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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.

Suggested Citation

  • Bandyopadhyay, Arindam, 2010. "Understanding the Effect of Concentration Risk in the Banks’ Credit Portfolio: Indian Cases," MPRA Paper 24822, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:24822
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    File URL: https://mpra.ub.uni-muenchen.de/24822/1/MPRA_paper_24822.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

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

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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