robert Merton, it is being regarded as one of the primary model of assessing credit risk. In this model the default process is endogenous, and relates to the capital structure of the firm.
RESEARCH QUESTIONS
Why credit risks are crucial to the banks?
What are the main effects of the credit risks on the other risks faced by banks?
Determine the credit risk management instruments available at present?
AIMS & OBJECTIVES
The main of this research is to find out what strategies can be adopted for the successful credit risk management in HSBC.
The objectives of this research:
To review the current credit risk management in HSBC and compare it with theories of credit risk management.
To find out if board or management are aware to the benefits of emerging concepts of credit risk management.
To recommend the appropriate strategies of credit risk management
RESEARCH DESIGN
Sample and Data Collection Process
The sample for my research will be the financial managers and the quality managers in the HSBC. The data will be collected through questionnaires and by personal interview. Questioners will be sent to both financial managers and quality managers. But interview will be conducted of the quality managers only, because of the assurance of the quality managers' availability.
Sample Size and Selection Process
Questionnaire Design
Data Analysis
Validity and Data Reliability
Other Research Techniques
More research will be done in the area of academic writing about this issue, journal some time do have some columns as well. These sources will be looked at for the purpose of getting the general idea of the market and general environment factors.
Limitations of Design
TIME TABLE FOR ACTIVITES
Flow Diagram
*All the dates are the finishing date of the activity
Project Initiation
Gathering Data & Data
Questionnaire Design
SWOT Analysis
Primary Research
Analysis on Data Collected
Submission Report
APPENDICES
Appendix A
SAMPLE QUESTIONNAIRE
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