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Understanding the Effect of Concentration Risk in the Banks’ Credit Portfolio: Indian Cases

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  • Bandyopadhyay, Arindam

Abstract

Credit Concentration Risk has been the specific cause of many occurrences of financial distress of banks world wide. This paper analyzes the credit portfolio composition of a large and medium sized leading public sector Bank in India to understand the nature and dimensions of credit concentration risk and measure its impact on bank capital from different angles. In evaluating the bank wide measures in managing concentration risk, we demonstrate how economic capital approach may enable the bank to assess the impact of regional, industry and individual concentration. We also show how portfolio selection can be done through correlation, stress tests, marginal risk contribution vis-à-vis risk adjusted return that will enable the top management to manage portfolio concentration risk and accordingly plan its capital.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 24822.

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Date of creation: Jul 2010
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Handle: RePEc:pra:mprapa:24822

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Keywords: Credit Concentration; Portfolio Risk; Bank’s Economic Capital;

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