In the case of a financial institution, management has to assess not only its own risks, but also those of borrowers. The Development Bank of Kazakhstan JSC (DBK, Bank) is a development institution with a loan portfolio of about 2 trillion tenge, consisting of the country’s largest projects in various sectors of the economy - from the metallurgical industry to hotel business. In 20 years, the bank has accumulated perhaps the most extensive experience in risk management.
Sandugash Kenzhebayeva, Deputy Chairman of the bank's Management Board, told Kursiv about how DBK interacts with borrowers in the field of credit, political and legal risk management.
– Sandugash Aybasovna, the key risk for the bank is credit. How does DBK manage this risk?
– First of all, the bank conducts a systematic analysis of its portfolio. The Bank performs stress-testing of the loan portfolio under the influence of various stress-factors and the ratio of results to risk-appetite. For example, since the beginning of last year DBK has been carrying out stress analysis for the effects of the pandemic, has developed a system of activities for all participants in the projects to minimize the identified risks, and consistently executes such activities. As a result, the NPL level in 2020 was 1.5%, which is better than the pre-crisis level in 2019.
Given the heterogeneity of the loan portfolio, where each project is unique in its own way, DBK works with each client and especially with those who have problems with loan servicing. Since our mission is to support domestic business, we strive to find the most comfortable way out of the situation for both sides.
– How does DBK set up a mechanism for identifying credit risks?
– Risks are identified at all stages of a project’s life. Already at the level of expertise, DBK specialists analyze the technical and technological elaboration of the project, marketing research of raw materials and sales markets and other factors, legal expertise of the terms of contracts for the project. It’s important to clearly define the roles and responsibilities of each of the project participants. The transaction itself and each counterparty are evaluated for its solvency. The totality of the results of these types of project analysis is digitized and taken into account in the financial model.
Credit risks are identified as a result of a thorough review of the portfolio of documents, including the opinions of external experts, and the use of information from recommended and reliable sources on markets, world news and other resources, which may have some impact on the implementation of the investment project.
Each stage of project implementation has its own specific risks. During the construction phase, there may be a risk of project design being inadequate, depending on the contractor’s experience or viability. One of the major risks in construction is the risk of project cost, which depends on many factors, such as exchange rate volatility (particularly painful for projects that import equipment from abroad) and unforeseen costs.
The risks of uninterrupted production, quality of the output, risks of marketing and timely supply of the necessary raw materials, price formation, competitive environment, industry, risks of loan servicing and many others are assessed at the operational stage.
Each DBK project requires a case-by-case approach to the evaluation, as the same risk has a different level of influence on two different projects. The accumulated knowledge base, based on DBK experience over 20 years, also plays an important role in the evaluation. It provides a comparative analysis with realized case files and is thus a good resource for identifying additional risks. Our challenge is not just to identify the risk, but to find the best way to manage it.
– How does the level of industry risk affect the fate of a project when it is considered?
– The degree of credit risk of the prospective borrower and the transaction is a fundamental factor in its approval or rejection. Credit risk assessment is the final stage of all bank appraisals, which itself is a very labour-intensive and multilateral process, strictly regulated by the Bank. Since the Bank finances rather large projects, many of them are sectoral and give impetus to an industry in the country.
DBK has no goal of financing projects only in low-risk industries. Industry risk is managed both at the portfolio level, through diversification and industry ceilings that certainly take into account the industry’s overall average financial performance, and individually in each project.
There are common systemic risks inherent in a particular manufacturing sector, and here DBK as a development institution is not to avoid risk by abandoning the project, but to develop mechanisms that will minimize or accept such risks.
I will explain how it works in RES projects. On the one hand, it is an area with low market risk, as the producer is awarded long-term contracts for the sale of electricity at fixed tariffs. But because the raw materials are natural conditions - wind, solar radiation, the state of water bodies - uncontrolled climatic, natural, seasonal risk factors. Therefore, the Bank has developed and successfully implemented mechanisms to minimize credit risk during periods of unfavorable climatic conditions for the project.
Again, correct assessment of industry risks is not necessary for a reasoned rejection of a project, but for understanding the risk factors of project and credit risk and structuring the project.
– Has the post-pandemic approach to risk assessment changed?
– The crisis triggered by the COVID-19 pandemic has also affected DBK activities, as our activities are closely linked to industrial and major business players. We conducted stress testing, identified a group of the bank’s most vulnerable assets, developed various scenarios of the situation and response.
The financial sector’s “risk” increased significantly in 2020. In addition to the standard market and country risks, including global ones, that we saw as far back as 2008 and some subsequent years, there are risks in the category of “unknown & unknown” that are difficult to predict, assess the likelihood of their implementation and the level of their impact on the Bank.
The main objective of the last year was to develop the ability of DBK to make quick and effective decisions to keep our borrowers on a creditworthy level. It was also important for us to ensure that investors’ requirements were met, to work effectively with governments, to initiate legislative changes in a turbulent environment where many factors are unknown. The results of DBK in 2020, allow me to say that the Bank has passed the tests for durability, stress resistance and adaptability to changes.
Approaches to risk assessment have not changed since the pandemic, but attitudes of the Bank staff have changed (more so after positive results) - risk management in general has become a more applied activity, not aimed at identifying exclusionary measures. This is a way of allowing units to gain time, warning of risks and working together to minimize them.
Over the past year, we have significantly strengthened our macro-economic analyst, developing our capacity to assess the impact of policy risks on projects. Development of the function of insurance of factors that increase project and credit risks, these measures will allow in future to minimize losses in case of force majeure situations. The development of competences in cyberrisk assessment, IT-infrastructure failure risk assessment and data preservation are continuing.
– How actively does DBK use ESG criteria in risk assessment?
– In risk assessment we follow the principles of sustainable development in accordance with ESG approach. The experts of DBK are obliged to take account of their compliance with environmental protection standards when they examine investment projects. For DBK the priority is to support ecologically clean production and resource saving projects. Today, the bank's portfolio includes 5 projects in renewable energy. The company’s decision-making system and the corporate governance system in general are evaluated. The Bank has introduced a system for assessing and monitoring the socio-economic impact of projects. We continue to improve our project analysis and evaluation processes in line with ESG approach.