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CMA Final · Risk Management in Banking and Insurance · Credit Risk Management

Which of the following is a recognised credit risk mitigation technique that reduces a bank's capital charge under Basel norms?

Taking eligible financial collateral, such as cash or government securities, is a recognised credit risk mitigation technique under Basel norms because it reduces the exposure or risk weight used for capital. Repricing, longer tenor or delaying NPA classification do not qualify as mitigants.

  1. ATaking eligible financial collateral such as cash or government securities against the exposureCorrect
  2. BIncreasing the loan tenor to lower instalments
  3. CRaising the lending rate to cover expected default
  4. DDelaying classification of the account as non-performing

Explanation

Eligible financial collateral, guarantees and netting are recognised credit risk mitigants that reduce the exposure or risk weight. Higher pricing and longer tenor do not reduce capital, and delaying classification is not mitigation.

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