CREDIT RISK APPRAISAL AND MANAGEMENT PRACTICE: THE CASE OF COMMERCIAL BANK OF ETHIOPIA

Abstract

Lending money is one of the most important functions of banks and the interest earned on advances makes up a large part of their income. Since most of the money which banks lend belongs to customer who have deposited in trust for them, utmost care should be taken to avoid risky lending. The key cause for bank failure is bad loans. Therefore, credit is both an attractive venture and a horrible nightmare for banks if they cannot minimize bad loans. Credit can take a bank up the ladder fast and can also throw it to the bottom of the ladder at an unbelievable speed if bad loans are not minimized. The major intention of the study is to meet the objectives. The research will employ both primary and secondary data. Personal interview will be conducted with selected employees of the bank. As to the secondary data published and unpublished materials that include various books ,annual reports, credit policy manuals and publications will be consulted to bask up conceptual ground of the study. The major elements of credit policy have eligibility criteria for every sector being financed by the bank and they contain the 5C’s. The bank uses CRR (credit risk rating) as means of credit risk management practice, which is a system employed by the bank to differentiate the degree of credit risk in different credit exposure. Causes for the occurrence of credit risk are incomplete information, weakness in collateral arrangements, technical incompetence, the ability to analyze financial statements and to obtain and evaluate other credit information, lack of adequate supervision of old and familiar borrowers. The main reason for a loan to turnout bad is that borrowers do not use the fund for the purpose they had taken it for and reckless lending, collateral oriented loan assessment and poor credit follow up.